This is the judgment of the court in relation to an application by the Claimant, Philip Rose, for permission to appeal from the order made on 6 August 2003 by Mr. John Powell Q.C., sitting as a Deputy High Court Judge in the Chancery Division, the appeal having been ordered to follow immediately upon permission being granted. By his order the judge dismissed an application by Mr. Rose pursuant to CPR 31.16 for disclosure before proceedings commenced. Mr. Rose contends that the disclosure was desirable in order to assess the merits of a claim which he wanted to bring against the Defendants, Lynx Express Ltd. (“Lynx”) and Bridgepoint Capital (Nominees) Ltd. (“Bridgepoint”). He alleges that there have been breaches by Bridgepoint of a requirement in the pre-emption provisions in Lynx’s Articles of Association to give notice of a transfer of shares in Lynx. Lynx and Bridgepoint deny any such breach. That issue turns on the true construction of the Articles and was called by the judge “the notice issue”.

CPR r. 31.16 (3) contains the conditions which must be satisfied if the court is to accede to an application for pre-action disclosure. It provides:

The judge concluded that the notice issue was so central to the question whether there should be pre-action disclosure as to be suitable for determination as a preliminary issue. He invited the parties to agree to this. Mr Rose declined any such invitation. The judge nevertheless embarked on the resolution of the issue, but only “insofar as it is relevant to [Mr Rose’s] application for pre-action disclosure with a view to putative proceedings in which the notice issue will, as the parties recognise, arise for determination”. Proceeding on this basis, the judge decided the issue against Mr. Rose, and held accordingly that paras. (c) and (d) of r. 31.16 were not satisfied. He therefore dismissed Mr. Rose’s application.

We have reservations about the approach adopted by the judge. We are concerned whether it is possible, and it is in our view certainly unsatisfactory, to have a situation in which what is described as a straightforward issue of construction is decided one way for one purpose, but may later be re-argued and possibly decided differently during the course of subsequent proceedings. Further, whether or not the determination would be binding at the trial of the substantive claim, there are practical dangers about considering any substantive issue, and particularly the core issue in the action, in the context of an application for pre-action disclosure. At the pre-action stage, the parties may not have thought through or seen all the implications of the issue in the same way as they will have done by the time when it comes to be tried. Any pre-action determination will have to take place in the light of assumptions about the factual circumstances, which may prove incomplete or incorrect. The actual factual circumstances, when known, may throw up problems about a particular construction of the articles which may not have been apparent at the pre-action stage. We think therefore that courts should be hesitant, in the context of an application for pre-action disclosure, about embarking upon any determination of substantive issues in the case. In our view it will normally be sufficient to found an application under CPR 31.16(3) for the substantive claim pursued in the proceedings to be properly arguable and to have a real prospect of success, and it will normally be appropriate to approach the conditions in CPR 31.16(3) on that basis.

Permission to appeal against his decision was refused by the judge. On application by Mr. Rose to this court, permission was refused on paper by Carnwath L.J. However, on a renewed application this court (Waller and Carnwath L.JJ.) on 27 October 2003 directed that the application be adjourned to a with notice hearing, with the appeal to follow immediately if the application were allowed. On the adjourned hearing, we have had the benefit of helpful argument from Mr. David Mabb Q.C., who did not appear below, and who appears with Mr. Nigel Dougherty (who did appear below) for Mr. Rose, and from Mr. Robin Knowles Q.C. who did appear below and Miss Lucy Frazer (who did not) for Lynx and Bridgepoint.

The facts can be summarised shortly. Lynx was incorporated on 27 November 1996 as a vehicle for a management buyout from NFC Holdings Ltd. with Mr. Rose and other individuals being the original shareholders. The capital of Lynx was reorganised the following year when new Articles were adopted on 3 June 1997. Table A was thereby applied with extensive exclusions and modifications running to 42 pages. It is plain that the Articles were professionally drawn.

Article 2.1 is a detailed interpretation provision. It includes the following definition of “Investor”:

Art. 2 contains more interpretation provisions. Thus in Art. 2.7 the term “Investor Consent” is defined as meaning consent given or required to be given by or on behalf of the Investor. Art. 2.6 is an important provision for the purposes of this appeal. It provides:

Art. 3 sets out the 6 classes of shares into which Lynx’s authorised share capital is divided: 3 classes of Preference shares, viz. A, B and C, and 3 classes of Ordinary shares, viz. Ordinary and A and B Ordinary.

