Many companies are subject to pre-emption rights which state that shares must be offered to existing shareholders before they can be transferred to anyone else. What happens if all the shareholders forget about those pre-emption rights and then try to apply them at a later stage?
A recent case, Dixon and another v Blindley Heath Investments Ltd  EWCA Civ 1023, explored that issue.
In this case all parties accepted that pre-emption rights agreed in 2001 had been forgotten by 2009 and that transfers had occurred in 2009 in breach of those pre-emption rights. Those transfers had been approved by the directors and new share certificates issued. By 2010 there were difficulties between shareholders but at a board meeting in October 2011 a transfer, in breach of the pre-emption rights (which were still forgotten) was approved by the board. Shortly after that board meeting a shareholder re-discovered the paperwork containing the pre-emption rights and a board meeting in November 2011 declined to register the transfer of shares. The claimant (who was the person hoping to be registered as the shareholder) applied to the court for a declaration that there was no valid pre-emption agreement and that he should be registered as shareholder.
The court first, and then the Court of Appeal, decided in the claimant’s favour. The court decided that there was something called “estoppel by convention” which is when all parties had acted on a common misunderstanding, and that the parties now seeking to prevent the registration of shares had themselves benefitted from estoppel of convention by share transfers in 2009 which had been registered and it was therefore unconscionable for the objecting parties to rely on the pre-emption agreement now.
Lessons for the future:
The pre-emption rights in this case were easy to forget because they were not contained in the Company’s articles of association (and therefore readily available for everyone to view at from the Companies House website) but were contained in private documents between the shareholders. An easy way to avoid this situation would be for pre-emption rights to be contained in the Company’s articles of association.
If you would like to carry out a review of a company’s articles of association please contact one of our team.