England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BRISTOL DISTRICT REGISTRY

		Royal Courts of Justice Strand, London, WC2A 2LL
		18 March 2008

Mr. Justice Lewison:

	Paragraph
Introduction	1
History	3
Article 14	8
Further interest	9
Avingtrans	13
Mr Peet's death	23
The issue	41
What, if anything, was agreed at the end of March 2004?	43
Construction of article 14	50
Equitable overlays	59
Unfair prejudice	61
What price?	69
Result	85

Introduction

1. Mr John Peet died suddenly and unexpectedly on 21 April 2004. At the date of his death he was the owner of 52 per cent of the issued share capital in a company called Crown UK Ltd. The company was in the process of being sold. Acting under article 14 of the company's articles of association, on 28 April 2004 Mrs Brenda Dashfield, as secretary of the company, gave notice to Mr Peet's personal representatives requiring them to transfer Mr Peet's shares to the company, at a price fixed by the company's auditors in accordance with the articles. The auditors subsequently fixed the price at £243,648.
2. The question before the court is: were Mr Peet's personal representatives legally obliged to transfer the shares to the company at that price?

History

3. Mr Peet was a businessman and inventor. During the 1960s he ran a business called Bristol Metal Products Ltd. It was an engineering company. In 1968 he took on a business partner, called Daniel McDonough and he and Mr McDonough owned the share capital of the company between them: 51 per cent to Mr Peet and the remaining 49 per cent to Mr McDonough. After various changes of name, in the early 1970s the company became Canons Metal Products Ltd. Canons Metal Products Ltd employed both Mrs Dashfield, who worked in the office, and Mr John Shepherd who worked on the factory floor. Mr McDonough died in about 1987 and his shareholding passed to his widow. The years following Mr McDonough's death were difficult ones for Mr Peet. The company was under financial pressure and was compelled to raise money on the security of a flat in Bournemouth that he owned, in order to keep the company afloat. Mrs McDonough continued to take an income by way of dividends from the company, and made demands for money, such as payment of her petrol and car repair bills, which Mr Peet found irksome, to say the least, given his view that he was taking all the financial risk in running the company, for only 51 per cent of the reward. He tried to persuade Mrs McDonough either to sell him her 49 per cent share, or to buy his 51 per cent share, but to no avail. To make matters worse, Mr Peet's wife died of cancer in October 1990. It all became too much for Mr Peet and he decided to put the company into liquidation in November 1990.
4. In January 1991 Mr Peet decided to back another company with Mr Shepherd and Mrs Dashfield. It was also to be an engineering company. They took advice from Mr Ian Woodbury, an accountant who was a friend of Mr Peet's brother. They bought a company off the shelf. It was called Checkproof Ltd; but later it changed its name to Crown UK Ltd. Although Mr Peet put up the cash to start the business, he did not become a director of the company at the beginning, because it was mistakenly thought that he could not be a director, having been a director of a company that had gone into voluntary liquidation. The original directors were Mrs Dashfield and Mr Shepherd. At the outset Mr Peet was not a shareholder either. The new company's business involved the design and manufacture of poles and housings for speed cameras. It subsequently expanded its product range.
5. By 1993 Mrs Dashfield and Mr Shepherd had transferred shares to Mr Peet, who also became a director of the company. The share capital of the company was thenceforth owned as to 52 per cent by Mr Peet, 24 per cent by Mrs Dashfield and 24 per cent by Mr Shepherd. Mrs Dashfield ran the office and was in charge of the paperwork. Mr Shepherd ran the manufacturing side. They were both engaged full time on the company's business. Mr Peet came in when he wanted to, but he was nevertheless regarded as the boss. He looked after the company's property interests and, as I find, he was decisive in strategic matters. Mr Peet, Mrs Dashfield and Mr Shepherd all got on extremely well together. Mr Shepherd and Mr Peet, in particular, had a close relationship. They often confided in each other, and Mr Shepherd trusted and relied on Mr Peet in business matters. The company was run very informally. There were few, if any, formal meetings. Things would be dealt with by an informal chat on the stairs or in someone's office.
6. By 1995 Mr Peet was in his late sixties and Mr Shepherd and Mrs Dashfield were in their late fifties. They began to think about selling the company and retiring. Mr Peet asked Mr Woodbury to advertise the company for sale. This provoked some interest, including a tentative offer from a company called Neepsend Ltd to buy the company for £900,000 plus a two year "earn out"; but then the company became embroiled in a copyright dispute which led to litigation. Not surprisingly, buyers were put off, although the company eventually won the claim.
7. During the late 1990s Mr Shepherd became ill. It was thought that he had cancer, but fortunately that turned out not to be the case. However, in the course of investigation it was discovered that he had a serious heart problem. This alarmed Mr Peet, who did not want a repeat of the situation that had arisen on Mr McDonough's death. Mr Peet consulted Mr Woodbury and the latter produced a draft of a new article of association for the company, which became article 14. Mr Peet, Mrs Dashwood and Mr Shepherd held a meeting in February 1999 at which they approved the new article. It is the operation of article 14 (b) that is at the heart of the dispute.

Article 14

8. Article 14 (b) reads as follows;

"On the death of any Shareholder the personal Representatives of such a deceased shareholder shall be required to transfer the deceased shareholders shares in the company as follows:

(i) Within three months of the shareholders death the company secretary will issue a transfer notice to the personal representative of the deceased shareholder

(ii) The auditors will value the deceased shareholders shares in accordance with the following formula. The value of the company will be the net asset value of the company per the last set of audited accounts.

The value of the deceased shareholding will be the proportion of this value of shares held divided by the total issued share capital multiplied by the net asset per the latest audited accounts.

(iii) If the company has sufficient distributable reserves, the company will purchase the shares from the personal representative of the deceased. On production of a Banker's Draft at the value ascertained in (ii) above the personal representative will transfer the shares to the company and the company will cancel the shares.

(iv) If the company has insufficient distributable reserves to purchase the shares, the shares of the deceased will be offered at the value noted in (ii) above to the other shareholders in the proportion of their existing shareholding. On acceptance of the offer the existing shareholder will pay the appropriate proportion of the valuation to the deceased personal representative by bankers draft.

(v) If the arrangements in section 14 (iii) or (iv) have not been completed within three months of the date of the Transfer Notice referred to in section 14 (i) then the personal representative of the deceased shareholder shall be free to offer the said shares to a third party. Before completing the sale to a third party, however the shares must be offered to the existing shareholders at the same price as agreed with the third party. If existing shareholders do not accept at this price within 21 days the shares are offered at this price per share to other shareholders. If this has not resulted in acceptance and payment within a further 21 days then the personal representative of the deceased will be free to sell the shares to the third party at the agreed price and the company will be obliged to register such transfer."

