England and Wales High Court (Chancery Division) Decisions

(1)        “A Ordinary Shares”, being A ordinary shares of £1.00 each in the capital of Signia.

(2)        “B Ordinary Shares”, being B ordinary shares of £1.00 each in the capital of Signia.

(3)        “C Ordinary Shares”, being C ordinary shares of £1.00 each in the capital of Signia.

(4)        “D Ordinary Shares”, being D ordinary shares of £0.001 each in the capital of Signia.

The Articles define “Ordinary Shares” as comprising A, B, C and D Ordinary Shares.

(5)        “Preference Shares”, being preference shares of £1.00 each in the capital of Signia.

(1)        On 15 February 2010:

(a)          20,000 B Ordinary Shares;

(b)          78,000 C Ordinary Shares.

(2)        On 8 April 2011:

(a)          20,000 re-designated B Ordinary Shares;

(b)          78,000 re-designated C Ordinary Shares.

Table 1 Shareholders in Signia immediately prior to the compulsory transfer

B.      THE COMPULSORY TRANSFER PROCESS

(1)     An analysis of the compulsory transfer process

(a)     The triggering event

“For the purpose of Article 6.21.3 the date upon which a holder becomes a Leaver shall be:

6.25.1         where a contract of employment or directorship is terminated by the employer giving notice to the employee of the termination of the employment or directorship, the date of expiry of that notice (whether or not a payment is made by the employer in lieu of all or part of the notice period required to be given by the employer in respect of such termination);

6.25.2         where a contract of employment or directorship is terminated by the employee by giving notice to the employer of the termination of the employment or directorship, the date of expiry of that notice;

6.25.3         save as provided in Article 6.25, where an employer or employee wrongfully repudiates the contract of employment and the other accepts that the contract of employment has been terminated, the date of such acceptance;

6.25.4         where a contract of employment is terminated under the doctrine of frustration, the date of the frustrating event;

6.25.5         where a contract of employment or directorship is terminated for any reason other than in the circumstances set out in Articles 6.25.1 to 6.25.4 above, the date on which the action or event giving rise to the termination occurs.”

(b)     The Deemed Transfer Notice

(c)     The process of sale of the Shares the subject of the Deemed Transfer Notice

(1)        Article 6.23.1 provides that a “Deemed Transfer Notice shall be deemed to have been given on the date of the Transfer Event or, if later, the date upon which the Investor becomes aware that the relevant event is a Transfer Event and has notified [Signia] that the relevant event is a Transfer Event”.

(2)        Article 6.23.5 provides that “the Prescribed Price shall be as set out in Article 6.24”. As to this:

(a)          Article 6.24 provides as follows:

“6.24 The Prescribed Price for any Sale Shares which are the subject of a Deemed Transfer Notice given as a consequence of a Transfer Event shall be:

6.24.1       in the case of a Good Leaver:

A Ordinary Shares = the lower of Fair Value and Exit Value

B Ordinary Shares = the lower of Fair Value and Exit Value

C Ordinary Shares:

Within 24 months of Employment Start Date – Issue Price

Within 36 months of Employment Start Date – 20% the lower of Fair Value and Exit Value

Within 48 months of Employment Start Date – 40% the lower of Fair Value and Exit Value

Within 60 months of Employment Start Date – 60% the lower of Fair Value and Exit Value

Within 72 months of Employment Start Date – 80% the lower of Fair Value and Exit Value

Within 84 months of Employment Start Date – 100% the lower of Fair Value and Exit Value

Thereafter – the lower of Fair Value and Exit Value

D Ordinary Shares = the lower of Issue Price and Fair Value; and

6.24.2       in the case of a Bad Leaver:

A Ordinary Shares = the lower of Fair Value and Exit Value

B Ordinary Shares = the lower of Issue Price and Exit Value

C Ordinary Shares:

Within 36 months of Employment Start Date – Issue Price

Within 48 months of Employment Start Date – 25% of the lower of Fair Value and Exit Value

Within 60 months of Employment Start Date – 50% the lower of Fair Value and Exit Value

Within 72 months of Employment Start Date – 75% the lower of Fair Value and Exit Value

Within 84 months of Employment Start Date – 100% the lower of Fair Value and Exit Value

Thereafter – the lower of Fair Value and Exit Value

D Ordinary Shares = the lower of Issue Price and Fair Value; and

6.24.3       in the case of an Incapacitated Good Leaver the lower of Fair Value and Exit Value, irrespective of the class of the Sale Shares.”

