Does Failure To Get A Share Valuation Cause A Good/Bad Leaver Any Loss?

In this article, our Private Equity team discusses the importance of leaver valuation and the enforceability of restrictive covenants in shareholders' agreements.

Leaver Valuation

The High Court has recently ruled that a company breached provisions of its articles of association in relation to the compulsory transfer of a leaver's shares. The company failed to instruct an Independent Expert to value the shares as they wrongly treated the former consultant as a Bad Leaver when she was a Good Leaver. As a result of this failure it was claimed that opportunities to sell the shares were lost.

The leaver was a consultant to the company with a fixed term consultancy agreement. This agreement came to an end after nearly 3 years. One of the categories of Bad Leaver in the company's articles was "a consultant of any Group Company who terminates his consultancy on or before the third anniversary of the commencement date of his consultancy agreement", and the company claimed she fell under this category. The court disagreed and said that the "wording naturally refers to some action taken by the consultant to bring the agreement to an end before its natural expiry" and would not cover cases where the consultancy agreement came to an end on its terms. There would have been no logic in granting share options to a consultant whose engagement from the outset was for less than three years.

The company therefore acted in breach of its articles by failing to initiate the correct transfer procedures.

However, it was held that the articles do not guarantee or promise that the shares will be sold and do not impose any duty on the company to find a buyer. On this basis the court found that the former consultant had not suffered any loss as a result of the failure to instigate the transfer process as she still held the shares, and they had actually increased in value (notwithstanding that as shares in a private company they were not readily marketable).

(Ajayi v Ebury Partners Ltd EWHC 166 (Comm))

Restrictive Covenants

The Court of Appeal has recently considered an important case on the enforceability of restrictive covenants in shareholders' agreements.

The defendant was a consultant to the claimant company, and was also a shareholder and a party to the shareholders' agreement.

The shareholders' agreement included various restrictive covenants applying to "Employee Shareholders", defined as "any Shareholder who is also an employee, agent or director of the...