Doughty Hanson & Co Ltd v Roe

This is a dispute between shareholders in a company known as Doughty Hanson & Co Limited (“the Company”). The relevant shareholders are Mr Roe, Mr Hanson and Mr Doughty. In August 2006 Mr Roe resigned his directorship in the company and its subsidiaries, thereby triggering an obligation to give a transfer notice under the Articles of Association in respect of his shares. He gave a transfer notice. The mechanisms under the Articles of Association provide for accountants to value the shareholding. The accountants, Messrs PricewaterhouseCoopers (“PwC”) certified a price per share as being a “fair value” within the Articles of Association. Having received that certificate, Mr Roe purported to withdraw his transfer notice. The questions arising in these proceedings are whether or not the certificate was a proper certificate within the Articles of Association and whether Mr Roe was, on the true construction of the Articles of Association, entitled to withdraw his transfer notice.

The company is a fund management company with very large funds under management. In the financial year ended 2001 its post tax profit was £120,000. In the other years from 2000 to 2005 post tax profit ranged from a low of £3.7m in 2003 to £29.7m in 2005. For what it is worth, the company’s estimates for profits in the years 2006 to 2010 range from £6.3m to £39.8m. I mention these figures at this stage to demonstrate that, at least in profit terms, this is a substantial company.

The shares in the company were divided into three classes – A and B Ordinary shares and Participating Shares. The ordinary shares were and are vested in Mr Doughty and Mr Hanson, and they carry the votes. The Participating Shares were not voting shares, but under article 4(c) it was provided:

“(c)

The holders of the Participating Shares shall be entitled to receive the whole of the profits of the Company available for distribution and from time to time determined to be distributed by way of dividend, in proportion to the number of Participating Shares held by them respectively.”

Any surplus in the winding up is payable to the holders of the Participating Shares. The Participating Shares are owned by Mr Roe, Mr Doughty and Mr Hanson. Mr Roe holds 12,240 Participating Shares, amounting to 10.34% of those shares.

The Articles of Association contain provisions governing the transfer of shares and rights of pre-emption. Article 11 governs what happens on a voluntary transfer. For ease of reference the relevant parts of Article 11 are set out in a Schedule to this judgment, along with other provisions to which reference is made below. For ease of exposition from time to time I nonetheless repeat some of that wording in this judgment.

Article 11.2 provides for someone who wishes to transfer shares to give a Transfer Notice to the Company. It provides:

“11.2

The provisions of this Article to apply [sic] in respect of any transfer of Participating Shares.

(a)

A member or a person entitled by transmission or otherwise, who intends to transfer shares (the "Vendor”) shall give to the Company notice in writing of his intention (the "Transfer Notice”), specifying the shares which he intends to transfer (the “Shares for Sale”) and the price per share (the “Sale Price”) at which he is prepared to sell the Shares for Sale, or where appropriate, that he wishes to sell at the fair value to be determined in accordance with Article 11.2(f).”

Thus two sorts of offer are contemplated - one at a fixed price, and the other at a price to be determined by a valuer. The reference to a determination in accordance with 11.2(f) is a reference to a valuation by an investment bank or accountants.

The remainder of Article 11.2 appears in the Schedule, to which reference should be made. In summary the provisions provide as follows:

Thus the relevant parts of article 11.2 can be summarised as follows. A proposed transferor gives a Transfer Notice which specifies a price which is acceptable to the transferor, or a willingness to sell at a third party valuation, by an investment bank or accountant. That is taken to be an offer which is passed on to the other shareholders. They may accept at either the specified price or elect for a valuation. The valuation, if there has to be one, is carried out by an investment bank or an accountant, who has to certify the “fair value”. The valuer is to disregard the fact (if it be the case) that the shares are a minority holding, and shall positively have regard to the fact (if it be the case) that there is no public market in the shares and shall also have regard to the distributable reserves of the company. When the value is fixed by the valuer, the sale shall be at that price, though the proposed vendor has 14 days from the fixing of the value to indicate that he is not prepared to sell at that value, in which case the transfer notice is deemed to be withdrawn. The valuer acts as expert and not as arbitrator.

Paragraph 12 is headed “Compulsory transfer of shares”, though article 3 provides that headings are not to be taken into account in construing the articles. Article 12.1 provides for a deemed transfer notice when a relevant Insolvency Act event arises in relation to a shareholder (the presentation of a bankruptcy or winding up petition, or an application for a voluntary arrangement and so on) and it is expressly provided that such a transfer notice cannot be withdrawn. A deemed transfer notice is to be “at the fair value” and there is an express exclusion of the right of withdrawal contained in article 11.2(g). Article 12.2 contains an obligation on an outgoing director or employee within 6 weeks of the office or employment ceasing to give a transfer notice at a price equal to a fair value determined under article 11, and for the provisions of Article 11.2 to apply to have effect.

Article 34 provides for the deeming of service of a notice in any case where a shareholder was obliged to serve a notice but does not do so after demand or within the relevant period.

Although Mr Roe did not resign his directorships until 11^th August 2006, there was some debate between him and the other shareholders about his shareholding and its valuation for a couple of months before then. His redundancy and termination of employment were ostensibly brought about on 29^th June 2006 and there was thereafter some correspondence about share values. On 30^th June 2006 Mr Doughty told Mr Roe that PwC had been appointed as “the independent valuer” by the board of the company and that the holders of the ordinary shares had approved the appointment. This was probably technically premature, but nothing turns on that. There was a little debate in correspondence between the company and Messrs Olswang, who were acting for Mr Roe, about various matters, including transfer obligations. By the end of July Messrs Skadden Arps Slate Meagher & Flom (UK) LLP (“Skaddens”) had come on the scene, acting for the Company. In a letter dated 10^th August 2006 Olswang wrote to Skaddens and said:

“As outlined in our letter of 21 July, we do not consider that the requirement for Mr Roe to serve a Transfer Notice under Article 12.2 of the Company’s Articles of Association has yet been triggered, as Mr Roe remains a director of a number of Doughty Hanson companies. Mr Roe will however be forwarding his resignations to you in respect of these companies shortly.”

It was pointed out on behalf of the Company that it was assumed that a notice would be given under Article 12.2. No reference is made to the possibility of giving a separate notice under Article 11.2 (essentially a voluntary notice). The next day Mr Roe resigned his directorships. That started the six week clock in Article 12.2 running. On 7^th September 2006 Olswang wrote to Skaddens and pointed out that “Mr Roe’s obligation to serve a transfer notice under the Articles of Association” had a deadline for service of 26^th September. The letter went on to say:

“Mr Roe therefore intends shortly to serve a transfer notice in accordance with the Articles of Association.”

The letter asked for financial information so that he could assess the value of his shareholding in the value of the company more accurately. It was said that Mr Roe would wish to make representations to the valuer “once appointed”.

On 20^th September 2006 Skaddens responded to that letter. In relation to consultation with a valuer, they wrote:

“In terms of consultation, we expressly assert that there is no duty under the Articles of Association for Mr Roe to consult with, or to express views to, the valuer, nor should such rights be otherwise implied. Nonetheless, in the interests of establishing a process which can be seen to be fair in an attempt to resolve the matter, we would expect the valuer to be prepared to receive any submissions Mr Roe made, provided they were made promptly, and to provide him with a copy of the valuation report setting out the factual material on which they are relying, but omitting their conclusions, and allowing him to make representations on that material (again, without any delay).”

Under cover of a letter dated 22^nd September 2006, Mr Roe gave a transfer notice. It was in the form of a letter addressed to the company, and was in the following terms:

“Dear Sirs,

Transfer of shareholding in Doughty Hanson & Co Limited (‘the Company’)

In accordance with the company’s Articles of Association (‘the Articles’), I hereby give notice of my intention to transfer my holding of 12,240 Participating Shares in the Company (the ‘Roe Shares’) at a price of £8,618 per share or, if required by the existing shareholders under Article 11.2(c), to have the fair value of the shares determined in accordance with Article 11.2(f) of the Articles.

For the avoidance of doubt, I reserve my right to make representations to any independent valuer appointed under the Articles in relation to the determination of a fair value for the Roe Shares.”

It will be noted that that notice specifies a price which the existing shareholders can accept. That is an ingredient of a voluntary transfer notice given under Article 11.2, but is not an ingredient of a compulsory transfer notice which has to be given under Article 12.2. That has given rise to a question in these proceedings, first as to whether this is a voluntary notice under Article 11 or a compulsory notice under Article 12, and second, if it falls to be treated as an attempt to serve the former, whether or not it is open to Mr Roe to serve a voluntary notice in these circumstances. On 28^th September 2006 the Company formally passed on the offer contained in the Transfer Notice to Mr Hanson and Mr Doughty in terms of the offer to sell at fair value and not in terms of the other limb of the offer to sell at a fixed price. On the same date both of those shareholders accepted the offer to sell at fair value, and signed a further notice specifying that, as holders of more than 51% of the Ordinary Shares of the Company, they approved the appointment of PwC as valuers for the purposes of Article 11.2(f).

On 29th September 2006 PwC sent an engagement letter to the Company which set out the contractual terms on which that firm was engaged. The “Scope of services” to be provided was contained in paragraph 3 of that letter which reads:

“3.