(3)        The Prescribed Price laid down by Article 6.24 thus turns upon a combination of factors: (i) the type of Leaver that a Shareholder is; (ii) the type of Ordinary Share that he or she holds; and (iii) the length of time since the Leaver’s Employment Start Date. The first two factors determine which of “Fair Value”, “Exit Value” or “Issue Price” is used for the purpose of valuation. The third factor can affect whether only a percentage of that price is to be paid.

(4)        Article 6.24 makes reference to a number of defined terms:

(a)          There are three types of Leaver:

(i)           A “Good Leaver” is:

“a person who is a Leaver as a result of:

(a)     his/giving notice to terminate their employment when not in breach of their terms of employment and where such notice of termination will expire five years or more after the Employment Start Date; or

(b)     summary dismissal or service by [Signia] of notice to terminate the employment of a person when (1) [Signia] has no right to summarily dismiss such person without notice or (2) such person is not an Under Performer as defined in his contract of employment”.

(ii)           An “Incapacitated Good Leaver” is:

“a person who is a Leaver as a result of:

(a)   death; or

(b)  Serious Ill Health or permanent disability; or

(c)   summary dismissal in accordance with a person’s contract of employment for mental incapacity or long term absence”.

(iii)         A “Bad Leaver” is:

“any Leaver who is not a Good Leaver or an Incapacitated Leaver”.

(b)          The “Employment Start Date” means “the date that the relevant person becomes an employee and/or director of [Signia]”.

(c)          As noted, Article 6.24 references three different Share values – “Fair Value”, “Exit Value” and “Issue Price”:

(i)           “Fair Value”:

“for the purposes of these Articles means as determined between the Board and the Investor; save that where a Leaver indicates that he does not agree with such valuation, as determined by an Independent Valuer as at the date of the Transfer Event (such valuation to be on the basis of a willing buyer and a willing seller and shall not take any account of whether the Shares comprise a majority or a minority interest nor the fact that transferability is restricted by the Articles)”.

(ii)          “Exit Value” means:

“the aggregate of the consideration received or unconditionally to be received from the purchaser by the holders of the Shares on or following an Exit”.

“Exit” means:

“the sale of the whole of the issued share capital of [Signia] to a third party for value which includes a payment for each Preference Share of the Issue Price thereof”.

(iii)          “Issue Price” means:

“in respect of a Share in the capital of [Signia], the aggregate of the amount paid up (or credited as paid up) in respect of the nominal value and any share premium”.

(5)        Article 6.23.6 provides that “the share certificate for any Shares for which no buyers are found, will be deposited by the Proposing Transferor with [Signia] pending an Exit and pending such Exit all Shares the subject of a Deemed Transfer Notice shall carry no rights to vote at any meeting or class meeting of members of [Signia].”

(1)        Most of Article 6.5 – which relates to an actual Transfer Notice, as opposed to the Deemed Transfer Notice under the compulsory transfer procedure – is inapplicable. The exception is that part of Article 6.5 constituting Signia the agent of the Proposing Transferor.

(2)        Article 6.6 is excluded by the provisions of Article 6.24.

(3)        Articles 6.7 and 6.8, which provide for the offering of Shares for sale following the ascertainment of the Prescribed Price are applicable.

(4)        Article 6.9 expressly does not apply, by virtue of Article 6.23.2.

(5)        Articles 6.10 to 6.13 are applicable.

(2)     Issues arising out of the compulsory transfer process

(1)        Bifurcation between the Leaver and the holder of the Dauriac Shares. As I have described, the Dauriac Shares were properly transferred by Ms. Dauriac to Marlborough. Thus, although Ms. Dauriac was, according to Signia, a Leaver, the shares the subject of the compulsory transfer process were not held by her, but by Marlborough pursuant to a Permitted Transfer by Ms. Dauriac. It is necessary to consider whether this bifurcation affects the operation of the compulsory transfer process.

(1)        Section D describes the witnesses who gave evidence before me.

