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OUTER HOUSE, COURT OF
SESSION
[2009] CSOH NUMBER23
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P1578/06
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OPINION
OF LORD GLENNIE
in
the Petition of
ALEXANDER
HERRON ROBERTSON
Petitioner;
for
An
order under section 459 of the Companies Act 1985 in respect of
RM SuppliesRM Supplies
(Inverkeithing) Limited
________________
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Petitioner: Dean of Faculty ,&
Ms Wolffe; Simpson & Marwick
Respondent: Johnston
QC, &
McIlvride; Brodies LLP
17 February 2009
Introduction/ Overview
[1] This petition is brought under s.459 of
the Companies Act 1985 (the
predecessor of s.994 of the Companies Act 2006). The subject matter of the petition is a
dispute between shareholders in RM Supplies
(Inverkeithing) Limited ("the CompanyCompany"), a companyCompany
engaged in the scrap metal business. The
resolution of the dispute has taken an unusual course, for two reasons: first, because of a change of position on the
part of the petitioner (in terms of the relief that he sought) before the
hearing on evidence; and, secondly, because, while the case was at avizandum, after the hearing on evidence
and submissions, the business of the CompanyCompany,
the value of its assets and the extent of its liabilities were all drastically
affected by what has become known as the "credit crunch" and the related global
financial turmoil. That has occasioned
the hearing of further evidence and submissions. As a result of that the issues on quantum,
i.e. the value to be attributed to the parties' respective shareholdings and
the price at which one side should be given the opportunity to buy out the
other, have considerably narrowed.
[2] The petitioner is Alexander Robertson.
The second and third respondents
(the only respondents who have taken part in these proceedings) are George Muir
and Thomas Muir
junior. They are brothers. I shall refer to the latter simply as Thomas Muir,
his father being Thomas Muir senior;
and I shall from time to time refer to the respondents together as "the Muir
brothers". The petitioner is the holder
of 1500 shares
in the CompanyCompany. His shareholding comprises one half of the
issued share capital in the CompanyCompany. The respondents between them own the other
shares, holding 750 shares (or 25%)
each. I shall refer to their
shareholding as "the Muir shareholding".
[3] The shareholding is divided in this way
because the CompanyCompany was
formed by William Robertson and
Thomas Muir
senior, respectively the fathers of the petitioner and the father of the Muir
brothers. I shall at times refer to them
together as "the fathers". They each
held 50% of the shares in the companyCompany and
passed those shares onto their sons. The
petitioner, being the only son of William Robertson,
acquired a 50% shareholding; whilst the Muir brothers each acquired 25% of the
shares.
[4] The petitioner and the Muir brothers are
all directors of the companyCompany. There are two other directors, namely Mrs Robertson,
the petitioner's mother, and Mrs Muir, the
mother of the Muir brothers. The companyCompany
secretary is, and has been for some considerable period, James Thomson. Mr Thomson
is a solicitor.
[5] In this petition, the petitioner
complains that the affairs of the companyCompany have
been and are being conducted in a manner which is unfairly prejudicial to his
interests as a member of the companyCompany. In the early stages of the petition, in
addition to certain incidental and ancillary relief, the petitioner sought an
order that the respondents should be required to buy his shareholding at a
price to be fixed by the court. For
their part, the respondents denied that there had been any unfairly prejudicial
conduct of the companyCompany's
affairs by them; but they accepted that, if it were shown that there had been
any such unfairly prejudicial conduct as was alleged, they should buy the
petitioner out at a price to be fixed by the court. Later, they made certain limited admissions
of unfairly prejudicial conduct so as to focus the dispute on value. The issue at that stage, therefore, was
essentially an issue about the price which the respondents should be required
to pay for the petitioner's shareholding.
On this issue the parties were far apart. Both sides lodged expert reports from
chartered accountants. The expert for the
petitioner was Mr Ian Webster
of Johnston Carmichael,
while that for the respondents was Mr Greig Rowand
of Henderson Loggie. Mr Webster's
valuation was higher than Mr Rowand's by a
factor of more than two.
[6] As the date fixed for hearing approached,
the petitioner sought leave to amend the prayer of the petition so as to enable
him to argue that he should be permitted to buy the respondents'
shareholding. This amendment was
opposed, but it was not suggested that the respondents would suffer any
prejudice from it, apart from having to deal with a case with which they would
have preferred not to deal. I allowed
the amendment. In light of this, since
the relief sought was now in dispute, the petitioner insisted on all his
allegations of unfairly prejudicial conduct and the respondents deleted their
limited admissions. The matter proceeded
on the basis that both liability and quantum would be contested. It was made clear by the petitioner that the
purchase of the respondents' shareholding was now his preferred option. Nonetheless, the parties maintained the same
positions as regards the value of the CompanyCompany
and of the relevant shareholdings, with the result that the petitioner, who
wanted to buy the respondents' shares, was contending for a value which was far
higher than that which was put upon them by the respondents. At the time the case came to a hearing on
evidence, Mr Webster
assessed the fervour of the companyCompany to be
about £25.2 million. Mr Rowand's
valuation was only £10.3 million. Although at an earlier stage Mr Rowand
had valued the CompanyCompany on an
assets basis, by the time the proof began both he and Mr Webster
were approaching the question of valuation on an earnings basis, albeit using
different methodology, Mr Rowand applying
a multiple of Future Maintainable Profits ("FMP") and Price Earnings ("P/E")
ratio while Mr Webster
preferred to use the EBITDA (Earnings Before Interest, Tax, Depreciation and
Amortisation) approach. There were also
a significant number of other differences between them.
[7] In May and June 2008
I heard 11 days of
evidence, including very detailed examination and cross-examination of the
expert witnesses. Submissions were made
over two days at the end
of June. At
this stage both the petitioner and the respondents confirmed that they would be
able to purchase the shareholding of the other(s) at the price fixed by the
court, even if that price was at the higher end of the scale based upon Mr Webster's
valuation of the CompanyCompany. In September 2008
I asked my clerk to contact the solicitors for each party to ask whether, in
light of the financial upheaval that had by then hit the headlines, they wished
to make further submissions on value. I
heard the parties on this at a By Order hearing
on 10 October 2008. The petitioner lodged in
process a further letter from Mr Webster
revising his valuation downwards in light of two particular matters, namely a
significant fall in the value of some shares (in Forth Ports plc)
held by the companyCompany and an
increase in the losses suffered by the CompanyCompany
on certain forward foreign exchange contracts which it had entered into with
the Royal Bank of Scotland. There was
some discussion about whether the respondents wished to have the opportunity to
put in a further report substantially reducing Mr Rowand's
valuation in light of a large number of factors. Ultimately it was agreed that the respondents
should have two weeks in which to put in a letter from Mr Rowand
dealing only with the two points addressed in Mr Webster's
letter. It was not envisaged that there
were any more widespread difficulties.
In particular it was not envisaged that either party would have any
additional difficulties in raising the finance needed to purchase the other
shareholding(s) if I decided in their favour.
[8] Just before the expiry of that two-week
period, the solicitors for the respondents wrote to the court asking for a
further hearing as a matter of urgency before I finalised my Opinion. There had, they said, been a material change
of circumstances. They elaborated on
this to say that "the respondents are now completely clear that they are not in
a financial position whereby they can afford to purchase at [the petitioner's]
valuation". They said that they would
now be prepared to sell their shares to the petitioner at the valuation
attributed to the companyCompany by Mr Webster,
though they remained willing to buy on the basis of Mr Rowand's
valuation.
