Cosmetic Warriors Shares Valuation Battle, Differing interpretations of Company Rules

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Cosmetic Warriors Shares Valuation Battle, Differing interpretations of Company Rules

Cosmetic Warriors Shares Valuation Battle, Differing interpretations of Company Rules

This decision is another example of shareholders falling out and being unable to agree on the interpretation of the company rules.


Two of the founder (minority) shareholders decided to leave the company and served notice on the company that they wanted to sell their shares. This triggered the pre-emption provisions in the articles and one of the issues in point was how to value the selling shareholders’ shares.

What are pre-emption provisions?

Companies often contain a rule in their articles of association whereby when an existing shareholder wants to transfer its shares, those shares must first be offered to existing shareholders. This is called a right of pre-emption or a right of first refusal. In this case, a company’s articles contained a right of pre-emption. It said that if a shareholder wanted to transfer its shares, it had to offer them to existing shareholders at a price to be determined by accountants but the method of valuation was not expressly set out.

How should the sale shares be valued?

The question arose as to whether the shares being sold should be valued on the basis of:

(i) a pro rata proportion of the value of the equity of the company as a whole and ignoring the fact the sale shares constituted a minority holding; or
(ii) the price that might be achieved for the shares being transferred as between a willing buyer and a willing seller of the particular block of shares being sold and taking into account the fact the sale shares constituted a minority holding.

The decision and its impact

The judge decided on the first valuation basis i.e. that the price of the shares to be sold meant the price per share with the company valued on a going concern basis and that had to mean a valuation of the company as a whole. The judge noted that at the point of valuing the shares, the parties wouldn’t know the identity of the purchaser. The parties were also unlikely to know to what extent the purchaser may be prepared to pay a special price for the shares for example, because it would add to their existing stake and potentially create a majority shareholding. The articles could not have expected the accountants to apply any special valuation rules (discounts or premium) to cater for the type of purchaser and the number of shares comprising the block being sold.

The court found it relatively easy to interpret the drafting to decide on the method of valuation so although the drafting was clear in one regard it still lacked precisely set out steps to enable the reader to reach a robust conclusion on valuation straight away. This is another case highlighting the importance of thinking through every element of the subject in point when drafting and catering precisely for what is intended.

Cosmetic Warriors Ltd & Anor v Gerrie [2017] EWCA Civ 324

For more information, contact Cathy Goodman, Corporate Professional Support Lawyer.