2003 PLP 183 (CLD)

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89. Nature of shares and certificate of shares.‑‑‑(1) The shares or other interest of .any member in a Company shall be movable property, transferable in the manner provided by the Articles of the Company. (2)........ (3)........." From the above provision of law it would appear that the shares of the Company of any member would be transferable in the manner as provided by Articles of the Company, therefore, it would be as said above, necessary to reproduce the relevant Articles of the Company relating to the mode of transfer of shares by any member In the Company. Articles 39 to 46 read as follows:‑‑ "39.Transfers of shares which may for the time being registered in the name of a person or‑company not being a national of Pakistan or a company controlled by Nationals of Pakistan shall be further subject to the provisions and restrictions contained in the next seven clauses hereof and all references to transferors, persons and members whomsoever and wheresoever they may occur throughout the same clauses shall be deemed to mean transferors persons and members respectively other than Nationals of Pakistan or companies controlled by Nationals of Pakistan and all references to a share or shares shall mean such as may for the time being be registered in the name of a person or company not being a National of Pakistan or a Company controlled by Nationals of Pakistan.

40. No share shall (save as provided by clauses 49 and 50 hereof) be transferred to a person who is not a member so long as any member is willing to purchase the same or any person selected by the Board of Directors as one whom it is desirable in the interests of the company to admit to membership is likewise so willing.

41. In order to ascertain whether any member or person selected as aforesaid is willing to purchase a share the proposing transferor shall give notice in writing (hereinafter called "the transfer notice") to the Company that he desires to transfer the same. Such notice shall specify the sum he fixes as the fair value and shall constitute the Company his agent for the sale of the share to any member of the company or persons selected as aforesaid at the price so fixed or at the option of the purchaser at the fair value to be fixed in accordance with the provisions of clause 43 hereof. The transfer notice may include ‑ several shares and in such, case shall operate as if it were a separate notice in respect of each. The transfer notice shall not be revocable except with the sanction of the Board of Directors.

42. If the Company shall within the space of two calendar months after being served with such notice find a member or person selected as aforesaid willing to purchase the share (hereinafter called "the purchasing member") and shall give notice thereof to the proposing transferor he shall be bound upon payment of the fair value as fixed in accordance with clause 41 or 43 hereof to transfer the share to the purchasing member.

43. In case any difference arises between the proposing transferor and the purchasing member as to the fair value of share an accountant or firms of accounts appointed for this purpose by the Mercantile Bank of India Ltd., on the application of either party shall certify in writing the sum which in his or their opinion is the fair value and such sum shall be deemed to be the fair value and in so certifying the accountant or accountants shall be considered to be acting as an expert or experts and not as arbitrators and accordingly the Arbitration Act shall not apply.

44. If in any case the proposing transferor after having become bound as aforesaid makes default in transferring the share the Company may receive the purchase money and shall thereupon cause the name of the purchasing member to be entered in the Register as the holder of the share and shall hold the purchase money in trust for the proposing transfers, The receipt of the Company for the purchase money shall be a good discharge to the purchasing member and after his name has been entered in the register in purported exercise of the aforesaid power the validity of the proceedings shall not be questioned by any person.

45. If the Company shall not within the time prescribed as aforesaid find as existing member or person selected as aforesaid willing to purchase the share and give notice to purchase the share and give notice in manner aforesaid, the proposing transferor shall at any time within three months afterwards be at liberty to sell and transfer the share to any person and at any price.

46. The Company in General Meeting may by special resolution make and from time to time vary rules as to make in which any shares specified in any notice served on the Company pursuant to clause 41 hereof shall be offered to the members and as to their rights in regard to the purchase thereof and in particular may give any member or class of members a preferential right to purchase the same. Until otherwise, determined such shares shall be offered to the members (other than the proposing transferor) as nearly as may be in proportion to the existing shares held by them respectively and the offer shall in each case limit the time within which the same, if not accepted in whole or in part, will be deemed to be declined, and may notify to the members that any member who desires an allocation of shares in excess of his due proportion should in his reply state how many excess shares he desires to acquire; and if all the members do not claim their due proportions the unclaimed shares shall be allocated in proportion to their existing holdings amongst the members claiming in excess up to the number of excess shares desired, If any shares shall not be capable, without fractions, of being offered or allocated to the members in proportion to their existing holdings, the same shall be offered or allocated to the members or some of them in such proportions or in such manner as may be determined by the Board of Directors. Offers, to members made hereunder shall be communicated by registered post (or in case of members with registered addresses outside Pakistan by telegram confirmed by registered air mail) and the time limit above mentioned shall be not less than two months from the date of posting or telegraphing as the case may be."

