Articles of Association take precedence over a shareholders’ agreement in the determination of the fair value of shares in a private company.

November 4, 2021


In the recent case of Lord and others v Maven Wealth Group Limited [2021] EWHC 2544, the High Court has held that the provisions in the articles of association for the determination of ‘fair value’ of shares take precedence over the provisions in the shareholders’ agreement, even if ‘fair value’ is defined in the articles by reference to the definition given in the shareholders’ agreement.

The founders of a company sold their majority stake. They retained a minority stake and continued to be engaged as directors and employees of the group. At the time of the sale, the company adopted new articles of association (Articles) and the founder sellers and the buyer entered into a “call option and shareholders’ agreement” (SHA).

The Articles provide that the shares of a leaving founder would be subject to compulsory transfer for a consideration to be determined by reference to the ‘fair value’ of the shares. ‘Fair value’ in the Articles was defined by reference to the definition in the SHA (albeit the methodology for defining ‘fair value’ in the SHA was for the purpose of valuing the shares in connection with the exercise of certain put and call option provisions).

The Articles specifically set out the procedure for the determination of the ‘fair value’:

  • the leaver and the company’s directors were to agree on the value
  • if a value is not so agreed, the auditors would be appointed to determine the ‘fair value’
  • if the auditors were unable or unwilling to do so, an independent chartered accountant, nominated by the majority shareholders, would act as the ‘expert’ whose decision would be final and binding.

In addition to defining ‘fair value’, the SHA also contained a procedure for the determination of the ‘fair value’ (which differed from the Articles):

  • the company was to instruct the auditors to determine the ‘fair value’;
  • if any party disagreed, the parties would need to seek to resolve the issue by agreement
  • if unresolved, either party could ask the President of the Institute of Chartered Accountants in England and Wales to determine the ‘fair value’ whose determination would be final and binding.

Interestingly, there was a clause in the SHA which provided that if there was a conflict between the terms of the SHA and the Articles, the terms of the SHA should prevail.

Two of the founders were dismissed as directors and were suspended from employment on grounds of misconduct. Accordingly, the compulsory transfer provisions applied. Following a disagreement on the ‘fair value’, the majority shareholders proceeded to appoint an independent accountant relying on the provisions of the Articles. The leaving founders contended that the procedure in the SHA should be followed for the determination of ‘fair value’ because the Articles defined ‘fair value’ by reference to the definition in the SHA.

The issue before the court was the construction of the provisions that determined the processes by which the shares were to be valued.

The court held that the position was ‘relatively straightforward’ and the procedure in the Articles should be followed. There was no need for the expert to ‘import procedural requirements not found’ in the Articles.

While ‘fair value’ was to be calculated in accordance with the SHA, the procedure for determination of ‘fair value’ which was stipulated in the Articles was to be followed.

Perhaps the lesson to learn from this case is that consistency between the articles of association and shareholders’ agreement is key while drafting these documents, otherwise inconsistencies can give rise to unnecessary disputes.

For more information, please contact JD Ghosh.

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