In Christopher Charles Dixon and EFI (Loughton) Limited v Blindley Heath Investments Limited [2015], the Court of Appeal applied the doctrine of estoppel by convention to agreed but apparently forgotten shareholder pre-emption rights where no shareholders’ agreement existed.

Summary

  • The case related to a struggle for control of EFI (Loughton) Limited (Company) and, in particular, a transfer of 200 shares in the Company to a company registered in the British Virgin Islands and now called Blindley Health Investments Limited (BHIL).
  • When Mr Dixon subscribed for 100 shares in the Company in 2001, he made an interest free loan of £80,000 to the Company.  The terms of lending document included a short paragraph containing a pre-emption provision on the transfer of shares. This was reflected in a letter to shareholders approved by the board in the following terms:

"No shares may be transferred unless they are first offered pro rata to the existing shareholders save that it shall be permitted for any member to transfer their shares to their spouse or immediate children (family transferees) but it shall be a condition of such transfer that any transfer by a family transferee shall not be permitted unless the shares are first offered pro rata to the existing shareholders at proportion of net asset value in every case."

  • Copies of the document in substantively the same terms were circulated to shareholders.
  • Mr Dixon acquired more shares and entered into an agreement with another shareholder to obtain control of the Company.
  • Various share transfers took place over the years without reference to pre-emption rights and without objection from shareholders or directors.
  • In 2011, a Mr Boam tried to acquire the share capital of the Company.  Mr Boam came to control the Company.
  • In October 2011 certain shareholders agreed to sell their shares to Mr Boam and their shares were then to be transferred to BHIL, a company controlled by Mr Boam.  The transfers were approved at an October board meeting.
  • Later that month, Mr Dixon claimed that he rediscovered the document containing the pre-emption rights which offered Mr Dixon the means to block the transfer to Mr Boam.  At a subsequent board meeting in November, the Board reversed its decision and the share transfers to Mr Boam were blocked.  Also, BHIL was misdescribed in the share transfer documentation.
  • The High Court held that the pre-emption rights were valid, but that Mr Dixon and his co-directors were estopped by convention from relying on them.  The High Court also found that the share transfers had been unanimously approved at the October board meeting and the revocation of that decision in November was invalid.  The misdescription of BHIL in the share transfers was a mere misnomer and it was clear that BHIL was the intended recipient as there were no other possible contenders.  Mr Dixon appealed.
  • The Court of Appeal agreed that Mr Dixon was estopped by convention.  Estoppel by convention is founded on mutual conduct based on a common but mistaken assumption of law or fact which binds the parties to their shared, even though mistaken, assumption.  Whether the true position had been misappreciated, misremembered or forgotten makes no difference to whether the parties have adopted a common assumption.  In this case the assumption was that there were no pre-emption rights which could impede the transfers to Mr Boam/BHIL.
  • The Court of Appeal disagreed with the High Court that a decision of the Board could not be reversed (if that was what the judge had meant) and pointed out that in some circumstances, the Board would be required to do so.  However, the Court of Appeal did not have to decide the point.
  • The Court of Appeal held that there was neither merit nor legal substance in the argument that, because BHIL was misdescribed in the share transfer documentation, the transfers were not effective.
  • The appeal was dismissed because:
  • the parties concerned were estopped by convention from relying on and enforcing pre-emption rights;
  • the October board meeting decision entitled the transferees to registration subject only to presentation of stock transfer forms (in this context see section 771(1) of the Companies Act 2006);
  • it would nevertheless have been open to the Board acting in accordance with their fiduciary duties to change their minds at the November board meeting given that no actual registration and no passing of legal title had occurred.  However, it was unnecessary for the Court of Appeal to reach a concluded view on the point; and
  • there was no merit or substance in the suggestion that the transfers were invalid due to the misdescription of the transferee.

Facts

The factual history of the case is complex, but essentially the case related to a struggle for control of EFI (Loughton) Ltd (the Company) and a transfer of 200 shares in the Company to a company registered in the British Virgin Islands, Blindley Heath Investments Limited (BHIL), pursuant to a share purchase agreement dated 7 October 2011 (the SPA).

The Company had adopted Table A articles of association, which included the provision that the ‘Directors may in their absolute discretion and without assigning any reason therefor decline to register the transfer of a share…’.

Mr Dixon and the Company claimed that the transfer was made in breach of valid rights of pre-emption and that the share transfer should be unwound. If successful, Mr Dixon would secure control of the Company.

