The recent case of Attorney General of Belize and others v Belize Telecom Ltd and another has provided new guidance regarding the court's position in dealing with implied terms and interpreting a company's Articles of Association.
Facts And Issues
Belize Telecommunications Ltd was formed to take over a public body, Belize Telecommunications Authority. The purpose of the transfer was to enable the government of Belize to sell its financial interest in the undertaking while maintaining a degree of control. The share capital of the company comprised one special share (held by the government), "B" shares and "C" shares. Different rights attached to each class of share. In terms of the Articles of Association ("Articles"), where the special shareholder also held "C" shares amounting to 37.5% or more of the issued share capital, it was entitled to appoint/remove two of the "C" Directors, irrespective of whether or not it held a majority of "C" shares. Pursuant to an agreement with the government, Belize Telecom Ltd ("BT") acquired the special share and a majority of the issued share capital. BT subsequently defaulted on its obligations under a finance agreement, with the effect that the government took back a substantial number of the ordinary shares. BT remained a special shareholder but no longer possessed "C" shares amounting to 37.5% of the issued share capital.
The question which came before the courts was therefore whether the two special "C" Directors appointed by BT remained members of the Board? Under the Articles, only a special shareholder holding "C" shares amounting to 37.5% of the issued share capital had the authority to remove such Directors. However, this person no longer existed and there was no express provision in the Articles dealing with this situation. Were the two special "C" Directors appointed by BT irremovable (as contended by BT) or, by implication, should they vacate office?
Decision
The Supreme Court held that such a term should be implied, that is to say, the special "C" Directors appointed by BT should vacate office. The Belize Court of Appeal disagreed, finding that this construction could not be 'derived from the language of the articles'.
The Privy Council agreed with the decision of the Supreme Court. Lord Hoffmann stressed that the court had no power to improve upon an instrument which it was called upon to construe, and that it cannot introduce terms to make it fairer or more reasonable. The court therefore required to decide was that what the instrument - read as a whole against the relevant background - would reasonably be understood to have meant?
In arriving at its answer, the Privy Council observed that the Board had been constructed so that its membership would reflect the interests of the various participants in the company and that the powers which the Articles conferred upon the government were carefully graduated according to its economic interest in the company at the relevant time. In the context of the special share, the Privy Council took the view that the Articles could not reasonably mean that the government-appointed directors should remain in office after the special share had ceased to exist. Instead, the Articles had to be read as providing by implication that the government-appointed directors ceased to be members of the board when the special share was redeemed. It would necessarily follow that, in order to prevent absurd consequences, the two special "C" Directors should vacate office where the special shareholder continued to exist but no longer had the 37.5% shareholding.
While it is frequently impossible expressly to provide for every eventuality, situations such as the one in this case are often not entirely unexpected. If the circumstances can be contemplated, it's better expressly to provide for these!
Disclaimer
The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.
