COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION
OF THE HIGH COURT (Mr Justice Davis)
London, WC2A 2LL
B e f o r e :
LORD JUSTICE BUXTON
LADY JUSTICE ARDEN
| Robert Chaston
|- and -
|SWP Group plc
Smith Bernal Wordwave Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Mark Cunningham QC (instructed by Lyons Davidson) for the Respondent
Crown Copyright ©
Lady Justice Arden :
i) was the commitment to pay these fees or the payment of these financial assistance at all?
ii) to which party was the financial assistance given?
iii) was the assistance "for the purpose of" the acquisition by DRCH of the share capital of DRCH?
|Invoice No||Date of Invoice||Amount of Invoice including VAT||Amount alleged by SWP to have been rendered||To whom invoice||Narrative in invoice paid in breach of s.151|
|0100828||01.12.97||£3,525.00||£3,525.00||DRC||For professional services rendered in respect of the potential sale of the entire share capital of [DRCH]|
|0100781||22.10.97||£8,812.50||£8,812.50||DRC|| Payment on account for professional services in respect of assistance given on the sale of [DRCH] to [SWP].
|0100981||02.10.97||£7,775.00||£1,468.75||DRC||For professional services for the period ended 15 September 1997|
|0101319||15.02.98||£5,875.00||£5,875.00||DRC||For professional services for the period ended 30 November 1997. During this period we performed the tax related work in connection with the sale of [DRCH] to [SWP] [in addition] to the audit work carried out by David Isherwood. The work included a meeting and correspondence with Geoffrey Smith with regard to the past and presenttax affairs of the DRC Group together with telephone conversations with [Coopers & Lybrand].|
"151 Financial assistance generally prohibited
(1) Subject to the following provisions of this Chapter, where a person is acquiring or is proposing to acquire shares in a company, it is not lawful for the company or any of its subsidiaries to give financial assistance directly or indirectly for the purpose of that acquisition before or at the same time as the acquisition takes place.
(2) Subject to those provisions, where a person has acquired shares in a company and any liability has been incurred (by that or any other person), for the purpose of that acquisition, it is not lawful for the company or any of its subsidiaries to give financial assistance directly or indirectly for the purpose of reducing or discharging the liability so incurred.
(3) If a company acts in contravention of this section, it is liable to a fine, and every officer of it who is in default is liable to imprisonment or a fine, or both.
152 Definitions for this Chapter
(1) In this Chapter—
(a) "financial assistance" means—
(i) financial assistance given by way of gift,
(ii) financial assistance given by way of guarantee, security or indemnity, other than an indemnity in respect of the indemnifier's own neglect or default, or by way of release or waiver,
(iii) financial assistance given by way of a loan or any other agreement under which any of the obligations of the person giving the assistance are to be fulfilled at a time when in accordance with the agreement any obligation of another party to the agreement remains unfulfilled, or by way of the novation of, or the assignment of rights arising under, a loan or such other agreement, or
(iv) any other financial assistance given by a company the net assets of which are thereby reduced to a material extent or which has no net assets;
(b) "distributable profits", in relation to the giving of any financial assistance—
(i) means those profits out of which the company could lawfully make a distribution equal in value to that assistance, and
(ii) includes, in a case where the financial assistance is or includes a non-cash asset, any profit which, if the company were to make a distribution of that asset, would under section 276 (distributions in kind) be available for that purpose, and
(c) "distribution" has the meaning given by section 263(2).
(2) In subsection (1)(a)(iv), "net assets" means the aggregate of the company's assets, less the aggregate of its liabilities ("liabilities" to include any provision for liabilities or charges within paragraph 89 of Schedule 4).
(3) In this Chapter—
(a) a reference to a person incurring a liability includes his changing his financial position by making an agreement or arrangement (whether enforceable or unenforceable, and whether made on his own account or with any other person) or by any other means, and
(b) a reference to a company giving financial assistance for the purpose of reducing or discharging a liability incurred by a person for the purpose of the acquisition of shares includes its giving such assistance for the purpose of wholly or partly restoring his financial position to what it was before the acquisition took place.
