DnaNudge Ltd v Ventura Capital Ltd

The Court of Appeal dismissed the appellant's challenge to HHJ Hodge KC's decision that the purported conversion of all Series A Preferred Shares into Ordinary Shares was void because the conversion notice had not been accompanied by the written consent of more than 75% in nominal value of the Series A class as required by Article 10.1 of the Articles. The court held that Article 9.2(a) (the Investor Majority conversion mechanism) must be read subject to the class‑rights protection in Article 10.1, either by corrective construction or by implication of a term, because a literal construction would produce incoherent and commercially irrational results. The court accepted the Judge's overall approach to interpretation (iterative assessment of text, scheme and limited admissible background) but corrected his reliance on the share premium as evidence that the premium was paid specifically for the Series A rights. The alternative unfair‑prejudice remedy under section 633 Companies Act 2006 was considered but not determinative because the court dismissed the appeal on the primary construction point.

The appellant company (DnaNudge) appealed from HHJ Hodge KC's decision ([2023] EWHC 437 (Ch)) that a conversion notice purporting to convert all Series A Preferred Shares into Ordinary Shares was void for want of the written consent of more than 75% in nominal value of the Series A Shares, as required by Article 10.1 of the company's Articles of Association.

Background:

• The company adopted new Articles on 21 January 2021 and issued Series A Shares to investors (Ventura and SMTB). The Articles contained conversion provisions (Article 9) and a class‑rights protection provision (Article 10.1).
• In May–June 2022 an Investor Majority of Ordinary Shareholders served a conversion notice under Article 9.2(a). The company treated the Series A Shares as converted and amended its register. Ventura challenged that step, seeking declarations that the conversion was void, relief under section 633 Companies Act 2006 and rectification of the register.

Issues framed:

• Whether conversion under Article 9.2(a) was effective without the written consent of holders of more than 75% of the Series A Shares as required by Article 10.1, i.e. whether conversion amounted to a "variation or abrogation" of class rights.
• Whether, alternatively, the court should order relief under section 633 because any variation/abrogation was unfairly prejudicial.

Court's reasoning:

• The Court of Appeal applied the established iterative approach to interpretation: natural meaning, scheme and purpose of the Articles, and the limited background reasonably available to a reader of the public filings. The court emphasised that admissible background is limited for constitutions filed at Companies House.
• The court found that a literal reading of Article 9.2(a) would permit an Investor Majority composed solely of Ordinary Shareholders to extinguish the specially negotiated distribution rights of the Series A class at a time when those rights were most valuable, producing incoherent and commercially irrational results when read with Articles 5, 6 and 10.1.
• Because the natural reading produced an irrational scheme, the court either by corrective construction or implication read Article 9.2(a) as subject to the consent required by Article 10.1. The court therefore concluded the conversion without the requisite class consent was void.
• The court disagreed with the Judge’s passing suggestion that the share premium demonstrated payment specifically for the special rights attached to the Series A Shares, but held that this did not alter the constructional outcome.
• On the alternative section 633 point, the court noted this was not determinative of the appeal and that Ventura chose not to pursue the Respondent's Notice; the court expressed no definitive view on the broader question whether section 633 applies where variation is effected pursuant to articles rather than under section 630.

Appeal dismissed. The Court of Appeal agreed with the judge that the conversion under Article 9.2(a) must be read subject to the class‑rights protection in Article 10.1 (either by corrective construction or implication), so the purported conversion without the written consent of holders of more than 75% in nominal value of the Series A Shares was void; the court corrected the judge's subsidiary finding about the share premium but held that the correction did not alter the outcome.

Appeal from the Companies Court (ChD), High Court of Justice: HHJ Hodge KC, [2023] EWHC 437 (Ch); appeal heard in the Court of Appeal (Civil Division) and decided as [2023] EWCA Civ 1142 on 9 October 2023.