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Case law: Limited company articles of association should be interpreted in the same way as commercial contracts

Parties in a dispute over the meaning of their limited company's articles of association will welcome clarification that the same principles of interpretation apply as to commercial contracts, according to a recent ruling.

July 2017

This update was published in Legal Alert - July 2017

Legal Alert is a monthly checklist from Atom Content Marketing highlighting new and pending laws, regulations, codes of practice and rulings that could have an impact on your business.

Minority shareholders in two companies wanted to dispose of their shares. The two companies had identical articles of association governing transfers of shares. These said that an outgoing shareholder had to offer their shares back to the remaining shareholders at a 'prescribed price' which would either be agreed, or settled by referring the issue to two independent chartered accountants. (The articles went on to provide for what was to happen if the other shareholders did not want to buy them at that price.)

The parties could not agree a price, and failed to agree the basis upon which the accountants should value the shares. The remaining shareholders wanted the value of the shares to be discounted to reflect the fact they were minority shareholdings, but the minority shareholders wanted the valuation to ignore the fact that the shareholdings were minority holdings. They therefore referred the matter to the courts for a decision.

The Court of Appeal ruled that the same principles should be applied when interpreting articles of association of a company as when interpreting a commercial contract (since articles are in the nature of a contact between the shareholders in a company). The test was 'what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract'.

This means looking at the meaning of the words given the documentary, factual and commercial context, and taking no notice of subjective evidence of what the parties' intentions were.

Importantly, the factual background included that the companies were intended to operate as quasi-partnerships, ie, although set up as limited companies, the parties intended their relationship to operate more along the lines of a partnership. So, for example, each shareholder had a legitimate expectation that they would be involved in management decisions in the same way as partners in an ordinary partnership - irrespective of their shareholdings in the company.

The Court of Appeal ruled in favour of the minority shareholders. It found that, given the companies were intended to be quasi-partnerships, the definition of the 'prescribed price' in the articles was unambiguous, and the effect was that the price per share of each company should be calculated by valuing the company as a whole, on a going-concern basis and then apportioning that value on a per share basis, without discounting for the fact that a particular holding was a minority holding.

Operative date

  • Now


  • Company shareholders should ensure that any share transfer provisions in their articles requiring valuation of shares either prescribe clearly the basis upon which shares are to be valued, including whether they should be discounted or enhanced because they are either a minority or majority holding, or confer an absolute discretion on an independent valuer as to how they are valued

Case ref: Cosmetic Warriors Ltd v Gerrie [2017] EWCA Civ 324

Please note: An article published in the May 2016 edition of Legal Alert covered this case at an earlier stage in the legal process.

Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.