Gunewardena v Conran Holdings Ltd

Factual and Procedural Background

On 1st December 2014, the Plaintiff's shareholding in the Defendant company ("Company A") was compulsorily transferred to the company under what the Defendant claimed were its rights under its Articles of Association, due to the Plaintiff ceasing to be employed within the Company A group. The Defendant applied a valuation mechanism that resulted in a nil valuation, but nonetheless paid the Plaintiff the par value of his shares (£1,254). The Plaintiff challenged the entitlement to this valuation, contending that the event triggering the compulsory transfer had not arisen under the true construction of the Articles, and alternatively that if it had, the valuation method applied was incorrect. The Plaintiff argued the valuation should have been a "fair selling value" determined by auditors, which would have yielded over £3 million. Additionally, the Plaintiff challenged the validity of the notice invoking the compulsory transfer, contending that if the valuation was nil, the notice was invalid for proposing payment exceeding that amount. The Defendant disputed all claims and maintained the validity of its actions.

The case involved detailed examination of the Articles of Association of Company A, particularly amendments made in 1993, 1995, and 1998, and their effect on share transfer and valuation mechanisms. The 1995 amendments introduced a valuation method based on five times the average annual profits of the last two accounting periods ("Five Times Profits" valuation), which was proposed by the Plaintiff himself. A further amendment in 1998 created a new class of shares and introduced an error in the filed Articles of Association, which omitted the 1995 amendments and reverted to earlier provisions.

The Plaintiff ceased to be employed by the group in 2013 following a transaction whereby Company A sold its interest in a subsidiary company ("Company B"). The Defendant contended that Company B had been a subsidiary until that sale, triggering a deemed transfer notice under the Articles. The Plaintiff disputed that Company B was a subsidiary at that time, arguing that it was treated as a joint venture and thus the compulsory transfer provisions could not be invoked.

The procedural history includes a trial where multiple witnesses testified, including the Plaintiff, company officers, minority shareholders, and the majority shareholder. The trial focused on the proper construction of the Articles, the status of Company B as a subsidiary, the effect of filing the erroneous 1998 Articles, and the validity of the valuation and transfer process.

Legal Issues Presented

1. Was Company B a subsidiary of Company A immediately prior to the 2013 sale, thereby triggering a deemed transfer notice under the Articles?
2. Are the true Articles of Association those filed in March 1998, by virtue of their filing and/or what occurred at the March 1998 Extraordinary General Meeting (EGM), affecting the valuation method?
3. If not, did the March 1998 filed Articles become the true Articles by agreement, acquiescence, or informal adoption?
4. Did the company follow the correct procedural requirements specified by the Articles in effecting the compulsory transfer?

Arguments of the Parties

Appellant's Arguments

• Company B was not a subsidiary of Company A at the relevant time, as it was treated as a joint venture, so the compulsory transfer provisions could not be invoked.
• The March 1998 filed Articles, which omitted the 1995 amendments, are the true Articles by virtue of their filing and/or adoption, and thus the valuation method should be the fair selling value without the Five Times Profits calculation.
• Alternatively, the March 1998 filed Articles were adopted by acquiescence or estoppel by convention, binding the parties to the valuation method therein.
• The notice invoking the transfer was invalid because it proposed payment exceeding the valuation certified by auditors (which was nil), thus the exercise failed.

Appellee's Arguments

• Company B was a subsidiary of Company A until the 2013 sale, triggering the deemed transfer notice under the Articles.
• The true Articles are those amended in 1995 and further amended in 1998, not the March 1998 filed Articles, which were mistakenly filed and do not reflect the correct amendments.
• The filing of erroneous Articles does not alter the true Articles, which require amendment only by special resolution.
• The March 1998 filed Articles were not adopted by acquiescence or estoppel; most shareholders explicitly rejected them by signing a corrective special resolution in late 1998.
• The notice of transfer was valid as it effectively offered to purchase at the auditors' certified valuation (nil) and more, which cannot invalidate the notice.

Table of Precedents Cited

Court's Reasoning and Analysis

The court first addressed whether Company B was a subsidiary of Company A immediately prior to the 2013 sale. Applying the Articles' definition of "Group" and "subsidiary," which incorporated the Companies Act definition, the court found that Company B was a subsidiary because Company A held a majority of voting rights. The court rejected the Plaintiff's argument that accounting treatment or subjective views of shareholders could alter the legal meaning of "subsidiary" under the Articles.

Next, the court examined the effect of the March 1998 filed Articles. It found that the filing of erroneous Articles at Companies House does not alter the true Articles of Association, which can only be amended by special resolution. The Articles filed in 1998 mistakenly reverted to the 1993 provisions, omitting the 1995 amendments including the Five Times Profits valuation. The court held that the Articles as resolved upon by shareholders remain binding regardless of erroneous filing, rejecting the Plaintiff's argument that the filed Articles had "sanctity" or conclusive effect.

The court then considered whether the March 1998 filed Articles were adopted by acquiescence or estoppel. It applied the Duomatic principle and the authority in Ho Tung, which require unanimous shareholder assent or conduct equivalent to such assent. The court found that most shareholders explicitly rejected the March 1998 filed Articles by signing a corrective special resolution later in 1998. Some shareholders, including minority family members, were aware of the mistake and did not acquiesce. The Plaintiff himself acted inconsistently, proceeding on the basis of the 1995 Articles and the Five Times Profits valuation in prior transactions. Therefore, there was no unanimous assent or acquiescence to the March 1998 filed Articles.

Finally, the court addressed the technical argument that the transfer notice was invalid because it proposed payment of more than the auditors' certified valuation (which was nil). The court found that since no transfer notice specifying a price had been served by the Plaintiff, the company's notice effectively offered to purchase at the auditors' valuation (nil) and in fact offered more (the par value). A sensible recipient would construe this as an offer to pay at least the certified valuation. Therefore, the notice was valid and the exercise could stand.

Holding and Implications

The claim is dismissed.

The court held that Company B was a subsidiary of Company A until the 2013 sale, triggering the deemed transfer notice under the Articles. The true Articles of Association were those incorporating the 1995 amendments and subsequent corrections, not the erroneous March 1998 filed Articles. There was no unanimous shareholder assent or acquiescence to the erroneous Articles. The valuation mechanism applied by the Defendant, based on the Five Times Profits method, was valid. The transfer notice was valid despite offering more than the nil valuation certified by auditors. As a result, the Plaintiff's claims failed.

The decision directly affects the parties by affirming the Defendant's right to compulsorily purchase the Plaintiff's shares at the valuation method stipulated in the true Articles. The court did not establish a new precedent but reaffirmed established principles regarding the construction of Articles of Association, the effect of filing errors, and the application of the Duomatic principle.