Scottish Court of Session Decisions

EXTRA DIVISION, INNER HOUSE, COURT OF SESSION

[2016] CSIH 68

P560/13

 

Lord Menzies

Lord Brodie

Lord Malcolm

OPINION OF LORD MENZIES

in the Reclaiming Motion

of

NIGEL ANTHONY HARDEN GRAY and OTHERS

Petitioners and Reclaimers;

for

Orders pursuant to sections 994 and 996 of the Companies Act 2006 in respect of Braid Group (Holdings) Limited

 

Petitioners and Reclaimers:  Sandison QC, McColl;  Brodies LLP

Second, Third and Fourth Respondents:  Lord Davidson of Glen Clova QC, Middleton; CMS Cameron McKenna LLP

Fifth Respondent (Jeff Prowse):  Party

23 August 2016

The issues

[1]        In these proceedings the petitioners and reclaimers seek orders under section 996 of the Companies Act 2006 on the ground that the affairs of Braid Group (Holdings) Limited (“BGHL”) have been conducted in a manner that was unfairly prejudicial to the interests of some of its members.  The petitioners and reclaimers sought these orders having regard to eight separate factors.  After hearing 24 days of evidence, the Lord Ordinary issued an opinion dated 30 October 2015.  At paragraph [141] of that opinion he summarised his findings of unfairly prejudicial conduct.  He rejected the petitioners’ contentions in respect of five factors, but found that the petitioners’ interests had been unfairly prejudiced by conduct as regards three factors.  He therefore held that conduct unfairly prejudicial to the interests of the petitioners had been proved.  No party has reclaimed against his determination on these matters.

[2]        The Lord Ordinary went on to address what order he should make in terms of section 996 of the 2006 Act.  Section 996(1) provides as follows:

“(1)      If the Court is satisfied that a petition under this Part is well-founded, it may make such order as it thinks fit for giving relief in respect of the matters complained of”.

 

[3]        Having heard competing valuation evidence, the Lord Ordinary concluded that BGHL might reasonably be valued, as at the date of conclusion of the proof, at £32,000,000.  On this basis, the cumulative value of the petitioners’ holdings would be in £20,614,400.  However, the second to fourth respondents, supported by the fifth respondent, submitted that because of the first petitioner’s participation in bribery offences involving BGHL, he was a Bad Leaver in terms of the Articles of Association of BGHL and was entitled on disposal of his shares to be paid only whichever was the lesser of their fair value or their subscription or par value.  It was contended that to give appropriate relief under section 996, an order should be made for the purchase by the company of the petitioners’ shares at par value, ie £2,444,000.  The Lord Ordinary gave effect to these submissions and made an order for the purchase of the petitioners’ shares by the company for the aggregate sum of £2,444,000.  That decision was given effect to by the Lord Ordinary’s interlocutor dated 13 November 2015.

[4]        No issue is taken by any party as to the Lord Ordinary’s findings as to unfairly prejudicial conduct (whether as to the five factors which he rejected, or the three factors which he found established).  However, the petitioners reclaim against the Lord Ordinary’s decision to ordain BGHL to purchase the shares in BGHL held by the first and second petitioners respectively for the aggregate sum of £2,444,000.  The following matters were in issue in the reclaiming motion:-

1.         Can the order pronounced by the Lord Ordinary properly be regarded as giving relief in respect of the matters complained of? (The petitioners and reclaimers arguing that it had the practical effect of expropriating the petitioners’ shares at an undervalue of more than £18,000,000 less than their true worth, to the benefit of the parties whom the Lord Ordinary had held had caused the affairs of BGHL to be conducted in a manner that was unfairly prejudicial to the petitioners). 

2.         Did the Lord Ordinary err in using as the basis for his order a value which might be brought out under certain provisions in the Articles of Association of BGHL in terms of Leaving Shareholders, when he did not hold that the pre-conditions for those provisions being effective existed and he was aware that the parties were in dispute and in the course of separate litigation on this matter?

3.         Did the Bad Leaver provisions of article 6.8.2.2 of BGHL’s Articles of Association amount to an unfair and unenforceable penalty clause, and so could not properly form a model for an appropriate disposal of the petition?

[5]        The petitioners and reclaimers urged that the first of these questions should be answered in the negative, and the second and third in the positive.  The respondents took the opposite position.

 

Background

[6]        Inevitably, the Lord Ordinary required to set out the background to the dispute at some length.  For the restricted purposes of this reclaiming motion it is unnecessary to repeat this, but it is convenient to refer to the following excerpts from the Lord Ordinary’s opinion, which provide the context for consideration of the issues before this court.

[7]        The Lord Ordinary dealt with the group structure as follows:-

“[4]      BGHL was incorporated in Scotland on 22 March 2006.  It is the ultimate parent of a number of companies incorporated in various countries throughout the world.  Its principal subsidiary is Braid Logistics (UK) Limited (‘Braid UK’).  Braid UK was incorporated in Scotland on 4 June 1971 under its former name of John S Braid & Co Limited, to carry on a shipping and warehousing business that had been conducted since the 1950s by an unincorporated body.  BGHL was formed to facilitate a management buy-out of John S Braid & Co Limited following the death in 2003 of its chairman and principal shareholder, Steven Braid.  BGHL and Braid UK have their head office in Glasgow.

 

[5]        Braid UK in turn has a number of subsidiaries.  For present purposes I need mention only three.  The first of these is Braid Logistics Asia Pte Limited (‘Braid Asia’), a company incorporated in Singapore, in which Braid UK has a 57% shareholding.  Of the remaining shares, 28% are owned by Mr Leddra and the remaining 15% by three employees of Braid Asia.  The second is SARL Braid Logistics Europe (‘Braid Europe’), a company incorporated in France of which Braid UK owns 80% and Mr Bagley 20%.  The third is Braid Logistics Australia Pty Limited, a company incorporated in Australia of which Braid UK owns 80% and Shane Watson 20%.

 

[6]        BGHL also has a 30% holding of shares in a company called Pro-flex Packaging Europe Limited (‘PPEL’).  60% of PPEL’s shares are owned by Pro-flex Packaging Company Limited (‘PPCL’),  a company incorporated in the British Virgin Islands, with the remaining 10% belonging to a Mr Elson Koh.  Until November 2014, 60% of PPCL’s shares were owned by Mr Leddra, 15% by Mr Gray, 5% by Andrew Watson, and the remainder by Singapore employees.  PPCL has a wholly-owned subsidiary, Pro-flex Packaging (UK) Limited (‘PPUK’) which was incorporated in 2009”.

 

[8]        After summarising the group business activities, the details of the management buy-out and those members of management who participated in it, the Lord Ordinary went on to explain the shareholdings in BGHL and the weighted voting system contained in the shareholders’ agreement dated 6 December 2006 as follows:

“[11]    Following months of intensive discussion, a deal with the Braid family was reached in December 2006.  BGHL was formed to effect the MBO.  At a later date, John S Braid & Co Ltd’s name was changed, and the various joint venture companies were brought into a group under the ultimate control of BGHL.  Shareholdings in BGHL were allocated according to capital investment (including Mr Gray’s contribution of his 24% holding in John S Braid & Co Ltd) and were as follows:

Mr Gray                                  64.42%

Mr Leddra                              15.81%

Shane Watson                                    5.27%

Andrew Watson                    2.64%

Mr Haldane                            2.64%

Mr Prowse                              2.64%

Mr Bagley                               2.64%

Mr Russell                               2.64%

 

One further shareholder, Mr Stanley Fell, owns a 1.3% holding with no voting rights.  He has played no part in these proceedings.

 

[12]      A difficulty arose at an early stage regarding the 15% shareholding in PPCL which had been owned by Steven Braid and passed to Mrs Gay Braid on his death.  Mrs Braid wished to sell these shares as part of the overall package of sale of the Braid family’s interest.  For reasons which remain obscure to me, Mr Leddra was adamant that the two should not be linked and threatened to withdraw from the MBO if such a connection were made.  In January 2006, he offered to purchase Mrs Braid’s PPCL shares for $51,000;  this offer was not acceptable.  By the end of 2006 the deadlock had not been broken.  In order to ensure that the MBO went ahead, and without seeking Mr Leddra’s approval of what he intended to do, Mr Gray paid £52,000 out of his pension fund to Mrs Braid, and her shares were transferred to Mr Leddra for the sum of $51,000.  Mr Gray considered that he ought to be reimbursed in respect of the purchase of Mrs Braid’s shares;  Mr Leddra did not.  This became a persistent source of friction between Mr Gray and Mr Leddra, to which I return below.

 

The shareholders’ agreement

[13]      It will be seen from the table of shareholdings in paragraph 11 above that Mr Gray owned significantly more than 50% of the issued shares in BGHL.   It was important to Mr Leddra, supported by Shane Watson and Andrew Watson, that Mr Gray did not have voting control of BGHL.  A weighted voting system was therefore devised which would, in effect, give either Mr Gray or Mr Leddra a veto over critical issues such as winding up, and the power to carry a vote on less important matters with the support of other shareholders.

 

[14]      As a consequence of the need to agree a weighted voting system, BGHL members entered into a Shareholders’ Agreement dated 6 December 2006.  I shall refer in due course to other provisions in this agreement.  For now, I note that immediately after completion of the MBO, for the purpose of calculating voting percentages, the shareholders’ respective voting rights were as follows:

 

Mr Gray                                  34.82%

Mr Leddra                              30.08%

Shane Watson                                    10.03%

Andrew Watson                    5.01%

Mr Haldane                            5.01%

Mr Prowse                              5.01%

Mr Bagley                               5.01%

Mr Russell                               5.01%

 

I note also that the Agreement included express consent by the parties that Mr Haldane’s shares could be held by the Private Pension Allan Haldane Group SIPP (the Eighth Respondents) and that some of Mr Gray’s shares could be held by the Trustee of the Gray Trust (the Second Petitioners)”.

 

[9]        The Lord Ordinary went on to summarise the petitioners’ complaints as follows:

“The Petitioners found upon the following matters as establishing conduct by the majority of the board of BGHL that was unfairly prejudicial to their interests:

 

i.          Breach by Messrs Leddra, Shane Watson, Andrew Watson and Bagley of fiduciary duties owed to BGHL by diversion of profitable business from PPEL to PPUK, a company in which BGHL has no interest, and to other PPCL subsidiaries;

 

ii.         Failure by Mr Leddra and Andrew Watson to disclose conflicts of interest regarding the latter’s shareholding in PPCL and the formation of PPUK;

 

iii.        Refusal without good reason by Mr Leddra, supported by Shane Watson and Andrew Watson, to provide the board of BGHL with information relating to the financial affairs of Braid Asia, of which BGHL was the ultimate parent;

 

iv.        Unjustified obstruction by Messrs Leddra, Watson and Watson of attempts by the auditors of BGHL to undertake an audit of aspects of the Braid Asia accounts;

 

v.         Removal of the auditors of BGHL by a vote of the second to Seventh respondents on the grounds of a divergence of opinion on the proper audit procedures to be applied (particularly with regard to information sought regarding Braid Asia) or, alternatively, the improper basis that Mr Leddra believed that the auditors were too closely aligned to the interests of Mr Gray;

 

vi.        Exploitation by Messrs Leddra, Watson and Watson of alleged concerns in relation to the CFT issue (discussed below) to avoid disclosure of information of BGHL’s auditor;

 

vii.       Effective exclusion by Messrs Leddra, Watson and Watson of Mr Gray from the decision-making process in relation to the affairs of BGHL, by discussing and agreeing upon key matters before and after board meetings, with a view to sidelining Mr Gray from his proper influence upon and involvement in the business of the company.

 

viii.      Conduct by Messrs Leddra, Watson and Watson of the investigatory and disciplinary proceedings in relation to the CFT issue and the Sapesco issue (also discussed below), as if they were the de facto board of BGHL, with powers of suspension and dismissal of employees including Mr Gray, abetted by professional advisers who were not acting with the requisite independence and impartiality;

 

[20]      These complaints are advanced by the Petitioners in the context of the averred existence of a relationship of quasi-partnership among the shareholders of BGHL.  It is contended that the consequence of the Respondents’ conduct has been the destruction of the trust and confidence among shareholders upon the basis of which the MBO was undertaken and the Shareholders’ Agreement entered into.

 

[21]      For their part, the Respondents all deny that they have been guilty of any conduct unfairly prejudicial to the interests of the Petitioners.  They dispute in particular that the relationship among the members of BGHL is properly characterised as one of quasi-partnership.  They further contend that in the event that the court holds that the Petitioners have established unfairly prejudicial conduct, it is appropriate to take Mr Gray’s conduct into account in determining what order to make”.

 

 

The Lord Ordinary’s findings on “unfairly prejudicial conduct”
[10]      The Lord Ordinary summarised his findings about unfairly prejudicial conduct at paragraph [141] of his opinion as follows:-

“[141]  I have rejected the Petitioners’ contentions that the affairs of BGHL have been carried on in a manner that is unfairly prejudicial to their interests as members as regards:

 

• the creation of and allocation of manufacturing business to PPUK;
• failures to disclose conflicts regarding interests in PPCL and its subsidiaries;
• conduct of BGHL board meetings prior to September 2012;
• conduct of BGHL board meetings after the emergence of the CFT issue;
• conduct of the CFT and Sapesco investigations and the disciplinary proceedings against Mr Gray.

 

On the other hand I have found that the Petitioners’ interests have been unfairly prejudiced by conduct as regards:

 

• refusals to provide information concerning Braid Asia;
• ·obstruction of the 2011 audit of Braid Asia;
• removal of BJM as group auditors

 

I therefore hold that conduct unfairly prejudicial to the interests of the Petitioners has been proved.  I must therefore now address my task under section 996, namely to make such order as I think fit for giving relief in respect of the matters complained of”.

