Jersey Unreported Judgments

Companies - reasons for declining to order a split trial.

[2019]JRC214

Royal Court

(Samedi)

28 October 2019

Before     :

Advocate Adam Justin Clarke, Judicial Greffier

 

Advocate N. A. K. Williams for the Plaintiffs.

Advocate J. Harvey-Hills for the First Defendant.

Advocate R. A. B. Gardner for the Second Defendant.

CONTENTS

		Paras
1.	Introduction	1-3
2.	Background	4-15
3.	Submissions	16-30
4.	Decision	31-35

judgment

the JUDICIAL gREFFIER:

1.        This judgment contains my written reasons for declining to order a split trial in this matter.

2.        This matter came before me following the issuing of a summons for directions dated 4^th September, 2019, by the plaintiffs in compliance with Practice Direction RC05/10.  The summons was supported by Draft Directions containing twenty four directions and it was to the credit of the parties that the majority of the proposed directions had been agreed in advance of the hearing.  The substantial issue between the plaintiffs and the second defendant (the first defendant having already expressed the intention to take a neutral role in the proceedings wherever practicable to so do) was whether the adjudication of the claim lent itself to separate trials; the first to deal with liability and the second to determine quantum.

3.        There was a minor secondary issue in regard to the appropriate date for the completion and distribution of lists of discovery and I will deal with that briefly at the end of this judgment.

Background

4.        The plaintiffs are minority shareholders in the first defendant, ETFS Capital Limited (the Company).  The 1st and 2nd plaintiffs are referred to together as "FTV".  They hold 22% of the Company's shares.  The 3rd to 6th plaintiffs are referred to as "Millennium" and hold 10% of the shares.  The 7th plaintiff, "Susquehanna", holds 3%.  Between them, the plaintiffs hold 35% of the Company's issued shares.

5.        The second defendant is the Company's majority shareholder and Chairman holding 55% of the Company's shares personally, with a further 3% held by a company owned by him and his wife.  The remaining shareholders in the Company are former employees and officers and/or their nominees who received shares in the Company as compensation, primarily by way of re-investment of salary and bonus or as equity based incentive.  They hold approximately 7% of the Company's shares.

6.        The Company was incorporated in August 2004.  At all times from the commencement of its business until last year, the Company carried on business as a developer, issuer and manager of exchange-traded products (i.e. listed securities that track an index, commodity or basket of assets).

7.        The plaintiffs are US-based private equity funds that provide growth capital to, inter alia, companies in the financial services industry.  FTV invested a total of US $10 million in the Company in 2006 and 2007 in return for Preferred Shares (which it subsequently converted to Ordinary Shares in 2009).  Millennium and Susquehanna acquired their shares in the Company from FTV in 2011.

8.        The plaintiffs assert that they acquired their shares on the expectation that the Company would pursue a "liquidity event" (i.e. a public listing or sale) which would provide them an opportunity to achieve an exit and liquidity for their investments.  The Company took steps towards achieving such a liquidity event from the time that FTV invested in 2006 and an Initial Public Offering ("IPO") was subsequently targeted for 2010.

9.        In 2012 the decision was made to abandon the long-planned IPO and substantial efforts towards a liquidity event ceased for several years until substantially all of the Company's businesses and assets were sold in a sales process which completed in April 2018 (the Sales).  The only substantial asset retained by the Company following the Sales was a small Australian business, which had accounted for approximately 2% of the Company's revenues prior to the Sales.

10.      The Company received nearly US$300 million in cash proceeds in the Sales, as well as a substantial shareholding in one of the purchasers, a US listed company, WisdomTree Investments Inc. (WisdomTree).  The total consideration for the Sales was said to be more than US$600 million.

11.      The plaintiffs expected that the Sales would lead to a wind down and distribution of the Company's assets.  However, despite the Company having disposed of substantially all of its income earning assets and ceasing to carry on its business as an issuer and manager of exchange-traded products, the second defendant declined to wind down the Company and distribute its assets.  

12.      Instead, the second defendant wishes for the Company to retain the proceeds of the Sales, and embark on a new business as a private equity-type fund investing in companies in "the ETF eco-sphere", contrary to the desires of the minority shareholders.  The plaintiffs allege that the second defendant's conduct in this regard is motivated by a desire to force the plaintiffs to sell their shares in the Company for less than their fair value to him or the Company (which would enure to his benefit as his holding would become more valuable).

