Shareholder disputes and valuation issues


Imagine a company with four shareholders: A, B, C and D.  They work together to build a successful business over a number of years, but then fall out.  The fall out is terminal and shareholders A and B decide they will have to exit the company.

Happily, the company has taken legal advice and its articles of association (i.e. the rules which govern the relationship between the company and its shareholders) include bespoke provisions designed to assist in this very situation.  In particular, the articles provide that – if a shareholder wishes to dispose of his shares – he must first serve a notice on his co-shareholders, offering to sell those shares at a (defined term) “prescribed price”.

This, or a substantially similar, fact pattern is what was presented to the courts in Cosmetic Warriors Limited v Gerrie [2017] EWCA Civ 324.

Cosmetic Warriors

The key question arising for decision by the Court of Appeal was how to calculate the “prescribed price” of the sale shares: (i) a pro rata proportion of the company’s aggregate value; or (ii) the price that would be achieved taking into account that shareholders A and B held a minority stake (22%) in the company?

The starting point for the Court of Appeal was the contractual language:

“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 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…” (emphasis added)

With the parties (unsurprisingly) unable to agree a valuation, the “prescribed price” fell for determination by the independent accountants.  It was agreed by the parties that the effect of the ‘fair value’ formulation was to be identified by reference to ordinary principles of contractual construction, as summarised by the Supreme Court in Arnold v Britton [2015] UKSC 36:

“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 focusing on the meaning of the relevant words…in their documentary, factual and commercial context.”

Put another way, you start by identifying the meaning of the words chosen by the parties and included in their contract, then sense-check this meaning against the commercial consequences.


The Court of Appeal looked first to the contractual definition of the “prescribed price” and highlighted the reference to a valuation of the company on a “going concern basis”.  A valuation on a going concern basis – so reasoned the Court – required the accountants to look at the company as a whole and, once a valuation of the whole had been achieved, the price per share should be calculated on a straightforward pro rata basis, i.e. without any minority discount.  This approach made commercial sense, according to Henderson LJ, since it was unlikely the parties would have intended the accountants to apply a substantial discount or premium depending on the number of shares offered for sale.

Points to note

It goes without saying that people can on occasion have disagreements and/or behave unreasonably.  These issues are often quickly resolved; however, where the disagreement relates to someone’s business and money becomes involved, people are less likely to simply shrug their shoulders and move on.

In those circumstances, it will be invaluable for everyone to have thought about and considered (in detail and in advance) what should happen in the event of a dispute.  Not only should they think about these issues, but they should seek appropriate legal advice – to ensure that whatever is agreed is clearly and properly documented.  In very simple terms: if you want a minority discount to apply on exit, make sure the drafting says so!

If Cosmetic Warriors teaches us one thing, it is to check and double-check that the contract does everything you need it to: do not rely on the courts to fill the gaps or “read in” protections.

Further detail

If you have any questions or would like to discuss this case, and/or its impact on your own business, please contact a member of our Corporate Department.


While great care has been taken in the preparation of the content of this article, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.