BEFORE: THE HON. Mr. JUSTICE EVANS-LOMBE
The Hon. Mr Justice Evans-Lombe
ROYAL COURTS OF
JUSTICE
21st January 2000
- The respondents made detailed written submissions about these documents.
Although there are oddities about the documents and their provenance, it does
not appear to me that although they concern issues in the case that they are
of particular significance so as to be likely to have been forged.
- In his evidence Nigel sought to give the impression that his forgeries
came about as a result of an impulsive moment of madness flowing from his
disappointment that his case was not adequately supported by the documents. In
my judgment, so far from that being the case, it is apparent that the process
of forgery, which Nigel admitted to, was sophisticated and must have taken
some time to complete including the special manufacture of headed notepaper of
the defunct Tobias family companies. But for the slip up with relation to the
telephone numbers shown on the headings it would, in all probability, not have
been discovered.
- In the course of his cross examination Nigel was pressed as to the purpose
behind the forgeries. He would not admit that there was any specific purpose.
It seems to me to be quite plain that the purpose of the forgeries was to
manufacture written support for Nigel’s case as to what was agreed between
himself and Graham in late 1993 and early 1994 as to the terms upon which
Bodycare would deal with PLC in the supply of toiletries for the first three
years of its trading and thereafter. In particular he wished to create written
evidence which supported his case that he never at any time accepted that a
15% margin over the retail price fixed for toiletries by PLC would afford
Bodycare an acceptable level of profit. That this was the purpose of the
forgeries is specifically borne out by Mr Seymour’s file note of the 10 am
meeting with Nigel on the 4th August to which I have referred on a
number of occasions already.
- I turn to consider whether these findings require me to strike out the
petition.
- It was the respondents submission that any case which depended on breach
of "reasonable expectations" of the petitioners derived from the 1994
agreements pursuant to which Nigel and Lorraine joined Bodycare cannot receive
a fair trial or, at least, there is a substantial risk that it cannot receive
a fair trial, because Nigel’s forgeries have placed in question the
documentary evidence on which the Court could base its conclusions. I accept
that submission subject to the qualification that there would be no
substantial risk to a fair trial of a case which was not based on the 1994
agreements or, to the extent that it depended on the terms of those
agreements, the relevant terms were not in issue between the
parties.
- In the present case it is not in issue that one of the terms was that the
petitioners should each be able to subscribe at par for 24% of the issued
shares of Bodycare. [Paragraph 5(1) of the petition paragraph 14.1 of the
points of defence]. It is not in issue that Bodycare was to pursue a policy of
expansion through the acquisition of retail outlets both during the three year
period and thereafter [paragraph 5(7) of the petition paragraph 14.7.1 of the
points of defence]. The issue here to which the terms of the 1994 agreement
are relevant and which is contested by the parties, is whether the expansion
of the Bodycare chain of retail shops was intended to be exclusively conducted
through Bodycare. It is the respondents case that the agreement as to the
terms upon which PLC would supply toiletries to Bodycare arrived at in 1994,
and thereafter varied, would expire at the end of three years from the
commencement of Bodycare’s trading when there would have to be a renegotiation
of those terms. It is not suggested by the respondents that there was any
agreement whereby the petitioners bound themselves to accept any particular
level of margin after the expiry of that time. Indeed it is specifically their
case that the parties were unable to agree the margin at that time or
subsequently. It is not in issue that the company was at all material times
entitled, whether as of right as the petitioners contend, or as an implied
licensee of PLC as the respondents contend, to use the Bodycare concept in its
existing retail stores and when it opened new stores as part of its expansion.
As I have already pointed out Nigel and Lorraine were to receive their shares
in Bodycare unconditionally. It is not suggested that, in the events which
have happened the respondents are entitled to forfeit those shares indeed they
are cross petitioning for an order that they be at liberty to purchase those
shares at a fair value.
- It seems to me that the petitioners are able to pursue a simple case for
relief under sections 459 and 461 on the basis that at the time that the
parties fell out in December 1997 they held 48% of Bodycare’s issued shares.
