Do you have a "change of control" clause in your
shareholders' agreement? Are your pre-emption rights on
transfer of shares comprehensively drafted? If not the High
Court case of McKillen v Misland (Cyprus) Investments
Limited1 involving the back-door takeover by
the Barclay brothers of Coroin Limited, the entity that owns the
hotels Claridge's, the Connaught and the Berkeley should be a
wake-up call for a review of your joint venture / shareholders'
agreement and articles of association.
The Barclay brothers obtained control of Coroin Limited not by
acquiring shares directly in Coroin Limited which would have been
in breach of the pre-emption provisions on a share transfer in that
company's articles of association and shareholders'
agreement but by acquiring ownership of shares in Misland (Cyprus)
Investments Limited, a shareholder in Coroin Limited. Mr J David
Richards held that this was not in breach of the terms of those
particular pre-emption rights.
The judge made it clear in his judgment that a principle
applicable to pre-emption articles is that as the right to deal
freely with a share is an important attribute of ownership and
prima facie right of a shareholder, the existence and extent of any
restriction on transfer, such as pre-emption rights, must be
"Commonly used phrases in pre-emption provisions have
distinct legal meanings and superficial small variations can have
significant legal effects. This is relevant consideration when
construing pre-emption provisions, particularly when as in this
case they are complex and have been professionally drafted, using
and adapting well known standard provisions."
The case makes it clear that pre-emption right provisions must
restrictions on transfer of shares to prevent legal title being
restrictions on transferring or creating any interest therein
to prevent beneficial interests being transferred outside the
In addition, if the pre-emption provisions only restrict the
above they do not prevent the sale of the shares in a shareholder
itself that holds such shares in the joint venture company
(JvCo). Such a sale involves no change in
the shareholder's legal and beneficial ownership of the
underlying shares in the JvCo nor evidences a desire to transfer
those shares or any interest in them. "Any interest
therein" does not include indirect interests such as those it
could be said arose by ownership of shares in the shareholder who
held the underlying shares in the JvCo.
From the terms of the relevant shareholders' agreement it
was clear that the JvCo was a vehicle for a venture between a
restricted number of shareholders who had personal rights to
appoint directors. The pre-emption provision was supposed to
preserve the personal nature of the venture. However, the
lack of an express change of control provision allowing the
pre-emption provisions to apply on the change of control of a
shareholder in the JvCo meant this intention was not met leading to
a rather unsatisfactory outcome for Mr McKillen. If you don't
suddenly want to find yourself in partnership with a stranger make
sure you have comprehensive pre-emption rights on transfers of
shares, interests in shares, declarations of trusts, transfer of
voting rights and change of control of the shareholder you went
into business with originally.
The judge further stated that articles of association have a
special status as a "statutory contract" adopted pursuant
to the Companies Act, requiring public registration and being
capable of amendment by special resolution. By reason of these
provisions, the court has no jurisdiction to order rectification of
articles or set them aside on grounds of misrepresentation. He also
held that extrinsic evidence is not admissible in the construction
of articles. This is because the articles govern relations between
the company and its members and between the members. Members are a
fluctuating body of persons. Persons become members on the basis of
registered articles and without in most cases any knowledge of the
circumstances existing when the articles were adopted or
subsequently amended perhaps on many occasions.
The Law Commission has issued its report on the fiduciary duties of investment intermediaries.
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