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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Arbuthnott v Bonnyman & Ors [2014] EWHC 1410 (Ch) (08 May 2014) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2014/1410.html Cite as: [2014] EWHC 1410 (Ch)

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		08/05/2014

Mrs Justice Asplin :

1. This case concerns claims of unfair prejudice under s.994 of the Companies Act 2006 made by the Petitioner, Mr Geoffrey Arbuthnott ("Mr Arbuthnott"), who is an 8.91% shareholder in the Nineteenth Respondent, Charterhouse Capital Limited (the "Company").
2. The Company through various subsidiaries and limited partnerships carries on a well-known and very successful private equity business, trading under the name of "Charterhouse" (the "Business"). After a management buyout from the HSBC group in 2001 the original shareholders of the Company were also the principal executives of the Business. Over time a number of the original executives have retired or left and a misalignment between the shareholding in the Company and the identity of the active executives in the Business has arisen.
3. In January 2008, Mr Arbuthnott, one of the Founders, gave notice of retirement as a member of Charterhouse Capital Partners LLP (the "LLP"), the main operating entity in the group of companies and LLPs in which the Company is interested ("the Group"). The LLP acts as investment adviser for the private equity funds managed by the Group. At the same time as retiring as a member of the LLP, Mr Arbuthnott retired as a director of the Company and other subsidiaries. However, he retained his 900 A shares of £0.01 each in the capital of the Company.
4. On 11 November 2011, the Eighteenth Respondent, Watling Street Limited ("WSL"), a vehicle for the 1^st to 11^th Respondents who were also shareholders in the Company and the other active members of the investment management team, made an offer to acquire all shares in the Company for £15.15 million (the "WSL Offer"). The WSL Offer was accepted by all of the members of the Company (other than Mr Arbuthnott), and they transferred their shares to WSL in February 2012. It was a condition of the WSL Offer, amongst others, that those who accepted it should vote in favour of an amendment to the articles of association of the Company. This duly took place. WSL proposes to exercise drag provisions in the Articles of Association in their amended form in order to acquire Mr Arbuthnott's shares. Mr Arbuthnott says that they would be better described as expropriation provisions.
5. In summary, Mr Arbuthnott raises four claims of unfair prejudice although there was some dispute as to whether these have been extended in the course of the proceedings, something to which I will return. In any event, the four main elements set out in the Petition were:

(i) First, that on 18 December 2008, he entered an oral agreement with Mr James Gordon Bonnyman the Chief Executive of the Company acting on its behalf ("Mr Bonnyman") under which it was agreed that there would be an independent valuation of the Company which would form the basis of a negotiation between Mr Arbuthnott and the Company for the purchase of his shares (the "Oral Agreement"). Mr Arbuthnott claims that the Company repudiated the Oral Agreement, causing him unfair prejudice;

(ii) Secondly, that the Company failed properly to consider or investigate concerns which he had raised in 2006, 2008 and 2009, about the misuse of confidential information and acquisition processes within the Company;

(iii) Thirdly, that subsequent amendments to the Shareholders' Agreement in 2009, which restricted the information rights of members, were improper and unfair;

and lastly that

(iv) The WSL Offer, the amendments of the Company's Articles of Association (the "Articles") which were a term of the WSL Offer, and the manner in which the WSL Offer was dealt with by the Company were carried out improperly in order to expropriate Mr Arbuthnott's shares at a gross undervalue rather than for any genuine corporate purpose.

Relief sought

6. The relief which Mr Arbuthnott seeks is either that he be permitted to purchase the shares of the 1^st to 17^th Respondents now held by WSL, at the price which applied under the WSL Offer or alternatively, that his shares be purchased by the Respondents at a fair and proper value determined by the Court or by a valuer appointed by the Court, reflecting the pro rata value of those shares on the basis of a willing buyer and a willing seller for the entirety of the issued share capital of the Company. In the further alternative, Mr Arbuthnott seeks injunctive relief in relation to the purchase of his shares and the remuneration policy applied by the Company.
7. In closing it was also submitted that an amount should be added to the purchase price payable by the Respondents or awarded in relation to the dividends foregone by Mr Arbuthnott during the period from his retirement in 2008 until the WSL Offer in 2011 and in particular in respect of 2009 and 2010.

Witnesses and Experts

8. It seemed to me that all of the witnesses of fact were straightforward and sought to assist the court, although in some cases their recollection of events was clouded by the passage of time and what in some cases appeared to be a reconstruction of events in light of the issues raised by Mr Arbuthnott. If and to the extent that I found parts of the evidence to be unreliable I will mention it expressly below.
9. I heard expert evidence on the Private Equity business from Mr Morton on behalf of the Respondents and Mr Florman for Mr Arbuthnott. They not only produced their initial reports and a joint memorandum but were also both the author of two supplemental reports.
10. Mr Florman is the former Chief Executive Officer of the British Private Equity & Venture Capital Association. He has experience of having set up his own private equity firm, and worked for seven years at Doughty Hanson, a firm which is accepted to have been within Charterhouse's peer group. He also advised 3i in its purchase of Adler in 1999 and sold his own small financial services business.
11. Mr Morton is a chartered accountant who has 29 years experience in corporate finance, the last 26 of which were spent as adviser to and in relation to the main participants in the private equity industry. It was not disputed that during his career he had advised on more change of ownership transactions of private equity fund management companies than anyone else in Europe.
12. There were also lengthy reports, supplemental reports and two joint memoranda from the valuation experts. Mr Mitchell was instructed on behalf of Mr Arbuthnott and Mr Eales on behalf of the Respondents.
13. Mr Mitchell is National Head of Share and Business Valuations at BDO LLP and since 2001 has been exclusively involved in the valuation of private companies and shares in them and has given expert evidence in relation to the valuation of a private equity house based in Hong Kong and a number of hedge funds (amongst other things).
14. Mr Eales is the Global Leader of Ernst & Young's Valuation & Business Modelling team. He is a member of the International Valuation Standards Council standards board, a member of the Chartered Institute for Securities & Investments, a certified Royal Institute of Chartered Surveyors ("RICS") Business Valuer, a Fellow of the RICS and a Member of the Licensing Executives Society. Amongst other things he is also a former chairman of the Society of Shares and Business Valuers in the UK and Chairman of the RICS Business Valuation Board.

Background to Charterhouse in more detail

15. Charterhouse Development Capital Limited ("CDC") (now a wholly-owned subsidiary of the Company) was established as a subsidiary of Charterhouse plc in 1965. In 1985 Charterhouse plc was acquired by the Royal Bank of Scotland ("RBS"). Thereafter, in 1993, RBS sold Charterhouse plc to Crédit Commercial de France ("CCF") and Berliner Handels-und Frankfurter Bank.
16. In 1997, CCF took 100% control of Charterhouse plc and in 1999 there were rumours in the market that ING might acquire CCF. At that time, Mr Bonnyman who took the lead in relation to the negotiation of the proposed buy-out received a number of letters from investors signalling their dissatisfaction at this potential arrangement and a preference for CDC to be independent of a larger group. In 2000, HSBC was considering the acquisition of CCF and once again a number of CDC's investors wrote to Mr Bonnyman expressing their concerns. It was Mr Arbuthnott's evidence that he was of the opinion that Mr Bonnyman had solicited the correspondence as a bargaining tool in the negotiations for the purchase of CDC from HSBC.
17. In any event, in July 2000, CCF was acquired by HSBC. After the acquisition, discussions began regarding a possible management buy-out of CDC. Mr Bonnyman took the lead. HSBC proposed a high valuation for CDC and in addition, proposed that it should retain 25% of future carried interest in the current investment fund for a period of 5 years after the buy out had been completed. Mr Bonnyman's response was that it would not be acceptable either to the CDC team or to its investors were HSBC to retain carried interest in the future. He made clear that, from the point of view of the CDC team, the entire point of the buyout was to acquire all of the carried interest in the profits created by the team and that it was carried interest which motivated them. He also made clear that he considered that the goodwill in CDC was in the people who worked there.
18. Once again, investors raised their concerns, this time about HSBC's proposal regarding carried interest. On 15 November 2000, Sue Scollan of Morley Fund Management sent an email to a number of other CDC investors stating that she could see no justification for HSBC having any share of carried interest and that she would not be prepared to consider investing in Charterhouse funds in the future were the arrangements in place.
19. Eventually a purchase price of approximately £9 million was agreed representing £2 million for the assets of CDC and the other companies within the Charterhouse Group, £4 million to reflect "goodwill" and £3 million in foregone performance bonuses.
20. The Share Purchase Agreement was executed in 2001 between CCF, a company named DMWSL 326 Limited (which later became Charterhouse Capital Partners Limited ("CCP")) and Charterhouse Development Capital Holdings Limited ("CDCHL").

Structure of Charterhouse after the MBO

21. On 15 June 2001, the 15 investment managers forming the MBO team (which included Mr Arbuthnott and the 1^st to 8^th and 12^th to 17^th Respondents, along with Kate Adderley who sold her shares in 2004 (the "Founders") subscribed for shares for a nominal value in CCP (then called DMWSL 326 Limited) and the Company (then called DMWSL 334 Limited). Mr Arbuthnott subscribed £9, the par value for his 900 A shares of £0.01 each in the capital of the Company, amounting to 8.9% of the issued share capital. He was the second largest shareholder after Mr Bonnyman who held 17.8%.
22. CCP was used by the Founders as a vehicle to acquire the issued share capital of the holding company of CDC and other companies related to the private equity business. On 20 November 2001, the Company acquired the shares of the investment managers in CCP for nil consideration, as had been envisaged by the Shareholders' Agreement dated 15 June 2001 (the "Shareholders' Agreement"). In March 2004, CCP was renamed Charterhouse Intermediate Holdings Limited.

The Shareholders' Agreement and initial thinking

23. The basis of participation in the Company was set out in the Shareholders' Agreement. Discussions as to the contents of the Shareholders' Agreement took place between January and June 2001. In a letter of 22 January 2001, from Mr Bonnyman to Alastair Dickson and Martin MacNair of Dickson Minto, a solicitors' firm which came to act for the Company and thereafter for WSL, which Mr Bonnyman accepts may well have been a draft, he set out his initial views on the philosophy which was to underlie ownership of the Company. It is important to set out the relevant parts at some length:

"Now that the MBO seems likely to move forward, I thought it was time for me to set down the philosophy which will underlie ownership of CDC.

(1) The objective in buying CDC in the first place is to secure for those who work there, all of the carried interest and all of the annual cashflow surplus generated by CDC. Other than as contemplated in (3) below, it is not intended that there be any other economic benefit flowing from the ownership of CDC. No dividends, for example, are likely to be paid.

(2) Ownership would not confer any right to participate in or alter the management of CDC. Any changes to the way in which CDC is being managed or, indeed, to the people who manage the firm would be dealt with by the management for the time being. A shareholding as such would give the shareholder no rights in that regard. Thus, if a shareholding held today was passed on, for example by way of inheritance, to another party, that party would have no rights whatsoever either to money or influence, other than as provided in (3) below.

(3) It is possible that CDC, in the medium or longer term, could acquire a value. At the moment, and as we have just seen, it has little value other than in the hands of those who run it. However, it is possible that it could acquire a value, over time, as a fund management business which could be sold in whole or in part for a substantial goodwill figure. That is the reason why I am anxious to protect CDC's new shareholders from being forced prematurely to sell out in the future; recognising that, through clause (2) above, all management control will reside in the hands of the management for the time being and that no limitation is placed on that by any non-management shareholders. My idea is that there be no pre-ordained arrangements or formula which would govern transfers of shares. On the other hand, if there was an offer for any or all of the CDC share capital there would be appropriate tag and drag along provisions."

24. In cross-examination, Mr Bonnyman emphasised that as far as he was concerned value would only be acquired by the Company over time, if, for example, a decision had been taken to expand the business to become a multi-national fund manager, a decision which had not been taken. Further, he said that he had always assumed that control would remain in the hands of the active executives and that shares held by others would have neither value nor control. However, he had not envisaged that investors would require alignment between shareholding and the investment team.
25. Mr Bonnyman enunciated his philosophy further in a subsequent letter to Alastair Dickson of Dickson Minto dated 25 January 2001. In that letter, Mr Bonnyman set out the differing views within the Company as to future exit:

". . . . There are a number of views on this, as you may imagine, but the common ground is as follows.

The absolute intention is to maximise the value of CDC to the people who are there today. In other words, no one is particularly concerned with the financial well being of those who will succeed us at CDC. Taking this as the overall objective there are, for the time being, two broad schools of thought.

The first takes the view that there is no goodwill in CDC as such or at any rate very little, as evidenced by our most recent discussions with HSBC. The goodwill, if any, of CDC resides only in the people running it for the time being. The argument then is that the right course for the people currently at CDC is to ensure that all of the cash generated by the company should be paid out year by year. The cash which CDC generates comes from management fees and carried interest. Carried interest is straightforward, since it is allocated to individuals, essentially in full, when each fund is raised. Where the cash flow generated by management fees is concerned, those who belong to this school of thought would argue that it should be paid out fully, subject to an obvious hold back for prudence, as salary and bonuses each year.

None would, in other words be retained within the firm to build goodwill since it is accepted that the firm will not have any goodwill. All power under this argument is vested in the managers of the business through whatever documentation is necessary (presumably the Shareholders Agreement and Articles of Association). Shareholders have essentially no power but if, in the unlikely circumstances of CDC having some goodwill, the original shareholders get the benefit (if say, CDC is sold). From this it follows that no formal arrangements need to be made in advance to cover future transfer of shares since in themselves the shares offer no economic benefit; and it is appropriate for future transfers to be dealt with as people see fit at the time. Share ownership in these circumstances could, in John Major's words, cascade down the generations.

The other school of thought, whilst not disagreeing with the objectives set out above, argues that, although today we may see no prospect of CDC as such having any goodwill, to organise affairs as described above guarantees that CDC will not accumulate goodwill. Future managers may receive the cashflow benefits which the firm generates, but if they have no share ownership of CDC they will not take the business forward (for example as a growing fund management business) if they have no ownership incentive to do so. It therefore makes sense to provide now for the future transfer of at least some proportion of the CDC share capital to its future managers on some basis. In support of that view, they also raise the question of whether it is realistic (or even legally feasible) for there to be, in future, a group of ageing or perhaps dead shareholders whose shares confer no rights in the way described above. They also take the view that now is the time to resolve any such questions since today we are talking amongst colleagues and friends where there is no current divergence of interests, which may become less true as time passes."

26. Mr Bonnyman's evidence was that Mr Arbuthnott was in the first school of thought. In fact, at around the same time, Mr Arbuthnott sent a handwritten note to Mr Bonnyman setting out his thoughts on the subject of an exit in the following way:

"I have read Alastair's discussion paper and it confirms my previous opinion that trying to legislate now for a price in say ten years time is impractical. The "devil is in the detail." The estimates/opinions that have to be made will leave any pricing even more open to challenge or if the new formula is made very rigid it will make it certain that the founders fail to receive close to fair value...I still think we should be silent on take out valuations except for bad leavers who should receive costs (which I understand will be v. low). I still cannot understand what benefit the founders receive from giving people who we quite possibly don't know an option to buy our shares at a pre-determined price. Yes I accept we cannot take out dividends etc and keep those remaining motivated but we should simply come to a deal at that time when we know all of the circumstances."

27. On 19 February 2001, Mr Arbuthnott set out some further thoughts in advance of a meeting in a fax to Martin McNair of Dickson Minto, the relevant parts of which are as follows:

"FUNDAMENTAL ASSUMPTIONS & PRACTICES FROM WHICH A SHAREHOLDERS AGREEMENT WILL BE DERIVED

1. The Founders (i.e. original shareholders) wish to maximize the value of their investments in CDC within a [eight] year timescale.

2. In the absence of an agreed alternative strategy (e.g. invest in starting up a CDO or technology fund) the Founders intend to strip CDC of cash each year subject to

Borrowing

CDC's typically prudent accounting policies

assumption 1. above. . .

. . .

9. In the event that CDC is not sold after eight years, the Company will no longer be stripped of cash through paying "excessive" bonuses. Instead the cash will be paid out by way of dividends."

28. In early March 2001, Dickson Minto produced a draft shareholders' agreement. In their covering letter of 2 March 2001 they included a commentary on the drafting. The comments in relation to the exit and remuneration provisions were as follows:

"Clause 7 - Exit: Clause 7. 1 contains confirmation from each of the parties that it is their intention to seek an Exit within eight years from the date of the Agreement (or such later date as the Founder Majority may specify). Regardless of the reference to the eight year time period, a Founder Majority may at any time agree to pursue an Exit. In such case, each party must co-operate in the pursuit of the Exit. An Exit is defined as a sale or listing.

. . . . . .

Clause 11 – Remuneration: We are aware that there has been a significant amount of discussion on how "profits" are distributed from the Company and, in particular, the relationship between profits distributed by way of bonus (whether ordinary or extraordinary) and profits distributed by way of dividend.

The position we have sought to reflect in the documents is, we believe, the one we ended up at in our meeting, namely:

(a)        In each year, the board (or whoever the relevant remuneration committee might be) put forward a proposal as to bonus levels.  These bonuses should be based on what the board/remuneration committee believes is appropriate for the business.  Before these bonuses can be paid, the proposal needs to be approved by the Founder Majority.

(b)        The Shareholders Agreement then obliges the board to declare a dividend in respect of any remaining distributable profits (subject to retaining sufficient cash in the business for the reasonable requirements of the business).

In summary therefore, the executives who continue to work in the business should be remunerated on a "marked" basis and any excess profits are then allocated pro rata according to the number of shares held (i.e. there is no special treatment of Founders)."

29. Mr Arbuthnott stated in his witness statement that he did not recall any discussion about the payment of dividends. This is consistent with Mr Pilgrim's evidence that he too did not recall the discussion of dividends. Nevertheless, the correspondence with Dickson Minto in early March 2001 addressed both to Mr Pilgrim and to Mr Arbuthnott is consistent with there having been discussions in the process of producing the final draft of the Shareholders' Agreement and the Articles of Association of the Company and in particular, at a meeting on 13 March 2001.
30. Thereafter, upon receipt of an email from Harriet Sandeman of Dickson Minto, of 26 March 2001, which recorded that it was understood that Mr Bonnyman had advised Alastair Dickson of Dickson Minto that it had been agreed that as long as Mr Bonnyman remained chief executive of the Company, he should be responsible for determining remuneration and in which instructions were sought as to whether to incorporate the amendment into the Shareholders' Agreement, Mr Arbuthnott's email response was "Yes, please incorporate this amendment into the Shareholders' Agreement now." The Dickson Minto email to which he responded had set out:

" . . . We understand that, in order to reflect the new proposal, we will need to provide for all remuneration decisions (i.e. salary reviews, salaries to be paid to new employees, bonuses, carried interest entitlement and any other discretionary payments) to be made by Gordon in his sole discretion. We assume that, once Gordon ceases to be chief executive (regardless of whether or not he remains a shareholder) the remainder committee (constituted as per the existing provisions in the Shareholders Agreement) will be responsible for making all remuneration decisions."

31. At a meeting with Dickson Minto on 30 May 2001, attended by Mr Bonnyman, Mr Arbuthnott, Mr Aldred and Mr Pilgrim amongst others, it appears from the annotated agenda that various topics were discussed including the function of the Remuneration Committee which by that stage included Mr Cox as well as Mr Bonnyman. On that agenda, an item which refers to annual dividend after remuneration and prudent provision is ticked. However, it was Mr Aldred's evidence that he had no recollection of any discussion about dividends.
32. In cross-examination, Mr Arbuthnott stated for the first time that he recollected discussions with Mr Bonnyman about the payment of dividends. In the light of the annotated agenda to which I have referred, it seems more likely than not that general discussions took place, although the content of those discussions is not clear.
33. In any event, the Shareholders' Agreement was adopted on 15 June 2001. The central provisions in relation to exit and remuneration are as follows:

"7. EXIT

7.1 Each of the parties confirms its intention to seek an Exit within eight years of the date of this Agreement or such later date as the Founder Majority may specify.

7.2 Each of the parties (other than the Company) hereby agrees that if a Founder Majority (excluding any Founder who is a proposed purchaser or is connected with a proposed purchaser involved in the Exit and, for this purpose, a Founder will be connected to a proposed purchaser if such a purchaser is a "connected person" within the definition of Section 839 of the Income and Corporation Taxes Act 1988) agrees to pursue an Exit at any time after the date of this Agreement, he will co-operate in the pursuit of the Exit and will agree to sell all the shares in the capital of the Company held by him to the proposed purchaser provided that the terms on which he is required to sell his shares are no less favourable to him than those being offered to any other shareholder holding shares of the same class.

7.3 The Founders, the Employees and the Company hereby agree to the disclosure by the Founders (acting with Founder Consent) of any information regarding the Group (whether confidential or otherwise) to any third party in contemplation of an Exit provided that no confidential information shall be so disclosed unless such third party shall have undertaken in writing to preserve the confidentiality thereof.

. . . . .

11 REMUNERATION

11.1 The parties hereto undertake to establish a standing committee of the directors of the Company called the remuneration committee (the "Remuneration Committee"). For so long as Gordon Bonnyman is Chief Executive of the Company (or, if the office of Chief Executive no longer exists, for so long as Gordon Bonnyman holds an office equivalent to Chief Executive), the Remuneration Committee shall comprise Gordon Bonnyman and, for so long as the Company has a Chairman, one other person who shall be the Chairman of the Company. At all times while composed of such individuals, the Remuneration Committee shall act by the unanimous agreement of its members. In respect of any decision, either member may notify the Founders that the two members are unable to agree on a decision, giving details of the decision which requires to be made. Within 21 days of any such notification, a Founder Majority shall appoint any other person to be a member of the Remuneration Committee in connection only with its consideration of the relevant decision, such appointment to subsist only for so long as is required to make the relevant decision and in relation to which the Remuneration Committee shall act by majority.

11.2 If and when Gordon Bonnyman ceases for any reason to be Chief Executive of the Company (or the holder of an equivalent office), the parties hereto undertake to ensure that the then existing members of the Remuneration Committee resign from membership of that committee and that instead the Remuneration Committee comprises the Founder Representative(s), any person holding the office of the Chief Executive of the Company and any other director appointed to the committee from time to time by the Founder Directors. At all times while the Remuneration Committee is so comprised, the Remuneration Committee shall act by majority, such majority to include a Founder Representative.

11.3 The Remuneration Committee shall make determinations on all matters concerning the emoluments payable or proposed to be paid to any employee or director of the Company or other member of the Group (including, without limitation, initial salary, salary reviews and the setting of bonus levels and performance targets, co-investment opportunities and entitlement to carried interests) and shall be empowered, on behalf of the Company (but not on behalf of the relevant employee or director) to amend any of the terms of the service contracts of any such employee or director from time to time.

11.4 For the avoidance of doubt nothing in Clauses 11.l, 11.2 and 11.3 shall affect or limit the right of the Founder Representative to receive remuneration and repayment of expenses in accordance with Clauses 6.3 and 6.4.

11.5 Each of the parties hereto (with the exception of the Company) hereby waives any right he may have to make a claim (whether in respect of any breach of fiduciary duties or otherwise) in respect of the payment by the Company to the employees and/or directors of the Company or any other member of the Group by way of remuneration (whether as part of a contractual right to be paid or as part of a discretionary element paid) provided the making of such payment has been determined in accordance with Clauses 11.1, 11.2 and 11.3.

11.6 Each of the parties hereto agrees, and each of the parties (other than the Company) undertakes to procure that so far as lawful and subject to:

(a) making prudent provision for the continued operation of the business of the Company (including the payment of remuneration referred to in Clauses 11.1, 11.2 and 11.3 above); and

(b) the Company, having sufficient funds available for such purposes (and does not require to incur any further borrowings),

a dividend in respect of all distributable profits available to the Company in respect of each financial year shall be declared and paid to the shareholders of the Company forthwith upon the production of the audited accounts of the Company for the relevant year."

"Founder Majority" for the purposes of a Clause 7 exit was defined as:

"the Founder or Founders who hold more than 50% of the A Shares held by the Founders (or, where any Founder or Founders are, by the terms of this Agreement, excluded from participating in the Founder Majority, the Founder or Founders who hold more than 50% of the A Shares held by the remaining Founders". "Founder Consent" was defined as: "the consent of a Founder Majority".

34. It was Mr Pilgrim's evidence that the inclusion of Clause 11.6 in the Shareholders' Agreement was of little concern to him because he did not believe that there would be distributable profits. In relation to Clause 7 he says that he was concerned about it and asked Dickson Minto who informed him that it was not binding. He viewed it merely as an expression of intention. He says that he had no expectation that there would be an "Exit" in 8 years when he signed the Shareholders' Agreement and he did not think that it would happen in any event. However, if it did and the majority were in favour, he would have gone along with it. He also considered a flotation to be a remote possibility only and did not discuss it with Mr Arbuthnott.
35. The Shareholders' Agreement also provided for certain matters set out in Schedule 3 to be the subject of Founder Consent and by Clause 4 provided for certain information rights set out in Schedule 4. Clause 14 of the Shareholders' Agreement provided that it represented an entire agreement with respect to the matters contemplated in the agreement and superseded all prior representations, agreements and negotiations, that no modification was enforceable except by amendment in writing agreed by more that 75% of the shareholders and that, in the case of inconsistency between the Articles of Association of the Company and the Shareholders' Agreement, the latter should prevail.
36. The Articles of Association of the Company were also adopted on the same day as the Shareholders' Agreement, and contained provisions as to pre-emption rights and change of control provisions. Article 34 contained "Bad Founder Leaver" compulsory transfer provisions. Under the change of control provisions, there were "drag and tag" rights if a person, whether or not a member of the Company obtained more than 50% of the voting rights.
37. Article 38.4, to which I shall refer in more detail, contained a drag right if a Founder Majority transferred or agreed to transfer their shares and determined that the provisions should apply. The "drag rights' provided that if a "Founder Majority" accepted an offer for their shares then, subject to certain formalities, the purchaser could require members who had not accepted the offer to sell their shares at the price accepted by the Founder Majority.
38. It was Mr Arbuthnott's evidence that as a result of discussions with Mr Bonnyman, Mr Pilgrim and Mr Aldred he had always understood that the Founders intended to raise two new funds after the buy-out and then seek an exit from Charterhouse. That exit might take the form of a sale to a third party, flotation or a sale to other executives at the firm and that this would be decided at the time of the exit based on what would produce the most favourable result for the Founders. In cross-examination, Mr Arbuthnott accepted that he had agreed to Mr Bonnyman having sole discretion over all remuneration, that he knew that profits would all be paid out to executives on an annual basis and that he had not complained that no dividends were paid until long after his retirement. (The payment of all available profits to the active investment managers was referred to in the witness evidence as "the remuneration model.") He also accepted that there was no reference to a change of policy after eight years in the Shareholders' Agreement and that, even when the eight year period expired in 2009, he did not demand the payment of dividends.
39. In cross-examination, Mr Bonnyman stated that he had accepted the Exit provisions in the Shareholders' Agreement because he understood them to mean that an Exit could not occur unless there were a Founder Majority in favour of it and in his estimation such a majority would not be achieved. In relation to remuneration and dividends, he was content because he was in control of remuneration and took the view that all profits should be distributed to the active team in order to create the maximum incentive, in other words, in accordance with the remuneration model. In any event, at that stage, there was no misalignment between share ownership and active investment managers and the Company was barely making a profit. Dividends were not an issue.
40. It was also Mr Bonnyman's evidence in his first witness statement that Mr Arbuthnott took the view that all the members of the Charterhouse team were involved on a daily basis with the valuation, buying and selling of companies and that if a valuation of Charterhouse was needed, the team would be best placed (and certainly able) to determine the price of the shares. Mr Bonnyman says that Mr Arbuthnott's view was that a market in the shares would develop among the members of the team and a price would be arrived at at that time, Mr Arbuthnott agreed that the remaining members of the management team were the only realistic and viable purchasers of the shares.

The Introduction of the LLP

41. On 18 December 2003, the LLP was incorporated into the structure of Charterhouse. From that time, the members of the investment team and senior administrative staff ceased to be employees of the Company and became self-employed members of the LLP. The Company's subsidiary CDCL remained and remains the managing Member of the LLP. All new members of the management and investment team become members of the LLP and when a person ceases to have an active role in the management and investment team, they cease to be a member of the LLP but retain any shares they hold in the Company.
42. All members of the LLP including Mr Arbuthnott signed the LLP Deed (which was subsequently amended and restated on 28 July 2003 and 15 October 2007). Clause 11 of the LLP Deed deals with the allocation of profits of the LLP in the following way:

"11.1. The Managing Member shall take all decisions relating to the allocation of the profits of the LLP.

11.2. The Managing Member shall make determinations on all matters concerning the allocation of profits payable or proposed to be paid to any Member and any other matters relating to the benefits which may be enjoyed by Members (including, without limitation, Monthly Drawings Amounts, Special Drawings Amounts, the setting of performance targets, new co-investment opportunities and new entitlement to carried interests) and shall be empowered, on behalf of the LLP (but not on behalf of the relevant Member) to amend any of the terms upon which the relevant Member(s) provide services to the LLP from time to time (provided that, without prejudice to Clauses 17 and 18, any such amendment which is detrimental to the Member shall also require the approval of that Member).

11.3. Each of the parties hereto (with the exception of the LLP) hereby waives any right he may have to make a claim (whether in respect of any breach of fiduciary duties or otherwise) in respect of any allocation of profit share by the LLP to the Members (whether as part of a contractual right to be paid or as part of a discretionary element paid) provided the allocation of such profit share has been determined in accordance with Clauses 9.1 and these Clauses 11.1, 11.2 and 11.3.

11.4. Subject to Clause 12.7, each of the parties hereto agrees, and each of the parties (other than the LLP) undertakes to procure that, so far as lawful and subject to:

(a) making prudent provision for the continued operation of the business of the LLP (including the allocation of profits referred to in Clauses 11.1, 11.2 and 11.3 above); and

(b) the LLP having sufficient funds available for such purpose (and not requiring to incur any further borrowings),

all profits available to the LLP in respect of each financial year shall be allocated amongst and paid to the Members forthwith upon the audited accounts of the LLP being duly signed by the Designated Members for the relevant year."

43. Clause 12.7 of the LLP Deed provided that:

"The LLP shall be under no obligation to make a distribution of profits in any circumstances. The Managing Member shall determine in its sole discretion whether a distribution of profits is to be made, how much of the Profits are available for distribution and to what extent a distribution of such amounts shall be made."

