Amendment of drag along rights

Arbuthnott v Bonnyman & others

The Facts

A was an executive and founder of the Company concerned.

In 2003, the Company’s structure changed following the incorporation of an LLP into the group. In 2008, A gave notice of retirement of the LLP, as well as notice of retirement from the Company and any other subsidiaries.

A retained 900 shares in the Company’s capital, valuing £0.01 each. This equated at around 9% of the unissued share capital.

Over time, a number of the original executives also left, together holding more than 50% of the Company’s share capital.

When considering a further re-structure, the active executives of the Company at the time offered a sale of the shares to the continuing executives in the investment team for £15.15 million (of which A was one of these shareholders).

In 2011, WSL, an active member of the investment team, made an offer for these shares, which was subsequently accepted by all members of the Company other than A. The shares were transferred to WSL in 2012. A condition of the WSL offer was that those who accepted it would vote in favour of an amendment to the articles of the Company.

A written resolution was circulated to this effect and was signed and accepted by all members of the Company except A. The key amendment to the changes was a new majority drag position, and an alternation to the definition “Founder Majority”.

WSL proposed to exercise drag provisions following the transfer of the shares in order to acquire A’s shares.

A raised 4 claims of unfair prejudice on the basis that the WSL offer itself, the amendment to the Company’s articles and the manner in which they were carried out expropriated A’s shares at a gross undervalue.

Following a dismissal of the claim by the High Court, A appealed.

The Court of Appeal

The Court of Appeal dismissed the appeal, holding that:

  1. The original articles clearly permitted the majority shareholders to acquire all the shares of the minority provided that a majority of the non- purchasing shareholders agreed.
  2. An alteration of a company’s articles could be challenged as invalid by a minority of shareholders in certain circumstances. A’s claim did not bring rise to such circumstances.
  3. There had been nothing unfair, unreasonable or improper in the purchase of A’s shares.

In the case of Arbuthnott, the alteration of the articles did not introduce any major change from the compulsory transfer provisions in the articles before the alteration. Therefore, this will not resolve any uncertainty over whether an amendment to future drag provisions will involve unfair prejudicial conduct.