Jones v BWE International Ltd.

THE PRESIDENT: I will ask Lady Justice Arden to give the first judgment.

LADY JUSTICE ARDEN: This is an appeal with the permission of the judge against the order of Mr Kevin Garnett QC sitting as a Deputy Judge of the High Court of Justice, Chancery Division, dated 7 June 2002. This appeal concerns only one of the questions decided by the judge, namely, a question as to the true interpretation of the Articles of Association of BWE Ltd ("BWE"). Both the appellant, Mr Jones, and the respondent, BWE International, are shareholders of BWE. Mr Jones holds 12.5 per cent of the issued share capital of BWE, BWE International holds 87.5 per cent of its issued share capital, and it wished to transfer 27.5 per cent of BWE's share capital to a Venezuelan company called Sural CA. However, as is common in private companies, BWE's Articles, which were adopted on 29 October 1991, contains restrictions on the transfer of shares. The relevant Article was Article 14. This is a very long Article and it is not necessary for me to describe other than its essential parts.

The directors are prohibited from registering any transfer which does not comply with Article 14. There is a provision whereby a number of potential transferees are persons to whom a member can transfer shares freely. They include trustees of family trusts. However, in other circumstances Article 14.2.1 provides that:

Accordingly, the service of transfer notice puts in train the following process. The company becomes the agent of the member serving the notice for the sale of the shares specified in his notice to any member willing to purchase them at the price specified in the Transfer Notice. The directors have to give notice to all the members in writing. This is called an "Offer Notice" (Article 14.2.2). The Offer Notice must "state the price per share specified in the Transfer Notice". The Offer Notice must be given first to holders of shares of the same class, and they have 28 days in which to decide whether or not to accept the offer. If the capital is divided into several classes there has to be a further offer offering the shares to the remaining members. If, through this process, the company finds purchasers for the shares, it has to give notice to the transferor. He then becomes bound "upon payment of the price specified in the Transfer Notice" to transfer the shares offered for sale in the Transfer Notice to the members who have agreed to take them (Article 14.2.5). No timetable is set by the Article for completion. Article 14 also contains provisions as to what should happen if the transferor defaults in executing a transfer of his shares. Article 14.2.8 provided that in that circumstance:

Article 14 also deals with the possibility that the company does not find purchasers for the shares. Article 14.2.9 provided that in that event:

Article 14 also makes provision for certain events in which a member is to be deemed to have given a transfer notice, such as upon his bankruptcy, or on his ceasing to be a director or an employee of the company. For example, if a member becomes bankrupt he is to be deemed to have served a transfer notice to sell his shares at fair value. This value is fixed by the auditors and is clearly contemplated to be a fixed sum. Likewise, if a member is an employee and he is dismissed for negligence, he is deemed to have given the transfer notice to transfer his shares at "deemed value" which is the higher of (a) the nominal value of his shares increased by the rate of 15 per cent per annum compound for the period from allotment, and (b) three times the nominal value of such shares. Again this Article would produce a finite sum of money at the date of the Transfer Notice.

Article 14.11 provides:

On 18 October 2001 BWE International gave a Transfer Notice to BWE in the following form:

Before I leave that Transfer Notice I must make a number of observations. First, it is clear that at the date of that notice the full amount which was to be paid for the shares in question was not calculated, nor could it be calculated until the expiration of four years. Second (turning to paragraph (ii) of the price calculation), it is to be noted that the adjustment could be either upwards or downwards, and that what had to be calculated was the value of the net assets as at the date of completion. No basis is given for that; so it would appear to me that the exercise has to be carried out by finding the actual value of net assets and that would obviously entail a fresh valuation of all the assets since it is unlikely to be the same as book value. Third, there is no specified date for completion; it is simply referred to as "the date on which completion takes place". Fourth, the recipient of an offer in these terms would not know the full extent of the potential adjustment under paragraph (ii), and he would have to wait until the four year-year period was completed to know what the true price was in terms of pounds and pence. Fifth, it is to be noted that the final paragraph contemplates completion at the midway stage, namely, after the calculation of the price in paragraphs (i) and (ii). Accordingly Article 14.2.5, to which I have already referred, is in point. This provides for completion "upon payment of the price specified in the Transfer Notice."

Miss Kyriakides, for the respondent, submits that it was possible for an intending transferor under this form of Article to specify that completion could take place at an earlier date and that this provision of the Article merely stipulates the last day for completion. In my judgment the plain meaning of the Article is that completion takes place upon payment in full of the price specified in the Transfer Notice; that is the whole price. There can only be one price, and completion cannot take place until that occurs.

