Share conversions: can you convert preference shares to ordinary shares without preference shareholder consent?

In DnaNudge Ltd, Re [2023] EWHC 437 (Ch), the High Court held that a conversion of preference shares into ordinary shares by a company was a variation or abrogation of the rights attached to those preference shares. The Court granted a declaration that the conversion was invalid, void and of no effect, because the procedure for varying class rights in the company’s articles had not been followed.

One of the articles provided for automatic conversion on notice in writing from an investor majority, but the company did not obtain the consent of the preference shareholders in order to vary or abrogate their class rights, as required by another article. The preference shareholders also argued that the variation or abrogation of their rights unfairly prejudiced the preferred shareholders and should be voided pursuant to section 633 of the Companies Act 2006.

The Court said that the articles had to be read as a whole. The article which provided for the share conversion mechanism was subject to another article which dealt with the variation of class rights, and which should have been complied with to effect any variation or abrogation of those rights. An implied limitation to this effect was deemed inserted into the share conversion article.

This case emphasises how important it is to consider overlapping or conflicting provisions within a company’s articles of association. Any provision which provides for automatic share conversion without class-holder consent will need special attention.

The Court didn’t have to consider section 633 of the Companies Act 2006, but it took the view that section 633 applied to all attempted variations of class rights. Section 633 gives a right to the holders of at least 15% of the issued shares of the relevant class to object, and the burden is on the objector to prove unfair prejudice. The Court said that where a share conversion is made in accordance with the articles as a whole (and assuming no improper purpose or bad faith), then a claim for unfair prejudice under section 633 might fail.

If the article requiring the consent of the preference shareholders hadn’t been there, the decision looks as though it would have gone the other way. This means that an automatic share conversion in accordance with the articles without class-holder consent, from preference to ordinary shares, might be valid, as long as the articles of association are clear and unambiguous.

If you are thinking about amending or preparing articles of association for your company, or you have a query on your existing articles, please do get in touch and we’d be happy to help. Likewise, if you’re thinking about shareholder agreements, it is always wise to consider your company’s articles, and to ensure there is no conflict between the two documents. Contact Brian Levine on 01935 846 258 or email him at brian.levine@battens.co.uk.