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No general principle of interpretation for shareholders’ agreements

Kerry Chan

In Rusal v Crispian and Whiteleave, the High Court held that the principle of interpretation which applied to a private company’s articles of association – that the right to transfer shares could only be restricted by clear words – would not generally apply to shareholders’ agreements.

The central issue was whether Crispian had validly commenced the right of first refusal procedure set out in a shareholders’ agreement with Rusal and Whiteleave.

Rusal contended that Crispian’s right to offer the shares at “the price proposed by a bona-fide third party purchaser” did not extend to the offer in question which was at a price proposed by Whiteleave or its affiliates. As part of their defence, Crispian and Whiteleave argued that the general unitary approach to contractual interpretation should be qualified by the principle that the right of transferring shares freely can only be removed or restricted by clear words.

The High Court rejected this argument. It held that the qualification established in the context of construing pre-emption provisions in articles of association of private companies does not generally apply in shareholders’ agreements.

  1. A company’s articles are a contract between all shareholders and also part of the constitution of the company, defining the rights and restrictions applicable to the shares. A presumption that the articles do not intend to reduce the normal rights of transferability of the shares without express provision is desirable.
  2. However, the same could not be said for a subsequent commercial agreement between two or more shareholders for their own specific purpose as to how they would deal with their shares between themselves. The intrinsic rights attached to the shares (as per the articles) were not affected.
  3. A shareholders’ agreement made on the establishment of the company between all the initial shareholders and all subsequent allottees or transferees, with the articles adopted in accordance with the terms of the shareholders’ agreement, may be different, especially if the shareholders’ agreement would prevail in the event of inconsistency. In this circumstance, the shareholders’ agreement is effectively synonymous with the articles. Accordingly, the special principles of interpreting articles might well apply.

The High Court interpreted the shareholders’ agreement by looking into the choice of words throughout the agreement and the commercial context of the agreement. This led it to conclude that the right had not been validly exercised.

Comments published on Compact Contract do not necessarily reflect the views of Allen & Overy or its clients.

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