Further interest

9. Once the copyright dispute was over Mr Woodbury continued to make efforts to sell the company. In 2000 there were talks with Gatso, who made speed cameras which used the company's housings. The talks lasted for nearly six months, but they came to nothing. In 2003 another company called Harris Watson holdings began talks, but they also came to nothing. There were other interested parties too. One proposed purchase at £1.6 million (which may have been the Harris Watson proposal) fell through towards the end of the due diligence process. The terms upon which Mr Woodbury was retained by the company were contained in a letter of 1 October 2002. He was to be remunerated at the rate of £60 per hour (plus reasonable expenses) and would receive a commission of 5 per cent if the company were to be sold. These terms superseded terms that had been contained in previous letters. Mr Woodbury plainly had a keen personal interest in seeing a sale of the company go ahead.
10. Time was moving on, and Mr Peet, Mrs Dashfield and Mr Shepherd discussed how the management succession might work at the company. They talked about appointing an outside managing director, but that too did not materialise.
11. In the spring of 2003 Mr Peet's health began to deteriorate. He had been coming into the office about once a week; but from about January 2004 he began to have difficulty climbing stairs. He also began to have difficulty driving, and his partner Mary Eddie, with whom he had been living in Torquay, drove him to the office on his visits. He remained on close terms with Mr Shepherd, who spoke to him on the telephone every day, except on those days when Mr Peet came into the office. On one of Mr Peet's visits to the office, he and Mr Shepherd talked about Mr Shepherd's health. Mr Shepherd asked him "What if the boot was on the other foot and you died". Mr Peet replied "You've got no worries. The business is yours and Brenda's; you'll have no interference from anyone else". Although at the time of this conversation nothing was said about article 14, Mr Shepherd says that, with hindsight, this is what Mr Peet must have been referring to. I think he was right. Mr Shepherd also said (and I accept) that he is not a documents man. Mr Peet would keep him informed verbally about what was going on. Mr Shepherd had the highest regard for Mr Peet; and trusted him to make the decisions. As he put it: "What was good enough for John Peet was good enough for me".
12. However, despite Mr Peet's partial withdrawal, the company continued to prosper. For the year ending 31 December 2001 its net assets were £358,000 and for the year ending 31 December 2002 they had risen to £470,000. At some time in early 2004 (before 16 March) Mr Woodbury sent Mr Peet draft accounts for the year ending 31 December 2003. These draft accounts had been prepared by the company's auditors and consisted of a profit and loss account and a balance sheet. Mr Woodbury had not shown them to either Mrs Dashfield or Mr Shepherd. These accounts showed an operating profit of £600,000 (compared with operating profits of £265,000 in the previous year) and net assets of £852,000. 2003 had been a record year for the company. However, in his covering note Mr Woodbury pointed out that stock and profit had been understated by some £6,000 and the tax charge was also understated. There were two matters that he also raised. The first was that because the level of profits had put the company into a higher tax bracket, it was worth investigating whether directors should be given bonus payments rather than dividends. The second was that there was a rumour that the forthcoming budget might remove the favourable tax treatment of dividends. These accounts did not become available to Mrs Dashfield or Mr Shepherd until after Mr Peet's death, when they were found in his briefcase at his home in Torquay. However, Mrs Dashfield was conversant with the company's cash flow position, and used to run off monthly management accounts. She also kept an eye on the company's bank balance. It was consistently in substantial credit.

Avingtrans

13. In late January 2004 Mr Woodbury had introduced a company called Avingtrans plc which was an AIM listed company. Representatives from Avingtrans came to visit the company three or four times during February and March. Mr Peet and Mr Woodbury took the lead in negotiations; but Mr Shepherd showed the Avingtrans representatives round the factory and Mrs Dashfield showed them the office and answered questions. Both Mrs Dashfield and Mr Shepherd "had been there before" in showing potential purchasers round only to see that nothing materialised; and at that stage neither of them thought that this potential purchase was any different. Indeed Mr Shepherd thought that Avingtrans were less interested in the company than previous interested parties had been. Mr Peet's health continued to deteriorate and by the third week in March he was too ill to travel to the office; so Mr Woodbury went to Torquay to see him.
14. On 29 March 2004 Avingtrans sent Mr Woodbury a "subject to contract" letter expressing interest in continuing with the proposal to buy the company for £1.8 million. Among the terms of the proposal were:

i) A period of eight weeks exclusivity was to be given to Avingtrans for the completion of legal, financial and due diligence;

ii) The due diligence was to cover the completion of definitive documentation which was to include representations and warranties;

iii) Directors were to be retained on a part time consultancy for a minimum period of six months;

iv) The company and Avingtrans were each to pay their own costs

v) The consultancy agreement with Mr Woodbury was to be extended for a period to 31 May 2005, and thereafter on six months notice.

15. The letter envisaged that the deal would be completed by 31 May. Although the reason for this date was not explained in the letter itself Mr Woodbury knew either at the time or very shortly afterwards that this was Avingtrans' financial year end; and that if a deal was to be done, it would have to be done before then. On the following day, 30 March 2004, Mr Woodbury passed the offer on to Mr Price, the solicitor acting for the company. Mrs Dashfield thought that a copy of the offer would have been sent to Mr Peet in Torquay and accepted in evidence that she must also have seen the offer either on that day or the next one, either because Mr Peet had faxed a copy of it, or because he had brought a copy with him when he came into the office on 31 March. She regarded the making of the offer with cautious excitement, but thought that it was very promising. However, there was still a long way to go, and no certainty that this offer would not meet the fate of previous ones. On 31 March 2004 Mr Peet came in to the company's premises. He sat in Mr Shepherd's office on the ground floor because he could not get up the stairs. He asked Mrs Dashfield to get him some cash from the bank which she did. Mrs Dashfield was adamant that she and Mr Peet did not discuss the offer from Avingtrans, although she did eventually concede that it must have been mentioned, if only to say that "maybe it will happen this time". Mr Shepherd was also adamant that they did not discuss the Avingtrans offer. However, he accepted that he knew about the Avingtrans offer, having been told about it either by Mr Peet during one of their daily conversations or by Mr Woodbury. He did not see the offer letter itself. Although he said at first that he did not know the price he later accepted that it was "bandied about at £1.8 million" and that he must therefore have known the price. I did not find it credible that the offer was not mentioned at all when Mr Peet came into the office on 31 March, and I think that in the end both Mrs Dashfield and Mr Shepherd did accept that it was. Mrs Dashfield also accepted that she had discussed the offer letter with Mr Woodbury, and Mr Shepherd accepted that he had been told about it by Mr Peet.
16. Also on 31 March 2004 Mr Woodbury had a telephone discussion with Mr Price, the solicitor acting for the company. Mr Price made a note of the discussion, part of which reads as follows:

"All x 3 agreed

John Peet – ill

making will with Mead-King

IW is executor

P of A - to negotiate transaction on his behalf (letter of authority info needed

to sign dox – SPA, STF, Con Agmt etc

but will not assist if he dies"

17. It seems, therefore, that the possibility of Mr Peet's death was raised, but apart from the reference to his making a will, no action was proposed to deal with this possibility. I did not hear evidence either from Mr Woodbury or from Mr Price, so the context of the note remains obscure. In the course of the conversation it was pointed out that the subject to contract letter had not been sent with the approval of Avingtrans' board; and that in these circumstances perhaps Avingtrans should cover the company's costs up to an agreed figure. On the same day Mr Woodbury sent an e-mail to Mr King at Avingtrans. He said that he had discussed the offer with the shareholders who wanted to proceed along the lines of the offer. He said that the company was "currently talking to one other party" but understood the need for exclusivity. He also said that the company would be happy to delay finalisation of audited accounts to 31 December 2003. This proposal came from Avingtrans who, for reasons that are obscure, feared that signing off the 2003 accounts might give rise to the more stringent requirements of the Stock Exchange about reverse takeovers. The "other party" with whom the company was talking was in fact Mrs Dashfield's son Neil Dashfield and a business partner of his.
18. In the light of this evidence and in particular the contemporaneous documents I find that Mr Peet, Mrs Dashfield and Mr Shepherd all knew and approved of an offer of exclusivity to Avingtrans. Mrs Dashfield said that Mr Peet and Mr Woodbury agreed the exclusivity and said that she did not think that she agreed. However, as Mr Freedman QC submitted, it is very unlikely that exclusivity would have been granted to Avingtrans without Mrs Dashfield's approval, since the inevitable consequence of the grant would have been that her son would be relegated to second place. I find that Mrs Dashfield approved the grant in principle of exclusivity to Avingtrans, although the detailed terms were left to Mr Peet and Mr Woodbury. Those detailed terms were not formulated for another few days. So far as Mr Shepherd was concerned, he was simply content to do whatever Mr Peet wanted. I find also that all three shareholders assumed that any expenses that they incurred (for example legal expenses and Mr Woodbury's commission) would be borne by them in proportion to their shareholdings. This was not based on any express discussion or agreement made at the time, but was their common understanding based on previous unsuccessful attempts to sell the company. I find also that all three shareholders knew that if a deal were to be done with Avingtrans it would have to be done by 31 May 2004.
19. Mrs Dashfield left for a family holiday in the USA on 1 April and did not return until 16 April. During the period of her holiday she had no contact with either Mr Peet or Mr Shepherd.
20. On 2 April 2004 Mr Woodbury replied by letter to Avingtrans. He said that the directors of Crown UK had asked him to reply formally to the offer. He said that "we accept the proposed period of exclusivity" but put forward two conditions. The first was that the period would expire on 6 May but would be extended to 30 May if they had received bankers' confirmation that funds were in place for the purchase. The second was that the exclusivity period would be ended if the proposed price fell below £1.8 million. In legal terms this could not have amounted to more than a counter-offer. There is no reply to this letter in the case papers, but Avingtrans proceeded with its due diligence. Nor is there any evidence that Avingtrans provided the banker's confirmation referred to in that letter. I accept that neither Mrs Dashfield nor Mr Shepherd had any input into the terms of this letter. The details were left to Mr Peet and Mr Woodbury. But as I have said, they agreed in principle to the grant of exclusivity to Avingtrans.
21. Mrs Dashfield saw this letter on her return from holiday. She did not object to it; not surprisingly since she knew about the offer to grant exclusivity to Avingtrans and the letter merely set out the detailed terms of the offer.
22. Avingtrans proceeded with its due diligence. Again Mr Peet took the lead in giving instructions to the lawyers. But Mrs Dashfield answered questions when they were asked of her.

