In Syspal Capital Ltd v Truman [2024] EWHC 1561 (Ch), the High Court considered the correct interpretation of a leaver provision in a company's articles of association in circumstances where the member that was leaving held different positions in different companies within the same group. The court found that the correct interpretation of the leaver provision resulted in a 'Transfer Notice' for the transfer of shares being deemed to be served when the member retired from his position as a director of the company, rather than upon his earlier dismissal as an employee of another company within the group. The member was therefore entitled to receive the higher 'Fair Value' as opposed to 'Market Value' of his shares in the company.
Background
The claimant, Syspal Capital Ltd (SCL), held 76% of the share capital in its subsidiary, Syspal Holdings Ltd (SHL), which in turn held 100% of the share capital of an engineering company, Syspal Ltd (SL). Mr Truman was a director of SHL, holding the remaining 24% of its share capital, until he resigned on 24 May 2023, his 65th birthday. He had also previously been an employee and managing director of SL but had been dismissed as an employee in October 2022 and removed as a director of that company a month later.
SHL's articles of association (Articles) required notice (Transfer Notice) to be served by any person wishing to transfer their shares. The Articles also contained a leaver provision (Leaver Provision) requiring the transfer of any shares held by an employee, director or consultant of SCL, SHL or SL (Group Companies) upon them ceasing to be employed as an employee, director or consultant of those companies (see Certification and transfer, Q&A here). The Leaver Provision was worded as follows:
'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.'
The Articles provided for a discounted market value (Market Value) for shares where a Transfer Notice had been deemed served pursuant to the Leaver Provision 'as a result of any reason other than the Employee Member's death, permanent incapacity or retirement at 65 years of age'. In the latter circumstances, the shares were to be transferred at a valuation on a pro rata basis by reference to the value of SHL (Fair Value), which, in the circumstances, would result in a significantly higher share price than Market Value.
SCL brought a Part 8 claim in which it asked the court to determine whether, pursuant to the Leaver Provision, a Transfer Notice was deemed served upon Mr Truman's dismissal as an employee of SL in October 2022. The main issue for the court concerned the interpretation of the words 'in that capacity' within the Leaver Provision. SCL argued that the words 'in that capacity' referred to the specific capacity in which the Employee Member ceased to act, such that a Transfer Notice was deemed served when Mr Truman ceased to be an employee of SL as he was not employed in the same capacity by another Group Company (which would result in a Market Value valuation of his shares). Mr Truman contended that the words 'in that capacity' were a reference to any of the three capacities referred to in the Leaver Provision, such that a Transfer Notice was not deemed served until he retired as a director of SHL on his 65th birthday (which would result in a Fair Value valuation of his shares). Mr Truman argued that, in the alternative, the Leaver Provision should include an implied term on the basis of the officious bystander or business efficacy tests, such that the Leaver Provision should read: 'If any Employee Member shall cease for any lawful reason … to be employed as an employee, director or consultant … '. (The lawfulness of Mr Truman's dismissal as an employee of SL was the subject of separate proceedings in the employment tribunal).
High Court decision
Roth J held that on the correct interpretation of the Leaver Provision, the Transfer Notice was served when Mr Truman resigned as a director of SHL on 24 May 2023 (his 65th birthday), and not when he was dismissed as an employee of SL in October 2022. Consequently, Mr Truman was entitled to be paid Fair Value for his shares upon transfer.
Interpretation
Although the judge considered that the wording of the Leaver Provision was "not entirely clear", he found in favour of Mr Truman's interpretation. The judge noted that it was common ground that the word 'employed' was not used in its strict sense (as in the member needing to be an employee under a contract of employment), but more broadly included members engaged as a director or consultant (notably the Articles defined 'Employee Member' as a member who was an employee, director or consultant of a Group Company). Roth J confirmed that the Leaver Provision addressed three different ways in which an 'Employee Member' might be engaged to work for a Group Company and therefore the wording 'in that capacity' was a reference back to any of those alternatives. Consequently, when Mr Truman ceased to be employed by SL, the terms of the Leaver Provision did not apply since he continued to be a director of SHL.
