England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(Mrs Justice Arden)

		Royal Courts of Justice Strand London WC2 Wednesday 14th March, 2001

1. LORD JUSTICE ALDOUS: By order dated 1st March 2000 Arden J gave summary judgment in favour of the respondents to a petition presented under section 459 of the Companies Act 1985. With leave of this court the petitioners appealed. They also seek leave to adduce further evidence on the appeal and to re-re-amend their petition.
2. The petitioners are the executors of the late Mr Harding who was killed in a helicopter crash on 22nd October 1996. He was a director of Benfield Greig Group Plc, the first respondent. The 2nd-11th respondents are the present directors of Benfield and the twelfth respondent is the trustee of an employees' trust. I will refer to the trust as the "Jersey Trust" and unless there is need to differentiate between the other respondents, I will refer to them generally as the respondents.
3. Mr Harding was one of four founder members of the company which has grown into Benfield. The Group is substantial with a main activity of reinsurance brokers. He and the other three original founder members signed a statement of common belief in July 1992 which affirmed that there should not be a separation of share ownership from the management, and that accordingly the directors should offer to sell their shares on leaving the company to interests within the company. That was incorporated into the Articles of Association.
4. At the date of his death Mr Harding held 16 million ordinary shares which conferred about 30 per cent of the voting rights at general meetings of the company. In 1997 Benfield acquired a Greig Fester Group Ltd and in consequence the proportion of voting rights conferred by his holding was reduced to 24.9 per cent.
5. Article 13(a) of Benfield precluded a transfer of shares without the shares first being offered round in the manner provided for in the Articles. The detail of the offer-round procedure is not important to this appeal, but in general it required a transfer notice. Such a notice was deemed to have been served upon death. That notice was said by Article 13(i) to "constitute the company his agent to offer for sale the shares in question in accordance with the succeeding provision of, and, if a sale is concluded, to implement the sale in accordance with its terms". It follows that on the death of Mr Harding, a transfer notice in respect of his shares was deemed to have been given and Benfield became the petitioners' agent to the offer for sale and the subsequent sale.
6. The compulsory transfer of the Harding shares was not implemented in 1997 because of the acquisition of Greig Fester.
7. During November and December 1996 and throughout 1997 and 1998 the petitioners had frequent and cordial meetings with the directors of Benfield. As a result they came to trust the directors and relied on them to act in the best interests of Benfield and themselves as executors. It was against that background that the compulsory transfer was not implemented in May 1998, but was implemented in May 1999.
8. The price to be paid for the shares offered in a transfer round had to be determined in accordance with Article 13 of the Articles of Association. That Article required the directors to take action in advance of any transfer period. Thus Article 13(i) provides:

"In advance of any Transfer Period, the Directors will appoint the Auditors (or at their discretion, another appropriately qualified external and independent valuer) to give a view on the market value of any shares which are the subject of a transfer notice served in respect of such Transfer Period."

9. Article 13(j) stated:

"The valuer shall take into account the information available in respect of the most recent audit, together with any additional information that is then available. The valuer shall be requested to perform the valuation promptly and in any event within a period specified by the Company in the terms of appointment. In performing the valuation and for the purposes of these Articles, the valuer will act as an expert and not as an arbitrator."

