When is a company free to amend its Articles? Court assists corporate exit strategyPrint publication
The Court of Appeal has resolved a long-running dispute surrounding the sale and valuation of a founding shareholder’s shares as part of an overall exit strategy. In so doing, it has clarified some key points of interest for corporate lawyers and clients alike. Gwendoline Davies explains.
The Court of Appeal has considered the fairness and validity of a share purchase effected to release retiring founding members from a business. In Charterhouse Capital sub nom Arbuthnott v Bonnyman & Others  the appellant, along with others, was a founder shareholder of a company governed by articles of association and a shareholders’ agreement (the SA). The SA provided that if a founder majority agreed to pursue an exit, the shareholder would agree to sell his shares on the same terms as those offered to the other shareholders. When the appellant and other members of the original team approached retirement, members intending to continue with the business offered to purchase all of the shares in the company. All retiring members accepted, except the appellant. He considered the company valuation, and the share price offered, to be too low. When the remaining members altered the company’s articles of association to enable the buyout to proceed without the appellant’s consent, he presented an unfair prejudice petition under section 994 of the Companies Act 2006.
Dismissing the appeal, the court looked at the terms of the SA as to exit strategy and the articles of association 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 buyout to proceed was not inconsistent with original arrangements between the founding members and that it made “commercial common sense“. Furthermore, the SA provided that the appellant would be bound by the price with which the founder majority was content. Interestingly, the court confirmed that a term could be implied that, as sophisticated financial professionals, the founder majority would not accept a price which they did not honestly consider to be fair and reasonable .
The case highlights several key issues of interest on the question of amending articles:
- Generally, a company is free to amend its articles. However shareholders’ powers of alteration are not completely without limit.
- A power to amend will be validly exercised if it is exercised in good faith in the interests of the company.
- It is for the shareholders to say what is in the interests of the company, but an alteration will not be in the interests of the company if no reasonable person would consider it to be such.
- The fact than an alteration adversely affects one or more minority shareholders does not, of itself, invalidate the alteration if it is otherwise made in good faith in the interests of the company…
- …but an alteration should not amount to oppression of the minority; it should not be unjust; and it should not be outside the scope of the power to amend.
- The burden of proof lies on the party alleging invalidity of an amendment.
And on the on question of share valuation:
- A term can be implied that a majority of sophisticated financial professionals would not accept a price which they did not honestly consider to be fair and reasonable.
 Charterhouse Capital Ltd sub nom Geoffrey Arbuthnott v James Gordon Bonnyman & 18 others  EWCA Civ 536
 Para 85
 Para 126