It’s Common Sense: Leaver Provisions Entitled Retiree to ‘ Fair Value’ for Shares
How should a company’s leaver provisions be construed in the event of a dispute? Directors will welcome guidance from the Court of Appeal following a disagreement as to the price to be paid for the transfer of shares under a company’s Articles of Association.
Commercial common sense and reasonableness are important factors for the court when interpreting business contracts and documentation, as this case shows.
What’s the background?
In Syspal Capital Ltd v Truman [2025] EWCA Civ 469, a dispute arose around the meaning of just three words within the articles’ compulsory transfer provisions.
Christopher Truman owned 24% of the holding company of a group of manufacturing companies. The claimant company owned the remaining 76%. Mr Truman was also a director of the holding company, and a director and employee of one of its subsidiary.
Leaver provisions within a company’s articles are included to determine the treatment of a founder’s shares on leaving the company. In this case, the leaver provisions required Mr Truman to serve a transfer notice, by which his shares were to be offered to the other shareholder under a compulsory sale.
The articles also included this provision: “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.” [our emphasis]
The defendant was dismissed as an employee of the subsidiary on 10 October 2022. On 24 May 2023 he turned 65 and retired from the holding company.
At issue was: when was the share transfer notice served? This was crucial because:
· If the date of service was the date of his retirement – Mr Truman would receive ‘Market Value’
· If the date of service was at a different date – he would receive ‘Fair Value’ (a price that would not be discounted to reflect his minority holding)
The parties were in agreement that Fair Value was likely to be substantially greater than Market Value. The outcome turned on the correct construction of the words “in that capacity” in the leaver provisions.
The Court of Appeal agreed with the lower court that giving the words their natural meaning, they referred to any of the three capacities (employee, director or consultant) within the compulsory transfer provisions. This approach accorded with commercial common sense.
Mr Truman’s transfer notice was therefore deemed to have been triggered on his retirement date. This meant he was entitled to be paid Fair Value for his shares.
Key takeaway
Leaver provisions must be carefully drafted to ensure they are unambiguous and not a potential cause for a costly dispute. The decision demonstrates that a commercial common sense approach to the interpretation of a contract should be applied where disagreement does arise (taking into account other relevant factors).
Always take specialist legal advice from corporate and commercial lawyers where necessary.
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