Euro Accessories Ltd, Re

In construing a fair-value clause in company articles, the court must focus on the natural and ordinary meaning of the words, the articles’ scheme and purpose, publicly ascertainable background and commercial common sense. Where the clause concerns compulsory transfer of identified shares, fair value ordinarily means the value of the actual shareholding transferred. Unless the articles indicate otherwise, a minority discount may therefore be applied; the transferor is not entitled to a pro rata share of control value or the company’s undertaking. An unwilling seller and unilateral insertion of the option do not, without more, require a pro rata valuation. A specialist valuation definition is not incorporated without sufficient textual or publicly available contextual indication. The clause does not require an inquiry into equitable factors relevant to relief under the Companies Act 2006.

Aidan Monaghan petitioned under section 994 of the Companies Act 2006 against Gerard Gilsenan and Euro Accessories Limited. The company’s articles had been amended to give the majority shareholder an option to require the minority shareholder to transfer all his shares for fair value. The option was exercised at a stated price of £175,000.

Mr Monaghan did not challenge the majority’s power to adopt or operate the option. He contended that fair value required a pro rata valuation, alternatively a median between pro rata and discounted values, or an assessment of equitable circumstances. The central issue was the meaning of fair value in Article 6A and whether a minority discount was permissible.

1. Disposition. The petition was dismissed. The court declared that £245,000 represented the fair value of Mr Monaghan’s shares for the purposes of Article 6A.
2. Construction of the articles. Articles of association are a statutory contract, but their interpretation requires modification of ordinary contractual principles. They are generally not negotiated by all members and must be understood by anyone inspecting the public register. The admissible background was therefore limited to the articles, their scheme and purpose, publicly ascertainable company and membership information, and commercial common sense. The private history and breakdown of the parties’ relationship were inadmissible.
3. Meaning of fair value. Article 6A focused on the consideration payable for the identified Sale Shares. Consistently with the general principle in Shanda Games Ltd v Maso Capital Investments Ltd [2020] UKPC 2 and Short v Treasury Commissioners [1948] 1 KB 116, fair value ordinarily meant the value of the actual minority shareholding being transferred, rather than a pro rata share of the company’s assets or the control value created by aggregation. The fact that the option was compulsory, that Mr Monaghan was unwilling to sell, and that he had not agreed to Article 6A did not constitute a contrary indication.
4. Valuation definitions and equitable factors. The 2013 IVS definition was not incorporated into Article 6A. There was no express cross-reference and no basis for assuming that a general reader of the articles would know of that definition. Swain v Swains plc [2015] EWHC 660 (Ch) was distinguishable because the experts there had agreed the meaning of fair value and the judge had proceeded on that basis. Fair value under Article 6A was an objective valuation of the shares at the relevant date. It did not require assessment of the parties’ relationship or equitable factors relevant to relief under sections 994–996 of the Companies Act 2006 or section 112(1)(g) of the Insolvency Act 1986.
5. Subsidiary observations. The court noted that a purchase order under section 996(2)(e) requires unfairly prejudicial conduct, must be fair and proportionate, and is not statutorily required to be on a non-discounted basis. The issue whether a non-discounted valuation might be appropriate where the option was exercised immediately before a third-party sale did not arise for decision.