44. Clause 11.3 of the Shareholders' Agreement was amended in 2003 in order to allow for the incorporation of the LLP into the Charterhouse structure:

"11.3 The Remuneration Committee shall make determinations on all matters concerning the emoluments payable or proposed to be paid to any employee or director of the Company or other member of the Group (including, without limitation, initial salary, salary reviews and the setting of bonus levels and performance targets, co-investment opportunities and entitlement to carried interests) and shall be empowered, on behalf of the Company (but not on behalf of the relevant employee or director) to amend any of the terms of the service contracts of any such employee or director from time to time. Any determinations on matters relating to the allocation of profits of the LLP which are to be made by Charterhouse Development Capital Limited pursuant to the terms of the LLP Deed shall be made by Charterhouse Development Capital Limited acting through the Remuneration Committee. The parties hereto shall procure, so far as they are able, that such determinations are implemented by the LLP and any member of the Group which is a Member of the LLP."

45. It was Mr Arbuthnott's evidence that he was happy to leave remuneration in the hands of Mr Bonnyman at that stage. In fact, Mr Cox also attended Remuneration Committee meetings and Mr Pilgrim was often present acting in a Human Resources capacity and provided details of the individual managers drawings and market data in relation to average remuneration for different levels of seniority within the industry. Mr Bonnyman said that he paid little attention to the data and that he discussed the level of remuneration widely amongst his colleagues before making determinations.
46. I should mention that the investment managers were remunerated not only by way of drawings and annual bonus but also by the award of a percentage carried interest in a fund which was awarded at the outset and also as a result of the need to "co-invest". It was the evidence of the Private Equity experts that investors in a fund like to see that the investment managers are also committed to the outcome of the investments they make and, therefore, require a level of "co-invest." In the case of Charterhouse, the investment was covered by way of a bonus payment to the individual managers which was netted off against the liability to the fund. If a fund proved successful, both carried interest and co-investment could prove extremely lucrative.
47. In fact, as a result of the way in which the complex structure of the Charterhouse business was set up and the way in which the agreements relating to the funds themselves were organised, 95% of the fees which formed the bulk of the income of the Business was payable directly to the LLP.
48. At this stage, I should also summarise the structure of the Business. The Company is the 100% owner of Charterhouse Intermediate Holdings Limited, (CIHL). It was Mr Patrick's evidence that both the Company and CIHL are holding companies and have no other activities. CIHL owns 100% of CDCL which acts as the Managing Member of the LLP. CIHL also owns 100% of the shares in each of the companies which act as General Partner in the various fund Limited Partnerships.
49. The General Partners are appointed pursuant to the relevant LP Agreement in respect of each respective fund. Each General Partner receives a management fee referred to in the LLP Agreements as the "Management Profit Share." Each General Partner appoints the LLP to act as adviser to the General Partner in relation to the management of the investments in the particular fund. In practice, the funds are raised and managed by the members of the LLP which in return is paid at least 95% of the management fee income received by the General Partner together with any additional amounts which may have been agreed.
50. CDCL as Managing Member of the LLP is responsible for the allocation of profits and all matters relating to benefits which may be enjoyed by the members of the LLP pursuant to Clauses 11.2 and 11.3 of the LLP Agreement whereby, pursuant to Clause 11.4, subject to prudent provision and having sufficient funds available, all profits of the LLP in each financial year are payable to the members of the LLP.
51. Further, as I have already mentioned, Clause 11.3 of the amended form of the Shareholders' Agreement provided that the Remuneration Committee would act on behalf of CDCL in relation to determinations as to the allocation of the profits of the LLP to be made by CDCL under the LLP Agreement. It was Mr Pilgrim's evidence that it was an oversight that the amended provision was not included in the 2005 Amended and Restated version of the Shareholders' Agreement. This evidence was unchallenged and I accept it.
52. In exercising its discretion under the LLP Agreement, CDCL through the Remuneration Committee owes a contractual duty of good faith to the LLP and to the general body of its members as a result of Clause 13.2 of the LLP Agreement. Accordingly, all profits of the LLP which amount to at least 95% of the management fee income of the Business is distributed amongst the members of the LLP. It was Mr Patrick's unchallenged evidence that the remainder is used by CDCL to cover business expenses.

Founder Departures and new shareholders

53. To return to the chronology of events, in 2004, one of the Founders, the 14^th Respondent, Mr Simon Drury ("Mr Drury") retired from the business. Prior to his retirement but also in 2004, Ms Adderley had retired and sold her shares to the Company based on a value for the Company of £15million. Messrs Xavier Thoumieux and Thierry Gisserot, who joined the investment team briefly, bought shares in the Company in 2005 and on their resignation a year later in 2006, sold them, based on a value for the Company of £9.5m.
54. Mr Arthur Mornington joined the investment team in 2006. He says that he was not aware of the Company or the details of its ownership at that stage but was informed that all surplus management fees were paid out in bonus each year, something which was of considerable importance to him. He did not read the Shareholders' Agreement or the Articles of Association of the Company.
55. New members of the investment team, Messrs Etroy, Fehling and Morgan acquired shares in 2007 based on a valuation of £15.15m. It was Mr Arbuthnott's evidence that he was against Messrs Etroy, Fehling and Morgan acquiring shares because it did not fit with an exit strategy and he said in cross-examination that he had broached exit with Mr Bonnyman when they were away on fundraising trips, but had made no headway.
56. He was shown an email dated 15 August 2008 from Mr Offord to Dickson Minto in which amongst other things, Mr Offord reported a discussion he stated that he had had with Mr Arbuthnott at dinner after the Windsor Races some three years previously. Mr Offord reported that Mr Arbuthnott had stated that it was a mistake to promote Messrs Etroy, Fehling and Morgan, that the Company was for the benefit of the Founders and that new recruits should work for a minimum salary, in part to create a tension which would increase the price for shares on retirement, that he should be paid a large price for his shares on retirement and that there should be a dividend in order to set a precedent. In cross-examination, Mr Arbuthnott stated that there had been no dinner and that the email did not reflect his views. However, he did accept that he had held the view that the salaries of the junior members of the team should be limited and that their role was to make money for the firm.
57. He also stated in cross-examination that he had discussed exit strategy not only with Mr Bonnyman but also with Mr Pilgrim around the end of 2006, when the promotion of Messrs Etroy, Fehling and Morgan was under consideration. They were sharing an office at the time.
58. In fact, shares were allotted to Messrs Etroy, Fehling and Morgan at a price of £1500 per share and the necessary Founder Consent dated 29 May 2007 was signed by Mr Arbuthnott.

KPMG

59. In around November 2006, Mr Pilgrim, Mr Bonnyman and others attended a meeting with KPMG about the valuation of the Company. It appears that in fact, there had been a meeting in October and that another took place in July 2007. Nevertheless, it was Mr Pilgrim's evidence that the exercise did not go very far and KPMG merely set out how they might assist. However, it is clear from an email of 24 November 2005 that the position of "exiting partners" had been discussed and was to be discussed again with Mr Arbuthnott.

Reduction in carried interest

60. At Mr Arbuthnott's annual appraisal at Christmas 2006, Mr Bonnyman told him that a number of senior figures in Charterhouse were strongly of the view that his share of carried interest in Fund VIII should be reduced by a half to around 4% on account of his poor performance and declining contribution to the business. This was something which had never been suggested to anyone before and had the potential to be of considerable financial detriment. Mr Arbuthnott's evidence was that he was taken by surprise. He accepted in cross-examination that the percentage of carried interest was awarded to an executive at the commencement of a fund on the basis of anticipated performance. In any event, after negotiation, the eventual reduction was agreed at 0.48%. Nevertheless, Mr Arbuthnott says that he felt humiliated by the diminution in his carried interest and that he had been "mugged".
61. Thereafter, in early 2007, the Executive Committee was formed and Mr Arbuthnott was not included as a member. Mr Bonnyman says that it was a continuation of the Administrative Committee and that Mr Arbuthnott had never shown any interest in such matters. Nevertheless, Mr Arbuthnott says that he had been considered potentially as Mr Bonnyman's successor and his right hand man and that he felt excluded.

The Alleged Oral Agreement

62. On 18 December 2007, Mr Bonnyman met with Mr Arbuthnott in his office, for an end of year appraisal meeting. It was at this meeting that Mr Arbuthnott indicated a wish to resign. It is also not in dispute that it was agreed that on Mr Arbuthnott's resignation, the unvested portion of his carried interest in Fund VIII would vest in full (this would not have otherwise happened until March 2010 and Mr Arbuthnott would have lost the unvested component if he retired before that date). It was the first time that such a concession had been made and Mr Bonnyman says that he saw it as a significant one. In cross-examination, Mr Pilgrim accepted that it was a big concession and would have been thought at the time to have been of considerable value.
63. Mr Arbuthnott says that he sought a clean break from Charterhouse and accordingly, his shares were also discussed at the meeting in December 2007. He says that he reached an oral agreement with Mr Bonnyman under which an independent valuation of the Company would be undertaken which would be used as the basis for negotiations of the purchase of Mr Arbuthnott's shares by the Company. The valuer was to be jointly instructed and both Mr Arbuthnott and Mr Bonnyman were to have input into the assumptions to be used (the "Oral Agreement"). It is Mr Arbuthnott's evidence that he mentioned KPMG to Mr Bonnyman because he hoped the firm would be acceptable, given that he and Mr Bonnyman had met KPMG previously.
64. Mr Bonnyman categorically denies that the Oral Agreement was reached and says that he neither agreed to an independent valuer nor the purchase of Mr Arbuthnott's shares. He says that he pointed out that the only purchasers for Mr Arbuthnott's shares would be the other members of the executive team and that they would only fetch a minimal price and that the team could not afford a high price. He says that he thought that Mr Arbuthnott had taken his point and had responded that as a solution, he should be paid for his shares by being allocated 10% of the carried interest in the next fund. This is denied by Mr Arbuthnott. Mr Bonnyman does accept that he may have said that he might go back to KPMG in order to see what ideas they had about the value of the shares.
65. Mr Arbuthnott says that he mentioned his intended retirement and the agreement in relation to the vesting of carried interest to Mr Pilgrim as soon he left Mr Bonnyman's office but accepts that he did not mention the Oral Agreement. Mr Pilgrim confirms that Mr Arbuthnott mentioned his retirement on his way out of the office after his meeting with Mr Bonnyman on 18 December 2007 and states that on that occasion, Mr Arbuthnott suggested that he would be willing to sell his shares for 9% of carried interest in Fund IX. Mr Pilgrim says that he made clear that he considered such a proposal to be wholly unrealistic and that Mr Arbuthnott responded that it was his starting position and that he intended to act against Charterhouse before Fund IX closed because he considered that his position would be strongest at that stage.
66. Mr Pilgrim says that he only discussed Mr Arbuthnott's hostility with his wife and a colleague, Nigel Hamway, and that he came to the conclusion that it was probably said in the heat of the moment. I accept Mr Pilgrim's evidence in this regard. In any event, it is not disputed that he did not tell Mr Bonnyman or any of the legal advisers who assisted in concluding the retirement agreement with Mr Arbuthnott.
67. In any event, on 20 December 2007, Mr Pilgrim sent an email to Martin MacNair at Dickson Minto stating that Mr Arbuthnott would be leaving the LLP with effect from 31 December 2007. After Martin MacNair had requested further details of the arrangements, Mr Pilgrim sent a further email setting out the main provisions to be included in Mr Arbuthnott's retirement agreement. No mention was made of any arrangements concerning Mr Arbuthnott's shares. The relevant part of his email is as follows:

"I can see the agreement being similar to the one entered into with Simon Drury back in 2004, specifically:

1. Geoff will get six months of scheduled monthly drawings up to 30 June on the 31 December level but no bonus drawings.

2. His carry in the VIIIth fund will vest (earlier funds are already vested) and he will keep any co-investment he already has and co-investment in any new deals done up to 30th June will be funded by special drawings.

3. I think we will offer him the chance to co-invest in any other CCPVIII deals after 30th June but he will have to pay for them himself and if he turns one down he loses the option."

68. On 16 January 2008, Mr Pilgrim sent Mr Arbuthnott an email attaching a first draft of Mr Arbuthnott's retirement agreement. It dealt amongst other things with the vesting of carried interest in Fund VIII as agreed with Mr Bonnyman at the meeting before Christmas but contained no reference to the alleged Oral Agreement. However, Mr Arbuthnott's shares in the Company were referred to in the following way:

"2 It is acknowledged that you hold 900 A Ordinary Shares in the capital of Charterhouse Capital Limited (the Shares) and that nothing in this Agreement (including but not limited to Clause 19) shall affect your rights in relation to the Shares."

69. On 21 January 2008, Trevor Ingle of Hammonds (Mr Arbuthnott's lawyer) sent Mr Pilgrim and Martin MacNair an updated draft of the retirement agreement, which included "minor comments", which were "essentially points of clarity." Clause 2 of the retirement agreement, which dealt with Mr Arbuthnott's shares, was amended slightly by inclusion of an express reference to the Shareholders' Agreement as amended. No mention of the alleged Oral Agreement was included. The other amendment was the addition of a new provision in Clause 7 by which Mr Arbuthnott was permitted to use the LLP's debenture tickets for the Wimbledon tennis Championships in 2008.
70. The same day, Mr Pilgrim sent an email to Martin MacNair of Dickson Minto in which he commented on the second draft of the agreement:

"Nothing of great significance to report – Geoff said that both he and Trevor felt it was a fair agreement."

Negotiations continued until 24 January 2008 when the seventh and final draft was agreed. Clause 2 remained in the same form and had not been subject to further discussion.

71. Mr Pilgrim says that he was the Charterhouse contact for the negotiation of Mr Arbuthnott's retirement terms and that there was no mention whether from Mr Arbuthnott or through the lawyers for both sides of the alleged Oral Agreement or more generally, of a valuation of Mr Arbuthnott's shares at any time during the negotiations for the retirement agreement. On the contrary, he pointed out that the only mention of the Shares was in accordance with Clause 2 of the retirement agreement, namely that they were held and that nothing in the agreement would affect his rights in relation to them.
72. Mr Arbuthnott on the other hand says that this is not surprising because the Oral Agreement was to be treated as a 'separate' agreement to be dealt with afterwards which he now characterises as having been "stupid". He says that once the valuation had taken place and the negotiation completed, the transfer and cancellation of his shares would be dealt with as a separate matter and that he took it in good faith that the valuation would be progressed whilst he was on holiday and that he telephoned Mr Pilgrim for an update on progress before he went away on a number of occasions, although he could not remember precisely when. However, he said that one of the calls was on 8 February 2008. Mr Pilgrim had no recollection of the calls.
73. When asked in cross-examination why he had not sought written confirmation of the Oral Agreement he said that he just thought that it would follow. He said that he had been too frightened of Mr Bonnyman to write to Mr Bonnyman to remind him of the terms of the Oral Agreement and was mindful not to cause any difficulty until after his retirement from the LLP took effect on 30 June 2008.
74. Mr Arbuthnott also says, and it is alleged in the Petition, that he was rushed into signing the retirement agreement because there were rumours in the market about his departure from Charterhouse and it wished to agree terms and make a public announcement as soon as possible, something of which Mr Pilgrim denies any knowledge. There is no other evidence of a rush as a result of rumours in the market and I reject Mr Arbuthnott's evidence in this regard. I do accept his evidence that he was eager to resolve the terms of his departure before he went on holiday on 25 January 2008.
75. It is not disputed that Mr Arbuthnott and Mr Pilgrim met at Starbucks in Paternoster Square on 16 April 2008. Mr Arbuthnott says that the valuation of his shares was discussed, something which Mr Pilgrim denies. It was his evidence that he did not remember any discussion about an independent valuation of Mr Arbuthnott's shares. It seems to me that it is more likely than not that having arranged a meeting in central London, Mr Arbuthnott would have at least mentioned his shares, as he suggests and I accept his evidence in this regard.
76. In cross-examination Mr Arbuthnott was asked why, if the Oral Agreement had been concluded, he had not contacted anyone between 8 February and 16 April and why he had not mentioned the Oral Agreement to anyone other than Mr Bonnyman and Mr Pilgrim. His response was that it was only worth dealing with Mr Bonnyman about the shares and that he had not made contact until 16 April because he already realised that the agreement had "gone sour". He did not make contact again until 21 June 2008 when he began to make arrangements to meet for lunch, to which I refer below.
77. In any event, it is Mr Drury's evidence that after Mr Arbuthnott had left Charterhouse in 2008, he contacted him and stated that he had ideas for increasing the value of his shares in the Company, that there was a window of opportunity before the next fund raising and asked him whether he was interested in joining with him. Mr Drury says that he was interested in selling his shares but did not believe that all of the shares had any more value than around £9 to 10m. He also says that he made clear that he would only participate in something which Charterhouse was willing to go along with. In cross-examination, Mr Arbuthnott said that he had no recollection of the telephone conversation at all. I found Mr Drury to be an honest and straightforward witness and I accept his evidence in this regard.
78. Meanwhile in the context of a memorandum headed "Compensation Review 2007" from Mr Pilgrim to Mr Bonnyman, Mr Pilgrim noted:

"Retiring partners

I don't know what thoughts you have regarding Geoff's position and whether you want to discuss this.

It does occur to me that there are now a number of partners in various "transition' states (Geoff, Tom, Simon, me and possibly Duncan and Edward) and between us we have about one-third of the Charterhouse shares. Next year might be an opportunity to consider a reorganisation, perhaps after CCPIX [Fund IX] has been raised."

The meeting at Burnham Market

79. Thereafter, on 21 June 2008, Mr Arbuthnott sent an email to Mr Pilgrim inviting him for lunch in the week beginning 14 July. After further emails, it was agreed between the two that they would meet on 9 July 2008. However, on 8 July 2008, Mr Arbuthnott sent Mr Pilgrim an email cancelling lunch the following day:

"I would rather cancel our lunch tomorrow but would like to meet with you and Edward Cox before July is out and before Fund 9 is closed. Can you arrange that for the w/b 21 July? . . . It is in everyone's best interests if we keep this meeting to ourselves. . ."

80. On 30 June 2008, Mr Bonnyman acting on behalf of Charterhouse, wrote to Mr Arbuthnott concerning his retirement as a director of Lucite, a company which had been acquired as a fund investment. Mr Arbuthnott responded at some considerable length. I should add that in neither communication was reference made to the valuation of Mr Arbuthnott's shares pursuant to the alleged Oral Agreement.
81. Thereafter, on 9 July 2008, Mr Pilgrim responded to Mr Arbuthnott stating that it had been agreed that there was no point in involving Edward Cox, the Thirteenth Respondent (Mr Cox) and that although he agreed to the conversation being confidential, he, Mr Pilgrim, would tell Mr Bonnyman that he was going to meet Mr Arbuthnott. Mr Arbuthnott responded the following day as follows:

"As the second largest shareholder in Charterhouse and as someone who worked there for 24 years I am astonished that the Chairman refuses to meet me for a confidential meeting and that you feel it necessary to inform Gordon despite my request that you do not. I suggest you reconsider on both counts. When can you both make it. I believe that it is in everyone's best interests if we have that meeting before Fund 9 closes."

82. In cross-examination, Mr Arbuthnott suggested that his concern to meet before Fund IX closed was as a result of an effort on his part to protect the fundraising process from the uncertainties which would be caused by an unresolved dispute as to his shares. On the balance of probabilities, and in the light of his telephone conversation with Mr Drury and his immediate reaction to Mr Pilgrim after his resignation in December 2007, it seems to me that although Mr Arbuthnott wanted to avoid the effects of the uncertainties of a dispute upon the fundraising process, the urgency was driven by Mr Arbuthnott's desire to maximise his bargaining position in relation to his shares.
83. Mr Arbuthnott called Mr Pilgrim a few days later, as Mr Pilgrim was leaving for a holiday, insisting that a meeting be arranged as soon as possible. Mr Pilgrim suggested that he contact Mr Cox, which he did. Mr Cox was on holiday in Norfolk. It is his unchallenged evidence that he indicated that he would be back in London the following week and suggested that a meeting be arranged then. Nevertheless, Mr Arbuthnott stated that he wished to meet in Norfolk as soon as possible. A lunch meeting was arranged at "The Hoste Arms" in Burnham Market on 31 July 2008.
84. On 31 July 2008, Mr Arbuthnott and Mr Cox met at "The Hoste Arms" for lunch. Having found their table and exchanged short pleasantries, Mr Cox took a note of the meeting on a Herbert Smith notepad with a Deloitte pen, both of which Mr Arbuthnott had provided, having told Mr Cox that he might find them useful. Mr Arbuthnott, on the other hand, did not take any notes during the lunch. It is not disputed that Mr Cox said little and took notes. Mr Cox's notes read as follows:

"O/Clean Break

KPMG

[???] Def[f]erred

2 stage process

JGB reneged

Would not have signed resignation

HS 'strong case'

• Misrepresentation

• Collateral Agreement

• Unfair Prejudice

Confidentiality Breaches

Plundering corporate data

18 months / "Background to Deal"

FSA - go nuts

PHS

Auction CDC late

entrant

Jamie/Christian ? JGB

Breaches Confidential [letter]

TRP in big trouble

Aware / meetings

• JGB embedded rights in '01 S/A agreement

Jamie (lawyer) should know better

Rights issue

Gangsters

JGB @ meetings with Mgt

Out of control

1/06 •Teachers/Albany

• [$23k]

• charged to Fund 8

JGB dismissed summarily

Only deal

• EGC/GJA/JGB

S Times Rich List

Account '07 50m-post interest 37m

Agreed to sell (2 funds)

Moral commitment

Legal Advice • Herbert Smith

Shocked!

'Plundering of Corporate Data'

FSA

Choice –

• a writ

Alternative 'Buy my shares & I go away'

Instruct HS to send a writ

or purchase & sale agreement

Will spiral out of control

No Fund 9

"Crooks"!

9% = [text crossed through] £50m

+ 9% carry in 9

'I think reasonable'

That's what I think worth

That what I want.

EGC should get out

high stakes games

Not for me (GJA)

Writ in respect of "deal"

with JGB

JGB misrepresentation [text crossed through]

as a result of which GJA

signed the resignation agreement."

85. There is conflicting evidence as to what exactly was said at this meeting and what was discussed. Mr Cox says that Mr Arbuthnott initially began talking about the Oral Agreement between Mr Bonnyman and himself, before moving onto raising concerns as to improper conduct within the Company and then requesting that the Company buy his shares for £50 million plus 9% carried interest in Fund IX. Mr Cox says that the effect of the discussion and the manner and sequence in which topics were raised, the reference by Mr Arbuthnott to serious breaches of confidentiality undertakings and the plundering of corporate data was that he felt that Mr Arbuthnott was trying to blackmail the Company. Mr Cox says that he also referred to a "gangster" culture at Charterhouse and asserted that the FSA "would go nuts" if they knew of the details which had shocked his advisers, Herbert Smith LLP.
86. Mr Cox says that he also referred to what he said were expenses irregularities committed by Mr Bonnyman and demanded a sale and purchase agreement for his shares within eight days and that Mr Bonnyman be summarily dismissed. He said that he would issue a writ unless the sale and purchase agreement was agreed and that what he termed the improprieties would be aired. Mr Cox says that at one stage, Mr Arbuthnott said that he would go away if he was paid 50 million and, having clarified the currency as sterling, Mr Cox expressed his incredulity.
87. Mr Arbuthnott accepts that he did mention £50m and 9% carried interest in Fund IX which on the basis of the return on Fund VII would be worth in the region of a further £50m which he said he regarded as the top end value for his shares. He says, however, that he had avoided mentioning a price and only did so when pressed by Mr Cox. He also says, despite the content of Mr Cox's note, they spent a significant part of the conversation discussing valuation related matters which Mr Cox denies. Mr Cox does accept that Mr Arbuthnott stated at the outset of the conversation that his grievance stemmed from the lack of progress in respect of the sale of his shares since his meeting with Mr Bonnyman on 18 December 2007.
88. He denies requiring an agreement within eight days and accepts that it may have been unwise to have raised the issue of the valuation and purchase of his shares along with his concerns about conduct in Charterhouse at the same time and that Mr Cox may have gained the impression that he was trying to blackmail him, something which he says, he did not intend.
89. Mr Cox says that following his meeting with Mr Arbuthnott he telephoned Mr Bonnyman to tell him what had happened and that Mr Bonnyman asked him to produce a summary of the meeting, which he did either that evening or the next morning. He then dictated his note over the telephone to his secretary the following morning. The relevant parts of the note are as follows:

". . .What Geoff had to say can be grouped under three headings:

His sense of grievance that no progress had been made in partnership shares following his meeting with Gordon Bonnyman ("JGB") on 17 December 2007;

What he regarded as serious governance the possible consequences if these matters came to light;

The possibility that these might not come to light if he sold his shares.

Grievance

He said that arising out of his meeting the JGB he had only signed his resignation letter on the understanding that this that would result in the sale of his shares.

He stated that such process had ceased and thus he had been misled by JGB.

He has been advised by Herbert Smith that he has a "strong case in respect of various issues under the headings

Misrepresentation

Collateral agreement

Unfair prejudice

[I did not press him on what these words meant – EGC]

He proposed to instruct Herbert Smith to issue a writ in respect of these matters unless he received a Purchase and Sale Agreement by noon on 8^th August 2008.

Charterhouse Governance Issues

He stated that Charterhouse suffers from serious governance shortcomings. These relate to:

Serious breaches of confidentiality undertakings

Obtaining information from management which he described as "plundering corporate data"

A culture of obtaining information by dubious/underhand/possibly illegal means as a result of meetings with the management of companies which Charterhouse propose to buy. In this regard reference was made to:

JGB's presence at most of these dubious meetings.

JGB's creation of a culture which encourages this behaviour and produces the "gangsters" that Charterhouse now employs. Geoff said he was not prepared to join this culture and as a result became unpopular and something of an outsider.

The process (described as fraudulent) that led up to the second purchase of PHS: Stuart Simpson, Jamie Arnell, JGB all got a mention – as did the FSA which Geoff said would "go nuts" if they knew what had gone on.

Tom Plant, as Head of Compliance, would be in big trouble because he was aware of the meetings. (This might refer to all meetings or only the PHS meetings)

Herbert Smith are shocked

Charterhouse is out of control (I assume that relates to governance matters.)

If I (EGC) wanted to consult a lawyer for advice in the these matters I should not go to Dickson Minto as they are well aware of all that goes on in Charterhouse

JGB should be summarily dismissed.

Conclusion

Geoff stated that unless he receives a Purchase and Sale Agreement in respect of his shares he will instruct Herbert Smith to issue a writ in respect of the failure to proceed with matters in relation to the purchase of his shares. (Which in answer to a question from me he values at "a reasonable" figure of £50 million.) This he envisages would lead to proceedings at which the governance shortcomings might be aired. He mentioned the possibility of individuals turning up at "Wood Street" (police station?).

Geoff felt that it would be impossible to raise Fund IX if a writ has been issued.

On the other hand "Buy my shares and I go away".

He advised me to get out as this was a "high stakes game – but not for him".

. . . "

90. Almost immediately after this, Mr Cox required Mr Plant to conduct enquiries about the allegations made as to Mr Bonnyman's expenses. In cross-examination, Mr Cox accepted that it was revealed that a flight taken by Mr Bonnyman in the United States of America should have been charged to Charterhouse itself and not the fund in question. Otherwise, he satisfied himself of the way in which Mr Bonnyman's expenses had been dealt with. In relation to the allegations of misuse of confidential information, it was Mr Cox's evidence that he awaited the response to a letter of 6 August 2008 which was sent to Mr Arbuthnott.
91. Just under a week after the meeting at Burnham Market, on 6 August 2008, the Company sent a letter to Mr Arbuthnott, signed by Mr Cox, in which he referred to the Burnham Market meeting in which he described Mr Arbuthnott as having raised:

"a number of matters, (first) your shares in Charterhouse and what you saw as Charterhouse's commitment to acquire these, (second) what you suggested were unlawful activities carried out by Charterhouse and (third) the link you made between these two matters."

92. In relation to the "unlawful activities", given that Charterhouse is a regulated entity, Mr Cox pointed out that he was obliged to investigate the allegations and that he required them to be put in writing as soon as possible and, in any event, within seven days. He also made clear that they were grave allegations and if communicated to a third party and unsubstantiated, Charterhouse would not hesitate to seek redress and reserved its position in relation to further legal action.
93. In relation to Mr Arbuthnott's shares amongst other things he stated:

"You informed me that you only signed your resignation on the understanding that this should be linked to a process which would result in the sale of your shares. I was aware of no such assurance and, while Gordon acknowledges that he did discuss with you the possibility of obtaining a valuation, no agreement was reached, not least because of your own very unrealistic expectations as to value. You had your own legal advice at the time and I am advised that the agreement deals with your shares at your request by containing only acknowledgment as to your title and ownership. You sought no reference to a sale process."

Mr Cox also referred to the link which he considered Mr Arbuthnott to have made between the "illegal activities" and the sale of his shares as blackmail.

94. Mr Arbuthnott did not reply to the letter of 6 August and so Barlow Lyde & Gilbert wrote on 21 August 2008, dealing again with the allegations Mr Arbuthnott had made regarding the conduct of the Company. On 22 August 2008, Herbert Smith replied on behalf of Mr Arbuthnott, repeating that the Oral Agreement had been entered into prior to Mr Arbuthnott's resignation. Herbert Smith also stated that Mr Arbuthnott "is not making any allegations against Charterhouse nor is he attempting to "blackmail" anyone."

Was the Oral Agreement concluded?

95. In my judgment, had an agreement of the kind which Mr Arbuthnott alleges in the Oral Agreement been concluded, in relation to a topic which he knew to be contentious, he would have sought written confirmation as soon as possible and would have at least sought to document a reference to it in his retirement agreement. This is all the more so in the light of the fact that he says that he no longer trusted Mr Bonnyman, felt that he had been humiliated over the reduction in his carried interest, excluded from the Executive Committee and "edged out" as he put it. On the contrary, Mr Arbuthnott received legal advice in relation to the retirement agreement, made a number of peripheral changes including changes to the clause relating to his shares and is reported by Mr Pilgrim as considering that the agreement was fair.
96. Given Mr Arbuthnott's knowledge of Charterhouse itself and all of its members including Mr Bonnyman and given the sensitivity of the share issue and Mr Arbuthnott's considerable experience in negotiation and deal brokerage, I am unable to accept his evidence that he was merely "stupid" in not recording the Oral Agreement in his retirement terms or making his retirement conditional on the purchase of his shares. Nor am I able to accept his evidence that he did not contact Mr Bonnyman or seek any written record of the Oral Agreement because he was afraid of Mr Bonnyman which in my judgment is inconsistent with his evidence that Mr Bonnyman was the only person worth dealing with about the shares and that he did not make contact until 16 April 2008 because he realised that the agreement had "gone sour".
97. It seems to me that if the Oral Agreement had been reached, given its importance, it would have been documented and furthermore, Mr Arbuthnott would have sought to determine what progress had been made on a regular basis on his return from holiday in early 2008 and would have set out in writing the parameters he proposed for any valuation. It seems to me that there would also have been discussion about liability for and the extent of any valuation fees and detailed discussion as to the assumptions to be adopted in any valuation. There is no evidence whether oral or written as to any of these matters.
98. I also consider the existence of the Oral Agreement to be inconsistent with the content of the discussions between Mr Drury and Mr Arbuthnott on the telephone, to which I have referred. If the Oral Agreement had existed, Mr Arbuthnott would not have suggested that there was an opportunity in the window before the next fundraising to increase the value of the shares. He would already have committed to the professional valuation of those shares as at a date in or around the date of his retirement and at the very least, in that context, would have mentioned the Oral Agreement to Mr Drury.
99. In the light of all of these matters, the fact that Mr Arbuthnott's description of the terms of the Oral Agreement varied and the failure to mention a valuation of the shares in the correspondence with Mr Bonnyman in June 2008 to which I refer below and despite the evidence as to the discussions at Burnham Market and references to the purchase of the shares in the notes written at the meeting at Burnham Market referred to below, on the balance of probabilities, I consider it more likely than not that there was no Oral Agreement and I reject Mr Arbuthnott's evidence in this regard.

