Andrew Butler KC and Hugh Rowan appear in important High Court case on interpretation of shareholder pre-emption rights

Andrew Butler KC and Hugh Rowan, instructed by Acuity Law, have appeared in a shareholder dispute with important ramifications relating both to pre-emption rights under shareholder agreements and wider points of contract law.

The facts

The facts of Kulkarni -v- Gwent Holdings Ltd. and another [2024] EWHC 1357 were that Mr Kulkarni and Gwent Holdings entered into a Shareholder Agreement (“the SHA”) pursuant to which Mr Kulkarni was to hold 49% of the shares in a company called St Joseph’s Independent Hospital Ltd. (“SJIH”), and Gwent Holdings were to hold 51% of the shares. These shareholdings amounted to 1652 and 1720 shares respectively. SJIH owned and operated a hospital of the same name in Newport, South Wales, where Mr Kulkarni practiced.

Clause 7.1(d) of the SHA provided that one of the shareholders was entitled to buy the shares of another in the event of the other one “…committing a material or persistent breach of this agreement which, if capable of remedy, has not been so remedied within 10 Business Days of notice to remedy the breach being served by the Board (acting with Shareholder Consent).” Shareholder Consent was defined as the consent of the majority of shareholders not including the defaulting shareholder.

Shortly after the SHA was entered, the Covid pandemic broke out. The parties also found themselves in dispute about whether Mr Kulkarni was required to pay for his shares, or could look to Gwent to pay for them on his behalf, pursuant to an oral side agreement which he said had been made. For these reasons among others, Mr Kulkarni was only ever registered as the holder of 1 of the 1652 shares in SJIH to which he was entitled.

The relationship of the parties subsequently came under severe strain. This culminated in Gwent refusing to recognise Mr Kulkarni’s shareholding at all, purporting to acquire the remaining 1651 shares for itself, and allocating to itself and others a number of B Shares without offering Mr Kulkarni first refusal as the Companies Act (and the SHA itself) required it to do. It also purported to terminate the SHA and declined Mr Kulkarni’s request to appoint a director, pursuant to a right contained within it.

In response to pre-action correspondence, Gwent initially sought to defend its position, but on the intervention of lawyers for SJIH, its position changed. Gwent recognised the validity of the SHA and restored Mr Kulkarni to the correct shareholding position. They also recognised the appointment of his chosen director. In subsequent proceedings, they admitted that they had committed repudiatory breaches in their treatment of the shareholdings (but denied other breaches).

No notice to remedy was served (clause 7.1(d) providing that service of such a notice was in the power of SJIH, not Mr Kulkarni), and the main questions at trial were (a) the extent of Gwent’s breaches, and (b) whether the breaches were capable of remedy so as to require such a notice before Mr Kulkarni’s pre-emption rights arose.

The judgment

Following a 10-day trial, and in a marathon 509-paragraph judgment, Richard Farnhill, sitting as a Deputy Judge of the High Court, has agreed with Mr Kulkarni that Gwent was in breach of contract in all the respects alleged (and not just those which it had admitted), and furthermore held that all the breaches were both material and persistent. However, he took the view that the breaches were all capable of remedy, with the consequence that in the absence of a notice to remedy, Mr Kulkarni could not avail himself of his contractual right of pre-emption.

The decision addresses several important issues in the law of contract, in particular in relation to the meaning of “material” and “persistent” breach, the relationship of such breaches with repudiatory breach, and whether a repudiatory breach is ever capable of being remedied.

A copy of the decision can be found here.