Case highlights considerations for corporate lawyers when drafting constitutional documents

The case examined a provision that required an individual leaving the group to surrender their shares, which stated: “If any Employee Member shall cease for any reason (including but not limited to death or termination of employment by the Employee Member or Company) to be employed as an employee, director or consultant of a Group Company (and does not continue in that capacity in relation to any Group Company) then a Transfer Notice shall be deemed to have been served … on the date of such cessation.”

Under the company’s articles of association, if the trigger was the earlier date - that is, the date of the shareholder’s dismissal as an employee - his shares were to be valued at market value. If the trigger was instead the later date, the date of his resignation as a director, the shares were to be valued at fair value.

The difference between market value and fair value was potentially substantial, with fair value being greater than market value. As a result, the dispute arose over the date on which Truman, the employee, left the group, which determined the value he would be paid for his shares.

Truman, who was first dismissed as an employee but later resigned as a director, was deemed to have served a notice to transfer his shares to other members only because of his resignation as a director by the court. As a result, his shares were to be valued at fair value, rather than market value. The decision was made in 2024 and was recently upheld by the Court of Appeal following an appeal by Syspal Capital.

The judge noted that “employed” has a wide meaning and that “in that capacity” referred to any of an employee, director or consultant, and not just an employee, stating that this interpretation was a natural reading of the words and within commercial common sense. When interpreting drafting, a court will first give a natural meaning to the words of the contract, but if the interpretation is unclear, it will give weight to the construction that most aligns with commercial common sense.

The meaning of the words “in that capacity” in article 11.3 was to be determined by reference to the company’s articles, as well as any extrinsic facts about the company or its membership that would be reasonably ascertainable by any reader of the company’s constitution and public filings at Companies House and commercial common sense.

The purpose of the provision, in terms of commercial common sense, was to ensure that if a shareholder stopped contributing to the day-to-day running of the business, the other shareholders would be given the opportunity to buy their shares. This aligns with the purpose of leaver provisions generally, which ensure that an individual who ceases to have any connection with a business is not able to influence that company’s operations via their shareholding.

In this case, where the shareholder left one position as an employee, but continued to be engaged in another as a director, there is a less compelling rationale for forcing that individual to sell their shares.

In the company’s interpretation of article 11.3, where the trigger for transfer of the shares was Truman’s dismissal as an employee, the company could have dismissed Truman without good reason to create a forced sale of his shares at the lower price. The judge believed this was unlikely to be the intention of the shareholders when adopting the articles.

Further, in terms of surrounding circumstances, the shareholder was the only “employee member” when articles of the company were adopted. Article 11.3 could be seen as directed at him, showing the application of examining the whole and wider context of the articles and how each dispute is determined on its facts, on a case-by-case basis.

The decision shows the importance of using precise language when drafting a company’s articles. Once articles are drafted, it is important for individuals to analyse the language used to ensure they work as intended and, more generally, to ensure that drafting is clear, noting that individual provisions won’t be read in isolation, but rather in the context of the wider articles. It is important to keep constitutional documents under regular review, particularly as a company or group of companies evolves to ensure the clarity of drafting and that the provisions do what the company wants and intends them to do.

The court’s findings also emphasise the protection of minority shareholders and ensuring that their rights are upheld in corporate governance.

When drafting constitutional documents, consider agreeing a clear share valuation mechanism before a dispute arises. While the court’s decision allowed the shareholder to obtain “fair value” for his shares, the company’s auditors couldn’t ascertain this amount. This meant the court had to direct an inquiry into the valuation of the shares based on its judgment, incurring further time and costs.