[9] In light of this, there was a further
short hearing on 30 October 2008, at which it became clear that there had been a significant
downturn in the ferrous and non-ferrous markets. It seemed possible that the parties would
reach some agreement for disposal of the whole action without the need for any
Opinion, and I continued the hearing for further discussions. In the event, those discussions came to
nothing.
[10] There was a further By Order
hearing on 14 November 2008. I had, at an earlier
hearing, made it clear that I had reached a decision on the question of unfair
prejudice and on the question of which side should be given the opportunity to
purchase the shareholding of the other; and I had offered to make it known to
the parties if they thought that this would assist them in coming to a
resolution of the dispute. At the
hearing of 14 November 2008 I was asked by both parties, on the assumption that I was prepared
to find that there had been unfairly prejudicial conduct, to indicate which way
my decision would go. I therefore told
the parties my decision, which was that the petitioner should be allowed to
purchase the respondents' shares. It was
agreed that parties would consult their experts and that the experts would meet
with a view to identifying what were the issues between them in the light of
the prevailing financial turmoil.
[11] A further hearing took place on 8 December 2008. The experts had by then met
and were due to meet again. It was
agreed that the value of the of the CompanyCompany
should be assessed as at 31 December 2008. A hearing was fixed, in the
event for 19 and 26 January 2009. It was anticipated that the expert witnesses
would give their evidence, followed by submissions on the outstanding matters
of difference.
[12] In January 2009,
in advance of the hearing, the parties lodged further supplementary expert
reports from Mr Webster and Mr Rowand
(respectively 6/287 and No. 334
of Process). Both reports showed a
marked drop in the value of the CompanyCompany as
assessed by the experts. Mr Webster,
using the same methodology as he had used previously, assessed the fair value
of the CompanyCompany
as £10,137,100. Mr Rowand
reverted to an assets based valuation: his figure, on this basis, was £7.9 million.
[13] At the hearing on 19 January 2009, however, only Mr Webster gave
evidence. His evidence extended into the
morning of 20 January. He was cross-examined only on four discrete
issues. Otherwise his valuation was
accepted. It was agreed that, although
he had not given further evidence, Mr Rowand's
further supplementary expert report should be regarded as in evidence as
setting out his Opinion. However, it was
no part of the respondents' case that Mr Rowand's
latest report should be preferred to that of Mr Webster. Parties lodged in process a Joint Minute (No. 36
of Process) dealing with certain issues. I heard submissions on 21 January. These were, in effect, limited to the four
points on which Mr Webster was
cross-examined. On the basis of these
four points, it was suggested by the respondents that Mr Webster's
valuation should be higher by some £4..569 million.
[14] Having heard that evidence and considered
the submissions, I have come to the conclusion that Mr Webster's
valuation of the CompanyCompany at £10,137,100
must be accepted. I shall explain my
reasons at the end of this Opinion.
Having regard to certain other matters, to which I shall refer later,
this valuation leads to the conclusion that the petitioner should be allowed to
purchase the respondents' 50% shareholding for the sum of £3,305,780.50 (or
£1,652,890.25 each).
[15] At the end of the last round of
submissions, I was asked by the respondents to set out in writing my reasons
for coming to the conclusion that the petitioner should be given the
opportunity to buy out the respondents, rather than the other way round. I propose to do that next, though without
going into the evidence in as much detail as I would have done had proceedings
not taken the course they did. After
that I shall deal with the outstanding issues of quantum.
Background
[16] There was no significant dispute about the
background to the current relationship between the parties. In the 1950's
both fathers' had had their own scrap metal
businesses. William Robertson
(the petitioner's father) carried on business through Alex Robertson
& Son, while Thomas Muir senior
(the father of the Muir brothers) carried on business through Thomas Muir
(Metals) Limited (hereafter called "Metals") and, later, also through Thomas Muir
(Haulage) Limited ("Haulage"). There was
some suggestion in evidence that the business run by the petitioner's father
was just a "rag and bone" business, but I reject that. I am satisfied that both were involved in the
scrap metal business, albeit that the business run by Thomas Muir
senior may have been the larger of the two.
Those companies are now run by their sons, the petitioner having taken
over from his father at Alex Robertson &
Son, Thomas and George Muir having
taken over Haulage and Metals respectively.
[17] The two fathers were good friends. In about 1957
they set up a companyCompany known as
RM
SuppliesRM Supplies (Kirkcaldy) Limited
("the Kirkcaldy companyCompany"). They each owned 50% of the shares and their
wives were appointed directors, although in practice the two fathers carried on
the running of the business. With the
establishment of the Kirkcaldy companyCompany, much of
the business of Alex Robertson &
Son, Metals and Haulage was channelled through Kirkcaldy. When the business of the Kirkcaldy companyCompany
was transferred to the CompanyCompany on 31 January 2004, the individual directors, i.e. the petitioner and the Muir
brothers, continued to maintain their interest in their own companies. In particular, through Metals, George Muir
sold scrap to the CompanyCompany and,
through Haulage, Thomas Muir provided
the CompanyCompany
with haulage services.
[18] From its inception, the CompanyCompany,
and before that the Kirkcaldy companyCompany, was a
small scrap metal business run informally by and for the benefit of the
Robertson and Muir families. The CompanyCompany
is the de facto successor to the
Kirkcaldy companyCompany. The petitioner makes the following averment
on record:
"The
Kirkcaldy companyCompany (and the
CompanyCompany
as the de facto successor to its
business) was run for many years with a view to prospering the interests of the
Muir and Robertson families. From the
inception of the Kirkcaldy companyCompany and over
the 40 years
or so that they were active in the business, the said William Robertson
and the said Thomas Muir senior
took any value out of the CompanyCompany
(including its predecessor business) in equal shares, reflecting their
respective shareholdings. The business
(which was transferred to the CompanyCompany in the
circumstances hereafter narrated) was of the nature of a
quasi-partnership. In particular, it was
to be (and was) conducted fairly, and in the interests of both the Muir and
Robertson families."
Although there was no
admission of this in the answers, I am satisfied on the evidence that this is
an accurate reflection of how the Kirkcaldy companyCompany
and, subsequently, the CompanyCompany was run
whilst the two fathers were actively concerned in its management.
[19] Evidence of this came not only from the
petitioner but also from Mr Thomson. Not only had he been companyCompany
Ssecretary
to the CompanyCompany
since its formation, but he was, before then, solicitor to the several
businesses of the two families. He gave
evidence that, for as long as he could recall, profits were split equally
between the families, originally by payments to the wives as shareholders; and,
later, when pensions came to be paid in different amounts to the wives because
of their different ages, arrangements were made to "equalise" the payments so
that each family received the same amount.
There was always an equal division of money between the two families
whilst the fathers ran the business.
[20] The
petitioner and the Muir brothers became Ddirectors
in 2000 at a time when it was thought the fathers would take a step back from
active involvement in the business. I
have already referred to the fact that payments were taken out from the CompanyCompany
equally by the two families. When the
petitioner and the Muir brothers became directors, there was no agreement
reached that this would change. Nor was
there anything in the conduct of the business of the companyCompany,
or the level of withdrawals made from the companyCompany,
to suggest that there was an intention to change this. The pursuer was right, in my opinion, to say
that there was, even after 2000, a continuing expectation that the families
would participate in the profits of the basis in accordance with their
shareholding, i.e. equally.
