In this blogpsot, Harsha Jeswani, Student, National Law Institute University, Bhopal, writes about the nuances related to voting agreements, their meaning and conditions regarding enforceability.

What Are Voting Agreements

A group of shareholders may enter into a mutual agreement to pool their votes and cast them in a particular manner. Such agreements could also contain several other conditions which could result in curtailment of rights of certain individual shareholders or group of shareholders. This is known as voting agreement. Most American states recognize expressly that agreements between shareholders to vote their shares in accordance with voting agreements are valid.[1]

Thus, voting agreement is essentially An agreement between two or more shareholder if in writing and signed by the parties thereto, may provide that in exercising any voting rights, shares held by them shall be votes as provided by the agreement ,or as agreed among the parties, or as per the procedure agreed upon by them.

Pooling agreements are essentially kind of contracts which provides the manner agreed between the shareholders to vote their shares.[2]

Thus, a group of shareholders may enter into a mutual agreement to pool their votes and cast them in a particular manner. Such agreements could also contain several other conditions which could result in curtailment of rights of certain individual shareholders or group of shareholders. In a voting agreement or a pooling pact, each shareholder retains sole ownership of shares binding him only to vote for a specific person or in a certain way. The Supreme Court in the case of Mohan Lal Chandumall And Ors. vs. Punjab Company Ltd., Bhatinda[3] held such agreements to be enforceable in law since the right to cast a vote is regarded as a proprietary right and the  shareholder can exercise such right as he wants.

One of the key characteristics of corporations is the free transferability of shares: shareholders can sell their shares at will. This right of alienation flows from the fact that shares are a form of personal property. Section 44 of the Companies Act, 2013 clearly states that the shares, debentures, or other interest of any member in a company are movable property capable of being transferred as provided in Articles of the Company.

Voting agreements have not been given an exact definition as per the Indian Law but the definition of Control which includes the right to appoint majority of the directors or to control the management or policy decisions, exercisable directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.[4] This throws light on the fact that control with respect to i) Appointment of Majority of Directors and ii) Voting Agreements also enable to control the management or policy decisions of a company.

Enforceability Of Voting Agreements

The Shareholder’s Agreement became popular in India with the flourishing of modern forms of businesses. The statutes of India do not specifically provide for any laws relating to them, nor are there any cases exclusively inclined in that direction.

A voting or a pooling agreement may be utilized in connection with the Election of Director or Shareholders Resolution where shareholders have a right to vote[5].  A shareholder is dealing with his own property and is entitled to consider his own interest, without regard to the interest of other shareholders.[6]

The Supreme Court in Gherulal Parekh v. Mahadeo Das Maiya [7] held that freedom of contract can be restricted by law only in case of public interest. The court held that such agreements are valid provided that they are entered into keeping in mind the best interest of the company. It is important that such Shareholder’s Agreement must be in accordance with the Articles of Association of the company.  The essential purpose of a shareholder’s agreement is to ensure proper and effective internal management of the company.  There is no express provision under  Companies Act 1956, FERA 1973, RBI regulations or I.T. Act, which restricts shareholders of a company from entering into agreements regarding exercised of voting rights attached to their shares.

A leading case where the court talked about the enforceability of voting agreements is Rolta India Ltd v Venire Industries Ltd. In this case, the Bombay High Court held that-

• The pooling agreement can be defined as an agreement between two or more shareholders which deals with the procedure of exercising voting rights by the shareholders in accordance with the shares held by them; it is a contract to the effect that the shares held by them shall be voted as one single unit. The agreement enables the shareholders to vote according to their mutual agreement. In a pooling agreement, each shareholder retains sole ownership of shares binding him only to vote for a specific person or in a certain way. These agreements are enforceable because the right to vote is a proprietary right.

A reading of the above judgments indicates that the courts are very reluctant to enforce such pooling agreements. The pooling agreements, which are enforced, are only concerned regarding the right to vote of the shareholders. The courts have not been granting specific performance of the agreements whereby the powers of the Directors stand denuded.

When Not Enforceable

Section 6 of the Companies Act, 2013 provides that any provision contained in the memorandum, articles, agreement or resolution, which is inconsistent with the provisions of the Act are void to the extent of its repugnancy.

 The Supreme Court in V.B. Rangaraj v. V.B. Gopalakrishnan[8] ; held that a restriction on the transfer of shares contrary to the articles of association of a private company was not binding on the private company or its shareholders.

In the case of Rolta India v. Venire Industries Ltd., the court held that any Shareholder Agreement, which deprives the Board of Directors of their statutory rights to manage the company is void since the shareholders cannot by virtue of pooling agreement achieve anything which they are not allowed in case of voting individually. Therefore, a pooling agreement which enables shareholders to unite cannot be permitted if such agreements supersedes the powers of directors.  Thus, the provision of a shareholders’ agreement curtailing the rights of directors declared is unenforceable in law.

The law, therefore, is that the shareholders are not entitled to infringe the rights and duties of the directors of the company by virtue of pooling agreement. Even Directors are not empowered to enter into an agreement, thereby agreeing not to increase the number of Directors when there is no such restriction in the Articles of Association. The shareholders cannot dictate the terms to the Directors, except by amendment of Articles of Association or by removal of Directors.

Conclusion

It is evident from the above that though the Companies Act, 2013 does not provide any express provision governing the validity of Shareholders’ Agreement still the Supreme Court of India has held in catena of cases that such pooling agreements are valid and enforceable in law. However any such agreement which is contrary to the provisions of Articles of Association of a company and supersedes the powers of Board of Directors cannot be enforced and is considered as void.

[1] M Thomas Arnold ,Shareholder Duties Under State law,28 Tulsa L.J. 213,228 (1992)

[2] Franklin A. Gevurtz, Corporation Law 35-36

[3] AIR 1961 P H 465

[4] Section 2(27) ,Companies Act,2013

[5] Section 2(27), Companies Act,2013

[6] Section 44, Companies Act,2013

[7] Gherulal Parekh v. Mahadeo Das Maiya (1959) SCR supp (2) 406

[8] V.B. Rangaraj v. V.B. Gopalakrishnan AIR 1992 SC 453.