Art. 10 deals with prohibited transfers. It provides (so far as material):

Art. 11 contains the pre-emption provisions. Art. 11.1 is in the following form:

Art. 11.2 to Art. 11.15 set out the consequences of the service of a Transfer Notice. Art. 11.2, applicable only to Ordinary Shares, gives the Board of Lynx a wide discretion as to the persons to whom the Sale Shares are to be offered. In the case of shares other than Ordinary Shares, Lynx is to offer the Sale Shares to other members holding shares of the same class (Art. 11.4). There are detailed provisions as to the allocation of shares to members accepting the offer and as to what is to happen to any unallocated shares. By Art. 11.13 on completion of the sale and purchase, and the payment of the price due, the Vendor is to transfer the Sale Shares to the persons to whom they have been allocated. Art. 11.14 deals with the position where the Vendor makes default in transferring the Sale Shares. In that event Lynx may nominate some person to execute a transfer of the Sale Shares on behalf of the Vendor and thereafter Lynx is to cause the name of the proposed transferee to be entered in the Register as the holder of the Sale Shares. Art. 11.15 governs the position if there are Sale Shares not sold under the preceding provisions of Art. 11. In that event the Vendor may transfer any such shares to the Proposed Transferee at any price not less than the Sale Price. However the directors have power to refuse registration in a certain event.

Art. 12 contains exemptions from Art. 11. Thus a member may transfer any shares:

Arts. 13 and 14 contain further exemptions from Art. 11. Art. 13 relates to Leavers. Art. 2.1 contains an elaborate definition of “Leaver” which embraces persons falling within 5 categories. They include two categories of persons who are not members but become entitled in particular circumstances (such as the death or bankruptcy of a member) to any share in Lynx. “Leaver’s Shares” are defined in Art. 2.1 as meaning:

The Articles contain no definition of “member”. However the ordinary meaning of that term is given by s. 22 of the Companies Act 1985 as a person who agrees to become a member of a company and whose name is entered in the register of members. By Art. 1 of Table A, unless the context otherwise requires, words or expressions are to bear the same meaning as in that Act. By s. 360 ibid. no trust can be entered on the register. It is not in dispute that whilst members are contractually bound by the Articles (s. 14 ibid.), persons holding beneficial, but not legal, interests in shares are not so bound.

Limited partnerships under the Limited Partnerships Act 1907 (not to be confused with limited liability partnerships under the Limited Liability Partnerships Act 2000) have become popular investment vehicles for sophisticated investors. In June 1997 Bridgepoint acquired two holdings of shares in Lynx as nominee for two limited partnerships. One, then called NatWest Ventures but now called Bridgepoint Capital No. 1 LP, had two limited partners, NatWest Ventures Investments Ltd. (“NVIL”) and NatWest Pensions Trustees Ltd., and a general partner, NatWest Ventures (GP) Ltd. NVIL subsequently made transfers of its share in the partnership to third parties. The assets of the partnership held for the partners included the beneficial interest in the Lynx shares held by Bridgepoint as nominee for the partnership. Another limited partnership, then called NatWest Ventures No. 2 but now called Bridgepoint Capital No. 2 LP, had as a limited partner Shell Pensions Trust Ltd. and as a general partner NatWest Ventures (GP) Ltd. Bridgepoint held the other holding in Lynx shares for that partnership. We need not go into the details of any transfers of a beneficial interest in Lynx shares held by Bridgepoint as nominee, as it is not disputed for the purposes of Mr. Rose’s application and appeal that there were such transfers. However, it is not clear whether Lynx and Bridgepoint would claim that any exemption in Arts. 12, 13 or 14 apply. No Transfer Notice was given by Bridgepoint in respect of the transfer of a beneficial interest in Lynx shares by NVIL.

Mr. Rose has at all material times been a member of Lynx. He took the view that the transfer of a beneficial interest in the Lynx shares caused Bridgepoint to be a member who wished to transfer shares within Art. 11.1 as extended by Art. 2.6. On that view he submits that Bridgepoint was obliged to give a Transfer Notice on each transfer of a beneficial interest, and was in breach of that obligation in failing to do so.

