DnaNudge Ltd v Ventura Capital GP Ltd (acting for and on behalf of Ventura Capital LP Fund IV and Ventura Capital MG1 LP Fund)
| Jurisdiction | England & Wales |
| Judge | Lord Justice Snowden,Lord Justice Arnold,Lord Justice Bean |
| Judgment Date | 09 October 2023 |
| Neutral Citation | [2023] EWCA Civ 1142 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: CA-2023-000707 |
[2023] EWCA Civ 1142
Lord Justice Bean
Lord Justice Arnold
and
Lord Justice Snowden
Case No: CA-2023-000707
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
COMPANIES COURT (ChD)
HIS HONOUR JUDGE HODGE KC (Sitting as a Judge of the High Court)
Royal Courts of Justice
Strand, London, WC2A 2LL
Andrew Thornton KC (instructed by Dorsey & Whitney (Europe) LLP) for the Appellant
Timothy Collingwood KC (instructed by Fladgate LLP) for the Respondent
Hearing date: 26 July 2023
Approved Judgment
Remote hand-down: This judgment was handed down remotely at 10.30 a.m. on Monday 9 October 2023 by circulation to the parties or their representatives by e-mail and by release to the National Archives.
This is an appeal by DnaNudge Limited (“the Company”) against a decision of HHJ Hodge KC (sitting as a Judge of the High Court) given on 8 March 2023: [2023] EWHC 437 (Ch) (the “Judge” and the “Judgment”). The Judge determined that the conversion of all the Series A Preferred Shares of £0.001 each (“the Series A Shares”) in the Company to Ordinary Shares of £0.001 each (“Ordinary Shares”) was void and of no effect because the conversion had not received the consent in writing of the holders of more than 75% in nominal value of the Series A Shares. The case concerns the interpretation of the Articles of Association of the Company (the “Articles”).
Background
The facts are not in dispute. The Company was incorporated in July 2015. It operates as a medical and health technology company in the business of supplying clinical products for rapid testing for COVID and the provision of genetic services. At the relevant times, the 162,561 issued Ordinary Shares have been held by a number of individuals and entities who include the founders and directors of the Company.
Towards the end of 2020 and early 2021, the Company sought to raise significant funding of up to £50 million from external investors. In the first part of 2021, Ventura Capital GP Limited, acting as the general partner for and on behalf of two Cayman Islands exempted limited partnerships (together “Ventura”), invested about £40 million in acquiring a total of 24,026 Series A Shares. Shortly thereafter, Sumitomo Mitsui Trust Bank Limited (“SMTB”), Japan's largest trust company, and part of Japan's second largest banking group, invested some £2 million in acquiring a further 851 Series A Shares. Together, Ventura and SMTB hold all of the 24,877 issued Series A Shares.
In connection with Ventura's subscription for Series A Shares, the Company adopted its new Articles on 21 January 2021.
Article 3.1(a) provides that, unless the context otherwise requires, the Ordinary Shares and the Series A Shares rank pari passu among themselves, but constitute separate classes of shares.
A key definition in the Articles is that of “Investor Majority Consent”. This is defined to mean the prior written consent of the “Investor Majority”, which is in turn defined as the holders of a majority of the Ordinary Shares and the Series A Shares in aggregate as if such Shares constituted one class of share.
Article 4 provides that any profits available for distribution that the Company, with Investor Majority Consent, determines to distribute in respect of any financial year will be distributed among the holders of the Series A Shares and the Ordinary Shares pari passu as if they constitute one class of shares and pro rata to the number of such shares held. By Article 7, the Series A Shares and the Ordinary Shares are also each entitled to attend and vote at Company meetings and have equal voting rights.
The Series A Shares enjoy enhanced rights to distributions in certain circumstances. These flow from the terms of Article 5, which is entitled “Distribution Priorities”. Article 5.1 provides as follows,
“On a distribution of assets on a liquidation or a return of capital (other than a conversion, redemption, a reduction of capital or purchase of Shares) the surplus assets of the Company remaining after payment of its liabilities shall be applied (to the extent that the Company is lawfully permitted to do so):
(a) first, in paying to each of the holders of the Series A Shares, in priority to the holders of the Ordinary Shares, an amount per Series A Share held equal to the Preference Amount (provided that if there are insufficient surplus assets to pay the amounts per share equal to the Preference Amount in full, the remaining surplus assets shall be distributed to the holders of Series A Shares pro rata to their respective entitlements under this Article 5.1(b)) [sic];
(b) thereafter, the balance of the surplus assets (if any) shall be distributed among the holders of the Ordinary Shares pro rata to their respective holdings of Ordinary Shares.”