Roth J based his reasoning on a more natural reading of the wording which accorded with commercial common sense; notably, that it is not uncommon in private companies for a senior employee to retire from full-time employment but continue to serve the business as a consultant. In the judge's view, commercial good sense did not suggest that in such circumstances an individual would be required to sell his or her shares at the lower of the two valuations in the Articles. Additionally, if dismissal of an employee of one of the Group Companies who remains a director could be deemed to serve a Transfer Notice, there would be potential for the employing company to dismiss the employee for no good reason in order to trigger a forced sale of their shares at a lower price. This was an allegation of Mr Truman's in the present case. While the judge did not take a view as to whether this allegation was correct, he noted that an interpretation of the Leaver Provision that could give rise to this possibility was most unlikely to accord with the intention of the shareholders when adopting the Articles.
Furthermore, when looking at the relevant surrounding circumstances publicly ascertainable at the time when the Articles were adopted, the judge highlighted that the Leaver Provision was directed in particular at Mr Truman. SHL's financial statements and annual return showed that Mr Truman was the minority shareholder of SHL (the only other shareholder being SCL, a company controlled by one Mr Roberjot) and that the only directors were Mr Truman and Mr Roberjot. Mr Roberjot had been expressly excluded from the definition of 'Employee Member'. In addition, the wider Articles specified what was to happen should Mr Truman, specifically, die prior to 10 April 2024 and had clearly been drafted to protect Mr Truman's position as regards the valuation of his shares. The judge therefore considered that the Leaver Provision should not be interpreted as leaving Mr Truman exposed to a compulsory purchase of his shares at a lower valuation should he be dismissed from one Group Company while remaining director of another.
In reaching this decision, the judge considered Signia Wealth Ltd v Vector Trustees Ltd [2018] EWHC 1040 (Ch), in which Marcus Smith J was of the view (based on the specific language of the articles in question) that '… a person is rendered a Leaver should that individual, being both a director and an employee, lose only one of these positions'. However, Roth J noted that the different language of the specific article in that case, the different context, and the fact that the issue was not seriously contested at trial meant that Signia Wealth was not in any way determinative of the matter before the court in Syspal.
For further consideration of the principles that a court will generally apply when construing articles of association, see Company constitution/Articles: application of rules of contract law.
Implied terms
In light of the judge's conclusion on the interpretation of the Leaver Provision, it was unnecessary to consider Mr Truman's alternative argument for an implied term. However, the judge noted obiter that he would not have accepted that the qualification of 'lawful' should be incorporated by reference either to the words 'any reason' or 'termination of employment'. The term was not necessary to give business efficacy to the article or for commercial coherence and the inclusion of the words 'any reason' within the Leaver Provision strongly suggested that the investigation into the lawfulness of that reason was specifically excluded.
For more information on the principles that the court will follow when implying a term into articles of association, see Q&A here.
Comment
This decision is a reminder of the need to set out clearly the circumstances in which leaver provisions take effect, particularly where there are group companies and the potential for employee members to hold multiple positions. While such provisions are often considered to be 'standard', determining the point in time when leaver provisions are triggered may have significant consequences including, as in this case, a substantial impact on the price payable for the shares.
The decision also reinforces the principle that the interpretation of such provisions will depend on the particular terms of the articles read in the context of the relevant surrounding circumstances at the time they were adopted. Notwithstanding the decision in Signia Wealth, Roth J was able to reach a different conclusion based on the different language and the very different context. In this case, it was clear that the leaver provisions were directed in particular at Mr Truman, and it therefore followed that the leaver provisions were not intended to expose him to a compulsory purchase at a lower valuation where he remained a director of a group company.
Finally, although only obiter, the judge's reluctance to imply a term (requiring the reason for cessation of employment, or the termination itself, to be lawful) serves as a reminder of the court's approach to implication of terms in articles, particularly where they have been drafted by lawyers.
First published on the Corporate News Service on 24 July 2024.
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