England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
The Hon Mr Justice Hart

		Royal Courts of Justice Strand, London, WC2A 2LL Wednesday 18th December 2002

Lord Justice Carnwath:

1. This is an appeal from the judgment of Hart J on an application by the Claimant for summary judgment on its claim that an agreement dated 30^th March 2000 (the "SSA") was unenforceable against it.
2. The main facts to be taken into account or assumed for the purpose of this application can be taken from the judgment. The relevant paragraphs are reproduced as an Appendix to this judgment. They include the judge's account of the relevant facts, and also his citation from the evidence of Mr Glaser (the second defendant, who was not represented before us).
3. Although, as appears from this account, both Oaktree and Criterion had launched applications for summary judgment, only that of Criterion was pursued to judgment, and that is the only matter before us. Although there are fundamental disputes on many factual aspects of the case, these cannot be resolved on an application for summary judgment. Insofar as they are relevant to the matters in issue before us, we have to assume (within the bounds of reasonableness) that they would be resolved in favour of the Defendant.
4. In summary, Oaktree, an American company, and Criterion, a UK Plc, were parties to a joint venture for investment in real property in this country. The legal form was that of a limited partnership, the terms of which were governed by an Investment and Shareholders Agreement ("ISA") dated 26^th January 1998. The Chairman of Criterion was and is Mr Nordström; he also now owns (following acquisitions since the SSA) 50.42% of the shares of Criterion. The managing director of Criterion was Mr Glaser (the second defendant to these proceedings).
5. The SSA was entered into in March 2000, by way of variation of the ISA. Its avowed purpose was to protect Criterion against a possible take-over and change of management, by what has been called a "poison pill" arrangement. Its effect was to give Oaktree the right to have its interest in the joint venture bought out, on very favourable terms, in the event of another party gaining control of Criterion, or in the event of Mr Nordström or Mr Glaser ceasing to be director or employee or involved in the management of Criterion. The buyout price was fixed at the greater of the market value of Oaktree's interest in the partnership and a sum calculated to give Oaktree a guaranteed 25% per annum (compounded monthly) return on its investment in the partnership.
6. The SSA having apparently achieved its purpose of deterring the take-over, there were negotiations to secure its rescission in late 2000 and early 2001. Following the breakdown of these negotiations (the reasons for which are contentious), on 30^th March 2001 Mr Nordström notified Oaktree of legal advice that the SSA was unenforceable, having been entered into by Mr Glaser in breach of duty to the knowledge of Oaktree. On 3^rd April 2001 Mr Glaser was dismissed. Oaktree then served notice to exercise its option to be bought out under the SSA, and Criterion commenced these proceedings to have the SSA set aside.
7. For the purpose of this application, we have to assume (although this is disputed) that the SSA was entered into with the knowledge of, and indeed at the instigation of, Mr Nordström. We also have to proceed on the basis that the Oaktree evidence is accepted: that is, that it acquiesced in the arrangement in good faith, and for good commercial reasons, and that it had no reason to believe that it was in any way improper. Further, both parties were advised by reputable and experienced English solicitors, who raised no legal or ethical objections to the arrangement. We have evidence from Oaktree's legal advisers at the time, English and American, who saw this principally as a matter for Criterion and its solicitors. We have no equivalent evidence from Criterion's solicitors as to how they viewed the matter, or why the SSA was drafted in the way it was.

Issues

8. The judge summarised Criterion's three reasons for contending that the SSA was not binding on it:-

(1) because the board of Criterion were in breach of their duty to Criterion in entering into the agreement, and Oaktree's entry into the agreement was a dishonest assistance by Oaktree in that breach of duty ("the dishonest assistance claim");

(2) because the purpose of the second supplementary agreement was an improper one on the part of Criterion's board, and Oaktree was on notice of the improper purpose, and thus that the agreement was in excess of the actual and ostensible authority of the members of Criterion's board (in particular Mr Glaser) ("the apparent authority point");

(3) there were formal respects in which the second supplementary agreement did not comply with the machinery prescribed by the ISA for its own variation ("the Clause 5.2 point").

9. He treated the critical issue as the second, which he subdivided into two issues:-

"For Criterion to succeed on this point, it must show (1) that the entry by Criterion into the second supplementary agreement constituted an improper use by the Criterion board of its power to contract on behalf of Criterion, and (2) that Oaktree knew sufficient about the motivation of the Criterion board to disable it from relying on that board's apparent authority to commit Criterion to the contract."

Having decided both issues in favour of Criterion, he found it unnecessary to determine the "dishonest assistance" or "clause 5.2" points. He accordingly made a declaration that the SSA was unenforceable against Oaktree.

10. Oaktree has appealed against the judgment on both the issues decided by the judge, on the grounds (in summary) that:

i) There is nothing wrong in a company employing defensive tactics, such as a poison pill, to ward off unwanted bids, provided that the directors act honestly in what they believe to be the best interests of the company;

ii) The judge applied too low a test for disentitling Oaktree to rely upon the SSA; good faith on the part of Oaktree should have been sufficient.

11. By a respondent's notice Criterion seeks to uphold the judge's order, on the alternative ground that the effect of the agreement, known to Oaktree, was to entrench the position of the directors, in abuse of their powers. Mr Steinfeld QC, for Criterion, did not separately pursue before us the "dishonest assistance claim" or the "Clause 5.2 point", save to the extent that the former overlaps with the "apparent authority" point.

Summary judgment

12. This is an application for summary judgment under CPR Part 24. Criterion therefore has to establish that Oaktree has "no real prospect" of successfully defending the claim at trial. As has been often said, these words direct the court to the need to see whether there is a "realistic" as opposed to a "fanciful" prospect of success.
13. In Three Rivers DC v Bank of England (No 3) [2001] 2 All ER 513 (para 94-5), Lord Hope emphasised the importance of relating the words of the rule to the "overriding objective" of dealing with the case "justly", and the further question "what is to be the scope of that inquiry?" He continued:-

"I would approach that further question in this way. The method by which issues of fact are tried in our courts is well settled. After the normal processes of discovery and interrogatories have been completed, the parties are allowed to lead their evidence so that the trial judge can determine where the truth lies in the light of that evidence. To that rule there are some well-recognised exceptions. For example, it may be clear as a matter of law at the outset that even if a party were to succeed in proving all the facts that he offers to prove he will not be entitled to the remedy that he seeks. In that event a trial of the facts would be a waste of time and money, and it is proper that the action should be taken out of court as soon as possible. In other cases it may be possible to say with confidence before trial that the factual basis for the claim is fanciful because it is entirely without substance. It may be clear beyond question that the statement of facts is contradicted by all the documents or other material on which it is based. The simpler the case the easier it is likely to be take that view and resort to what is properly called summary judgment. But more complex cases are unlikely to be capable of being resolved in that way without conducting a mini-trial on the documents without discovery and without oral evidence. As Lord Woolf MR said in Swain's case [2001] 1 All ER 91 at 95, that is not the object of the rule. It is designed to deal with cases that are not fit for trial at all."

