The enthusiasm and drive that go with embarking on any new business venture, including setting up a company, can sometimes blind those involved to the possibility that things might not always go according to plan, That’s why companies should always include provisions in their Shareholders’ Agreements and Articles of Association to cover events where one shareholder may seek to buy another shareholder’s shares from the company.
For buyout provisions to take place there must normally be some kind of ‘triggering event’. To avoid shareholder disputes it’s crucial to ensure that the circumstances in which buyout provisions are triggered are nailed down in a clear and unambiguous way. Below we look at a High Court case from 2023 where a dispute arose over the interpretation of buyout provisions.
Bailey Ahmad Holdings Limited v Bells Holding Limited (2023)
In Bailey Ahmad Holdings Limited the Articles of Association stated that one shareholder could force the compulsory purchase of the other shareholder’s shares if specified triggering events occurred. The relevant articles in this matter included:
- Article 14.1 which stated that a “Compulsory Transfer Event” would be “deemed to have occurred” where a shareholder (the Defaulting Shareholder) “commits a material or persistent breach of any shareholders’ agreement relating to the Company to which it is a party and fails to remedy such breach (if capable of remedy).”
- Article 14.3 which stated that “a Shareholder which is not a Defaulting Shareholder may at any time serve written notice on the Defaulting Shareholder and the Company identifying the Compulsory Transfer Event. Upon service of such notice the Defaulting Shareholder shall be deemed to have given the Non-Defaulting Shareholder irrevocable notice offering to transfer all of the Shares held by it to the Non-Defaulting Shareholder”.
The claimant (one of the two shareholders of the company), sought to impose these articles on the other shareholder under the basis that the defendant shareholder had committed a material or persistent breach of the shareholders agreement. While the defendant denied the existence of such a breach, the claimant argued that his belief in the breach was enough to satisfy the requirements of the provision due to the provision stating, “deemed to have occurred”. However, the defendant argued that no court had established any breach therefore the requirements of the buyout provision had not been met.
The court summarily dismissed the claimant’s claim. The judge felt that the claimant was attempting to interpret the articles differently from how a reasonable person would have understood them. The use of the word “deemed” did not translate into “believed” as the claimant argued. A shareholder simply “believing” that another shareholder had committed a breach of the shareholders’ agreement was not sufficient to trigger the buyout provision.
In short, the judge found that the breach must be found to have actually occurred in order to trigger the provision. The claimant was therefore unable to force the buyout of shares.
Comment
In conclusion, courts will be reluctant to interpret a provision in a manner other than exactly how it is written. It is therefore important that such provisions, especially those that may fall under circumstances shareholders may disagree on, are written carefully and precisely. Certain triggering events are more subjective than others and it may be beneficial to specify such events.
Buyout provisions won’t cover every eventuality. But they serve a useful purpose when ownership of the company needs to be changed in some way.
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