Mr Desmond Gunewardena v Conran Holdings Ltd
| Jurisdiction | England & Wales |
| Judge | Mr Justice Mann |
| Judgment Date | 22 November 2016 |
| Neutral Citation | [2016] EWHC 2983 (Ch) |
| Docket Number | Case No: HC-2015-001691 |
| Court | Chancery Division |
| Date | 22 November 2016 |
[2016] EWHC 2983 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Rolls Building, 7 Rolls Buildings
Fetter Lane, London EC4A 1NL
Mr Justice Mann
Case No: HC-2015-001691
Matthew Collings QC (instructed by Olswang LLP) for the Claimant
Philip Jones QC (instructed by Simkins LLP) for the Defendant
Hearing dates: 12 th, 13 th, 17 th, 18 th, 19 th and 21 st October 2016
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Introduction
On 1st December 2014 the claimant's shareholding in the defendant company ("CHL") was compulsorily transferred to the company under what the defendant claims were its rights to do so under its Articles of Association because the claimant ("Mr Gunewardena") had ceased to be employed within the CHL group. It applied a valuation mechanism which technically gave Mr Gunewardena nothing for his shares because the valuation was nil, but in fact the company gave him the par value of his shares (£1,254). Mr Gunewardena challenged that entitlement. By the end of the trial his challenge had become limited to a claim that the event which entitled the company to invoke the compulsory transfer mechanism had not arisen on the true construction of the Articles, and that if it had, the true Articles entitled him to a valuation which would have produced more than the sum he received. He says that the company should have applied one which gave him a fair value as determined by the auditors, which would have yielded a sum of over £3m. He also mounted a last ditch attack on the notice invoking the company's rights on the odd footing that, if the company was entitled to invoke the Article as it did, and if the value was actually nil, the notice exercising the rights was invalid because it proposed payment of more than he would have been entitled to under the Articles. CHL disputes all those claims and maintains its acts were valid.
Mr Matthew Collings QC appeared for Mr Gunewardena; Mr Philip Jones QC appeared for the defendant company.
The core facts giving rise to the claim
The dispute as to valuation arises out of amendments to the Articles made in the 1990s and involves tracing the course of those amendments and associated events. I shall have to set out some precise provisions in those Articles, but in many instances I will be able to describe provisions by their nature rather than by setting out their detailed wording.
In this section of this judgment I deal with the core facts that give rise to the claim. In later sections I provide some additional factual background, and add other important facts, but it will be useful to build those facts around the framework of some central events.
CHL was formed in 1993 as the holding company for many of the various businesses of Sir Terence Conran, the well-known designer and restaurateur. Prior to that time his assets were held in a more disparate way. Mr Gunewardena was an accountant who joined Sir Terence in his businesses in 1991 as finance director. Over the following years he took on other roles in the businesses and was an important part of the overall operation. He and Sir Terence were close, both commercially and personally, until the present dispute.
When CHL was formed in 1993 Mr Gunewardena was given the opportunity to acquire a limited holding of the B shares issued by the company (2%). The first Articles adopted on incorporation were fairly standard modified Table A Articles to which I need not refer. The first important Articles were adopted by special resolution dated 12th August 1993 and were much more customised. In the jargon of this case they are called "the 1993 Articles".
Article 7 of the 1993 Articles dealt with the "Transfer of Shares", and contained a number of provisions relating to those matters which are not relevant to this action. It also contained pre-emption provisions binding a B shareholder (such as Mr Gunewardena) who wished to sell his or her shares. Such a shareholder was obliged to give a Transfer Notice which (in the familiar way) constituted the company the agent of the shareholder for the purpose of offering the shares to the other existing shareholders. The Transfer Notice was to specify a price, but if it did not, or if a price was not agreed between the outgoing shareholder and would-be purchaser, then the price was to be:
"… such price as the auditors of the Company for the time being shall certify in writing to be their opinion of a fair selling value therefor as between a willing vendor and a willing purchaser." (Article 7.8).
