A conflict between two director-shareholders at Lush led to a court dispute over how to value shares on a sale.

Embroiled in internal disputes, Mr Genie left the company and sought to sell his and his wife’s shares in two companies connected with Lush.

However, within the company’s articles of association, any shareholder wanting to sell their shares had to first offer them to existing shareholders at a price agreed between all parties.

After the parties failed to agree on a valuation of the shares, independent accountants stepped in. However, the parties could not agree on whether it would be best to calculate the price:

  • pro-rata: The calculation is based on their minority shareholding in the overall value of the company which is likely to give rise to a higher valuation; or
  • share premium: The calculation is based on assessing the minority shareholding individually at a discounted rate which is likely to give rise to a lower valuation.

The Court of Appeal examined the companies’ articles, noting that they directed the accountants to value the companies as a whole. The court interpreted the relationship between the two companies as being one of a quasi-partnership, and held that general contractual principles had to be applied to the articles such that the shares should be valued on a pro-rata basis.

This case demonstrates that where the court is required to intervene in shareholder disputes and matters of the company, it will adopt an objective, factual and commercial approach when assessing all the circumstances. When drafting contractual documents, clarity is vital in terms of reflecting all parties’ intentions in the wording.