England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
Mr Justice David Richards
[2011] EWHC 3466 (Ch)

		Royal Courts of Justice Strand, London, WC2A 2LL
		24/02/2012

Lord Justice Rimer :

Introduction

1. This appeal, by Patrick McKillen, is against an order made by Mr Justice David Richards on 21 December 2011 in the Chancery Division. Mr McKillen is the petitioner in an 'unfair prejudice' petition presented on 5 October 2011 (and amended on 29 November) under section 994 of the Companies Act 2006 in relation to Coroin Limited ('Coroin'). Coroin is the last of eight respondents to the petition. The other seven are (1) Misland (Cyprus) Investments Limited (a Cypriot company, 'Misland'); (2) Derek Quinlan; (3) Ellerman Corporation Limited (a Jersey company, 'Ellerman'); (4) B Overseas Limited (a British Virgin Islands company, 'BOL'); (5) Richard Faber; (6) Michael Seal; and (7) Rigel Mowatt. The sole respondents to the appeal are Misland and BOL.
2. Following an order he made on 22 November 2011, it fell to the judge to decide preliminary issues in the petition concerning the interpretation of the pre-emption provisions contained in a shareholders' agreement between the Coroin shareholders and in Coroin's articles of association. He heard the argument on 14 and 15 December and delivered his reserved judgment on 21 December. As the trial of the petition is due to commence in the Chancery Division on 12 March 2012 (with reading commencing on 7 March), he expressed his view that this appeal, for which he gave permission, should be expedited, as it has been. We heard it on 20 February 2012.
3. Mr McKillen challenges the correctness of the judge's answers to the questions raised by the preliminary issues. Alternatively, he submits that the matters they raise should not have been, or be, decided on a preliminary basis at all but should be decided by the judge hearing the petition, with the benefit of all admissible evidence that might be relevant to their resolution. The judge refused his application to defer the consideration of the preliminary issues until after there had been full disclosure in the proceedings
4. In general terms, but subject to specific exceptions, the shareholders' agreement and articles impose restrictions on transfers of Coroin shares save in accordance with a pre-emption procedure. The point at the heart of the preliminary issues is whether that procedure is triggered not just by a proposed transfer of shares in Coroin, but also by a proposed transfer of control of the company holding such shares. The company in question is Misland.

The facts

5. The judge set out the background with admirable clarity and the account that follows is gratefully drawn directly from his judgment ([2011] EWHC 3466 (Ch)).
6. Coroin was established in 2004 for the purpose of acquiring the companies that owned four London hotels: the Savoy, Claridge's, the Connaught and the Berkeley. Coroin duly made such acquisitions, at a cost of £750m funded by loans and by subscriptions by its initial investors for shares and loan stock. As was intended, the Savoy was sold at an early stage. The Coroin group continues to own and manage the other three hotels. The proceedings have been provoked by a plan executed by Sir David Barclay and Sir Frederick Barclay ('the Barclay brothers') directed at the acquisition of complete control and ownership of Coroin and its three hotels. Mr McKillen, who owns 36.23% of the Coroin shares, opposes the plan and his proceedings are directed at frustrating it.

Coroin

7. There were originally five investors, or groups of investors, in Coroin, each being issued with a separate class of shares: (1) Mr McKillen (A shares); (2) John McColgan and Moya Doherty (B shares); (3) Misland (C shares); (4) Derek Quinlan (D shares); and (5) Quinlan Nominees Limited, (E shares). Misland was wholly owned by A&A Investments Limited ('A&A'), a Bermudian company, through which Peter Green and his family control their business interests. Quinlan Nominees was a vehicle used by another group of individuals. It is the subsequent sale by A&A of Misland to the Barclay interests that has provoked the preliminary issues.
8. The investors entered into a shareholders' agreement on 14 May 2004 ('the agreement'), shortly before the acquisition of the hotels. Coroin was named as a party but does not appear to have executed it. The judge expressed his view, for reasons given in [10], that under the Duomatic principle (In re Duomatic Ltd [1969] 2 Ch 365) Coroin was to be regarded as a party to the agreement (a view that Mr McKillen accepts as correct), although the judge left open whether Coroin was or should be regarded as a party to the subsequent amendments made between 21 December 2004 and 23 October 2009 principally to take account of changes in shareholders. Our documents include a composite version of the agreement as amended, one described as 'not a legally binding agreement'. There is, however, no issue that the provisions in it relating to the pre-emption provisions are correctly reproduced.
9. The five classes of Coroin shares rank pari passu in all respects and have the same voting rights. The differences between them relate only to the appointment of directors. Each of the A, B, C and D classes of shares confers the right to appoint one director. The E shares carry no such right. The maximum number of directors is six, of whom two may be co-opted by the board. The directors appointed by the four classes of shareholders have different numbers of votes at board meetings: the A director has 70 votes, the B director 7, the C director 48, and the D director 70. Any co-opted director has one vote. There were various dealings after 2004 in the interests held by the original investors, the outcome of which was that, by December 2010, the equity holdings, including preference shares, were held as follows: Mr McKillen 36.23%, Misland 24.78%, Mr Quinlan 35.4% and Kyran McLaughlin 3.58%.

