The High Court faced an application relating to the interpretation of a shareholders' agreement (SHA) and a company's articles of association (AoA) – in particular, whether the term ‘privileged relation’ could exclude a former spouse of a member.
Background:
Mr. Fane, Mr. Wellesley (1st defendant), Mr. Turnbull (2nd defendant) and Chalet Valentine Ltd. (3rd defendant) are the registered shareholders in Wellesley Group Investor Ltd. (4th defendant). The shareholders' rights are governed by the AoA of the company as adopted by a special resolution dated 5th December 2018 and by a shareholders' agreement (SHA) made on or around the 30th October 2015 between the then shareholders in the company and the company itself.
Mr. Wellesley was appointed as director in May 2013, while Mr. Turnbull was appointed as director in April 2014. There is a third director who was appointed in July of 2018.
Mr. Fane’s marriage to Ms. Fane was dissolved in January 2019. In October 2020, Mr. Fane and Ms. Fane entered into a "Deed of Confirmation and Undertaking”.
The claimant alleges that the charge is a ‘permitted transfer’ under Article 49.2.7 of the company’s AoA and does not violate the SHA. The defendants, however, argued that the terms of the charge are not permitted, as Ms. Fane does not qualify as a ‘permitted transferee’ under Article 49.2.7.
Decision:
The Court analysed the wording of the SHA and noted that ‘privileged relation’ related to any particular individual member, deceased or former individual member, and Ms. Fane did not fall under the title of privileged relation as listed in the clause. The Judge noted that the “first group of persons includes any parent of a husband or wife or civil partner and the parents of a widower or widow or surviving civil partner. It also includes lineal descendants and ascendants as well as the brothers and sisters of the member and their lineal descendants. The second group of persons however does not. The second group of persons includes former spouses and civil partners, while the first group of persons does not.” The two categories overlap, yet are different.
The transfer by the claimant of a 50% beneficial interest in his shares in favour of Ms. Fane would thus be a transfer or disposition of an interest in the shares within the meaning of various provisions within the SHA. The Court held that a purported transfer of a beneficial interest in shares without serving the required transfer notice may be ineffective under the AoA. The Court ruled that the applicant remained a 'principal shareholder' with rights to information and to appoint a director, subject to certain qualifications.
A virtual hearing will have to be scheduled to address costs.
Implications:
This case highlights the importance of following the procedures as set out in the AoA and SHA. Moreover, such agreements can exclude a former spouse of a member from being regarded as a ‘privileged relation’ who is therefore allowed to receive the shares.
It offers a good reminder that, in estate planning or divorce, it is important to ensure any transfer of beneficial interest in shares is done according to the articles to avoid any lengthy and complex lawsuits.