When shareholders have a disagreement, it can be particularly divisive where they do not have a controlling interest in the company concerned. However, as one Court of Appeal decision has recently shown, the outcome will usually depend on the interpretation of the company’s articles of association.
The case concerned two minority shareholders who between them owned 22 per cent of each of two cosmetics companies within the same very successful group. None of the shareholders owned 50 per cent or more of either of the companies. Following the deterioration of relations between certain shareholders, the minority shareholders gave notice to the others that they wished to dispose of their holdings.
The two companies’ articles of association were identical, and contained pre-emption clauses which specified the mechanism for the other main shareholders to acquire the 22 per cent block and also the method of valuation of any shares. The clauses provided, amongst other things, that the shares could be acquired at a “prescribed price” that would be determined by two independent accountants, if not agreed.
No such agreement was reached, and an issue arose as to how the “prescribed price” would be valued by the accountants. In particular, the minority shareholders argued that the shares should be valued on the basis of a pro rata proportion of the value of the whole equity of each company. The other shareholders preferred to value the minority shareholders’ shares, by taking into account the minority status of the shares.
In the High Court, the judge had found that the shares should be valued in accordance with the minority shareholders’ argument. This method of valuation produced a much higher value for the shares, and the other shareholders appealed the decision. In dismissing the appeal, the Court of Appeal could find no flaw in the High Court judge’s careful and thorough interpretation of the pre-emption clauses.
The lesson to be learned from this case, is that founders of companies and majority shareholders, should have a Shareholders’ Agreement, and regularly consider the pre-emption rights in the company’s Articles of Association - especially before granting any minority shareholdings to valued employees.
For further information, please contact our Corporate and Commercial team on 0121 698 2200 or complete our online enquiry form.
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