Minority Shareholders in Troubled Cosmetics Group Triumph

Fallings out between shareholders can be particularly divisive where no one person has a controlling interest in the company concerned. However, as one Court of Appeal decision showed, the outcome will usually depend on an accurate interpretation of the company’s articles of association.

The case concerned two minority shareholders who between them owned 22 per cent of two cosmetics companies within the same very successful group. No one owned 50 per cent or more of the companies. Following the deterioration of relations between certain members of the companies, the minority shareholders gave notice to other shareholders that they wished to dispose of their holdings.

The companies’ articles of association were in identical terms and contained pre-emption clauses which specified a mechanism by which the other main shareholders had an opportunity to acquire the 22 per cent block. The clauses provided, amongst other things, that the shares could be acquired at a prescribed price that would be determined by two independent accountants, if not agreed.

No such agreement was reached and a dispute arose as to the basis on which the prescribed price was to be arrived at. All important issues in that respect were later determined in favour of the minority shareholders by a judge. In particular, he found that the shares should be valued on the basis of a pro rata proportion of the value of the whole equity of each company.

In challenging that ruling, the other shareholders argued that the correct valuation benchmark should be the price that might be achieved for the shares between a willing buyer and a willing seller, having regard in particular to their status as a minority shareholding. In dismissing the appeal, however, the Court could find no flaw in the judge’s careful and thorough interpretation of the pre-emption clauses.