Share Transfer Refused by Directors Without Reasons
Meghna Agro Ltd is a private company with 12 shareholders. Its articles contain a pre-emption clause requiring a selling shareholder to offer shares to existing members first, and a clause permitting the directors to refuse to register any transfer without giving reasons. Mr. Haque, holding 18%, signs a sale agreement with an outside buyer at a premium of 35% over the last audited net asset value per share. He serves the transfer notice on the company. The board, without a meeting, passes a circular resolution refusing registration. No reason is recorded. The other members did not take up the offer within the 30-day window in the articles. Mr. Haque claims the refusal is invalid because the directors acted in bad faith to keep him from realising value and because the circular resolution was not properly passed. He also argues the pre-emption clause was not triggered because the buyer is a company, not a member.
1. Assess the validity of the directors' refusal to register the transfer.
Read the worked answer
A power to refuse registration, even one expressed as 'without giving reasons', is not unlimited. It is a fiduciary power and must be exercised in good faith and in the interests of the company as a whole. The court will examine whether the refusal was bona fide and whether there were grounds on which a reasonable board could have acted.
Here, three features are damaging:
No reasons. A blanket refusal with no recorded reason makes it very difficult for the board to show it acted properly. The absence of reasons is not conclusive but shifts the evidential burden.
No meeting. A circular resolution is valid only if the articles permit it and the required majority signs. If the articles require a board meeting, or if any director was not given the opportunity to vote, the resolution is defective. The company secretary should check the articles and the signed consents.
Bad faith allegation. The premium of 35% is not itself a reason to refuse. If the refusal was designed to prevent Mr. Haque from obtaining a price other members did not want to match, that is an improper purpose.
My conclusion is that the refusal is likely to be set aside unless the board can show a genuine, company-focused reason, such as a concern about the buyer's identity or a regulatory issue. The board should be advised to reconvene properly and record its reasons.
2. Explain whether the pre-emption clause was triggered and what the buyer's position is.
Read the worked answer
The pre-emption clause is triggered by a proposed transfer to any person who is not an existing member, regardless of whether that person is an individual or a company. The fact that the buyer is a company does not take the transfer outside the clause. The clause is designed to give existing members the first opportunity to buy, and the identity of the buyer does not matter.
Mr. Haque did serve the transfer notice, and the 30-day window expired without any member taking up the offer. Once the window closed, the pre-emption requirement was satisfied and the only remaining hurdle was the directors' power to refuse registration.
The buyer's position is therefore conditional. The buyer has a contractual right against Mr. Haque under the sale agreement, but it does not become a member until the transfer is registered. If registration is refused, the buyer cannot enforce membership against the company; its remedy is against Mr. Haque for breach of the sale agreement. If the refusal is later held invalid, the buyer may seek an order that the register be rectified.
3. Set out the steps the company secretary should take to regularise the position.
Read the worked answer
The company secretary should:
Verify the articles. Confirm whether circular resolutions are permitted and whether the refusal power is subject to any express limits.
Check the resolution. Confirm that all directors received the circular and signed. If any did not, the resolution is invalid and a properly convened board meeting should be held.
Advise a fresh decision. The board should meet, consider the transfer on its merits, and record specific reasons in the minutes, for example concerns about the buyer's source of funds or regulatory approvals.
Communicate the decision. Notify Mr. Haque and the buyer in writing within any period set by the articles.
Update the register. If registration is refused, record the refusal and the reasons in the register of members and in the minutes.
Manage the dispute. If Mr. Haque applies to the court for rectification of the register, the company should be ready to justify the refusal with evidence. The company secretary should preserve all board papers and correspondence.