Dashfield & Anor v Davidson & Ors

Articles of association are construed objectively and commercially, but a mandatory procedure is not converted into a discretionary power merely because it benefits surviving shareholders. Where an article requires a transfer notice after a shareholder’s death, its implementation is an obligation and the notice is an administrative step, ordinarily to be taken promptly. A general appeal to fairness cannot displace clear contractual and statutory rights. Unfair prejudice requires breach of the agreed basis on which the company’s affairs are conducted, or an equitable promise or understanding binding conscience. A valuation clause referring to the last audited accounts may, in context, mean the audited accounts for the last completed financial year before death. The company may be required to take reasonable steps to procure those accounts before valuation.

John Peet’s estate claimed an interest in a retention fund created after the sale of Crown UK Ltd. Following Peet’s death, the company invoked article 14 of its articles, requiring his shares to be transferred to the company at a price fixed by reference to the company’s audited accounts. The shares were bought using the 2002 accounts and the remaining shareholders then sold the company to Avingtrans plc.

A preliminary decision had upheld the validity of article 14. The remaining issues were whether the estate was legally obliged to sell the shares to the company, whether article 14 had been suspended by agreement or equitable considerations, and which accounts governed the valuation.

1. The estate was legally obliged to sell Peet’s shares under article 14. The shareholders had agreed only to offer Avingtrans a period of exclusivity. There was no express or implied agreement suspending article 14, and no joint venture carrying that consequence.

2. The approach in The Aramis [1989] 1 Lloyd’s Rep 213 was applied. No contract could be implied where the parties would have acted in the same way without a contract.

3. Article 14 imposed mutually enforceable obligations. Its mandatory wording left no relevant discretion whether to invoke the procedure. The transfer notice was an administrative act, ordinarily to be issued as soon as reasonably possible within the three-month period.

4. The proper-purpose principle in Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 did not apply to the performance of a mandatory obligation. Reallocating ownership after a shareholder’s death was the purpose of article 14.

5. The estate could not establish unfair prejudice under section 459 of the Companies Act 1985. Applying O’Neill v Phillips [1999] 1 WLR 1092, there was neither a breach of the agreed basis on which the company was conducted nor a promise or understanding binding in equity.

6. “The last set of audited accounts” meant the audited accounts for the last completed financial year before death. The valuation crystallised at death, but later-produced accounts could provide evidence of value at that date. Alternatively, a term was implied requiring the company to take reasonable steps to procure those accounts before valuation. The correct price was £442,479, not £243,648.

7. The difference of £198,831, together with a pro rata share of accrued interest, was to be paid from the retention fund to Peet’s current personal representatives. The balance was to be shared equally by the surviving shareholders.