Appointment of an agreed independent valuer involves more than an agreed nomination

10/12/2008

The Court of Appeal has ruled that strict and precise arrangements must be formalised and agreed in cases where a company is "buying out" the shares of a member.

The claimant D had been a non-executive director for three years and subsequent to being formally removed, various efforts were made to agree a sum to purchase his shares. These efforts being unsuccessful, it was decided that in order to determine the "fair value" of the shares, a third party accountant would need to be chosen in accordance with the Articles of Association to determine the value of the shares.

The relevant Articles stated that the fair value was the "price per share as agreed by the board and the transferor or failing such agreement as determined by the third party accountant". In turn, a third party accountant was defined as "an independent firm of accountants chosen by the transferor and the board" (Article 2.1).

It transpired that D provided a list of acceptable accountants from which the company C selected a firm of accountants, B. In due course, C signed a letter of engagement with B and B carried out a valuation of the shares in C. However, D refused to sign the letter of engagement, reserving his rights generally and particularly in regard to the instruction of B.

B carried out a valuation of the shares nevertheless and D sought a declaration that such a valuation would not be binding, citing the reason that B had not been duly appointed in accordance with the Articles. The declaration was granted on the basis that the terms of B's engagement had not been agreed with D nor had B agreed with both D and C to act on the terms of the letter of engagement. Further, the judge held that it was not sufficient for the parties to merely identify a valuer but that a formal tripartite agreement between C, D and any third party accountant was required. For these reasons, the valuation was not a fair one and thus not binding on D.

On appeal, the defendants contended that the judge had erred in construing the definition of a third party accountant in Art 2.1 and that such a definition was unrealistic and un-commercial in practice.

The appeal was dismissed and the Court held that the reason for agreed formal requirements was in fact to reduce wasted time and costs and to minimise disputes about the appointment of a third party accountant. The reason that such an appointment should be precise and formalised is so that the language of the terms of engagement reflects the agreed intentions of both parties.

It was held that the claimant was not bound by B's valuation as there had been no offer on the terms of B's engagement that was capable of acceptance by D and thus no appointment of a third party accountant. As B was therefore not the third party accountant within the meaning of Art 2.1, D could not possibly be bound by B's valuation.

[i](Davenport v Cream Holdings Ltd and others [2008] EWCA Civ 1363)

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