The Barclay brothers' plan

10. Unable to reach agreement with Mr McKillen for the acquisition of Coroin, the Barclay interests engaged in the following strategy to take Coroin over.
11. In January 2011 A&A sold the share capital of Misland to BOL, a Barclay company, for £70m, so yielding control to BOL, through its holding of Misland, of Misland's C shares in Coroin. The C director was replaced by an employee of Ellerman, another Barclay company; his successors have also been Barclay associates.
12. In February 2011 the Barclay interests took over from Bank of Scotland (Ireland) the benefit of loans to Mr Quinlan and the charges securing them, being charges over the D and some B shares. The shares were transferred to Ellerman. There is an issue (not the subject of the preliminary issues) as to whether that transfer was permitted under the pre-emption provisions in the agreement. In May 2011 Mr Quinlan was replaced as the D director by an Ellerman employee.
13. In February 2011 Mr McLaughlin's shares and loan stock, including a holding of B shares, were offered to shareholders under the pre-emption provisions in the agreement. Mr McKillen did not take up his rights and Misland purchased all the shares and loan stock. In March 2011 Mr McLaughlin was replaced as the B director by an Ellerman employee.
14. In September 2011 the Barclay interests acquired other loans made to Mr Quinlan and the related security over certain of his B, E and special redeemable shares and loan stock, with the acquiring company becoming the registered holder of the shares as a security holder. In September 2011 another Barclay company acquired Coroin's senior debt and associated security.

The petition and related claim

15. Mr McKillen alleges in the petition that all or most of these and other steps were effected in breach of provisions in the agreement and in Coroin's articles of association; and that, together with the alleged conduct of the Coroin directors appointed by the Barclay interests, they constituted unfairly prejudicial conduct of Coroin's affairs. He has also commenced a separate CPR Part 7 claim alleging a conspiracy to cause loss by unlawful means. It is to be heard together with the petition.
16. The preliminary issues were directed to determining whether the sale of Misland to the Barclay interests in January 2011 triggered the (essentially identical) pre-emption provisions in clause 6 of the agreement and article 5 of Coroin's articles of association. The transaction did not involve a transfer or other dealing with Misland's shares in Coroin. It involved no more than a transfer of the shares in Misland itself. That issue provided the basis for the following seven preliminary issues (the reference in them to 'Shares' being to shares in Coroin), the first issue being the crucial one:

'1. Does the registration by a shareholder of a transfer of the shares in itself constitute a transfer of interest in Shares for the purposes of clause 6.1 of the Shareholders' Agreement and Article 5.1?

2. Is a holder of shares in any registered holder of Shares a Shareholder within the meaning of the Shareholders' Agreement?

3. Is a desire by a holder of shares in any registered holder of Shares to transfer the shares held by it in the registered holder a desire to transfer an interest in Shares within clause 6.1 of the Shareholders' Agreement and Article 5.1?

4. If the answer to any of issues 1), 2) or 3) is 'yes', in the event of a proposed transfer of the shares in the registered holder, must notice be given pursuant to clause 6.1 of the Shareholders' Agreement?

5. If, as alleged, in January 2011, Misland desired to transfer Shares in Coroin or an interest in Shares in Coroin, was Misland required to give a Transfer Notice to the Company in respect of such Shares?

6. If, as alleged, in January 2011, the Green family desired to transfer Shares in Coroin or an interest in Shares in Coroin, was Misland required to give a Transfer Notice to the Company in respect of such Shares?

7. As a result of the failure to serve a Transfer Notice, was and/or is the purported transfer ineffective vis-à-vis Coroin and the other shareholders, by reason of Clauses 6.17 of the Shareholders' Agreement?'

17. The application for the determination of those issues was made by Misland and BOL. It was supported by Coroin, which has adopted a neutral stance in the proceedings but also wished an early resolution to them. It was opposed by Mr McKillen but the judge considered it appropriate to decide the issues. He rejected Mr McKillen's application to have the determination of the issues deferred until after disclosure in the proceedings. He answered issues 1 to 3 and 7 in the negative and held that it followed that issue 4 did not arise. Issues 5 and 6 were not the subject of much argument before him but he held that they too should be answered in the negative.

The agreement

18. Recital B of the agreement recited that the initial investors had entered into the agreement for, inter alia, regulating the future conduct of the business of Coroin and its subsidiaries and for the purpose of regulating their relationship with each other. Clause 2 dealt with the subscription by the investors for shares and loan stock, with clause 2.6 providing that Coroin was to use the funds thereby raised solely in connection with 'the Relevant Business', meaning the acquisition, holding and management of the 'Target Group'. Clause 3.1.1 provided that Coroin's primary objective was to manage and turnaround 'the Primary Assets', being the hotels or the companies holding them; and it recorded that Coroin should 'initially seek to sell the Savoy Hotel and the Berkeley Hotel or their respective holding entities'.
19. Clause 3.2 imposed various 'business covenants' on Coroin relating to its management of the business and directed at keeping 'the Shareholders' informed about such management. A 'Shareholder' is defined in the agreement as meaning 'any holder of Shares for the time being and shall as the context permits include any beneficial owner of shares for the time being'. Clause 3.4 set out a series of 'Protective Covenants' by which the shareholders agreed to procure Coroin not to take various steps without the prior consent in writing 'of the holders for the time being of a majority' of the voting shares. Clause 3.7 imposed obligations on the shareholders to take all steps within their power to ensure that (i) any allottee of shares not already a party, (ii) any transferee of shares or loan stock not already a party, and (iii) any permitted transferee under clause 6.16 who was not already a party would enter into a scheduled form of deed of adherence to the agreement. Clause 4 dealt with the composition, voting rights and other matters relating to board and general meetings.
20. Clause 6, headed 'Transfers of Shares', contains pre-emption provisions as regards the transfer of existing shares; and virtually identical provisions are in article 5 of Coroin's articles. Clause 6 is the key provision for the purposes of the preliminary issues. The judge described it as long and complex.
21. Clause 6.1 provides:

'Except in respect of a transfer made pursuant to clauses 6.14, 6.15 and/or 6.16, a Shareholder (the Proposing Transferor) desiring to transfer one or more Shares (or any interest therein) (the Transfer Shares) may at any time give notice in writing to the Company (Transfer Notice) of his desire to transfer the Transfer Shares and the sale price thereof and other sale terms, as fixed by him. For the purposes of this clause 6, "Share" shall be deemed to include Loan Stock and any other debt or other instruments convertible into share capital of the Company'.

