Background
This case was heard in the High Court on 27 November 2015. Two minority shareholders had served transfer notices, seeking to dispose of their shares in two companies. The articles of association came into play, specifically the pre-emption rights on share transfers.
These provisions resulted in the company being the shareholders’ agent for the sale of the shares in one or more lots at the discretion of the directors and at the “prescribed price”.
The articles of both companies were substantially the same. Article 5 (C) read as follows:
“The ‘prescribed price’ shall be such sum per share as shall be agreed between the vendor and the company failing which it shall be the median price of the prices as determined and certified in writing by two independent chartered accountants as being in their opinion the fair value thereof as between a willing buyer and a willing seller valuing the company on a going concern basis such accountants to be nominated by agreement between the vendor and the company or in default of such agreement by the President for the time being of the Institute of Chartered Accountants in England and Wales and if so nominated the said chartered accountant when determining and certifying the fair value of the transfer shares as aforesaid shall act as an expert and not as arbitrator…”
Article 5 (L) dealt with the circumstances in which existing shareholders had not exercised their pre-emption rights. It read:
"During a period of 90 days after the expiry of the time for service of an Allocation Notice the vendor shall be at liberty to transfer to any person at any price (not being less than the prescribed price) any of the transfer shares which he has not become obliged to sell under the foregoing provisions."
Points of interpretation
Several firms of accountants had become involved in trying to conclude on the most appropriate way of moving this matter forward. However despite these endeavours, the parties decided that a court decision was needed in order to resolve matters.
The court was asked to decide a number of points of interpretation:
- Whether the accountants were required to conduct their valuations on a pro rata or discounted basis;
- Whether the accountants' valuations should be conducted on the basis of publicly available information only or have regard to such further information available as the accountants might request;
- Whether a potential transferee of the shares under article 5(L) was to be provided with (a) publicly available information only; or (b) such further information available as the potential transferee might reasonably request (upon giving appropriate undertakings as to confidentiality); or (c) some other, and if so what, information;
- Whether liability for the fees and expenses of the accountants was (a) the responsibility of the defendants in any event, (b) to be shared between the claimants and the defendants; or (c) a matter to be determined by the accountants themselves.
Pro rata or discounted valuation?
The Judge determined that the wording in article 5 (C) meant that there should be no discount: “… the Accountants' task is to fix a price per share, as opposed to fixing a price for "the Transfer Shares" as a block… the Accountants will be unable to fix the value of the Transfer Shares by reference to the size of the particular block of shares being sold because, at the time at which they are required to calculate the Prescribed Price in accordance with article 5(C), they will not know the size(s) of the block(s) that will ultimately be transferred or what significance they will or may have in the hands of the transferee (e.g. by creating a majority shareholding).”
It is rather telling that the decision was based, not only on the wording of article 5 (C), but also the ability of the company to divide the shareholding into lots and, of very considerable interest, on the position of the recipient shareholders.
The information standard
The judge disposed of this point in a very straightforward manner:
“In my view, the correct interpretation of article 5 is that it is for the Accountants to decide what information they require in order to carry out the job that they have been appointed to do. It appears to me to that (a) this accords with the agreed principles that apply to the construction of articles of association, as set out above, and (b) any different or more restrictive approach would not be in keeping with those principles.”
It would have been an unusual combination of circumstances if the valuation was to be conducted of the entire equity in order to derive a pro rata value per share, but with the information standard not being consistent with that basis of valuation.
The rights of the transferee to information
The decision of the judge was that the potential buyer of the shares under the provisions of article 5 (L) was entitled to the following information, in addition to that which was in the public domain:
- Information held by the shareholders about the company which was not subject to an obligation of confidentiality;
- The prescribed price as determined the accountants;
- Any other information received by the shareholders as part of the price determination process, provided that this was not subject to an obligation of confidentiality.
The allocation of the fees
It was the decision of the judge that unless the accountants were given express authority, they were not able, in their role as experts, to determine the allocation of their fees. In accordance with what was considered to be normal practice, he directed that the fees should be borne equally by the company and the selling shareholders.
Andrew Strickland, Consultant, Scrutton Bland
Valuation Group, December 2016