In February 2001, Mr Dixon was invited to become a shareholder; he subscribed 100 shares at par in the Company (taking the issued share capital to 600) and provided an interest free loan of £80,000. Mr Dixon drafted a document entitled 'Terms of Lending' which set out the basis on which he (and his brother) was prepared to lend to the Company. Paragraph 9 provided as follows:

“No shares in [the Company] to be issued sold or transferred unless offered pro rata to existing members on same terms. May be gifted to immediate family (spouse and children) but further transmissions by those transferees or on death should be required to be offered pro rata at asset value.”

A draft of a subsequent document which became known as the ‘February Shareholders’ Letter’ was initialled and approved by each of the directors other than Mr Dixon who was absent at the time. The February Shareholders’ Letter, consistently with the Terms of Lending, provided, by clause 3, as follows:

“No shares may be transferred unless they are first offered pro rata to the existing shareholders save that it shall be permitted for any member to transfer their shares to their spouse or immediate children (family transferees) but it shall be a condition of such transfer that any transfer by a family transferee shall not be permitted unless the shares are first offered pro rata to the existing shareholders at proportion of net asset value in every case.”

The other directors also made loans to the Company and in November 2001, they each received copies of their respective loan agreements together with a copy of a document (which was referred to as the ‘November Shareholders’ Letter’) substantively in the same terms as the February Shareholders’ Letter.

Following various share transfers (without reference to the pre-emption rights and without objection from directors or shareholders), by June 2010 Mr Dixon and another shareholder, Mr Wells, controlled 400 of the 600 issued shares and an agreement existed between them which was intended to regulate the basis on which they would acquire the remaining shares. Mr Dixon made further acquisitions through a corporate vehicle and tried to acquire more shares.

On 3 October 2011, certain shareholders agreed to sell 200 shares (Sale Shares) for a total of £540,000 to a Mr Boam (who came to control the Company) despite a higher offer from Messrs Dixon and Wells. On 7 October 2011, these shares were transferred to BHIL, a company controlled by Mr Boam, again for £540,000 pursuant to a written share purchase agreement (“the SPA”) and, at an October Board Meeting, there was unanimous approval and agreement to the transfer of the Sale Shares to BHIL.  However, BHIL was misdescribed in the SPA and in the stock transfer form.

Later in October 2011, Mr Dixon made (in the Judge’s words) “what is for his and the Company’s case, an important discovery”. According to Mr Dixon, it was at this juncture that he found the February Shareholders’ Letter and versions of the November Shareholders’ Letter.

The re-discovery of the pre-emption provisions in those letters offered Mr Dixon the means of blocking the transfer to Mr Boam and he set about using the rights of pre-emption to block the registration of the transfer of the Sale Shares. At a subsequent Board Meeting in November, the Board declined to register the share transfers.

The questions for the Court included:

Ÿ     whether the pre-emption rights were valid;

Ÿ     whether the reversal of the Board’s decision in October at the subsequent November Board Meeting was valid; and

Ÿ     whether BHIL being incorrectly described in the share transfer documentation of the Sale Shares to BHIL rendered the transfer ineffective.

High Court decision

The High Court found that there were valid pre-emption rights in place, but that Mr Dixon (and his co-directors) were in all the circumstances estopped by convention from relying on such rights to prevent the transfer; alternatively the Court concluded that the share transfers had been unanimously, though informally, approved and passed at a meeting in October 2011 by the Board of Directors of the Company, who comprised a majority of its shareholders and that their decision to effect registration of the transfers was binding upon all concerned, and that its purported revocation at a subsequent Board Meeting in November 2011 was invalid. Mr Dixon appealed.

Court of Appeal decision

The appeal raised issues which included the scope and applicability of the doctrine and principles of estoppel by convention, the revocability of a Board decision at a subsequent Board Meeting and the powers and duties of directors in relation to the passing and registration of share transfers subject to pre-emption rights conferred not in the Articles of Association but (as in this case) in an agreement evidenced by letters between certain of its shareholders.

Estoppel by convention

Estoppel by convention is founded on conduct by the parties based on a common, but mistaken, assumption of law or fact: its basis is consensual. Its effect is to bind the parties to their shared, even though mistaken, understanding or assumption of the law or facts on which their rights are to be determined rather than to provide a cause of action. If and when the common assumption is revealed to be mistaken the parties may nevertheless be estopped from departing from it for the purposes of regulating their rights inter se for so long as it would be unconscionable for the party seeking to repudiate the assumption to be permitted to do so.

