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Court Hearing: Pre-Emption Rights
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Court Hearing: Pre-Emption Rights

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At the last Court hearing between Lee Power, Michael Standing and Axis Football Investments Ltd (“Axis”) there was discussion about “pre-emption rights”.  This article by James Maton, legal adviser for TrustSTFC, explains what they are and why they are relevant to Swindon Town.

Formally, Swindon Town is a company called Swindon Town Football Company Limited (“STFC”).

STFC is wholly owned by a company called Seebeck 87 Limited (“Seebeck”).

Seebeck is wholly owned by a company called Swinton Reds 20 Limited (“Swinton”). 

Whoever owns and controls Swinton indirectly owns and controls STFC.

What are the “Pre-emption provisions” in Swinton Red’s governing documents and why are they relevant to ownership of STFC?

As things stand, Lee Power owns 85% of Swinton, and therefore controls Swinton and indirectly STFC (although Michael Standing claims in the court case that he owns 50% of Lee Power’s shares). 

Axis Football Investments Ltd (“Axis) owns the remaining 15% of Swinton.  Axis is owned and controlled by Clem Morfuni.

The rules governing how a company should be run are set out in a legal document called the “Articles of Association” (“Articles”).  The Articles are effectively a contract between the company and its shareholders.

Articles typically contain provisions as to how shares in a company can be issued and transferred.   The Articles of Swinton contain “pre-emption rights”, which are standard terms requiring a shareholder who wishes to sell his or her shares to first offer them for sale to the other existing shareholders at market price.  The selling shareholder can only sell to a third party if the other shareholders decline to purchase the shares.

Swinton’s pre-emption rights work like this:

Swinton’s Articles require a shareholder wishing to sell his interest to inform the company that he intends to sell his shares and to state what he thinks is a fair value for the shares, as a price per share:  

The shares are then offered for sale at that price to the other shareholders, in proportion to their current shareholding.

The other shareholders have a right to buy the shares at that price.  Alternatively, if they think the price is unreasonable, they can require the auditor of the company to decide the fair value of the shares or, if the auditor declines to do so, an accountant (i) agreed by the selling shareholder and the directors or (ii) in the absence of agreement, appointed by the President of the Institute of Chartered Accountants).

The other shareholders are then entitled to buy the shares at the lower of the value notified by the selling shareholder or the value determined by the auditor/accountant.

Under this mechanism Power could inform Swinton that he intends to sell the shares in Swinton to Able and the price which Able is willing to pay.  The company must then inform Axis. Axis could then either agree to pay that price or first require a valuation of the shares.  In either case, Axis could require Power to sell the shares to him, either at the Able price or at a lower price determined by the auditor/accountant.   

Power is not seeking to sell his shares in Swinton though the pre-emption mechanism. Instead, he is either arranging for Swinton to sell its shares in Seebeck to Able or arranging for Seebeck to sell its shares in STFC to Able (in either case giving Able indirect ownership and control of STFC without any change in the share ownership of Swinton).  

If this route was taken Swinton would no longer own nor have any interest in STFC (and Axis also would no longer have an interest in STFC). Instead, Swinton would own only what Able pays for the shares in either Seebeck or STFC.

Axis asserts that Power cannot sell STFC in this way under the share sale agreement entered into between Axis and Power when Axis bought 15% of the shares in Swinton.    Axis has joined the Standing legal proceedings to prevent Power from selling STFC other than through a sale of his shares in Swinton through the pre-emption mechanism.  Injunctions are currently in place preventing a direct or indirect sale of STFC (other than to Axis) until the legal proceedings have been decided.

Axis is also asking the Court to require Power to commence the pre-emption mechanism.

If the pre-emption mechanism is invoked, it is very likely to lead to Axis taking over STFC.  It also appears from the Court case that Michael Standing will not seek to block a sale of Power’s shares to Axis.

It is unclear why Power won’t sell STFC to Axis.    He has said the Able offer is better, but that doesn’t seem to be the case from what has been said at Court (although TrustSTFC hasn’t had access to the evidence filed at Court).  The Judge described the reasons given by Power for preferring Able as “unconvincing” during the hearing in May 2021.  Able itself has disclosed no information publicly about its financing or plans and has not given any interviews.