Shareholders' Agreements: Getting a First Refusal Right

The English High Court judgement of 14 September 2018 in Rusal v. Crispian Investments & Whiteleave Holdings considers the scope of a right of first refusal in a shareholders’ agreement for a major resources company.  It helpfully reviews the current state of the law on the interpretation of contracts and serves as another reminder of the benefits of clear drafting to avoid disputes. In this article, we take a further look at some of the issues to consider when drafting commercial agreements.

Three companies controlled by different Russian oligarchs owned substantial stakes in Norilsk Nickel, the world’s largest producer of nickel and palladium. They had entered into a shareholders’ agreement in 2012, pursuant to which two of them (Rusal and Whiteleave) sold to the third one (Crispian) shares in Norilsk Nickel in proportion to Rusal’s and Whiteleave’s holdings. These sales were matched by a right of first refusal, which gave Rusal and Whiteleave the right to buy their shares back in similar proportions in the event Crispian sold the shares. Thus, if Crispian agreed to sell shares in Norilsk Nickel to a third party, it had to offer Rusal and Whiteleave to buy the shares at the same price agreed with a “bona fide third party”. This term was not defined in the shareholders’ agreement. 

Crispian entered into an agreement to sell a stake in Norilsk Nickel to an affiliate of Whiteleave, conditional on the right of first refusal not being exercised. Crispian therefore issued a notice to Rusal and Whiteleave, offering them the right of first refusal.

Rusal brought proceedings against Crispian and Whiteleave, claiming that (a) the sale price was artificially inflated, (b) Whiteleave’s affiliate was not a bona fide third party, (c) this was part of a scheme agreed between Crispian and Whiteleave to ensure Whiteleave could buy all of Crispian’s shares, and (d) that the notice was therefore invalid. Most of the case turned on the meaning of “bona fide third party”.

Applying an interpretation based on a detailed analysis of both the text and the context, Justice Phillips found that neither a party to the shareholders’ agreement nor any of its affiliates, could qualify as a bona fide third party. The notice offering the right of first refusal was therefore invalid, so that Crispian was unable to sell the shares pursuant to the notice.

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