13.      The second defendant confirms that his intention is not to distribute the funds raised by the Sales, but has said that he would support the Company buying back the plaintiffs' shares at the right price, being a discount of 44% from the Company's net asset value.  The 44% figure is said to be based on a report that the second defendant personally commissioned from KPMG, who are the Company's auditors.

14.      Although not currently part of the pleaded case, the Court's attention was drawn to the assertion that the second defendant has recently returned to Australia.  In August 2019, the second defendant provided the Board with a presentation which the plaintiffs say outlined significant adverse tax consequences for the Company if the second defendant continues to manage the Company's affairs from Australia including that some or all of the Company's worldwide income would become subject to Australian tax.

15.      In light of the above, the plaintiffs issued an order of justice dated 24^th April, 2019, in which the plaintiffs have requested (together with the usual ancillary orders) that the Court orders that:-

(i)        The Company be wound up pursuant to Article 155(1)(b) of the Companies (Jersey) Law 1991.

(ii)       Alternatively, the second defendant or the Company do purchase the plaintiffs' shares in the Company at a fair value to be determined by the Royal Court with no discount for a minority shareholding.

(iii)      Such other or alternative order(s) as the Court thinks fit for giving relief under Articles 141 and 143 of the Companies (Jersey) Law 1991 against the matters complained of.

Submissions

16.      The principle submission of the plaintiffs was that this action could and should be disposed of in a single hearing.  It was advanced that the line of authorities on the issue of a split trial (and especially so in respect to cases involving shareholder disputes- see In re Tobian Properties Ltd [2012] EWCA Civ 998) did not lay down a general rule or presumption towards the ordering of a split trial but rather confirmed that each such case required effective case management and consideration of the case on its particular merits.

17.      In support of that position, Advocate Williams drew the Court's attention to the following extract from Hollington on Shareholders' Rights (eighth edition) at paragraph 9-48:-

"But there will clearly be cases where split trials of liability and valuation are desirable: Re LCM Wealth Management Ltd [2013] EWHC 4759 (Ch).  See also Shah v Shah (Re Mister Dee International Plc) [2011] WTLR 519 (liability) and Shah v Shah (Re Mister Dee International Plc) [2012] WTLR 165 (share valuation).  The case of Re Annacott Holdings (above), whilst recognising the merits in ordering a split trial, is a good example of the dangers of an order for a split trial.  In that case, a direction was given for a trial of the issues of unfair prejudice, with share valuation evidence to be deferred to a subsequent trial.  The company had gone into creditors' voluntary liquidation and the minority shareholder's interest in obtaining a share purchase order depended upon whether the majority was accountable for wrongful drawings and diversion of the company's goodwill.  It was not appropriate to make a buy-out order until it had been determined that the shares were of value.  If expert evidence as to the value of the shares is required in order to determine the relief to be granted, it is difficult to see how a split trial can be appropriate.  Thus, although it may the case that "generally" a split trial of liability and quantum will be ordered (see at [27] of the judgment of Arden LJ in that case), the facts of that case demonstrate what will go wrong if that course is followed in cases which are not "run of the mill"."

18.      In addition, the plaintiffs relied upon the case of Electrical Waste Recycling Group Limited and others v Philips Electronic UK Limited and others [2012] EWHC 38 (Ch), in which Mr Justice Hildyard pronounced:-

"5. Where the issue of case management that arises is whether to split trials the approach called for is an essentially pragmatic one, and there are various (some competing) considerations. These considerations seem to me to include whether the prospective advantage of saving the costs of an investigation of quantum if liability is not established outweighs the likelihood of increased aggregate costs if liability is established and a further trial is necessary; what are likely to be the advantages and disadvantages in terms of trial preparation and management; whether a split trial will impose unnecessary inconvenience and strain on witnesses who may be required in both trials; whether a single trial to deal with both liability and quantum will lead to excessive complexity and diffusion of issues, or place an undue burden on the Judge hearing the case; whether a split may cause particular prejudice to one or other of the parties (for example by delaying any ultimate award of compensation or damages); whether there are difficulties of defining an appropriate split or whether a clean split is possible; what weight is to be given to the risk of duplication, delay and the disadvantage of bifurcated appellate process; generally, what is perceived to offer the best course to ensure that the whole matter is adjudicated as fairly, quickly and efficiently as possible.

6. Other factors to be derived from the guidance given by CPR Rule 1.4, which reflect a common sense and a pragmatic approach, may include whether a split would assist or discourage mediation and/or settlement; and whether an order for a split late in the day after the expenditure of time and costs might actually increase costs.

