Private shareholders win share buyout contract dispute case

The majority shareholders of a private limited company have succeeded in an action to establish the terms of a contract between themselves and another shareholder with whom they were in dispute.

Ronald Somerville, Charles Shaw, and Nick Felisiak brought the claim against David McGuire after a dispute between them resulted in a contract to have the defender’s shares in the company bought out.

The case was heard in the Outer House of the Court of Session by Lord Clark.

Hoffmann compliance

The pursuers and the defender were shareholders in 5 PM Ltd, incorporated in 1999, with the defender owning a 35.4% share. Together, the pursuers and the defender owned 98% of the shares. The defender had been a non-executive director of the company, with the first and second pursuers being the executive directors.

Following a dispute that resulted in the defender raising proceedings in the sheriff court against the company and the pursuers, the parties determined that the dispute could be resolved by the defender relinquishing his shares in the company at a fair price.

The first and second pursuers and the defender jointly instructed a chartered accountant to provide a valuation of the defender’s shares. A valuation was issued but subsequently withdrawn. By letter in November 2016, it was proposed that an independent expert value the defender’s shares for purchase in accordance with a methodology contained in the company’s articles of association.

In November 2017, following other correspondence, that offer was accepted, with a Mr MacDonald appointed to value the shares. A key feature of the defender’s correspondence was a request for the valuation to be “Hoffmann compliant”, i.e. consistent with the principles set out by Lord Hoffmann in O’Neill v Phillips (1999).

The defender refused to sign a letter of engagement, following meetings with Mr MacDonald in which they discussed the defender’s request for Hoffmann compliance. The defender maintained that Mr MacDonald denied being familiar with the O’Neill case at a meeting in April 2018.

The pursuers sought declarator that the terms of the contract between themselves and the defender were contained in the offer issued in November 2016 and accepted in the following November. They averred that the methodology proposed by the accountant was consistent with the parties’ rights and obligations under the company’s articles of association.

The defender averred that there was apparent bias that disqualified Mr MacDonald from acting for the parties, as he wrongly continued to deny that he had confirmed his lack of familiarity with O’Neill at the April 2018 meeting, had ignored most of the reasonable proposed revisions to the letter of engagement suggested by the defender, and not made revisions to the letter of engagement that he agreed to include at a meeting with the defender in May 2018.

Acceptance not qualified

In his opinion, Lord Clark first considered the constitution of the contract, saying of the defender’s November 2017 letter of acceptance: “The acceptance was not in any way qualified and it referred only to the offer dated 8 November 2016, making no reference at all to any of the other correspondence or documents which are now argued to form part of the contract. These other documents comprise many pages and deal with a number of matters. On behalf of the defender, there was no identification of the relevant passages in these numerous documents which were to be taken to constitute part of the contract. This raises considerable difficulties for the suggestion that they do form part of it.”

He continued: “It is inappropriate to conclude that an offer which is met by an acceptance is supposed to have added to it words from numerous other documents which also form part of the contract when those words are not identified.”

On whether there was an aim that the agreement was Hoffmann compliant, he said: “I conclude that there was no aim that the agreement would be ‘Hoffmann compliant’ whatever that concept meant. A reasonable person in the situation of each of the parties was not aiming for or committing to the application of a meaning of that concept which ran starkly against his understanding. There is nothing in the factual background to support the view that the pursuers were proceeding on the basis that the concept applied whatever it meant and even it if did include full and unfettered access, and that the defender was also proceeding on the basis that the concept applied, again whatever it meant, and even if it did not include full and unfettered access.”

On the issue of bias, he said: “In relation to the meeting on 16 April 2018, Mr MacDonald accepted that the defender may simply have a different recollection of what was said, rather than have stated any untruth. As I understood the defender’s evidence, he was not suggesting that Mr MacDonald was telling a lie about what happened. I see no basis for concluding that because they differed in their recollections of what was said at the meeting that could give rise to a conclusion of a real possibility of bias.”

Regarding Mr MacDonald’s failure to amend the letter of engagement as the defender requested, he said: “Accepting, as I do, the evidence of Mr MacDonald that it was simply an oversight, there is no support for the suggestion of a real possibility of bias. In relation to the rejection of the other revisions proposed by the defender, Mr MacDonald’s evidence was that while the majority of the proposed revisions were unobjectionable and reasonable the letter of engagement would normally be two to three pages long, the matters had already been adequately covered and it was not necessary to make them explicit. Once again, this discloses no basis for finding a real possibility of bias.”

For those reasons, Lord Clark found in favour of the pursuers regarding the construction of the contract and repelled the defender’s pleas-in-law in the counterclaim.