153 Transactions not prohibited by s 151
(1) Section 151(1) does not prohibit a company from giving financial assistance for the purpose of an acquisition of shares in it or its holding company if—
(a) the company's principal purpose in giving that assistance is not to give it for the purpose of any such acquisition, or the giving of the assistance for that purpose is but an incidental part of some larger purpose of the company, and
(b) the assistance is given in good faith in the interests of the company.
(2) Section 151(2) does not prohibit a company from giving financial assistance if—
(a) the company's principal purpose in giving the assistance is not to reduce or discharge any liability incurred by a person for the purpose of the acquisition of shares in the company or its holding company, or the reduction or discharge of any such liability is but an incidental part of some larger purpose of the company, and
(b) the assistance is given in good faith in the interests of the company.
(3) Section 151 does not prohibit—
(a) a distribution of a company's assets by way of dividend lawfully made or a distribution made in the course of the company's winding up,
(b) the allotment of bonus shares,
(c) a reduction of capital confirmed by order of the court under section 137,
(d) a redemption or purchase of shares made in accordance with Chapter VII of this Part,
(e) anything done in pursuance of an order of the court under section 425 (compromises and arrangements with creditors and members),
(f) anything done under an arrangement made in pursuance of [section 110 of the Insolvency Act] (acceptance of shares by liquidator in winding up as consideration for sale of property), or
(g) anything done under an arrangement made between company and its creditors which is binding on the creditors by virtue of [Part I of the Insolvency Act].
(4) Section 151 does not prohibit (a) where the lending of money is part of the ordinary business of the company, the lending of money by the company in the ordinary course of its business …"
"I can see that if such liability was incurred other than in good faith or for the proper interests or purposes of DRC then a breach of section 151 might thereby also be established (although there would in any event ipso facto be a breach of fiduciary duty on the part of the directors involved). But in the present case this was work done by D&T for and on behalf of the company itself: D&T (properly) regarded DRC as its client for this purpose and the work was undertaken (and instructed by the directors to be undertaken) in good faith for the corporate purposes of the DRC Group. I take the view, on the evidence, that the instructions to D&T (giving rise to the obligation to pay D&T) were given on behalf of and in the interests of DRC (and DRCH), to facilitate the progress of the negotiations and to enable SWP to conclude its due diligence exercise: and, having done so, then to enable it to make up its mind as to whether or not to acquire the shares in DRCH. In such circumstances I do not think that there has been given financial assistance directly or 'indirectly for the purpose of' the acquisition of its shares."
"There are two elements in the commission of offence under s.54 [the section that preceded s.151]. The first is the giving of financial assistance and the second is that it should have been given 'for the purpose of or in connection with' in this case, a purchase of shares … There is no definition of giving financial assistance in the section, although some examples are given. The words have no technical meaning and their frame of reference is in my judgment the language of ordinary commerce. One must examine the commercial realities of the transaction and decide whether it can properly be described as the giving of financial assistance by the company, bearing in mind that the section is a penal one and should not be strained to cover transactions which are not fairly within it."
That passage was cited with approval by Aldous LJ in Barclays Bank plc v British Commonwealth Holdings plc  1 BCLC 1, 39, with whom Kennedy LJ and Sir Roger Parker agreed. Aldous LJ went on to hold that what section 151 requires is "that there should be assistance or help for the purpose of acquiring the shares and that that assistance should be financial." (page 40). In the present case, as a matter of commercial reality, the payments provided assistance because, as the judge found, the instructions to D&T were given "to facilitate the progress of the negotiations, and to enable SWP to conclude its due diligence exercise: and, having done so, then to enable it to make up its mind as to whether or not to acquire the shares in DRCH." The assistance was financial as it involved the payment of money.
