Ventura Capital GP Limited & Anor v DnaNudge Limited

When preferred shares are converted into ordinary shares, the court must consider the substance and effect of the transaction. If the conversion extinguishes the special rights attached to the preferred shares, it constitutes a variation or abrogation of those rights.

Articles of association must be read as a whole. A clear conversion power may be subject to an express class-rights protection where reading it literally would make the articles irrational and commercially incoherent. In such a rare case, the court may imply a limitation or use corrective construction if both the mistake and the correction are clear.

Section 633 of the Companies Act 2006 can apply to variations effected under a provision in the articles. However, relief requires both prejudice and unfairness.

The claimants were the holders of all the defendant company’s Series A preferred shares. Those shares carried preferential rights under the articles, including priority on distributions and exits. The claimants also had contractual rights under a shareholders’ agreement.

An Investor Majority, consisting principally of ordinary shareholders, served notice under article 9.2(a) requiring the preferred shares to convert into ordinary shares. The company amended its register accordingly, without obtaining the preferred shareholders’ consent under article 10.1.

The claimants sought declarations that the conversion was invalid and, alternatively, relief under sections 630 and 633 of the Companies Act 2006. The central issues were whether the conversion varied or abrogated class rights, whether article 9.2(a) was subject to article 10.1, and whether the conversion would unfairly prejudice the preferred shareholders.

1. Construction of the articles. Articles of association are construed by reference to their natural and ordinary meaning, the scheme and purpose of the articles, admissible public information and commercial common sense. Extrinsic evidence is narrower than in an ordinary commercial contract and is generally confined to matters apparent from the articles and Companies House filings.
2. Variation or abrogation. The conversion did not merely affect the enjoyment of rights or perform an agreed contractual power. In substance, it extinguished the special rights attached to the preferred shares. The fact that redundant rights might remain in the articles was immaterial. The transaction therefore amounted to a variation or, more accurately, an abrogation of class rights.
3. Interaction between articles 9.2(a) and 10.1. Article 9.2(a) was clear when read in isolation, but its literal operation would be incompatible with article 10.1, which protected special rights from variation or abrogation without the consent of more than 75 per cent of the class. This was a rare case in which a drafting mistake became apparent from the irrational result produced by reading the provisions together. The court implied a limitation, or alternatively adopted corrective construction, so that article 9.2(a) operated subject to the consent required by article 10.1.
4. Scope of rights. For the gateway questions under sections 630 and 633, the relevant rights were those attached to the class of shares under the articles. Contractual rights under the shareholders’ agreement, including the put option and board representation, were not themselves class rights. The preferential distribution and exit rights in articles 5.1 and 6 were sufficient.
5. Section 633. The court held, alternatively, that section 633 could apply where a variation was effected under a provision in the articles, not only under the statutory default procedure in section 630(2)(b). A claimant must establish both prejudice and unfairness. On the assumed hypothesis that the conversion was authorised by the articles, the claimants established prejudice but not unfair prejudice, because they would have been held to the bargain represented by article 9.2(a), and no improper purpose or bad faith had been alleged.
6. Disposition. The conversion of the preferred shares into ordinary shares was declared invalid, void and of no effect. Consideration of section 633 was unnecessary to the result and was undertaken only as an alternative.

First-instance decision. The judgment records that the defendant intended to seek permission to appeal, but no appeal decision is stated.