[21] The fathers did not in fact cease to be
active in the CompanyCompany until
2003. However, long before that both
the petitioner and the Muir brothers had had some involvement in the business
of the companyCompany. It is worth noting at this point that in November 1998
a Mmanager,
Glen Dunn,
was appointed who took over a large part of the active running of the companyCompany. He gave evidence at the hearing. He struck me as an impressive witness, both
in terms of honesty and reliability.
Before joining the CompanyCompany he had
had extensive experience in the re-cycling industry. When he joined the CompanyCompany,
he had responsibility for the day to day running of the yard at
Inverkeithing. The two fathers continued
to attend, usually twice a week on Tuesdays and Fridays. But Glen Dunn
was effectively in charge.
[22] It is
in the context of Glen Dunn being in
charge that the involvement of the petitioner and the Muir brothers in the
business of the CompanyCompany must be
viewed. Each of them gave evidence as to
their own involvement and that of the others.
Glen Dunn also gave
evidence on this point. On this matter,
as on others, I found Glen Dunn's evidence
to be of great assistance. He confirmed
the petitioner's evidence that the petitioner was the person primarily
responsible for sourcing the raw materials for the business. The raw materials would be fed to the
fragmentiser within the yard. This
involved negotiating on behalf of the CompanyCompany
with suppliers of raw material. Some of
his time, it is true, was involved in the business of Alex Robertson
& Son, but I am satisfied that by far the major part of his time was taken
in sourcing material for the CompanyCompany. I accept the petitioner's evidence that he
spent about 75% of his time in working for the companyCompany. Evidence was given by reference to details of
the list of purchases of raw material in 2007; and, although the records kept did not enable
a precise analysis to be undertaken, they seemed to confirm that the petitioner
was responsible for sourcing over 70% of the raw material for the CompanyCompany
in that year. The petitioner was also
the person responsible within the CompanyCompany for most
of the sales of non-ferrous materials.
[23] By
contrast I am satisfied that the roles played by George and Thomas Muir
within the companyCompany were
much less significant. Glen Dunn
gave evidence that when he joined the companyCompany
in 1998 they were both very peripheral.
George Muir would help
out from time to time, as did everyone else within both families, when there
was a major capital purchase which needed to be installed. Otherwise, he "popped down" to the yard only
occasionally, perhaps once a month.
Thomas Muir was
primarily involved in his haulage business, although he too would help out when
there was a major piece of machinery requiring to be installed. Their involvement did increase as the fathers
began to step back from the business. By 2003,
according to Glen Dunn, George Muir
had become more involved in the companyCompany but with
no specific task. Glen Dunn
suggested that he would walk around the yard, inspect this and that, swear at
him and then go off. I suspect there is
an element of exaggeration there but to my mind that gives the flavour of George Muir's
involvement. He was, after all, still
concerned to further the business of Metals and, acting for Metals, to sell raw
materials to the CompanyCompany. Thomas Muir
became more involved too, perhaps with more practical effect. He took over the placing of insurance and
dealt with certain other matters; and he became involved in projects such as
the installation of a new fragmentiser and the setting up of a non-ferrous
processor.
[24] Taking
the evidence as a whole, I am satisfied that the petitioner's contribution to
the companyCompany
both before and after the fathers ceased actively to be involved was
immeasurably greater than even the combined contribution of the Muir brothers.
[25] In
coming to this conclusion I have been influenced not only by the evidence of
Glen Dunn
but also by my assessment of other witnesses as they gave their evidence. I should make it clear at this stage that I
considered the petitioner to be an honest and reliable witness. He struck me as someone who was dedicated to
the success of the CompanyCompany and felt
frustrated by the actions of the Muir brothers, particularly Thomas Muir. He answered questions directly and
confidently and he resisted to a large extent the temptation to minimise
completely the contribution made by others.
By contrast, I did not form a high opinion of either Thomas or George Muir. I was not satisfied that they were always
doing their best to assist the court.
They appeared evasive at times in their answers. Nor did they strike me as reliable. Their conduct at the meeting of 3 May 2006, to which I
shall refer, was wholly unreasonable, and Thomas Muir's
explanation of his conduct on that occasion was not convincing. Further, both Thomas and George Muir
entered into disastrous foreign exchange contracts on behalf of the CompanyCompany
with the Royal Bank of Scotland, and kept them secret not only from the
petitioner but also from Mr Graham, the CompanyCompany's
accountant and (until the very last moment), from Mr Rowand,
their expert. They had no satisfactory
explanation for what they had done. This
conduct was symptomatic of their general approach. Thomas Muir
in particular was often muddled in his thinking; and he was also both assertive
and unreasonable. He sought to diminish
the role played by Glen Dunn and by the
petitioner in a manner and to an extent which I found wholly unconvincing. George Muir
was perhaps weaker - he was easily led by his brother - but, equally, I did not
find him reliable. Where there was a conflict
between the evidence of the petitioner and Glen Dunn
on the one hand, and Thomas and George Muir
on the other, I was not inclined to accept the evidence of Thomas and George Muir
unless constrained to do so by the documentary evidence.
The meeting of 3 May 2006
[26] After the fathers relinquished control of
the CompanyCompany
to the younger generation, it is clear that a rift developed between the
petitioner on the one hand and the Muir brothers on the other. In particular, they were in dispute about the
reward to be taken by each of them from the business. The petitioner continued to insist that the
reward should be shared equally between the two families. The Muir brothers, as I understand it,
contended that this was unfair and that the reward should be divided three
ways, with the petitioner and themselves receiving one third each.
[27] Matters came to a head at a board meeting
of 3 May 2006 attended by the petitioner, the Muir brothers and Mr Thomson
as companyCompany
Ssecretary. The meeting was taped by the petitioner,
openly and without objection by any of the others present. A transcript was lodged in process and
confirmed as substantially accurate by all of the witnesses who spoke to it. At that meeting Thomas Muir
proposed a payment out to the petitioner's companyCompany,
Alex Robertson
& Son, of an additional £105,000 on top of the sum of £97,500 already
invoiced. As I have noted, payment was
frequently made to the companies rather than to the individuals. That made a total going to Alex Robertson
& Son of just over £200,000. Thomas Muir
then went on to suggest a payment to his and his brother's companies (i.e.
Haulage and Metals) of £292,000 each.
The payments were sought to be justified as being for management
services provided by the two Muir companies, through the provision of the
services of Thomas and George Muir. But as justification for the amounts sought
to be paid, Thomas Muir alluded to
the CompanyCompany's
ability to pay based on the profits it had made. The discussion became both heated and
confused. Thomas Muir,
without always being able to differentiate the points, variously stated that
the proposed payments were (a) for management fees for the services provided
and (b) by way of a dividend reflecting their three way interest in the CompanyCompany. The disparity between the £200,000 payable to
the petitioner's companyCompany and the
£292,000 intended to be paid to each of the Muir companies reflected, as I
understood Thomas Muir's
explanation, an imbalance from the previous year. Nothing turns on this aspect of the
discussion. Towards the end of the
meeting Thomas Muir refused to
explain his position further, hinting that any further explanation would have
to await court proceedings. In essence
the proposal from Thomas Muir was for a
three way split of the profits of the CompanyCompany. The petitioner reacted to this by saying that
the payments could not be justified as fees for services rendered. The division of profits had always been 50/50
between the two families, as reflected in the respective shareholdings, and in
this he was supported by Mr Thomson. Any proposal to change this should be
discussed at a shareholders meeting rather than at a board meeting. Nonetheless the Muir brothers were able to
pass a resolution for a division of the proceeds in this way.
