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Forgotten pre-emption rights

A recent case, Dixon and another v Blindley Heath Investments Ltd [2015] EWCA Civ 1023, explored the issue of what happens if all the shareholders forget about pre-emption rights as they were contained in an informal exchange of letters between shareholders and not in the company’s articles of association and then try to apply them at a later stage.

Pre-emption rights on issue and transfer of shares are a common provision used by shareholders to ensure a shareholder’s proportion of the voting (and other rights such as dividend rights) are not diluted – they provide for the shares in a company to be offered to the existing shareholders before they can be issued and/or transferred to anyone else.

In this case, the parties had forgotten about pre-emption rights that they had agreed to abide by informally in 2001, when they approved transfers of shares in 2009 (in breach of those pre-emption rights). By 2010, there were difficulties between the shareholders. At a board meeting in October 2011, a transfer, in breach of the pre-emption rights (which were still forgotten) was approved by the board.  After that board meeting, a shareholder re-discovered the paperwork containing the pre-emption rights, and a board meeting in November 2011 declined to register the transfer of shares. The claimant (who was the person hoping to be registered as the shareholder) applied to the court for a declaration that there was no valid pre-emption agreement and that he should be registered as shareholder.

The court decided in the claimant’s favour and this decision was upheld by the Court of Appeal. The court decided that the shareholders were “estopped by convention” from relying on the pre-emption rights.Estoppel by convention is a form of equitable remedy that acts to bind parties to a shared assumption or mutual understanding of the terms and facts of a contract if: (i) they both knew the other operated under the same assumption/understanding; and (ii) they both regulated their subsequent dealings on the same assumption/understanding.

It was held that where the parties had forgotten that those rights existed rather than where the parties had acted upon a mistaken assumption that such rights did not exist made no difference and that the parties now seeking to prevent the registration of shares had benefitted themselves from estoppel of convention by share transfers in 2009, which had been registered and it was therefore unjust for the objecting parties to rely on the pre-emption agreement now and depart from the mutual assumption. They were accordingly estopped by convention from relying on the pre-emption rights. 

This case clarifies that a mistaken recollection of a contractual document is not legally different from a state of forgetfulness of it. The court held that whether the true state of affairs has been misappreciated, misremembered or forgotten should make no difference to whether the parties eventually adopted a common assumption for the purposes of the estoppel doctrine.

This case is an important reminder that pre-emption rights should be set out in the company’s articles of association (and therefore publicly available and easily accessible information) or a formal shareholders’ agreement rather than in informal documents to ensure they are not overlooked. 

For further information, please contact Deborah Angel, corporate associate.