Member - Unfair prejudice to member's interests

McKillen v Misland (Cyprus) Investments Ltd and another: Court of Appeal, Civil Division (Lord Justices Lloyd, Rimer and Tomlinson): 24 February 2012

C Ltd had been formed in 2004 by five original investors, or group of investors for the acquisition by a consortium of Irish investors of four hotels. Those original investors were the claimant petitioner (who owned 36% of C Ltd's shares), J and MD, MIL Ltd (MIL) (which was wholly owned by A&A Investments Ltd (A&A)), Q and QN Ltd.

Each of those investors was issued with a separate class of shares, namely the A, B, C, D and E shares, with those first four classes of shares conferring the right to appoint one director. Following the sale of one of its four hotels, C Ltd continued to own the remaining three hotels. Unable to reach agreement with the petitioner for the acquisition of C Ltd and its three hotels, two brothers (the Barclay brothers) executed a plan, through companies and trusts they controlled, directed at the acquisition of complete control and ownership of C Ltd and its three hotels.

That plan included the sale by A&A of MIL to the Barclay interests. The petitioner commenced proceedings pursuant to section 994 of the Companies Act 2006, alleging that all or most of that and other steps were effected in breach of provisions in the agreement and in C Ltd's articles of association; and that, together with the alleged conduct of the directors of C Ltd appointed by the Barclay interests, they constituted unfairly prejudicial conduct of C Ltd's affairs. He further commenced a separate claim pursuant to civil procedure rule (CPR) Pt 7, alleging a conspiracy to cause loss by unlawful means.

That claim was to be heard together with the petition. Following an order made by the judge on 22 November 2011, it fell to the judge to decide preliminary issues in the petition concerning the interpretation of the pre-emption provisions contained in a shareholders' agreement entered into between the shareholders of C Ltd (the agreement) and in C Ltd's articles of association. Clause 6.15 of the agreement provided that: 'Each shareholder (being a body corporate) shall be entitled to transfer the entire legal and beneficial interest in all or any part of the shares held by it to any member for the time being of its Shareholder Group PROVIDED THAT in any such event, any such transferee shall first enter into an agreement under or supplemental to this Agreement whereby it undertakes all of the liabilities and responsibilities of the transferring shareholder under this Agreement and that, on such transferee proposing to cease to be a member of that Shareholder's Group, it shall first re-transfer all its interest in the shares held by it or on its behalf to the original transferor under this clause or another member of its Shareholder Group or as otherwise may be agreed in writing by the other shareholders'.

Clause 6.1 7 of the agreement provided that no share 'or any interest therein' should be transferred, sold or otherwise disposed of save as provided in clause 6. The primary issue for determination in respect of those preliminary issues was whether the pre-emption procedure was triggered not just by a proposed transfer of shares in C Ltd, but also by a proposed transfer of control of the company holding such shares, namely MIL. That first question was the critical one and had asked: 'Whether the registration by a shareholder of a transfer of the shares in itself constituted a transfer of interest in shares for the purposes of clause 6.1 of the agreement and article 5.1 of C Ltd's articles of association?'.

On 21 December, the judge delivered his reserved judgment (see [2011] All ER (D) ), answering the relevant questions in the negative, including that first critical one. The petitioner appealed to the Court of Appeal. The petitioner challenged the correctness of the judge's answers to the questions raised by the preliminary issues. The petitioner made the same emphasis about the essential features of the agreement, as was made to the judge. His case was that the original investors had been bound in for an initial four-year period, during which, save for permitted transfers, they had been prevented from transferring their shares. He argued that those matters were underlined by the pre-emption provisions in clause 6, which (apart from permitted transfers) prevented any transfer being made without a share offer being made to the existing shareholders.

He further argued that the reference in clause 6.1 and 6.17 to 'any interest therein' had been and was capable of referring not just to a beneficial interest in the shares held by someone other than their registered holder, but that it could and did also mean, in the instant case, that the interest in MIL's shares in C Ltd that its own parent, A&A, was said to have by virtue of its ownership in its shares in MIL. The petitioner further challenged the judge's application of the principles applicable to the interpretation of commercial contracts. More specifically, the proposition was that, for the purposes of the relevant words in clauses 6.1 and 6.17, A&A was regarded as having an 'interest' in MIL's shares in C Ltd, such that any disposition of A&A's shares in MIL out of A&A control was a transaction involving a transfer of an 'interest' in MIL's CLtd shares that triggered the need to serve a transfer notice on C Ltd under clause 6.1. The appeal would be dismissed.

It was well established that as part of the interpretation exercise a court could read words into a document which were not already there. It could and would, however, only do so in a case in which it was satisfied that it was necessary to do so in order to reflect what it was satisfied had been its true meaning. That was 'the meaning which the instrument would convey to a reasonable person having all the background knowledge which would be reasonably available to the audience to whom the instrument is addressed'. However, it was not any part of the court's interpretative exercise to improve upon the instrument that it was called upon to construe (see [54] of the judgment).

In the instant case, the judge had been right to answer the preliminary issues in the way that he had. The instant case was one in which the reasonable man would: (a) have no hesitation in rejecting the petitioner's suggested interpretation of 'any interest therein' in sub-clauses 6.1 and 6.17; and (b) would not be satisfied that there were sufficient grounds for concluding that the parties intended clause 6.15 to impose a restraint on A&A's actions in relation to MIL of the nature that was being suggested but for which its language made no provision (see [56] of the judgment). Decision of [2012] All ER (D) 58 (Feb) affirmed.

Philip Marshall QC, Richard Hill and Gregory Denton-Cox (instructed by Herbert Smith LLP) for the claimant; Jeffery Onions QC, Sa'ad Hossain and Edmund Nourse (instructed by Weil, Gotshal & Manges) for the defendants.