Jones v BWE International Ltd.

Articles of association are commercial documents. They should receive a construction which gives them reasonable business efficacy, where the language permits, while preserving a shareholder’s proprietary right to transfer shares unless the articles fairly restrict it.

A pre-emption article requiring a transfer notice to specify the price may require a fixed and certain monetary sum when the notice is issued. Where the article contemplates simultaneous payment and transfer, a formula dependent on future events cannot constitute the specified price. A member may challenge a transfer made in breach of the articles whether or not that member could have purchased the shares.

BWE International Ltd held 87.5 per cent of BWE Ltd and wished to transfer 27.5 per cent to Sural CA. Phillip Jones held the remaining 12.5 per cent. Article 14 of BWE Ltd’s articles required a selling member to serve a transfer notice specifying the price, after which the shares were offered to existing members.

BWE International’s first notice stated an initial sum, an adjustment calculated at completion and a bonus dependent on sales during the following four years. Jones declined the offer and refused consent to the proposed third-party transfer. BWE International obtained declarations from a deputy High Court judge that the notice was valid and Jones’s refusal was unreasonable.

Jones appealed only against the construction of Article 14. The central issue was whether the notice specified a price within Article 14 when its final amount could not be fixed until future events had occurred.

1. Appeal allowed unanimously. Lady Justice Arden delivered the leading judgment. Lord Justice Thorpe and the President agreed. Article 14 required the price to be fixed and certain when the Offer Notice was given. The first Transfer Notice therefore failed to comply with the articles.

2. Articles of association are business documents and should be construed to give them reasonable business efficacy where the language permits. That approach requires close attention to the words used. Articles generally cannot be interpreted by reference to extrinsic evidence and cannot be rectified. The court applied Holmes v Keyes [1959] 1 Ch 199.

3. A share is property, and the shareholder’s ability to transfer it is one of the rights attached to that property. Articles should not be construed as cutting down that right unless this is their fair interpretation. In a private company, however, the selling shareholder’s interest must be balanced against the interests protected by agreed transfer restrictions.

4. Although a price may ordinarily contain deferred elements or be calculated under a formula, its meaning depends on context. Article 14 repeatedly required the transfer notice to specify the price and the Offer Notice to state it. Read as a whole, this language required the complete price to be a fixed and certain sum.

   Article 14 also contemplated simultaneous payment and transfer. Its default machinery required the company to receive the purchase money before completing a transfer for a defaulting transferor. A formula dependent on events over four years would either postpone completion indefinitely or permit transfer before full payment. It could also leave the validity of a third-party transfer uncertain for years, although a non-compliant transfer was void. Those consequences were commercially unworkable.

5. Under section 14 of the Companies Act 1985, the articles constituted a contract between the company and all its members. A member could therefore complain of a transfer made in breach of the articles without proving that the member could have paid the stated price.

The respondent was ordered to pay the costs of the appeal. Permission to appeal to the House of Lords was refused.

1. Court of Appeal (Civil Division): The appeal was allowed unanimously. The court held that the first Transfer Notice did not comply with Article 14 because it failed to specify a fixed and certain price. Permission to appeal to the House of Lords was refused.
2. High Court, Chancery Division: Mr Kevin Garnett QC, sitting as a deputy High Court judge, declared that the Transfer Notice was valid and that the refusal to consent to the proposed transfer was unreasonable. The Court of Appeal reversed the decision concerning the notice’s validity.