Mr Peet's death

23. Mr Peet died suddenly and unexpectedly on 21 April 2004 at his home in Torquay. Everyone was shocked. Although his health had been deteriorating, as his step-daughter Mrs Angela Lewis put it in evidence: "There was no way he thought he would not be around to see the sale completed." He had made a will in the previous month. Mr Woodbury was one of his executors. The will contained a pecuniary legacy to Mrs Eddie, and two bequests of properties. Mr Peet's residuary estate was left to Mrs Lewis. The will did not contain any specific gift of Mr Peet's shareholding in the company.
24. Mr Woodbury and Mrs Dashfield went to Mr Peet's house in Bristol on the day of Mr Peet's death to meet Mrs Lewis. Mrs Dashfield recalled that when she heard of Mr Peet's death she thought that the sale would fall through. But Mr Woodbury reminded her of article 14. On the very same day Mr Woodbury sent Mr Price a copy of article 14. Mr Woodbury and his co-executor, Mr Prowting, met as the estate's solicitors, Meade King, on 23 April. Mr Woodbury explained that as the time of Mr Peet's death the company's solicitors were half way through the due diligence process in connection with the sale. He said that the purchasing company needed to complete before 31 May which was their year end. He passed a copy of article 14 to Mr Prowting and their solicitor, Mr Boulding of Meade King. He also said that he had met Mrs Dashfield and Mr Shepherd earlier in the day and that they had both said that they intended to enforce their rights of pre-emption. Mr Woodbury also said that he was very keen to obtain the grant of probate in order to facilitate the sale of the company by the end of May. It was agreed that the validity of the pre-emption rights would be investigated. On 23 April 2004 Mrs Dashfield and Mr Shepherd gave written instructions to Mr Price asking him to put the provisions of article 14 into effect, adding that it was important that the transaction was completed very quickly. Although Mrs Dashfield and Mr Shepherd were the signatories of the letter, Mr Woodbury was the formulator of its words. He was also the draftsman of a written authority that Mrs Dashfield and Mr Shepherd gave Mr Price allowing him to take instructions directly from Mr Woodbury.
25. On the following day Mr Boulding asked one of his colleagues to consider whether the pre-emption rights were valid.
26. On 26 April 2004 a meeting took place at the company's premises, attended by Mr Price, Mr Woodbury, Mrs Dashfield and Mr Shepherd. Mr Price had prepared an agenda which included the steps needed to implement the procedure under article 14. One topic that was raised was the effect that implementation of article 14 would have on the sale price to Avingtrans. But the meeting concluded that it would have no real effect: there would simply be a pound for pound reduction in the price. The meeting also noted that at the request of Avingtrans the audited accounts to December 2003 had not been finalised or signed. However, significantly, it was reported that Avingtrans had received Stock Exchange approval so "we can now sign this". So the reason underlying Avingtrans' request that the finalising of the 2003 accounts be delayed had now disappeared. There was still the possibility of a bonus being paid to the directors, but otherwise I find that on 26 April 2004 the 2003 accounts could have been made ready for signature on short notice. By this time Mrs Dashfield was aware that the year to 31 December 2003 had been a very good year from the company; and that once audited, the 2003 accounts would show a much healthier financial picture than the 2002 accounts. She knew also at this time that Mr Peet's shares would be bought more cheaply if they were valued by reference to the 2002 accounts than to the as yet unaudited 2003 accounts. At the meeting it was agreed that a transfer notice under article 14 would be served on the executors (who of course included Mr Woodbury who was present at the meeting) and also that Mr Woodbury would continue to deal with all negotiations with Avingtrans.
27. On the following day Mr Boulding's colleague reported on his initial thoughts. He said that on the face of it "there is no option as to whether these provisions apply, they automatically apply and the company and the company secretary is under an obligation to serve the transfer notice for the purposes of this regulation." He also advised that the "directors and the company secretary will be in breach of their duties if they do not try to serve a purchase notice".
28. A transfer notice was duly served on 28 April 2004. The letter said that the company would shortly be instructing its auditors to certify the value of Mr Peet's shares in accordance with the formula set out in article 14. It was signed by Mrs Dashfield as company secretary, but drafted by Mr Price. Mrs Dashfield was aware at the time that under the articles the company had three months within which to issue the transfer notice. However, if the sale to Avingtrans were to go through she thought that "we needed to put these things in place". She was under the impression that she and Mr Shepherd had to have 100 per cent of the shares between them in order to sell the company, but no one has suggested that there would have been any practical impediment to the executors selling Mr Peet's shares direct to Avingtrans. Whether there was a legal impediment is something that I consider later. Mr Woodbury as co-executor of Mr Peet's estate was keen for the sale to proceed. As Mr Freedman QC said, Mr Woodbury's entitlement to 5 per cent commission on the sale price gave him 90,000 reasons for wanting the sale to go through. Mrs Dashfield had worked out that the price of the shares would be £243,000-odd based on the 2002 accounts and had satisfied herself that the company's cash resources were sufficient to pay that amount. Mrs Dashfield also said (and I accept) that there would have been enough money to pay the price of the shares even if the valuation had been made on the basis of the 2003 accounts (which would have produced a purchase price of £441,000-odd). Mrs Dashfield also knew and appreciated that if the purchase of Mr Peet's shares at that price were to be completed before completion of the sale to Avingtrans, she and Mr Shepherd would share an extra £630,000 between them. Mr Shepherd portrayed himself as someone who was uninterested in money and who had not appreciated that he stood to gain from the purchase of Mr Peet's shares under the articles. I accept that he was less financially aware than Mrs Dashfield, and he may not have appreciated the extent to which he stood to gain. But I do not accept that he was completely unaware that he would be better off if Mr Peet's shares were acquired under the articles. He accepted that he knew that the company could acquire Mr Peet's shares for about £240,000 and that he would become a fifty per cent shareholder in the company as a result. He may not have worked out the consequences of that in pounds and pence, but he was aware that he would be better off as a result. I also find that although his appreciation of the financial position was limited he was prepared to go along with whatever he was advised to do, and to follow Mrs Dashfield's lead. The need to complete the purchase of Mr Peet's shares before completion of the sale to Avingtrans was the only urgency underlying the implementation of the procedure under article 14. Mrs Dashfield and Mr Shepherd believed themselves entitled to serve the transfer notice; and both thought that if the "boot had been on the other foot" (that is, is one of them rather than Mr Peet had died) then Mr Peet would have done exactly the same thing. They therefore acted in good faith, based on the understanding that they thought they had had with Mr Peet before his death. I do not consider that either of them consciously took the view that they were obliged (as opposed to entitled) to serve a transfer notice (as the estate's solicitors had advised). The question was simply not addressed.
29. On 29 April 2004 Mr Woodbury wrote to Mrs Dashfield. He suggested that since the pre-emption rights were to be exercised, his commission on the sale of the company should be split 50/50 between her and Mr Shepherd. There does not appear to be a reply to this letter.
30. On 11 May 2004 the auditors certified the value of Mr Peet's shares at £243,648. The value was based on the net asset value of the company as shown in the audited accounts for the year ended 31 December 2002. They pointed out, however, that on one interpretation of the article the valuation should have been based on the accounts for the year ended 31 December 2003. They had been given the draft accounts for the year ending 31 December 2003, but did not use them in their valuation. Mrs Dashfield accepted in evidence that she and Mr Shepherd waited for the auditors' valuation before signing off the 2003 accounts. She knew that if they signed off the 2003 accounts then a higher price might have to be paid for Mr Peet's shares. I find that, as a practical matter, the accounts for the year ending 2003 could have been signed off before the auditors' valuation was issued.
31. The proposed sale to Avingtrans was still to go ahead. The parties' solicitors were working on a draft sale and purchase agreement. The earliest draft I have seen is dated 14 May 2004. It contains many definitions, among which is "Accounts Date". This is defined as 31 December 2003. It is plain that the 2003 accounts would have to be signed off before completion of the sale to Avingtrans. A manuscript note on the draft made by Mr Price says that the auditors were "ready to complete the a/cs at short notice". By the middle of May Mr Woodbury proposed that Mrs Dashfield and Mr Shepherd should each receive 24 per cent of the proceeds and that Mr Peet's 52 per cent share should be retained pending agreement on who should have it. This seemed like a good idea to Mr Boulding, and it became the foundation for what became known as the Retention Agreement.
32. On 21 May 2004 a meeting took place between Mrs Lewis, Mr Prowting and Mr Woodbury. Mrs Lewis was accompanied by an accountant friend of hers, Rosie Poule. Mr Woodbury's note of the meeting reads (in part)

