19 February 2019
Reading time (1-10 minutes):4 if you’re quick
Sophistication level (1 (idiot) – 10 (expert)): 6
Entertainment value (1 (turgid) – 10 (side-splitting)): 6
(wet) A sizzling tale involving a menage a trois of Russian oligarchs
(dry) English law is very big on protecting people’s property rights, including their right to deal with or dispose of their property as they think fit. When it comes to shares in companies, a clear rule has developed over the years saying that any provisions in a Company’s Articles of Association which seek to restrict this right must be set out extremely clearly and precisely. But does this rule also apply to shareholders agreements?
This recent case involved some Russian oligarchs who through their companies were the major shareholders of a Russian company PJSC MMC Norilsk Nickel (‘NN’), the world’s largest producer of nickel and palladium. They had a bit of a dispute going on, and as part of resolving it the shareholder companies, United Co Rusal Plc (‘Rusal’) and and Whiteleave Holdings (‘Whiteleave’) entered into an agreement with a third shareholder company, Crispian Investment Limited (‘Crispian’) owned by a third oligarch. It looks like Crispian’s role was to keep the peace between the other two. This agreement included a ‘right of first refusal’ (‘ROFR’) clause. The agreement was properly negotiated with top law firms, but was in Russian. However, it provided that English law should apply to it and that English courts should decide disputes under it. For the purposes of the court hearing the parties agreed an English translation of the agreement, which translated into the following remarkably short and simplistic wording for the ROFR clause, which any half-educated corporate lawyer can see is riddled with a lack of clarity and precision:
“If Crispian sells any number of NN shares… Crispian shall grant to Wightleave and Rusal the right of first refusal to buy out the shares being so disposed of (pro rata to their shareholdings)… on the following terms:
(i) in the event that Rusal and Whiteleave exercise their right of first refusal, they shall serve a notice of exercise of the right of first refusal within 10 days of receipt of the relevant notice from Crispian …
…the share price… shall be equal to the price proposed by a bona-fide third party purchaser…”
It seems that some time later the oligarchs behind Whiteleave and Crispian came up with a cunning wheeze. Crispian agreed to sell a large part of its shareholding to Bonico Holdings Co. Limited (‘Bonico’- hang on in here, no more names to remember after this…), which was a subsidiary of Whiteleave. The price they agreed on was significantly more than seemed to be their real value. Who knows what other arrangements the oligarchs behind these companies had made between themselves? But Whiteleave was banking on the effect of the ROFR clause being that Rusal only had the choice of either taking up its rights to buy all the shares at the inflated price (Whiteleave was not going to exercise its own right to buy the shares) or to see the shares going to Whiteleave’s subsidiary Bonico, thereby dramatically depriving Rusal of its share of control over NN.
Rusal didn’t like this and went to court arguing that:
- Bonico could not be said to be a ‘third party’ as although it was not a party to the shareholders agreement it was connected to Whiteleave, being Whiteleave’s subsidiary
- Bonico was in any event not a ‘bona fide’ purchaser as the price was clearly an artificially inflated price
- The ROFR clause was a joint right, and must be exercised by both Whiteleave and Rusal or not at all.
Whiteleave and Crispian disagreed. They also argued that since the law relating to interpreting a company’s Articles of Association in particular said that any restrictions on transfer of shares had to be set out very clearly and precisely to be effective, the same principle should be applied to any ambiguity in the shareholders agreement and so the ROFR clause had to be construed in favour of the shareholder which was looking to transfer its shares.
What did the court decide?
The court sided with Rusal. And it said that it didn’t have to interpret any ambiguity in the defendants’ favour as the ROFR clause was not in the Articles of Association but was in a separate commercial agreement agreed later between shareholders.
I won’t go into detail here on how the court applied the rules of interpretation in this case. Suffice it to say that regular readers may have noticed that a recurring theme in many of my case reports is that courts will tend to bend over backwards to apply every means at their disposal to come up with what they inherently feel should be the fair result. They are often successful because they are clever and can manipulate the rules of interpretation of contracts to their own ends. But here it was easy as the ROFR clause was so loosely drafted.
Comments and tips
It seems that if the ROFR provisions had been set out in the Articles of Association the result might have been different. The reason that the particular law about the need for clarity and certainty in pre-emption provisions mainly relates to how Articles of Association should be interpreted is that the Articles set out the inherent constitutional rules of the company containing rights and restrictions which apply to shares in a company; whereas individual shareholders are free to set out whatever commercial restrictions they may agree between themselves, and the court is more free to interpret such agreements however they want, paying less regard to the requirement for clarity and certainty and more regard to what the court thinks the parties must have intended when drafting the agreement.
It used to be thought that if you wanted to be ultra sure that any restrictions on share transfers were effective you should put them in the Articles of Association (as well as perhaps in a separate shareholders agreement), because they then became intrinsic restrictions which were binding on the company itself, not just on the shareholders. However, based on this case there are good arguments for saying it might be safer to put any restrictions in a shareholders agreement as the court will then be freer to determine any disputes with more of a sense of fairness and consideration as to what the parties might have actually intended when entering the agreement.
There remain possible arguments that if a shareholders agreement is entered into between all the shareholders rather than some only, particularly if done at the same time as the Articles of Association are adopted and particularly if it has clauses requiring any future allottees or transferees of shares to become a party to it, then any pre-emption clauses or similar clauses in it might have to be interpreted as if they set out in the Articles. The court raised this but decided it didn’t need to decide it.
In view of the way company law has developed over the last couple of decades to make the governance of companies much less formal I struggle to see the continuing need for this distinction between how you interpret Articles of Association and how you interpret separate shareholders agreements, but there it is.
If you are thinking of putting pre-emption rights in your Articles of Association or a shareholders agreement, here are some of the many issues you may need to cover:
- Who is the right given to? If more than one shareholder, do they all have to buy? In the same proportions as their existing shareholdings? What if some but not all want to buy? What is the procedure for all this, for example to find out how many shares they each want to take up and how they should be allocated?
- If there are only takers for some of the shares, does the seller have to sell those shares, or none at all?
- How are you meant to value the shares? If based on what a seller might have been offered by someone else how do you ensure fairness and prevent manipulation, for example where there is some connection between seller and buyer? How do you factor in non-cash elements of the price? Or the value to the deal of personal restrictive covenants on the seller? Or do you provide that the shares should be valued by an independent expert? If so, what rules do you set out as to the basis on which the shares should be valued?
Final comments: if you are foreign but want your agreement to be governed by UK law and jurisdiction because the UK legal system is so wonderful, you should ideally agree a definitive English language version and get English legal advice.
And if you are going to use an English lawyer, have the courtesy of respecting and heeding their advice rather than thinking you know better. I only mention this because I have recently been involved in a joint venture/shareholders deal between Russians where my client didn’t listen to my concerns about how the proposed shareholders agreement should be drafted and went ahead and signed it. Things later went pear-shaped and my client was in a much worse position than he would have otherwise been.
Case: United Co Rusal Plc v Crispian Investments Limited (1) and Whiteleave Holdings (2) (2018)