 

[11]      The Lord Ordinary’s finding regarding the CFT and Sapesco investigations should be noted.  These, which the Lord Ordinary referred to together as “the bribery investigations”, took up a substantial proportion of the evidence and of the Lord Ordinary’s opinion;  he dealt with them from paragraph [82] to [140].  In brief summary, the CFT account was an arrangement created and operated for the purpose of bribery of an employee (a Mr Park) of a customer of Braid UK.  The arrangement provided benefits to that employee, members of his family and others, and included gifts, foreign travel, holidays and cash payments;  in return, he ensured that an increased volume of business was placed with Braid UK by his employers and their associated companies.  The petitioner maintained that he was unaware of the illegal purpose of the CFT account, but that the second and fourth respondents were aware of this some considerable time before September 2012.  The second to fourth respondents’ position was that the petitioner was aware of its bribery purpose from the time when it was set up, but that they themselves had no suspicion of its purpose until September 2012 and no knowledge of the detailed circumstances until after January 2013.  The Lord Ordinary (at paragraph [124]) was satisfied “to a high degree of probability that Mr Gray was aware at all material times that the purpose of the CFT arrangement was to provide funding for expenditure by Mr Park of a personal as well as a business nature, on the understanding that Mr Park would endeavour to ensure that increased business was given by SGL to Braid UK”.

[12]      Similarly, the Sapesco arrangement was, in substance, an arrangement whereby Mr Kanafani, an employee of Sapesco, sought and received bribes in return for giving Sapesco’s business to Braid UK.  The petitioner’s position at proof was that he was aware that the business arrangement between Braid and Sapesco involved an element of profit-sharing, but was unaware that Mr Kanafani was an employee of Sapesco or that the “profit-share” was being paid to him personally.  The Lord Ordinary (at paragraph [131]) had little difficulty in finding that Mr Gray was aware in 2009 that Mr Kanafani was an employee of Sapesco.

[13]      The Lord Ordinary went on to consider the procedures adopted to investigate the revelation of illegal conduct in relation to the CFT account and, subsequently, the Sapesco arrangement, and the consequent disciplinary proceedings against Mr Gray.  He held (at paragraph [140]) that nothing in the investigation of the CFT account or Sapesco, nor in the disciplinary proceedings resulting in Mr Gray’s dismissal for gross misconduct, amounted to conduct that was unfairly prejudicial to the interests of the petitioners as members of BGHL.

[14]      In the result, having carried out the exercise which he required to perform in terms of section 994 of the Companies Act 2006, the Lord Ordinary concluded that the petitioners’ interests had been unfairly prejudiced by conduct as regards (1) refusals to provide information concerning Braid Asia, (2) obstruction of the 2011 audit of Braid Asia, and (3) removal of BJM as group auditors.  However, he rejected the petitioners’ contentions regarding five other matters, including in particular the investigation of the CFT account and the Sapesco arrangement and the disciplinary proceedings resulting in Mr Gray’s dismissal for gross misconduct.  He concluded that Mr Gray was aware of the purpose and function of the CFT account and of the Sapesco arrangement.  He described these as relevant to the establishment of unfairly prejudicial conduct, and also to the question of appropriate remedy.  None of these are matters with which the reclaimers take issue in the present reclaiming motion.

 

Submissions for parties in the reclaiming motion
Submissions for the petitioners and reclaimers

[15]      Senior counsel for the petitioners and reclaimers began by considering the nature of the discretion confided to the Lord Ordinary by section 996 of the 2006 Act.  The court “may make such order as it thinks fit for giving relief in respect of the matters complained of”.  “Relief” in this context means the same as “a remedy”.  Section 996(2) provides a list of remedies, stated to be without prejudice to the generality of subsection (1);  the remedy most frequently granted was that selected by the Lord Ordinary in this case, namely that stated in section 996(2)(e).  So, the Lord Ordinary had a discretion, but he was not entitled to do as he pleased – any order must be to give relief in respect of the matters complained of.  Senior counsel did not suggest that the Lord Ordinary erred in selecting a share purchase order;  however, having selected this type of order, he proceeded under the misapprehension that he was required to take into account all the circumstances when placing a value on the share purchase.  He had to remember that the purpose of the order was to give relief in relation to the matters complained of.  He was not entitled to make an order simply because he considered it to be fair in all the circumstances.  We were referred to the general principles governing the exercise of this discretion, including the well-known dicta of Oliver LJ in Re Bird Precision Bellows Ltd [1986] Ch.658 at 669, Peter Gibson LJ in Re Legal Costs Negotiators Ltd [1999] BCC 547 and Grace v Biagioli [2006] BCC 85, all as these are conveniently summarised in Hawkes v Cuddy (No.2) [2008] BCC 390, at paragraphs 243-246.

[16]      Senior counsel submitted that the Lord Ordinary had misunderstood the dictum in Biagioli as giving him a free-ranging discretion as to the price at which shares should be purchased.  This was a misunderstanding – the court has a wide discretion and must look at all the relevant circumstances in deciding what kind of order it is fair to make, but that wide discretion only extends to the kind of order.  Once the court has decided to make a share purchase order, the exercise of valuing the shares is not covered by this wide discretion.  At this stage, the court must bear in mind that the purpose of the order is to give relief in relation to the matters complained of;  the court does not have a free-ranging discretion as to the valuation of shares.  At that stage, the court must exercise its discretion rationally and judicially – (1) this must be in accordance with settled legal principle and in particular upholding any legal agreement between the parties, and (2) it must be on the basis of evidence, not on supposition or conjecture.  Counsel relied on the observations of Lord Hoffmann in O’Neill v Phillips [1999] 1 WLR 1092 at 1098D/G and 1099F/H.  In the present case, it was submitted, the Lord Ordinary did not apply the terms of the shareholders’ agreement, and, to use Lord Hoffmann’s words, he abandoned the tolerably well settled legal principles in favour of some wholly indefinite notion of fairness.  Senior counsel found further support for his position from the observations of Warner J in Re J E Cade & Son Ltd [1992] BCLC 213 at 227, where it was observed that the court “has a very wide discretion, but it does not sit under a palm tree”.  He also observed, under reference to the Opinion of Balcombe LJ in Virdi v Abbey Leisure Ltd [1990] BCLC 342, that:

 “Balcombe LJ did not say, and cannot be taken to have meant to say, that, where such equitable considerations arise from agreements or understanding between the shareholders dehors the constitution of the company, the court is free to superimpose on the rights, expectations and obligations springing from those agreements or understandings, further rights and obligations arising from its own concept of fairness.  There can, in my judgement, be no such third tier of rights and obligations”.

 

[17]      Moreover, the Lord Ordinary could only carry out the exercise of reaching a value for the purchase of the petitioners’ shares on a solid evidential basis, and not based on speculation as to matters not established by evidence properly before the court – Profinance Trust SA v Gladstone [2002] 1 BCLC 141, particularly at paras. [32], [49] and [59/60].

[18]      The Lord Ordinary sets out the reasoning for the order which he made between paragraphs [153] and [161] of his opinion.  There are several errors in this approach.  He refers, at [153], to “Mr Gray’s participation in the CFT and Sapesco bribery offences”, but it should be remembered that it has not been established that any offence has taken place, and neither Mr Gray nor anyone else has been charged with any offence.  The Lord Ordinary did not take into account the limitations on the exercise of his discretion explained in Hawkes v Cuddy (No.2).  Fundamentally, having decided that the company’s affairs had been conducted in a manner that was unfairly prejudicial to the interests of the petitioners, the effect of the Lord Ordinary’s order was to grossly enrich the very people whose behaviour gave him the discretion in the first place.  The effect of the order was to inflate the value of the shareholding of those whose bad conduct gave the court jurisdiction.  Mr Leddra, Mr Shane Watson and Mr Andrew Watson were each involved in each of the three aspects of unfairly prejudicial conduct which the Lord Ordinary found established.  The effect of the Lord Ordinary’s order was to enrich Mr Leddra to the extent of £8,075,378, Mr Shane Watson to the extent of £2,691,793 and Mr Andrew Watson (and others) to the extent of £1,345,896 each.  By contrast, the first petitioner will suffer a loss of £3,717,185, and the second petitioner a loss of £14,452,415.  This cannot be categorised as constituting the granting of relief or remedy in respect of the matters complained of.

[19]      Senior counsel did not take issue with the suggestion that an award might be affected by the conduct of Mr Gray.  He also accepted that the Lord Ordinary might properly have made no order in terms of section 996;  this would have avoided any unjust enrichment to anybody, and the parties would receive what had been agreed in the shareholders’ agreement.

[20]      As part of the application of settled principles, the court may (a) accept as legally valid, and (b) apply the provisions of, any bargain made by the parties as to how a process of share valuation ought to be carried out in particular circumstances, when those circumstances pertain, but it has no power to innovate upon such bargains (for example, by imposing contractually stipulated outcomes without the pre-requisite elements of the stipulation being present).  The Lord Ordinary referred, at paragraph [155] of his opinion, to Re LCM Wealth Management Ltd [2013] EWHC 3957 (Ch), but the circumstances of that case were entirely different from the present.  In any event, that case is authority for the proposition that the court will give effect to contractually agreed arrangements (to the extent that they are valid in law), albeit they should be strictly interpreted, exercised in good faith and not permitted to be used “for unworthy purposes” – see paragraph [55].  In the present case, the company has taken no steps to implement the bad leaver provisions of the shareholders’ agreement against Mr Gray.  The Lord Ordinary proceeded on the basis of what he surmised would have happened on the basis of his findings.  There was no evidence before the court that this would have been the outcome if the company chose to proceed with the bad leaver provisions.  It should be noted that it has been held that forcing a shareholder out of a company and then expropriating his shares at a bargain price by the operation of contractual mechanisms does not generally provide a fair or appropriate remedy – Re Phoenix Contracts (Leicester) Ltd [2010] EWHC 2375 (Ch) at [86].  In all of these circumstances, the order of the Lord Ordinary does not provide the petitioners with anything that might properly or reasonably be understood as “relief”.  It did not fall within the proper bounds of the discretion conferred on him by section 996 of the 2006 Act. 

[21]      Turning to the terms of the articles of association of BGHL, senior counsel referred us to the definition of “Bad Leaver” and “Leaving Shareholder” in articles 1.4 and 6.8.  Article 6.8.1 defines a “Leaving Shareholder” as (1) any Shareholder ceasing for whatever reason to be an employee and/or a director of the Company or any other member of the Group (and does not continue to be so employed or appointed in/by another member of the Group), (2) the Company in the Group or the division or business of the Group by whom any Shareholder is employed and/or appointed as a director, ceasing to be part of the Group, (3) any Shareholder suffering an Insolvency Event.  None of these circumstances applied to Mr Gray at the time of the proof, nor at the time of the reclaiming motion.  He was and remains a director of BGHL, PLUK, and Braid (Asia).  He is not a Leaving Shareholder.  He therefore does not qualify for consideration as a Bad Leaver.  The mechanisms for determining the Sale Price for Compulsory Sale Shares contained in article 6.8.2.2 therefore do not apply to Mr Gray, because he is not a Bad Leaver.

[22]      Should the other members of BGHL seek to remove Mr Gray as a director (and they have taken no steps to do so), the mechanism which would require to be followed is to be found in the shareholders’ agreement which, in the event of any conflict with any provisions of the articles, prevails over the articles – see clauses 12.2 and 12.4.  Clause 4.1 provides inter alia that:

“Unless otherwise agreed by the 75 RP” (ie 75 per cent of the voting rights as set out in paragraph [14] of the Lord Ordinary’s opinion, quoted above) “the Board shall following completion comprise five directors.  Each of the three largest Shareholders (by voting rights) will be entitled to appoint a Director from time to time….”.

 

Clause 4.5 provides that:

“Save as set out above, any other change to the composition of the Board will require the consent of the 75 RP”.

 

Given that Mr Gray himself controls 34.82 RP, this mechanism cannot be invoked against him.  Senior counsel accepted that there is another provision in the shareholders’ agreement which might suggest that only 58 RP was required for the appointment or dismissal of any director of the company or a subsidiary of the company – see clause 9.1(u).  However, the Lord Ordinary does not deal with this in his opinion.  He appears to have proceeded on the assumption that if the company chose to exercise an entitlement to design Mr Gray as a Bad Leaver, he would have been made a Bad Leaver – but the contractual scheme is much more complicated than the Lord Ordinary assumed.  At paragraph [161] of his opinion the Lord Ordinary observed that “the proper approach for the court to take is to determine what is fair and equitable in circumstances in which the consequence of Mr Gray’s conduct is that the Bad Leaver provisions of the articles have become applicable”.  That is a mis-statement of the position – the Bad Leaver provisions of the articles have not become applicable.  Moreover, even if the board resolves to remove a director of the Company or a subsidiary of the Company, there is a complicated process to be gone through in terms of clause 9.3 of the shareholders’ agreement, requiring notification to shareholders and their consent to such action.  The Lord Ordinary characterises these as procedural in nature, but they are not;  they are substantive provisions which require each shareholder to decide the issues.  The shareholders did not all give evidence at the proof about this, and none of the shareholders who were witnesses was asked whether, if the board resolved to remove Mr Gray as a director, they would have given their consent to such action.  There was therefore no evidential basis for the inference drawn by the Lord Ordinary.  The Lord Ordinary was merely speculating about the consequences of what he himself described as “a carefully negotiated contractual provision”. 

[23]      In any event, there is a further contractual mechanism to which the Lord Ordinary had no regard.  Even if Mr Gray was a Leaving Shareholder, the compulsory transfer provisions in clause 6.8 of the articles are not automatic;  article 6.8.1 makes express provision for the board resolving not to implement them.  This was not a matter investigated in evidence at the proof.  Despite the time that has elapsed since Mr Gray’s purported dismissal, the board has taken no steps to operate these provisions against Mr Gray.  He was purportedly dismissed as managing director of PPUK on 26 April 2013;  this dismissal was suspended in the judicial review proceedings, but that suspension was lifted in the Inner House on 8 October 2014.  Since October 2014 there has been nothing to prevent the board from implementing the compulsory transfer provisions of the articles. 