[28] The dispute on this matter developed
rapidly. The petitioner withdrew a
further sum from the CompanyCompany in order
to bring the payment that he received up to the amount voted for and paid to
the Muir brothers pursuant to the resolution.
In correspondence from solicitors thereafter, the petitioner offered to
return that sum provided that the Muir brothers reimbursed the CompanyCompany
with the amount of the excess payments for which they had voted at the
meeting. Before the proof, as I
understand it, these sums were indeed returned and I need not deal with these
further.
[29] This meeting, itself the culmination of
two years of disagreement, was the final nail in the coffin of the relationship
between the petitioner and the Muir brothers.
Further board meetings confirmed this.
At a board meeting of 14 June 2006, according to "additional minutes" proposed by the petitioner in
respect of that meeting, there was discussion about why Thomas Muir
had asked the CompanyCompany's
accountant, Tom Graham, to
include in the accounts for the year ending January 2006
a figure of £600,000 in respect of management fees. He was told that this was a continuation of
the three-way division agreed at the board meeting of 3 May 2006 in respect of the previous year.
There ensued a discussion similar to that which had taken place on 3 May 2006, the petitioner saying that if the payment was to be profit related
it should be agreed by a shareholders meeting and divided in accordance with
the respective shareholdings. At a
further board meeting of 24 August 2006, a resolution was agreed about sales procedures, in terms of which
no sales were to take place unless agreed by at least two working directors. It was not clear why the petitioner agreed to
this, but the effect was that nothing could be sold without the approval of at
least one of the Muir brothers. This had
a consequence in terms of the non-ferrous part of the business to which I shall
refer in due course.
[30] It was apparent from the evidence that the
relationship between the petitioner and the Muir brothers had completely broken
down and that this was having an adverse effect upon the continuing management
of the companyCompany. It was in these circumstances that the
petitioner petitioned for relief under sections 459-461 of the Companies Act 1985.
Section 459 Companies Act 1985
[31] Section 459
provides that a member of a companyCompany may
apply to the court for an order under Part XVII
of the Act
"On
the ground that the companyCompany's
affairs are being or have been conducted in a manner which is unfairly
prejudicial to the interests of its members generally or of some part of its
members (including at least himself)..."
Section 461
sets out the orders which may be made if the court is satisfied that a petition
under that Part of the Act is well founded.
The court my make such order as it thinks fit for giving relief in
respect of the matters complained of.
Without prejudice to the generality of that, the court may make an order
providing for the purchase of the shares of any members of the companyCompany
by other members, or by the companyCompany itself,
and, in the case of a purchase by the companyCompany
itself, for the reduction of the companyCompany's
capital.
[32] I was referred to a number of authorities
setting out the general principles upon which the court will act pursuant to
those sections. They included, in date
order, Elder v. Elder & Watson Limited 1952 SC 49, a case concerned with
winding up on "just and equitable" grounds, but whose relevance to a petition
under section 459 is made
clear in Re Saul D Harrison & Sons Plc (infra), In in Re Bird
Precision Bellows Limited [1986] Ch 658,
iIn Re London School of Electronics Limited [1986] 1 Ch 211,
Jesner v. Jarrad Properties Limited 1993
SC 34,
iIn Re Saul D Harrison & Sons Plc [1995] 1 BCLC 14,
O'Neill v. Phillips [1999] 1 WLR 1092, Anderson v Hogg 2002 SC 190,
Grace v Biagioli [2006] 2 BCLC 70, Strahan v. Wilcock (unreported) [2006] EWCA CIV 13
and Re West Coast Capital (LIOS) Limited (unreported)
[2008] CSOH 72. Other cases cited to me need not be mentioned
since they related to some of the issues on quantum which no longer arise.
[33] It would not be helpful for me to attempt
any general restatement of the applicable principals. In Elder,
at p. 55,
the Lord President (Cooper)
said this:
"The
essence of the matter seems to be that the conduct complained of should at the
lowest involve a visible departure from the standards of fair dealing, and a
violation of the conditions of fair play on which every shareholder who
entrusts his money to a companyCompany is
entitled to rely."
That was cited with
approval by Hoffman LJ in Re Saul D Harrison at p. 118. He went on to point out that conduct might be
technically unlawful without being unfair and also unfair without being
technically unlawful.
[34] This point was amplified by Lord Hoffman
(as he had by then become) in O'Neill v.
Phillips at p. 108-9 when
he emphasised the importance, in considering the question of "fairness" (the
criterion adopted by Parliament in s.459 of the Act as the threshold for the
jurisdiction to grant relief), of having regard to the context and background
against which it must be considered. He
said this:
"In
the case of section 459, the
background has the following two features.
First, a companyCompany is an
association of persons for an economic purpose, usually entered into with legal
advice and some degree of formality. The
terms of the association are contained in the Articles of Association and
sometimes in collateral agreements between the shareholders. Thus the manner in which the affairs of the companyCompany
may be conducted is closely regulated by rules to which the shareholders have
agreed. Secondly, companyCompany
law has developed seamlessly from the law of partnership, which was treated by
equity, like the Roman societas, as a
contract of good faith. One of the
traditional roles of equity, as a separate jurisdiction, was to restrain the
exercise of strict legal rights in certain relationships in which it considered
that this would be contrary to good faith.
These principles have, with appropriate modification, been carried over
into companyCompany
law.
The first of these two
features leads to the conclusion that a member of a companyCompany
will not ordinarily be entitled to complain of unfairness unless there has been
some breach of the terms on which he agreed that the affairs of the companyCompany
should be conducted. But the second
leads to the conclusion that there will be cases in which equitable
considerations make it unfair for those conducting the affairs of the companyCompany
to rely upon their strict legal powers.
Thus unfairness may consist in a breach of the rules or in using the
rules in a manner which equity would regard as contrary to good faith."
The principles arising
from O'Neill and other cases have
been recently summarised in the judgement of the court delivered by Patten J in
Grace v. Biagioli at para [61].
[35] In light of the evidence and of the
submissions made to me in this case, it is perhaps worth emphasising four
features of the jurisdiction. The first
is that there is no "no fault divorce".
This is made clear by Lord Hoffman in O'Neill at p. 1104. In other words, it is not enough merely to
show that the relationship between the parties has irretrievably broken
down. Some unfairly prejudicial conduct
must be shown. It may be, however, as is
said in Grave v Biagioli at para [61], that the
irretrievable breakdown in relations leads to one or other party being excluded
from the management of the companyCompany and,
therefore, to the position where it can properly be said that unfairly
prejudicial conduct is established. Secondly,
it is important to emphasise that not all conduct which is in breach of the
Articles or of some agreement between the parties will necessarily amount to
unfairly prejudicial conduct. If parties
have for a considerable period acquiesced in a departure from strict observance
with the rules, it will be difficult for them later to complain that that
departure from the rules is, in itself, sufficient to show unfairly prejudicial
conduct. That is shown, for example, in
the decisions in Jesner v Jarred Properties and Anderson v Hogg. Such considerations
are likely to have all the more force when the affairs of the companyCompany
are carried on in a very informal manner.
Third, in a case where the court is persuaded that it is appropriate to
make an order that one party purchase the shareholding of the other, the price
fixed by the court (having heard expert evidence) will normally be a fair value
without any discount being applied for the fact that the shareholding being
purchased may be a minority shareholding.
