Growth Management Ltd. & Anor v Mutafchiev & Anor

A shareholders’ agreement may restrict majority shareholders from converting a private company into a public company and procuring a listing where that step fundamentally alters the balance of shareholder rights. The expression “reorganisation of its corporate structure” can extend beyond changes to the company’s organs or share capital. It may include a change in corporate status which makes shares freely transferable and defeats contractual restrictions on transfers.

An exception for a reorganisation undertaken to achieve a listing does not authorise unilateral action where the agreement contemplates a listing initiated by the minority investors and requiring consultation and agreement. A contractual power to terminate on listing cannot be used to evade the protections which the agreement confers before termination.

The claimants were minority shareholders in First Investment Bank AD and the defendants were its majority shareholders. A shareholders’ agreement regulated the parties’ rights and imposed negative covenants protecting the claimants’ investment.

The defendants proposed resolutions which would convert the bank from a private to a public company, amend its constitutional documents and enable its shares to be listed on the Sofia Stock Exchange. The claimants contended that those steps required their consent under sections 3.02(d) and 3.02(i) of the agreement. The defendants argued that the agreement permitted them to effect a listing and that listing would terminate the agreement.

The central issue was whether the proposed conversion and listing constituted a prohibited reorganisation or materially adversely affected the claimants’ shares or investment.

1. Construction. The shareholders’ agreement had to be construed as a whole, giving its language its natural and ordinary meaning in its commercial and factual context. The agreement was intended to protect the claimants as minority shareholders against majority rule. The commercial consequences of the competing constructions were relevant to that interpretation (paras [33]-[43]).
2. Section 3.06. Section 3.06 gave the claimants an option, exercisable on or after 31 March 2007, to advise that a listing was in the company’s best interests. It contemplated full cooperation and consultation concerning an appropriate listing. It did not give the defendants an unrestricted right to choose and impose a listing before that date (paras [44]-[50]).
3. Section 3.02(d). The conversion of the bank into a public company and the associated listing would make its shares freely transferable. That would fundamentally alter the carefully negotiated balance of rights concerning the retention and transfer of shares and could enable the defendants to bring about termination under section 7.10. Those changes therefore constituted a reorganisation of the company’s corporate structure. The parenthetical exception for a reorganisation undertaken to achieve a listing pursuant to section 3.06 applied only to the listing contemplated by that provision, not to unilateral action by the defendants (paras [51]-[64]).
4. Section 3.02(i). The proposed amendments to the bye-laws would materially adversely affect the claimants’ shares and investment because they would remove or undermine valuable contractual protections, including restrictions on transfers and the continuing minority protections under the agreement (paras [65]-[67]).
5. Disposition. The defendants and FIB were prohibited from converting FIB into a public company and procuring the listing of its shares without the claimants’ consent. The claimants were entitled to an injunction. The court indicated that costs should ordinarily follow the event (paras [68]-[70]).

The claim was expedited for trial after an interlocutory injunction had been granted. The High Court determined the construction issues at first instance and held that the claimants were entitled to injunctive relief.