10. The valuer's remuneration was to be calculated on the basis to be determined by Benfield and paid by Benfield to the extent permitted by law and otherwise by the transferor.
11. The Harding shares were placed in the 1999 transfer round with the result that sale at the market value price became compulsory. The valuation was carried out by PricewaterhouseCoopers who had been appointed auditors to the company in the autumn of 1998. On 4th May 1999 they gave their valuation which valued each share at £2.10. The petitioners were told on 11th May that the Harding shares were to be included in the 1999 offer round at the price determined by Pricewaterhouse. 7,600,000 shares were to be sold to the Jersey Trust and the rest would be acquired by Benfield. The finance to pay for the shares acquired by the Jersey Trust was to be provided by Benfield.
12. The petitioners had anticipated a price of at least £4.00, being the minimum price that had been paid in two placements of shares that had taken place in 1987. They therefore sought advice from Deloitte & Touche. They provided a preliminary valuation on 26th May 1999. It indicated a minimum value of £4.00 per share based mainly on the two placements of Benfield shares to seven outside investors at £4.17 and £4.00 per share. That valuation was based on published information and was qualified. It prompted the petitioners to present the petition on 2nd June 1999. Deloitte & Touche confirmed their preliminary view on 15th and 25th June in the light of further information that had been provided.
13. Benfield proceeded with the Extraordinary General Meeting that had been arranged, but gave an undertaking not to implement any resolution passed. On 25th June 1999 the petitioners applied for an interim injunction restraining transfer of the shares. It was dismissed by Pumfrey J upon Benfield undertaking not to transfer, dispose of or deal with 10 shares. They were to be retained by the petitioners to ensure that they had locus. Following dismissal of the application for interim relief all the shares, save for the 10, were transferred as I have indicated.
14. On 20th July 1999 the petitioners issued proceedings against Pricewaterhouse for negligence. On 1st September 1999 the respondents issued an application under CPR Part 24 to dismiss the petition and obtain summary judgment. That application came before Arden J between 18th and 20th January 2000. She handed down her judgment on 26th January 2000 and ordered that there be summary judgment dismissing the petition.
15. In the petition the petitioners had alleged that they had been unfairly prejudiced because they had a reasonable and legitimate explanation, gained from meetings between them and the directors of Benfield, that there would be no forced sale of the shareholding and that they would participate in the process for determination of the sale price or any consensual sale of the shareholding that might occur. Although the judge accepted that upon an application under CPR Part 24.2 it would not be right to conclude that the allegations of fact could not be proved, she held that the equitable considerations relied on did not establish a good ground of unfair prejudice, as required by section 459, in the circumstances where the respondents had complied with the provisions of the Articles of Association.
16. The petition also alleged that the valuation had not been carried out appropriately because it had not been completed prior to the transfer period. That allegation was rejected by the judge upon the basis that there was no specific requirement in the Articles that the valuation should have been completed by the start of the period.
17. The petition also alleged that there should be implied into Article 13 an obligation upon the respondents to ensure that the petitioners should have access to information relating to the valuation and should have a right to make submissions to the valuer. The judge rejected that submission taking into account the terms of the Articles of Association. She concluded that such a term could not be implied as a matter of necessity.
18. Finally the petition alleged that the offer price of £2.10 per share was not the true market value of the shares in the shareholding and was not a value that any reasonable valuer, properly appointed and instructed, could have arrived at. The judge held that such an allegation was unsustainable in law because the effect of the Articles was to make the valuer an expert with the result that the valuation was final and binding. It was that allegation which this court considered fit to be argued on appeal.
19. The basis of the allegation in the petition that the price of £2.10 arrived at by Pricewaterhouse was not appropriate was the preliminary valuation given by Deloitte & Touche in their letter of 26th May 1999. That letter emphasised that Deloitte & Touche had in the limited time available not been able to finalise the investigations necessary for them to prepare a detailed report. They had had access to published information, but not to the company's management or up-to-date management information as to the current performance and future expectations of the company. That letter went on to point out that such access and information would generally be considered to be essential in any assessment of the market value of a shareholding of this magnitude. Thus the letter stated:

"I have had access to certain published information which I have made no attempt to audit or independently verify in any way, but not to the company's management or up-to-date management information as to the current performance and future expectations of the company. In my experience such access and information would generally be considered to be essential in any assessment of market value of a shareholding of this magnitude. Accordingly, my preliminary views are based solely on the information currently before me and these may change as more information comes to light.

...

Having regard to the arm's length subscription in October/November 1997 for some 7,554,136 1p ordinary shares and the arm's length acquisition by way of tender in December 1997 of a further 1,250,000 1p ordinary shares both at a price of £4.00 per share - since when there does not appear to have been any significant deterioration in either the company's prospects or in market conditions generally - such price, or possibly a price within a relatively small tolerance of up to 10% to allow for the difference in profitability and share capital between the dates, is in my opinion indicative of the minimum current market value of the estate's shareholding. Whether a premium to this price is currently appropriate in view of the size of the estate's shareholding will depend on the current facts as to the future plans for, and expectations of, the company to which I am not yet privy."

