CAN DIRECTORS ALLOT SHARES TO NEW INVESTORS WITHOUT FIRST OFFERING THEM TO EXISTING SHAREHOLDERS ?
CASE:
M. Nandana Reddy v. Sri Lakshmi Narasimha Mining Co. (P)
Ltd. & Ors.
NCLAT CHENNAI:
VIOLATION OF ARTICLES OF ASSOCIATION RENDERS SHARE ALLOTMENT NULL AND VOID
SHARE ALLOTMENT IN VIOLATION OF ARTICLES OF
ASSOCIATION IS VOID – NCLAT CHENNAI
SUBJECT:
Illegal
allotment of shares, violation of Articles of Association, oppression of
minority shareholders and fiduciary duties of directors.
BACKGROUND AND FACTS OF THE CASE
The dispute
arose in a closely held family-owned company.
·
The appellant originally held approximately 24% of the
company's share capital.
·
The Board allotted
1,77,800 additional equity shares to two new shareholders, 88,900 shares each.
·
The allotment resulted in the new shareholders acquiring
approximately 64% combined ownership.
·
The appellant's shareholding was diluted to approximately
8.64%.
·
The appellant contended that the company had failed to offer
the additional shares to existing shareholders in accordance with Clause 5 of
its Articles of Association.
· The appellant challenged the allotment as illegal and oppressive under the Companies Act, 2013.
FINDINGS AND LEGAL REASONING OF NCLAT
·
A. Articles of Association are binding on the Board
·
The Tribunal relied on the Supreme Court judgment in
Claude-Lila Parulekar v. Sakal Papers (P) Ltd., (2005) 11 SCC 73.
B. EXISTING SHAREHOLDERS MUST RECEIVE THE PRESCRIBED OFFER
Clause 5 of the company's Articles specifically required:
·
- An offer of new shares to existing shareholders of the
same class.
·
- Proportionate entitlement based on paid-up share capital.
·
- Service of notice by registered post.
·
- A minimum acceptance period of 14 days.
·
- Freedom for the Board to dispose of the shares elsewhere
only after rejection or expiry of the offer period.
·
The Tribunal found no evidence that the prescribed offer had
been made.
· Consequently, the allotment to the two new shareholders could not be legally sustained.
WHETHER LAW OF LIMITATION IS APPLICABLE IN THIS
CASE?
The Tribunal rejected the respondents' limitation
objection.
It held that the continuing adverse effect of the illegal
allotment and resulting dilution of the appellant's shareholding could
constitute a continuing course of oppression.
It relied on Surinder Singh Bindra v. Hindustan Fasteners
(P) Ltd., (1990) 69 Comp Cas 718.
KEY TAKEAWAYS
1. NCLAT: Set aside the order passed by NCLT Bengaluru.
2. Allowed the appeal filed by M. Nandana Reddy.
3. Declared the impugned allotment of shares to the two
allottees null and void.
4. Directed consequential corrections in the Register of
Members within 30 days.
5. Made no order as to costs.
6. Section 62 Companies Act 2013 safeguards the rights
issue of shares, pre-emptive rights of shareholders
# R V SECKAR, FCS, LLB 79047 19295,