This because the party selling is not a willing seller, putting his
shares on the market and accepting the reduction in price usually associated
with a minority shareholding, but is being forced to sell to resolve an impasse
which is not, or at least not wholly, of his making. The normal approach will be to value the companyCompany
and attribute a pro rata valuation to
the shares in it. This is made clear in
a number of the authorities (see e.g. Re
Bird Precision Bellows and Re London School of Electronics) and is
impliedly approved in O'Neill at p. 1107D. This does not depend, in my opinion, on it
being established that the companyCompany is a
"quasi partnership", though if it were necessary so to find I would do so in
the present case. Fourth, the date on
which the shareholding is to be valued, if a sale is ordered, should usually be
the date on which the court makes the order.
Clearly the evidence given will relate to a slightly earlier time, but
valuations may change with changes in economic circumstances. The revised valuations given by the experts
in light of the recent turmoil in the financial markets, which was presaged
during the hearing on evidence but have become more intense in the last few
months, illustrate the importance of this point.
The main allegations of unfairly prejudicial conduct
[36] A number of matters of complaint were
raised by the petitioner in support of the petition. They can be grouped conveniently under three
headings: (i) the payment of "management charges" to the Muir brothers or their
companies; (ii) the exclusion of the petitioner from the management of the companyCompany,
and the Muir brothers' conduct of the CompanyCompany's
business; and (iii) transactions between the CompanyCompany
and Metals and Haulage. I propose to
deal with each in turn.
(i) Payment of
"management charges" to the Muir brothers or their companies
[37] The
first head of complaint, and in many ways the most important, relates to the
"management charges" which the Muir brothers procured, by a resolution voted
upon at the directors meeting on 3 May 2006, to be paid to
them or their companies.
[38] I have
already set out what happened at that meeting.
When adjustments are made for payments previously made, and even making
allowance for the suggestion that part of the payments to be made to Haulage
and Metals were in respect of a previous year, the effect of the resolution was
to change completely the basis upon which profits were to be taken out of the companyCompany. Two explanations were put forward at the
meeting. One was that these payments
were in respect of management services rendered by each of the companies
through the petitioner and Thomas and George Muir. I do not accept that this was honestly put
forward as a basis upon which they should be entitled to such amounts. The "management services" provided by the
three companies in the form of the services of the respondent and the Muir
brothers were by no means equal either in time or effort or in value to the CompanyCompany. As I have already said, I accept the evidence
that the contribution made by the petitioner was greatly in excess of the
combined contribution of the Muir brothers.
It could not even be respectfully argued that their contributions were
commensurate. The presentation of that
argument was, in my opinion, simply a pretext for trying to divide the profits
three ways rather than two. This was
made clear from time to time during the meeting, as appears from the references
in the transcript of the meeting to what the CompanyCompany
could afford to pay and the profits it had made. What the Muir brothers were trying to do was
to take a per capita dividend in the CompanyCompany
equal to that taken by the petitioner.
There was no justification for this, since the petitioner held 50% of
the shares and the Muir brothers each held 25%.
[39] It was
argued on behalf of the respondents that in some way these payments were
justified by reference to the amounts paid to Glen Dunn
over a three year period. In other
words, Thomas and George Muir wanted to
be paid salaries equivalent to that paid to Glen Dunn,
and the figure of £290,000 for each of them (or rather for their companies)
represented something over three years worth of accrued salary. That, at any rate, is how I understood the
argument. It was spoken to in evidence
by Thomas Muir but in my
view it has no merit. It was not the
reason put forward at the meeting of 3 May 2006, nor could it be
justified by reference to the amount of work which either of the Muir brothers
did by comparison with Glen Dunn.
(ii) The exclusion of
the petitioner from the management of the companyCompany,
and the Muir brothers' conduct of the CompanyCompany's
business
[40] The
second main complaint is that the petitioner was, in effect, excluded from any
material management role in the conduct of the companyCompany's
business after about the middle of 2006.
This complaint is less all embracing than might at first appear. It is clear that the petitioner continued to
play an active role in sourcing raw material for the companyCompany. He continued to attend the yard at
Inverkeithing and discuss matters with Glen Dunn until the latter's
resignation. The real complaint is more
limited than that. It focuses on two
main points.
[41] The
first related to a change in the Bank Mandate in June and/or August 2006. The petitioner complains that, although he
approved a new mandate in relation to the CompanyCompany's
account at the Dundee branch of the bank requiring the signature of the yard
manager at Dundee, the mandate that was in fact presented to the CompanyCompany's
bank was one on which the Dundee manager's signature was no longer required;
and, further, it related not simply to the Dundee account but to all of the CompanyCompany's
bank accounts. The effect, he complains,
is that the new mandate enabled the accounts to be operated for the first time
without reference to him. The evidence
on this aspect was unclear. No one from
the bank was called to give evidence of what happened. On the evidence it appeared that the
insertion of the account numbers of all the CompanyCompany's
bank accounts, rather than only the number of the account at the Dundee branch,
were inserted by the bank after the mandate had been submitted by the CompanyCompany. Having regard to the whole of the evidence
led on this point, which was very limited, I do not find it proved that the
Muir brothers deliberately procured a new mandate in such terms that it enabled
them to operate all of the CompanyCompany's bank
accounts without reference to the petitioner.
[42] The
second matter is, I think, of more importance.
I have already noted that the petitioner was the person responsible for
the sale of non-ferrous material. There
was some dispute between the petitioner and Glen Dunn on the one hand and
the Muir brothers on the other as to the value to the companyCompany
of the sale of non-ferrous material. The
Muir brothers seemed to regard it as merely a by-product, though they came to
recognise that it had some value, so much so that a non-ferrous processor was
purchased in 2003 and began to operate.
The advantage of processing non-ferrous material, rather than selling it
unprocessed, was that the CompanyCompany could
know what it was selling, rather than being entirely in the hands of the buyer
for information as to what had been in the unprocessed material. I did not understand the thinking behind this
to be criticised.
[43] The
non-ferrous processor was unable to keep pace with the increasing amount of
non-ferrous material in the yard. Up
until late 2006, the bulk
of the non-ferrous material which was in excess of the capacity of the
non-ferrous processor was sold off unprocessed.
In August 2006, as I have
already noted, a decision was taken by the directors that all future sales by
the CompanyCompany
would require the approval of two directors.
This was a unanimous decision and the petitioner voted for it. The result, however, was that the Muir
brothers effectively took control of the policy in respect of selling
unprocessed non-ferrous material. After
that there was only one further occasion before the hearing on evidence in this
action upon which that unprocessed non-ferrous material was sold. Thereafter it was stockpiled in the
yard. This was at a time when there was
a rising market for non-ferrous materials, both processed and unprocessed. The petitioner complains that the policy of
simply stockpiling this unprocessed non-ferrous material was detrimental to the
profitability of the companyCompany. The response by the Muir brothers was to the
effect that there were different views as to whether it was better to process
the non-ferrous material before selling it or to sell it unprocessed. This seems to me to miss the point
completely. The petitioner does not
complain about the policy of using the non-ferrous processor to its full
capacity and selling as much as possible of the non-ferrous material after it
has been processed. His complaint is
that there will always be a build up of non-ferrous material which is beyond
the capacity of the processor; and that the resulting stockpile of unprocessed
non-ferrous material ought to be sold.
To my mind there is no convincing answer to this. It is not a matter of there being two
legitimate commercial views and there being a disagreement about what policy to
adopt. The business of the companyCompany
was to make money by selling. Had there
been some intent to buy another processor, or to expand the processing capacity
for non-ferrous material, it might have made sense to stockpile non-ferrous
material. But nothing of that sort was
suggested. Nor was it suggested that it
was being held because of some anticipation of a particularly good sales
opportunity which was likely to arise in the future.
