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The Forgotten Agreement: Shareholder Pre-emption Rights Ignored

The Court of Appeal has recently had to consider a case involving a battle between shareholders for control of a company.  In 2001 the shareholders had agreed that other than a transfer of shares to family members, any shares would first have to be offered to the existing shareholders on a pro-rata basis before they could be sold to an outside third party.  Ten years later the transfer of shares to an outside third party was approved and took place.  The shareholders had apparently forgotten the agreement they had made ten years before.  Later, when a shareholder wanted to make a further transfer of shares, some of his co-shareholders tried to block the transfer on the basis of the pre-emption rights in the 2001 Agreement.  If those shareholders had been successful before the Court they would have secured control of the company for themselves.  

A High Court Judge approved the transfer on the basis that there had been an estoppel by convention because even though the  true position regarding rights of pre-emption had been forgotten, where everyone had already acted on a common mistaken assumption, they were bound by it and the subsequent proposed transfer could proceed.  The Judge was supported by the Court of Appeal who held that the shareholders mounting the challenge were estopped by convention from relying on the 2001 Agreement and furthermore, even if the pre-emption rights had survived, the directors had unanimously approved the transfer.

The decision confirms that estoppel by convention can be based on forgetfulness and not just a common mistake but also underlines the sense of having pre-emption rights in the articles of the company rather than in a separate agreement.  

For further advice contact James Staton on 01274 377 651.

About the Author

James Staton

Partner

Jim Staton has been a litigation solicitor for 36 years and has headed the Schofield Sweeney litigation…

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