On 20 January 2003 Mr. Rose issued his Part 8 claim form, seeking an order for disclosure of 6 categories of documents before commencing proceedings against Lynx and Bridgepoint. It has never been in dispute that Mr. Rose satisfied paras. (a) and (b) of CPR r.31.16(3). The judge held that Mr. Rose did not satisfy paras. (c) and (d) because he was wrong on the notice issue. He said that Art. 11 was clear and only required a Transfer Notice to be given by a member who wished to transfer shares, albeit that that might be a legal or beneficial interest in shares by reason of Art. 2.6, and that does not require a Transfer Notice to be given by a member in respect of the intended transfer by a non-member of a beneficial interest in shares, the legal interest in which is vested in that member. He said that that construction did not ignore or render nugatory the deeming provision in Art. 2.6.2 and in para. 25 of his judgment he gave the following example as his reason for that view:

The judge went on to say that even if he had reached a different conclusion on that issue, he would not have acceded to the full width of Mr. Rose’s application but would have ordered disclosure of two classes of documents:

Mr. Rose accepts the judge’s narrowing and limiting of the categories of documents. He seeks to challenge the decision of the judge as to the question of construction only in order to obtain the disclosure which the judge would have ordered if he had decided the notice issue in Mr. Rose’s favour.

Waller and Carnwath L.JJ. indicated that it would be helpful to know more about the commercial context in which the new Articles were adopted in June 1997 and to know how realistic was the judge’s example in para. 25 of his judgment. Both sides have accordingly put in evidence not before the judge, which we have admitted as, in effect, agreed facts. However, Mr. Mabb and Mr. Knowles were rightly cautious about relying on such evidence in relation to a question of construction of the Articles of Association in view of the comments by this court in Bratton Seymour Service Co. Ltd. v Oxborough [1992] BCLC 693. This court emphasised both the unusual nature of the contract between members of a company constituted by Articles of Association of the company and the very limited assistance which extrinsic evidence of surrounding circumstances can provide in construing the Articles. We do not find it necessary to refer to the evidence further.

Mr. Mabb acknowledges that Art. 11.1, read on its own, does not require a member holding shares in Lynx to give a Transfer Notice when the owner of a beneficial, but not the legal, interest in those shares transfers that interest. However, he submits that Art. 11.1 must be read with Art. 2.6. He points to the elaborate and unusual nature of Art. 2.6, one aspect being that thereby any sale or other disposition of any equitable interest in a share, whether or not by the registered holder of the share, is deemed to be a transfer of the share. He relies on Lord Asquith’s much cited observation in East End Dwelling Co. Ltd. v Finsbury Borough Council [1952] AC 109 at p. 132:

Mr. Mabb subjected Art. 2.6 to close analysis and pointed to what he called the change of direction after the first 4 lines when one comes to the deeming provision whereby three categories of acts are to be deemed to be a transfer of a share. He argued that such transfer of a share could only be a transfer by the registered holder of the share and that the member must be deemed to wish that transfer, as the legal title could not be transferred without the member wishing it. He said that the member holding shares as nominee for others was bound by, and took his shares on, the terms of the Articles and that the obligation to give a Transfer Notice rested on the member even though what caused the deemed transfer was the act of the owner of the beneficial interest. He pointed to the importance given in the Articles to the Investor who, in a case where shares are held by a nominee, is the person for whom the shares are held and whose consent is required for various steps to be taken. Mr. Mabb submitted that the judge’s example in para. 25 of his judgment failed adequately to reconcile Arts. 2.6 and 11.1.

Mr. Knowles submitted that the judge was right for the reasons which he gave. He pointed out that Art. 2.6 seeks to extend the meaning of “any transfer of any share” and does not address the meaning of “a member who wishes to” transfer shares. He argued that it does not follow from the proposition that the transfer of a beneficial interest in shares by the owner of that interest is deemed to be a transfer of those shares that Bridgepoint must be taken to have wished to transfer the shares the beneficial interest in which is transferred by the owner of that interest. He contrasted the express provision in Art. 13.2 specifically deeming the giving by a Leaver of a Transfer Notice indicating the Leaver’s wish to transfer shares, and drew attention to the fact that in Art. 13 a Leaver, who may not be a member but only a person entitled to shares, is the person deemed to have given a Transfer Notice. Mr. Knowles pointed to Art. 10 with its references to prohibited transfers as a provision to which Art. 2.6 applied quite apart from its application to Art. 11.1. He supported the judge’s use of the example in para. 25 of his judgment as showing that Art. 2.6. did apply satisfactorily to Art 11.1.