We understand that the Engagement will be for us to provide an opinion of the Fair Value (as defined below) of the shares. Such valuation will be carried out as at a date to be advised by the Directors of the Company (the “Valuation Date”) and pursuant to the requirements of articles 11.2(f) and 12.2 of the Articles of Association.”

Paragraph 4 sets out the specific matters to which regard must and must not be had in Article 11.2(f) and paragraphs 6 and 7 say:

“6.

The output of our work will take the form of:

(i)

a valuation memorandum (“Memorandum”) explaining our understanding of the business, assumptions, analysis and conclusion; and

(ii)

a one page letter (“Opinion Letter”) certifying our opinion of the Fair Value.

Paragraphs 11 and 12 set out their “Valuation approaches”:

“We will consider the appropriateness of the following approaches when estimating the Fair Value:

•

The Income Approach indicates the value of the Shares based on the value of the cashflows that the Company can be expected to generate in the future;

•

The Market Approach indicates the value of the Shares based on a comparison of the valuation subject to comparable publicly traded companies and an analysis of statistics derived from transactions in its industry as well as prior transactions involving the subject of the valuation;

•

The Net Assets Approach indicates the value of the Shares by adjusting the asset and liability balances on the Company’s balance sheet to their market value equivalent. The approach is based on the summation of the individual market values of the underlying assets less the market value of the liabilities.

12.

After consideration of the above approaches we will make any adjustments we consider reasonable to reflect the rights and interests in the Shares that we are valuing. In arriving at our opinion of the Fair Value we shall consider the result of any of the above approaches that we have regarded as appropriate.”

Thereafter the parties proceeded on the footing that PwC were going to be the valuers. There was no resolution of a dispute that had arisen as to the provision under which the transfer notice was given. Attention turned to the valuation exercise. On 18^th October 2006 PwC wrote to Olswang, copied to the Company, dealing with their proposals as to the conduct of the valuation exercise. They said:

“I am in agreement that the valuation process should be fair. It is on this basis that I have provided Mr Roe with additional rights beyond those explicitly set out in the Articles of Association, namely:

•

An opportunity to submit information in respect of such matters that you would like us to consider when forming our view on the Fair Value of the shares;

•

An opportunity to comment on the facts on which our valuation will be based (in the form of a memorandum) prior to our issuance of a final report; and

•

Based on the memorandum, a further opportunity to supply us with any additional relevant information.

I suggest the following:

……

•

Prior to our determination of the final value, we will provide all parties with a copy of our memorandum outlining the facts on which we have relied when forming our view on value. The parties will be given 10 working days to review this memorandum and provide relevant comments or additional information in writing….”

Thereafter the parties made submissions to the valuers. Those submissions (without some of the supporting technical information) were in evidence before me. Mr Roe employed Deloittes to submit a long report. They urged a large number of facts and figures upon the valuers, including forecasted figures for the financial performance of the Company provided by the company. That showed the sort of figures for profit after tax that I have referred to above, and dividends from 2005 to 2010 ranging between £3.8m in 2010 and £15.5m in 2007. In paragraph 5.3 of their report, they said that the appropriate way of valuing Mr Roe’s shareholding would be to treat it as a pro rata share of the value of the entire class of share capital. In the following paragraph, they urged that there should be no “marketability discount” applicable to the entire share capital, because there would be no shortage of willing and competing buyers eager to acquire the Company in a sale. In paragraph 5.7 they stated their opinion that the value of a Participating Share was in excess of £8,553, emphasising the likely future maintainable earnings, likely distributed earnings and other factors. The Company put in its own submissions on 6^th November, saying that it was considered difficult, unreliable and perhaps even impossible to use anything other than the level of net assets in order to determine the value of the shares. One of the uncertainties expressly referred to was the dependence of the Company upon key individuals, namely Mr Hanson and Mr Doughty, whose departure would trigger certain adverse clauses in the arrangements with clients. While not containing any positive indication that Mr Hanson and Mr Doughty actually intended to retire, it did say that rather than just deciding to retire it was conceivable that they could start a business outside the Doughty Hanson group or in parallel to it. It made a number of other points. Further information was provided by the Company in a letter dated 22^nd November 2006, and Olswang corresponded further with PwC (enclosing a letter from Deloittes) on 23^rd November. I need not at this stage refer to further correspondence.

Meanwhile, on 20^th October 2006, the Company had commenced proceedings against Mr Roe seeking a declaration that a transfer notice served pursuant to article 12.2 was irrevocable and could not be withdrawn, and a declaration that the notice given by Mr Roe was a transfer notice pursuant to Article 12.2 of the Articles of Association and not a notice pursuant to Article 11.2. There was an alternative claim for a declaration that if the notice was not an Article 12.2 notice it was ineffective and Mr Roe remains under a duty under Article 12.2 to serve a transfer notice.

On 15^th January 2007 PwC issued the fact-containing document referred to in the preceding correspondence. It describes itself as a “Draft factual memorandum” and has the word “DRAFT” as a vertical watermark in large type across every page. Whenever referring to itself in the narrative of the document, it refers to itself as a “draft factual memorandum”.

The draft factual memorandum annexes the terms of engagement referred to above. It records PwC's instructions in terms which are not materially different from those explicitly set out in the letter. In paragraph 1.5 it sets out the purpose and background of the letter thus:

“1.5

In ensuring that the valuation process is as fair as possible, we are providing Mr Roe with additional rights beyond those explicitly set out in the Articles of Association, namely

•

An opportunity to submit information in respect of such matters that he wanted us to consider when forming our view on the fair value of a single share comprised in the Shares for Sales; and

•

An opportunity to comment on the facts on which our valuation is based (in the form of this memorandum) prior to our issuance of a final report.”

Paragraph 1.7 repeats that they have considered the appropriateness of the approaches referred to in their letter of engagement. Paragraph 1.10 records the receipt of Mr Roe’s submissions and paragraph 2.6 refers to the basis on which a minority holding can be valued as set out in CVC/Opportunity Equity Partners Limited v Almeida [2002] UK PC15 at paragraphs 37 and 38. Paragraph 2.10 sets out “our view”:

“2.10

Having taken into consideration the Articles and submissions from Mr Roe and the Company, it is our view that in order to arrive at a fair value pursuant to the requirement of the Articles, we do not consider it appropriate to value the company on a liquidation or break up basis. Rather, the total value of the Company will need to be arrived at, based on a hypothetical sale of Doughty Hanson at the valuation date. A pro rata value is then ascribed to a single share comprised in the Shares for Sale, subject to the provisions of the Articles in relation to minority discount, there being no public market in the Company shares and the distributable reserves of the Company, as discussed below.”

Paragraph 2.20 records the view that it would be appropriate to ascertain the total value of the company, and then ascribe a pro rata value to a single share comprised in the Shares for Sale.

There then follow extensive paragraphs in which the accountants set out the submissions made by either side under various heads, expressing conclusions on the way. Paragraph 2.33 contains the accountants’ conclusions in relation to the various matters it is required to have regard to, thus:

“2.33

We conclude that in order to determine fair value in accordance with the Company’s Articles, the following approach needs to be adopted:

(i)

a fair value for the whole business needs to be determined, based on a hypothetical sale of Doughty Hanson as at the valuation date, recognising that it is a private company, and having regard to the level distributable reserves [sic] (mechanically they operate as a floor).

(ii)

The value is then divided by the number of Participating Preference Shares to arrive at a fair value per share, without the application of a minority discount.”

In section 3 the accountants turn to “Valuation methodology”. Having set out in short the submissions of the two parties, paragraph 3.4 contains “Our view on the appropriate valuation methodology”. This is an important paragraph because it lies at the heart of Mr Roe’s attack on the valuation certificate which was ultimately issued. Paragraph 3.4 says:

“In deciding on the most appropriate valuation methodology to use in determining the fair value of a single share comprised in the shares for sale, we have taken into account what a sale of Doughty Hanson would generate as at the valuation date. We have had to consider under what terms and conditions a transaction between a hypothetical willing purchaser and Messrs Doughty and Hanson as willing sellers would take place, taking into account what is fair to the parties. In determining a set of assumptions which would underline such a transaction, it is our view that in order to be fair we need to consider what a third party would pay for the business, assuming that the partnership of Messrs Doughty, Hanson and Roe has run its course, and that Messrs Doughty and Hanson have no ongoing obligation to work within the business.”

The last sentence of that paragraph is of particular importance. As will become apparent, it is said by Mr Roe that it contains such an element and quality of falsity in its hypothesis so as to mean that the accountants actually valued something different. I shall elaborate that argument in due course. Paragraph 3.21 summarises the valuation methodology and reads:

“3.21

Therefore, it is our view that the fair value of a single share comprised in the Shares for Sale should be determined as follows:

(iii)

The Net Assets as at 22 September 2006 per the balance sheet;

(iv)

Adjusted to reflect the market value of investments (which are currently held on the balance sheet at book value);

(v)

Adjusted to reflect the timing of the Transaction fees received;

(vi)

A degree of option value to reflect the possibility that the business has a greater value than that derived from steps (a), (b) and (c) above; and

(vii)

The value of a single share comprised in the Shares for Sale is then calculated as a direct pro rata of the total value derived from steps (a) to (d).”