9. The first point for consideration whether transfer of shares in favour of petitioner No.5 was valid and in accordance with the Articles of the Company, in the said respect the learned Division Bench of the High Court, after referring Articles 39 to 46 of the Company,' came to the conclusion that the proposing transferor could also transfer their shares not only to existing members but even to any other selectee of Board of Directors with respect to whom it was desirable in the interest of Company to admit such membership. It was further concluded that Article 40 of the Company cannot be read in isolation but in the over all context of the provisions relating to the transfer of shares and further any private transaction relating to the transfer of shares could not be effected without consent of Board of Directors, when the said Article imposed a further restriction upon the transfer of shares registered in the name of non‑Pakistanis inasmuch as such shares could only be transferred to existing member or person selected by Board as one, whom it was desirable in the interest of company to be admitted to membership. As provided by Article 40 of the Company, the sale of shares can only be made after the prospective 'purchaser has been selected by the Board of Directors upon a conscious application of mind as one to be admitted to membership. It would appear from the record as well as vide letters, dated 19‑4‑1985 and 20‑5‑1985 of the petitioner No.3; letter, dated 20‑5‑1985 of petitioner No.4 and letter of same date from respondent No.5 addressed to the Board of Directors of petitioner No.1 that the said transferors had wished to sell their shares to petitioner No.5 who had agreed to purchase the shares. In fact in view of Article 40 of the Company shares could not be transferred to a person who was not a member so long as any member was willing to purchase the same or any person selected by the Board of Directors as one whom it was desirable in the interest of Company to admit to membership who was also willing to purchase. However, as provided by Article 41 of the company proposing transferor shall have to give notice in writing to the Company that he desired to transfer the shares and notice so given by the transferor shall specify the sum he has fixed as fair value and would also constitute the Company as his agent for the sale of shares to any member of the Company or person selected. It is for the Company to ascertain the member or the person to be selected willing to purchase shares proposed to be sold to whom shares are to be transferred when the Company as provided by Article 42 within span of two calendar months after being served with such notice would find a member or select a person when member is found not willing to purchase shares and (ii) when it is considered desirable in the interest of Company. It is only when the Company has failed to find a member would select a person willing to purchase the said shares in terms of above Articles, it would then be the transferor within two months thereafter only, in terms of Article 45 within three months afterwards it liberty to sell and transfer shares to any person at any price of their choice. On perusal of evidence on the record we have failed to find any evidence that the petitioners allowed Articles of Company which being the terms of contract between the members and the said terms being legally binding upon the members, breach of the said right would be enforceable in law provided the said terms are not forbidden by law. The Articles of the Company reproduced above imposed enforceable liability, as also created mutual obligations on its true construction upon every member. In Rayfield v. Hands and others (1958) 2 WLR 851 it has been observed by Wynn Parry, J. in In re: Hartley Baird Ltd. (1955) Ch. 143, 146; (1954) 3 WLR 946; (1954) 3 All ER 695) wherein he said: "In the interpretation of such a commercial document as Articles of Association, the maxim at res magis valeat quam pereat should certainly be applied." and in same case of Rayfield v. Hands (supra) at page 853 it has been observed by Jenkins, L.J. in Holmes v. Keyes where he is reported to have said:‑‑ "Articles of Association of the Company should be regarded as a business document and should be construed so as to give them reasonable business efficacy ....in preference to a result which would prove unworkable." The petitioners cannot claim exception from following the terms of mutual rights and obligations viz. the Articles of the Company. Admittedly the petitioners did not give notice in terms of Article 41 of the Company and did not give stipulated period of two calendar months to the Company as their agent to find a member or select a person willing to purchase shares, and it would be only in case of failure of the Company, the petitioners/transferors would be at liberty to sell and transfer shares to any person of their choice within three months afterwards. Record would show that petitioner No.5 informed the Secretary of the Company about purchasing of shares held by transferors the petitioners Nos.3 and 4 and respondent No.5 on 25‑8‑1985 even prior to the Board meeting dated 22‑9‑1985 enclosing shares certificates, transfer deed and nomination with regard to their Directors requiring the Secretary to complete the formalities. This would show that the transaction approved in the meeting, dated 22‑9‑1985 was not made in accordance with the terms of Articles of the Company. All that we have said above would show that the (Petitioners Nos. 3 and 4 and respondent No. 5 being transferors of shares, transferred and sold their shares without following the laid down terms of the Articles of the Company which were binding upon them being enforceable in law, therefore, the said transfer of shares in favour of petitioner No. 5 Messrs Scan Maritime was invalid being violative of contract viz. terms of Articles of Company.

