The Supreme Court has held that a shareholder who did not sign a Memorandum of Settlement (MoS) can nevertheless be treated as a “veritable party” to the arbitration agreement if his conduct, contractual obligations, and role in the composite transaction demonstrate an intention to be bound by it.
The bench of Justice Sanjay Kumar and Justice Sanjeev Sachdeva quashed the Delhi High Court’s refusal to refer the shareholder to arbitration and directed that his disputes be adjudicated by the same sole arbitrator already seized of the related disputes.
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The dispute arose out of a corporate acquisition transaction in which the Appellant sought to acquire Sensorise Digital Services Pvt. Ltd. and its sister concern under a Memorandum of Settlement executed on May 9, 2022. The MoS contemplated the transfer of the entire shareholding of promoters, management team members, consultants, employee shareholders and other stakeholders for a total consideration of ₹8 crore.
Although respondent Ashiesh Shukla was not a signatory to the MoS, he was listed in Schedule 2 as a consultant-shareholder holding 1,480 shares. Pursuant to the MoS, he separately executed a Share Purchase Agreement (SPA) under which he agreed to transfer his shares to the buyer as part of the overall acquisition transaction. The SPA also contained obligations relating to intellectual property, confidentiality, non-compete and non-solicitation.
The MoS further envisaged execution of individual Share Purchase Agreements with various management personnel and shareholders, making those agreements an integral component of the overall acquisition structure. It also contained an arbitration clause providing that disputes arising from the MoS would be resolved through arbitration under the Arbitration and Conciliation Act, 1996.
Following disputes between the parties, arbitration proceedings were initiated. During the arbitral proceedings, objections were raised by certain non-signatories, including Ashiesh Shukla, questioning the arbitrator’s jurisdiction over them.
The Delhi High Court examined whether these non-signatories could nevertheless be treated as parties to the arbitration agreement by applying the Supreme Court’s judgment in Cox and Kings Ltd. v. SAP India Pvt. Ltd. After considering factors such as the parties’ conduct, mutual intent, interconnected agreements and composite nature of the transaction, the High Court held that several management team members were “veritable parties” and referred them to arbitration.
However, the High Court carved out an exception for Ashiesh Shukla. It relied upon Clause 16 of his Share Purchase Agreement, which stated that the transfer of shares would be independent of the remaining clauses of the SPA and the MoS. The High Court concluded that this clause reflected his intention not to be bound by the arbitration clause contained in the MoS and therefore refused to refer him to arbitration.
The Supreme Court found that the High Court had overlooked a crucial factual aspect.
Justice Sanjay Kumar, writing for the Bench, observed that identical clauses existed in the Share Purchase Agreements executed by the other management team members who had nevertheless been held to be veritable parties. Consequently, there was no rational basis to treat Ashiesh Shukla differently.
The Court also examined the recitals of Ashiesh Shukla’s Share Purchase Agreement, which expressly acknowledged the existence of disputes resolved through the Memorandum of Settlement; that the buyer was acquiring shares of promoters, management team members and shareholders under the settlement; and that his own share transfer formed part of that settlement transaction.
These provisions clearly demonstrated that his participation was intrinsically linked to the MoS rather than being an independent commercial arrangement.
The Supreme Court reiterated the principles laid down in Cox and Kings Ltd. v. SAP India Pvt. Ltd., explaining that a non-signatory may still be bound by an arbitration agreement if the surrounding circumstances establish that the person intended to be part of the contractual arrangement.
The Court emphasized that the most significant factor is the non-signatory’s participation in performing the underlying contract. Other relevant considerations include the legal relationship with signatories, the composite nature of the transaction, and the commonality of the subject matter.
Applying these principles, the Court held that Ashiesh Shukla’s transfer of shares was indispensable for completing the acquisition envisaged under the Memorandum of Settlement. Without his participation, the buyer could not achieve complete ownership of the target company as contemplated under the transaction documents.
The Bench observed that there was no meaningful distinction between his position and that of the other management personnel who had already been referred to arbitration.
Allowing the appeal, the Supreme Court set aside the Delhi High Court’s judgment insofar as it excluded Ashiesh Shukla from arbitration.
The Court declared that he is also a “veritable party” to the Memorandum of Settlement and is therefore bound by the arbitration agreement contained therein. Accordingly, it referred his disputes to the same sole arbitrator—Justice T.S. Thakur (Retd.), former Chief Justice of India—who is already adjudicating the related disputes arising from the MoS and the connected Share Purchase Agreements.
The Court left all substantive issues open for determination by the arbitrator on their merits and directed the parties to bear their own costs.
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