"4. The pre-emption rights relating to Crown was reviewed in detail and it was confirmed that the other shareholders of Crown had given notice that they intended to exercise those rights. Angie confirmed that in her view the business had been built up by the three shareholders and that she would not wish to dispute those rights. It was agreed that Ian W would fax a copy of the documents to Rosie.

5. However, in view of the significance to the Estate the Executors confirmed that they had asked the Estates Solicitors to seek Counsel's opinion on the validity of the pre-emption rights and the correct convening of the meeting to introduce those rights…. Counsel's advice had been requested 18 May and an answer requested within 7 days.

6. The offer for the purchase of the share capital of Crown was discussed and the requirement by the Purchasers that the transaction be completed before the end of May which coincided with the Purchasers financial year end. Due diligence was at an advanced stage and Completion was scheduled for 27 May. The surviving shareholders would exercise the pre-emption rights immediately prior to completion but proceeds would remain on Solicitors account pending clarification from Counsel. The shareholders would, pending clarification, only be able to draw from this account as if pre-emption had not been exercised.

7. … When selling a company the purchaser seeks warranties and if these warranties were not given the value of the company is reduced or in extreme cases the purchaser would choose not to proceed. Because the pre-emption rights were being exercised these warranties were falling on the shoulders of the other two shareholders of Crown as were all of the professional costs involved in the sale thus reducing exposure as far as the Estate of John Peet was concerned."

33. Mrs Lewis said in evidence that she did not say what is attributed to her in paragraph 4 of the note. I think that it is unlikely that her memory now about what she said three and a half years ago is more accurate than the contemporaneous note. But whether she did say that or not, she did not at that stage take any independent steps to challenge article 14 or its implementation. On the same day Mr Price sent Mr Woodbury a draft of the Retention Agreement. On 25 May Mr Price sent Mr Woodbury drafts of the various agreements incorporating the amendments required by Avingtrans' solicitors. The amendments included a warranty by the executors that neither the company nor its shareholders or directors were under any obligation or liability to Mr Peet or his estate.
34. On 26 May probate of Mr Peet's will was granted to Mr Woodbury and Mr Prowting. Either on that day (or possibly on 28 May) Mrs Dashfield and Mr Shepherd signed the audited accounts of Crown UK Ltd for the year ended 31 December 2003. With the adjustments to the value of stock and the tax charge, those accounts were almost identical to the draft accounts that Mr Woodbury had sent Mr Peet back in March.
35. Completion took place at the offices of Avingtrans' solicitors in Birmingham on 28 May. The executors sold Mr Peet's shares to the company for £243,647. The purchase price was paid by means of a cheque drawn on the company and signed by Mrs Dashfield rather than by banker's draft as stipulated in the articles. The sale and purchase agreement contained the warranties that Avingtrans had required. Those shares were then cancelled, leaving Mrs Dashfield and Mr Shepherd as the sole shareholders. They sold their shares to Avingtrans at the price of £1,556,353 (i.e. £1.8 million less £243,647). The executors, Mrs Dashfield and Mr Shepherd entered into the Retention Agreement. It is not a well thought out agreement. It was agreed that of the reduced purchase price £432,000 should be paid to each of Mrs Dashfield and Mr Shepherd. That is 24 per cent of the original £1.8 million purchase price. It was also agreed that Mr Woodbury should be paid his commission of £90,000. That left a balance of £692,353. No payment of that balance was to be made without the consent of the parties or "pursuant to an Order of the Court". Clause 6 of the Agreement said:

"The parties agree that it is their respective intentions that the following principles should apply in relation to reaching agreement between them as to the manner in which the Retention should be applied:

a) that if no claim is made by the Executors or the Estate to the Retention (or any part thereof), the whole of the Retention shall be paid to Brenda and John in equal amounts;

b) that the Estate and the Executors will only seek to make a claim to the Retention (or any part thereof) if they have received a written opinion (from a suitably experienced barrister of at least 10 years call) to the effect that the Estate and/or the Executors were (on a balance of probabilities) not legally obliged to offer to sell (or to sell) John Peet's shares in Crown to Crown either at all or not at the price at which such shares were in fact sold to the Company…"

36. It was expressly provided that Mrs Dashfield and Mr Shepherd were not to be bound by counsel's opinion. Miss Mary Stokes of counsel had written an opinion dated 27 May. Although she considered the validity of article 14 (and concluded that it was probably valid) she did not answer the specific question posed by clause 6 b) of the Retention Agreement. That was because it was not one of the questions on which she had been asked to advise. However, in the light of her opinion Mr Woodbury wrote to Mrs Lewis on 8 June saying that he and Mr Prowting thought that they had no further reason to withhold the retention from Mrs Dashfield and Mr Shepherd. Mrs Lewis replied on 9 June asking for copies of relevant documents for the purpose of obtaining her own legal advice.
37. Mr Davidson and Mr Ruddy (both partners in PDT Solicitors) replaced Mr Woodbury and Mr Prowting as executors in February 2005. They obtained an opinion from Mr Michael Green of counsel on 1 June 2005. Mr Green advised:

i) Article 14 was void because it contravened section 165 of the Companies Act 1985, and consequently the executors were not obliged to sell Mr Peet's shares to the company;

ii) It was arguable that there was an implied waiver of the requirements of article 14;

iii) The court would not have ordered the executors to transfer the shares to the company before 28 May 2004 because article 14 did not specify a date for completion of the sale to the company;

iv) Consequently the executors were, on a balance of probabilities, not legally obliged to sell Mr Peet's shares to the company.

38. It is common ground that Mr Green's opinion satisfies the requirements of clause 6 b) of the Retention Agreement.
39. On 23 June 2005 this claim was begun. In June 2007 HH Judge McCahill QC tried a number of preliminary issues relating to the validity of article 14 as a matter of company law. He decided (contrary to Mr Green's advice) that article 14 was valid. However, his decision did not dispose of the remaining issues in the case: namely whether, in the circumstances prevailing at the time, the company was entitled to invoke article 14 at all, and if so at what price the shares were to be sold.
40. It is undoubtedly the case that the preliminary issues were argued before HH Judge McCahill QC on the basis (accepted by all parties) that article 14 contained mutually enforceable rights and obligations, rather than an option exercisable by the company alone.

The issue

41. The issue I am asked to decide is that stated by clause 6 b) of the Retention Agreement namely, whether:

"the Estate and/or the Executors were (on a balance of probabilities) not legally obliged to offer to sell (or to sell) John Peet's shares in Crown to Crown either at all or not at the price at which such shares were in fact sold to the Company."

42. I am bound to say that I have misgivings about whether that is an issue which is properly justiciable at all (cf. Re Hooker's Settlement Trusts [1955] Ch 55). However, since the court had already embarked upon the process by the determination of the preliminary issues, and with the encouragement of the parties, I decided to proceed.

What, if anything, was agreed at the end of March 2004?

