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23 November 2023 | Comment | Article by Gerallt Jones

Conversion of shares, variation of rights and articles of association

Tomas Stephens, Solicitor in the Corporate Commercial team discusses the recent case on articles of association and the conversion of shares.

The importance of articles of association for the conversion of shares

The recent case of DnaNudge Ltd, Re [2023] EWHC 437 (Ch), is a good example of why it is important for the articles of association to be drafted carefully when it comes to the conversion of shares.

In DnaNudge Ltd, Ventura Capital Limited (Ventura) and Sumitomo Mistui Bank (SMTB) both invested substantial sums in DnaNudge Ltd (the Company) in return for preferred shares. The Company’s issued share capital following this investment comprised 24,877 preferred shares and 162,561 ordinary shares.

The preferred shares were different from the ordinary shares in that they had a number of valuable rights attached to them. These rights were set out in the Company’s articles of association and a shareholders’ agreement.

Shareholders’ agreements and the conversion of shares

Under the shareholders’ agreement, amongst other things, the preferred shareholders were granted a put option, exercisable if a “Qualifying IPO” did not occur prior to a specified date.

The Company’s articles also provided for the conversion of shares.

Article 9 provided that the preferred shares shall automatically convert to ordinary shares upon notice from an Investor Majority at the date of such notice.

Article 10 provided that whenever the share capital of the Company is divided into different classes of shares, the special rights attached to any such class may only be varied or abrogated with the consent in writing of the holders of more than 75% in nominal value of the issued shares of that class.

After the investment, the Company suffered cashflow issues and sent a circular to its shareholders setting out a proposal to raise further capital. The circular explained it would be detrimental to the Company should the preferred shareholders exercise their put option. An investor majority comprising ordinary shareholders gave notice requiring the conversion of preferred shares to ordinary in accordance with article 9. The Company notified Ventura and SMTB that their shares had been converted.

The preferred shareholders claimed that the share conversion had not been in accordance with the Company’s articles when read in their proper construction. It was alleged that article 9 should be read as being subject to article 10 and the variation/abrogation of the rights attached to the preferred shares via the conversion required the consent of more than 75% of the preferred shareholders.

The High Court, and subsequently the Court of Appeal, agreed. Even though article 9 did not explicitly say it was subject to the consent of the preferred shareholders, it did not make commercial sense that ordinary shareholders had absolute discretion to deny the preferred shareholders of rights which they had paid a premium for. The court was therefore willing to imply that article 9 was subject to the consent of the preferred shareholders.

The variation/abrogation had not been in accordance with the articles of the Company when read in their proper construction. The variation/abrogation had therefore been in breach of section 630 of the Companies Act 2006. The conversion was undone.


DnaNudge Ltd emphasises the importance of properly drafted articles. Articles should be drafted clearly and in a way that makes commercial common sense.

A conversion of shares may vary or abrogate the rights attached to shares and deprive a class of shareholder of a benefit that would otherwise be available. If so, the conversion should be subject to the consent of the relevant class. Failure to obtain consent beforehand could give rise to legal challenge and render a conversion void.

The case has drawn particular attention as the articles in question were the standard form issued by the British Private Equity & Venture Capital Association (BVCA). The BVCA has since revised its standardised documents for early stage venture capital investment. Those who implemented the older versions should review and update their constitutional documentation.

Our corporate and commercial team works with a high calibre of local, national, and international clients. If you would like more information, or to discuss any of the topics raised in this post, please contact us today.

Key contact

Gerallt Jones


Gerallt is a partner and head of the corporate and commercial team. Since joining Hugh James in 2005, Gerallt has led the team to be a leading player within the corporate and commercial market, advising clients including the Welsh Government, Princes Gate Water and the Development Bank of Wales.

Gerallt also has particular expertise in the sport and food & drink sectors, leading Hugh James’s relationships with clients in these sectors including the Welsh Rugby Union and Braces Bakery.

Disclaimer: The information on the Hugh James website is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. If you would like to ensure the commentary reflects current legislation, case law or best practice, please contact the blog author.


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