Cosmetic Warriors Ltd and Another v Andrew Gerrie and Another
|England & Wales
|18 December 2015
| EWHC 3718 (Ch)
|Claim No: HC-2015-000738
|18 December 2015
 EWHC 3718 (Ch)
IN THE HIGH COURT OF JUSTICE
Royal Courts of Justice
Strand, London, WC2A 2LL
Richard Spearman Q.C.
(sitting as a Deputy Judge of the Chancery Division)
Claim No: HC-2015-000738
Michael Bloch QC and Mark Vinall (instructed by Lewis Silkin LLP) for the Claimants
Simon Salzedo QC and Kyle Lawson (instructed by Taylor Wessing LLP) for the Defendants
Hearing date: 27 November 2015
Richard Spearman Q.C.:
This is the trial of a claim brought under CPR Part 8 for the determination of a number of agreed issues concerning the construction of Article 5 of the Articles of Association of the Claimant companies. There is no material difference between the Articles of Association of the two companies, and it is therefore convenient to make reference only to Article 5 of the Articles of the First Claimant ("Article 5"). The rights of shareholders to sell their shares are restricted by Article 5, which confers pre-emption rights on other shareholders.
The First Claimant is the owner of the intellectual property rights associated with the "Lush" brand of cosmetics. The Second Claimant is the holding company for a number of subsidiary companies which manufacture and sell the Lush range of cosmetics, and which have more than 100 outlets in the UK and approximately 800 outlets overseas. It operates under the terms of a licence granted by the First Claimant to one of its subsidiaries.
The First Defendant ("Mr Gerrie") and the Second Defendant ("Ms Hawskley") are husband and wife and shareholders in each of the Claimants. Mr Gerrie owns 995 (or 11.62%) of the shares in each of the Claimants. Mr Gerrie and Ms Hawksley jointly own a further 853 (or 10.38%) of the shares in each of the Claimants. They wish to sell their shares and have given transfer notices, and this has triggered the provisions of Article 5.
The Claimants were represented by Michael Bloch QC and the Defendants by Simon Salzedo QC. I am grateful to both of them for their clear and helpful submissions.
Because the parties' submissions referred to much of this wording, and in order to place those parts of the wording which seem to me to be of greatest importance in context, I consider that it is helpful to set out Article 5 in full. It provides as follows:
"A. No share in the Company shall be transferred except in accordance with the provisions of this clause which:
(a) shall apply to renunciations or nominations of shares as it applies to transfers thereof and
(b) may be waived with the written agreement of all members of the Company (in relation to either proposed transfers on sale or proposed transfers of any other kind whatsoever).
B. (a) any member who desires to sell, transfer or otherwise part with any share or shares 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 other Members.
D. Upon the prescribed price being either agreed upon or determined in accordance with Article 5C above (as the case may be) the Company shall forthwith upon receipt of written notice inform the Vendor and other Members of the number of the Transfer Shares as specified in the Transfer Notice and the prescribed price thereof and invite each such Member to apply in writing to the Company within 180 days of the date of that notice (the Application Period) for such maximum number of the Transfer Shares (being all or any thereof) as he shall specify in such application.
E. With[in] the Application Period the Vendor may by written notice to the Company (save where the prescribed price has been agreed by the Vendor or a Transfer Notice has been given or is deemed to have been given under Article 5B(b) above) withdraw the Transfer Notice.
F. Immediately after the Application Period the Company shall allocate the Transfer Shares (or so many of them as shall be applied for as aforesaid) to and amongst those Members who have made applications as aforesaid and in the case of competition pro rata between them according to the number of shares of which they are registered as holders save that no applicant shall be obliged to take more than the maximum number of shares applied for by him as aforesaid and the Company shall within five working days after the Application Period give notice of such allocations (the Allocation Notice) to the Vendor and to those Members to whom the shares have been allocated and shall specify in such notice the place and time (being not earlier than five working days and not later than fifteen working days after the date of the notice) at which the sale of the shares allocated shall be completed.
G. The Company shall also be entitled to sell to any person or Company of whom or which in its absolute discretion it shall approve within the said period of five working days after the Application Period at the prescribed price any of the Transfer Shares for which Members shall not have applied as aforesaid and any shares so sold shall for the purposes of this Article be deemed to have been included in an Allocation Notice.
H. The Vendor shall be bound to transfer the shares comprised in the Allocation Notice to the purchasers named therein at the time and place therein specified and if he shall fail to do so the Chairman of the Company or some other person appointed by the Directors shall be deemed to have been appointed attorney of the Vendor with full power to execute complete and deliver in the name and on behalf of the Vendor transfers of the shares to the purchasers thereof against payment of the prescribed price to the Company and on payment of the prescribed price to the Company and execution and delivery of the transfer the purchaser shall be entitled to require that his name be entered in the register of members as the holder by transfer of the same and the prescribed price shall be paid forthwith into a separate bank account in the Company's name and held in trust for the Vendor but without any obligation to invest the same.
L. During a period of ninety days after the expiry of the time for service of an Allocation Notice the Vendor shall be at liberty to transfer to any person at any price (not being less than the prescribed price) any of the Transfer Shares which he has not become obliged to sell under the foregoing provisions."
The applicable legal principles
These were substantially not in issue, and the following summary is derived from the arguments of both sides.
The articles of association are a statutory contract between the members and between each member and the company. They must be construed in accordance with the ordinary principles that apply to the interpretation of any contract: . The correct approach was summarised in , by Lord Neuberger PSC at  (omitting citation):
"When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to 'what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean' … And it does so by focussing on the meaning of the relevant words … in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of [the contract], (iii) the overall purpose of the clause and [the...
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