It is odd, we all know that the time will come eventually, when we need to move on to do something else. This could be retire and indulge in our hobbies or other interest or to just cut back on the time we spend running the business, but we are all reluctant to face up…
Sale of Company Shares
Case law: Sale of company shares in breach of forgotten agreement was valid
Company director, shareholders and buyers of shares should not forget any rights, obligations or encumbrances over those shares before undertaking transactions involving them – otherwise they risk litigation.
A company’s articles of association contained a clause giving the directors power to refuse to approve any proposed transfer of shares in the company. At a board meeting the directors were told of a transfer of shares to a third party. No transfer forms were presented for board approval, and there was no formal resolution approving the transfers, but no objection was raised by any of the directors. All the directors appeared to have treated the transfers as a ‘done deal’, and it was accepted that they had unanimously approved and agreed the transfers, subject to transfer forms being lodged with the company.
Soon after the meeting, one of the directors (also a shareholder) claimed to have come across some old documents. These reminded him that the shareholders had, many years previously, agreed that shares in the company should not be transferred to a new owner unless offered to the other shareholders first – ie the company’s shares were subject to ‘pre-emption rights’ on transfer.
However, none of the directors or shareholders had remembered the pre-emption rights at the time of the board meeting. Indeed, over the years various other transfers of shares had been approved by the board without regard to, and in breach of, the forgotten pre-emption rights.
The director/shareholder who had found the old documents raised the possibility that the transfers were invalid because the pre-emption rights had not been complied with and, at the next board meeting, when transfer forms for the transaction were put before the board for rubber-stamping, the directors purported to refuse to approve the transfers. Their reasons included the fact the shares being transferred had not been offered to the other shareholders first, as required by the previously forgotten agreements.
In the resulting legal action, the director/shareholder argued that the transfers should be unwound as they were in breach of the pre-emption rights. If his argument was successful, this would give him control of the company.
The other side argued that the legal doctrine of estoppel by convention applied. This doctrine says that if parties share a common but mistaken assumption that a particular set of facts applies, one of them cannot then turn round and try to undo actions carried out based on that assumption, if it would be unconscionable for them to do so – they are ‘estopped’ from doing so.
The director/shareholder said the doctrine of estoppel did not apply, because the directors had not ‘wittingly’ behaved as if there were no pre-emption rights on transfer, but ‘unwittingly’ – because they had all forgotten those rights existed.
The Court of Appeal ruled that the director/shareholder was estopped from relying on the pre-emption rights: it was irrelevant that the directors had unwittingly forgotten about the shareholders’ agreement. It would also have been irrelevant if the directors had remembered the agreement – but not appreciated its effect, or had not remembered what it said.
The Court also found it relevant that the director/shareholder himself had previously benefited from transfers of shares in breach of the pre-emption rights. It would therefore be unconscionable to allow him to enforce those rights against other shareholders. The company was therefore ordered to register the third party as a shareholder in the company’s register of shareholders.
- Company directors, shareholders and buyers of their shares should ensure they are aware of all rights and obligations that exist in respect of the company’s shares before any transaction is undertaken.
- Any such rights, etc, should be clearly and unambiguously set out in writing, preferably in the articles of association or formal agreements, so they are less likely to be forgotten, and easier to enforce.
Case ref: Christopher Dixon & EFI Loughton Ltd v Blindley Heath Investments Limited & Others  EWCA Civ 1023
Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and Pinstripe (as distributor) disclaim all liability for any errors or omissions.
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