Hikari Miso (UK) Limited v David Knibbs & Ors

This judgment determines the construction of a detailed Subscription and Shareholders' Agreement (the SSA) and whether any breaches by the parties triggered compulsory buy-out rights. The court held that Schedule 3 Reserved Matters and Clause 6 give shareholders holding the specified percentages (75% or 70% depending on the matter) the power effectively to veto those matters, and that shareholder consent may be "deemed" in specified ways under Clause 6.2 (notably by the shareholder's nominated director approving the matter at a Board meeting (Clause 6.2(a)) or where an action is "specifically provided for in the Business Plan" (Clause 6.2(d))).

The court held that a shareholder may exercise a veto in its own interests and that the SSA and company law do not impose a general duty on shareholders to vote only for the company's best interests when exercising those veto rights. Directors must, however, act within the scope of their powers and in good faith for the company: if a matter is outside the company's permitted scope because of a shareholder veto, a director is not in breach for refusing to pursue it; conversely, shareholder consent to a Business Plan does not direct directors to implement every item regardless of directors' statutory and fiduciary duties.

Applying these principles the court declared (inter alia) that: the Five Matters proposed in 2020 were validly vetoed by HMUK; HMUK was entitled to act self-interestedly and was not shown to be in material breach in refusing certain dividends or in relation to external financing; the hiring of two roles was validly approved as Reserved Matters (one alleged hire, Mr Eastwood, involved a technical but not material breach); capital expenditure aggregation did not require treating many smaller items as a single >£100,000 Reserved Matter; hire-purchase and financing arrangements necessary to implement a Business Plan approved by shareholders are covered by that approval; and no Buy-Out Event was triggered. The court also found insufficient evidence of any deliberate "Strategy of Disruption."

The claim concerned interpretation of the SSA dated 10 October 2016 under which HMUK took a 32.8% shareholding in R&R Tofu Ltd and a range of matters were reserved to shareholder approval (Schedule 3). The Claimant sought declarations about the operation of Clauses 6 and related provisions and whether either HMUK or the First Defendant had breached the SSA so as to trigger compulsory buy-out provisions.

Background and parties: HMUK (the Claimant) invested in the Company and became an investor with specific reserved powers; D1 and D2 (Knibbs and L. Smith) and a cohort of B shareholders held the remainder. The Board comprised executive and non-executive directors including HMUK's nominee director (Mr Hayashi). Disputes arose from 2020 about whether shareholder vetoes under the SSA could lawfully be exercised in the shareholders' own interests and about the obligations of nominee directors.

Nature of the claim/application: Parties sought declaratory relief on contractual construction, operation of Clause 6 and Schedule 3 (Reserved Matters), the effect of deemed consent mechanisms in Clause 6.2 (including the effect of Business Plan approval under Clause 6.2(d)), the duties of shareholders and of nominee directors (particularly Clauses 6.4 and 6.5), whether particular actions (dividends, external financing, appointments of solicitors, hires, capital expenditure and hire-purchase agreements) required shareholder consent, and whether there had been breaches amounting to a Buy-Out Event. The Defendants additionally alleged a "Strategy of Disruption" by HMUK and its nominee.

Issues framed and court reasoning:

• The court applied orthodox contractual interpretation (Wood, Arnold, Sara & Hossein principles) and emphasised the SSA's detailed, professionally negotiated text as the starting point.
• On construction, the court held that (i) Schedule 3 Part C and D created matters the Company could not undertake without the stated shareholder consents; (ii) Clause 6.2 provides alternative, "deeming" routes to written consent, most importantly Clause 6.2(a) (nominee director approval at a Board meeting) and Clause 6.2(d) (actions "specifically provided for in the Business Plan"); and (iii) shareholders holding the requisite percentages can exercise vetoes in their own interests (the court followed and relied on Wilkinson v West Coast Capital on this point).
• As to the interface between shareholder veto and directors' duties, the court held that where shareholders have lawfully vetoed a Reserved Matter the directors are bound not to pursue it and are not in breach by so refraining; conversely, where shareholders have consented (including by Business Plan approval) directors must still decide, under their fiduciary/statutory duties, whether to implement particular steps.
• The court construed Clause 6.2(d) to mean that a matter is "specifically provided for in the Business Plan" if the shareholders, when approving the Business Plan, are on clear notice that they are agreeing to extend the company's liability or to authorise particular items to the stated financial level; general items in the Plan can be sufficient for deemed consent where the Plan gave sufficient notice of the nature and financial envelope of the proposed action.
• Applying the construction to the facts, the court found: dividend proposals at issue were not Reserved Matters and HMUK's refusal did not amount to a material breach (shareholders and directors could have implemented distributions by ordinary resolution and board recommendation); no material breach in relation to external funding was proved; the instruction of company lawyers in the circumstances was within the ordinary course of business; capital expenditure should be assessed by the ordinary meaning of the clause (individual items over £100,000 are Reserved Matters; linked aggregation over time is not automatically mandated); hire-purchase entered to implement a Business Plan approved by shareholders is covered by that Plan; the appointments of two senior roles were properly approved (one hire involved only a technical non-material breach); and no Buy-Out Event occurred.
• The court rejected the assertion that HMUK and its adviser(s) had implemented a proven "Strategy of Disruption": the evidence did not show the required deliberate abusive scheme and, in any event, the lawful exercise of contractually granted veto rights is not per se an abuse.

Procedural posture: First instance determination with the court making detailed declaratory answers to the issues in the parties' Joint Statement of Issues and directing the parties to address a draft order in light of the Judgment.

The court made declaratory findings resolving the parties' disputes under the SSA. It held that shareholders holding the required percentages can veto Reserved Matters and may act in their own interests; Clause 6.2 supplies alternative means by which shareholder consent may be deemed (notably approval by a shareholder's nominated director at a Board meeting and actions specifically provided for in the Business Plan); directors must act within the company's permitted scope and in accordance with fiduciary duties; on the facts HMUK and its nominee director were not shown to be in material breach and no Buy-Out Event was triggered; there was insufficient evidence of any "Strategy of Disruption." The court therefore determined the issues in the parties' Joint Statement by way of declarations in the terms set out in the judgment.