[24]      Another area of dispute was whether Mr Gray’s employment with BGHL terminated as a result of his purported dismissal, or his resignation in December 2014.  This was an issue which remained in dispute;  it was not a matter which the board could decide, but would have to be determined by the court.  There were therefore several questions which remained unanswered.  Was Mr Gray a Leaving Shareholder?  Would the board opt to treat him as a Bad Leaver?   And if so, what sort of Bad Leaver would he have been?  In terms of article 1.4, there were two categories of Bad Leaver which might apply – (i) a leaver who was dismissed for gross misconduct and whose dismissal was not subsequently found to be unfair or wrongful, and (ii) a leaver who voluntarily resigns his employment (unless the board resolves that his leaving was unlikely to have a material adverse effect on the Business).   If a leaver is accused of gross misconduct, he can remove himself from the first of these categories by resigning.  The different consequences of these different categories with regard to the sale price of the leaver’s shareholding are set out at article 6.8.2.2.  The importance of this distinction is highlighted by the position adopted in evidence by Mr Leddra and Shane Watson;  each of these respondents indicated in their witness statements that Mr Gray’s leaving would have no adverse impact on BGHL, and indeed his departure would have a positive impact.  So, the potential consequences of the application of the provisions of the articles and the shareholders’ agreement were much more complex than the Lord Ordinary appreciated.  There was no evidence before him to justify the view that the sale price for his shares would be other than fair value.  There was no evidence that Mr Gray was a Leaving Shareholder, nor that he was a Bad Leaver, nor that the board would have chosen to invoke the Bad Leaver provisions.

[25]      Under reference to paragraph [159] of the Lord Ordinary’s opinion, senior counsel pointed out that Mr Gray’s purported dismissal was challenged.  There was no evidence that he was dismissed, and he remains a director.  His removal as a director is a matter for shareholders, not the board;  there was no evidence before the Lord Ordinary that the provisions of article 6.8.2.2 would have been invoked.  None of the people on whom power of decision has been conferred by the articles and the shareholders’ agreement have taken any decision;  the Lord Ordinary purported to take that decision for them.  In doing so he exceeded the proper bounds of his discretion.  Moreover, although it is common ground that par value of the petitioners’ shares is £2,444,000, on any view they are entitled to subscription value, not par value.  There is no evidence as to the subscription value of the shares owned by the Gray Trust, because the value of the 24% shareholding in John S Braid & Co Ltd has not been ascertained.  The Lord Ordinary was wrong to have treated subscription value and par value as synonymous. 

[26]      Senior counsel summarised what he described as the Lord Ordinary’s failures in the exercise of his discretion as follows:

(i)         The Lord Ordinary did not give relief in respect of the matters complained of, as he was required to do by section 996(1).  His approach was outwith the bounds of the section as explained in Hawkes v Cuddy (No.2).

(ii)        The Lord Ordinary did not respect the terms of the contractual arrangements between the parties (which conferred the power to make decisions on several parties); rather, he took on himself those powers.  He therefore did not exercise his discretion properly – Re JE Cade & Son Ltd.

(iii)       He did not exercise his discretion in a judicial manner – his decision was not based on the evidence before him, but on conjecture and supposition as to how the contractual procedures would be operated. 

(iv)      In the final analysis, the Lord Ordinary’s conclusion was irrational;  it conferred huge rewards on all of the respondents, in the purported exercise of the court’s discretion to provide relief against their “deplorable” conduct – O’Neill v Phillips.

[27]      Because of these errors, the issues were open for the decision of this court.  What the Lord Ordinary should have done, and this court should do, is to regard the remedy of share buy-out as appropriate, because it reflects the real ailment afflicting the company, namely the complete breakdown of relations between Mr Gray and Mr Leddra.  The court should then reach a decision as to the fair value of the company.  The Lord Ordinary assessed that at £32,000,000.  The court must then consider the contractual provisions in the articles of association and the shareholders’ agreement, which had the potential to affect the petitioners;  however, to date there has been no attempt to implement those provisions, and it is not clear from the evidence whether Mr Gray would be within the category of a Leaving Shareholder, nor, if he is, what the outcome of the provisions would be.  This is not a case of a simple set of contractual provisions which inexorably lead to the shares being valued at par value.  The Lord Ordinary gives no indication of his reasons as to why he concluded as he did.  There is therefore no proper basis for an order for valuation of the petitioners’ shares on any basis other than a percentage of the fair value of the company.  Senior counsel accepted that the Lord Ordinary could deduct from that value any diminution in value caused by Mr Gray’s conduct, but this had already been taken into account by the valuation experts in their evidence to the Lord Ordinary.

[28]      The final chapter of senior counsel’s submissions for the petitioners and reclaimers, which he presented as an esto case on the hypothesis that everything that he had submitted thus far was not accepted, was that article 6.8.2.2 is in law an unenforceable penalty clause and so cannot form a model for the court’s disposal of this matter.  Since the Lord Ordinary issued his opinion, the UK Supreme Court has carried out a comprehensive review of the law of unenforceable penalty clauses in Cavendish Square Holding BV v Makdessi [2015] UKSC 67, [2015] 3 WLR 1373.  It is clear from this authority that the law on penalty clauses applies not just to a specific fixed sum in the event of breach of contract, but to a range of circumstances, including the situation in which a person is required to give up or surrender property at other than value.  Senior counsel referred particularly to the Opinion of Lord Hodge JSC at paragraphs 230-233 and 242-255.  He also relied on Watson v Noble (1885) 13 R 347.  This latter case involved an undertaking by one party to a contract that he would observe and maintain certain standards of behaviour.  The contract provided that in the event that he failed to fulfil the obligations undertaken by him, the other party should be entitled to dismiss him from his employment and he would also forfeit all claims to repayment of the capital sum which he had contributed to the venture.  The court held that while the dismissal might be fair, the forfeiture of capital amounted to a penalty which was unenforceable.

[29]      Senior counsel submitted that the correct way to approach this issue in the present case was as follows.  Article 6.8.2.2 provides that at any point in the future life of the company, a shareholder who is dismissed from his employment, and from any directorial post he may hold in the entire group, on the basis of gross misconduct (whatever form that misconduct may take, and whether or not it may cause any loss or harm to the company) that shareholder must risk losing whatever value has been added to his shares since his subscription.  Is that stipulation exorbitant or unconscionable, having regard to the company’s interest in the proper performance of his duties as an employee or as a director?  The focus is on the company’s interests in the fulfilment of the employee’s or director’s duties;  is that interest capable of being compensated for by way of an ordinary action for damages?  If it is, it is unlikely that a clause requiring transfer of shares at undervalue will be enforceable.  Even if the company does have some legitimate interest in the performance of these duties which is not capable of being addressed by the ordinary remedy of damages at common law, it is necessary to ask the further question – does that interest extend to the particular remedy which article 6.8.2.2 stipulates, namely the compulsory acquisition from him of his shareholding at an undervalue?  If the answer to that question is in the negative, and the company has no legitimate interest in this particular remedy, then a clause which purports to enable it to do so is in fact a penalty clause. 

[30]      Senior counsel submitted that the company’s legitimate interests do not extend to the remedy set out in article 6.8.2.2.  The company has a clear interest in seeing that its employees and directors perform their duties properly, but that interest is already amply protected by its right to remove a person from his employment or post, deprive him of future emoluments therefrom, and to seek damages for any harm he has caused.  The company has no legitimate interest in forfeiture of whatever value has been built into the shareholding since the shareholder subscribed for shares.  There is no relation between such forfeiture and the legitimate interests of the company in seeing to it that employees or directors discharge their duties.  The effect of article 6.8.2.2 is to deprive the individual of the value built up in property owned by him.  Although there is a presumption of validity, this is not irrebuttable.  In every case, it is necessary to look at the test explained in Cavendish, and to ask the questions set out above.

[31]      The respondents argue that the provision avoids the risk of the company overpaying for shares;  however, such a risk is adequately provided for by the requirement in the Bad Leaver provisions for the shares to be valued by an independent chartered accountant.  The only other argument advanced in support of the clause by the respondents is deterrence, but that was not regarded as a helpful concept in Cavendish – see paragraph 248.  The correct test for a penalty, as identified in Cavendish, involves a value judgment similar to that in Watson v Noble – is the remedy stipulated as a consequence of a breach of contract exorbitant or unconscionable, when regard is had to the innocent party’s interest in the performance of the contract.  The misconduct of an employee or director may be sufficient to enable a company to dismiss him, but having dismissed him, it has no legitimate interest in taking from him the benefit of his capital investment.

[32]      For these reasons, article 6.8.2.2 was not a proper model for the appropriate disposal of this petition.  The Lord Ordinary was not purporting to apply this provision, but merely to emulate it.  He gave a remedy which, had it been stipulated for, was exorbitant or unconscionable.  The remedy bears no rational connection to the breach;  it is the element of undervalue which renders it a penalty.  The question may be approached thus – is the company’s legitimate interest in preserving its reputation served not just by dismissing Mr Gray, and by requiring him to give up his shares, but also requiring that he should do so at an undervalue?  There is a disconnect between the company’s legitimate interest and the particular remedy in article 6.8.2.2. 

 

Submissions for the respondents

[33]      Senior counsel for the respondents opposed the motion for review and submitted that there were three issues for this court, namely (1) the Lord Ordinary’s exercise of his discretion, (2) whether article 6.8.2.2 was an unenforceable penalty clause, and (3) whether the subscription value of the shares owned by the Gray Trust was different from par value.  The second and third of these issues were not argued before the Lord Ordinary, and even the first was not fully developed before the Lord Ordinary.  The decision of the UK Supreme Court in Cavendish Square Holdings does not represent a change in the law, but merely sets out how the law has developed.

[34]      Senior counsel submitted that there were nine points in this case which were relatively clear: 

(i)         Mr Gray had been found to be involved in two instances of bribery, which amounted to gross misconduct.

(ii)        He was dismissed as a director and employee of Braid UK (although this is a matter of dispute).

(iii)       The petition is founded on unfair conduct by all the respondents;  the petitioners were in fact leaving shareholders, and wanted to get out of the company.

(iv)      The Lord Ordinary found that there had been unfair and prejudicial conduct by the second, third and fourth respondents, but on reduced grounds.  He rejected the argument that Mr Gray’s dismissal for gross misconduct was some sort of ploy.

(v)       The court has a very wide discretion regarding remedy.  What are the limits of that discretion?

(vi)      The court was entitled to consider Mr Gray’s conduct when considering disposal of this petition – not merely the type of remedy, but the actual remedy.  The Lord Ordinary could not ignore Mr Gray’s misconduct in deciding what is fair.  It is still not known how much fine or penalty may be required of the company in respect of Mr Gray’s bribery, nor is the damage to the company’s reputation with its customers yet known.  The Lord Ordinary was correct to look at Mr Gray’s conduct, and not only in relation to the type of remedy he selected.

(vii)     Mr Gray’s misconduct was, and remains, damaging to the company, and its consequences are not yet fully determined.  Bribery causes reputational and business damage to the company.

(viii)    Article 6.8.2.2 adjusts the share price where a shareholder leaves the company because of gross misconduct.

(ix)       Mr Gray’s testimony as contained in the supplementary appendix is relevant.  His position was that his career was finished and he wished to get out of the company.  The company regards him as a Bad Leaver because of gross misconduct, and he accepts that if he was guilty of bribery, he would be guilty of gross misconduct.  This position accorded with the petitioners’ averments on record, particularly at statement 23, at page 95 of the reclaiming print.

[35]      It was in this context that the Lord Ordinary made his decision, and had regard to the consequences of the articles.  He had a very wide discretion, and he exercised it correctly.  The penalty argument was not made before the Lord Ordinary, and featured neither in the petitioners’ pleadings nor in evidence.  In any event, applying the test in Cavendish, article 6.8.2.2 is not a penalty clause;  alternatively, if it is a penalty, it is an enforceable penalty.

[36]      The difference between the value of Mr Gray’s shares and those owned by the Gray Trust was also not raised before the Lord Ordinary, either in the pleadings or in the evidence.  The petitioners’ position was set out jointly, without any differentiation.  The articles deal with this issue;  in reality, the Gray Trust was Mr Gray.  Article 2.2 ranks all shares as pari passu.  If the Gray Trust shares were exchanged at any value other than par, that would have been reflected in a share premium account;  there was no evidence of this.

[37]      With regard to the petitioners’ argument that the Lord Ordinary’s exercise of his discretion was irrational in setting a price of £2,444,000 when the fair value of the shares was £20,600,000, it should be remembered that in Re LCM Wealth Management Ltd Mr Moxon’s shares were transferred at a price of £15,000, when he sought a price of £600,000;  Hildyard J observed that he was conscious that this produced “a harsh, even draconian, result for Mr Moxon”, but as he was guilty of gross misconduct and justifiably characterised as a “Bad Leaver” and he agreed to those provisions, there was insufficient basis for relief from or modification of their effect.  Similarly, the maximum value of the company in Cavendish was $300,000,000, but without goodwill was $69,700,000.  It does not follow, just because there is a significant difference in value, that the Lord Ordinary’s decision is irrational.  Mr Gray’s involvement in two arrangements involving bribery was more significant than the unfairly prejudicial conduct of the second, third and fourth respondents.  His bribery caused significant losses to the company;  any unfair conduct by the respondents did not result in financial loss.  The petitioners and reclaimers do not challenge the Lord Ordinary’s finding that Mr Gray was involved in bribery.

[38]      This court should be circumspect about overturning the Lord Ordinary’s exercise of discretion – G v G (Minors):  Custody Appeal [1985] 1 WLR 647, per Lord Fraser of Tullybelton at 651C and 652D, and Lord Bridge of Harwich at 656E.  The discretion conferred on the Lord Ordinary is very wide, and requires him to do that which is just and equitable between the parties – in Re Bird Precision Bellows Ltd at 672H and 678H.  The Lord Ordinary was entitled, and indeed correct, to look at Mr Gray’s gross misconduct, and required to reach a fair and equitable result – O’Neill v Phillips at 1098F;  see also the observations of Nourse J in Re London School of Electronics Ltd [1986] Ch.211 at 222B.  A petitioner’s own misconduct may be relevant to the grant of relief;  while there is no requirement that the petitioner should come to the court with clean hands, the petitioner’s conduct may mean that the harm inflicted on him was not unfair or that the relief granted should be restricted – Re Phoenix Contracts (Leicester) Ltd [2010] EWHC 2375.  The court should take a broad, equitable approach to the matter.