Since that time the respondents by reason of the fact that they are majority
shareholders and directors, with at least equal representation on the board,
have been able to prevent any further expansion by Bodycare of its retail
outlets see paragraph 8(1) of the petition. It is apparently accepted that
whereas after the transfer of 8 Bodycare stores to Bodycare by PLC pursuant to
the 1994 agreement, and before the fall out, PLC opened only one further
Bodycare store, since the fall out it has opened a further nine including a
store on a site where Bodycare intended itself to open a store but was
prevented from doing so by the respondents. I say nothing as to whether the
respondents intervention to prevent Bodycare opening a store at
Ashton-under-Lyne was justified or not. [See also paragraph 7(4) of the
petition and 16.4 of the points of defence]. It seems to me also that such a
claim could be based on the allegation that it was reasonable to expect that
the respondents would not use their control of Bodycare to require it to
purchase from PLC toiletries on terms less favourable than those available to
other customers of PLC or from third party suppliers in the open market
thereby, at least, restricting Bodycare’s profits and so the value of the
shares of the petitioners. [See paragraph 7(5) and 8(3) of the petition]. If
it can be shown that the respondents have used their control of Bodycare to
restrict its ability to borrow money to finance its trading and expansion to
borrowing from PLC, which has charged interest on borrowings at a rate higher
than that obtainable by Bodycare in the open market, that might also be a
ground for seeking relief [see paragraphs 7(6) and (9) and 8(2) of the
petition].
- These claims of the petitioners do not depend on any term of the 1994
agreements which is in issue between the parties. If fought out, whether the
petitioners establish a right to relief will depend on events which have
occurred between December 1997 when the parties fell out and today. It will
depend on whether the petitioners can establish that the respondents have used
their control of the company to restrict its ability to expand and/or have
diverted opportunities for expansion to PLC. It will depend on a comparison
between the terms offered to comparable customers of PLC and those given to
Bodycare during that period and whether Bodycare could have obtained supplies
of toiletries from third party suppliers at appreciably less cost than that it
was incurring in taking supplies from PLC to which supplies it was restricted
by reason of the respondents control of Bodycare.
- It was argued on behalf of the respondents that no such understanding as,
for instance, the understanding that Bodycare would be dealt with by PLC on
terms at least as good as those available to third parties, was capable of
basing a petition under section 459 because no such term was included in the
1994 agreements or subsequently agreed to by the respondents. This contention
was based on the authority of the decision of the House of Lords in
O’Neill v Phillips 1999 1WLR p 1092 . I do not accept that that is the
effect of this decision of the House. In that case the House was considering a
petition by a holder of 25 of the 100 issued shares in a company against the
majority shareholder. The petitioner was an ex-employee who had been taken
into management at which point he was given his shares and was permitted to
draw 50% of the company’s profits in addition to his salary. Some years later
the respondent indicated in the course of negotiations with the petitioner
that he was in principle agreeable to the petitioner increasing his
shareholding to 50% if certain profit targets were reached. No final agreement
was arrived at however before the respondent changed his mind and revoked the
profit sharing arrangement. The petition which succeeded on appeal to the
Court of Appeal was based on the respondents "unfair" refusal to make
good the petitioners reasonable expectations that, on achieving the target
set, he would be made a 50% shareholder in the company and that meanwhile the
profit sharing arrangement would continue. The House allowed the appeal. The
leading speech was given by Lord Hoffmann with whom the remainder of their
Lordships agreed. He concluded that what constituted unfair conduct for the
purposes of section 459 could not be decided in accordance with some general
principle of fairness fixed by the Court but must be based on, and not
inconsistent with, the agreements or understandings existing between the
petitioner and the respondent upon which the petitioner was entitled to rely.
Because in that case the petitioner was not entitled to rely on a continuing
profit share arrangement or an agreement that he should receive a further 25
shares the Court was not entitled to pronounce the respondents refusal to
grant those benefits as unfair within section 459. It is important to note in
O’Neills case the petitioner was not basing his case on any
suggestion that the respondents conduct was affecting his position as an
existing minority shareholder in the company.
