High Court Interpretation of Pre-Emption Rights on Transfer of Shares

The High Court, in McKillen v Misland (Cyprus) Investments Ltd and Others, has released judgment on its interpretation of the restriction on the transfer of shares by pre-emption provisions in a shareholder’s agreement and in the articles of association.

This case centred on the battle between the Barclay Brothers’ and Irish businessman, Paddy McKillen, for control of a hotel group in London. Mr Mckillen has so far resisted offers from the brothers to sell his shareholding in the company, however, the brothers have attempted to skirt their way around the pre-emption rights contained in the articles of association and shareholders agreement by buying out the corporate shareholders in the group and appointing a member of their company as a director on these company’s boards.

The High Court has held that pre-emption provisions only applied to restrict a transfer of the legal or direct beneficial interest in the shares. The provisions did not, however, apply to a third party’s sale of its interest in a legal and beneficial holder of those shares. Thus, the buyout of these companies did not infringe Mr McKillen’s pre-emption rights.

This decision highlights the importance of drafting any restrictions clearly, especially where the restrictions are contained within the articles and not a separate shareholders agreement, given that extrinsic evidence will generally not be admissible in interpreting the articles.

Furthermore, it underlines how shareholders can seek innovative ways to avoid contractual restrictions on transfer of shares. Therefore, when drafting a shareholders agreement, the parties should consider whether provisions that restrict only the registered shareholders or parties to a shareholders agreement will suffice. As this case shows, a third party may be able to influence the exercise of a shareholder’s rights despite having no direct interest in the company, should a change of control of a corporate shareholder occur. Advisers should, in such cases, extend the circumstances in which pre-emption rights are triggered to cover this.