Desmond Gunewardena v Conran Holdings Ltd (2016)
If members of a company amended its articles of association by special resolution, but filed an incorrect version of the articles at Companies House, that did not affect the validity of the amended articles. Their status did not depend on registration.
The claimant challenged the exercise of pre-emption rights by the defendant company.
The claimant had acquired a 7% shareholding while he was company secretary, and later CEO. The company's 1993 articles of association provided that pre-emption rights would apply if an employee ceased to work for the company or a subsidiary. He would be deemed to have served a share transfer notice and a "fair selling valuation" would be applied. In 1995 the articles were amended and the valuation mechanism was changed. The value of shares subject to pre-emption rights was to be determined by a calculation involving the company's profits. The articles were amended again after an extraordinary general meeting in 1998, when it was agreed that a new class of shares would be created. In error, the company's solicitor amended the 1993 articles and filed them at Companies House. Those articles did not include the profit-based valuation method introduced in 1995. A special resolution was later signed by shareholders resolving to adopt the correctly amended version of the articles, but they were not filed. The claimant acquired shares in a related company (CGL). He ceased acting as CEO of the company and became CEO of CGL. In 2013 he acquired all of CGL's shares. The company asserted that the effect of this was that CGL had left the company's group, the claimant was no longer a group employee and the pre-emption provisions applied. Using the profit-based valuation, it concluded that his 7% shareholding was worth nothing. However, it paid him £1,254 for the shares.
The court was required to determine (1) whether CGL was a subsidiary of the company or a joint venture company, and whether the pre-emption provisions had been triggered by the claimant's acquisition of CGL in 2013; (2) the effect of filing the wrong articles in 1998; (3) whether the incorrect 1998 articles had been adopted by acquiescence, and which share valuation method should apply.
The claimant submitted that CGL was treated as a joint venture company in the company's accounts, and was regarded as such by everyone involved.
(1) The claimant's argument failed to distinguish between what "subsidiary" meant for the purposes of the articles and the label to be applied to the proper accounting treatment of CGL in the company's consolidated accounts. It was true that for accounting purposes CGL fell to be treated as a joint venture company rather than a subsidiary. However, the articles did not define "subsidiary" by reference to UK accounting standards; they defined it by reference to the Companies Acts. For the purposes of the Companies Acts, and the articles, CGL was a subsidiary of the company until the sale of the balance of the shares in CGL in 2013. At that point the claimant ceased to be employed by a company that was a subsidiary. He therefore gave a deemed transfer notice in respect of his 7% shareholding in the company. The assertion that everyone treated CGL as not being a subsidiary was of no significance (see paras 53-55 of judgment).
(2) The Companies Act 1985 provided for the creation, registration and amendment of articles of association. The articles in question were clearly those that had been agreed, and there was an assumption that what had been agreed would be registered. However, the Act did not provide for any overriding effect of registration in the event of conflict between what was agreed and what was registered. If the members resolved on an amendment by special resolution, the amended articles became the new contract and the new articles, and took effect immediately, Ho Tung v Man On Insurance Co Ltd  A.C. 232 considered. Their status as articles did not depend on registration. When the conformed copy was filed with the registrar, the company secretary was fulfilling a statutory obligation. If the right form of articles was filed, then the obligation was fulfilled. If the wrong form was filed, the obligation was not fulfilled but the articles as resolved on remained the articles. Any other conclusion would be contrary to the Act which permitted only one mechanism for the amendment of articles: a special resolution (paras 67-68, 70, 75-76).
(3) When it was discovered that incorrect articles had been filed, the company's solicitor had sent a special resolution with a copy of the correct version to all shareholders for signature. All but two shareholders expressly assented and signed, and the two who did not sign could think of no reason why they would not have done so. Their failure to sign and return the document did not connote dissatisfaction with it. It could not be said that the shareholders had consented to the operation of the filed articles, as that was inconsistent with the signed special resolution, HoTung and Duomatic Ltd, Re  2 Ch. 365 considered. Accordingly, under the agreed version of the articles, the profits-based valuation mechanism applied to the claimant's shares (paras 109-113, 119).