English Court Determines Meaning Of 'Fair Value' In A Private Company Shareholder Buy-Out

• Published date: 02 March 2021
• Subject Matter: Accounting and Audit, Corporate/Commercial Law, Accounting Standards, Corporate and Company Law, Contracts and Commercial Law, Shareholders
• Law Firm: Armstrong Teasdale
• Author: Ms Kathryn C. Bascom and Coral Yu

In a recent ruling, the High Court has provided useful guidance on an issue common to many joint ventures and similar shareholder arrangements: when one shareholder is forced to sell its shares to the other shareholder(s), how is 'fair value' to be determined?

In Re Euro Accessories Ltd [2021] EWHC 47 (Ch), the minority shareholder of a company (Mr Monaghan) brought an unfair prejudice claim to determine the 'fair value' to be paid to him by the majority shareholder (Mr Gilsenan) for his minority shareholding in the company. The key issue was whether the value of Mr Monaghan's shares, absent any specific contractual agreement, should be discounted to reflect the fact it was a minority shareholding. The court held that a discount should be applied in the circumstances.

Summary of the Facts

The company was incorporated by Mr Gilsenan, who initially held 100% of the shares. Mr Monaghan joined the company subsequently as an employee and was later given 24.99% of the shares. After their relationship broke down, the parties tried to negotiate a deal for Mr Gilsenan to buy Mr Monaghan's minority stake, but they were unable to agree a price. Mr Gilsenan then used his majority control to amend the articles of association of the company to enable him to purchase the shares held by Mr Monaghan at 'fair value'. The revised articles did not define 'fair value' or otherwise provide guidance as to how it should be calculated.

Following adoption of the new articles, Mr Gilsenan sent Mr Monaghan a notice requiring Mr Monaghan to sell his shares to Mr Gilsenan for a total price of '175,000 - in his calculation of the price, Mr Gilsenan had discounted the value of Mr Monaghan's shares to reflect the fact that it was a minority shareholding. Mr Monaghan did not comply.

Mr Gilsenan ultimately effected the share transfer himself using a power under the amended articles to do so. However, several years later, Mr Monaghan commenced legal proceedings under section 994 of Companies Act 2006 on the grounds that the company had been run in such a way that his interests had been unfairly prejudiced.

High Court's Decision

The court agreed with Mr Gilsenan that a 'minority discount' should be applied.

An independent appraiser found that the value of Mr. Monaghan's shares would have been '545,000 if no discount were applied, but only '245,000 if the value was discounted, a difference of 55%.

In reaching its decision, the court referred to the ordinary principles that apply to the...