Mr. Knowles referred us to two authorities. In Safeguard Industrial Investments Ltd. v National Westminster Bank Ltd. [1982] 1 WLR 589 this court was concerned with pre-emption provisions in a company’s Articles. They provided that no ordinary share should be transferred to a person who was not a member as long as any member was willing to purchase the same at the fair value (as defined) and that “the proposing transferor” should serve a transfer notice on the company that he “desires” to transfer the same. The executor of a deceased shareholder brought proceedings for the court to determine whether the executor on the completion of the administration of the estate should serve a transfer notice. Oliver L.J., with whom Fox and Lawton L.JJ. agreed, said at p. 598 that he felt quite unable to construe the provisions in the Articles in a way which would make a person who involuntarily comes under an obligation to transfer, if called upon, a “proposing transferor”. The terms of the Articles are far removed from those of the present case (for example, there was no deemed transfer) and we obtain no assistance from it.

In Greenhalgh v Mallard [1943] 2 All ER 234 at 237 Lord Greene M.R. (with whom Luxmoore and Goddard L.JJ. agreed) said of pre-emption provisions somewhat similar to those in Safeguard:

We consider the true meaning and application of the Articles to be somewhat elusive and we do not regard the arguments so far advanced on either side as entirely satisfying. Even assuming that it would be possible to confine the implications of any view we might express to the present context of pre-action disclosure, we have come to the conclusion that the right course is to do no more than to determine that Mr Rose has a properly arguable case and on that basis to order the limited pre-action which the judge identified. The true meaning and application of the Articles will have to be fully re-argued in the ordinary course of any trial. What follows is in these circumstances no more than our present perception of some of the points which arise.

There is an obvious attraction in Mr. Knowles’ straightforward approach that Art. 11.1 only requires that a member who wishes to transfer shares must give a Transfer Notice, and that it is significant that Art. 2.6, whilst deeming the transfer of an equitable interest in shares to be a transfer of those shares, does not specifically deem the member to wish to transfer those shares so as to require him to give a Transfer Notice. The contrast with the express deeming provision in Art. 13.2 is striking, and it is noteworthy that Art. 13.2 deems a person other than the member (for example a person entitled to the shares on the death of a member) to give the Transfer Notice. Mr. Mabb’s construction leads to the remarkably inconvenient result that whenever any beneficial interest in Lynx shares held by a nominee for the beneficial owners is disposed of by a beneficial owner the nominee is deemed to transfer those shares even though the other beneficial owners and the nominee may not know of that disposal, still less wish that the pre-emption provisions be triggered. Further, there are major difficulties with the application of the pre-emption provisions of Art. 11 if Mr. Mabb is right in his submission that the disposition by the owner of a beneficial, but not the legal, interest in shares triggers the application of Art. 11 to the shares themselves. We return to those difficulties in paras. 33 and 34 below. If it could be shown that Art. 2.6, and in particular Art. 2.6.2, applied satisfactorily to other Articles, then we would have been persuaded to uphold the judge’s conclusion, bearing in mind the principle enunciated by Lord Greene.

Mr. Mabb was plainly entitled to point to the unusual emphasis given in these Articles to the role of the Investor, who, in the case where there is a bare nominee holding A Ordinary and A Preference shares for another, is the beneficial owner, or, where there are more than one, the beneficial owners. Art. 2.6.2 is explicit that there is a deemed transfer of a share or the disposition of any equitable interest in the share whether or not by the registered holder thereof. Further, Mr. Mabb pointed out that, if Mr. Knowles were right, a coach and horses could be driven through the pre-emption provisions in relation to A Ordinary and A Preference shares. A member holding such shares, which he wished to transfer to an outsider without going through the pre-emption procedures, would first transfer the shares to a nominee, that transfer being exempt under Art. 12.1.5; second, he would assign his beneficial interest to the outsider, that assignment on Mr. Knowles’s construction not falling within the pre-emption provisions because it is not a transfer by a member; third, the outsider would call for the transfer of the shares, that transfer being exempt again under Art. 12.1.5. Mr. Knowles accepted that this could be done, but he said that that could not apply to other classes of shares, and in any event did not assist on the question of construction. Whilst it is true that this only applies to two classes of shares, those classes are important classes in the capital structure of Lynx and that application cannot be brushed aside. There are more authorised A Ordinary shares than the total of Ordinary and B Ordinary shares and more A Preference shares than the total of B and C Preference shares, and the special status of those classes of shares can be seen from the significance of the Investor and Investor’s Consent in the Articles and the special rights accorded to them (see, for example, Art. 10.2). Nor do we accept that Mr. Mabb’s point is incapable of bearing on the question of construction. If the pre-emption provisions can be circumvented so easily, it casts doubt on whether the premise that a disposal of an equitable interest in shares by a person who is not a member is not caught by Art. 11.1 can be correct.

