Amending Drag-Along Rights In A Company's Articles

The Court of Appeal has rejected an appeal in an unfair prejudice claim based on a variation of drag-along rights in a company's articles. In doing so, it reviewed a line of cases in which the courts have considered the power of a company's shareholders to amend a company's articles.

Background

Mr Arbuthnott was a founding shareholder and director of Charterhouse Capital Limited. Over time, the retirement of senior shareholding executives resulted in a misalignment between the shareholders and the active executives running the business. An MBO team of the active executives made a bid to buy the shares of the retired and retiring executives. It was a condition of the MBO offer that the shareholders amend the existing drag-along rights in the company's articles. The offer was accepted and the changes to the articles approved by all the shareholders other than Mr Arbuthnott. He argued that the changes were invalid as their effect was to allow the majority shareholders through the drag-along rights to expropriate his shares at an undervalue.

Decision

In rejecting Mr Arbuthnott's appeal the court made the following observations:

There are limits on the power to amend the articles. These arise because the power of the majority to bind a minority will not, without clear words, be taken to have been intended to be without limit. The basic test is that the shareholders must exercise the power in good faith in what they consider to be the interests of the company. It is for the shareholders and not the court to decide what amounts to a benefit to the company. However, this is subject to the caveat that it will not be for the benefit of the company if no reasonable person would consider it to be such. The burden is on the person challenging the validity of the...