Appointing An Independent Valuer: How A Dissentient Party Could Frustrate Expert Determination Provisions

The Court of Appeal has recently held that the process of

appointing an independent accountant to value shares under the

mandatory transfer provisions of a company's articles of

association required the express agreement between the relevant

shareholder, the company and the accountant regarding the terms of

the accountant's appointment. In the absence of terms agreed by

all those parties, the accountant was not validly

appointed for the purpose of resolving the disputed value of the

shares in question, effectively allowing the dissentient party to

frustrate the resolution process.

Whilst this case is of particular importance to private equity

investors (as mandatory transfer provisions are most commonly used

in their investment documentation), it has far-reaching

consequences for all commercial agreements where parties agree to a

third party being appointed to resolve an issue in dispute.

In light of this decision, standard documents containing such

provisions should be reviewed and amended accordingly and legal

advice should be taken before expert determination processes are

begun pursuant to existing arrangements.

Facts of Case

In Cream Holdings & Ors v Stuart Davenport [2008] EWCA

Civ 1363, the respondent, Mr Davenport, was removed as the

director of a company, thereby triggering the mandatory share

transfer and valuation provisions in the company's articles.

The articles contained typical provisions for the sale price of the

director's shares to be the fair value agreed between him and

the company or, failing agreement, the fair value determined by an

independent accountant. The independent accountant was to be chosen

by the director and the board or, failing their agreement on such

appointment, by the President of the Institute of Chartered

Accountants.

The parties failed to agree on the sale price, but did agree on

the identity of a firm of accountants to act as the independent

accountant and determine the fair value of the shares under the

articles. Although the director agreed to the identity of the firm,

the company alone signed an engagement letter with the firm of

accountants; the director never signed the engagement letter and

reserved his position concerning the firm's appointment.

The accountants determined the fair value of the shares and the

director sought a declaration that the valuation was not binding on

him, as there had been no agreement on the terms of the firm's

appointment.

Court's Decision

The Court held that the...