The question which the judge had to decide was whether the Transfer Notice complied with Article 14.2.1.1, that is to say, whether it was a notice:

On 23 March 2001 BWE International served a further Transfer Notice which gave a fixed sum of the price of the shares. BWE gave notice of this offer to Mr Jones, but he failed to take it up. He was asked again to approve a transfer to Sural CA; he refused to do this and a further set of proceedings was commenced seeking a declaration that his refusal was again unreasonable.

The judge had both sets of proceedings before him. He declared that the Transfer Notice was valid and that the refusal to give consent was unreasonable. We are not concerned with the latter point. In fact, by the time the judge gave judgment Sural CA had withdrawn its offer and accordingly BWE International no longer desired to sell its shares to Sural. However, BWE International successfully obtained an order for the costs of both proceedings to be paid by Mr Jones. It has apparently also threatened to bring proceedings against Mr Jones for damages for breach of contract in refusing unreasonably to give his consent to the transfer to Sural CA, with the result that BWE lost some very considerable commercial advantages which it would have obtained in its business if Sural CA had been a substantial shareholder.

The appellant's objective in bringing this appeal is to obtain an order that he is not liable for the costs of the first set of proceedings and also to establish that the first part of the notice was indeed truly bad, so that BWE International could not in any event have proceeded to transfer the shares to Sural CA pursuant to the first Transfer Notice, even if Sural had then been willing to take them under the terms set out in the Transfer Notice.

The judge dealt with the "question of interpretation" point shortly. He recorded that the two arguments put to him were first, that the Articles as a commercial contract would require that the price be ascertainable and certain by the date of the Offer Notice. The judge held that there was nothing objectionable about an offer notice being framed in the way that the Offer Notice in this case was framed. He held:

The second argument which the judge noted was that if other shareholders did not accept the offer made to them, the shares could be sold within three months to another person at a price not less than the price at which the shares had been offered to the members. If the respondent was right, the shareholders would not know, until possibly the end of the four-year period for ascertaining the price, whether the price at which the third party bought the shares was above or below the price offered to them. The judge held that this was not an insuperable objection. He said:

Mr Nigel Dougherty, for the appellants, submits that on the true interpretation of the Articles a fixed and certain price must be stated at the date of the Transfer Notice or the Offer Notice. It was not enough for BWE International that BWE International could show that they entered into a sale with a third party on terms which were not less than the terms stated in the offer of Transfer Notice. Shareholders who received the offer were entitled to know what sum of money would be required in order to purchase the shares. Mr Dougherty relies on the fact that Articles are a commercial document and accordingly they must be certain.

Mr Dougherty further submits that the purpose of a requirement to state the price in the Transfer Notice is to enable shareholders to make decisions as to whether or not they wish to acquire the shares of transfer members. Contrary to the view expressed by the judge, a transferor could not be certain that the price paid by a third party under this formula would be greater than that contained in the Transfer Notice even with some re-jigging. It is impossible to be certain that the transfer to a third party, if the shares are not taken up by the existing members, will comply with the articles.

Mr Dougherty points to other provisions of Article 14 which he submits support his contention. In Article 14 there is a provision for transfer at fair value, in respect of which the price would be a fixed certain sum. Moreover, under Article 14.2.1 in some circumstances the price would be a lower deemed value, but again the calculation provides for a fixed and certain sum. Mr Dougherty submits that the provision for implementing the Transfer Notice in the event of default by the transferor assumes that the purchase price will be fixed and certain so that the purchase price constitutes a good discharge of the transferee (see Article 14.2.8 which I have summarised above).

Miss Kyriakides submits as follows. First, "price" means consideration could take any form. Second, that "price" can include deferred elements (see Crofton v Colgan (1859) Ir & CL 133. Third, there is nothing in the Articles to exclude the normal meaning of price. Fourth, when a formula is used a price need be no more certain for the shareholder than for the third party. Fifth, the appellant's argument would mean that a selling shareholder could not sell his shares to a third party at a formula which had not become fixed and certain until sometime after completion, and this infringes his freedom of contract. Sixth, the fact that the price would be fixed and certain where it was the fair value or deemed value does not effect the situation where the price is fixed voluntarily. Seventh, Miss Kyriakides submits that her construction involves no practical difficulties. It ought to be possible to re-jig the formula so that the transfer to a third party complies with the articles. The other members would know at the date of completion of the contract with the third party if the price was less than the offer notice. Those members were not entitled to complain of any breach of the articles unless they can show that they could have paid the price. No practical problem arises on completion of the transfer because the respondent was in this case willing to sell. Miss Kyriakides sees no difficulty in the completion machinery in the event of default resulting in completion not taking place until the price had been ascertained at the end of four years.

