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RECENT CASES |
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Northern Rock’s former shareholders challenge compensation assessment SRM Global Master Fund LP and others v the Treasury [2009] EWHC 227 (Admin) A claim for judicial review was brought by two investment companies (the two largest former shareholders of Northern Rock plc) and several small individual former shareholders (who had acquired their shares on Northern Rock’s demutualisation in 1997, as employees, or on the London Stock Exchange). Their claim challenged the valuation method set out in a statutory compensation scheme, under which they will receive compensation for their shares following the nationalisation of Northern Rock. In February 2008, all of the shares in Northern Rock plc were transferred to the Treasury Solicitor, as nominee for the Treasury, to bring the company into State ownership. A statutory compensation scheme was then implemented providing for compensation to be paid to the former shareholders of an amount equal to the value of their shares immediately before the company’s nationalisation. Under the scheme the following assumptions are to be taken into account on assessing the value of the shares: » Northern Rock is unable to continue as a going concern; » it is in administration; » all of the public financial assistance that has been provided by the Bank of England and the Treasury has been withdrawn; and » no further public financial assistance will be provided by the authorities in the future. The former shareholders argued that these assumptions are unfair and incompatible with EU law, and would result in them receiving substantially less compensation, if any at all, for their shares. It should be noted that the two largest former shareholders bought their shares in Northern Rock after the announcement made in September 2007 that public financial assistance had been provided, and both bought more shares after the Government’s announcement in early February 2008 that nationalisation was a possibility. The High Court dismissed their claim. It did not see that fairness required the State, having provided financial support to Northern Rock, to pay its former shareholders the added value to their shares brought about by that support, without which Northern Rock could not have continued as a going concern. They were not entitled to be compensated for value created or enhanced by the provision of public financial assistance. The court commented that the shareholders could have sold their shares on the London Stock Exchange when Northern Rock’s financial difficulties became public in September 2007, but they did not do so. In addition, the primary responsibility for the company’s failure lay with the directors managing it, who could have been removed by the shareholders if they thought that the business model being followed was inappropriate or unsafe. There was no evidence that any attempts had been made to do so. While the court sympathised with the small individual shareholders, it made clear that all shareholders, large or small, professional or private, are taking a commercial risk in investing in the fortunes of a company. In this case, they simply had the misfortune to invest in a company that was, by September 2007, cash-flow insolvent. The former shareholders are expected to appeal the decision. The Government has published a draft amendment to the statutory compensation scheme to allow the independent valuer (appointed to determine the amount of any compensation payable to the former shareholders) to apply to court for an order to require the provision of information that is reasonably required for the purposes of the assessment of compensation. A person will not be liable for breach of confidence where any information is given to the valuer for that purpose. Such information may only be disclosed by the valuer in limited circumstances. Unfairly prejudicial conduct in managing a company See CLM ¶2109, ¶2113, ¶2115 Oak Investment Partners XII, Limited Partnership v Boughtwood and others [2009] EWHC 176 (Ch) A director and shareholder of a company (which was set up as a joint venture and operated as a quasi-partnership) had acted improperly in changing the composition of the board so as to take control over the practical management of the company’s affairs. He had (amongst other things) failed to adhere to his agreed management role and had improperly asserted rights to take control of the board, thereby: » destroying the relationship of trust and confidence which should have been the foundation of the quasi-partnership between himself (as a shareholder) and the petitioning shareholder; » destroying the chance of accepting much needed funding under a finance proposal; and » disrupting and distracting the management of the company. Although the conduct of the petitioning shareholder could also be criticised, the court found that its misconduct was, in comparison, very minor. To meet the overall justice of the case it ordered the director to sell his shares in the company to the petitioning shareholder. The court also commented that, in an appropriate case, the conduct of a significant shareholder in a management role is capable of amounting to unfairly prejudicial conduct, whether he is a director or not (for example, a senior manager). Exercise of a share option and alleged repudiatory breach of employment contract See CLM ¶2724+ Plumbly v Beatthatquote.com Ltd [2009] EWHC 321 (QB) A company was wrong in its refusal to allot shares to an employee who had exercised his right under a share option agreement, where there had been no repudiatory breach of his contract of employment. B Ltd operated a very successful comparison website concerning financial products, such as loans, mortgages and insurance. Mr P had worked for B Ltd since its formation and entered into a contract of employment, a side letter (under which he was permitted to continue to operate a separate buy-to-let website, AABTL, provided it did not directly compete with B Ltd’s business) and a share option agreement entitling him to 10% of B Ltd’s shares after a period of 12 months. The relationship between Mr P and B Ltd’s founder and controlling shareholder deteriorated. Mr P gave notice that he was exercising his share option and subsequently resigned from his employment. The shares were not allotted to Mr P on the grounds that he had breached fiduciary duties and had breached his contract of employment by: » operating AABTL in competition with B Ltd’s business; » carrying on his own