43. In my judgment all that was actually agreed by the three shareholders at the end of March 2004 was that a period of exclusivity would be offered to Avingtrans. The details of the offer were to be left to Mr Peet and Mr Woodbury. Mr Freedman understandably stressed that although personal relations between the three shareholders were friendly and informal the relationship between them was commercial rather than familial. However, what needed to be decided was nothing to do with relations between the three of them. What needed to be decided was whether Avingtrans should be granted a period of exclusivity. But although they collectively agreed to grant the period of exclusivity to Avingtrans, I do not consider that they had any intention to enter into contractual relations as between themselves. They did not agree between themselves the details of the terms on which exclusivity was to be offered to Avingtrans, leaving that to Mr Peet and Mr Woodbury to decide. At best, therefore, it seems to me that all that can be said is that Mrs Dashfield and Mr Shepherd authorised Mr Peet and/or Mr Woodbury to offer exclusivity to Avingtrans on such terms as they thought fit. Indeed on the material I have seen it is, in my judgment, very doubtful whether there was any contract to which Avingtrans itself was a party. The correspondence I have seen amounts to no more than a "subject to contract" expression of interest, and a counter-offer relating to exclusivity.
44. Although Mr Freedman based his case on the assertion that an express contract had been made be the three shareholders, and disclaimed reliance on the creation of a contract by implication, it is nevertheless instructive to consider the approach that the court takes towards a finding of a contract by implication. The basic approach is that described by Bingham LJ in The Aramis [1989] 1 Lloyd's Rep 213, 224:

"Most contracts are, of course, made expressly, whether orally or in writing. But here, on the evidence, nothing was said, nothing was written. So regard must be paid to the conduct of the parties alone. The questions to be answered are, I think, twofold: (1) Whether the conduct of the bill of lading holder in presenting the bill of lading to the ship's agent would be reasonably understood by the agents (or the shipowner) as an offer to enter into a contract on the bill of lading terms. (2) Whether the conduct of the ship's agent in accepting the bill or the conduct of the master in agreeing to give delivery or in giving delivery would be reasonably understood by the bill of lading holder as an acceptance of his offer.

I do not think it is enough for the party seeking the implication of a contract to obtain "it might" as an answer to these questions, for it would, in my view, be contrary to principle to countenance the implication of a contract from conduct if the conduct relied upon is no more consistent with an intention to contract than with an intention not to contract. It must, surely, be necessary to identify conduct referable to the contract contended for or, at the very least, conduct inconsistent with there being no contract made between the parties to the effect contended for. Put another way, I think it must be fatal to the implication of a contract if the parties would or might have acted exactly as they did in the absence of a contract."

45. In the present case the three shareholders would have acted exactly as they did in agreeing to offer exclusivity to Avingtrans in the absence of any contract between them. So there can, in my judgment, be no implied contract. While that does not, of course, conclude the question whether they made an express contract, the fact that they would have acted in the way that they did in the absence of any contract makes it factually less likely. So far as Avingtrans were concerned there is no evidence that they provided the banker's confirmation of funds requested by Mr Woodbury's counter-offer. Apart from proceeding with due diligence (which is consistent both with a contract and with the absence of a contract), there is no evidence that they accepted the terms of the counter-offer itself.
46. Even if (contrary to my finding) there had been an intention to contract, I do not consider that the contract would have been as extensive as that for which Mr Freedman contended. All that was actually discussed was the grant of exclusivity to Avingtrans. It was assumed by all three (but not actually discussed) as a result of previous attempts to sell the company that they would share expenses in proportion to their shareholdings. But it does not follow from that that they agreed (either expressly or implicitly) that their shareholdings would remain held in the same proportions. I understood Mr Freedman to accept that there could have been no complaint by anyone if one of the shareholders had transferred his or her shares to another of them. This is the necessary foundation for Mr Freedman's ultimate goal, namely an implied term to the effect that article 14 would be suspended during the period of exclusivity. I do not consider that that foundation exists.
47. Mr Freedman also submitted that a more detailed consideration of the terms of the offer of exclusivity to Avingtrans led to the conclusion that there was an implied term that article 14 would be suspended for the duration of the exclusivity period. The argument ran as follows. Avingtrans' expression of interest in buying the company for £1.8 million included the company's operating cash. The offer of exclusivity contained a term to the effect that the period of exclusivity would end if the offer fell below £1.8 million. If, therefore, the company were committed to buy in the shares of a deceased shareholder under article 14, it would necessarily deplete its cash resources. That of itself would bring the period of exclusivity to an end. Thus the period of exclusivity coupled with the price are inconsistent with the survival of any article 14 rights during the period of exclusivity. The problem with this argument is that if it holds good for a buy in of a deceased shareholder's shares under article 14 it also holds good for any expenditure by the company which would deplete its operating cash. Expenditure on a new piece of machinery, on increased rent or rates, on increased salaries or on professional services might all have the same effect. The alleged implied term would go far beyond the limited objective that Mr Freedman wishes to achieve. Moreover, as I have said, I do not consider that there was any contract between the three shareholders into which such a term could be implied; and no real evidence of a contract with Avingtrans itself. In addition, if and to the extent that there was any contract with Avingtrans, it was a contract of exclusivity for the purpose of investigating whether to buy the shares in the company whose articles already contained article 14. The possibility that article 14 might be operated was inherent in the grant of exclusivity, just as much as the operation of any other of the company's articles.
48. Accordingly I reject the argument that there was a contract made either expressly or by implication which had the effect of suspending the operation of article 14.
49. The second way in which Mr Freedman put his case was that there was a joint venture between the three shareholders which carried with it fiduciary obligations. However, Mr Freedman disavowed any contention that the three shareholders had agreed to accept an offer on acceptable commercial terms, if it were to transpire that Avingtrans made one. What then is the alleged joint venture? In my judgment it can be no more than an agreement to offer to give Avingtrans an exclusivity period on terms to be decided by Mr Peet and Mr Woodbury. That joint venture (if such it was) was carried through, and Avingtrans were offered the exclusivity period. No one reneged on it. In my judgment the argument that part of the joint venture was an inhibition on invoking article 14 constructs a joint venture that never was. It was not the subject of any agreement or discussion between the three shareholders. I reject the argument based on the allegation of joint venture.

Construction of article 14

50. I turn to the construction of article 14. In construing article 14 one must beware of hindsight. It must be interpreted in a businesslike way, and ought to produce a workable result in a variety of possible factual scenarios. It would be wrong to interpret it in a way that was tailor-made for the particular facts of this case.
51. Mr Freedman submitted that article 14 in effect gave the company an option to buy the shares of a deceased shareholder. The purpose of the option was to enable the surviving shareholders to avoid outside interference from those who inherited the shareholding of a deceased shareholder. The decision whether or not to implement article 14 by the service of a transfer notice was a decision to be taken in furtherance of that objective. If, on the facts, there was no risk of outside interference then a decision to implement article 14 could not properly be made. It would be a decision made for an improper or collateral purpose, even if it was a decision made in good faith. As a fall-back position, Mr Freedman submitted that at the very least the company had a discretion when (within the three month window for which the article provided) to issue a transfer notice. In exercising that discretion, the directors of the company could, again, only properly decide to invoke article 14 if there was a risk of outside interference.
52. Mr Arden QC objected that Mr Freedman's primary position (viz. that article 14 gave the company an option) was not an argument that was open to him. Even if HH Judge McCahill QC had not explicitly decided that the article gave rise to mutually enforceable obligations, that assumption underlay the whole of the basis on which the preliminary issues were argued. I do not think that Mr Arden went so far as to say that there was an issue estoppel arising out of the judgment on the preliminary issue. Rather, his argument was more of a Henderson v Henderson type of argument.
53. Whether or not Mr Arden is right on this question, I reject Mr Freedman's primary argument that article 14 gave the company no more than an option. In my judgment it gave rise to mutually enforceable obligations. The whole of the article is couched in mandatory terms. It begins by saying that on the death of a deceased shareholder his personal representative "shall be required to transfer the deceased shareholder's shares". It continues by saying that the company secretary "will" issue a transfer notice. The auditors "will" value the shares in accordance with the formula. If the company has distributable reserves then the company "will" purchase the shares. All this is, in my judgment, the language of obligation rather than the language of option. There is no relevant distinction to be drawn between the uses of "shall" and "will" for this purpose (cf. Rayfield v Hands [1960] Ch 1). In addition the transfer notice is to be served by the company secretary. Although on the facts of this particular case the company secretary at the date of Mr Peet's death was Mrs Dashfield, who was both a director and shareholder as well, that would not necessarily be the case. The company secretary might as easily have been Mr Woodbury. Thus the decision to issue a transfer notice is not one to be taken by the board.
54. Moreover there are, in my judgment, good reasons for the article to be mandatory. The article is not a one-sided benefit for the company or the surviving shareholders. It is true that one of its effects is that the surviving shareholders are protected from outside interference. But on the other hand the estate of a deceased shareholder (who might have been a minority shareholder only) is given a guaranteed exit from a private company quickly and cheaply. In addition, as Mr Arden submitted, if the surviving shareholders (or directors) are given a discretion whether or not to implement article 14, they may be placed in a position where there is an irreconcilable conflict between their interests and those of the estate of the deceased shareholder. By eliminating that discretion the potential conflict is removed. There is also another point. The issue of a transfer notice not only starts the timetable running for the acquisition of the shares by the company; it also starts the timetable running for the acquisition of the shares by the surviving shareholders at the certified price pursuant to their rights of pre-emption under article 14 b) (iii), in the event that the company does not purchase the shares. If therefore the company's directors or secretary owed a fiduciary duty to the putative seller in deciding whether or not to implement article 14 they would owe an equal duty to the surviving shareholders. In circumstances where it was in the interests of the putative seller not to sell (because of a disadvantageous price) it would equally be in the interests of the surviving shareholders to buy (because from their perspective the price would be advantageous). How that conflict could be resolved by the exercise of a discretion is difficult to see, bearing in mind the directors' duty to act fairly between shareholders. So the solution provided by the articles, namely that there is no discretion, is a sensible one.
55. In response to Mr Freedman's fall-back position (namely that the choice of the date on which to issue the transfer notice was a discretionary decision) Mr Arden said that once one had reached the conclusion that article 14 gave rise to mutually enforceable rights and obligations, the issue of the transfer notice was mere mechanics of implementing the agreed procedure. Both counsel suggested a number of reasons why a three month window existed. Before a transfer notice could be served a number of things might have to come to the notice of the company or be investigated by it. These included:

