Companies Act, 1956:
Sections 3(iii), 26, 28, 31, 39, 40, 82, 109 and 110-Transfer of shares-Shareholder's right to transfer-Subject to restrictions contained in the Articles of Association of the Company-Agreement among shareholders restricting transfer of shares-Not specified in the Articles of Association--Whether binding on the company or on shareholders--Shares--Nature of transferable like any other movable property.
Of the total shareholding of 50 in a private limited company, 25 shares each were held by two brothers B and G of a joint family. It was agreed among the two brothers, that each of the two branches of the family would continue to hold the shares in equal measure, viz. 25 each and if any member in either of the branches desired to sell his share/shares, he would give the first option to the members of the branch to which he belongs and only in case the offer was not accepted, the shares could be sold to others. However, the Articles of Association of the said company were not amended in conformity with the oral agreement.
After the death of the two brothers B and G, one of the sons of B sold the shares to sons of G, which was contrary to the oral agreement. The other sons of B, not having got the option to purchase as per the said oral agreement, filed a suit against their brother, for a declaration that the sale was void and not binding on them. Defendants 4 to 6 were the purchasers of shares. Defendant No. 2, another son of B, was made pro forma defendant. The Trial Court decreed the suit and held that the sale of the said shares was invalid. The first appellate court dismissed the appeals preferred by the defendants. In the second appeals filed by the defendants, the High Court held that the sale of the shares by the first defendant in favour of defendants 4 to 6 was invalid and hence the plaintiffs and the second defendant became entitled to purchase the said shares; that the said oral agreement was binding on the company, and that the company was bound in law to register the said shares in the plaintiffs' names.

Aggrieved against the High Court's decisions, the defendants preferred appeals before this Court contending that the said oral agreement in effect imposed an additional restriction on the right to transfer the shares, which was not envisaged by any of the Articles of Association; that it was not binding on any shareholder or a vendee of the shares; that it was unenforceable at law and therefore, not binding on the company. It was further contended that the High Court could not have directed the transfer of shares in favour of plaintiffs as the first defendant could not be forced to sell the shares to the plaintiffs.

The respondents contended that the shareholders were bound by the oral agreement; that the agreement was entered into to maintain the ownership of the company in the family and to ensure that the two branches of the family had an equal share in the management and profits and losses of the company; that there was nothing in the Articles of Association which prohibited such agreement and that the two branches of the family being party to the agreement, it was enforceable against them.