05 January 2012

In this article, we comment on the recent appeal decision in Cream Holdings Limited v Davenport [2011] EWCA Civ 1287.

Background

This case concerns the interpretation of the articles of association of Cream Holdings Limited, the company that runs the Cream nightclub in Liverpool.

When Stuart Davenport was removed as a director of that company in August 2004, this triggered a share transfer process in the company’s articles of association: Mr Davenport was deemed to have offered his shares for sale to the other shareholders.

But at what price?

The articles provided that the price would be an agreed price or, failing agreement, a “fair value” determined by an independent third party accountant chosen by the parties.  If the parties could not choose an accountant within a set time limit, the accountant would be chosen by the President of the Institute of Chartered Accountants. 

A price could not be agreed and so a suitable firm of accountants was chosen by the parties to establish the fair value.

What was not agreed upon, however, were the terms of engagement of that firm, and Mr Davenport refused to sign the firm’s letter of engagement.  After some delay, the accountants were persuaded to carry out the valuation on the basis that they had been “chosen” by the parties in terms of the articles.  A fair value was established but rejected by Mr Davenport who raised court proceedings to prevent the share transfer going through. 

The result

The judge decided that both the company and Mr Davenport had to sign the letter of engagement. The word “chosen” implied that a process had to be followed that would result in a firm agreeing to act.  A necessary stage in this process was that both parties had to agree to the terms of that appointment.  Accordingly, the fair value had not been established because an accountant had not been chosen in accordance with the articles.

The first appeal

The company appealed, successfully.  One of its arguments was that Mr Davenport was acting unreasonably in refusing to sign the letter of engagement.  The company persuaded the court that the articles of association contained an implied term that Mr Davenport had to:

• co-operate in doing everything reasonably necessary
• to procure the appointment of a suitable accountant

and further, had to refrain from:

• unreasonably refusing to agree the accountant’s terms of engagement
• provided those terms were reasonable.

Having implied this term into the articles of association, the court held that Mr Davenport had been in breach of the relevant provisions and, accordingly, the accountant had been properly “chosen” by the parties.

The second appeal

Mr Davenport then appealed. He argued that he had not acted unreasonably in refusing to sign the letter of engagement as the company had refused to provide to him certain information that he had requested of it to enable him to assess for himself the value of his shares.

The court did not agree with this argument.  The relevant provisions of the articles were designed to result in an appointment of an accountant in the event the parties failed to agree a price for the shares: the provisions said nothing about a shareholder being entitled to particular information to enable him to agree a price in the first place.

Conclusion

The first appeal judgement shows that the courts, in appropriate circumstances, are prepared to imply terms requiring the parties to act reasonably, where that is necessary to enable an agreed process to be implemented properly. 

The second appeal judgement shows that the courts will not imply detailed obligations into such provisions: if the intention is that a shareholder should be entitled to certain information in particular circumstances, the articles of association need to state this explicitly.