Contact with Mr Drury

100. In early August 2008, Mr Arnell contacted Mr Drury and discussed whether he was willing to sell his shares. Mr Arnell says that he discussed the £15million to £20m range for the value of the Company because the shares had previously changed hands at £15million and he wanted to make a goodwill gesture. In cross-examination, Mr Drury stated that Mr Arnell had discussed a valuation for the Company of up to £20m, that he did not have a firm expectation of that figure and that he thought that Mr Arnell was exploring the possibilities and did not necessarily have authority to do so. He also stated that he was eager to sell in the £15-20m range and that there were few opportunities to do so. Although he took no advice, he considered that he had a reasonable view on value as a result of having been a Founder of the Charterhouse business and having been in the private equity industry for many years.
101. In cross-examination, Mr Arnell stated that he discussed a range from £15million to £20m at which Mr Drury was willing to sell but did not know whether Charterhouse would be willing to purchase. However, a draft letter intended to be sent to Mr Arbuthnott in which both Mr Arnell and Mr Bonnyman had input, refers to an agreement having been reached for purchase at a Company valuation of £20m.
102. Having received an email from Dickson Minto on 17 August 2008 in which reference was made to a value of £20m for the Company, on 19 August 2008, Mr Arnell emailed Dickson Minto and Mr Aldred putting forward the structure of a strategy to deal with the misalignment between share ownership and active investment management which included a special resolution for alteration of the Company's articles of association. It was premised on a valuation for the Company of £20m and made reference of producing "a first draft of the deal with Simon [Drury]."
103. In the meantime, Dickson Minto had sent instructions to Michael Todd QC by email on 14 August 2008 and had a telephone consultation with him the next day in relation to any claims for unfair prejudice and breach of fiduciary duty which might be raised by Mr Arbuthnott.
104. By 1 September 2008, Mr Pilgrim was chasing Dickson Minto for progress in relation to the "purchase of the Drury shares" and was met with the response the following day that it was understood that it had not been intended to progress the sale because it might be helpful to have Mr Drury as a shareholder agreeing to changes in the articles of association. Thereafter, on 15 September 2008, Dickson Minto produced a memorandum in which they considered proposals for changes to the articles of association of the Company and the LLP Deed.
105. On 15 September 2008, Mr Arnell sent an email to Dickson Minto copied to Mr Bonnyman and Mr Coulthard stating that he would be having dinner with Mr Drury on 22 September and would ask him to sign up to changes in the information rights under the articles of association and that it would be helpful also to ask him to do so in relation to the proposed valuation and exit provisions. Mr Arnell stated that it was to be put forward on the basis of a valuation of £20m for the Company. Mr Bonnyman's evidence with regard to the £20m level was that he was very reluctant to pay so much but that he may have heard it mentioned. He rejected the suggestion that it would not have been offered to Mr Drury without his approval.
106. In fact, Mr Arnell and Mr Drury did meet for dinner in September 2008. Although Mr Drury stated that his recollection of the discussion on that occasion was imperfect, he remembered discussing sale of his shares at a value for the Company between £15 and 20m and an anti-embarrassment provision, although he did not recall discussing the prospect of a sale or flotation of the Company. In any event, he did not object to the changes in information rights.
107. At around the same time, on 23 September 2008, Mr Arnell met with solicitors from Dickson Minto in relation to possible changes to the articles of association of the Company and thereafter, Dickson Minto produced draft amendments to the Articles of Association which included an express abrogation of the right to dividends and included amendments to the "drag and tag" provisions making them subject to a "Maximum Amount" for the price of ordinary shares.
108. On 30 September 2008, Mr Pilgrim produced a number of sets of figures headed "Possible annual dividends to a 9% shareholder". They ranged from £1.9m to £4.005m and for the most part were premised upon salaries and bonuses in the 75^th percentile in the MM&K survey of large buy out houses.
109. A meeting also took place on 6 November 2008 at which KPMG were instructed to carry out a valuation of the Company. On 17 December 2008, Mr Pilgrim received a number of scenarios from KPMG. It was noted on the covering email that the value of the Company was above £20m when bonus payouts were at 94% or less.
110. In early 2009, Dickson Minto promised a paper setting out the various steps which the Company might take in order to deal with the situation which had arisen. Dickson Minto's paper was delivered on 21 January 2009. The final and fifth version of KPMG's report was dated 12 February 2009 and contained reference to verbal acceptance of an offer for Mr Drury's shares based on a valuation of £20m. It placed a value on the Company of between £8m and £10m but also made reference to a market value of 100% of the shares in the Company of £20m, that a fair value of Mr Arbuthnott's shares would be £1.782m, and that having applied discounts for the unquoted nature of the shares and his minority holding that the value would be in the region of £1.247 to £1.337m.

Information requests and changes to the Shareholders' Agreement

111. On 13 July 2009, Mr Arbuthnott sent a lengthy email to members of the investment team in which he stated that he had no intention of pursuing legal action in connection with the sale of his shares. It did, however, contain a detailed request for information, including requests for the confidentiality agreements in relation to four opportunities pursued by Charterhouse as part of Fund VIII, being Ista, Eco, GTT and Hema. Mr Bonnyman replied by email on 17 July 2009 on behalf of the Group declining to provide the information.
112. On 18 July 2009, Mr Arbuthnott sent a further email in which he made clear that in declining to provide the information asked for, the executive shareholders were in breach of the Shareholders' Agreement. Mr Cox responded to Mr Arbuthnott on 28 July 2009 and noted that the shareholders did not believe that the entitlement to information under the Shareholders' Agreement could be exercised without regard to the Company's confidentiality undertakings and without reference to relevance and reasonableness.
113. Charterhouse did provide Mr Arbuthnott with a number of documents during this time, for example monthly managements accounts and financial information. However, some members of the investment team were becoming concerned about the motives of Mr Arbuthnott in seeking such information. Consequently, the Company obtained legal advice from Dickson Minto and, based on that advice, prepared a Deed of Amendment to the Shareholders' Agreement, in which the information rights of Shareholders were altered in order to allow the Company to withhold from members information in respect of which the Company had assumed confidentiality obligations, information which the Company considered was not usually provided to shareholders of a company of its nature and information which was commercially sensitive.
114. The amendments to the Shareholders' Agreement were approved by the requisite 75% majority of members and the Board approved the changes on 23 September 2009.
115. On 9 October 2009, Dickson Minto sought further advice from Michael Todd QC about the possible amendment to the Articles of Association of the Company in order to impose a maximum amount payable for ordinary shares and were informed that unless the amendments reflected the agreement of the shareholders at the outset, it was a high risk strategy.

Investigation of Mr Arbuthnott's concerns

116. Although the investigations into Mr Arbuthnott's earlier allegations concerning PHS and the alleged misuse of confidential information were not pursued because he confirmed through his solicitors by letter of 22 August 2008 that he was not making any allegations in relation to PHS, an investigation in relation to his subsequent allegations concerning Ista, Eco, GTT and Hema was instigated. On 21 July 2009, a committee comprising Mr Aldred, Mr Arnell and Mr Greenhalgh was formed in order to carry out the investigation. Advice was taken from specialist regulatory solicitors, both at Dickson Minto and at Travers Smith LLP, concerning the regulatory aspects of Mr Arbuthnott's complaints.
117. Dickson Minto prepared a detailed report dated 24 September 2009 which concluded that there had been a number of minor breaches of process letters and confidentiality agreements but that there was nothing to suggest dishonesty or systemic disregard for obligations. It was also concluded that there had been no benefit to Charterhouse arising from the breaches. Dickson Minto concluded that no Financial Services Authority ("FSA") notification was necessary. The work of Dickson Minto was also reviewed by a specialist Financial Regulatory lawyer at Travers Smith LLP who indicated on 10 June 2010 that they were satisfied that the allegations had been investigated and dealt with in full and that there were no grounds to justify a report to the FSA or otherwise.
118. It seems to me therefore, that both the allegations in relation to Mr Bonnyman's expenses and the concerns about possible misconduct in relation to confidential information were dealt with by Charterhouse in a thorough way and accordingly, all other things being equal, in any event, neither could be the basis for a claim by Mr Arbuthnott in unfair prejudice.

WSL Offer and changes to the Articles of Association

119. In 2010, Mr Pilgrim announced that he proposed fully to retire before the next fundraising and when Mr Plant further scaled back his working hours prior to taking retirement, it is Mr Bonnyman's evidence that it was appreciated that the need to deal with the issue of alignment of shareholding and active investment team membership had gained added urgency. In fact, by November 2011, Mr Arbuthnott and the 12^th to 17^th Respondents, Messrs Benthall, Cox, Drury, Greenhalgh, Pilgrim and Plant had either retired or intimated an intention to do so. Mr Bonnyman also indicated his intention to retire in the near future. The aforesaid members together with Mr Arbuthnott held more than 50% of the shareholding in the Company.
120. Mr Patrick, Charterhouse's General Legal Counsel, who had been recruited in November 2010, brought it to Mr Bonnyman's attention that, with the retirement of one additional shareholder, the threshold of 25% of outside shareholders would be crossed. In the event of 25% or more of the shares in the Company being held other than by the investment team, the investors in Fund VIII had various rights which they could exercise in relation to their investments. It was at this stage that Mr Bonnyman says that it was decided that a reorganisation of the Company was essential.
121. Finally, in early 2011, it emerged that Mr Greenhalgh also intended to retire before the next fundraising. In total, therefore, it was likely that before or at the time of a new fundraising, 56% of the Charterhouse shares might be owned by individuals no longer working at the firm or, at the very least, soon to depart. Mr Bonnyman says therefore, that the issue had to be resolved before a fundraising when it would be necessary to discuss the position with potential investors. Mr Arbuthnott on the other hand contends that the crisis which led to what became known as the WSL Offer was orchestrated in order to expropriate his shares at an undervalue. Given that it is not disputed that some shareholders did retire and that others had indicated an intention to do so or to reduce their hours in anticipation of retirement and the agreed evidence of the private equity experts to which I shall refer is that misalignment causes difficulty with investors when raising funds, it seems to me that although it may have been convenient to deal with the dispute with Mr Arbuthnott at the same time, I nevertheless accept Mr Bonnyman's evidence that it was a solution to the realignment issue which had become a priority.
122. In fact, Mr Giacomotto took over from Mr Bonnyman as Managing Partner at Charterhouse in March 2011. He was also concerned about the misalignment issue and conducted discussions with other senior members of the team including Mr Coulthard, Mr Greenhalgh, Mr Bonnyman, Mr Offord and Mr Arnell. He says that a resolution of the issue of the structure of Charterhouse was a priority. He and Mr Bonnyman met with Dickson Minto in early 2011 to discuss what they wanted to achieve and set out four main objectives. They were:

i) the shares in the Company should have no value and the issue of alignment should not arise again;

ii) decision making should follow carried interest shares in the most recent fund raised;

iii) the structure would need to be able to survive the departure of Mr Bonnyman and, in due course, Mr Giacomotto;

iv) the scope of the Managing Partner's authority should be clear and there should be clear provisions for the removal of the Managing Partner, the Executive Chairman and the other member of the Remuneration Committee.

123. Mr Patrick was required to manage the restructuring project and wrote a confidential email to Mr Bonnyman dated 14 February 2011 in which he set out the progress made and stated that it was intended that the shares should be purchased at a value of £15million. The note also included reference to anti- embarrassment provisions in the event of an IPO or similar exit by the new owners. In cross-examination, Mr Bonnyman stated, nevertheless, that he considered an IPO to be unimaginable. He said that it would have required a radical change in the business model of Charterhouse over many years and that he had given no consideration to it. He also accepted that he may have set the value of £15million and that there was no consideration of the value were there to be a run off of the Charterhouse business. Nor was there an independent valuation, advice from a merchant bank, consideration of a change in business practice and a move towards fund management or the adoption of a dividend policy. Furthermore, he accepted that no legal advice had been taken as to the value of the contractual rights of Charterhouse against the investors in the Funds.
124. An outline of a proposed new structure was produced by Dickson Minto on 10 March 2011. It was used by Mr Patrick in discussions with those members of the investment team who were expected to be the purchasers of the shares which formed the basis of a further meeting which he had with Dickson Minto on 20 April 2011. He accepted that other investment managers who had indicated an intention to retire and those who had already retired were not involved. Thereafter, on 18 July 2011, Dickson Minto produced a "Steps paper" setting out the steps necessary to implement the restructuring which included various possible amendments which might be made to the Articles of Association.
125. On 29 July 2011, further advice was taken from Michael Todd QC in a telephone consultation. Mr Patrick accepted that the advice was only shared with those who were expected to make the offer for the Company's shares.
126. Mr Patrick continued to work on the proposals and it was around September 2011 that the price of the offer was finalised. Mr Patrick stated that the level of £15million was set by Messrs Bonnyman, Giacomotto and Dockeray on the basis of previous transactions and what they said that the purchasers would pay and the vendors would be willing to accept. Mr Patrick suggested that a further valuation be obtained and that the consideration for the shares be paid to non-continuing members of the investment team first, but neither suggestion was taken up. He said that it was considered that a further valuation would be a waste of money given the outcome of the discussions with the ongoing members of the team.
127. On 14 October 2011, Mr Plant contacted Mr Turnbull of Shepherd & Wedderburn with a view to him acting on behalf of those members of the Board of the Company not involved with the proposal and Mr Turnbull accepted the instructions shortly thereafter. Mr Turnbull was provided with the relevant documentation and a meeting took place on 18 October 2011. The group in receipt of the advice who were referred to as the "Independent Directors" were Messrs Cox, Benthall, Greenhalgh and Plant.
128. On 19 October 2011, Mr Turnbull sent an email to Mr Jordan Simpson, copied to Dickson Minto, in which he stated amongst other things:

". . . In drafting these minutes, I have formed the view that the independent directors should not, as directors, hold themselves out as negotiating with Newco on terms for recommendation to the shareholders. The normal considerations in a public takeover are not relevant here, and so the Company's role (and so the role of the directors) should only be to ensure compliance with the various obligations to which it is subject. To the extent that the independent directors wish to enter into negotiations on terms, they should do so as shareholders. You will appreciate this is to ensure that neither the Company nor the directors (in that capacity) incur any liability to shareholders in relation to the terms of the acquisition . ."

129. Mr Arbuthnott was first notified of the re-organisation in a letter from Mr Cox dated 21 October 2011. Amongst other things, the letter stated:

"The Board of Directors of Charterhouse Capital Limited (the "Company") is aware that discussions have for some time been taking place regarding a possible reorganisation of the Company and its subsidiaries with a view to securing the future success of the Company and its subsidiaries and maintaining the best possible relationship with investors in the Charterhouse funds. The Board has been informed that certain of the Directors wished to present a possible reorganisation (their "Proposal") but the Board has been advised that doing so may put them in a situation in which they have, or could have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the Company.

To enable the relevant Directors to develop and present their Proposal without risk of infringement of this duty [conflicts of interest with the Company], certain of the Company's members have proposed that members give the Directors the power to authorise matters giving rise to a conflict of interest. The power being sought is a general power which will enable the Directors to authorise any such matters after the time at which it is passed.

A written resolution granting the power referred to above is enclosed. In order to vote in favour of the resolution, please sign and date it, and send it as soon as possible . . . ."

130. On the same morning that the letter was sent out to shareholders, a Board meeting of the Company took place, at which it was noted that the written resolution had been passed and that the Board had authorised the conflicts. In fact, the minutes of the meeting had been drafted in advance by Mr Turnbull of Shepherd & Wedderburn and the directors not involved with the proposal were gathered with him in another meeting room before the meeting. He had commented to Mr Simpson in an email of 19 October 2011 that he assumed that all of the retiring shareholders but for Mr Arbuthnott were "on side". Mr Plant stated in cross-examination that Mr Turnbull had not been given instructions to negotiate with those making the WSL Offer on behalf of the retiring shareholders and it appears that he made that clear to the solicitors acting for the offeror.
131. The relevant parts of the minutes of the meeting record as follows:

"5. Circulation of Written Resolution

...

The Chairman adjourned the Meeting while the resolution was sent or submitted to the members for their approval and signature. It was noted that the resolution was to be despatched immediately by email, and sent by first class post, to all members.

6. Authorisation of Conflict of Interests

6.1 When the Meeting was reconvened by the Chairman, he informed the Meeting that the resolution had been duly passed as an ordinary resolution.

6.2 The Chairman then proposed that the Board proceed to consider a resolution of the Directors, as now permitted in accordance with the ordinary resolution, to authorise certain matters which would or might constitute a conflict of interests for the Continuing Directors in accordance with the statutory power set out in Section 175(5)(a) of the Companies Act 2006.

...

6.6 The Retiring Directors considered the matters set out in this paragraph 6 and IT WAS UNANIMOUSLY RESOLVED by the Retiring Directors THAT:

6.6.1 it would be in the interests of the Company for the shareholders to have an opportunity to receive and consider the Proposal and therefore to facilitate the development by the Continuing Directors of the Proposal which they had been considering and consequently the Retiring Directors should take the necessary steps to authorise the potential conflicts of interests that had been identified;

6.6.2 those matters referred to in 6.3 above, being matters which would or might conflict with the interests of the Company, be and are hereby authorised in accordance Section 175(5)(a) of the Companies Act 2006; and

6.6.3 in their respective capacities as directors of the Company, the Continuing Directors take no part in any discussion and decisions involving the Company which relate directly or indirectly to the Proposal, and in particular do not attend any Board meeting (or part of a Board meeting) at which such matters are under consideration, and receive no information from the Company or the Board relating to the Company's involvement in the Proposal or the Board's consideration of such matters.

7. Appointment of Shepherd and Wedderburn

The Chairman explained that that it was considered necessary for the Company to receive independent advice in relation to the Proposal and any implementation thereof. It was noted that Shepherd Wedderburn LLP had been instructed to provide advice to the Company, represented by the Retiring Directors for such purposes, and IT WAS RESOLVED THAT such appointment be approved and ratified and that any of the Retiring Directors be authorised to agree and sign an engagement letter from Shepherd and Wedderburn LLP in respect of the appointment."

132. It was the evidence of Mr Cox, with which Mr Plant agreed, that the Board of the Company had decided not to make a recommendation in relation to the WSL Offer because they considered that all of the shareholders were very sophisticated and knew the private equity business and that the Board wanted to be neutral and avoid any criticism or legal challenge were they to recommend the WSL Offer.
133. Some four days after the resolution had been passed, on 25 October 2011, Mr Arbuthnott sent an email in response to Mr Cox's letter stating his inability to come to a conclusion as to whether to support the proposal or not in the light of the fact that information had not been shared with him. A response drafted by Mr Plant with the assistance of Mr Turnbull of Shepherd & Wedderburn was signed by Mr Cox and dated 27 October 2011. In it, Mr Cox explained the need for the proposal and assured Mr Arbuthnott that he had not received any less information that the other "Retiring Directors".
134. On 1 November 2011, Mr Arbuthnott replied by email the relevant parts of which are set out below. This is the first communication in which Mr Arbuthnott raised the issue of a dividend payment:

"Dear Edward

1. Thank you for your quick reply of 27 October 2011 by email and for the new information. Subject to receiving answers to the queries in this paragraph and an assurance that in future the Board of CCL will immediately bring any future conflicts of interest to the attention of shareholders I agree to support the written resolution and to sign and post it to Linda.

- How long have you been aware of this conflict?

- Why is the Continuing shareholders Proposal so vague? I presume a buyout is envisaged as it is not obvious to me how else you align "......ownership of the General Partner.....to those who conduct the investment business". Your description of what is proposed as a "reorganisation" is misleading. As Charterhouse are in the business of valuing companies I cannot understand why the Continuing shareholders have not already put their figure and terms on the table so that the non conflicted shareholders can either say yes or no to it in principle.

...

- The Remuneration Committee (yourself and Gordon) has paid 100% of the groups profits and carried interest in CCP9 [Fund IX] to themselves and executive shareholders. I have received no explanation as to why you believe that to be fair. I presume it is simply a case of we can and so we will and by the way we don't need to give you an explanation.

...

3. I believe that it is the duty of the Retirers on the CCL [the Company] Board to look at alternatives to accepting a Proposal from the Continuing Shareholders. Perhaps it is in the interests of the non conflicted shareholders to be patient and wait as I don't believe that the ownership of the General Partner is an issue for the majority of potential investors in private equity funds. There are many examples of successful General Partners with outside shareholders."

135. Mr Cox's email response of 3 November 2011 set out his position in relation to the resolution as follows:

". . .

My primary role at this point, as elected Chairman of a Board meeting held on 21 October, was to ensure that the shareholders were appropriately notified of the resolution then proposed and, subject to the passing of that resolution, to invite the Board to authorise the conflict of interests that had been identified - which it has now done, enabling the "Continuing shareholders" to work up their proposal. As you have already been informed, we have appointed lawyers to act for CCL [the Company] to ensure that the Board is appropriately advised in relation to the matters arising from the proposal anticipated (but not yet received) from the Continuing shareholders. Please note that these lawyers are acting for CCL [the Company] itself not any shareholder(s) individually or collectively and the appointment was therefore properly the province of the Board.

Since you ask about timing, I am aware that the Continuing shareholders' proposal is still being worked on and I understand that they wish to present it as soon as possible to all shareholders at the same time - and of course on the same terms. . ."

136. On 11 November 2011, all of the shareholders were sent an offer for their shares from Watling Street Limited, a wholly owned subsidiary of Watling Street Capital Partners LLP, both of which were described as having only nominal capital having been newly formed. The partners of the LLP were listed and of those Messrs Aldred, Bonnyman, Arnell, Coulthard, Dockeray, Etroy, Fehling, Giacomotto, Morgan, Offord and Simpson were also shareholders in the Company. A sale and purchase agreement was appended to the offer letter, (the "WSL Offer").
137. The WSL Offer was in the following terms:

a) WSL would purchase the entire issued share capital of the Company at a price of £1,500 per share (£15,150,000 for the entire issued share capital). 20% was to be payable in cash on closing and 80% in WSL loan notes redeemable in four annual instalments and bearing interest at 2% pa.

b) The Share Purchase Agreement would provide for anti-embarrassment payments for a four-year term.

c) The Offer was conditional upon:

i) acceptance by members holding half the shares in issue and two thirds of all shares held by "Non-Concert Members" (those with no interest in WSL) i.e. the Retiring Members;

ii) FSA approval of the change of control;

iii) a Founder Special Majority (under the terms of the Shareholders' Agreement) disapplying the pre-emption provisions of the Articles;

iv) amended Articles being adopted by the Company in the form circulated with the Offer;

v) a Founder Majority (as defined in the Amended Articles) approving the sale and purchase as a Relevant Sale (as defined in the Amended Articles for the purpose of Article 39 of the Amended Articles); and

vi) WSL's desire to acquire the entire issued share capital of the Company in the manner contemplated by the Offer being approved by a meeting to which all Non-Concert Members are invited, by Non-Concert Members holding (i) a majority in number of the Non-Concert Members in attendance, and (ii) holding in aggregate at least two thirds of the Shares held by all Non-Concert Members in attendance at the meeting.

138. By 1 December 2011, all of the "Non-Continuing Shareholders" had accepted the offer except for Mr Arbuthnott. The evidence of Mr Cox and Mr Pilgrim was that they had accepted the WSL Offer without reference to anyone else.
139. Mr Bonnyman's evidence was that the valuation of the shares at £15million was already generous and that his view and that of his senior colleagues was that they did not need to continue to work at Charterhouse and that they would not contemplate a higher price for the shares. He maintained that they would not have paid another £5m despite the fact that the LLP Agreement contained restrictive covenants which, if he had chosen to leave, would have prevented him and his colleagues from being involved in a competing business or soliciting any employees from Charterhouse for a period of 12 months, in a period in which he accepted that he earned approximately £5.8m. Mr Bonnyman added that both he and his senior colleagues held the view that they did not need to work at Charterhouse any longer and that the more junior members of the investment team could obtain other employment "in a heart beat" and therefore that they would not have contemplated paying any more and that he certainly would not have done so. He said that although he might have assisted others in setting up a new fund, he was likely to retire. He also emphasised that although there would be a long period, perhaps in the region of 18 months or 2 years before any remuneration was received from a new fund, if he had taken such a step it would not have been for the money. He said that the desire of the investment team to leave would have been discussed with the investors at that stage and that he viewed Charterhouse as a band of brothers and not a distinct corporate entity.
140. Mr Plant stated that the offer price was within the range he had expected but that he was disappointed that it was not at the upper end, namely a valuation of £20m. In cross-examination, he said that his focus as a director of the Company had been upon what was right both for the shareholders and the investors as the Company's regulated clients. In this context he had considered a run off or "earn out" not to be appropriate. He considered that the purchase by the existing investment team was the only real option and that it was in the best interests of the Company to resolve the alignment problem in order to prevent difficulties in raising another fund upon which the existence of the Business was dependent. However, he accepted that the Board had not considered any other alternative but for the WSL Offer and did not calculate the effects of different scenarios including a run off or obtain any specialist advice.
141. In fact, on 29 November 2011, Mr Plant had contacted Mr Patrick expressing concerns about three aspects of the offer, namely the loan note element of the consideration, the timing of acceptance and the anti-embarrassment provisions. However, when he met with Mr Patrick he was informed that it was too late to raise such issues.
142. Mr Drury stated that he may have discussed the WSL Offer with one or two of his former colleagues, that he would have preferred it to have been on the basis of a £20m valuation for the Company and that he would have been "on the warpath" if it had been only on the basis of a valuation of £10m. He accepted, however, that in reality there was only one purchaser. He also stated that he took no advice but was happy to sell his shares in accordance with the WSL Offer and, in fact, that it was an easy decision to make. He said that he would have objected had the difference in price been material but that the £15-20m difference was not. He made clear that he would not have allowed his former colleagues to have "ripped him off." He also stated that he considered that acceptance of the WSL Offer was in the interests of Business and would not have been prepared to have voted for a run off even if it had resulted in a better return on his shares.
143. It was also Mr Aldred's evidence that he considered acceptance of the WSL Offer to be in the best interests of the shareholders and the Charterhouse Group at the time. He said that without alignment of shareholding and investment team he did not consider that the Company had a future because it would not be possible to raise another fund. He also stated that he was interested in the future of the Business because he had a considerable percentage of carried interest in the existing fund which would be best protected if the Business were maintained in its present form.
144. Mr Pilgrim says that he did not discuss the WSL Offer with anyone other than his wife, he read all of the relevant documentation and viewed the matter purely as a shareholder because he was no longer a director of the Company. He could not recall whether he looked at the Shareholders' Agreement and whether he recalled Clause 7.2. He considered the price to be at the bottom of the range and did give some consideration to a premium for obtaining control. However, on balance he concluded that a premium of 25 or 30% for control made little difference to him, he considered that the no dividend premium affected the price and concluded that it was a reasonable offer and that he was glad to sell his shares. He considered that the raising of another fund was some time off and that, accordingly, the minority shareholders had very little leverage in any negotiation.
145. Mr Mornington says that from his perspective, the WSL Offer involved him committing a substantial sum of money, equivalent to one year of his regular drawings, to the purchase of the shares by WSL although he accepted in cross-examination that his contribution had been netted off against receipts. Nevertheless, he said he was not happy about it because he considered the shares to be worthless and had argued that the misalignment issue could have been dealt with by setting up a new structure to raise the next fund. Nevertheless, he was persuaded that it was worth paying something for the shares to avoid the need for a new structure, in his eyes, by way of nuisance value, and out of respect and good manners towards former and current colleagues who had held the shares. He maintained that there were precedents for setting up a new structure and that it would have been possible despite the terms of the LLP Deed.
146. On 1 December 2011, one day before the deadline for acceptance of the WSL Offer, Herbert Smith LLP wrote to Shepherd & Wedderburn on Mr Arbuthnott's behalf stating that Mr Arbuthnott would not be accepting the WSL Offer and asking for an undertaking from the other shareholders not to take any steps or assist in the expropriation of his shares. The letter also contained a lengthy request for further information from the Company concerning the WSL Offer and the surrounding circumstances. Herbert Smith LLP also indicated that Mr Arbuthnott would be prepared to make an offer to buy all of the other shares in the Company at a price greater than that offered by WSL.
147. On 2 December 2011 Mr Greenhalgh replied by email to Mr Plant and Mr Patrick stating that he suggested from the outset that the issue of valuation be addressed within the offer process. He added, however, that the assumptions upon which any valuation would be prepared would depend:

" . . . almost entirely on subjective judgements about:

1. The level of bonuses required to retain and motivate the investment team. This must be viewed in the context of the key man clauses and the reliance of the firm's future income streams on the continuing participation of these individuals; and

2. The prospects for raising a successor fund to CCP 9 [Fund IX]. This must be heavily discounted at present as there have been no exits in CCP 8 or 9 [Fund VIII or IX] and the succession plan still has to be demonstrated as robust.

Similarly, without the support of the investment team we cannot solicit or develop an alternative competing offer. So given the circumstances, any valuation is essentially a goodwill payment to reflect the value of the brand and ensure the interests of the investors in the fund are protected.

The response from the team to Geoff's attempt to put forward a competing offer should be formally documented even if the SPA is now effective."

148. On 5 December 2011, an email was sent to all shareholders stating that the Sale and Purchase Agreement (the "SPA") had taken effect and setting out the next steps. A Founder Special Majority consent form was enclosed with the letter. These were signed by all "Non-Continuing Members", except Mr Arbuthnott.
149. The clauses of the SPA referred to in the above email were in relation to proposed amendments to the Articles and a meeting of the Non-Concert Members:

"4.1 The sale and purchase of the Sale Shares pursuant to this Agreement are in all respects conditional upon:

4.1.1 the FSA, in respect of the Purchaser and each controller of the Purchaser, either

(a) giving notice under section 189(4)(a) of FSMA . . . . .

