DR.

RAM MANOHAR LOHIYA

NATIONAL LAW UNIVERSITY,
LUCKNOW

CORPORATE LAW
Final Draft
Conflict Between The Shareholders
Agreement And Articles Of A Company
SUBMITTED TO :
Dr. Manish Singh
Associate Professor (Law)
SUBMITTED BY :
Apurv Singh
5th Smstr, 3rd Yar
B.A. LL.B. (Hons.)
Dr. RMLNLU, Lucknow
Roll No. :28

ACKNOWLEDGEMENTS:
I would like to extend special thanks and gratitude to my subject teacher Dr. Manish
Singh who gave me the golden opportunity to work on this wonderful research topic "
Conflict Between The Shareholders Agreement And Articles Of A
Company " which has helped me gain a lot of standpoint regarding the legality of
Shareholders Agreements and any similar covenants over the provisions of the Articles of
Association of a company in case of any clash between the two. Throughout the research
period I have been time and again guided my by teachers whenever I faced any hurdles
or was in a state of stupor not being able to figure out the intricacies of the subject.
I would like to thank my university Dr. Ram Manohar Lohiya National Law University
for giving me the chance to be a part of a unique research oriented curriculum which
indeed boosts the understanding of the subject.
I would also like to thank my parents, mentors and well wishers who have been a
constant support and have time and again reviewed my work and have provided their
insights on the matter.

-Apurv Singh

CONTENTS
1. ACKNOWLEDGEMENT

..PAGE 2
2. RESEARCH
METHODOLOGY.....
PAGE 4
3. INTRODUCTION...
....PAGE 5
4. ENFORCEABILITY OF SHA IN INDIA......
.PAGE 7
5. AN ANALYSIS OF THE CURRENT POSITION.......
..PAGE 9
6. CONTRIBUTION....
..PAGE 13
7. CONCLUSION.......
..PAGE 13
8. BIBLIOGRAPHY......
....PAGE 14

RESEARCH METHODOLOGY
SCOPE & OBJECTIVE:
The objective of the project is to discuss the problem that is prevailing regarding the legality of
Shareholders Agreements and that whether the shareholders can agree on terms, outside the
articles of a company. The paper will also be deciding, with the help of the various case laws, the
issues as to whether a provision in a SHA that is contrary to the Articles of the company is valid
or not and what are the possible remedies for a shareholder against breach of a SHA by other
shareholders, when such an action is not construed to be a breach under the Articles of the
company.

HYPOTHESIS:
Based on the research that I conducted on this particular aspect of company law, my hypothesis
would be that the shareholders agreement is valid agreement and it has a binding value on all the
shareholders. But in case of conflict with the articles of the company, it is the articles which will
prevail. But nevertheless, all this doesnt deny the shareholders their right to sue, and they can
claim a remedy in case of a breach caused by any other person.

RESEARCH QUESTION
1) What will prevail in case of contradiction between Articles of a company and the Shareholders
Agreement and whether a provision in a SHA that is contrary to the Articles of the company is
valid and enforceable?
2) Whether shareholders have any remedy against such a breach caused by the other shareholders
when there is no breach under the Articles of the company?

Methodology:
The research for the project has been done through the doctrinal approach. There is no statistical
analysis of data. Analysis of the project topic in accordance with research questions will be done
through various articles and journals.