14. With that guidance in mind, I turn to consider whether, as the judge found, the issues in this case were suitable for resolution by summary means.

The judgment

15. On the first issue, the judge noted that the authorities give some support for the proposition that the directors may use their powers to raise capital, with a view to resisting a take-over which they think would be damaging to the company. He cited the judgment of Sir Robert Megarry VC in Cayne & Anr v Global Natural Resources Plc (12.8.82, unreported), where, having referred to Howard Smith Ltd v Ampol Petroleum Limited [1974] AC 821 at 834-836, Re Smith and Fawcett Ltd [1942] Ch 304, and Hogg v Cramphorn Limited [1967] Ch 254 [1966] 3 All ER 420, he gave this example of the legitimate use of the directors' powers to defeat a take-over:-

"......If Company A and Company B are in business competition, and Company A acquires a large holding of shares in Company B with the object of running Company B down so as to lessen its competition, I would have thought that the directors of Company B might well come to the honest conclusion that it was contrary to the best interests of Company B to allow Company A to effect its purpose, and that in fact this would be so. If, then, the directors issue further shares in Company B in order to maintain their control of Company B for the purpose of defeating Company A's plans and continuing Company B in competition with Company A. I cannot see why that should not be a perfectly proper exercise of the fiduciary powers of the directors of Company B. The object is not to retain control as such, but to prevent Company B from being reduced to impotence and beggary, and the only means available to the directors for achieving this purpose is to retain control. This is quite different from directors seeking to retain control because they think that they are better directors than their rivals would be…."

Hart J also referred to Teck Corporation Ltd v Millar [1972] 33 DLR (3d) 288 (a decision also cited in Howard Smith Ltd v Ampol Ltd [1974] AC 821, 837 per Lord Wilberforce), where Berger J said (p 315):-

"So how wide a latitude ought the directors to have? If a group is seeking to obtain control, must the directors ignore them? Or are they entitled to consider the consequences of such a group taking over? In Savoy Corp Ltd v Development Underwriting Ltd (1963) NSWR 138 at p.147 Jacobs J said:

'It would seem to me to be unreal in the light of the structure of modern companies and of modern business life to take the view that directors should in no way concern themselves with the infiltration of the company by persons or groups which they bona fide consider not to be seeking the best interests of the company.'

My own view is that the directors ought to be allowed to consider who is seeking control and why. If they believe that there will be substantial damage their powers to defeat those seeking a majority will not necessarily be categorised as improper."

16. Hart J commented (para 18):

"… the reasoning in those authorities was directed to a case where the exercise by the directors of their powers to raise capital was impugned on the grounds of improper motive. Where directors are raising capital, they are doing something which is prima facie for the benefit of the company as an economic unit. There clearly has to be a wide ranging investigation of all the facts and circumstances in such a case if there is an issue as to whether the exercise of the capital raising power was in fact motivated by an improper desire to deprive an existing majority of shareholders of their position as such. The present case is rather different since, if Criterion is right, the only possible consequence of the exercise of the power was to expose the company to the possibility of economic damage."

17. He then referred to Mr Steinfeld's submission that the inevitable consequence of the SSA was "contingently to transfer value from Criterion to Oaktree", and that:

"If the second supplementary agreement was to achieve its object of deterring a predator from making a bid for Criterion, it was necessary that its provisions be tailored in such a way as to ensure that, if the trigger were ever to be pulled, the consequences for the predator would be so unappetising as to be indigestible."

18. In substance Hart J accepted this submission. He concluded on this issue:

"… the logic of the second supplementary agreement must be that the result of the calculation (had it been done) would have demonstrated that its effect on Criterion would in fact have been more damaging than the effect on Criterion of the acquisition of control by an unwanted predator. If that was not the effect of the agreement, it would fail to have the deterrent effect on the predator which it was professedly designed to have. On that analysis, I do not myself see how the exercise can begin to be justified as a proper exercise by the Criterion board of its powers…." (para 23)

19. Accordingly, he turned to the second issue:

"whether Oaktree knew or must be taken to have known that the board of Criterion was acting in excess of its authority"

For this he cited the well-known summary of the relevant authorities by Slade LJ in Rolled Steel Products (Holdings) Ltd v British Steel Corporation & Ors [1986] Ch 246. In that case the plaintiff company had borrowed money, and given a guarantee, using powers within the memorandum of association, but for purposes which were held to be improper, because not in the interests of the plaintiff company itself. One issue was whether the receiver of the company could assert the invalidity of the transactions, against the defendant companies (Colvilles and its successor British Steel). Colvilles had been party to the proposals, and had full knowledge that they were "not entered into by the plaintiff for any purpose of the plaintiff but were a gratuitous disposition of the property of the plaintiff…" (p 265, 282). Slade LJ summarised the applicable law in six propositions, only the last two of which are relevant to the present issue:

"(5) A company holds out its directors as having ostensible authority to bind the company to any transaction which falls within the powers expressly or impliedly conferred on it by its memorandum of association. Unless he is put on notice to the contrary, a person dealing in good faith with a company which is carrying on an intra vires business is entitled to assume that its directors are properly exercising such powers for the purposes of the company as set out in its memorandum. Correspondingly, such a person in such circumstances can hold the company to any transaction of this nature.

(6) If, however, a person dealing with a company is on notice that the directors are exercising the relevant power for purposes other than the purposes of the company, he cannot rely on the ostensible authority of the directors and, on ordinary principles of agency, cannot hold the company to the transaction."

(p 295-6, emphasis added)

Since in that case the defendants had actual knowledge of the lack of authority, they acquired no rights under the transactions (p 297).

20. There was an issue before Hart J as to the nature of the "notice" (under the emphasised words in Slade LJ's formulation) that a person dealing with the company needed to have , in order to be deprived of the right to rely on the transaction. Oaktree's submission, as recorded by the judge was that:

"…Oaktree's ability to rely on the apparent authority of the Criterion board depended not on a test of whether or not it had notice of the facts which constituted the breach of duty… but on whether it was unconscionable in all the circumstances for Criterion to have relied on that authority."