4.1.2 a Founder Special Majority (as defined in the Shareholders' Agreement) consenting for all purposes under the Shareholders' Agreement to the transactions contemplated by this Agreement;

4.1.3. the Amended Articles being adopted by the Company as its articles of association;

4.1.4 a Founder Majority (as defined in the Amended Articles) approving the sale and purchase of the Sale Shares pursuant to this Agreement as a Relevant Sale (as defined in the Amended Articles) for the purpose of article 39 of the Amended Articles; and

4.1.5. the Purchaser's desire to acquire the entire issued share capital of the Company in the manner contemplated hereby being approved at a meeting to which all Non-Concert Members are invited, by Non-Concert Members (a) representing a majority number of all Non-Concert Members in attendance at that meeting, and (b) holding in aggregate at least two thirds of the Shares held by all Non-Concert Members in attendance at that meeting.

4.2 For the avoidance of doubt, the Purchaser has no desire to purchase, and the Vendors have no desire to sell, the Sale Shares unless and until each of the Conditions is fulfilled."

150. On 13 December 2011, a written resolution was circulated proposing to amend the Articles. This was signed and accepted by all members, except Mr Arbuthnott. The key amendments were the removal of the reference to a "General Offer" complying with the Takeover Code, the introduction of a new majority drag provision, and the alteration of the definition of "Founder Majority", as follows:

" MAJORITY DRAG

39.1 Notwithstanding any other provisions of these Articles and. in particular, the provisions of Articles 33, 36 and 38 (pre-emptive transfers, change of control, and drag-along), the holders of 50% or more of the A Shares in issue at the relevant time (in this Article the "Seller") may agree to sell or transfer (the "Relevant Sale") shares representing not less than 50% of the Voting Rights to any Person whatsoever (in this Article the "Buyer") without restriction. A Relevant Sale shall only be a Relevant Sale for the purposes of this Article if it has been approved as such by a Founder Majority (and the holder(s) of shares included in such Founder Majority does not include any Founder who is the Buyer or is acting in concert with the Buyer). If such Relevant Sale becomes unconditional in all respects, the Buyer may complete the Relevant Sale and shall by written notice to the Company served within 60 days of the Relevant Sale so becoming unconditional, require the Company as agent for the Buyer to serve notices (in this Article each a "Compulsory Acquisition Notice") on all of the members who have not participated in such Relevant Sale (the "Remainder Shareholders") requiring them to sell their shares to the Buyer or a person or entity nominated by the Buyer at a consideration per share (including any contingent or deferred consideration) which is not less than and is in the same form as the consideration payable to the Seller in respect of their shares. The Company shall serve the Compulsory Acquisition Notices forthwith upon being required to do so and the Remainder Shareholders shall not be entitled to transfer their shares to anyone except the Buyer or a person identified by the Buyer. Each Compulsory Acquisition Notice shall specify the same date (being not less than seven nor more than twenty one days after the date of the Compulsory Acquisition Notice) for the completion of the relevant transfer of shares to the Buyer (the "Compulsory Acquisition Completion Date" ).

39.2 The Buyer shall be ready and able to complete the purchase of all shares in respect of which a Compulsory Acquisition Notice has been given on the Compulsory Acquisition Completion Date. Any transfer pursuant to a Compulsory Acquisition Notice shall not require the relevant Remainder Shareholders to give a Transfer Notice.

39.3 If in any case any Remainder Shareholders shall not on or before the Compulsory Acquisition Completion Date have transferred their shares to the Buyer or a person identified by the Buyer against payment of the price thereof:

(a) the Directors shall authorise some person to execute and deliver on their behalf any necessary transfers in favour of the Buyer or the person identified by the Buyer;

(b) the Company shall receive the consideration in respect of such shares; and

(c) the Company shall (subject to the transfer being duly stamped) cause the name of the Buyer (or the person identified by the Buyer) to be entered into the Register of Members as the holder of the relevant shares.

39.4 The Company shall hold the consideration in trust for the Remainder Shareholders but shall not be bound to earn or pay interest thereon. The issue of a receipt by the Company for the consideration shall be a good receipt for the price for the relevant shares. The Company shall apply the consideration received by it in payment to the Remainder Shareholders against delivery by the Remainder Shareholders of the certificates in respect of the shares or an indemnity in respect of the same in form and substance acceptable to the Company. After the name of the Buyer or the person identified by the Buyer has been entered in the Register of Members in purported exercise of the aforesaid powers the validity of the proceedings shall not be questioned by any person.

39.5 For the avoidance of doubt, the provisions of Articles 33 and 36 (pre-emptive transfers and change of control) do not apply in respect of either a transfer constituting a Relevant Sale or a transfer pursuant to a Compulsory Acquisition Notice.

SCHEDULE

...

"Founder Majority"

means the Founder or Founders who hold A Shares representing more than 50% of the aggregate Voting Rights attached to the A Shares held by Founders (or, where any Founder or Founders are, by the terms of these Articles excluded from participating in the Founder Majority, the Founder or Founders who hold A Shares representing more than 50% of the aggregate Voting Rights attached to the A Shares held by the remaining Founders);"

151. Mr Cox's evidence was that he viewed the resolution as procedural and as a necessary step as part of accepting the WSL Offer itself. He added that he accepted the WSL Offer because he wanted the Business to continue as before. Mr Plant took a similar view and could recall reading the proposed amendments themselves. Mr Drury had no real recollection of considering the amendments or of whether he viewed voting in favour as a consequence of accepting the WSL Offer whereas Mr Pilgrim's evidence was that he appreciated that having accepted the WSL Offer it was necessary to take the other steps in order to complete the transaction. Of the continuing members, Mr Etroy said that he considered the change in the Articles of Association to have been in the best interests of Charterhouse, by which he meant the executive team and the retiring members. Lastly, in cross-examination, Mr Giacomotto stated that he had not read the proposed amendments to the articles at the time, but relied on advice that the new drag along provisions in the articles of association brought them into line with the Shareholders' Agreement which took precedence in any event and that, accordingly, it was a tidying up operation. He said that he saw the resolution as part of the WSL Offer and that he did not recall giving it separate consideration.
152. On 14 December 2011, a Founder Majority Consent form was circulated to approve the sale of shares pursuant to an offer as a Relevant Sale as required under Article 39, which was signed by the requisite majority on 16 December 2011.
153. It was also a term of the WSL Offer that the approval of the necessary majority of the Non-Continuing Members of the Company to the transaction be obtained at a meeting. The meeting had originally been scheduled for 13 December 2013 but as a result of Herbert Smith LLP's letter of 1 December 2011 and the fact that Financial Services Authority approval was likely to take some time, the meeting was re-scheduled for 30 January 2012.
154. The meeting of Non-Continuing Members on 30 January 2012 was chaired by Mr Pilgrim and attended by Mr Cox, Mr Benthall, Mr Greenhalgh and Mr Plant. Mr Arbuthnott was represented by Herbert Smith LLP and Mr Drury by Slaughter & May. Herbert Smith LLP sought to argue that the Company was worth substantially more than the offer price; the other Non-Continuing Members disagreed. After further discussion, the meeting approved the acquisition by WSL of all the shares in the Company, only Herbert Smith LLP on behalf of Mr Arbuthnott voting against the resolution.
155. During the meeting, Mr Benthall indicated that he had not needed an independent valuation of the Company in order to conclude that the WSL Offer was appropriate and that he considered that it represented a reasonable valuation of the Company. Mr Pilgrim also observed that as a limited partner in two funds as well as a holder of carried interest, it was important to him to ensure the continuity and stability of the Business. He also noted that there was no precedent for the sale of an entity such as the Company to a third party purchaser, something with which Mr Cox and Mr Greenhalgh agreed, save in distressed situations.
156. In the meantime, on 18 January 2012, Herbert Smith LLP wrote a letter of claim on Mr Arbuthnott's behalf to Slaughter & May. At paragraph 91, Herbert Smith LLP indicated that Mr Arbuthnott would be willing to make an offer for all of the issued share capital of the Company at a price 25% higher than the WSL Offer, in other words £1,875 per share, with the consideration split between cash and loan notes in the proportions 20% to 80% respectively, as under the WSL Offer. The offer was reiterated in a letter of 7 February 2012 from Herbert Smith LLP to Slaughter & May in which it was stated that the offer was conditional upon sufficient acceptances to increase Mr Arbuthnott's shareholding in the Company to more than 25%. It was also made clear that Mr Arbuthnott would be willing to enter into negotiation with any shareholder because he considered the value of the Company to be much greater than £18, 937,500.
157. In fact, the transfer of all shares in the Company (other than those held by Mr Arbuthnott) took place under the terms of the WSL Offer on 6 February 2012.

Further relevant evidence

158. Mr Edward Kane is a senior adviser in the private equity investment firm HarbourVest Partners LLC of which he was a founding member. HarbourVest is an investor in the Charterhouse funds and Mr Kane sits on the Advisory Committee in respect of the funds. In his witness statement he said that his team knew that he was not willing to invest in funds where the general partner was owned or controlled other than by the investment team and that when he pays an investment fee it is to motivate and incentivise the active investment managers. He said that his team enquire whether 100% of the available profits go to the investment team and if not it is a major disincentive to him. However, in cross-examination it became clear that he is in a very senior role and that only matters of importance are relayed to him and only some of them in writing. In fact, he placed considerable reliance upon his team in London. No written reports in relation to due diligence in respect of Charterhouse funds have been disclosed. When asked in cross-examination why his firm had invested in Fund VII which did not contain a change of control provision enabling investors to take steps if control of the relevant company changed, he said that the investment had been made on the basis of Charterhouse's track record.
159. It was also Mr Giacomotto's evidence that when marketing he would explain orally to potential investors that the surplus profit of the Business was paid to the active investment team. It had been suggested that this was in the due diligence documentation provided by Charterhouse but in cross-examination it was shown not to be the case.
160. He also said that if a dividend had been paid to a third party or non-member of the active investment team, he would have left Charterhouse. He was taken to a schedule of his earnings over the period 2009 – 2013 which, for example, showed £4m remuneration plus £5m by way of co-invest in 2009/2010 and £4.5m and £2.6m in 2011/12 and was asked whether he really would have left. He was pointed to Mr Greenhalgh's estimate that his carried interest in Fund IX which was the same as that of Mr Giacomotto might be worth 15m euros and asked the same question. Mr Giacomotto's response was that carried interest in Fund VIII had turned out to be worthless and that he did not look into the future in this way. He said that independence, how he worked and the environment in which he worked were more important to him than the money.
161. He also added that if the entire investment team had left because the business model was changed and profits diverted to a third party or to individuals other than the investment team, he considered that the investors would retain their trust in the team as a whole and invest in a new fund, leaving the Charterhouse brand worthless. He also remained confident that although there would be obstacles in the team setting up a new fund it would be possible to do so. His evidence was that had any of the surplus income been directed away from the active investment team he would have left Charterhouse in November 2011 and that he was motivated by a desire to preserve the independence of Charterhouse and to protect the investors and not by money. He nevertheless accepted that shortly before he had been appointed as managing director of Charterhouse, he and others had proposed that the bonus pool be split in a way which would have led them to be better remunerated than others in the team, a proposal which came to nothing. Mr Giacomotto admitted that he was not proud of the proposal and that it had been greedy.

The Expert Evidence in summary

162. A large volume of expert evidence was received both as to the private equity industry and as to valuation of the Company. Despite supplemental reports and in the case of the valuation experts, two joint memoranda, all of the experts were cross examined extensively over a number of days.

(i) Private equity

163. In summary, the Private Equity experts agree that the overwhelming majority of "captive" private equity firms, like Charterhouse, became independent as a result of management buy outs and the sale of the captives by their parent bank or insurance companies was as a result of a variety of factors including investors' concern regarding alignment and conflicts of interest and regulatory pressure upon the parents.
164. They are also of the view that the private equity market is in a period of change as a result of which a number of firms will cease to exist, Mr Morton being of the opinion that this is more likely to arise as a result of the firms going out of business than as a result of merger or acquisition, in the light of the difficulty in obtaining the necessary agreements and consents. Mr Florman considers that the phase will include the development of new investment models and models of ownership including the taking of minority stakes in the company itself by an existing investor, family office or sovereign wealth fund, whereas Mr Morton doubts that this will occur in other than a small minority of cases.
165. Both experts agree that fundraising has become increasingly difficult in the wake of the international financial crisis since 2008 and the Euro crisis. For the most part, they also agree that investors look at the historical performance of all funds with a focus on the most recent funds when making investment decisions, Mr Morton emphasising that investors are most interested in the performance of the two most recent funds for which the investment team for the next fund will have been most responsible. In any event, both experts agree that investors focus on the individual team members who will be responsible for investing the fund being raised, accordingly, that the record and reputation of that team is very important and that it is more important than the reputation of the firm itself. Furthermore, investors like to see co-investment in the fund by the investment team or the general partner of the limited partnership in question.
166. It is accepted that the predominant ownership model in respect of non-listed private equity firms is the owner manager model. Nevertheless, Mr Florman considers that listed private equity companies are relevant when valuing a business such as Charterhouse, something disputed by Mr Morton because he says that such businesses are primarily valued on the basis of the investments on their balance sheets, something which does not apply to Charterhouse. Mr Morton also considers that large multi-fund firms such as Blackstone, KKR, Carlyle and the like have business models so different from Charterhouse that they are not comparable whereas Mr Florman considers that one can at least compare the private equity parts of those firms with Charterhouse.
167. It was agreed that the market perception of Charterhouse is that of a high quality firm and that performance is generally good although the under performance of Fund VIII, the uncertainty about Mr Bonnyman's future and the departure of other senior members of the investment team would be issues in relation to future fund raising.
168. It was also agreed that the investment team was a very important part of the business and that any buyer would want to retain a significant number of them. Although it was agreed that there was some value in the goodwill of the Business itself and its infrastructure, Mr Morton stressed that he considered it to be very limited, whereas Mr Florman considers that strong private equity brands can have significant goodwill. Both agreed that if the investment executives were to move elsewhere, they would raise less money from investors and therefore, in the near and medium term, earn less money if they were to start again from scratch rather than remain with Charterhouse.
169. There was no disagreement that on any sale of the entire issued share capital of the Company it would be necessary not only to agree a price for the shares but also to agree the manner in which the Business would be run in the future, including the division of profits and the remuneration of the investment team. The potential purchaser would also have to convince investors of the advantages of a sale and it would be important that the significant members of the current team or most of them would remain post sale. It would be necessary to carry out all of this in confidence.
170. It was also agreed that any external equity investor would not change the remuneration structure for the investment team without agreeing it with senior executives in advance of any sale. However, assuming that executives were motivated only by financial considerations, the 75^th percentile used by Mr Morton in his report as being the approximate level of remuneration below which the risk of team departures would rise significantly was a reasonable level to use, although Mr Morton considers that those with a better chance of raising a fund elsewhere such as Mr Giacomotto and Mr Offord would be more likely to leave if faced with a smaller reduction in remuneration. It was also accepted that loss of autonomy was the main non-financial reason for individuals to leave in the event of a sale to a third party, although lower ranking staff might be motivated to stay as a result of broader career development paths. It was agreed that it was rare for the most senior people in the private equity business to move firms.
171. Both experts agreed that the purchase of a minority shareholding in Charterhouse by a small group of sovereign wealth funds or major investors was theoretically possible although it would be essential to retain the significant members of the investment team and to have gained the support of the significant investors in advance who would want to hear compelling arguments as to why they should agree. Some investors might be opposed and others might choose not to invest as a result. Mr Florman considers that such a strategy is, in fact, possible but if Charterhouse had decided to pursue such a course it would have had to be "absolutely certain" that it could be presented to investors as a positive outcome. He also agreed that it was reasonable for a business like Charterhouse to decide not to pursue such a path. Furthermore, in his opinion, using the capital from such an investment to buy out a retiring member's shares would not be compelling and he would not advise Charterhouse to have followed such a strategy.
172. However, both experts consider it unlikely that a sale to a competitor or a broader investment management group would occur. Such an event would be unattractive to the investment team and would be unlikely to be welcomed by some investors. It was considered that an acquisition by a broader investment management group was more likely than by a competitor. However, Mr Florman considers that although it might prove difficult to achieve, Charterhouse could be sold to a buyer or buyers other than the existing management team if significant members of the present team were to remain for a significant period. Mr Morton on the other hand does not believe that sale to any third party would be possible. However, Abraaj and Aureos and Blackrock and MGPA are examples of full mergers or acquisitions of fund manager companies. In any event, Mr Morton does not consider the transactions which post dated the WSL Offer to be comparable. He points out that MGPA is a real estate manager which had stated the need for a partner in order to grow and is of the opinion that the Abraaj acquisition of Aureos was a geographical expansion in an immature market. Although both experts agree that there is a trend towards consolidation in the private equity markets, Mr Morton considers that that will occur by less successful firms going out of business or being acquired at "distressed" prices rather than by full mergers or acquisition.
173. Furthermore, it was agreed that it would be difficult for Charterhouse to be listed as a result of its business model which creates a level of risk which would be unattractive on the stock market.
174. In the same way, it would be possible to pay a dividend to external shareholders depending on the amount and upon satisfying investors that there is a good reason for it and it was in return for a substantial contribution to the business. Such a reason would need to be a "significant contribution" such as substantial funding to enable the general partner to increase its co-investment in the fund or funding to expand resources including new offices. Mr Florman added that even then, most equity owners did not seek a dividend. However, it was agreed that ownership structures which included some decaying deferred interest for retired partners could be agreed because investors might benefit indirectly from the business being prepared for its own evolution over time. Mr Florman suggested that this was more likely to take the form of re-purchase of shares on retirement and the payment for ongoing advisory services, rather than the payment of a dividend.
175. In any event, it was agreed that alignment of interests between investment management teams and investors is critical to investors and that it is an issue of increasing importance. It was also agreed that strong alignment of interest makes fund raising easier.
176. Although remuneration is a central part of alignment, carried interest and co-investment is better. Furthermore, the existence of outside equity can create misalignment and investors tend not to like the risk of potential influence of outside owners. Although alignment does not require 100% of carried interest to be paid to the investment team, that is generally the case and where there are other arrangements it has to be justified to the investors.
177. Both experts agreed that there is scope for external interests but only where it is justified to investors on the basis of compelling arguments as to the benefit to the overall performance of the fund or the business as a result. 10-20% external ownership, therefore, might be justified if it brought benefit for all stakeholders including investors.
178. It was also agreed that the growing number of investment executives who had retired or were to retire from Charterhouse but retained their shareholding in the Company was an issue which needed to be addressed. Third party ownership which is too large or unexplained or both would be likely to raise issues with investors when fund raising and 40% plus Mr Bonnyman's additional 18% of the shares in the Company in the hands of the retired team would have been an impediment to raising another fund.

(ii) Valuation

179. As to valuation, it was pleaded on Mr Arbuthnott's behalf that the Company was worth approximately £465m whereas the Respondents consider it to be worth no more than £15.15m, the value upon which the WSL Offer was based.
180. As I have already mentioned, the valuation experts were Mr Eales of Ernst & Young on the Respondents' behalf and Mr Mitchell of BDO on behalf of Mr Arbuthnott. Not only their approach to the issue of the valuation of the entire share capital of the Company but also as a result, not surprisingly, their actual valuations differed widely.
181. In summary, Mr Mitchell valued 100% of the equity in the Company in the range of £275m to £321m based on a P/E ratio approach and a market capitalisation as a percentage of AUM approach (both derived from four publicly listed companies) with a discounted cash flow valuation ("DCF") of £275m as a "cross check", (£217.5m excluding carried interest). He concluded that the value is at the upper end of the range at between £300m and £325m "reflecting the rounded Market Capitalisation to AUM range."
182. Mr Eales on the other hand used only the DCF method because he said that the other models were unreliable in the circumstances. He concluded that the shares had no economic value on the present model of the Business and that in the absence of a third party purchaser, were unlikely to have more than nominal value. However, he acknowledged that in the actual circumstances of the transaction in this case, the shares had a nuisance value to the purchasers as the continuing investment team. He also accepted that there was always hope of a change of business model and, therefore, under the WSL transaction, the market value of the shares was in the region of £10m to £15million. However, on the assumption that the Company was acquired by a third party and remuneration levels for investment executives are reduced to the 75^th percentile level in the MM&K survey of 2012 to allow for dividend payments, he valued the entire shareholding at £20 - 25m.
183. In fact, despite the disparity in approach, the outcome of Mr Eales' and Mr Mitchell's valuations of Mr Arbuthnott's 8.9% shareholding in the Company, albeit on a minority basis, as at the date of the WSL Offer, overlap. Mr Eales says that the value is between £0.9m and £1.3m and Mr Mitchell concludes that it is worth between £0.458m and £1.322m. The WSL Offer provided for a payment of £1.35m.
184. The difference in methods adopted by the valuers arises from a different view as to whether there are companies comparable with Charterhouse. The PE and AUM valuation methods require broadly comparable companies from which to derive multiples. Mr Eales considers that the comparable companies are sufficiently different from Charterhouse to render the conclusions reached by reference to them to be unreliable as a result of the number of subjective adjustments which would be necessary.
185. Mr Mitchell gave no real explanation for using the DCF method purely as a cross check. In fact, Mr Eales' evidence was that all other methods are "in essence merely simplified applications of the DCF approach." Mr Mitchell accepted that without an appropriate comparable company it was not possible to use either the P/E multiple or the AUM approach to valuation and that one is left with the DCF approach. He also accepted that in the case of the P/E multiple approach, if one fails to take account of a firm's financial fundamentals and the differences between comparators one would end up applying the wrong multiple and consequently arriving at the wrong valuation.

(a) The P/E Approach

186. As Mr Mitchell explained at paragraph 8.5-6 of his report:

"A P/E ratio is a measure of the price per share relative to the annual net income or after tax profit earned by the company per share.

A P/E ratio approach involves applying appropriate P/E Ratios to the historical, current and/or forecast earnings of a company. P/E Ratios are derived from comparable, listed companies and may be adjusted to reflect such factors as size, or range of activities. P/E Ratios may also be observed where there is a transaction in private companies. The value resulting from applying an appropriate P/E Ratio to profit after tax is the market capitalisation or equity value, and represents the value of the company to equity shareholders."

187. The listed comparable companies from which his P/E ratio is derived are valued on a minority basis and, accordingly, he applied a bid premium to the P/E ratios that he had calculated to reflect a control premium. Mr Mitchell concluded, based on market data spanning five quarters prior to the WSL transaction, that 40% was the appropriate premium to apply. He also applied a private company discount to the applicable PE ratio of 35% based on his market analysis.
188. He applied what he considered to be a conservative P/E ratio of 10x to the Company's earnings and as a result calculated an equity value for the Company of approximately £260 million excluding carried interest. With carried interest, his overall valuation on a P/E ratio approach is approximately £318 million. Thereafter, he used a "sum of the parts" analysis to demonstrate the reasonableness of the P/E ratio he had selected.
189. However, Mr Mitchell accepted that the companies that he had chosen as the basis for his P/E ratio approach were not directly comparable with Charterhouse. In cross-examination he accepted, for example, that no meaningful data could be obtained for the purposes of calculating a PE multiple in relation to Charterhouse from 3i and that it could be ignored. Although Mr Mitchell did not concede that ICG was not truly comparable, he did accept that if one were to come to such a conclusion, it would be very difficult to derive a PE multiple merely from the remaining two companies which he had used as comparables, namely KKR and Blackstone. Mr Mitchell went on to accept that ideally one was looking for a company which is 100% comparable and that KKR is nowhere near 100%. Furthermore quite apart from the size, diversity, assets, risk and growth profiles of Blackstone and Charterhouse, Mr Mitchell accepted that he did not know that Blackstone had a large, valuable, centralised hub for fundraising and investor relations (which Mr Florman had accepted) and that he had not factored that into his relative value calculations.
190. Mr Eales' evidence was that 3i was plainly not comparable with Charterhouse, and that nor was ICG because, amongst other things, 92% of its balance sheet was made up of financial assets and investments undertaken by its investment business, which in 2011 generated 81% of its profits before tax, it had offices in nine countries and its investment focus was geographically broader. In his opinion, the same was true of Blackstone and KKR, although he accepted in cross-examination that the risk profile of Blackstone and Charterhouse was the same if one is "putting a headline description on the risk". On the basis of Mr Eales' evidence in this regard, Mr MacLean submits that ICG's business and structure is akin to that of 3i and ought also to have been discarded.
191. Mr Eales' rejection of Blackstone and others as proper comparables with Charterhouse was supported by Mr Florman's evidence in cross-examination. He confirmed that Charterhouse's business was very different from any of the large companies and when asked if the risk profile for an equity investor in KKR, for example, would be very different from that in Charterhouse, he agreed. Mr Florman also agreed that KKR, Blackstone, Carlyle and other multi asset fund managers are "in a league of their own."
192. Mr Mitchell accepted that he adopted a naïve approach of using industry averages rather than more sophisticated multivariate regression modelling. He accepted the importance of identifying and controlling the relevant variables. However, his cross-examination revealed that the only adjustments he had made was to add the bid premium of 40% and the marketability discount of 35% to reflect illiquidity and restrictions applying to private companies. Accordingly, specific controls for relevant variables of risk, growth, cash flow profiles were not applied. It is said that this led to Mr Mitchell ending up with a much larger multiple for Charterhouse than ICG, a much more diversified and listed entity, which Mr Mitchell accepted in cross-examination did not lead him to think again.
193. In fact, the KPMG report of February 2009 utilises comparables to calculate a P/E ratio to determine a valuation for Charterhouse and Mr Eales accepted that, like Mr Mitchell, KPMG had not stripped out management fee earnings when calculating the multiples to be applied. When asked whether a reasonable body of professional opinion would consider the use of a P/E valuation approach to be appropriate, Mr Eales eventually concluded:

"If there had been a steady income stream then it would have lent itself much more to applying a crosscheck with a multiples approach, yes, but I would have needed to find the appropriate companies. My challenge here is not so much one of methodology, it is one of finding the appropriate comparables and making the right adjustments to those."

194. KPMG also concluded that an average control premium of 39% was observed and Mr Mitchell used 40%. Mr Eales accepted that it was very important to include an uplift for control when valuing by reference to listed companies.
195. Under this head, in response to criticisms by Mr Eales of Mr Mitchell's approach to valuation, in his second report he introduced a "sum of the parts" approach. He acknowledged that such an approach relies upon the views of individual analysts rather than arm's length prices and acknowledged that the timing of the analyst's report and the share price could have a substantial impact on the conclusion reached. Mr Eales pointed out that the information is significantly less reliable, therefore, than market based information. He also pointed out that, in addition, it would be necessary to make many subjective adjustments. He did not accept, therefore, that the sum of the parts analysis was tenable because in his opinion, the multiples required too many adjustments and it was not clear to him which year's multiple should be applied.
196. Lastly, it is said that Mr Mitchell failed to make adjustment for the unusually large income from management fees enjoyed by Charterhouse as a result of the difficulty in realising Fund VIII, another reason for rejecting the values derived from the use of this method.

(b) The AUM Approach

197. Mr Mitchell's second relative valuation approach is the AUM approach which he described as "a bench marking tool". Under this approach one compares the total assets under management of various asset management businesses to their market capitalisation in order to produce a multiple which can be applied to Charterhouse's total assets under management in order to produce a notional value of the business. It is not in dispute that, as with the P/E approach, the AUM approach relies upon businesses being comparable and requires the valuer to take account of the differences between his chosen comparables and to adjust accordingly.
198. Mr Mitchell explained that he had adjusted the market capitalisation and AUM figures obtained for his comparable companies to reflect that the ratios calculated from the comparable companies include a minority discount (so an uplift of 40% is appropriate) but are also listed whereas the Company is not (so a discount of 35% is appropriate). Although he said he had done so, it was not clear from his reports that Mr Mitchell had made other adjustments.
199. Mr Mitchell calculated the ratios for his comparable companies at between 4% and 14.4% with a mean of 7.8% and a median of 6.3%. Given that 3i had a particularly high ratio, he excluded that figure and adjusted the averages accordingly. As a result, he arrived at a median of 4.7% and a mean of 5.5%. He then applied a further 15% discount to reflect that the comparable companies have more diversified businesses than Charterhouse, resulting in a median of 4% and a mean of 4.7%. Those figures were then applied to arrive at a valuation for the Company of between £275 million and £322 million with no figure for carried interest.
200. Mr Mitchell accepted in cross-examination, however, that under this approach one would arrive at the same result irrespective of what remuneration was paid to any new third party owner of the business whether it was 10% or 90% and would take no account of the greater key man risk which exists in a business like Charterhouse than in the alleged comparables such as Blackstone and KKR.
201. In cross-examination, Mr Eales described the difficulties with this approach in the following way:

"…. you have to have good comparable companies otherwise you are not in the same risk and growth profiles. The next problem and why, as I said yesterday I think, that I dislike the AUM approach, if you don't adjust for margins, ie the profit you would generate, it is far too crude because a loss-making AUM business would have the same value as a profitable one, so you have to -- you know when you see that if you look at -- if you are valuing a profitable -- highly profitable AUM business and it has a percentage of funds under management and then you were to look at a loss-making one, you can't simply apply the same percentage of funds under management. That would be ridiculous. You would get the same value for the loss-making company, because it has got the same amount of funds under management, as the profitable one. You have to understand what's driving the profits and that's why I believe this is such a crude and unhelpful approach, particularly when the heart of the dispute here revolves around a remuneration model which impacts directly the margin on the business.

So by simply taking a group of comparable companies and taking a percentage of their funds under management and saying "This gives me a value" misses out the whole point of the dispute before the court, as far as I can see. That's why I found it particularly unhelpful despite all the other technical limitations to the approach."

202. Mr Eales also suggested that a valuer cannot derive any meaningful conclusion as to a relationship between AUM and market capitalisation from companies that have investments on their balance sheets. Nevertheless, Mr Eales accepted that it was possible to use these comparables if appropriate and reliable adjustments could be made, that the appropriate adjustments were subjective and that they could reasonably be expected to vary from one expert valuer to another. He also commented that if one starts with too wide a variance:

" . . . if you were going to start with Intermediate Capital and 3i, KKR and Blackstone, it is obvious to me that there are far too many adjustments to give you a reliable benchmark. You have got a very different business model, single sequential funds, you have got very different size, you have got assets on the balance sheet. Even if you split out the asset management companies you have very different activities within the asset management companies. You have different growth prospects. By the time you make all the subjective adjustments for those factors I'm not sure you would ever get any real comfort around the value from that methodology, which is why -- which is not my preferred approach -- I only used one methodology. I would always prefer to use more than one methodology and it is when you look at the answers that you get when you use those approaches, it challenges you to look at your discounted cashflow again and say "Where could I have gone wrong?" and you cannot bridge the gap because you are comparing, in my view, absolutely apples and pears when you look at these companies as a whole."