Chitty on Contracts states that estoppel by convention arises when the parties have acted on an assumption:

“the assumption being either shared by both or made by one and acquiesced in by the other. The parties are then precluded from denying the truth of that assumption, if it would be unjust or unconscionable to allow them (or one of them) to go back on it. Such an estoppel differs from estoppel by representation and from promissory estoppel in that it does not depend on any representation or promise. It can arise by virtue of a common assumption which was not induced by the party alleged to be estopped but which was based on a mistake spontaneously made by the party relying on it and acquiesced in by the other party.”

It is not sufficient for one or (even) both parties to have acted on the assumption if there is no communication of that assumption, but the necessary communication may be effected by the conduct of one party which is known to the other, provided that such conduct is

            “very clear conduct … of which the other party was fully cognisant.”

Forgetfulness

The authorities do not suggest that the principle is confined to cases of mistake. A mistaken recollection was not, in the view of the Court, legally different from a state of forgetfulness. Whether the true state of things has been misappreciated, misremembered or forgotten should make no difference to whether the parties have in the event mutually adopted a common assumption.

In the present case, where a director (at an earlier board meeting in July 2010) sought to raise a number of arguments against approval of a previous share transfer but never raised the question of pre-emption rights, it is only explicable on the basis that all present assumed, or at least (in the case of Mr Dixon) were prepared to proceed on the footing, that there was no impediment on which the director could rely to object to that transfer. In a case of a share transfer in a small private company there is every reason for the parties to be thinking of company control. An assumption that there is no way of stopping any change in that control was assumed by the parties throughout and was relied on in connection with their subsequent mutual dealings. The High Court judge’s conclusion that the parties conducted themselves on the basis of a positive assumption that no valid rights of pre-emption existed, was amply justified.  Seven previous dealings with shares demonstrated that assumption and the relevant shareholders were therefore estopped from enforcing the pre-emption rights.

October and November Board Meetings

The true position in relation to the registration of a share transfer is not that directors’ approval is a condition precedent but that the transferee is entitled to be registered unless within a reasonable time (which is prescribed by section 771(1) of the Companies Act 2006 to be a period of not more than two months after lodging of the transfers) the directors resolve as a board to reject. If the board resolves not to reject, or, if the board does nothing, after the expiry of a “reasonable time”, the transferee is entitled to registration (see In re Zinotty Properties Ltd [1984]).

Having resolved not to reject the transfer at the October meeting, can the Board change its mind at the November Board meeting? The High Court judge thought not. The Court of Appeal disagreed; there could be circumstances where it was bound to do so, although the Court of Appeal declined finally to decide the matter as it has been conceded by counsel for Mr Dixon at the High Court hearing.

Mis-description of the transferee

Mr Dixon argued that the High Court was wrong to conclude that there was no substance in the point that the stock transfer forms had no effect since at the time they were lodged there was no company with the name stated both in the SPA and in the transfer as the transferee. The transfer forms set out the name of the person to whom the shares were to be transferred as “Blindley Heath Investments Ltd” with a BVI address (but no company registration number). At this time BHIL was called Blindley Heath Investment Properties Ltd. Only later did Blindley Heath Investment Properties Limited change its name to Blindley Heath Investments Limited.

The Judge treated this as an obvious misnomer. She considered that any objective bystander would have appreciated that the reference was to the same corporate vehicle, there being no other contender.

The Court of Appeal also did not accord any substance to Mr Dixon’s argument. The misnomer was clear; enquiry would have revealed that the company intended to be referred to was indeed the company then called Blindley Heath Investment Properties Limited, there being no other contenders. The Court of Appeal agreed with the Judge’s conclusion that the point had neither merit nor legal substance.

Summary as to conclusions in relation to the appeal:

The Court of Appeal dismissed the appeal on the grounds that:

  • the parties concerned were estopped by convention from relying on and enforcing the pre-emption rights conferred by the February and November Shareholders’ Letters to prevent the transfers provided for by the SPA;
  • the effect of the discussions at the October Board Meeting was that the Board of Directors resolved not to object to those transfers; and that this entitled the transferees to registration subject only to presentation of stock transfer forms;
  • it would nevertheless have been open to the Board of Directors acting in accordance with their fiduciary duties at the November Board Meeting to change their minds, given that by then no actual registration and thus no passing of legal title had been effected. But it was unnecessary for the Court to reach a concluded view on that point; and
  • Ÿthere was no merit or substance in the suggestion that the transfers were invalid on the ground of the mis-description of the transferee.
  • The appeal was dismissed and BHIL was entitled to be registered as a member of the Company.

Comment

Suffice it to say that if the pre-emption rights had been included in the Company's Articles of Association or in a Shareholders' Agreement, the outcome may have been different.  The case serves as a reminder of the importance of ensuring that such provisions are properly documented.