'9. Clause 2.1

9.1. Clause 2.1 of the … Shareholders Agreement provides as follows:

2.1. The Company's Board of Directors (the "Board") shall be composed of no more than Six (6) members ("Board Members"), of which each of the [company A] Shareholders and the [company B] Shareholders shall be entitled to designate three (3) Board Members each. The Board Members shall have all the rights and powers vested in the Board as set out in the Articles.

9.2. Neither clause 2.1 nor any of the other provision of the Newco Shareholders Agreement (or any of the other connected agreements) expressly specify how decisions as to the appointment of a director are to be made by the [company A] Shareholders and whether the decision needs to be unanimous or by majority (whether by number of shareholders, value of shareholding and/or in respect of those eligible to vote or those casting a vote).

9.3. Both the Claimants and the Respondents accept that, in the absence of a specific agreement between the [company A] Shareholders, the determination of whether a valid appointment has been made must be resolved by reference to clause 2.1 (whether by construction or implication).

9.4. The Respondents argue that a term is to be implied into clause 2.1 that a majority (by shareholding) of the votes cast is sufficient to appoint a director. The Respondents put the argument as follows:

The background to the Newco Shareholders Agreement and the formation of [company C] is a merger between [company A] and [company B]. The original agreement was set out in Heads of Terms which provided for the new company ([C]) to be jointly owned by these companies with a board of six directors, with three being appointed by each of [company A] and [company B]. The purpose of this structure was to provide for equal ownership and control of [company C] by [company A] and [company B]. In the event, the shares in [company C] were in fact issued to the shareholders in [company A] and [company B] rather than [company A] and [company B] directly, but the original structure was otherwise followed.

Because [company B] had a 10% shareholding in [company A], [company B] is one of the [company A] Shareholders. If, therefore, clause 2.1 required unanimity in order for a [company A] director to be appointed, this would render the entire scheme of the merger agreement unworkable, since it would effectively grant [company B] control of [company C], since [company B] would effectively have a veto right over the appointment of the [company A] directors, but would be free to appoint its own [company B] directors, thereby ensuring that it had majority control of the board.

Designation by the majority of the [company A] shareholders is, therefore, required in order to preserve the fundamental scheme of the merger agreements and, therefore, to give the Newco Shareholders Agreement business efficacy.

A requirement that the agreement be unanimous would be inconsistent with the way in which shareholder decisions in corporate law are made generally.

The majority should be determined by the size of shareholding and not the number of shareholders voting.

9.5. The Claimants argue that no implied term is necessary or appropriate and that the wording of clause 2.1 is to be given its plain and ordinary meaning - the reference to the "[company A] Shareholders" means all of the shareholders. The Claimants put the argument as follows:

The intention of the parties is to be derived from the terms of their agreement. It is illegitimate to rely on the subjective and unexpressed intentions of the parties and contemporaneous documents, particularly given the entire agreement clause in the Newco Shareholders Agreement. In particular, it would be wrong to rely on the Heads of Terms, given that these have been superseded by contracts in different terms.

The Claimants' proposed intention is consistent with the common law as laid down in Clay v. The Grand Junction Waterworks (1904) 21 TLR 31 in which the word "shareholders" was interpreted to mean all the shareholders.

The Respondents' case relies upon imputing to both [company B] and [company A] an intention to protect the position of [company D] and [company E] (which were merely minority shareholders in [company A]).

9.6. In response, the Respondents have argued that:

The Claimants' argument that it is illegitimate to look outside the agreement itself is incorrect as a matter of law. Agreements must be construed in the factual context in which they are made. This is not altered by the entire agreement clause, which simply prevents collateral warranties.

Clay v. The Grand Junction Waterworks is irrelevant, since it dealt with the interpretation of a statute, rather than some general common law principle.

10. Discussion

10.1. Both sides to this dispute agree that the determination of whether a valid appointment has been made must be resolved by reference to Clause 2.1 of the Newco Shareholders' Agreement. This provides, in material part, that the Company's Board of Directors shall be composed of not more than six members, "of which each of the [company A] shareholders…..shall be entitled to designate three (3) Board Members each."

10.2. The intention of this provision is clear. The [company A] shareholders … are to be treated as a composite group and, as a group, are to designate three Board Members. How they are to go about this is their own affair, but in the absence of any agreement between them to the contrary, it would seem evident that each of them is entitled to vote and that accordingly unanimity is required to effect a valid appointment.

10.3. This did not happen. On the evidence before me, only two of the [company A] shareholders voted for the designation of Mr [X] as the third [company A] Director. Two of the other [company A] shareholders voted against this designation; and the remaining four shareholders did not vote at all. On this basis, it cannot be said that Mr [X] was designated by "each of the [company A] shareholders". This was plainly not the case.

10.4. The Respondents argue that in order to give business efficacy to Clause 2.1, it is necessary to imply a term to the effect that a majority (by shareholding) of the votes cast would be sufficient to appoint a Director. It may well be that, in retrospect, clause 2.1 should have been more carefully drafted to reflect such an intention - if indeed it was the intention of all the parties to the Newco Shareholders' Agreement. But, as the Claimants point out, such an intention would have had to be spelt out in some detail - indicating, for example, whether the votes were to be counted by the number of shareholders or by the value of the respective shareholdings. On the evidence before me, and in face of the plain wording of Clause 2.1, I see no basis for implying any such term into the clause. It must be read as it stands.'