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New Diversity, Equity and Inclusion changes to the Actuaries’ Code and Guidance
Jenny Higgins
A decision of the Court of Appeal last year in the case of DnaNudge v Ventura Capital casts doubt on the application of articles which are commonly used by companies with outside investors.
It was held that the purported conversion of a class of preferred shares into ordinary shares was void under the company’s articles. In brief, investors in the company held Series A shares and all other shareholders held ordinary shares. The articles provided for the automatic conversion of the Series A shares into ordinary shares on notice given by the majority of the investors which, somewhat unusually, included for this purpose the ordinary shareholders as well as the Series A shareholders. The articles also provided that a variation or abrogation of share capital required the written consent of the holders of more than 75% in nominal value of the issued shares of the class being varied or abrogated.
For various reasons (but essentially, as ever, financial), the company purported to convert the Series A shares into ordinary shares. The Series A shareholders sought a declaration that this conversion was void because the consent of more than 75% of the Series A shareholders had not been sought. The judge’s view in the lower court was that any reasonable reader of the articles would assume that this conversion was a variation or abrogation of the special rights of the Series A shareholders which therefore required their consent. He illustrated why this was the case.For example, a reduction in the coupon payable in respect of the Series A shares would require class consent. It would therefore seem irrational if consent was not required for a total removal of that coupon on conversion into ordinary shares.
This view was confirmed by the Court of Appeal even though on a literal interpretation there had arguably been no variation or abrogation of the Series A share rights. There had been a variation of the rights of the holders of the Series A shares following the conversion, because they held ordinary shares instead of the Series A shares, but the rights of the Series A shares themselves had not been varied or abrogated.
Conclusion
Whilst the facts of the case are perhaps slightly unusual, the upshot is that all articles which include automatic conversion rights, including those based on the BVCA templates, should be reviewed as a precautionary matter. As there is no mechanism in legislation for converting shares from one class to another, the provisions of the articles prevail and must set out the conversion mechanism. On the basis of this case and perhaps against the previously prevailing view, it would be prudent for the articles to state explicitly if that conversion is to take place without class consent, which may require a change to existing articles.
further information
If you would like to discuss anything raised in this note, please email jyoung@kingsleynapley.co.uk.
about the author
John Young is a partner in the Corporate, Commercial, and Finance team, specialising in the business needs of entrepreneurial, high-growth, and family businesses. He advises them throughout their lifecycle, from start-up through to listing and beyond.
He specialises in M&A and fundraisings, with a particular focus on M&A transactions in the £5m-100m enterprise value range and private and capital markets fundraises between £500,000 and £20m, often with a cross-border element.
We welcome views and opinions about the issues raised in this blog. Should you require specific advice in relation to personal circumstances, please use the form on the contact page.
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