Court analyses validity of share transfer without valid deed of adherence to shareholders’ agreement
03 April 2025The High Court has analysed the validity of a share transfer that was registered in breach of a condition in the company’s constitution that required a deed of adherence to a shareholders’ agreement to be executed prior to the share transfer being registered, finding that the directors had not had authority to register the transfer but that the company could not challenge it.
What happened?
Jusan Technologies Ltd v Uconinvest LLC [2025] EWHC 704 (Ch) concerned a private asset-holding company.
At the time in question, the company had two shareholders. It also held a number of shares in treasury following a buy-back from a former shareholder.
In due course, the company agreed to sell the shares it held in treasury to another company (Uconinvest) (which happened to be owned by the individual from whom the company had originally bought those shares back).
The company’s articles of association contained the following provision relating to share transfers:
“(2) If … the transferee is not a party to any shareholders’ agreement or similar document in force between some or all of the shareholders and the Company, then the directors shall … :
- require the transferee … to deliver to the Company a deed agreeing to be bound by the terms of any shareholders’ agreement or similar document in force between some or all of the shareholders and the Company in any form as the directors may reasonably require … ; and
- decline to register the transfer of such share unless and until the transferee has done so … ”
At the time, the company and its two shareholders were parties to a shareholders’ agreement, and so the articles required Uconinvest to execute a deed of adherence to that shareholders’ agreement before the transfer of the shares to it could be registered.
The shareholders’ agreement set out an obligatory form of deed of adherence, which was to be signed not only by the transferee (i.e. Uconinvest), but also by the company and by the other shareholders.
Uconinvest duly executed a deed of adherence in the correct form. Both the company and one of its shareholders duly counter-executed the deed. However, the second shareholder did not.
Uconinvest executed a second deed of adherence around three weeks later, but again, the second shareholder did not counter-execute it.
Notwithstanding this, after a period of time, the company’s register of members was updated to reflect the transfer of shares to Uconinvest and to show Uconinvest as a shareholder of the company.
In due course, the company applied to court to reverse the share transfer. It claimed that the transfer had been made in breach of the company’s articles (because there had been no valid deed of adherence) and was, therefore, void. The company applied under section 125 of the Companies Act 2006 to rectify its register of members to remove Uconinvest’s name with retrospective effect.
Uconinvest objected, arguing that it had done all it was required to do to give effect to the transfer, and that it could not have been intended that a transfer could be blocked merely because a third party (i.e. another shareholder in the company) refused to sign a deed of adherence.
Uconinvest also argued that, even if the transfer was registered in breach of the company’s articles, it should still stand due to section 40 of the Companies Act 2006. Section 40 protects third parties dealing with a company where the company’s directors act beyond their powers. See box “What is the effect of section 40 of the Companies Act 2006?” below for more information.
The company counter-argued that section 40 could not protect Uconinvest, because section 40 applied only to transactions between a person and a company, whereas registering a share transfer was a unilateral act by the directors.
The key questions for the court were, therefore.
- Did the deed of adherence need to be executed by all parties to it in order to register the transfer?
- If it did, was the transfer nonetheless binding due to section 40?
What is the effect of section 40 of the Companies Act 2006?
Section 40(1) of the Companies Act 2006 states: “In favour of a person dealing with a company in good faith, the power of the directors to bind the company, or authorise others to do so, is deemed to be free of any limitation under the company's constitution.”
In particular, section 40(2)(b)(i) states that the person dealing with the company “is not bound to enquire as to any limitation on the powers of the directors to bind the company or authorise others to do so”. They do not even need to check the company’s articles of association.
The basic purpose of this is to ensure that people can deal honestly with a company’s directors without fear that those directors have no power to commit the company. Without this, a person transacting with a company would need to make potentially extensive enquiries to establish whether appropriate decisions have been taken and authorities granted internally within the company.
They would also need to review the current form of the company’s constitution. Although a UK company is required to file a copy of its constitution (including its articles of association) at Companies House, changes to a company’s constitution take effect whether or not they are filed. As a result, a person cannot know for certain that the version of a company’s articles filed at Companies House is, in fact, the current operative constitution.
There are some limitations to this rather broad principle.
- Section 40 does not apply if the person is not dealing with the company “in good faith”. In that case, the transaction will be void. However, it is a high threshold to show bad faith. There is a presumption of good faith, and a person does not act in bad faith simply because they know an act is beyond the directors’ powers in the company's constitution.