7. All these sorts of factors seem to me to be potentially relevant and need to be taken into account in what is essentially a pragmatic balancing exercise in assessing how the case is likely to unfold according to whether there is or is not a split.

8. It follows that each case falls to be assessed by reference to its own facts, features and peculiarities. Further, the assessment has to be made before the Court can responsibly take any reliable view as to the prospects of success, and thus as to whether quantum will be a live issue or not.

9. Given the variety of circumstances, and the nature of the approach required, little definitive guidance can sensibly be culled from the cases beyond generalities such as I have expressed, except that experience has confirmed the importance of ensuring that there be careful demarcation, in the event of an order for a split trial, of the boundary between the two in terms of the issues to be deal with at each stage (and see per Morgan J in Bookmakers' Afternoon Greyhound Services Ltd and Others v Amalgamated Racing Ltd and Others [2008] EWHC 2688 (Ch), approved by the Chancellor, Sir Andrew Morritt CVO, in The Leaflet Company Ltd v Royal Mail Group Ltd [2009] UKCLR 323)."

19.      In preparation for the hearing, the plaintiffs had prepared a draft List of Issues.  Advocate Williams contended that these would be matters for the Court to adjudicate upon in order to fully resolve the present dispute.  Whilst it was accepted that the defendants had not yet commented upon the draft List of Issues and may take issue with some parts of the list, Advocate Williams argued that of the forty seven issues, at least eight of them required the Court to consider valuations of the shares in the Company (at one or more times during the period when the parties have been in dispute) to be able to determine issues of liability.

20.      The plaintiffs therefore contended that no split trial should be ordered for the following reasons:

(i)        First, there was no "clear line of demarcation" between the issues of liability and quantum.  Indeed, there was considerable interaction between the issues of liability and quantum which made it unthinkable for a court to be asked to adjudicate issues of liability without having regard to expert evidence on the topic of valuation.  The plaintiffs argued the very fact that the second defendant has offered to acquire the plaintiffs' shares at a substantial discount was in part the cause for the loss of confidence in the second defendant that had led to the action being commenced.  The Court would therefore need to consider the appropriateness of the quantum of the offer in order to fully adjudicate on the issues of liability.

Moreover, it was submitted that the second defendant had pleaded in his answer that he has offered a fair price for the shares and as such had himself brought the need for expert valuation evidence into the issue of liability.

The plaintiffs also submitted that given the change in the intended objects of the Company since the Sales completed in April 2018 and imposed upon the minority shareholders by the second defendant, it would be important for the Court to understand how a valuation of the shares in the Company should be approached; should the company be valued on a Net Asset Value basis or perhaps as a going concern?  These were issues that ought to be in the consideration of the trial court as they impacted upon the appropriate remedy that might be handed down.

(ii)       Second, dealing with the matter at one hearing was consistent with the overriding objective of ensuring speedy and cost proportionate justice.  Advocate Williams asserted that further delay would prejudice the plaintiffs who have been already unreasonably forced to wait to receive their funds.  Splitting the trial came with the prospect of delaying the final decision and the potential for appeals against aspects of the bifurcated hearings which would result in elongation of the litigation.

Moreover, given that the plaintiffs were already concerned about the alleged historic prejudicial activities of the second defendant, delay would increase the likelihood that further improper actions might be taken to the prejudice of the plaintiffs.  These actions included the continuation of the second defendant's management of the Company from Australia which, in the view of the plaintiffs, would greatly prejudice the Company as a whole and specifically them as minority shareholders.

There were further practical issues regarding the location of the parties.  None of the parties were resident in Jersey.  The plaintiffs are based across the United States of America including San Francisco and the second defendant is in Australia.  Having to arrange two trials would be difficult and expensive for the parties both as regard to finances and managerial time lost in the process.

Finally, there would be potential difficulty in being able to convene the same Court to hear two separate hearings in the same case.  Even if the Court could be identically convened, the passing of time between the hearings would mean that further inconvenience would be placed upon the Court and additional time spent in reacquainting all the interested parties with the facts at hand.

(iii)      Third, there was nothing to suggest that the trial or the expert evidence on valuation would be too complex or burdensome for a court to be able to deal with it in one hearing.  Advocate Williams argued that whilst the valuation evidence was important, it was not complicated.  Since April 2018, the Company has been a non-trading cash-rich vehicle which holds shares in a single third party entity.  That would not be complicated to value or to understand.

