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TMI Blog1959 (6) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... ether or not it is a fully paid share. This article must be borne in mind in construing the succeeding articles. Article 8 provides that subject to the provisions of articles 7 and 12 ordinary shares may be dealt with by an ordinary shareholder by way of transfer or bequest to, or conveyance to trustees for behoof of certain relations with or without any consideration being paid. Article 9 is that upon which this appeal turns and I must set it out in extenso : "Subject to the provisions of clauses 7, 8 and 12 no registered holder of more than one per centum of the issued ordinary share capital of the company shall, without the consent of the directors, be entitled to transfer any ordinary share for a nominal consideration or by way of security, and no transfer of ordinary shares by such a shareholder shall take place for an onerous consideration so long as any other ordinary shareholder is willing to purchase the same at a price, which shall be ascertained by agreement between the intending transferor and the directors and, failing agreement, at a price to be fixed by the auditors of the company for the time being. Any such ordinary shareholder who is desirous of transferring his o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipal, who, though his name was then undisclosed, later proved to be a Mr. Hugh Fraser, with a written offer to purchase their shares. The offer was expressed to be subject to certain terms and conditions, of which the first was that the offer was conditional upon acceptance by the holders of 75 per cent. of the ordinary shares then in issue or such lesser proportion as their clients might in their absolute discretion accept as sufficient, and the second that the price for each ordinary share should be 210s. and should be inclusive of any ordinary dividend declared subsequent to the date thereof and that the price for each preference share should be 20s. with a similar provision in regard to dividend. Then there was a condition about holdings of both ordinary and preference shares, and then this condition which I deem of sufficient importance to set out in full : "The price shall be satisfied by payment in cash on or after December 18, 1956, against delivery of valid and effective transfers of the said ordinary and/or preference shares together with the relative share certificates and a general proxy in favour of our clients' nominee." Certain other conditions were expressed to w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled upon the ground that, though the provisions of article 9 have been breached by Scott's trustees, they have not established their right to the remedy they have claimed. Conclusions 1 and 2 of the summons are as follows : "1. For declarator that the defenders, in respect that they are the holders of ordinary shares of Lyle Scott Ltd. amounting to more than one per centum of the issued ordinary share capital of the said company and are desirous of transferring the said ordinary shares for an onerous consideration, are bound to implement the terms of article 9 of the articles of association of the said company and that by informing the secretary of the said company in writing of the number of ordinary shares which they desire to transfer. 2. For decree ordaining the defenders forthwith to implement the terms of the said article 9 by informing the said secretary in writing of the number of ordinary shares which they desire to transfer." At the hearing before the Lord Ordinary, as also at that before the First Division, the debate appears to have been divided into two parts. First, it was questioned whether Scott's trustees had been guilty of a breach of the first or prohibi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the root of the matter, that I regard Scott's trustees as desirous of transferring their ordinary shares unless and until their agreement with Mr. Fraser has been abrogated. Of this at least one acid test would be the return by them of the price they have received. Against this view it was urged that they were not desirous of transferring their shares within the meaning of the article because they had not a general desire but a particular desire to transfer only to Mr. Fraser at a certain price. This makes nonsense of the article, the purpose of which would be wholly defeated if it did not apply to a desire to transfer to a particular person, who might be the person whom the company particularly wished to exclude. That it was contended that they were not desirous of transferring their shares, because their task had been done and their desire satisfied. I think my Lords, that this ingenious and almost humorous plea ignores that they have elsewhere pleaded and vigorously relied on the fact that the transfer has not been completed. This plea had perhaps not been thought of when they decided not "at the present time" to have deeds of transfer executed. If, then, Scott's trustee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion as any other shareholder who wishes to sell his shares in the manner prescribed by the article if he can get a satisfactory price for them. That is the bargain he made when he became a shareholder and he must abide by it. What he cannot be permitted to do is to adhere to his contract and in the same breath assert that he does not desire to transfer his shares. It may well be that he thus places himself in a position of disadvantage vis-a-vis the purchaser with whom he has contracted. But it cannot be denied that he has done so with his eyes open. I would therefore allow the appeal with costs here and below. The order will be in the form which my noble and learned friend, Lord Reid, has prepared, and will intimate to the House. My Lords, in the