22. Clause 6.2 provides, upon such a transfer notice being given, for the directors to offer the shares comprised in it to the holders of the voting shares, and it describes the scheme for doing so. Clause 6.3 provides that, upon acceptance of such offer in respect of any of the shares, the offeror will be bound to sell and the offeree bound to purchase the relevant shares at the sale price, and the directors will not be entitled to decline to register the consequential transfers. Clause 6.4 provides that if some but not all of the transfer shares are accepted, the offeror may elect to treat all of the transfer shares as not having been accepted. Clause 6.5 deals with the offeror's rights in respect of any transfer shares not accepted, or which he has treated as not accepted. Its scheme is (a) that the offeror must indicate to the other shareholders the identity of his proposed transferee, with such reasonable information about him as the shareholders may request; (b) the shareholders (other than the offeror) then have a limited period in which to nominate a transferee for such shares; but (c) in default of such nomination, the shares may be transferred to the proposed transferee.
23. Clause 6.6 provides:

'If any Shareholder

6.6.1 (being a corporate Shareholder) enters into liquidation or receivership or suffers the appointment of an examiner or any Shareholder Security becomes enforceable or suffers any analogous proceeding (not being a voluntary liquidation for the purpose of and followed by a reconstruction or amalgamation while solvent upon such terms as may be approved by all of the Shareholders); or

6.6.2 (being an individual Shareholder) becomes or is adjudged bankrupt in any part of the world or enters into any composition or arrangement with his creditors generally or any Shareholder Security becomes enforceable; or

6.6.3 attempts to deal with or otherwise dispose of any Shares or interest in Shares in the Company otherwise than in accordance with the provisions of this Agreement;

such Shareholder or as the case may be, his personal representatives, if so notified by the Company following a determination by the Directors at any time within a period of one month after the occurrence of any such event, shall be deemed to have given a Transfer Notice in respect of all Shares held by it or him on the date of such notice and the provisions of clause 6.7 shall apply.'

Clause 6.7 contains provisions for determining the price applicable to the shares comprised in a transfer notice deemed to have been given under clause 6.6.

24. Clauses 6.14 to 6.16 are in a section headed 'Permitted Transfers'. Clause 6.15 provides:

'Each Shareholder (being a body corporate) shall be entitled to transfer the entire legal and beneficial interest in all or any part of the Shares held by it to any member for the time being of its Shareholder Group PROVIDED THAT in any such event, any such transferee shall first enter into an agreement under or supplemental to this Agreement whereby it undertakes all of the liabilities and responsibilities of the transferring Shareholder under this Agreement and that, on such transferee proposing to cease to be a member of that Shareholder's Group, it shall first re-transfer all its interest in the Shares held by it or on its behalf to the original transferor under this clause or another member of its Shareholder Group or as otherwise may be agreed in writing by the other Shareholders'.

25. The agreement defines 'Shareholder Group' as meaning:

'a) in relation to any Shareholder (other than [Misland]), that Shareholder and any subsidiary or holding company of that Shareholder for the time being of any member of its Shareholder Group, and

b) in relation to [Misland], that company and any subsidiary or holding company of such company, or for as long as that company is a subsidiary of [A&A], any other body corporate, fund, trust, partnership or limited liability partnership which is controlled by the controller of [A&A];'

Clause 1.12 provides that:

'For purposes of paragraph (b) of the definition of Shareholder Group, "control" of an entity shall mean the power, direct or indirect, (i) to vote or direct the voting of fifty (50) per cent. or more of the securities having voting power, or (ii) to direct or cause the direction of the management and policies of such entity whether by agreement or otherwise, or (iii) to elect the majority of the directors of such entity, and the words "control", "controller" and "controlling" shall be construed accordingly. For purposes of this Agreement, a person or entity shall be the controller of another if it, either alone or together with third parties, whether by agreement or otherwise, is able to exercise control over such person or entity.'

26. Clause 6.16 deals with the permitted transfers that individual shareholders may make. They can transfer them to a 'privileged relation', a class including spouses and children. They can also transfer them to trustees of 'Family Trusts', being trusts under which the beneficiaries are the former individual shareholder and/or his privileged relations. In the latter case, the shares may also be transferred to the trustees of the trust for the time being.
27. Clauses 6.17 and 6.18 come under the heading 'No Transfers except as Permitted'. Clause 6.17 provides that 'No Share nor any interest therein shall be transferred, sold or otherwise disposed of save as provided in this clause 6.' Clause 6.18 provides:

'Nothing in this clause 6 shall prohibit or restrict the grant by a Shareholder of any Shareholder Security or the transfer of any Share to the holder for the time being of such Shareholder Security and the Directors shall approve such transfer; provided that for the avoidance of doubt the holder of such Shareholder Security shall be subject to the terms of clause 6 (including clauses 6.1 to 6.5 hereof) in the event of any such Shareholder Security becoming enforceable.'

28. Clause 6.24 (in a section headed 'General') provides:

'Each of the Shareholders covenants that other than to grant any Shareholder Security and other than in respect of a transfer made pursuant to clauses 6.14, 6.15 and/or 6.16 he or she shall not transfer any Share (or any interest therein) which would give rise to a Transfer Notice under clause 6.1 at any time prior the fourth (4^th) anniversary of Completion.'

29. Clause 8.3 (in a section headed 'Miscellaneous Provisions') provides:

'In the event of any inconsistency between any terms in this Agreement and any matter set out in the Articles of Association including, without limitation, the provisions of clause 6, the terms of this Agreement shall prevail and the Shareholders shall make such amendments as may be necessary to the Articles of Association to permit the Company, its affairs and the transfers permitted by clause 6 to be administered as provided in this Agreement.'

