Scottish Court of Session Decisions

 

OUTER HOUSE, COURT OF SESSION

[2015] CSOH 18

 

P522/14

OPINION OF SHERIFF P A ARTHURSON QC

(Sitting as a Temporary Judge)

 

In the petition of

GLOBAL PORT SERVICES (SCOTLAND) LIMITED

Petitioners;

against

GLOBAL ENERGY (HOLDINGS) LIMITED and OTHERS

Respondents:

For An Order in terms of section 1 of the Administration of Justice (Scotland) Act 1972

 

Petitioners:  Sandison, QC; Harper Macleod LLP

Respondents:  R Dunlop, QC;  Stronachs LLP

13 February 2015

Background

[1]        In terms of section 1(2)(b) of the Administration of Justice (Scotland) Act 1972, a party can petition the court to recover documents in the event that that party is able to persuade the court that (i) the party who is to bring such proceedings is likely to be a party to (ii) (substantive) proceedings which are likely to be brought. 

[2]        The present petitioners (“the petitioning company”) were incorporated on 14 August 2013 in order to provide a commercial vehicle for, inter alia, the merging of the logistics businesses then being operated by two companies in separate ownership, namely (a) Port Services (Invergordon) Limited, and (b) Global Logistics Services Limited, the latter company having been part of a group of companies known as the Global Energy Group.  The commercial background is accordingly one essentially of business merger.  Pursuant to that merger the petitioning company and the respondents entered into an Agreement for the Supply of Logistics Services dated 4 October 2013 (“the logistics contract”).  The multiple respondents are all companies belonging to the Global Energy Group, of which the first respondent, Global Energy (Holdings) Limited, is the holding company.  In terms of the logistics contract, the respondents agreed to purchase certain logistics services exclusively from the (newly formed) petitioning company.  The interests of Port Services (Invergordon) Limited are now represented by Moray Firth Service Company Limited (“MFS”), and the interests of the Global Energy Group by GEG Marine & Offshore Limited (“GMOL”).  Accordingly, MFS and GMOL are now the two major, but not the only, shareholders in the petitioning company, Global Port Services (Scotland) Limited. 

[3]        The logistics contract has a duration of five years from its inception and continues in force.  The de quo of the putative substantive proceedings relates to alleged breaches of the logistics contract.  In an appendix annexed to the petition, certain documentation is sought, pertaining in general terms to any purchasing by the respondents from October 2013 of certain services from persons other than the petitioning company.  It was not in dispute before this court that the object of the proposed recovery was to obtain disclosure in respect of the extent of any breach(es) of the logistics contract and accordingly of the scope of any remedy available to the petitioning company.  The terms of the appendix were not in issue as comprising appropriate documentary material to be recovered in terms of section 1 of the 1972 Act in the event that the petition was deemed by the court to be well founded.  It was, further, a matter of agreement that the petitioning company’s board of directors had not passed any resolution authorising or ratifying the raising of proceedings.

[4]        Finally, in terms of a shareholders’ agreement dated 4 October 2013 (“the shareholders’ agreement”), to which nine persons were party, including MFS, GMOL and the petitioning company, the parties to that agreement provided in terms of sub-clause 6.1 that:

“6.1      The Board has responsibility for the supervision and management of the Company and its Business, subject to clause 5.”

 

That sub-clause refers to clause 5, which in full is in the following terms:

“5.       Matters requiring consent of certain shareholders

 

5.1       Each party shall procure that the Company shall not, without the prior written approval of GMOL and MFS, carry out any of the Reserved Matters.

 

5.2       Any action or demand by the Company against any or all of : GMOL, MHM, GEHL, GLS, HSL or RJM or any Customer (as defined in the Logistics Contract) in respect of (i) the acquisition by the Company of the entire issued share capital of GLS;  (ii) the acquisition by the Company of the business and assets of GLS and/or HSL on or after Completion;  and/or (iii) any breach or termination of the Logistics Contract;  and/or (iv) any breach of the MacGregor Family Restrictive Covenant Letter, shall require the prior written approval of MFS only.