Under the mechanism that was established, the parties had a chance to respond to that. The Company and Mr Hanson and Mr Doughty did not respond. Olswang responded in a letter dated 26^th January 2007. The first page of that letter took the point that I have referred to above, namely that something different was to be valued under the valuation methodology proposed by the accountants. The letter said:

“Rather than valuing a share in the Company, you have indicated that you intend to value a share in an entirely different (and fictional) entity, i.e. one in which Messrs Doughty and Hanson are no longer shareholders and are no longer participating in the business. This fictional entity bears no resemblance to the company itself as at 22 September 2006. As at that date (and at all times subsequently) Messrs Doughty and Hanson were both shareholders in the company and were both participating fully in its business. Moreover, there was no reason to believe as at 22 September 2006 that this would not remain the case for the foreseeable future – certainly nothing has happened since that date to suggest that Messrs Doughty and Hanson will cease their continued involvement and participation in the company. Consequently, if you pursue the approach set out in the memorandum, you will not be valuing a share in the company as required by the Articles, put another

way, you will not be performing the task allocated to the Valuer by the Articles but a different task altogether.”

Other observations are made.

On 2^nd February 2007 PwC issued a final certificate. The certificate recites their instructions to certify the fair value of a single share in Mr Roe’s holding, sets out the relevant requirements of article 11.2(f) and concludes:

“In accordance with your instructions, we set out below our opinion as to the fair value of a single share comprised in the Shares for Sale as at 22 September 2006:

Value of a single share comprised in the Shares for Sale: £760.”

That would give Mr Roe’s entire shareholding a value of £9.3m. He considers that his shareholding is worth something in the region of £100m, particularly bearing in mind what he says is its future profitability. He disputes the validity of the certificate for reasons which I deal with below, but on the footing and assumption that it is or may be valid, on 15^th February 2007 he gave or purported to give a withdrawal of his Transfer Notice under Article 11.2(g).

Each of the parties has issued Part 8 claims in this matter. The issues arising, and which I am invited to decide, are as follows:

Mr Roe seeks to challenge the certificate given by the accountants. Mr Charles Graham Q.C., for Mr Roe, acknowledges that the accountants were acting as experts, and acknowledges the limits which that imports as to challenges that can be made. He says that in this case he falls within one of the bases on which a challenge can be made, namely that the valuers have departed from their instructions by valuing something other than that which they were instructed to value.

His legal case starts with the judgment of Dillon LJ in Jones v Sherwood Computer Services plc [1992] 1WLR 277, as cited in Veba Oil Supply & Trading Gmbh v Petrotrade Inc [2002] 1 Lloyds Rep 295 at para 23. The citation reads:

“On principle, the first step must be to see what the parties have agreed to remit to the expert, this being, as Lord Denning MR said in Campbell v Edwards…a matter of contract. The next step must be to see what the nature of the mistake was, if there is evidence to show that. If the mistake made was that the expert departed from his instructions in a material respect – e.g. if he valued the wrong number of shares or valued shares in the wrong company, or if, as in Jones v Jones… the expert had valued machinery himself whereas his instructions were to employ an expert valuer of his choice to do that – either party would be able to say that the certificate was not binding because the expert had not done what he was appointed to do.”

In Veba Oil itself, Simon Brown LJ went on to say:

“26…(i) A mistake is one thing; a departure from instructions quite another. A mistake is made when an expert goes wrong in the course of carrying out his instructions. The difference between that and an expert not carrying out his instructions is obvious.

….

(vi)

Once a material departure from instructions is established, the court is not concerned with its effect on the result. The position is accurately stated in paragraph 98 of Mr Justice Lloyd’s judgment in Shell UK v Enterprise Oil: the determination in those circumstances is simply not binding on the parties…. I would hold any departure to be material unless it can truly be characterised as trivial or de minimis in the sense of it being obvious that it could make no possible difference to either party.”

Mr Graham also relied on Morgan Sindall plc v Sawston Farms (Cambs) Limited [1999] 1 EGLR 90. In that case a valuer, acting as an expert, had valued a roadway for the purpose of the exercise of an option. He determined the value in a non-speaking valuation. The case of the plaintiff was that the road had a small value as it would not be required in connection with any development in the area, whereas the defendant’s contention was that it had a ransom value of over £700,000. The expert fixed the price at £130,000. Some months later, the plaintiff produced a deed of grant of a right of way for all purposes over the land, and, as a result, claimed in the proceedings that the valuer must have used a ransom value approach and proceeded on a wrong principle. It was further contended that the valuer had valued the wrong subject matter because the roadway that he had valued had had limited rights over it whereas, by reason of the deed of grant, the plaintiff had unlimited rights of way. In his judgment in the case, Robert Walker LJ set out the basic principles which made an expert’s determination binding, and indicated the limited exceptions to that state of affairs. At page 91M he cited an extensive passage from the judgment of Dillon LJ in Jones v Sherwood Computer Services plc, including the following:

“Both Campbell v Edwards and Baber v Kenwood Manufacturing Co Limited…. Were cases of non-speaking valuations and it is convenient to say a little at this juncture about the distinction between speaking and non-speaking valuations or certificates, which to my mind is not a relevant distinction. Even speaking valuations may say much or little; they may be voluble or taciturn if not wholly dumb. The real question is whether it is possible to say from all the evidence which is properly before the court, and not only from the valuation or certificate itself, what the valuer or certifier has done and why he has done it. The less evidence there is available, the more difficult it will be for a party to mount a challenge to the certificate.

….

On principle, the first step must be to see what the parties have agreed to remit to the expert this being, as Lord Denning said in Campbell v Edwards….a matter of contract. The next step must be to see what the nature of the mistake was, if there is evidence to show that. If the mistake made was that the expert departed from his instructions in a material respect – e.g. if he valued the wrong number of shares, or valued shares in the wrong company… either party would be able to say that the

certificate was not binding because the expert had not done what he was appointed to do.”

Having set up those tests, Robert Walker LJ then went on to consider how they were applied in that case, and in particular “to see what the parties agreed to ask the expert to do in this case”. He noted that the option price was an open market value price (see page 92F) and noted that the valuation was a non-speaking valuation. Leading counsel seeking to challenge the valuation sought to demonstrate that the valuer “must have assumed…that it was a ‘ransom strip’ situation, and so failed to carry out his instructions to make an open market valuation” (see page 92L). Robert Walker LJ rejected the attempt to peep behind the curtain of the valuation in that case. At page 92M he said:

“However, the fundamental objection to this part of Mr Burton’s case, which was not put forward before the judge, is that it is seeking, by a process of inference, to turn a non-speaking valuation into a reasoned valuation and then to attack the reasons. On the facts of this case, the materials on which the inference is to be based are very tenuous. Indeed, were it not for Mr Burton’s skilful advocacy, I would have said that the point was quite unarguable. Even if the materials had been more substantial and the process of inference less speculative, the court should, in my view, turn its face against that sort of argument, except in wholly exceptional circumstances. The whole point of instructing a valuer to act as an expert (and not as an arbitrator) is to achieve certainty by a quick and reasonably inexpensive process. Such a valuation is almost invariably a non-speaking valuation, with the expert’s reasoning and calculations concealed behind the curtain. The court should give no encouragement to any attempt to infer, from ambiguous shadows and murmurs, what is happening behind the curtain.”

At first sight, those paragraphs might seem to pose some considerable difficulty for Mr Roe’s attack on the valuation in this case. However, Mr Graham seeks to distinguish them. He says that the valuation in the present case is not a non-speaking valuation. It is, at least in part, a speaking valuation. He says that the valuers indicated that they would set out the facts on which they relied and allow the parties to comment on their indication, and that one can see from the process what facts they did indeed rely on. He gets this from the procedure invoked and from what the valuers said they would do in the context of that procedure. I have set out the material parts of the correspondence above. Mr Graham says that it is apparent from that that the experts were intending to set out their facts. If, as a result of observations made by the parties, they decided to proceed on the basis of different facts, then there should have been a fresh factual memorandum in which they set out the revised facts so that the parties could comment afresh on what had become a different set of facts which would be fed into the valuation process. Since the valuers did not do that, it is to be inferred that they acted on the basis of the facts set out in the memorandum. The most important of those facts, which Mr Graham says was an unjustified finding, is the factual hypothesis underlying the valuation, namely a sale of the entire Company, with Messrs Doughty, Hanson and Roe playing no further part in the affairs of the Company after the deemed sale. Although that scenario was challenged in Olswang’s response to the draft factual memorandum, since PwC did not issue any further document indicating a different approach to those “facts”, they must be taken to have determined their valuation on the basis of those matters. Alternatively, Mr Graham said, the valuers must be taken to have determined the value by taking the net assets of the Company and adding a small sum (he said it was much too small a sum) to reflect the future profits of the Company. He said this was not a case in which one was seeking to work out what was behind the valuer’s curtain by means of inference in contravention of the principles laid down by Robert Walker LJ in Morgan Sindall. This was a case where there was positive evidence of what the basis, or at least part of the basis, of the valuation was, even though the actual valuation certificate itself was non-speaking.

