Interpretatation of shareholder agreement

The High Court has considered a claim for a declaration as to the meaning of a price calculation clause in a shareholders agreement. The claim arose out a merger of two businesses. The parties had entered into a merger agreement and a shareholders agreement both of which were relatively complex and heavily negotiated.

The shareholders agreement gave certain shareholders the right to force one particular shareholder to buy their interest out at the greater of two valuation methods and the ambiguity concerned whether a price reduction mechanism applied to both valuation methods. On the face of the agreement the price reduction method only applied to one of the valuation methods. The price for the departing shareholders’ shares would be £2,673,940 instead of £5,142,195 if the price reduction mechanism applied.

The issues for the Court to consider were whether there was an error or absurdity produced by the ordinary meaning of the language used in the clause and, secondly, if there was, whether it was clear that reasonable people in the position of the parties at the time would have objectively intended, in effect, that the price reduction mechanism applied to both valuation methods.

There was no doubt about the natural meaning of the words chosen and no room for inferring an obvious mistake. There was no obviously wrong date or number. One valuation might appear favourable to the selling shareholders but it did not make the structure arbitrary and irrational, nor were there any obvious defects of omission. Whilst the particular provision appeared generous, the Court could not evaluate the commercial good sense or the economic consequences of the clause in the wider context of the overall merger.

This case reaffirms the position that Courts are unwilling to amend the wording of commercial agreements where there is a complex merger in which both parties are legally advised. Great care must be taken when preparing complicated and detailed provisions in shareholder and joint venture agreements.

Bishops Wholesale Newsagency Limited and others v Surridge Dawson Limited [2009] EWHC 2578 (Ch)