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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Dnanudge Ltd v Ventura Capital GP Ltd [2023] EWCA Civ 1142 (09 October 2023) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2023/1142.html Cite as: [2023] EWCA Civ 1142 |
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ON APPEAL FROM THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
COMPANIES COURT (ChD)
HIS HONOUR JUDGE HODGE KC (Sitting as a Judge of the High Court)
Strand, London, WC2A 2LL |
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B e f o r e :
LORD JUSTICE ARNOLD
and
LORD JUSTICE SNOWDEN
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| DnaNudge Limited |
Appellant/Defendant |
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- and – |
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| Ventura Capital GP Limited (acting for and on behalf of Ventura Capital LP Fund IV and Ventura Capital MG1 LP Fund) |
Respondent/Claimant |
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Timothy Collingwood KC (instructed by Fladgate LLP) for the Respondent
Hearing date : 26 July 2023
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Crown Copyright ©
Lord Justice Snowden :
Background
"On a distribution of assets on a liquidation or a return of capital (other than a conversion, redemption, a reduction of capital or purchase of Shares) the surplus assets of the Company remaining after payment of its liabilities shall be applied (to the extent that the Company is lawfully permitted to do so):
(a) first, in paying to each of the holders of the Series A Shares, in priority to the holders of the Ordinary Shares, an amount per Series A Share held equal to the Preference Amount (provided that if there are insufficient surplus assets to pay the amounts per share equal to the Preference Amount in full, the remaining surplus assets shall be distributed to the holders of Series A Shares pro rata to their respective entitlements under this Article 5.1(b)) [sic];
(b) thereafter, the balance of the surplus assets (if any) shall be distributed among the holders of the Ordinary Shares pro rata to their respective holdings of Ordinary Shares."
It is clear that the reference in Article 5.1(a) to Article 5.1(b) is a typographical error and ought to be a reference to Article 5.1(a) itself.
"an amount per Series A Share equal to the amount paid up or credited as paid up (including premium) for such share together with the Series A Preferred Return (if applicable) as well a sum equal to any Arrears less any amounts or proceeds previously received on such Series A Share (including any dividend(s))."
"a per Series A Share amount equal to the amount paid up or credited as paid up (including premium) for such share plus a cumulative 8.0% preferred return compounding annually until and upon liquidation or return of capital, which Series A Preferred Return shall apply and accrue until such time as the Company raises additional equity capital funding of at least £10 million at a pre-money valuation of the Company of at least £900 million, upon which the Series A Preferred Return shall cancel and no longer apply or accrue to the Series A Shares or be payable."
"9. CONVERSION OF SERIES A SHARES
9.1 Any holder of Series A Shares shall be entitled, by notice in writing to the Company, to require conversion into Ordinary Shares of all of the Series A Shares held by such holder at any time and those Series A Shares shall convert automatically on the date of such notice (the "Conversion Date").
9.2 All Series A Shares shall automatically convert into Ordinary Shares:
(a) upon notice in writing from an Investor Majority at the date of such notice (the "Conversion Date"); or
(b) immediately upon the occurrence of a Qualifying IPO.
9.3 In the case of: (i) Articles 9.1 or 9.2(a), not more than ten Business Days after the Conversion Date; or (ii) in the case of Article 9.2(b), at least five Business Days prior to the occurrence of the Qualifying IPO, each holder of the relevant Series A Shares shall deliver the certificate(s) (or an indemnity for lost certificate(s) in a form acceptable to the Board) in respect of the Series A Shares being converted to the Company at its registered office for the time being.
9.4 Where conversion is mandatory on the occurrence of a Qualifying IPO, that conversion will be effective only immediately prior to and conditional upon such Qualifying IPO (and "Conversion Date" shall be construed accordingly) and, if such Qualifying IPO does not become effective or does not take place, such conversion shall be deemed not to have occurred. In the event of a conversion under Article 9.1, if the Conditions have not been satisfied or waived by the relevant holder by the Conversion Date, such conversion shall be deemed not to have occurred.