The first question for me, therefore, is whether Mr Graham is right in this approach. Is it permissible, in the circumstances of this case, to say that one can see how the valuer has arrived at his conclusion, or at least that he has laid part of his process of reasoning bare so that it can be scrutinised? In my view, it is not permissible. The end of the process was a non-speaking valuation (though this taken by itself is of limited significance). During the course of the process leading up to that, the parties were given an opportunity to understand how the valuer’s mind was working as at the date of the step in question. That date was the date of the draft factual memorandum. The procedure did not necessarily envisage that all matters opened up at that stage, or indeed any matters opened up at that stage, would remain in the same position as at the date of the final determination. The whole purpose of the process was to enable submissions to be made. Looking at the terms of the correspondence, it seems to me to be more likely that the valuer was expecting comments on what valuation principles should follow from the facts that they indicated, but I do not read the correspondence as ruling out observations on matters of fact. What the process then seemed to envisage was that the valuer would take away the comments provided, and arrive at a final figure. The process certainly did not expressly contemplate a further round of expression of relevant facts, and I do not think it was necessarily implicit that there would be such a further round if the valuer reconsidered any factual matters in the light of the comments submitted.

In those circumstances, I do not think that it can be clearly inferred that the valuer must have taken any particular fact into account, or adopted any particular approach on valuation, from the steps taken in this case. The parties were given the opportunity to give the valuer food for thought on the basis of an initial expression by the valuer. Whether the valuer’s views of fact or valuation matters (both of which seem to have found their way into the memorandum) changed as a result of the submissions from Olswang is not known. The process of inference necessary to get to Mr Graham’s suggested conclusions on this point seems to me to be fall within the prohibition expressed by Robert Walker LJ in Morgan Sindall. It might fairly be said that there is more material in the present case than there was in Morgan Sindall, but at the end of the day the process involved in Mr Graham’s line of reasoning is one of inference which, in my view, is not appropriate in a case such as this. I do not regard the facts as exceptional so as to bring them within the possible exception referred to by Robert Walker LJ. Mr Graham’s case still remains in the realms of inference. This is not a speaking valuation in the sense that the valuer has actually said what he has taken into account by way of fact and valuation reasoning.

It seems to me to be an inherent, and desirable, part of the mechanism of expert determinations (as opposed to arbitrations) that the process of reasoning is properly kept behind a curtain. That means that there are strict limits on what can be relied on as evidence of what the valuer did and thought behind that curtain. In the case of a non-speaking valuation, the best way of finding out what actually underlies a valuation would be to call the valuer himself to give evidence of it, or to seek third party disclosure from him. No-one has suggested that that would be permissible, and it plainly would not be. To seek to arrive at a conclusion as to what the valuer was thinking by a process of inference from secondary materials is even less desirable. Accordingly, I do not think that Mr Graham’s attempted route of attack on the valuation in this case is one that is open to him.

For that reason, therefore, the attack on the valuation fails. However, even if I am wrong about that, the attack still fails because the quality of the alleged mistake made by the valuer is not such as to invalidate the valuation. The only basis on which the valuation is attacked by Mr Roe is that the valuer departed from his instructions in valuing something other than that which he was told to value. His case is that the approach which the valuer can be seen to have taken involves the valuer valuing something other than the subject matter of the exercise. He says that what the valuer was told to value was a share in the Company. That company had certain attributes as at the relevant date for the valuation (22^nd September 2006), the relevant ones for present purposes being the participation of Mr Hanson and Mr Doughty, the historic profitability of the Company and the Company’s own projections of very significant profits in the next five years. However, what the valuer is said to have done is to have valued something different. It is said that PwC reached its valuation figure by taking two false key hypotheses for the purposes of valuation that make the thing they valued something other than the Company they were instructed to value. The first key hypothesis is a sale of the whole Company, from which a value is obtained for the whole of the share class which in turn leads to the value of a single share. In such a sale Messrs Doughty and Hanson must be deemed to be sellers. The other key hypothesis which is said to have formed part of the mental process of the valuer is that Messrs Doughty and Hanson would leave the Company and would not remain to participate in the business. The first hypothesis is said to be a false one, or an erroneous one, not so much because the starting point is a deemed sale of the Company, but because it fails to build in the fact that Mr Hanson and Mr Doughty were in fact buyers and not sellers. The alleged error in the second hypothesis is probably related. It is said that there was no evidence that Mr Hanson and Mr Doughty were going to leave the Company, and indeed the evidence received by the valuers was that they would stay, so the valuer’s assumption in this respect was wrong. In addition to those alleged errors, Mr Graham for Mr Roe also says that it is apparent from the evidence that the valuer did not pay any real attention to the future profitability of the Company, and based his valuation primarily on a net assets figure. He therefore did not value the Company with the financial and trading prospects of the Company in this case. For those reasons the valuer in this case actually valued something other than the Company.

I shall assume for the purposes of this argument that it has been demonstrated that the valuer did what Mr Graham describes him as having done. Even so, it is clear to me that Mr Graham’s argument fails for the following reasons.

The function of the valuer under the Articles is to determine the fair value of Mr Roe’s shares by arriving at a fair value for a single share. In doing so, the valuer had to take into account and ignore various matters as set out in the Articles and identified above. There is no complaint that they failed to do any of that. Nor is there any suggestion that the valuer’s initial instructions were somehow faulty. The valuer was clearly, on the facts, expected to carry out an exercise complying with the terms of the Articles.

Mr Roe’s complaint is that the valuers did not comply with those instructions because they valued something else. In line with the authorities that I have referred to above, it is plain that if, in a literal sense, they valued the wrong Company, then they would not have complied with their instructions and the valuation would not be binding. However, that is not the complaint. The valuer knew which company he was looking at, and did not misunderstand the nature of the shares comprised within the relevant holding. What the valuer did (on the present hypothesis) was to arrive at a value for a single share by looking at a greater whole and valuing that greater whole. There was no mistake as to the identity of that greater whole. The valuer then hypothesised a sale. At that point he is, of course, imagining a state of affairs which does not exist – the Company is not in fact being sold. Nevertheless, that is a perfectly acceptable valuation technique, and as a technique it is not complained of in this case. The conduct of such an exercise does not, however, mean that the valuer has suddenly started to value something other than the subject matter of his valuation. What he is doing is applying a valuation technique. In my view it is clear that the same thing happens when further hypotheses are applied. When those hypotheses are applied, the valuer is doing what he is employed to do, namely to apply such valuation techniques, and to make such judgments, as are in his view necessary and/or appropriate to arrive at a value of that which he is valuing. If he adopts a hypothesis that would not be adopted by other valuers, then he may have made an error in his valuation, but it does not mean that he has valued something different. It means he has made a mistake.

Mr Graham accepted that a mere mistake would not be sufficient to vitiate the valuation on the footing that something different had been valued. What he says distinguishes that case from the present is that in this case the valuer knew the “true” facts and yet hypothesised against them. Thus the valuer knew that Mr Hanson and Mr Doughty were not going to leave the Company, and yet hypothesised that they would. I do not consider that that distinction is a good one. If a valuer is making any hypothesis then he is deeming something to be true when it is not, or at least when it cannot be shown to be true. Thus a valuer who values shares on the footing of a market sale of the whole of the shares of which the subject shares form part (in order to arrive at a value of the part) he is assuming that a sale is going to take place (or actually took place on the valuation date) even though he knows that no such sale is going to take place. That is the stuff of valuation. Accordingly, it does not seem to me that Mr Graham’s distinction assists him. And even if there is some sort of relevant distinction, I do not see why Mr Graham’s case should mean that something different has been valued. All that it means is that the right thing has been valued but on an erroneous hypothesis. Such an erroneous hypothesis is a mistake which a valuer, acting as an expert, is “entitled” to make.

Mr Graham put his point in a number of ways. None of them improve his position. Thus he submitted that if the shares should have been valued on the basis of the Company’s current trading position then to value them on some other basis was a material departure from the instructions given to the valuers. This does not work for him. The statement that the shares should have been valued in one way is a statement about the way in which the valuer ought to go about valuing them. If he values them in another way then he has gone about his exercise in an erroneous way. However, he has still expressed his opinion as to the fair value of the shares (to use the wording in the Articles). He has made a mistake; and Mr Graham accepted that a mistake of this nature was not enough for him. Mr Graham also proposed another formulation – he proposed that the parties do not give the valuer authority to value something on a basis known to be different from that which is actually the case. Of course it is true that parties who give a valuer an instruction to value company A do not give him instructions to value that company on the footing that it is in fact (actual) company B. However, as long as he is looking at company A, the instructions he is given (at least in the present case) allow and require him to value it on the basis that he considers proper. If he does not do that, then he may have been negligent in the fulfilment of his instructions, but he has fulfilled his instructions for the purposes of the tests applying to whether his valuation should be treated as binding or not.

Further authority cited by Mr Graham does not assist him. He drew my attention to Parkinson v Euro Finance Group Limited [2001] 1 BCLC 720. At paragraph 98 of the judgment in that case Pumfrey J made some remarks about what was necessary in assessing a “fair value” in the absence of a market. He said:

“98.

