Coroin Ltd, Re [2013] EWCA Civ 781

Mr McKillen, a 36.2% shareholder in Coroin Limited, petitioned for relief under section 994 of the Companies Act 2006, claiming unfairly prejudicial conduct when pre-emption rights were allegedly circumvented as the Barclay interests acquired practical control over another shareholder's stake through various arrangements without triggering the pre-emption provisions.

Facts

Patrick McKillen held 36.2% of shares in Coroin Limited, a company that indirectly owned three major London hotels. Under a shareholders’ agreement dated 14 May 2004 and Coroin’s articles, shareholders had pre-emption rights entitling them to purchase shares of other shareholders in particular circumstances. Derek Quinlan, holding 35.4% of shares, was in severe financial difficulties. Through various arrangements with the Barclay interests, including security charges, a power of attorney, the resignation of Quinlan as director (replaced by a Barclay nominee), and an exclusivity agreement, practical control of Quinlan’s shareholding passed to the Barclay interests without triggering the pre-emption provisions. On 17 February 2011, Quinlan entered into a binding agreement with the Barclay interests for the sale of his shares, subject to compliance with the shareholders’ agreement.

Issues

Principal Issues

1. Whether the arrangements between Quinlan and the Barclay interests triggered Mr McKillen’s pre-emption rights under clause 6 of the shareholders’ agreement.

2. Whether there was an act or omission by Coroin that was unfairly prejudicial to Mr McKillen under section 994(1) of the Companies Act 2006.

Specific Arguments Considered

The court examined four main arguments: (1) the practical effect argument – whether arrangements achieving practical control triggered pre-emption rights; (2) the proprietary interest argument – whether a contingent proprietary interest was transferred; (3) the good faith argument – whether clause 8.5 of the shareholders’ agreement was breached; (4) the security becoming enforceable argument – whether security charges becoming enforceable triggered clause 6.6.

Judgment

The Court of Appeal dismissed Mr McKillen’s appeal. Lady Justice Arden, delivering the leading judgment, held that the arrangements did not breach the pre-emption provisions.

On the Practical Effect Argument

The court held that the pre-emption provisions in clause 6 were geared to preventing transfers of proprietary interests, not mere changes in control. This was consistent with the court’s earlier decision in Re Coroin (No 1) [2012] 2 BCLC 611. The February agreement was conditional on compliance with pre-emption rights and therefore did not constitute a desire to transfer shares contrary to clause 6.1.

On the Proprietary Interest Argument

The court held that no proprietary interest passed under the February agreement because it was subject to a true condition precedent requiring compliance with the pre-emption provisions. Additionally, clause 6.17 prevented the creation of any such interest outside the provisions of clause 6.

On the Good Faith Argument

The court interpreted the good faith clause (clause 8.5) as requiring parties to act honestly in a subjective sense. Since the February agreement was conditional on due observance of pre-emption rights, there was no bad faith. The court noted:

“the terms of the February agreement were inconsistent with the notion that Mr Quinlan intended to act in bad faith as it was conditional on the due observance of Mr McKillen’s pre-emption rights on any transfer of his shares to the Barclay interests.”

On the Security Becoming Enforceable Argument

Regarding the 2004 charge, the court (Arden LJ, with Moore-Bick LJ and Rimer LJ disagreeing on this specific point) held it did not become enforceable for clause 6.6 purposes because BOSI had not made the required declaration of immediate enforceability. Regarding the 2005 charge, while it did become enforceable, the one-month period for directors to act under clause 6.6 had expired before they knew of the default. No implied term could extend this period.

Implications

The decision clarifies that pre-emption provisions in shareholders’ agreements are interpreted according to their express terms. The transfer of practical control over shares, as distinct from proprietary interests, does not trigger pre-emption rights unless specifically provided for. The case also confirms that clause 6.17-type provisions can invalidate attempted transfers that do not comply with pre-emption procedures, providing protection even where directors fail to act within specified time limits under provisions like clause 6.6. The judgment emphasises the importance of precise drafting in shareholders’ agreements and the limited scope of good faith clauses to expand contractual obligations beyond their express terms.

Verdict: Appeal dismissed. The Court of Appeal upheld the decision of David Richards J, finding no act or omission by Coroin that constituted unfairly prejudicial conduct against Mr McKillen under section 994 of the Companies Act 2006.

Source: Coroin Ltd, Re [2013] EWCA Civ 781