11th June 2015
The Court of Appeal has resolved a long-running dispute surrounding the sale and valuation of a founding shareholder’s shares as part of an overall exit strategy. In so doing, it has clarified some key points of interest for corporate lawyers and clients alike. Gwendoline Davies explains.
The Court of Appeal has considered the fairness and validity of a share purchase effected to release retiring founding members from a business. In Charterhouse Capital sub nom Arbuthnott v Bonnyman & Others  the appellant, along with others, was a founder shareholder of a company governed by articles of association and a shareholders’ agreement (the SA). The SA provided that if a founder majority agreed to pursue an exit, the shareholder would agree to sell his shares on the same terms as those offered to the other shareholders. When the appellant and other members of the original team approached retirement, members intending to continue with the business offered to purchase all of the shares in the company. All retiring members accepted, except the appellant. He considered the company valuation, and the share price offered, to be too low. When the remaining members altered the company’s articles of association to enable the buyout to proceed without the appellant’s consent, he presented an unfair prejudice petition under section 994 of the Companies Act 2006.
Dismissing the appeal, the court looked at the terms of the SA as to exit strategy and the articles of association together. It held, on the facts, that amendments to the articles were no more than a tidying-up exercise with no evidence of bad faith or improper motive and that the amendment to allow the buyout to proceed was not inconsistent with original arrangements between the founding members and that it made “commercial common sense“. Furthermore, the SA provided that the appellant would be bound by the price with which the founder majority was content. Interestingly, the court confirmed that a term could be implied that, as sophisticated financial professionals, the founder majority would not accept a price which they did not honestly consider to be fair and reasonable .
The case highlights several key issues of interest on the question of amending articles:
And on the on question of share valuation:
 Charterhouse Capital Ltd sub nom Geoffrey Arbuthnott v James Gordon Bonnyman & 18 others  EWCA Civ 536
 Para 85
 Para 126