I think that when arriving at a 'fair value' in the absence of a market it is necessary to assume that the notional sale is taking place between the actual participants in the transaction, since the whole purpose of the valuation is to be fair as between the parties. There is no market to provide an objective external criterion. The actual parties must be taken to participate in the sale as willing participants. In my judgment, an answer to the problem of lock-in, notice periods and non-competition clauses lies in this proposition. One can expect that there will be a turnover in the directors, but it will be relatively slow. Thus while there is a risk of losing one in a year, the risk is not unduly high. It cannot be said that there is a substantial risk of all leaving the day after the sale, which would necessarily depress the share price to near nothing. The reason that it cannot be said that they will all leave is that the business belongs to them, and they wish to work in it. I consider, therefore, that the assumption of a third party purchaser is essentially inappropriate in this case.”

Mr Graham relied on that in support of his proposition that what the valuer had done in this case was not to achieve a fair value within the meaning of the Articles and his instructions because he was wrong to take into account the possibility of Mr Doughty and Mr Hanson leaving. I do not think that that passage assists him. The passage occurred in the context of a petition under s.459 of the Companies Act 1985 and what the judge was considering in that paragraph was what the basis of the valuation should be for a compulsory purchase by the respondents of the petitioner’s shares. He was setting out the principles on which a valuation exercise, which he also conducted, should be carried out. He was not making general propositions about what does and does not amount to a “fair value” in other circumstances, and in particular is not saying anything which would support the proposition that PwC have departed from their instructions in the present case and failed to give their opinion of a fair value, which is what their instructions were.

Mr Graham drew my attention to Veba Oil (above). While the mistake in that case demonstrates the principles on which an attack on a valuation might be based, and demonstrates that a departure from instructions has to be material, it does not otherwise assist Mr Graham. On its facts it was a speaking valuation case. The experts were explicitly instructed to use one method of testing, and in fact they used another, as their own certificate revealed. Morgan Sindall demonstrates that Mr Graham’s arguments on this point are wrong. A similar argument to his was run by the claimant in that case. At page 93B Robert Walker LJ records the argument as follows:

“Before the judge, counsel then appearing for Morgan Sindall argued that the roadway subject to an unlimited right of way already enjoyed by Morgan Sindall was something different from the roadway subject to a limited right, and that [the valuer] had therefore valued the wrong subject matter. The judge rejected this argument. Echoing Dillon LJ in Jones v Sherwood Computer Services…he asked himself what the parties had agreed to remit to the expert for valuation. That was the roadway, “the property” as defined in the schedule to the option agreement. He accepted the submissions of counsel for Farms that:

‘… there is no evidence before the court to suggest that that is not precisely what the valuer did. Any mistake that may have been made was as to the attributes of the land that was being valued and not the identity of the land. Indeed, it is perfectly plain that there was no evidence to suggest that the valuer himself made any mistake at all. So far as the evidence goes, he valued the land in accordance with his instructions. Any mistake that may have been made was not in the valuation but in the formulation by the option agreement of the task which was to be undertaken by the valuer.’

In my judgment, the judge was entirely correct in accepting those submissions and dismissing the originating summons….”

It therefore appears that the judge at first instance drew a distinction between the identity of the land being valued and the attributes of the land that was being valued. The same, or at least a similar, distinction can be drawn in the present case. There is no doubt that the valuer in this case valued the correct shares in the correct company. The mistake relied on by Mr Roe in this case is not as to the identity of either of those things. It is as to the attributes which the valuer gave to the company for the purposes of his valuation hypotheses. There is a difference between identity and other attributes. Morgan Sindall demonstrates that only a mistake as to the former (identity) will found an attack on the certificate. In this case, on the hypothesis on which I am working for this part of the judgment, there was only a mistake as to the latter.

I therefore determine the validity of the certificate point against Mr Roe. The certificate is not impeachable on the basis suggested by Mr Roe.

The question that I am asked to decide is whether or not, on the true construction of the Articles of Association, the transfer notice served by Mr Roe could be withdrawn. Although it did not take up a lot of time in argument, there was a debate as to whether the notice given by Mr Roe was a notice under Article 11.2 or clause 12.2., which sprung another issue as to whether Mr Roe could give a notice under Article 11.2 in the circumstances and as to whether it would have a different effect from a notice under clause 12.2. The debate was somewhat reduced when Mr Graham accepted that the notice that his client intended was a notice under Article 12.2, but broadened again when he added that if necessary it was also a notice under Article 11.2. This point only matters if an Article 12.2 notice does not carry a right of withdrawal. It will therefore be convenient to decide that point first.

When he opened his submissions Mr Graham placed reliance on the fact that these Articles were drawn by a top firm of City solicitors (which they apparently were), so they must be taken to have been drawn with some care. The words used would be likely to be deliberately chosen and to mean what they say. By the end of both sets of submissions the parties were agreed that on any footing these Articles were not the draftsman’s finest hour. I agree with them, and I do so not to be gratuitously critical, but because that point is an important factor in my approach to construing them. It increases the possibility that these are Articles where mistakes have been made in covering the ground which it was probably intended they should cover.

In order to discuss and resolve the difficulties that arise in this case it will be useful to give some labels to the recurring concepts.

A notice under Article 12.2 is a notice to sell “at the amount equal to fair value determined under Article 11 …”. In other words, it seems to be the equivalent of a valuation price offer.

The difference between the parties can be summarised as follows. The Doughty Hanson parties say that the notice that has to be served under Article 12.2 is a valuation price offer notice. If one then matches that against the wording of paragraph (g), and the right of withdrawal, one sees that the right does not arise because the right only arises in favour of a vendor, which thus is a “purchasing member who has required a fair value to be fixed”. Those words do not describe the situation where a valuation price offer has been made because the purchasing members have made no such requirement, so the right simply does not apply. It is of the essence of these submissions that the right of withdrawal never arises in a valuation price offer case because the words in paragraph (g) describing the circumstances in which there can be a withdrawal are inadequate to describe such a situation.

Mr Roe’s case is that there is a right of withdrawal when an article 11.2 notice has been served. His case accepted that the proviso to paragraph (g) which contains the right of withdrawal applies in the context of a sale to the members just referred to in the Article (those who have required fair value to be fixed). However, the drafting is such that unless one gives an extended meaning to the crucial phrase in paragraph (g) (“a purchasing member [to]… pursuant to Article 11.2(f)”) so as to enable it to catch a valuation price offer situation, then the effect is to leave a lacuna in that paragraph, and indeed throughout Article 11. Accordingly one should give the phrase an extended meaning in paragraph (g) so that it catches not only the hybrid situation but the valuation price offer as well. Since an Article 12.2 offer is a valuation price offer the right of withdrawal applies.

What this part of the case turns on is whether it is right to give to the crucial words “a purchasing member who has required a fair value to be fixed pursuant to Article 11.2(f)” a very extended meaning. Prima facie that seems a tall order. But something has apparently gone wrong in paragraph (g). Its apparent purpose is to state what price is to be paid by a purchaser. On its face it covers the eventuality of a fixed price offer (because of the use of the defined expression “Sale Price”), and a hybrid offer (because of the other crucial words just quoted). It seems at first sight to have left out the case of a valuation price offer. If one investigates no further then Mr Roe loses, because he cannot bring himself within the wording of the right of withdrawal (because he was a valuation price offeror). However, one cannot necessarily stop there. The oddity of the apparent wording requires investigation, and the critical phrases are used elsewhere in the agreement. It is therefore necessary to consider whether there is an argument for saying that valuation price offers are brought within this paragraph by extending either the meaning of “Sale Price”, or the other crucial wording, based on the use of the phrases elsewhere.

That requires a dissection of large parts of the Articles, and the parties set about such an exercise and a close analysis of the parts resulting from that dissection. They also sought to put the relevant parts in their commercial context, so as to make commercial sense of their respective positions. I shall not set out all the various elements of their respective arguments, because it would take too long to do so, and it would probably obscure a proper analysis, but what follows below are the fruits of a consideration of their various points.

I start by taking the wording of paragraph (g). The right of withdrawal is, ostensibly, confined to a case where “a purchasing member … has required a fair value to be fixed pursuant to Article 11(2)(f)”. That has not happened in the case of Mr Roe. No member has so required. In the case of Mr Roe, or any other person making a valuation purchase offer, the purchasers merely accept an offer of a sale at a valuation - they do not require a valuation, and, if one looks at the cross-referenced Article (paragraph (f)) they have even more clearly not required it under that because the requirement referred to in that paragraph arises in the context of an original fixed price offer which has been turned into a hybrid offer. Linguistically speaking, therefore, Mr Roe fails at this stage of the argument. It is for that reason that, in order to succeed, he needs to establish a rather extended meaning of those words.