- At page 1101 of the report Lord Hoffmann having agreed with a passage in
the judgment of Mr Justice Jonathan Parker’s judgment in re
Astec where he said:-
"In order to give rise to an equitable constraint [on the
power of a majority shareholder to control the company] based on
"legitimate expectation" what is required is a personal relationship or
personal dealing of some kind between the parties seeking to exercise the
legal right and the party seeking to restrain such exercise, such as will
affect the conscience of the former."
then continued:-
"This is putting the matter in very traditional language,
reflecting in the word "conscience" the ecclesiastical origins of the long
departed Court of Chancery. As I have said, I have no difficulty with this
formulation. But I think that one useful cross check in a case like this is to
ask whether the exercise of the power in question would be contrary to what
the parties , by word or conduct, have actually agreed. Would it conflict with
the promises which they appear to have exchanged? In Blisset v Daniel
the limits were found in the "general meaning " of the partnership articles
themselves. In a quasi-partnership company, they will usually be found in the
understandings between the members at the time they entered into the
association. But there may be later promises, by words or conduct which it
would be unfair to allow a member to ignore. Nor is it necessary that such
promises should be independently enforceable as a matter of contract. A
promise may be binding as a matter of justice and equity although for one
reason or another (for example because in favour of a third party) it would
not be enforceable in law.
I do not suggest that exercising rights in breach of some
promise or undertaking is the only form of conduct which should be regarded as
unfair for the purposes of section 459. For example there may be some event
which puts an end to the basis upon which the parties entered into the
association with each other making it unfair that one shareholder should
insist upon the continuance of the association. The analogy of contractual
frustration suggests itself. The unfairness may arise not from what the
parties have positively agreed but from an a majority using its legal powers
to maintain the association in circumstances to which the minority can
reasonably say it did not agree: non haec in foedera veni. It is well
recognised that in such a case there would be power to wind up the company on
just and equitable ground (see Virdi v Abbey Leisure Ltd 1990 BCLC 342)
and it seems to me that, in the absence of a winding up, it could equally be
said to come within section 459. But this form of unfairness is also based
upon established equitable principles and it does not arise in this case."
My emphasis added.
- From this passage in the speech of Lord Hoffmann it is plain that he was
not restricting the right to relief under section 459 and 461 to circumstances
where it could be shown that the respondent was exercising his control of the
company to the disadvantage of the petitioner in breach of some contract or
understanding between them which the Court would regard as either
contractually binding or sufficiently binding in conscience so that the Court
could treat its breach as being unfair. Lord Hoffmann plainly acknowledges the
right, long established by authority under section 210 of the Companies Act
1948 and section 459, for a minority shareholder to petition where a majority
exercised its majority power to the disadvantage of the minority in their
capacity as shareholders. Such conduct can be rationalised as a breach of the
express or implied terms of the articles of association binding on the
shareholders.
- Later in his speech Lord Hoffmann referred with approval to the Case of
re H.R.Harmer Ltd 1959 1WLR p 62 as showing "that shareholders
who receive their shares as a gift but afterwards work in the business may
become entitled to enforce equitable restraints upon the conduct of the
majority shareholder."
- For these reasons it seems to me that notwithstanding what I said in my
first judgment and my findings the petitioners are able to present a case for
relief under their petition in respect of which there is no substantial risk
that a fair trial cannot be held.
- I turn to consider the third question namely whether the petitioner has
established a prima facie case for a minority buy out order.
- Whereas Mr Rosen was initially disposed to contend that it would premature
for me to decide whether such an order should be made before he had
opportunity to cross examine the respondents witnesses, in particular Graham
Blackledge, in the end he accepted that I was in a position to do so at the
close of the petitioners case.
