Pre-Emption Rights: Are They Clear?
Company shareholders are often awarded pre-emption rights under the articles of association, entitling them to purchase the shares of another shareholder before they are offered to third parties.
However, there is no other automatic legal right for existing shareholders to be offered those shares first. But sometimes, the articles (or related legal documents) are not as clear as they could be, with the risk of a dispute arising.
In a recent case1, the pre-emption clause within the articles included: "The sale shares shall be offered to the members (other than the proposing transferor) as nearly as may be in proportion to the number of shares held by them respectively".
The words “the members” were, said the court, potentially ambiguous as they could mean either all of the members or the members other than the proposing transferor.
The defendant gave notice to sell his 85 shares in a company (SR20) at a price of £2,500 per share pursuant to the pre-emption rights. A week later, the company sent an offer notice offering to sell 13 shares (representing 15% of 85 shares) at a price of £2,500 per share pursuant to the articles.
Three days after that, a company (Axis) served a notice of acceptance purporting to accept a purchase of 85 shares.
Axis asked the court for declaratory and/or injunctive relief that its notice of acceptance was valid in relation to all 85 shares; or alternatively that SR20 was obliged to issue an offer notice to Axis in respect of all 85 shares. Axis sought appropriate declaratory or injunctive relief accordingly.
The key issue related to the construction of the articles, particularly whether the validity of the acceptance notice was affected by the fact that it purported to accept an offer for 85 shares - when just 13 shares were offered. The claimant argued that 85 shares should have been offered.
The next issue was while Axis was entitled to receive an offer notice referring to 85 shares, was it entitled to treat the offer notice as offering it 13 shares, as if it had been for the correct number of shares?
The court decided that the wording, “held by them respectively”, meant the members other than the proposing transferor, so Axis should have been offered all 85 shares. On that basis, the offer notice was to be rectified to that effect – and including the invitation to take up any other shares under the articles.
The effect of the order was that the shareholder could not sell or otherwise dispose of his shares.
Key takeaway
This case illustrates the importance of ensuing a company’s articles of association (and related corporate documentation) are drafted clearly and unambiguously to avoid the risk of a dispute.
Standing v Power [2021] EWHC 1744 (Ch)
If you would like us to cover an issue in the next NGM Tax Law Newsletter, we would be pleased to