"In MT Realisations Ltd (in liquidation) v Digital Equipment Co Ltd a purchaser, MTI, acquired the shares of a company, M, for £1. At the same time MTI agreed to pay £6.5m for an assignment of sums totalling £8m due from M to the vendor, D. Although not stated in the judgment, it appears that these sums were due on demand. Subsequently MTI could not meet its obligations in respect of the assignment and the terms were varied so that sums due from D or any member of its group to MTI or its subsidiaries, including M, would be directed to be paid to D. M was compensated by the creation by MTI of a credit in its favour. M subsequently went into liquidation and its liquidator claimed that the rescheduling of MTI's obligations in this way constituted a breach of s,151 by M. It appears that M had negative net assets. It was not contended that M's assets were actually reduced as a result of the rescheduling. Laddie J held that there was no breach of s.151(2). The first issue was whether MTI's agreement to pay £6.5m under the assignment was a liability incurred 'for the purpose of' the acquisition of M's shares within the CA 1985, s.151(2). Laddie J found for the defendant on this issue. There was no evidence that MTI could not pay the price of £1 for the shares or that M's shares were worth more than £1. It seems that Laddie J would have reached a different conclusion if the attribution of £1 to the price of M's shares had not fairly reflected the value of those shares or if there had been an artificial apportionment of the total consideration for the intercompany loans and the shares."
(I need not read the rest of this commentary as it proffers an alternative analysis to that given by the judge or Mr Todd and this court is not concerned with the second issue in the MT Realisations case). Laddie J held:-
" 'For the purpose' …
30 … a distinction must be drawn between incentives to enter an agreement or concurrent benefits and the acquisition of the shares in the target company … Even though the Loan Assignment was connected with the sale of [M's] shares, that does not mean that it is necessarily for the purpose of that sale."
Mr Todd submits that, to the extent that Laddie J held that section 151 was concerned only with financial assistance as regards the acquisition of shares, his reasoning should not be followed in this court. Otherwise, where, for example, an acquisition proceeded by share exchange there would be nothing to prevent the target from paying all the expenses which the bidder incurred to facilitate the share exchange, irrespective of their amount.
"The need to look at the commercial realities means that one cannot consider the surrender letter in isolation. Although it constituted a collateral contract, it was in truth part of a composite transaction under which Tempest both received benefits and assumed burdens. It is necessary to look at this transaction as a whole and decide whether it constituted the giving of financial assistance by Tempest. This must involve the determination of where the net balance of financial advantage lay. I see no contradiction between this view and anything which was said in the Belmont case. In Belmont the company made cash available to the purchaser. This amounted to giving financial assistance and no less because it was done without any net transfer of value by the company. On the facts of this case there is no question of cash being provided and the only way in which it can even plausibly be suggested that Tempest gave financial assistance is if it made a net transfer of value which reduced the price Mr Allam would have to pay for the shares if the transaction as a whole had not taken place."
"… I am not satisfied that [even if the transaction had involved a net transfer of value from Tempest to the Charterhouse Group] Tempest could be said to have given financial assistance. The object of the transaction was to put the assets and liabilities of Tempest into a state in which it was acceptable to both parties for them to be sold to Mr Allum for £1. If this process involved the prior extraction by the shareholders of assets from Tempest by means which were intra vires and not a fraud upon creditors, I doubt whether it could be described in any acceptable commercial sense as a giving of financial assistance by the company. It is no more than a change in the character of the assets being sold."
"The distinction between commercial and legal concepts has also been drawn in other areas of legislation. So, for example, the term 'financial assistance' in s.151 of the Companies Act 1985 has been construed as a commercial concept, involving an inquiry into the commercial realities of the transaction (see Burton v Palmer  2 NSWLR 878 at 889-890 and Charterhouse Investment Trust Ltd v Tempest Diesels Ltd  BCLC 1). But the same is not necessarily true of other terms used in the same section, such as 'indemnity'. As Aldous LJ said in British and Commonwealth Holdings plc v Barclays Bank plc  1 WLR 1 at 14:
'It was submitted that as the words 'financial assistance' had no technical meaning and their frame of reference was the language of ordinary commerce, the word 'indemnity' should be similarly construed. The fallacy in that submission is clear. The words 'financial assistance' are not words which have any recognised legal significance whereas the word 'indemnity' does. It is used in the section as one of a number of words having a recognised legal meaning.'
I would only add by way of caution that although a word may have a 'recognised legal meaning', the legislative context may show that it is in fact being used to refer to a broader commercial concept."
