The High Court's decision in Blindley Heath Investments Limited v Bass and others is significant, both for those involved in preparing shareholders' agreements and share sale and purchase agreements, and for those advising on any shareholder disputes that might arise afterwards.
The case was all about pre-emption rights - how they were created, could be applied, and could be lost. And as the decision turned principally on the question of whether or not pre-emption rights (in this case, in relation to the transfer of shares in a company) were enforceable, it may have wider significance in relation to similar rights of first refusal over other kinds of property.
As this is only a first instance decision, it may be subject to appeal in certain respects. However, pending any successful appeal, matters now stand as follows. You can find the practical lessons to take from the case here.
In the words of Lesley Anderson QC (sitting as a Deputy Judge), the case concerned "a struggle for control" of a company named EFI (Loughton) Limited (the Company). The Company had been set up by a number of members, who were also its directors. Some shares were also held by the directors' family members. All in all, a very usual small/ medium sized company structure.
The Company required finance to acquire a leasehold property. This was provided partly by unsecured loans from existing member directors, including one Mark Dixon. A further unsecured loan of £80,000 came from Mark Dixon's brother, Christopher Dixon, who was not a director or member at that stage.
As conditions of making these loans, Christopher Dixon was issued with 100 shares in the Company and in February 2001 a letter was prepared stating that pre-emption rights applied so that (with the exception of certain limited transfers to family members) no shares in the Company were to be transferred without the shares first being offered pro rata to the other existing members (the February Letter). Christopher Dixon also became a director.
In November 2001, a second letter (the November Letter) was prepared and circulated to those directors who were also shareholders. The November Letter was in materially the same terms as the February Letter. Although the evidence did not show that all of the members had signed either letter, it was shown that all of the director members (and one of their wives) had signed one or other version (and it was probable that all had signed at least the November Letter). It seemed that Mark Dixon had collected up the various signed copies and retained them.
In subsequent years the preparation of a more formal shareholders' agreement was proposed. Mark Dixon was instructed to progress this, but nothing ultimately came of it.
The first share transfer
In 2009, Mark Dixon died. Under the terms of his will, his 100 shares passed to his widow. However, this was contrary to the pre-emption provisions in the February and November Letters. Nonetheless, the transfer of those shares was duly approved by the directors and registered.
Over time, there were said to be disagreements among the directors/ members over the future direction of the Company's business. In simple terms, two broad opposing "blocks" of shares emerged:
- 200 shares owned by the Bass and Mingay families (Mr Bass and Mr Mingay were the executive directors, and in the case of Mr Mingay also an employee, of the Company); and
- 400 shares owned by the Dixons and by the Clarke and Wells families (some of whom were directors but all of whom were, in effect, mainly financial investors and not executives).
Further share transfers
The Deputy Judge found that, between 2009 and 2011, Christopher Dixon (Mr Dixon) set about attempting to obtain control of the Company. He acquired 50 shares from Mark Dixon's widow and came to an agreement with the Wells family for a company controlled by them and Mr Dixon to acquire the Clarke family's shares. There were also further transfers within the Bass family grouping. Once again, all of these transfers were approved and registered by the directors, despite being contrary to the pre-emption rights set out in the February and November Letters.
Later in 2011, Mr Mingay and Mr Bass entered into an agreement with a company (the buyer) referred to in the document as "Blindley Heath Investments Limited" to sell their and their families' shares in the Company. In fact, at the time the agreement was signed, the registered name of the buyer was "Blindley Heath Investment Properties Limited" and the name stated in the agreement was incorrect.
However, the buyer's correct registered office address and registered number were set out in the agreement. The sale and purchase was duly completed and stock transfer forms in relation to the Bass and Mingay shares were delivered to the buyer (the Blindley Transfer). There was correspondence between Mr Dixon and the buyer indicating that Mr Dixon accepted the sale as (in the words of the Deputy Judge) "a done deal". There was even a board meeting at which, although no transfers were produced for registration, the directors (including Mr Dixon) were shown to have approved the transfers conditionally on them being lodged.
However, shortly afterwards, Mr Dixon found copies of the February and November Letters amongst his brother's papers. He sent emails to the buyer and to Messrs Bass and Mingay stating that the Blindley Transfer was in breach of the pre-emption rights in those letters and could not proceed.
It was held that the February and November Letters had created enforceable pre-emption rights. The consideration for those granted by the February Letter were the investments made through unsecured loans by the various existing members and Mr Dixon.