(2)        Sections E, F and G set out a detailed factual history of Signia and Ms. Dauriac’s relationship with Signia. An understanding of this history is essential in order to be able to determine the issues arising out of the compulsory transfer process. These sections are necessarily lengthy. Specifically, they consider:

(a)          The events surrounding the establishment of Signia, including a description of a number of documents and instruments important to understanding the foundation and operation of Signia (Section E).

(b)          The financial performance and metrics of Signia between the date of its establishment in 2010 to Ms. Dauriac’s departure in December 2014/January 2015 (Section F).

(c)          The events of 2014 (Section G). Section G considers the events that lead to Ms. Dauriac’s departure from Signia. One of the main topics to be covered is an inquiry conducted into Ms. Dauriac’s expenses. That inquiry features centrally in the allegations between the parties as to why Ms. Dauriac left Signia, and necessarily must be considered in detail. But the events preceding that inquiry also matter, and this section therefore considers the events of 2014 quite generally.

(3)        As part of her Defence, Ms. Dauriac relied upon “similar fact” evidence, concerning events at another company in which Mr. Caudwell had an interest, Pure Jatomi Fitness (“Pure Jatomi”). Section H considers this similar fact evidence, including questions relating to its admissibility and its relevance.

(4)        At this point in the Judgment, it is possible to return to, and determine, the various questions and issues arising out of the compulsory transfer process. Sections I to N consider these issues in the order they have been set out in paragraph 29 above.

(5)        Section O considers the declarations that it is appropriate to make in light of the findings in the Judgment. Section O also deals with the related breach of contract and tort claims advanced by Ms. Dauriac.

D.      THE WITNESSES

(1)     Introduction

(2)     Factual witnesses called by Mr. Caudwell

(a)     List of witnesses called

(1)        Mr. David Canfield.

(2)        Mr. Timothy (Tim) Maycock.

(3)        Mr. John Caudwell.

(4)        Ms. Katherine (Kate) Cooper.

(5)        Ms. Janet Tarbet.

(6)        Ms. Rebekah Caudwell.

(7)        Ms. Victoria Olszewska.

(8)        Mr. Paul Lester.

(9)        Mr. David Hayes.

(10)      Mr. Daniel Ward.

(11)      Mr. Michael Fenton.

(12)      Mr. Michael Balfour (who was, however, interposed and called after Ms. Dauriac had given her evidence).

(b)     Mr. David Canfield

(d)     Mr. John Caudwell

(f)      Ms. Janet Tarbet

(g)     Ms. Rebekah Caudwell

(h)     Ms. Victoria Olszewska

(i)      Mr. Paul Lester

(j)      Mr. David Hayes

(k)     Mr. Daniel Ward

(m)    Mr. Michael Balfour

(3)     Factual witnesses called by Ms. Dauriac

(a)     List of witnesses called

(1)        Ms. Dauriac herself.

(2)        Ms. Kelly Degruttola.

(3)        Ms. Tracy Gehlan.

(4)        Ms. Suzette Burger.

(5)        Mr. Martin Wilson.

(b)     Ms. Nathalie Dauriac

(c)     Ms. Kelly Degruttola

(d)     Ms. Tracy Gehlan

(e)     Ms. Suzette Burger

(f)      Mr. Martin Wilson

(4)     The expert witnesses

(1)        The first report of Mr. Sharp dated 27 October 2016 (“Sharp 1”).

(2)        The first report of Dr. Shi dated 20 December 2016 (“Shi 1”).

(3)        A supplemental report of Mr. Sharp, responding to Shi 1, dated 27 March 2017 (“Sharp 2”).

(4)        A supplemental report of Dr. Shi, responding to Sharp 2, dated 15 June 2017 (“Shi 2”).

(5)        A third report of Mr. Sharp dated 11 August 2017 (“Sharp 3”).

E.      THE FACTS: THE ESTABLISHMENT OF SIGNIA

(1)     The background to Mr. Caudwell’s and Ms. Dauriac’s relationship

(1)        Equity funding.

(2)        Debt funding.

(3)        Funding through management fees charged to Mr. Caudwell for the management of his assets. It is a convenient shorthand to refer to the assets managed by a wealth management company as “Assets Under Management”. This is a measure that is of some significance in these proceedings.

(3)     Mr. Caudwell’s practice

(1)        Signia would be funded by a loan of either £6 million or £6.5 million, with repayment when “free cash permits” (Point 10).

