All is fair (value) in love and war … and minority shareholder acquisitions

Aaron Jones

“Fair value” means the value of the shares on a sale between a willing buyer and a willing seller, discounted to reflect the fact that shares represent a minority holding (Re Euro Accessories Ltd).

Monaghan, the minority shareholder, claimed he was entitled to a pro rata proportion of the total value of company’s issued share capital. In contrast, Gilsenan, the majority shareholder, said that the natural reading of “fair value” should apply: given the shares represented a minority shareholding, the price should be discounted accordingly.

While a company’s articles, unlike a contract, are not the product of a negotiation leading to a meeting of the minds of all shareholders, the process of interpreting the true meaning of “fair value” must concentrate on the natural and ordinary meaning of the words used given the scheme and purpose of the articles in general, and commercial common sense.

The court said the reference to “fair value” was to the actual shares for sale rather than the company’s shares generally. Further, this focus on the identified “property” being bought and sold meant that the “fair value” must apply a discount to reflect that the disadvantages of a minority shareholding in a private company – consistent with the Privy Council in Shanda v Maso.

In addition, this focus on the actual shares for sale in the articles suggested that “fair value” should be capable of being objectively determined. The provision did not suggest that the seller was able to exercise subjective discretion or take into account the relationship between Monaghan and Gilsenan either when exercising the option or before. The majority shareholder’s argument prevailed.