What is the fair value of shares subject to pre-emption provisions on transfer?

In Cosmetic Warriors Ltd & Anor v Gerrie & Anor [2015] EWHC 3718 the High Court considered provisions in articles of association providing for proposed transfers of shares to be preceded by an offer to sell them to existing shareholders, either at a price to be agreed by the transferor and the company, or as determined by independent accountants (the “Pre-Emption Provisions”). A key question for consideration by the court was the basis upon which the accountants should carry out the valuation. The two defendants (the “Minority Shareholders”), with a combined shareholding of 22% of the share capital in each claimant company, had given notice of their intention to sell their shares (the “Transfer Shares”) in accordance with the PreEmption Provisions.

Interpretation of articles (general principles)

The applicable legal principles to be applied when interpreting articles were substantially not in issue and are summarised in paragraphs 6-13 of the judgment. The point on which the parties were divided was the extent to which extrinsic evidence could be introduced. The judge concluded that: Š

  • there is no absolute prohibition on considering extrinsic material for the purpose of interpreting articles; Š
  • the admissible background for the purposes of construction is limited to what any reader of the articles would reasonably be supposed to know; and Š
  • an implication based on extrinsic evidence of which only a limited number of people would have known is impermissible.

Despite having come to that conclusion, the judge decided to interpret the Pre-Emption Provision “purely from a consideration of the language used in it” i.e. without extrinsic evidence.

Basis of valuation of minority shareholding: either per share or as a block?

The question to be considered was whether the valuation exercise involved: Š

  • ascertaining the price that might be achieved for the transfer of the shares as a block, between a willing seller and a willing buyer (which may include a minority discount); or Š
  • whether the value of each individual share should be determined by reference to the value of the company as a whole, divided by the number of shares in issue. 

The judgment includes the full text of the Pre-Emption Provisions. Of particular relevance was the wording, extracted below (underlining added for emphasis).

The “prescribed price” shall be such sum per share as shall be agreed between the Vendor and the Company failing which it shall be the median price of the prices as determined and certified in writing by two independent chartered accountants as being in their opinion the fair value thereof as between a willing buyer and a willing seller valuing the Company on a going concern basis… the said chartered accountant when determining and certifying the fair value of the Transfer Shares as aforesaid shall act as an expert…”

The judge, agreeing with the Minority Shareholders, concluded that it “is clear that the subject matter of the “thereof” in this wording is an individual “share” and not “the Transfer Shares”” i.e the block of shares. The words “the fair value per share” could be substituted for “the fair value thereof” without any significant alteration of meaning which would not be the case if “the fair value of the Transfer Shares” was used.

The judge dismissed suggestions that a reference in the Pre-Emption Provisions to the accountants “determining and certifying the fair value of the Transfer Shares” precluded valuation on a per share basis although he noted that other approaches could reasonably be adopted and that “no solution is perfect”. He also rejected suggestions that references to the “fair value” as that which applies “as between a willing buyer and a willing seller” and derived from “valuing the Company on a going concern basis” assisted in deciding whether what is to be valued is each individual share or the shares as a block. A further reason given in support of the judge’s opinion was that “the Accountants will be unable to fix the value of the Transfer Shares by reference to the size of the particular block of shares being sold because, at the time at which they are required to calculate the Prescribed Price… they will not know the size(s) of the block(s) that will ultimately be transferred or what significance they will or may have in the hands of the transferee (e.g. by creating a majority shareholding).

Evidence of value: public information only or the information the accountant receives?

Evidence was heard that standard practice is for valuers to be provided with access to management accounts, forecasts and business plans and that it would be highly unusual for a valuation to proceed on the basis of publicly available information only. The counter argument was that if shares were to be valued by reference to hypothetical individuals, the valuer may only rely on information available to such individuals i.e. public information.

The articles did not cover this point and the judge, considering the recent Supreme Court decision on implied terms (Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd & Anor (Rev 1) [2015] UKSC 72, summarised here) concluded that there was no basis for implying that the valuation should be restricted to publicly available information. Instead, the judge concluded that the accountants could decide “what information they require in order to carry out the job that they have been appointed to do”. This interpretation was noted to accord with the general principles for interpreting articles and the Supreme Court decision in Arnold v Britton & Ors [2015] UKSC 36 (summarised here).

Does “person” include or exclude a corporate entity?

The court also considered whether a transferee needed to be a natural person. The point being that if it was not restricted to individuals, a corporate transferee might subsequently change ownership, effectively enabling a transfer of shares outside the Pre-Emption Provisions. The judge concluded that, on the wording, there was no restriction on the identity of the transferee and to imply such a term would impose potentially significant restrictions on the freedom of a seller to transfer any shares.

Impact – the case highlights a number of issues that those drafting pre-emption, transfer, tag, drag or share valuation provisions may wish to consider. In particular: Š

  • whether transferring shares should be valued as a block or singularly; Š
  • what information the accountants should base their valuation on i.e. publicly available information or materials requested and received; Š
  • whether shares may be transferred only to natural persons (an issue highlighted in the Coroin litigation); and Š
  • who should bear the liability for costs (e.g. the accountants fees). In this case, in the absence of a provision the judge concluded that costs should be shared equally, relying on Rule 6(5) of the Rules for Expert Determination.


  • The FRC has published its report on “Developments in Corporate Governance and Stewardship 2015”. The report has four main purposes, it:
    • gives an assessment of corporate governance in the UK;
    • reports on the quality of compliance with, and reporting against, the two Codes;
    • gives the FRC’s findings on the quality of engagement between companies and shareholders; and
    • indicates to the market where the FRC would like to see changes in governance behaviour or reporting.

In addition, the Report summarises and comments on other relevant changes over the last 12 months. It notes that the quality of explanations has improved and compliance with the Corporate Governance Code remains high, with 90% of FTSE 350 companies reporting that they either comply with all, or all but one or two, of its provisions. As well as commenting on future projects the Report confirms that the FRC does not intend to make substantial revisions to the Corporate Governance Code in the next three years.

  • The EU Commission is consulting on non-binding guidelines in relation to the reporting of non-financial information by companies which will come into force later this year. EU member states are required to implement changes made to the Accounting Directive by Directive 2014/95/EU, by 6 December 2016. The provisions will broadly require large EU listed entities with over 500 employees to include a non-financial statement in their annual report containing information relating to, amongst other things: environmental, social and employee matters; respect for human rights; anti-corruption; and bribery. The obligation will apply to all relevant undertakings for the financial year starting on or after 1 January 2017. In the UK, all companies (unless small) are already obliged to prepare a stand-alone strategic report (covering certain non-financial matters) in addition to their directors’ report. BIS is reportedly expected to publish a consultation on implementation of the revised directive on the UK’s regime shortly