Automatic Conversion Of Shares Ruled A Variation Of Class Rights

• Published date: 01 May 2023
• Law Firm: RDJ LLP
• Author: Mr Se'n O'Reilly

Introduction

A company's constitution may provide for the conversion of one class of shares into shares of a different class upon the occurrence of specified events. Companies Act, 2014 regulates variations to the rights attaching to a class of shares. Typically, in order to validly vary such rights it will be necessary to secure the approval of a particular proportion of the holders of the class concerned as specified in the company's constitution or of all of the company's members. How do the conversion of shares and the variation of class rights interact?

In the recent decision of the High Court of England and Wales in Ventura Capital GP Ltd v DnaNudge Limited,¹ it was held that an attempted 'conversion' of preference shares to ordinary shares pursuant to the articles of association of a company was "invalid, void and of no effect"² because it constituted a variation or abrogation of the rights attached to the preference shares which required the consent of the preference shareholders.

Background

The defendant, DnaNudge Limited (the "Company"), is a medical and health technology company which received investments of '42 million from Ventura Capital GP Limited ("Ventura") and '2 million from Sumitomo Mitsui Trust Bank ("SMTB") in 2021/2022 in return for Series A preferred shares in the Company. Ventura and SMTB (together the "Preferred Shareholders") held all the preferred shares (24,877 each of '0.0001) in the Company. A substantially greater number of ordinary shares (162,651 each of '0.0001) had been issued by the Company.

The Preferred Shareholders had acquired a number of preferential rights attached to the shares which were recorded in an amended articles of association and an amended shareholders' agreement. The shareholders' agreement provided that if a 'Qualifying IPO' (a defined term but effectively a listing on an identified or recognised exchange with an offering of at least '900m) does not occur prior to 19 November 2023", that the Preferred Shareholders would have a 'put option' to require their shares to be bought by the Company.³ Articles 5.1 and 6 of the amended articles also provided that the preferred shareholders would have "preferred payment of arrears of dividends and return of capital plus a cumulative 8% preferred return (compounding annually), in priority to ordinary shareholders" on distribution or exit.

In May 2022, the Company issued a circular to all shareholders stating that the Company wished to 'raise additional capital'...