Smith v Charles Building Services Ltd & Anor

A share transfer is ineffective where the signature is accompanied by words or conduct showing that completion is conditional upon further negotiations. A court deciding whether a transfer was completed must assess the parties’ evidence together with the surrounding probabilities and subsequent conduct. Where a shareholder signs but retains the transfer form pending an agreed outcome, and later destroys it when negotiations fail, execution is incomplete. Rectification of the share register may therefore be ordered. The court will not determine a different alleged equitable entitlement to shares on material that is insufficient for that issue or outside the formulation of the claim.

The claimant and the second defendant were brothers and the only original shareholders in the first defendant, a building company. The claimant contended that he was intended to hold one share and that a stock transfer form which he signed in 1997 was conditional, was retained by him, and was later torn up. The defendants contended that the claimant had never been intended to own the share and that the transfer had been completed before the form was destroyed.

The claimant sought rectification of the company’s share register. The central issues were whether he was entitled to the share and whether the 1997 transfer had taken effect.

1. Entitlement to the share. The claimant was intended to hold a share in the company. The company was established as a joint venture closely connected with an existing family company. The claimant participated in its formation, funding arrangements and accounting administration. The defendant’s case that the claimant had procured the share dishonestly was rejected.
2. Completion of the transfer. The claimant signed the stock transfer form during a meeting, but did not hand it over. He indicated that the transfer was to be discussed and retained it while negotiations about other financial matters continued. When those negotiations failed, he tore up the form. On the balance of probabilities, the signature was conditional and the execution was incomplete.
3. The court took account of the parties’ credibility, the commercial background, contemporaneous documents and subsequent conduct. The later dating and reconstruction of the form were unreliable and undermined the defendants’ account.
4. The court did not need to consider Pennington v Waine [2002] 1 WLR 2075, because the parties agreed that a signature accompanied by the relevant conditionality would not complete the transfer.
5. The transfer was not completed and ought not to have been registered. Orders would be made to rectify the share register and restore the claimant’s shareholding. Any separate question whether the claimant should have a lesser equitable interest would require determination in an appropriate form and, if necessary, after rectification.