Appointing An Independent Valuer: How A Dissentient Party Could Frustrate Expert Determination Provisions

Author:Mr James Goold
Profession:Jones Day

The Court of Appeal has recently held that the process ofappointing an independent accountant to value shares under themandatory transfer provisions of a company's articles ofassociation required the express agreement between the relevantshareholder, the company and the accountant regarding the terms ofthe accountant's appointment. In the absence of terms agreed byall those parties, the accountant was not validlyappointed for the purpose of resolving the disputed value of theshares in question, effectively allowing the dissentient party tofrustrate the resolution process.Whilst this case is of particular importance to private equityinvestors (as mandatory transfer provisions are most commonly usedin their investment documentation), it has far-reachingconsequences for all commercial agreements where parties agree to athird party being appointed to resolve an issue in dispute.In light of this decision, standard documents containing suchprovisions should be reviewed and amended accordingly and legaladvice should be taken before expert determination processes arebegun pursuant to existing arrangements.Facts of CaseIn Cream Holdings & Ors v Stuart Davenport [2008] EWCACiv 1363, the respondent, Mr Davenport, was removed as thedirector of a company, thereby triggering the mandatory sharetransfer and valuation provisions in the company's articles.The articles contained typical provisions for the sale price of thedirector's shares to be the fair value agreed between him andthe company or, failing agreement, the fair value determined by anindependent accountant. The independent accountant was to be chosenby the director and the board or, failing their agreement on suchappointment, by the President of the Institute of CharteredAccountants.The parties failed to agree on the sale price, but did agree onthe identity of a firm of accountants to act as the independentaccountant and determine the fair value of the shares under thearticles. Although the director agreed to the identity of the firm,the company alone signed an engagement letter with the firm ofaccountants; the director never signed the engagement letter andreserved his position concerning the firm's appointment.The accountants determined the fair value of the shares and thedirector sought a declaration that the valuation was not binding onhim, as there had been no agreement on the terms of the firm'sappointment.Court's DecisionThe Court held that the accountant's role was to produce anexpert valuation of the...

To continue reading