 

5.3       Any action or demand by the Company against PSI in respect of the acquisition by the Company of the business and assets of PSI shall require the prior written approval of GMOL only.

 

5.4       MFS shall be entitled at any time to appoint directors to the board of GLS without the consent of the other Shareholders (subject to the following proviso) or the Company:  provided that the same restrictions that apply to the appointment of a director by MFS pursuant to clause 6.4, shall apply equally in respect of the appointment by MFS or directors to the board of GLS.

 

5.5       Each party hereby consents, for the purposes of this Agreement, to the Company entering into the Hive-Up Agreement (as defined in the Share Swap Agreement) upon satisfaction of the Trigger Event (as defined in the Share Swap Agreement).”

 

The parties in these petition proceedings, against the background set out, supra, joined issue before this court on the proper construction of clause 5, and in particular clause 5.2 of the shareholders’ agreement.

 

Submissions for the petitioners

[5]        Senior counsel for the petitioning company, in a cogent and forceful submission, contended that no issues of company law arose properly for consideration in this case;  rather, the exercise for this court was instead purely one of construction of clause 5 of the shareholders’ agreement.  He observed that of the nine persons listed as parties to the shareholders’ agreement, only four were actually shareholders in the petitioning company, namely two named private individuals together with MFS and GMOL.  The remaining five parties were in fact not shareholders in the petitioning company at all.  The contract for construction was therefore not an agreement among shareholders or directors, but was, senior counsel submitted, a multilateral contract including the petitioning company as a non-shareholding party.   In that context it could be seen that the petitioning company had agreed with others, in terms of clause 5.2, the circumstances in which an action could be brought in its name.  There was, of course, no suggestion, senior counsel noted, that the petitioning company lacked authority to enter the shareholders’ agreement itself.  The case was therefore not about in what circumstances shareholders can control the actions of a board of directors, but instead raised the single issue of whether the company itself had agreed to permit actions to be raised in its name or on its behalf in certain circumstances in a multilateral contract to which it had a priori committed itself.  On that point, senior counsel argued that the petitioning company had already, in terms of the shareholders’ agreement, validly contracted with others thereby setting out the circumstances in which an action in its name or on its behalf could be raised.  In terms of clause 6.1, board responsibility was expressly and plainly made subject to the terms of clause 5.   Against the background of merger as set out supra, it could be seen that clause 5 as a whole was designed to facilitate the operation of a business created in that way and to facilitate the supply of business to the new company (the petitioning company) in terms of the logistics contract. 

[6]        Senior counsel turned to the broad scheme of clause 5, noting that clause 5.1 made reference to certain “Reserved Matters” that the petitioning company could not do without the prior written approval of both GMOL and MFS.  These Reserved Matters were set out in a schedule and dealt largely with matters such as the allotment of shares, alteration of the company name or articles and could be seen accordingly to be related to matters of major importance to the corporate structure, the nature of the business, or indeed the operation of that business.  In terms of such Reserved Matters it was clear that clause 5.1 envisaged that the agreement of both of the major shareholders would be required.  Clause 5.2 required instead the prior written approval of MFS only in respect of any action by the petitioning company against GMOL and others in respect of any breach of the logistics contract.  Those listed along with GMOL were members of or associated with the Global Energy Group side of the merger, being “customers” in terms of the logistics contract.  That logistics contract was, senior counsel contended, the mechanism by which the petitioning company was to be assured of an ongoing supply of work through the business activities of the other members of the group.  The commercial purpose of clause 5.2 could, accordingly, properly be stated to be the prevention of Global Energy Group (now GMOL) interests in the petitioning company being able to hinder or stop the petitioning company taking action against members or associates of that group of interests, in circumstances in which the other major shareholder, formerly Port Services (Invergordon) Limited (now MFS), wished such action to be taken.  On a proper construction of the shareholders’ agreement, accordingly, all that was required to place proceedings within clause 5.2 in order for an action properly to be raised by the petitioning company was for prior written approval to be obtained from MFS, and in this case it was not contested that a letter in appropriate terms dated 28 March 2014 on behalf of MFS was in the hands of the petitioning company.  Such a construction, senior counsel submitted, gave effect to the language of clause 5.2 and further was in accordance with business common sense standing the commercial purpose of clause 5.2.  While senior counsel contended that the construction which he urged upon the court did indeed give effect to the ordinary language used in clause 5.2, in the event that the court should determine that this language permitted both his construction and that contended for on behalf of the respondents, his position was that all of the commercial factors arising in the matter from both the logistics contract and the shareholders’ agreement pointed only in the direction of the petitioners’ contended construction.  In advancing this submission, senior counsel relied upon the dicta of Lord Clarke of Stone-cum-Ebony JSC, in the leading judgment in Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900 at paras.14, 21, 23, 29 and 30, and in particular at 2911 at para 30 in terms of which his Lordship observed:

“As stated in a little more detail in para.21 above, it is in essence that, where a term of a contract is open to more than one interpretation, it is generally appropriate to adopt the interpretation which is most consistent with business common sense.”

 

Characterising the construction favoured by the respondents of clause 5.2 in terms that the prior approval of MFS was a necessary condition but not a sufficient one for the raising of an action by the petitioning company, senior counsel proffered three reasons why such a construction would be erroneous.  First, with reference to the language used in clause 5.2 and in particular the expression “MFS only”, he argued that if any contract provided that “X only” is required, it was not promising ground for parties such as the respondents to say that “X and Y are required”.  Second, the construction was consistent with the terms of clause 6.1, which rendered board responsibility for supervision and management of the petitioning company and its business “subject to clause 5”.  Insofar as the respondents argued for a lack of sufficiency in the prior approval of MFS (in this instance “X”), the only realistic contender for an act that could constitute “Y” would be a resolution of the board to raise an action;  and yet clause 6.1 rendered such an act of the board as expressly subordinated to clause 5.  Accordingly, as a matter of the internal functioning of the contract, the construction offered by the respondents could only be seen as being at variance with clause 6.1.  The third reason was, most significantly, that of commercial sense.  Clause 5.2 would be deprived of commercial purpose if the board required to act in this way.  As a worked example of this point, senior counsel noted that it was a matter of agreement that a resolution to support the taking of the proposed substantive action had indeed been attempted at a board meeting on 16 April 2014 and that such a resolution had been duly voted down.  

[7]        For these reasons senior counsel invited the court to sustain the pleas-in-law for the petitioners, repel the respondents’ pleas-in-law and grant the prayer of the petition with expenses against the compearing respondents.

 

Submissions for the respondents
[8]        Senior counsel for the respondents, in an articulate and learned submission, contended that the instant petition had been raised without valid authority in the name of the petitioning company and that, absent ratification, it was a nullity.  For the same reason, he argued, the petitioners could not demonstrate that substantial proceedings were likely to be brought:  Pearson v Educational Institute of Scotland 1997 SC 245. 

[9]        As a preliminary point, senior counsel noted that article 2 of the Articles of Association of the petitioning company adopted the model  articles set out in the Companies (Model Articles) Regulations 2008, Schedule 1.  Article 3 of the Schedule 1 model articles provides: “Subject to the articles, the directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company.”  There was no suggestion that the shareholders’ agreement amended the said articles in any way.

