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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Gunewardena v Conran Holdings Ltd [2016] EWHC 2983 (Ch) (22 November 2016) URL: https://www.bailii.org/ew/cases/EWHC/Ch/2016/2983.html Cite as: [2016] WLR(D) 639, [2017] Bus LR 301, [2016] EWHC 2983 (Ch) |
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CHANCERY DIVISION
Rolls Building, 7 Rolls Buildings Fetter Lane, London EC4A 1NL |
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B e f o r e :
____________________
Mr Desmond Gunewardena |
Claimant |
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- and - |
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![]() ![]() ![]() ![]() |
Defendant |
____________________
Philip Jones QC (instructed by Simkins LLP) for the Defendant
Hearing dates: 12th, 13th, 17th, 18th, 19th and 21st October 2016
____________________
Crown Copyright ©
Mr Justice Mann :
Introduction
The core facts giving rise to the claim
"… such price as the auditors of the Company for the time being shall certify in writing to be their opinion of a fair selling value therefor as between a willing vendor and a willing purchaser." (Article 7.8).
I shall call this basis of valuation the "fair selling valuation" or "fair selling calculation". The auditors were given no further instruction or guidance in the Articles as to how to arrive at their valuation. The Articles go on to provide a mechanism for finalising and, if necessary, enforcing the sale.
"7.6. Whenever any member (other than Sir TerenceConran)
who is employed by the Group in any capacity ceases to be an employee of the Group (otherwise than by reason of his death) he shall be deemed to have served a transfer notice pursuant to Article 7.7 in respect of all the B shares held by him …"
"7.5. Whenever any member (other than TOC [i.e. Sir TerenceConran])
who is employed by the Group in any capacity ceases to be an employee of the Group (otherwise than by reason of his death) he shall be deemed to have served a transfer notice pursuant to Article 7.6 in respect of all the B shares held by him …"
" … the Company and its subsidiaries";
and "subsidiary" is defined as having:
"… the meaning ascribed to it in the Act."
"The Act" is defined as meaning the Companies Act 1985 as amended by the Companies Act 1989 and re-enactments thereof.
" … such price ("the Transfer Price") as may be specified in the Transfer Notice or (if no such price is specified in the Transfer Notice or such price is not approved by the directors within thirty days after the date of the Transfer Notice) such price ("the fair price") as the auditors of the company for the time being shall certify in writing to be the opinion of a fair selling value thereof as between a willing vendor and a willing purchaser."
"7.9 If the auditors are asked to certify the fair price as aforesaid:
(1) the fair value of the Said Shares shall be a sum equal to the percentage which the Said Shares shall be of all the issued shares in the Company as at the date of the Transfer Notice of the average of the consolidated profits or losses of the Group before tax and after minority interests for the two accounting reference periods of the Company ended on the accounting reference date last before the date of the Transfer Notice or the date upon which a Transfer Notice shall be deemed to have been given in accordance with articles 7.4 or 7.5 multiplied by five ..."
I shall call this "the Five Times Profits" valuation or calculation. As a matter of history, this method of calculating the fair price was proposed by Mr Gunewardena himself.
"That the Articles of Association of the Company be amended as follows:
1. By the deletion of the full stop at the end of article 1.3 and the addition of the following words:
"; and
(4) "the Trustees" means that the trustees for the time being of Sir TerenceConran's
nineteen ninety-eight Settlement."
2. By the addition of the following words at the beginning of the second sentence of article 7.1(2):
"Subject as provided in sub-paragraph (3) of this article,";
3. By the addition of the following words after article 7.1(2):
"(3) Whenever a share which is an A share is transferred by TOC [i.e. Sir TerenceConran]
to the Trustees, it shall be redesignated as a C share."
4. By the addition of the following words after article 2.7:
"2.8 If any A shares shall be redesignated as C shares in accordance with article 7.1(3) the A ordinary shares of £1 each so redesignated ("the C shares") shall, except as expressly mentioned in these Articles, rank pari passu in all respects with the B shares as if they were B shares so that any reference in these articles to B shares shall be deemed to refer also to C shares mutatis mutandis. Theholders
of the C shares will not be entitled to participate in any dividend paid or distribution made during any financial period of the Company ending on or before 31 March, 2003. Immediately before 31 March 2003 all C shares then in issue shall automatically be redesignated as B shares."
