The articles of a company, restricting transfer of any ‘interest’ in its shares, were ineffective to stop third parties gaining control of the company indirectly by buying the shares of a corporate shareholder of the company instead, the Court of Appeal recently ruled.
A company’s articles of association and its shareholders’ agreement contained restrictions on the transfer of any ‘interest’ in the company’s shares. Nearly 25 per cent of the shares in the company were owned by a corporate shareholder, Misland.
Misland transferred all of its shares to two other shareholders in the company. Those shareholders therefore controlled Misland’s 25 per cent shareholding in the company, as well as their own holdings. This gave them a majority shareholding in the company.
Another shareholder argued that the restrictions in the company’s articles and the shareholders’ agreement should have applied to the transfer of Misland’s shares.
The court said the words in both the articles and the shareholders’ agreement were insufficiently wide to cover a change of control of a corporate shareholder, so the transfer of shares in Misland was not caught by them. The court ruled there was a legal presumption that a shareholder was free to transfer his shares in a company, or any interest in them, unless it was clearly restricted or prohibited by the articles. In this case, the articles and the agreement did not restrict or prohibit the purchase of Misland’s shares, as that transaction neither changed the ownership of Misland’s shares in the company nor any interest in those shares.
This was so even though the company had been intending to operate as a joint venture, and the provisions in the articles were intended to stop such a change of control that actually resulted.
The judge particularly mentioned the significant legal effect that small variations in wording of such articles could have.
Recommendation • Companies with a corporate shareholder (including particularly, joint venture companies) should consider whether to include provisions in their articles (and any shareholders’ agreement) requiring corporate shareholders to offer their shares to other shareholders if control of their own shares changes. • Companies should beware drafting transfer provisions in articles and/or shareholders’ agreements unless they know exactly what they are doing. If in doubt, take specialist legal advice.
Case ref: McKillen v Misland (Cyprus) Investments Limited  EWCA 179
Jonathan Waters is the founder of Helix Law. Before qualifying as a Solicitor he worked in industry and in investment banking for over a decade. He was also the Partner in charge of Commercial Litigation, Employment Law and Property Litigation at Stephen Rimmer LLP. Jonathan has wide experience of helping and advising businesses to avoid or to deal with commercial disputes and in particular construction disputes.
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