[39]      The petitioners raised the question of a share buyout and section 996, and then raised the issue of the bribery investigations.  It is clear that Mr Gray was dismissed for bribery, and that the consequence of this is that his shares fall to be valued at subscription price.  The present proceedings were raised in order to avoid the consequences of Mr Gray’s dismissal, on the basis that the dismissal proceedings were wrongful, and that the petitioners’ shareholding should be valued at more than £20,000,000, rather than £2,444,000. 

[40]      It cannot be a fair and equitable outcome for the court simply to ignore Mr Gray’s involvement in the bribery matters.  Senior counsel for the petitioners submitted that the bribery element was reflected in the valuation of the petitioners’ shares at £20,614,400;  however, this ignores the effect on the respondents as a whole.  They did not diminish the value of the company by bribery or otherwise, yet the values of their shareholdings have been reduced by Mr Gray’s conduct.  It would be unfair on the fifth, sixth and seventh respondents in particular if the value of the petitioners’ shares was assessed at a figure in excess of £20,000,000.  Moreover, even the conduct of the second, third and fourth respondents, which the Lord Ordinary held to have been unfairly prejudicial, did not reduce the value of the company.  It is impossible at present to know what the effect on the value of the company will be, by way of fines, civil recovery orders, and loss of goodwill and reputation, as a result of Mr Gray’s misconduct.  So, the Lord Ordinary exercised his discretion properly, and assessed matters in the round.  Having set this ball rolling, the petitioners have to accept the result.  The authorities are clearly to the effect that in carrying out the exercise in terms of section 996 of the 2006 Act the court should be aiming to achieve a fair and equitable result between the parties.  The approach of the Lord Ordinary at paragraph [160] is supported by Re LCM Wealth Management Ltd, and also by Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch).  Whilst it is correct that the Lord Ordinary’s approach results in enrichment of the respondents, this is not unjustified enrichment.  It should be remembered that nobody suggests that the fifth, sixth and seventh respondents have done anything wrong;  their enrichment is just the working through of the provisions of the shareholders’ agreement and the articles.  It is not unconscionable or unfair that innocent shareholders may get an uplift in the value of their shares as a result of enforcement of the shareholders’ agreement and articles following on the departure of a Leaving Shareholder who has been involved in bribery. 

[41]      The petitioners’ submission that Mr Gray could never be a Bad Leaver because in terms of clause 4.5 of the shareholders’ agreement he can only be removed with the consent of 75RP is wrong.  In terms of clause 9.1(u) of the shareholders’ agreement, any director of the company or a subsidiary of the company may be dismissed subject to 58RP.  A Bad Leaver has the meaning assigned to it in article 1.4 of the articles.  The company, guided by the decision of the board, supported Mr Gray’s dismissal at the time that judicial review proceedings were the subject of a reclaiming motion.  The company has stepped in to ratify the termination of Mr Gray’s employment, and any procedural irregularities within BGHL have been ratified by BGHL – see the Opinion of the Court in the reclaiming motion in the petition for judicial review, dated 8 October 2014, particularly at paragraph [2].  This undermines the petitioners’ argument about the complexity of the contractual provisions, because the company (ie BGHL) has ratified the process of Mr Gray’s termination, and any procedural missteps have also been ratified.  The technical argument for the petitioners and reclaimers does not survive this ratification.  In support of this proposition senior counsel relied on Alexander Ward & Co v Samyang Navigation Co 1975 SC (HL) 26 (particularly Lord Morris of Borth-y-Gest at 44/45, Lord Hailsham at 47 and Lord Kilbrandon at 51/2).

[42]      Lord Davidson next turned to the submission that article 6.8.2.2 was an unenforceable penalty clause.  Under reference to Cavendish Square Holding, he submitted that it contained a conditional primary obligation;  alternatively, it was enforceable because it was protecting a legitimate interest.  His primary position, however, was that there was no evidence about this before the Lord Ordinary, and the point comes too late.  If the decision of the UK Supreme Court had been to alter the law in favour of the petitioners, the lateness might be excusable;  however, the Court of Appeal in Cavendish Square Holding was even stronger in favour of the petitioners;  the decision of the Court of Appeal was issued in November 2013, well before the proof in this case which was heard between March and July 2015.  The point was therefore available, but was not advanced on behalf of the petitioners.  It is clear from Cavendish that evidence may assist the court in reaching an understanding of the point – the proper construction of a contractual provision may appear from the whole surrounding facts.  Had the petitioners raised this line of argument before the proof, evidence could have been led on it.  The court should accordingly not entertain the argument now.

[43]      Under reference to paragraph 14 of Cavendish, Lord Davidson submitted that article 6.8.2.2 provides for a conditional primary obligation, and it therefore cannot be a penalty.  The primary obligation is that in certain circumstances a shareholder is obliged to sell his shares;  the condition is the circumstances in which he asks to be bought out – is he a good leaver, a bad leaver or an early leaver?  No breach of any contractual stipulation may be involved – an early leaver may simply wish to leave early.  In form and in substance this is a primary conditional obligation, and in accordance with the decision of the majority of the UK Supreme Court, it cannot be a penalty.

[44]      If the clause is properly characterised as a conditional primary obligation, it is unnecessary to consider the argument advanced on behalf of the petitioners regarding what legitimate business interest in the company is protected by the clause.  However, the company’s interest is to remove the employee as quickly as possible, to remove him as a shareholder, and to protect the interests of the company in the future.  It should be borne in mind that fair value might be below subscription price, so this provision is not designed as a punishment.  There is a distinct commercial reason for requiring sale at subscription price – fraud could destroy the company, and instead of seeking other remedies for damages for fraud, the shareholders have agreed this mechanism as the best way to protect the non-fraudulent shareholders and the rest of the company.  There were analogies between the present case and the important background set out at paragraph 66 of Cavendish.  Again, it is important to remember that the court in Cavendish had the benefit of evidence about this background;  in the present case, because the point was not taken before him, the Lord Ordinary did not have this benefit.

[45]      Was the provision unconscionable at the time that the agreement was made?  Lord Davidson submitted that it was not – so even if it is (contrary to his primary argument) a penalty, it is still enforceable, because it is protecting the legitimate interests of the company. 

[46]      Turning to the submission for the petitioners that the Lord Ordinary failed to take account of the different position of the shares held by the Gray Trust, and the value to be placed on those shares, senior counsel drew our attention to the Deed of Trust, in terms of which Mr Gray provided that control of the shares should be exercised by himself and his wife;  he did not completely denude himself of the assets.  Mr Webster, who was Mr Gray’s adviser, stated in the schedule to his witness statement that he saw the two shareholdings (Mr Gray’s shares and those held by the Gray Trust) as identical and treated them as a whole;  there was no evidence from the other trustee, nor any evidence as to how the Trust operates.  The Trust was simply a tax efficient vehicle for the holding of shares, but it is not a mechanism which enables Mr Gray to escape the consequences of his gross misconduct.  Family trusts are included within the provisions of article 6.8.1, and article 6.8.2 applies to a deemed transfer notice provided by article 6.8.1. 

 

Response for the petitioners and reclaimers

[47]      Mr Sandison responded on three matters – (1) the nature of the Lord Ordinary’s discretion, (2) the possibility of a middle way, and (3) penalty. 

[48]      With regard to the nature of the Lord Ordinary’s discretion, the submissions for the respondents focussed excessively on what was said to be the court’s “wide” discretion.  However, the wide discretion was confined to the type of relief to be granted (Grace v Biagioli), and even then, the discretion must be rational, judicial and proportionate.  Having determined the type of remedy, the court still retains a discretion, but it must be rational, judicial, proportionate, and based on the evidence.  It cannot innovate on the parties’ contractual arrangements.  The Bad Leaver provisions show that the Lord Ordinary could not properly have arrived at the conclusion that these were inexorably enforceable against the petitioners – it was an open question whether they could be enforced at all against Mr Gray, and if they could be, which of the potential outcomes might be found to apply to him.  Senior counsel reminded us that one only becomes a Leaving Shareholder if one is deprived not only of one’s employment in any group company, but also of the post of director of any group company – article 6.8.1.  Nobody can be removed from the position of director of BGHL other than by a vote of the shareholders in BGHL.  Clause 4 of the shareholders’ agreement requires that vote to be on the basis of 75RP;  this means that Mr Gray has entrenched rights.  He owns two-thirds of the company – it is not surprising that the shareholders’ agreement provides that he cannot be removed other than by 75RP.  In any event, nobody has purported to remove him as director of BGHL.  Even if the submission that 75RP was required is mistaken, no director can be removed from BGHL without a 58RP vote.  No such vote has been taken, and there was no evidence before the Lord Ordinary to justify the conclusion that 58RP would be achieved.  Without a vote of the shareholders of BGHL (whether to the standard of 75RP or 58RP), it cannot properly be concluded that Mr Gray would be a Leaver, and it follows that he cannot be a Bad Leaver.

[49]      Clause 13.7 of Mr Gray’s contract of employment with Braid UK makes it clear that the procedure for removal is far from automatic.  The company must request Mr Gray to give up all his offices;  no such request has been made, nor could it be made without the necessary vote by shareholders in BGHL.  A request by Braid UK that Mr Gray should give up all his offices cannot be made unless it is authorised by the board of BGHL, as the controller of Braid UK.  BGHL cannot authorise such a request without at least 58RP.  The board of BGHL then have to make a further decision, because even if Mr Gray is categorised as a Leaver, the provisions as to Bad Leavers under article 6.8.1 are not automatic.  The board must decide whether to enforce them or not.  They have not done so.  (It should be noted that the pending litigation only relates to Mr Gray’s employment with Braid UK;  it does not relate to his office as a director of Braid UK, and he remains a director of BGHL and Braid Asia).

[50]      Moreover, a person who leaves is not a Bad Leaver unless the board of BGHL decide that is such.  The evidence indicates that the BGHL board would not have decided that Mr Gray’s leaving the company would cause detriment to the business.

[51]      The Lord Ordinary did not have the necessary evidential material to enable him to conclude that all of these decisions would have been made against Mr Gray.  With regard to Lord Davidson’s argument that both Braid UK and BGHL have ratified Mr Shane Watson’s decision to dismiss Mr Gray from his employment, Mr Sandison’s response was two-fold – (1) there was a real issue as to whether Braid UK or BGHL were properly authorised to appear in the court proceedings.  There was no valid resolution of either company to this effect;  in the absence of this, the ratification argument must fail.  (2) In any event, the judicial review proceedings were only concerned with Mr Gray’s employment – they had nothing to do with his directorship of Braid UK, and in particular nothing to do with either BGHL or Braid Asia.  The ratification argument has no substance.

[52]      The Lord Ordinary was accordingly not entitled to treat Mr Gray as if he were a Bad Leaver, when, in terms of the contractual arrangements, a variety of people had to make decisions and a variety of juridical acts had to be taken before he became such.  These decisions have not been made and these acts have not been taken;  the Lord Ordinary was not entitled on the evidence before him to speculate that they would be taken, nor to innovate upon the contractual arrangements of parties.

[53]      The figure of £2,444,000 is not the product of a fair valuation of the petitioners’ shares.  It is not open to the Lord Ordinary to adopt this as a value, because it is not rational.  It could only be rational if something requires it.  There has been no suggestion that this is a rational valuation of the shares.  The only factor which might support it is the contractual agreement, but the Lord Ordinary did not apply this, and there remains real doubt as to whether it would be applied.  The Lord Ordinary applied a contractual outcome without the necessary contractual conditions for that outcome.

[54]      Turning to the “middle way”, Mr Sandison provided the court with a document headed “Reworking of Lord Ordinary’s valuation findings so as place the whole assessed consequences of bribery on Nigel Gray/The Gray Trust”.  I do not seek to repeat or précis this document here.  Its purpose was to calculate what valuation of the petitioners’ shareholding might be achieved if the full burden of the loss and damage occasioned by Mr Gray’s involvement in the bribery arrangements was shifted from the other shareholders to the Gray interests.  Two methods of achieving this are set out in the paper;  each method has the same result, namely that the petitioners’ shareholdings, taken together, would have a value of £18,713,538.50. 

[55]      Mr Sandison accepted that his penalty clause argument had not been raised before the Lord Ordinary;  however, this court has a discretion to hear new arguments, and given that the court’s overriding purpose is to do justice between the parties, the court should allow the submission to be made unless real prejudice has been suffered by the respondents.  No such prejudice has been demonstrated.  The question of whether the clause is a penalty or not is a matter of contractual construction – it would never have been open to the respondents to lead evidence as to what people thought they were agreeing, nor to lead evidence about negotiations – Chartbrook v Persimmon [2009] 1 AC 1101.  The background is fully set out in the Lord Ordinary’s opinion;  Lord Davidson did not suggest what evidence he would have sought to adduce if the point had been raised at an earlier stage.  This court should consider it.

[56]      The submission that this is a conditional primary obligation is misconceived.  If a contract provides that a party is expected to do X, and if he does not, then he must do Y, that is a conditional primary obligation.  However, if a contract provides that a party is obliged to do X, and if he breaches that obligation then the consequence is that he shall be obliged to do Y, then Y is a secondary obligation.  In the present case, clause 6.8.2.2 can only ever arise if there is a breach of a primary obligation.  Mr Gray’s unconditional primary obligation was to do his job properly;  only if he breached this does the secondary obligation arise.  He did not have an option to do one thing or another.  The present case is therefore less complex in this regard than the circumstances in Cavendish. 