30. Finally, under clause 8.5 each of the shareholders agreed that:

'8.5.1 during the continuance of this Agreement all transactions entered into between any of them or any company controlled by them on the one hand and the Group on the other hand shall be conducted in good faith and on the basis set out or referred to in this Agreement or, if not provided for in this Agreement as may be agreed by the parties and in the absence of such agreement on an arm's length basis;

8.5.2 each of them shall at all times act in good faith towards the others and shall use all reasonable endeavours to ensure the observance of the terms of this Agreement;

8.5.3 no party will seek to increase its profit or reduce its loss at the expense of another; and

8.5.4 each of them will do all things or desirable [sic: necessary or desirable?] to give effect to the spirit and intention of this Agreement.'

Coroin's articles of association

31. As regards pre-emption rights, article 5 is the key provision. Its substance is the same as the material provisions in the agreement and so also, to a major extent, is its form. Articles 5.1 to 5.7 match clauses 6.1 to 6.7 and article 5.16 is the same as clause 6.17. Article 5.15 is the same as clause 6.15 save that the definition of 'Shareholder Group' does not include any express reference to Misland and provides simply that it means:

'… in relation to any Shareholders, that Shareholder and any subsidiary or holding company of the Shareholder for the time being'.

The definition of Shareholder Group was in that form in the original version of the agreement, but was later expanded by one of the amendment agreements to the form set out at [25] above. Correspondingly, there is no definition of 'control' as in clause 1.12 either in the articles or in the original version of the agreement.

The judge's decision

32. The judge recorded a debate as to whether the applicable pre-emption provisions were those in clause 6 of the agreement or those in article 5. The suggested relevance of the distinction was that whereas evidence of background was agreed to be admissible in the interpretation of clause 6, there was a dispute as to the extent to which such evidence was admissible in the interpretation of article 5. The judge referred to the authorities that explained the position in relation to the latter point. He explained in [68] and [69] why, on the facts of the case, he regarded it as artificial to apply a different approach to the construction of the articles and agreement, but concluded his discussion by saying:

'70. It is not, however, necessary to reach a final conclusion on this point. Misland is a party to the shareholders agreement and is bound to give effect to its terms, which include the pre-emption provisions in clause 6. If the sale of Misland triggered the obligation to give a transfer notice under clause 6, it is bound to do so irrespective of whether it was also obliged to do so under article 5. If clause 6, but not article 5, required Misland to give a transfer notice, Misland and the other shareholders would be bound by clause 8.3 to alter the articles to achieve conformity. It is not disputed that in construing the shareholders agreement, evidence of background facts is admissible.'

33. There is, unsurprisingly, no challenge by Mr McKillen to that approach.
34. The judge explained that there were no significant differences between the parties as to the construction principles applicable to the interpretation of the agreement. He cited two passages from the judgment of Lord Clarke of Stone-cum-Ebony JSC in Rainy Sky SA v. Kookmin Bank [2011] 1 WLR 2900, which are instructive as to the core principles:

'14. … those cases show that the ultimate aim of interpreting a provision in a contract, especially a commercial contract, is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant. As Lord Hoffmann made clear in the first of the principles he summarised in the Investors Compensation Scheme case [1998] 1 WLR 896, 912H, the relevant reasonable person is one who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. …

21. The language used by the parties will often have more than one potential meaning. I would accept the submission made on behalf of the appellants that the exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.'

35. The judge did, however, also note, at [74], that:

'It is, however, right to say that pre-emption provisions are generally drafted with precision, as befits provisions dealing with property rights. As appears from authorities to which I later refer, commonly used phrases have distinct legal meanings and superficially small variations can have significant legal effects. This is a relevant consideration when construing pre-emption provisions, particularly when as in this case they are complex and have been professionally drafted, using and adapting well-known standard expressions.'

36. As regards the evidence admissible for construction purposes, the judge said that it would include background knowledge that was, or would reasonably have been, available to the parties at the time; and evidence, such as previous documents, identifying objectively the commercial or business object of the agreement. It would not include evidence of the parties' subjective intentions, facts not known or reasonably available to the parties, the course of negotiations or post-contractual conduct. He summarised the background evidence that, by witness statements, Mr McKillen and Mr Murphy sought to adduce and explained in [78] why 'virtually none' of it was admissible.
37. The judge said, in [80], that the admissible evidence as to the background to the agreement:

'… can for the most part be gleaned without difficulty from the terms of the agreement itself. Clause 3.1 states the business purpose of [Coroin]. It is clear that this was a venture between a small group of investors most of whom were to have rights of participation in management through the appointment of directors. They were to act in good faith towards each other (clause 8.5.2) and do all things [necessary] or desirable to give effect to the spirit and intention of the agreement (clause 8.5.4). Their rights of disposing of their shares were restricted by the pre-emption provisions. Evidence is admissible to identify the Green family as the ultimate controller of Misland referred to in the definition of "Shareholder Group". The purposes of the shareholders agreement were as stated in recital B.'

