Contract Construction and Apparent Bias in Share Valuation: Insights from Somerville, Shaw & Felisianik v McGuire [2020] ScotCS CSOH_70

Introduction

The case of Somerville, Shaw & Felisianik v McGuire ([2020] ScotCS CSOH_70) adjudicated by the Scottish Court of Session addresses a significant dispute between shareholders of a private limited company, 5 PM Limited. The primary contention revolves around the contractual terms governing the valuation of shares intended for buyout, the interpretation of those terms, and allegations of apparent bias against the appointed expert valuer. This commentary explores the intricacies of the judgment, shedding light on contract construction principles and the standards for expert impartiality in share valuation.

Summary of the Judgment

The plaintiffs (Somerville, Shaw, and Felisianik) and defendant (McGuire) are primary shareholders and directors of 5 PM Limited. Following a deterioration in their relationship, they entered into an agreement for an independent valuation of McGuire's shares to facilitate a buyout. Grant Thornton initially conducted a valuation but withdrew it, leading to the appointment of Stewart MacDonald as the new expert valuer.

The core disputes encompassed:

Determining which communications between the parties constituted the contractual terms.
Interpreting the meaning of those terms, particularly the requirement for the valuation process to be "Hoffmann compliant."
Assessing whether Mr. MacDonald was disqualified from his role due to apparent bias.
Resolving whether the plaintiffs were entitled to pursue additional remedies if the valuation exceeded the company's capacity to purchase the shares.

The Court concluded in favor of the plaintiffs, determining that the contract was limited to the initial offer and acceptance without incorporating subsequent correspondence. Additionally, the expert's conduct did not exhibit apparent bias warranting disqualification.

Analysis

Precedents Cited

The judgment extensively references several key legal precedents that informed the Court’s reasoning:

O'Neill v Phillips [1999] 1 WLR 1092: Established principles for fair valuation in shareholder disputes, emphasizing equality of arms and access to relevant information.
Wood v Capita Insurance Services Ltd [2017] AC 1173: Highlighted the importance of clear contractual terms and the interpretation based on objective intentions.
Hoffman principles as articulated in O'Neill v Phillips: Served as a benchmark for "Hoffmann compliant" valuation procedures.
Macro & Ors v Thompson & Ors (No 3) [1997] 2 BCLC 36 and Bernhard Schulte & Ors v Nile Holdings Ltd [2004] 2 Lloyd's Rep 352: Discussed the standards for apparent vs. actual bias in adjudicators and experts.
Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38: Provided guidance on contract interpretation focusing on objective meanings within the contractual and factual context.
Arnold v Britton [2015] AC 1619: Reinforced the approach to contract construction by prioritizing the natural and ordinary meaning of the words used.

Legal Reasoning

The Court's legal reasoning revolved around two main issues: contract construction and the standard for assessing apparent bias.

Contract Construction:
The Court examined whether the correspondence between parties post-offer and pre-acceptance was part of the contractual terms. Citing Wood v Capita and Arnold v Britton, the Court emphasized that only the offer and acceptance constituted the contract unless clear indications exist to incorporate additional terms. The Court found that the defender's attempts to include subsequent correspondence as part of the contract were unsubstantiated and contrary to established precedents.

Furthermore, the interpretation of "Hoffmann compliance" was scrutinized. The Court interpreted "equality of arms" not as unlimited access to all company information but as access to information relevant to the valuation process, aligning with Lord Hoffmann's original intent for economy and expedition in the valuation.
Apparent Bias:
Addressing the defender's claims of apparent bias against Mr. MacDonald, the Court differentiated between actual bias and apparent bias. Drawing on Macro & Ors v Thompson & Ors (No 3) and Hopkinson and others v Maximus Securities Limited, the Court applied an objective test: whether a fair-minded and informed observer would perceive a real possibility of bias. The Court concluded that discrepancies in recollections did not amount to a real possibility of bias, given the corroborated evidence supporting Mr. MacDonald's impartiality.

Impact

This judgment reinforces the stringent boundaries in contract construction, particularly in shareholder agreements involving valuations. It underscores that post-offer correspondence does not automatically become part of the contract unless explicitly integrated, thereby encouraging clarity and precision in contractual communications.

Additionally, the Court's stance on apparent bias sets a clear precedent for evaluating expert impartiality. By adopting an objective standard, the judgment ensures that experts retain the autonomy to conduct valuations without undue influence, provided there is no tangible evidence of partiality.

Future cases involving shareholder disputes and contractual interpretations will likely reference this judgment to determine the extent of contractual obligations and the standards for expert neutrality.

Complex Concepts Simplified

Contract Construction

Contract construction refers to the process by which courts interpret the terms and intentions of the parties involved in a contract. The primary goal is to ascertain the objective intention based on the language used and the surrounding circumstances at the time of the agreement.

Hoffmann Compliance

Derived from the principles set forth by Lord Hoffmann in O'Neill v Phillips, "Hoffmann compliance" pertains to ensuring that the valuation process in a shareholder buyout is fair and equitable. This involves both parties having equal access to information relevant to the valuation, facilitating an unbiased and reasonable assessment of share value.

Apparent Bias

Apparent bias occurs when a fair-minded observer might reasonably suspect that an adjudicator or expert has a conflict of interest or prejudice affecting their decision-making. It does not require proof of actual bias, only that the circumstances give rise to a legitimate perception of partiality.

Equality of Arms

A principle ensuring that all parties in a dispute have the same opportunity to present their case and access relevant information. In the context of share valuation, it means both parties can access information that influences the fair value of shares.

Conclusion

The Court of Session's decision in Somerville, Shaw & Felisianik v McGuire serves as a pivotal reference in the realms of contract interpretation and the impartiality of expert valuations within corporate disputes. By delineating the boundaries of contract construction and reinforcing the standards for assessing apparent bias, the judgment promotes fairness, clarity, and objectivity in shareholder agreements.

Key takeaways include the affirmation that only expressly agreed terms constitute the contract, with post-offer negotiations not inherently binding unless incorporated explicitly. Furthermore, the objective test for apparent bias ensures that experts can operate without unwarranted skepticism, provided their conduct remains beyond reproach.

This judgment not only resolves the immediate dispute but also contributes to the broader legal framework governing shareholder relations and corporate valuations, offering guidance for future cases and fostering robust contractual practices.