A minority shareholder has been forced to sell his shares after the Court of Appeal upheld a decision where drag along provisions were inserted in a company’s articles of association.
Last year we reported on the decision in the Charterhouse Capital case (see Minority Shareholder Dragged into Sale). Charterhouse, a private equity firm, was facing significant problems as a result of an increasing disparity between its investment team and its owners. If the issue was not resolved, the company would face problems raising a new fund. To overcome this, a restructuring was proposed under which the active members of the investment team formed a new company (Newco) which then offered to acquire all the shares in Charterhouse. That offer was conditional on drag along provisions being inserted into Charterhouse’s articles of association. Those drag along provisions were then used by Newco to acquire shares from a shareholder who had refused to accept Newco’s original offer.
The original decision
The High Court held that the insertion of the drag along provisions into the articles was valid. The amendment had been made in the best interests of the company as a whole, in order to overcome the difficulties it was facing and secure its long-term future.
A key factor in the decision was that Charterhouse’s shareholders had already agreed to similar drag along provisions in a shareholders’ agreement. So this was effectively an amendment of an existing contractual right rather than the insertion of wholly new provisions allowing a majority to take shares from a minority.
The Court of Appeal
The Court of Appeal has now agreed with the High Court that the amendment of the articles to include the drag along was merely a “tidying up exercise”. The shareholders who voted to amend the company’s articles honestly believed they were acting in the company’s best interests.
The amendment of the articles was primarily for the benefit of the company, even if the majority shareholders also happened to benefit themselves.
Not a solution for all
As we noted in our previous post, this case is highly fact specific: the presence of the existing drag along provisions in the shareholders’ agreement and the specific industry-related issues facing Charterhouse were key factors in the decision. Therefore, whilst it is of interest to see that the court will uphold the insertion of drag along provisions in some circumstances, the decision should not be viewed as an easy solution to the problem of removing a troublesome shareholder.