The test of "unconscionability" was derived from the recent decision of this court in BCCI v Akindele [2001] Ch 437. The judge commented:

"(Counsel) submitted that, although that case was concerned with the test to be applied in relation to the "knowing receipt" class of constructive trust, there was every reason why the same test should be applied on the "apparent authority" point. With that proposition I am inclined to agree….

He thought that the facts of the Rolled Steel case illustrated "the logic of that approach":

"… the question whether Colvilles could enforce the debenture in the first place and the question whether it (or British Steel as its successor) could subsequently retain the sums which it had received under that debenture can readily be seen as two sides of the same coin. To put the point in another way the contractual rights received by Colvilles under the debenture can be viewed either as flawed by lack of authority in the counterparty (the apparent authority point), or as themselves property transferred to Colvilles in breach of trust." (para 29)

21. Having reviewed the judgment of Nourse LJ in Akindele, and the other cases discussed in it, including Belmont Finance Corpn Ltd v Williams Furniture Ltd (No 2) [1980] 1 All ER 393, the judge commented:

"35. Why, in Belmont, was City held liable as a knowing recipient? According to Vinelott J in Eagle Trust plc v SBC Securities [1993] 1 WLR 484, at 497 it was because:-

".... the defendant knew that the monies paid to him were trust moneys and of circumstances which made the payment a misapplication of them."

In Akindele Nourse LJ did not reject that formulation. On the contrary he cited it with apparent approval (see p.450 F), and interpreted Belmont as a case where "actual knowledge was found" (see p.452 B). The actual knowledge was knowledge, not that the monies were being paid in breach of duty, but of the circumstances which made it a breach of duty. It was that factor which rendered it impossible for the recipient, in the words of Buckley LJ at [1980] 1 AER 393, 405, 'conscientiously [to] retain [the] funds against the company.'

36. So far as the present case is concerned that provides a sufficient answer as to what kind of knowledge is capable of, or is to be treated in law as, binding the conscience of the recipient for the purposes of the unconscionability test. The purpose of that test is not to destroy the old authorities which say in general terms that "constructive" knowledge is enough: it is to enable the court to articulate the conditions which must be satisfied before he is held liable to account. A sufficient condition for that purpose is actual knowledge of the circumstances which make it a breach of duty."

22. He concluded

"38. In my judgment, therefore, what Belmont and Akindele decide for present purposes is that actual knowledge of circumstances which make the payment a misapplication is sufficient to bind the conscience of the recipient. What is left open and undecided by either of these cases is the case where the recipient knows of circumstances which may on the one hand make the payment a misapplication but which may on the other hand be consistent with perfect propriety. Such a case might be determined on its particular facts by the principle that a party to a commercial agreement should not be fixed with notice simply because in a loose sense he has been put on inquiry. Close examination of the particular facts might in such a case be necessary. On my analysis of the essential nature of the second supplementary agreement that, however, is not this case. It was plain for all to see that its terms were motivated not by a desire to advance or protect the commercial interests of Criterion but from a desire contingently to cripple those interests so as to deter an unwanted predator. If I am right that there could be no circumstances in which that was a legitimate exercise by the Criterion board of its powers, the question of Oaktree being faced with the dilemma of not knowing whether or not the board's powers were being exercised from a proper motive cannot arise. It knew what the motive was, and it is irrelevant that neither it nor its lawyers perceived that to be a vitiating factor."

Discussion – the first issue

23. On the first issue, Mr Carr submitted that on the basis of the authorities referred to by the judge, there was nothing wrong in principle in the directors entering into a "poison pill" agreement for the purpose of deterring a bid. He challenged the judge's "logic", in assuming that the poison pill could only work if it was unacceptably damaging to the company, since this failed to distinguish between the viewpoint of the directors and that of the predator. He criticised the judge for failing to carry out a proper analysis of the factors which could properly have affected the directors' decision in this case, including: the potential disadvantage to the company of control by the predator; the degree of risk of the predator gaining control; the likely success of the "poison pill" agreement in deterring the predator; and the extent of disadvantage to the company if it failed. He also drew attention to certain factors, which he said had been overlooked by the judge, including that the joint venture was only intended to last a few years (three to five years, according to Oaktree's evidence); that even within that period the sale of properties would reduce the amount of capital affected by the buy-out arrangement; and that Criterion would have the full benefit of the properties to set against the amount payable to Oaktree.
24. However, Mr Carr was unable to provide any support, by reference to evidence or reported authority, for the suggestion that a "poison pill" arrangement in this form taken by this agreement was in any sense "normal business practice", here or elsewhere. Mr Steinfeld accepts that it may, depending on the circumstances, be legitimate for the board to exercise its power to issue shares, in order to deter a takeover which would cause serious economic harm to the company. Examples, in relation to common law jurisdictions, can be found in Stena Finance BV v Sea Containers Ltd (1989) 39 WR 83 (Supreme Court of Bermuda); and Re 347883 Alberta and Producers Pipeline Inc (1991) 80 DLR (4^th) 359 (Supreme Court of Saskatchewan). The latter (at p 392-3) includes helpful quotations from articles, describing the "typical poison pill" and the history of its use in America and Canada.
25. This agreement, he says, is wholly different, because it involved, not the issue of shares, but the gratuitous disposition of the company's assets. The researches of counsel on both sides had failed to find any reported authority, whether in the USA or in the Commonwealth, in which a poison pill agreement of this type had been upheld. In any event, the SSA went far beyond anything which could be justified for the purpose of deterring an unwelcome predator. The buy-back provision could be triggered by any take-over, not only by a hostile predator, but even by one regarded as wholly beneficial (or even by Oaktree itself). Furthermore, it could be triggered by the departure of Mr Nordström or Mr Glaser, even in circumstances which had nothing to do with a change of control, for example death or dismissal due to misconduct.
26. In my view, these submissions are compelling. Unlike the judge, I would not wish to rest this conclusion on the simple "logic" that the poison-pill needed to be damaging to the company to achieve its effect. Had the agreement been so drafted as to be confined to the purpose of seeing off the particular predator, the present dispute would not have arisen. It is therefore unnecessary to decide to what extent "poison pills", limited to that purpose, are permissible in English law. However, as Mr Steinfeld says, the agreement went far beyond that limited purpose. Even if one accepts the lawfulness of the purpose, and the power of the directors to use the mechanism of a "contingent transfer" of assets to achieve it, it is very difficult to see how this particular agreement could be justified as a reasonable exercise of that power in the interests of the company.
27. Accordingly, I approach the second issue on the basis that, at least on the information presently available, the judge was correct to hold that the agreement was outside the powers of the directors of Criterion. I do so, not on the relatively limited basis on which he decided the matter, but taking account of the full effect of the agreement, including in particular the range of events (unrelated to the particular threat which then faced the company) which might trigger the buy-out right. In approaching the second issue, however, I also think it important to keep in mind that (on the assumed facts) this agreement was instigated, not by Oaktree for its own purposes, but by Mr Nordström, who now, as Chairman and principal shareholder of Criterion, is leading the battle to set it aside.