203. Both experts agreed that leverage and pre-financing may distort an AUM multiples approach to valuation.

(c) The DCF Approach

204. Mr Mitchell explains at paragraph 8.12 of his report that a "DCF approach derives the present value of a company by discounting the forecast cash flows expected to be generated by the company to present value at the valuation date." Mr Mitchell's DCF valuation for the Company is £346.3 million whereas as I have already mentioned, Mr Eales' highest figure is £22m.
205. The main differences in approach are that Mr Eales does not take into account a value for carried interest available to the Company in the future, which Mr Mitchell considers to be 20% of the total carried interest available on future funds and values at £50m and Mr Eales excludes on the basis that it will continue to be divided amongst the investment team. It was also accepted that Mr Mitchell had proceeded on the basis that there was an alteration of the remuneration model applied by the Company. He also took no account of the risk of departures amongst the investment team were a sale to take place and the remuneration model changed as he did not consider that to do so would properly reflect a sale by a "willing seller". Mr Eales also took issue with Mr Mitchell's assumptions about increases in the size of future funds, the high level of expected return on the funds, that 20% of carried interest would be retained by the Company, 50% of pre tax profits would be paid to a new owner of the shares and that there would be an add back of co-investment bonuses previously paid to the investment team. It is said that none of those assumptions were borne out by the evidence and ignored the commercial bargain which it is said Mr Arbuthnott entered into.
206. It is also said that Mr Mitchell has misunderstood the definition of "market value" under the International Valuation Standards 2011 of the International Valuation Standards Council. Mr Eales, a member of the IVSC Standards Board who formulated the definition, explained that it excluded the special purchaser with special characteristics unless they became market participants and would affect the price. However, the definition was meant so far as possible to replicate the realities of the company being valued:

"The hypothetical purchaser and vendor are as you say anonymous, but the investment team is not anonymous, so the market value is, as I explained, trying to get to the real world value and the real world value will be looking at what's the risk associated with the management team on a transfer of ownership of them staying with the company, or indeed any change in any remuneration structure for example which is one of the ways in which you could extract money out of the company. So to that extent it was necessary to consider what the risks were associated with the investment team and the lack of alignment. So if you look at it from the point of view of the buyer, the buyer would be concerned, if there was a lack of alignment, because the investment team might walk. It is a risk factor for the buyer."

Mr Eales made clear in his first report that he had assumed a hypothetical willing buyer and hypothetical willing vendor:

"…to isolate the value attaching to the shares rather than any value that might be attributable to the management team beyond their contractual obligations".

This is consistent both with the "real world" approach under the IVSC standards and the approach suggested by Professor Damodaran in "Investment Valuation, Tools and Techniques for Determining the Value of Any asset" Aswath Damodaran 3rd ed at 20-24, a text quoted by Mr Mitchell in his reports. Professor Damodaran states that to assess a key person discount, a business should be valued both with the key people involved and then with the loss of those individuals built into revenues, earnings and expected cash flows, the difference between the two valuations being the key person discount. If the entire business will cease without the key person, the value to be attached to the business without the key person is effectively nil, a proposition with which Mr Mitchell agreed.

207. It is said, therefore, that Mr Mitchell ignored the need for any hypothetical purchaser to secure the services of the actual investment team. This is not a point which can be subsumed into the assumption of a hypothetical willing seller. Mr Florman had accepted that a seller such as Mr Giacomotto would have an interest in negotiating a price for his shares and also an interest in negotiating his remuneration package. In relation to the price to be paid for giving up his remuneration package, he would carry out a mental discounted cashflow model of the remuneration stretching into the future and he would need to be paid the value of that cashflow "plus a bit more, for the risk and stress that he is going to be put through". This would be separate to the value of his shares to ensure that the purchaser did not overpay for the shares of individuals and was accepted by Mr Mitchell. This is consistent with Mr Bonnyman's evidence.
208. Mr Eales applied a discount rate of 18% for future income streams, assumed a fund size of 3.5 billion euros for the next two funds to be raised (which was consistent with the unchallenged evidence of Mr Morton) but has not assumed that carried interest is diverted to a purchaser. This is consistent with the private equity expert evidence. In order to arrive at the market value of the entire issued share capital of the Company, he then modelled the cash flows which could arise in four different scenarios. He explained in cross-examination that when determining market value, in accordance with valuation standards, he was considering the position of the hypothetical buyer and seller. He was looking at the overall balance of risk and reward in a transaction from both sides and looked at what he considered to be "the key scenarios" in order to give "an indication of where the power might lie." Mr Eales explained in cross-examination that "I looked at scenarios 2 and 3 and had regard to 4 and 1, but 2 and 3 are the run off and effectively where either is a no fault divorce position, and that helped me to examine where you could extract value from the company."
209. Scenario 1 was based on the assumption that the current remuneration model continued and produced negligible value. Scenario 2 assumed that the purchaser would seek to reduce remuneration to the 75th percentile as per MM&K surveys, that the investment management team would resign and the investors would exercise the "no fault divorce" rights to transfer funds to a new general partners three months after acquisition. On that basis, the value was estimated at £33m. Scenario 3 adopted the basis that the Company continues to manage the current funds and disposal of investments in a run off managed by some of the existing team of investment managers or a new team brought in to manage the run off. In this situation, Mr Eales considered that the Company would have no value. Under Scenario 4 it was assumed that the current investment team would not leave, despite their remuneration being reduced to the 75th percentile level and that the change affected neither the investment team nor the investors. On such a basis, Mr Eales attributed a value between £27m and 44m to the cash flow.
210. In determining the market value from the results of the cash flows shown in the Scenarios, Mr Eales accepted that he formed a qualitative judgment and took into consideration matters including the question of whether changes to the remuneration model would create a significant risk of departures, the issue with investors over the allocation of fees and carried interest other than to the investment team, uncertainties as to whether the values under Scenarios 2 and 3 could be achieved including the very significant prospect that the FCA would not grant permission to a purchaser to extract value from no fault divorce provisions (Mr Morton's unchallenged evidence) and Mr Morton's further unchallenged evidence that where investors sought to transfer the fund to another manager they would be likely to seek to avoid or, at least, minimise any no fault divorce payment to Charterhouse. In this regard, Mr Florman's evidence was that scenario 2 was "highly unlikely" in the real world and the assumptions in scenarios 1, 2 and 3 were "extraordinary" and "quite unrealistic and they are not in the real world at all." He also added that the suggestion that remuneration could be cut by 25% was "complete nonsense".
211. Mr Eales explained that, in each of his scenarios, the earnings prior to the valuation date are distributed by way of bonus immediately prior to the valuation date. This was notwithstanding his acceptance that bonuses were not usually paid until January of each year. His instructions in this regard were to assume that "all the earnings of the Charterhouse group prior to the Valuation Date have been distributed by that date."
212. In fact, Mr Eales conceded that on the valuation date (i.e. the date on which he was instructed to value the Company), the Company actually had £59 million of cash on its balance sheet. In this regard, he commented:

" -- if you imagine going back to the real world, that -- and I think this is the danger of mixing hypothetical with -- but if you go back to the real world and the management team were intending to sell the on the 11th, I would presume some time prior to the 11th they would have distributed to themselves any surplus cash. So I think -- I don't think it is an unreasonable assumption. I can see it depends precisely when you decide you kick in the hypothetical basis of valuation, pre-or post where you distribute the earnings, but that's what the instructions quite clearly say."

Had Mr Eales' assumptions regarding earnings not been made, he accepted that he would have reached a different valuation.

213. Mr MacLean submits that the Court should conclude that the DCF approach is best in this case because unlike the other approaches, the model used is transparent and it is preferable where one can predict cash flows with a reasonable degree of certainty and it is helpful when there are not "normal" or "maintainable" patterns of growth in earnings.

The Relevant Law

(i) Section 994

214. The jurisdiction of the court to grant relief in respect of unfairly prejudicial conduct in relation to a company is entirely statutory. The grounds upon which the jurisdiction may be invoked are set out in section 994(1) Companies Act 2006 (the "2006 Act") as follows:

"A member of a company may apply to the court by petition for an order under this Part on the ground-

(a) that the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or

(b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial."

It is common ground that there are three distinct requirements. They are: conduct of the company's affairs (or act or omission of the company proposed or actual); prejudice to the petitioner's interest as a member; and unfairness. If the requirements of section 994 can be established, the Petitioner must also persuade the Court that in all the circumstances, the Court should exercise its discretion under section 996(1) of the 2006 Act to make an order in the Petitioner's favour.

(a) Conduct of the company's affairs

215. In Gross v Rackind [2005] 1 WLR 3305 per Sir Martin Nourse at [29], it was held that the words "affairs of the company" are extremely wide and should be construed liberally, looking at the business realities of the situation and not confining them to a narrowly legalistic view; "affairs" encompasses all matters which might come before the board for consideration. However, in McKillen v Misland (Cyprus) Investments Ltd; McKillen v Barclay, [2012] EWHC 2343 (Ch), [2012] All ER (D) 71 (Aug) at [626] it was held that:

"the section is not directed to the activities of the shareholders amongst themselves, unless those activities translated into acts or omissions of the company or the conduct of its affairs."

216. In this regard, Mr Chivers also referred me to Oak Investment Partners XII, Limited Partnership v Boughtwood and Ors [2009] 1 BCLC 453 per Sales J at [15]:

" . . .Conduct of anyone involved in a company may be so far removed from actually carrying on the affairs of the company that it does not amount to the conduct of the company's affairs for the purposes of s994. But in my view, s 994 is concerned with the practical reality which obtains on the ground in relation to the conduct of a company's affairs, and there is no sound reason to exclude the possibility that what someone does in exercising or purporting to exercise managerial power as a director or senior employee should not in principle qualify as conduct of the affairs of the company for the purposes of that provision."

217. Both Mr Chivers and Mr MacLean also drew my attention to the recent decision of the Court of Appeal in Graham v Every [2014] EWCA (Civ) 191. It was an appeal and cross appeal against an order allowing in part the respondents' application to strike out a petition. The particular aspect of the appeal which is said to be relevant here was the decision that the judge had been wrong to strike out the "non-compliant share purchase allegation" because when properly particularised it might involve the unfairly prejudicial conduct of the company's affairs. Arden LJ held at [30] and [37]-[40]:

"[30] Mr Stewart accepts that a mere breach of a pre-emption agreement would not in itself constitute the conduct of the affairs of the company or an act of omission of the company within section 994. In my judgment, Mr Stewart is right to accept that the mere breach of the pre-emption agreement was not an act or omission of the company or the conduct of the company's affairs for the purposes of section 994(1). The reason is obvious. The act of purchasing the shares was not effected by the Company or on its behalf.

. . .

[37] The requirement in section 994 for an "act or omission of the company" means that the petitioner must identify something which the company does or fails to do. The alternative requirement – that "the company's affairs are being or have been conducted in a manner that is unfairly prejudicial" to members or the petitioner – does not contain the same stipulation. Mr Graham can rely on the actions of some other persons, including his fellow shareholders. But the actions must still amount to the conduct of the company's affairs.

[38] On its own, non-compliance with a pre-emption agreement for the sale of shares in the company would not be an act which amounts to the conduct of the company's affairs since the events have nothing to do with the company save when the shares are registered in the names of the new holder, which is purely ministerial act. An act done in the conduct of the shareholder's personal affairs is not the conduct of the company's affairs.

[39] However, Mr Stewart puts the point more widely than this. And it is true to say that, if Mr Graham establishes his allegation about the terms of the Heads of Agreement, then, in so far as those terms set out how the Company's business is to be run, breach of those terms would fall within section 994(1).

[40] In the normal way, pre-emption agreements fall outside section 994(1) but in the present case the directors were, as I have explained, not to be remunerated by salary but by way of dividend. Thus the size of a director's shareholding would dictate his reward for his work on the Company's business. How directors were to be remunerated and the Company's distributions policy are within the conduct of the company's affairs. So, by denying Mr Graham's pre-emption right at a time when Mr Graham was still a director, Mr Every was arguably interfering with the way in which the parties had agreed that the Company would remunerate its directors."

(b) Prejudice to the petitioner's interests as a member

218. There is no dispute as to the meaning of "prejudice" for the purposes of section 994. It is accepted that an expropriation of shares at an undervalue would necessarily prejudice the interests of the shareholder concerned.

(c) Unfairness

219. There is also no dispute that the principles set out by Lord Hoffmann in O'Neill v Phillips [1999] 1 WLR 1092 apply. The jurisdiction under section 459, the predecessor of section 994 was under consideration but nothing turns upon that. Lord Hoffmann emphasised that the criterion by which the court must decide whether it has jurisdiction to grant relief is fairness and that its content is dependant upon the context in which it is used. He stated that the background to section 459 had two features, the first of which was the terms of association contained in the articles of association of the company and any collateral agreements between shareholders and the second was the role of equity to restrain the exercise of strict legal rights where it would be contrary to good faith. At 1098H – 1099A he went on:

" . . . a member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted. But the second leads to the conclusion that there will be cases in which equitable considerations make it unfair for those conducting the affairs of the company to rely upon their strict legal powers. Thus unfairness may consist in a breach of the rules or in using the rules in a manner which equity would regard as contrary to good faith."

220. In this regard, Mr Chivers drew attention to Re a Company (No 005685 of 1988) ex parte Schwarcz (No 2) [1989] BCLC 427 in which Peter Gibson J concluded that in light of the detailed agreements in relation to all of the matters which were to govern the relationship, there was no room for any legitimate expectations to have arisen. He says that the position is the same here. Given the detailed Shareholders' Agreement, he says there was no room for wider non-contractual understandings which is the way in which he characterises the remuneration model.
221. It is also not disputed that unfairness is an objective standard. In Re Macro Ipswich [1994] 2 BCLC 354, Arden J (as she then was) described the issue in the following way at 404:

"The question whether any action was or would be 'unfairly prejudicial' to the interests of the members has to be judged on an objective basis. Accordingly it has to be determined, on an objective basis, first whether the action of which complaint is made is prejudicial to members' interests and secondly whether it is unfairly so."

222. Mr Chivers also draws attention to In re a Company ex parte Glossop [1988] 1 WLR 1068 per Harman J as support for the proposition that the directors of a company are under a duty to consider the payment of dividends. That was a case in which it was held that the failure to pay dividends affected all of the shareholders equally and therefore was not unfairly prejudicial to some party of the members. Nevertheless it was held that there was a duty to consider the rights of the members to have profits distributed so far as was commercially possible and that failure to meet the legitimate expectation of the members to receive reasonable dividends would be allowed by amendment for the purpose of founding a petition on the ground that winding up would be just and equitable. He also referred me to Re Tobian Properties Limited; Maidment v Attwood [2013] BCC 98 in which it was held that it was contrary to the duties of a director and unfairly prejudicial to fix remuneration by reference to the director's own interests and not those of the company.
223. On the other hand, Mr MacLean emphasises that in In Re Sunrise Radio [2010] 1 BCLC 210 the complaint that the directors had acted improperly or unfairly in not declaring dividends was rejected. At [142] Judge Purle QC sitting as a judge in the High Court found that:

" . . . the growth policy was adopted and acquiesced in at a time when Ms Kohli was a director. In that respect, the normal expectation of shareholders was abrogated or qualified."

224. The Respondents contend, therefore, that Mr Arbuthnott's agreement to or, at least, acceptance of the remuneration model means that it is unfair for him now to complain about the continued operation of that model or to seek to assess the value of the Company on a basis which ignores that model and his acceptance of it.

(ii) Construction of Articles of Association

225. In this regard, it is not disputed that articles of association are a business document and should be construed so as to make them workable and to take account of another important principle:

"A share is a right of property, and the right of a shareholder to transfer a share is one of the rights attached to that property. A company's articles should not be construed so as to cut down that right unless that is the fair interpretation of the articles."

BWE International v Jones [2004] 1 BCLC 406 per Arden LJ at [22] and [24].

(iii) Directors' Duties

226. Section 171 of the 2006 Act provides:

"A director of a company must –

(a) act in accordance with the company's constitution, and

(b) only exercise powers for the purposes for which they are conferred."

Furthermore, section 172(1) of the 2006 Act provides:

"A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—

(a) the likely consequences of any decision in the long term,

(b) the interests of the company's employees,

(c) the need to foster the company's business relationships with suppliers, customers and others,

(d) the impact of the company's operations on the community and the environment,

(e) the desirability of the company maintaining a reputation for high standards of business conduct, and

(f) the need to act fairly as between members of the company."

227. Section 170(4) of the 2006 Act provides the duties set out in sections 171 to 177 are to be interpreted and applied in the same way as common law rules or equitable principles, and that regard is to be had to the corresponding common law rules and equitable principles in interpreting and applying those duties.
228. The primary duty under s.172(1) CA 2006 was expressed in the case law in the classic words of Lord Greene MR in Re Smith & Fawcett Ltd [1942] Ch 304, at 306 (CA), as a duty on the directors to act:

"bona fide in what they consider – not what a court may consider – is in the interests of the company."

229. If the directors exercise a power conferred by the articles of association for a purpose other than that for which, on its proper interpretation, it was so conferred, their conduct is open to challenge and it would be no answer for them to maintain that they believed in good faith that their conduct was most likely to promote the success of the company. The Court will not substitute its own view for that of the board as to the exercise of its management powers. The court will look to see whether a particular purpose was proper as a matter of construction of the articles of association. The onus of proving that the directors' purpose was improper is on someone seeking to challenge their action. They must show that an improper purpose was the dominant purpose of the directors.

(iv) Alteration of Articles of Association

230. It is also well known that the exercise of the power of the majority by special resolution to alter the articles of association may be subject to restraint in equity if it is abused. The members have a wide power to amend the articles but as Lindley MR explained in Allen v Gold Reefs of West Africa (1900) 1 Ch 656 at 671:

"… the power … must, like all other powers, be exercised subject to those principles of law and equity which are applicable to all powers conferred on majorities and enabling them to bind minorities. It must be exercised, not only in the manner required by law, but also bona fide for the benefit of the company as a whole, and it must not be exceeded."

231. There is no dispute that the test is subjective and that the burden in such cases is on the person who challenges the validity of the amendment to show that the amendment was not bona fide believed by the shareholders to be in the interests of the company as a whole.
232. In Citco Banking Corporation NV v Pusser's Ltd & Anr [2007] 2 BCLC 483, the Privy Council upheld a change to the articles which entrenched the existing controller of the company (who controlled 28% of the shares before the change) by permitting the conversion of his existing shares (carrying one vote per share) into a new class of share carrying 50 votes per share. The test in Shuttleworth v Cox Brothers and Company (Maidenhead) Ltd & Ors [1927] 2 KB 9 was applied and stated to be "clearly settled". Lord Hoffmann reiterated that the burden of proof was on those challenging a resolution and the Privy Council found that the test of "bona fide in the interests of the company as a whole" was met.
233. The members supporting the decision had indicated that they believed it to be bona fide in the interests of the company because it enabled the company to raise further finance for expansion, the financiers requiring that the existing controller remain in charge. The genuineness of that belief was not challenged and the court found that a reasonable shareholder could have held this view about the proposed alteration.
234. At [15]-[17] Lord Hoffmann had explored the "bona fide for the benefit of the company as a whole" test and set out passages from the judgments of Scrutton and Bankes LJJ in Shuttleworth v Cox Brothers & Ors with approval. The passage from the judgment of Scrutton LJ at (23) is in the following form:

"Now when persons, honestly endeavouring to decide what will be for the benefit of the company and to act accordingly, decide upon a particular course, then, provided there are grounds on which reasonable men could come to the same decision, it does not matter whether the Court would or would not come to the same decision or a different decision. It is not the business of the Court to manage the affairs of the company. That is for the shareholders and directors. The absence of any reasonable ground for deciding that a certain course of action is conducive to the benefit of the company may be a ground for finding lack of good faith or for finding that the shareholders, with the best motives, have not considered the matters which they ought to have considered. On either of these findings their decision might be set aside. . ."

235. Lord Hoffmann went on to note that in both Allen v Gold Reefs and the Shuttleworth case, the amendment in question operated to the particular disadvantage of the minority of shareholders. He went on to conclude at [17]:

". . . the same principle must apply when an amendment which the shareholders bona fide consider to be for the benefit of the company as a whole also operates to the particular advantage of some shareholders."

Nevertheless, he acknowledged that the test will not enable the court to decide all cases in which the amendment of the articles operates to the disadvantage of some shareholders where the amendment regulates the rights of shareholders in which the company as a corporate entity has no interest. Although it was unnecessary to decide the point, Lord Hoffmann referred to the test applied by Sir Raymond Evershed MR in Greenhalgh v Arderne Cinemas Ltd [1950] 2 All ER 1120, [1951] Ch 286 where the amendment was to remove a pre-emption clause to facilitate a sale to a third party and commented that "some commentators have not found this approach entirely illuminating . . ." In that case, Lord Hoffmann stated that the Master of the Rolls:

". . . tried to preserve the application of the traditional test by saying that in such cases "the company as a whole" did not mean the company as a corporate entity but 'the corporators as a general body" and that it was necessary to ask whether the amendment was, in the honest opinion of those who voted in favour, for the benefit of a hypothetical member."

236. Lord Hoffmann also noted that the test adopted by the High Court of Australia in Gambotto v WCP Ltd (1995) 182 CLR 432 that an amendment involving expropriation could be justified only if it was reasonably apprehended that the continued shareholding of the minority was detrimental to the company, its undertaking or the conduct of its affairs and expropriation was a reasonable means of eliminating or mitigating that detriment "had no support in English authority."
237. It is also not disputed that both the principle to be derived from the Allen v Gold Reefs case, rendering the alteration of articles ineffective in certain circumstances, and the ability to seek relief under section 994 may both be engaged in circumstances in which articles of association are altered in order to allow for the expropriation of shares. Any resolution which offends the Allen principle will inevitably be unfair and prejudicial for the purposes of section 994, but an alteration of the articles does not have to offend the Allen principle in order to amount to unfair prejudice. Unfair prejudice is a wider concept, judged in accordance with an objective standard and gives rise to greater and more flexible remedies.

Submissions and Conclusions

(i) Conduct of the affairs of the Company

238. First, it is not disputed that the conduct of the affairs of the Company for the purposes of section 994 includes the resolution to amend the Articles of Association and the directors' actions on behalf of the Company in responding to the WSL Offer and in implementing its terms pursuant to the terms of the WSL Offer and in accordance with the amended Articles.
239. Mr Chivers on behalf of Mr Arbuthnott says that it is beyond doubt that an expropriation of shares necessarily prejudices the interests of the shareholder; that forcing a minority shareholder to sell against his will is in any case prejudicial; and that an expropriation at a price which is an undervalue is doubly prejudicial.
240. He also submits that the implementation of what became known as Project Parker being the formulation and implementation of the WSL Offer amounted to the conduct of the affairs of the Company. He says that the conflict of interest between WSL and those directors who were interested in it and the Company existed long before it was recognised and addressed in October 2011. The Company through Mr Patrick at the behest of Mr Bonnyman, Mr Giacomotto and others had been working against itself and, for example, the advice sought from Mr Todd QC had been kept from the group which became known as the Independent Directors. Furthermore, Dickson Minto which had long been the adviser of the Company began advising WSL on 8 October 2011 and the Independent Directors were placed in a position in which they had to obtain separate advice at short notice from Mr Turnbull of Shepherd & Wedderburn.
241. In his email to Jordan Simpson copied to Dickson Minto of 19 October 2011, Mr Turnbull stated that he was "assuming that all the retiring shareholders are "on side" apart from Arbuthnott" and that:

"I have formed the view that the independent directors should not, as directors, hold themselves out as negotiating with Newco on the terms for recommendation to the shareholders. The normal considerations in a public takeover are not relevant here, and so the Company's role (and so the role of the directors) should only be to ensure compliance with the various obligations to which it is subject. To the extent that the independent directors wish to enter into negotiations on terms, they should do so as shareholders. You will appreciate this is to ensure that neither the Company nor the directors (in that capacity) incur any liability to shareholders in relation to the terms of the acquisition."

242. Mr Chivers submits, therefore, that the entire process amounts to conduct of the affairs of the company aimed at Mr Arbuthnott and that if it had not been for him, the evidence was that there would have been a series of bilateral agreements in order to achieve alignment. He also says that the evidence reveals that no regard was given to the duties of the directors, the position of the Company itself or its shareholders as such.
243. Furthermore, he suggests that the purpose of the WSL Offer was to ensure that the prejudice to the shareholders suffered by reason of the distribution of profits amongst the active investment managers rather than the shareholders would continue. Accordingly, the conduct of the affairs of the Company was engaged on this ground also.
244. Mr MacLean on behalf of the Respondents urges me to reject such a formulation of the conduct of the affairs of the company as too broad. Further, he says that neither the allegation that the WSL Offer was generated by the Company itself or at its expense nor the allegation that the affairs of the Company were engaged by the acquisition of the shares by WSL because the Business of the Company was carried on as before with no value being achieved for the shareholders was contained in the Petition or the Points of Reply. He also says that there is no allegation that Project Parker and the use of Company resources in the Project amounted to the conduct of the affairs of the Company and, accordingly, they should be rejected.
245. In this regard, he refers me to McKillen v Misland (Cyprus) Investments Ltd & Ors (In Re Coroin Ltd) at [56] of the judgment of David Richards J at which he stated that:

" . . the petition plays, in my judgment, a vital role in defining the basis of the petitioner's case. This is not a question of taking technical pleading points. The petition must be read sensibly. But it does mean that the grounds on which the petitioner says the affairs of the company have been conducted in an unfairly prejudicial manner should be fairly set out in the petition. Only in this way will the respondents be able properly to meet the case and the court be able to keep the proceedings within manageable bounds . . ."

246. In any event, Mr MacLean says that the allegation that the Company generated and paid for the formulation of the WSL Offer is unfounded. In fact, Mr Patrick was given carriage of the project was a member of the LLP and was neither a director nor was he paid by the Company. Furthermore, he says, there is no evidence that the fees for the services of Dickson Minto were charged to the Company.
247. Mr MacLean points out that in this case there is no pleaded allegation that the WSL Offer and its acceptance by 17 of the 18 shareholders adversely affected the Company's affairs to Mr Arbuthnott's prejudice going forward. Mr Arbuthnott's objection, it is said, is merely as to the price at which he is to be bought out.
248. In fact, there were three elements which were pleaded as allegedly constituting the conduct of the affairs of the Company which were unfairly prejudicial to Mr Arbuthnott. The first was the failure to purchase Mr Arbuthnott's shares at a fair price pursuant to the alleged Oral Agreement with Mr Bonnyman. This did not feature in the written or oral closings and as far as the Oral Agreement is concerned, does not appear to be pursued with any vigour. In any event, I have found that the Oral Agreement was not reached and therefore, that basis for the claim is rejected.
249. The second pleaded element was the failure to investigate and respond to Mr Arbuthnott's concerns about possible misconduct and the restriction of information provided to him. This is also not pursued with any vigour. Once again I have found that Mr Arbuthnott's concerns were addressed. Even if such a failure amounts to the conduct of the affairs of the Company it seems to me that given the way in which they were dealt with, they led neither to prejudice nor to unfairness to Mr Arbuthnott. In relation to the restriction of information, once again it seems to me that even if one assumes in Mr Arbuthnott's favour that in the context in which it arose, the alteration of the Shareholders' Agreement amounted to the conduct of the affairs of the Company, in my judgment it was neither prejudicial nor unfair that information rights under the Shareholders' Agreement should be limited in a way which allowed the Company to withhold from members information in respect of which the Company had assumed confidentiality obligations, information which was commercially sensitive and information which the Company considered was not usually provided to shareholders of a company of its nature.
250. The third element which was pleaded as amounting to the conduct of the affairs of the Company is very wide and is described as:

". . . the conduct relating to the making of the Offer and the attempt to expropriate Mr Arbuthnott's shares which amounts to a single course of conduct, but one giving rise to various elements of unfair prejudice . . . relating both to the process surrounding the Offer and its content and then to the subsequent attempted expropriation after the Offer had been accepted. . . . ."

The various elements of unfair prejudice were set out in summary thereafter and various alleged failures by the directors and breaches of duty are set out.

251. However, taking the Petition and the Points of Reply together, there is no reference to the allegation that the WSL Offer was generated by the Company itself or at its expense. Nor is there an express allegation that the affairs of the Company were engaged by the acquisition of the shares by WSL because the business of the Company was carried on as before with no value being achieved for the shareholders. Accordingly, in my judgment Mr Arbuthnott is not entitled to rely upon these allegations at this late stage.
252. In any event, even if that were not the case, it seems to me that Mr MacLean is correct to say that there is no evidence to support the allegation that, in fact, the WSL Offer was generated by the Company as opposed to various Founders together with other active investment manager members of the LLP or that it was paid for by the Company. There is no evidence at all about how Dickson Minto's fees were met and as Mr MacLean points out, Mr Patrick who was the main driver for the project, was not employed by the Company. In my judgment, Mr Arbuthnott's case in this regard is not assisted by the fact that the conflict of interests issue was only addressed at a late stage in the process. A conflict of interest in the case of those directors of the Company who together with others were formulating the WSL Offer is not the same as the activities amounting to the conduct of the Company's affairs.
253. I also agree with Mr MacLean that it is both unpleaded and too wide a formulation to suggest that the affairs of the Company were engaged by the acquisition of the shares in the Company by WSL or the WSL Offer itself because the business of the Company was carried on as before allegedly with no value being achieved for the shareholders. The exercise of the voting rights by the majority of shareholders more than 50% of whom had retired from investment management is not of itself the conduct of the Company's affairs, nor was the making of the WSL Offer or its acceptance by individual shareholders.
254. In my judgment, the circumstances in this case are different from those considered for the purposes of a strike out application by the Court of Appeal in Graham v Every. In this case it seems me that it is the price for the shares under the WSL Offer and the manner of their purchase with which Mr Arbuthnott takes issue and in relation to which he says he was unfairly prejudiced. Unlike the circumstances in Graham v Every, he had no interest in the distribution policy adopted by WSL in the future and that policy could not cause him unfair prejudice because his membership of the Company was to cease. It seems to me that Mr Arbuthnott's interest in the distribution policy is only as a facet of the price of his shares.
255. In my judgment, therefore, the relevant matters in relation to the WSL Offer which constitute the conduct of the affairs of the Company are the manner in which the independent members of the board of directors of the Company responded to the WSL Offer and put it into effect and the alteration of the Articles of Association by the Company by means of a resolution.