[10]      Turning to the shareholders’ agreement, senior counsel’s broad submission was that the function of clause 5 was to put a brake on clause 6.1, which, of course, expressed itself as “subject to clause 5”.  Clause 5 performed this “braking” function by providing that certain things that might otherwise be done by the company required the prior approval of certain persons.  As a generality, a company required to authorise the inception of any litigation.  The petitioners in this case could accordingly be seen to require the terms of clause 5.2 to clothe MFS with the ability to sue in the name of the petitioning company:  Daimler Company Limited v Continental Tyre & Rubber Company (GB) Limited [1916] 2 AC 307, per Lord Parker of Waddington at 336-337;  Adams v London Improved Motor Coach Builders Limited [1921] 1 KB 495, per Atkin LJ at 503;  and John Shaw & Sons (Salford) Limited v Peter Shaw & Another [1935] 2 KB 113, per Greer LJ at 134 and Roche LJ at 147.  Senior counsel noted in particular the observation of Roche LJ in John Shaw & Sons (Salford) Limited, supra at 147:

“Nevertheless, as appears from the decision in the Daimler case, if want of capacity or authority to sue plainly appears at any stage the Court may then strike out the action.”

 

Senior counsel duly stated plainly that the respondents were indeed inviting the court to strike out the present petition by way of dismissal. 

[11]      Embarking on an analysis of clause 5 in some detail, senior counsel observed that the heading, namely “Matters requiring consent of certain shareholders”, was not in any sense one that would favour the petitioners’ construction, such as “Matters entrusted to the control of certain shareholders”.  He argued that the content of clause 5 was truly one of veto, rather than one of empowerment, as indeed the heading and content of the clause made clear.  Clause 5.1 set out certain things that the company “shall not” do without the consent of both major shareholders, GMOL and MFS.  A true reading of clause 5.1 and indeed the whole of clause 5 was that it represented a brake on the unfettered powers of directors.  Clause 5.1 could not properly be read as effecting a transfer of powers to both major shareholders to carry out all of the Reserved Matters, which would be the effect of the petitioners’ submission, which in turn was in terms that prior consent required to involve a transfer of control.  In clauses 5.2 and 5.3, senior counsel traced the same theme, submitting that these clauses did not wrest control of the matters referred to therein from the company itself, but instead set out certain things that could not be done by the company unless a particular party consented.  Insofar as clause 5.2 provided that proceedings by the petitioning company required the approval of MFS only, a priori an “action or demand by the company” was required as a starting point.  Senior counsel submitted that the only person who could advance such an action or demand must be the board of directors.  He submitted that the petitioners’ construction gave no content to the words “prior” or “approval”.  As a matter of common sense “prior” in this clause meant that the approval must precede the action or demand and that “approval” must be read as consent or agreement to such an action or demand.  In order to achieve the meaning contended for by the petitioning company, the word “prior” required to be read as “current” and the word “approval” read as “proposal”.  Put in the most general terms, a requirement on A to obtain prior approval from B before doing X did not connote A ceding control to B.  While B could stop X happening by declining to approve, once B had stopped X from happening, the role of B was over.  By way of a well-known and common example in a litigation context, when a court approves the proposal of a party, the court is assenting to rather than directing that proposal.  In terms of clause 5.2, the subject matter requiring approval by MFS was “an action or demand by the company”.  It was of note that the same words appeared in clause 5.3, giving a consistent theme of veto to this whole provision, senior counsel submitted, rather than one of transfer of control. 

[12]      Senior counsel contended further that the construction advanced on behalf of the petitioners was an unworkable one.  The shareholders’ agreement had been drafted by two experienced firms of solicitors.  If the parties had intended MFS to be given delegated authority to sue in the name of the petitioning company, it would have been an easy matter so to provide.  Clause 5.2 only addressed the matter of prior written approval, but once that approval had been given and a litigation was proceeding, the central question could no longer be seen to be one of approval but surely must be considered to be one of control.  It was entirely unclear how MFS would have the ability to compromise, settle or abandon any such ongoing litigation, let alone deal with any question of expenses. 