INTRODUCTION
Shareholders agreements are quite common in business, and more so today as variety of
strategic, institutional investors make investments in companies. There are numerous situations
where such agreements are entered into family companies, JV companies, venture capital
investments, private equity investments, strategic alliances, and so on. In addition, there may be
put options, buy back agreements and so on. Questions commonly arise about their
enforceability, particularly as against the companies. There may not be a doubt as to their
enforceability as between shareholders inter se (except for violation of specific laws, for
example, Securities Contracts (Regulation) Act), but issues arise as to whether such an
agreement can govern the rights of shareholders of the company generally.
Essentially, Articles of Association constitute an agreement between the company and its
members as well as members inter se and is binding on all the members whether he was a
member originally or becomes later on. Section 36(1) of the Companies Act states that the
registered Memorandum and Articles of Association of a company binds the company and the
members to the same extent as if they respectively had been signed by the company and each

member and member as defined in section 41 includes any person who has subscribed to the
Memorandum of a company and any person holding equity shares of the company whose name
has been entered in the register of members or in depositorys records. However, quite often,
sections of shareholders have private agreements among themselves generalizing, shareholders
agreement (SHA). SHA is a contractual arrangement between the shareholders of a company
describing how the company should be operated and the defining inter-se shareholders' rights
and obligations. SHAs are the result of mutual understanding among the shareholders of a
company to which, the company generally becomes a consenting party.
Such agreements are specifically drafted to provide specific rights, impose definite restrictions
over and above those provided by the Companies Act. They are seen as problematic as they can
be instruments for groups of shareholders to circumvent the normal scheme of the companys
legislation or the companys constitution in its Articles of Association.
A SHA creates personal obligation between the members signing such agreement however, such
agreements do not become a regulation of the company in the way the provisions of Articles are.
An agreement outside the Articles between shareholders as to how they are to exercise their
voting rights on a resolution to alter the Articles would not necessarily be invalid.
Shareholders agreement is an agreement among the shareholders of a company defining rights
and liabilities of shareholders and controls operations of the company. Articles 1 of association,
also termed as constitution of company, is an internal document of a company which defines the
responsibilities of the directors, the kind of business to be undertaken, and the means by which
the shareholders exert control over the Board of Directors. The Shareholders agreement and
Articles of Associations have two major areas of conflict- first one is issues relating to transfer of
shares and second one is issues relating to management of company. The paper focuses on
judicial stand in respect of transfer of shares while drawing underlying principles in the event of
conflict arising between these two.

Section 2(2) of Indian Companies Act defines Articles as Articles means the articles of association of a company as
originally framed or as altered from time to time in pursuance of any previous companies law or of this Act.

ENFORCEABILITY OF SHA IN INDIA

It would be trite to state that the enforceability of any contract (which is not perceived as
violative of any law) is taken for granted. This may not however, always hold good.
Enforceability of SHA is one such instance. These kinds of agreements have, sometimes, clauses
that go against the company legislation like

drag-along rights,
tag-along rights,
right of first refusal (ROFR),
composition of board of directors,
maintaining a particular structure for the company
conferring on shareholders which would not otherwise be enforceable if not contained in

Articles of the company

specific provision as to quorum requirement for board and general meetings,
veto or supermajority rights available to certain shareholders at board or shareholder level
providing private arbitration of disputes

Though these rights are present in many investment and joint venture agreements, this is the
topic of much discussion as the Indian courts generally have not favoured such complete
freedom in these agreements. Courts have either refused to recognize clauses in shareholders
agreements or, even when consistent with company legislation, enforced such clauses only if
they have been incorporated in the articles of association of the company. There is a series of
rulings in the respect in case of any conflict between the Articles and the SHA, the former will
always prevail. Some of these are:

V.B. Rangaraj v. V.B. Gopalakrishnan (AIR 1992 SC 453)

Shanti Prasad Jain v. Kalinga Tubes Ltd., (35 Com. Cas. 351 SC)
Mafatlal Industries Ltd., v. Gujarat Gas Co. Ltd (97 Comp Cas 301 Guj),
Pushpa Katoch v. Manu Maharani Hotels Limited ([2006] 131 Comp Cas 42 (Delhi)]

In Western Maharashtra Development Corporation Ltd. Vs. Bajaj Auto Ltd 2, it was held that such
clauses are to hamper the free transferability of shares and in violation of section 111A of the
Companies Act, 1956 and hence, are not enforceable. However, the Supreme Court in 2003 in its
decision in M.S. Madhusoodhanan v. Kerala Kaumudi Pvt. Ltd. 3, not disagreeing with the
2
3

(2010) 154 Company Cases 593 (Bom).

