Aidan Monaghan v Gerard Gilsenan Euro Accessories Ltd
| Jurisdiction | England & Wales |
| Judge | Mr Justice Snowden |
| Judgment Date | 13 January 2021 |
| Neutral Citation | [2021] EWHC 47 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: CR-2019-MAN-000019 |
| Date | 13 January 2021 |
[2021] EWHC 47 (Ch)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS IN MANCHESTER
INSOLVENCY AND COMPANIES LIST
Civil Justice Centre
Bridge Street
Manchester
Mr Justice Snowden
Vice-Chancellor of the County Palatine of Lancaster
Case No: CR-2019-MAN-000019
In the Matter of Euro Accessories Limited
And in the Matter of the Companies Act 2006
David Uff (instructed by Aughton Ainsworth) for the Petitioner
Neil Berragan (instructed by Slater Heelis) for the First Respondent
The Company was not represented
Hearing date: 20 October 2020
Approved Judgment
Introduction
This petition under section 994 of the Companies Act 2006 (the “Act”) concerns the interpretation of a provision in the articles of association of a private company giving the majority shareholder an option to acquire the shares of the minority shareholder on terms that the consideration payable for the sale shares shall be “for fair value”.
The Petitioner (“Mr. Monaghan”) contends that “fair value” in the relevant article means that he is entitled to be paid an amount for his 24.99% minority shareholding which is calculated pro rata to the value of the entire issued share capital of Euro Accessories Limited (“the Company”). The Respondent (“Mr. Gilsenan”) says that “fair value” means the value of the shares on a sale between a willing buyer and a willing seller; that the shares to be sold represent a minority holding; and that the price should be discounted to reflect that fact.
Background
The Company was incorporated by Mr. Gilsenan on 15 December 2000. The principal business of the Company is the supply of “accessories” such as reinforcement spacers, tying systems for reinforcement and other items for use in relation to concrete.
Mr. Monaghan joined the Company in 2003 as a sales representative tasked with developing the Company's “precast business” which involved the supply of accessories to customers who manufacture pre-formed (pre-cast) concrete products in a factory.
Although there is some dispute between the parties as to relative success of the Company's business in the intervening years, on 22 February 2008 Mr. Gilsenan voluntarily transferred 24.99% of the then issued share capital of the Company to Mr. Monaghan. It seems clear from the pleadings that the transfer was prompted by a desire that Mr. Monaghan should be remunerated in a more tax efficient way for the services he provided to the Company.
In or around January 2010, the relationship between Mr. Monaghan and Mr. Gilsenan broke down and on 31 January 2010, Mr. Monaghan tendered his formal resignation from the Company by a letter in which he set out his reasons for deciding to leave the Company.
Thereafter, although there were negotiations and offers and counter-offers for the purchase of Mr Monaghan's shares by Mr Gilsenan, no agreement was reached. From the witness statements of both Mr. Monaghan and Mr. Gilsenan it seems that there was no disagreement over a sale in principle: the sticking point was the price. Mr. Monaghan put a value on his shares in the region of £350,000, but Mr. Gilsenan's final offer for the shares was £175,000, which was not accepted.
This impasse endured for a number of years. Mr. Gilsenan then decided to use his majority control of the Company to impose a solution. After warning Mr. Monaghan in correspondence of his intentions, he proposed three special resolutions that were circulated on 7 March 2016 and passed on 9 March 2016 under his sole signature. One resolution had the effect of amending the Articles by inserting a number of new articles. New Article 3A provided for the shares in the Company to be designated as “A” and “B” Shares, and further special resolutions converted Mr. Gilsenan's shares into the “A” Shares and Mr. Monaghan's shares into the “B” Shares. New Article 6A then provided,
“6A The B Shareholder may at anytime be required to transfer all their shares (“Sale Shares”) to the A Shareholders (“Sale Option”).
6A 1 The A Shareholder may only have the right to acquire the Sale Shares by giving written notice to the B Shareholder (“Option Notice”) at any time before the transfer of the Sale Shares to the A Shareholder. The Option Notice shall specify
(a) that the B Shareholder is required to transfer all his Shares pursuant to this Article 6A,
(b) the consideration payable for the Sale Shares which shall be for fair value, and
(c) the proposed date of transfer (“Transfer Date”) which shall be such date as the A Shareholder may specify.