[13]      The commercial purpose of clause 5.2 was, to put the matter shortly, senior counsel submitted, to the effect that MFS had the right to veto proceedings referred to in that clause, but that GMOL did not.  The purpose was not to divest the board of directors of the control which they otherwise would have, and to transfer it to MFS.  Other remedies could be available in such circumstances, senior counsel observed, such as those available to minority shareholders.  The resolution put before the board on 16 April 2014 had requested the board’s support of an action which, exercising its responsibility in terms of clause 6, it had chosen not to pursue.  If indeed the commercial purpose of clause 5.2 was that MFS, brevi manu, and in the name of another, could cause the initiation of proceedings, it would have been an easy matter to confer that power expressly, using, for example, the wording used in clause 5.4 in the conferring of a power or entitlement.  There was apparent a contrast between the language of a transferred power (clause 5.4) and the language of veto of a general power of management (clauses 5.1 to 5.3).  In developing this chapter of his submission, senior counsel referred to the following authorities:  Quin & Axtens Limited and Others v Salmon [1909] AC 442, per Lord Loreburn LC at 443-444 (an illustration of veto in the hands of two directors);  Breckland Group Holdings Limited v London & Suffolk Properties Limited and Others (1988) 4 BCC 542 per Harman J at 543-547 (an illustration of written approval);  and Mitchell & Hobbs (UK) Limited v Mill [1996] 2 BCLC 102 (an illustration of a delegation of power to institute proceedings).  

[14]      Senior counsel summarised his contentions in conclusion.  If the intention of the parties had been to confer in terms of clause 5.2 an entitlement on MFS, it would have been an easy matter for the professional drafters involved so to stipulate, as indeed they had done in clause 5.4.  There could be no business common sense in effecting a delegation by use of the words “prior written approval”, when such words did not connote control of a litigation.  Further, the important question of who was to pay for the litigation remained unanswered.  In the event that MFS required a remedy, standard minority shareholder remedies were available to them.  In that context it was absurd to suggest that a provision which started out as a requirement for consent must become a ceding of control by the board without any mechanisms therefor specified.  In endorsing this construction the court would be giving a delegation of authority to MFS to bind the petitioning company in matters which might indeed be inimical to its interests.  In the absence of clear wording to achieve that, such a course ought not to be embarked upon.  A revealing window into the commercial reality of the situation was available by consideration of an initial writ warranted on 30 September 2014 at Inverness Sheriff Court at the instance of MFS against the petitioning company where the agents acting in that sheriff court for MFS are the same agents representing the petitioners in proceedings before this court.

[15]      For all these reasons, senior counsel for the respondents invited the court to take the view that the words in clause 5.2 would not bear the weight which the petitioners urged upon them.  He accordingly moved the court to take the view that the petition, having been raised without lawful authority, and thus being a nullity, should be dismissed and accordingly to sustain his pleas-in-law, repel the petitioners’ pleas-in-law, and dismiss the petition.

 

Discussion and decision
[16]      At the outset of my discussion of the respective contentions of parties, I wish to compliment the submissions to the court of both senior counsel, which were of great assistance and indeed of the highest quality.

[17]      The approach which I require to take in construing clause 5 of the shareholders’ agreement is that set out by Lord Clarke in Rainy Sky SA, supra, at para 21, which I take the opportunity to set out in full:

“The language used by the parties will often have more than one potential meaning.  I would accept the submission made on behalf of the appellants that the exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant.  In doing so, the court must have regard to all the relevant surrounding circumstances.  If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.”

 

I take as read in this discussion the whole relevant surrounding commercial background circumstances as adumbrated to the court so helpfully by the parties’ senior counsel and set out, supra.