Discussion – the second issue

28. The second issue, as formulated by the judge, was whether Oaktree knew sufficient about the motivation of the Criterion board to disable it from relying on that board's apparent authority to commit Criterion to the contract. As has been seen, he accepted Oaktree's submission that this should be approached by reference to the guidance given by this Court in Akindele. Before us, Mr Steinfeld, for Criterion, adopted the same approach, and I am content to do the same. It is therefore necessary to consider that case in more detail.
29. The judge (para 30-31) helpfully summarised the facts of Akindele:

"… Chief Akindele had entered into an agreement in 1985 with an investment company (ICIC Overseas) under which he was to invest US$10m in the purchase of 250,000 shares of BCCI Holdings, and to hold the shares for two years. If he wanted to sell the shares after the expiry of two years and up to five years from the date of the agreement, ICIC Overseas undertook to sell the shares at a price which would give him a return of 15% per annum on his investment, compounded annually. In 1988 Chief Akindele decided to terminate the agreement and did so by an agreement (the divestiture agreement) under which he was paid a total of US$ 16.679m. The fraud underlying the 1985 agreement was a fraud being carried on by BCCI, namely the purchase of its own shares through nominees, including ICIC Overseas, financed by "dummy" loans made to the nominees by companies within the BCCI group. In order to disguise from its auditors and regulators that the dummy loans were in fact non-performing, real money had to be raised and raised in such a way as not to create balance sheet liabilities. Offering Chief Akindele the opportunity of investing on the terms of the 1985 agreement achieved that aim.

BCCI claimed that Chief Akindele was liable as a constructive trustee both on the grounds of 'knowing assistance' and, in relation to the 1988 divestiture payment, on grounds of 'knowing receipt'."

30. As trial judge in Akindele, I had (following concessions based on first instance authorities) treated both issues as turning essentially on the question of dishonesty; a charge of which I acquitted Chief Akindele, in respect both of the original agreement and of the divestiture payment. In this Court, although the judgment was upheld in the result, it was held that dishonesty was the wrong test for knowing receipt. Having reviewed the authorities, Nourse LJ took the opportunity to reformulate the test in terms of "unconscionability":

"…. I have come to the view that, just as there is now a single test of dishonesty for knowing assistance, so ought there to be a single test of knowledge for knowing receipt. The recipient's state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt. A test in that form, though it cannot, any more than any other, avoid difficulties of application, ought to avoid those of definition and allocation to which the previous categorisations have led. Moreover, it should better enable the courts to give commonsense decisions in the commercial context in which claims in knowing receipt are now frequently made, paying equal regard to the wisdom of Lindley LJ on the one hand and of Richardson J on the other." ([2001] Ch 437, 455)

31. As the last sentence shows, the purpose of the new formulation was to give greater flexibility for the application of common sense in commercial situations. The "wisdom" in question was that encapsulated in two earlier quotations in his judgment: first, from Lindley LJ in Manchester Trust v Furness [1895] 2 QB 539, 545:

"In dealing with estates in land title is everything, and it can be leisurely investigated; in commercial transactions possession is everything, and there is no time to investigate title; and if we were to extend the doctrine of constructive notice to commercial transactions we should be doing infinite mischief and paralyzing the trade of the country."

and secondly from Richardson J in Westpac Banking Corp v Savin (New Zealand Court of Appeal):

"Clearly Courts would not readily import a duty to inquire in the case of commercial transactions where they must be conscious of the seriously inhibiting effects of a wide application of the doctrine. Nevertheless there must be cases where there is no justification on the known facts for allowing a commercial man who has received funds paid to him in breach of trust to plead the shelter of the exigencies of commercial life." (See ([1985] 2 NZLR 41 at 53.)

32. In considering the application in Akindele of the distinction between "dishonesty" and "unconscionability", it is important to keep in mind the factual context, in particular that it was a case of actual fraud by the BCCI officers. If, at the time of the original offer, the Chief had known of the underlying fraud, it would have been clearly dishonest for him to enter into the agreement; he would have been a co-conspirator. If, on the other hand, having entered into the agreement in good faith, and having learnt subsequently of the fraud, he had then sought to enforce the agreement, his conduct would not necessarily have been "dishonest". There need have been nothing underhand about it; he would simply have been seeking to enforce his contract. However, it would have been "contrary to conscience" for him to do so, at least for more than the return of his investment, because he would have been seeking to take advantage of someone else's fraud. One cannot necessarily apply the same analysis to a simple want of authority. A third party's right to rely on the apparent authority of the agent is not lost, merely because, after contract and before action, he becomes aware of the lack of authority. Nor, in the absence of fraud or the like, is it necessarily "unconscionable" for him to hold the principal to a bad bargain.
33. Turning to the present case, Criterion's case for setting aside the agreement is clearly set out in the Amended Particulars of Claim, which, after summarising the effect of the SSA, states:

"In the above circumstances, Oaktree was on notice at the time when it entered into the (SSA) that Mr Glaser was acting for an improper purpose, not in the legitimate interests of Criterion. As a result, Oaktree cannot rely on the authority of Mr Glaser to bind Criterion to the (SSA), and it is unenforceable against Criterion." (para 21A)

Thus, the case is based on want of authority, not fraud; and it is based on the facts known to Oaktree at the date of agreement, not on subsequent events. (I mention the latter point, because in the last paragraph of his judgment the judge raises, without detailed discussion, the question whether the matter "might have to be reassessed in the light of (Oaktree's) state of knowledge at the time at which it sought to exercise the put-option…" (para 40). Whatever the merits of this suggestion, it is not in my view an issue raised on the pleadings.)

34. Mr Steinfeld says that the simple question is whether Oaktree was on notice of the breach of authority by the board of Criterion. For this purpose, it is sufficient that Oaktree had actual knowledge of the circumstances which made the SSA a breach of the duties of the Criterion board. These were apparent from the terms of the agreement itself. There is no further requirement of dishonesty, or "lack of probity" in any sense. The judge accepted that approach; a "sufficient condition", he thought, was "actual knowledge of the circumstances which make it a breach of duty" (para 36).
35. In my view, this is too narrow an interpretation of Akindele. As has been seen, Hart J referred in support to a sentence of Vinelott J (in Eagle Trust plc v SBC Securities [1993] 1 WLR 484, 497), which he thought had been cited with apparent approval by Nourse LJ. However, the context is important in both cases. In Eagle Trust, the passage which included that sentence was no more than an introduction to a detailed examination of the meaning and significance of "constructive notice", in which discussion issues such as "lack of probity" (p 498) and "commerciality" (p 504) clearly played a part. In Akindele, the same passage was cited by Nourse LJ for the proposition that in knowing receipt "it was immaterial whether the breach of trust was fraudulent or not"; it was not part of his subsequent discussion of "Knowing receipt – the authorities on knowledge".
36. The main purpose of that discussion was to reconcile two different lines of thought in the authorities:

"Expressed in its simplest terms, the question is whether the recipient must have actual knowledge (or the equivalent) that the assets received are traceable to a breach of trust or whether constructive knowledge is enough."