- Section 40 only protects third parties against limitations in the company’s constitution (principally, its articles of association). It does not provide protection against any limitations on directors’ powers arising from other sources (e.g. limitations imposed by legislation).
- If the transaction is between the company and one of its directors (or an associate of one of its directors), then the general rule is that transaction is “voidable at the instance of the company”. This means the company can set the transaction aside if it so wishes. The rationale for this is that the directors should know whether an act is beyond their own powers.
- Section 40 is modified (and is a little more restrictive) in relation to charities.
Section 40 is often interpreted as imbuing each individual director of a company with unlimited authority to bind the company to commitments to third parties. This argument is sometimes put forward as a justification for foregoing a board meeting to approve a transaction.
This is plainly not correct, because (as stated above) section 40 only provides protection against restrictions in a company’s constitution.
However, in addition, it is not clear whether section 40 applies to acts of individual directors. Section 40(1) refers to the powers of “the directors”, not the powers of “a director”. The predecessor to this section – section 35A of the Companies Act 1985 – referred to the powers of the “board of directors” – i.e. the directors as a collective body.
Section 40 is a re-enactment of section 35A, and so one argument is that it should continue to be interpreted in the same way. The counterargument is that Parliament deliberately adopted different wording in section 40, signalling a change in effect (i.e. if Parliament had wanted to preserve the same interpretation, it would have used the same wording).
In practice, the safe course when dealing with a company – particularly on a significant transaction that is not routine business – is to ask for a copy of a board minute approving the relevant matter.
What did the court say?
The court held that the company’s articles required a deed of adherence that was “legally effective to bind the transferee”. This had to be the case, because otherwise a transferee could become a member of the company without being bound by any accompanying shareholders’ agreement. This would have defeated the purpose of a requirement to execute a deed of adherence.
In this case, the court concluded that the deed of adherence was conditional on all parties executing it. Because one of the shareholders had not done so, the deed had not become legally effective and so the directors had not been authorised to register the transfer of shares to Uconinvest.
However, it found that section 40 did apply and so the company was not permitted to contest the transfer registration or rectify its register of members. The judge made the following comments.
- Section 40 applies to transactions between a company and its shareholders as much as it does to transactions with third parties who are unconnected to the company.
- However, case law shows that section 40 does not apply to something that requires no action or involvement by the shareholder or other person. So, for example, section 40 does not apply to a bonus issue of shares to shareholders that is beyond the directors’ powers, because the shareholders are not “dealing with” the company.
- In isolation, registering a transfer is a unilateral act by a company and does not involve a transaction with an incoming shareholder.
- In this case, however, the incoming shareholder had entered into negotiations with the company itself to buy shares from the company which the company had been holding in treasury. Registration of the transfer was the final stage in that process and so formed part of a transaction.
What does this mean for me?
The decision shows the need for companies and their shareholders to consider carefully the mechanics of share transfers when putting together a shareholders’ agreement.
In this case, by formulating a deed of adherence that needed to be countersigned by the existing shareholders, the shareholders’ agreement effectively gave every shareholder a veto over transfers of shares to third parties (even those explicitly permitted by the shareholders’ agreement or the company’s constitution).
That this veto was not effective in this case was a quirk of the fact that the new shareholder was acquiring shares from the company itself. Had it been attempting to acquire shares from an existing shareholder, it seems that the transfer would have been unwound.
The decision is also a clear reminder to anyone looking to acquire shares in a company to check the company’s constitution for any conditions to or restrictions on transfers, and to ask for a copy of any applicable shareholders’ agreement (or, at the least, a copy of extracts of all relevant sections).
It is critical to check those documents to ensure that the transferee is entitled to acquire the shares (i.e. that they fall within any category of permitted transferees) and to be able to provide all documentation (including executing any deeds of adherence) required to do so.
If the transfer will require the consent of some other person, the parties should consider whether (and, if so, when) to approach that person in advance so as to ensure the transfer will not be blocked.
The decision is also a useful reminder of the breadth and limitations of section 40. Persons dealing with a company should not assume that its directors have carte blanche to agree and do anything on behalf of the company.
Companies should remind themselves of the effect of section 40 and ensure they have robust procedures in place to manage the risk of their directors committing them to transactions inappropriately.
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