The High Court had to decide at what point a transfer notice was deemed to have been served. Its decision would determine the amount payable for the shares in question.

The arguments revolved around the meaning of three simple words – “in that capacity” – in the compulsory transfer provisions.

What happened?

Syspal Capital Ltd v Truman and another [2024] EWHC 1561 (Ch) concerned the holding company of a group of manufacturing companies.

The holding company was owned as to 24% by a Mr Truman and as to 76% by Syspal Capital Ltd, a company under the control of another individual. Mr Truman was also a director of the holding company, as well as a director and employee of one of its subsidiaries.

The holding company’s articles contained the following provision: 

“If any Employee Member shall cease for any reason (including but not limited to death or termination of employment by the Employee Member or Company) 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 shall be deemed to have been served … on the date of such cessation.”

In essence, this was a short form of “leaver” provision which required an individual who was leaving the group to surrender their shares. For these purposes, Mr Truman was an “Employee Member”.

The term “Transfer Notice” referred to a notice given under provisions in the articles that required a shareholder of the holding company to offer their shares for sale to the other shareholder(s) (usually termed “pre-emption provisions” or “right of first refusal”).

The articles then set out the price for the sale of shares following a Transfer Notice. The provisions relevant to this case stated that:

• if Mr Truman retired at 65 years old, he would receive “Market Value”; and
• otherwise, he would receive “Fair Value”.

The key difference between these two values was that Market Value would incorporate a discount to take into account Mr Truman’s minority holding, whereas Fair Value would not. As a result, a price based on Fair Value would be more favourable to Mr Truman.

On 10 October 2022, Mr Truman was dismissed as an employee of the subsidiary. On 3 November 2022, he was removed as a director of the subsidiary. However, he remained a director of the holding company.

On 24 May 2023, on his 65^th birthday, Mr Truman retired as a director of the holding company.

What was the issue?

The key question was whether Mr Truman had been deemed to serve a Transfer Notice:

• on 10 October 2022, when he was 64, as a result of the termination of his employment; or
• on 24 May 2023, as a result of his retirement at 65 years old.

This turned on the meaning of the words “continue in that capacity” in the compulsory transfer provisions. If these words applied, then Mr Truman would have been deemed to serve the Transfer Notice on his retirement and so would be entitled to Fair Value, rather than Market Value.

Syspal Capital argued that the words “in that capacity” referred to the capacity in which an Employee Member ceased to be employed. In other words, Mr Truman had ceased to be employed as an employee on 10 October 2022 and had not continued in that capacity (i.e. as an employee of any other group company), and so he had been deemed to serve a Transfer Notice on that date.

Mr Truman argued that the words “in that capacity” referred to any of the three different ways an Employee Member might be engaged to work for the group. In other words, Mr Truman had ceased to be employed as an employee on 10 October 2022, but he had continued in that capacity (as a director of the holding company), and so he had not been deemed to serve a Transfer Notice on that date. Instead, therefore, he had been deemed to serve a Transfer Notice on his retirement.

The court acknowledged that the wording was unclear and so embarked on the traditional exercise of contractual interpretation.

What did the court say?

The court agreed with Mr Truman.

In the judge’s view, Mr Truman’s interpretation was the more natural meaning of the wording of the articles and accorded with “commercial common sense”.

He said that the word “employed” was not limited to the strict sense of being an employee under a contract of employment, but also included engaged to serve as a director or consultant.

The purpose of the compulsory transfer provision was that, if one of the shareholders stopped contributing to the day-to-day running of the business, the other shareholder(s) should be given the opportunity of buying that shareholder’s shares.

But, the court said, it is not uncommon for a senior employee to retire from full-time employment but continue to serve the business as a consultant (or, as in this case, a director). In those circumstances, the idea that the individual should be required to sell their shares (indeed, at the lower of two valuations) did not make commercial good sense.

Finally, if Syspal Capital’s argument had been right, it would have been possible to dismiss Mr Truman as an employee of one group company yet retain him as a director of another, in effect forcing a sale of his shares at a lower price. This could not be right.

A person reading the articles from the outside would conclude from the surrounding context, including the fact that Mr Truman was the only shareholder in the holding company who was an individual, that the forced transfer provisions were “directed in particular at Mr Truman”. In the judge’s words, “the [articles] were clearly drafted to protect Mr Truman (and his family)’s position as regards the valuation of his shares”.

What does this mean for me?

The court’s decision certainly seems the right outcome.

Compulsory transfer and leaver provisions are normally designed to ensure that an individual who has ceased to have any connection with a business is no longer able, through holding shares in the company, to influence its operations.

There may be exceptions to this, such as where an individual has contributed cash to the business as an investor and holds shares as an economic investment, rather than as a voting stake or as part of incentivisation arrangements. Even then, depending on the circumstances of the individual’s departure, they may be required to surrender that stake on leaving.

But where an individual continues to be engaged by, and to contribute to, the business, there is usually no rationale for forcing them to sell their shares. If an individual is to be required to divest themselves of their shareholding under leaver provisions, steps should be taken to remove the individual from all levels of the business, including terminating all their directorships.

Ultimately, this turns on the wording of the relevant articles.

It is therefore important to scrutinise and critically challenge the language of leaver and compulsory transfer provisions to ensure they work as intended. This might include considering the following.

• What does it mean to be “employed”? Make sure it is clear what is meant by “employed” or “engaged” by a company. This will typically include formal employment under a contract of employment, as well as appointment as a director. Parties will need to consider whether it should also apply to engagement as a consultant or as a company secretary.
• What happens if someone leaves one group company but not another? Should the compulsory transfer provisions kick in if an individual ceases to be employed or engaged by one group company but remains an employee or officer of another? Normally (for the reasons given in the court’s judgment in this case) it will not be appropriate to force a sale where they cease to be employed or engaged by one group company but remain employed or engaged by another group company.
• Should there be any exceptions? Parties are free to choose their own terms, and they might consider some exceptions to the “usual” position referred to above. For example, a party might argue that, if an individual is dismissed due to serious misconduct, compulsory transfer provisions should activate at that point and should not be delayed merely because the individual remains a director of another group company. (This is particularly relevant because, in these circumstances, it may take longer to remove an individual as a director than to dismiss them from their employment.)

Access the court’s decision in Syspal Capital Ltd v Truman [2024] EWHC 1561 (Ch) on the interpretation of compulsory share transfer provisions