Lord v Maven Wealth: the perils of untidy drafting

Background

Maven Wealth Group Limited ("MWGL") was incorporated in 2016 to provide financial advisory services.   The Claimants, Mr Lord and Mr Davies, were shareholders in and directors of MWGL. On 1 August 2019, the Claimants, who had until then been the majority shareholders in MWGL, sold their A and C ordinary shares but retained a minority shareholding of B ordinary shares in MWGL.  On 1 August 2019, new articles of association of MWGL were agreed and a shareholders' agreement between MWGL, the Claimants, and other shareholders were executed.  The articles of association and the shareholders agreement were later amended in January 2020 (respectively, the "Articles" and the "Shareholders Agreement"). 

In April 2020, the Claimants were removed as directors of MWGL and suspended (and shortly afterwards dismissed) from employment by a subsidiary of MWGL on the grounds of gross misconduct. This constituted a "Transfer Event" under the Articles, compelling sale of the Claimants' shares in MWGL, and the price of the shares was to be determined according to their "Fair Value". The precise percentage of the Fair Value to be paid would depend on whether or not the Claimants were "Bad Leavers", which was being determined separately by the Employment Tribunal. 

In any event, it was necessary for the parties to establish how "Fair Value" should be determined.

Fair value

In the circumstances, the Articles required the Directors to "instruct the Expert to determine and certify the Fair Value of the Sale Shares."  The Articles also stated that "Fair Value" has "the meaning given in the [Shareholders' Agreement]". 

The definitions in the Shareholders Agreement set out a procedure for determining "Fair Value"² and the Shareholders Agreement also contained a provision stating that, in the event of any conflict between the terms of the Shareholders' Agreement and the Articles, the terms of the Shareholders' Agreement should prevail.

A dispute arose as to the correct construction. The Claimants contended that the correct procedure to value their shares was as set out in the Shareholders' Agreement, which they said followed from the definition in the Articles. The Defendants, on the other hand, argued that the correct procedure was that set out in the Articles (i.e. expert determination) and that the provision in the Shareholders' Agreement was intended to identify the formula for determining the price in certain situations, but not the mechanism by which it should be determined.

Judgment

HHJ Keyser QC found in favour of the Defendants. He concluded that the Articles required the Fair Value calculation to be carried out in accordance with the Shareholders' Agreement. However, the determination of Fair Value was to be carried out in accordance with the Articles. The Articles did not, applying the rules of contractual construction, incorporate the determination mechanism contained within the Shareholders' Agreement. There was therefore no conflict between the two documents:

"[t]he only basis on which one might find a genuine conflict between the provisions of the Articles and [Shareholders' Agreement], rather than some fairly unimportant untidiness, is by approaching the construction exercise in the spirit of literalism that has for many years rightly been deprecated."

HHJ Keyser QC went on to agree with the Defendants' submission that the Claimants "had fallen into the trap of looking for contradictions in order to justify importing a procedure that was more to their liking than what was being proposed".​

Comment

Disputes regarding what is "fair value" and how it is to be achieved are frequent (see our article here) and this judgment is a reminder of the need to ensure the process itself is as clear as possible. There are many legitimate reasons why parties may prefer detailed valuation processes to be set out in a shareholders' agreement rather than a company's articles, not least because the latter are publicly available. However, these proceedings highlight the importance of ensuring both clarity and consistency across suites of documents, particularly when terms and definitions cross-refer to terms used in other documents, in order to try to minimise costly and avoidable litigation further down the line.

HHJ Keyser QC summed up the risks of failing to do so succinctly, and noted that this was: "an unfortunate and unnecessary dispute, to which both sides have contributed and in which a substantive outcome (that is, a determination of Fair Value) could have been achieved in the time that has been occupied with litigation".

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¹ [2021] EWHC 2775 (Comm)

² "Fair Value: an amount determined in accordance with Schedule 2 as at the date of the relevant Exercise Notice as being equal to: (Company Group EBITDA x Group Multiple) – Debt x Relevant Proportion".