second case, Lyle Scott Ltd. v. British Investment Trust Ltd., [1901] 9 SLT 137 the respondents are shareholders of the appellant company and hold more than 1 per cent. of its issued ordinary shares. I cannot in any relevant matter distinguish this case from that of Scott's trustees with which the House is dealing. The same order must, in my opinion, be made. Lord Reid. My Lords, in these two actions the pursuers and appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holders of more than 1 per cent. of the ordinary shares, and it is clear from their defences that they have received the price of 3 per share and that they have not attempted to resile from their contracts with Mr. Fraser. The appellants maintain that this necessarily means that they are desirous of transferring their shares within the meaning of this article, and that they are therefore bound so to inform the secretary of the company so as to set in motion the provisions of the article under which the other shareholders are entitled to have an opportunity to purchase any share which any shareholder is desirous of transferring. The only conclusions of the summons now in issue are for declarator that the defenders, in respect that they are desirous of transferring their shares, are bound to implement the terms of article 9 and for decree ordaining them forthwith to do so by informing the secretary of the number of ordinary shares which they desire to transfer. The Lord Ordinary, Lord Strachan, and the First Division have held that the respondents have contravened the provisions of article 9, but that the appellants are not entitled to the remedy which they seek. Before your Lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the price to be ascertained as aforesaid, without first offering them" to the other shareholders at the new price. That appears to me to make it clear that the shareholder "desirous of transferring" shall so inform the secretary before he makes any agreement to sell to anyone, and that he is only entitled to agree to sell to a stranger such shares as the other shareholders fail to purchase under article 9. I find nothing in the article which is inconsistent, or even difficult to reconcile, with this interpretation of it. Whether the appellants are entitled to the remedy which they seek depends in the first place on whether the respondents are now "desirous of transferring" their shares. They were certainly desirous of doing so when they made their contracts with Mr. Fraser. It is said that, though they desired to transfer to him at 3, they never desired to transfer to the other shareholders under article 9. But the article does not say desirous of transferring in the manner which it provides. It simply says desirous of transferring and, if it is to be effective in ensuring that the other shareholders have an option to purchase, it must apply whenever a shareholder desires to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat a shareholder who in bona fide mistakes his rights should be compelled to sell his shares on terms which he cannot control, and I might find it difficult to read such a meaning into an article of this kind. But I think that that is not the meaning of article 9. That article requires a notice to be given by any shareholder who desires to sell his shares, but it does not make such a notice irrevocable. No doubt it becomes irrevocable when the procedure following on it results in a contract between the shareholder giving the notice and another shareholder who has made an offer for the shares, and I need not discuss the question of the exact stage at which such a contract emerges. But until that stage is reached it appears to me that it is open to the shareholder who gives the notice to withdraw it : I see no reason to doubt two decisions of the Court of Session on this matter, Smith v. Wilson [1901] 9 SLT 137 and Stevenson v. Wilson [1907] SC 445. Both these cases arose out of the same transaction. In 1900 Wilson, as trustee in a sequestration, advertised for sale shares of J.M. Smith Ltd. and on January 20 Stevenson agreed to buy the shares. An article of associatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the question whether a company is entitled to object and take action if a shareholder purports to sell to a stranger in breach of its articles because J.M. Smith Ltd. did not object and this question was not raised. Under article 9 the respondents are bound to give notices so long, as they are desirous of selling their shares, and they must be held to be desirous of selling their shares so long as they maintain and do not annul their contracts with Mr. Fraser. It is in their power to do that, and, once they have done so, they will be entitled to say that they are no longer desirous of transferring their shares. So any decree requiring them to give notice must be so qualified that they are only required to give notice if they are still desirous of transferring their shares. And, even if they have not terminated these contracts before they are required to give notice, they could still do so and withdraw the notices before any contract with the other shareholders had been made. But if either of the respondents does not withdraw the notice then the shares to which it relates will pass to other shareholders who acquire them under article 9 and the respondents will receive the price p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o transfer to another the legal and equitable title to his share. They have received from Mr. Fraser the agreed purchase price and the contract still subsists. By so doing they have, in my view, beyond question taken an overt act signifying their desire to transfer their shares within the meaning of article 9 of the articles of association of Lyle Scott Ltd. Such desire must be taken as continuing so long as the contract