19th June 2017
The key events in this case are as follows:
The High Court made the following findings:
Lessons to be learned
These types of leaver provisions are very common in shareholders’ agreements and small changes to these clauses can have a significant impact on the outcome of a valuation particularly in relation to minority discounts. In this case, when a substantial part of the business was hived off into CRL (this part being the restaurant business that was valued at £50m at the time), from what we can see from the outside, Mr Gunewardena should have revised the metric on which his shares were valued on his departure. This was because, although the residual CHL business was profitable, its profits were much diminished after the disposal of the restaurant business and so the continued use of a profit metric provided him with significantly less certainty of a return on his Shares than before.
Parties should be very cautious about relying on such a specific valuation metric as the level of profits is only one of the ways to value a business, and can be both radically out of kilter with the true value, and open to manipulation. For instance, in times of expansion or where owner managers extract value through operating costs, profits could be low but the underlying business could be healthy and valuable.
It is more common for auditors to be given a freer reign to determine value – and whether that be according to balance sheet valuation, discounted cash flow forecasts on the basis of profit multiple of comparative businesses, or a combination of these metrics. This approach means that changes in a business over time are less likely to produce anomalous results.
The golden rule therefore is that it is important that you consult your solicitor whenever presented with a shareholders' agreement or an amendment is proposed to the articles of the company in which you are a shareholder.
For further information on this matter or advice on Shareholders’ Agreements please contact Jonathan Morris, a partner in our Corporate and Commercial team.