Cosmetic Warriors Ltd and Another v Andrew Gerrie and Another
| Jurisdiction | England & Wales |
| Judge | Lord Justice Henderson,Lord Justice Lindblom,Lord Justice Beatson |
| Judgment Date | 05 May 2017 |
| Neutral Citation | [2017] EWCA Civ 324 |
| Docket Number | Case No: A3/2016/0780 |
| Court | Court of Appeal (Civil Division) |
| Date | 05 May 2017 |
[2017] EWCA Civ 324
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE CHANCERY DIVISION
Mr Richard Spearman QC sitting as a Deputy Judge of the Chancery Division
Lower Court NC No: [2015] EWHC 3718 (Ch)
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Beatson
Lord Justice Lindblom
and
Lord Justice Henderson
Case No: A3/2016/0780
Mr Robin Hollington QC and Mr Mark Vinall (instructed by Lewis Silkin LLP) for the Appellants
Mr Simon Salzedo QC and Mr Kyle Lawson (instructed by Taylor Wessing LLP) for the Respondents
Hearing date: 22 March 2017
Approved Judgment
Introduction
This appeal concerns the true construction of shareholders' rights of pre-emption contained in the Articles of Association of the two claimant companies, Cosmetic Warriors Limited and Lush Cosmetics Limited. The Articles of each company are in materially identical form. Article 5 states that no share in the company may be transferred except in accordance with the provisions which it lays down. In short, the other shareholders are given the opportunity to purchase the relevant shares at a "prescribed price", which is to be determined in default of agreement by two independent chartered accountants. To the extent that the shares are not taken up at that price by the other shareholders, or sold at that price by the company to external purchasers of whom or which it approves, the vendor then has a 90-day period during which he may transfer them "to any person at any price (not being less than the prescribed price)".
The defendants, Andrew Gerrie and his wife Alison Hawksley, are minority shareholders in each company. Mr Gerrie is the sole owner of 11.62% of the ordinary shares in each company, while he and Ms Hawksley own a further 10.38% of such shares jointly. Thus their combined stake in each company is 22%.
The other main shareholders in each company are Mark Constantine and his wife Margaret Constantine, with holdings of (approximately) 38% and 24% respectively. There are also four other shareholders with much smaller holdings, ranging from about 6% to under 1%. Accordingly there is no single majority shareholder, although Mr and Mrs Constantine between them own approximately 62% of the shares.
The total number of ordinary shares in issue in each company is 8,219. There are no other classes of shares. In numerical terms, the principal shareholdings are as follows:
| Mark Constantine | 3,131 |
| Margaret Constantine | 2,000 |
| Andrew Gerrie | 955 |
| Andrew Gerrie and Alison Hawksley | 853 |
Mr and Mrs Constantine were the founders of the Lush Cosmetics business in 1994. It originally operated from a shop in Poole, Dorset. Mr Gerrie joined the then operating company in August 1994, initially as an investor, but within a few months he also became a full time executive. The business grew and prospered, and in 2001 a corporate re-structuring took place as a result of which the first claimant became the owner of the intellectual property rights associated with the "Lush" brand of cosmetics, while the second claimant became the new holding company of the retail section of the wider group. The Lush group manufactures and retails hand made cosmetics, with an emphasis on the use of natural ingredients and the avoidance of animal testing. It currently has more than 100 outlets in the UK and approximately 800 overseas, in 49 countries.
In 2014, relations between Mr Constantine and Mr Gerrie deteriorated, and for various reasons Mr Gerrie decided that it was time for him to leave the group. On 10 October 2014, he and Ms Hawksley served a single combined transfer notice in respect of their shareholdings in the first claimant, and a similar notice in respect of their holdings in the second claimant. It is accepted by the companies that these notices were validly given, and triggered the pre-emption provisions of Article 5. No point is taken that separate notices should have been served by Mr Gerrie for his sole shareholdings, and by him and Ms Hawksley for their joint holdings. In each letter, they gave notice of their desire to sell the entirety of their shareholdings, and also gave notice pursuant to Article 5B(a) that, unless all of the transfer shares were sold pursuant to Article 5, none should be so sold.