"New Articles of Association ofConran
![]()
Holdings
Ltd (Adopted by Special Resolution passed on 12th August 1993 and amended by Special Resolution passed on 16 March 1998)."
Witnesses
Mr Gunewardena
Mrs Elizabeth Dunley
Mr Geoffrey Davies
Mr Roger Seelig
Mr Alex Willcock
Mr Sebastian Conran
Mr Simon Brown
Mr Jasper Conran
Mr Edmund Conran
Miss Sophie Conran
Mr Thomas Conran
Sir Terence Conran
The issues
(a) Was CGL a subsidiary of CHL immediately prior to the ultimate sale to CGL in 2013? If it was, then Mr Gunewardena was deemed to have given a transfer notice in 2013.
(b) Were the true Articles of the company those in the March 1998 Filed Articles by virtue of their filing and/or what happened at the March 1998 EGM? This goes to the basis of valuation of Mr Gunewardena's shares.
(c) If not, were the March 1998 Filed Articles the true Articles of the company by virtue of agreement, acquiesence or some other form of informal adoption? This again goes to the basis of valuation of Mr Gunewardena's shares.
(d) Has the company followed the correct procedure specified by the Articles?
Was CGL a subsidiary immediately before the transfer by CHL of its shares in 2013
"A company is a 'subsidiary' of another company, its 'holding
company', if that other company -
(a)holds
a majority of the voting rights in it …"
"(2) In section 736(1)(a) … the references to the voting rights in a company are to the rights conferred on shareholders in respect of their shares .. to vote at general meetings of the company on all, or substantially all, matters."
"Introduction
This analysis considers the relationship that now exists betweenConran
![]()
Holdings
Ltd ('CHL') and CGL Restaurant
Holdings
Ltd ('CGL') following the
Conran
group reorganisation in September 2006 (Project Cougar). The determination of the relationship between these two parties is a pre-requisite to the formulation of CHL's accounting approach with regard to CGL.
Definitions
Investor control of an investee exists when the investor can direct the operating and financial policies of the investee. If an investor solely controls the investee, the relationship is that of a subsidiary. If the control is shared with another party, the relationship is that of a joint venture.
If an investor has significant influence over, but does not control, the operating and financial policies of the investee, the relationship is that of an associate.…
Conclusion
The directors ofConran
![]()
Holdings
Ltd considered that the relationship between CHL and CGL is that of investor and investee and, as such, CGL should be accounted for as a simple investment. The main factors leading to this conclusion are:
- CHL does not control or significantly influence the board of CGL, nor the operating and financial policies of CGL;
- the substance of CHL's ordinary shareholding in CGL is to give CHL a return relative to risk on its investment in CGL that is in line with its target; and,
- consistency of this approach with that of fellow investor HBoS."
"Details of the investments in which the group held more than 10% of the nominal value of any class of share capital at 31 March 2012 were as follows…"
"Further to your request, we are writing to set out our opinion as to the appropriate accounting treatment under UK GAAP forConran
![]()
Holding
Ltd's ('
Conran
![]()
Holdings')
investment of 51% of the ordinary shares in CGL Restaurant
Holdings
Ltd ('CGL') in the consolidated accounts of
Conran
![]()
Holdings.
We have taken the views of the directors ofConran
![]()
Holdings
on the accounting treatment, and expressed and debated these views on your behalf with the senior partner of our Financial Reporting Group and also with other senior audit partners within our firm.
However unfortunately, the response from these deliberations was very clearly thatConran
![]()
Holdings
has the ability to exercise control over CGL, irrespective of whether it chooses to exercise this control.The existence of the investment agreement is helpful in requiring certain matters to require more than just
Conran
![]()
Holdings
consent and therefore we would accept the judgment that control is shared and it is appropriate to account for your investment as a joint venture, as opposed to continuing to consolidate it as a subsidiary."
"Conclusion
On the basis ofConran
![]()
Holdings
51% of the ordinary shares of CGL, it has the ability to exercise control over CGL, if it chose to do so. The existence of the Investment Agreement and the matters set out therein that require the approval of
Conran
![]()
Holdings,
but together with other shareholders, indicates that it is appropriate to account for the investment as a joint venture in the consolidated accounts of
Conran
![]()
Holdings."