38. The judge turned to construe clause 6 of the agreement. The key words in clause 6.1 were '… a Shareholder … desiring to transfer one or more Shares (or any interest therein) …'. He said that each significant word of that carried a legal meaning. 'Shareholder' was defined as I have earlier set out. A 'holder' of shares in that definition means the person registered in the company's share register as the holder, who owns the legal title and who may or may not own the beneficial interest, a distinction that the definition recognises. If, said the judge, company A owns the beneficial interest in shares registered in its name, it alone is the beneficial owner, and this will be so even if A is wholly-owned by company B or an individual. A 'desire' or an intention to transfer shares had been considered in authorities to which the judge referred. A 'transfer' of shares means the transfer of the legal title, by a stock transfer form or similar instrument and by registration of the transfer in the register of members. Finally, 'any interest therein' means a proprietary, or beneficial, interest as opposed to the legal title. The words broadened the effect of clause 6.1, which without them would be confined to the legal title.
39. The judge's conclusion was that, read on its own, there could be no doubt that clause 6.1 had no application to the case where company A is the legal and beneficial owner of shares in Coroin and the issued shares of company A are sold. The judge said that '[s]uch a sale involves no change in company A's legal and beneficial ownership of the underlying shares, nor evidences a desire to transfer those shares or any interest in them'.
40. The judge was referred to, but did not find of relevant assistance, the decision of the House of Lords in British American Tobacco Co Ltd v. Inland Revenue Commissioners [1943] AC 335 as to whether, for a particular statutory purpose, a company had a 'controlling interest' in its sub-subsidiary company. He then rehearsed Mr McKillen's main point which was this. Coroin had been established as the vehicle for a particular venture to be carried out by a restricted number of shareholders, who were effectively committed to it for at least four years (clause 6.24). They had rights to appoint directors, which made them partners in a real, although not technical, sense. They wished and agreed to prevent share disposals except to a very restricted class of permitted transferees or after a pre-emption procedure had been followed. They were all either individuals holding shares in their own names or in nominee names or, in the case of Misland, a corporate vehicle for investment by the Green family. The conduct of the venture depended on individual investors including, in Misland's case, the Green family. The pre-emption provisions served to preserve the personal nature of the venture. Individual shareholders could not dispose of their shares, save to permitted transferees, without going through the pre-emption procedure. It could not, therefore, be the case that those controlling Misland could do so simply by selling Misland. If they could, it would leave a gaping hole in the pre-emption provisions and render them toothless. The Green family had no less an interest in the Misland shares than the individuals had in the shares they held. That view was said to be fortified by the provisions of clause 6.15 permitting transfers of shares within a 'Shareholder Group' but providing also that if a transferee proposes to cease to be a member of such group, it must re-transfer its shares to the original transferor or as may be agreed with the other shareholders. That, it was said, was consistent with an intention that the shares would be kept under the ownership of the original investors. As a sale of the transferee out of the group would trigger a re-transfer obligation, it was said that it would be surprising if a sale of Misland itself would not trigger the pre-emption provisions. All this pointed to the conclusion that the words 'any interest therein' in clause 6.17 should be construed as including the type of indirect interest in the Misland shares that was enjoyed by the owner of Misland's share capital. A sale of Misland therefore triggered an obligation to give a notice under clause 6.1 or else gave rise to a deemed transfer notice under 6.6. These sub-clauses should be construed in a manner consistent with this construction of clause 6.17.
41. The judge rejected these submissions. He said:

'99. In my judgment, there are insuperable difficulties with this construction. The ambiguity, if there is one, lies in clause 6.17. The resolution of any such ambiguity requires an examination of the other provisions of the agreement, particularly clause 6, and the factual background to the agreement.

100. For the reasons already given, there is no ambiguity in the definition of "Shareholder" or in clause 6.1. The references there to "interest" in the shares are to direct proprietary interests in the shares. Clause 6.6 applies only where a "Shareholder" has attempted to deal with shares or any interest in shares and then deems the "Shareholder" to have given a transfer notice. Clause 6.15 permits each corporate Shareholder "to transfer the entire legal and beneficial interest" in shares held by it.

101. These unambiguous provisions resolve any ambiguity which may be said to exist in clause 6.17. The clause must be read as a whole, and the earlier provisions of the clause show that the reference to an interest in shares in clause 6.17 is to the same direct proprietary interests as appear in those provisions.

102. The various commercial considerations on which Mr Miles [leading counsel for Mr McKillen] relies might, if the parties had so wished, have provided good reasons for including clear provisions to the effect that a disposal of Misland would trigger the pre-emption procedure. The absence of any such provisions in what is a complex clause, providing for many eventualities, itself tells against the suggested construction. It is a reasonable objective assumption that these sophisticated investors in a large commercial venture, and their advisers, did not overlook the possibility of a sale of Misland, particularly in the light of both the definition of "Shareholder Group" with its special provision for Misland and the provision to clause 6.15. The absence of provisions dealing with a sale of a corporate shareholder is, objectively speaking, consistent with a decision by the parties not to include them. …

103. Nor is this a case like [Aberdeen City Council v. Stewart Milne Group Ltd [2011] UKSC 56 or [Investors Compensation Scheme Ltd v. West Bromwich Building Society [1998] 1 WLR 896] or indeed Rainy Sky where something appears obviously to have gone wrong with the drafting of the contract.

104. There is the further difficulty of identifying the provision which the parties would have negotiated to include. Mr Miles submits that it is enough for him to say that "interest" in the shares includes the interest of the owner of Misland. But once one indirect interest is included, why not others? What if A&A Investments Limited sold 49% or 51% of the share capital of Misland or if the Green family sold A&A Investments Limited? What if, without a sale, there was a disposal of control? Mr Miles submitted that the concern of the investors was to know that the Green family would continue to control Misland. While the concept of control is used, in relation to A&A Investments Limited, in the definition of Shareholder Group and "control" is defined for that purpose in clause 1.12, there are no provisions requiring Misland to give a transfer notice on a change of control. The absence of such provisions is the more striking because change of control provisions are a familiar feature of joint venture and other commercial agreements.

Conclusion

105. For all these reasons, I conclude that the sale of the share capital of Misland in January 2011 was not made contrary to clause 6.17 of the shareholder agreement and did not trigger the other shareholders' pre-emption rights. I reach the same conclusion on the articles and do so whether or not reference is made to background facts. Accordingly, I answer the preliminary issues numbered 1, 2, 3 and 7 in the negative. Issue numbered 4 does not therefore arise. There was no real argument about issues 5 and 6. Clause 6.1 uses the word "may", not "shall". If a shareholder does no more than desire to transfer shares or an interest in them, he may but need not give a transfer notice. However, he must not go on to transfer, sell or dispose of his shares or any interest therein without going through the pre-emption procedure. Issues numbered 5 and 6 should also therefore be answered in the negative.'

