Shareholders Have No Inherent Right To Proportionate Allotment Of Future Shares Unless AoA Provides: Bombay High Court

The Bombay High Court has held that shareholders do not have an inherent right to proportionate allotment of future shares unless such an entitlement is provided under the company's Articles of Association (AoA).

The court observed that a person whose name is not recorded in the company's register of members or its AoA may not be entitled to formal notice of corporate changes. It further held that a bona fide increase in share capital, carried out in accordance with the company's rules, does not constitute oppression merely because it dilutes an existing shareholder's percentage of shareholding.

"The non-inclusion of one's the shareholders' register or AoA generally means that formal notification for corporate changes is not legally required. In relation to share allotments, unless the AoA specifically provide otherwise, no shareholder inherently possesses a right proportionate allotment of future shares. Therefore, in the absence of a clause in the AoA granting proportionate entitlement, any increase in share capital and resulting dilution of a shareholder's percentage if effected in accordance with the Company's rules and for bona fide purposes cannot constitute oppression.", Justice Abhay Ahuja observed. 

The Court dismissed Rajiv Kant Laxman's appeal under Section 10F of the Companies Act, 1956, challenging the Company Law Board's December 4, 2013 order rejecting his petition alleging oppression and mismanagement in Bobby Electronics Pvt Ltd. The allegations included unlawful dilution of his shareholding, siphoning of company funds and illegal appointments of directors.

The appeal was filed by Rajiv Kant Laxman under Section 10F of the Companies Act, 1956, challenging the Company Law Board's order dated December 4, 2013. Laxman alleged that his shareholding in Bobby Electronics was reduced from 50% to around 8%, while Nirmala Dindayal Gosain's stake increased from 1% to 92%, following a capital increase approved at an EGM on March 20, 2009. The company's authorised share capital was increased from ₹10 lakh to ₹70 lakh.

The Supreme Court on August 4, 2017 had directed the High Court to reconsider the appeal after hearing both sides, particularly the allegation of unauthorised increase in share capital and consequent dilution of Laxman's shareholding

The Court rejected the allegation that certain respondents siphoned off company funds through a Leave and Licence Agreement, holding that the CLB's conclusion was based on the evidence placed before it. The challenge essentially sought a reappreciation of factual findings, which was impermissible under the limited jurisdiction of Section 10F.

On the issue of share capital increase, the Court found that the company required funds for factory reconstruction following a demolition notice. It held that the enhancement was a bona fide business decision and not an isolated manoeuvre to dilute Laxman's stake.

The CLB's factual finding that the capital increase was necessary for the company's requirements did not warrant interference.

"The Company Law Board specifically found, as a matter of fact, that the increase was to meet the requirement of funds and therefore is not an oppressive act. Such a finding is entitled to deference under the restricted scope of Section 10F jurisdiction under the Act, which precludes re-appreciation of evidence or substitution of factual determinations unless the finding is perverse, unsupported by evidence, or arbitrary none of which has been demonstrated by the Appellant."

The Court further held that the increase in share capital had been carried out by following due process under the Companies Act and the AoA.

The resulting reduction in Laxman's shareholding followed from the bona fide capital increase and his failure to subscribe to the additional shares. The allegation of oppression on this ground was therefore rejected.

Rejecting the claim that the company was a quasi partnership, the Court noted that Bobby Electronics was incorporated in 2000, before Laxman's involvement he was not named in the AoA, had invested in 2003 for construction related purposes, sought return of his investment and had not participated in management.

The appeal was accordingly dismissed.

For the Appellant: Advocate Vishal Kanade with Ganesh Khemka, Rohan Savant, Prasad Batavia, Siddhi Rao i/b Batavia Legal, for the Appellant.

For the Respondents: Advocates Krupali Rajani with Sayali Nikam