Re Euro Accessories Ltd  EWHC 47 (Ch): Court interprets meaning of “fair value”
On 13th January 2021, the High Court held that where a minority shareholder is forced to sell their shares to a majority shareholder at “fair value” pursuant to the company’s articles of association, in the absence of any contractual arrangement stating otherwise, a discount should be applied to the value of the minority shareholding.
Facts of the case
Mr Gilsenan held the majority shareholding of 75.01% in Euro Accessories Limited, whilst Mr Monaghan held the remaining 24.99% of the company’s shares. In 2010, the relationship between the two shareholders broke down and negotiations began for Mr Gilsenan to buy Mr Monaghan’s shares. However, they were unable to agree a price.
In March 2016, Mr Gilsenan passed a special resolution as the majority shareholder holding 75.01% of the shares to amend the company’s articles. The effect was to give Mr Gilsenan the right to force Mr Monaghan to sell his shares for “fair value”. The articles did not define “fair value” or provide any guidance as to how it should be calculated.
In April 2016, Mr Gilsenan notified Mr Monaghan that he was required to sell all his shares to Mr Gilsenan for £175,000, the price having been discounted to reflect that this was a minority shareholding. Whilst Mr Monaghan accepted that the sale itself would have to go ahead, he disputed the price to be paid for the shares, arguing that he should be paid an undiscounted amount that was proportionate to his shareholding. Mr Gilsenan completed the share transfer, despite Mr Monaghan refusing to comply.
Mr Monaghan brought a claim for unfair prejudice against Mr Gilsenan. The question for the court was whether “fair value” for Mr Monaghan’s shares included a discount to reflect his minority shareholding.
The High Court agreed with Mr Gilsenan and ordered that the value of Mr Monaghan’s shares was to be discounted, holding that Mr Monaghan had not been unfairly prejudiced. It was held that, as a company’s articles are a contract between the company and its members, the ordinary principles of interpretation of a contract should apply with a few modifications to take into account certain distinguishing features of articles; specifically that, in contrast to a private contract:
(i) articles are not generally negotiated before they are adopted; and
(ii) articles are required to be registered at Companies House making them a public document that should be capable of being understood by anyone.
Therefore, when interpreting the articles, the Court focused on the natural and ordinary meaning of the words, facts about the company that were ascertainable by any reader and commercial common sense.
The High Court noted that it was the consideration for the sale shares that was at “fair value”, and the emphasis therefore was on the shares rather than the shareholders.
An independent valuer calculated that on a pro-rata basis the undiscounted value Mr. Monaghan's 24.99% shareholding was £545,000, and the discounted value was £245,000. Therefore, Mr Monaghan was paid £245,000 for his shares.
Re Euro Accessories Ltd clarifies how the value of shares which are to be forcibly acquired at “fair value” should be determined. Unless any contract indicates otherwise, the “fair value” of shares is their actual value, rather than a value calculated on a pro rata basis.
Any potential disputes can be avoided through clear drafting of the articles setting out how valuation should be determined and whether factors such as a minority shareholding should be taken into account.