[44] This, so
it seems to me, provides an example of how, after the disputes had crystallised
by the middle of 2006, the business of the CompanyCompany
was being conducted by the Muir brothers in a manner which excluded the
petitioner and was detrimental to the interests both of the CompanyCompany
and, because of his shareholding, of the petitioner himself. The effect of the stockpiling was to depress
significantly the apparent profitability of the CompanyCompany. There was much argument about whether the
sale of non-ferrous material was "key" to the CompanyCompany's
success. I am not persuaded that the
particular word is of any great significance.
It was clearly an important part of the CompanyCompany's
profitability. The effect of stockpiling
the non-ferrous material which could not be processed, rather than selling it,
was to depress the apparent profitability of the CompanyCompany
in two particular ways. First, the cost
of purchasing scrap (from which both the ferrous and non-ferrous materials were
derived) went into the accounts on the debit side. By stockpiling this part of the non-ferrous
product rather than selling it, this debit was not matched by a corresponding
credit. Secondly, the companyCompany
continued with its accounting policy not to record the value of non-ferrous
materials in its accounts. While this
policy may have made sense when small stockpiles were built up and then sold,
it made no sense once a decision had been taken to stockpile large amounts of non-ferrous
material and not sell them.
[45] It was
submitted on behalf of the petitioner that the policy of stockpiling the
non-ferrous materials, together with the failure to change the CompanyCompany's
accounting policy in such a way as to record in the companyCompany's
books the value of the stockpiled non-ferrous materials, was done deliberately
by or on the instructions of the Muir brothers with a view to driving down the
apparent value of the companyCompany; and
this at a time when a dispute had arisen between the petitioner and the Muir brothers,
and it was likely that there would be legal proceedings which might result in
the Muir brothers being ordered to purchase the petitioner's shareholding. The point was put to the Muir brothers in
cross-examination. Although they denied
it, it seems to me that the inference is one which ought properly to be
drawn. No other sensible explanation
has, in my view, been put forward.
[46] An
additional matter emerged in the last few weeks before the hearing on
evidence. Glen Dunn had always been
responsible for the foreign sales of scrap.
Since the companyCompany
purchased raw materials in pounds sterling, and sold abroad in a foreign
currency, usually the euro, Glenn Dunn had taken
it upon himself in connection with individual sales to enter into short term
hedge transactions to protect the companyCompany against
currency movements. When Glenn Dunn
resigned from the companyCompany in March 2007,
Thomas Muir
decided that he would take over this part of the business. However, he did not carry it out in the same
way as Glenn Dunn. He decided to enter into long term foreign
exchange contracts with open ended liability.
He took no independent professional advice regarding the risks posed by
such contracts or the potential losses to which the companyCompany
might be exposed. George Muir,
who was the minor player in this but was kept in the picture by his brother
Thomas, explained it in these terms:
"2007 was not a profitable
year. This seemed a way to make easy
money. You just 'give it a go'. You do, don't you..."
The foreign exchange contracts which Mr Muir
entered into on behalf of the CompanyCompany with the
Royal Bank of Scotland ("RBS") related
to some 40% of the CompanyCompany's
turnover. There were a number of
contracts (the "FOREX contracts"), the last of which expires in December 2009. Under these contracts the CompanyCompany
is bound to make payments of euros to RBS at €:£ exchange rates of between
€1.425002/£1 and €1.449501/£1. The rate
in April was about €1.25/£1. On that
basis the FOREX contracts were likely to lead to a significant loss. An indication was given by RBS in late April 2008
that they would consider terminating the FOREX contracts at a price of
£4,765,000. That, less a saving for deferred
taxation, would represent the loss to the companyCompany
arising from these transactions. Since
then, the CompanyCompany's
position under the FOREX contracts has deteriorated. As at 9 January 2009 the rate was
€1.25/£1. It remains the case that the FOREX
contracts are likely to result in a very significant loss to the companyCompany. In the Joint Minute lodged in process on 21 January 2009,
it was agreed between the parties: (i) that the accrued losses incurred by the CompanyCompany
on the FOREX contracts during the 10 month
period to 30 November 2008
amounted to £2,627,331; (ii) that the accrued losses incurred by the CompanyCompany
on those contracts for December 2008 amounted
to £898,219; and that the figure required to settle the whole outstanding
contractual liabilities owed by the CompanyCompany
to RBS in respect of the ongoing FOREX contracts as at 9 January 2009
is £3,629,000 (leading to a liability after allowance for deferred taxation of
£2,613,205).
[47] The
startling thing to note about this part of the case is that, although he told
his brother George, and the two of them went to the bank together on one
occasion, Thomas Muir kept this
venture into foreign exchange a secret from everyone else in the CompanyCompany. The petitioner was not told. Nor was the companyCompany's
accountant, Tom Graham. He sent a fax on 8 February 2008 in which he said
he had no information regarding any FX (foreign exchange) hedging arrangements. It was not suggested that he was being
untruthful - he had not been told. As
late as 29 April 2008 he e-mailed
Sandra Robertson,
the petitioner's wife, confirming that he did not have any details regarding
these transactions. They first came to
light, as I understand it, in a report lodged in process by Mr Rowand,
the expert instructed on behalf of the respondents, dated 25 April 2008. He had only found out about them just before
that report.
[48] It is
clear to me that these contracts were not in fact authorised by the CompanyCompany
(though it was not suggested that the CompanyCompany
would not be bound vis á vis the bank).
It was argued for the respondents that, since Glenn Dunn
had been authorised to engage in hedging transactions, that authority carried
over to Thomas Muir when he
took over Glenn Dunn's role in
the CompanyCompany. I disagree.
What Glenn Dunn was doing
was ordinary prudent hedging in respect of foreign sales. What Thomas Muir
was doing was wholly different. He was
speculating on the currency markets with a view to making easy money, on
transactions quite unrelated to any of the CompanyCompany's
core business. For this he would have
needed the authority of the board of directors.
The fact that it was kept secret both from the petitioner and from the CompanyCompany's
accountant speaks volumes. It is
illustrative, to my mind, of how Thomas Muir,
and to a lesser extent his brother George, took the view that they could run
the companyCompany,
or at least certain aspects of its business, without involving the petitioner;
and they did so in a manner which was wholly prejudicial to the CompanyCompany's
interests and that of the petitioner as a shareholder.
(iii) Transactions
between the CompanyCompany and
Metals and Haulage
[49] The
third main head of complaint related to the CompanyCompany's
dealings with Metals and Haulage. I
propose to take these points briefly.
[50] Dealing
first with Metals, I am satisfied on the evidence that Metals would sell scrap
to the companyCompany
at a price at the higher end of the range of prices which the CompanyCompany
would normally pay. Further, George Muir
would give instructions that scrap delivered by Metals would be favourably
graded. I am not persuaded, however,
that this is to be regarded as unfairly prejudicial conduct. When the CompanyCompany
was set up at Inverkeithing, it did not subsume the business of the other
companies run by Mr Robertson or Mr Muir
senior or, later, their children. Those
companies would trade with the CompanyCompany: indeed,
that was the main way in which they made a profit. It appears to have been accepted for a number
of years, perhaps from the start, that Metals would be favourably treated as
regards to the price paid by the CompanyCompany for the
raw material it supplied. I am persuaded
that the exercise of grading scrap delivered to the yard is often a matter of
negotiation. In the informal
relationship which existed, I do not find it proved that in relation to the
sale of raw materials by Metals to the CompanyCompany,
George Muir
was guilty of unfairly prejudicial conduct.