(2)        As regards future funding, the company was free to borrow in the ordinary course of business, and Mr. Caudwell (whilst not obliged to provide further funding) would give a request for further funding “reasonable consideration” (Point 12.1).

(3)        The company’s affairs were to be conducted in accordance with “good corporate governance and arm’s length dealings” (Point 12.2).

(4)        Point 12.8 concerned the use of Mr. Caudwell’s management fees to defray Signia’s expenses. Mr. Caudwell’s position is recorded as follows: “[Mr. Caudwell] is sympathetic to this proposal provided it works legally in a tax efficient manner”.

(6)     Incorporation

(7)     Kinetic Partners’ advice on regulatory capital

“Further explanation following our conference call

If a business makes a loss, this must be deducted from the Share Capital immediately before this capital can be assessed against the Regulatory Capital requirement. Conversely, if the business makes a profit, this can only be included as Regulatory Capital once it has been externally verified – i.e. after an audit.

It is not possible for Signia to meet its Regulatory Capital requirements with Share Capital and Long Term/Short Term Subordinated Loans alone. The business initially makes a loss, which must be deducted from the Share Capital before it can be assessed against the Regulatory Capital requirement. To qualify as Regulatory Capital, even Subordinated Loans have restriction on their values. These restrictions are based upon fixed percentages of the Share Capital, so, as the Share Capital is reduced by the business’ losses, any loans are also reduced proportionately. The certain outcome therefore is that if a business is making a loss and its Share Capital is reducing accordingly, in time there is a breach.

Solution

It is necessary to charge a 45bp management fee on the £350m seed capital in order to prevent the business from making a loss in the initial months (Note: the above bulleted reductions to the business’ costs have reduced this from 50bp). This preserves the £612k Share Capital for assessment against the Regulation Capital requirement. As you are aware, the Requirement itself is one quarter of your first year’s fixed expenses – which are £3,206k – making the Requirement £802k.

A further capital injection is therefore needed in addition to the £612k Share Capital to cover this shortfall. This capital injection can either be in the form of Long-Term or Short Term Subordinated Loan and it must be at least £190k.

We would recommend that a buffer of one month's expenses was added to this figure and that the actual amount of Subordinated Loan that was placed in the business as Regulatory Capital was £350k. The loans maturity can either be Long-Term or Short-Term – the major difference being that the latter offers more flexibility.

We understand that your seed investor intends to put more capital into the business than the £962k (Share Capital of £612k + £350k Sub Loan) that is required to meet the Regulatory Capital Requirement. An additional amount can be put into the business at your discretion, and as a loan if this is preferable based on the legal and tax advice you receive, but we would not recommend that it be put in as Regulatory Capital (i.e. further Share Capital and/or Subordinated Loans) as this would place restrictions on its subsequent removal and future flexibility of the business.”

“David

Please find below, the solution we found to fund the business. We aimed for John to put as little as possible cash and as max as a loan. However, we needed to find a solution that will meet the Regulatory requirement for the FSA (the issue is that any losses is added to the capital requirements so in order to reduce the loss we needed to produce additional income to the business).

So the following proposed solution should satisfy John and the FSA. The requirements based on this solution is £802k which could be funded as below:

£612k Share Capital (including my £200k and £100k from Gautam) which should make easy the capital structure. As the requirement itself is £802k and to avoid putting additional cash, the difference of £190k can be put as a Subordinated loan (I did ask to increase the amount of capital that was supplied through a loan but FSA regulations restrict the amount of permitted regulatory capital that can be met through a loan to 250% of the Share Capital and, as the share capital is reduced by the losses on a monthly, the corresponding amount of capital allowed as a loan is also reduced until such a point as the regulatory capital requirement is breached). However see below they recommend that a buffer of one month’s expenses was added to this figure and that the actual amount of Short term (more flexible) Subordinated Loan that was placed in the business as Regulatory Capital was £350k.

However that solution of £802k is based on finding additional income to cover the losses to comply with the regulator. Therefore, we have found the solution of charging [Mr. Caudwell’s] portfolio 45bp management fee based on his £350m we discussed. The only key downside for you is that the fees invested in the business cannot be recovered as easy as a piece of senior debt. On the business front, it would allow us to market our business without mentioning of side letters/special deals on fees or explaining why [Mr. Caudwell] has a different treatment. Second, it would help substantially with the clarity of the track record and the generation of an audited investment record. The only downside is that VAT will be payable on the management fee (unless we manage his funds offshore as it will avoid VAT but Gautam and I would prefer to use the Vestra platform in the UK as it is robust).