The question raised by this appeal is one of construction. Mr Dougherty emphasises that the articles are a business document and that they should be construed purposively to effectuate the obvious purpose of a pre-emption provision, which is to give a shareholder an effective opportunity of buying the shares, the subject of the Offer Notice. Miss Kyriakides for her part submits that the purpose of the article is to enable a shareholder to transfer his shares freely, and therefore it should be construed to enable the shareholder to fix the price at which he desires to transfer to the third party and he should have maximum flexibility in this. Mr Dougherty for his part does not argue for some loose construction; it is, as I have said, for a purposive construction for which he argues. It can be noted in response to Miss Kyriakides' argument that, by taking shares on the terms of these articles, a shareholder has agreed to certain restrictions and those include, on the view that I have already expressed, the restriction under Article 14.2.5 that shares must be paid for in full before completion can take place under Article 14.

Another aspect of the principle that articles are a business document is the principle that articles should be construed so as to make them workable. This was the approach of Jenkins LJ in Holmes v Keyes [1959] 1 Ch 199, 215. He said:

With that approach, I agree. The approach to be adopted in interpreting articles of association in this respect is very much the same approach as is to be applied to other commercial documents. The one qualification is that referred to by Miss Kyriakides it is not in general possible to have regard in the interpretation of articles of association to extrinsic evidence. Furthermore, articles of association cannot be rectified. (On these points, see Buckley on the Companies Acts, 15 ed, T[A i.4]). Moreover, it is to be noted that Jenkins LJ held that a document can only be construed so as to give it reasonable business efficacy where that is admissible on the language. Accordingly, there must be close attention to the particular words of Article 14. Mr Dougherty did not contend otherwise.

In determining the true interpretation of the Articles, there is another important principle in play to which Miss Kyriakides, in effect, refers. A share is a right of property, and the right of a shareholder to transfer a share is one of the rights attached to that property. A company's articles should not be construed so as to cut down that right unless that is the fair interpretation of the articles. There are therefore two conflicting economic interests in this situation. The first is that of a shareholder who wishes to transfer his shares and realise his investment; the other is that of the other members who may wish to prevent a transfer or take the shares themselves. It is very important in private companies that both those interests are borne in mind. There are often complex commercial reasons for restrictions on transfer of this kind, and their presence is one of the indicia of a company as between whose shareholders the court is prepared to find equitable obligations additional to or overriding the express obligations set out in the articles (see Ebrahimi v Westbourne Galleries Limited[1973] AC 360) and Buckley, above,[459.23]. The difficulty of applying a purely purposive approach in the instant case is the presence of potentially conflicting purposes. The purpose of the relevant provisions is not limited, as Mr Dougherty submits, to giving the offeree shareholders an effective opportunity to buy the selling shareholder's shares. It also includes the protection of the rights of the selling shareholder to sell his shares.

Mr Dougherty does not dispute that the price could be either a sum of money or a formula which produced a sum of money, provided the formula produced a sum of money by the date of the Offer Notice. There are two problems in this case. First, could the price include a deferred element? Second, could the price be established by a formula which is not capable of producing a fixed and certain price at the date of the Offer Notice? As a matter of general contract law a price can obviously include a deferred element. It can be fixed by a formula which is capable of producing a fixed and certain price at a later date. But the question is whether the word "price" has the plenitude of its ordinary meaning in this Article. The meaning of a word depends on the context in which it is used.

It is very common for private companies to have restrictions on transfer. In pre-emption articles, it is usual to find, as here, a permitted class of transferee or a provision for transfer to a non-member in the event that no existing member is willing to purchase the shares. It is well known among practitioners that very great care must be taken over the drafting of pre-emption articles such as these and in particular over such issues as whether the price is fair, whether the transfer notice can be revoked, whether the obligation to give a transfer notice has been triggered, and so forth.

Miss Kyriakides approaches the meaning of "price" by reference to its general meaning, rather than its meaning in the context of these Articles. In my judgment, it is clear when Article 14 is read as a whole that the price must be fixed and certain at the date of the Offer Notice. I attach importance to the fact that the price must be "specified" in the Transfer Notice, and that the Offer Notice must "state" the price of the share specified in the Transfer Notice. This language seems to me to denote a fixed and certain sum of money. I take the meaning of "specify" from the Shorter Oxford English Dictionary 2002, which defines the word "specify" (used as a transitive verb) "to mention or name a thing explicitly, to state categorically..." Article 14 could have used some other word like "indicate" the price, but where it has used the word "specify", as I have endeavoured to show, it uses that word quite deliberately. The requirement to "specify" the price means that the price must be stated in detail and, as I see it, wholly and completely.