subsists. The desire to sell having been established, it became imperative for the respondents to inform the secretary of the company in writing of the number of shares they desire to transfer and thereby to bring into operation the procedure contained in the article for offering such shares to all the other ordinary shareholders at the price fixed in accordance therewith. I cannot accept the respondents' contention that the desire to sell envisaged by the article does not include a desire to sell to some specific person but only applies to a desire to sell to some unascertained purchaser who may be found as a result of notification to the secretary and putting into operation the procedure of the article. This step of informing the secretary was not taken and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. I shall consider the bearing of these qualifications in a moment. The Lord Ordinary has, I consider, accurately stated the position when he says 1958 SC 230, 233-234 : "The defenders' averments as a whole seem to me to indicate a sale or transfer of the shares subject to a condition that the formal steps necessary to complete the transfer should be postponed for a period which is not stated. If that be a right reading of the defences, I take leave to suspect that the delay in completing the transfer was introduced simply in order to leave open an argument that article 9 did not apply to the circumstances of these particular transactions." The defenders in fact relied for their main argument on the submission that article 9 did not apply here at all. Their argument proceeded on a very narrow point. The word "transfer" in the prohibitory words in article 9, "no transfer of ordinary shares . . . shall take place for an onerous consideration so long as," etc., meant, they said, "no registration of an instrument of transfer shall take place." From this, as I understood it, the next stage was reached that the words: "Any such ordinary shareholder who is desirous of transferring his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... registration. If I may express my view of the article in the most general sen9e, I think the prohibitory part of the article is the sanction which prevents a shareholder from carrying through a transfer of shares without complying with the machinery of transfer set out in the second part of the article. And I think a shareholder who has transferred, or pretended to transfer, the beneficial interest in a share to a purchaser for value is merely endeavouring by a subterfuge to escape from the peremptory provisions of the article. A share is of no value to anyone without the benefits it confers. A sale of a share is a sale of the beneficial rights that it confers, and to sell or purport to sell the beneficial rights without the title to the share is, in my opinion, a plain breach of the provisions of article 9. This, I think, is the view which commended itself to Lord Sorn, and I think he is right. What has happened in the present case is that by virtue of the articles the purchaser is unable to take the seller's name off the register and substitute his own. The defenders have done everything apart from executing a formal instrument of transfer that would be necessary to a normal purc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ep at this stage, in my opinion, is to ordain the defenders to give notice to the secretary of their desire to transfer the number of shares which they have contracted to sell to their purchaser. There is nothing in the decision in Smith v. Wilson's case ( supra ) to prevent such a course. In that case Wilson offered, under a clause similar to that in the present case, certain shares to the company concerned. The offer was made on January 31, 1900. The offer was intimated by the board to the other shareholders, and on February 10 a shareholder lodged with the company a sealed offer to buy the shares. Before this the intending seller had withdrawn his offer on February 5. The only point considered was whether Wilson was bound to keep his offer open for fourteen days from the board's notice to the other shareholders, within which a shareholder could lodge his offer to buy. The court held that Wilson was not bound to keep his offer open for that period. It appears from the later case of Stevenson v. Wilson 1907 SC 445 that Wilson had, on January 30, 1900, entered into a conditional contract with Stevenson, which incorporated the company's articles of association, for sale of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n opportunity is given to the directors sitting as a board to determine whether the proposed transferee is a person whom they are prepared to admit as a member of the company, the conditions imposed by the article are, in my opinion, complied with, and the contract into which the vendor on becoming a shareholder entered with his co-shareholders is sufficiently discharged." That case was concerned with the consent of directors under a company's article to a transfer of shares. But mutatis mutandis it can equally be applied to the contract which the defenders made here with their co-shareholders when they became members of the company and bound themselves to observe the conditions of article 9. In the circumstances, I think the pursuers' averments and the admissions of the defenders are relevant to infer a desire of the defenders to transfer their ordinary shares for an onerous consideration within the meaning of article 9. In my opinion, the defenders' first plea in law should be repelled, the pursuers' sixth plea in law should be sustained, and an appropriate decree within the conclusions of the summons should be pronounced. I agree with the form of order proposed by my noble and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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