What were the Articles after the March 1998 EGM - the effect of filing
"(2) Alterations so made in the articles are (subject to this Act) as valid as if originally contained in them, and are subject in like manner to alteration by special resolution."
"(1) The company's memorandum and articles (if any) shall be delivered -
(a) to the registrar of companies for England and Wales …"
"14. Effect of memorandum and articles
(1) Subject to the provisions of this Act, the memorandum and articles, when registered, bind the company and its members to the same extent as if they respectively had been signed and sealed by each member, and contained covenants on the part of each member to observe all the provisions of the memorandum and of the articles.
(2) Money payable by a member to the company under the memorandum or articles is a debt due from him to the company, and in England and Wales is of the nature of a specialty."
"It is quite true that in the case of the rectification of a document, such as a deed inter partes, or a deed poll, the order for rectification does not order an alteration of the document; it merely directs that it be made to accord with the form in which it ought originally to have been executed. This cannot be the case with regard to the memorandum and articles of association of a company, for it is the document in its actual form that is delivered to the Registrar and is retained and registered by him, and it is that form and no other that constitutes the charter of the company and becomes binding on it and its members."
These remarks are, I believe, said by Mr Collings to demonstrate the conclusive nature of the registered version of the Articles.
Adoption by acquiscence
"Where it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting."
"The unsigned articles of a company incorporated under Hong Kong Ordinance I. of 1865 (similar to the English Companies Act, 1862) were irregularly registered along with its memorandum of association; but it appeared that they had for nineteen years been published, acted on without objection, and from time to time amended and added to by special resolutions."
"It appears, therefore, that these articles have been registered, and have been published and put forward as the company's only articles of association, and have been acted on, amended, and added to by the shareholders of the company, and the company's business has been conducted under the regulations contained therein for nineteen years without any objection, and the company on the record says that these articles are its articles of association. Their Lordships think that in these circumstances they are entitled to draw the inference that all the shareholders have accepted and adopted the articles as the valid and operative articles of association of the company."
Having considered the obligation on the Registrar to require the articles to be signed he went on:
"But there is no reason why the shareholders should not adopt them although irregularly registered. The statutory mode of doing so is by special resolution; but this again is only machinery for securing the assent of the shareholders, or a sufficient majority of them."
Having cited Phosphate of Lime Co v Green (1871) LR 7CP 43, he ended by saying:
"Their Lordships think that, by the acquiescence and agreement of the shareholders shewn by a long course of dealing, the registered articles have become and are the articles of association of the company as surely as if they had been formally adopted by special resolution."
"122. Although the principle has been characterised in somewhat different ways in different cases, I do not consider that that is because its nature or extent is in doubt or the subject of debate. The difference in language is attributable to the fact that the principle will have been expressed by reference to the particular facts of the case. The essence of the Duomatic principle, as I see it, is that, where the articles of a company require a course to be approved by a group of shareholders at a general meeting, that requirement can be avoided if all members of the group, being aware of the relevant facts, either give their approval to that course, or so conduct themselves as to make it inequitable for them to deny that they have given their approval. Whether the approval is given in advance or after the event, whether it is characterised as agreement, ratification, waiver, or estoppel, and whether members of the group give their consent in different ways at different times, does not matter."
"Their Lordships think that in these circumstances they are entitled to draw the inference that all the shareholders have accepted and adopted the articles as the valid and operative articles of association of the company (p235)";
And:
" … by the acquiescence and agreement of the shareholders shown by a long course of dealing, the registered articles have become and are the articles of association of the company as surely as if they had been formally adopted by special resolution." (p236) (my emphasis in each case).
(a) Mr Davies did so at the end of 1998 because his proposed remedying resolution sought to replace or correct something, and one cannot replace or correct something which does not exist.
(b) The company relied on the March 1998 Filed Articles as its specific constitution, and made specific reference to them at board meetings.
(c) When the company was dealing with the sale of its 51% interest in CGL in 2013 Ms Dunley obtained and distributed the March 1998 Filed Articles.
(d) Both the company and Mr Gunewardena negotiated on the basis of a fair selling value without the Five Times Profits valuation in 2013 and 2014 (until Ms Dunley started to discover the 1998 mistake of Mr Davies).