The appeal

42. In advancing Mr McKillen's appeal, Mr Marshall QC, in his written and oral submissions, made the same emphasis to us about the essential features of the agreement as was made to the judge. The original investors were bound in for an initial four-year period (clause 6.24), during which, save for permitted transfers, they were prevented from transferring their shares. They were entitled to participate in Coroin's management: apart from the E shareholders, all classes of shares carried the right to appoint a director. They were business partners in a real sense. The identity of the human beings ultimately controlling a corporate shareholder such as Misland was therefore material. It was common ground that Misland, via A&A, was a vehicle for investment by Mr Green and his family. Clause 8.5 imposed duties of good faith on the shareholders and reflected the close nature of the venture between them and the degree of trust and confidence that they could be expected to place in each other. All this was underlined by the pre-emption provisions in clause 6, which (apart from permitted transfers) prevented any transfer being made without a share offer being made to the existing shareholders.
43. As for the approach to interpretation of commercial contracts, Mr Marshall submitted that the modern approach is set out in the Investors Compensation Scheme case. The ultimate aim is to ascertain what a reasonable person, with all the background knowledge available to the parties in the situation they were in at the time of the contract, would have understood the parties to have meant. Mr Marshall also relied, as did the judge, on Lord Clarke's judgment in Rainy Sky SA v. Kookmin Bank [2011] 1 WLR 2900, at [21]. He also referred us to Lord Clarke's further observations, as follows:

'29. Finally, it is worth setting out two extracts from the judgment of Longmore LJ in Barclays Bank plc v. HHY Luxembourg SARL [2011] 1 BCLC 336, paras 25 and 26:

"25. The matter does not of course rest there because when alternative constructions are available one has to consider which is the more commercially sensible. On this aspect of the matter Mr Zacaroli has all the cards …

26. The judge said that it did not flout common sense to say that the clause provided for a very limited level of release, but that, with respect, is not quite the way to look at the matter. If a clause is capable of two meanings, as on any view this clause is, it is quite possible that neither meaning will flout common sense. In such circumstances, it is much more appropriate to adopt the more, rather than the less, commercial construction."

30. In my opinion Longmore LJ has there neatly summarised the correct approach to the problem. That approach is now supported by a significant body of authority. As stated in a little more detail in para 21 above, it is in essence that, where a term of a contract is open to more than one interpretation, it is generally appropriate to adopt the interpretation which is most consistent with business common sense. …'