[51] Turning
to deal with Haulage, it was not in dispute that Haulage contracted to provide
haulage services for the CompanyCompany. It appears that, certainly in the last year
or two, it was unable to supply those services itself but instead used a
sub-contractor. It made a profit by
doing this. The complaint is made that
there was no need for the CompanyCompany to deal
with Haulage when it could have dealt directly with the sub-contractor. That may be, but there is no reason why
Haulage should not act in a commercial way in its relations with the CompanyCompany.
Nor does the fact that Thomas Muir
may have put business in the way of Haulage (even though that business might
have been placed at less expense with another haulage contractor) necessarily
mean that he is guilty in this regard of unfairly prejudicial conduct, given
the background to the formation of the CompanyCompany
and the informal way in which its relations with the other family companies had
been conducted over the years.
[52] In any
event, I am satisfied that all these matters of which complaint is now made had
been known to the petitioner for a number of years. They have only been brought up because
relations have broken down and litigation has become inevitable. This is not a criticism of the petitioner,
nor does it lead me to question his honesty.
It simply means that I do not consider that the petitioner is entitled,
having acquiesced in that conduct for many years, now to complain that that conduct
amounted to unfairly prejudicial conduct for the purposes of seeking relief
under sections 459 and 461
of the 1985 Act.
Conclusion
on "unfairly prejudicial conduct"
[53] My decision in relation to transactions
between the CompanyCompany and
Metals and Haulage does not, however, alter my essential findings, which are
that, for the reasons I have endeavoured to set out, I am satisfied that the
petitioner has made good his contention that the affairs of the companyCompany
had been conducted in a manner which is unfairly prejudicial to his interests
as a shareholder in the companyCompany.
The
relief to be granted
[54] That
threshold having been crossed, I have to consider what is the appropriate
relief. In the present case the choice
is simple. The petitioner wants to buy
out the Muir
shareholding. The Muir brothers want to
buy the petitioner's shareholding. I
have no hesitation in preferring the former course. There are a number of reasons for this. It was the conduct of the Muir brothers that
brought about the breakdown in the relationship between the parties and has
necessitated these proceedings. It would
be unfair to the petitioner to require him to sell against his wishes. The petitioner is, after all, the single
largest shareholder. Why should he be
the one who is required to sell?
Further, having heard the evidence of the petitioner and Glenn Dunn, and contrasting that with
the impression created by the Muir brothers in evidence, I am persuaded that if
the petitioner were allowed to buy out the companyCompany
he would stand a reasonable prospect (though nothing is certain) of making a
success of the business. He was the one,
amongst the three of them, most involved in the running of the companyCompany,
certainly until Glen Dunn left in March 2007. I accept that after Glen Dunn left the CompanyCompany,
the Muir brothers took a more active role.
But that all occurred in the context of the dispute that had
arisen. Until then, by far the larger
role was played by the petitioner. There
is a possibility - I put it no higher - that Glenn Dunn would return to work for the
companyCompany
if the Muir brothers were to leave. By
contrast, I am not persuaded that the Muir brothers would be likely to make
such a success of it. Their record since
Glen Dunn left does not inspire
confidence. Their policy in stockpiling
the non-ferrous material that could not be processed made no sense
commercially. Their forays into the
foreign exchange market without taking any independent advice - Thomas Muir said that he relied upon RBS
for advice, but they were, of course, the opposite party to the transactions -
gives further cause for concern. In
addition, they do not appear to have been easy to work with. Glen Dunn, in particular, did not find
them so and this was largely instrumental, as I understood his evidence, in him
leaving. This is an important
consideration, not only for the parties but also for the business and for its
employees.
[55] Taking
all these matters into consideration, I am satisfied that it was in the
interests of the CompanyCompany, as well
as being the fairest course for the petitioner who has been put in this
position against his will, that the petitioner be allowed to purchase the Muir
shareholding.
The
price at which the shares should be purchased
[56] I have
explained in paras.[12]-[14] above the circumstances in which the most of the
expert evidence given in June 2008 by Mr Webster
and Mr Rowand,
based on reports lodged in process before the hearing on evidence, relating to
the fair value of the CompanyCompany and the
parties' shareholdings in it, now falls to be disregarded. In these circumstances, I do not propose to
set out in any detail the differences in approach between the two of them. At the hearing of submissions on 21 January 2009, Mr Johnston
no longer challenged Mr Webster's use
of EBITDA as the proper approach to valuation.
Nor did he challenge the multiplier used by Mr Webster
in his latest report. It is therefore
unnecessary to go through the various factors which formed the basis of Mr Webster's
valuation. Mr Johnston
cross-examined Mr Webster on only
four points relating to his valuation, and his submissions as to fair value
focused only on these points.
[57] The
first point raised by Mr Johnston
related to the quantity of what he called "missing sales", i.e. the quantity of
non-ferrous scrap which the CompanyCompany would
have sold unprocessed had there not been a decision to stockpile it (see
para.[42]-[45] above). The figure for
the CompanyCompany's
future maintainable earnings for use in the assessment of a fair value for the CompanyCompany
was derived for the adjusted accounts for three consecutive years, FY07 (iI.e.
the financial year to end-January 2007), FY08 and
FY09 and projected accounts for FY10.
The putative value of those missing sales required to be added into the
accounts by way of an adjustment in order to arrive at a realistic figure for
the CompanyCompany's
earnings for each financial year. Mr Webster
had made adjustments for FY07 and FY08.
He had made no similar adjustment for FY09 due to the level of
non-ferrous sales in that period being comparable to the adjusted sales
position in FY08. It was put to him, on
the basis of a calculation in Appendix 2
to Mr Rowand's
latest report, that he should have adjusted the FY09 figures for missing sales
of unprocessed non-ferrous material. He
disagreed. He was not sure that there
had been missing sales for that year. It
was by no means clear that the stockpiled quantity had increased. The problem was that, although there was now
an independently verified figure for the tonnage in the stockpile as at 11 January 2009, there was no
certain figure for the amount of stockpiled material for the beginning of the
year. On the basis of figures given by
the petitioner, he had assumed that the stockpile had not increased during the
year. On the evidence I do not think
that it can be shown that his assumption is wrong. The question of the size of the stockpile and
the problem of not having any independently verified figures was a problem
which recurred throughout the proof.
There was some evidence about sales of unprocessed non-ferrous material
in FY09 but it was not conclusive. Of
perhaps more significance is that there was no evidence that nothing had been
sold in FY09: indeed, there could not have been any such evidence since the
hearing on evidence took place in the middle of that financial year. I therefore reject this line of challenge to
his assessment of value.
[58] Mr Johnston's
second point related to the adjustments made for "directors'
remuneration". Both experts in their
earlier reports had sought to adjust the accounts for previous years by
removing the "management charges" previously taken by the petitioner and the
respondents and putting in instead a figure for directors' remuneration on the
basis of how the CompanyCompany might
reasonably be run by a new purchaser.