[57]      The Bad Leaver provisions were not aimed solely at people who were causing loss or damage to the company – there might be gross misconduct which caused no damage to the company.  The question must be asked:  is this a provision which is designed to serve a legitimate interest of the company?  The purpose of a clause must be determined by its effect.  If its effect is to deprive a shareholder of his shares at a price unconnected to their worth, possibly where no damage has been caused to the company, the company has no legitimate interest in that purpose.  The company has an interest in seeing that the misbehaving person leaves as an employee, and leaves as a director, and leaves as a shareholder, but it has no legitimate interest in forcing him to give up his shares at subscription price rather than for value.  Mr Sandison accepted that there was a presumption that the clause is enforceable, but that presumption is rebuttable.  Without clause 6.8.2.2, there is no content to the concept of a Bad Leaver;  Mr Gray is an early leaver in terms of clause 6.8.2.1.  The company retains its common law rights against Mr Gray – if it can prove that Mr Gray’s conduct has caused it harm, it is open to the company to sue him.  However, it has no legitimate interest in acquiring his shares at undervalue – Cavendish at paragraph 255 (Lord Hodge JSC), paragraph 293 (Lord Toulson JSC) and paragraph 32 (Lord Neuberger PSC and Lord Sumption JSC).  In 2016, just as in 1885 when the court was considering Watson v Noble, there is no legitimate interest in a company not only getting rid of an errant employee and putting him out of the business but also acquiring his shares at a value which bears no relation to their true value.

           

Discussion and decision

[58]      The task required by section 996 of the 2006 Act involves the exercise of a wide discretion by the court.  However, it is worth noting at the outset the purpose for which that discretion is to be exercised, namely “for giving relief in respect of the matters complained of”.  If the court decides to make an order and the result of the exercise of the court’s discretion cannot fairly be described, in light of all the relevant circumstances, as giving relief in respect of the matters complained of – that is, the matters set out in section 994(1) of the 2006 Act – then the court will not have exercised its discretion properly.  Senior counsel for the petitioners and reclaimers submitted that “relief” in this context means the same as “a remedy”, and this was not challenged on behalf of the respondents.  I agree with the submission for the petitioners and reclaimers that “relief” in this context means “remedy”.

[59]      There are several points in this task which might be described as requiring the court to exercise its discretion.  First, the court has a discretion as to whether to make any order at all, or whether to decline to make an order.  Second, the court has a discretion as to what kind of order it should make, under reference to the various categories listed in section 996(2), but without prejudice to the generality of subsection (1).  Neither party in the present case takes issue with the Lord Ordinary’s exercise of his discretion (i) that he should make an order, and (ii) that an order under section 996(2)(e) was appropriate.

[60]      In the course of his submissions to us, Mr Sandison argued that once the court has decided to make a share purchase order, the exercise of the valuing of the shares is not covered by the same wide discretion.  Whilst I accept that the court’s discretion is not unfettered (and I shall deal with this point below), I am not persuaded that it is appropriate to apply different standards, or measures of “width of discretion”, to the various considerations to which the court must have regard in terms of section 996.  I consider that the section as a whole provides a wide discretion (as did its predecessors, section 75 of the Companies Act 1980 and section 461 of the Companies Act 1985 as amended), and that it is not helpful to try to subdivide it into parts which provide a wide discretion and other parts which provide a less generous discretion.  There is nothing in the language of the section which supports such a construction.  The various possible orders which the court may make in terms of section 996(2) are stated to be expressly without prejudice to the generality of subsection (1), namely “such order as it thinks fit for giving relief in respect of the matters complained of”. 

[61]      This approach is consistent with the authorities to which we were referred.  A similar argument to that advanced by Mr Sandison was advanced to the Court of Appeal in Re Bird Precision Bellows Ltd, namely that the court is to be rigidly restricted, if it is to make an order under section 75(4)(d) of the 1980 Act at all, to making an order for a purchase at a market price of the holding being purchased, to be arrived at only by the ordinary valuation principles, which will take into account the proportionate size of the holding in relation to the issued capital as a whole and to the control of the company.  Oliver LJ had this to say (at 669D):

“For my part I find myself quite unable to accept this submission.  It seems to me that the whole framework of the section, and of such of the authorities as we have seen, which seem to me to support this, is to confer on the court a very wide discretion to do what is considered fair and equitable in all the circumstances of the case, in order to put right and cure for the future the unfair prejudice which the petitioner has suffered at the hands of the other shareholders of the company;  and I find myself quite unable to accept that the discretion in some way stops short when it comes to the terms of the order for purchase in the manner in which the price is to be assessed.  It has been pointed out, and I mention it again, that section 75(4) is merely a collection of possible methods of giving effect to section 75(3), and it is expressed to be without prejudice to the generality of subsection (3), which gives the court a very wide discretion as to the granting of relief in general terms in respect of the matters of which complaint has been made”.

 

He went on to observe (at 672H) that “what the court is required to do, in the exercise of its very wide discretion, is that which is just and equitable between the parties”. 

[62]      In agreeing with him, Purchas LJ observed:

“I agree with all that has been said by Oliver LJ, that the effect of section 75(4) is merely to expand the wide powers granted under section 75(3) and not in any way to restrict them.  Moreover, the use of the expression in the consent order ‘the purchase of the shares’ is not, in my judgment, intended in any way to restrict the powers otherwise enjoyed by the court”.

 

[63]      In my view the court retains a wide discretion when fixing the price for a share purchase order under section 996(2)(e).  It is entitled to assess the effect of the unfairly prejudicial conduct, and to consider issues of proportionality – as Lewison J observed in Hawkes v Cuddy (No.2) at paragraph 246:

“Where unfair prejudice has been established, the remedy must also be proportionate to the unfair prejudice found.  It may be disproportionate to order a buy-out of one shareholder’s shareholding where the unfair prejudice is relatively modest.  By the same token, the exercise of jurisdiction under section 996 is not a punishment for bad behaviour”.

 

[64]      The court is also entitled to have regard to the conduct of the petitioner.  As Nourse J observed in Re London School of Electronics Ltd (at page 222B):

“The conduct of the petitioner may be material in a number of ways, of which the two most obvious are these.  First, it may render the conduct on the other side, even if it is prejudicial, not unfair.  Secondly, even if the conduct on the other side is both prejudicial and unfair, the petitioner’s conduct may nevertheless affect the relief which the court thinks to grant under subsection (3).  In my view there is no independent or over-riding requirement that it should be just and equitable to grant relief or that the petitioner should come to the court with clean hands”.

 

[65]      In accordance with this line of authority, I consider that the court has a wide discretion throughout the exercise which it must carry out in terms of section 996, including the fixing of a price for the purchase of shares in terms of section 996(2)(e).  However, as Lord Hoffmann observed in O’Neill v Phillips (at pages 1098/9):

“In section 459 Parliament has chosen fairness as the criterion by which the court must decide whether it has jurisdiction to grant relief.  It is clear from the legislative history …that it chose this concept to free the court from technical considerations of legal right and to confer a wide power to do what appeared just and equitable.  But this does not mean that the court can do whatever the individual judge happens to think fair.  The concept of fairness must be applied judicially and the content which it is given by the courts must be based upon rational principles….  In my view, a balance has to be struck between the breadth of the discretion given to the court and the principle of legal certainty… The way in which such equitable principles operate is tolerably well settled and in my view it would be wrong to abandon them in favour of some wholly indefinite notion of fairness”.

 

[66]      So, in fixing a price for a share purchase order, the Lord Ordinary had a wide discretion to achieve a result which is just and equitable between the parties, for the purpose of giving relief in respect of the matters complained of.  That did not entitle him to do whatever he happened to think fair – as senior counsel for the petitioners and reclaimers put it, he must exercise his discretion rationally and judicially, in accordance with settled legal principle, upholding any legal agreement between the parties, and on the basis of the evidence before him, not on the basis of supposition or conjecture.  I agree with this summation. 

[67]      There are many different factors to which a court will have to have regard when exercising its discretion in making a share purchase order under section 996(2)(e).  They will inevitably differ from case to case, and it would be unwise (and perhaps impossible) to attempt to give a definitive list of factors which might be relevant.  I do not attempt to do so here.  However, some of the factors to which the Lord Ordinary in the circumstances of the present case might perhaps have assessed as having some weight in the exercise of his discretion are (1) the evidence as to the value of the company as at the date of proof, (2) the evidence as to the unfair conduct of some of the respondents, and the extent to which this has prejudiced the interests of the petitioners, (3) the evidence as to the misconduct of Mr Gray, and the extent to which this may have damaged BGHL and its subsidiary companies, and (4) evidence about any contractual provisions between the parties which determine, or may determine, the price for the petitioners’ shareholding, together with evidence about the fulfilment of any conditions or requirements before such provisions become effective and enforceable. 

[68]      I emphasise that there may be other factors which might arise in other cases, but the above are factors which appear to me to be relevant in this case.  I also emphasise the importance of evidence in each of these factors – without evidence, there would be a risk of the court slipping into supposition or conjecture.  The exercise which the court undertakes must have a solid evidential basis – Profinance Trust SA v Gladstone.

[69]      The Lord Ordinary found that the value of BGHL at the date of conclusion of the proof was £32,000,000.  The petitioners between them own 64.42% of the shares of BGHL, so that on the basis of a price pro rata to the valuation of the company, the value of petitioners’ holdings would be £20,614,400.  These figures are not challenged by either party.  The Lord Ordinary also had regard to the misconduct of Mr Gray in authorising and in participating in the bribery arrangements.  The petitioners and reclaimers do not seek to challenge his findings in these respects.

[70]      Beyond noting (at paragraph [107]) that at the conclusion of the proof in July 2015 the outcome of the self report to Crown Office was not yet known, the Lord Ordinary does not record that any evidence was led at proof about the possible effects of Mr Gray’s misconduct on BGHL or any of its subsidiaries, whether by way of fine, reputational damage, litigation or otherwise.

[71]      The Lord Ordinary used as the foundation of his order that the price to be paid for the petitioners’ shares should be £2,444,000 because of the Bad Leaver provisions in article 6.8.2.2.  He rejected the submission on behalf of the petitioners that the court cannot treat Mr Gray as if he were a Bad Leaver unless or until the BGHL board has found him to be such, and described this as

“yet another objection of a procedural nature which runs contrary to the wide power conferred upon the court to decide what further order it is fair to make.  The proper approach for the court to take is to determine what is fair and equitable in circumstances in which the consequence of Mr Gray’s conduct is that the Bad Leaver provisions of the articles have become applicable”.

 

[72]      However, it is the position of the petitioners and reclaimers that, properly construed, the Bad Leaver provisions have not become applicable, and they may never be enforced against Mr Gray;  that the Lord Ordinary proceeded on the basis that they had become applicable without evidence as to the fulfilment of the necessary conditions for this to have occurred, or even as to the likelihood of such fulfilment in the future.  I consider that there is force in this submission.  The following considerations have driven me to this conclusion:

• Was there evidence that Mr Gray was a Leaving Shareholder?  From the material before me the answer appears to be that there was not.  He was not within any of the categories listed in article 6.8.1.  The Lord Ordinary records (at paragraph [106]) that Mr Gray remains a director of BGHL and of Braid UK, and he continues to dispute in other court proceedings which are still pending the validity of attempts to suspend and dismiss him.  He also remains a director of PLUK and Braid (Asia).  If he is not a Leaving Shareholder, he cannot be a Bad Leaver for the purpose of article 6.8.2.2.
• If the other members of BGHL did seek to remove Mr Gray as a director, it is not a foregone conclusion that they would succeed.  On one view, clause 4.1. and 4.5 of the shareholders’ agreement require agreement of 75RP for such a step;  if this is correct, Mr Gray could block the move as he controls 34.82RP.  Even if this construction is wrong, and the dismissal of any director of the company or a subsidiary of the company is covered by clause 9.1(u) of the shareholders’ agreement, this can only be achieved with consent of 58RP.  The Lord Ordinary does not address the apparent conflict between these two provisions.  Moreover, there was no evidence to support the view that the lower threshold would be met – not all the shareholders gave evidence, and none of the shareholders who were witnesses was asked whether, if the board resolved to remove Mr Gray as a director, they would have given their consent to such action.  There was therefore no solid evidential basis for the Lord Ordinary’s conclusion that the Bad Leaver provisions of the articles have become applicable.
• Even if Mr Gray was a Leaving Shareholder, and even if he was a Bad Leaver, it does not follow automatically that the board of BGHL would deem the petitioners to have given to the board a Transfer Notice;  article 6.8.1 makes express provision that the board may resolve otherwise, and the matter was not explored in evidence.
• Even if the board decided to treat Mr Gray as a Bad Leaver, there are different categories of Bad Leaver in terms of article 1.4.  If Mr Gray voluntarily resigned his employment he would become a Bad Leaver.  However, both Mr Leddra and Mr Shane Watson stated in their witness statements that Mr Gray’s leaving would have no adverse impact on BGHL.  This might have the result that, if Mr Gray resigned from office, the sale price for the petitioners’ shares would be 75% of fair value, in terms of article 6.8.2.2, rather than subscription price.

[73]      Having regard to these considerations, I am persuaded that the Lord Ordinary did not have a solid evidential basis for his conclusion that he was faced with “circumstances in which the consequence of Mr Gray’s conduct is that the Bad Leaver provisions of the articles have become applicable”.  This is not a case in which the court was dealing with an unconditional binding legal agreement, or in which there was evidence that all the conditions required for the agreement to define the price for the transfer of shares had been fulfilled, or were likely to be fulfilled.  The shareholders’ agreement and the articles provided for a far from straightforward series of steps and decisions by a variety of persons to be completed before Mr Gray could be categorised as a Bad Leaver whose shares had to be transferred at subscription price.  There was no evidence before the Lord Ordinary that these steps and decisions had been taken, nor even that they were likely to be taken.  The Lord Ordinary used the articles and the shareholders’ agreement as the model and foundation of his order.  I consider that in doing so he fell into error, and anticipated or speculated that the necessary steps and decisions would be taken without the necessary evidential basis.

