2018 (3) TMI 1707 - Tri - Companies Law

Registration of transfer of equity shares - refusal on the ground that the first respondent-company had decided in its board meeting on October 26, 2016 to refuse registration as the lodgement is in violation of article 23A of the articles of association of the first respondent-company - sufficient cause or not - sub-section (4) of section 58 of the Companies Act, 2013 - Held that - It is an admitted fact that the petitioner has purchased 25 equity shares of ₹ 10 each from the tenth respondent which constitutes 0.02 per cent. of the overall shareholding of the first respondent-company. By acquiring such fraction of shares by the petitioner in the first respondent-company, there are no chances of hostile takeover of the first respondent-company by the petitioner. Therefore, this contention of the first respondent-company stands rejected. Rejection of the registration of the transfer of shares in favour of the petitioner also on the ground that the petitioner-company is running the same business and is a competitor - Held that - There is nothing on record to suggest that there has been any instance which goes to show that, the petitioner-company as a competitor has derived benefits which were otherwise, to be enjoyed by the first respondent-company - a perusal of copy of the articles of association placed in the typed set filed with the petition reveals that article 23A stood deleted from the time when the first respondent-company became the deemed public company, and the respondents have also admitted that the first respondent-company is a public company. Therefore, the reliance on article 23A which is not the part of the articles of the first respondent is misconceived and the said ground taken by the respondents stands rejected. There can be various reasons which may constitute sufficient cause for refusal of the registration of the transfer of shares in a public company. In other words, every case is to be seen in the light of its facts and circumstances in order to determine whether reasons on the basis of which the registration has been refused are constituting sufficient cause or not. Thus, the discretion of the directors is to be tested as the opinion on fair and sensible manner in the interest of the company as held in Bajaj Auto Ltd. v. N. K. Firodia 1970 (9) TMI 55 - SUPREME COURT OF INDIA . The decision dated October 26, 2016 of the board of directors by which the registration of transfer of shares of the first respondent-company in the name of the petitioner has been refused is the respondent-company and respondents Nos. 2 to 9 are directed to register the transfer of 25 equity shares of ₹ 10 each in the name of the petitioner by entering its name in the register of members of the first respondent-company and by omitting the name of the transferor, viz., the tenth respondent, viz., Beena George therefrom within ten days from the date of this order - petition disposed off.

Summary

Issues Involved:
1. Validity of the refusal to register the transfer of shares by the board of directors.
2. Interpretation and applicability of Article 23A and Article 24(2) of the Articles of Association.
3. Determination of "sufficient cause" under Section 58(4) of the Companies Act, 2013.
4. Allegations of hostile takeover and competition between the petitioner and respondent companies.

Detailed Analysis:

1. Validity of the refusal to register the transfer of shares by the board of directors:
The petitioner, M/s. Plant Lipids P. Ltd., lodged a transfer of 25 equity shares from the tenth respondent, Beena George, to itself. The first respondent-company, M/s. Synthite Industries Ltd., refused to register the transfer citing non-compliance with Article 23A and Article 24(2) of its Articles of Association. The tribunal analyzed the reasons provided by the board of directors for the refusal, particularly focusing on whether these reasons constituted "sufficient cause" under Section 58(4) of the Companies Act, 2013.

2. Interpretation and applicability of Article 23A and Article 24(2) of the Articles of Association:
Article 23A was cited by the first respondent-company as a basis for refusal. However, the tribunal found that Article 23A had been deleted when the company became a deemed public company, making its reliance misplaced and misconceived. Furthermore, Article 24(2) allows the board to refuse registration if it is not desirable to admit the proposed transferee. The tribunal examined whether these articles were applicable and valid grounds for refusal.

3. Determination of "sufficient cause" under Section 58(4) of the Companies Act, 2013:
The tribunal referred to various legal precedents to determine what constitutes "sufficient cause." It was noted that in the case of a public company, reasons such as contravention of the SEBI Act, the Sick Industrial Companies Act, or any other law in force could be considered "sufficient cause." However, reasons like competition or hostile takeover intentions were not deemed sufficient unless backed by substantial evidence. The tribunal concluded that the refusal based on competition and the alleged hostile takeover was not supported by any documentary proof and did not fall within the purview of "sufficient cause."

4. Allegations of hostile takeover and competition between the petitioner and respondent companies:
The first respondent-company argued that the petitioner intended to increase its shareholding to facilitate a hostile takeover and that the petitioner was a competitor. The tribunal found that the acquisition of a mere 0.02% of the shares did not support the claim of a hostile takeover. Additionally, allegations of competition and business harm were not substantiated with evidence. The tribunal emphasized that free transferability of shares in a public company is a legislative policy and must be upheld unless a valid "sufficient cause" is demonstrated.

Conclusion:
The tribunal directed the first respondent-company and its directors to register the transfer of the 25 equity shares in the name of the petitioner, M/s. Plant Lipids P. Ltd., and to update the register of members accordingly within ten days from the date of the order. The petition was disposed of with this directive, reinforcing the principle of free transferability of shares in public companies and clarifying the limited scope of "sufficient cause" for refusal of share transfers.