UK: Selling Shares In JV Shareholder Did Not Trigger JV Preemption Provisions

Last Updated: 26 March 2012
Article by Mark Alsop

McKillen v Misland (Cyprus) Investments Limited [2012] EWCA Civ 179

This case involved Coroin Limited (C) which was established by a group of investors to acquire four well known London hotels: The Savoy, Claridges, The Connaught and The Berkeley. The investors included McKillen who held 36% of C's shares and Misland (a wholly owned subsidiary of a Bermudian company (A&A) through which Peter Green controlled his business interests) which held nearly 25%. Some other investors (the Barclay Brothers) wanted to acquire C but McKillen opposed this. As part of a strategy to take C over, the Barclay Brothers acquired Misland from A&A, which ultimately gave them control over Misland's shares in C.

McKillen brought an action for unfair prejudice and these proceedings were to determine one of the preliminary issues which was whether the sale of Misland to the Barclays Brothers triggered the pre-emption provisions contained in C's articles of association and in clause 6 of a shareholder's agreement between the original investors (which were in broadly the same terms).

Clause 6 of the shareholders agreement contained extensive pre-emption provisions. Clause 6.15 set out "Permitted Transfers", one of which provided that any corporate shareholders could transfer their interest in any part of the shares to a member of its shareholder group provided that in the event the transferee left the group, the Shares were transferred back to the original transferor or another member of its shareholder group. "Shareholder Group" was then defined and, importantly, there was a specific definition of shareholder group applicable to Misland which went wider than the definition applicable to the other corporate shareholders. Clause 6.17 provided that "no Share nor any interest therein shall be transferred, sold or otherwise disposed of save as provided in this clause 6" and pursuant to clause 6.24, each shareholder covenanted that, other than by way of a permitted transfer, or to grant security, no shareholder would transfer any Share (or any interest therein) which would give rise to a transfer notice under clause 6.1 at any time within four years of completion

McKillen argued that the words "any interest therein" in clause 6 should be construed as including the type of indirect interest in C's shares that A&A had as the parent of Misland. Furthermore, as clause 6.15 permitted transfers of shares within a shareholder group but provided for re-transfer if the transferee ceased to be a member of such group, McKillen argued it would be surprising if a sale of Misland itself would not trigger the pre-emption provisions.

At first instance, the Judge found in favour of Misland and McKillen appealed.

Held

The Court of Appeal agreed with the Judge at first instance and dismissed McKillen's appeal.

The words "any interest therein" did not extend beyond a direct proprietary interest in C's shares held by a shareholder, as defined. Whilst the definition of "shareholder" in the agreement could extend beyond the registered holder of the shares to any person with a beneficial interest in such shares, as Misland was both the legal and beneficial owner of the C shares, A&A had no proprietary interest in them. The Court was in no doubt that a pre-emption clause had no application to the case where, for example, company A is the legal and beneficial owner of shares in C and the issued shares of company A are sold, as such a sale involves no change in company A's legal and beneficial ownership of the underlying shares.

With regard to McKillen's other submission, that in light of clause 6.15 and the general spirit of the agreement (i.e. the covenant not to transfer any interest in shares for four years) clause 6 should be construed as including the type of indirect interest in the Misland shares that was enjoyed by A&A, this was also rejected. Whilst the doctrine of construction permits the Court to read words into a document which are not already there, it will only do so where it is satisfied it is necessary to reflect the true meaning of the clause. It is not part of the Court's interpretive exercise to improve upon the instrument that it is called upon to construe. Here, the complexity of the drafting of the pre-emption provisions went against McKillen. Whilst the Court felt the fact that any sale of Misland itself was not caught was odd, it could not satisfy itself that this was a mere drafting mistake, especially given the definition of "Shareholder Group" in relation to Misland was different and even expressly recognised that there may be a time when Misland ceased to be a subsidiary of A&A (it included words "for as long as that company is a subsidiary of A&A..."). The "Misland exclusion" could easily been a rational omission. Applying the reasonable man test, the Court was not satisfied there was sufficient grounds for concluding that the parties intended clause 6.15 to impose a restrain on A&A's actions in relation to Misland and were not prepared to construe it in that way.

Comment

You may recall that there was another case recently (Estafnous v London and Leeds Business Centres) in which an estate agent was refused commission when shares in the company holding property were sold, rather than the property itself. This is an equivalent case in relation to joint venture companies. The Courts are tending to interpret wording strictly (especially where it is complex and has been professionally drafted) and will be reluctant to imply or change terms unless there are good reasons to do so. The cases show the importance of thinking through all possible outcomes and ensuring that, where relevant, they are covered. In particular, make sure that change of control provisions are included in joint ventures to prevent pre-emption provisions being circumvented by sale of shares in the shareholder.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Mark Alsop
 
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