- A company’s articles of association provided that one shareholder could force a compulsory purchase of the other shareholder’s shares if certain specified events occurred, including a material or persistent breach by the other shareholder of the shareholders’ agreement.
- One of the shareholders sought to enforce the compulsory purchase provisions based on its belief that the other shareholder had committed a material breach of the shareholders’ agreement, even though the other shareholder disputed that this had occurred and the matter had not been judicially determined.
- The court’s view was that the wording of the contract clearly required that the material or persistent breach must have actually occurred, and it was not enough that one party simply believed that there had been a breach.
- This judgment is another example of the reluctance of the courts to read language into clear and unambiguous contractual provisions, and serves as a reminder of the need to be especially careful when drafting provisions buy-out provisions and other such provisions that may be exercised in contentious circumstances.
“It is a commonplace, familiar type of contractual regime, to specify a list of trigger events and to provide that if one or more of those events occurs, certain consequences follow. It is as simple as that, and there is no arguable need to read the contract differently, or to read into it something that is not there.” – Mr Justice Baker
The English High Court recently handed down judgment in Bailey Ahmad Holdings Limited v. Bells Holding Limited  EWHC 2829 (Comm), which concerned Part 8 proceedings in the Commercial Court seeking a declaration on the meaning of “Defaulting Shareholder” in a company’s articles of association. The claim was summarily dismissed.
Facts of the case
- Bailey Ahmad Holdings Limited (Bailey) and Bells Holding Limited (Bells) together owned the shares in Omer & Company Accountants Ltd (the Company) (Bailey holding 40% and Bells, 60%) and had entered into a shareholders’ agreement.
- The Company’s articles of association (the Articles) contained the following mechanism for a forced buy-out of a shareholder that breached the shareholders’ agreement (the Defaulting Shareholder) by the other shareholder (the Non-Defaulting Shareholder):
- Article 14.1 provided that a “Compulsory Transfer Event” occurred where a shareholder (i.e., 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) within 14 Business Days of being given notice by the other Shareholder to do so”.
- Article 14.3 provided that “A Shareholder which is not a Defaulting Shareholder (the Non-Defaulting Shareholder) may, at any time, serve written notice (a Default Transfer Notice) on the Defaulting Shareholder and the Company identifying the Compulsory Transfer Event. Upon service of such Default Transfer 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 (Sale Shares) to the Non-Defaulting Shareholder in accordance with Article 14.5.”
- Bailey served notice on Bells purportedly under Article 14.3, asserting that Bells had committed and failed to remedy (if capable of remedy) material or persistent breaches of the shareholders’ agreement. On this basis, Bailey purported to exercise its contractual rights to buy out Bells’ shares.
- Bells denied that any breach had occurred and accused Bailey of acting in bad faith and without any reasonable basis for its allegation.
- Bailey issued a Part 8 claim seeking a declaration that it was entitled to rely on the Defaulting Shareholder forced buy-out mechanism based on its honest belief in a material breach by Bells.
- In essence the court was asked to decide what the trigger was for the Defaulting Shareholder forced buy-out mechanism:
- Bailey argued that a shareholder becomes a Defaulting Shareholder if the other shareholder forms the belief that there has been a material or persistent breach of the shareholders’ agreement (whether or not a breach has actually been committed).
- Bells argued that, since it disputed that it had breached the shareholders’ agreement, this question would have to be judicially determined in Part 7 proceedings (in Bailey’s favour), before Bells was deemed to be a Defaulting Shareholder and Bailey could rely on the forced buy-out mechanism.