A recent case, involving two companies connected with the worldwide ‘Lush’ cosmetics brand, emphasises the need for a company’s articles of association to be tightly drafted to avoid disputes. The case also provides guidance for the valuation of shares which are the subject of pre-emption on a transfer.
In common with many companies, the articles of association of the two companies contained a provision stating that, before a transfer of shares is permitted to a third party, they must first be offered to the existing shareholders. The articles provided that any shares should be valued by an accountant and offered to the existing shareholders at that price.
The companies’ articles stated:
“the Prescribed Price shall be [the] sum per share… agreed between the Vendor and the Company, failing which it shall be… determined…. by… independent chartered accountants as being… the fair value thereof as between a willing buyer and a willing seller valuing the Company on a going concern basis.”
The dispute centred on two key points.
- Should the shares be valued as a block or individually? Each defendant owned approximately 10% of the Company’s share capital, and the claimants argued that the fact that they held a minority holding should be considered by the accountant.
- Should the accountants base their valuation on only publically available information, or such information as they may request? One of the claimants held a senior management role giving the claimants access to information not in the public domain. The defendants argued that this ought not to be considered.
On these points, the court found as follows.
- The word thereof in the relevant article is significant as it confirms that the valuation relates to individual shares, not a block. In addition, before the shares have been offered, accepted and allocated to the existing shareholders, the accountant has no way of knowing what size of block will ultimately be transferred, or the result it will have on the transferee’s position (for example, giving control).
- As the court put it, expecting an accountant to provide a valuation without having all of the information required could lead to “placing the experts in an invidious and unworkable position, and [be] a recipe for disaster.” It is for the accountant to decide what information is required to carry out the task.
So, what can we learn from this case? The lesson seems to be to check your company’s articles and, if in doubt, clarify them! As demonstrated here, the interpretation of a provision can turn on a single word, and you don’t want to be drawn into costly litigation to have this resolved by the courts.