Losing control?

In commercial situations where parties rely on ongoing cooperation (e.g. joint ventures), they often agree to restrict each others' ability to change their ownership structures. If unconsented change occurs, this would trigger some buyout or termination right on the other party. The purpose of such restriction is to protect the preferred relationship of the original parties to the commercial relationship.

You should be creative (but clear) in defining what exactly constitutes a change of control and what happens in case of an unconsented change. For example, in one Privy Council judgment, the use of the word “loss” as opposed to “change” of control turned out to be very critical.

The Case

Rivnu Investment Ltd v United Dock Ltd [2017] UKPC 24 (for link see Downloads) centered on four shareholders of Axys Group Ltd (Axys) who together held 89.15% of the shares in Axys. They entered into a shareholders’ agreement in June 2006 (Axys shareholders’ agreement) which, among others, gave each party a buyout right of another party’s interest in Axys if that party went through a change in the shareholding structure (buyout right).

One of the four shareholders, United Docks Limited (UDL), was a widely held company with some 1,900 shareholders. No shareholder held a majority of the shares in UDL. In July 2006, Horus Ltée (Horus) bought out two of the largest shareholders in UDL, gaining 18.27% of the UDL shares. Horus then lobbied for and completely changed the board of UDL at its next general meeting.

Soon after, the three shareholders of Axys other than UDL gave notice requiring UDL to sell its Axys shares to them on the basis that there was a change in the shareholding structure of UDL. They relied on the following clause of the Axys shareholders’ agreement:

11.1 Should there be any change in the shareholding structure of any of the parties, resulting in the loss of the controlling interest of the shareholder(s) which/who currently hold(s) such controlling interest in the said party, the other parties shall have an option to purchase all or part of the shares of such party. [Emphasis added]
“Controlling Interest” was defined in the agreement as the interest held by a shareholder as per the listing rules of the local stock exchange. That listing rule defined a controlling shareholder as:

Any person who is… entitled to exercise, or control the exercise of, 20% or more of the voting power at meetings of shareholders of the issuer or one which is in a position to control the appointment and/or removal of directors holding a majority of voting rights at board meetings on all or substantially all matters.

The Arguments and Outcome

‍UDL argued that there was no loss of controlling interest. Essentially, there was no shareholder in UDL who held a controlling interest, and so there could not have been any “loss” of that interest.

The other shareholders asked that the court look broader than the literal text of the Axys shareholders’ agreement. The buyout right held by each shareholder was designed to tightly control the composition of the shareholders, and any alteration to the shareholding structure should trigger the buyout right. Further, they asserted that UDL’s argument made clause 11.1 of the agreement meaningless in respect of any shareholder in whom no person held a controlling interest. This, it was argued, was not the parties’ intention.

The Privy Council sided with UDL. The court acknowledged that under the law of Mauritius, interpreting a contract focussed on the common intention of the parties rather than the literal sense of the terms used. However, the court could find no evidence to suggest that the common intention of the parties was such that it should rewrite the words “loss of controlling interest” in the agreement to “change or alteration of controlling interest”.

Some comments‍‍

In New Zealand (and other common law countries), the wording of the agreement will be even more critical.

One final note is that a clause in a contract restricting change in a company’s board may receive a different kind of scrutiny from the courts. In this case, the Privy Council stated that if the change of control provision focussed on keeping the current directors of each shareholder, there may have been legal and other objections. These objections would relate to the propriety of such a purpose and/or the current directors’ authority to give effect to it.

Photo image - Caudan Waterfront at Port Louis, Mauritius. (courtesy of carrotmadman6). Privy Council Judgment on appeal from judgment of the Supreme Court of Mauritius, Rivnu Investment
Ltd v United Dock Ltd [2017] UKPC 24.