- The only reported case where a minority buy order was made to which my
attention was drawn was re Brenfield Squash Rackets Ltd 1996 2BCLC p
184 a decision of Mr Justice Rattee. At page 190 of the report he says
this:-
"It may be comparatively unusual for a majority shareholder
of the company to be ordered to sell its shares to minority shareholder
petitioners, but in the circumstances of this case I consider it
appropriate."
- He then went on to draw attention to particular contractual provisions
which bound the parties and might as a matter of contract have enabled the
petitioners to require the majority shareholders to sell their shares. That a
minority buy out order was an unusual order was also stated by Mr Justice
Harman in an unreported part of the case of re Nuneaton Borough
Association Football Club reported in the Court of Appeal on a
different point at 1989 BCLC. In that case Mr Justice Harman appeared to base
his decision to make such an order on the fact that the majority shareholder
had demonstrated his unfitness to control a limited company. In neither case
did the Court try to lay down any guidelines to the sort of conduct by a
majority shareholder which would justify a minority buy out order.
- In the present case it was argued by Mr Rosen that I should make such an
order because the very evident success of Bodycare was substantially the
result of the efforts and commercial skill of Nigel and Lorraine and it would
be unjust for PLC to reap the benefit. I am unable to accept that submission.
Quite apart from the impact of the fraud of Nigel in his conduct of the
litigation a minority buy out order would disregard the fact that it is common
ground that Bodycare was set up, if not to be the retail arm of PLC, to be a
substantial customer of PLC bound to it by PLC’s control of a majority
shareholding in it. It would also disregard the substantial financial and
other assistance given by PLC which has undoubtedly meant that Bodycare has
reached its present levels of commercial success in a much shorter time than
would have been the case had it been throughout trading on its own without the
support of a benevolent parent.
- I now turn to consider the petitioners application to strike out the cross
petition of PLC. This was presented on the 13th November 1998. It
is based on the alleged unfair conduct of Nigel and Lorraine as managing
directors of Bodycare and alleges a series of events which were procured to
take place by Nigel and Lorraine and which, it is said, constitute conduct of
Bodycare’s business unfairly prejudicial to PLC. Complaint is also made that
Nigel failed to disclose to the cross petitioner his chequered business
history before being admitted to membership of Bodycare or at any subsequent
material time, that he has been guilty of forgery and contempt of Court and
that he has refused to resign as a director of the company in the light of
that dishonesty in which refusal Lorraine has supported him.
- I will hereafter refer to the respondents to the cross petition, Nigel,
Lorraine and Arrow Nominees Inc as the "respondents" and to PLC as the
"cross petitioner".
- The respondents contend that the cross petition should be struck out as
being demurrable on the ground that at all material times the cross petitioner
has controlled Bodycare, at general meeting by being the holder of 52% of
Bodycare’s issued shares and at Board level because, whereas at all material
times the Board has consisted of Graham and Margaret Blackledge, Nigel and
Lorraine, Graham as chairman of the company has held a casting vote.
- In re Baltic Real Estate Ltd (2) 1993 BCLC p 503 Mr Justice
Knox was considering a case where leave was being sought under RSC order 11 to
serve a petition under section 459 out of the jurisdiction on certain
respondents. Having found a jurisdiction to grant leave under order 11 Knox J
went on to consider whether the petitioner had established the necessary
"good arguable case" to justify service abroad. He found that no such
case was established because the petitioner at all material times controlled
the company in respect of the conduct of which relief was being sought under
section 459. At page 507 of the report Knox J referred to a passage in the
judgment of Lord Justice Jenkins in re HR Harmer Ltd ibid where
he said :-
"I think the point about the word "minorities" is that it is
only where the voting control is elsewhere that a case for the application of
the section [section 210 of the Companies Act 1948] arises. To take
this case, if the voting control had resided where the beneficial interest in
the ordinary shares resides, there would have been no need to invoke the
section. The chairman( the father) would have been eradicated root and branch
by this time. It is only because of the beneficial voting interests and his
having voting control that it is necessary to invoke the section at all. I
cannot think of any case where it would be possible to invoke the section if
the voting control was in the hands of the persons who are alleged to have
been oppressed… ."
