"Corrective Construction" To Achieve Commercial Common Sense In Company Articles

• Published date: 06 November 2023
• Law Firm: Goodwin Procter LLP
• Author: Sarah McAtominey

In the recent Court of Appeal judgment in DnaNudge Limited v. Ventura Capital GP Limited [2023] EWCA Civ 1142, the court confirmed that a provision of the company's articles allowing for the conversion of Series A shares to ordinary shares should be read as being subject to another provision requiring the consent of 75% of the affected shareholders. This case provides a useful reminder of the importance of ensuring that the articles of a company properly reflect the rights that are intended to be enjoyed by any particular class of share and the restrictions on any abrogation, variation or extinguishment of those rights. However, the case also provides comfort that where one party seeks to rely on a literal interpretation of the articles that makes no commercial sense, the court may conclude that there has been a drafting error and be prepared to remedy the same.

The Series A investment

DnaNudge Limited (the Company) is a medical and health technology company. In 2021, Ventura Capital GP Limited (Ventura) and Sumitomo Mitsui Trust Bank Limited (SMTB) invested in the business and were issued a total of 24,877 Series A shares (24,026 were held by Ventura and 851 by SMTB). There were also 162,521 issued ordinary shares held by individuals and entities, which included the founders and directors of the Company.

New articles were adopted in connection with Ventura's investment. The articles set out the matters on which the holders of both classes of shares were to be treated equally and the matters on which holders of Series A shares were to enjoy enhanced rights. For example, in certain circumstances, the holders of Series A shares were to enjoy special distribution rights.

There was also a separate shareholders' agreement under which Ventura had the right to require the Company to repurchase all or any portion of the Series A shares held by it and SMTB (the Put Option).

There were two particular provisions of the articles that became central to the dispute.

Article 9.2(a). This provided that all "Series A Shares shall automatically convert into Ordinary Shares:... upon notice in writing from an Investor Majority at the date of such notice (the 'Conversion Date')." "Investor Majority" was defined to mean the prior written consent of the holders of a majority of the Series A shares and ordinary shares in aggregate as if such shares constituted one class of share. In circumstances in which there were only 24,877 issued Series A shares (13% of all issued shares)...