Pre-emption rights under a company’s Articles of Association give existing shareholders first refusal to buy another shareholder’s shares, before they may be offered elsewhere. The award-winning corporate and commercial lawyers at Bahamas law firm ParrisWhittaker are highly experienced in advising companies and shareholders on share sales and pre-emption rights.
Without express pre-emption rights, shareholders do not have an automatic legal right to first refusal where a shareholder decides to sell their shares.
The UK court has handed down a ruling on the interpretation of a somewhat ambiguous clause around pre-emption rights in a company’s articles. The ruling has persuasive authority on the courts in The Bahamas and should be noted.
What happened in this case?
Here, the pre-emption clause within the Articles included: “The sale shares shall be offered to the members (other than the proposing transferor) as nearly as may be in proportion to the number of shares held by them respectively”.
However, there was ambiguity around the words “the members”. These could mean either all of the members or the member other than the proposing transferor.
The defendant (an individual) gave notice to sell his 85 shares in a company (SR20) at a price of £2,500 per share pursuant to the pre-emption rights in the Articles. A week later, the company sent an offer notice to another company (Axis) offering to sell 13 shares (ie 15% of 85 shares) at a price of £2,500 per share pursuant to the Articles.
Three days later, Axis served a notice of acceptance, purporting to accept a purchase of 85 shares.
Axis asked the court for declaratory and/or injunctive relief that its notice of acceptance was valid in relation to all of the individual’s 85 shares; or SR20 was obliged to issue it an offer notice in respect of all the shares.
A key issue related to a question of construction of the pre-emption clauses, particularly whether the validity of the acceptance notice was affected by the fact it purported to accept an offer for 85 shares, when only 13 shares were on offer.
The court ruled on the facts that the words, “held by them respectively” meant the members other than the proposing transferor. Therefore, Axis should have been offered all 85 shares which were the subject of the transfer notice.
The court also took the view that the offer notice should have offered 85 and not 13 shares under the articles. On that basis, it was to be rectified to that effect – additionally to include the invitation to take up any other shares under the article. The individual shareholder could not therefore sell or otherwise dispose of his shares to any other party.
Key takeaways
This case demonstrates just how important it is to ensure your articles of association are clear and unambiguous to avoid the risk of a dispute. Always consider the merits of undertaking a risk assessment to identify potential areas of risk before finalising your Articles of Association and other important corporate documents.
Contact the experienced corporate and commercial lawyers at ParrisWhittaker for specialist assistance and representation.