9.5 On the Conversion Date, the relevant Series A Shares shall without further authority than is contained in these Articles stand converted into Ordinary Shares on the basis of one Ordinary Share for each Series A Share held (the "Conversion Ratio"), and the Ordinary Shares resulting from that conversion shall in all other respects rank pari passu with the existing issued Ordinary Shares.
9.6 The Company shall on the Conversion Date enter the holder of the converted Series A Shares on the register of members of the Company as the holder of the appropriate number of Ordinary Shares and, subject to the relevant holder delivering its certificate(s) (or an indemnity for lost certificate in a form acceptable to the Board) in respect of the Series A Shares in accordance with this Article, the Company shall, within ten Business Days of the Conversion Date, forward to such holder of Series A Shares by post to his address shown in the register of members, free of charge, a definitive certificate for the appropriate number of fully paid Ordinary Shares."
"10. VARIATION OF RIGHTS
10.1 Whenever the share capital of the Company is divided into different classes of shares, the special rights attached to any such class may only be varied or abrogated (either whilst the Company is a going concern or during or in contemplation of a winding-up) with the consent in writing of the holders of more than 75 per cent in nominal value of the issued shares of that class.
10.2 The creation of a new class of shares with preferential rights to one or more existing classes of shares shall not constitute a variation of the rights of those existing classes of shares."
"In the event that the Company was obliged to repurchase Series A Shares pursuant to an exercise of the Put Option, its business, financial condition, results of operations and prospects may be materially adversely affected."
The circular went on to state, however, that,
"… an Investor Majority might seek to nullify the Put Option by converting the Series A Shares into Ordinary Shares (pursuant to Article 9.2), ahead of any exercise of the Put Option",
The circular noted that such action would be likely to be challenged by Ventura.
The Claim
The Judgment
"… had paid a substantial premium for the special rights attached to those shares, in preference to the inferior rights enjoyed by the numerically far greater number of [Ordinary Shares] in the Company."
"108. …. In my judgment, no reasonable person reading the Company's Articles, with knowledge of the substantial premium paid for such rights, would regard Article 9.2(a) as being capable of enabling a qualifying majority of Ordinary Shareholders to abrogate the special rights enjoyed by Ventura and SMTB, as the holders of the Series A Shares in the Company. Had an officious bystander been asked whether the Series A Shareholders could lose the rights attached to their shares, without their consent, by the simple device of the Ordinary Shareholders converting the Series A Shares to Ordinary Shares, in my judgment the answer would be an unqualified and resounding negative.
109. In my judgment, the only way to give business efficacy, and integrity, to the Articles as a whole is to construe Article 9.2 (a) as being subject to the comprehensive protection of special class rights contained in Article 10.1, which must also be complied with in order to effect any abrogation of the special rights attached to the Series A Shares. That is the manner in which reasonable business efficacy is to be given to the interrelation between the two provisions. I would therefore insert, by way of implied limitation, at the end of Article 9.2(a), the words "…subject always to having first obtained the consent required under Article 10.1." …
110. … I am satisfied that this is one of those rare cases where there has been a drafting error. In my judgment, there is a clear mistake on the face of Article 9.2 (a) in failing expressly to provide that it is subject to the consent required by Article 10.1; and it is also clear, from Article 10.1, and the limited admissible extraneous evidence, what correction ought to be made in order to cure that mistake.
111. Considering the relationship between the two Articles, the inconsistency between them, and the absurdity of treating Article 9.2 (a) as a stand-alone provision, unaffected by Article 10.1, I accept Mr. Collingwood's submission that something has clearly gone wrong with the drafting because the two Articles do not work together. The results for which Mr. Thornton contends cannot be reconciled with the Articles as a whole; and the problem is clear: the conflict between Article 9.2 (a) and Article 10.1, and the absurdity of the situation whereby the special rights of the Series A Shareholders can be lost at the whim of an Investor Majority simply by the service of a conversion notice from those with an interest in inflicting such loss. It is plain that that is not what was contemplated by the parties. So the problem is clear; and once the problem has been clearly identified, the solution to it is equally clear: Article 9.2 (a) is to be read as subject to Article 10.1, which takes precedence. That is the clear solution, and is clearly what any reasonable person at the time the new articles were adopted would have understood the Shareholders and the Company to have intended."
