When drafting a company’s Articles of Association, it is vital that all the provisions are worded clearly. This is the most effective way to avoid potential ambiguity or conflict arising out of apparently contradicting provisions. In circumstances where the provisions require clarity, courts will interpret the relevant clauses in a manner that makes the most commercial sense. Provisions should therefore be drafted to avoid such uncertainties and prevent disputes between shareholders. At Nath Solicitors, we specialise in providing expert legal guidance and support to small and medium-sized businesses. This includes advice on all aspects of company law and related matters.
We look at a 2023 case below where different classes of shareholders disagreed on the interpretation of specific provisions in the relevant Articles of Association.
DnaNudge Ltd v. Ventura Capital Ltd, 2023
The dispute here arose between the ordinary shareholders and a preference shareholder of a company. The articles of association contained the following provisions which the shareholders disagreed on the interpretation of:
- Article 9.2 – a provision to allow the automatic conversion of preference shares on notice by a majority of combined ordinary and preference shareholders.
- Article 10.1 – a provision stating that the special rights accompanying a class of shares can only be varied with the consent of more than 75% of the holders of the relevant shares.
Ordinary shareholders holding approximately 87% of the combined shares attempted to execute Article 9.2 to convert the preference shares, however a preference shareholder argued that such actions remained subject Article 10.1 (and the ordinary shareholders had failed to receive the necessary consent under Article 10.1 from the preference shareholders).
The court decided in favour of the preference shareholder, finding that the ordinary shareholders would still require the consent of the holders of over 75% of the preference shares before they are able to convert and vary the preference shares. The court found it necessary to read the conversion clause in conjunction with the requirements of other clauses. It could not be interpreted alone.
Most UK companies require class consent to vary a class right. The judge stated that any reasonable reader of the Articles would deem the conversion of preferred shares into ordinary shares as varying the rights attached to that class of shares. Article 9.2 should be read subject to the conditions of Article 10.1. The ordinary shareholders attempt to convert the preference shares into ordinary shares was therefore found to be inconsistent with the way the Articles of Association should have been interpreted. The purported conversion was null and void.
Comment
In conclusion, it is clear that a company’s Articles of Association need to be drafted in an unambiguous manner. Articles should be carefully checked against one another to avoid any potential conflict or ambiguity of interpretation. Any disagreement on the interpretation of Articles may result in risky and expensive litigation that should be avoided where possible. If a dispute does arise, courts will be prepared to interpret separate articles in conjunction with one another rather than treating each article as an independent, standalone provision.
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