(e) The claimant himself proceeded throughout on the basis that he was entitled to a fair selling value without the Five Times Profits elaboration. He put the value of his shares in the company at £3.5m in a directors' questionnaire (which was far less than would have been yielded by the Five Times Profits calculation at the time), and in undertaking the risk of the 2006 management buy-out, and in undertaking the risk of the 2013 buy-out as well. He said that if he had known that his belief would have been challenged he would immediately have approached Sir Terence, who would have agreed that the Five Times Profits valuation method should be removed.
"That the Articles of the Association of the company be amended …".
"It would be sensible to clarify the amendments to Article 7 by adopting a further Special Resolution ofConran
![]()
Holdings
to deal with that issue [ie the unsatisfactory wording created by applying the 1998 amendments to the 1995 drafting]. That is a relatively simple matter but will involve either an EGM of
Conran
![]()
Holdings
or all of the members signing a written resolution."
The letter bears a marking stating it was sent to Mr Gunewardena for information and it also bears a manuscript direction from Mr Gunewardena, obviously to Mr Brown, saying:
"Pls sort this out as Geoffrey [Davies] suggests."
"You indicated that the company had an option to buy the shares at a value of shares based on the formula contained within the articles and using the previous two years' audited accounts."
"Conran
![]()
Holdings
- Articles of Association
As part of a review of the books of the company, it was noted that certain amendments to the Articles of Association, which were established by resolutions passed in 1995 and 1998, were not contained in the document distributed to you at the meeting of 16th March 1998.
I now therefore enclose a copy of the appropriately updated document for your records. As a formality, please sign the attached Special Resolution, which simply acknowledges that the Articles are correct in this form, and return it to me as soon as possible.
Thanks."
"I/We, the undersigned, being a member of the Company entitled to attend and vote at general meetings of the Company, hereby agree in accordance with Article 9.10 of the Articles of Association of the Company to pass the following Resolution of the Company as a Special Resolution as if proposed and passed at an Extraordinary General Meeting of the Company:
SPECIAL RESOLUTION
THAT the regulations contained in the document annexed hereto be adopted as the Articles of Association of the Company in substitution for and to the exclusion of the regulations contained or incorporated in the existing Articles of Association of the Company."
(a) Mr Davies did so because one cannot replace or correct something that does not exist. I find that Mr Davies was not a shareholder, so his views were irrelevant, but in any event there was no evidence that he thought he had actually bound the members to new Articles when he sent in the wrong form. Indeed, in the witness box he disputed that he could. When he proposed his December 1998 changes he was proposing to register articles which best reflected the 1995 Articles as intended to be amended in March. He was not intending to replace Articles which had somehow been validated by registration. This point does not help Mr Collings.
(b) The company relied on the the March 1998 Filed Accounts as its constitution and made specific reference to them at such things as board meetings. One example of such a board meeting is given. Otherwise the reliance by the company is not particularised. I think it is likely that between 1998 and 2014, if it was necessary to consider Articles the March 1998 Filed Articles will have been referred to, but it does not follow that all its provisions should be taken as being acted on by the company, and in particular the transfer provisions, which never fell for consideration (save in relation to Mr Willcock, and on that occasion the March 1998 Filed Articles were not invoked, because the Five Times Profits calculation was invoked). Referring to the wrong Articles in the manner relied on (which seems to have been infrequent) does not demonstrate any form of informed assent by the company to its acting on the footing that Mr Gunewardena's preferred version of the transfer provisions was the operative one. In any event, the company's assent is not relevant. Shareholder assent is, and there is no suggestion of shareholder involvement at all.
(c) When dealing with the 2013 sale of the 51% interest in the restaurant business, Ms Dunley obtained the March 1998 Filed Articles from Companies House and distributed them. This is true, but again the transfer provisions were not relevant to this exercise, and the answer is the same as under point (b).
