Cottrell v King & Anor

Where company articles require pre-emption before a share transfer, a notice by a person entitled to shares on a member’s death may be treated as a transfer notice. Compliance with the machinery converts the other member’s pre-emption right into an option to buy at the fair value certified under the articles. Registration gives legal title to the transferee, but a non-purchaser for value takes subject to the option-holder’s equitable interest. Section 35A of the Companies Act 1985 does not determine whether the transferee is bound by that equitable interest. Waiver is a question of fact. Where actual knowledge is required, constructive knowledge is insufficient.

The claimant, Josephine Cottrell, was registered as holder of shares formerly owned by her deceased husband in T A King (Services) Limited. The transfer was implemented without operating the company’s article 12 pre-emption machinery. The first defendant, Graham King, the other shareholder, later asserted that the shares should have been offered to him and counterclaimed for rectification of the register.

The issues were whether the articles applied, whether Mr King’s equitable pre-emption interest bound Mrs Cottrell, whether section 35A of the Companies Act 1985 protected her, and whether Mr King had waived his right.

1. Pre-emption machinery. Regulation 30 of Table A applied when Mrs Cottrell elected to become holder of the shares. Her notice was treated as a transfer notice for article 12 purposes.
2. Equitable interest. The notice converted Mr King’s pre-emption right into an option to purchase at a fair price certified by the auditors. Registration vested legal title in Mrs Cottrell, but, as she was not a purchaser for value, she took subject to Mr King’s equitable interest. Rectification of the register was ordered.
3. Section 35A. Section 35A protected persons dealing with the company in good faith against limitations on the board’s power to bind the company. It did not determine whether Mrs Cottrell was bound by Mr King’s equitable interest as shareholder.
4. Waiver. Pre-emption rights may be waived, but waiver is a question of fact. Actual knowledge of the pre-emption provisions was required; constructive knowledge was insufficient. The waiver allegation failed.
5. An order was made for rectification of the register.