The recent decision in the case of Cosmetic Warriors Ltd & Anor v Gerrie EWCA Civ 324 dealt with the correct construction of shareholders’ pre-emption rights.
Cosmetic Warriors Limited and Lush Cosmetics Limited (the Appellants) appealed the 2015 decision of DJ Richard Spearman QC sitting in the Chancery Division (Cosmetic Warriors Ltd & Anor v Gerrie & Anor  EWHC 3718).
Cosmetic Warriors is the owner of the “Lush” brand’s intellectual property rights and Lush Cosmetics is the holding company for the subsidiaries which manufacture and sell the cosmetics, which operate under licence from Cosmetic Warriors. Mr Gerrie and his wife (the Respondents) were minority shareholders of both companies together with another husband and wife couple. The relationship between the two couples broke down in 2014 resulting in the Respondents serving a transfer notice relating to their shares in accordance with the Articles of Association. Such notice triggered the pre-emption provisions of the Articles. The price for the shares could not be agreed by the shareholders which invoked the provision that the price was to be determined by independent accountants. The Appellants then issued a Part 8 claim for clarification on six agreed issues relating to the valuation and transfer of the shares.
- The basis of the valuation;
- The valuation of tranches;
- The provision of information to the Accountants;
- The provision of information to third party transferees;
- The classes of third party transferees; and
- The liability for fees and expenses.
DJ Richard Spearman QC found in favour of Mr Gerrie and his wife on all issues except issue 2 which would not arise due to the finding on issue 1. The Appellants appealed his decision in relation to issues 1 (and therefore 2 if successful) and 5. The Court of Appeal considered these three issues as follows:
(1) whether the share valuation should be based on (a) a pro-rata proportion of the value of the whole equity of each company, or (b) the price that might be achieved 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) the answer to the first question is (b), whether the shares owned by Mr Gerrie and his wife should be valued jointly, (a) separately; (b) together; or (c) in accordance with such basis of valuation as they consider appropriate; and
(3) whether the “any person” to whom the endor 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.
The Court of Appeal construed the Articles in accordance with the general contractual principles established in Arnold v Britton  UKSC 36, Wood v Capita Insurance Services Limited  UKSC 24 and Rainy Sky SA v Kookmin Bank  UKSC 50. The Judgment highlights the importance of taking into consideration the factual context and emphasised the fact that the Appellants are private companies with very few members and the original relationship was akin to a quasi-partnership. LJ Henderson observes at para 43:
“there is in my judgment no substitute for looking at the language which the parties have actually used, in accordance with the principles of construction which are common ground, in order to ascertain what they objectively intended. As the cases show, the issue is one which frequently arises and is often difficult to answer, but the guidance which the authorities can give is limited because ultimately everything turns on the wording of the articles in question.”
Despite some ambiguity in the Articles regarding the definition of “person” the Court of Appeal concluded that the normal interpretation of that word should apply, in accordance with section 61 of the Law of Property Act 1925 and section 5 of the Interpretation Act 1978, and would include a corporate body.
As such the appeal was dismissed and the Court of Appeal upheld the decision of DJ Richard Spearman QC in favour of the Respondents.
The lesson to take away from this decision is one which is often revisited by the Courts; careful consideration should be given to the wording of any contractual document to ensure the removal of ambiguity and clear definition of key terms. The document should be consistent throughout and devoid of “typographical errors”.
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