Hailes v Hood & Ors

A settlement providing for the purchase and valuation of an LLP member’s share ordinarily concerns the capital value of the member’s interest, rather than merely revenue profits accrued before departure. Where the agreement adopts the approach used for a shareholder buy-out, valuation is generally made on a pro rata basis by reference to the LLP’s assets, including goodwill where applicable. The statutory default entitlement to share equally in capital and profits does not itself extend to all assets of the LLP. The court must construe the settlement correspondence in its legal and commercial context, including references to an independent valuation and the modified unfair-prejudice remedy.

The claimant and defendants were members of an LLP. After a dispute concerning the claimant’s departure, the parties exchanged letters dated 20 May, 17 June and 20 June 2005. They agreed that the defendants would buy the claimant’s interest, subject to an independent valuation as at 31 May 2005, and that the claimant would resign.

The parties accepted that a binding settlement existed but disputed its meaning. The claimant contended that his interest was to be valued as a one-quarter share of the LLP’s assets, including goodwill. The defendants contended that he was entitled only to a one-quarter share of capital and profits and sums otherwise due, excluding goodwill.

1. The court held that the settlement terms were contained in substance in the letters of 20 May and 17 June 2005. It was immaterial whether the correspondence was characterised as an offer and acceptance or as a counter-offer accepted by the letter of 20 June.
2. The language of buying the claimant’s interest, valuing his share, using an independent expert and adopting the approach applicable to a dispute between shareholders in a limited company pointed to a capital valuation. It did not describe a simple computation of revenue profits up to a cessation date.
3. The approach recognised in O’Neill v Phillips [1999] 1 WLR 1092, namely that a fair value ordinarily represents the equivalent pro rata proportion of the total value without a minority discount, was relevant to the construction of the settlement. The references to Re London School of Electronics [1986] Ch 211 and Profinance Capital SA v Gladstone [2002] 1 WLR 1024 likewise supported a capital valuation approach.
4. Under regulation 7(1) of the Limited Liability Partnership Regulations 2001, “capital” had the meaning associated with section 24 of the Partnership Act 1890, as explained in Popat v Shonchhatra [1997] 1 WLR 1367. It did not extend to the LLP’s assets from time to time. That default rule did not determine the financial consequences here because the parties had made a settlement agreement.
5. The claimant was therefore entitled to one quarter of the value of the LLP’s assets, if any, including goodwill, if any, as at 31 May 2005. A declaration to that effect was appropriate. The court reserved the question of further relief.