The remaining amount can be put into the business as a loan.

For clarification, I assume the £6.5m we agreed included interest payable on the loan and excluded the money that Gautam and I were putting in the business. Please find attached the proposed split based on all the above assumptions.”

(1)        Clause 2.1 provided that Signia appointed Ms. Dauriac and Ms. Dauriac agreed to act “as Managing Director from the Commencement Date upon and subject to the terms of this Agreement”. The “Commencement Date” is a defined term and was typed as “11 January 2010”, but that date was amended by hand to “09/11/09”, i.e. 9 November 2009. By the end of the trial, it was common ground that this was the Commencement Date.

(2)        Clause 3.2 provided:

“You shall perform all the duties (including but not limited to exercising all the powers) of the position of Managing Director (or such other position as you may hold from time to time). The following is a non-exhaustive list of your duties. You will:

(a)     as soon as reasonably practicable in the first quarter following the end of the Financial Year, cause to be prepared and delivered to the Board an Annual Business Plan and obtain the Board’s approval thereto making such changes to such Annual Business plan as may be necessary for obtaining such approval;

(b)     be responsible for the day to day management of the Business of [Signia];

…

(f)      ensure that you conduct your affairs with fidelity and with the highest standards of ethics and integrity…”

(3)        Clause 5.1 provided that Ms. Dauriac’s principal place of work was Signia’s principal place of business (then 14 Cornhill, London), but that (on giving reasonable notice) Signia might require Ms. Dauriac to work anywhere, whether temporarily or permanently.

(4)        Clause 5.2 provided:

“You shall make all journeys, whether in the United Kingdom or abroad, as may be required for the proper performance of your duties, whether inside or outside normal working hours.”

(5)        Clause 6.1 provided that Ms. Dauriac would receive a salary of £200,000 per annum. Clauses 7.1 and 7.2 set out the criteria for the payment to Ms. Dauriac of a bonus of up to £200,000 for the years 2010 and 2011. Clause 8 provided for a “a Discretionary Bonus scheme, which will apply to you in the third calendar year of your employment i.e. from 1 January 2012 and thereafter. The Board will determine in its absolute discretion at the end of the relevant calendar year whether any bonus is to be awarded in respect of that year, and if so, the form, amount and any conditions attached”.

(6)        Clause 9 made provision for expenses:

“[Signia] will reimburse you for all reasonable out-of-pocket expenses (including travel, subsistence and entertainment expenses) necessarily and wholly incurred by you in the proper performance of your duties, provided you claim such expenses and produce receipts or other evidence of actual expenditure.”

(7)        Clause 15 provided for termination of the employment relationship:

(a)          Clause 15.1 set out the rights of Signia to terminate the employment relationship. So far as material, clause 15.1 provided:

“[Signia] may terminate the Employment:

(a)     by giving you 3 months’ notice if you are an Under Performer;

(b)     without notice on grounds which merit summary dismissal. The following is an exhaustive list of the grounds which merit summary dismissal in the event of such a breach:

(1)     In connection with the performance of your duties, you are guilty of:

1.      serious or repeated breach of your obligation due to gross negligence; or

2.      gross or wilful neglect.

(2)     You are guilty of a gross breach of any fiduciary duties owed by you to [Signia].

(3)     You commit any act of gross misconduct.

…”

(b)          Clause 15.2 provided that Ms. Dauriac could “terminate the Employment for any reason by giving [Signia] at least 3 months’ notice”.

(c)          Clause 15.3 provided that the employment relationship would terminate automatically at Ms. Dauriac’s 65^th birthday (the normal retirement age for employees of her position).

(d)          Clause 15.4 provided:

“There will be no right to give notice of termination of, or otherwise terminate, the Employment other than under clauses 15.1, 15.2 and 15.3.”