(2003) 117 CompCas 19 SC.

decision in V.B Rangaraj (Supra) but distinguishing itself from the facts in that judgment, held
that a restriction in relation to identified members on identified shares of a private company did
not amount to restriction of transferability of shares per se. Recently also, the Division Bench of
Bombay High Court in Messer Holdings Limited v Shyam Madanmohan Ruia and Ors 4,
overruling its own previous decision in Western Maharashtra Development Corporation Ltd
(Supra) held that any private arrangement in relation to shares are not in violation of section
111A of the Act. The Bench, analysing inter-alia the validity of ROFR, giving liberal meaning to
the term transferability, held that Section 111A of the Act is not a law dealing with the right of
the shareholders and does not expressly restrict or take away the right of shareholders to enter
into consensual arrangement/agreement by way of pledge, pre-emption/sale or otherwise.
However, in the case of Bombay High Court in IL & FS Trust Co. Ltd v. Birla Perucchini Ltd 5, it
was held that the provisions in an agreement, cannot be given effect to insofar as the
management of the affairs of the company is concerned, unless those provisions have been
incorporated in the Articles of a company. The fact that a company is a party to the subscription
agreement (as in the case it was) makes no difference to this position because the same is wellsettled in law. The provisions of a shareholders agreement curtailing the rights of directors
declared unenforceable if not included in Articles by Bombay High Court in Rolta India Ltd. &
Another vs Venire Industries Ltd. & Others. 6 It was held that the shareholders cannot infringe
upon the Directors' fiduciary rights and duties. Even Directors cannot enter into an agreement,
thereby agreeing not to increase the number of Directors when there is no such restriction in the
Articles of Association. The shareholders cannot dictate the terms to the Directors, except by
amendment of Articles of Association or by removal of Directors.

AN ANALYSIS OF THE CURRENT POSITION

As a background, it would be apt to note that conflicts between SHA and the Articles of a
company can be of two types; first, where the conflict relates to the management of the company
(affirmative vote, board of directors, accounts, etc.) and second, where the conflict relates to the
4

(2010) 98 CLA 325.

(2003) 47 SCL 426.
6
2000 100 CompCas 19 Bom
5

transferability of shares. The latter has been the subject of extensive case law in the Supreme
Court and High Court. As regards the former, two main questions arise;

Whether a provision in a SHA that is contrary to the Articles of the company is valid and
enforceable?

What are the possible remedies for a shareholder against breach of a SHA by other
shareholders even though such action would not be construed as a breach under the
Articles of the company?

The most important case in this regard is that of VB Rangaraj v. VB Gopalakrishnan. 7 The High
court had taken the view that sale by one defendant to other defendants was invalid according to
shareholders agreement which put restriction on transfer. The Supreme Court held that finding
recorded by the courts below that the sale by the first defendant of his shares to defendants 4 to 6
was invalid as it was in breach of the agreement, was erroneous in law. While asserting the
principle that shareholders agreement cannot go beyond Articles of Association, the Apex court
held that shareholders agreement clause, which was not expressly averred in Articles of
Association of the Company was unenforceable. In this case, while dealing with a conflict
between the SHA and the Articles of the company of the latter type, i.e. a conflict dealing with
the transferability of shares, the Supreme Court took the view that the provisions of a SHA
imposing restrictions even when consistent with the Companies Act, are to be authorised only
when they are incorporated in the Articles of the Company. The decision of the Supreme Court
was based on the seemingly settled position that where there is a contradiction between the SHA
and the Articles of a company, the latter will prevail.
In IL & FS Trust Co. Ltd. v. Birla Perucchini Ltd, 8 the decision in Rangaraj was also held
applicable to conflicts in the Articles and SHA not involving transfer of shares.
Therefore, it is a settled law that the Articles of a company would prevail when there is a
contradiction between the SHA and the Articles. But assuming that there is a certain provision in
the SHA that has not been incorporated in the articles of the Company, would it mean that merely
because the articles are silent (not contradictory), the articles will prevail?
7
8