20. Before the application for summary judgment was heard, the petitioners sought in correspondence disclosure from the respondents. The respondents took the view that disclosure was inappropriate pending the outcome of the Part 24 application and therefore refused to give it. Counsel for the petitioners had submitted that the facts as known suggested that Pricewaterhouse had not carried out their instructions as required by Article 13. However the true facts could not be ascertained without further disclosure and for that reason Part 24 judgment was not appropriate. That submission was rejected by the judge because she did not believe it right that the court should allow the claim to stand simply so that the petitioners could wait and see.
21. In May 2000 disclosure took place in the action against Pricewaterhouse. As a result of that disclosure the petitioners believed that they were able for the first time to see how Pricewaterhouse had gone about the valuation and the input that the respondents had had in that process. Having considered the disclosure, the petitioners concluded that it supported the petitioners' case against the respondents that they had been unfairly prejudiced. They therefore sought and obtained leave from Ferris J on 11th October 2000 to use in the petition certain documents disclosed in the action. That application was opposed by the respondents. Having obtained permission, the petitioners applied for permission to introduce the documents into the appeal and to re-re-amend their petition.
22. On 22nd November 2000 the petitioners made a CPR Part 18 request for further disclosure by Pricewaterhouse. In response Pricewaterhouse stated in a letter dated 8th December 2000 that they wished to serve a supplementary list of documents. It was served on 22nd January 2001. Having inspected the documents in the list, the petitioners concluded that some of them were relevant to the petitioners' case under section 459. They sought and obtained permission to use some of them in these proceedings and then applied to introduce them into the appeal. They also put forward a fresh form of proposed re-re-amended petition.
23. The respondents did not resist the application to introduce fresh evidence, provided that their evidence in answer was also admitted. We therefore gave permission for the evidence of both parties to be admitted. However the respondents did resist the re-re-amendment to the petition which was proposed. Their case was that the allegations contained in the proposed pleading did not put forward a case which stood a real chance of success.
24. The application before the judge was for summary judgment pursuant to CPR Part 24.2. It followed that the application could only succeed if the respondents established that the petition stood no real prospect of success. As was pointed out by Lord Woolf MR in Swain v Hillman [2000] 1 All ER 91, the test is whether there is a real prospect of success in the sense that the prospect is realistic rather than fanciful. That was the test applied by the judge. But the proceedings have, with the introduction of fresh evidence and different allegations raised in the proposed re-re-amended petition, moved a long way away from that considered by her. In fact the proposed re-re-amended petition is so different to the petition before the judge it is necessary for this court, when deciding the appeal, to decide afresh whether the allegations now relied on are such as to raise a section 459 case which stands a real chance of success. In that regard the crucial question to bear in mind is whether there is a real prospect of this petition showing that the petitioners were unfairly prejudiced. With that in mind, I turn to the proposed re-re-amended petition to consider the allegations made and the submissions of counsel.
25. The opening paragraphs of the petition sought to be relied on are introductory. Paragraph 10 relies upon the requirement in Article 10(c) that the company shall constitute the agent of the shareholder to offer for sale the shares and to implement the sale. It states that "as a consequence of that agency, or in the alternative as a consequence of the obligations undertaken by the Company pursuant to article 13," Benfield were under an obligation of loyalty and had a duty to act in good faith, to act openly and honestly with a proper regard to the petitioners' interest, to account to the petitioners for its conduct and generally to perform its functions in such a way as to enable the valuer to determine the proper market value, and/or in the alternative not to do or to cause to be done anything which would have the effect of artificially depressing the value of the shares.
26. Mr Cohen QC, who appeared for the petitioners, submitted that the pleaded obligation followed in part from the requirement in Article 13(i) that Benfield should be the agent for the transferor. He accepted that the obligation of agency could be qualified by the terms of the Article.
27. Mr Richards QC, counsel for the respondents, accepted that Benfield was the agent for the offer for sale and sale, but the obligation was confined to the mechanism of offer and transfer. The agency was limited to the obligation in Articles 13(e) and (p).
28. I pass for the moment from that allegation and turn to the obligations in Article 13(i). Mr Cohen submitted that by reason of the words "another appropriately qualified external and independent valuer" that Article should be construed as requiring the auditors to be independent. Mr Richards accepted that the auditor should be independent and act independently. However he submitted that that did not mean that they had to be independent in the sense that they had no connection with Benfield other than as auditors. I suspect the difference between Mr Cohen and Mr Richards is semantic rather than practical.
29. The question that has to be decided is whether the petitioners have a real prospect of establishing that they have been unfairly prejudiced. The crux of the petitioners' case, based upon the new evidence, is that Pricewaterhouse, the appointed valuer, was not independent and was not in a position to act independently.
30. Prior to being appointed the valuer, Pricewaterhouse had been engaged by Benfield to advise and negotiate with the Inland Revenue and agree with them the value of shares to be issued by Benfield to its employees as an incentive. It is pleaded that Pricewaterhouse knew that the valuation should be as low as possible for tax purposes. With that aim Pricewaterhouse had, in December 1998, valued the ordinary shares at £1.50 and the incentive shares at £1.00.
31. It was Benfield's wish that those shares should be valued as low as possible and Pricewaterhouse knew that. To enable that to be achieved the placement at £4.00 per ordinary share had to be distinguished. The explanation agreed, upon advice of Benfield, was that the investors had special interests. Pricewaterhouse when supplying the report to be submitted to the Inland Revenue said in a letter dated 10th December 1998:

"I enclose the final version of our valuation report for your kind attention. You will note that I have increased the value slightly, this is in part a function of the further information which you have provided to us regarding the transactions in the company's shares.

I am still unable to make sense of those prices [those are the placement prices] and you should understand that our conclusion is therefore at risk of considerable challenge in any future negotiations with the SVD.

In the absence of those transactions I am comfortable with our value on the assumption that the comparable companies are just that and we have not omitted any material fact.

May I ask you to confirm that our factual statements are correct to the best of your understanding and that we have not omitted any material issues."

32. It followed that by the time of the 1999 offer round, Benfield knew that Pricewaterhouse had put their name to a report valuing an ordinary share at £1.50. It is therefore arguable that they must have known that despite the purposes of the previous request, namely that the valuation was for the purposes of reporting to the Inland Revenue, it was unlikely that they would say that the value placed on the shares was wrong or was valued on a wrong basis.
33. The 1998 valuation was not the first time that Pricewaterhouse had been asked to advise Benfield. In 1987 they had advised Benfield on valuation. The letter from Pricewaterhouse of 8th January 1997 set out what Pricewaterhouse were required to do. The opening paragraphs were in this form:

"1. You have requested us to advise you in relation to the likely current value of the entire share capital of Benfield, the value of 33% shareholding and the value of an uninfluential minority shareholding. This work is required to assist you in determining your approach in respect of shares in Benfield previously held by Matthew Harding and which are now the subject of a transfer notice as defined in Benfield's Articles of Association (`the Articles of Association').

2. We understanding the Articles of Association require an independent valuer `to give a view' on the market value of any shares which are the subject of a transfer notice. At this stage you do not require us to act as that independent valuer and we will therefore not produce a point estimate of value. We will, however, advise you on the appropriate valuation methodologies, key value drivers and the impact that any changes in key assumptions may have upon the valuation."

34. The introduction to the report which was submitted stated:

"Terms of reference dated 8 January 1997 (copy included as an appendix)

• Advice to the directors of Benfield Group Limited (`Benfield') in relation to the likely current value of shares of Benfield

- 100%

- 33%

- uninfluential minority

• Required to assist the directors in determining their approach in respect of the shares previously held by Matthew Harding and which are now the subject of a Transfer Notice.

• We have relied upon information and explanations provided to us by management (principally John Whiter) and have carried out no verification procedures of such information and explanation.

This document has been prepared solely for the directors of Benfield for the purposes set out above. It should not be relied upon for any other purpose. It should not be made available or copied to any other person (other than other advisers to the directors of Benfield) without our express written permission. No persons other than the directors of Benfield may rely upon this document for any purpose whatsoever. Additional terms and conditions are set out in our terms of reference."

