You informally enter into a written agreement with somebody and forget that you did so only remembering it some years later. Can you still enforce those rights and how may your conduct in the intervening years affect your position?
This scenario was recently considered by the Court of Appeal in Dixon v Blindley Heath Investments Limited.
The case concerned an agreement via an informal exchange of letters between the shareholders in EFI (Loughton) Ltd (EFI) that they would not sell their shares in the company without first offering them to each other.
Several years after entering into the agreement, two shareholders sold their shares in EFI to a company connected with two of the other shareholders without first offering the shares to all of the other shareholders as required by the agreement.
The sale was approved and none of the parties to the agreement objected.
About a year later two other shareholders who were also parties to the agreement received an offer for their shares in EFI and this sale was unanimously approved by the board in accordance with the company’s articles of association.
It was just after this point that one of the shareholders who had benefitted from the acquisition of shares pursuant to the first sale found the agreement amongst some papers and used it to prevent the second sale from proceeding in his capacity as a director.
The shareholders whose attempt to sell their shares had been blocked argued that the directors should not be allowed to prevent the second sale as they had agreed to the first sale. In addition, the director now blocking the second sale had benefitted from the first sale which itself would have been in breach of the agreement.
The Court of Appeal sided with the shareholders now attempting to sell their shares. It held that the directors could not now rely on the agreement to block the second sale based on the doctrine of estoppel by convention.
For an estoppel by convention to arise, the parties must act on a mistaken assumption of fact or law that is shared by both parties or is acted on by one party and acquiesced to by the other party and it would be unjust or unconscionable for one party to permit the other party to go back on the assumption.
In this case it was apparent that the parties had forgotten about the existence of the agreement at the time of the first sale and, as a result, shared a common belief that there was no restriction on the transfer of shares. Coupled with this, one of the directors had clearly benefitted from this mistaken assumption as a party to the first sale. It was therefore unconscionable for him to now go back on the assumption to the detriment of the shareholders now attempting to sell their shares.
Putting to one side the doctrine of estoppel by convention, it should not be overlooked that the directors had in effect sanctioned the second sale anyway by unanimously approving it at a board meeting although had not gone as far as actually registering the transfer of shares. Whether it could subsequently go back on its initial decision was not decided upon but is an interesting point.
We would recommend that where parties wish to place restrictions on the transfer of shares, they do so by including the provisions in the company’s articles of association or in a formal shareholders’ agreement. Such documents are much less likely to be forgotten or misunderstood – as a matter of good practice, directors should always consult the company’s articles and any shareholders’ agreement before approving a transfer of shares to avoid unwittingly approving a transfer that could or should be refused.
Giles Dunning is an associate in our corporate team in Truro. If you would like to contact Giles, then please call 01872 265100 or email corporate.cornwall@stephens-scown.co.uk.