Previously Mr Webster had
assumed three directors at £50,000 per annum each. In his report in January 2009,
however, he had increased these figures and estimated the total annual
"directors' remuneration" of £220,000, £225,000 and £225,000 for FY07, FY08 and
FY09 respectively. He explained that the
change resulted from his understanding of how the petitioner intended to run
the business in the future. He was
pressed in cross-examination that this was subjective, whereas he ought to have
made an objective assessment. It is, of
course, right to make an adjustment to reflect the way in which the companyCompany
might reasonably be expected to be run by a willing buyer. This removes the element of artificiality
inherent in looking simply at the way it operated under the previous
management. Both experts attempted to do
this. The proper approach is to assess
what objectively would be a reasonable arrangement for running the companyCompany,
in terms of the number of directors (or other management staff) needed and
their likely remuneration. But there is
nothing to suggest that the structure suggested to Mr Webster,
and the remuneration package that is implicit in it, is not objectively
reasonable. Mr Rowand
put forward figures for "management team payroll cost" (the equivalent to
"director's remuneration) of £300,000, £300,000 and £250,000 for those three
years, figures which are consistently and significantly higher than those used
by Mr Webster. In those circumstances I do not see any basis
for saying that Mr Webster's
figures are too high.
[59] The
third point related to the figure which Mr Webster
had used for rent payable by the CompanyCompany to Forth Ports plc. Mr Webster
explained that the figure which he used was based on what he had been told by
Tom Graham,
the CompanyCompany's
accountant, was likely to be agreed at the end of negotiations. I see no reason not to accept his figure.
[60] The
fourth and last point related to the value of stock. In the draft balance sheet for FY2009, stock
is valued at £3,442,000. This reflected
an increase, as compared with the previous year, both in quantities held and in
the cost of stock. Mr Rowand
explains the figures at paras.3.2 and 5.12-5.15 of his January January 2009
report. However, as he notes in that
paragraph, there has been a decline in sales prices from August 2008
onwards. There is a risk that the net
realisable value of some of the stock may be less than the cost of that
stock. In para.5.14, Mr Rowand
says that Tom Graham and
Thomas Muir
are of the view that there is no requirement for any further stock
provision. Mr Rowand
gives his opinion that this is "largely dependent on the assumption that a
sales price of £320 per tonne will be achieved for the stock held for
Arcelormittal", it being uncertain (as explained in para.5.13) whether
Arcelormittal, a buyer from the CompanyCompany, would
in fact take the 3,000 tonnes held in stock for it. If Arcelormittal did not take the stock, the
price likely to be obtained from another customer might be as low as £174.
[61] Mr Webster
deals with this matter in his January 2009
report at paras.3.3.7-3.3.14. At
para.3.3.9, he sets out the average selling price for the various grades of
scrap in December 2008. This produces an across the board average of
£142.00/tonne. As against this, Mr Webster
has placed the average value of ferrous stock recorded in the accounts
(£169.00/tonne) plus the expected margin (£45.00/tonne), that being the margin
the companyCompany
expects to make over and above direct and indirect costs and overheads,
totalling £214.00/tonne. The difference
is £72.00/tonne. Applied to the number
of tonnes of ferrous stock this come to £1,445,408. Mr Webster
applied this figure for stock write down to the prospective FY09 accounts.
[62] Mr Johnston
suggested that Mr Webster should
have taken a higher figure for the value of the stock. He pressed him as to the proper value to put
on the stock being held for Arcelormittal.
He also pressed by reference to the values given by Mr Rowand. Mr Webster
emphasised that the proper approach was to value stock at the lower of cost and
net realisable value. He said that the
figure put forward by Mr Rowand, and by
Tom Graham,
was based on the selling price without taking into account the whole cost of
sales. I am not persuaded that it has
been shown that Mr Webster has
adopted the wrong approach or that on this particular matter he has got it
wrong. I am satisfied that, on this
aspect, Mr Webster's
valuation is to be preferred to that of Mr Rowand..
[63] On the
four points raised by Mr Johnston,
therefore, I accept Mr Webster's
evidence. It follows that I do not see
any basis for departing from his figure for the fair or equity value of the CompanyCompany
as at 31 December 2008. That figure is £10,137,100. I should note that that is not only
significantly higher than the asset value attributed to the CompanyCompany
by Mr Rowand
(£7.9 million) but is also higher than Mr Rowand's
indication of the equity value (c.£6.45 million) which he would have attributed
to the CompanyCompany
had he adopted an equity based approach.
Mr Johnston handed
in a Note showing the increase in value attributable to each point, and the
overall effect. The effect of Mr Johnston's
points, if I had accepted them all, would have been to increase Mr Webster's
valuation of the CompanyCompany by some
£4.569 million. In light of Mr Rowand's
figures, that seems to me to be wholly unrealistic. Not only would it be double Mr Rowand's
current valuation, but it would also be nearly 50% higher than Mr Rowand's
valuation at the start of the hearing on evidence, when the global financial
difficulties were only just beginning to emerge.
[64] That
only leaves one question to be resolved.
Prima facie the respondents
should be paid half of the value of the CompanyCompany
for their (combined) 50% shareholding.
That comes to £5,068,500.
However, consideration has to be given to the question of how to treat
the FOREX losses to which I have referred.
The settlement figure (net of tax relief) for the continuing FOREX
contracts has already been taken into account in arriving at the equity value
of the CompanyCompany. But no adjustment has been made to take
account of the actual losses incurred on FOREX contracts maturing in the eleven
months to the end of December 2008. Those losses total £1,762,769. It was submitted for the petitioner that this
sum fell to be deducted from the respondents' (combined) 50% share, since it
was caused by the very "unfairly prejudicial conduct" which formed the basis of
the present proceedings. Mr Johnston
accepted that if I came to this view, I should deduct that sum from the
respondents' 50% share; but he argued that I should not in fact deduct it
because the FOREX contracts had been entered into in good faith in order to
give the CompanyCompany a
competitive advantage. I cannot accept
this. It is apparent from my earlier
discussion of this matter that I regard this unhappy episode as both a part of
and a consequence of the respondents' deliberate exclusion of the petitioner
from the management of the CompanyCompany. In those circumstances I shall, as invited by
the petitioner, deduct these losses from the respondents' half share in the CompanyCompany. The sum to be paid to the respondents is
therefore £3,305,780.50 (£5,068,500 less £1,762,769) between them, or
£1,652,890.25 each.
Disposal
[65] The
Dean of Faculty helpfully handed up a proposed interlocutor, identifying the
terms of the order sought if I was in his favour. Mr Mr Johnston
did not raise any points as to the form of order. I propose in the main to follow the terms of
the proposed order and grant decree in the following terms:
1. Finds and DeclaresGrants declarator
that the petitioner or, at his option, RM SuppliesRM Supplies
(Inverkeithing) Limited (hereafter called "the CompanyCompany"),
whichever of them is so chosen being referred to herein as "the purchaser", is
entitled to purchase the whole shares of the second respondent in the CompanyCompany
at a price of £1,652,890.25 and the whole shares of the third respondent in the
CompanyCompany
at a price of £1,652,890.25, within six months of the date of this
interlocutor;
2. Orders the second respondent, within seven days after the
purchaser has intimated to him his or its intention to tender to him his share
of the price, to deliver to the purchaser, in exchange for his share of the
price, duly completed stock transfer forms in respect of his shares in the CompanyCompany;
3. Orders the third respondent, within seven days after the
purchaser has intimated to him his or its intention to tender to him his share
of the price, to deliver to the purchaser, in exchange for his share of the
price, duly completed stock transfer forms in respect of his shares in the CompanyCompany;
However, rather than, as suggested, attempt to
anticipate precisely what may happen and what further orders may be required
ancillary to the above, I will also make the following order:
4. Continues the petition to a date to be fixed to consider
such other orders as may be necessary in connection with the sale and purchase
of the said shareholdings; and..
5.
MeantimeI shallI shall
reserves all questions of
expenses.
