Court holds company articles do not grant surviving founder pre-emption rights over deceased brother's shares against heirs.

[*127] 1975 December 20

(PIKIS, AG. P.D. C.)

IN THE DISTRICT COURT OF FAMAGUSTA SITTING

AT LARNACA

In the matter of the Administration of Estates

Law, Cap. 189, article 53,

and

In the matter of Antonio Jacomo Branco,

Deceased.

Edmonto Branco, executor of the will of the above-named deceased,

Plaintiff,

and

Achilleas K. Emilianides, executor of

the will of the deceased Antonio

Jacomo Branco, and Others,

Defendants.

(Probate Application No. 16/74).

Construction of documents - principles applicable - A document must be construed in a manner reasonable between the parties.

Words and Phrases - "Transfer”

- "Transmit”.

Company - Shares - Founder shares - Articles of Association providing for right of pre-emption to co-founder – Death of share holder - Whether said articles confer a right of pre-emption to the surviving founder at the expense of the family of the deceased.

C. Indianos, for Jacomo Branco.

A. Emilianides, for the executors.

K. Talarides, for the heirs of Antonio Branco.

JUDGMENT

The following judgment was delivered by:-

PIKIS. AG. P.D.C.: Edmonto and his brother, Antonio Branco, founded a salvage company, namely Branco Salvage Limited, [*128] having as its main business the. salvage of wrecks at sea. The company had a share capital of (a) 500 founder shares of £1. - each and (To) 194 ordinary shares worth a hundred pounds each. The capital was fully paid up.

On a study of the articles of association it becomes manifest that the two brothers, founders of the company, purported to safeguard two objectives when the company was incorporated. Firstly, to keep the company within family hands; and secondly to ensure parity between the two brothers in the control of the company.

Antonio Branco died in 1974, leaving a will whereby his property is disposed, subject to certain legacies and bequests, to his legal heirs, that is his wife and children. The surviving brother, who is one of the executors of the will, now moves the Court for directions as to the manner in which founders shares of the deceased in the aforesaid company should be disposed of, seeking to assert, as it has been contended for on his behalf, a right of pre-emption allegedly conferred upon him by article 5(b) of the articles of association of the company. Article 5(b) of the articles of association of the company reads:-

###[*129]

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(English translation:

"In the event of either founder member wishing to sell or transfer voluntarily or by law to any other person except for the other founder member, founder shares he must offer to his co-founder member at a reasonable price 10 per cent of the shares thus being sold or under transfer. In the event of the shares being offered for sale, are under transfer and the founder shares are less than ten then the vendor must cede to the other founder member one founder share".)

Articles of Association of a Company

In the submission of. Mr. Indianos, counsel for Edmonto Branco, the death of Antonio will involve at one stage or another the transfer of shares, including founder shares, by operation of the

law; therefore he argued that the provisions of article 5(b) come into play imposing a duty upon the executors to act

accordingly.

The heirs of the deceased contest the suggestion of Edmonto Branco that article 5(b) of the articles of association of the company confers upon him a right of pre-emption [*130] after the death of his brother. Mr. Talarides argued on their behalf that the application of article 5(h) was limited to transfers of shares made voluntarily or by operation of the law during the life of founder members. The co-executors of Edmonto Branco remained neutral in the dispute and stated that they are awaiting the directions of the Court on the matter.

Transfer of Shares

The basic problem is one of construction of the provisions of article 5(b) of the articles of association of the company. Under the Companies Law it is permissible to regulate the right to transfer shares and in the case of a private company this is obligatory. (See s.29(1)(a), Cap. 113). Therefore the limitation sought to be imposed on the right of members of this company to transfer shares, whatever its ambit may be, does not offend any of the provisions of the law. Of course like every provision restrictive of the right of a member of the company to transfer his shares must be strictly complied.

The Company Law distinguishes between a transfer and a transmission of shares and different provisions regulate these two aspects of change of ownership (see sections 73 and 74, Cap. 113). The distinction between the two is noted in Halsbury's Laws of England, 4th edition, volume 7, at paragraph 417 in the following terms:-

"In Table ’A', and in articles of association generally, the word ’transmission' is used in contra distinction to the word ’transfer’; the [*131] former means transmission by operation of law, including devolution by death or bankruptcy, and the latter by the act of a member".

