Franbar Holdings Ltd v Casualty Plus Ltd

The court determined preliminary issues about the proper financial basis for calculating the price under a call option in a shareholders' agreement. It held that the "most recent audited annual accounts as have been formally adopted by the Company immediately prior to the exercise date" (Schedule 3, paragraph 2) were the accounts for the year ended 31 December 2005 and not the 2006 accounts. The 2006 accounts were not treated as "adopted" because they were unilaterally approved by the defendant's representatives, were the subject of an auditors' disclaimer and the requisite formalities and unanimous or equivalent informal agreement were not present.

The court further held, for the limited purpose of the preliminary issue as posed, that the EBITDA required by Schedule 3 was not the figure of £524,830 stated as an "Adjusted EBITDA" in the Chairman's Statement of the 2005 accounts. The court declined to resolve in full whether the parties had in fact agreed the Adjusted EBITDA stated in the Chairman's Statement because that was outside the determined preliminary issue.

The claimant (Franbar) and the defendant (Casualty Plus) were parties to a shareholders' agreement containing put and call options and a Schedule prescribing that the option price be calculated by reference to the Company's most recent audited annual accounts "formally adopted" immediately prior to exercise. The defendant exercised a call option on 1 April 2009. The parties disagreed whether the option price should be calculated by reference to the audited accounts for the year ended 31 December 2005 or for the year ended 31 December 2006, and whether the Chairman's Statement figure of "Adjusted EBITDA" in the 2005 accounts (£524,830) was the EBITDA for the purposes of the Schedule.

The court tried preliminary issues. It reviewed the factual history: both parties had approved the 2005 accounts (albeit informally) and those accounts were filed and audited; by contrast the claimant and its nominated directors were excluded from involvement in and consideration of the 2006 accounts, which were signed and filed without claimant involvement and contained an auditors' disclaimer. The judge applied the Duomatic principle and authorities about unanimous informal approval to conclude that the 2005 accounts were the last accounts "formally adopted" for the Agreement's purposes. The 2006 accounts were not adopted because formalities had not been observed, the claimant had been excluded and the auditors had been unable to express an opinion.

The issues decided were:

• (i) Which audited accounts are to be used: the court held the 2005 accounts were the appropriate accounts because they had been adopted (formally or by unanimous informal approval) and the 2006 accounts were not adopted and were disclaimed by the auditors.
• (ii) Whether the Chairman's Statement figure of £524,830 represents the EBITDA required by Schedule 3: the court held, on the limited issue as posed, that EBITDA was not set out in the 2005 accounts and therefore the £524,830 Adjusted EBITDA figure in the Chairman's Statement did not, as a matter of construction of the Schedule, constitute the EBITDA used to calculate the option price; the court declined to determine whether the parties had in fact agreed that Adjusted EBITDA figure because that was outside the narrow preliminary issue.

The judge observed that the auditors' disclaimer was an important indicium that the 2006 accounts could not be treated as "audited annual accounts" for the Agreement's purposes. The court also noted that where a dispute as to adjustments arises, the contractual route to an independent accountant acting as expert remained available under Schedule 3 paragraph 7, but the second preliminary issue as ordered was answered in the defendant's favour in the limited form put to the court.

This is a first-instance disposal of preliminary issues. The court determined that the 2005 audited accounts were the last audited annual accounts "formally adopted" for the purposes of Schedule 3 to the Shareholders' Agreement because they had been approved by the parties (directors acting as representatives) whereas the 2006 accounts were unilaterally approved, lacked requisite formalities and carried an auditors' disclaimer. The court also held, on the limited question posed, that EBITDA for Schedule 3 was not the £524,830 figure stated as "Adjusted EBITDA" in the 2005 Chairman's Statement and therefore that EBITDA was not set out in the 2005 accounts; the court declined to decide whether the parties had in fact agreed the Adjusted EBITDA stated in the Chairman's Statement because that matter was outside the framed preliminary issue.