i) The fact of the shareholder's death. A shareholder might, for instance, have retired and gone to live abroad, or might have disposed of his shares during his lifetime;

ii) The identification of the deceased shareholder's personal representatives;

iii) The examination of the articles and the drafting of a transfer notice;

iv) The consideration whether the company has distributable profits and if so, what their level might be.

56. All or any of these reasons may be adequate to explain why here was a three month window provided for in article 14, but none of them of themselves explain upon what principles (if any) the company (or more accurately the company secretary) should select a particular date within that window upon which to issue the transfer notice. The only legal effect of the date on which the transfer notice is issued is that it marks the start of the timetable laid down by article 14. While the timetable is running the personal representatives of a deceased shareholder are unable to sell the deceased's shares except in accordance with article 14. Their ability to administer the deceased's estate is therefore fettered or delayed. It therefore makes sense for the transfer notice to be served as soon as possible within the window to minimise the duration of that delay. I do not consider that in deciding when within the window to issue the transfer notice the company secretary is entrusted with performing anything more than an administrative act. It is not a discretionary power in the sense in which that expression is commonly used to import fiduciary obligations. I thus accept Mr Arden's submission.
57. In addition underlying the debate between Mr Arden and Mr Freedman on this question was the assumption that if the company had not served the transfer notice before the end of May 2004, the estate would have been free to sell to Avingtrans. I do not consider that that assumption is well-founded. The highest that Mr Freeman put his case (on the assumption that article 14 was more than a mere option to the company) was that no immediately binding obligation on the part of the estate to sell the shares came into existence until:

i) The transfer notice had been issued;

ii) The auditors had certified the value; and

iii) The company had both sufficient distributable reserves to buy the shares at the certified price and sufficient cash to procure the necessary banker's draft.

58. I will assume for the sake of argument that this analysis is correct. Of these conditions only the third is a contingent condition. The other conditions are all conditions within the power of the company to procure. The position of the estate, as it seems to me, is therefore that of a seller of property under a conditional contract, where the conditions have yet to be fulfilled (and of course they may never be fulfilled). In such circumstances the seller would not be entitled to sell the property to a third party before it was known whether the contingent condition had been satisfied. Whether this is classified as an anticipatory breach of contract or breach of an implied term not to put it out of his power to perform the contract when the time comes does not seem to me to matter. In either case a threatened sale to a third party could be restrained by injunction. So here. Unless and until it was known that the company would not have the necessary distributable reserves to buy the shares, the estate was not free to sell the shares to a third party. And even if it were known in advance that the company did not have the distributable reserves, the estate would still have been obliged to offer the shares to the surviving shareholders themselves under the right of pre-emption contained in article 14 b) (iv). If Mr Peet's shares had been sold to Avingtrans without having gone through the procedure under article 14, the directors would have been bound to refuse to register the transfer: Tett v Phoenix Property and Investment Co Ltd [1986] BCLC 149. Either way, therefore, it was not open to the estate to sell Mr Peet's shares directly to Avingtrans. Thus there would, in my judgment, have been no advantage to the estate in delaying issue of the transfer notice. This is an additional reason for accepting Mr Arden's submission that the issue of the transfer notice was an administrative act which should be performed at the earliest possible time.

Equitable overlays

59. Mr Freedman submits that whatever is the construction of article 14, it can only be implemented for proper purposes. The principle on which he relies is that stated by Lord Wilberforce in Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821:

"In their Lordships' opinion it is necessary to start with a consideration of the power whose exercise is in question, in this case a power to issue shares. Having ascertained, on a fair view, the nature of this power, and having defined as can best be done in the light of modern conditions the, or some, limits within which it may be exercised, it is then necessary for the court, if a particular exercise of it is challenged, to examine the substantial purpose for which it was exercised, and to reach a conclusion whether that purpose was proper or not. in doing so it will necessarily give credit to the bona fide opinion of the directors, if such is found to exist, and will respect their judgment as to matters of management; having done this, the ultimate conclusion has to be as to the side of a fairly broad line on which the case falls."

60. The first difficulty in applying this principle is that the implementation of article 14 is an obligation rather than a power. If, as I hold, the company was bound to implement article 14 and if, as I also hold, it makes no difference to the nature of the obligation binding the estate when (within the three months window) the transfer notice is issued, the stated principle can have no application. Second, as Mr Arden submitted, it is important not to confuse the events which gave rise to the alteration of the articles to include article 14 b) and the purpose of the article itself. The events which give rise to the alteration of article 14 b) were Mr Peet's learning about Mr Shepherd's ill-health and his memory of what had happened when Mr McDonough died. Part of what happened when Mr McDonough died was the interference (as Mr Peet saw it) in the affairs of the company. But another part was her refusal to allow him to buy her out and her refusal to buy him out. A compulsory buy-out on death was therefore the objective of article 14 b). Necessarily a compulsory buy-out of one shareholder on death means that the remaining shareholders become collectively the owners of all the shares in the company. This result follows whether it is the company that buys the shares under article 14 b) (iii) or the shareholders who buy them under article 14 b) (iv). So the implementation of article 14 b) for the purpose of re-allocating ownership of the company among the surviving shareholders is the very purpose for which article 14 b) was intended. It cannot be a collateral purpose. The value at which the shares are to be acquired (whether by the company itself or by the surviving shareholders) is governed by a formula. Although it may be going too far to say that the company has a duty to spend as little as possible of its own money on acquiring the shares, I cannot see that it is an improper or collateral purpose to implement article 14 in circumstances where the value produced by the formula is less than the market value of the shares. If it were, it would defeat the purpose of the formula.

Unfair prejudice

61. Mr Freedman invites me to imagine a notional petition under section 459 of the Companies Act 1985 presented, heard and determined immediately before the making of the Retention Agreement. On such a petition, presented by the estate, he says that the court would have found unfair prejudice to have been established and would have ordered the unfair prejudice to be cured essentially be allocating to the estate, by one means or another, its 52 per cent share of the £1.8 million purchase price.
62. What amounts to unfair prejudice was authoritatively laid down by the House of Lords in O'Neill v Phillips [1999] 1 WLR 1092. Lord Hoffmann said:

"The first of these two features leads to the conclusion that a member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted. But the second leads to the conclusion that there will be cases in which equitable considerations make it unfair for those conducting the affairs of the company to rely upon their strict legal powers. Thus unfairness may consist in a breach of the rules or in using the rules in a manner which equity would regard as contrary to good faith."