"The purpose of the covenants in the option agreement was to reassure Caledonia. The covenants were bona fide covenants, the performance of which did not involve giving of any financial assistance. The fact that breach of the covenants might render B&C liable to damages did not mean that B&C gave financial assistance thereby."
"The matter can perhaps, most easily be tested by reference to section 153(1)(a) where the same formula is used. Here the words are 'or the giving of the assistance for that purpose' (i.e. the acquisition of shares) 'is but an incidental part of some larger purpose of the company'. The words 'larger purpose' must here have the same meaning as the same words in subsection (2)(a). In applying subsection (1)(a) one has, therefore, to look for some larger purpose in the giving of financial assistance than the mere purpose of the acquisition of the shares and to ask whether the giving of assistance is a mere incident of that purpose. My Lords, 'purpose' is, in some contexts, a word of wide content but in construing it in the context of the fasciculus of sections regulating the provision of finance by a company in connection with the purchase of its own shares there has always to be borne in mind the mischief against which section 151 is aimed. In particular, if the section is not, effectively, to be deprived of any useful application, it is important to distinguish between a purpose and the reason why a purpose is formed. The ultimate reason for forming the purpose of financing an acquisition may, and in most cases probably will, be more important to those making the decision than the immediate transaction itself. But 'larger' is not the same thing as 'more important' nor is 'reason' the same as 'purpose'. If one postulates the case of a bidder for control of a public company financing his bid from the company's own funds – the obvious mischief at which the section is aimed – the immediate purpose which it is sought to achieve is that of completing the purchase and vesting control of the company in the bidder. The reasons why that course is considered desirable may be many and varied. The company may have fallen on hard times so that a change of management is considered necessary to avert disaster. It may merely be thought, and no doubt would be thought by the purchaser and the directors whom he nominates once he has control, that the business of the company will be more profitable under his management than it was heretofore. These may be excellent reasons but they cannot, in my judgment, constitute a 'larger purpose' of which the provision of assistance is merely an incident. The purpose and the only purpose of the financial assistance is and remains that of enabling the shares to be acquired and the financial or commercial advantages flowing from the acquisition, whilst they may form the reason for forming the purpose of providing assistance, are a by-product of it rather than an independent purpose of which the assistance can properly be considered to be an incident."
Lord Justice Buxton :
Lord Justice Ward:
"that the instructions to D & T (giving rise to the obligation to pay D & T) were given on behalf of [and in the interests of] DRC (and DRCH) to facilitate the progress of the negotiations and to enable SWP to conclude its due diligence exercise: and, having done so, then to enable it to make up its mind as to whether or not to acquire the shares in DRCH."
(I am not sure that I see the purpose of or need for the words I have highlighted and placed in parenthesis, but this may not much matter).
"152(1) In this chapter –
(a) "Financial assistance" means –
(i) financial assistance given by way of gift.
(ii) financial assistance given by way of guarantee …
(iii) financial assistance given by way of loan …
(iv) any other financial assistance given by the company the net assets of which are thereby reduced to a material extent or which has no net assets."
"If one postulates the case of a bidder for control of a public company financing his bid from the company's own funds – the obvious mischief at which the section is aimed – the immediate purpose which it is sought to achieve is that of completing the purpose and vesting control of the company in the bidder." (Emphasis added by me).
Arden L.J. has explained the historical development of s.151 and I accept that is the obvious mischief. Chapter IV concerns "financial assistance by a company for the acquisition of its own shares", which would also lead me to think that the financial help is indeed directed to the financing of the acquisition, including financial help of the kind defined in s.152(1)(a)(i)–(iii).
"Whatever the categorisation of the loan swap under the Rescheduling Agreement it was not financial assistance for the purpose of reducing or discharging the liability incurred by MTI "for the purpose of" acquiring shares in MTR-Digital".
"The words have no technical meaning and their frame of reference is … the language of ordinary commerce."
Speaking for myself, I probably would not direct the jury to the subtleties of distinction between "purpose" and "reason", helpful though Lord Oliver's words always are. If the jury found the facts as the judge did, then I am satisfied, with respect to the judge whose experience is so much greater than mine, that the jury would return a verdict of guilty and would not, as the judge did, acquit Mr Chaston.