Franbar Holdings Ltd v Casualty Plus Ltd & Anor

The Court of Appeal dismissed the appellant's challenge to the judge's declaration that the option price was to be determined by reference to the Company's audited accounts for the year ended 31 December 2005. The court upheld the construction of Schedule 3 of the shareholder agreement that the phrase "the most recent audited annual accounts as have been formally adopted by the Company" requires a process of adoption that involved knowledge and participation by both shareholders (or their nominated directors) and compliance with the procedures envisaged by the agreement, including clause 2.11. The court also endorsed the alternative ground that accounts which were disclaimed by the auditors and qualified in a way that might affect EBITDA could not sensibly be the accounts intended to determine the option price.

Background and parties:

• The dispute concerned valuation of Franbar's remaining shares in Medicentre (UK) Limited on exercise by Casualty of a contractual call option contained in a shareholder agreement dated 28 July 2005.
• Causal events included the parties falling out in late 2007, Franbar's exclusion from company business, filing of draft 2006 accounts by Casualty at Companies House in July 2008, and Casualty's exercise of the call option on 1 April 2009.

Nature of the application and procedural posture:

• Franbar sought a declaration that the option price should be determined by reference to the Company's audited accounts for the year ended 31 December 2005. The parties asked the court to resolve preliminary issues, including which year's audited accounts should be used to calculate EBITDA under Schedule 3 to the agreement. The preliminary issues were tried in the Chancery Division before Mrs Justice Proudman, who declared in favour of the 2005 accounts; Casualty appealed to the Court of Appeal.

Issues framed by the court:

• How to construe "the most recent audited annual accounts as have been formally adopted by the Company" in paragraph 2 of Schedule 3: whether formal adoption required only signing and filing, or the knowledge/participation of both shareholders (or their nominees) in accordance with the agreement.
• Whether accounts disclaimed or qualified by the auditors could be used for determining EBITDA for the option price.

Court of Appeal reasoning (concise):

• The court agreed with the judge that, read in the commercial and contractual context, "formally adopted" could not sensibly be satisfied by a unilateral process where directors nominated by only one shareholder signed and filed accounts without the knowledge, approval or opportunity to participate of the other shareholder's nominated directors. Clause 2.11 (requiring audited accounts to be made available for inspection and formally adopted within a specified time) supported an interpretation requiring participation and knowledge by both parties.
• The court further held that audited accounts which carried a significant auditor qualification or disclaimer that might affect EBITDA were not the kind of "audited annual accounts" the parties would have intended to determine the option price. The auditors' inability to form an opinion where the qualification could impact profit rendered those accounts unsuitable for use under Schedule 3.
• The court relied on the agreement as a whole and established principles of contractual construction, including that the court should give the instrument the meaning it would reasonably have in its commercial context.

Appeal dismissed. The Court of Appeal agreed with the judge that "formally adopted" accounts in Schedule 3 required a process involving the shareholders' knowledge and participation in accordance with clause 2.11 and the agreement as a whole; and alternatively that accounts disclaimed or qualified by auditors in a way that could affect EBITDA could not be used to fix the option price. Accordingly the 2005 Accounts, not the 2006 Accounts, were the appropriate basis.

Appeal from the Chancery Division (Mrs Justice Proudman, HC08CO0626). Preliminary issues were decided by Mrs Justice Proudman, who declared the option price was to be determined by reference to the 2005 audited accounts (order 26 May 2010). Permission to appeal was given by Mummery LJ; the appeal was heard in the Court of Appeal (neutral citation [2011] EWCA Civ 60).