The Court of Appeal (CoA) considered the crucial question of when a departing employee-shareholder triggers compulsory share transfer provisions (CSTPs) in a company's Articles, when that person held various roles within the company.
Background:
Syspal Holdings Ltd.’s (SHL) Articles of Association were adopted in December 2015. SHL is a holding company owned by Mr. Truman at 24% and Syspal Capital Ltd. (SCL) at 76%. It also owns 100% of the shares in Syspal Ltd. (SL).
Mr. Truman was an employee of SL from 1980 until he was dismissed on 10 October 2022, and also a director of SL until he was removed from that position on 3 November 2022. Mr. Truman was also a director of SHL until he resigned on 24 May 2023.
The dispute centred around the interpretation of the pre-emption provisions in the Articles, specifically whether the transfer notice was triggered by Mr. Truman’s dismissal as an employee and the valuation of his shares. The provisions apply to shares of an "Employee Member".
The High Court agreed with Mr. Truman that the words ‘in that capacity’ in Article 11.3 of SHL's Articles of Association related to any of his three capacities, so the transfer notice was triggered only upon Mr. Truman's resignation as a director of SHL. Syspal Capital appealed.
Decision:
The CoA dismissed the appeal and agreed that the transfer notice was served on 24 May 2023 when Mr. Truman resigned as director. The Court agreed with the Judge's interpretation of Article 11.3 of SHL's Articles of Association. The term ‘in that capacity’ refers to the overall state of being "employed" by the Group and includes employees, directors, and consultants. Such interpretation makes more commercial sense and avoids the potentially unfair outcome of a lower "market value" being triggered when an employee ceases one role within the Group but continues to contribute in another. SCL’s interpretation could result in commercially illogical results, as an employee could be forced to sell at a lower value while still being a director or a consultant.
Mr. Truman was thus entitled to the fair value of his shares.
Implications:
This decision serves as a crucial reminder of the importance of precise drafting in company Articles of Association and shareholder agreements, particularly concerning exit provisions. It highlights the potential for costly disputes arising from ambiguous wording around when a shareholder is deemed to have left the company, triggering share transfer obligations. This decision should prompt companies to review their Articles of Association and any Shareholder Agreements to ensure that they are clear, unambiguous, and reflect the intended consequences of a shareholder's departure. As exemplified in this case, seemingly minor ambiguities in shareholder agreements can lead to significant disputes and financial implications.
This case also underscores the need for unambiguous provisions specifying how shares are to be valued in different scenarios (e.g., resignation, dismissal, retirement). A failure to do so can lead to disputes about whether "fair value" or "market value" applies, with potentially significant financial consequences.