Most company constitutions contain pre-emptive rights. Pre-emptive rights require a shareholder who wishes to transfer their shares in the company to first offer their shares to the other shareholders. Pre-emptive rights protect the current shareholders by giving them the ability to maintain control of the Company by buying a transferring shareholder’s shares.
Therefore, it is important for Trustees who hold shares in a company to ensure that the company’s constitution, if it contains pre-emptive rights, also contains provisions that ensure the pre-emptive rights do not apply to a change of trustee(s).
This issue was recently highlighted in the Court of Appeal case Ord & Anor v Calan Healthcare Properties Limited [2004] 2 NZLR 122 where a routine change in the trustees of a family trust resulted in an inadvertent loss of the Trust's shares in the company due to the pre-emptive rights being triggered and the other shareholders buying the Trust’s shares.
In this case the company had two shareholders. The minority shareholder was a family trust. The company’s constitution stated that a shareholder intending to transfer shares had to notify the Board, who could then require the shares to be offered to the existing shareholders.
The Trust appointed a new Trustee and retired an old Trustee. The Trustees executed a share transfer and asked the Board to register the change of shareholder in the Company’s Share Register. The Board declined to record the transfer, stating that the transfer triggered the pre-emptive right provisions of the constitution.
The Trustees applied to the Court to seek a declaration that the pre-emptive rights had not been triggered.
The Court held that the transfer from one Trustee to another did trigger the pre-emptive right provisions in the Company’s constitution, and that the Board had acted correctly when interpreting the constitution.
Pre-emptive rights are included in constitutions to maintain agreement between the shareholders. Shareholders wish to maintain control over who owns and controls the company.
A share transfer, even if only to new Trustees of the same Trust, is still a transfer of control of the Company. Any such transfer introduces a new shareholder that the other shareholder(s) are required to deal with when shareholder rights are to be exercised.
If your Trust holds shares in a Company, we recommend you check the company’s constitution to see if it contains pre-emptive right provisions. If it does then you may need to ensure that the constitution contains a further provision providing that a change of trustees will not trigger the pre-emptive rights. If a change of trustees would trigger pre-emptive rights then the Trust may find itself in the position of being forced to sell its shares to the other shareholders in the company.
If you need to change the company’s constitution to ensure this does not happen to your Trust please contact us.
