The judgment

• The court summarily dismissed Bailey’s claim.
• Bailey’s attempt to read into the Articles a different meaning based on the alleged purpose of the provisions, or the practical implications of Bells’ construction, was rejected
• Bailey asserted that the purpose of Article 14 was to “provide a comprehensive self-contained set of prescriptive mechanisms to regulate the Parties’ affairs in connection with … possessing and dispossessing shares in the Company”, and that the court could therefore read the words “when one of them considers the other to have committed” into Article 14.1.1 concerning material or persistent breaches (para. 24).
• The court rejected this argument and agreed with Bells that the Articles clearly and plainly specified that a Compulsory Transfer Event had to have occurred for the Defaulting Shareholder mechanism to be triggered, and Bailey’s belief “is not referred to and does not come into it” (para. 21).
• In support of its case, Bailey argued that Bells’ construction of Article 14.1.1 could not be correct because this would mean that the Defaulting Shareholder mechanism would only be triggered once there had been a final determination by the court that a material or persistent breach had taken place, and this was not what Article 14 said.
• The court did not agree that this was a consequence of Bells’ construction. It acknowledged that a dispute between the parties over whether a relevant trigger event had occurred could result in a dispute regarding the lawfulness and legal effect of any steps taken by a party purporting to be a Non-Defaulting Shareholder under Article 14. However, that was not a reason for reading Article 14.1.1 to mean that a shareholder’s mistaken belief that a material or persistent breach had occurred was sufficient for the forced buy-out provision to be triggered.
• The court held that Bailey’s claim was not appropriate for the Part 8 procedure, which is intended for cases where there is no substantial dispute of fact or law. It summarily dismissed the Part 8 claim and left the parties to liaise and cooperate to find a solution away from court, or to bring appropriate proceedings under Part 7 if a settlement was not achieved.

Comment

• This judgment illustrates the reluctance of the courts to read language into clear and unambiguous contractual provisions based on arguments regarding the purpose of the provisions. Here, the court had no difficulty in discerning the plain and natural meaning of the Defaulting Shareholder provisions, and declined to read into these provisions language that was not there.
• The case is an important reminder of the importance of carefully drafting forced buy-out provisions in agreements between shareholders. Protracted shareholder disputes may cause serious damage to the company, and shareholders often wish to agree contractual mechanisms that allow for a quick and clean break if a shareholder dispute arises. This case illustrates some of the difficulties in ensuring that such provisions are effective – if, as appears to be the case here, there is a dispute as to whether a trigger event has occurred, the party wishing to exercise the buy-out provision is left in a difficult position where any steps it takes to exercise the provision may subsequently lead to litigation.
• Some trigger events in compulsory buy-out provisions (such as insolvency events) are inherently more objective in nature and easier to substantiate. Others are more subjective, making it more likely that judicial intervention will be required to determine whether the trigger event has actually occurred. In the context of “material breach” trigger events, one way of addressing this uncertainty is to seek to clearly define what constitutes a “material breach”, for instance by reference to specific provisions of the agreement and/or by including a financial threshold for loss.

Client Alert 2023-272