As for the contrast with Art. 13.2, Art. 13 applies notwithstanding the other provisions of the Articles. Art. 13.2 does not rely on the interpretation provisions of Art. 2.6 and its deeming of certain acts to be transfers of shares. Art. 13.2 contains its own deeming provision to assimilate the situation there addressed to Art. 11.1, whereas, if Mr. Mabb is right, Art. 2.6, by deeming acts such as the disposal by a beneficial owner, who is not a member, of the beneficial interest in a share to be the transfer of a share, carries with it as a consequence that the member holding the share must wish to transfer the share. The deemed giving of a Transfer Notice by a person only entitled to shares rather than by the member does not justify an inference that for the purposes of the Articles other than Art. 13 the owner of a beneficial interest can give a Transfer Notice, still less that the Transfer Notice can relate to that interest. In the case of the death of a member, the draftsman may well have wanted to avoid the incongruity of deeming the dead member to give the notice and to have the wish to transfer. It is to be noted that by Art. 13.4 it is expressly provided that Art. 11.2 to Art. 11.13 are to apply mutatis mutandis to any Transfer Notice pursuant to Art. 13.2 subject to the provisions of Art. 13.4.1 to Art. 13.4.4. In short, Art. 13 appears to us to contain its own code relating to Leavers and not to assist in the construction of other Articles.

Mr. Knowles’s reliance on Art. 10 as provisions to which Art. 2.6.2 applies satisfactorily seems to us as at present advised misplaced. Art. 10.1 applies only to “a holder of …. Ordinary Shares” and Art. 10.2 to “any member holding more than one class of shares”, in each case preventing a transfer of shares, in the latter case without transferring other shares as well. It does not contemplate any transfer of an equitable interest in a share by a person who is not the registered holder.

No other application of Art. 2.6.2 is relied on by Mr. Knowles in support of his construction except for the example given by the judge in para. 25 of his judgment, an example which, Mr. Knowles told us, he supplied to, and was accepted by, the judge. The example is of the member holding certain shares also having a beneficial interest in other shares held by another member. The Articles can only bind members, but it would be remarkable if the Articles were purporting to bind members not just in respect of the shares registered in their names but also in respect of shares which are not registered in their names but in which they happen to have a beneficial interest. Mr. Mabb submits that that is not possible, and that Articles can only bind members in their capacity as holders of the shares which are registered in their names. Without deciding that point, we think it sufficient to say that no authority or precedent has been drawn to our attention where Articles of a company bound members in respect of a beneficial interest in other shares, and it seems to us improbable that that was the intention underlying the Lynx Articles. The judge envisaged in the example that Art. 11.1 would operate, not as requiring a Transfer Notice to transfer the shares in which the member had only a beneficial interest, but as requiring a Transfer Notice to transfer the beneficial interest. Mr Mabb’s response is that this involves a misunderstanding of the operation of Art. 11 read with Art. 2.6. His case is that the various acts short of a transfer of shares operate, by way of the deeming provision, as the transfer of the shares themselves and not merely of the lesser interest which the owner of the interest sought to transfer. The provisions of Art. 11 are directed to the shares themselves. Thus it is the shares for which the Sale Price has to be given in the Transfer Notice and, if the transfer offer is accepted, the transferee is entered in the register as the holder of the shares (Art. 11.14).

