Franbar Holdings Ltd v Casualty Plus Ltd & Anor

Where a shareholder agreement uses audited accounts to calculate an option price, formally adopted accounts cannot be created by unilateral action of directors nominated by one shareholder, carried out without notice or involvement of the other shareholder and its directors. The agreement must be construed as a whole and against its commercial background. A reference to the most recent audited annual accounts does not include accounts heavily qualified by auditors in ways that may affect the relevant financial measure. The court must give effect to the bargain made, while identifying the meaning reasonably conveyed by the agreement read as a whole.

Franbar held 25 per cent of Medicentre (UK) Limited and Casualty held 75 per cent. Under their shareholder agreement, Casualty could exercise an option to acquire Franbar’s remaining shares at a price calculated by reference to the Company’s EBITDA and the most recent audited annual accounts formally adopted before exercise.

Casualty exercised the option in April 2009. The parties disputed whether the price should be based on the 2005 Accounts or the 2006 Accounts. After a trial of preliminary issues in the Chancery Division, Proudman J ordered that the 2005 Accounts governed. Casualty appealed, raising the meaning of formal adoption and the effect of the auditors’ qualification of the 2006 Accounts.

Appeal dismissed unanimously. Etherton LJ delivered the judgment, with Thomas and Maurice Kay LJJ agreeing.

1. The phrase formally adopted had to be construed in the context of the shareholder agreement as a whole. Clause 2.11 required audited accounts to be available for inspection by both parties or their representatives and to be formally adopted within ten weeks of the financial year end. That provision presupposed knowledge of, and active participation by, both shareholders. Accounts signed and filed by directors nominated by only one shareholder, without notice to or involvement of the other shareholder and its nominated directors, did not satisfy the requirement.
2. The agreement’s provisions seeking fairness between the shareholders, including the reserved shareholder matters in clauses 5.9 and 5.12, reinforced that conclusion. The fact that Casualty could have secured a majority in a properly constituted vote did not validate its deliberate exclusion of Franbar from the adoption process. The 2005 Accounts had been agreed through the nominated directors and were therefore materially different.
3. There was also an independent reason for excluding the 2006 Accounts. The reference to the most recent audited annual accounts could not include accounts heavily qualified by the auditors in a way, and for reasons, that might affect EBITDA. The Court of Appeal agreed with Proudman J’s alternative conclusion on that point.
4. The approach was consistent with AG of Belize v Belize Telecom Ltd [2009] UKPC 10. The court must construe the instrument as a whole against the relevant background and ask what it would reasonably be understood to mean. The court does not rewrite or improve the parties’ contract. On that construction, the 2005 Accounts governed the option price.

• Court of Appeal (Civil Division): On 25 January 2011, the appeal was dismissed, upholding the order that the option price be determined by reference to the 2005 Accounts. [2011] EWCA Civ 60
• Chancery Division: Following a trial of preliminary issues in case HC08CO0626, Proudman J handed down judgment on 21 May 2010 and made an order on 26 May 2010 directing that the 2005 Accounts governed the option price.