The Court of Appeal has upheld a High Court decision that exercising a right in a company's articles of association to convert preference shares to ordinary shares by notice required preference shareholder consent. The decision in Ventura Capital GP Ltd v DnaNudge Ltd [2023] EWCA Civ 1142 could impact the mechanics of 'conversion by notice' rights contained in companies' articles of association.

DnaNudge's articles of association contained:

  • a provision allowing for the automatic conversion of the preference shares upon notice by a majority of the combined ordinary and preferred shareholders (Article 9.2(a)); and
  • a separate provision which stated that the special rights attaching to a class of shares could only be varied with the consent in writing of the holders of more than 75% of the relevant class of shares (Article 10.1).

When the ordinary shareholders (who held around 87% of the total issued share capital) sought to exercise the conversion right in Article 9, Ventura (a holder of the preference shares) argued that the purported conversion involved a variation or abrogation of the rights attached to the preference shares and was accordingly void because of a failure to comply with Article 10.1.

The High Court agreed with Ventura's argument and held that the purported conversion was invalid, void and of no effect, having determined that there was a clear mistake in the articles and that it was necessary to read the conversion article as subject to the consent requirement in Article 10, which had not been obtained. DnaNudge appealed the decision, arguing that the conversion was not a variation of class rights, but the Court of Appeal upheld the High Court's decision, concluding that, in order to make rational and coherent sense of the articles, either Article 9.2(a) must be interpreted as being subject to Article 10.1, or a term must be implied to that effect.

Most UK companies' articles require class consent for a variation of class rights, so this is likely to be a consideration when drafting or exercising conversion rights in a broad range of circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.