Nourse LJ contrasted the "instinctive approach of most equity judges", which was to assume that "constructive knowledge is enough"; with the contrary view, adopted in "a series of decisions of eminent first instance judges", at least in relation to commercial transactions (p 450). Among the latter, he cited with approval the judgment of Sir Robert Megarry VC in Re Montagu' Settlement [1987] Ch 264, including this memorable sentence (at p 278):

"The cold calculus of constructive and imputed notice does not seem to me to be an appropriate instrument for deciding whether a [person's] conscience is sufficiently affected for it to be right to bind him by the obligations of a constructive trustee."

Nourse LJ (at p 453) summarised the broad effect of that judgment as being that, to establish knowing receipt:

"… the recipient must have actual knowledge (or the equivalent) that the assets received are traceable to a breach of trust and that constructive knowledge is not enough"

He noted that, in Eagle Trust, Vinelott J had arrived at a same conclusion, but on the basis that he was dealing with a commercial transaction.

37. Although that discussion was presented as one of "constructive" as opposed to "actual" knowledge, it is clear that Nourse LJ was not proposing a rigid division of any kind. This is apparent from his reference (at p 454-5) to the "five-fold categorisation of knowledge" accepted by Peter Gibson J in the Baden case [1993] 1 WLR 509, 575-6. Having shared the doubts expressed in other cases as to the utility of this categorisation in the context of knowing receipt, he continued:

"… any categorisation is of little value unless the purpose it is to serve is adequately defined, whether it be fivefold, as in the Baden case, or twofold, as in the classical division between actual and constructive knowledge, a division which has itself become blurred in recent authorities

What then, in the context of knowing receipt, is the purpose to be served by a categorisation of knowledge? It can only be to enable the court to determine whether, in the words of Buckley LJ in Belmont (No 2) [1980] 1 All ER 393 at 405, the recipient can 'conscientiously retain [the] funds against the company' or, in the words of Megarry V-C in Re Montagu's Settlement Trusts, '[the recipient's] conscience is sufficiently affected for it to be right to bind him by the obligations of a constructive trustee'. But if that is the purpose, there is no need for categorisation. All that is necessary is that the recipient's state of knowledge should be such as to make it unconscionable for him to retain the benefit of the receipt."

This passage led on to his formulation of the new test, in the passage to which I have already referred.

38. Accordingly, I disagree respectfully with the judge in thinking that the question in the present case could be answered simply by reference to whether Oaktree had actual knowledge of the circumstances which gave rise to the breach of duty. In my view, on the facts of this case, and in the light of the more flexible approach endorsed by Nourse LJ, it was too narrow and one-sided a view of the matter. The SSA did not arise in the abstract. It was one element in a continuing commercial relationship between two parties acting at arms-length, and should have been judged in that light. In particular, I do not see how one can consider the "conscionability" of the actions of one party to the agreement without considering the position of the other. It is wholly artificial, in the context of this case, to consider the actions and motivations of the directors of Oaktree, and to ignore those of the directors of Criterion, particularly if it was they, through the Chairman Mr Nordström, who were the principal instigators of the SSA.
39. Nor do I think one can ignore the legal advice received by both parties. Mr Steinfeld relied on the Belmont case, where the court was unimpressed by the fact that the parties had obtained counsel's advice that the scheme was lawful, apparently on the basis that:

"… if all the facts which make the transaction unlawful were known to the parties… ignorance of the law will not excuse them" ([1980] 1 All ER at 404h)

The case cited for that proposition by Buckley LJ (Churchill v Walton [1967] 2 AC 224) was in a very different factual and legal context (criminal conspiracy to evade fuel duties). It cannot necessarily be applied without qualification in other contexts (see e.g. Cave v Robinson Jarvis & Rolfe [2002] 2 All ER 641 para 61, per Lord Scott). In any event, there is nothing in Nourse LJ's formulation which excludes legal advice as a factor, in an appropriate case. In this case, unlike Belmont, one has to consider two sets of legal advisers. On the face of it, it does not seem unreasonable for Oaktree's solicitors to have taken the view that the legality of the transaction was principally a matter for Criterion and its advisers.

40. I have said enough to explain my view, in respectful disagreement with the judge, that this not a suitable case for summary judgment. It was not enough that Oaktree had knowledge of the relevant facts. To decide whether to set aside the agreement, under the correct test, it is necessary to consider their actions and knowledge in the context of the commercial relationship of the parties as a whole. This can only be done at trial. Having reached that view, it is unnecessary and inappropriate to say more by way of analysis of the law and the facts. It is enough to say that they raise triable issues.
41. I would therefore allow the appeal, and set aside the judge's declaration.

Lord Justice Brooke:

42. I agree.
43. I wish to emphasise that we are deciding this appeal on the assumed basis that the SSA was entered into with the knowledge of, and indeed at the instigation of Mr Nordström, who wishes to set it aside now that it has achieved its purpose. Mr Nordström vehemently disputes this version of events, but on the assumptions we have to adopt for the purposes of this appeal this appears to me pre-eminently a matter which should go forward to trial.
44. I would add, as Carnwath LJ says at para 33 of his judgment, that Criterion's case is based on the facts known to Oaktree at the date of the agreement, and not on its state of knowledge at the time at which it decided to exercise the put-option. It is therefore unnecessary for us to consider whether Oaktree had any real prospect of showing that it was not unconscionable for it to exercise its rights in the situation that then arose, because this is not part of the case pleaded against it.
Order: Appeal allowed with the costs. Costs below to be in case. Costs already paid to be repaid £30,000 costs to be paid on interim basis. Leave to appeal was refused.

