The founders of a financial advisory firm sold most of their holdings to a competitor but retained some shares and continued as directors and employees under a new shareholder agreement. Less than a year later, two of the founders were dismissed and required to sell their remaining shares under the “fair value” transfer mechanism in the acquirer’s articles of association. Unfortunately, the mechanism was described differently in the articles of association than it was in the shareholder agreement.

Most business valuers know this is treacherous territory. A new decision by the High Court (Lord v Maven Wealth Group Ltd [2021] EWHC 2544 (Comm)) shows a willingness to follow the precise language of the articles of incorporation to resolve disputes. In the end, the court “held that the fair value of shares to be sold by departing directors under a compulsory transfer mechanism could not be calculated using a mechanism in a private contract,” wrote Robert Boyle and Dominic Sedghi of Macfarlanes LLP in their thoughtful analysis of the decision.

Experienced business valuers would advise their clients to avoid divergent definitions of fair value in any agreement, but, unfortunately, this review did not happen in the Lord v Maven Wealth Group case:

• One document had a binding mechanism if others failed; the other did not;
• The last recourse varied between the two documents; and
• One required that the parties attempt to agree between themselves before initiating a dispute; the other deferred the matter immediately to outside auditors.

The court said, in this case, the procedure in the company’s articles applied. As Boyle and Sedghi comment, “It is common for different documents in a single transaction to cross-refer to and ‘borrow’ definitions from each other.… However, it is important to ensure that any borrowed terms fit properly with the relevant document and do not contradict any express terms and not to resort to ‘lazy’ cross-referencing.”