Interpretation of a company’s Articles of Association in relation to the sale of shares of an outgoing shareholder - Fair Value or Market Value?

Damian Carter discusses the recent High Court case of Syspal Capital Limited v Truman & Anor, [2024] EWHC 1561 (ChD) in the context of how the court interpreted a company’s Articles of Association and whether an outgoing minority shareholder’s shares are valued at fair value or market value.

The correct interpretation of the Articles of Association

Where a minority shareholder of a company leaves, whether it be through retirement or dismissal, the valuation of their shares may depend on whether they are deemed a ‘good leaver’ or a ‘bad leaver’, based on the interpretation of the Articles of Association of the company. This issue is pertinent to both minority shareholders and company directors alike and was discussed in the case of Syspal Capital Limited v Truman & Anor, [2024] EWHC 1561 (ChD).

The facts of the case

The case revolved around the Articles of Association of the second defendant, Syspal Holdings Limited (SHL) (a holding company that owned 100% of the share capital of Syspal Capital Limited).

Mr Truman had been an employee of Syspal Capital Limited (SCL) since 1980, and became the managing director in 2000, before being dismissed from SCL as an employee in October 2022 and as a director in November 2022. Mr Truman had also been a director of SHL, holding a 24% shareholding. The remaining shares were held by SCL, and were controlled by Anthony Roberjot, another director.

After his dismissal, Mr Truman continued to be a director of SHL until he resigned as a director in May 2023, on his 65^th birthday, leaving Anthony Roberjot as the sole director of SHL.

Within the Articles of Association of SHL were provisions relating to the transfer of shares as well as the service of a transfer notice.  As is the case with many private companies, the Articles dictated that where one shareholder decides to sell their shares, the right to purchase the shares is firstly given to another shareholder(s).

A disagreement developed regarding when the transfer notice had been triggered, either at the time of Mr Truman’s dismissal as an employee of SCL in October 2022, or if it occurred at Mr Truman’s resignation as a director in May 2023.

Had Mr Truman’s retirement at 65 been the causative factor behind the transfer notice coming into effect, he would have been paid for his shares at ‘fair value’. Conversely, if the transfer notice was triggered as a result of Mr Truman’s dismissal as an employee of SCL, his shares in SHL would have been purchased according to ‘market value’, which would take account of a minority discount based on Mr Truman’s ownership percentage.

The legal principles

The court looked at the case of Sara Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2023] UKSC 2, which provided an outline of principles of contract interpretation. The court looked at what the particular purpose of the provisions were within similar contracts as well as considering the factual matrix.

The court placed particular emphasis on what the ‘natural and ordinary’ meaning of the words of the provisions were, the purpose of the Articles, as well as ‘any extrinsic facts about the company’ and overall commercial common sense.

The court held

The court decided that the Articles themselves were unclear to a degree, but the court preferred Mr Truman’s interpretation of them and ruled in his favour. It was held that Mr Truman’s resignation as a director of SHL on his 65^th birthday had triggered a transfer notice which allowed Mr Truman to enjoy fair value of his shares (without therefore applying a minority discount).

The court disagreed with the notion that Mr Truman’s shares should be purchased at a lower value just because of his dismissal from SCL, which was a decision that he had no control over. A subsequent inquiry into the valuation of the shares was made based on the court’s interpretation of the provisions within the Articles.

The court’s decision indicated that the court will support the rights of shareholders in accordance with the company’s Articles of Association and highlighted the importance of clear and unambiguous drafting of the Articles.

How can funding help?

If you are unable to fund your own legal fees to explore a potential claim relating to a shareholder dispute or a minority shareholder claim, third party litigation funding may provide you with the ability to finance litigation with funds provided by a third party litigation funder. This funding is non-recourse financing and the funder only gets repaid (and is paid a multiple of its investment amount) if the claim is successful.