[74]      The case of G v G (Minors): Custody Appeal, on which Lord Davidson relied, was a case concerning custody of children, and a rather different form of judicial discretion from that in the present case.  However, I recognise and agree with the principles enunciated therein to the effect that an appellate court should not interfere with the exercise of a discretion of a judge at first instance merely because it would have exercised the discretion differently.  On the other hand, if the appellate court reaches the clear conclusion that there has been a wrongful exercise of discretion, the reversal of the order on appeal may be justified.  In the present case, I have reached the view that, by proceeding on the basis that the Bad Leaver provisions of the articles have become applicable without the necessary evidential foundation for this, the Lord Ordinary has plainly exercised his discretion wrongly.

[75]      Lest there be any misunderstanding, I am not to be taken as suggesting that a court should close its eyes to the provisions of articles of association or a shareholders’ agreement where these provisions are unconditional or where there is evidence that the conditions have been, or will be, fulfilled.  Such provisions, representing as they do the terms on which parties have agreed to purchase shares in a company or form the company, will clearly carry real weight, and may be determinative, in the exercise of the court’s discretion.  As Hildyard J observed in Re LCM Wealth Management, in that case “there is no basis for the court’s intervention to modify the consequences provided for in the contractual agreements the parties made when the company was formed” (paragraph 8), and “there is no over-riding reason not to give effect to the arrangements, including those for dismissal and removal of a director and the sale of his shares, comprised in the agreements (to the extent valid in law), albeit they should be strictly interpreted, exercised in good faith and not permitted to be used ‘for unworthy purposes’”.  My view in the present case rests on the absence of evidence to justify the conclusion that the steps and decisions necessary to bring article 6.8.2.2 into play had been, or would be, taken.

[76]      It is perhaps convenient at this stage to address two submissions which were made to us, neither of which I found persuasive.  First, Mr Sandison’s submission that the subscription price for the Gray Trust shares might have been different from the subscription price for Mr Gray’s own shares, because the value of the shareholding in John S Braid & Co Ltd now held by the Gray Trust was not established.  We were referred to the accounts of BGHL and subsidiary companies for the period 22 March 2006 to 30 June 2007, which disclose that the called up share capital of BGHL was £3,744,000, comprised of 3,744,000 ordinary shares of £1 each allotted, called up and fully paid, which were all issued during the year at par.  In terms of article 2.2, all shares rank pari passu.  I agree with Lord Davidson that if the Gray Trust shares were exchanged at any value other than par, this would have been reflected in a share premium account.  There was no evidence of this.  Indeed, the valuation by Iain Webster dated 29 April 2013 which was produced on behalf of the petitioners put a value on Mr Gray’s interests in BGHL of £2,444,000, and this is reflected in the petitioners’ written pleadings.  I am not persuaded by the submission for the petitioners and reclaimers on this point.

[77]      Secondly, Lord Davidson’s submission that any missteps or mistakes by BGHL were ratified by the board of BGHL by reason of BGHL’s appearance as an interested party in the judicial review proceedings at the instance of Mr Gray against Braid UK.  I am not persuaded by this submission.  First, it is not clear who authorised the appearance of BGHL as an interested party in those proceedings:  no minute of the board was produced, nor any resolution that BGHL should appear as an interested party.  In any event, it is not clear to me that the appearance of BGHL in those proceedings, even if properly authorised, serves to resolve in the respondents’ favour the various procedural steps which I have identified above.  The object of those proceedings was reduction, suspension and interdict in respect of certain disciplinary actions taken against Mr Gray in respect of his position as a director of Braid UK.  As discussed above, those disciplinary actions would require to proceed not only on the instructions of BGHL, but also with the consent of 58RP (or arguably 75RP) of the shareholders.  I do not consider that the appearance of BGHL in the judicial review proceedings has the effect argued for by Lord Davidson.

[78]      To summarise my conclusions thus far, I consider that the Lord Ordinary erred in the exercise of his discretion in making an order based on a price of £2,444,000, because in reaching that figure he proceeded on the basis that the Bad Leaver provisions of the articles had become applicable, when there was not a sufficient evidential basis for this.  Nothing other than the provisions of article 6.8.2.2 provides a justification for a transfer price of £2,444,000 in respect of the petitioners’ shareholding of 64.42% of BGHL, a company which has a valuation of £32,000,000.  The sum of £2,444,000 is not the result of a balancing exercise between the prejudice caused by the second, third and fourth respondents’ unfairly prejudicial conduct on the one hand and the damage caused by Mr Gray’s misconduct on the other;  it is based solely on the mechanisms provided by article 6.8.2.2, and the assumption that those mechanisms have become applicable.  In this, the Lord Ordinary has fallen into error, and exercised his discretion wrongly.  His order cannot properly be said to amount to the giving of relief in respect of the matters complained of.  This court is accordingly entitled to interfere with the Lord Ordinary’s order. 

[79]      That is sufficient to dispose of the substantive arguments, without the need to consider whether article 6.8.2.2 amounts to an unfair and unenforceable penalty clause.  However, in deference to the careful submissions which were made to us on both sides on this point, I shall give my views on this matter briefly.  As Mr Sandison acknowledged, this was not a matter put in issue before the Lord Ordinary;  it was not raised in the petitioners’ pleadings, nor in evidence.  I accept Lord Davidson’s point that evidence may assist the court on an issue such as this, and that the proper construction of a contractual provision may depend to some extent on the whole surrounding facts.  However, no indication was given as to what evidence the respondents might have led which might have assisted the court in this regard, and the respondents did not point to any specific prejudice occasioned to them by reason of the issue being raised so late.  I consider that it is in the interests of justice that this court should consider the point, despite its not having been mentioned before the Lord Ordinary.

[80]      The primary submission for the respondents was that article 6.8.2.2 could not be a penalty, because it provides for a conditional primary obligation – Cavendish at paragraph 14.  It was submitted that the primary obligation was that in certain circumstances a shareholder is obliged to sell his shares;  the condition is the circumstances in which he asks to be bought out (as a Good Leaver, a Bad Leaver or an Early Leaver).  In accordance with the decision of the majority of the UK Supreme Court, this cannot be a penalty. 

[81]      I disagree with this submission in the circumstances of this case.  Properly characterised, the primary obligation in considering the Bad Leaver provisions in article 6.8.2.2 is that the employee will not commit an act of gross misconduct or persistently under-perform (see article 1.4).  If this primary obligation is breached, the Bad Leaver provisions of article 6.8.2.2 are triggered, and the secondary obligation is the compulsory transfer of the Bad Leaver’s shares at subscription price.  The circumstances of the articles and shareholders’ agreement in this case are very different from the contract with which the UK Supreme Court was concerned in Cavendish, which was for the sale of a controlling interest in a business.  In Cavendish a large amount of the sale price of $147,000,000 reflected goodwill, and the seller was subject to a non-competition provision which, if breached, would result in the seller not being entitled to receive an interim and/or final payment which would otherwise have been paid to him, and the purchaser having an option to buy his remaining shareholding at a price which disregarded goodwill.  The UK Supreme Court held that the provision (clause 5.1) was plainly not a liquidated damages clause, and was not concerned with regulating the contractual alternative to damages at law.  It held that the clause was in reality a price adjustment clause.  Although the occasion for its operation was a breach of contract, it was in no sense a secondary provision.  It belonged with clauses 3 and 6, among the provisions which determine Cavendish’s primary obligations, i.e. those which fix the price, the manner in which the price is calculated and the conditions on which different parts of the price are payable.  (See paragraph 74).

[82]      I do not consider that article 6.8.2.2 can be construed in the same way.  The only circumstance in which a Bad Leaver can be compelled to transfer his shares at subscription price is where the reason for ceasing to be employed or to act as a director is fraud or gross misconduct.  It is the fraud or gross misconduct in the circumstances of the present case which constitutes the breach of the primary obligation;  the provision as to transfer at subscription price is a secondary provision.  Article 6.8.2.2 cannot be equiparated to clause 5.1 in Cavendish.  This is not a situation in which a shareholding in a company which reflected to a large extent goodwill was being sold by way of instalment payments, and during the course of those instalments steps were taken by the seller which might reduce the value of the goodwill and therefore reduce the price payable.  These articles of association were adopted in December 2006, which appears also to be the date of the shareholders’ agreement.  This is not a mechanism for fixing share prices at the date of the agreement, as the UK Supreme Court held was the case in Cavendish, but rather a mechanism for determining the consequences of a subsequent default, which may occur many years later.  I do not consider that article 6.8.2.2 can be properly categorised as providing for a conditional primary obligation.

[83]      It is accordingly necessary to consider whether article 6.8.2.2 is an unfair and unenforceable penalty provision.  In this regard it is worth repeating the observations of Lord Hodge JSC in Cavendish at paragraph 255:

“I therefore conclude that the correct test for a penalty is whether the sum or remedy stipulated as a consequence of a breach of contract is exorbitant or unconscionable when regard is had to the innocent party’s interest in the performance of the contract.  Where the test is to be applied to a clause fixing the level of damages to be paid on breach, an extravagant disproportion between the stipulated sum and the highest level of damages that could possibly arise from the breach would amount to a penalty and thus be unenforceable.  In other circumstances the contractual provision that applies on breach is measured against the interest of the innocent party which is protected by the contract and the court asks whether the remedy is exorbitant or unconscionable”.

 

[84]      In considering this question in relation to article 6.8.2.2 I am persuaded by the submissions for the petitioners and reclaimers that the provision that a Bad Leaver must transfer his shares at subscription price is indeed exorbitant and unconscionable, having regard to BGHL’s interest in the performance of the contract.  I agree that BGHL has a clear interest in seeing that its employees and directors perform their duties properly;  however, that interest is protected by its right to remove the employee or director from his employment or post.  The company has an interest in seeing that Mr Gray leaves (i) as an employee, (ii) as a director, and (iii) as a shareholder.  However, I am unable to ascertain a legitimate interest in the company requiring Mr Gray to give up his shares at subscription price rather than for value.  The company has no legitimate interest in requiring Mr Gray to forfeit whatever value has been built into the shareholding since he subscribed for his shares.  BGHL are protected against the risk of overpaying for the shares of a Bad Leaver by the requirement in article 6.8.2.2 that the fair value of the shares shall be determined by an independent chartered accountant as provided for by article 6.1.1. 

[85]      It was argued on behalf of the respondents that fair value might be below subscription price, so the provision was not designed as a punishment.  Moreover, fraud could destroy the company, and instead of seeking other remedies for damages for fraud, this was the mechanism which shareholders had agreed to protect the non-fraudulent shareholders and the rest of the company.  I am not persuaded by these arguments.  In the vast majority of cases in which provisions such as this are relied on, the fair value of a shareholding will be greater than the subscription price.  In this case, the difference is in excess of £18,000,000.  I regard this remedy as exorbitant and unconscionable when regard is had to the innocent party’s interest in the performance of the contract.

[86]      The point was considered succinctly by the Second Division in 1885 in Watson v Noble, to which Lord Hodge JSC referred.  In that case the contract provided that the pursuer would purchase shares in a steam trawler at a price of £100, and he undertook to take command and charge of the trawler, to conduct the trawling operations, to be sober and attentive to his duties,

“and in the event of his at any time becoming intoxicated or in any way failing to fulfil the obligations hereby undertaken by him, the first party shall be entitled forthwith to dismiss him from his employment as captain of the said vessel, and in that event the second party shall forfeit all claims to repayment of the said sum of £100 paid to the first party as aforesaid, and shall also forfeit his right to any share of the said vessel, or of the profits thereof”.

 

In due course the pursuer became intoxicated and was dismissed.  The pursuer sought repetition of the price of the shares.  No claim for damages arose on either side in this action.  Lord Young observed:

“The main question in the case, and that on which its decision must turn, related to the clause of forfeiture, that if the pursuer gets drunk, although he does no damage at all, he is to forfeit the shares which he has bought and paid for.  Now, I am not prepared to enforce that.  I think it is a penalty and that it cannot be enforced”.

 

Lord Rutherfurd Clark agreed, asking whether the pursuer’s shares in the trawler ever ceased to be his property?  He continued:

“I do not think they did.  It is said that he forfeited his property in them in consequence of the condition in the agreement as to his sobriety.  I do not think that we can enforce that condition of forfeiture, not merely to the disadvantage of the pursuer, but to the effect of retransferring his property to the defender.  It seems to me that when we are left in ignorance as to whether the pursuer has caused any loss to the defender, it would be contrary to every rule of equity to order the forfeiture of this property and its consequent transfer to the defender”.

 

 

[87]      The considerations which weighed with the Second Division in 1885 were not so very different from those which weighed with the UK Supreme Court in 2015 (albeit on the facts the results were different).  When I consider the legitimate interests of BGHL in the present case, I am persuaded that the provision in article 6.8.2.2 that where the reason for ceasing to be employed or to act as a director is fraud or misconduct the sale price shall be the lower of 75% of the fair value or the subscription price is indeed exorbitant or unconscionable, and unjustified by the innocent party’s interest in the performance of the contract.

[88]      For this reason too, if it had been necessary for me to do so, I should have concluded that article 6.8.2.2 was not a proper model for an order in terms of this petition.  In saying this, I observe that no criticism can be made of the Lord Ordinary in this respect, because no hint of a penalty clause submission was made before him.

