Article / 1 Mar 2025
In this month’s update we:
The High Court has considered provisions in a company’s articles of association relating to the forfeiture of a shareholder’s shares. Although the provisions purported to permit forfeiture for the non-payment of any amount owed by the shareholder to the company, the Court found that they were in fact restricted to the non-payment of an unpaid amount due on the shareholder’s shares.
Forfeiture refers to the process under which shares can be “taken off” a shareholder if the shareholder in some way fails to meet their obligations to the company.
There is no statutory process permitting forfeiture of shares and so a company can only do this where a power of forfeiture is set out in its articles of association.
Typically, a company’s articles may permit shares to be forfeited where they have been issued nil or partly paid. In those circumstances, the shareholder has an obligation to pay the unpaid amount due on those shares if the company issues a “call” for that unpaid amount. If a shareholder fails to comply with that call, the articles usually go on to enable the company to forfeit (or extinguish) the shareholder’s shares.
The Model Articles for Private Companies Limited by Shares assume that all shares will be issued fully paid so they do not contain any forfeiture provisions. But the Model Articles for Public Companies anticipate that such a company may wish to issue nil or partly paid shares. Therefore, they contain provisions which set out when a company may call for the unpaid amount due on those shares and what happens when a shareholder fails to comply with that call.
In Key Choice Financial Planning Limited v Evoy [2025] EWHC 4 (Ch), a former director held 57 fully paid shares in a company. The former director issued a winding up petition against the company. The petition was dismissed and the former director was ordered to pay the company’s costs of just over £162,000.
The company had adopted the Model Articles for Private Companies Limited by Shares, with certain amendments. In particular, provisions relating to liens, calls and forfeiture had been inserted in the articles. Those provisions appeared to have been prepared using the equivalent provisions from the Model Articles for Public Companies, but with various amendments, including changes to:
Following the dismissal of the winding up petition, the company issued a call notice in respect of its outstanding costs. When the former director failed to respond to that notice, the company took steps to forfeit his shares in accordance with the company’s articles.
The former director then alleged that both the call and the forfeiture of his shares were illegal.
The Court agreed with the former director.
When considering the company’s articles, the judge noted that the relevant provisions had specifically and deliberately been amended in an attempt to expand the meaning of “call” to include any sums outstanding from the shareholder to the company.
However, the judge highlighted inconsistencies and ambiguities in the drafting of those provisions. For example, the words “in respect of shares which that member holds” had been removed from the provision relating to when a call notice may be issued, but remained in the consequential provisions relating to forfeiture following such a call. The articles didn’t take into account the effect of extending the lien and call provisions as the drafter had attempted to do on joint shareholders who could, as a result, become a guarantor of their co-owner’s liabilities. In addition, if the company was able to forfeit shares but was not required to account to the shareholder for any value of those shares in excess of the amount due to the company, this could result in a windfall to the company and a penalty to the shareholder.
Because of these issues, the judge said the articles had to be read as impliedly limiting calls to unpaid capital on specified shares. As the only point of serving a call notice was to set up the possibility of forfeiture, he said it was clear that the word “call” was limited to sums payable in respect of unpaid share capital.
As noted above, provisions relating to liens, calls and forfeiture are usually limited to nil or partly paid shares. But, in this case, the relevant shares were fully paid and no sum was due from the shareholder to the company in respect of those shares. Whilst it may be tempting to try and extend the provisions to any shareholder debts, this case shows the dangers of doing so. Companies that have included similar provisions in their articles of association should consider updating them to remove any inconsistencies and ambiguities, or else recognise that the provisions will only be useful in dealing with unpaid share capital.
In R. (L1T FM Holdings UK Ltd) v Chancellor of the Duchy of Lancaster in the Cabinet Office [2024] EWHC 2963 (Admin), the High Court dismissed the claimant’s application for judicial review of a final order made by the Secretary of State under the National Security and Investment Act 2021 (NSIA). The final order required the claimant to divest its entire shareholding in a company that it had acquired two years previously.
The case marks the first judicial review challenge under NSIA to reach the High Court and confirms the wide discretionary powers given to the Secretary of State to prevent, remedy or mitigate any perceived risk to national security.
The NSIA allows the Government to scrutinise and intervene in certain acquisitions and investments that could harm the UK’s national security. The Investment Security Unit (ISU) – a unit within the Cabinet Office – is responsible for operating the notification and screening regime under the NSIA.
A transaction within the scope of the NSIA regime may be “called in” for assessment if the Government reasonably suspects that it poses a risk to national security.
In addition to the Government’s call in powers, acquisitions or investments in one of seventeen high-risk sectors must be cleared by the ISU before completion. Failure to obtain clearance will result in the acquisition being void and the acquirer may be subject to criminal or civil penalties.
Following a national security assessment, the Secretary of State can impose remedies that they reasonably consider to be necessary and proportionate to deal with the national security risk. These include approving a transaction subject to conditions (e.g. restricting access to sensitive sites or information), blocking a deal, or requiring an acquisition to be divested or unwound. The Government may also choose to provide financial assistance when making a final order.
