Investors in private companies frequently agree not to dispose of their shares without making an offer of first refusal to their co-investors. In a guideline case, the Court of Appeal has analysed the legal effect of such agreements in the context of a battle for control of a property company.

The company was established for the purpose of making a property investment. The shareholders agreed that each of them would have a right of pre-emption before any of them disposed of their shares. However, following a falling out between them, a number of them transferred their shares to an overseas company.

With a view to obtaining control of the company, other shareholders argued that they had not been afforded their pre-emption rights and the transfers were thus invalid and should be unwound. A judge accepted that the pre-emption rights were valid, but nevertheless rejected the other shareholders’ claim.

In upholding that decision, the Court found that the pre-emption rights had been superseded by an informal agreement reached at a board meeting. The board, which comprised a majority of shareholders, had unanimously resolved not to object to the transfers and that decision was binding on all concerned. There were circumstances which made it unconscionable and inequitable for the disappointed shareholders to seek to assert their pre-emption rights. The overseas company had thus validly acquired the shares and was entitled to register them.