63. In the light of my findings and my construction of article 14 b) this is not a case in which there has been a breach of the terms on which Mr Peet agreed that the affairs of the company would be conducted. Does it fall within the second category of case to which Lord Hoffmann referred? In speaking of using rules in a manner which equity would regard as contrary to good faith, Lord Hoffmann added:

"In my view, a balance has to be struck between the breadth of the discretion given to the court and the principle of legal certainty. Petitions under section 459 are often lengthy and expensive. It is highly desirable that lawyers should be able to advise their clients whether or not a petition is likely to succeed. Lord Wilberforce, after the passage which I have quoted, said that it would be impossible "and wholly undesirable" to define the circumstances in which that application of equitable principles might make it unjust, or inequitable (or unfair) for a party to insist on legal rights or to exercise them in particular way. This of course is right. But that does not mean that there are no principles by which those circumstances may be identified. The way in which such equitable principles operate is tolerably well settled and in my view it would be wrong to abandon them in favour of some wholly indefinite notion of fairness."

64. He later said that a useful cross-check is:

"to ask whether the exercise of the power in question would be contrary to what the parties, by words or conduct, have actually agreed. Would it conflict with the promises which they appear to have exchanged? In Blisset v. Daniel the limits were found in the "general meaning" of the partnership articles themselves. In a quasi-partnership company, they will usually be found in the understandings between the members at the time they entered into association. But there may be later promises, by words or conduct, which it would be unfair to allow a member to ignore. Nor is it necessary that such promises should be independently enforceable as a matter of contract. A promise may be binding as a matter of justice and equity although for one reason or another (for example, because in favour of a third party) it would not be enforceable in law."

65. However, it is clear from Lord Hoffmann's application of these principles to the facts of the case that a promise binding in equity is more than a reasonable and legitimate expectation. Mr O'Neill had a reasonable and legitimate expectation that he would be allotted more shares, in the sense that it reasonably appeared likely to happen. But Mr Phillips gave no promise to that effect. So there was no equity binding Mr Phillips' conscience and section 459 should not be used to impose on someone an obligation to which he had never agreed.
66. In the present case there was no "promise" that article 14 would not be enforced. It was not discussed between the making of Avingtrans' proposal and the date of Mr Peet's death. To the extent that there was any understanding (after Mr Peet became ill but before his death) it was to the effect recounted by Mr Shepherd, namely that if Mr Peet died the business would belong to him and Mrs Dashfield. But that is the precise opposite of the understanding for which Mr Freedman contended. In addition, it would in my judgment be a very unusual case in which an "understanding" arises without anything having been said to give rise to that understanding and without any of the parties to the understanding having understood it. Yet that would be the consequence of Mr Freedman's argument on the facts of this case.
67. In truth, it seems to me that Mr Freedman's argument amounts to little more than invoking an appeal to a general notion of unfairness. In that sense it was unfair that Mr Peet died when he did. But in my judgment that is not enough to ground relief under section 459.
68. I conclude therefore, on the first issue, that the estate was legally obliged to sell Mr Peet's shares to the company.

What price?

69. On the basis that the estate was obliged to sell Mr Peet's shares to the company, the second issue is: at what price? Was it a price calculated by reference to the audited accounts for the year to 31 December 2002 or by reference to the audited accounts for the year 31 December 2003?
70. The words of article 14 b) which govern this issue are:

"The value of the company will be the net asset value of the company per the last set of audited accounts."

71. The auditors themselves raised the question whether these words referred to the accounts for the year ending 31 December 2002 or 31 December 2003; so the phrase "last set of audited accounts" is very unlikely to have an immutable meaning.
72. The fact that the shares were to be acquired at the price certified in accordance with the formula was intended to be a relatively straightforward way of dealing with the price. In some circumstances that might benefit the estate of a deceased shareholder. For example if the company had declining assets, or if the business was badly affected by the death of one of its key personnel, the value ascertained by reference to the last set of audited accounts might produce a higher value for the estate than an up to date market value of the shares. In other circumstances, for example where the company had increasing assets, or where (as on the facts of the present case) an outsider was prepared to buy the company at a price higher than its net asset value, the estate of a deceased shareholder would be worse off. The formula also operated equally as between shareholders, with the price being a price calculated pro rata to the shareholding, without any discount for a minority shareholding. There is, therefore, nothing intrinsically unfair about a valuation by reference to the company's audited accounts. I might add that the circumstances that arose in the present case, namely that a shareholder died very shortly before a take-over bid was made must be a very unusual occurrence in the case of a small private company.
73. Mr Arden submitted that the respective right and obligations of the parties crystallised on the death of the shareholder in question. He supported this submission by reference to the decision of the Court of Appeal in Talbot v Talbot [1968] Ch 1. In that case a will gave certain beneficiaries the right to buy a farm at a fair valuation. Harman LJ said:

"The valuation is to be made, according to the order appealed from, as at the death of the testator. There is no appeal about that, and it is justified, I feel, because the right to have the land by the exercise of the option accrued at that date. But that does not mean, or it will not mean, when valuation comes, that the valuers are to draw blinkers over their eyes or to shut their eyes to the fact that some time has passed since the testator's death and very likely the lands have very much increased in value since, they are entitled to say what, today, knowing what they do, and discounting back for the three years, is the proper market value of these farms."

74. Davies LJ agreed with Harman LJ. So did Russell LJ, who added:

"Fourthly, the date for valuation is the death. The will, I think, is to be construed as offering the property with effect from the death. But it is admitted that subsequent developments may be considered in that valuation."