"139. Read literally and in isolation, the wording of Article 9.2 (a) is clear and unambiguous: the Series A Shares automatically convert into Ordinary Shares upon notice in writing from an "Investor Majority". This is not a case where a provision in a contract is unclear because a word has two different meanings. Nor is this a case where the language of the articles, either read on their own, or, at any rate, when read in context, could be seen to give rise to possible rival interpretations. Rather it is a case where, in my judgment, some limitation must be placed upon the apparent width of Article 9.2 (a) because, without such an implied limitation, it makes no sense, when read in conjunction with Article 10.1, construed against the admissible background material.
140. For the reasons I have given, I am satisfied that the conversion of the Series A Shares into Ordinary Shares constitutes either a "variation" or an "abrogation" of the special rights attached to those shares. I do not consider that it is necessary, or helpful, to seek to differentiate between the two terms because both attract the protection afforded by Article 10.1; although, if required to do so, I would hold that the special rights were "abrogated" rather than "varied" because the conversion of the Series A Shares involved the extinction of the special rights attached to those shares. If I am wrong, however, those rights were "varied" so as to conform to the different rights attaching to the Ordinary Shares in the Company.
141. On that basis, there is a clear tension between Articles 9.2(a) and 10.1 so it becomes apparent, on examination, that the drafter cannot have meant Article 9.2(a) to be read literally as it makes no rational sense, when construed in light of the protection afforded to the special rights of the Series A Shareholders by Article 10.1. I am satisfied that there is a clear mistake in the drafting of the earlier Article (9.2 (a)), and that the solution to that mistake is clear: Article 9.2(a) must be read subject to the consent required in accordance with Article 10.1. In my judgment it matters little what route one takes to arrive at this result: whether by a process of corrective construction, or by the implication of a term (or, more precisely, by implying a limitation upon the apparently unlimited width of the power conferred by Article 9.2(a)). In my judgment, the requirements for both interpretative techniques are satisfied. My judgment is founded upon an application of both of them, in the alternative…
142. I also agree with Mr. Collingwood that the court's finding that there is a variation, or abrogation, of the special rights attached to the preferred shares involves no inconsistency with the conclusion reached by Buckley J in Re Saltdean Estate Co Ltd [1968] 1 WLR 1844, as later approved and applied by the House of Lords in House of Fraser plc v ACGE Investments Ltd [1987] AC 387 and later applied by Patten J in Re Hunting plc [2004] EWHC 2591 (Ch). The further three authorities belatedly cited and relied upon by Mr Thornton concerned the proposed reduction of the company's capital by means of the cancellation of the preferred shares in fulfilment of their priority on a return of capital. At the end of the process, the Series A Shareholders no longer held any shares in the Company. The present case does not concern any repayment of capital at the rate the shareholders concerned had bargained for. Here (as addressed in my draft judgment) the Company did not give effect to the Series A Shareholders' special rights; rather, it purported to take them away. It involved the loss of the Series A Shareholders' special rights…."
(emphasis in the original)
The Appeal
Relevant principles of interpretation and implication of terms
"Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract."
"… has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the lease, (iii) the overall purpose of the clause and the lease, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party's intentions."
"98. … The natural, indeed, I would have thought, the inevitable, point of departure is the language of the provision itself. However, where the interpretation of a word or phrase is in dispute, the resolution of that dispute will normally involve something of an iterative process, namely checking each of the rival meanings against the other provisions of the document and investigating its commercial consequences.
99. Most words, and a fortiori, most phrases, can have more than one meaning, or at least different shades of meaning. This is certainly true, for instance, of the word "possible", which can, for instance, mean physically achievable or legally permissible, to give two relevant examples. However, to consider what words could mean in abstract is not normally a helpful exercise. What one has to do, when assessing each rival interpretation, is to ask whether the words at issue are capable of having the meaning contended for, but even that question cannot be judged free of the documentary and commercial context. The more a particular interpretation, which accords well with the words in question judged on their own, produces a commercially improbable result and is hard to reconcile with other provisions in the document, the more ready the court will be to give the words another, perhaps linguistically more strained, interpretation, if that other interpretation complies with the other provisions and commercial reality."