I shall call this basis of valuation the "fair selling valuation" or "fair selling calculation". The auditors were given no further instruction or guidance in the Articles as to how to arrive at their valuation. The Articles go on to provide a mechanism for finalising and, if necessary, enforcing the sale.
Article 7.6 operates so as to apply the pre-emption rights to a shareholder who was a group employee but who left that employment:
"7.6. Whenever any member (other than Sir Terence Conran) who is employed by the Group in any capacity ceases to be an employee of the Group (otherwise than by reason of his death) he shall be deemed to have served a transfer notice pursuant to Article 7.7 in respect of all the B shares held by him …"
In 1995, in circumstances which will be elaborated later, the Articles were amended by special resolution passed on 4th October 1995. The Articles in this form will be called "the 1995 Articles". The amendments replaced the former Article 7 with a whole new Article 7, with some minor consequential amendments elsewhere in the Articles. The new Article 7 was still headed (and dealt with) "Transfer of Shares". Some of the former Article 7 was reproduced, but the pre-emption and compulsory transfer provisions were changed. Article 7.5 was the equivalent of Article 7.6 of the 1993 Articles with some cross-references changed, but since it is the provision which is actually relied on by the defendants in this action I shall reproduce it here:
"7.5. Whenever any member (other than TOC [i.e. Sir Terence Conran]) who is employed by the Group in any capacity ceases to be an employee of the Group (otherwise than by reason of his death) he shall be deemed to have served a transfer notice pursuant to Article 7.6 in respect of all the B shares held by him …"
By Article 1.3 "Group" is defined as meaning:
" … the Company and its subsidiaries";
and "subsidiary" is defined as having:
"… the meaning ascribed to it in the Act."
"The Act" is defined as meaning the Companies Act 1985 as amended by the Companies Act 1989 and re-enactments thereof.
Articles 7.6 to 7.17 of the 1995 Articles contain pre-emption rights which operated when a B shareholder wished to dispose of his or her shares. The provisions are more complicated than those which they replaced in the 1993 Articles because, as well as providing for shares to be offered to existing members, the company was given the right to be an offeree as well, so provisions were necessary to provide for that to happen only where it could lawfully be done and for relevant meetings to be called if the company was to purchase the shares. It is unnecessary to set those out, but the introduction of those significant provisions is an important feature when it comes to considering what happened in 1998. It is one of the two important new matters introduced into the 1995 Articles.
The other is a change in the valuation mechanism. Article 7.7 provided that the transfer price would be:
" … such price ("the Transfer Price") as may be specified in the Transfer Notice or (if no such price is specified in the Transfer Notice or such price is not approved by the directors within thirty days after the date of the Transfer Notice) such price ("the fair price") as the auditors of the company for the time being shall certify in writing to be the opinion of a fair selling value thereof as between a willing vendor and a willing purchaser."
This wording is virtually the same as in the 1993 Articles, but in these 1995 Articles express guidance is given as to how the fair price is to be determined. It was to be calculated by reference to 5 times the average annual profit of the last two accounting periods. Article 7.9 provides:
"7.9 If the auditors are asked to certify the fair price as aforesaid:
(1) the fair value of the Said Shares shall be a sum equal to the percentage which the Said Shares shall be of all the issued shares in the Company as at the date of the Transfer Notice of the average of the consolidated profits or losses of the Group before tax and after minority interests for the two accounting reference periods of the Company ended on the accounting reference date last before the date of the Transfer Notice or the date upon which a Transfer Notice shall be deemed to have been given in accordance with articles 7. 4 or 7.5 multiplied by five …"
I shall call this "the Five Times Profits" valuation or calculation. As a matter of history, this method of calculating the fair price was proposed by Mr Gunewardena himself.
In 1998 Sir Terence wished to put some of his shares into a new trust, and it was decided that the shares thus dealt with should not participate in dividends until after 31st March 2003. This was achieved by a further amendment to the Articles which created C shares for this purpose and postponed their dividend rights. An EGM was called for 16th March 1998 and it was proposed that the following resolution be passed:
"That the Articles of Association of the Company be...
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