10. So far the next point for our consideration whether respondents Nos. 1 and 2 being members/shareholders willing to purchase shares in dispute had first right of refusal/pre‑emptive right to purchase the same at fair value to be fixed in accordance with the provisions of Company's Articles. Article 46 of the Company stipulates that the Company in the general meeting may by special resolution vary rules in which any share specified in any notice served upon it pursuant to Article 41 shall be offered to the members and also to their rights in regard to purchase thereof and any member may give any member or class of members a preferential right to purchase the same. It also lays down that until otherwise determined such shares will be offered to the members other than proposing transferor and there being no otherwise resolution of the Company in the said respect, therefore, the petitioner‑Company would be under obligation to offer the shares of petitioners Nos. 3 and 4 and respondent No.5 to respondents Nos. 1 and 2 who had given their consent and willingness to purchase the same proportionate to their existing holding. It may also be observed that petitioners‑Company is a private limited Company and under section 2(28) of the Companies Ordinance, 1984 it has been expressly provided that private limited Companies can restrict the right of transfer of its shares and such private limited companies could provide a restrictive covenant with regard to transfer of shares of the members to be offered for sale by the company to other members of the said covenant would not be ultra vires the Articles of Company. On perusal of the above mentioned Articles 39 to 41 only reasonable inference which can be drawn with regard to transfer of shares of the members to another member appears to be to discourage an outsider being inducted into a private limited company until and unless exiting shareholders/members are found to be unwilling to buy the shares of transferor. The consequence of all that has been discussed above would lead us to the conclusion that transfer of shares of a private limited company in any manner otherwise than that provided ill the Articles of Association would be invalid and contrary to the terms of the contract agreed upon by the members of the company/shareholders. Mr. Astbury, J. in Hickman v. Kent and Romney Marsh Sheepbreeders Association (1915) 1 Ch. 881, 891) observed:‑‑ "The Articles of Association are simply a contract as between the shareholders inter se in respect of their rights as shareholders. They are the deeds of partnership by which the shareholders agree inter se."

