UK: Amending Drag-Along Rights In A Company's Articles

Last Updated: 20 July 2015
Article by Richard Barham, Candice Chapman and Rebecca Gordon

The Court of Appeal has rejected an appeal in an unfair prejudice claim based on a variation of drag-along rights in a company's articles. In doing so, it reviewed a line of cases in which the courts have considered the power of a company's shareholders to amend a company's articles.

Background

Mr Arbuthnott was a founding shareholder and director of Charterhouse Capital Limited. Over time, the retirement of senior shareholding executives resulted in a misalignment between the shareholders and the active executives running the business. An MBO team of the active executives made a bid to buy the shares of the retired and retiring executives. It was a condition of the MBO offer that the shareholders amend the existing drag-along rights in the company's articles. The offer was accepted and the changes to the articles approved by all the shareholders other than Mr Arbuthnott. He argued that the changes were invalid as their effect was to allow the majority shareholders through the drag-along rights to expropriate his shares at an undervalue.

Decision

In rejecting Mr Arbuthnott's appeal the court made the following observations:

  • There are limits on the power to amend the articles. These arise because the power of the majority to bind a minority will not, without clear words, be taken to have been intended to be without limit.
  • The basic test is that the shareholders must exercise the power in good faith in what they consider to be the interests of the company. It is for the shareholders and not the court to decide what amounts to a benefit to the company. However, this is subject to the caveat that it will not be for the benefit of the company if no reasonable person would consider it to be such. The burden is on the person challenging the validity of the amendment to satisfy the court that there are grounds for doing so.

On the facts, the shareholders considered they were acting in the best interests of the company as a whole. They wanted to resolve the alignment issue to secure the company's future. There was no evidence of bad faith or improper motive. The amendments to the drag-along rights were a tidying-up exercise and not inconsistent with original arrangements between the founding members.

Comment

The amendment to the articles did not introduce any major changes. The case therefore does not deal with the question of whether an amendment to insert drag-along rights for the first time or significantly change existing drag-along rights would be invalid or involve unfair prejudice.

On the best interests point, the court noted that a power to amend will be validly exercised even though a change is not for the benefit of the company itself because it concerns a matter in which the company as an entity has no interest, but is only for the benefit of the shareholders or some of them, provided "it does not amount to oppression of the minority or is otherwise unjust or outside the scope of the power".

Arbuthnott v. Bonnyman & Ors [2015] EWCA Civ 536

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