Four days later, on 14 October 2014, Mr Gerrie received a letter which purported to terminate his employment with all companies within the Lush group with immediate effect. Mr Gerrie subsequently began proceedings for unfair dismissal, and on 23 July 2015 the Southampton Employment Tribunal found (by consent) that he had been unfairly dismissed, and ordered Lush Limited (a subsidiary of the second claimant) to pay him the statutory maximum of £87,710 by way of compensation.
The parties were unable to agree the "prescribed price" for Mr Gerrie and Ms Hawksley's shares, or the basis upon which that price was to be determined by the independent accountants appointed pursuant to Article 5C. This disagreement led to the issue by the claimants of a Part 8 claim in March 2015, seeking determination of a number of agreed questions arising from the pre-emption provisions in Article 5. By the date of the trial, which took place before Mr Richard Spearman QC, sitting as a deputy High Court judge of the Chancery Division, on 27 November 2015, the parties had reached agreement on a summary list of six issues for determination. In his thorough and careful reserved judgment, which he handed down on 18 December 2015, the judge found in favour of the defendants on all issues, with the exception of issue 2 which did not arise if they were successful on issue 1.
The claimants now appeal to this court, with permission granted by David Richards LJ, in respect of the (original) issues 1 and 5. If they succeed on issue 1, the claimants also ask this court to decide issue 2 in their favour.
In outline, the three live issues are as follows:
(1) Issue 1: whether the accountants are required to conduct their valuations of the shares to be transferred on the basis of (a) a pro rata proportion of the value of the whole equity of each company, or (b) the price that might be achieved for the Transfer Shares as between a willing buyer and a willing seller of that block of shares, having regard in particular to its status as a minority shareholding;
(2) Issue 2: if the answer to the first question is (b), whether the accountants are required to value the shares owned by Mr Gerrie alone, and those owned by him and Ms Hawksley jointly, (a) separately; (b) together; or (c) in accordance with such basis of valuation as they consider appropriate; and
(3) Issue 3 (the original Issue 5): whether the "any person" to whom the vendor may transfer shares, if they are not taken up by the other shareholders, is (a) restricted to natural persons (so as to exclude a corporate transferee); or (b) not so restricted.
The provisions of Article 5
Each claimant company adopted new Articles of Association on 18 May 2001. Article 1(a) provides that the Regulations contained in Table A in the Schedule to the Companies (Tables A to F) Regulations 1985, as amended, shall apply to the company "save in so far as they are excluded or varied hereby".
Article 5 provides, in material part, as follows:
"5. A. No share in the Company shall be transferred except in accordance with the provisions of this clause …
B.(a) any member who desires to sell, transfer or otherwise part with any share or shares or any interest therein (the vendor) shall give to the Company notice in writing of such desire (a Transfer Notice) which shall constitute the Company the Vendor's agent for the sale of the share or shares specified therein (the Transfer Shares) in one or more lots at the discretion of the Directors at the prescribed price (as hereafter defined) and which may, (except in the case of a Transfer Notice given or deemed to have been given under Articles 5B(b) below) contain a provision that unless all the Transfer Shares are sold pursuant to this Article none shall be so sold and any such provision shall be binding upon the Vendor and any applicant for Transfer Shares.
(b) If any member shall die or become bankrupt or go into liquidation or being an employee of the Company shall cease to be so employed for any reason the Board of Directors will have an option, exercisable at their discretion, to give notice that on the happening of that event the member shall be deemed to have given a Transfer Notice in respect of the whole of his or its shares in the Company to which the provisions of this clause shall apply and be deemed the Vendor in respect thereof.
C. The "prescribed price" shall be such sum per share as shall be agreed between the Vendor and the Company failing which it shall be the median price of the prices as determined and certified in writing by two independent chartered accountants as being in their opinion the fair value thereof as between a willing buyer and a willing seller valuing the Company on a going concern basis such accountants to be nominated by agreement between the Vendor and the Company or in default of such agreement by the President for the time being of the Institute of Chartered Accountants in England and Wales and if so nominated the said chartered accountant when determining and certifying the fair value of the Transfer Shares as aforesaid shall act as an expert and not as arbitrator but without incurring liability to the Vendor or any Member and his certificate shall be final and binding on the Vendor and the other Members.
D. Upon the prescribed price being either agreed upon or determined in accordance with Article 5C...
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