- Knox J then continued:-
"That is authority, albeit obiter, for the proposition that a
person with voting control cannot be oppressed by a person without voting
control. One dictionary definition of "oppressed" is to keep under by
tyrannical misuse of power and the word does in my view denote power invested
in the oppressor over the oppressed. The same conclusion is much less clear
when what is involved is unfair prejudice in the conduct of a company’s
affairs. Even the wider phrase "unfair prejudice" however in my judgment is
not apt to encompass prejudice from which the person whose interests are said
to be prejudiced can readily rid himself. The prejudice relied on by the
petitioner is based solely upon the activities of the second and third
respondents as directors of the company a status which they only enjoyed until
the majority shareholders removed them. That the second and third respondents
were in breach of their obligations under the shareholders agreement, which I
assume in the petitioners favour, does not in my view establish the
proposition that the petitioners prejudice was unfair within the meaning of
section 459, because on that hypothesis the petitioner had an available method
of bringing the prejudicial state of affairs to an end and indeed did so. …
the section was I believe enacted to enable help to be given to those who
needed it and it seems to me to be improbable that the petitioner could show
it fell into such a category."
- That passage in the judgment of Knox J was cited with approval by Lord
Justice Peter Gibson giving the lead judgment in re Legal Costs
Negotiators Ltd 1999 BCC p547. In that case the Court of Appeal was
considering a section 459 petition in respect of a company whose 100 issued
shares were held equally by the four former partners in a partnership whose
business it incorporated. The respondent in respect of whom unfair conduct of
the company’s affairs was alleged had been dismissed from his employment by
the company and, under threat of removal, had resigned his directorship.
Thereafter the majority shareholders presented a petition under section 459
claiming an order that the respondent sell his shares to them at a fair
price.
- Lord Justice Peter Gibson said this, having cited the passage from Knox
J’s judgment in The Baltic case which I have set out:-
"The good sense and correctness of those words seem to me
obvious. In my judgment the Judge was entitled to find Knox J’s observations
in No 2 persuasive on the ground that they contain a clear statement that the
section is not apt to deal with a case where the petitioner can himself
readily put an end to the unfair prejudice alleged."
- Earlier in his judgment Lord Justice Peter Gibson had said:-
"Miss Garcia-Miller was in my opinion right to submit that
there is academic and judicial consensus as to the meaning of the section and
as to the mischief which it was intended to cure, viz. the abuse of power to
the prejudice of shareholders who lack the power to stop that abuse. A mere
majority shareholding may not suffice its holder: for example the voting
rights may not accord with the shareholding as in re HR Harmer Ltd… .
But in the ordinary case where the shares carry equal voting rights a majority
shareholder will generally have the power to stop unfairly prejudicial conduct
of the company’s affairs or any unfairly prejudicial act or omission of the
company."
- It was contended by Mr Freedman that in the present case the cross
petitioner did not have "an available method" of bringing the prejudice
of which it was complaining to an end by reason of its control of Bodycare.
This was so because Nigel and Lorraine might have an equity to restrain their
removal as directors of the company because of a contention that they had a
right to participate in Bodycare’s management arising from the understandings
between them and PLC through Graham and Margaret when they joined the
company.
- I cannot accept this contention. If correct it would have been available
to the petitioners in both the Baltic case and the Legal
Costs Negotiators case. Indeed it would be available in all cases
where a petitioner with voting control of a company was petitioning to obtain
a buy out order against a respondent against whom he was alleging unfairly
prejudicial conduct of the company’s affairs. In all such cases it would be
likely that the respondent could contend in a cross petition that to remove
him was contrary to the equities upon which he joined with the petitioner in
the relevant company.
- In addition it seems to me that if the allegations contained in the cross
petition could be established so that a Court would be justified in granting
relief under section 459 they would also afford the cross petitioner grounds
for contending successfully that its removal of Nigel and Lorraine as
directors of the company was justified thereby negating the equity to
participate in the management of Bodycare which they might otherwise
have.