(ii) Conduct allegedly unfairly prejudicial

(a) Procedural unfairness

256. Mr Chivers adopts the analysis from the Gambotto case in the High Court of Australia and deals not only with the alteration of the articles themselves but also with procedural and substantive unfairness. In that case, it was held that the alteration of articles of association to enable the expropriation of shares will not be valid simply because it was made for a proper purpose. It also needed to be fair in the circumstances and that fairness included both procedural and substantive elements.
257. As to procedural unfairness, in this case it is alleged that the directors of the Company were obliged pursuant to section 172 of the 2006 Act:

i) to seek to involve themselves in negotiations with WSL, to require WSL to explain the basis for the offer price, and to attempt to obtain the best price and terms for members;

ii) to obtain and provide independent advice to members of the Company regarding the value of the Company and the Offer generally and to give advice on the same matters on the basis of the directors' own views;

and

iii) to provide information to members, to ensure that all members had equal access to relevant information, and specifically to provide to Mr Arbuthnott information that he requested.

He alleges therefore, that the directors of the Company breached each of these duties in relation to the WSL Offer. Mr Chivers also drew attention to Fiske Nominees Ltd & Ors v Dwyka Diamond Ltd [2002] 2 BCLC 123 which was concerned with the compulsory purchase of shares of a minority. Peter Leaver QC sitting as a deputy High Court Judge in the Chancery Division, held that in order for an offer to be fair or proper, it must be made in sufficient detail to enable the offeree to make an informed decision and that although the City Code did not apply (as a matter of concession) it was accepted to be good practice and there should be time to obtain competent advice on the offer. In this case, Article 36 was amended to remove reference to the Code.

258. The general principles under the Code as it stood at the time included (at B1) the following:-

i) "all holders of the securities of an offeree company of the same class must be afforded equal treatment";

ii) "the holders of the securities of an offeree company must have sufficient time and information to enable them to reach a properly informed decision on the bid";

iii) "the board of an offeree company must act in the interests of the company as a whole and must not deny the holders of securities the opportunity to decide on the merits of the bid"

259. It is said therefore that Article 36 as unamended and the Code would have required the Board, amongst other things:-

i) to obtain competent independent advice on the offer;

ii) to make the substance of that advice known to members; and

iii) to circulate its own opinion on the offer to members.

260. Mr Chivers says that if advice had been sought here, the WSL Offer may have failed, or at least, there would have been a proper focus on the benefit of the company as a whole. In this case, he says that procedural unfairness has led to prejudice. The prejudice is such that Mr Arbuthnott is entitled not just to the fair value for his shares but the appropriate proportion of the full value which the Company had to the purchasers. In relation to full value, he emphasises that the remuneration model was not binding nor was it shown to be commercially necessary. There was no evidence that investors necessarily required 100% of any surplus arising out of management fees to be paid to executives and the evidence revealed that the investment managers were paid well above the market rate. He stressed that they would suffer considerable financial and reputational damage were they to leave and that fair value is to be considered in the light of actual conduct and not hypothetical threats: Re Eurofinance Group Ltd [2001] BCLC 720 per Pumfrey J at [98] and [100].
261. In addition, Mr Chivers says that in accordance with the principles in Sunrise Radio Ltd, Re Macro Ipswich and Re London School of Electronics, the court can adjust the valuation assumptions to take account of any past prejudice and therefore, in this case, I should grant relief taking into account the very large bonuses paid in 2009, 2010 and 2011.
262. He referred me to Re Benfield Greig Group plc, Nugent and Anr v Benfield Greig Group plc and Ors [2002] BCLC 65, a case in which it was alleged that the executors of a shareholder had been unfairly prejudiced because auditors had failed to ascertain the true market value of the shares pursuant to a provision in the articles of association. The Court of Appeal held that it was clearly arguable that the auditors had compromised the ability to be an independent valuer for the purposes of the articles.
263. In response Mr MacLean points out that it is clear that the duty contained in section 172 is owed to the company and directors do not owe such duty to current shareholders with respect to disposal of their shares: Dawson International Plc v Coats Patons Plc [1990] BCLC 560. Accordingly, the role of directors in the context of a takeover offer is limited. The primary role of directors is to ensure that the offer and any competing offers are put to the members so that they can decide for themselves whether to accept or reject the best bid available: Heron International Ltd v Lord Grade [1983] BCLC 244.
264. Mr MacLean pointed out that in In Re a Company [1986] BCLC 382 Hoffman J considered a situation in which there were two rival bids for the shares of a private company (the target). The bid under which a lower price was offered for the shares was made by a company set up for the purpose by the directors of the target. Hoffman J held that directors of the target were not even obliged to recommend and take steps to facilitate the highest offer. At 389a-c he explained:

"I cannot accept the proposition that the board must inevitably be under a positive duty to recommend and take all steps within their power to facilitate whichever is the highest offer. In a case such as the present, where the directors proposed to exercise their undoubted right as shareholders to accept the lower offer in respect of their own shares and, for understandable and fully disclosed reasons, hope in their personal capacities that a majority of other shareholders will accept it as well, it seems to me that it would be artificial to say that they were under a positive duty to advise shareholders to accept the higher offer. The fact that they would get more money by taking the higher offer is hardly something which needs to be pointed out. I do not think that fairness can require more of the directors than to give the shareholders sufficient information and advice to enable them to reach a properly informed decision and to refrain from giving misleading advice or exercising their fiduciary powers in a way which would prevent or inhibit shareholders form choosing to take the better price. . . "

265. He went on to state that the imposition of such positive duties would involve "a considerable extension of the principle applied in the Heron case". He also held that directors do not have a positive duty to give advice to members regarding an offer for their shares. However, if a board of directors chose to give advice upon such matters, fairness required that such advice should be factually accurate and given with a view to enabling the shareholders to sell, if they so wish, at the best price.
266. Furthermore, in relation to the Respondent Members' exercise of their votes as members of the Company, Mr MacLean says that as held in Astec (BSR) Plc, Re [1998] 2 BCLC 556 at 584-585:

"The starting point is the proposition that in general the right of a shareholder to vote his shares is a right of property which the shareholder is free to exercise in what he regards as his own best interests. He is not obliged to cast his vote in what others may regard as the best interests of the general body of shareholders, or in the best interests of the company as an entity in its own right."

Mr MacLean also says that they are also entitled to vote in their capacity as shareholders even though personally interested in the matter being voted upon.

267. Mr Chivers submits that these authorities are irrelevant because the Board of the Company was not faced with a genuine third party takeover offer. On the contrary, he says, the Company itself had generated the WSL Offer and, accordingly, the Board was required to balance the competing interests of the different classes of shareholder, namely those interested as buyer and those as seller. He says that the Board failed to do so throughout Project Parker, throughout the consideration of the conflict issue and throughout the WSL Offer and by failing to have regard to the interests of the Company rather than the Business and their failure to give information and assistance to the shareholders, section 172 was breached.
268. In this regard, Mr MacLean points out that in In Re a Company itself, the lower bid was made by a company established by the Board for that purpose. He also emphasises that each of the shareholders in this case was a sophisticated professional well versed in the valuation of companies and that information and advice would have made no difference. It was with the advice of Shepherd & Wedderburn that the Board of independent directors determined not make any recommendation. He says that there was no breach of section 172 by the independent directors who pursuant to section 172 had regard for the long term, reputation and business relationships. The evidence of Mr Cox was that he took into consideration the need for re-alignment and the effect of a run off upon the employees and the future of the Company which would be destroyed and considered the price for the shares to be satisfactory. Mr Plant's evidence was that he too took account of the interests of the Company, the investors and the business in the long term.
269. Mr MacLean also submitted that the purposes of the Company should be viewed in the context of the corporate structure of the wider Group, the web of agreements to which I have already referred and the imposition of the LLP upon the structure in 2003 with the agreement of all concerned. He submitted, therefore, that the Company should be seen as the holding company of its subsidiary which provided services to the LLP and, accordingly, that the interests of the Company were tied to that of the LLP and that the long term success of the Company should be viewed in the context of the agreements which allowed for profit to be distributed at LLP level. The long term success of the Group required the web of agreements to be honoured.
270. In addition, he says that there is no pleaded allegation against the directors of the Company that if information in relation to the WSL Offer and all of the other alleged duties had been fulfilled, it would have made any difference and Mr MacLean asks me to find that in the light of the fact that the shareholders were all sophisticated professionals with a depth of experience in valuing companies and an intimate knowledge of the Company and its Business it would not have done so. They were happy to accept the WSL Offer and realise the value of their shares, something which they did not otherwise expect to be able to do and they were also happy to be able to resolve the alignment issue which would lead to the future stability and success of the Group. In this context he reminded me that the Private Equity experts had agreed that the lack of alignment was a serious issue and would cause an impediment to raising the next fund.
271. Furthermore, he reminds me that Mr Arbuthnott asked for further information in the same letter in which he rejected the WSL Offer outright. That was a letter of 1 December 2011, only a day before the closing date for acceptance of the WSL Offer itself. He suggests that in the circumstances, the request was merely tactical and adds that, in any event, there is no evidence to suggest that the other shareholders would have behaved differently if further information had been provided.
272. With regard to the application of the Code, first he says that upon a true construction of Article 36 in its original form, the Code was only ever intended to apply to the General Offer and not to the entire process of a bid itself. In any event, even if that is wrong, the effect can be waived and, in this case, the members were in a position to make up their own minds.
273. In cross-examination Mr Arbuthnott accepted that the executives in Charterhouse were in the business of valuing companies and that non-conflicted shareholders were perfectly capable of forming a view as to whether any price was acceptable or not, something to which he had referred in his email to Mr Cox of 1 November 2011. He stated:

"As Charterhouse are in the business of valuing companies I cannot understand why the continuing shareholders have not already put their figure and terms on the table so that the non-conflicted shareholders can either say yes or no to it in principle…"

He had also expressed a similar view in his witness statement in relation to the advice sought from KPMG as to the value of the Company's shares in October 2006. He stated:

"KPMG did not really tell us anything that we, as experienced buyers and sellers of businesses, did not already know."

274. Nor, Mr MacLean emphasises, was it suggested in cross-examination of the Respondents that it would have made a difference to them had they had sight of the 2009 KPMG report. He also says that if the Company had really been worth much more than the price contained in the WSL Offer it is inconceivable that all of the independent shareholders would have foregone what would have been tens of millions of pounds by accepting it. In any event, the evidence of both Mr Bonnyman and Mr Giacomotto was that the members of the Eighteenth Respondent, WSL were not willing to pay any more and Mr Mornington, a new investment executive, made clear that he was unwilling to pay more and only adhered to the price in the WSL Offer out of respect for former senior colleagues. Mr Patrick made clear that if the offer had not been accepted it would have been made again a few months later at the same or possibly a lower price.

Conclusion:

275. First, it seems clear that as Mr MacLean submits, the duties set out in section 172 are owed by the directors to the company itself and not to the shareholders and that where there is a bid, the duties of the directors are limited. I do not agree that those duties are owed directly to shareholders and are extended in the circumstances of this case. Furthermore, I do not agree with Mr Chivers that the principles set out in the Dawson, Heron and Astec cases are irrelevant here. He says that they do not apply because the WSL Offer was not a genuine third party takeover offer. However, it seems to me that there is no principle to that effect and as I have already mentioned, in In Re a Company itself, the bid under which a lower price was offered for the shares in a company was made by a vehicle set up for that purpose by the directors of the target itself.
276. I have already rejected the contention that the WSL Offer was generated by the Company itself. Accordingly, there is nothing to distinguish the circumstances surrounding the WSL Offer from those considered in the cases to which I was referred. It seems to me that the authorities are clear that in order to be fair, an offer must be made in sufficient detail to enable an informed decision to be made. There is no positive duty to obtain advice on behalf of shareholders or to advise the shareholders nor is there a duty upon the directors to involve themselves in negotiations as to price. It seems to me that that is the case, even if the Code applies.
277. In this regard, I also take into account that it was accepted by all, including Mr Arbuthnott, that the shareholders in the Company were sophisticated, well versed in the art of company valuation and best placed to know the Business of the Company itself. Mr Arbuthnott still held this view as late as 1 November 2011. Furthermore, the Independent Directors received independent advice from Shepherd & Wedderburn.
278. As I have already mentioned, the failure to provide information and the change in the rights to information were not emphasised on behalf of Mr Arbuthnott in closing. I agree with Mr MacLean that given the timing of Mr Arbuthnott's request for further information, it is more likely than not that it was made with an eye to his potential Petition. I also consider that given the evidence of the 17 shareholders who accepted the WSL Offer including both the Independent Directors and those such as Mr Drury who had already retired, on the balance of probabilities they would not have behaved differently if further information had been available.
279. I come to this conclusion despite the fact that Mr Plant stated that he was disappointed with the price and that Mr Pilgrim said that it was at the bottom of the range which he had expected and that in principle, Mr Arnell had engaged in discussion with Mr Drury on the basis of a valuation of £20m for the Company. Nevertheless, Mr Drury did not press for the sale of his shares on the basis of a £20m valuation, which, in fact, was also the figure in the KPMG report despite discussing the offer with one or two of his colleagues. Taking the evidence in the round, it seems to me that the non-continuing shareholders were all sophisticated financial professionals with an intimate knowledge of the private equity business and Charterhouse in particular, saw this as the only real opportunity to sell their shares, did not consider that there was any other likely purchaser, did not consider that more would be offered and, in any event, did not wish to create a situation in which the entire business model of Charterhouse and the Group was broken.
280. Further and in any event, I agree with Mr MacLean that there was no breach by the Independent Directors of their duties to the Company. The evidence of both Mr Cox and Mr Plant was that they took into account the interests of the Company, its reputation and business relationships. Mr Cox made express reference to the effects of run off upon the employees and the future of the company. Furthermore, none of the Independent Directors stated that they considered the price to be other than satisfactory.
281. Lastly, it was not suggested to the Respondents in cross-examination that they would have taken a different view about the WSL Offer had the KMPG report been available to them and it was accepted even by Mr Arbuthnott that they were sophisticated individuals with business expertise in the valuation of companies, with particular knowledge of the private equity business and direct knowledge of Charterhouse itself.
282. In any event, if it had been necessary to decide the point, I would have determined that Mr MacLean's narrow construction of the application of the Code to General Offers under Article 36 of the Articles of Association is correct. It seems to me that the plain meaning of Article 36 is that the Code was intended to apply to a "General Offer" which itself is defined as "an offer made in accordance with the provisions of Article 36 (change of control)." The paragraph itself refers only to such offers and makes no express reference to any steps taken in dealing with such an offer. Had it been intended to impose wide obligations upon the Directors, it seems to me that it would have said so. Furthermore, the reference to "determinations which would otherwise fall to be made by the Panel" is in my judgment consistent with seeking to impose obligations upon the offeror rather than the Company. In any event, it is not disputed that the WSL Offer was not a "General Offer".

(b) Alteration of the Articles of Association

283. Mr Arbuthnott's case under this head is, in summary, that the circumstances fall within the 2^nd category in Citco; that the amendment to the Articles of Association was invalid because its most immediate and direct effect was to allow the majority to expropriate Mr Arbuthnott's shares at a price of £1.35m being an undervalue, and that, therefore, it was invalid because it fell foul of the Allen principle and was unfair and prejudicial as a result and in any event, under s994.
284. He says that by the time of the resolution to amend the articles of association, the minority shareholders other than Mr Arbuthnott had accepted WSL's Offer. It was only Mr Arbuthnott's shares which were expropriated as a result of the amendment to the Articles. The votes of the independent shareholders he says, were really therefore, those of the purchasers.
285. Mr Chivers submits that in the present context of an amendment of existing drag rights under the Articles, in circumstances where the members were being asked to do so as a term of an offer for the entire share capital of the Company, the price at which that offer is made is material to the Court's assessment of whether the members honestly considered the amendment to be in the best interests of the Company. He says that if no reasonable member could really have considered the price to be fair, the Court might be entitled to conclude that the members had not acted in good faith. Mr MacLean submits that absent such grounds, it is not for the Court to interfere with the commercial decision of the members in relation to the transaction, including, on the facts of this case, the price at which an offer made under the drag provision would operate.
286. It seems to me therefore that it is not in dispute, nor could it be in the light of the passage from the judgment of Scrutton LJ, quoted with approval in Citco, that if a reasonable member could not have considered the price offered under the WSL Offer to be fair, the absence of such a conclusion may be ground for a finding of lack of good faith or that with the best of motives, the shareholders failed to consider the matters which they ought to have considered.
287. In this regard, Mr Chivers seeks to draw a distinction between an expropriation of a minority shareholding by the majority and what he describes as a genuine "drag-along". He says that a genuine drag-along involves a minority shareholder being liable to be compelled to sell his shares to a genuine third party offeror seeking to acquire the entire issued share capital of the company, whose offer has been accepted by the requisite independent majority of the shareholders. Against this he contrasts an expropriation by majority shareholders compelling a minority shareholder to sell out to them (or to their vehicle).
288. He submits that a genuine drag-along right facilitates the realisation of the value of the shares of all shareholders whereas the expropriation of a minority shareholder by a majority does not have that potential justification and can only be justified in extreme circumstances. He referred me to In Re Bugle Press [1961] Ch 270 in which a new company was set up by the majority shareholders in order to make a bid for the company's shares so as to trigger statutory squeeze-out provisions. Harman LJ at pp 287-8 described that scheme as "an elementary device . . . to expropriate a minority" and "a bare-faced attempt to evade that fundamental rule of company law which forbids the majority of the shareholders, unless the Articles so provide, to expropriate a minority".
289. In this regard, Mr MacLean points out that in this case, the Shareholders' Agreement did "so provide" and that unlike the circumstances in In Re Bugle Press Ltd, Clause 7.2 contained the protection for the minority of the need for approval by the independent Founder Majority.
290. Furthermore, it is said that the alteration was made for the improper collateral purpose of advancing the interests of the continuing executives in that capacity, by facilitating the future pursuit of the Business, free of the misalignment obstacle and pursuant to the "remuneration model", for their exclusive benefit.
291. Alternatively, if the case falls within the 1^st category in Citco, then Mr Chivers submits that the alteration was invalid because the majority decision to alter the Articles of Association was not, in fact, and could not reasonably have been, taken genuinely in the best interests of the Company as a separate entity.
292. In the written closing on Mr Arbuthnott's behalf, the position is summarised as follows:-

i) the fundamental purpose of the WSL offer process, of which the alteration of the Articles of Association was part, was to benefit the continuing executives in that capacity by removing an obstacle to the continued pursuit of the business under its existing structure, through the acquisition of complete control of the Company as cheaply as possible, so as to allow the introduction of the new structure;

ii) that enterprise generally, and specifically the alteration to the Articles of Association, would provide no benefit whatsoever to the Company, or to its general body of shareholders, and no reasonable man who actually thought about it could have thought otherwise;

iii) it could only provide any benefit to the minority shareholders who were being invited to sell if the price was a proper one;

iv) it was discriminatory against Mr Arbuthnott who was the sole intended target of the change to the Articles of Association and was the only intended target of the anticipated expropriation under the amended Articles of Association; and

v) those voting for the alteration were all voting for the purpose of advancing the interests of the continuing executives, being either continuing executives themselves or shareholders who had become contractually obliged to WSL to vote for the resolution.

The purported alteration of the Articles of Association to achieve those purposes was invalid.

293. In his oral closing, Mr Chivers went on to submit that in this case it is said that the purpose of the WSL Offer and the change in the articles of association was purportedly to cure the alignment issue from which he says the Company was to receive no benefit. On the contrary, he says, the change was to perpetuate a situation in which profits did not reach the Company but were distributed at the LLP level amongst the active investment managers.
294. He says that applying the test in Shuttleworth as approved in Citco, reasonable men could not have concluded that the change was in the interests of the Company and the lack of such a conclusion is a ground for finding lack of good faith or a failure to take into account the matters which ought to have been considered. He also suggests that, in fact, as the Company gains no benefit, the "hypothetical member" test in Greenhalgh should be applied and on that basis, the amendment to the articles fails.
295. Furthermore, Mr Chivers says that the evidence reveals that there was no independent thought given to the amendment of the Articles of Association, the only decision taken being whether or not to accept the WSL Offer itself. Voting in favour of the amendment was merely a condition to be fulfilled in order to satisfy the terms of that offer. Mr Giacomotto's evidence was that he had not even read the proposed amendments and considered them to be just tidying rather than anything substantive.
296. Mr Chivers says that the evidence shows that those of the purely selling shareholders who have given any evidence about their decisions to accept the WSL Offer did so on the basis of a flawed and rather cursory assessment of the price; in the case of at least Mr Pilgrim and Mr Drury, on the basis of a belief that it was not worth negotiating, in light of amongst other things their comfortable personal financial positions or generally, for example in the case of Mr Plant and Mr Pilgrim, without seeking to obtain the best price possible; in the case of Mr Cox because it was thought to be "in the interests of Charterhouse's business moving forward to correct the misalignment issue" and not with reference to the Company; in the case of Mr Pilgrim at least, driven by a concern for their positions as investors or holders of carried interest, rather than as shareholders; in the case of Mr Drury, on the basis to some extent of a moral or sentimental desire to see the business continue; and in the case of Mr Plant a residual regulatory concern for investors generally. Mr Chivers says that the evidence of the continuing executives as to why they accepted the offer is of no relevance because they were the offerors and the buyers.
297. On the basis of that evidence, if this is, contrary to Mr Arbuthnott's primary submission, a case in the 1st category of Citco, the outcome he says is clear.

i) The resolution to amend the Articles of Association was not passed with a genuine intention to advance the best interests of either the Company or its shareholders generally, since no thought was given to the issue.

ii) Any claim that the majority decision was taken genuinely in the best interests of the Company as a separate entity would not be credible anyway, since no reasonable person considering the right issues could have thought that it was. Any shareholder who considered that it was can only have been considering the wrong issues, such as for example the interests of the executive team, or of "the business", or the interests of investors or holders of carried interest.

iii) As a result, applying the Allen v Gold Reefs principle, the resolution was invalid.

298. Mr Chivers also referred me by analogy to Assenagon Asset Management SA v Irish Bank Resolution Corpn Ltd [2013] Bus LR 266 per Briggs J (as he then was). In that case the learned judge was concerned with the validity of "exit consent" a technique by which holders of bonds are persuaded to exchange their bonds for replacements. They are invited to offer their bonds for exchange on terms that they are required to commit themselves irrevocably to vote at a bondholders' meeting for a resolution amending the terms of the existing bonds so as to substantially destroy the rights in those bonds. A bondholder who votes against or abstains, takes the risk that the requisite majority will be obtained and that his bonds will be rendered worthless. Briggs J summarised the general principles in relation to the construction and exercise of powers conferred upon a majority to bind the minority within a class, namely that the power given must be exercised for the purpose of benefiting the class as a whole and not merely individual members. He also made reference to the inclusion of bespoke restrictions sometimes included where there are wide powers in order to avoid their exercise other than for the benefit of the relevant class.
299. Briggs J concluded at [64] that under the structure of the offer in that case, at the relevant time, the notes had been offered and accepted for exchange and therefore, were held for the benefit of the bank under contracts which could be specifically enforced. He found that the mechanism oppressed the minority.
300. Mr Chivers submitted that the structure of the WSL Offer should be seen in the same light. First one was required to accept the offer and, thereafter, it became a condition of that acceptance that one voted in favour of the amendment to the articles of association. Accordingly, for the purposes of the new Article 39, the shareholders, having by the time that the Founder Majority approval was given, already agreed to sell their shares, were the "Buyer" or acting in concert with the Buyer for the purposes of the Founder Majority definition. Accordingly, he says, even in accordance with its own terms Article 39 does not entitle the Respondents to drag Mr Arbuthnott's shares because they had put themselves "offside" by accepting WSL's offer prior to taking part in the Founder Majority.
301. Mr MacLean by contrast says first that Mr Chivers' analysis is wrong. He says that the independent members were not in concert with the Buyer and had not already agreed to sell their shares. The conditions in Clause 4 of the SPA had not been met and Clause 4.2 makes it clear that there is no intention to sell until they are fulfilled.
302. He also says that the principle in the Assenagon case does not apply here because Mr Arbuthnott was already obliged as a matter of contract to sell his shares if Clause 7.2 and/or the relevant provisions in the Articles applied. This was not the exercise of a discretion or power by the majority. Each member was entitled to decide in his or her own interests whether they should pursue the exit. An agreement to do so does not amount to the exercise of any power or discretion. The evidence was that the Respondents wished to sell their shares and that they thought that the price was fair. It was not suggested to them in cross-examination that there was a collateral purpose which might vitiate the decision.
303. He says, accordingly, that this is quite clearly a case falling within the first rather than the second category in Citco. He submitted that the circumstances were similar to those considered in Sidebottom v Kershaw, Leese and Company Ltd [1920] 1 Ch 154. In that case a special resolution was passed amending the articles of association to introduce a power in the directors to require a shareholder who competed with the company's business to transfer his shares to nominees of the directors at full value. It was held that the resolution was passed bona fide in the interests of the company as a whole and was valid. It had been suggested that the amendment was made to be rid of the particular shareholder in question and, therefore, was invalid. Lord Sterndale MR at 166 stated that if it had been done for a malicious motive he would have agreed because it would cease to be bona fide and that it was a question of fact.
304. Mr MacLean says that this case is just like Sidebottom, because the members of the Company were entitled to conclude that the facilitation of the WSL Offer was in the interests of the Company. The Company had been formed by the investment managers to facilitate a management buy-out from HSBC and it was plainly open to the members to conclude that the best way to promote the interest and success of the Company was to promote alignment between the interests of investors and investment managers by ensuring that the ownership of the Company accorded directly and 100 per cent with the active investment managers at all times and without the need for negotiation or a separate agreement each time a manager retired or left.
305. In this regard, he pointed out that since 2003 the Business of the Company had been to hold shares in a group service company, CDCL, which acts as the managing member of the LLP and which is subject to its own fiduciary duties to the LLP. It is in fact the LLP which carries on the business of providing investment management services to the investors. Its members are the active investment managers and it is the LLP acting as advisor to the general partner of the funds. The extraction of income from the LLP for the Company would have been inconsistent with the structure. The WSL Offer could therefore quite properly be considered by the members of the Company to promote the interests of the Company as a holding company of a managing member of the LLP which owed fiduciary duties to the LLP, the other members of which were the investment managers. There is no evidence of bad faith and it is for the shareholders and not the Court to say whether the alteration of the articles is for the benefit of the Company: Shuttleworth v Cox.
306. Mr MacLean also drew an analogy with the circumstances in Citco in which articles of association of a company incorporated in the British Virgin Islands had been altered in a way which gave the chairman indisputable control which was said to assist in the company raising further finance. Similarly in this case, he says that the changes are for the purpose of long term stability. The retiring members all considered it to be a sensible way to proceed in order to facilitate the future of the business of the Company and that the price was fair and that the retiring shareholders who were not directors of the Company were entitled to take the view they did. There was no basis to contend that the purpose of alignment was not genuine.
307. However, Mr Chivers goes on to say that what is patently unfair about the new Article 39 is that it enables the majority to expropriate Mr Arbuthnott's shares at a minority valuation. He drew attention to the provisions in article 34 which apply to a Bad Founder Leaver whose shares are acquired at a nominal sum and Employee Leavers whose shares are purchased under article 34.4- 8 at the "Fair Price" in respect of a Good Employee Leaver and the lower of the Fair Price and the price paid, in the case of the Bad Employee Leaver. Mr Chivers asks therefore, why Mr Arbuthnott as a Founder who is not a Bad Founder Leaver should be treated less favourably than an employee.
308. He emphasises that as a result of Clause 7.2 of the Shareholders' Agreement and Article 36, the majority cannot drag Mr Arbuthnott's shares to themselves which is what he says they seek to do. The relevant provisions require Mr Arbuthnott to sell on an "Exit" which is defined as a "Sale or Flotation". In turn, "Sale" is defined as "the acquisition by any person (or persons who in relation to each other are acting in concert) of 50% or more of the Ordinary Shares of the Company." Mr Chivers points out that if WSL, a corporate vehicle incorporated only days before the WSL Offer was made, had not been interposed in order to purchase 100% of the shares of the Company, the majority could not have satisfied the 50% requirement necessary to satisfy the requirements for an Exit. He also says that those "acting in concert" for the purposes of the definition of a "Sale" cannot be both buyers and sellers.
309. What is more a Founder who is a proposed purchaser or connected with a proposed purchaser, is excluded from the necessary Founder Majority for the purposes of Clause 7.2 of the Shareholders' Agreement and, therefore, he says that its provisions did not apply. This he says is consistent with Article 36 which is concerned with "Change of Control" in relation to which the definition of "Founder Majority" was different and which could not have applied to the WSL Offer.
310. Furthermore, he says that the court should be slow to find an inconsistency between the Articles and Clause 7.2 of the Shareholders' Agreement (in which case, the Shareholders' Agreement would prevail pursuant to Clause 14.6) because they were drafted at the same time and intended to operate together. They should be read seamlessly and in accordance with Pagnan SpA v Tradax Ocean Transportation SA [1987] 3 All ER 565. He also points out that the terms of Article 38.4 under which the Respondents did not purport to proceed appear to be anomalous.
311. Lastly, he reminded me that although the Respondents now place much weight upon the existence of Clause 7.2, neither the witness evidence nor the contemporaneous documentation suggests that it was the mechanism relied upon in 2011. In any event, he says that even if on its true construction Clause 7.2 would have applied to the WSL Offer, Mr Arbuthnott would still have been able to rely on section 994 because the acceptance of the offer by the other shareholders and their consequent attempt to compel Mr Arbuthnott to transfer his shares in reliance upon Clause 7.2 would have involved conduct of the Company's affairs.
312. This Mr MacLean seeks to refute for a number of reasons. First he says that the WSL Offer was not an act or omission of the Company; secondly, consent by a Founder Majority would also amount to the exercise of their property rights as shareholders; and thirdly, even if it were conduct of the Company, it was not unfair because it was the very bargain to which Mr Arbuthnott had agreed.
313. Mr MacLean draws attention to the fact that in the present case, the amendments did not introduce the possibility of the compulsory transfer of Mr Arbuthnott's shares. Such a provision, he says, already existed in the unamended Articles and the Shareholders' Agreement. Article 38 of the Articles (prior to their amendment) already contained "drag" provisions permitting a buyer who had acquired 50% or more of the voting rights in the shares in the Company as a result of a General Offer to require any other shareholders who had not accepted the General Offer to sell their shares at the same price as that offered in the General Offer; Article 38.4 provided for a right to apply drag provisions if a Founder Majority (as defined in the Articles) agreed to transfer all of their shares and determined that the drag provisions should apply.
314. Further, Clause 7 of the Shareholders' Agreement required all Founders to co-operate in a sale of the Company and agree to sell their shares if a Founder Majority (as defined in the Shareholders' Agreement) agreed to pursue a sale of the shares in the Company.
315. Overall, therefore, Mr MacLean takes a different approach to this issue. He says that it is important to appreciate before the alteration of the articles, drag rights already existed in Clause 7.2 of the Shareholders' Agreement and that therefore, the alteration of the articles was an amendment of something which already existed. It was a contractual obligation to which Mr Arbuthnott had agreed and, accordingly, it is not open to him to complain under section 994 about the operation of article 39. In this regard, he referred me to "The Law of Majority Shareholder Power" edited by Chivers and Shaw where at paragraph 1.96 it is observed that:

"It is important to emphasise that all the uncertainties regarding the extent of the majority's power to amend a company's articles of association so as to introduce compulsory transfer provisions can be avoided by including these provisions in the company's original articles at the time of its incorporation. It is clear that it will be very difficult for the minority to challenge the exercise [of] compulsory transfer provision if they are included in the company's original articles. . "

316. At paragraph 1.97 the learned editors go on:

"Authority for the view that it is legitimate to exercise compulsory transfer provisions which are included in a company's original articles is found in the decision of Court of Appeal in Albert Phillips and Albert Phillips Ltd v Manufactures' Securities Ltd [(1917) 116 LT 290]. . . "

In Albert Phillips and Albert Phillips Ltd v Manufactures' Securities Ltd (1917) 116 LT 290, the provision in the articles enabled a majority holding three quarters of the company's issued shares to resolve that a member's shares be offered for sale to the other members. The resolution could fix the price so long as it was not less than a shilling. The majority used the power and fixed the price at a shilling at a time when the shares were worth approximately £1 each. Petersen J at first instance and the Court of Appeal rejected the claimant's challenge to the validity of the resolution under the Allen v Gold Reefs principle. The Court of Appeal assumed in the claimant's favour that the test applied but held that it was satisfied. It also rejected the argument that the majority had acted fraudulently given the actual value of the shares. The Court of Appeal held that it could not be fraudulent to exercise a power given to it in the articles of association. Mr Chivers pointed out that both Warrington LJ and Lush J also applied the test in Allen v Gold Reefs and, accordingly, Albert Phillips is not authority for the proposition that one is merely required to construe the expropriation provision in the articles of association. He also stressed that the circumstances are different from this case.

