Anil bid to blunt Mukesh offensive

Mumbai, June 16: Anil Ambani is ready to face down any legal challenge that brother Mukesh throws at him over the sale of a substantial stake in Reliance Communications (R-Com) that may be necessary to seal a global alliance with MTN of South Africa.

The Anil camp claims it has dug up several court rulings to buttress its stand that the right of first refusal clause, which Mukesh wormed into a contentious non-compete agreement before the group’s demerger in January 2006, won’t stand up to legal scrutiny.

The younger Ambani scion is principally relying on attorney general Milon Banerjee’s advice to the Centre in its dispute with Sterlite Industries over the sale of the rump stake in Balco.

Banerjee quoted several judgments by the Supreme Court which held that restrictions on share transfers through shareholders’ agreements — but were not incorporated in the articles of association of a private company — would be void and unenforceable.

A case in point

Banerjee cited two celebrated cases — V.B. Rangaraj versus V.B. Gopalakrishnan, and Pushpa Katoch versus Manu Maharani Hotels — where the courts upheld the view that the provisions of section 111A of the companies act overrode any provision in any shareholders’ pact that placed fetters on the right of a shareholder of a public company to transfer his/her shares.

“The legal position is that under section 111A of the companies act, the shares of a public company are required to be freely transferable. There can be no fetters on the rights of a shareholder to transfer his or her shares.

If the shareholders’ agreement and/or the articles of association of the company impose any fetters, then the said clause/provision shall be void ab initio in the light of the express provision of section 23 of the Indian Contract Act, 1872 and section 9 of the Companies Act, 1956,” Banerjee’s note to the government said in the Balco case.

Sources at R-Com said on Sunday that RIL’s claim to a right of first refusal was not even incorporated in the articles of the association of R-Com. Moreover, legal eagles believed that there could be no restriction on the transfer of shares of a listed company.

Officials from RIL were not available to respond to the Anil camp’s contention on the issue.

The Katoch case is truly interesting. The company — Manu Maharani Hotels — was set up in 1988 by four sisters.

The company was making losses and two of the four siblings wanted to sell their stake to the other two.

This was in line with a family settlement and a broad understanding between the sisters.

On May 4, 1999, the four sisters even signed a memorandum of family agreement under which they agreed not to dispose their shares to outsiders without first offering them to the other sisters.

But when things got rough in 2000, three of the sisters sold their stake to an outsider after Pushpa Katoch dithered on offers to buy them out.

Court view

Katoch challenged the stake sale before the Company Law Board and Delhi High Court — both of which ruled that the articles of association of a company would prevail over any family settlement.

In its ruling in the Katoch case, Delhi High Court said, “Shares are... transferable like any other movable property. The only curb on sahre transfer of a company is as laid down in its articles, if any. A restriction which is not specified in the articles is, therefore, not binding on the company or on the shareholders.”

Last Thursday, RIL had written to MTN stating that it had the right of first refusal that would pre-empt any sale of a controlling stake in R-Com. It also threatened to initiate legal proceedings against R-Com to enforce its rights and said it would also make MTN a party to the court case.

The Anil Ambani camp had said the non-compete pact was signed at a time when Mukesh’s men ran RIL and the entities that were demerged from the Reliance group.

The deals were signed on January 12, 2006 just six days before a demerged RIL stock listed on the bourses. Anil gained control over the entities only in early February.