- For these reasons it seems to me that the cross petition is demurrable and
ought to be struck out. Indeed on the accepted facts I am bound by authority
to do so.
- I turn to consider Nigel and Lorraine’s application to strike out the
action commenced by writ issued on 16th February 1999 by PLC
against them claiming injunctions and damages for passing off. This action is
the basis of certain interlocutory relief granted in these proceedings. The
action is based on the allegation that Bodycare are the licensees of PLC to
exploit the Bodycare concept and that by varying that concept without the
authority of PLC they have been selling products to the public outside the
terms of their licence and so passing off their retail services as those of
which PLC has the exclusive right to offer to the public or licence others to
do so.
- Because of the view which I have formed as to the part played by this
action in the dispute between the parties I will deal with the application
briefly.
- It is apparent that this action was brought with the object of obtaining
interlocutory relief restraining the defendants from opening new branches of
Bodycare using the Bodycare concept and from varying that concept. If my
orders on the petition stand the position will be that the petitioners will be
petitioning for relief which is also being sought by one of the respondents as
cross petitioner albeit pursuant to a demurrable petition it is clear that if
my orders stand, whatever the result of the petition , the respondents will be
left in control of Bodycare able to prevent the conduct which this action
seeks to restrain.
- The attack mounted by the defendants upon which they seek to justify an
order striking out the action is based on the contention that it is
demonstrable that within, CPR 24.2, the plaintiff has no real prospect of
establishing one of the fundamental requirements of a successful action for
passing off namely its right to the goodwill of the business being conducted
under the name Bodycare using the Bodycare concept. To do this PLC must show
the indicia of the Bodycare concept, the name, the décor of the shops, the
types of goods sold, the sort of prices at which they sold, are associated in
the minds of a substantial number of the purchasing public specifically and
exclusively with PLC: see the judgement of the Court of Appeal in
Scandecor Development v Scandecor Marketing 1999 FLR p 26 at
page 40 .
- In that case the Court of Appeal was dealing with a question of whether a
foreign parent was entitled to the goodwill of a retail business through which
its subsidiary had been distributing its products in the United Kingdom. At
page 43 of the judgment the Court accepted "that, in an appropriate case,
it is legally and factually possible for a business based overseas to acquire
a goodwill in this country by the supply of its product or services through a
subsidiary agent or licensee. Whether or not that occurs must depend on the
facts of the particular case."
- Indeed throughout the judgment, the Court of Appeal stresses that the
decision of in which party the right to the goodwill of the business resides
is, in almost all of the cases, essentially a question of fact. The conclusion
of the Court in that case was that the goodwill of the distribution business
in the United Kingdom was not shared between the parties (as found by the
trial Judge) but was owned exclusively by the English company.
- In the present case the facts are substantially different. It does not
seem to me to be of importance that both parent and subsidiary are situated in
this country. It may, however, be of importance that the business is one for
sale to the public of branded goods not goods carrying any sort of trade mark
of PLC. The degree of control exercised by PLC over the trading of Bodycare
will clearly also be of importance.
- It seems to me that just as in the Scandecor case these are
questions of fact which it is not appropriate to determine on an application
under CPR 24.2. I would therefore dismiss the application.
- It was submitted to me that considerable savings of costs and expense
would be achieved if this action could be disposed of at this stage. I accept
that if it is tried at the same time as the remaining issues in the petition
it will be necessary to enquire into facts and law much of which will be
irrelevant to the final disposal of the petition. In my view whether it will
ultimately be necessary to determine the issues in this action will depend on
the result of any appeal from my orders in the petitions thus far made, and on
the result of the petition whether at any appeal stage or at judgment after I
have heard the respondents case and the parties submissions. As at present
advised I would take the view that the appropriate course is that the hearing
of the action should await the result of the petition to be dealt with by me
immediately after judgment in the petition so that there will be no wastage of
time and costs by having to examine common issues of fact on a second
occasion.
