OnHand Counsel

Corporate and Commercial Solicitors

Expert determination of fair value – Cream Holdings case

February 2012

A recent case has flagged some potential problems with provisions regulating how to deal with a departing shareholder’s shares.


Where a number of people go into business together using  a company , they normally (should do anyway) have provisions in the company’s Articles of Association or in a shareholders agreement saying what happens if one of them leaves. Often these provide that:

-he must put his shares up for sale;

-the other shareholders have the first right to buy them;

-if they can’t agree the price then an independent expert should be asked to value them;

-if they can’t agree on who to choose as the expert they must ask some independent body to choose one; and

-the expert should value the company as a whole, and then value the departing shareholder’s shares as a proportionate amount, ignoring that his shareholding might have been a minority shareholding (which is actually worth a lot less. I went into this more in a previous newsletter).

These provisions are usually very short, and don’t go into any detail about the basis on which the expert should make its valuation. This is very different from what you often see in share sale agreements which might contain detailed schedules of accounting policies, principles and assumptions, let alone when they also include earn-out arrangements as a mechanism to determine the value of goodwill…

I have seen cases where the outgoing shareholder has been completely shafted by an unfairly low valuation. The valuers are often the company’s accountants, funnily enough, who value their ongoing relationship with the company and the remaining shareholders. The trouble with these valuations is that it is very hard to challenge them unless the valuer has made an obvious mistake with reference to the instructions he was given. Since the instructions are often very vague, there is very often no basis to challenge them even if they seem unfairly low – there are many different ways to value businesses, and the possible outcomes can cover a very wide spectrum, and the valuer can simply choose to veer towards the lower end.

So I tend to advise outgoing shareholders to elect for their shares to be valued by someone else, and to make sure they have as much input as possible to setting out the scope of the valuer’s terms of appointment and in providing the valuer with any information they think might be relevant.

But also, the departing shareholder needs to be aware that if he ends up not selling his shares at this stage, he might struggle ever to sell them later; and he might find that the remaining shareholders milk the company and he never receives any dividends. He will have to rely on statutory protections which can be difficult and expensive to invoke; and on whatever minority shareholder protection provisions (eg veto rights) there may be in the Articles or shareholders agreement.

The Cream Holdings case (Cream Holdings & others v Stuart Davenport)

This was a recent Court of Appeal decision. It involved the following issues:

The Articles said the departing shareholder and the Board should choose an expert. They failed to agree one, and so an expert (an accountancy firm) was chosen by an independent body (the ICAEW). But a problem arose because the expert quite naturally wanted to agree its terms of appointment, and wanted these signed by the departing shareholder (Mr Davenport). This included terms such as what the expert’s costs would be; limitations on its liability; and the extent of its duty of care. Mr Davenport refused to sign, for various reasons.

The Court said that although the Articles said that the ICAEW could ‘choose’ an expert if the departing shareholder and the Board couldn’t agree, the ICAEW couldn’t force the parties to agree the expert’s terms of appointment. So, did that mean the provisions were effectively an ‘agreement to agree’, which under English Law is unenforceable? In which case everything was stymied if Mr Davenport refused to agree the terms of appointment, and the Board/remaining shareholders would never be able to force Mr Davenport to sell his shares, at any price? The court said no. The court said there was an implied term that the departing shareholder would cooperate in doing everything reasonably necessary to procure the appointment of an expert, and wouldn’t unreasonably refuse to agree the expert’s terms of engagement if reasonable. (Note the three references to ‘reasonable’ – the lawyers’ way of sorting out grey areas.)

On this basis, the court was able to rule that Mr Davenport should accept the expert’s terms of appointment, leading to them coming up with a value at which he had to sell his shares.

But the case does beg some interesting questions. For example:

-When might it be reasonable to refuse to agree an expert’s terms of engagement? Would it be reasonable if the Board has agreed a limit on costs with the expert, or a limit on the scope of what the expert can do (eg can the expert pay for a valuation of the company’s freehold property?) but the departing shareholder thinks that the expert would not be able to do the job properly within this limit?

-Should the Articles provide in a bit more detail what scope of work or level of fees should be sufficient?

-Might the answer be different depending on what the Articles said about who should pay the expert’s costs – eg 50:50? Or as the expert decides at its discretion? Or simply payable by the company?

-What would the position would be if the Articles simply said that the Board should appoint the expert; and that the expert would only owe a duty of care to the Board and not to the selling shareholder or the buying shareholder? Some accountants might still not want to act unless the departing shareholder (and possibly the buying shareholders) sign something waiving a duty of care which might exist, or limiting liability.

By the way, this case took 8 years from start to finish!

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