[89]      Having concluded, for the reasons given earlier, that the Lord Ordinary erred in the exercise of his discretion, it would fall to this court to consider what order should be made.  Neither party in their submissions to us argued that the Lord Ordinary should have made no order;  neither party submitted to us that the Lord Ordinary was wrong to make a share purchase order in terms of section 996(2)(e) of the 2006 Act.  It was within the Lord Ordinary’s discretion to make such an order, and I agree that this is the appropriate order in the circumstances of the present case.  In light of the evidence led before the Lord Ordinary, the mechanisms provided by the articles of association and shareholders’ agreement provide no assistance.  This leaves a fair valuation of the shareholding.  However, I do not consider that it would be appropriate to make an order for the first respondent to purchase the petitioners’ shares for the aggregate sum of £20,614,400.  I agree with the submission for the respondents that it cannot be a fair and equitable outcome for the court simply to ignore Mr Gray’s involvement in the bribery matters.  The Lord Ordinary found (at paragraph [152]), on an analysis of all the company valuation evidence presented to him, that BGHL might reasonably be valued, as at the date of conclusion of the proof, at £32,000,000.  The valuation evidence before him, which came from two expert witnesses, appears to have attempted to take account of the possible damage to BGHL arising from the bribery matters.  To this extent, Mr Gray’s involvement has been taken into account in reaching the valuation of £32,000,000.  However, this means that the consequences of Mr Gray’s misconduct would be shared by all the parties.  This would be unfair on the fifth, sixth and seventh respondents in particular.  A petitioner’s own misconduct is relevant to the grant of relief – O’Neill v Phillips;  Re London School of Electronics Ltd;  Re Phoenix Contracts (Leicester) Ltd.

[90]      I have had regard to what Mr Sandison described as the “middle way”, and the document “Reworking of Lord Ordinary’s valuation findings so as to place the whole assessed consequences of bribery on Nigel Gray/The Gray Trust”.  I consider that it is proper to have regard to this, even given the late stage at which it was tendered – it does not amount to new evidence, but merely a reworking of the figures before the Lord Ordinary to remove the consequences of Mr Gray’s misconduct from those not responsible for it.  In all the circumstances I have reached the conclusion that an order for the purchase of the shares in the first respondent held by the first and second petitioners respectively for the aggregate sum of £18,000,000 is the appropriate order for giving relief in respect of the matters complained of, in terms of section 996(1) of the 2006 Act.

[91]      Having read each of your Lordships’ opinions in draft it is clear that I am in the minority in my conclusions.  With the greatest respect to your Lordships, I adhere to the views expressed above, particularly having regard to the factors listed at paragraph [72].  I remain of the view that the Lord Ordinary did not have the evidential material before him to justify the exercise of his discretion in the way he did.  However, in light of your Lordships’ opinions, clearly this reclaiming motion must be refused.

 

EXTRA DIVISION, INNER HOUSE, COURT OF SESSION

[2016] CSIH 68

P560/13

 

Lord Menzies

Lorde Brodie

Lord Malcolm

OPINION OF LORD BRODIE

in the Reclaiming Motion

of

NIGEL ANTHONY HARDEN GRAY and OTHERS

Petitioners and Reclaimers;

for

Orders pursuant to sections 994 and 996 of the Companies Act 2006 in respect of Braid Group (Holdings) Limited

 

Petitioners and Reclaimers:  Sandison QC, McColl; Brodies LLP

Second, Third and Fourth Respondents:  Lord Davidson of Glen Clova QC, Middleton; CMS Cameron McKenna LLP

Fifth Respondent (Jeff Prowse):  Party

23 August 2016

[92]      Like Lord Malcolm, I have had the very considerable advantage of reading a draft of the opinion of your Lordship in the chair.  I have had the additional advantage of reading a draft of Lord Malcolm’s opinion.  Your Lordships’ opinions provide very full and very clear expositions of the facts and issues in this reclaiming motion.  For that I am very grateful.  In large part what follows is a repetition of what appears in your Lordships’ respective opinions.  However, given that your Lordships differ in result, it is important that I indicate how I have arrived at my conclusion. 

[93]      Parties were in sharp disagreement as to the correctness of the sum of £2,444,000 selected by the Lord Ordinary as the purchase price at which the first respondent, Braid Group (Holdings) Limited (“BGHL”), should purchase the shares held by the first and second petitioners but, as appears from the opinion of your Lordship in the chair, no issue is taken with many of the steps taken by the Lord Ordinary in arriving at his decision.  The petitioners sought orders pursuant to sections 994 and 996 of the Companies Act 2006.  They complained that the affairs of BGHL had been carried on in a manner that was unfairly prejudicial to their interests.  The Lord Ordinary found that that was so, in the three respects he identifies in paragraph [141] of his opinion.  No issue is taken with that conclusion.  Equally, no issue is taken with the Lord Ordinary’s finding that the first petitioner authorised and participated in the bribery of employees of BGHL’s customers (as discussed in the Lord Ordinary’s opinion at paragraphs [82] to [140]).  At paragraph [161] of his opinion the Lord Ordinary characterises that as gross misconduct.  Again there was no dispute as to the correctness of that as an objective assessment. 

[94]      Parties are therefore agreed that the Lord Ordinary had the power, which it was incumbent upon him to exercise, to make such order as he thought fit “for giving relief in respect of the matters complained of”.  In this context, following what I understand to be English terminology, “relief” merely means what a Scots lawyer would describe as remedy.  Again, as your Lordship in the chair observes, parties are agreed about that.  They are further agreed that the meaning of the full expression “giving relief in respect of the matters complained of” and, to the extent that that is different, the principles to be applied in giving that meaning effect, are to be found in the cases cited by your Lordship and, in particular, in the passages quoted from them by Lewison J in Hawkes v Cuddy (No 2).  In Grace v Biagioli the Court of Appeal explained at para 73 that “giving relief in respect of the matters complained of” was not limited merely to reversing or putting right the immediate conduct which has justified the making of the order, although, again, choice of the appropriate kind of remedy is not in issue in the present case.  Mr Sandison expressly confirmed that he was not arguing that the Lord Ordinary had been incorrect to make an order for purchase of the petitioners’ shares in terms of section 996(2)(e).  That of course was entirely consistent with his pleadings.  The matters which the Lord Ordinary found to have been justly complained of related to the giving of information and obstruction of and interference with audits, but these, as with the other matters complained of, were in the nature of instances or symptoms of what is described in statement 6 of the petition as the deliberate side-lining of the first petitioner in the ongoing management of the first respondent company.  The petitioners go on to aver that the remedy sought in respect of this exclusion of the first petitioner from full participation in the direction of the company is an order for the purchase of their shareholdings. 

[95]      If then the petitioners’ complaint is one of exclusion from full participation in the company’s affairs and the petitioners’ identified remedy is having their share-holding bought out, it might be thought that the making of an order for purchase fully addresses “the matters complained of” and that the court, its discretion under section 996 exhausted, must then proceed to determine the price at which the shares are to be purchased, with the price presumably reflecting their value.  The observation by Lewison J, with which I respectfully agree, that the exercise of jurisdiction under section 996 is not a punishment for bad behaviour again might suggest that once unfairly prejudicial conduct is established which can be remedied by an order for purchase then, what began as an exercise of discretion has come to be an exercise in valuation, determined by ordinary valuation principles.

[96]      However, as your Lordship in the chair points out, this would not give full force to “such order as [the court] thinks fit “where it occurs in section 996(1) and it is not as the provision and its predecessor have been interpreted in the authorities.  The court’s wide discretion has been held to extend to the precise terms in which it might chose to fashion a purchase order in order to make it fair and equitable, having regard to all the circumstances, including the conduct of the petitioner:  Re Bird Precision Bellows at 669D, Grace v Biagioli at para 73, Re London School of Electronics Ltd at 222B.  That must include fixing the price. 

[97]      I therefore recognise, as I must, that when making an order under section 996(2)(e), the court retains a discretion when fixing the price, but discretionary decision-making is not the same as arbitrary decision-making, as Mr Sandison submitted under reference to O’Neill v Phillips at 1098; a discretion must be exercised rationally and judicially, in accordance with settled legal principle, upholding any legal agreement between the parties and on the basis of evidence.  That, in my opinion, brings one back, in the circumstances of this case, to what I have described as an exercise in valuation.  Neither “valuation” nor “value”, nor indeed “price” appear in section 996, but a purchase implies a price and fixing a price usually involves consideration of value.  I respectfully agree with everything that appears in paragraphs [67] and [68] of the opinion of your Lordship in the chair; other factors may come into play, particularly the actions of parties which have in some way impacted upon the value of the company or its shares but, subject to any adjustment that requires to be made to ensure that the order is fair, the starting or default figure for a section 996(2) purchase price must inevitably be the value of the shareholding that is to be purchased.  To talk of “the value” of a shareholding is to beg a number of questions but these can be explored in the valuation evidence. 

[98]      Among the factors in valuing any shareholding will be the terms of the articles of association of the company and any shareholders’ agreement, insofar as conferring rights or imposing duties on the shareholders.  In this case it would not appear from the summaries of their evidence which appear in the Lord Ordinary’s opinion that either of the valuation experts drew on the particular terms of the articles of association of BGHL.  They certainly do not appear to have made reference to article 6.8.2 and the provision for the compulsory sale of shares by a leaving shareholder who is a “Bad Leaver” as that expression is defined in article 1.4, but that did not tie the Lord Ordinary’s hands.  I respectfully agree with what the Lord Ordinary said at paragraph [160] of his opinion under reference to the decision of Hildyard J in Re LCM Wealth Management Limited [2013] EWHC 3957;  as a matter of generality there is nothing intrinsically unfair in giving effect to a freely negotiated contractual provision.  Indeed, if the articles provide for a mechanism for the valuation or pricing of shares in particular circumstances, where these circumstances have occurred and the court is considering making an order under section 996(2)(e), then an application of the mechanism would seem to be the obvious starting point in determining the price for any purchase of shares. 

[99]      At paragraph [161] of his opinion the Lord Ordinary posed the issue for him when it came to framing the order for relief as being to determine what was fair and equitable in circumstances in which the consequences of Mr Gray’s conduct is that the Bad Leaver provisions of the articles have become applicable.  That would seem to be a correct approach.  However, it supposes that the provisions had indeed become “applicable”.  As your Lordship in the chair has set out in paragraphs [21] to [25] of your opinion, Mr Sandison disputed that. 

[100]    Mr Sandison’s first objection to the applicability of the Bad Leaver provisions was that in order for Mr Gray to be a Bad Leaver he had to be a “Leaving Shareholder”, as that term is defined in article 6.8.  For a shareholder to be a Leaving Shareholder, in terms of article 6.8 he must cease to be an employee and/or director of BGHL and not continue to be employed or appointed by another subsidiary or associated company of BGHL.  As your Lordship in the chair notes at para [72] of your opinion, Mr Gray remains a director of BGHL, Braid UK, PLUK and Braid (Asia).  He therefore cannot be a Leaving Shareholder. 

[101]    Mr Sandison submitted that not only did the Bad Leaver provisions not apply because Mr Gray was not a Leaving Shareholder but that they could not be made to apply simply by a decision of the board of BGHL.  He pointed to the terms of the shareholders’ agreement which, in terms of clause 12.2, took precedence over the terms of the articles.  Clause 4.5 of the shareholders’ agreement provides that “changes to the composition of the Board will require the consent of 75 RP [that is 75 per cent of the voting rights attributable to the shareholder’s shares]”.  While clause 9.1(u) provides that “appointment or dismissal of any director of the Company or a subsidiary of the Company” shall only be undertaken by the Company or any of its subsidiaries with the prior approval of 58RP (that is 58 per cent of the voting rights attributable to the shareholder’s shares), there was a question as to whether Mr Gray could ever be ousted against his will, given that he held 34.82 per cent of the voting rights.  The Lord Ordinary had not resolved the question of which majority would be required for the dismissal of a director.  If clause 4.5 was the relevant provision then 75RP was not achievable without Mr Gray’s agreement.  But even if clause 9.1(u) governed and 58RP sufficed to dismiss a director, it could not be said on the basis of the evidence led before the Lord Ordinary that such a majority would vote for the dismissal of Mr Gray in any particular set of circumstances. 

[102]    Mr Gray had been summarily dismissed as managing director of Braid UK on 16 April 2013.  Potentially the significance of that went beyond Braid UK in that in terms of clause 13.7 of his service agreement, on termination of that agreement Mr Gray was required, at the request of Braid UK, to resign “from all and any offices he may hold as director of any Group Company and from all other appointments or offices which he holds as nominee or representative of any Group Company”.  That dismissal was suspended by Lord McEwan on 31 May 2013 but the order for interim suspension had been recalled in the Inner House on 8 October 2014 and, Mr Sandison emphasised, no attempt had been made since then to operate the compulsory transfer provisions in article 6.8.  While that is no doubt true it is subject to qualification.  The order granted by Lord McEwan had been in a process initiated by a petition for judicial review.  The Inner House held that the invocation of the supervisory jurisdiction had not been competent and dismissed the petition.  The petitioner served notice of appeal to the United Kingdom Supreme Court.  On 29 October 2014, following a hearing of a motion under section 41 of the Court of Session Act 1988 to regulate interim possession, the Inner House continued Lord McEwan’s order until 10 December 2014 to allow Mr Gray time to raise alternative proceedings.  This he did by way of an ordinary action.  On 4 December prior to a hearing of an application for interim orders in the ordinary action, the second, third and fourth respondents to the current petition gave undertakings (effective until the final resolution of the section 994 proceedings) not to (1) pass any resolution to remove Mr Gray as director of Braid UK;  (2) exercise any right pursuant to clause 13.7 of Mr Gray’s service agreement;  or (3) exercise any deemed transfer notice pursuant to article 6.8.1 of the articles of association of BGHL.

[103]    Mr Sandison further pointed to the details of the compulsory share transfer provisions in article 6.8.  Once a shareholder was to be regarded as a Leaving Shareholder he shall be deemed to have given the board a transfer notice constituting it as his agent for the compulsory sale of all of his shares.  However, this was subject to the board otherwise resolving.  Again, there had been no evidence before the Lord Ordinary about what the board might have resolved but the matter did not end there.  Mr Gray had tendered his resignation as managing director of Baird UK on 4 December 2014.  That was significant.  As could be seen from article 1.4, a Leaving Shareholder might be a Bad Leaver by virtue of voluntary resignation from his employment but that was subject to the proviso “unless the Board resolve that such resignation is unlikely to have a material adverse effect on the Business”.  In Mr Sandison’s submission there had been some evidence (from Mr Leddra and Mr Shane Watson) to the effect that Mr Gray’s departure would be beneficial.  Moreover, while voluntary resignation might make a Leaving Shareholder a Bad Leaver the price of his shares on compulsory sale was determined by article 6.8.2.2 at 75 per cent of fair value, rather than the lower of 75 per cent of fair value and subscription price which applied on termination of employment by reason of fraud or gross misconduct. 