In January 2021, the claimant (L1T) acquired the entire share capital in a company (Upp). Upp’s business involved bringing next-generation broadband services to under-served rural UK communities. At the time of this acquisition, the ultimate beneficial owners of L1T were a group of Russian nationals who became subject to EU and UK sanctions following the Russian invasion of Ukraine.
Shortly after the NSIA came into force (in January 2022), concerns were raised by the Government about possible national security risks to the UK telecoms infrastructure arising from L1T’s acquisition of Upp. These risks included the potential for espionage, the ability to disrupt and sabotage the UK’s broadband network, and access to customer data that could be used to undermine national security. As a result of these concerns, the ISU called in the acquisition for assessment.
Following an in-depth review, and despite L1T’s representations for less draconian measures, the Secretary of State made a final order requiring L1T to divest itself of 100% of its shareholding in Upp. L1T subsequently sold these shares at a loss.
L1T brought judicial review proceedings in January 2023, arguing that the Government’s final order:
The application for judicial review was refused.
On the question of whether the divestment remedy was proportionate, the Court noted that proportionality was part of the statutory test for making a final order under the NSIA and the Secretary of State could be assumed to have considered it. The Court found that the Government had effectively balanced community interests with the rights of the claimant and it deferred to the Secretary of State’s opinion that national security could not be protected by less intrusive measures. As for compensation, the Court found that the interests of national security had to prevail over L1T’s financial interests and that awarding financial assistance was a discretionary power and was not obligatory.
In relation to procedural unfairness claims, the Court was satisfied that the decision to make the final order was based on a fair process. It found that the Secretary of State had a duty to act in accordance with accepted principles of fairness, no more and no less. Provided that process was fair (in the eyes of the Court), it was ultimately up to the Secretary of State to decide what procedure to follow. The NSIA did not expressly impose a duty to consult, and the Court considered that L1T had been given adequate opportunity to understand and to comment on the case against it.
The NSIA was drafted to give the Government wide discretion when assessing risks to national security and deciding on the appropriate remedy to manage those risks. It is, therefore, unsurprising that in the absence of obvious procedural unfairness, a court will uphold the Secretary of State’s decisions.
However, for the relatively small number of acquirers whose transactions are called in for review, this decision may cause some frustration. It illustrates the limited scope within the current process for challenging the Government’s objections (not least because “national security” is not defined in the NSIA), and the lack of opportunity to address the Government’s concerns when those concerns may not be clearly articulated.
The High Court struck out part of a shareholder’s unfair prejudice petition on the basis that a failure to transfer shares between shareholders did not relate to “conduct of the company’s affairs”.
An unfair prejudice claim is the main procedural route for a minority shareholder to petition the Court when they believe that the company’s affairs are being conducted in a manner that is unfairly prejudicial to their interests. For the claim to be successful, the conduct complained of must:
If the Court finds that the claim of unfair prejudice is made out, it has very wide powers and may make any order that it thinks appropriate to put right the prejudice complained of. In theory, this includes the draconian remedy of ordering the company to be wound up. But, in reality, the most common remedy requires the shares of the member making the claim to be bought out at fair value by the other member(s).
A recent case, Brierley v Howe (Re 36 Bourne Street Ltd) [2024] EWHC 2789 (Ch), involved a minority shareholder in an interior design company. The company founder transferred 10% of his 100% shareholding to the minority shareholder. But she alleged they had agreed that the founder would gradually transfer further shares to her over a number of years if the company met certain financial targets. According to the minority, that arrangement was itself replaced with a new agreement under which she was immediately entitled to a 49% shareholding. Whilst there were some references to the arrangements in email correspondence between the parties, no formal agreement was entered into.
The founder denied that the arrangements alleged by the minority shareholder existed. To the extent that they were referred to in email correspondence, the founder said it was always understood that this would be subject to legal advice and tax advice, and that, in the end, the discussions came to nothing.
The minority shareholder issued a petition in which she argued that the company’s affairs had been conducted by the founder in a manner that was unfairly prejudicial to her interests. The founder applied to strike out those sections of the petition relating to his failure to transfer shares to the minority on the basis that this did not relate to “conduct of the company’s affairs”.
The judge agreed with the founder. He confirmed that the statutory requirements had to be dealt with on a step-by-step basis. Firstly, it had to be ascertained whether the matter complained of qualified as either an act or omission by the company or conduct of the company’s affairs. Only if that requirement is satisfied would the Court move on to consider unfair prejudice.
In this case, the minority shareholder’s claims to receive additional shares “by transfer” from the founder were directed solely at the founder. There was no allegation that the company was required to do (or not do) anything. The claims related to a purely personal arrangement between the founder and the minority, and did not involve the conduct of the company’s affairs. The judge distinguished an earlier case which, rather than a transfer of shares, related to an allotment and issue of new shares – something which clearly did involve the company and the conduct of its affairs.
Accordingly, the judge struck out those parts of the minority’s petition relating to the transfer of shares.
It seems that the use of unfair prejudice petitions is on the rise, with significantly more petitions being issued in the last few years than previously. Given that a buyout order is the typical remedy for a successful petition, it appears that some minority shareholders may be using an unfair prejudice claim as a strategic tool to engineer an exit. As this case shows, however, the Court will exercise its discretion to strike out weak claims and not allow the process to be used for nuisance petitions by aggrieved shareholders.
First published in Accountancy Daily.
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