AIBE III 2012 Question 88

The articles of association of ABC Private Limited provide that its members shall transfer shares to a third party only after first having offered such shares to the other existing members, on a pro rata basis, at the existing market value of such shares. D, a member of ABC Private Limited, gets an offer from E, who is not an existing member of ABC Private Limited, to purchase all the shares held by D in ABC Private Limited for two times the market value of the shares. D transfers the shares to E on the terms offered by E. The board of directors of ABC Private Limited refuses to record the transfer of shares on the grounds that the transfer is ultra vires the articles of association of ABC Private Limited. E goes to Court against ABC Private Limited to enforce and record the transfer of the shares. Which of the following Statements most accurately applies the principle below?

1. A The transfer of shares shall be upheld because E paid more than the fair market value of the shares, and is therefore exempt from the requirement of the articles of association.
2. B The transfer of shares shall be upheld because D should have secured the approval of the board of directors of ABC Private Limited prior to transferring the shares to E, and therefore E is not at fault.
3. C The transfer of shares shall not be validated as the principle of 'caveat venditor' (seller beware) is applicable in all contracts of purchase in India
4. D The transfer of shares shall be upheld because ABC Private Limited will be deemed to have had constructive notice of the sale of shares.
5. E The transfer of shares shall not be validated, as E had constructive notice that D needed to offer the shares to the existing members of ABC Private Limited prior to transferring the shares to E. Official answer