11. There is no provision in the Articles of the Company that existing shareholders/members of the Company are barred/prohibited from making purchase of shares proposed to be transferred/sold by a foreign shareholder so also there has been no restriction on foreign shareholder to transfer his shares to Pakistani national shareholder. The restriction with regard to pre‑emptive' right of a member for the transfer and purchase of shares of the transferor of a private company has been held to be legal and valid covenant in the Articles of Association. Reference may be made to Ontario Jockey Club Ltd. v. Samuel McBride (AIR 1928 PC 291) wherein it was held:‑‑ "Shares are prima facie transferable. But there is no law which precludes the shareholders from contracting for value that they shall each submit to any reasonable restriction which they choose to agree to .. A restriction which precludes a shareholder altogether from transferring may be invalid, but a restriction which does no more than give a right of pre‑emption is valid." In "Introduction to Company Law" by L.H. Leigh, V.H. Joffe and D. Goldberg. Second Edition at page 266 on "Pre emptive Rights" it has been stated:‑‑ "Pre‑emptive rights are often provided for. These impose restrictions on transfer, or they may provide for the compulsory disposition of shares. An example of the latter type is the agreement sometimes entered into between a Company's employee or officer and the company that, on leaving the company, he will sell and transfer his shares to the company's controllers at a price to be fixed by a suitable formula. The former type, a relatively common restriction on transfers, is a clause in the articles giving pre‑emptive rights to other members to acquire the shares of a member who desires to sell all or part of his holdings. Such restrictions are perfectly lawful. Indeed, such a clause has been upheld where only one member remained to purchase the shares. The Courts will apply such provisions in strict conformity with their terms. A leading case is Lyle and Scott v. Scott's Trustees and British Investment Trust Ltd. (1959 AC 763); 1959 All ER 661)." In "The Principles of Modern Company Law" by LCB Gower, Third Edition at pages 392‑393 with regard to "Restrictions on Transferability" has mentioned:‑‑ "Prima facie, companies' shares are freely transferable; as we have seen, it is this feature which constitutes one of the great advantages of an incorporated company. Unless the company's regulations provide otherwise, the shareholder is entitled to transfer to whom he will. But, as we have also seen, the company's regulations may place restrictions on the right to transfer and must do so if the company is a private one. These restrictions may take any form, but in practice they normally either give the existing members a right of pre‑emption or first refusal, or confer a discretion on the directors to refuse to pass transfers. The vast body of case‑law on this subject may, it is thought, be reduced to the following propositions: (a) The extent of the restriction is solely a matter of construction of the regulations. But, since shareholders have a prima facie right to transfer to whomsoever they please, this right is not to be cut down by uncertain language or doubtful implications. If, therefore, it is not clear whether a restriction applies to any transfer or only to a transfer to non‑members, or whether a right or pre emption applies to any disposition or only to a sale, the more restrictive construction will be adopted. (b) On the other hand the Courts will not carry a literal construction of the regulations so far as to defeat their obvious purpose. In one case the articles conferred a right of pre‑emption on the other shareholders when any shareholder was 'desirous of transferring his ordinary shares'. Certain shareholders sold their shares to a take‑over bidder, received the purchase price and gave him irrevocable proxies to vote on their behalf, but, in the light of the articles, transfers were not to be lodged for registration. The House of Lords held that in the context 'transferring' obviously meant assigning the beneficial interest and not the technical process of having a transfer registered. The shareholders had clearly manifested an intention to sell their shares and could not continue with the sale without giving the other shareholders a right to exercise their option under the Articles." The learned Division Bench in para. 13 of the impugned judgment has observed:‑‑‑ "

13. Even otherwise we find extremely difficult to accept the proposition that the provisions of Article 39 was intended to discriminate against Pakistani citizens as a class and restrain them forever in acquiring controlling shares in a Company registered and carrying on business in Pakistan. On the other hand we find considerable logic in the contention that the provisions of Articles 39 to 46 were basically designed to provide a transparent mechanism for withdrawal or transfer of foreign equity in the capital of the Company. A careful consideration of all the relevant Articles clearly tends to show that Companies for transfer of shares held by foreigners is made through the Company and not through the private negations which could possibly involve illicit transfer .of foreign exchange. Even if it be assumed that the shares held by the respondents Nos. 4 to 6 could only be transferred to foreigners. We are constrained to remark that the transaction effected in a clandestine manner and without following the requirements of Articles 41 to 46 does not speak of their bona fides. Nevertheless, since we have come to the conclusion that under Article 16, the shares were to be offered to the appellant and the respondent No.1 and that respondent No.13 was not duly selected in terms of Article 40, we would with profound respects to the learned Single Judge allow this appeal and set aside the impugned judgment and decree the suit as prayed." We are in full agreement with the observations of the learned Division Bench of the High Court and see no reason to take different view with regard to the import and inferences drawn in respect of Articles 39 to 46 of the Company that respondents Nos.1 and 2 being existing members having shown their willingness since March, 1985 to buy the shares of petitioners Nos. 3 and 4 and respondent No.5 had pre‑emptive right who were not even offered to buy the said shares at the fair value to be fixed in accordance with the provisions of the Articles of Association, and had first right of refusal to purchase the same. Mere fact that no objection was given by the State Bank of Pakistan to the transfer and purchase of shares in favour of petitioner No.5 would not validate the transaction of purchase in their favour in respect of shares which otherwise in terms of the Articles of Association was invalid.

13. In view of aforesaid reasonings, we do not find any merit and substance in the contentions of the learned counsel for the petitioners, therefore, leave to appeal is declined and the petition is dismissed. Q.M.H./M.A.K./U‑22/S Petition dismissed.