75. Likewise in Re a Company (No 002708 of 1989) ex p W [1990] BCLC 795 Knox J held that valuation of shares should be carried out as at the date upon which the vendor agreed to accept the offer to purchase. However, he added that in carrying out the valuation, the valuer was entitled to have regard to a later offer to purchase as evidence of what the shares were worth on the valuation date. Although Mr Freedman said that these cases turned on their own special facts, it seems to me that they are useful analogies. Although they support Mr Arden's general submission that the valuation must be carried out as of the date on which the parties' rights crystallised, they also show that in valuing those rights subsequent developments may be taken into account, as long as they are taken into account only for the purpose of determining the value on the valuation date.
76. Mr Arden submits that the "last set of audited accounts" is the set of accounts which, as at the valuation date, is the last set of the company's annual accounts on which the auditors have reported in accordance with section 235 of the Companies Act 1985 and signed in accordance with section 236. Draft accounts, or accounts approved by the directors, are simply not capable of falling within that description. It would have been quite possible for Article 14 b) to have provided for another valuation mechanism. Thus, for example, the shares could have been valued by reference to their value (a) as at the date of death, or (b) as at the last day of the company's last financial year, in either case to be fixed by the auditors or some other independent valuer, and without regard to the last set of audited accounts. Neither of these routes was taken. The mechanism adopted was less sophisticated, but has the advantage of cheapness and simplicity. Like most such solutions, it was capable of working to the advantage of either the personal representatives or the company and the surviving shareholders. In other words, it was not, at its inception, necessarily weighted in favour of the selling or the purchasing party. The choice of audited accounts was a measure designed to promote certainty. The last set of audited accounts must necessarily have been a set of accounts not only audited by the auditors but also signed off by the directors and laid before the company. In other words they were accounts that had been agreed by all concerned and were therefore incapable of dispute. Draft accounts, by contrast, might be the subject of all kinds of dispute. What was needed therefore was a signed piece of paper (or pieces of paper) actually in existence on the date of the shareholder's death.
77. Mr Freedman submitted that the "last set of audited accounts" were the accounts for the last complete financial period prior to the date of death. The objective of the clause was to provide for a valuation by reference to net assets which was up to date but confined to the end of a financial year. As part of the process there has to be evaluated whether the company has sufficient distributable reserves. It is logical, and it in fact occurred in this case, that the auditors would assess whether there were or not distributable reserves. In order to do so, it would be necessary to look at the current position of the company. That would entail having audited the set of accounts for the most recently completed financial year (as well considering the most recent management accounts). It is a commercially unreasonable result to have the valuation by reference to a financial year other than the end of the most recent financial year. The timetable for the acquisition of the shares laid down by article 14 was more than sufficient to accommodate this.
78. There is, in my judgment, considerable force in Mr Freedman's point that in order to decide whether the company has distributable profits out of which to buy the shares it is necessary to carry out what is in practice an audit of its last completed financial year. The ascertainment of distributable profits is not something that can be determined merely by looking at the company's bank statements (although they would have to be looked at as well, since the company was obliged to pay for the shares by banker's draft). In addition, as Mr Freedman also pointed out, if all that was required was the apportionment of the company's net assets shown in the last set of accounts to have been actually signed off by the auditors and directors, there was little point in involving the auditors in that process. It could have been carried out by anyone who could read accounts and operate a pocket calculator.
79. Moreover, in my judgment Mr Arden's interpretation is capable of working capriciously according to the diligence of the directors in instructing the auditors; and the ability of the auditors to prepare the accounts within the limits and burdens of their own professional practices. If, as in the present case, the directors deliberately held off signing off the accounts it could have a significant effect on the price to be paid. In the period before Mr Peet's death the accounts were delayed at the request of Avingtrans; but in the period that followed they were delayed in order to achieve a lower valuation. Mr Arden pointed to the time limits contained in the Companies Act 1985 for the laying of accounts. In the case of a private company it is 10 months from the end of the financial year. However, as Mr Arden himself pointed out, the statutory time limits are concerned with laying accounts before the members of the company in general meeting (or delivering accounts to the registrar of companies). The Act does not, I believe, contain any timetable for the auditing of the accounts themselves. Necessarily accounts will already have been audited before they are laid before the members of the company in general meeting or sent to the registrar of companies. So I do not obtain any help from the statutory timetable.
80. In the context of article 14 taken as a whole, and in particular having regard to the requirement that it had to be ascertained whether the company had to have sufficient distributable reserves in order to know whether the company would indeed buy the shares or whether the procedure would pass to the second stage of offering the shares to the surviving shareholders, I consider that it is possible to interpret the phrase "the last set of audited accounts" as meaning the audited accounts for the last completed financial year prior to the date of death. Not only is it possible, it is the only reasonable interpretation consistent with achieving a sensible commercial result and one that is fair as between both the deceased shareholder and the surviving shareholders. It is also consistent with the two cases on which Mr Arden relied in that evidence (in the shape of audited accounts) that comes into existence after the date of death is nevertheless relevant for the purposes of determining the value of the shares at the date of death. I acknowledge that this is not the most obvious meaning of the words; but having regard to the obvious purpose of the article (and without recourse to any extrinsic evidence) I am driven to the conclusion that something has gone wrong with the words.
81. I hold therefore that Mr Peet's personal representatives were obliged to sell his shares to the company at a valuation based on the audited accounts for the year ending 31 December 2003.
82. Mr Freedman had another way of reaching the same conclusion through the mechanism of an implied term. It is clear that the articles of association of a company must be interpreted in a businesslike fashion in order to give them reasonable business efficacy (Holmes v Keyes [1959] Ch 199, 215 approved in Bratton Seymour Service Co Ltd v Oxborough [1992] BCLC 693). However, unlike the case of a commercial contract, the role of background in interpreting articles of association is limited. In particular when it comes to the question of implying terms the court will not imply terms from the background alone. Bratton Seymour Service Co Ltd v Oxborough is an example. The facts are not entirely clear from the report, but what seems to have happened was this. Mr Oxborough bought part of the site of an old school which was to be developed for residential purposes. He sold off six flats to purchasers and retained three flats for himself. The conveyance by which he bought the land contained covenants by him to contribute towards the upkeep of maintaining the drives and verges of the property. However, part of the overall site (which Mr Oxborough did not buy) was laid out as tennis courts, a swimming pool and a garden. It was envisaged that these amenity areas would be held by a management company which was duly incorporated. The amenity areas were conveyed to the management company. Mr Oxborough subscribed for nine shares in the company (one for each flat) and after sales of the six flats, retained three shares. The other residents apparently contributed to the upkeep of the amenity areas, but Mr Oxborough refused to do so. What is not clear is the source of the other residents' obligation (if any) to contribute. It may well be that their flats contained service charge provisions (see Towcester Racecourse Co Ltd v The Racecourse Association Ltd [2003] 1 BCLC 260, 271); but the report does not make this clear. However, the company claimed that it was an implied term of the articles of association that Mr Oxborough should contribute towards that cost. The Court of Appeal held that no such term could be implied, because the implication depended entirely on a consideration of the extrinsic facts, namely that there was in fact a large amenity area to which Mr Oxborough was not contributing although all the other residents were. But the Court of Appeal made it clear that it was not impossible to imply terms into articles of association. Steyn LJ said:

"Turning now to the present case, the question is whether the implied term of requiring members to contribute to maintenance of the amenities can be implied not on the basis of any language to be found in the articles, but on the basis of extrinsic circumstances. The question is, is it notionally ever possible to imply a term in such circumstances? I will readily accept that the law should not adopt a black-letter approach. It is possible to imply a term purely from the language of the document itself: a purely constructional implication is not precluded. But it is quite another matter to seek to imply a term into articles of association from extrinsic circumstances."

83. This dictum has been approved by the Privy Council (HSBC Bank Middle East v Clarke [2006] UKPC 31). In my judgment therefore it is possible to imply a term into articles of association, but only if the term can be implied without recourse to extrinsic evidence. Such a term will therefore only be implied where it is a necessary inference, so as to give business efficacy to the obvious intention of the parties, (see Tett v Phoenix Property and Investment Co Ltd [1986] BCLC 149, 159); or where it passes the officious bystander test (Tett v Phoenix Property and Investment Co Ltd [1986] BCLC 149, 160).
84. The implied term for which Mr Freedman contends is a term to the effect that the company and/or the remaining shareholders (as shareholders and/or directors) would take all reasonable steps to procure that the company's accounts for the last financial year were audited prior to the issue of a transfer notice, alternatively prior to the auditors carrying out a valuation of the shares. I find it difficult to see how this term can be implied so as to impose an obligation on the remaining shareholders in that capacity. The management of the company is, in accordance with its constitution, in the hands of its directors. In attempting to impose on shareholders an obligation to take all reasonable steps to procure that the company's accounts were audited, it is not easy to see what the content of this obligation might be. Moreover shareholders are usually entitled to act solely in their own interests and owe no duties to other shareholders. I therefore reject the argument that there was an implied term in the article which required the shareholders to do anything. However, in my judgment the company itself is in a different position. It is the potential buyer of the shares (if it has sufficient distributable profits). Unless its accounts are audited (or an exercise very close to an audit takes place) whether it has sufficient distributable profits will not be known. The relationship between the company and a deceased shareholder under article 14 is not the same as the more general relationship between a company and its members collectively. It is both closer and contractual (although the articles of association themselves are a statutory contract between the company and its members). The company (acting through its directors) is also in a position to cause its accounts to be audited. I have already held that although the shares must be valued as of the date of the death, evidence relating to that value which comes into existence after the death is relevant evidence for determining that value. It is, in my judgment, an obvious implication that the price at which the company buys and the deceased shareholder's estate sells should be assessed by reference to the most up to date accounts reasonably available. It is both necessary to give business efficacy to the article and passes the officious bystander test. Although I do not consider that the accounts would have to be audited before the issue of a transfer notice (because that would in itself have no impact on the price) I do consider that there is properly to be implied into article 14 a term to the effect that the company (acting through its directors) would take reasonable steps to procure that the company's accounts for the last completed financial year prior to the death were audited before the auditors certified the value of the shares. On the facts there is no doubt that if the company had complied with that obligation, the company's accounts for the year ending 31 December 2003 would have been audited before the auditors certified the price of Mr Peet's shares. In that event the price payable would have been £442,479. Accordingly, if I am wrong about the construction of the article, I reach the same result through implying a term.

Result

85. The result of my conclusion (either as a matter of construction of article 14 b) or by means of the implication of a term) is that the price at which Mr Peet's personal representatives were bound to sell was £442,479 rather than the sum of £243,648 for which they did in fact sell. The difference between the two is £198,831. That sum, together with a pro rata of interest accrued thereon, should be paid out of the retention fund to his current personal representatives, and the remainder should be shared equally between Mrs Dashfield and Mr Shepherd.