Charlotte Langmead v Richard Andrew & Anor

A contractual share option is construed by applying ordinary principles of contractual interpretation. There is no special rule requiring options to be construed strictly against the party exercising them.

Where an agreement refers disagreements about the calculations establishing a share price to auditors, that provision may confer a broad expert-determination function. The auditors must be told the actual disagreements and must determine the calculations to be used. A short delay in producing projected accounts does not automatically invalidate the option, particularly where the accounts use the contractual valuation date and the agreement permits completion after that date.

References to accounts prepared on the same basis as earlier audited accounts generally refer to the applicable accounting standards, including later standards, unless the contract requires historic standards.

The claimant and first defendant were parties to a 1999 shareholders’ agreement governing the first defendant’s option to purchase the claimant’s shares in the second defendant company.

The first defendant served a purchaser’s notice requiring the sale of all the claimant’s shares. Interim accounts and a share-price calculation were produced after the specified disposal date. The claimant contended that the procedure had not been followed, that the accounts should use historic accounting methods, that detailed asset valuations had to be provided, and that the auditors had not been validly instructed to resolve disagreements.

The central issues were the construction and operation of clauses 6(i), 6(ii) and 6(iv) of the agreement.

1. The option process was not invalidated by the late production of the interim accounts. The agreement contemplated production before the disposal date, but did not provide that any delay automatically made the purchaser’s notice a nullity. The accounts used the disposal date as the effective valuation date, and completion could occur after that date once the price had been determined. The delay was minimal and was not attributable to either party. The claimant had also waived any right to insist on production before the disposal date.
2. Clause 6(i) did not require the use of accounting standards in force in 1999. The requirement that interim accounts be prepared on the same basis as the company’s audited accounts referred to the relevant accounting standards applicable when the accounts were prepared. The subsequent change requiring investment properties to be remeasured at fair value did not override the agreement; it informed its proper construction.
3. The agreement did not require extensive valuation evidence to be supplied to the seller. Its wording established a mechanism for calculating the share price and did not impose an express or implied obligation to provide a detailed valuation of each asset.
4. Clause 6(iv) was a broad expert-determination provision. “Calculations” meant more than mathematical totalling. The auditors had authority to determine the calculations establishing the share price, subject to allegations of bad faith or failure to follow instructions. The parties’ disagreements had to be identified to the auditors, and the claimant was entitled to make representations so that the auditors knew what they were required to determine.
5. The first defendant’s instruction to the auditors merely asked them to determine the share price from the interim accounts. It did not identify the disagreements or give complete instructions under clause 6(iv). The auditors’ determination was therefore not binding, and the agreement had not been fully complied with.
6. The parties should set out their disagreements, particularly concerning the relationship between fair value and market value, to the auditors, who should resolve them and determine the calculations used to establish the share price. Further declarations or directions were reserved.

First-instance Part 8 proceedings. No prior appellate decision was stated in the judgment.