- Services for Business
- Services for Individuals
- Events & Media
- Contact Us
- Conveyancing login
We often use the term ‘fair value’ in our documents when determining how shares are to be valued in the future, and recently the High Court interpreted the meaning of these words in the case of Euro Accessories Limited (2021). The court heard from Gerard Gilsenan (Gilsenan) and Aiden Monaghan (Monaghan) regarding a dispute over the sale price of shares in a forced share buy-out.
The facts of this case are interesting and worth looking at the detail. Gilsenan incorporated Euro Accessories Ltd (Company) in December 2000 and held all of the shares in the Company. In 2008, Gilsenan transferred 24.99% of his shares to Monaghan making him a minority shareholder in the Company. As it can happen, Gilsenan and Monaghan’s relationship deteriorated in 2010 ending with Monaghan’s resignation. Gilsenan attempted to buy back Monaghan’s share in the Company, however, the two shareholders were unable to agree on a price. The argument between the two shareholders was such that Monaghan was a minority shareholder and therefore had no controlling influence over the Company, and that Gilsenan had the right to apply a discount to his shares. Monaghan though, insisted that he was entitled to 24.99% of the total value of the Company’s shares.
Gilsenan, as majority shareholder, had controlling influence over the Company and the authority to make controlling decisions in relation to the Company without Monaghan’s permission. In 2016, Gilsenan passed a number of special resolutions, amending the Company’s articles of association and redesignating the Company entire share capital from ordinary to alphabet shares and varying the rights attached to those shares. Gilsenan’s shares were redesignated from ordinary to B shares and Monaghan’s shares from ordinary to A shares. The articles were amended to give Gilsenan the right to force the A shareholder, Monaghan, to sell his A shares to the B shareholder, Gilsenan, for “fair value” on receipt of written notice. Gilsenan served written notice on Monaghan who then filed court proceedings. Monaghan did not dispute the authority for Gilsenan to force him to sell his shares but rather that the shares should not be discounted because they would not then be sold for “fair value”.
The court therefore had to consider and rule on the meaning of “fair value”. Firstly, Monaghan argued that his shares should not be discounted on the grounds that the amended articles gave Gilsenan, as majority shareholder, the unrestricted right to force the Monaghan to sell his shares without notice or cause. Furthermore, that no reasonable businessman would think that he was willing to sell his shares at a discounted price. Secondly, Gilsenan’s actions went against the meaning of “fair value” as set out in the International Valuation Standards Council (2013) which defines fair value as “the estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties”. Lastly, “fair value” of the shares was one that was “just and equitable in the circumstances”, discounting Monaghan’s shares would be unfairly prejudicial.
The court ruled in favor of Gilsenan agreeing that as the shares held no controlling influence over the Company they should be sold at a discounted price. The key question was, what was the meaning of “fair value” in a company’s articles of association. A company’s articles of association are a contract between the company and its members, i.e. Gilsenan and Monaghan. Case law states that the court is able to consider both the literal meaning and factual context in which a contract is made to determine the meaning of its contents. However, the High Court stated that as a company’s articles of association is a public document it would not take all of the factual background into account as a public reader would not be aware of the background and therefore would not be able to draw further understanding from the articles other than its literal meaning. The High Court also stated that articles of association are not like a commercial contract where negotiation leads to a meeting of the minds. As a result, when interpreting a company’s articles, a court will look at the natural meaning of the words, how they are used in the articles, any readily ascertainable facts about the company and apply commercial common sense.
The judge noted the following:
The case of Euro Accessories Limited (2021) reinforces the approach to be taken when interpreting articles of association in comparison to that taken with commercial contracts. The two main points to be taken from the ruling in this case is: Firstly, the court is unlikely to take into account background information when determining the meaning conferred by a company’s articles of association. Secondly, when drafting articles the definition of value and how it is to be calculated should be clear. The meaning of value can be made more transparent in a number of ways:
These simple measures can help protect parties from disputes born from misunderstanding and miscommunication.
The Ramsdens Corporate Team would be more than happy to assist you and your fellow shareholders by reviewing your current articles of association and shareholders agreement in light of the above.
April 19, 2021
Emma is a Senior Associate in the Company and Commercial team.