(Order does not form part of the approved judgment)

Appendix – the Facts

(Extracts from the Judgment of Hart J)

45. In this action the claimant Criterion Properties Plc ("Criterion") seeks an order setting aside an agreement dated 30 March 2000 ("the second supplementary agreement") purportedly made between Criterion, the first defendant Stratford UK Properties LLC ("Oaktree") and the third defendant, Criterion-Stratford Umbrella GP Ltd ("The General Partner"). That agreement was made in order to vary the terms of an Investment and Shareholders Agreement ("the ISA") made on 26 January 1998 between the same parties. Criterion also claims against the second defendant, Aubrey Glaser ("Mr Glaser"), that as its director he was in breach of duty in causing Criterion to enter into the second supplementary agreement.
46. The ISA had been entered into pursuant to an agreement between Criterion and Oaktree to enter into a limited partnership under the Limited Partnership Act 1907 (as amended) with a view to investing in real property. The ISA provided for the establishment and regulation of the activities of the General Partner and other companies set up under the partnership, and a Limited Partnership Agreement of the same date provided for the formation and establishment of the partnership. At the date of the ISA, 150 of the General Partner's issued shares were already registered in the name of Criterion and the remaining 850 shares were issued and allotted to Oaktree in accordance with Clauses 3 and 4 of the ISA. Clause 7.1 and 7.2 of the ISA provided so far as material as follows:

"Clause 7.1

(1) In the event of:

(a) Impasse;

(b) Bankruptcy of a Shareholder; or

(c) breach of this agreement or the Umbrella Partnership Agreement by a Shareholder which is not remedied to the satisfaction of the other Shareholder within 14 Business Days of its occurrence;

the Offeror may serve a notice (hereinafter called the "Sale Notice") on the other Shareholder (in this clause called the "Offeree") stating the grounds on which the notice is served and making both the following alternative offers:

(x) to purchase all of the Ordinary Shares owned by the Offeree (the "Offeree Shares"), any Debt owed by the Company to the Offeree and its associated companies (the "Offeree Debt") and the Offeree's (and its Connected Persons') entire interest in the Umbrella Partnership (Offeree Partnership Interest") at the Sale Price (as defined in clause 7.2(a));

(y) to sell all of the Ordinary Shares owned by the Offeror (the "Offeror Shares"), with any Debt owed by the Company to the Offeror and its associated companies (the "Offeror Debt") and the Offeror's (and its Connected Persons') entire interest in the Umbrella Partnership ("Offeror Partnership Interest") at the Sale Price (as defined in clause 7.2(a)).

Clause 7.2

(2) Sale Price

(a) Both the offers set forth in clauses 7.1(x) and (y) shall be made at the same price per Ordinary Share and proportionate interest in the Umbrella Partnership (which may be a positive or negative figure), specified by the Offeror in the Sale Notice being such price as the Offeror shall in its absolute discretion think fit, and at 100p in the pound in respect of Debt (in each case payable in cash) ("Sale Price");

(b) An offer for Ordinary Shares, Debt and an interest in the Umbrella Partnership is not severable into separate offers and accordingly any acceptance must relate to all of them."

47. "Impasse" was defined as meaning an inability on the part of the Board of the General Partner to approve a draft Business Plan or to agree on a material issue relating to the implementation of a Business Plan or on any one of certain other specified matters: see Clause 1.1. The privilege and duty of preparing the draft Business Plan was for Criterion: see Clause 5.3.
48. Under Clause 2.1 of the Limited Partnership Agreement the General Partner was appointed the general partner, with the power to carry on day-to-day management of the business of the partnership and Criterion and Stratford Associates Ltd ("SAL" a wholly owned subsidiary of Oaktree) were the limited partners. Clause 9 of the Limited Partnership Agreement governed the amount of Capital Contributions and Advances to be made by Criterion and Stratford Associates Ltd, and provided as follows:

"Clause 9.1

The initial capital of the Partnership shall be £1,000 to be contributed by the following Capital Contributions:

General Partner £2

Stratford Limited Partner £849

Criterion Limited Partner £149

Total £1,000

Clause 9.2

The capital of the Partnership may only be increased from time to time as all Partners shall agree and the amount of any increase shall be as agreed between them.

Clause 9.3

The Limited Partners shall each make Advances to the Partnership if and when required by the General Partner as follows. The Criterion Limited Partner shall made an Advance equal to 15 per cent of the amount required by the General Partner but shall at the option of the Criterion Limited Partner be entitled to make an Advance equal to a maximum of 50 per cent of such amount required. Each Advance shall be attributed to an Investment Partnership and any Advance made after the fist Advance made in respect of an Investment Partnership must be in the same proportions as the first Advance. The balance of the amount required by the General Partner shall be advanced by the Stratford Limited Partner provided always that the maximum aggregate amounts advanced by the General Partner, the Criterion Limited Partner and the Stratford Limited Partner shall not exceed £20,000,000.

Clause 9.4

Neither Partner shall while it remains a Partner be entitled directly or indirectly to draw out or receive back any part of its share of its Capital Contribution other than on dissolution of the Partnership pursuant to clause 19.

Clause 9.5

No Partner shall be paid interest by the Partnership or by the General Partner on or in respect of its Capital Contribution or upon any amount, whether of Net Income or otherwise, allocated to any Partner but not yet distributed to it, except as otherwise mutually agreed to by the Partners. No interest shall be paid or payable on any Advance."

49. Clause 14 of the Limited Partnership Agreement governed the repayment of Advances to Criterion and SAL and the sharing of profits. Clause 14.3 provided that any Net Income and Capital Contribution attributable to an Investment Partnership available for distribution should be used to pay any Advances or other indebtedness due to Criterion and SAL pro rata to the amount of such indebtedness. Thereafter, Clause 14.4 provided that the profits of the Partnership should be distributed as follows:-

"(a) until the Stratford Limited Partner achieves an IRR (calculated as set forth below) in respect of the relevant Investment Partnership equal to or exceeding 20% distribution of profit in respect of the relevant Investment Partnership in relation to the Limited Partners will be in proportion to the aggregate of each Limited Partner's Capital Contributions;

(b) when the Stratford Limited Partner achieves an IRR in respect of the relevant Investment Partnership exceeding 20%, distribution of profit in respect of the relevant Investment Partnership in relation to the Limited Partners will be in the proportions set out in the Profit Sharing Exhibit with respect to such Investment Partnership...."

Clause 19 provided that, on a liquidation of the partnership and subject to providing for liabilities, any surplus should be distributed so as to ensure that the total distributions accorded with the scheme of division provided for by Clause 14.