(1992) 1 SCC 160

[2004] 121 Comp Cas 335

The answer to this question might lie in recognition of the legal position that a company is
controlled only by its Memorandum and Articles. The Articles are a form of a statutory contract
binding all the members of the company as regards the affairs of the company. A company
cannot contract outside the Articles in so far as the management of the affairs of the Company is
concerned, and any other agreement attempting to bind the company as regards its affairs, not
provided for in the Articles and Memorandum of the company, may not be enforceable. For
instance, a provision in a SHA giving a casting vote to the Chairman of the Board in case of a tie,
not provided in the Articles, will not be enforceable. However, this may also depend on whether
the company is a party to the SHA.9
In the case of World Phone India Pvt. Ltd. v. Wpi Group Inc, 10 the Board of Directors of the
company passed a resolution approving a rights issue in accordance with the Articles of the
company, even though such an action required the affirmative vote of the Appellant in
accordance with a SHA entered into between the shareholders of the company. The Company
Law Board held that since the provisions of the SHA granting an affirmative vote to the appellant
were not incorporated in the Articles of the company, the said provision is unenforceable and the
board resolution approving the rights issue was valid. On appeal, Justice Muralidhar of the Delhi
High court held:
The legal position is that where the articles of association are silent on the existence of an
affirmative vote, it will not be possible to hold that a clause in an agreement between
shareholders would be binding without being incorporated in the articles of association. The
question to be asked is whether the provisions of an agreement, that are not inconsistent with the
Act, but are also not part of the articles of association, can be said to be applicable. All that
section 9 states is that the clauses in the agreement that that repugnant to the Act shall be
void. This does not mean that the clauses in the agreement which are not repugnant to the Act
would be enforceable, notwithstanding that they are not incorporated in the articles of
association.
Thus, the court has held that the provisions of the SHA, though silent in the Articles of the
company, and not in contradiction with them, will not be enforceable. This ruling, as it stands,
9

See Russell v. Northern Bank Development Corp Ltd, [1992] 1 WLR 588
World Phone India Pvt. Ltd. & Ors vs Wpi Group Inc, CO.A (SB) No. 102 of 2012

10

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brings in a lot of confusion to the issue of conflicts between SHAs and Articles of a companybecause the issues dont stand resolved merely with the conflicting provisions being
unenforceable. Further issues arise in light of the judgment of the Supreme Court in Vodafone
International Holdings BV v. Union of India11, that have not been considered by the Delhi High
Court in World Phone.
In Vodafone, three main observations were made by the Supreme Court on the issue;

That the Supreme Court does not subscribe to the view in Rangaraj that restrictions in a
SHA, though consistent with company law, are to be authorised only when they are

incorporated in the articles of the Company.

Shareholders can enter into any arrangement in the best interests of the Company, but the
only thing is that the provisions of SHA shall not go contrary to the articles of the

Company.
Breach of SHA which does not breach the Articles of a company is a valid corporate
action, but the parties agreed can get remedies under the general law of the land for
breach of any agreement and not under Companies Act.

