How to avoid a Mike Ashley/House of Fraser style shares row

Against a backdrop of Chinese conglomerate Sanpower Group’s attempts to acquire the firm, the row centres on whether or not Sir Tom complied with pre-emption provisions contained in the articles of association of Highland Group Holdings Limited (HGHL), the holding company of House of Fraser.

These require that a shareholder must offer his/her shares first to the other shareholders in writing, stating the price and identity of the proposed third party purchaser, before he is permitted to sell his shares to the purchaser. 

House of Fraser’s argument is that if Sir Tom did not comply with the formal procedure (which it says he did not), he cannot sell to Ashley. The directors of HGHL must therefore refuse to register the purported sale to Ashley, the transfer of legal title to the shares cannot be completed and Sir Tom’s company remains the legal holder of the shares in question.

Pre-emption rights on transfers of shares are an extremely common means of contractually restricting transferability of shares in private limited companies and unlisted public companies and typically feature in articles of association as well as shareholders’ agreements. 

They are designed to enable the shareholders to control admission of new shareholders to the venture and to manage exits of shareholders who wish to leave the venture and realise value for their shares.

Although much can be done to avoid unwanted disagreements over transfers, companies and their directors may still find themselves in circumstances where a major shareholder attempts to circumvent the pre-emption rights or seeks to force through a transfer, despite the commercial and legal uncertainties this creates for the board.

Company directors and prospective buyers and sellers are advised to: 

• Remind themselves generally of their rights and obligations under articles of association and shareholders’ agreements;

• When contemplating transfers of shares, encourage early communication between affected parties regarding the applicability of pre-emption rights and other restrictions and the procedures to be followed, preferably before binding legal agreements are entered into; 

• Where appropriate, consider the viability and practicality of shareholders disapplying or waiving pre-emption provisions and whether informal waivers may be acceptable;

• If questions arise, seek independent legal advice at the earliest opportunity in order to avoid becoming entangled in potentially expensive and disruptive disagreements with shareholders and, in the case of directors, to ensure compliance with statutory duties regarding the exercise of directors’ powers and discretions; and

• Consider adopting new articles of association to include or clarify restrictions on transfers and pre-emptive rights – in the absence of clear restrictions, the shares will be freely transferable, which in many cases will not be desirable.

It is worth noting that the current form of Model Articles for private companies provides directors with a discretionary right to refuse to register any proposed transfer of shares, which they must exercise in good faith. 

Although older model articles of association under the Companies Act 1985, which are still in place for many companies, did not contain such a restriction, they were typically modified to do so. Accordingly, this is an issue that comes up often in the context of UK transactions, but it rarely gets to the stage where a public row ensues.

As full details of the proposed deal by Sanpower are yet to emerge, it is unclear whether the real point of contention is the value and structure of the deal, rather than any failure to comply with applicable pre-emption rights. Bringing public attention to the proposals and creating a ‘noise’ may well be a tactical move on the part of Sir Tom or Ashley to secure an improved offer for one or both or to generally disrupt the Sanpower offer.

Nick Jennings is an associate in the London corporate group at international law firm, Faegre Baker Daniels LLP.

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