In support of the position, Advocate Williams drew the court's attention to the English Court of Appeal decision in Re Sprintroom Ltd, [2019] EWCA Civ 932 at paragraph 138 in which the Judges said:-

"If it is necessary to have some expert valuation evidence for an assessment of the offers that does not mean that the issue should be postponed to the quantum stage."

(iv)      Fourth, there was no overriding presumption in favour of a split trial in unfair prejudice claims.  Rather case management must be consistent with both parties' right to a fair hearing.  Only in "run of the mill" cases might it be appropriate to start with the expectation of a split trial and the present dispute was far from run of the mill.  There was very little agreement between the parties.  The disputes were based on a complicated factual matrix and the assets were of very high worth.  All of this implied that the matter was not "run of the mill".

(v)       Fifth, dealing with the expert valuation evidence at an early stage had a number of benefits. Primarily, it would give rise to disclosure around evidence pertaining to issues of valuation which may in turn assist in narrowing issues between the parties.  In addition, the provision for expert evidence on valuation may go some way to aiding the parties to reach settlement prior to a final hearing in this dispute.

21.      In response, Advocate Gardner for the second defendant asserted that perhaps the parties were not as far apart as Advocate Williams suggested.  The second defendant had made the suggestion of a split trial because he wishes for the matter to be dealt with as fairly and efficiently as possible.  His focus was likewise on bringing matters in dispute to a swift conclusion.

22.      The main thrust of the contentions for the second defendant was that there was no interaction between the valuation of the shares in the Company and the issue of liability.  It was argued that the plaintiffs' request for a winding up order under Article 155 of the Companies (Jersey) Law 1991 did not require consideration of expert valuations.  In the event that this limb of the claim was successful, the matter would be concluded.  If it was not successful, it was unlikely that an application for unfair prejudice on the same set of facts would be successful and again there would be no need for expert valuation.  It was only in the unlikely event that the plaintiffs succeeded on the unfair prejudice point and the Court ordered the acquisition of the shares by one of the defendants that the issue of the value of the shares would be pertinent.  It therefore followed that ordering expert valuations at this point would increase costs and complicate the discovery process for all the parties and would likely result in considerable wasted expense.

23.      In addition, the second defendant asserted that the plaintiffs had misunderstood the relevance of valuation to the question of liability under the unfair prejudice claim.  Advocate Gardner submitted that the case of Re Sprintroom Ltd had no application in the present dispute as it was not part of the defence to the claim that "fair" offers had negated any unfair prejudice.  Advocate Gardner submitted that, contrary to what he said the plaintiffs were asserting, the second defendant's actions were not motivated by a desire to acquire the plaintiffs' shares at a discount.  Further, Advocate Gardner submitted that the main issue in this matter concerned the intentions of the plaintiffs at the time of their investment in the Company.  On this basis, valuation evidence was unnecessary to resolve the unfair prejudice claim.

24.      Furthermore, Advocate Gardner argues that having a trial on the issue of quantum alone would (if a hearing on quantum was necessary) have the benefit of clarifying the dates upon which valuation of the shares should be undertaken.  At present there remains considerable debate regarding when and how the valuations should be undertaken and these would be clarified by the trial judge if liability is successfully argued by the plaintiffs.

25.      The second defendant also advanced that, contrary to the submissions of the plaintiffs, the case of In re Tobian Properties Ltd did make it clear that a split trial would be the normal course where valuation evidence was not required to determine the liability issues.

26.      In response to the concerns of delay advanced by the plaintiffs, Advocate Gardner submitted that a split trial would also result in little delay.  The liability trial would be heard considerably sooner than a combined trial and, were it necessary to have a second trial on quantum, this could be brought on relatively quickly thereafter.  To evidence this argument, I invited Advocate Gardner to provide the Court with his own draft of the directions setting out the timetable for a split trial, which he did the following day.  The second defendant's proposal for the liability trial was for a hearing of no greater than 10 days not to take place before the 26^th June, 2019, whereas the joint trial proposal was for trial of no greater than 20 days not to take place before the 7^th September, 2019.

27.      The second defendant did not agree that a split trial would lead to considerable inconvenience to the Court or the parties.  As far as the second defendant was concerned, notwithstanding that he was resident in Australia, there was a great deal of money at stake and if he had to travel to Jersey for two trials, he was prepared to do so.  It was suggested that the plaintiffs, although based in the United States of America, would no doubt do likewise given the issues and quantum at stake.

28.      In reply, Advocate Williams submitted that the case could not be characterised as "run of the mill".  This was a complex factual background to the dispute, a great deal of money at stake and the parties were at loggerheads over a great number of issues.  This was complicated litigation that would require considerable time and intervention from the Court to resolve.

