24th September 2015
A drag along clause is a provision, contained in a company’s articles of association, conferring on the majority shareholders the right to accept an offer to buy their shares and to force the minority shareholders to accept such an offer.
In Arbuthnott v Bonnyman  the Court of Appeal was concerned with the insertion of drag along provisions into the company’s articles without the consent of the minority shareholder, which then resulted in the sale of the company to a third party. The amendment was made following a management buy-out offer and in the knowledge that one of the shareholders was reluctant to sell, considering the price offered to be a substantial undervaluation. The minority shareholder argued that this constituted unfair prejudice under section 994 of the Companies Act 2006.
The Court of Appeal looked at the terms of the shareholders’ agreement that the parties had previously entered into and the articles of association, as amended, together. It held, on the facts, that amendments to the articles were no more than a tidying-up exercise with no evidence of bad faith or improper motive and that the amendment to allow the sale to proceed was not inconsistent with the original arrangements entered into by the shareholders. For example, the agreement contained a provision that the minority would be bound by the price with which the majority was content. The amendments to the articles also accorded with “commercial common sense”, in particular the need to align ownership of the company with those who worked in the business and to avoid a scenario in which a majority of the shares were held by retired or retiring members.
The Court also held that a term could be implied that, as sophisticated financial professionals, the majority would not accept a price which they did not honestly consider to be fair and reasonable, something which could have significant precedential value in further cases of this type.
The case highlights several key issues of interest on the question of amending articles:
 Charterhouse Capital Ltd sub nom Geoffrey Arbuthnott v James Gordon Bonnyman & 18 others  EWCA Civ 536