(8)        Clause 20 provided:

“20.1 [Signia] does not have its own disciplinary and dismissal procedures but intends to comply and expects you to comply with the ACAS Code of Practice on Disciplinary and Grievance Procedures (the “Code”). The Code does NOT form part of this Agreement. If you are dissatisfied with any disciplinary decision relating to you, you should first attempt to resolve this by discussion with the person who took the decision. If, having taken this step, you remain dissatisfied with the disciplinary decision you should appeal in writing to the Board, whose decision on the matter will be final.

20.2   [Signia] does not have its own grievance procedure but intends to comply and expects you to comply with the ACAS Code of Practice on Disciplinary and Grievance Procedures (the “Code”). The Code does NOT form part of this Agreement. If you wish to seek redress of any grievance related to your employment, you should write to the Board with details of the basis for the grievance. If the grievance is not resolved to your satisfaction, you should appeal in writing to the Board, which will allocate an appropriate individual to deal with it. The decision on appeal will be final.”

(9)     The Shareholders’ Agreement

(1)        Provided that Ms. Dauriac would submit a business plan to Grecco for its approval (clause 4.2).

(2)        Made provision for the appointment of directors (clause 4.4).

(3)        Made provision for the funding of Signia (clause 5). In particular, clause 5.1 provided that Signia would be financed by “the Loan Agreement, the Subordinated Loan Agreement and the ND Loan Agreement”.

(4)        Clause 6.2 provided:

“The management of [Signia] shall be vested in the Board provided that the day to day management of [Signia] will be the responsibility of the Manager. Without prejudice to the generality of the foregoing, the Board will determine the general policy of [Signia] and the manner in which that is to be carried out (subject to the express provisions of this Agreement) and will reserve to itself all matters involving major or unusual decisions. In particular, but without limitation to the generality of the foregoing, the Board will procure that:

6.2.1 [Signia] shall transact all its business on arm’s length terms…”

(10)   The loan agreements

(11)   The Articles of Association

(12)   The early operation of Signia

(1)        Discretionary;

(2)        Hedge fund;

(3)        Assets under supervision;

(4)        Cash and custody.

Table 2: Signia’s Assets Under Management and the revenue derived therefrom

The percentages for the hedge fund AUM were:

The lion’s share of the AUM (particularly when Caudwell-related AUM is taken into account) came from Mr. Caudwell.

The equivalent figures for the hedge fund AUM were:

The evidence was that one might expect to pay 50-100 BPS for discretionary AUM services and 70 or more BPS for hedge fund AUM services. Obviously, rates are negotiable and (in a competitive market) I do not consider that it is possible to establish a “market” rate for these services. Nevertheless, Mr. Caudwell clearly achieved competitive rates for his (and for the Caudwell-related) AUM, both when compared to the rates that one might expect to pay and (more importantly) when compared with what third parties were charged by Signia.

As regards the hedge fund AUM, I should say that I do not regard the fees charged by Signia as being commercial rates. They are far too low for that. I anticipate that the explanation for the low rates is simply that this line of business had only started up in 2014, and the figures are simply not representative.

(4)        The effect of the lower rates charged to Mr. Caudwell and the Caudwell-related parties is evident when one compares the proportion of AUM contributed by Mr. Caudwell and the Caudwell-related parties (as set out in Tables 2 and 3 above) with the proportion of Signia’s revenue that they contributed:

The percentages for the hedge fund AUM were:

In revenue terms, the proportions contributed by third parties is substantially higher, and the proportions contributed by Mr. Caudwell and the Caudwell-related parties significantly lower, than when the measure is AUM.

(2)     Signia’s total costs and total revenue

Table 10: Signia’s total revenues

(3)     Signia’s profit/loss

Table 11: Signia’s profit/loss and EBITDA

(4)     Signia’s sources of finance over time

(a)     Introduction

(b)     Financing of Signia in 2011

(1)        The first invoice – “Invoice S01145” – was in the amount of £950,000. VAT was not said to be payable. The invoice was in respect of “Introducers fee: Final fee for introduction to HSBC for lending on Hedge Fund Portfolio”.

(2)        The second invoice – “Invoice S01146” – was in the amount of £750,000. VAT was not said to be payable. The invoice was in respect of “Successful introduction to RBC for property loan on Ancaster House & 3 Audley Square”.

“Further to conversations between Nathalie and John last week, John has confirmed that Nathalie shall be entitled to a bonus of £300,000 every year from 2014 going forward. The remaining terms of her employment contract will remain unchanged.”