It is clear that the reference in Article 5.1(a) to Article 5.1(b) is a typographical error and ought to be a reference to Article 5.1(a) itself.
The “Preference Amount” is defined as,
“an amount per Series A Share equal to the amount paid up or credited as paid up (including premium) for such share together with the Series A Preferred Return (if applicable) as well a sum equal to any Arrears less any amounts or proceeds previously received on such Series A Share (including any dividend(s)).”
Importantly, the “Series A Preferred Return” is defined as,
“a per Series A Share amount equal to the amount paid up or credited as paid up (including premium) for such share plus a cumulative 8.0% preferred return compounding annually until and upon liquidation or return of capital, which Series A Preferred Return shall apply and accrue until such time as the Company raises additional equity capital funding of at least £10 million at a pre-money valuation of the Company of at least £900 million, upon which the Series A Preferred Return shall cancel and no longer apply or accrue to the Series A Shares or be payable.”
By virtue of Article 6, headed “Exit Provisions”, the enhanced distribution rights conferred on the Series A Shares also apply in respect of the distribution of surplus assets in the event of a sale by the Company of all or substantially all of its undertaking and assets. By Article 6.1, it is further provided that on any sale of shares in the Company which results in the purchaser and those acting in concert with him acquiring a controlling interest in the Company, the proceeds of sale of those shares should be distributed in the order of priority set out in Article 5, and the directors of the Company are prohibited from registering any transfer of shares if the proceeds of sale are not so distributed.
The Articles which are central to the dispute in this case are Articles 9 and 10. The key provisions of Article 9 are as follows,
“9. CONVERSION OF SERIES A SHARES
9.1 Any holder of Series A Shares shall be entitled, by notice in writing to the Company, to require conversion into Ordinary Shares of all of the Series A Shares held by such holder at any time and those Series A Shares shall convert automatically on the date of such notice (the “Conversion Date”).
9.2 All Series A Shares shall automatically convert into Ordinary Shares:
(a) upon notice in writing from an Investor Majority at the date of such notice (the “Conversion Date”); or
(b) immediately upon the occurrence of a Qualifying IPO.
9.3 In the case of: (i) Articles 9. 1 or 9.2(a), not more than ten Business Days after the Conversion Date; or (ii) in the case of Article 9.2(b), at least five Business Days prior to the occurrence of the Qualifying IPO, each holder of the relevant Series A Shares shall deliver the certificate(s) (or an indemnity for lost certificate(s) in a form acceptable to the Board) in respect of the Series A Shares being converted to the Company at its registered office for the time being.
9.4 Where conversion is mandatory on the occurrence of a Qualifying IPO, that conversion will be effective only immediately prior to and conditional upon such Qualifying IPO (and “Conversion Date” shall be construed accordingly) and, if such Qualifying IPO does not become effective or does not take place, such conversion shall be deemed not to have occurred. In the event of a conversion under Article 9.1, if the Conditions have not been satisfied or waived by the relevant holder by the Conversion Date, such conversion shall be deemed not to have occurred.
9.5 On the Conversion Date, the relevant Series A Shares shall without further authority than is contained in these Articles stand converted into Ordinary Shares on the basis of one Ordinary Share for each Series A Share held (the “Conversion Ratio”), and the Ordinary Shares resulting from that conversion shall in all other respects rank pari passu with the existing issued Ordinary Shares.
9.6 The Company shall on the Conversion Date enter the holder of the converted Series A Shares on the register of members of the Company as the holder of the appropriate number of Ordinary Shares and, subject to the relevant holder delivering its certificate(s) (or an indemnity for lost certificate in a form acceptable to the Board) in respect of the Series A Shares in accordance with this Article, the Company shall, within ten Business Days of the Conversion Date, forward to such holder of Series A Shares by post to his address shown in the register of members, free of charge, a definitive certificate for the appropriate number of fully paid Ordinary Shares.”
A “Qualifying IPO” is defined as the admission of all or any of the Company's Shares or securities representing those Shares to trading on a number of...
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