Company Law Board
Smt. Lakshmi Natarajan vs Bharatan Publications Ltd. And Ors. on 22 November, 1996
Equivalent citations: [1998]94COMPCAS367(CLB)
ORDER
1. This is a petition filed under Section 111(4) of the Companies Act, 1956, (hereinafter referred to as "the Act"), praying for declaration that the transfer of 240 equity shares bearing distinctive Nos. 1242 to 1301, 1486 to 1545 and 2041 to 2160 by the second respondent in favour of the third respondent is illegal and rectification of the register of members of the first respondent (hereinafter referred to as "the company") by restoring the name of the second respondent in the place of the third respondent.
A brief of the allegations in the petition is as follows :
According to the petitioner, the company made an offer of sale of the impugned shares standing in the name of the second respondent to all the shareholders on April 22, 1993, by way of a circular, determining the intrinsic value at Rs. 5,001 per share. The petitioner along with two other shareholders of the company made an offer for the purchase of 54 of the impugned shares at the rate of around Rs. 2,500 per share. There had been a series of correspondence between the petitioner and the company on sale of the impugned shares. As per Article 32 of the Articles of association of the company, the shares could be transferred at the fair value fixed by the board of the company based on the certificate of the auditors of the company. The company had never communicated the fair value of the impugned shares to the shareholders. The impugned shares were sold to the third respondent at Rs. 3,000 per share without following the requirements of Article 32. The company communicated the offer of sale of the impugned shares on April 22, 1993, determining the intrinsic value as at March 31, 1992, based on the auditor's certificate dated August 10, 1992. The company did not fix the fair value which is in contravention of Article 32. The transfer of the impugned shares is void and not binding upon the company.
2. According to respondents Nos. 1 and 2, there was no offer from the petitioner to purchase the impugned shares at the rate of Rs. 2,500 per share. The petitioner not only failed to set out the price but also did not deposit the consideration. Nor did the petitioner approach the company for fixing the fair value. The company on previous occasions during 1989 and 1990, accepted the intrinsic value certificate given by the auditors as the fair value. When the shares were sold at the prices negotiated between the seller and buyer and based on the intrinsic value neither the petitioner nor the other shareholders raised any objection on any previous occasion. The petitioner had purchased these shares at the negotiated price of Rs. 2,500 with the seller, Dr. A. S. Raman. If the existing shareholders fail to purchase the shares, the company can offer the shares to any person whether member or not. In such cases, preference will be given to the existing shareholders. The company had followed the procedure prescribed by Article 32. The second respondent negotiated with the third^ respondent on June 3, 1993, regarding the price of the shares. The board of directors of the company at its meeting held on June 5, 1993, permitted the second respondent to sell the impugned shares to the third respondent at the rate of Rs. 3,000 per share. The impugned shares were duly transferred to the third respondent in accordance with Article 32.
3. According to the third respondent, the petitioner's offer to purchase the impugned shares did not comply with the mandatory requirements of Article 32. The petitioner did not give any specific offer with reference to the auditor's certificate nor did she deposit the consideration with the company. The time limit of 30 days for purchasing the impugned shares had lapsed. As there was no valid offer by May 22, 1993, respondents Nos. 2 and 3 negotiated the price at Rs. 3,000 per share. The transaction between the second and the third respondents was in accordance with the Articles of association. The proposal was duly approved by the board of directors of the company. The impugned shares are supported by consideration and duly transferred in favour of the third respondent.
4. During the hearing, Shri T. K. Seshadri, counsel for the petitioner and Shri Arvind P. Datar, counsel for the second respondent, have reiterated their submissions in their respective pleadings. Counsel for the petitioner contended that the company had not complied with the procedure prescribed in Article 32 before sale of the impugned shares in favour of the third, respondent. He also emphasised that Article 32 does not contemplate negotiations by a member for sale of shares. In the light of Article 33, it is only in case the board of directors of the company fail to find a purchaser for the shares, the transferor member shall be at liberty to sell shares to any other person whether a member or not at such price as may be negotiated by him/her. The second respondent cannot, therefore, negotiate for sale of the impugned shares under Article 32. Counsel for the petitioners relied upon the decision in Cruickshank Company Ltd. v, Stride-well Leather (P.) Ltd, [1996] 86 Comp Cas 439 ; [1995] 3 Comp LJ 143 (CLB), to state that non-compliance with the Articles of association renders a transfer invalid and such transfer is liable to be set aside. He also cited C. P. No. 28/111/SRB/1993, stating that when the Articles prescribe certain procedure and vest some right in members, a transfer in violation of the same will have to be set aside even against bona fide purchasers by adequately compensating them for their investments.