He gains some encouragement from the fact that all is apparently not well with paragraph (g), and there is a good case for saying that some adjustment of its

Although paragraph (g) plainly confers a right of withdrawal, that is not its apparent main purpose. The right of withdrawal is engrafted on to the paragraph as a proviso. The main purpose is to declare the price at which the sale and purchase transaction takes place. Where there is an acceptance of the Sale Price the sale is to be at that Sale Price. Sale Price is a defined term - it is the price per share specified in a fixed price offer (see paragraph (a)). Where there is a hybrid situation the transaction price is the price determined by the valuer. Ostensibly, therefore, a valuation price offer is not catered for at all. That is strange, because if the main purpose of the paragraph is as I have held it to be then one would have expected that purpose to have applied to a valuation price offer as much as to the other two situations. There is no apparently good reason for leaving such a situation outside the scope of the Article.

The impression that something has gone wrong is strengthened by the opening wording of Article 11 itself. Article 11 starts by removing from its scope the situations referred to in Article 16, which deals with permitted transfers to certain connected persons. Subject to that, Article 11.2 provides that it applies “in respect of any transfer of Participating Shares”; it is apparently to have universal application. If valuation price offers are not within paragraph (g) there is an unintended lacuna. Of course, accidents happen in drafting, and if paragraph (g) accidentally does not provide for valuation price offers then there is indeed a lacuna, but since the Articles seem to have intended that there should be complete coverage then further scrutiny should take place to see if there are indications that the Articles have fulfilled their apparent intention to be complete by inelegant wording.

To that end it is now relevant to place paragraph (g) in its full context. Both Mr Graham and Mr Bompas sought to bolster their respective cases by pointing to other parts of the Articles in which common expressions occurred as demonstrating that one could not and should not apply strict language in construing paragraph (g).

I have already pointed out that the opening words of Article 11 apparently indicate that the Article is intended to provide a complete code. As will be apparent, on any footing the wording of the rest of Article 11 does not ostensibly manage to do that. The extent of that apparent shortfall appears below.

Paragraph (a) sets out the basic obligation to give a notice. It is to specify either a fixed price (the “Sale Price”, a defined term) or a valuation-determined price. On the face of this paragraph, the expression “Sale Price” means only a fixed, specified price. Elsewhere, however, it is apparent that the draftsman lost sight of that. Article 16 reinforces the effect of Article 11 by providing that no share shall be transferred unless the Article 11 “rights of pre-emption” have been exhausted save in the cases to which Art 16 applies. The Article then goes on to permit (inter alia) intra-group transfers by companies. However if an intra-group transferee ceases to be a member of the group then it -

“shall … give a Transfer Notice in respect of all the relevant shares. If the transferee company fails so to transfer the shares registered in its name, it shall be deemed to have given a Transfer Notice pursuant to clause 11.2 with a Sale Price as shall be determined by the Valuer in accordance with 11.2(f).”

Three things should be noted about that. First, the mechanism referred to here does not make total sense. It requires a Transfer Notice to be given, and then deems a Transfer Notice to have been given. The second step is pointless, because by then the deeming provisions of Article 34 will have taken over. Second, it deems a transfer notice to be given in the absence of a transfer, not in the absence of a transfer notice. If one has a transfer notice which is then not followed up with a transfer, a fresh transfer notice is deemed to have been given. That is an odd procedure. These are part of a pattern of inadequate wording in these Articles. However third, and most significantly for present purposes, it uses the term of art “Sale Price” to mean a valuation-determined price, and not an expressly indicated (fixed) price as per Article 11(2)(a). This is the only instance where the expression “Sale Price” is quite clearly used to mean, or include, a valuation price offer price, but it does give substance to the proposition advanced by Mr Bompas that there may be other occasions where the draftsman’s attention wandered similarly.

Paragraph (c) deals with offer and acceptance. It contains another error in drafting (“and shall be accompanied” does not make sense in context - some words seem to have been omitted). Furthermore, in the last sentence it does not seem to cater for a valuation price offer. That sentence refers to acceptances. It purports to apply to “Every” form of acceptance, and refers to “any such offer” but in doing so apparently presupposes that they will all contain a fixed price (see the definition of Sale Price in Article 11.2). Accordingly it forgets that the offer may be a valuation price offer and says nothing express about acceptance of that, though the paragraph would probably work without it in the case of such an offer. Each side sought to say that this last sentence must cover a valuation price offer because it contained the mechanism of acceptance, and they argued from there that the wording needed to be modified to fit their respective cases, but I do not consider that either of them is right. The preceding sentence (“Every such offer shall be open for acceptance in whole or in part within 21 days from the date of its despatch”) is the one which deals with acceptance generally. Acceptance can be of some or all of the shares offered. The last sentence deals with a special case, where a purchasing member does not like the fixed sale price sought and wishes to have a valuation exercise conducted to ascertain the price. This option applies only to all (and not to some of) the shares which the purchasing member wishes to purchase. It makes no sense in relation to a valuation price offer at all - the valuation exercise is built into that offer, and general acceptance is dealt with by the preceding sentence. So this last sentence does not require any adjustment of anything to make it work, though, as observed, it does forget that valuation price offers are possible.

Paragraph (e) deals with the consequences of an acceptance. The first sentence can apply to any case. The second sentence is an important one which seems to create the binding obligation on the purchasers. One would expect it to cover all three cases (fixed price offer, valuation price offer and hybrid), yet on its express terms it ostensibly covers only the first and third of them (via the expression Sale Price and the phrase “such purchasing member has specified that he is not prepared to accept the Sale Price” respectively). It does not seem expressly to cater for a valuation price offer. Either it leaves such offers out, or they are intended to be covered by the words more naturally applicable to one of the other situations.

The opening words of paragraph (f) undoubtedly refer to a shareholder who is in receipt of a fixed price offer. The expression “Sale Price” must mean the specified price in a fixed price offer, ie as defined in paragraph (a). The last sentence deals with the cost of the valuation exercise. It is to be borne by “those purchasing members who have required a fair value to be fixed” - the same words as are used in paragraph (g). In this context the words seem most naturally to refer back to those who have triggered the operation in the opening words of the paragraph. They have required the valuation; they should pay for it. But what of the costs of a valuation price offer valuation? That does not seem to be provided for, unless the words just quoted are construed so as to include the purchasers who accept such an offer.

Then there are the crucial words in (g). I have set out the apparent problems with this paragraph above.

Paragraph (j) deals with what happens when some shares are not accepted by anyone. It does not work well in all circumstances. For example, if there is a fixed price offer and no-one turns it into a hybrid offer, there is no alternative fair price which can be the subject of the price comparison in the closing words. That may be thought to be merely an inelegance - in those circumstances the fixed price would be the only price floor. Things are a little more difficult if there is a valuation price offer and there are no acceptances. In those cases no valuation exercise has been conducted; or, if the seller procures a valuation, the time limit does not work - there are no acceptances, and no “purchasing member [who] has required a fair value to be fixed”. I do not need to determine what happens in those circumstances; it suffices to observe that yet again the Articles do not, on their face, cater for various events which might well occur under the regime that the Articles themselves have created. Some implication is probably necessary to fill the gap.

Paragraph (k) does not present any apparent difficulties. Its purpose is to allow the directors to “intercept” shares which are offered through a Transfer Notice and place them in friendly hands, in a trust for the benefit of employees or in a suitable nominee company, all at a fair valuation determined in accordance with paragraph (f). However, Mr Graham says on one of his arguments it is important as providing a commercial rationale behind giving a right of withdrawal in the case of an Article 12.2 notice. I deal with this below.

Article 11.3 does not assist in this part of the debate. Article 11.4 assists only to the extent of reinforcing that which has already appeared, namely that the whole of Article 11 is intended to provide a complete scheme governing the transfer of shares.

Other Articles are relevant to the matter, because they are part of the overall picture. I have referred above to Article 16 and a particular part of it which goes to the meaning of Share Price. Relevant parts of Article 16 are set out in the Schedule to this judgment.

The proviso to Article 16(3)(c) provides for a Transfer Notice to be given when shares are no longer held for Connected Persons. The form of the notice is not specified in sub-paragraph (i), though there is cross-reference to Article 12.2 in sub-paragraph (ii). This is yet another unsatisfactory lacuna. Is the person within (i) entitled to make a fixed price offer? If so, this would be likely to make the transfer essentially voluntary, contrary to what one would imagine the intended effect of this provision to be. The shareholder could specify a high fixed price, and when a notice was served requiring a valuation he could then withdraw when the price was fixed. If he can only make a valuation price offer, then the question arising in these proceedings will arise here too - is there a right of withdrawal which makes this provision less than a compulsory transfer?

What emerges from this survey is as follows. First, these are not well-drawn Articles from which one can detect a consistency of approach and a clear complete scheme. It is not possible for either side to mount a case of consistent use of the particular expressions they rely on respectively which would support the extended meaning that each would wish to give their expression. Second, the occasions on which these Articles have apparently produced anomalies or apparent omissions are such that one is less confident than one would wish to be that paragraph (g) is consciously drafted as some integral part of a well thought-out whole. The prospect of an accidental lacuna is thereby increased.

Provisions in Articles of Association such as Article 11.2 and its related provisions should be viewed and construed as a commercial document. They are designed to achieve a commercial end. Accordingly, on normal principles of construction if there are two interpretations, one of which produces a commercial result in keeping with the apparent commercialities of the situation, and the other does not, then the former should be adopted as being more likely to be within the intention of the parties (or the purpose of the Articles). I bear this point in mind; it is helpful on one level in the present case.