The consideration for the November Letter was not (as was argued) the same, past consideration (which would not have supported legally enforceable rights), but the release of the obligations in the February Letter. The fact that a more formal shareholders' agreement was proposed but never made did not mean the two letters were not intended to be legally binding (the November Letters were marked "Signed as agreed", without any "subject to contract" or similar wording).
The pre-emption rights had not been abandoned. This would have required an express offer to abandon from one member which had been duly accepted by everyone else entitled to enforce the pre-emption rights. That had never happened.
However, because the parties had conducted themselves on a common mistaken assumption that there was nothing to prevent the various transfers that had in fact been made and registered, this created an "estoppel by convention" meaning that none of them could, by the time of the Blindley Transfer, enforce the pre-emption rights.
Furthermore, because Mr Dixon or companies connected with him had acquired shares in breach of the pre-emption rights, it would be "unconscionable and inequitable" for him to enforce the same rights against other members.
In addition, the board could not now purport to reject the transfers to the buyer under the provisions of the Company's articles when it had already approved them (conditionally or in principle). Even had it not already approved the transfers, the supposed rejection of the transfers at a later board meeting was not a proper exercise of the directors' powers because they did not genuinely believe the grounds set forth to justify the rejection were in the Company's best interests.
Attempts were also made to show that the agreement to transfer the Bass and Mingay shares to the buyer was invalid because of the mistake in the buyer's name as stated in the share sale and purchase agreement. These were rejected; the buyer's registered office address and registered number were correctly stated and there was no other company that could have been mistaken for the buyer at the relevant time.
Accordingly, an order was made for the rectification of the Company's register of members to register the Blindley Transfer and show the buyer as the holder of 200 shares acquired from the Bass and Mingay families.
Although partly obiter, the judgment also had further elements of interest:
- The buyer's alternative claim for breach of warranty (that there were no pre-emption rights preventing the sale to it of the Bass and Mingay shares) failed, because in the event there were no such enforceable rights. But even if the claim had been made out, the buyer would have recovered nothing because:
- pending registration of the share transfer to it, the buyer had acquired beneficial although not legal title to the shares; this meant the sellers would have been in the position of bare trustees and would have had to pay over to the buyer anything received by way of dividends or proceeds of sale of the shares to another buyer, and the buyer could direct how the shares were voted; and
- it had paid no more than what the relevant shares were actually worth at the time of sale.
- The buyer's alternative claim to rescind the share sale and purchase agreement was also rejected; the buyer had demonstrated that it wanted the shares, not its money back, above all by applying for an order for the rectification in its favour of the Company's register of members. This was sufficient to amount to affirmation of the agreement.
- The buyer's alternative claim in misrepresentation (always something of a last resort) also failed; there was no evidence that any of the Bass or Mingay sellers had made any representation that was:
- relied on by the buyer
- which induced the buyer to enter into the sale and purchase agreement.
All three would be essential elements of a successful misrepresentation claim (and the buyer would still have to have shown loss or damage flowing from these elements - on which the position would have been the same as on the breach of warranty claim).
- Nor would the buyer have been able to claim for:
- lost dividends (as there was no evidence the Company had ever paid one);
- loss of profits because the buyer could not procure the sale of the Company's business; any such "reflective" loss would have been incurred by the Company, not by the buyer (even if it could be shown that the business would otherwise have been sold at a profit); or
- loss of value of the shares or investment potential, or of the chance to sell the shares at a profit - these were too remote or speculative (if indeed different to the other heads of claim).
The Company in this case will not be alone in having potentially important and very valuable members' rights set out in short and relatively informal letter agreements. While these may have a role in quickly and temporarily capturing the essence of what has been agreed, this case shows that they can easily be forgotten over a relatively short time.
In the interests of all parties (existing members and potential transferees), it must be preferable to have these kinds of rights set out clearly and in full in a formal agreement, which is likely to be more clearly recalled (and more readily enforceable). Moreover, in the case of a company, unless the rights involve something of a genuinely private nature, the best place for them is probably in the articles of association, which are a matter of public record and thus unlikely ever to be overlooked.
Other lessons to be drawn from the judgment include the continuing and welcome unwillingness of the courts to permit a party to enforce rights against others where that party has itself avoided the enforcement of similar rights against itself, even where no fraud or other impropriety is shown.
Once again, a "belt and braces" claim for misrepresentation failed because it could not be demonstrated to the court's satisfaction that the buyer was induced to enter into an agreement (which contained contractual warranties covering the same subject matter, amongst others) by a false statement on which the buyer relied, thereby suffering loss.
Finally, it seems that claims based on a buyer's failure to obtain legal title to shares are unlikely to bear fruit where beneficial ownership can be shown to be of at least the same value at the time of sale as the price paid by the buyer.