If I understood rightly the argument of Mr. Indianos, I gained the impression that he was, at first, labouring under the misapprehension that the devolution of shares on personal representatives, upon the death of the shareholder, amounts to an act of transfer. This, as he came to concede later on in argument, is a fallacy. There is ample authority for the proposition that upon the death of a shareholder the title to the shares devolves upon his personal representatives. (See Re Greene (deceased) (1949) 1 All E.R. 167). The personal representative steps, as it has been repeatedly said, into the shoes of the deceased and may, subject to the provisions of the articles of association, transfer the shares without being himself first registered as shareholder. (See s.74, Cap. 113 - Halsbury’s Laws of England, 4th edition, volume 7, paragraph 417). The primary meaning of the Greek word "metavivazo" is to transfer. Lord Reid, describing the process of a transfer of shares in Lile & Scott Limited v. Scott’s Trustees (1959) 2 All E.R, 661 (H.L.) at p. 668, observed:-

"Transferring a share involves a series of steps. First, agreement to sell, then the execution of a deed of transfer and finally the registration of the transfer. The word ’transfer' can mean the whole of those steps. [*132] Moreover the ordinary meaning of ’transfer' is simply to hand over or part with something and a shareholder who agrees to sell is parting with something. The context must determine in what sense the word is used".

There is a difference in the meaning of the words "transfer" and "transmit". The synonym of "transmit" in Greek is "diavivazo". Both words import, whenever used, the notion of passing hut through a different process (for example sound is transmitted hut never transferred). There is, however, a close association in the meaning of the two words and it is conceivable that one may, in Greek, employ the word "transfer" to signify a process of transmission. Be that as it may, I am of the view that the word "transfer", in the context of article 5(b), encompasses both transfer as well as transmission of interest in shares. I am reinforced in this by the fact that transfers made by operation of the law, for example bankruptcy, are distinguished from valuntary transfers. The answer, however, to the above is not decisive as the ultimate question that must be answered is whether the provisions of article 5(b) apply to a transfer by the personal representatives of the deceased. It is a question of construction of a document.

Construction of a Document

The construction of a document is a question of law and must be resolved by the Judge guided by the ordinary meaning of the words used unless, the parties thereto signify that they attribute a different meaning to such words, the [*133] context in which they appear and the relations between the parties bound thereto. (See Bahamas Trust Company v. Threadgold (1974) 3 All E.R. 881 (H.L.) - Woodhouse v. Nigerian Produce (1971) 1 All E.R. 665 (C.A.) - Marion White Limited v. Francis (1972) 3 All E.R.

857 (C.A.) - Halfdan Grieg v. Sterling Coal Corporation (1973) 2 All E.R. 545). In construing a document on endeavour to do justice to the intention of the parties as manifested by the words employed, the context of the document and the circumstances of the case. In the words of Lord Denning M.R. in Gillespie Brothers Limited v. Roy Bowles Limited (1973) 1 All E.R. 193 "The Courts should give effect to a clause according to that meaning (ordinary meaning) provided always that it is reasonable as between the parties and is applied reasonably in the circumstances of the case",

I have read and reread more than once article 5(b) in order to discern the intention of the founders of the company and then explored the periphery to find out whether it throws any further light on the intention of the founders. The contents of article 13, under the heading "Directors" does illuminate the issue to an extent inasmuch as it betrays the intention of the founders to keep complete equality between one another by reference to founder shares.

In my judgment the provisions of article 5(b) were limited in application to instances of transfer or transmission of the interests of either founder shareholder in the shares of the company during his life. This article [*134] constantly refers to acts of founder members without any reference to their heirs or nominees. I do appreciate that by the device of personal representatives, and their attributes, the life of a person, so far as his rights and liabilities are concerned, may be said to be prolonged; but I cannot credit the parties either with knowledge of this fiction or any desire to give vent to it. On the contrary a document must be construed, in the above-quoted words of Lord Denning, M.R., in a manner reasonable between the parties. And it would, in the absence of a compelling wording, be unreasonable as a matter between the parties to attribute an intention to either of them to benefit one another at the expense of their families. It would seem to me that their intention was to keep strangers out and not members of their family.

I hold that it was never their intention, given the family complex of the company and the manifest intention to keep the two sides in substantially the same position, that article 5(b) should confer a right of pre-emption to the surviving founder at the expense of the family of the deceased. Going further and subjecting yet once more the rival interpretations to the second leg of the test propounded by Lord Denning in the case of Gillespie above, to accede to the submission of Mr. Jacomo Branco and give him the controlling interest at the expense of the family of his deceased brother would be patently unreasonable. [*135]

For the reasons above given the submission of the heirs of the deceased is well-founded and directions are given to the executors accordingly. Lastly a word should be said about the position of Mr. Edmonto Branco as an executor of the estate of his deceased brother. He should, no doubt, seek advice as to whether he should remain an executor of the estate of his deceased brother, given the conflict between his personal interests and his interests as a trustee charged with the protection of the interests of the beneficiaries of the estate. Edmonto Branco to bear his own costs. The costs of the other two sides to be borne by the estate.

Order accordingly.