5. Shri Seshadri drew our attention to the sale of five shares by Shri. A.S. Raman in favour of the petitioner in December, 1994, wherein the company had fixed the fair value of the shares in accordance with Article 32 whereas the sale notice dated April 22, 1993, in respect of the impugned shares refers to the intrinsic value. Thus, according to him, the board of directors of the company is conscious of both fair value and intrinsic value. No certificate of the auditor was obtained for the fair value of the impugned shares. There is nothing on record to show that the auditors' certificate dated August 10, 1992, determining the intrinsic value was obtained for the purpose of sale of the impugned shares.
6. Counsel for the petitioner elaborated on the meaning of "fair and intrinsic value" making the subtle difference between them by quoting from Brudney and Chireltein's Cases and Materials on Corporate Finance by Victor Brudney. The auditor's certificate produced by the company does not confirm the fair value of the impugned shares. The petitioner is questioning the entire sale of impugned shares and not restricting her remedies in respect of the 15 shares for which an offer was made. As the company had not given the fair value, the petitioner did not deposit the consideration in accordance with Article 32.
7. Counsel for the second respondent submitted that the impugned shares had to be sold in order to meet the marriage expenses of the second respondent. The petitioner had not deposited the consideration in terms of Article 32 and no valid offer was made by the petitioner. As there was no offer to purchase the impugned shares, the board of directors of the company is empowered to sell to any other person whether a member or not, as contemplated in the Article 33. Taking into consideration Articles 31, 32 and 33 of the Articles of association, the action of, the board of directors of the company is in order. The board had approved the sale of impugned shares and hence the petitioner cannot challenge the decision of the board. The sale of the impugned shares in favour of the third respondent was unanimous and transparency was maintained by the second respondent. The second respondent had even paid the capital gains tax on account of the sale of the impugned shares. The auditors' certificate dated August 10, 1992, is based on the figures for the period as at March 31, 1992. Though the auditor's certificate makes a reference to the intrinsic value, there is no difference between the fair value and intrinsic value Even otherwise, it is only a technical flaw which cannot invalidate the entire impugned shares (234 shares), when especially they were sold for the maximum price. Moreover, the petitioner made an offer to purchase only 15 shares and hence she has no locus standi to challenge the entire impugned shares. Counsel for the respondents has, therefore, prayed for dismissal of the petition.
8. We have perused the pleadings and heard the arguments. The respondent company is a closely held private limited company having 10 shareholders. The dispute is in regard to transfer of shares in violation of the Articles of the company. The counsel for the petitioner has relied on various decisions of the Company Law Board wherein the transfers made in violation of the pre-emptive clause in the Article has been held to be invalid and as such he seeks that the transfer of the impugned shares in this case should also be declared invalid.
The provisions relating to transfer of shares in the company are contained in Articles 31 to 35. A sum up of these Articles is as follows :
"1. A shareholder shall give notice of sale to the board of directors.
2. The company shall determine the fair value within 30 days from the date of receipt of the notice by any shareholder.
3. The fair value is based on the auditor's certificate.
4. The board must thereafter give notice of the intended sale by members to the existing shareholders.
5. Shareholders desirous of purchasing shares should give notice to purchase the shares within 30 days.
6. Shareholders should deposit the consideration with the board.
7. In case no offer is received within 30 days, directors are at liberty to offer shares to any person. While doing so, preference should be given to shareholders who had exercised the option to purchase the shares so offered.
8. In case the board does not find any person within 90 days from the date of offer, the transferor member shall be at liberty to sell the shares to any person.
9. Once a notice is given, the transferor shall not be entitled to withdraw the notice without the permission of the board."
Respondent No. 2 issued a notice to the company of his intention to sell the impugned shares. The board considered the matter on April 16, 1.993, and issued a notice of sale to all the shareholders on April 22, 1993, along with the intrinsic value certificate dated August 10, 1992, issued by the auditors of the company. On May 7, 1993, the petitioner addressed a letter to the company evincing interest to buy about 15 shares. Two other shareholders also evinced interest to buy 15 shares and 20 to 25 shares. All these three shareholders had indicated that they hope to negotiate the price for the shares.
9. The petitioner's claim is that the company had not obtained a fair price certificate from the auditors after the notice of sale was received and the intrinsic value certificate cannot be treated as the fair value certificate. It is the contention of the company that the petitioner had not offered a firm price and had not deposited the money for the price of the shares as provided in the articles. It is also the contention of the petitioner that respondent No, 2 should not have acted on behalf of the board to negotiate the price with respondent No. 3 without any authority of the board.
10. As we have already pointed out the company is a closely held company and the Articles provide for pre-emptive right. It was urged during the hearing that respondent No. 2 had disposed of the shares to meet the expenses in connection with the ensuing marriage in his family and as such he was desperate to find a buyer for a good price. Therefore, to decide this matter especially in view of the fact that the Company Law Board is a court of equity, the overall circumstances under which the transfer has taken place have to be taken into account. The company by following the provisions in the Articles had issued a notice. The grievance that the fair value certificate should have been enclosed instead of the intrinsic value certificate, should have been taken up with the company within the stipulated period. The petitioner had not done so and as a matter of fact even the firm number of shares to be purchased by her as well as the firm price for the same had not been indicated in her letter.
