Business Law: Joel Furniss on how a shareholders’ agreement cased a disagreement

Joel Furniss of Ashton KCJ.

Joel Furniss of Ashton KCJ. - Credit: Archant

It is common when setting up a company to have a Shareholders’ Agreement setting out various obligations between the shareholders.

Often this may confer on the shareholders a right of first refusal if another shareholder wishes to sell their shares. However, a recent case highlights the potential for such a provision to be circumvented if not properly drafted.

In McKillen v Misland the Shareholders’ Agreement, and the articles of the company, required shares to be offered to the other shareholders before they could be transferred to anyone else.

Rather than actually transferring the shares, a shareholder (A) instead entered into an agreement to sell them to a third party (B) conditional on compliance with the Shareholders’ Agreement.

A also resigned as director and used his right to nominate a director to appoint a representative of B, and granted to B a power of attorney to exercise A’s rights as shareholder. The effect of this was that the control of the shares was effectively transferred to B.

Another shareholder (C), who wished to acquire A’s shares, claimed that the arrangement was in breach of the Shareholders’ Agreement, which he argued should be construed so as to apply to arrangements having the same practical effect as a transfer.

The Court disagreed and held that the Shareholders’ Agreement would only apply to an actual transfer of the shares themselves, and not to a transfer of control.

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In light of this case it is worth checking any existing Shareholders’ Agreement to make sure that the provisions cannot be circumvented in a similar way. It should be drafted so that any provisions for pre-emption rights will apply in the event that the control of the shares is transferred to a third party, and the pre-emption rights should also apply in the event of an agreement to transfer shares, whether or not that agreement is put into effect.

Consideration should also be given to limitations on the right to appoint directors to ensure that this cannot be used to transfer control of board voting rights.

A well-drafted Shareholders’ Agreement can be very useful for setting out the relationship between the members of a company. If you would like any advice on an existing Shareholders’ Agreement, or on preparing a new one, the Company Commercial team at Ashton KCJ would be happy to assist.

: : Joel Furniss is a solicitor at regional law firm Ashton KCJ.