Meaning of “fair value” of shares in a private company on compulsory transfers
June 1, 2021
Earlier this year, the High Court in the matter of Euro Accessories Ltd  EWHC 47 (Ch) held that a discount should be applied in determining the value of a minority shareholding that is subject to compulsory purchase at “fair value”.
In this case, the petitioner held 24.99% of the issued share capital of the Euro Accessories Ltd (Company) with the remaining shares held by the respondent. Following the breakdown of the relationship between the parties, several failed attempts were made to arrive at a price for the buyout of the petitioner’s shares by the respondent. Eventually, the respondent amended the articles of association of the Company forcing the petitioner to sell his shareholding to the respondent at ‘fair value’.
The petitioner’s contention was that the “fair value” of shares meant that he was entitled to a pro rata share of the total value of the Company. On the other hand, the respondent held that a discount should be applied for the petitioner’s minority stake.
The court decided in favour of the respondent and held that in determining the “fair value” of a minority stake, a discount ought to apply. Accordingly, a discount of 55% for the 24.99% state was applied based on the determination by a professional valuer, who was jointly appointed by the parties.
In arriving at its decision, the court applied the usual principles of contractual interpretation (using the literal meaning of words and taking into account the factual context) to the articles of association of the Company. However, the court noted that when interpreting articles of association of a company, all of the factual background does not need to be taken into account because articles of association are not a product of commercial negotiations leading to a meeting of minds and they are a public document, which should be capable of being understood by anyone who reads them.
In the circumstances, in interpreting the articles of association of the Company, the court did not take all of the factual background into account. Instead, the court looked at the natural meaning of the words, how they were used in the articles and considered any readily ascertainable facts about the Company and commercial common sense.
What can we learn from this case?
- Unlike commercial contracts, factual context is given less importance in the interpretation of articles of association
- Unless the way in which shares are to be valued is not clearly stated in the articles of association, the value to be attributed to shares is the actual value as understood in professional valuation parlance
- It is possible to attribute a mechanism for valuing shares and it is perhaps prudent to do so, for example, if it is intended that no discount should be given in valuing a minority shareholding, it is possible to prescribe for the same in the articles
- It is preferable to include an expert determination clause so that costly litigation can be avoided.