Enforceability of SHA over AOA
A Shareholder’s Agreement (“SHA”) is an agreement between the company and the shareholders which describes the rights and obligations of the shareholders of the company. It also describes as to how a company should be operated. It also provides for the details with respect to information of the management of the company and the benefits and the safeguards provided to the shareholders of the company.
An Articles of Association (“AOA”) is a document which regulates the operations and the internal management of the company. It outlines the mode of performing the day to day operations and the accomplishment of aforesaid tasks. The document includes the name of the company, the purpose of the company, share capital structure of the company, provisions with regard to the meetings to be conducted by the company, responsibilities of the directors, transfer of shares, transfer restrictions etc. It is part of the constitution of the company and it has a binding effect on the existing as well as the future shareholders of the company who may come in at later dates.
The overlapping between an AOA and an SHA has created confusion and ambiguity with respect to the enforceability of the provisions incorporated in the aforesaid documents and is under continuous judicial scrutiny.
B. COMPANIES ACT, 2013 AND SHA:
Section 58 of the Companies Act, 2013 deals with the “Refusal of Registration and Appeal against Refusal”. Section 58 (2) clearly lays down that the shares and the interest of a public company are freely transferable, which is followed by a proviso which read as follows:
“any contract or arrangement between two or more persons in respect to transfer of securities shall be enforceable as a contract.”
Therefore, this proviso clarifies that an SHA is an enforceable and a legally recognised document. However, even though there is clarity with respect to the public company, there is still an ambiguity with regard to private companies and therefore, the following judicial pronouncements are required to be looked into.
C. JUDICIAL PRONOUNCEMENTS:
V.B. Rangaraj vs. V.B. Gopalkrishnan and Ors. is the first judicial pronouncement made by the Supreme Court with respect to the enforceability of clauses in SHA, if not mentioned in AOA. The Supreme Court opined that when a restriction on transfer of shares has not been incorporated in an AOA but has been incorporated in an SHA, such a provision shall be unenforceable and that such a provision shall be enforceable only when it has been incorporated in the AOA of the company.
World Phone India Private Limited and Ors vs. WPI Group Inc., USA: The Company Law Board held that the enforceability of an affirmative vote of the chairman under the agreement entered into between the parties was enforceable even though the same has not been incorporated in the AOA as the clause was not inconsistent with the provisions laid down in the AOA, but however, the same was overturned by the Delhi High Court, wherein it was held by the Delhi High Court that as the AOA was silent with regard to the affirmative vote required from the chairman and the same was incorporated in the SHA, hence, such a provision of the SHA shall not be enforceable and binding on the parties.
HTA Employees Union vs. Hindustan Thompson Associates Ltd. and Ors– In this case, the equity shares of the Hindustan Thompson Associates Limited was bought by the management and non-management staff and was held by them in the ratio of 65:35 respectively. A foreign company was offered 49% equity shares and the remaining share of 51% was to be shared among the management and the non-management staff in the aforesaid ratio of 65:35, in accordance with the terms laid down in the AOA. However, the foreign company further acquired 11% of the equity shares and it was further proposed that the 40% equity shares which were held by the employees shall be transferred to the new company. The plaintiff, being the non-management staff union noticed that the shares were not being shared with the retired and resigned employees as per the decided ratio of 65:35 but rather the shares were being provided to the management staff and further being sold to the new company and the plaintiff claimed that this was a breach of the terms as laid down in the AOA. It was contended by Hindustan Thompson Associates Ltd. and Ors. that the ratio of 65:35 was removed and the AOA was amended in 1998. Therefore, the Delhi High Court held that upon the coming into force of the amended AOA, no rights and claims, contravening it can be enforceable and held valid.
However, the aforesaid view of the clauses being unenforceable, if not mentioned in the AOA has been changed in the below-mentioned cases:
In Premier Hockey Development Private Limited vs. Indian Hockey Federation, ESPN and the Indian Hockey Federation entered into an SHA and a new company was formed which was called the Premier Hockey Development Private Limited for the purpose of organizing and conducting hockey leagues and tournaments. A hockey league was being organized by the Indian Hockey Federation with Nimbus Sports and ESPN’s contention was that the same was in breach of the terms of the SHA and a petition was filed by Premier Hockey Development Private Limited against Indian Hockey Federation. It was contended by Indian Hockey Federation that a resolution was not passed by the board of directors of the Premier Hockey Development Private Limited for the purpose of initiation of such proceedings against Indian Hockey Federation and that these clauses were not incorporated in the AOA of the company. The court opined that, as these clauses were not in contravention to the Companies Act, 1956 and did not violate the SHA, these clauses would be binding on the parties and that such proceeding could be initiated against Indian Hockey Federation.
In Vodafone International Holdings vs. Union of India and another, Vodafone International Holdings entered into transactions with Hutchinson Telecommunication International Limited by which share capital of Hutchinson Telecommunication International Limited’s Cayman subsidiary was transferred by Hutchinson Telecommunication International Limited to Vodafone International Holdings. Vodafone International Holdings acquired 67% in Hutch Essar Limited which is a joint venture of Hutchinson and Essar. The Supreme Court held that agreements can be entered into by the shareholders of the company which would be in the best interest of the company and when such provisions of the SHA are not contrary to the provisions as incorporated in the AOA, such clauses of the agreements shall be valid and enforceable.
From the aforesaid judgements, it can be deduced that the courts have put in great efforts towards upholding the sanctity of an SHA and the clauses of the SHA when not incorporated in the AOA. The clauses of the SHA shall be treated as valid and enforceable, so long as the clauses are in compliance with the laws and are not contrary to the AOA. Further, in the event, the company is not a party to the agreement, the same shall not be enforceable against the company and the clauses of the AOA shall prevail. In the event, the company is a party to the SHA, and there are a few clauses in the SHA which are not conflicting with the AOA, the SHA might prevail, but ultimately, it shall be kept in mind that, AOA is a charter document and is considered as a bible of the company and shall prevail over any agreement. Therefore, it is advisable that the clauses of the SHA should be incorporated in the AOA.
Authors: Anita Dugar, Senior Associate; Kriti Sanghi, Associate.
Disclaimer: The content of this article is intended to provide a general guide to the subject matter. For any queries, the authors can be reached at (i) email@example.com (ii) firstname.lastname@example.org.
Updated as on April 29, 2020
Image generation credits: https://www.canva.com/templates/
 AIR 1992 SC 453
 2013 178 CompCas 173 (Del)
 5th August 2013
 O.M.P. 92/2011 & O.M.P. 52/2011
 2012 6 SCC 613