50. Following the establishment of the partnership Criterion and SAL made advances to the Partnership for the purposes of acquiring four properties in England through the medium of four separate Investment Partnerships.
51. Oaktree is a subsidiary or associated company of Oaktree Capital Management LLC an institutional money manager and investment adviser registered with the US Securities and Exchange Commission. That company manages approximately US$20 billion for institutional investors and high net worth individuals. Criterion is a UK listed company. Its Chairman at all material times has been a Mr Rolf Nordström. At all material times until the events mentioned below Mr Glaser was its Managing Director.
52. In a witness statement dated 15 November 2001 Mr Sean Frederick Armstrong, the Managing Director of Oaktree Capital Management LLC describes the background to the second supplementary agreement as follows:-

"In about January 2000, I was contacted by telephone by Aubrey Glaser and, as far as I can recall, Rolf Nordström. They informed me that they were concerned about parties who were acquiring a substantial number of Criterion shares. They went on to explain that, under the London Stock Exchange Take-over Panel's Rules, if a party acquired 30% of the shareholding in a company, it must offer to purchase the other shareholders' shares. We were all concerned about the possibility of a change in control of Criterion as this would jeopardise our close personal working relationship.

It was discussed that two options existed for avoiding this, namely, either Rolf Nordström could purchase more shares in Criterion or Oaktree could do this.

I was subsequently telephoned by Aubrey Glaser stating that they wanted to put in place a strong disincentive to any person seeking to take control of Criterion. They were therefore proposing that the terms of the Joint Venture be amended so that, in the event of a change in control of Criterion, Stratford could bring the Joint Venture to an end.

They often referred to this as the "Poison Pill". I confirmed over the telephone that Stratford would agree to this amendment. A change in control in Criterion would have been of grave concern to Stratford. As stated previously, Stratford had contributed between 75 and 85 per cent of the funds to purchase the properties concerned and had thereby adopted the majority of the risk in the Joint Venture. As such, Stratford had a strong vested interest in preserving the identity and character of its partner in the Joint Venture. Stratford knew and liked dealing with both Aubrey Glaser and Rolf Nordström. We worked well as a team. Although Criterion was a plc, Criterion's Board of directors appeared to have a purely administrative function as opposed to a strategic one. As far as I was concerned, to all intents and purposes, Rolf and Aubrey were Criterion. It never occurred to me that this suggestion was in any way improper. In the United States, such "poison pill" agreements are common and it is a normal business practice for one to be put in place to try and deter parties seeking to take over a company in an unfriendly or "hostile" manner.

On terms being agreed, I asked Marc Porosoff to instruct AMC to deal with the necessary documentation.

Subsequently, I had a further conversation over the telephone with Aubrey Glaser in which we discussed the calculation of the amount to be paid by Criterion to "buy-out" Stratford from the Joint Venture. It was agreed that this would be calculated on the basis of the sum of the Stratford investment (as defined) and an amount equal to 25% per annum return on the Stratford investment compounded monthly. I do not recall who suggested this although it is likely that I did. I informed Marc Porosoff of my further discussions with Aubrey Glaser.

I had no involvement with the documentation of the second supplementary agreement. This matter was dealt with between Marc Porosoff and AMC. I have no recollection of whether Marc Porosoff asked me if I would be available for a Board Meeting of the General Partner on 30 March 2000 to authorise the execution of the second supplementary agreement."

53. The references there to Stratford are to what I have described as Oaktree. Marc Porosoff is a Senior Vice President, Legal of Oaktree Capital Management LLC. The reference to AMC is a reference to Oaktree's London solicitors Ashurst Morris Crisp.
54. The form of the second supplemental agreement was drafted by Brough Skerrett, Criterion's London solicitors and produced to AMC for their approval on behalf of Oaktree. It provided for the insertion of additional provisions in the ISA requiring (at Oaktree's option) Oaktree's entire interest in the General Partner and under the partnership to be bought out by Criterion upon the happening of particular events in the following terms:-

"Clause 7A.1

If:

(a) any person gains control (as defined in section 840 Income and Corporation Taxes Act 1988) (and "person" shall include persons acting in concert as defined in the city Code on Take-overs and Mergers) of Criterion; or

(b) Rolf Leonard Nordström or Aubrey Glaser ceases to be a director or employee of Criterion or involved in the management of Criterion

then Oaktree shall have the right to:

(c) notwithstanding clause 5.1(a), require each of the directors appointed by Criterion to immediately resign from the Board of the Company and to confirm in writing under seal that they know of no claim or rights of action against the Company, the members of the Group or any Partnership by them and that to the extent that any such claims or rights of action may exist they are thereby irrevocably waived;

(d) by notice in writing ("Put Notice") require Criterion to buy all of the Ordinary Shares owned by Oaktree ("Oaktree Shares "), together with any Debt owed by the Company to Oaktree and its associated companies (Oaktree Debt") and Oaktree's (and its Connected Persons') entire interest in the Umbrella Partnership ("Oaktree Partnership Interest") at the Sale Price (as defined in Clause 7A.2) in accordance with this clause 7A.

For the purposes of clause 7A.1(d) the Sale Price shall be the greater of:

(a) The amount which would be paid to Oaktree pursuant to clause 19.5 and 19.6 of the Umbrella Partnership Agreement if the Umbrella Partnership Agreement were then dissolved or terminated as determined by an independent expert ("Expert") on the basis that each of the assets of the Umbrella Partnership has a value equal to the best price then reasonably obtainable in the open market between a willing seller and a willing purchaser each acting at arm's length. The Expert shall be agreed between the Shareholders or, in default of agreement within 14 Business Days of a proposal being made by a Shareholder, nominated by the President for the time being of the Institute of Chartered Accountants in England and Wales. The Expert shall act as an expert and not an arbitrator and the Expert may consult with such chartered surveyors and other professionals as he or she shall see fit prior to making his or her determination. The Expert's determination shall be final and binding. The costs of the Expert and other professionals consulted by him or her shall be borne by Criterion.

(b) The sum of (1) the Oaktree Investment (as defined below) and (2) the amount equal to a 25 per cent per annum return on the Oaktree Investment compounded monthly calculated on the basis that all Capital Advances, Advances and Distributions (each as defined in the Umbrella Partnership Agreement) and the Oaktree Debt and the Oaktree Subscription Amount (each as defined below) shall be considered made as of the first day of the month during which they have been paid.

"Oaktree Investment" means the sum of Capital Advances, Advances, (each as defined in the Umbrella Partnership Agreement), Debt owed by the company to Oaktree ("Oaktree Debt") and the amount subscribed by Oaktree for Ordinary Shares ("Oaktree Subscription Amount") less (1) Distributions (as defined in the Umbrella Partnership Agreement) and (2) repayment of Oaktree Debt."