personal residential letting business and operating AABTL during working hours (and so in B Ltd’s time); and » divulging confidential information belonging to B Ltd to a third party. On the facts, the court found that Mr P was not, and had not consented to be, a director at the time he exercised his share option, and so the question of whether there was any breach of fiduciary duty did not arise. It found that AABTL was not competing with B Ltd’s business and there was no evidence that Mr P had used B Ltd’s confidential information for his own use or that he had divulged it to a third party. In addition, in relation to Mr P carrying on business on his own account during working hours, in light of the long hours he had worked as B Ltd was getting started, there was no serious or repudiatory breach of his contract of employment. Accordingly, Mr P was entitled to exercise his share option. He chose to receive damages, rather than the remedy of an injunction requiring B Ltd to allot the required shares, as he was entitled to do. Approving financial promotions for overseas companies See CLM ¶4829 FSA v Fox Hayes (A Firm) [2009] EWCA Civ 76 The FSA appealed against a decision of the Financial Services and Markets Tribunal relating to the approval of financial promotions for overseas companies. FH was regulated by the FSA and approved a number of financial promotion communications sent from unregulated overseas companies to potential buyers of shares in the UK. The communications offered the UK investors a free research report on a company in which they already held shares and included a response form on which the investor could fill in their name and telephone number consenting to be contacted by the overseas company about other investment opportunities. FH knew that the real purpose of the communications was to obtain the investors’ consent to be contacted by the overseas company, who would then try to persuade them to buy shares in high-risk, illiquid small companies which were not quoted in the UK. As a result of the communications, a number of the UK investors altogether invested over $20 million, most of which was lost. The Court of Appeal found that FH had recklessly, or deliberately, breached the FSA’s Conduct of Business Rules, which require (amongst other things) that before approving a financial promotion communication, regulated persons must: » take reasonable steps to ensure that: - the communication's purpose is not disguised or misrepresented; and - it is clear, fair and not misleading; and » where the communication relates to an investment or service of an overseas company, have no reason to doubt that the overseas company will deal with UK customers in an honest and reliable way. The FSA can impose a penalty of whatever amount it considers appropriate for breach of these rules (s 206 FSMA 2000). FH's failure to comply was serious misconduct and a penalty of £500,000, plus £454,770 of secret commissions (received from the overseas companies by FH's senior partner) was imposed. Protection of employment when business is transferred See CLM ¶5771+ Dietmar Klarenberg v Ferrotron Technologies GmbH, C-466/07, 12 February 2009 Where a business, or part of one, is transferred, the employment rights of any employees transferred with it are protected by the TUPE regulations in the UK. For this to happen, there must first be a “transfer of business”, which in this context means a transfer of an economic entity that retains its identity. TUPE applies to transfers of businesses which are situated in the UK immediately before the transfer (except where the transferor is insolvent, in which case the rules are different, see CLM ¶6422). Equivalent legislation serves the same purpose in other EU member states. This case deals with a transfer in Germany, although the interpretation of what constitutes a transfer is also relevant to the UK. Mr K was employed as the head of a systems unit at ET GmbH, which manufactured products for the metal industry. ET GmbH sold its business (which included the rights of various software and products) to FT GmbH, an American company which also manufactured products in the same field. A number of ET GmbH employees (but not Mr K) were taken on by FT GmbH, and ET GmbH soon went into liquidation after the sale. Mr K brought an action against FT GmbH in the German courts. The gist of Mr K’s argument was that his employment relationship with ET GmbH was transferred as a result of the sale, and therefore he should be re-employed as the head of the systems unit at FT GmbH. FT GmbH argued that there was no transfer in this case because the business it purchased from ET GmbH had lost its identity, in that the business functions were now carried out in the framework of a different organisational structure and the re-engaged employees were integrated into different units. In dismissing FT GmbH’s argument, the court held that a business may retain its identity (and the employment relationship would be transferred) even where it has been integrated into the purchaser’s structure and no longer retains its organisational autonomy, as long as the functional link between the various elements of production of the business is preserved after the transfer so that the purchaser can still use those elements to conduct an identical or similar business within his own organisation. Court sanction for a takeover by scheme of arrangement See CLM ¶6523, ¶6985+ Re TDG plc [2008] EWHC 2334 (Ch) In deciding whether to sanction a scheme of arrangement used in connection with a takeover, the court will consider various criteria, including whether: » the applicable law has been complied with; » the shareholders have been fairly represented by those attending the shareholder meetings, and whether the majority shareholders have acted in good faith without coercing the minority; » an intelligent and honest shareholder acting in his own interests might reasonably approve the scheme; and » there are any other problems or issues with the scheme. In this case, LIT plc proposed to acquire TDG plc by way of a scheme, and received overwhelming support from the latter’s shareholders. Mr C, a dissenting shareholder, appeared in court to object to the scheme on various grounds, which included the insufficiency of information provided to shareholders (for example, he claimed that the parties did not explain why the transaction was effected by a scheme of arrangement and not a takeover offer). Applying the above test to the facts, the court held that the scheme fulfilled all the criteria and it was accordingly sanctioned. |
