DnaNudge Ltd – conflicting articles of association

The Court of Appeal’s decision regarding conflicting provisions in DnaNudge Ltd v Ventura Capital GP Ltd highlights the importance of ensuring there’s no provision clashes when drafting articles of association. 

5 March 2024

Woman proof reading document

The Court of Appeal’s decision in DnaNudge Ltd v Ventura Capital GP Ltd provides a stark reminder of the importance of checking for conflicting provisions when drafting articles of association. 

Contested articles

The case concerned the interplay between two of DnaNudge’s (the “Company”) articles, namely: 

  • Article 9 provided for the conversion of series A shares into ordinary shares in various situations, including an automatic/ forced conversion of all series A shares into ordinary shares by written notice from an Investor Majority. An Investor Majority was defined in the articles as the holders of a majority of the ordinary and series A shares, as if they were one class of shares. Due to the number of ordinary shares in issue, an Investor Majority could be formed solely by ordinary shareholders. Certainly, an interesting position for series A shareholders to find themselves in. 

  • Article 10 related to the variation of class rights. This article provided that if the Company’s share capital is divided into different share classes, the special rights attaching to any class of shares could only be varied or abrogated with the written consent of those who hold over 75% in nominal value of the issued shares of that relevant share class.

Automatic/ forced conversion

From the competing provisions highlighted, it may come as no surprise that an Investor Majority, comprised solely of ordinary shareholders, converted the series A shares held by external investors, including Ventura Capital GP Ltd (“Ventura”), into ordinary shares pursuant to the conversion provisions in Article 9. 

The impact of this conversion was to remove the preference rights attached to the series A shares (i.e. the right to a preferential return on a sale, ahead of the ordinary shareholders). 

The High Court’s decision

Ventura claimed in the High Court that the conversion of series A shares into ordinary shares was void and of no effect as the Company had failed to obtain the written consent of the holders of 75% of the series A shares in accordance with Article 10. 

The High Court agreed with Ventura noting that, in short, there must have been drafting errors in the articles and that the conversion provisions contained in Article 9 cannot be viewed as a standalone provision but should instead be read as being subject to the variation provisions in Article 10, which take precedence. 

The Company appealed this decision. 

Court of Appeal’s decision

The Court of Appeal agreed with the High Court that held that there was no commercial sense in permitting the automatic conversion without complying with the share class right. They held that there must have been mistakes when drafting the articles and that Article 9 must be interpreted as being subject to Article 10. 

The conversion of series A shares constituted an abrogation of class rights which required, as a pre-condition, the consent of the series A shareholders in accordance with the Article 10. As this consent was not obtained, the conversion was therefore void.   

Importance of the decision

This decision impresses the importance that article provisions are clearly drafted, to avoid any future issues arising. If there is any potential for misinterpretation between articles, it is essential for this to be addressed prior to finalising the articles. 

Automatic conversion of share classes is customary on, for example, an initial public offering or listing and, accordingly, such automatic conversion rights should be clearly drafted to confirm that such conversion is not subject to separate share class consent requirements. 

If you need assistance with preparing articles, please don’t hesitate to contact a member of our corporate finance team.