29.      In addition, it was inconceivable that the Court could hive off the issue of the valuation of the shares.  It was a substantive part of the liability claim that the second defendant's behaviour in making the discounted offer for the plaintiffs' shares constituted evidence in support of the allegation of the breakdown in trust and confidence which had led to the proceedings being brought.

30.      Finally, the concern over the dates of the valuation expressed by the second defendant were misplaced.  Advocate Williams contended that the salient dates were limited e.g. to the date of the Sales in April 2018, the date of the offer for the purchase of the shares at a 44% discount and potentially the date of the trial.

Decision

31.      In reaching my decision, I have had particular regard to two aspects of the contentions.  Firstly, I have concluded that in shareholder disputes, In re Tobian Properties Ltd does not bind the court or indeed create a presumption towards a split trial between liability and quantum.  That is not to say that there may not be cases where it is appropriate to order a split trial because the facts and evidence support that as being the pragmatic approach.

32.      Secondly, I am persuaded by the words of Mr Justice Hildyard (as set out in paragraph 18 above) that a decision on the splitting of a trial is essentially a pragmatic one.  The issue is whether the potential savings achieved by avoiding the costs of the valuation process should liability not be established outweigh the anticipated increase in costs (and I should add inconvenience and delay) if liability is established and the court is required to convene at a later date for a further trial.  I have concluded that in this case, they do not.

33.      My reasons for concluding this are as follows:-

(i)        I am unable to clearly see the line of demarcation between issues of liability and quantum in this matter.  In issues of equitable winding up of a company and unfair prejudice of a minority shareholder, the actions of the parties which may have led to the breakdown in trust and confidence are salient to the final determination of the matter.  Whether the second defendant denies it or otherwise, an aspect of the plaintiffs' case revolves around the offer of a purchase of shares at a discounted value.  The court may therefore need to have regard to the reasonableness of the offer to better understand the intention of the parties at the time.  Having considered carefully the submission by the parties on this issue, I remain concerned that there is a genuine risk that the court may be hampered in its decision making on liability if this valuation information is not available.

(ii)       I conclude that there is a risk of significant delay in the bifurcation of the issues.  The plaintiffs are clear that they wish to receive a swift exit from the present circumstances.  The second defendant echoed those sentiments at the hearing.  Whilst I am less concerned about issues of convening the same court or the inconvenience of the parties and witnesses attending a second trial, I am conscious of the possibility of delay caused by appeals of matters in the separate trials.  In addition, having considered the competing timescales between a single trial and split trials, I am not convinced that the split offers significant benefits in the time saved.  I am however convinced that there will be an elongation of the dispute in the event that the plaintiffs succeed on liability at the first trial.

(iii)      I do not feel that I have heard compelling submissions to suggest that the matters of valuation are so complex as to make it unreasonable for a court to deal with all aspects of this dispute in a single trial.  On the issue of the dates of the valuation, this is something that I would expect the parties to make every effort to agree in the List of Issues.  However, if that is something that cannot be agreed, then I am prepared to provide further case management.  It should not be a topic that causes delay in bringing the matter to trial in accordance with the timescale set out in the directions ordered by this court.

(iv)      Finally, I am of the view that ordering the single trial, and by association the need for expert valuation evidence, will assist the parties in matters of alternative dispute resolution.  I believe that to be in accordance with the overriding objective and I would encourage the parties to pay more than lip service to the possibility of seeking resolution to this dispute outside the walls of the court.

34.      I mentioned earlier that Advocate Harvey-Hills for the first defendant invited an extension to the date by which the parties should exchange discovery lists from the 17th January, 2020 to the 31st January, 2020.  I was not given detailed particulars as to why it would necessarily be essential to the parties to receive this extension of time.  Generally, I would be reluctant to add time and delay where it was not essential, but, on this occasion I am prepared to add a week to the dates in directions 3 to 7 and to the consequential dates in directions 11 and 12.

35.      I am grateful to all counsel for the clear and timely manner in which they provided their evidence and contentions in the joint bundle and their helpful and efficient submissions at the hearing.

Authorities

Companies (Jersey) Law 1991. 

In re Tobian Properties Ltd [2012] EWCA Civ 998. 

Electrical Waste Recycling Group Limited and others v Philips Electronic UK Limited and others [2012] EWHC 38 (Ch). 

Re Sprintroom Ltd, [2019] EWCA Civ 932.