Having set out those points and considerations, I turn to apply them to the question of whether paragraph (g) confers a right of withdrawal in a valuation price offer situation? If it is to do so then the expression “a purchasing member who has required a fair value to be fixed pursuant to Article 11.2(f)” must be extended in meaning to catch a valuation price offeree.

I do not consider that it does. I consider it unlikely in the extreme that the draftsman had a valuation price offeree in mind when he used that expression in this paragraph. In fact I think that he overlooked the hybrid situation here, and I do not think that the paragraph covers that situation. I think that this is a case of an accidental lacuna. While that conclusion means that there is no express provision stating what the price is to be in a valuation price offer case, the Articles can still be made to work, because the offer and acceptance mechanism, coupled with the valuation mechanism, will produce a finalised price. So the lacuna is not fatal to the operation of the Articles in such a case. But lacuna there is. I might have been more reluctant to find that there is such a lacuna were it not for the other inadequacies, but they exist and tend to demonstrate that these Articles do not always manage to cover all situations that might otherwise be expected to be covered. It follows that if the notice given by Mr Roe was effectively a valuation price offer notice within Article 11 then he has no right of withdrawal. The necessary condition of a right of withdrawal (dissatisfaction of a fixed price seller with a forced valuation) is not fulfilled.

That conclusion means that the intention in Article 11.2 (that Article 11 shall apply in respect of all transfers) is not fulfilled. That is the fault of the drafting. But if I am wrong in my conclusion that there is a lacuna, and if it is necessary and appropriate to fit a valuation price offer into paragraph (g) then I think that the more natural construction of the paragraph is to treat the price arising as a result of the valuation price offer valuation exercise as being the Sale Price for the purposes of that paragraph rather than to treat the purchaser as having “required” a valuation within Article 11.2(f). Apart from being a slightly more natural (or less tortured) use of language, it is consistent with the indications given by Article 16.4 that the expression Sale Price could be something determined by the Valuer in accordance with Article 11.2(f).

I also consider that that result sits more happily with the commerciality of the situation, or the likely commercial rationale of the right to withdraw. Where a fixed price offer has been made but a purchaser requires a valuation it is readily understandable that the seller should be given a chance to rethink if he does not get the price that he originally specified that he wanted. Where he has made a voluntary valuation price offer it is not so obvious that he should have a right of withdrawal - he has, after all, offered the shares at a price to be fixed, and if he wanted a minimum price then he could have made a fixed price offer. It therefore makes some commercial sense that there should be no right of withdrawal in those circumstances.

However, there is a more compelling commercial consideration supporting my conclusion. It seems to me that voluntary valuation price offers are not going to be particularly likely. There is little point in a seller making one. A seller is likely to have an idea as to the price at which he is willing to sell, and there is no downside in such a seller making a fixed price offer. A valuation price offer is much more likely in the compulsory situations envisaged in Articles 12 and 16. A right of withdrawal makes little commercial sense in that situation. Those Articles are obviously intended to enable the other shareholders to take over the shares of the “selling” shareholder, and the heading to Article 12 (“Compulsory Transfer of Shares”) says as much. While Article 3 provides that “Headings are for convenience only and shall not affect construction”, that heading is descriptive of what the provision is about (that is doubtless the “convenience” - see SBJ Stephenson Ltd v Mandy [2000] FSR 286 @ 297). If the outgoing shareholder had a right of withdrawal after the valuation had been obtained it would render the clauses largely valueless. An unwilling but forced seller would be obliged to give a transfer notice, but in substance not obliged to go through with the sale, which renders the obligations largely nugatory. It makes much more sense that there should be no right of withdrawal in those circumstances.

Mr Graham sought to find another commercial rationale for allowing a right of withdrawal to a compulsory offeror under Article 12.2. He pointed to paragraph (k), and accepted that the right of withdrawal did not apply to that. He said that Article 12.2 with a right of withdrawal would trigger the company’s rights under paragraph (k), and that that provided a commercial rationale for the Article. In addition, he said, a transfer notice under Article 12.2, with a right of withdrawal, provided a commercially useful opportunity for the remaining shareholders to reflect on whether they wished to purchase, and for the outgoing shareholder to reflect on whether he wished to sell. That combination, he said, meant that the application of a right of withdrawal to an Article 12.2 notice still left it with some commercial sense. I am afraid I do not agree. The latter of those aspects is pretty ephemeral, and while Mr Graham is right that the paragraph (k) rights would be available to the Company I consider it unlikely that that was the only real intended commercial benefit behind Article 12 (and Article 16). The real point of Article 12 is to require shares to be given up if the valuation price is acceptable to purchasing shareholders. That would be defeated by the availability of a right of withdrawal.

Nor can Mr Graham gain much support from the express negation of the right of withdrawal in Article 12.1. Mr Graham relied on that as a strong indication that the right was available in the case of other transfer notices under valuation price offers and under Mr Roe’s offer - why otherwise would the words be necessary or appropriate? In the context of these Articles this does not seem to me to be a strong point. One certainly has to consider whether the negation demonstrates a clear assumption that absent those words there would be a right of withdrawal. I suppose it can be said that they tend to point in that direction. But I come back to the quality of the drafting of these Articles. The pattern of apparent omissions and other problems means that one cannot, in my view, give any real weight to the presence of these words for present purposes. Without them the position is clear enough. Their presence might cause one to re-address the situation, but the conclusion that I have reached is that they are mistakenly included, because the Articles have not conferred one in the first place. The presence of these words is not strong enough to lead to a conclusion that the words relied on by Mr Roe in paragraph (g) mean something different from what they say.

In the circumstances I find that a valuation price offer made under Article 11 does not carry with it a right to withdraw by virtue of paragraph (g). Since an Article 12.2 offer incorporates the Article 11 machinery, the same applies to such an offer. Accordingly, insofar as Mr Roe’s offer is an offer under that Article then he has no such right.

I have referred above to a dispute as to whether or not Mr Roe’s notice is an Article 11 notice or some sort of separate notice given under Article 12.2. My conclusion as to the absence of a right of withdrawal of a valuation price offer means that this point might be said to arise.

I say "might" be said to arise, because Mr Roe's position at the trial was a curious one. He accepted that the notice was intended to be an Article 12.2 notice, and accepted it was capable of being one. That might be thought to be an end of the matter. However, Mr Graham also sought to say that it was, in addition, an Article 11.2 notice. Bearing in mind his client's own intentions, that is an unattractive point. I am not sure where it would get him, if it were right, unless he could say that the route that was followed thereafter was the 11.2 fixed price offer route (which would give a right of withdrawal) rather than a valuation price offer route (which would not). However, I will deal with it briefly.

I do not consider that the argument can succeed. Mr Roe's departure was foreshadowed, as was the ultimate sale of his shares. When he actually resigned he came under an obligation to give a transfer notice under Article 12.2. This must have been the sort of notice which his solicitors were referring to in their letter of 22nd September when they said that he "intended shortly to serve a Transfer Notice in accordance with the Articles". That should be read as a reference to the notice which he was obliged to give - that is the only sensible reading of the letter. Accordingly, when he gave his notice "In accordance with the Articles" he should be taken as giving the notice which the Articles required him to give, not a voluntary notice. The reference to the price should be taken to be an indication of the price that he would be willing to sell at. I can see no objection to an Article 12.2 notice containing such a piece of information - it might be very useful. But the notice remains (perhaps despite its form) an Article 12.2 notice. The company seems to have treated it as such, because when it wrote to the shareholders it did not pass on the fixed term element. The shareholders also treated it as such, because they did not require the question of a value to be referred to valuers; they accepted an offer that it should be. Accordingly, the notice should be treated as a compulsory 12.2 notice (as, I repeat, Mr Roe intended it should be taken), and it was thereafter followed through as though it were.

It therefore follows that Mr Roe has no right of withdrawal and his Transfer Notice is irrevocable.

Pre-emption rights and process on transfer of shares

This Article is subject to the provisions of Article 16.

The provisions of this Article to apply [sic] in respect of any transfer of Participating Shares;

A member or a person entitled by transmission or otherwise, who intends to transfer shares (“the Vendor”) shall give to the Company notice in writing of his intention (the “Transfer Notice”) specifying the shares which he intends to transfer (the “Shares for Sale”) and the price per share (the “Sale Price”) at which he is prepared to sell the Shares for Sale, or where appropriate, that he wishes to sell at the fair value to be determined in accordance with Article 11.2(f).

The Transfer Notice once given may not be withdrawn save as set out in Article 11.2(g). On receipt of the Transfer Notice by the Company the Transfer Notice shall constitute the Company the Vendor’s agent for the sale in accordance with the following provisions of this Article.