44. Mr Marshall in fact advanced no criticism of the judge's self-direction as to the approach to be adopted in the interpretation exercise. He accepted it as orthodox and sound. His criticism was as to the judge's application of the principles. He levelled specific criticism at [74] of the judge's judgment (quoted in [35] above), saying that (i) there was no evidence of how the formulation of the pre-emption provisions was arrived at, (ii) there was no evidence as to the use of 'well-known standard provisions', (iii) there was no evidence that there had been detailed negotiation regarding the pre-emption provisions, (iv) there was evidence that Mr McKillen was not separately advised, and (v) that clause 8.5 obviously catered for the possibility that the precise wording of the agreement had not catered for all eventualities.
45. I do not, with respect, consider that there is any substance in those five points. Evidence in relation to (i) and (iii) would, I consider, have been inadmissible. As for (ii), I doubt whether evidence as to this would have been admissible either. But anyway I do not regard the point as material. The judge did no more than approach the agreement on the basis that the use in it of various phrases with a familiar and well-recognised legal meaning bore, at any rate on the face of the agreement, their usual meaning, although he was not shutting his mind to the possibility that, in the particular context, such phrases might bear a different or wider meaning (in particular, the phrase 'any interest therein' as used both in clause 6.1 and 6.17). As for (iv), I do not understand its supposed relevance. As for (v), I do not accept that it is or purports to be capable of doing the work attributed to it. If the focus is on the suggested 'spirit and intention' of the agreement, this case is about what that was as regards the ambit of the pre-emption provisions. Clause 8.5 sheds no relevant light on that. Little reliance was placed upon clause 8.5 before the judge, although much reliance was placed on it before us. For my part, I fail to see what assistance it is supposed to provide in relation to the resolution of the question of interpretation with which we are presented.
46. Mr Marshall also submitted that the judge failed to apply Lord Clarke's guidance in Rainy Sky. He said that, of the two available interpretations of the agreement, the judge favoured the one that made no business sense, being one for which neither he nor the respondents identified any business rationale. He made powerful points to the effect that there is apparently something odd about the conclusion that it was open to A&A to sell its shares in Misland and thereby achieve what was in practice a transfer of the Misland shares in Coroin free of the pre-emption provisions, whereas a like freedom to deal with the shares in Coroin was not open to other shareholders. He referred to the definition of 'Shareholder Group' that applies for the purposes of the provisions of clause 6.15. The effect of the provision in that definition as regards Misland was that Misland was permitted to transfer its shares to any other company controlled by the controller of A&A – call it Misland 2 – without triggering the pre-emption provisions. But if there were then a proposal that Misland 2 was to leave the group, it could not do so without first re-transferring its Coroin shares back to Misland or another company controlled by A&A.
47. In other words, clause 6.15 expressly contemplates, and prevents the possibility of, the Coroin shares held by a successor company such as Misland 2 coming into non-A&A control as a result of a sale of Misland 2 out of A&A control. Yet the judge's conclusion was that the agreement imposed no bar upon a sale of Misland itself out of A&A control, being a sale that would carry with it the Coroin shares free from the pre-emption rights. Mr Marshall urged that this interpretation produced a dramatic disparity between the obligations and rights of the individual investors on the one hand – who were locked in for four years and could not exit save through the pre-emption provisions – and (through A&A) the Green family on the other who, through the simple step of selling Misland, could transfer their interest to an outsider without restriction. Given the restrictions that would expressly arise on a transfer by Misland to Misland 2, such an interpretation of the agreement is, said Mr Marshall, an improbable one.
48. In his oral submissions, however, Mr Marshall focused his argument primarily on clauses 6.1 and clause 6.17, and he in fact opened his argument by focusing on clause 6.17. He advanced clause 6.17 as being, in effect, the clause that imposed the primary bar on non-conforming transfers, with the prior provisions of clause 6 setting out (i) the permitted transfers and (ii) the pre-emption scheme that must be engaged in the case of a non-permitted transfer. I would not myself so interpret the overall structure of clause 6. As it seems to me, its scheme is more obviously one under which (a) the provisions of clauses 6.1 to 6.7 set out the pre-emption procedure that (subject to express permitted exceptions) will ordinarily apply in relation to proposed transfers; (b) clauses 6.14 to 6.16 then set out the cases in which transfers can be made without the need to go through the pre-emption procedure; and (c) clause 6.17 is simply a sweeping up provision whose purpose is to make plain that what has gone before provides a complete code as to the circumstances in which transfers do or do not require the giving of a transfer notice. I recognise that that is not a comprehensive explanation, since clause 6.18 (dealing with a permitted transfer) ought logically on my approach to have found its place prior to clause 6.17. The drafting of the agreement is not, however, a masterpiece in all respects and I do not regard this logical infelicity as making a material inroad into the role that I would ascribe to clause 6.17.
49. Whether, however, the appellant's argument starts with clause 6.17 or, as I would consider more logical, clause 6.1 probably anyway makes no practical difference. Mr Marshall's submission in relation to both was the same, namely that the reference in each to 'any interest therein' was and is capable of referring not just to a beneficial interest in the shares held by someone other than their registered holder (and it is not in dispute that it can and does refer to such an interest) but that it can and does also mean (in the present case) the interest in Misland's Coroin shares that its own parent, A&A, is said to have by virtue of its ownership of its shares in Misland. More specifically, the proposition is that, for the purposes of the relevant words in clauses 6.1 and 6.17, A&A is regarded as having an 'interest' in Misland's shares in Coroin, such that any disposition of A&A's shares in Misland out of A&A control is a transaction involving a transfer of an 'interest' in Misland's Coroin shares that triggers the need to serve a transfer notice on Coroin under clause 6.1.
50. The judge had no hesitation in rejecting the suggestion that the words 'any interest therein' in clauses 6.1 and 6.17 can or do in the context extend beyond a direct proprietary interest in Coroin shares held by a 'Shareholder'. I entirely agree with him, for the reasons that he gave. The definition of 'Shareholder' in the agreement shows that it means not just the 'holder of Shares for the time being' but can also include another party holding merely a beneficial interest in such shares. In the present case, there was and is no suggestion that Misland's shares in Coroin were held by Misland otherwise than beneficially. A company's assets so held are the beneficial assets of the company alone and the shareholders in the company have no beneficial or other interest in its assets. On basic principles, A&A had no legal, beneficial or other interest in Misland's Coroin shares.
51. As was also argued before the judge, Mr Marshall submitted that the decision of the House of Lords in British American Tobacco Company, Limited v. Inland Revenue Commissioners [1943] AC 335 supported the proposition that A&A could be regarded as having a relevant 'interest' in Misland's Coroin shares. The question there was whether, for the purposes of paragraph 7(b) of Schedule IV to the Finance Act 1937, a company had a 'controlling interest' in its sub-subsidiary company. It was held that it did. Viscount Simon LC said that the case turned on the meaning of the words 'controlling interest' in the context in which they were used. He recognised that the parent company did not have a proprietary interest in the assets of its subsidiary or sub-subsidiary company but said that the phrase 'controlling interest' did not connote only a proprietary right. He said, at page 339:

'The word "interest," however, as pointed out by Lawrence J, is a word of wide connotation, and I think the conception of "controlling interest" may well cover the relationship of one company towards another, the requisite majority of whose shares are, as regards their voting power, subject, whether directly or indirectly, to the will and ordering of the first-mentioned company.'

52. The judge did not regard that as an authority for the wide interpretation that the appellant would attach to the sense of 'any interest therein' in clauses 6.1 and 6.17. Nor would I. If anything, I regard it as an authority pointing the other way. Viscount Simon expressly recognised that the company had no proprietary interest in the assets of its subsidiary or sub-subsidiary. The natural sense of clauses 6.1 and 6.17 is that they are focusing on a proprietary interest in the relevant shares. In the present case, the only company with a proprietary interest in Misland's shares in Coroin was Misland. Neither A&A nor the Green family had any sort of proprietary interest in those shares. In my judgment, there is no rational basis upon which, upon the ordinary construction of clauses 6.1 and 6.17, a proposed disposition of the sale of A&A's shares in Misland can be regarded as a proposed disposition either of Misland's shares in Coroin or of 'any interest' in such shares. The proprietary interest in such shares will be exactly the same after any disposition of Misland as it was before.
53. Mr Marshall's further argument, although it was not flagged up in the appellant's notice and was essentially responsive to discussion with the court in the course of argument, was based on clause 6.15 read together with the definition of 'Shareholder Group'. I have already summarised the points that he makes about that. His submission was that, in expressly covering the circumstances in which an A&A subsidiary other than Misland might (a) become a holder of Misland's Coroin shares, but might then (b) be the subject of a proposed transfer out of the A&A group, clause 6.15 expressly foresaw, and effectively forestalled, the possibility of the Coroin shares being moved out of ultimate Green control. Yet clause 6.15 did not expressly also foresee, let alone forestall, the possibility that Misland, whilst holding Coroin shares, might itself be sold out of the A&A group. That, said Mr Marshall, was an obvious lacuna that rendered the scheme of clause 6.15 irrationally uncommercial. He submitted that the court should therefore be prepared to meet such point by a construction of clause 6.15 that fills the gap. He suggested that we should interpret clause 6.15 as if it had at some appropriate point said:

'for the avoidance of doubt, if Misland (Cyprus) Investments Limited or any subsequent transferee of its Shares ceases to be controlled by the controller of A&A Investments Limited it must transfer the entire legal and beneficial interest in all the Shares held by it to a body corporate, fund, trust, partnership or limited liability partnership which is controlled by the controller of A&A Investments Limited.'

