DnaNudge Limited v Ventura Capital GP Limited

Articles of association are interpreted from their natural and ordinary language, their scheme and purpose, publicly ascertainable facts about the company, and commercial common sense. Rival meanings must be tested iteratively against the document as a whole.

Where the apparent meaning produces an incoherent and irrational scheme, the court may correct a clear drafting mistake if both the mistake and its cure are clear. Alternatively, it may imply a clear and obvious term necessary for commercial and practical coherence.

A power enabling one class of shareholders to convert another class’s shares did not permit the extinction of protected preferential rights without the required class consent. “Automatic” conversion meant that no further authority was needed after all applicable conditions had been satisfied.

The company issued Series A preferred shares carrying priority distribution rights. Its articles permitted conversion of all such shares into ordinary shares following written notice from an “Investor Majority”. Because ordinary shareholders held about 87% of the issued shares, they could constitute that majority without the preferred shareholders.

Ordinary shareholders served a conversion notice. Ventura challenged the conversion because the written consent required by the class-rights protection in article 10.1 had not been obtained. HHJ Hodge KC held in [2023] EWHC 437 (Ch) that the conversion was void.

The company appealed. The central issue was whether article 9.2(a) permitted automatic conversion without compliance with article 10.1, or whether corrective construction or an implied term made class consent a precondition.

1. Appeal dismissed. Article 9.2(a) had to be read as subject to article 10.1, or a term had to be implied to that effect. Written consent from holders of more than 75% in nominal value of the Series A shares was therefore a precondition to conversion initiated by an Investor Majority.

2. The word “automatic” did not exclude conditions imposed elsewhere in the articles. It meant that, once the applicable conditions were satisfied and the conversion date arrived, no further authority was required. Article 9.4 itself made one form of “automatic” conversion conditional upon a qualifying initial public offering.

3. Interpreting article 9.2(a) as an unrestricted power would make the articles incoherent and commercially irrational. Ordinary shareholders could extinguish the preferred shareholders’ carefully defined priority rights immediately after issue or precisely when those rights were intended to confer a benefit. It would also be irrational to require class consent for a minor reduction of those rights while permitting their complete extinction without consent.

4. The iterative process of interpretation showed that something had gone wrong in the drafting. The omission of a requirement to comply with article 10.1 was clear, as was the necessary correction. The same provision could alternatively be implied because it was clear, obvious and necessary to give the articles commercial and practical coherence.

5. The conversion involved continuation and redesignation of the existing shares, rather than cancellation followed by a fresh issue. The preferential rights simply ceased to attach. That was an abrogation of class rights. Re Saltdean Estate Co Ltd [1968] 1 WLR 1844 and House of Fraser plc v ACGE Investments Ltd [1987] AC 387 were distinguishable. In those cases the preference shareholders’ priority rights were performed by repayment according to their agreed priority.

6. The respondent withdrew its notice concerning section 633 of the Companies Act 2006. The court expressed no view on whether that section applied. On the assumed basis that it did, fairness had to be determined judicially. In an arm’s-length commercial association, simply enforcing the agreed articles would not ordinarily be unfair without a breach or circumstances engaging equitable considerations.

1. Court of Appeal (Civil Division): The company’s appeal was dismissed unanimously in [2023] EWCA Civ 1142. The requirement for class consent was upheld.
2. High Court, Companies Court: HHJ Hodge KC held in [2023] EWHC 437 (Ch) that the conversion was void because the consent required by article 10.1 had not been obtained. He would not, on his alternative hypothesis, have granted relief under section 633 of the Companies Act 2006.