Free transferability of public company shares prevails over pre-emption clauses, and inconsistent arbitral awards are vulnerable.

A pre-emption clause over shares of a public company was analysed as inconsistent with the statutory policy of free transferability under section 111A read with section 9 of the Companies Act, 1956, and therefore void to that extent. The text also explains that, on the valuation issues, the arbitrator was not treated as having exceeded jurisdiction by fixing 3-5-2003 as the valuation date because the parties had proceeded on a concluded bargain and only the rate remained open. It further states that the award on valuation was supported by evidence, including the discount applied to the shares and the use of book value for certain investments, and was not vitiated by patent illegality.

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Issues: (i) Whether the arbitrator exceeded jurisdiction in treating 3-5-2003 as the relevant date for valuation of the shares; (ii) Whether the valuation award suffered from patent illegality in applying a 30 per cent discount to BAL shares and adopting book value for non-BAL investments; (iii) Whether clause 7 of the protocol agreement, creating a pre-emptive right over shares of a public company, was void under section 111A read with section 9 of the Companies Act, 1956.

Issue (i): Whether the arbitrator exceeded jurisdiction in treating 3-5-2003 as the relevant date for valuation of the shares.

Analysis: The offer of 9-4-2003 and the response of 3-5-2003 were treated by the parties as a concluded bargain under clause 7, with only the rate remaining for determination. The reference to arbitration itself proceeded on the basis that the contract had been concluded and that the dispute was confined to the question of rate. Fixing the valuation date as the date of acceptance was therefore part of determining the rate, not an enlargement of the reference.

Conclusion: The arbitrator did not exceed jurisdiction in determining 3-5-2003 as the valuation date.

Issue (ii): Whether the valuation award suffered from patent illegality in applying a 30 per cent discount to BAL shares and adopting book value for non-BAL investments.

Analysis: The award was supported by expert evidence that justified discounting the respondent-company shares held by MSL on both conceptual and empirical bases, and the material showed that a discount of at least 30 per cent was warranted. The arbitrator's reference to one piece of evidence contained an error of fact, but the overall reasoning remained supported by the record. The use of book value for the non-BAL holdings was also justified because there was no significant appreciation in those assets and any market-value approach would have produced an even lower figure. The award was not founded on ex aequo et bono considerations, but on evidence and the contractual task of fixing a rate.

Conclusion: The valuation award was not liable to be set aside on the ground of patent illegality or non-application of mind.

Issue (iii): Whether clause 7 of the protocol agreement, creating a pre-emptive right over shares of a public company, was void under section 111A read with section 9 of the Companies Act, 1956.

Analysis: Section 111A embodies the legislative policy of free transferability of shares in a public company, and section 9 gives overriding force to that mandate over inconsistent articles or agreements. A clause in the articles that restricts transfer by giving a right of pre-emption to existing parties in respect of shares of a public company imposes a fetter inconsistent with free transferability. The arbitrator's reliance on authority dealing with a private company did not answer the distinct statutory position governing a public company.

Conclusion: Clause 7 was void and the arbitral award upholding it was contrary to law and public policy.

Final Conclusion: The challenge to the award succeeded because the restriction on transferability of shares in a public company was legally impermissible, and the award sustaining that restriction could not stand.

Ratio Decidendi: In a public company, a contractual or articles-based pre-emption clause that restricts the free transferability of shares is void to the extent it conflicts with section 111A and section 9 of the Companies Act, 1956, and an arbitral award upholding such a restriction is liable to be set aside as patently illegal.

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