[18]      In approaching the submissions for the respondents, I make the general point that while the authorities canvassed on that side of the bar were ex facie analogous company law cases, none contained anything like the shareholders’ agreement which this case must deal with, representing as it does a context in which the petitioning company has already acted in a commercially decisive way.  Putting the matter plainly, the petitioning company as a party (albeit a non-shareholding party) on any view competently entered the shareholders’ agreement on 4 October 2013.  This essential and historical fact puts the exercise which this court requires to undertake on a different footing from, for example, Breckland Group Holdings Limited and Mitchell & Hobbs (UK) Limited, supra.  In these very particular circumstances, the function of the court in my view requires to be limited to one of construction of that shareholders’ agreement.

[19]      Looking at the substantive text (not the heading) of clause 5 as a whole, and attempting to give the words used therein their ordinary meaning, I am not prepared to characterise that clause as conferring a power or powers of veto on the supervision and management of the company by the board.  It is clear that clause 5.4 confers (on MFS) an entitlement and as such I consider it impossible to construe that sub-clause of clause 5 as, in terms, a power of veto.  Certainly, clause 5.1 bears to prevent the company acting (in any of the Reserved Matters) without the prior written approval of both GMOL and MFS.  Consideration of clause 5.2, however, reveals the wording used to be rather different.  Accordingly, whereas clause 5.1 could be construed as the conferring on both GMOL and MFS of a power of veto on the company carrying out any of the Reserved Matters, and clause 5.4 be deemed to confer a power or entitlement on MFS (to appoint directors), when one comes to  consider the particular wording of clauses 5.2 and 5.3, it appears that the parties to the agreement did not choose either the express language of veto or of empowerment.  This is an unsatisfactory situation for the court to consider as it seeks to construe the language used in clause 5.2 in particular.  There is however some utility in taking this overview of clause 5 as a whole, because as one does so it becomes abundantly clear that in order to achieve a sound construction of clause 5.2 in the “unitary exercise” envisaged by Lord Clarke in Rainy Sky SA, supra, at para 21,  the court will require to make a determination of the matter by preferring the construction which is “most consistent with business common sense”: Lord Clarke, supra, at para 30.  This chapter of the case can be addressed in short compass.  Senior counsel for the respondents proferred the following commercial purpose for clause 5.2:  that MFS has the right to veto proceedings referred to in that sub-clause, but GMOL does not.  Against the whole commercial background set out, supra, involving merger, the logistics contract and the shareholders’ agreement, I cannot accept as viable the said commercial purpose attributed on behalf of the respondents to clause 5.2.  On the respondents’ reading of clause 5.2, the power of veto is given to MFS only.  This, put bluntly, does not make commercial sense against the background information made available to the court.  As agreed between parties and set out, supra, MFS represents the interests of what was formerly Port Services (Invergordon) Limited, and GMOL in turn the interests of the Global Energy Group.  The other parties named as potential defenders in any putative action in clause 5.2 are all associated with the Global Energy Group side of the merger and indeed are on the customer side of the merger.  I cannot imagine any reason, given the whole commercial background, why MFS would wish to veto an action at the instance of the petitioning company against GMOL or any of the others named in clause 5.2.  In that light, if indeed clause 5.2 required to be construed as conferring a power of veto, such a construction could only ever make commercial sense in the event that the veto was given to GMOL rather than to the party to whom it is expressly given, namely “MFS only”.  On that short and simple point I accordingly conclude that to follow the construction of clause 5.2 commended to the court on behalf of the respondents would be to fall into substantial error.

 

Disposal

[20]      For these reasons I conclude that the respondents’ answers to the petition are irrelevant, and, no issue having been taken with the terms of the appendix setting out the documentation to be recovered, I conclude that the items listed therein are documents in relation to which questions are likely relevantly to arise in future substantive proceedings which are likely to be brought by the petitioners.  In these circumstances I sustain the pleas-in-law for the petitioners, repel the pleas-in-law for the respondents and grant the prayer of the petition, making thereby an order in terms of section 1 of the 1972 Act.  While a motion for expenses was advanced formally for the petitioners, the court was not addressed on the matter on behalf of the respondents.  All questions of expenses are accordingly meantime reserved.