In April we reported on the High Court decision in Ventura Capital GP Limited v DNA Nudge Limited [2023] EWHC 437 (Ch). DnaNudge Limited ("DNA") subsequently appealed that decision and this article examines that appeal.
1. Facts
The facts of the case are set out in our earlier article. In summary, holders of 'Series A Preferred Shares' ("Series A Shares") in DNA claimed that the automatic conversion of their shares into 'Ordinary Shares' pursuant to article 9.2(a) of DNA's articles (which provided for automatic conversion "upon notice in writing from an Investor Majority") was invalid as DNA failed to get their consent as required under article 10.1 (which dealt with the variation of class rights). The High Court found in favour of the affected shareholders and granted a declaration that the conversion was void and of no effect.
In its appeal DNA argued, among other things, that:
- the wording of article 9.2(a) was clear and unambiguous and should have been given effect to, In particular, the decision of the judge made conversion subject to a condition and that "deprived the word "automatic" of any meaning"; and
- (contrary to the findings of the judge) there was no tension between articles 9.2(a) and 10.1 as the Series A Shares were always subject to the automatic conversion right and the conversion merely amounted to the performance of that right.
2. Decision
While it criticised some elements of the High Court's decision, the Court of Appeal upheld the judgment and dismissed the appeal. In the Court of Appeal's view:
- the drafting of the other provisions of article 9 showed that the word 'automatic' was not intended to exclude the possibility that other conditions may apply;
- the judge was entitled to investigate whether the different meanings of article 9.2(a) contended by the parties were consistent with other provisions of the articles and to consider whether they "produced a coherent and commercially sensible scheme for the Articles as a whole". DNA's interpretation of article 9.2(a) would lead to an "incoherent scheme and irrational results" in particular it would give the Investor Majority an unrestricted right to deprive the Series A Shares of their preferential rights at any time; and
- the fact that DNA had accepted that consent would be needed to change the special distribution rights attached to the Series A Shares conflicted with its argument that all the rights attached to the Series A Shares could be extinguished with no consent at all. In the Court of Appeal's view, there was "no rational or logical justification for such a bizarre regime under which the holders of the Series A Shares would be protected by having to give a class consent to every lesser alteration of their rights, but would have no such protection in the event of a conversion in which their special rights would be entirely extinguished." The Court concluded that "Something has plainly gone wrong with the drafting".
3. Comment
As noted in our earlier article, this decision should be taken into account when drafting any automatic conversion provision in articles of association. For example, express wording could be included to make it clear that the conversion of one class of shares into another class pursuant to the automatic conversion provision is not to be treated as a variation of class rights or require the consent of the holders of those shares.
However, it is important to put the decision in context. The provision in this case was somewhat unusual in that the conversion right was held by shareholders holding a different class of shares. It would be more common for shareholders to have an automatic conversion right in relation to their own shares rather than another shareholder's shares. Indeed, DNA's articles did in fact contain such a right in favour of the holders of the Series A Shares. In that scenario the holders of the affected shares are the instigators of the conversion and so there could be no argument about whether they had consented.
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