It’s a truth universally acknowledged that when shareholders fall out and one abandons the business, that shareholder will suddenly reverse their decision in the event the business becomes highly profitable. This is what happened in the case of LA Micro Group Inc v LA Micro Group (UK) Ltd [2024] UKSC 42. It’s a rather complicated case, but it illustrates the importance of having a Shareholders’ Agreement and how a vender-purchaser constructive trust can be applied to a situation where a company member chooses to transfer shares.

Background to the decision

The Appellants, (F and L) jointly owned a company (Inc). In 2004, LA Micro Group (UK) Ltd (LA Micro) was established as a joint venture between F, L and the Respondent (B).

LA Micro had two issued shares, each of which was held by B and L. Before 2010, B and L held their respective shares on trust as to 49% for B and 51% for Inc.

In 2010, F and L fell out. F subsequently told B that he was dissolving Inc and wanted nothing further to do with LA Micro. B and L, therefore, reached an agreement, which was binding on Inc (2010 Agreement), on new trading arrangements between Inc and LA Micro and that, from now on, L (rather than Inc) would run LA Micro alongside B and each of them would share the profits equally. L also agreed to take on Inc’s debt to LA Micro.

As you probably have guessed, F later claimed he was owed (via Inc) a share of the profits of LA Micro. B and LA Micro sought a court declaration that by the 2010 Agreement, Inc had contractually surrendered its interest in the LA Micro shares, causing them to be owned equally by B and L.

F and Inc argued that the alleged ‘surrender’ of Inc’s equitable interest in LA Micro was not in writing and, therefore, unenforceable pursuant to Section 53(1)(c) of the Law of Property Act 1925.

The High Court found for F and Inc; however, this decision was overturned by the Court of Appeal, which concluded that the 2010 Agreement gave rise to a vendor-purchaser constructive trust (VPCT) in favour of B and L, which displaced section 53(1)(c).

What is a vendor-purchaser constructive trust?

A vendor-purchaser constructive trust arises when an enforceable contract for the sale of specific property is made. They most commonly relate to the sale of land, but a VPCT can apply to personal property such as shares, provided they are not readily available on the general market.

If a VPCT is found to exist, the Court can order specific enforcement, meaning the parties must do what the terms of the contract state.

The case was appealed to the Supreme Court. F and Inc conceded that a VPCT would have arisen following the 2010 Agreement had the purchasers of Inc’s equitable interest been anyone other than B and L. F and Inc also accepted that the VPCT that could have arisen was sufficient to override section 53(1). However, they argued that Inc’s equitable interest could not survive via B or L following the 2010 Agreement because B and L, as legal owners, would have complete beneficial and legal title to F’s former share and therefore, there was no property in existence that a VPCT could attach itself to.

The Supreme Court’s decision

The Supreme Court dismissed F and Inc’s appeal, finding that a VPCT did, in fact, exist because:

a)   The overwhelming majority of cases involving a VPCT’s concern an agreement for the sale of property. These require further steps to be taken, usually by both parties, to carry the transaction through to completion. This has led to VPCTs being described as a protection for parties during the interval between contract and completion.

b)   In this case, there was a ‘conceptual quirk’ as the VPCT would not merely provide a form of interim protection, but also “provides all that is needed for completion of the disposal of Inc’s 51% beneficial interest in the two shares”

c)    If a VPCT was not created, B and L would have each remained (for as long as it might take to get an order for specific performance) minority owners of their respective shares. Inc could have sold its interests to a third party or become insolvent. Simply because in this case the VPCT had the added benefit of delivering all that is needed for completion of the disposal of Inc’s 51% beneficial interest in the two shares without the need for specific performance or any other remedy did not justify denying its existence.

Because the Supreme Court found that there was a constructive trust (in the form of a VPCT), section 53(2) of the Law of Property Act 1925 was engaged. This section provides an exception to the provisions of section 53(1)(c) of the same Act, namely that disposal (i.e. selling or transfer) of an equitable interest (in property) or trust must be in writing and signed by the transferor, or by their agent.

Getting legal advice

Regardless of how close you and a fellow shareholder are on a personal level, disputes can happen, usually when you least expect it. Having a Shareholder Agreement and bespoke Articles of Association in place will ensure that there is a dispute resolution method you can fall back on, as well as written, previously agreed-upon instructions on how to deal with share transfers.

To find out more about any matters discussed in this article, please email us at [email protected] or phone 0121 249 2400.

The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article, please contact 43Legal.

“Melissa Danks is the founder of 43Legal. She has over 20 years’ experience as a solicitor working within the legal sector dealing with issues relating to risk management, dispute resolution, and advising in-house counsel in SMEs and large companies. Melissa has extensive expertise in providing practical, valuable, modern legal advice on large commercial projects, joint ventures, data protection and GDPR compliance, franchises, and commercial contracts. She has worked with stakeholders in multiple market sectors, including IT, legal, manufacturing, retail, hospitality, logistics and construction. When not providing legal advice and growing her law firm, Melissa spends her time running, walking in the countryside, reading and enjoying downtime with close friends and family.”