Are Your Pre-Emption Rights On A Share Transfer Water Tight?

Do you have a "change of control" clause in your shareholders' agreement? Are your pre-emption rights on transfer of shares comprehensively drafted? If not the High Court case of McKillen v Misland (Cyprus) Investments Limited1 involving the back-door takeover by the Barclay brothers of Coroin Limited, the entity that owns the hotels Claridge's, the Connaught and the Berkeley should be a wake-up call for a review of your joint venture / shareholders' agreement and articles of association.

The Barclay brothers obtained control of Coroin Limited not by acquiring shares directly in Coroin Limited which would have been in breach of the pre-emption provisions on a share transfer in that company's articles of association and shareholders' agreement but by acquiring ownership of shares in Misland (Cyprus) Investments Limited, a shareholder in Coroin Limited. Mr J David Richards held that this was not in breach of the terms of those particular pre-emption rights.

The judge made it clear in his judgment that a principle applicable to pre-emption articles is that as the right to deal freely with a share is an important attribute of ownership and prima facie right of a shareholder, the existence and extent of any restriction on transfer, such as pre-emption rights, must be clearly stated:

"Commonly used phrases in pre-emption provisions have distinct legal meanings and superficial small variations can have significant legal effects. This is relevant consideration when construing pre-emption provisions, particularly when as in this case they are complex and have been professionally drafted, using and adapting well known standard provisions."

The case makes it clear that pre-emption right provisions must expressly contain:

restrictions on transfer of shares to prevent legal title being transferred; and restrictions on transferring or creating any interest therein to prevent beneficial interests being transferred outside the pre-emption provisions. In addition, if the pre-emption provisions only restrict the above they do not prevent the sale of the shares in a shareholder itself that holds such shares in the joint venture company (JvCo). Such a sale involves no change in the shareholder's legal and beneficial ownership of the underlying shares in the JvCo nor evidences a desire to transfer those shares or any interest in them. "Any interest therein" does not include indirect interests such as those it could be said arose by ownership of shares in the...