11. Normally, in cases of this type where the price is to be fixed by the board of directors for the shares on the basis of a particular method and if the board fails to do so and fixes the price by a different method, the shareholders to whom the shares are offered, while complaining, should also indicate as to how they have been prejudicially affected by the wrong method either by showing that the price fixed is higher than the price which would have been fixed as per the provisions of Articles and such fixation would put more burden on the shareholders in acquiring these shares. In the instant case, except complaining that instead of the fair value the company has indicated the intrinsic value, no details have been given as to whether the intrinsic value is excessive to that of the fair value. In the absence of such a grievance having been expressed with details, we would only consider this as a procedural defect. In all probability, looking into the asset base of the company, the fair value would have been more than the intrinsic value and in that case the respondent No. 2 being the transferor should have been more aggrieved for being offered a lesser price than the fair value. However, the issue relating to this point becomes irrelevant when we look at the transfers that took place on earlier occasions when even though the fair value was computed, the actual transfer took place on negotiated prices. For 90 shares in March 1989, the fair value fixed was Rs. 5,913 but they were sold on negotiated price of Rs. 1,500 and in January 1991, for 20 shares the fair value fixed was Rs. 4,755 while the shares were sold at Rs. 1,500. It is on record that the petitioner did orally offer a price of Rs. 2,500 per share which was not agreed to by respondent No. 2. The Articles provide that in case the board of directors, does not receive offers from the members within 30 days, it is bound to find a buyer within a period of 90 days from the date of offer. Even though the locus standi of respondent No. 2 as executive director to negotiate with respondent No. 3 is being questioned by the petitioner, yet as per board resolution dated June 5, 1993, respondent No. 2 had informed the board, that, as executive director, he had negotiated the price with respondent No. 3. This negotiated price has been approved by the board. In other words, even if he had acted without authority, his action has been ratified by the board. Therefore, we cannot find any fault with respondent No. 2 in negotiating with respondent No. 3 as executive director.
12. In the cases that were cited before us on the proposition that any transfer in violation of the Articles should be declared as invalid, it is to be noted, that, in most of those cases such transfers took place with an ulterior motive even without any offer to existing shareholders. But in the present case, as has been the earlier practice of the company, the company did issue notices to all the shareholders and the only fault complained of is that the fair value certificate was not enclosed. We do not find anything to show that the transfer was with any ulterior motive.
13. Thus, taking into consideration the facts and circumstances of the case and that as against the offer of 240 shares, the request from members was only to the tune of 55 shares and that the transfers of shares cannot be impugned on the basis of non-furnishing of the fair value certificate for reasons already stated, we do not consider it appropriate to declare the transfer of the entire 240 shares as invalid.
14. However, we find that Article 32 provides that the directors have the power to dispose of the shares as they wish after 30 days of notice and within 90 days of the offer to sell. Normally, an offer of shares could be rejected on two grounds. One is that a shareholder is not interested in buying any share at all or the price is excessive. In the present case the petitioner has offered to buy 15 shares but not at the prescribed price. The executive director negotiated a price of Rs. 3,000 per share with respondent No. 3. In other words, from Rs. 5,001 intrinsic value per share, the negotiated price came down to Rs. 3,000. Article 32 itself provides that the directors can give preference to the shareholders who had offered to purchase the shares so offered, when the board itself disposes of the shares. As we have pointed out, the petitioner and two other shareholders had offered Rs. 2,500 per share to respondent No. 2 and later he had negotiated for Rs. 3,000 per share with respondent No. 3. Even though the board had approved transfer of shares at Rs. 3,000 per share to respondent No. 3, before the actual transfer was effected, board had received a letter from petitioner No. 1 seeking to purchase 55 shares. Since respondent No. 2 was interested in the price of Rs. 3,000 in all fairness we feel, the board should have, in accordance with the Article 32, offered to the petitioner and two other shareholders 55 shares at Rs.3,000 and in case they had not accepted the same, the board could have gone ahead with its earlier approval. This would have been in full conformity with the last sentence of Article 32. The failure to comply with this requirement calls for remedial action/grant of relief.
15. While we have held that it would not be appropriate to declare the transfer of entire 240 shares as invalid we have also held that the board should have offered 55 shares to the petitioners and the other two shareholders. Accordingly, the most equitable way of disposing of this petition, according to us, would be to direct respondent No. 3 to transfer 55 shares to the three shareholders if they still desire to purchase the shares. Accordingly, we direct so. Within 30 days from the date of receipt of this order, the three shareholders will write to the company indicating therein the number of shares they desire to purchase from respondent No. 3 together with payment of Rs. 3,000 per share. The company shall, in turn, obtain transfer instruments along with the share certificates on payment of this amount, from respondent No. 3, and register the shares within one week thereafter. Any dividend received or declared in respect of these shares will be retained and/paid to respondent No. 3.
There will be no order as to costs.