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When granting a farm business tenancy (FBT) to a company consider restricting the tenant company's ability to transfer shares in the company without the landlord's consent.
Whilst unusual to grant a FBT to a company (usually the landowner wants to control the identity of the tenant and therefore grants the tenancy to a named individual), we examine what precautions to take should the situation arise.
It is standard practice to have a provision regulating who can occupy the land in a FBT but not a provision preventing the transfer of shares in a tenant company.
Shares are transferable in accordance with the company’s articles of association (section 544, Companies Act 2006). As a general principle, shares are freely transferable at any time and to any person with capacity to hold the shares, unless the company’s articles contain express provisions to the contrary.
A company’s articles bind the company and its shareholders as if they were covenants made between each party (section 33, Companies Act 2006). Therefore, any restrictions on transfers included in a company’s articles are contractual terms between the company and its shareholders, and must be observed accordingly.
It is possible, in principle, for restrictions on transfer of shares to be set out in a separate agreement (for example, the FBT to which the landlord is party). However, all shareholders will need to be party to the agreement to ensure that they are bound by the restrictions, and you will also need to ensure that the provisions of that agreement do not conflict with any provisions in the company’s articles regarding the transfer of shares.
Company articles imposing an absolute prohibition on the transfer of shares are invalid (Wellington Bowling Club v Sievwright), but a company’s articles can include a qualified prohibition on transfer, such as a curb on transferring shares during a specified period of time, or to a particular transferee. Further, share transfers may be restricted by imposing a prohibition on the transfer of shares unless the transferring shareholder first offers the shares for sale (often at a specified price) to the existing shareholders, or to certain other persons (a pre-emption right).
If the land owner’s intention is to restrict a change of the controlling shareholder of the company, consider whether including a change of control clause in the FBT may be more appropriate. This is a contractual provision which gives a party to an agreement enhanced protection if the controlling shareholding of the other party is transferred; it could be used here to give a landlord the right to terminate the FBT in the event of a change of control of the company tenant.
For advice and help, contact Frank Smith on frank@franksmithandco.com