"Lord Neuberger was right to observe that the resolution of an issue of interpretation in a case like the present is an iterative process, involving "checking each of the rival meanings against other provisions of the document and investigating its commercial consequences.""
That dictum was also expressly endorsed by Lord Hodge in his judgment in Arnold at [77] and reiterated by him with the approval of the other members of the Supreme Court (including Lord Neuberger) in Wood v Capita Insurance [2017] AC 1173 ("Wood") at [12].
"…the court's duty, when confronted with two provisions in a contract that seem to be inconsistent with each other, is plain. It must do its best to reconcile them if that can conscientiously and fairly be done."
"The result is that the process of interpretation to arrive at the true meaning of a provision in a company's articles of association must concentrate on the natural and ordinary meaning of the words used, when viewed in light of the scheme and purpose of the articles in general, any extrinsic facts about the company or its membership that would reasonably be ascertainable by any reader of the company's constitution and public filings at Companies House, and commercial common sense."
Analysis
The share premium
"Automatic" conversion
"Where conversion is mandatory on the occurrence of a Qualifying IPO, that conversion will be effective only immediately prior to and conditional upon such Qualifying IPO (and "Conversion Date" shall be construed accordingly) and, if such Qualifying IPO does not become effective or does not take place, such conversion shall be deemed not to have occurred."
That provision appears to attach a specific condition to what Article 9.2 describes as an "automatic" conversion.
Coherence and rationality
Resolution of the problem
"First, it is said that the proposed cancellation of the preferred shares will constitute an abrogation of all the rights attached to those shares which cannot validly be effected without an extraordinary resolution of a class meeting of preferred shareholders under article 8 of the company's articles. In my judgment, that article has no application to a cancellation of shares on a reduction of capital which is in accord with the rights attached to the shares of the company. Unless this reduction can be shown to be unfair to the preferred shareholders on other grounds, it is in accordance with the right and liability to prior repayment of capital attached to their shares. The liability to prior repayment on a reduction of capital, corresponding to their right to prior return of capital in a winding up, is a liability of a kind of which Lord Greene M.R., in [Re Chatterley-Whitfield Collieries Limited [1948] 2 All ER 593 at 596], said that anyone has only himself to blame if he does not know it. It is part of the bargain between the shareholders and forms an integral part of the definition or delimitation of the bundle of rights which make up a preferred share. Giving effect to it does not involve the variation or abrogation of any right attached to such a share."
"It is a clearly recognised principle that the court, in confirming a reduction by the payment off of capital surplus to a company's needs, will allow, or rather require, that the reduction shall be effected in the first instance by payment off of capital which is entitled to priority in a winding-up. Apart from special cases where by agreement between classes the incidence of reduction is arranged in a different manner, this is and has for years been the normal and recognised practice of the courts, accepted by the courts and by business men as the fair and equitable method of carrying out a reduction by payment off of surplus capital. I know of no case where this method has, apart from agreement, been departed from. Every person who acquires shares in a company has only himself to blame if he does not know this, and I have no doubt that it is well recognised by business men."
"I consider this to be an entirely correct statement of the law. Buckley J. does not address his mind to any special meaning which might fall to be attributed to the words "affect, modify, deal with" in juxtaposition with the word "abrogate". There was no need for him to do so. The proposed reduction of capital involved an extinction of the preferred shares in strict accordance with the contract embodied in the articles of association, to which the holders of the preferred shares were party. One of the rights attached to these shares was the right to a return of capital in priority to other shareholders where any capital was appropriately to be returned as being in excess of the company's needs. That right was not being affected, modified, dealt with or abrogated, but was being given effect to."
Disposal
The Respondent's Notice
Lord Justice Arnold:
Lord Justice Bean