54. I do not question that as part of the interpretation exercise a court can read words into a document which are not already there. It can and will, however, only do so in a case in which it is satisfied that it is necessary to do so in order to reflect what it is satisfied was its true meaning. That is 'the meaning which the instrument would convey to a reasonable person having all the background knowledge which would be reasonably available to the audience to whom the instrument is addressed' (Attorney General of Belize and others v. Belize Telecom Ltd and another [2009] 1 WLR 1988, at [16], per Lord Hoffmann). As Lord Hoffmann also observed in the same paragraph, it is not, however, any part of the court's interpretative exercise to improve upon the instrument that it is called upon to construe. The interpretative surgery which Mr Marshall invites us to inflict upon clause 6.15 is by any standards major. It may well be said that what I might call 'the Misland exclusion' from the restraints of clause 6.15 is an apparent oddity. It is, however, difficult to conclude with any confidence that it was not foreseen by the parties, not least because the definition of 'Shareholder Group' in relation to Misland expressly recognises that there may come a time when Misland ceases to be a subsidiary of A&A ('… for as long as that company is a subsidiary of A&A …'). The Misland exclusion was, therefore, an apparently obvious omission from the provisions of a clause whose very function was directed to the type of change of control that has in fact happened.
55. How, in these circumstances, could the reasonable man safely conclude that the Misland exclusion was a mere drafting mistake? How could he reject the possibility that, whilst such exclusion may be perceived as unfavourable to Mr McKillen, it was not simply the outcome of the exchanges in the course of negotiation between the parties (see, in that context, Chartbrook Ltd and another v. Persimmon Homes Ltd and another [2009] 1 AC 1101, at [20], per Lord Hoffmann). Even if he were to consider that there was an error of some sort in the drafting of clause 6.15, how could the reasonable man be confident as to the precise nature of the error? Moreover, the effect of any re-writing of clause 6.15 is in substance to affect the rights of persons who are not even parties to the agreement, namely A&A and the Green family. It is directed at providing that the parties to the agreement should be protected against the consequences of their actions. It is fair to note that clause 6.15 already does this to at least a limited extent, in its reference to '… on such transferee proposing to cease to be a member of that Shareholder's Group, …'. I would not, however, regard that as a licence to re-cast the substance of clause 6.15 in the fundamental way that Mr Marshall invites. I am not satisfied that the reasonable man, fully equipped as he needs to be and is, could or would be satisfied that this was in fact what the agreement was intended to mean. He would, I consider, prefer the view that, whatever may be the apparent limitations of clause 6.15 from Mr McKillen's perspective, there is no sufficient justification for re-casting it as Mr McKillen now invites.
56. In my judgment, therefore, this is a case in which the reasonable man would (a) have no hesitation in rejecting Mr McKillen's suggested interpretation of 'any interest therein' in clauses 6.1 and 6.17; and (b) would not be satisfied that there were sufficient grounds for concluding that the parties intended clause 6.15 to impose a restraint on A&A's actions in relation to Misland of the nature that is now suggested but for which its language makes no provision. In my judgment, the judge was right to answer the preliminary issues the way he did.
57. I add that Mr Marshall formally kept open Mr McKillen's appeal against the judge's refusal to defer the determination of the preliminary issues until after full disclosure in the proceedings, although he did not develop that orally. Disclosure has now taken place and no suggestion was made to us that it yielded any admissible material of any relevance to the interpretation of those provisions of the agreement with which we have been concerned.
58. I would dismiss Mr McKillen's appeal.

Lord Justice Tomlinson :

59. I agree. The key to the resolution of this appeal is in my view that whilst the "Misland exclusion" might be said to be odd, see paragraph 54 above, it cannot equally in my judgment be said to be either arbitrary or irrational – see per Lord Hoffmann in Chartbrook v. Persimmon at paragraph 20 of his speech. There are possible and plausible explanations, not the least of which is that Mr Green or the Green family were prepared only to participate on these terms.

Lord Justice Lloyd :

60. I also agree that the appeal should be dismissed for the reasons given by Rimer LJ.
61. Mr Marshall placed a good deal of emphasis in his submissions on Lord Hoffmann's words in paragraph 25 of Chartbrook, as follows:

"What is clear from these cases is that there is not, so to speak, a limit to the amount of red ink or verbal rearrangement or correction which the court is allowed. All that is required is that it should be clear that something has gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant."

62. He used that in support of the contention that it was open to the court to read in words such as those which he suggested as a possible expansion of clause 6.15, set out by Rimer LJ at paragraph [53] above. The proposition is not in doubt. He argued that the anomaly of the judge's reading of clause 6, as not subjecting a sale of the shares in Misland to the pre-emption rights, is so great and so stark that it is clear that something has gone wrong with the language. I do not accept that, for the reasons given by Rimer and Tomlinson LJJ. Even if that were established, however, in agreement with Rimer LJ at paragraph [55] above, it does not seem to me that it could be clear what a reasonable person would have understood the parties to have meant, by way of subjecting indirect disposals of the shares in Coroin held by Misland to the pre-emption provisions. Mr Marshall's formula might deal with the actual case, but what of a sale of, or change of control in relation to, A&A, or the other possibilities mentioned by the judge in paragraph 104. Those are matters which, if the point were to be dealt with in the agreement, would have to have been sorted out by agreement. It would not be possible for the reasonable person to have understood, merely from a statement of the problem, how the agreement was supposed to work in order to overcome it.