Moreover, the Articles proceed on the basis that the transaction between a transferor and a transferee will be completed on payment of the price; that is that payment of the price and delivery of the form of transfer will be simultaneous. It does not seem to me that this is possible if part of the price is deferred, especially if the price cannot be established at completion. This is also apparent from Article 14.2.5 dealing with the effect in general of notification that a member is prepared to buy the shares, and from Article 14.2.8 dealing with the effect of default by the transfer. I note particularly that under Article 14.2.8 the company must receive "the purchase money" before a transfer is completed by the directors on behalf of the defaulting transferor; and second, that the receipt of the company for the purchase money is to be a good discharge to the transferee.

I do not accept that these Articles permit completion to be delayed for some unspecified and unlimited period of time to enable the purchase price to be fully ascertained. The process contemplated is one of a businesslike transaction with simultaneous transfer and payment of the price. Likewise, there is the important point that Mr Dougherty makes that a transfer to a third party cannot take place if the price is less than the price specified in the Transfer Notice. The articles would not be workable if the price cannot be ascertained at the date of the transfer of the third party. I accept, however, that the price to be paid by the third party could be that notified to existing members plus £1 or the price in the Transfer Notice re-jigged in some way, as the judge suggested. Even so, it is not, in my judgment, a price for the purposes of the articles. It also potentially gives rise to some considerable practical difficulties because on Miss Kyriakides' primary case completion would take place before the shares had been paid for in full. Accordingly, the transferor would only have a right to sue for the balance of the price if it was unpaid. It seems to me that this is a uncommercial result, and it is unlikely to have been intended that the transferor would part with his proprietary interest in his shares before he had been paid the price.

Moreover, if in fact a price is agreed with a third party with provision for adjustment over (say) four years, one could well have the situation, as Mr Dougherty points out, that at the end of the four years the shareholders discover that the price when worked out is less than the price at which the shares were offered to the other shareholders and that the transaction then has to be undone. The position is that the articles have legislated a particular set of sanctions, namely, that a transfer which does not comply with the article is void. If the fact that the transfer was in breach of the articles was discovered four years later, the share register of the company would have been incorrect for all those years and doubts could arise as to whether the resolutions of the company which were passed in the period had been properly passed, whether the company could properly have acted on the basis of resolutions that subsequently turn out not to have been properly passed or could properly have paid dividends to shareholders shown on the register, and whether the pre-emption procedure was properly carried out in the meantime in respect of other shareholders.

As I see it this is a wholly uncommercial result and is not one which is likely to have been intended by a business document. Nor do I think it is likely that this set of articles contemplates that share transfers could be held up for four years until the purchase price is fully paid. No businessman would want to take an investment in a private company on those sorts of terms. (It is also unrealistic to have to wait for four years to see whether the price paid by the third party in fact complies with the articles). There could meanwhile be a state of stalemate in the management of the company's affairs which would discourage investment in the company by anyone else. And if the payment of price could be deferred for four years, why not ten years or 20 years? As I see it there is nothing in the articles which contemplates any of these unlikely results.

Accordingly I do not accept Miss Kyriakides submission that the word "price" must be given its normal meaning, and that there is nothing in the Articles of Association to exclude or qualify its normal meaning. The word "price" takes its meaning from the whole of Article 14 and in my judgment it has a restricted meaning.

I accept Miss Kyriakides' submission that the selling shareholder should have a certain freedom about the sale of the shares. However that freedom is limited by the terms of Article 14, fairly construed. I do not accept her submission that other shareholders would always know at the date of completion of the contract with the third party if the price was less than that offered to the other shareholders. They might do, but more commonly, if the price is fixed by reference to a formula, whose operation depends on the occurrence of future events, it will not be known at the date of the sale to the third party what the final price would be. In addition, I do not accept that members who do not accept the offer are not entitled to take the point that the Transfer Notice was in breach of the articles unless they can show that they could have paid for the shares at the price specified in the Transfer Notice. The articles constitute a contract between a company and all its members (Companies Act 1985 section 14), and accordingly if the transaction was done in breach of the Articles, a member is entitled to complain. (No objection has been taken to the fact that BWE itself is not joined as a party in this action.) I do not accept that it is an answer to the points made by Mr Dougherty on the default provisions that BWE International was in this case a willing vendor. It is necessary to test the working with the Articles by reference to situation in which the default provisions are triggered. Likewise, for the reasons given, I do not accept Miss Kyriakides' argument that completion can be suspended if the price cannot be ascertained until it has been paid in full. This is an unworkable conclusion for the reasons I have given. Moreover, in the meantime, the transferor would continue to be the registered holder of the shares, despite the fact that he may have lost his beneficial interest. This might make it difficult for the company to know whose instructions to accept in the exercise of shareholder rights.

For all these within reasons in my judgment the appeal should be allowed.

LORD JUSTICE THORPE: I agree.

THE PRESIDENT: I also agree.