Shareholders' and joint venture agreements and articles of association often include leaver provisions which require a departing employee member to sell his or her shares to existing members for fair value, as determined by an independent accountant appointed by the parties. This case illustrates how inadequate drafting of the relevant provisions can stall the valuation process where the parties fail to agree the appointment of the independent accountant due to one party refusing to sign the accountant's engagement letter.
Mr Davenport ("D") was removed as a director of Cream Holdings ("CH") in 2004 and at the time held just over 25% of its shares. His departure triggered the leaver provisions in CH's articles of association (the "articles"), which required an employee who was also a member to transfer his shares to remaining members for fair value when leaving that employment. Fair value was defined as the price per share agreed by CH's board and the transferor or, failing such agreement, as determined by an independent firm of third party accountants (the "TPA") chosen by the transferor and the board of CH or failing agreement on such appointment within 7 days as chosen by the President from time to time of the Institute of Chartered Accounts of England and Wales.
A long-running argument subsequently ensued about the value of D's shares, which resulted in D failing to agree to the appointment of BDO Stoy Haward ("BDO") as the TPA. D refused to signed BDO's letter of engagements on the basis that he was unhappy with certain terms in the letter and he claimed that CH had not made complete disclosure of all the financial and other material that would be relevant to the determination of the fair value of the shares. CH asked BDO to issue a new engagement letter on the basis that it had been "chosen" to act as the TPA within the articles. BDO valued the shares and D applied to the court for an injunction to restrain the implementation of the transfer provisions based on that valuation. The High Court and the Court of Appeal determined that there was no valid appointment of BDO, as the articles required a tripartite agreement between D, the board of CH and BDO on the terms of BDO's engagement.
Between the High Court judgment and the Court of Appeal hearing, CH asked the President of the Institute of Chartered Accountants of England and Wales to nominate a new TPA, and PKF was subsequently chosen. CH then brought a claim seeking a declaration that the appointment of PKF was effective or would become effective on settlement of the terms of his engagement. The issue before the Court was whether D could refuse to sign PKF's engagement letter until full disclosure had been given to him. CH argued that D was acting unreasonably in refusing to agree to the terms of engagement until disclosure was complete, as there was no contractual right to disclosure under the articles.
The Court of Appeal (agreeing with the decision of the High Court) determined that:
- the decision of the courts in the injunction proceedings was correct, namely that D needed to agree the identity and terms of appointment of the TPA;
- there was no obligation on CH to provide D with information to enable him to value the shares under the articles or as a matter of general law and as D was not entitled to insist on disclosure of the financial information prior to accepting the terms of engagement of the TPA, he was acting unreasonably in refusing to sign on those grounds; and
- assuming the TPA was prepared to act on reasonable terms consistent with the rights and obligations of CH and D under the articles, the articles should be read as containing implied terms that the parties would co-operate in doing everything reasonably necessary to procure the appointment of PKF as the TPA on those terms and that they would not unreasonably refuse to agree the terms of engagement. This was an obvious and necessary means of giving effect to the articles.
This case illustrates that the parties could have avoided unnecessary time and expense if the valuation provisions had been clear as to what would happen if the parties did not agree the TPA's terms of engagement. If the agreement is silent on the point, the terms implied by the court are likely to assist; however, as many cases are dependent on their facts, there is no guarantee that a court would imply a similar term into an agreement if the interpretation were left open. Parties negotiating such provisions would, therefore, be wise to include express wording to require the parties to co-operate to do everything reasonably necessary to procure the appointment of the TPA and that they will not unreasonably refuse to agree the terms of engagement. If the selling member is concerned about whether he will be given full disclosure of financial information to enable him to value his shares, the agreement or the articles will need to contain express provisions to that effect.