This brings us to an area where we consider that there would at trial be scope for further submissions, going beyond any addressed to us, and where the dangers involved in addressing substantive issues at the pre-action stage are particularly apparent. The draft particulars of claim, which Mr Rose proposes to issue (subject to any alterations flowing from the pre-action disclosure which he seeks), seek a declaration that Bridgepoint was obliged to give a Transfer Notice under Art. 11.1, and an order of the court that Bridgepoint should give one “forthwith” and “thereafter observe the requirements of Article 11”. Mr Mabb’s case is that Bridgepoint is deemed to wish to transfer the whole of its shareholding, whenever any owner of any beneficial interest, in that shareholding, wishes to sell or otherwise dispose of all or part of such beneficial interest, and that if the owner of the beneficial interest wishes to sell or otherwise dispose of all or part of his interest in part of that shareholding, Bridgepoint is deemed to wish to transfer that part of that shareholding. Even if one were to accept this proposition, the problem remains that Art. 11 postulates the existence of a “Proposed Transferee” to whom and a “Sale Price” at which the member, Bridgepoint, wishes to transfer its whole shareholding. Any Transfer Notice has to identify such a Transferee and Price. Any pre-emption by persons selected by the Board under Art. 11.2 has to be at that price. In the event that all of the shares the subject of a Transfer Notice are not sold under the pre-emption provisions, the member may, within the next three months, “transfer any Sale Shares not sold to the Proposed Transferee at any price not less than the Sale Price” (Art. 11.15). The directors may refuse to register any such transfer to the Proposed Transferee unless satisfied that “the Sale Shares are being sold in pursuance of a bona fide sale for not less than the Sale Price without any deduction, rebate or allowance whatsoever to the Proposed Transferee” (Art. 11.15.3).

The submission that any transfer by the holder of any beneficial interest in Bridgepoint’s entire shareholding requires Bridgepoint to give a Transfer Notice in respect of its entire shareholding thus faces the problem that there is no Proposed Transferee and no proposed Sale Price in respect of Bridgepoint’s entire shareholding. In addition, Art. 11 is on its face incapable of operating in the context of any proposed transfer other than by way of sale. A proposed gift (cf the reference in Art. 2.6.2 to the possibility of a disposition without consideration) might perhaps be accommodated within the framework of Art. 11 by treating the Sale Price as “nil”. The effect would however be to prevent any gift or any intention to make a gift ever being formed, since anyone wishing to make a gift to a third party would first have to give a Transfer Notice offering the shares, if Ordinary shares, to persons selected by the Board, or if shares other than Ordinary shares to other members, at nil consideration, who would in the ordinary course take up the offer and frustrate the intended third party gift. There is also obvious room for doubt whether Art. 11 can accommodate a deemed transfer under Art. 2.6.1 (directions to issue or allot shares to a third party), or Art. 2.6.3 (legal or equitable mortgage or charge) or, at least as regards equitable interests, under Art. 2.6.2. Similar problems could of course arise, on Mr Mabb’s (and to a lesser extent maybe also on Mr Knowles’s) case, in relation to the sale or other disposition by a member of a limited equitable interest in shares registered in the member’s name, or the grant of an option to acquire a limited equitable interest in such shares (see the opening sentence of Art.2.6). Mr Knowles’s submission is that such problems should lead to a conclusion that Art. 2.6 has no role in relation to Art. 11, or at least in relation to sales or dispositions by persons other than the registered member. Mr Mabb’s case is that Art. 11 can apply notwithstanding such difficulties, or should at least be made to apply in all circumstances in which it can sensibly do so, within which he would no doubt hope to bring whatever may prove to have taken place by way of transfer of beneficial interests in the present case. However, pending the disclosure sought on the present application, it remains to be ascertained precisely what the circumstances relevant to Mr Rose’s contentions were, and how Mr Rose will put his case regarding the application of Art. 11. In this situation we consider that it is inappropriate for us to attempt to express any view, even provisional, as to the relevance of Art. 2.6 to Art. 11, or, assuming it to be relevant, the extent to which Art. 11 can apply to the circumstances of this case. Such questions go to the core substantive issue in Mr Rose’s intended action. They should be fully argued and resolved in that context, not the present. For present purposes, it is enough that we conclude that Mr Rose has a properly arguable case, sufficient to support his application for pre-action disclosure.

On that basis, we grant permission to appeal, allow the appeal and order the limited discovery to we have referred in paragraph 19 above.