Cream Holdings Ltd v Davenport

Where articles of association require a third-party accountant to value shares, the valuation clause may provide default machinery if the parties do not agree a price. It does not, without clear language, make full financial disclosure a condition precedent to appointing the accountant or agreeing terms of engagement. Where agreement on those terms is required, the contract may contain implied duties to co-operate and not unreasonably withhold consent to reasonable terms consistent with the articles. The accountant determines what information is needed for the valuation. A shareholder cannot use unresolved disclosure requests to veto the process. An engagement term permitting termination may be removed if inconsistent with the articles.

The respondent company’s articles required a former employee-shareholder to offer his shares for sale at fair value. An earlier appointment dispute was determined at first instance in [2008] EWHC 298 Ch and on appeal in [2008] EWCA Civ 1363, where the Court held that the third-party accountant’s appointment required agreement on the engagement terms.

The President of the Institute of Chartered Accountants subsequently nominated Mr Whitaker. The appellant refused to sign the proposed terms until he received full disclosure of financial information and also challenged the proposed fees, liability cap and confidentiality provisions. The trial judge, in [2010] EWHC 3096 (Ch), implied duties to co-operate and not unreasonably withhold consent. The central issues were whether prior disclosure was required, whether the implied duties were enforceable, and whether the proposed terms were reasonable.

1. Disposition. The Court of Appeal dismissed the appeal and the application to adduce new evidence. The trial order was upheld, subject to deletion of clause 19.1 from the engagement terms because its termination power was inconsistent with the articles.
2. Construction of the valuation machinery. Article 11.14 defined Fair Value and supplied default machinery for the third-party accountant if the parties could not agree a price. It did not make prior disclosure a condition precedent to agreement on price or to settlement of the accountant’s engagement terms. Nor did it govern the accountant’s fees, resources or working methods. Those matters arose from the construction of Article 2.1, under which agreement between the parties and the accountant on the terms of engagement was required.
3. Implied contractual duties. The rule against agreements to agree did not prevent implication of terms where no essential term remained to be negotiated. Practical difficulties in operating the machinery were not sufficient to defeat the implication. It was necessary and appropriate to imply duties requiring the parties to co-operate in procuring the appointment and to accept reasonable terms consistent with their rights and obligations. A party could not unreasonably withhold consent and thereby veto the valuation process.
4. Role of the accountant and disclosure. The parties could negotiate the proposed terms, but the accountant determined the basis on which he was prepared to act, and the articles gave the parties no power to compel different terms. The appellant had no right to receive full disclosure before signing. Disclosure issues were to be raised with the accountant at the outset of the valuation, and he was to decide what further information was necessary. The court noted the general contractual and fiduciary principle in Hospital Products v United States Surgical Corporation [1984] 156 CLR 41, but rejected the suggested wider agency argument on the narrower construction of Articles 11.1 and 11.2: the company acted as agent only for transferring and passing title to the shares.
5. Application. The objections concerning advance fees and disclosure restrictions had been resolved. The judge was entitled to regard the £500,000 liability cap as reasonable in the circumstances. Refusal to sign because disclosure was incomplete was unreasonable and breached the implied duty to co-operate. The proposed valuation process therefore had to proceed, with clause 19.1 deleted.

• Court of Appeal (Civil Division): Dismissed the appeal and the application to adduce new evidence. The trial order was upheld subject to deletion of clause 19.1.
• High Court of Justice, Chancery Division (Companies Court): In [2010] EWHC 3096 (Ch), John Randall QC implied duties to co-operate and not unreasonably withhold consent, rejected the appellant’s objections to the proposed terms, and granted the company’s declaratory relief.
• Earlier Court of Appeal proceedings: In [2008] EWCA Civ 1363, affirming [2008] EWHC 298 Ch, the court held that agreement between the parties and the accountant on the engagement terms was required before the appointment became effective.