317. Mr MacLean rejected Mr Chivers' distinction between drag provisions and expropriation. He submitted that it has only ever been proposed that Mr Arbuthnott's shares be dragged on the basis that the WSL Offer was accepted by a majority of independent selling members. He says that that is nothing to do with an expropriation power given to a majority without protection built in to the articles and into the Shareholders' Agreement of the consent of an independent majority who are not connected with the bidder, or who are not acting in concert with the bidder.
318. Mr MacLean says that the circumstances cannot be distinguished from those in the Albert Phillips case. He also draws attention to Clause 14.6 of the Shareholders' Agreement which makes clear that the provisions of that agreement and, in this case, Clause 7.2 in particular, prevails if there is any inconsistency with the articles. He took me to article 38 which is under the heading "Drag Along" and noted the terms of Article 38.4 which applies where a Founder Majority agrees to transfer all of its shares to "any person". The definition of "buyer" is therefore different from that in Articles 38.1- 38.3. It states that the consideration payable to a member who has not agreed to transfer his shares shall be the same as that offered to those who have agreed. He submitted that this clause allowed members associated with the purchaser, or even with members acting as the purchaser, to add their votes to an aggregation of Founder Majority. By contrast Clause 7.2 only allows the votes of disinterested Founder members to count towards a Founder Majority. In addition, by its very terms, it contemplates that the purchaser may include existing members and be connected with the Founders.
319. Mr Chivers describes Article 38.4 as "curious", something which Mr MacLean says is supportive of the Respondents' position that the amendment to the articles was intended as a tidying up exercise. In any event, Mr MacLean submits that Article 38.4 at least echoes the provisions in Clause 7.2 of the Shareholders' Agreement.
320. Mr MacLean submits, therefore, that before the amendment to the articles there were three ways in which a drag could be achieved: a disinterested Founder Majority could agree to an Exit under Clause 7.2 of the Shareholders' Agreement, a Founder Majority could agree to sell their shares to any person under Clause 38.4 and determine that the provision of Clause 38.4 shall apply, or a General Offer could be accepted by sufficient members holding more than 50 per cent of the shares in accordance with Article 36.
321. In relation to the amendments themselves, Mr MacLean says that the evidence shows that the amendment to Article 36 to remove reference to the Code was suggested by Dickson Minto at the same time as the amendments to Article 39 and that it was suggested that Code compliance was out of date. In relation to Article 39, he says Mr Patrick's evidence reveals that the amendments were considered to be a tidying up exercise.
322. He says that once a buyer, under Article 39, has obtained the agreement of the majority of the disinterested members, that buyer will be able to acquire the shares of any members who have not accepted the offer, but the importance of Article 39 is that in conjunction with the amended definition of Founder Majority it has replicated the definition of Founder Majority which is to be found in the Shareholders' Agreement. So in order to drag a member's shares under Article 39, unlike the provision which applies under Article 38.4, one must obtain the acceptance of members holding a majority of the shares of those members who are not associated with the purchaser. Therefore, Mr MacLean says it is appropriate to regard the amendments as a tidying up by bringing the articles into line with Clause 7.2 of the Shareholders' Agreement. This is consistent with the evidence of Mr Cox, Mr Patrick and Mr Giacomotto. Accordingly, he says there is no substance to any complaint by Mr Arbuthnott in relation to the amendment of the articles. Mr Arbuthnott was always subject to the terms of Article 38.4 and Clause 7.2.

Conclusion:

323. It seems to me that the existence of Clause 7.2 of the Shareholders' Agreement and the fact that the terms of the Shareholders' Agreement take precedence over the Articles of Association in the case of any discrepancy takes this case out of the context in which the decision in In Re Bugle Press Ltd was made. The existence of Clause 7.2 together with the entirety of article 38, including Article 38.4, also take this case out of the category in which alterations are made to articles of association to permit drag along or expropriation where none had existed before.
324. The fact that, as Mr Chivers submits, Article 38.4 appears curious takes the matter no further forward. Article 38.4 provided for a separate 'drag" right if a Founder Majority, as defined in the Articles of Association agreed to transfer all of their shares and determined that the drag provisions apply. It did not contain the protection included in Clause 7.2 of the Shareholders' Agreement which excludes Founders acting in concert with a purchaser from the definition of "Founder Majority".
325. By contrast, it is envisaged under Clause 7.2 that Founders may be connected with the proposed purchaser and in such a case, as Mr MacLean observes, protection is provided by the need for a Founder Majority in favour of the Exit, in this case, the Sale, excluding those who are connected. In such circumstances, each party to the Shareholders' Agreement, including Mr Arbuthnott, agreed to co-operate with the proposed Sale and to sell his shares, the safeguard being that he would be offered no less favourable terms than those offered to the other shareholders holding A Shares. "Sale" was defined as "the acquisition by any person (or persons who in relation to each other are acting in concert) of 50% or more of the Ordinary shares of the Company."
326. It seems to me, therefore, that compulsory transfer provisions existed in the Articles of Association before the alteration and were also envisaged in Clause 7.2 of the Shareholders' Agreement. They therefore formed one of the bases of the original commercial bargain between the Founders of whom Mr Arbuthnott was one. In essence, the amendments to the articles brought the articles into line with Clause 7.2 and were, as Mr Patrick and Mr Giacomotto described them, a tidying up exercise. The introduction of article 39 dealt with the inconsistency in the Articles under Article 36 which imposed a requirement to comply with the Code which was not contained in Clause 7.2 of the Shareholders' Agreement and corrected the lacuna in Article 38.4 which was not consistent with the requirement under Clause 7.2 for the drag to be approved by a majority of non-concert party Founders.
327. I agree with Mr MacLean that the circumstances of this case are analogous to those in the Albert Phillips case, albeit that the facts of that case were much more extreme. The Court of Appeal upheld a resolution directing the sale of the claimant's shares pursuant to the terms of articles, at a price of 1 shilling despite their true value being approximately £1 per share, on the basis that it was the very bargain between the parties as evidenced by the article. In this case, the original articles contained compulsory transfer provisions which together with Clause 7.2 formed the commercial bargain between the Founders under which Mr Arbuthnott agreed to sell his shares at a price accepted by a majority of the retiring members. As a result, in principle, and subject to the considerations relevant to the Allen principle to which I refer below, he is not in a position to complain.
328. I also reject Mr Chivers' submissions that the independent members were in concert with the Buyer and therefore, the very terms of article 39 were not satisfied and that this was an expropriation of Mr Arbuthnott's shares because all of the other shareholders had accepted the offer by the time it was intended to exercise the powers contained in Article 39 against Mr Arbuthnott. That was a matter of chance and timing only.
329. Furthermore, I am unable to accept that the WSL Offer and consequent change in the articles of association were targeted purely at Mr Arbuthnott and intended as an expropriation. First, all of the independent shareholders, some of whom such as Mr Drury had been long since retired from Charterhouse, voted in favour and the purchase of their shares was on exactly the same terms. Furthermore, the agreed evidence of the Private Equity experts was that the lack of alignment was a serious issue which would be an impediment to raising a new fund.
330. Secondly, I have accepted the evidence of Mr Bonnyman and others that they were concerned to resolve the alignment issue in order to secure the Company's future and considered accordingly that they were acting in the best interests of the Company as a whole. The evidence of the retiring shareholders was that they were happy to sell their shares, that the price was within the range they expected and that they wished to resolve the alignment issue once and for all, something which accords with importance placed upon alignment by the Private Equity experts.
331. Furthermore, it seems to me that the reasoning in the Assenagon case does not apply here. This was not a case of the exercise of a discretion or power of the majority. The Shareholders' Agreement had always contained Clause 7.2 by which Mr Arbuthnott was contractually bound and Article 38.4 had been present in the Articles of Association. Accordingly, in the appropriate circumstances, he was required to sell his shares.
332. In addition, in this case, the acceptance of the WSL Offer by the individual shareholders remained subject to the completion of the remaining conditions contained in Clause 4 of the SPA including the need for regulatory approval and it was expressly stated that there was no intention to sell until the conditions were fulfilled. Therefore, it seems that the independent members cannot be said to have been in concert with the Buyer for the purposes of the necessary Founder Majority. Accordingly, I reject Mr Chivers' argument that the terms of article 39 itself were not fulfilled.
333. Taking all of these matters together, it seems to me that as the passages from Chivers & Shaw make clear, the alteration of the Articles of Association to include article 39 was not a fundamental change permitting expropriation in the way in which Mr Chivers would characterise it.
334. Was the process nevertheless one which fails the test of being bona fide for the benefit of the company as a whole, or the corporators as a general body? First, before turning to the relevant test itself, I should mention that in my judgment there is no evidence of bad faith or improper motive and none was put to the witnesses in cross-examination.
335. What is the test to be applied in relation to the alteration of the articles themselves? It seems to me that the changes to the articles in this case fall into the first category identified in Citco. In other words, the Allen v Gold Reefs test applies. Was the power to change the articles exercised honestly in the best interests of the company as a whole and are there grounds upon which reasonable men could have come to the same decision?
336. As I have already mentioned, it is not suggested that the power was exercised other than honestly. I have rejected any allegation, if indeed there was one, that there was any ulterior motive. Was the power exercised in the best interests of the Company as a whole and are there grounds upon which reasonable men could have come to the same conclusion?
337. In the light of the agreement between the Private Equity experts that the lack of alignment was a serious issue which would be an impediment to raising a new fund, the fact that Charterhouse was a sequential funds business and that by the time of the WSL Offer more than 50% shareholders had already or were about to cease to be active investment managers, it seems to me that the shareholders could reasonably have considered it in the best interests of the Company to vote in favour of the resolution to alter the articles of association.
338. Furthermore, the evidence of the retiring shareholders was that they were happy to sell their shares, that the price was within the range they expected and that they were concerned to resolve the alignment issue which threatened the ability to raise further funds. The change brought about by the resolution was necessary in order to achieve the long term stability of the Company as the holding company of the managing member of the LLP which owed fiduciary duties to the other members of the LLP and through which the Business of the Group and a fortiori, of the Company was conducted.
339. It seems to me that once the LLP Agreement was entered into and the Shareholders' Agreement was amended in 2003 in order to take account of the LLP structure, including the payment of the lion's share of profits at LLP level, with the consent of all, including Mr Arbuthnott, it is artificial to seek to view the purposes and interests of the Company separately from the Business of Charterhouse as a whole. The long term success of the Company therefore, and its interests were intimately bound up with the Group and the LLP.
340. In the light of the agreed evidence of the private equity experts as to the effect of a lack of alignment on fundraising, and the effects which run off would have had on the Business, in my judgment, there are reasonable grounds upon which the shareholders could have come to the view they that they did as to the best interests of the Company. I should also add that in circumstances in which the Business was thriving, I find the analysis which requires the shareholders to view the best interest of the Company to be the destruction of the Business to in order to benefit from what might be recovered on a run off, to be convoluted and unreal.
341. In addition, although it would have been possible to seek to change the model of the Business entirely, something which the evidence suggests would have been resisted strongly by the investment management team upon which to a great extent the Business depends, there is no evidence to suggest that there was a realistic prospect either of a third party purchaser or the need or business efficacy of a substantial cash injection from a third party or present investor in return for a minority stake in the Company. I shall turn to the issue of the payment of dividends separately below.
342. Furthermore, I do not accept Mr Chivers' differentiation between the decision to accept the WSL Offer and the reasoning behind the resolution itself. In my judgment to seek to differentiate between the two is in this case, artificial. The sale of the shares through the means of the WSL Offer which by its very terms involved voting in favour of the resolution to amend the articles of association, by those no longer active in the investment management business and those who had already stated that they intended to retire in the near future, was an integral package and in my judgment the evidence reveals that to have been the case. Mr Patrick and Mr Giacomotto spoke of tidying up the articles of association and together with Mr Plant and Mr Aldred considered the WSL Offer as a whole to be in the best interests of the Company, the shareholders and the Charterhouse Group. Mr Aldred went as far as to say that without alignment, he did not consider that the Company had a future because it would not be possible to raise another fund. Mr Drury expressed himself in terms of the best interests of the Charterhouse business. As I have already mentioned, I consider that it was perfectly permissible to view the interests of the Company in terms of the business of the Group as a whole.
343. If I am wrong then the second category identified by Lord Hoffmann in Citco applies. This is the test to be found in Greenhalgh applicable where the amendment to the articles regulates the rights of shareholders in which the company as a corporate entity has no interest. In such circumstances, it is necessary to show that the power was exercised in the best interests of the corporators as a general body and that the amendment to the articles was in the honest opinion of those who voted in favour, for the benefit of a hypothetical member.
344. In any event, it seems to me that in the light of the fact that the Private Equity experts agreed that the alignment issue would hamper raising a further fund, that I have found that the interests of the Company were those of the Business, that it was not suggested that the Respondents and in particular, those not connected with WSL had any ulterior motive that the decision to accept the WSL Offer and vote in favour of the resolution was in the best interests of the hypothetical member. This is all the more so in the light of the evidence that there was no realistic third party purchaser and Mr Florman's acceptance that even if were possible to obtain a capital injection in return for a minority stake in the Company, he would not advise that it be used to pay out shareholders who had retired from active investment management. Accordingly, the alignment issue could not realistically have been resolved in such a way, nor could the hypothetical member have realistically expected to have realised his shares other than to the existing investment team or a vehicle owned by them. In such circumstances, it seems to me that reasonable men could have come to the conclusion that it was in the best interests of the hypothetical member of the Company to vote in favour of the resolution in order to amend the articles and facilitate the Sale and as result to provide a permanent solution to the alignment issue.
345. Lastly, it is necessary to consider whether given what is said about value, in fact, reasonable men could have made the decision. This is relevant generally as to whether the principle in Allen v Gold Reefs is satisfied and more generally as to whether there is unfair prejudice. It was raised by Mr Chivers separately under the heading "non-payment of dividends" and in another guise under the heading of "substantive unfairness". I turn to each of them now.

(c) Non-payment of dividends

346. In the closing submissions on behalf of Mr Arbuthnott it is stated that whilst Mr Arbuthnott does not complain of the non-payment of dividends whilst he was a director of the Company and a member of the LLP when it is said, he received the reward for his services and in respect of ownership in one package, the failure to pay dividends in the three years between his departure in 2008 and the valuation date for the shares under the WSL Offer in November 2011 was conduct of the company and was unfairly prejudicial.
347. Of course, it is also said that the effect of the non-payment of dividends upon the value of the Company and accordingly, the level of the price offered under the WSL Offer when coupled with the alleged expropriation itself supports a finding of unfair prejudice and also goes to the nature of the relief to be granted.
348. The private equity experts agreed that as a rule of thumb only remuneration up to the level of the 75^th percentile of the MM&K survey data was required to retain executives and therefore, Mr Chivers submits that all receipts above that level should be treated as dividend. On that basis and using the methodology adopted by Mr Mitchell, it is said that a total of £7.214m should have been paid to Mr Arbuthnott by way of dividend for 2008, 2009 and 2010. If it is assumed that sufficient drawings should have been paid to the investment managers' co-investment commitment, it is said that a total of £5.93m should have been paid by way of dividend to Mr Arbuthnott for 2008, 2009 and 2010.
349. In fact, it is accepted that 2009 and 2010 were bumper years in relation to remuneration as a result, in part, of the difficulty in realising the investments in relation to Fund VIII as a result of the recession which led unusually to two income streams from management fees being payable at the same time. It was also said that the unusually high profits in these years resulted from foreign exchange movements. In any event, by chance, the increase in profits coincided with Mr Arbuthnott's retirement.
350. It is said therefore, that there was an additional profit of about £14.9m in 2009 and about £23.3m in 2010 which was in fact, paid out in bonus but should have been paid in dividend so that Mr Arbuthnott would have received £1.33m in 2009 and £2.07m in 2010. Mr Chivers submits that the payment of those sums other than by way of bonus was a breach of the directors' duties. In fact, the same is said in relation to co-investment bonuses which were not determined by the Remuneration Committee and were not a reward for performance.
351. It is submitted that the shares in the Company should have been valued in accordance with the shareholders' rights under the Shareholders' Agreement and that it was those rights which were being bought out by the WSL Offer. Mr Chivers says therefore, that the evidence demonstrates that the 75^th percentile is the best market measure of appropriate remuneration and co-invest bonuses should not be taken into consideration.
352. Mr Chivers submits that the key to this issue, if not the entire case, is Clause 11.6 of the Shareholders' Agreement. He says that subject to making prudent provision for the continued operation of the business and funds being available, it expressly provides for the payment of dividends in respect of all distributable profits in each financial year and requires their determination and payment for the relevant year on the production of the audited accounts. He says that this cannot be complied with by asserting that there can be no dividends because profits are distributed in another way. Of course, if the remuneration model were found to be incompatible with Clause 11.6, the value of the Company and its shares would also be affected.
353. He also says that the reference to prudent provision includes express reference to payment of remuneration pursuant to Clauses 11.1, 11.2 and 11.3 and that in turn, Clause 11.3 makes clear that it concerns emoluments payable to an employee or director and that emoluments are a reward for service or services. He also says that it is clear from the evidence that Mr Bonnyman did not consider that he was dealing purely with compensation for services, something which by the time of Mr Arbuthnott's departure was acknowledged in the schedules produced by Mr Pilgrim and in 2010 was acknowledged universally.
354. Mr Chivers says that the waiver contained in Clause 11.5 of the Shareholders' Agreement is given by all parties other than the Company and is in respect of the payment of remuneration pursuant to Clauses 11.1–11.3. Therefore, it does not limit or affect the duties owed to the Company.
355. He submits, therefore, that Clause 11.6 contains a contractual requirement to pay dividends in respect of all profits left after making a prudent provision for the payment of remuneration, by which he means genuine payments for work. Accordingly, it is said that the payment of remuneration should be limited to a proper commercial or market rate for the services rendered by investment managers and under Clause 11.6 of the Shareholders' Agreement, the directors must distribute any profits remaining after such remuneration as dividends, unless they genuinely consider it prudent to hold back a reserve in accordance with anticipated requirements within the business.
356. Therefore, under both Clause 11.6 and the general law as to directors' fiduciary duties, the so-called "remuneration model", involving the automatic payment of all surplus income by way of bonus, regardless of whether that resulted in the payment of remuneration in excess of market rates, was unlawful and inevitably involved both a breach of Clause 11.6 and breaches of the directors' fiduciary duties.
357. Mr Chivers says that it is quite clear from Mr Bonnyman's evidence that the Board through the Remuneration Committee did not comply with its fiduciary duties because in applying the "remuneration model" it failed even to consider the true and appropriate level of remuneration and the payment of dividends in respect of the excess pursuant to Clause 11.6. The application of the remuneration model and the failure to pay dividends in the years 2008 to 2010, therefore, was conduct of the affairs of the Company which was unfairly prejudicial. In the alternative, the super profits made in those years and in particular in 2010, amounted to a windfall which ought to have been distributed as dividend.
358. Furthermore, Mr Chivers submits that in the light of Clause 11 of the Shareholders' Agreement, it is not open to the Respondents to seek to rely upon the "remuneration model" as an answer to the failure to pay dividends. As in the case of ex parte Schwarcz, Mr Chivers says that the detailed provisions of the Shareholders' Agreement and the Articles of Association not only leave no room for the suggestion that in fact, the relationship between shareholders was governed by an accepted assumption that all profits would be distributed by way of remuneration to the active investment managers, but that the terms of the Shareholders' Agreement expressly militate against such a conclusion and their breach quite clearly reveals unfair prejudice.
359. He drew attention in particular to Clauses 14.2, 14.3, 14.4 and 14.6 of the Shareholders' Agreement which provide that it is an entire agreement which may be amended only in writing by the Company and by the holder or holders of more than 75% of the Ordinary Shares, that the rights contained in it are not waived by failure or delay to exercise them and that in the event of inconsistency, the provisions of the Shareholders' Agreement prevails over those contained in the Articles of Association.
360. Furthermore, in this regard, he points out that the Shareholders' Agreement was re-executed on 28 July 2005 and therefore, if there were any prospect of arguing that the terms of the Agreement itself were overridden by a commercial bargain, it would have had to have arisen after the re-execution.
361. He also stresses that, in fact, the contemporaneous documentation from 2001 is contrary to any understanding of the kind now referred to as the "remuneration model". For example, on 2 March 2001, Dickson Minto advised in writing on the meaning of Clause 11.6, the agenda for the meeting of 30 May 2001 attended by both Mr Bonnyman and Mr Arbuthnott amongst others contains the item "annual dividend of all distributable profits required following calculation of remuneration" and Clause 11.6 remained unchanged in the executed form of the Shareholders' Agreement and on the occasions when it was amended and re-executed.
362. In relation to the past, Mr Chivers says that the evidence supports the contention that Mr Arbuthnott before his departure in 2008 had favoured the payment of dividends and does not support the conclusion that the investors in the funds would not have tolerated their payment. He says that Mr Kane's evidence was not that of HarbourVest itself and, in any event, did not show that the payment of dividends was necessarily a concern to investors. Furthermore, he says that the evidence of Mr Giacomotto and Mr Aldred reveal that there were no representations about paying all management fee surplus as remuneration to investment managers made to investors. He questions how it can be said that it is in the interests of the Company that all surplus profit be paid out as remuneration to the investment managers.
363. In response, Mr MacLean submits first that the Petition contains no alleged breach of fiduciary duty against the directors, the Remuneration Committee or any individual respondent in this regard. He reminds me once again of the approach adopted by David Richards J in re Coroin. He also referred me to Re Smith of Smithfield Ltd [2003] BCC 769, a case in which Leslie Kosmin QC sitting as a Deputy High Court Judge made reference to the requirement in the Companies (Unfair Prejudice Applications) Proceedings Rules 1986 which require the petition to specify the grounds upon which it is presented and in that case, where the petition was to stand as the points of claim, pointed out that the cause of action should be set out in clear and precise language. At [39] the judge decided that very serious allegations that the company had deliberately adopted a policy of not paying dividends on preference shares so as to permit them to vote at general meetings could not stand in the absence of a properly pleaded allegation of breach of fiduciary duty and supporting factual evidence.
364. Mr MacLean says therefore, that it is for the first time in the written closing that it is alleged that the "remuneration model" involving the automatic payment of surplus income by way of bonus regardless of whether remuneration was in excess of market rates was unlawful, involved a breach of Clause 11.6 and the directors' fiduciary duties. He says that this is far too late and that the Petition itself merely states that the policy was neither fair nor appropriate.
365. He also adds that in any event, there has been no breach of Clause 11.6 or the contractual bargain between the parties. He reminded me of the judgment of Lord Hoffmann in O'Neill v Phillips at 1098H – 1099A at which he stated that a member of a company cannot ordinarily complain of unfairness unless there is a breach of the terms upon which it was agreed that the affairs of the company would be conducted although unfairness may also amount to "using the rules in a manner which equity would regard as contrary to good faith." He also noted that it was Mr Arbuthnott who in his petition contended for a wider approach on the basis that the Company was a "quasi partnership". That contention does not appear to have been pursued.
366. He also reminded me that until his retirement, Mr Arbuthnott was a member of the board of directors of the Company who are now accused of breach of fiduciary duty and that before his retirement there were shareholders who had retired from the Business but were not receiving dividends as a result of the remuneration model implemented by the Remuneration Committee with the express agreement of the individual shareholders and impliedly endorsed by the Board.
367. In any event, the breach is predicated on what he says is the false basis that Company had control over the income stream from the fees in respect of funds under management. He pointed out that under the complex structure of the Group and in particular under the Advisory Agreement, 95% of the Management Profit Share was payable to the LLP of which each of the active investment managers including Mr Arbuthnott (until 2008) were members. The Company's subsidiary CDCL was the Managing Member of the LLP which had a discretion in relation to the distribution of the 95% to be exercised on its behalf by the Remuneration Committee. In fact, Clause 11 of the LLP Agreement was executed on 18 December 2003 and amended and restated on 15 October 2007 and was in the following form:

"11. ALLOCATION OF PROFITS

11.1. The Managing Member shall take all decisions relating to the allocation of the profits of the LLP.

11.2. The Managing Member shall make determinations on all matters concerning the allocation of profits payable or proposed to be paid to any Member and any other matters relating to the benefits which may be enjoyed by Members (including, without limitation, Monthly Drawings Amounts, Special Drawings Amounts, the setting of performance targets, new co-investment opportunities and new entitlement to carried interests) and shall be empowered, on behalf of the LLP (but not on behalf of the relevant Member) to amend any of the terms upon which the relevant Member(s) provide services to the LLP from time to time (provided that, without prejudice to Clauses 17 and 18, any such amendment which is detrimental to the Member shall also require the approval of that Member).

11.3. Each of the parties hereto (with the exception of the LLP) hereby waives any right he may have to make a claim (whether in respect of any breach of fiduciary duties or otherwise) in respect of any allocation of profit share by the LLP to the Members (whether as part of a contractual right to be paid or as part of a discretionary element paid) provided the allocation of such profit share has been determined in accordance with Clauses 9.1 and these Clauses 11.1, 11.2 and 11.3.

11.4. Subject to Cause 12.7, each of the parties hereto agrees, and each of the parties (other than the LLP) undertakes to procure that so far as lawful and subject to:

(a) making prudent provision for the continued operation of the business of the LLP (including the allocation of profits referred to in Clauses 11.1, 11.2 and 11.3 above); and

(b) the LLP having sufficient funds available for such purpose (and not requiring to incur any further borrowings), all profits available to the LLP in respect of each financial year shall be allocated amongst and paid to the Members forthwith upon the audited accounts of the LLP being duly signed by the Designated Members for the relevant year."

368. Furthermore, on 11 December 2003, the Shareholders' Agreement and in particular, Clause 11.3 was amended in order to reflect that determinations in respect of the allocation of the profits of the LLP made by CDCL pursuant to the LLP Deed would be made by CDCL acting through the Remuneration Committee. Mr Arbuthnott was one of the shareholders who executed the deed of amendment which contained the waiver in Clause 11.5 in an unamended form.
369. Mr MacLean submits therefore, that there was no room for the Board of the Company to decide in relation to 95% of the profits because they were determined by CDCL through the Remuneration Committee and there is neither an allegation of breach of duty against CDCL or the Remuneration Committee itself.
370. In addition, he says that CDCL as the managing Member of the LLP owed fiduciary duties to the LLP and therefore, could not decide to redirect unallocated profits to the Company: F&C Alternative Investment (Holdings) Ltd v Barthelemy & Anr (No2) [2012] Ch 613 per Sales J at [212]. Furthermore, under Clause 12.7 of the LLP Agreement, the LLP was under no obligation to distribute profits, distribution was in the sole discretion of the managing Member to be exercised in the best interests of the LLP as a whole and by Clause 13.2, each member of the LLP which included Mr Arbuthnott, owed a duty of the utmost good faith to the LLP.
371. Mr MacLean says, therefore, that even if it were pleaded, there is no room to contend that there was a breach of fiduciary duty by any of the bodies including the Company and that in any event, Mr Arbuthnott had waived his right to complain by reason of Clause 11.3 of the LLP Agreement and Clause 11.5 of the Shareholders' Agreement.
372. In this regard, he drew a parallel with the decision in In Sunrise Radio Ltd at [141] and [142] at which Judge Purle QC rejected the complaint that the directors acted improperly or unfairly in not declaring dividends. He went on:

" . . . .it may perhaps be that the consideration by the directors of whether a dividend should be declared was not as anxious as it might have been, but the answer to the question of whether any dividend should be declared would have been no different had more detailed consideration been given, as the answer was obvious.

[142] Finally on this point, I would not in the circumstances of this case have upheld a complaint of failure to pay dividends in circumstances where the growth policy was adopted and acquiesced in at a time when Ms Kohli was a director. In that respect, the normal expectation of shareholders was abrogated or qualified."

373. In this regard, Mr Chivers pointed out that the circumstances in this case are different from those considered in the In Re Sunrise Radio because in that case there was no equivalent to Clause 11.6 and there had been a decision of the board of directors of which the petitioner had been a member, to invest profits in order to create growth.
374. Mr MacLean also pointed out that the first time that Mr Arbuthnott complained about the failure to pay dividends was almost four years after his retirement. He says that he knew that dividends would not be paid and acquiesced in the policy.
375. Mr MacLean also says that the attempt to make a distinction between emoluments and remuneration is a bad point and that the definition of "emoluments" in the Oxford English Dictionary includes remuneration.
376. Furthermore, he says that there is no breach of Clause 11.6 because there is no evidence that there were sufficient funds at the disposal of the Company for the purposes of the payment of dividends.
377. Finally, he points out that there is no pleaded complaint of excessive remuneration or allegation as to its proper level and if there had been, the expert evidence in this case which was already very extensive, would have covered this area also. He says that the reference to the MM&K surveys are not enough and that not only would the expert evidence have been different and fuller but the factual evidence would also have been different.

