In corporate ecosystem, the intersection of a shareholder’s agreement (“SHA”) and articles of association (“AoA”) gives rise to an important question, whether all the terms of SHA should be incorporated in the AoA for the terms to be legally binding and enforceable on the shareholders and the company. Over the years, this has been the substance of legal debate and judicial determination.
1. The era of strict formalism
The judicial discourse commenced with the landmark Supreme Court decision in VB Rangaraj v. VB Gopalakrishnan, which held that any restrictions on the transfer of shares should be stated in the AoA for it to be enforceable. This decision crystallized the principle that private agreements between shareholders, however comprehensive, could not bind the company or its members unless mirrored in the company’s constitutional document. Building on this foundational principle, the Delhi High Court in World Phone India Pvt. Ltd. v WPI Group Inc., USA, extended the Rangaraj doctrine’s ambit to include affirmative voting matters. The High Court held that since AoA did not comprise such rights, they could not bind either the company or its shareholders, thereby reinforcing the primacy of the company's constitutional documents over private contractual arrangements. The strict formalist approach received further judicial validation in IL&FS Trust Co. Ltd. v. Birla Perucchini Ltd, wherein the Bombay High Court ruled that governance rights, such as the continuation of a specific director on the board, could not be enforced against the company in the absence of corresponding provisions in the AoA. This remained true even though the company was a party to the SHA, thereby establishing that mere participation in a shareholders’ agreement did not suffice to create enforceable corporate governance obligations. These decisions collectively established a formalistic stance, creating what appeared to be an absolute rule - for rights under an SHA to be enforceable, they must be explicitly mirrored in the company's AoA.
2. The paradigmatic shift: Recognizing contractual autonomy
Indian courts, however, have not applied this rule as an inflexible straitjacket. In more recent judgments, there has emerged a perceptible shift towards recognizing shareholder autonomy and contractual freedom, without subjugating every SHA provision to the AoA.
In Premier Hockey Development Private Limited v Indian Hockey Federation, the Delhi High Court held that corporate governance obligations stipulated under an SHA could bind both the company and its shareholders, even if not explicitly included in the AoA, provided the company was a party to the SHA. This progressive line of reasoning received authoritative endorsement from the Supreme Court in Vodafone International Holdings BV v. Union of India, where the apex court stated that it did not subscribe to the restrictive view articulated in the Rangaraj case, affirming instead that shareholders possess the autonomy to enter into agreements in the best interest of the company. Notably, the principle was established that if there is a consistency of shareholders’ rights with the Companies Act, 2013, then such rights need not be there in the AoA to be enforceable.
3. Recent judicial pronouncement
The evolution in pragmatic judicial thinking was notably demonstrated in the Delhi High Court's decision in Dhanuka Agritech Pvt. Ltd. v. Iotechworld Avigation Pvt. Ltd. In this matter, Dhanuka Agritech had invested approximately INR 30 crores in Iotechworld and entered into a share subscription and shareholders’ agreement as part of the transaction. The SHA classified the appointment of statutory auditors as a ‘reserved matter’, requiring affirmative written consent from Dhanuka's nominee director. Despite this explicit stipulation, Iotechworld appointed an auditor without obtaining such consent or any written waiver of this right. The Delhi High Court examined three pivotal issues.
(i) Whether the provisions of the SHA requiring affirmative investor consent are enforceable even if not incorporated into the company’s AoA;
(ii) Whether Iotechworld could rely on its own failure to amend the AoA as a means to avoid compliance with the SHA; and
(iii) Whether Dhanuka had waived its right to provide affirmative consent through its conduct.
While addressing these issues, the Delhi High Court relied upon earlier decisions in Vodafone International Holdings and Premier Hockey Development Pvt. Ltd., restating the principle that when a company is a party to a SHA, it is bound by its terms, irrespective of whether every provision is mirrored in the AoA. Drawing upon the Supreme Court's pronouncement in Gherulal Parakh v. Mahadeodas Maiya, the Court held that freedom of contract can be restricted by law for the good of the community. On the second issue, the High Court emphasised that the company cannot benefit from its own failure to update its charter documents. Equally important was the Court’s dismissal of the waiver argument as Clause 10.2 of the SHA mandated that any waiver be in writing and signed by all parties, and since no such waiver had been executed, there was no valid waiver of the Investor’s affirmative voting rights. Hence, the High Court observed that there was no inconsistency between the AoA and the SHA, and rather, the latter merely imposed additional governance safeguards without contradicting the company’s AoA.
The judicial trajectory from VB Rangaraj to Vodafone International Holdings and, most recently, Dhanuka Agritech reflects a gradual evolution in the interpretation of corporate governance mechanisms in India. While the AoA remains the primary constitutional document of a company, courts now increasingly recognize SHAs as enforceable contractual arrangements that can supplement and strengthen governance frameworks, so long as they do not conflict with the Companies Act, 2013, or the AoA.
Where the provision of the SHA is consistent with the AoA, it can operate and be enforced independently as a matter of contract. At the same time, the jurisprudence consistently indicates that when parties intend provisions of the SHA to bind the company, the AoA should ideally be updated to reflect those terms. However, if any inconsistency arises between the two documents, it becomes more appropriate to amend the AoA, so that both documents are aligned and the intended rights can take full effect. It is also pertinent to note that form INC-34 (e-AoA) includes an ‘Others’ field with a highly limited character allowance. As a result, practically transposing detailed SHA provisions into the AoA becomes difficult. This makes it even more important to decide which key terms must go into the AoA, while the remaining terms can continue to be governed contractually through the SHA.
About the authors: Basava Rao is a Partner and Mahek Agarwal is an Associate at TLH, Advocates & Solicitors.
Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.
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