Why clarity matters: lessons from Ventura Capital GP Ltd v DnaNudge Ltd

The recent Court of Appeal case of Ventura Capital GP Ltd v DnaNudge Ltd [2023] EWCA Civ 1142 serves as a stark reminder of the critical importance of clear and unambiguous drafting in a company's articles of association.

The case revolved around a seemingly straightforward ‘conversion by notice’ clause, allowing for the automatic conversion of preference shares to ordinary shares upon a majority vote. However, a seemingly contradictory clause requiring Class consent for any variation in preferential rights threw a wrench into the process.

The dilemma

• Article 9.2(a) gave the impression of an effortless conversion triggered by a simple majority vote.
• Article 10.1, however, demanded a much stricter threshold – 75 per cent Class consent – for altering any privileges associated with preference shares.

When the ordinary shareholders sought to convert the shares using Article 9.2(a), Ventura, a preference shareholder, raised an objection. They argued that the conversion amounted to a variation of their Class rights, requiring compliance with Article 10.1’s stringent consent requirement.

The ruling

Both the High Court and the Court of Appeal sided with Ventura. They recognised the inherent contradiction between the two clauses and concluded that:

• Article 9.2(a) could not exist in isolation from the protective measures outlined in Article 10.1.
• Either Article 9.2(a) must be interpreted as subject to Article 10.1, or a term requiring Class consent for conversion should be implied.

The takeaways

This case presents the following valuable lessons for drafting and interpreting articles of association:

• Clear and unambiguous language is crucial: ambiguity creates confusion and opens doors for legal disputes.
• Consistency is key: articles should not contain conflicting provisions like those in DnaNudge’s case.
• Balance protection and flexibility: while safeguarding Class rights, drafters should also consider facilitating reasonable changes when needed.

Impact on businesses

Ventura Capital GP Ltd v DnaNudge Ltd has the following significant implications for companies across the UK:

• Revisiting conversion clauses: companies with similar ‘conversion by notice’ clauses may need to re-evaluate them in light of this ruling.
• Heightened due diligence: investors, particularly preference shareholders, should scrutinise articles of association more closely to ensure proper protection for their Class rights.
• Clearer drafting practices: this case serves as a call for legal professionals to prioritise clarity and consistency when drafting articles of association.

The consequences of unclear articles of association can be far reaching, leading to costly legal battles and hindering business operations. Ventura Capital GP Ltd v DnaNudge Ltd stands as a stark reminder of the importance of getting it right the first time. By prioritising clarity and consistency, companies can create a solid foundation for smooth operations and protect the interests of all stakeholders.

Dr Anil Balan is a senior lecturer in professional legal education at King’s College London
kcl.ac.uk