The second supplementary agreement was executed on behalf of Criterion by Mr Glaser, as director, and a Mr Palmer, as secretary. There is a dispute (not capable of resolution on the papers before me) of the extent to which the Criterion board did in fact authorise the second supplementary agreement. That is a dispute between Mr Glaser and Mr Nordström. It is Mr Glaser's case that he and Mr Nordström were at one in entering into it, but Mr Nordström says that he only discovered its existence in November 2000.

55. For reasons which are in dispute between Criterion and Mr Glaser (and which cannot be resolved on the applications which are before me) Criterion subsequently in late 2000 and early 2001 sought Oaktree's agreement to a rescission of the second supplementary agreement. There is a similarly irresoluble dispute as to whether or not Oaktree agreed to this in principle. Finally on 30 March 2001 Mr Nordström forwarded to Mr Armstrong a draft press announcement which asserted that legal advice had been received by Criterion that the second supplementary agreement had been entered into by Mr Glaser in breach of duty, that Oaktree must have been aware that it was not binding, and that it could not be enforced. It is not in dispute that this was the first intimation given by Criterion to Oaktree that the second supplementary agreement was unenforceable. On 3 April 2001 (again in circumstances which are disputed as between Criterion and Mr Glaser) Mr Glaser was dismissed as managing director of Criterion. Mr Nordström remains as its chairman and is said to have (directly or indirectly) a controlling interest in it. On 20 June 2001 AMC, as solicitors for Oaktree, served a Put Notice on Criterion under Clause 7A of the ISA (as amended by the second supplementary agreement) requiring Criterion to buy all the Oaktree shares together with the Oaktree Debt and the Oaktree Partnership Interest at the Sale Price calculated in accordance with Clause 7A.2 of the ISA (as amended). The letter relied on Mr Glaser's dismissal as a director of Criterion as the triggering event for the Put Notice.
56. ….
57. These proceedings were commenced by Criterion on 10 July 2001. Oaktree was first off the mark with an application for summary judgment dated 15 November 2001. At that stage, although the apparent authority point had been pleaded in defence to Oaktree's Part 20 claim, the main thrust of Criterion's case appeared to be the dishonest assistance claim. Oaktree's evidence in support of its summary judgment application was therefore designed to show that all its executives had acted in transparent good faith in entering into the second supplementary agreement, and for that purpose privilege was waived in respect of the legal advice which had been received from AMC. Witness statements from Mr Armstrong, Mr Porosoff, Mr Clyne (an assistant solicitor at AMC) and Mr Kershaw (a partner in AMC) were relied on. Following receipt of that evidence in support of its summary judgment application, Criterion amended its pleadings to put the apparent authority point at the forefront of its case, and launched its own application for summary judgment, dated 22 February 2002, for an order that the second supplementary agreement be set aside. Mr Glaser is not directly involved in either application, but is potentially affected by the result. He was accordingly represented on the hearing before me (by Mr James Ayliffe of Counsel) being concerned to argue that he had acted properly in causing Criterion to enter into the second supplementary agreement but that it was in fact unenforceable by virtue of the Clause 5.2 point.
58. …
59. …
60. … As to the motivation and purpose of the Criterion Board, Mr Hollander invited me to proceed on this summary application on the basis that Mr Glaser's evidence might be accepted in full at any trial. I so proceed. That evidence is set out in paragraphs 1-6 of paragraph 11.1 of his defence and counter-claim in these proceedings (which he has confirmed by a statement of truth) in the following terms:-

"(1) Over the course of 1998/1999 Johan Claasen Group ("Claasen") built up a shareholding of over 20% in Criterion and wished to acquire further shares and to obtain representation on the board of Criterion.

(2) Mr Nordström was concerned about Claasen's intentions. In particular:-

(a) He caused an investigation to be made into the individuals behind Claasen which indicated (or so he informed Mr Glaser and the rest of Criterion's board of directors) that they were disreputable people with whom it would not be in the interests of Criterion to become closely associated.

(b) He informed Mr Glaser that Claasen's objective was to wind up Criterion's' business and to liquidate the company (a suggestion which was supported by Claasen's past record).

(c) He suggested to Mr Glaser that it might become necessary in due course to adopt a device (such as a rights issue or the creation of a "poison pill") to thwart Claasen's attempts to obtain control of Criterion.

(3) Mr Nordström's concerns about Claasen increased in the first few months of 2000. On a date which Mr Glaser is at present unable to specify (save that it was prior to 29 March 2000) Mr Nordström telephoned Mr Glaser and asked him to contact Oaktree urgently to see whether Oaktree would be willing to vary the arrangements between it and Criterion so as to include a condition under which Criterion would become immediately liable to purchase Oaktree's interests in the Partnership for their full value plus an internal rate of return of 25% per annum in the event that (i) there was a change of control of Criterion or (ii) he or Mr Glaser were removed as directors of Criterion. He explained that the purpose of the variation was to create a "poison pill" which could be used to deter Claasen from proceedings further with its attempts to obtain control of Criterion. Limb (i) would be the primary deterrent whilst limb (ii) would reinforce (i) and at the same time provide a rationale for the variation from Oaktree's point of view, namely to ensure continuity and stability in the ownership and management of the company with whom it had entered into partnership. Mr Nordström omitted Mr Palmer from the proposed variation because he was not regarded by Oaktree as a key individual at Criterion.

(4) Mr Glaser believed that the proposed variation was in the best interests of Criterion for the following reasons:-

(a) It would act as a deterrent to Claasens, something which he believed was in the interests of Criterion given the concerns previously raised ((see (2) above) about the individuals behind Claasen and Claasen's intentions for Criterion.

(b) Although it subjected Criterion to an additional financial obligation, this obligation would never be triggered in practice because the whole purpose and effect of the variation would be to prevent the occurrence of the triggering event (i.e. change of control of Criterion or removal of Mr Nordström or Mr Glaser as directors).

(5) Mr Glaser was also aware from earlier discussions with Mr Nordström that Mr Nordström wanted, if possible, to acquire Claasen's shareholding and thereby to acquire a majority shareholding in Criterion. It was therefore apparent to Mr Glaser (and Mr Nordström himself was open about this) that the variation might also assist Mr Nordström in achieving this. However, Mr Glaser also believed that this would be in the interests of Criterion in that acquisition of a majority shareholding by Mr Nordström would eliminate any further threat from Claasens.

(6) Mr Glaser therefore proceeded as instructed by Mr Nordström. He spoke to Mr Sean Armstrong at Oaktree to whom he explained the purpose of the proposed variation and who indicated that Oaktree would be prepared to agree to the proposed variation. The matter was left on the basis that the parties' lawyers would liaise to prepare and agree the necessary legal documentation to implement the variation."

In addition Mr Glaser denies that it was any part of his purpose to keep himself or Mr Nordström in office.