Lush Cosmetics recently refused to let Silverwood PLC (Silverwood) transfer their 19.8% ownership stake in the company. This incident highlights the importance of following the company’s rules for transferring shares.

Here’s what happened: In December 2022, Silverwood purchased a 19.8% stake in Lush Cosmetics Ltd and Lush Cosmetic Warriors from Andrew Gerrie and his wife, Alison Hawksley, who were co-founders of Lush. The deal was valued at around £216 million, and Silverwood planned to issue shares to Gerrie and Hawksley as payment.

However, in February, Lush declined to register the transfer of shares, citing a violation of their articles of association.

It is common for companies to have restrictions on transferring shares to control who becomes a shareholder. These restrictions are typically outlined in the company’s articles of association and any shareholders’ agreement that may exist.

According to Section 544(1) of the Companies Act 2006, a company’s shares can be transferred as long as it aligns with the company’s articles of association. Additionally, Section 33 of the same Act states that the articles of association act as a binding contract between the company and its shareholders. Any restrictions mentioned in the articles can be enforced against a shareholder attempting to transfer their shares.

Typical restrictions may include limitations on transfer during a specific period or to certain types of buyers, as well as the power for directors to refuse the registration of a share transfer and pre-emption rights.

The power for directors to reject a registration is quite common. It can be a general power, like Article 26(5) of the Model Articles, or a limited power exercised only under specific circumstances.

The legal ownership of shares does not transfer until the company’s board of directors approves the registration of the stock transfer form. Thus, refusal to register can be a significant problem for the buyer of shares.

If the board of directors refuses to register the transfer, the buyer can ask for the reasons behind the refusal, and the company must provide an explanation (Section 771 of the Companies Act 2006). However, they are not required to submit copies of meeting minutes.

Unless the articles of association explicitly grant the right to refuse share transfers, if the company receives a properly completed and stamped stock transfer form that aligns with the articles of association, the directors cannot refuse the transfer.

Refusal by the company to register the transfer does not prevent a shareholder from transferring the beneficial interest in the shares, as this interest is not registered. It means that the seller holds the shares in trust for the buyer until registration takes place.

Until the transfer is registered, only the seller will be recognized by the company as having the rights associated with the shares, such as voting and receiving dividends.

To protect themselves in share sale transactions, buyers often require sellers to provide a power of attorney upon completion. This allows the buyer to exercise the rights attached to the shares until the transfer is registered and the legal ownership is transferred.

In this case, Lush has now provided Silverwood with the reasons for refusing the registration of the transfer. Silverwood has rejected these reasons, and it remains to be seen whether the refusal was justified.

Silverwood has informed its shareholders that it still holds contractual control over the Lush shares through an agreement with Andrew Gerrie and Alison Hawksley, while waiting for the transfers to be recorded. This indicates that Silverwood has some protection in place during the ongoing dispute.

This situation serves as a reminder to ensure that share transfers comply with the company’s articles of association. Additionally, it’s important to be aware of the directors‘ potential right to refuse share transfers and the practical implications of such refusals.

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