6A 2 On the Transfer Date the B Shareholder shall deliver a stock transfer form for the Sale Shares, together with the relevant Share Certificates (or a suitable indemnity for any lost Share Certificates) to the A Shareholder against payment of the amounts that are due for the Sale Shares pursuant to Article 6A 1(b).
6A 3 If any B Shareholder does not on the Transfer Date execute the stock transfer form in respect of the Sale Shares held by it, the defaulting B Shareholder shall be deemed to have irrevocably appointed any Director to be his agent and attorney to execute all necessary transfer(s) on his behalf, against receipt by the Company (on trust for such B Shareholder) of the consideration payable for the Sale Shares, to deliver such transfer(s) to the A Shareholder (or as they may direct) as the holder thereof. After the A Shareholder (or its nominee) has been registered as the holder, the validity of such proceedings shall not be questioned by any such person. Failure to produce a share certificate shall not impede the registration of the Sale Shares under this Article.”
After Article 6A had been adopted, Mr. Gilsenan wrote to Mr. Monaghan on 26 April 2016 giving him notice that Mr. Gilsenan wished to exercise the option to acquire all of Mr. Monaghan's B shares. The notice specified 4 May 2016 as the Transfer Date and the consideration for the shares to be £175,000 (a cheque for which was tendered).
Mr. Monaghan did not sign and return the enclosed stock transfer form. Mr Gilsenan (as director) then executed the transfer form on 30 August 2016 and transferred Mr. Monaghan's B shares to himself pursuant to Article 6A.3.
Thereafter, and after the first cheque expired, Mr. Gilsenan sent two further cheques to Mr. Monaghan for £175,000 in January and August 2017. Neither were cashed by Mr. Monaghan.
The Petition
On 22 January 2019 Mr. Monaghan presented the Petition. As amended, the Petition set out the background to the relationship between the parties and its breakdown. It alleged that the relationship was based on mutual trust and confidence, and that the value of the business of the Company was largely attributable to the pre-cast business that Mr. Monaghan had built up. The Petition then alleged that Mr. Monaghan's resignation was prompted by a failure on the part of Mr. Gilsenan to honour an agreement for payment of a 40% profit share to Mr. Monaghan.
Importantly, however, the scope of the complaint of unfair prejudice in the Petition was strictly limited. After tracing the unsuccessful negotiations for sale and purchase of Mr. Monaghan's shares, the Amended Petition set out the special resolutions that had been passed and then stated as follows,
“30. The amendments to the Articles gave [Mr. Gilsenan] the right to require [Mr. Monaghan] (by notice) to transfer all his shares to [Mr. Gilsenan] for “fair value” on a “transfer date” to be specified in the notice and which appointed [Mr. Gilsenan] as director to be [Mr. Monaghan]'s agent and attorney to execute all necessary transfers on his behalf.
31. The resolution was duly passed and on 26 April 2016 [Mr. Gilsenan] gave notice to [Mr. Monaghan] requiring him to transfer all his shares to [Mr. Gilsenan] on 4 May 2016 (“the transfer date”) for £175,000 expressed to be the fair value on the transfer date.
32. [Mr. Gilsenan] as director executed the transfer form on 30 August 2016 and thereby enforced the transfer of [Mr. Monaghan]'s shareholding in the Company to himself.
33. [Mr. Monaghan] contends that the expropriation of his shares was at less than fair value such that the affairs of the Company have been conducted in a manner which is unfairly prejudicial to his interests.
34. For the avoidance of doubt, [Mr. Monaghan] does not challenge the right of the majority to approve the special resolution requiring him to transfer his shares for their fair value at the transfer date and the relief claimed is limited to the fair value of his shares at the transfer date.”
The Amended Petition then set out, in paragraphs 37 and 38, the contention that Mr. Monaghan was “entitled” (by inference pursuant to Article 6A) to receive a value representing a pro rata proportion of the total value of the issued share capital of the Company. Somewhat confusingly, in the course of giving what were said to be “particulars” of that contention, the Amended Petition included the following, paragraphs 38(3)-(5),
“Alternatively and insofar as “fair value” in this context is to be interpreted as connoting the application of any discount for a minority holding —
(3) It is (without more) unfair that [Mr. Monaghan] as an unwilling seller should be bought out on a fictional basis applicable to a free election to sell his shares in accordance with the Articles.
(4) It is also (without more) unfair that the majority [Mr. Gilsenan] which has expropriated [Mr. Monaghan's] shares … should immediately secure a windfall or reward in the form of the...
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