Within seven days of the date of the giving of a Transfer Notice (the “Relevant Date”) the Company shall offer the Shares for Sale to all other Participating Shareholders of the relevant class on the register at the Relevant Date. The offer will invite them to apply for such number of the Shares for Sale as they are respectively prepared to purchase. Every such offer shall be made in writing and shall specify the number of Shares for Sale offered to each such Shareholder. Each such Shareholder shall be entitled to shares as nearly as may be in proportion to the number of the existing issued shares of such class held by him at the date of the offer (the “Proportionate Entitlement”) and shall be accompanied by forms of application for use by such Shareholder in accepting his Proportionate Entitlement and in applying for any shares in excess of his Proportionate Entitlement (the “Excess Shares”). Every such offer shall be open for acceptance in whole or in part within 21 days from the date of its despatch. Every form of application completed by a purchasing Shareholder pursuant to any such offer shall state whether, in respect of all (but not some) of the shares applied for, the Shareholder is prepared to accept the Sale Price or requires a fair value to be fixed in accordance with this Article.

At the expiration of such 21 days, the directors shall allocate the Shares for Sale, in the following manner:

To each purchasing Shareholder there shall be allocated his Proportionate Entitlement or such lesser number of the Shares for Sale for which he may have applied;

If the number of any Shares for Sale which remains unallocated is less than the aggregate number of Excess Shares for which applications have been made, the unallocated shares shall be allocated (as nearly as may be) in the proportions which the Excess Share applications bear to one another;

If the number of the Shares for Sale which remains unallocated equals or is greater than the aggregate number of shares for which Excess Share applications have been made, each purchasing Shareholder who has applied for Excess Shares shall be allocated the number of Excess Shares for which he applied.

Within seven days of the expiry of the period in which applications from purchasing members can be made in accordance with this Article, the Company shall notify the Vendor and all purchasing members of the details of the acceptance and applications which have been made and of the allocations made as between purchasing members under this Article. Each purchasing member shall be bound by the terms of any acceptance and applications made by him to purchase in accordance with this Article such number of shares as are specified therein at the Sale Price or, where such purchasing member has specified that he is not prepared to accept the Sale Price, the fair value per share.

If any purchasing member states in his form of acceptance and application that he is not prepared to accept the Sale Price, the directors shall arrange that an investment bank in London or firm of chartered accountants approved by instrument in writing signed by the holders of 51% or more so [sic] the Ordinary Shares (the “Valuer”) shall certify in writing the sum which, in his opinion, is the fair value of a share comprised in the Shares for Sale and such sum shall be deemed to be the fair value thereof unless the Vendor with his Transfer Notice shall have notified the Company that a third party, acting in good faith, is willing to purchase the Shares for Sale at a particular price per share and can demonstrate, to the reasonable satisfaction of the Valuer (such satisfaction to be notified to the Company in writing by the Valuer), the existence of such an offer, when such price shall be deemed to be the fair value. In certifying such sum the Valuer shall regard as appropriate for the purpose, the value shall not be discounted because of the fact (if it be the case) that the Shares for Sale to be transferred are a minority holding and do not confer control of the Company on any person whilst having regard to the fact (if it be the case) that there is no public market in the Company’s shares and also to the reserves of the Company then available for distribution in respect of such Shares for Sale. In so certifying, the Valuer shall be considered to be acting as an expert and not as an arbitrator and, accordingly, the Arbitration Act 1979 or any statutory re-enactment or modification thereof for the time being in force shall not apply. The cost of obtaining such Valuer’s certificate shall be borne by those purchasing members who have required a fair value to be fixed, in proportion to the number of shares allocated to each such purchasing member.

Any sale of shares effected pursuant to this Article to a purchasing member who has stated that he is prepared to accept the Sale Price shall be at the Sale Price and any sale of shares effected pursuant to this Article to a purchasing member who has required a fair value to be fixed pursuant to Article 11.2(f) shall be at the fair value so fixed save that the Vendor may, within 14 days of the issue of the certificate by the Valuer, indicate in writing that he is not prepared to sell at the fair value in which case the Transfer Notice shall be deemed to be withdrawn.

Within seven days of the certificate of the Valuer being received by the Company, the Company shall send a copy thereof to the Vendor and to all purchasing members.

The Vendor shall be bound, upon payment of the Sale Price or (subject to Article 11.2(g) the fair value (as the case may be)), to transfer the Shares for Sale which have been allocated pursuant to this Article to the purchasing members. If, after becoming so bound, the Vendor makes default in transferring any of the Shares for Sale, the Company may receive the purchase money and the Vendor shall be deemed to have appointed any one director or the secretary of the Company as his agent to execute a transfer of Shares for Sale to the purchasing members, and upon execution of such transfer, the Company shall hold the purchase money in trust for the Vendor. The receipt of the Company for the purchase money shall be a good discharge to each purchasing member and, after his name has been entered in the register of members of the Company, the validity of the proceedings shall not be questioned by any person.

If all or any of the Shares for Sale are not accepted by a purchasing member or purchasing members, the Vendor may within six months of the date on which he receives notification of the details of the acceptances and applications by purchasing members under this Article or, when any such purchasing member has required a fair value to be fixed, within six months after the receipt by the Vendor of a copy of the certificate of the Valuer under Article 11.2(h), transfer all of the Shares for Sale which have not been accepted, to any person or persons approved by the directors (such approval not to be unreasonably withheld) on a bona fide sale at a price per share not less than whichever is the higher of the Sale Price or the fair value (after deduction, where appropriate, of any dividend or other distribution to be retained by the Vendor).

On receipt by the Company of a Transfer Notice the directors shall be entitled to determine, subject to the prior written approval of the holders of 51% of the Ordinary Shares (the “Ordinary Majority”) to allocate the Shares for Sale at the fair value determined in accordance with Article 11.2(f):

to a person or persons replacing (directly or indirectly) the Vendor as an employee or director of the Company PROVIDED THAT such replacement is found within six months of the date of the Transfer Notice (or 12 months if the Ordinary Majority so approves);

to a trust for the benefit of employees or directors; or

a suitable nominee company (pending nomination of a person pursuant to Article 11.2(k)(i).

The provisions of this Article 11.3 relate only to the transfer of Ordinary Shares:

subject as set out in this Article 11.3, the provisions of Article 11.2 shall apply mutatis mutandis to the transfer of Ordinary Shares; and

the Sale Price for each Ordinary Share shall be [£]1 and there shall be no right to require a fair value.

The provisions of this Article 11 shall apply mutatis mutandis to the sale or other disposal of any shares allotted to a member by means of a renounceable letter of allotment or other renounceable document of title. No member shall transfer or agree to transfer the legal or beneficial ownership of any share registered in his name or allotted to him except by means of a transfer and subject to the provisions of this Article.

[not material]

Compulsory Transfer of Shares

Any member of the Company who (being an individual) shall have made in respect of him a petition for a bankruptcy order or an application for a Voluntary Arrangement or (being a body corporate) shall have any action, application or proceeding taken in respect of it for a Voluntary Arrangement or composition or reconstruction of its debts, the presentation of an administration petition, its winding up or dissolution or the appointment of a receiver, liquidator, trustee or administrative receiver or similar officer shall be deemed to have given a Transfer Notice at the fair value (and without the right of withdrawal contained in Article 11.2(g)) in respect of all of his or its shares in the capital of the Company immediately before the happening of such event unless any person entitled to a share in consequence of any of such events shall within 30 days of becoming so entitled transfer such shares to a person to whom shares may be transferred pursuant to Article 16. Regulations 29-31 of Table A shall be construed accordingly.

If any director or employee of the Company or any of its subsidiaries ceases from any cause to be such a director or employee or ceases to provide services to the Company or any of its subsidiaries without remaining or becoming a director or employee of the Company or any other of its subsidiaries or without continuing to provide services to the Company or any other of its subsidiaries (as the case may be) such director, employee or person (and any Connected Person of such director, employee or person within the meaning of Article 16 hereof) shall not later than six weeks following the date on which he so ceased to be a director or employee be bound to give a Transfer Notice at the amount equal to fair value determined under Article 11 for each Participating Share and at an amount of £1 for each Ordinary Share. In any such case as aforesaid the provisions of Article 11.2 or, as the case may be, Article 11.3 shall take effect.

This Article applies to all classes of shares in the Company.

Except in the cases set out in Article 16 no shares in the Company shall be transferred and no interest in any shares shall be transferred or (except by the Company) created unless and until the rights of pre-emption conferred by Article 11 have been exhausted …

The following are the exceptions to Article 16.2:

a transfer of any share in the Company held beneficially by an individual (the “Settlor”) [in favour of various persons described as “Connected Persons”] PROVIDED THAT:

Where a member being a body corporate (the “transferor company”) has transferred any shares to a member of the same group (the “transferee company”) pursuant to the exception contained in Article 16.3(b)(iii) … and thereafter at any time the transferee company ceases to be a member of the same group and no other exception under these Articles excludes the pre-emption rights, the transferee company shall promptly give notice thereof to the Company and shall unless all other members shall have agreed otherwise give a Transfer Notice in respect of all the relevant shares. If the transferee company fails so to transfer the shares registered in its name, it shall be deemed to have given a Transfer Notice pursuant to Article 11.2 with a Sale Price as shall be determined by the Valuer in accordance with Article 11.2(f).

If, in any case where in accordance with the provisions of these Articles:

a person has become bound to give a Transfer Notice in respect of any shares and such a Transfer Notice is not duly given within a period of two weeks of demand being made or within the period allowed thereafter respectively, a Transfer Notice shall be deemed to have been given at the expiration of the said period...”