(d) Before the buyout of the 51%, an approach was made to Mr Gunewardena by Mr Seelig on behalf of Sir Terence to see if Mr Gunewardena was interested in selling his shares at a price that might be acceptable to both sides. This came to nothing because Mr Gunewardena proposed a figure which was too large. It is correct that the discussions were not on a valuation basis trammelled by the Five Times Profits valuation basis. However, this was an attempt at a consensual valuation exercise. The Articles were not in issue, and it was not in the context of a compulsory purchase. The 2013 transaction had not been finalised, and Mr Seelig's evidence is that it was uncertain at this time. Accordingly, it is not any real evidence of an acceptance by anyone of the existence of the fair selling valuation basis of the 1993 Articles. It was a simple bilateral negotiation. After the buyout the negotiations started again, and it is true that for some time they were on a fair selling valuation basis. The company sought a valuation on this basis, and Mr Gunewardena got a form of countervaluation on the same basis. In subsequent debate with Mr Gunewardena Mr Seelig specifically cited Article 7.6 of the March 1998 Filed Articles (though not the actual valuation provisions - he cited provisions relating to whether Mr Gunewardena was a group employee). All this is true but not particularly relevant. These are acts of the company. They demonstrate an assumption as to what the valuation mechanism was, but not necessarily acceptance of, or acquiesence in, the operation of the March 1998 Filed Articles as such. And again, all the other shareholders were in no way party to this.
(e) Mr Gunewardena himself proceeded on the basis that the fair selling value calculation was appropriate to his shares. He did so when he filled in the questionnaire in 2006 (see above), in undertaking the risk of the 2006 buyout, and in undertaking the risk of the 2013 buyout. He also says he incurred the cost of his side's valuation in 2014 in response to the company's. The formulation of his case in relation to 2006 and 2013 is interesting. In Mr Colling's written final submissions it is not put on the basis that Mr Gunewardena believed the March 1998 Filed Articles were in force. He is said to have believed that the Five Times Profits valuation applied. His witness statement says he did not, and did not need to, look at the Articles before the 2006 and 2013 share sale transactions because he knew that he was entitled to a fair selling valuation. In other words, he was acting on his own misconception. He was not acting on the assumption that any particular set of Articles applied. It is not clear how he came to that view after the events in 1998, as a result of which he must have plainly known that the Five Times Profits valuation was the applicable one, but I do not need to make findings about that. None of this means that the shareholders were under any misapprehension as to the Articles that were in force.
" 4. To shew assent and acquiescence in such a case, it is not necessary (or possible) to prove the acquiescence of each individual shareholder. It is enough to shew circumstances which are reasonably calculated to satisfy the Court or a jury that the thing to be ratified came to the knowledge of all who chose to enquire, or having full opportunity and means of enquiry."
A last ditch point on mechanism
"7.7 On service of a Transfer Notice the Company may at the discretion of the directors either:
(1) If the Company has sufficient distributable profits (within the meaning of Part VIII of the Act) with which to purchase the Said Shares, require (by notice in writing) the Vendors to sell the Said Shares to the Company in accordance with article 7.10; or
(2) Offer as the Vendors's agent the Said Shares for sale to all the members of the Company (other than the Vendors) in accordance with articles 7.11 to 7.15
in either case at such price ("the Transfer Price") as may be specified in the Transfer Notice or (if no price is specified in the Transfer Notice or such price is not approved by the directors within thirty days after the date of the Transfer Notice) such price ("the fair price") as the auditors of the Company for the time being shall certify in writing to be their opinion of a fair selling value thereof as between a willing vendor or and a willing purchaser."
"The Fair Value at a multiple of 5 for 7.16% shares is minus £674,293".
"5.3 Our clients did not believe it necessary to go to the time and cost of instructing its auditor to certify a calculation that, given the negative figures, could only ever result in a valuation of zero. However, our client has now instructed its auditors and we attach a certified copy of the auditor's certificate for your information."
"7.1 In the light of the above, our client has now undertaken the following actions:
(a) it has filed a copy of the Correct 1998 Articles at Companies House; and
(b) it has resolved, in accordance with the Articles, to purchase your client's shareholding in CHL at par value of £1 per share (giving a total of £1254.00) and approved the terms of an Off-Market Purchase Agreement (attached) in respect of such purchase;
7.2 We should like to invite your client to sign the draft Of-Market Purchase Agreement and return the same to us together with copies of all relevant share certificates. In the event that we do not receive the same from him within the next seven days, we shall arrange for the Chairman or other authorised person to sign the Agreement on behalf of your client in accordance with the Articles."
Conclusion