Restriction on Share Transfer: private shareholders' agreement contrary to articles is not binding on company or transferees.

Whether a private shareholders' agreement can impose share-transfer restrictions contrary to the company's articles: the note applies company law principles treating shares as movable property and transferability as prima facie free unless the articles expressly or by necessary implication restrict transfers; the company's articles only restricted transfers on death and admission of heirs, whereas the private family agreement added living-member and branch-specific limits inconsistent with the articles; consequently the private agreement is not binding on the company, its members or a transferee and a sale effected in accordance with the articles is valid.

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Issues: Whether shareholders can among themselves enter into a private agreement imposing restrictions on transfer of shares that are contrary to or inconsistent with the articles of association of a private company, and whether such an agreement is binding on the company, its members and transferees.

Analysis: Section 3(iii), 26, 28, 31, 36, 39, 40 and 82 of the Companies Act, 1956 establish that articles of association constitute the regulations of a company binding on the company and its members and that shares are movable property whose transfer is regulated by the articles. Authorities and text treat shares as prima facie freely transferable absent express restrictions in the articles; restrictions must be expressly set out or arise by necessary implication and are construed strictly in favour of transferability. The articles of the company contained a specific provision (article 13) restricting transfer in limited circumstances related to the death of a member and the admission of heirs or nominees, but did not impose pre-emption or branch-specific transfer restrictions on living members. The private family agreement imposed additional restrictions on transfers by living members (first, limiting transfers to existing members; second, limiting transfers to members of the same family branch), which are not contained in the articles and therefore impose terms contrary to article 13.

Conclusion: The private agreement imposing transfer restrictions contrary to the articles of association is not binding on the company, its shareholders or a transferee; the sale of shares in accordance with the articles is not invalid for breach of such an agreement, and the appeals allowing that position succeed.

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