Conclusion

378. First, it seems to me that although the non-payment of dividends is not named expressly in the Petition as a head of conduct of the Company and unfair prejudice, reading the Petition and the pleadings as a whole there can be no doubt but that the issue of the non-payment of dividends is squarely raised in the context of the value of the shares themselves and more generally. It was expressly mentioned that after Mr Arbuthnott's resignation in 2008 the maintenance of the policy of distributing profits to the Income Members of the LLP was not fair and appropriate, issue was taken in the Points of Reply to the remuneration model as a defence and for example, one of the agreed list of issues related to whether it was unfair, improper and a breach of duty that no dividends had been paid since Mr Arbuthnott's resignation. Accordingly, in my judgment, reading the pleadings as a whole, there can have been no doubt but that the issue was raised.
379. It is true to say that there is no expressly pleaded claim for relief either by way of additional sum or adjustment to the value of the shares in respect of the non-payment of dividends for 2008 -2011. However, I accept Mr Thompson's submission that it is something which is capable of being taken into account in the wide discretion under section 994.
380. What then is the answer to the substantive question? Was it unfairly prejudicial not to pay dividends to shareholders of the Company and to continue not to do so after Mr Arbuthnott ceased to be a member of the LLP?
381. It is not in dispute that directors have a duty to consider the rights of members to have profits distributed as far as commercially possible and that such consideration amounts to the affairs of the Company. There is also little or no dispute that the Board of directors of the Company did not consider the payment of dividends in any real sense at all.
382. At least until 2008, Mr Arbuthnott was a member of that board and had also expressly agreed to Mr Bonnyman dealing with remuneration through the Remuneration Committee in a way which he knew would accord with the remuneration model.
383. It is not in dispute that in accordance with the principles enunciated in O'Neill v Phillips, a member of a company cannot ordinarily complain of unfairness unless there is a breach of the agreement upon which it was agreed that the affairs of the company would be conducted. In this case, therefore, has there been a breach of Clause 11 of the Shareholders' Agreement construed as a whole and in the light of the amendment to it in 2003 to which Mr Arbuthnott was a party? If there has been such a breach, is the conduct of failing to pay dividends unfair taking into account all relevant circumstances?
384. Mr Chivers says that the matter is open and shut because Clause 11.6 contemplates the payment of dividends and they have not only not been paid, they have not been considered and that is clearly unfair to a shareholder who is not an Income Member of the LLP. I disagree. It seems to me that if one reads Clause 11 in its original form as a whole, it is clear that dividends are payable subject to the provisos (a) and (b) in Clause 11.6 and that proviso (a) expressly includes reference to "remuneration referred to in Clauses 11.1, 11.2 and 11.3."
385. I agree with Mr MacLean that there is nothing in Mr Chivers' point that a distinction should be made between "emoluments" and "remuneration" for the purposes of Clause 11.3 which he says deals with the narrower concept of "emoluments" alone and accordingly, that proviso (a) at Clause 11.6 is only intended to make provision for payments to employees and directors purely in respect of their services. Both Clauses 11.5 and 11.6 make reference back to Clause 11.3 and in doing so use the term "remuneration" rather than "emoluments" and as Mr MacLean points out "emoluments" is defined by reference to remuneration. Further, it seems to me that no real assistance is gained from the non-exhaustive description of emoluments contained in the sub-Clause. Therefore, in my judgment, Clause 11.3 should not be construed narrowly only to include remuneration purely in respect of services.
386. Once one comes to such a conclusion, it seems to me that as a result of the principle in O'Neill v Phillips, Mr Arbuthnott is unable to complain of unfairness in relation to the non-payment of dividends despite the existence of Clause 11.6. Once Clause 11 is construed as a whole, it is clear that just as in that case, here Mr Arbuthnott prior to his retirement in 2008, agreed to the policy in relation to the distribution of surplus income in his capacity as a director of the Company and as a shareholder. It was part of the bargain he entered into. In fact, in early 2001, in the memorandum to which I referred at paragraph 26, Mr Arbuthnott stated that it was not possible to pay dividends and keep those remaining motivated. Further, as I have already mentioned, it was accepted in the closing submissions on his behalf that he does not complain of the failure to pay dividends whilst he was a director and member of the LLP. He only seeks to object now. It seems to me that although in the In Re Sunrise Radio case there was no provision similar to Clause 11.6, if one construes Clause 11 as a whole, the same principle is applicable by analogy.
387. In my judgment when determining whether, in any event, the conduct is unfair it is necessary also to take into account that Mr Arbuthnott was also bound by Clause 11.5 of the Shareholders' Agreement under which he waived any right to make a claim whether in respect of breach of fiduciary duties or otherwise in respect of remuneration paid under Clauses 11.1, 11.2 and 11.3 to employees and/or directors of the Company or any other member of the Group.
388. It is also necessary to take into consideration that Mr Arbuthnott executed the amended Shareholders' Agreement containing an amended Clause 11.3 which takes into account the effect of the LLP having been interposed into the Group structure and the terms of the LLP Agreement itself to which Mr Arbuthnott was also a party. The amendment to Clause 11.3 of the Shareholders' Agreement included a provision in relation to the allocation of profits of the LLP by the Remuneration Committee on behalf of CDCL and in particular, that:

"The parties hereto shall procure, so far as they are able, that such determinations are implemented by the LLP and any member of the Group which is Member of the LLP."

Mr Arbuthnott was one of the parties. At the same time, the amended version of Clause 11 continued to contain the waiver in Clause 11.5 and the dividend provision in Clause 11.6, in an unaltered form.

389. Those profits which were expressly referred to as such in the amended Clause 11.3 were earned on 95% of the fee income of the Group which was directed to the LLP. As a party to the LLP Agreement and the amendment to the Shareholders' Agreement, it seems to me that Mr Arbuthnott had agreed to a regime in which the distribution of profit in respect of the lion's share of the income of the Group would take place at LLP level. He had gone as far as to agree to procure that the determinations of the Remuneration Committee in that regard were implemented. It was also his evidence that at the time of the amendment he was happy to leave remuneration in the hands of Mr Bonnyman who was the guiding force of the Remuneration Committee.
390. This conclusion is also supported by the terms of the LLP Agreement itself to which Mr Arbuthnott was a party. At Clause 11.3 it contains a similar waiver to that in Clause 11.5 of the Shareholders' Agreement in relation to the allocation of profits share to the Members and at Clause 11.4 contains a provision in relation to all profits available to the LLP similar to Clause 11.6 of the Shareholders' Agreement. Mr Arbuthnott also owed a duty of the utmost good faith to the LLP. I should add that it was not disputed that the structure of the Charterhouse business and the way in which profits were distributed were a product of the tax regime and in all probability were intended to be tax efficient, both to the Company and the members of the LLP, including Mr Arbuthnott.
391. Given the regime to which Mr Arbuthnott agreed as a shareholder and a director, without demur, at a time when there were other shareholders who had retired as active investment managers, it is not necessary for me to be concerned with the detailed submissions which were made about fiduciary duties at LLP level or whether there was room outside the Shareholders' Agreement and the Articles of Association for an informal "remuneration model". It seems to me that as a result of Mr Arbuthnott's participation in the changes to the Shareholders' Agreement, the imposition of the LLP into the Group structure and the fact that Mr Arbuthnott was a member or partner of the LLP who signed the LLP Deed, rather than being informal, the remuneration model was enshrined in the very documentation by which the Group structure of which the Company was an integral part was governed. It was inherent in the amended version of Clause 11 read as a whole.
392. I have come to this conclusion despite the fact that Dickson Minto explained the existence of Clause 11.6 in their draft and there was reference in the agenda for the meeting of 30 May 2001 to the payment of dividends. The construction of Clause 11 as a whole does not preclude the payment of dividends if the income stream permits it.
393. In my judgment, therefore, Mr Arbuthnott is not entitled to rely upon the non-payment of dividends as a ground of unfair prejudice and to seek payment of what he says are lost dividends or an adjustment of the value placed upon his shares for the period of 2008-2011 during which he received neither dividends nor remuneration.
394. Accordingly, it is unnecessary to determine what remuneration and dividends ought to have been paid. However, if such a determination had been necessary, I would have decided that the amounts which would have been paid to Mr Arbuthnott by way of dividend in the years 2008-2010 would have taken into account an amount payable by way of co-investment bonus and therefore would have been a total of £5.93m. The payment of co-investment bonuses was an integral part of the remuneration package at Charterhouse.

(d) Substantive fairness - The value of the shares

395. Mr Chivers says that price is relevant both to support a finding of unfair prejudice and to determine the proper relief if unfair prejudice is established. He says therefore, that the failure of Project Parker to address a fair value for the shares of the Company not only demonstrates the procedural flaws in the process but that to conduct the affairs of the Company in a manner which is destructive of the value for the shareholders is itself objectively unfair and prejudicial. In addition, the alteration of the articles to allow for expropriation of those shares at an undervalue amounts to unfairly prejudicial conduct.
396. In summary, Mr Chivers commended Mr Mitchell's approach to valuation of the Company to me. He says albeit that no one suggests that the task is other than a difficult one, it was Mr Mitchell who set about answering the question put which was to determine the market value of the Company. He criticises Mr Eales' approach and says that, in fact, he has not set about arriving at an open market value for the Company because he has merely taken a number of scenarios based upon assumptions which have been supplied to him. He candidly accepted that the market value is entirely a matter of qualitative opinion expressed after having taken account of the different scenarios, none of which it is said have a basis in reality.
397. Furthermore, Mr Chivers criticises Mr Eales for only using the DCF approach which he says is no more or less subjective than any other. For example, he drew attention to Mr Eales use of a discount rate of 8% to take account of the risk that Charterhouse would not be able to raise another fund.
398. He also says that the P/E approach used by Mr Mitchell gains support from the "sum of the parts" approach in which analysts rather than valuers have made clear that they are able to divide up the sum of the parties of different companies' income streams and apply different discounts to them and different P/Es.

(i) Objective Minimum Value

399. A new construct also emerged in the written closing on behalf of Mr Arbuthnott. It is to the effect that the Court should value the Company on the basis that the WSL Offer had not been made or did not proceed and that in such circumstances, the evidence was clear that: the Company could not proceed to raise a new fund and it would inevitably go into run off unless the investors exercised their no fault divorce entitlements under Funds VIII and IX. It is said that Mr Eales accepted that in this event, his Scenario 2 valuation provided a minimum value for the Company of £33million. It is said that to that value must be added the corrections which Mr Eales accepted should be made and the cash on the balance sheet. Therefore, it is submitted that a figure of £90m is arrived at in the following way:

(i) Mr Eales' scenario 2 of £33.158m plus

(ii) the effect of the postponement of tax being £2.614m giving £35.722m plus

(iii) splitting revenue between takes the cumulative addition to £4.2m and the total value to £37.358m and

(iv) lastly one adds back surplus cash taking the cumulative total to £57.426m giving a value of £90.584m.

400. Mr MacLean points out that this is entirely new and unpleaded and is based upon Mr Eales' scenario 2 which is not a valuation in itself but as Mr Eales described it, a cash flow model. The way in which it was described was as a scenario in which the acquirer of the shares in the Company reduced the remuneration received by the management team materially, the current team leave and the investors in the fund vote to transfer the fund to an interim manager in February 2012. Mr MacLean points out that Mr Florman in cross-examination described such circumstances as highly unlikely because he took the view that in reality, the Company would not be sold until an agreement was made with each individual investment manager.
401. Mr MacLean also says that it was quite clear that Mr Eales was not purporting to arrive at a minimum value for the Company in scenario 2 at all. He did not accept that £33 million was a base value for the Company. He made clear that the no fault divorce scenario, implicit in the scenario 2, was hedged about with risks that the sum might never be received. In cross-examination in relation to the scenarios Mr Eales said:

" . . . you have to stand back from it and you say "I look at these four scenarios, I go from zero to 44 million and in-between I have two scenarios: 1, the run-downs which it looks like I'm not going to get any money out on that scenario, so my best course of action, or the best outcome for me as a potential purchaser if you can't get management to stay there and work for a lower sum, is to rely on a no fault divorce and take the risks associated with that. That scenario produces a value of say 36 million, 37 million, but you have got those risks, so you will never pay 36, 37 million for it, you will pay something substantially less, hence my 20 to 25."

402. Furthermore, Mr MacLean drew attention to the fact that Mr Chivers submits that the valuation on this basis should be approached on the basis that the WSL Offer had not been made or did not proceed and therefore, a new fund could not be raised. Mr MacLean pointed out that this is entirely inconsistent with Mr Arbuthnott's pleaded position that, in fact, the alignment issue was illusory. In any event, he went on to point out that scenario 2 proceeds on the basis of a change of control and not that a further fund cannot be raised. He also made clear that the Respondents do not accept that another fund could not have been raised. He says that the evidence did not go that far. Furthermore, he points out that it is scenario 3 which deals with run off, under which Mr Eales concludes that the value of the Company is nil. He also points out that assuming that the WSL Offer had not been made, there is no reason also to assume that the managers would leave and accordingly, there is no reason to assume that the no fault divorce payment would be made because in fact, the same investment managers would remain in place to manage the investors' funds.
403. Mr MacLean also submits that if the circumstances are those predicated on Mr Arbuthnott's behalf, namely that the WSL offer had not been made, then the cash sum which Mr Chivers seeks to add back would have been distributed in the normal way and would not have been available to the Company. I was shown consolidated group accounts in which the figure for cash appeared on the LLP's consolidated balance sheet.
404. In relation to the items at (ii) and (iii) of Mr Chivers' Objective Minimum Value calculation, Mr MacLean says that he cannot vouch for the figures but that, in any event, both are parasitic upon the existence of the no fault divorce payments which he says is itself illusory. He concludes therefore, that the Objective Minimum Value is zero.

Conclusion:

405. I do not feel able to accept the "Objective Minimum Value" put forward on Mr Arbuthnott's behalf in closing. It seems to me that it is a construct based upon an unsafe foundation. Mr Eales' Scenario 2 is not described as a valuation itself but merely a cash flow model which is used as a tool in the valuation itself. Furthermore, the Petitioner's private equity expert in cross-examination described the premise upon which Scenario 2 is based as highly unlikely and in any event, it is accepted that the no fault divorce payment which forms the basis for the scenario is hedged about with risks that it might never be received. Furthermore, Mr Chivers' calculation proceeds on the basis that the WSL Offer had not been made. If such a premise were accepted, it seems to me that it is far from clear either that the investment managers would have left or that the amount of cash on the balance sheet which Mr Chivers seeks to add back into his calculation would necessarily be available. Accordingly, it seems to me that the basis for the "Objective Minimum Value" is insufficiently certain to adopt for these purposes.

(ii) Nuisance Value

406. In the closing on behalf of Mr Arbuthnott it is also suggested that a nuisance value can be ascribed to the shares comprising three elements: namely the value of the goodwill, the cost of setting up a new firm and the lost income until the income from a new fund matches the income from the existing arrangement. I should say that Mr Eales says that the nuisance value is nil. In any event, £4m is ascribed to goodwill being the figure used for the purposes of the buy out from HSBC and the Court is asked to guess at the costs of a new set up which are said not to be highly significant but neither would they be trivial. In relation to lost income, it is said that the executives would lose at least 12 months' income which would be worth around £59m. If to this is added a further 6 months to first closing of a new fund, it is said that the nuisance value would be in the region of £90m.
407. Mr MacLean points out that this value is based for the most part upon income foregone and therefore proceeds on the back of the unpleaded assumption that the investment managers would have left en masse. However, if one is required to assume that the WSL Offer had not been made, there would be no reason to adopt such an assumption. Furthermore, some of the Respondents gave evidence that they were more concerned about their autonomy than any loss of income. On that basis, Mr MacLean says that it cannot be assumed that they would be willing to pay large sums by way of nuisance value.

Conclusion:

408. I am equally concerned about the basis for this construct put forward in closing on behalf of Mr Arbuthnott. There was no evidence whatever before the court as to the likely cost of setting up a new business were the investment management team to decide to go elsewhere. Furthermore, the lion's share of this value is based upon income which it is suggested would be foregone and the court is asked to assume the period during which that income would be lost. Once again there is no evidence as to precise period, nor as to the projected income likely to be received during it, nor is there evidence that, in fact, the hypothetical outgoing investment managers were motivated by money. In fact, the evidence, to the extent that there was any, was that they were motivated by autonomy. That was true of Mr Bonnyman, Mr Giacomotto and even the much more junior Mr Mornington. Accordingly, I am unable to accept this construct either.

(iii) Market value

409. Mr MacLean reminded me that the estimated value for the Company of £465m pleaded in the Petition is based upon a sale between a willing buyer and seller and in part, is premised on the basis that the WSL Offer price took no account of the ability of the Company to control the distribution of the profits from the business of the Group as a whole and that it was not fair and appropriate to fail to pay dividends. It is not a figure which is repeated in the Petitioner's closing.
410. Mr MacLean pointed out that in cross-examination Mr Florman had accepted that investors trust individual investment executives and he submits therefore, that Charterhouse is a "people business" in which it is expected that the active executives rather than retired shareholders will receive the fees. It is the active investment executives who manage the funds and raise them in the first place. He also reminded me that it is the Respondents' unchallenged evidence that no third party has sought to acquire Charterhouse since it became independent in 2001. It was Mr Morton's evidence with which Mr Florman agreed in cross-examination that the prospect of an IPO was unrealistic as the Charterhouse business model was too risky for stock market investors, and that Mr Florman had accepted that it was a highly unlikely scenario that Charterhouse would be purchased by a competitor and that it would be difficult for it to be purchased 100% by a wider purchaser.
411. Mr MacLean also submits that there was no real evidence of a third party such as a sovereign wealth fund purchasing a minority stake in Charterhouse and even if there had been, when asked whether the injection of cash could be used in order to purchase the shares of retiring members such as Mr Arbuthnott rather than as an injection to the business, Mr Florman replied that he would not advise it to be done like that.
412. He says it is clear that there is little or no value in the Company itself, the actual services being rendered at LLP level. Furthermore, he points out that Mr Arbuthnott does not put forward an alternative model which would deliver value to the Company (but for reliance upon Clause 11.6). Why, he asks rhetorically, for example, should the members of the LLP sign an advisory agreement which provides for CDCL and/or the Company to retain 20% of carried interest or profit?
413. Mr MacLean also submits that the price/earnings ratio basis adopted by Mr Mitchell, which was described by Professor Damodaran as "naive" is flawed. There were no truly comparable companies for the purposes of determining the appropriate multiple, no reasoned adjustments were made and there was no sound basis for maintaining the earnings stream. Having accepted that 3i was inappropriate, Mr Mitchell went on to base his multiple upon KKR, Blackstone and ICG which is too few to form a reliable basis. In any event, Mr Eales' unchallenged evidence demonstrated clearly that ICG was far more akin to 3i than to Charterhouse and it too should have been discarded as a comparator. One is left with only Blackstone and KKR which Mr Mitchell conceded could not safely be relied upon on their own as a basis upon which to derive meaningful multiples for Charterhouse. The evidence is that they are listed and are large multiple asset managers, more like multinational investment banks than they are like Charterhouse and are in a completely different league from Charterhouse in terms of size, diversity, risk profile and growth prospects.
414. Mr MacLean says that Mr Mitchell's AUM approach suffers from the same flaw as the P/E approach, namely that there are no comparable companies on which to base it. Furthermore, in cross-examination, Mr Mitchell admitted that this approach would produce the same value for Charterhouse, whatever the level of earnings in the Company, whether 10%, 90% or no part of the management fee. Since the foundation of Mr Arbuthnott's case is that dividends should have been paid and the question of the level of management fee which could or should have been diverted to the Company has been debated at length, it shows that this approach is of no assistance to the court in this case.
415. Mr Mitchell used the DCF approach only as a cross check and based his conclusions upon assumptions which had been supplied to him which Mr MacLean says bear no relation to reality. Mr Mitchell is also criticised because he has not allowed for any increased risk of departures as a result of the hypothetical reduction in remuneration. Mr MacLean says that that is unreal because if an open market value is to be derived on the basis of a distinction between the rights of ownership and the benefits derived from work, one should not assume that the workers will not depart.
416. Lastly, Mr MacLean took issue with a number of points in relation to what are described as the key specific inputs which the Court must determine on the evidence in coming to the market value for the shares. The first is the level of reward from employment as opposed to ownership in relation to which Mr Chivers says there is no better evidence than the 75^th percentile taken from the MM&K data. He says that the Respondents' approach that in an owner-managed business the surplus management fee income is divided up between the owner-managers and there is nothing else left is merely a truism. It tells one nothing about what the managers earn when they do not own the business.
417. In this regard, Mr MacLean says that there is no pleaded case or proper evidence in relation to remuneration and the MM&K data tells one next to nothing. He says that Mr Mitchell accepted that if other firms who provided data for the survey were using a model of distributing income/profits amongst their investment managers, the data would only reveal how profitable those firms were compared with Charterhouse. Mr Mitchell accepted that the figures do not include any way of determining the ratio between a firm's earnings and the amount paid to executives by way of salary, bonus or in any other way.
418. Mr MacLean also took issue with the assumption that there would be a reasonable level of fund growth in the future and submitted that but for speculation about the prospects of an injection of capital from a sovereign wealth fund, the only evidence was that of Mr Giacomotto about the uncertainties in the market and the likely reduction in the size of any future fund. In this regard, Mr Chivers submitted that the evidence of the private equity experts was that there were going to be winners and losers in 2011 and Charterhouse had every prospect of being a winner. He says that Mr Eales' assumptions simply do not reflect that and do not take account of the possibility that Charterhouse could seek to boost the size of a fund by requesting a cash injection from a limited partner, something which Mr MacLean rejects as simplistic. He also reminded me that in cross-examination, Mr Florman had said that he would not advise a private equity house to use a cash injection from a limited partner to pay former shareholders.
419. A further assumption that Mr Chivers espouses is that a 20% share in carried interest will be allocated to the house by which in this case, he means the Company itself. He points out that Mr Eales was instructed to ignore carried interest which at the rate of 20% would be worth in the region of £14-15m. Mr MacLean submits that this was not Mr Florman's evidence. He stated in cross-examination that it was the norm to pay perhaps 70% to the active investment team and 30% to back room staff such as the finance director and others and therefore, 100% is paid to the staff as a whole.
420. The final assumption is that the money multiple returns on investments for funds under management will grow by 2.5x over ten years. In fact, Mr Morton suggested that that was unrealistic and suggested that 1.7 times was more the norm. Mr MacLean also drew attention to the reality that there was no growth in Fund VIII at all.

(iv) Fair Value

421. The experts were not asked to consider what might be a fair value for the Company. In the written closing on Mr Arbuthnott's behalf it is suggested that the fair value would have been at the very least somewhere above the minimum value to the shareholders of the sale not proceeding and the true nuisance value to the purchasers of the sale not proceeding. It is also said that the Court should also bear in mind the considerable reputational damage which would be suffered by the majority were they to abandon Charterhouse and seek to replicate it elsewhere.
422. It is also submitted that fair value assumes some entitlement on the part of the majority to acquire the minority's shares. Mr Chivers submits that the nature of the bargain in the Shareholders' Agreement and Articles of Association as signed in 2001 was that the minority could be dragged on a change of control, but the change of control had to come with a Code-compliant offer. WSL is to be treated for these purposes as a third party acquiring control of 100% of the Company. Mr Arbuthnott is entitled to his 9% share of the value of the Company assessed on an arm's length basis; namely the market value of the Company on the assumption that his fellow shareholders are willing sellers and seeking to obtain the best possible price for their shares.
423. Mr MacLean submits that the fair value basis is not pleaded and had it been there would have been a different investigation at trial. It would have been relevant to consider the contribution made by Mr Arbuthnott to the success of the business, the privilege afforded to him on his retirement of being able to retain his carried interest in the preceding fund, something which had not been afforded to an outgoing Founder before, his acquiescence in the remuneration model from which he had benefited and the fact that there had been no suggestion in the past, in particular when Mr Drury retired, that there should be a run off of the business. Mr Thompson in reply pointed out that determining the fair value is a task for the court and that it does not need to be pleaded.
424. Lastly, in relation to relief, he points out that Mr Arbuthnott seeks an order for the purchase of his shares on the basis of a willing buyer and a willing seller and with no discount for his minority holding. Mr MacLean says that that might have been justified if the allegation of a quasi partnership and been maintained but in fact, it has been dropped and that therefore, there is no reason why the shares should be valued other than on a minority basis.

Conclusions: Market value and fair value

425. In relation to Mr Mitchell's approach to valuation, I accept the criticisms raised by Mr MacLean. It seems to me that Mr MacLean's criticisms of the adoption of the P/E approach and the AUM approach are entirely justified. The conclusions were based on multiples derived in fact, from what Mr Mitchell himself accepted were too few companies. As to KKR and Blackstone, I prefer Mr Eales' analysis.
426. I have already rejected the claim that the remuneration model was contrary to Clause 11 of the Shareholders' Agreement as amended and that in the circumstances of this case, that the non-payment of dividends was a breach of the directors' duties under section 172 of the 2006 Act. Furthermore, it seems to me that in the light of the contractual bargain which Mr Arbuthnott entered into, it is not open to him now he has retired to contend that the continuation of that model is unfairly prejudicial to him and to seek to have the Company valued on the basis that an entirely different practice is adopted or on the basis that the Business is run off. I come to this conclusion despite the fact that the private equity expert evidence was to the effect that a dividend could be paid in the short term on a 'decaying basis' to an outgoing member or relative of a deceased member and would be justified to investors on the basis of orderly succession.
427. In addition, in my judgment, the evidence did not support a valuation on the basis of a third party purchaser for Charterhouse. In this regard, I rely upon Mr Morton's evidence that there was no real prospect of such a purchaser and Mr Florman effectively agreed. I also rely upon Mr Florman's evidence that a private equity business is the most difficult type of business in the world to sell, that an IPO would be very difficult and not a realistic exit route for Charterhouse, that he viewed a sale to a competitor as "highly unlikely" and that a purchaser would have to negotiate a remuneration package with the most important members of the investment team who were selling their shares which was as good with a little extra for the stress involved.
428. It also seems to me that the Mr Florman's evidence does not support a valuation on the basis of the assumption that 20% of carried interest would be awarded to the Company itself or that funds under management would increase in the manner assumed by Mr Mitchell. Furthermore, it seems to me quite clear from the evidence of the private equity experts that although it was possible it would also be extremely difficult to obtain third party investment. In addition, it was Mr Florman's evidence that even if one did, he certainly would not advise that the capital injection be used to purchase the shares of retiring investment executives. In such circumstances, it seems to me to be entirely unrealistic to have sought to value the Company on either basis.
429. I take the same attitude in relation to the calculations in the valuations based upon the assumption that the remuneration model is changed. First, I have already found that Mr Arbuthnott agreed to that model both as a director and as a shareholder and therefore, it seems to me that it is not appropriate to seek to value the Company as if that model does not apply. Secondly, and in any event, I accept the evidence of the continuing investment executives that they valued their independence, the environment in which they work and would not accept either a sale or third party investor or a reduction in their remuneration and that despite the short term financial loss which was very considerable, they would nevertheless have sought to come to an accommodation with investors and would have taken the funds elsewhere. In the light of the fact that the evidence reveals strongly that private equity is a people- based business, it seems to me that this has a significant effect upon value. Accordingly, it seems to me that both Mr Eales and the independent shareholders were right to assume that the only realistic purchasers were the ongoing executives. It follows, therefore, that in my judgment, the Company should be valued on the basis that the Business continued as before and Mr Eales' approach is to be preferred.
430. Furthermore, in my judgment, it is also unsafe to proceed on the basis that remuneration would be reduced to the 75^th percentile of the MM&K Report for 2011, as Mr Mitchell assumed. Mr Mitchell acknowledged that he had no knowledge as to how comprehensive the MM&K survey was, the levels of remuneration for owner-managed businesses in survey could simply be a function of the revenue of the business and that the figures do not indicate a ratio between a firm's earnings and the amounts paid to investment executives. He also accepted that if the survey did not represent market remuneration, his analysis would be worthless.
431. Accordingly, it seems to me that there is no reason to assume for the purposes of the Allen v Gold Reefs test that a reasonable shareholder could not have come to the conclusion which the shareholders in this case reached. The price was consistent with previous transactions, the KPMG 2009 valuation and Mr Eales' valuation and was considered fair by retiring members with no interest in WSL. None of the witnesses, all of whom were sophisticated and with relevant knowledge, suggested that WSL Offer price was outside the range which they considered reasonable and Messrs Cox, Bonnyman, Giacomotto, Arnell, Plant, Mornington and Etroy were not challenged on their evidence that they regarded the offer price as fairly reflecting the value of the Company.
432. Furthermore, even if one were to take the Gambotto view, and for this purpose to assume that the articles had been amended to introduce an expropriation provision for the first time, the price under the WSL Offer is not one which leads to the conclusion that there is unfair prejudice here. This is all the more so when one takes account of the commercial bargain contained in Clause 7.2 of the Shareholders' Agreement which allowed for the minority to be bound by the price agreed by a disinterested majority. Mr Mitchell's evidence was that Mr Arbuthnott's shareholding valued on a minority basis would be worth in the region of £0.4789m to £1.3m. The WSL Offer provided for £1.35m. Given the reality that the ongoing investment managers were the only likely purchasers, coupled with the terms of Clause 7.2, in my judgment, Mr Arbuthnott cannot complain as to the process or the value placed upon the shares, including the use of the minority basis.

(e) Oral Agreement

433. Mr MacLean notes that nothing was made of this on behalf of Mr Arbuthnott in closing. As I have already found that there was no Oral Agreement, it follows that no claim and consequent relief can be founded upon it.
434. If follows that I reject Mr Arbuthnott's claim under section 994 and/or under the rule in Allen v Gold Reefs.

Conduct affecting relief

435. Although it is no longer relevant, for the sake of completeness, I should add that although I was taken to authorities concerning the effect of conduct upon the relief which may be granted under section 994, the matter was not dealt with in closing. In any event, I would not have taken the view that Mr Arbuthnott's approach at the Burnham Market meeting was such that it would have affected the relief to which he was entitled. It seems to me that he was seeking to negotiate in an aggressive environment and that his concern in relation to Mr Bonnyman's expenses proved correct.