The case of McKillen v Misland (Cyprus) Investments Ltd and Others, heard before the Court of Appeal on 20 February 2012, has highlighted the importance of corporate succession planning and ownership control particularly in relation to pre-emption rights
What are pre-emption rights?
Pre-emption rights can give the existing shareholders of a company a right of first refusal on the issue of new shares, thus protecting their investment from dilution, or on the transfer of existing shares, thus protecting them from change of control, alteration of the balance of shareholder power or from unwelcome third party investors.
Pre-emption rights on the issue of new shares are considered so important that all English companies have them by default, although private companies often set out their own, more extensive or tailored rights in their articles of association.
In relation to transfer of existing shares, however, there are no default rules, and pre-emption provisions must be clearly stated in order to restrict shareholders' rights to deal freely in the shares held by them.
What happened in McKillen v Misland (Cyprus) Investments Ltd?
The McKillen case centred on the affairs of Coroin Limited, a company set up in 2004 by five investors to acquire four well-known London hotels.
Mr McKillen and Peter Green were two of the five investors. However, while Mr McKillen made his investment directly in his own name, Mr Green made his investment through Misland (Cyprus) Investments Ltd, which took ownership of Mr Green's shares in Coroin.
Brothers Sir David and Sir Frederick Barclay expressed an interest in buying Coroin. They first approached Mr McKillen with their offer, but were unable to reach an agreement.
Unfazed, the Barclay brothers approached the other investors, and by September 2011 had successfully acquired sufficient interest in Coroin to gain control of the board of directors.
One of the key elements in their strategy was their acquisition of Misland.
Did pre-emption rights apply?
The articles of association of Coroin, together with a shareholders' agreement, contained pre-emption provisions restricting the transfer of shares in Coroin or any interest in those shares. Mr McKillen believed that the sale of Misland to the Barclay brothers was made in breach of his pre-emption rights.
Mr McKillen commenced proceedings for unfair prejudice, and the court was asked to consider the preliminary issue of interpretation of the pre-emption provisions.
The Court of Appeal upheld the High Court's decision.
The registration by a shareholder (Misland) of a transfer of shares in itself did not constitute a transfer of an interest in shares in Coroin.
In essence, whilst there was no question that there had been a change of control in Misland, the court ruled that this, by itself, did not trigger the pre-emption provisions, because Misland remained the actual shareholder in Coroin throughout.
What can we learn from this case?
No matter what your level of investment in a company, this case demonstrates just how important it is to ensure that your position is protected by a carefully drafted set of articles of association and shareholders' agreement.
It may be difficult to prevent, entirely, innovative ways to avoid restrictions on transfers of shares, but consideration of possible issues from the outset of investment and an extension of the circumstances in which pre-emption rights are triggered can ensure a greater level of protection.