In Syspal Capital Limited v. Truman & Anor [2024] EWHC 1561 (ChD), the court had to determine the correct interpretation of a particular clause in a company’s articles of association (articles) that concerned deemed transfer notices.

In reaching its decision, the court reaffirmed that when interpreting a company’s articles, the court will treat them as a “somewhat special category” as compared to a private contract and, when interpreting its provisions, will have regard to commercial common sense, the scheme and purpose of the articles in general and any reasonably ascertainable facts about the company or its membership.

Background

The case concerns the articles of the second defendant, Syspal Holdings Limited (SHL), which is the holding company and sole owner of Syspal Limited (SL), an engineering company specialising in steel and aluminium products.

The dispute revolved around whether it was the dismissal of the first defendant, Mr Truman, as an employee of SL or his later resignation as director of SHL, that engaged the deemed transfer notice provisions in SHL’s articles and, in turn, the sale of Truman’s shares in SHL to the claimant, Syspal Capital Limited (SCL).

Truman had been employed by SL since 1980 but was dismissed as an employee on 10 October 2022 and removed as a director on 3 November 2022. Truman was also a director of SHL, in which he held a 24% shareholding. The remaining 76% shareholding in SHL was held by SCL, itself controlled by Anthony Roberjot, who was also a director of SHL. Truman remained a director of SHL after his dismissal from SL until 24 May 2023, his 65th birthday, when he resigned his directorship. This left Roberjot as SHL’s sole director.

Article 11.3 of SHL’s articles stated that if any “Employee Member” ceased to be “employed” as an employee, director, or consultant of a Group Company and “does not continue in that capacity in relation to any Group Company”, then a transfer notice would be deemed to be served on the date of cessation. Both SL and SHL were Group Companies under SHL’s articles. A dispute therefore arose as to whether the service of a transfer notice had been triggered as a result of his dismissal as an employee on 10 October 2022 or whether this had occurred when he resigned as a director of SHL on 24 May 2023. The reason why this was relevant was because the articles provided for different valuation methods for Truman’s shares depending on the reason for and date of the cessation in his involvement with the group. If the transfer notice was deemed to have been served due to his retirement at 65 years of age, he would be entitled under the articles to be paid “Fair Value”. In contrast, if the transfer notice was deemed to have been served because of any other reason, he would be entitled only to “Market Value”. The difference in this case between the Fair Value and Market Value was very significant.

Decision of the Court

Interpretation of Articles

Before beginning his analysis, the judge observed that the principles of interpretation as summarised in Wood v Capita Insurance Services Limited [2017] UKSC 24 provided the governing approach. Put very simply, these principles require that contracts must be interpreted objectively by asking what a reasonable person, with all the background knowledge that would reasonably have been available to the parties when they entered into the contract, would have understood the language of the contract to mean. However, the judge also noted that when it comes to background facts, the articles of association of a company are in a “somewhat special category compared to a private contract.” As such, and quoting from the judgment in Re Euro Accessories Ltd [2021] EWHC 47, “the process of interpretation to arrive at the true meaning of a provision in the company’s articles of association must concentrate on the natural and ordinary meaning of the words used, when viewed in the light of the scheme and purpose of the articles in general, any extrinsic facts about the company or its membership that would reasonably be ascertainable by any reader of the company’s constitution and public filings at Companies House, and commercial common sense.” Such an approach was also approved by the Court of Appeal in Ventura Capital GP Ltd v DNANudge Ltd [2023] EWCA Civ 1142 (See our article “‘Corrective construction’ to achieve commercial common sense in company articles” for more information on this case.)

“Fair Value” or “Market Value”

The judge noted that the wording of Article 11.3 was not entirely clear but ultimately agreed with Truman’s submissions and determined that a transfer notice was deemed to be served upon Truman’s resignation as a director from SHL on 24 May 2023, rather than as a result of his dismissal as an employee of SL. He was therefore entitled to the higher “Fair Value” calculation.

When considering Article 11.3, the judge took a common sense approach to interpreting the articles, including that it did not make commercial sense to require Truman to transfer his shares upon ceasing to be an employee of SL when he still remained a director of SHL. Article 11.3 had instead been targeted at the cessation of all of the three categories of employment – employee, director or consultant – so that the relevant trigger was when the Employee Member was no longer involved in the business at all. In the judge’s view, this was the more natural reading of the words. In reaching this decision, the judge observed that it was not uncommon – particularly in private companies – for a senior employee to retire from full-time employment but continue to serve the business in a more advisory role.

The judge also considered the articles as a whole and the surrounding circumstances. Noting that Truman and Roberjot were the only directors at the date of adoption of the articles and that Roberjot was expressly excluded from the provisions of Article 11.3, the judge took the view that Article 11.3 must have been directed specifically at protecting Truman’s position regarding the valuation of his shares. The drafting ensured he would receive Fair Value if he retired from all positions at 65 years old or as a result of permanent incapacity or death. Indeed, if Truman had died before 10 April 2024 (the day when his “key man” insurance expired), his family were to receive the higher of £3 million or Fair Value. Taking all that into account, the judge did not consider that the provisions could be interpreted as allowing for SCL to compulsorily purchase Truman’s shares at a lower price in the event he was dismissed from a company controlled by Roberjot but continued in place as a director of SHL.

Furthermore, the judge also bore in mind that SCL’s interpretation could leave the articles open to abuse by Roberjot, because they would leave Truman vulnerable to a sham dismissal as an employee for no good reason in order to force a sale at a lower price, all while Truman remained a director. The judge considered that it was “most unlikely” that Truman and Roberjot had intended this to be a possibility when adopting the articles.

Alternative Arguments: Implied Term?

Truman advanced alternative arguments in support of his position. While the judge considered it was unnecessary to decide those arguments, he indicated that he would have rejected both alternatives.

In his first alternative argument, Truman argued that an implied term ought to be read into Article 11.3 to ensure that it would be engaged only when the cessation of employment was for lawful reasons. Truman considered that this would prevent the risk of an employee being dismissed unlawfully with the intention of forcing through a transfer of shares at a lower price. The judge rejected this argument because he did not consider implying a standard of lawfulness was necessary to give business efficacy or commercial coherence to the article: “The fact that it might make the provision seem more reasonable is clearly not enough.”

Truman further argued in the alternative that if his dismissal in 2022 was the relevant event that triggered the Transfer Notice, and if he could successfully prove before an Employment Tribunal that he had been unfairly dismissed and should be reinstated, then that cessation should not engage Article 11.3. The judge rejected this argument. Quite apart from the fact that reinstatement would be an unlikely remedy in circumstances in which relations between individuals had broken down, such an order to reinstate Truman would necessarily be directed at the employer SL, and an order on SL should not be allowed to impose on or alter the position regarding SHL’s articles and SCL’s rights under those articles.

Commentary

This case provides helpful guidance on how a court will analyse and interpret a company’s articles. In addition, it is a salient reminder of the need for parties to carefully consider and draft the triggers for transfer notices and any valuation consequences that are intended to follow.

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