35. It was against that background that Pricewaterhouse were appointed as the valuers of the 1999 offer round. If a low valuation was to be arrived at, Pricewaterhouse had to continue to disregard the placements at £4.00 for the reasons given in the report submitted to the Inland Revenue; had to be supplied with information that the business prospects of Benfield were no better than in 1998; had to value the Harding shares on the basis that it was a small minority shareholding and that no one purchaser would buy the whole of the shares in the 1999 offer round. It is alleged that Benfield supplied such information with the result that the value arrived at was as low as £2.10.
36. What happened has to be seen in the light of a letter written by Mr Harrison of Pricewaterhouse to Mr Steve Unsworth of Pricewaterhouse dated 15th April 1999. Mr Harrison said this:

"The background to the valuation is as follows:-

• We were asked to carry out a valuation of a new class of incentive shares in Benfield Greig for Income Tax purposes. I attach an update of that valuation which incorporates a valuation of the Company's ordinary shares. It is this latter valuation which I would like you to consider. The valuation report is useful in that it sets out all of the relevant background to this company and hopefully contains all of the information which you will require.

• The valuation has not yet been seen by the Inland Revenue. After we had carried out the initial valuation, we were then asked to carry out a valuation of the ordinary shares only for the purposes of Article 13 of the Company's Articles of Association which requires a market valuation for the purposes of an internal dealing period. It is this valuation which I would like to discuss with you. I attach a draft letter which I have prepared for John Whiter, the Company's Finance Director.

• I have not prepared a separate valuation of the ordinary shares for Article 13 but have based it upon the tax valuation and details of the Company's 1999 budget which indicate a small earnings downturn from 24.9 pence per share in 1998 to 20.6 pence per share in 1999.

• The Company would like to have had a merchant bank to confirm my valuation but, as I suspected, their contacts were reluctant to do the work so I suggested an internal partner review instead which they have readily agreed.

• There are two principal areas of concern:

- The subscription price of £4 per share on the acquisition/formation of respectively Greig Fester and Ben Re; and

- The fact that 16 million ordinary shares will be acquired either by the Company or an employee benefit trust from the estate of Matthew Harding, the former Chairman who was killed in an air accident. Those shares comprise less than 25% of the issued share capital of the Company."

37. The scenario that I have outlined is supported in the pleading by reference to documents that have been disclosed in the Pricewaterhouse action. It does in my view provide a reasonable argument that the petitioners have been unfairly prejudiced. First by appointing Pricewaterhouse as valuers when they were not "independent". By that I mean that they could not reasonably approach the task of valuer without restrictions imposed by the advice that they had given in very different circumstances. In particular advice for the purposes of persuading the Inland Revenue to disregard the placements at £4.00 and to accept the low value at which they had been arrived. Second, they had also acted as adviser to Benfield upon another, but similar matter that was in dispute between Benfield and the petitioners. In so doing it is arguable that they had compromised their ability to be an independent valuer. Whether that can be categorised as a failure to act in good faith or a failure of an obligation to appoint an independent valuer or some other failure is in my view irrelevant.
38. It follows that I believe that the documents which have been disclosed in the Pricewaterhouse action do show that the petitioners have a real prospect of establishing a case of unfair prejudice. It follows that there must be a trial. In my view allegations along the lines of those pleaded in paragraph 29.B of the proposed re-re-amended petition do establish a case which has a real prospect of success.
39. With the aid of counsel we have been taken through the proposed re-re-amended petition. Mr Cohen argued before us that all the allegations were substantial and properly pleaded: while Mr Richards submitted there was not a single matter which raised an arguable case.
40. For the reasons I have given, I believe that the documents do establish that the petitioners have a real prospect of success in establishing a case under section 459. I express no conclusion as to whether the other matters referred to in the re-re-amended petition are arguable. That needs to be decided by a judge.
41. I therefore would allow the appeal and remit the case back to the Companies Court to enable the petitioners to apply to re-re-amend their petition. In so doing they may feel it appropriate to produce a substitute petition which is more readily understood than the edition which we have had to consider. Clearly directions - including whether pleadings will be necessary and disclosure - need to be given as soon as possible, not least because the negligence action against Pricewaterhouse is due to be determined in July 2001.
42. I therefore would allow this appeal.
43. LORD JUSTICE MUMMERY: I agree.
44. LORD JUSTICE KAY: I also agree.
ORDER: Appeal allowed; respondent to pay the petitioners' costs in this court; costs in the court below to be costs in the petition. (Order not part of approved judgment)