Your Shareholders Agreement Says ROFR. Your Articles Do Not. That Is a Problem

Why does it matter whether a restriction is in the SHA or the articles?

A shareholders agreement is a contract among the shareholders and usually the company. It binds the people who signed it, and a breach gives the other parties a contractual claim. The articles of association are the company's constitutional document, filed with the Registrar of Companies, and they bind the company and its members in their capacity as members.

Those are not the same thing, and the difference matters most where the obligation is one the company has to perform. Registering a transfer of shares is an act of the company. If the restriction sits only in a contract between shareholders, the question of what the company must do when presented with a transfer is not answered by that contract in the same way.

There is also a practical point about third parties. A buyer who purchases shares from a founder may never have signed the SHA. The articles are a public document available on the Registrar's records, so restrictions in them are much easier to rely on against an incoming shareholder than terms in a private contract.

What did the Supreme Court say in V.B. Rangaraj?

In V.B. Rangaraj v V.B. Gopalakrishnan, reported at (1992) 1 SCC 160, members of a family had agreed among themselves on a restriction on transferring shares in a private company. The restriction was not in the articles. The Supreme Court held that a restriction on transfer not specified in the articles was not binding on the company or its shareholders.

That decision is still regularly cited. Later decisions, and the proviso to Section 58(2) of the Companies Act, 2013, have refined the position, particularly for public companies, where the proviso provides that a contract or arrangement between two or more persons in respect of transfer of securities is enforceable as a contract. How far these developments help a private company whose articles are silent depends on the facts and on the court.

The safe course does not depend on resolving that debate. If the restriction is in the articles, the question never arises. That is why Indian practice is to amend the articles to carry the transfer provisions agreed in the SHA.

What Section 58 and Section 2(68) address

Section 58 of the Companies Act, 2013 deals with refusal to register a transfer and the appeal against it. It provides a route for a person aggrieved by a private company's refusal to register a transfer to appeal to the National Company Law Tribunal, and it reflects the broader position that securities of a public company are freely transferable.

Section 2(68) defines a private company as one which, by its articles, restricts the right to transfer its shares. The restriction is therefore part of what a private company is, and it lives in the articles. Template articles adopted at incorporation usually contain only a general restriction and a board discretion to refuse registration. They do not contain the detailed ROFR timelines, pricing mechanics, tag-along percentages or drag-along thresholds negotiated in the SHA.

This is also why a well-drafted Indian SHA contains a clause obliging the parties to procure the necessary amendment to the articles, and a covenant that in the event of inconsistency the parties will act to give effect to the SHA. Those clauses exist precisely because the drafter knew the gap was real.

Which rights are exposed if they sit only in the SHA?

Should the company itself sign the SHA?

Yes, in most cases. Making the company a party means it is contractually bound to the SHA as well as the shareholders, and the SHA can include a covenant by the company not to register any transfer made in breach and to convene meetings to amend its articles. Most Indian SHAs are drafted this way.

That helps, but it is not a complete substitute for the articles. A company's power to act, and the validity of what it does, are judged against its constitution, and a third-party buyer is not bound by a contract it never signed. Think of the company's signature as a second line of defence and the articles as the first.

The SHA should also be properly stamped under the stamp law of the State where it is executed. Stamp duty on shareholders agreements is often modest, but an unstamped agreement can face admissibility problems at exactly the moment you need to rely on it.

How the gap actually appears

It rarely surfaces while everyone is aligned. It surfaces when a founder wants to sell, when an investor wants an exit, or when someone is leaving on bad terms and the buy-back provisions are invoked. At that point the question becomes what the company is obliged to do, and the answer depends on documents nobody has looked at since incorporation.

Consider an example. Three founders hold 40%, 40% and 20% of a private company. The SHA gives the two larger holders a right of first refusal, but the articles are the standard template. The 20% founder falls out with the others and agrees to sell to a competitor for ₹2 crore. The other two want to match the price and keep the competitor out. If the articles carry the ROFR, the board can refuse to register the transfer until the procedure is followed. If they do not, the remaining founders may be left suing the departing founder for breach of contract, seeking an injunction in a hurry, and arguing about whether the competitor is bound at all.

The second common trigger is diligence. An acquirer or a later-round investor reviewing your corporate records will compare the SHA against the articles. A material inconsistency becomes a condition to closing, and fixing it under time pressure with a shareholder who has since become uncooperative is a considerably worse position than fixing it now.

What to check in your own documents

• Do the articles contain transfer restrictions at all, or only the standard incorporation template?
• Do the ROFR, tag-along, drag-along and lock-in provisions in the SHA appear in the articles in substance, with the same timelines and thresholds?
• Does the SHA contain an obligation on the parties to procure amendment of the articles, and was it acted on?
• Was a special resolution passed and filed with the Registrar, or was the amendment only ever discussed?
• Where the SHA and the articles differ, which document does the SHA say prevails, and is that clause itself workable?
• After each funding round, were the articles updated again, or do they still reflect an earlier SHA?

How do you fix it?

The mechanical answer is to amend the articles. Under Section 14 of the Companies Act, 2013, a company may alter its articles by special resolution, which under Section 114 needs votes in favour of at least three times the votes against. The special resolution must then be filed with the Registrar under Section 117, within thirty days of passing. That is ordinary company secretarial work and it is much cheaper than the alternative.

In practice the steps are: a board meeting to approve the draft altered articles and call a general meeting; notice to shareholders with the draft; the general meeting, or a shortened-notice meeting if all shareholders agree; the special resolution; the Registrar filing; and updating the company's copies of the articles. If certain provisions should only be changed by a higher threshold, Section 5 allows entrenchment provisions in the articles, which must also be notified to the Registrar.

A simple drafting approach is an article stating that no shareholder may transfer shares except in accordance with the transfer articles, which reproduce the SHA's ROFR, tag-along, drag-along and lock-in mechanics, and that the company shall not register any transfer made in breach of them.

If you are drafting now, insist that the SHA and the amended articles are executed and filed together as part of the same closing, rather than the articles being left as an action item that quietly never closes. If you are looking at an existing gap, an advocate or company secretary can tell you what your specific articles do and do not carry. Remember also that each later round usually brings a new SHA, so the articles need updating each time.