In light of the above, a logical extension of the judgment in World Phone12 would be that even
though the provisions of an affirmative vote are not incorporated in the Articles of the company,
and though the action of the company in providing for a rights issue would be valid under the
Companies Act, such an action will still be in breach of the SHA for which the aggrieved
shareholder can pursue an action for breach of contract.
This view is also consistent with the position in English law. In Southern Foundries Ltd v.
Shirlaw, [1940] AC 701 it was held, a company cannot be precluded from altering its articles
thereby giving itself power to act under the provisions of the altered articlesbut so to act may
nonetheless be a breach of contract if it is contrary to a stipulation in the contract validly made
before the alteration, and the court awarded damages for wrongful dismissal of the managing
director of the Company even though the mode of dismissing was valid under the Articles of the
company. There is considerable opinion to show that the relief may also lie in terms of an
injunction to restrain it possible breach of the SHA contract.13
11

(2012) 6 SCC 613

World Phone India Pvt. Ltd. & Ors vs Wpi Group Inc, CO.A (SB) No. 102 of 2012
13
Aditya Swarup, Conflicts Between Shareholders Agreement and Articles of a Company, India Corporate law (June
6, 2013)
12

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The same position also seems to have been incorporated in the new Companies Act of 2013,
Section 58(2) of which provides that any contract or arrangement between two or more persons
in respect of transfer of securities shall be enforceable as a contract and the same would not
amount to restraining the concept of free transferability of the shares.
However, the controversy still remains unsettled. In fact, the same seems to have been revived
once again in Bajaj Auto Ltd. v. Western Maharashtra Development Corporation Ltd. 14, which
was recently decided by a division bench of the Bombay high court in appeal to its previous
decision15 of a single judge bench. The court in this case held that merely the fact that the shares
of a public company can be subscribed to by the public, unlike in the case of a private company,
does not in any way whittle down the right of a shareholder of a public company to arrive at a
consensual agreement/ arrangement with a third party or another shareholder provided the terms
are consistent with the AOA as well as the Companies Act and rules governing other laws. All of
this only leads to all the more confusion leaving scope for further speculation which means the
true resolution of the issue will have to await a pronouncement from the Supreme Court.

CONTRIBUTION
The researcher has researched the various aspects of the debate to analyse the current position of
law. There have been a plethora of cases dealing with this issue, but none of them has been able
to provide an established law on the matter. The cases mostly say the same thing, some agree and
some dont. What the courts have failed to do is to analyze both these aspects in a reasonable
manner and provide a final solution. In cases where some certainty is seemingly established, the
preceding cases dont acknowledge it.
With the help of this project, the researcher has analyzed all these case laws, and pointed out
what the debate is all about. And it is with the help of the case laws only that the researcher has
tried to provide a conclusion to for this debate.
14
15

2015 SCC Online Bom 2111

supra note 2.

12

CONCLUSION
The issue of conflicting provisions in a shareholders agreement and the articles of association of
a company is a never ending debate. It is settled law that articles of association prevail over
shareholders agreement. However, in the absence of an expressed provision in articles, the issue
remains unsolved as to whether a clause in shareholders agreement in the absence of affirmance
from article is enforceable or not. Supreme Court in Vodafone case has drawn the proposition
that restrictions in a Shareholding Agreement, though consistent with company law, are to be
authorized only when they are incorporated in the articles of the Company. However, this view
was ignored in the cases following it, especially in the World Phone Case. On 9th May, 2013, the
Supreme Court refused to admit a SLP in the World Phone case stating the opinion expressed in
the order was only as regards interim relief and that the CLB was to decide the issue
uninfluenced by the observations of the High Court. This sets the stage for a new round of
litigation where it is hoped that issues concerning the conflicts between SHAs and Articles of a
company would be finally settled.
Nevertheless, it is hereby concluded that the breach of Share Holding Agreement which does not
breach the Articles of accompany is a valid corporate action, but the parties agreed can get
remedies for breach of any agreement as envisaged under the Contract Act.

BIBLIOGRAPHY
PRIMARY SOURCES1. The Companies Act, 1956
2. Taxmanns Company Law Digest (1913-2009), 3rd Edition.
3. Singh, Avtar, Company Law, Eastern Book Company, 16th Edition, 2015.

SECONDARY SOURCES1. Westlaw India

2. Manupatra
3. http://indiacorplaw.blogspot.in

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