[104]    To an extent, the points made by Mr Sandison in this chapter of his submissions were uncontroversial.  He introduced them by saying that the Bad Leaver provisions had not been implemented.  Neither they have been.  As Lord Davidson of Glen Clova would have it, what Mr Sandison had presented as a complicated process of decision-making about which there had been no evidence, should be relegated to the status of mere procedural steps which, had it not been for the various litigations at the instance of the first and second petitioners, would inevitably have been taken by BGHL in order to enforce the Bad Leaver provisions on the basis of a dismissal for gross misconduct.  Lord Davidson pointed to the fact that BGHL was one of the reclaimers against Lord McEwan’s interlocutor of 31 May 2013.  That indicated its ratification of the dismissal of Mr Gray as managing director of Braid UK.  However, while maintaining that the Lord Ordinary had been correct to find them as having been applicable, Lord Davidson could not go the distance of saying that the Bad Leaver provisions actually had been applied.  For that to have happened, as Mr Sandison emphasised, Mr Gray would have to have been removed as a director of all group companies (albeit that there is perhaps something just a little odd in a shareholder who is intent on leaving putting such stress on his not being a “Leaving Shareholder”).

[105]    Before turning to the question as to whether the Lord Ordinary was entitled to find the Bad Leaver provisions applicable notwithstanding that they had not been applied, it is convenient to consider the petitioners’ argument that compulsory transfer at subscription price (what Mr Sandison referred to as the expropriation provision contained in article 6.8.2.2) is an unenforceable penalty.  If it is, then I would agree with Mr Sandison; not only can it not be enforced directly, it cannot provide an acceptable model for what is fair and equitable.  It is not of course a line of argument that was foreshadowed in the pleadings or which was presented to the Lord Ordinary.  The reporting of the decision of the Supreme Court in Cavendish Square Holdings v El Makdessi and Beavis v Parking Eye [2015] 3 WLR 1373 may have suggested the argument to the petitioners’ advisers but, agreeing with Lord Malcolm, I do not see the timing of the issue of the judgment as a good reason for only raising the argument for first time in the Inner House.  If it is a good argument, it was a good argument before the issue of the judgments in Cavendish Square.  That said, once raised it is not an argument that I feel able to ignore simply on the ground that it came late.

[106]    Cavendish Square reaffirms the common law rule that parties cannot enter into an enforceable contract the effect of which would be to give one the power to punish the other in respect of a breach of an obligation.  However, “the courts do not review the fairness of men’s bargains either at law or in equity”: Cavendish Square, Lord Neuberger PSC at para 13.  There is a distinction to be made between a conditional primary obligation and a secondary obligation which arises in the event of the failure to carry out a primary obligation.  Only a secondary obligation (in the paradigm case to pay a sum of money) is capable of being a penalty.  Agreeing with your Lordship in the chair I accept that article 6.8.2.2 is a secondary obligation.  I do not so regard the compulsory share transfer provision set out in article 6.8.1 which relates to a shareholder ceasing to be a director/employee “for whatever reason”, the understandable object of which would appear to be to retain the share capital of the company and the voting power associated with that in the hands of the active participants.  However, as the effect of article 6.8.2.2 in certain circumstances (of which the present circumstances are an example) is to require the transfer of a shareholding at less than fair value in consequence of what will have been a breach of the shareholder’s contract of employment or a failure on his part properly to carry out the duties of a director, it can be characterised as a secondary obligation and is therefore capable of being held to be an unenforceable penalty.  While the paradigm case may be a secondary obligation to pay a sum of money by way of penalty, as is explained in Cavendish Square and in particular by Lord Hodge JSC at paras 230 to 233, a clause requiring the transfer of property may also amount to a penalty.

[107]    I have not, however, been persuaded that article 6.8.2.2 does constitute a penalty.  The wider context for consideration of a question of this sort is, as Lord Neuberger explained, parties’ freedom to contract on such terms as they wish.  In Cavendish Square Lord Neuberger said this at paras 33 and 35:

“33      The penalty rule is an interference with freedom of contract.  It undermines the certainty which parties are entitled to expect of the law.  Diplock LJ was neither the first nor the last to observe that ‘The court should not be astute to descry a “penalty clause”’:  the Robophone case [1966] 1 WLR 1428, 1447.  As Lord Woolf said, speaking for the Privy Council in Philips Hong Kong Ltd v Attorney General of Hong Kong (1993) 61 BLR 41, 59, ‘the court has to be careful not to set too stringent a standard and bear in mind that what the parties have agreed should normally be upheld’, not least because ‘any other approach will lead to undesirable uncertainty especially in commercial contracts.’

 

…

 

35        …  In a negotiated contract between properly advised parties of comparable bargaining power, the strong initial presumption must be that the parties themselves are the best judges of what is legitimate in a provision dealing with the consequences of breach.”

 

[108]    What I take from the judgments in Cavendish Square is that for a provision to amount to a penalty with the result that a contractual terms which may have been adopted by parties only after very careful negotiation is held by the court to be unenforceable, the adverse consequence which the secondary obligation imposes must be entirely disproportionate to the interest in proper performance of the primary obligation; the penalty must be “exorbitant” or “unconscionable”.  Lord Hodge puts it this way at para 255:

“I therefore conclude that the correct test for a penalty is whether the sum or remedy stipulated as a consequence of a breach of contract is exorbitant or unconscionable when regard is had to the innocent party's interest in the performance of the contract.  Where the test is to be applied to a clause fixing the level of damages to be paid on breach, an extravagant disproportion between the stipulated sum and the highest level of damages that could possibly arise from the breach would amount to a penalty and thus be unenforceable.  In other circumstances the contractual provision that applies on breach is measured against the interest of the innocent party which is protected by the contract and the court asks whether the remedy is exorbitant or unconscionable.”

 

[109]    Here, as the respondents set out in their note of argument, the Bad Leaver provisions were the subject of negotiation carried out with the assistance of specialised legal advice.  I do not give much weight to the consideration that it was Mr Gray’s side of the negotiation which introduced the provisions, but the parties opted for them and, applying what was said by Lord Neuberger, it is the parties who can be presumed to be the best judges of what is legitimate in the circumstances. 

[110]    With a view to indicating the potentially disproportionate effect of article 6.8.2.2, Mr Sandison argued that something which might amount to gross misconduct in the context of a particular shareholder’s employment contract might very well have no adverse consequence whatsoever on either BGHL or any other group company.  Lord Davidson’s direct response to that, as articulated in the respondents’ note of argument, was to contend for a narrower interpretation of “gross misconduct” where it occurs in article 6.8.2.2, having regard to the commercial purpose of the provision.  According to Lord Davidson, the expression should be construed as referring to conduct which was capable of having a detrimental effect on the business of BGHL and therefore on what he described as shareholder value.  Lord Davidson emphasised that Mr Gray’s behaviour, as found by the Lord Ordinary, fully justified dismissal on that narrower interpretation of gross misconduct, its detrimental effect on BGHL being real and the extent of that detrimental effect perhaps being incalculable. 

[111]    I am attracted to Lord Davidson’s interpretation of gross misconduct in the context of article 6.8.2.2 and accept what he had to say about the potential for conduct such as Mr Gray has been found guilty of to have very damaging consequences for the company, but, while this might have been further explored in evidence had the respondents been put on notice at proof that it was in issue, I have not found it difficult to accept that BGHL and the signatories of the shareholders’ agreement had an interest in the faithful and diligent performance by each and all of the shareholders of their duties as employees and/or directors of group companies which might properly be protected by something of the nature of differential pricing of their shares in the event of their premature withdrawal from participation in the business of the group, a fortiori if the reason for premature withdrawal has been fraud or gross misconduct. 

[112]    If then there were interests to protect, can it be said that the secondary obligation selected to protect them was exorbitant or unconscionable? I think not.  In the course of submissions Lord Malcolm asked whether it was so unfair that a shareholder who had been guilty of gross misconduct should be required to give up his holding and, in return, receive back his initial financial stake, which is the effect of Mr Gray being paid subscription price for his shares.  I would not answer that question in the affirmative.  I agree with Lord Malcolm that it is very difficult to avoid being influenced by the large discrepancy between the current fair value of Mr Gray’s shares and the subscription price but, again as Lord Malcolm points out, the penal or otherwise nature of an impugned provision falls to be judged as at the date when it was entered into and not when it falls to be implemented.  Accordingly, in my opinion the Bad Leaver provision is capable of being enforced. 

[113]    How then might these various threads be brought together? The petitioners have established their case for relief in the form of an order for the purchase of their shares.  The question is: at what price? That question is one for the court to answer, in the exercise of what has been described as a wide discretion.  However, for the exercise of that discretion to be rational the price so fixed must be one which bears a relationship to what the shares are worth in the circumstances disclosed by the court’s findings in fact.  That of necessity brings the Bad Leaver provisions into consideration in that if, in the circumstances found by the Lord Ordinary, the petitioners could be compelled to transfer their shares at subscription price then that is all that they are worth in the petitioners’ hands.  The petitioners litigated before the Lord Ordinary on the basis that the allegations of misconduct made against Mr Gray and the steps taken to investigate and otherwise act upon them were spurious and formed part of the unfairly prejudicial conduct directed towards the petitioners.  They lost on that; the Lord Ordinary found that Mr Gray had indeed been guilty of gross misconduct and that had been the proper subject of investigation.  In these circumstances the Lord Ordinary was correct to have regard to the Bad Leaver provisions in fixing the purchase price for the share transfer.  To have done otherwise would have been to fail to consider what the shares were truly worth as long as they were owned by the petitioners, thereby allowing Mr Gray to avoid what would otherwise be the consequences of his behaviour.  This brings one back to the question of whether the Bad Leaver provisions were applicable, as the Lord Ordinary found them to be, as opposed to being only potentially applicable.  Agreeing with Lord Malcolm, if the correct view is that the Lord Ordinary went too far too fast in finding them to be applicable, then I consider the order of this court would have to be one which allows parties to pursue the procedures which the articles allow them to pursue and work out their respective entitlements that way.  However, again agreeing with Lord Malcolm, I do not consider that the Lord Ordinary went either too far or too fast.  The Lord Ordinary had heard a great deal of evidence about how the business of the group was conducted and the personalities of those principally involved.  It was accepted that the stage had not yet been reached at which the Bad Leaver provisions had been applied but the second to fourth respondents submitted to the Lord Ordinary that he should find that the BGHL board would have reasonably concluded that Mr Gray had committed an act of gross misconduct, that his employment would have been terminated and that as a result he would have been removed from all his group directorships and the article 6.8.2.2 provisions invoked requiring the sale of his shares at par.  The Lord Ordinary accepted that submission.  Now what the Lord Ordinary had been invited to determine by that submission was a hypothetical question but it was a question of hypothetical fact.  It appears to me that he was entitled to answer it as he did.  Mr Sandison submitted before this court that the Lord Ordinary had failed to have regard to the complexities involved in concluding that the price for a compulsory transfer of shares should be the subscription price.  I find no basis for that.  To the extent that the Lord Ordinary arrived at the decision he did by a certain degree of cutting the Gordian knot, then I consider that section 996 conferred the power on him to do so.  I would refuse the reclaiming motion. 

 

EXTRA DIVISION, INNER HOUSE, COURT OF SESSION

[2016] CSIH 68

P560/13

 

Lord Menzies

Lord Brodie

Lord Malcolm

OPINION OF LORD MALCOLM

in the Reclaiming Motion

of

NIGEL ANTHONY HARDEN GRAY and OTHERS

Petitioners and Reclaimers;

for

Orders pursuant to sections 994 and 996 of the Companies Act 2006 in respect of Braid Group (Holdings) Limited

 

Petitioners and Reclaimers:  Sandison QC, McColl;  Brodies LLP

Second, Third and Fourth Respondents:  Lord Davidson of Glen Clova QC, Middleton; CMS Cameron McKenna LLP

Fifth Respondent (Jeff Prowse):  Party

23 August 2016

[114]    I have had the considerable advantage of reading a draft of the opinion of your Lordship in the chair.  I am grateful for the careful rehearsal of the background, the submissions and the issues in the case.  However, I regret that I differ on the proper disposal of the reclaiming motion.  I can detect no flaw or error in the decision of the Lord Ordinary – indeed I am in full agreement with it, and would endorse his analysis and reasoning. 

[115]    The case law confirms that in petitions of this kind, after having regard to all the relevant circumstances of the case, the court has a wide discretion to do that which is considered to be fair and equitable.  The Lord Ordinary recognised that the discretion must be exercised in a reasonable and judicial manner, for example, avoiding unjust enrichment.  I reject the proposition that his interlocutor creates unjust enrichment of the respondents.  On the contrary, I view these proceedings, and the related actions raised by Mr Gray, as a failed attempt to extricate himself from the agreed consequences of his gross misconduct, namely implementation of the “bad leaver” provisions.  In agreement with Hildyard J’s approach in Re LCM Wealth Management Limited [2013] EWHC 3957 (Ch), sections 994 and 996 of the 2006 Act do not provide a reason for the court to interfere with the freely negotiated terms of the parties’ agreement in this regard, and thereby give a windfall benefit to the petitioning shareholder.

[116]    In effect the court is being asked to close its eyes to the fact – as found by the Lord Ordinary “to a high degree of probability”, after strenuous efforts to prove the contrary – that Mr Gray committed gross misconduct, namely bribery of customers’ officials, which entitles the board to dismiss him and which triggers the transfer of his shares as per the articles at par value.  As the Lord Ordinary observed, “there is nothing intrinsically unfair in giving effect to what was no doubt a carefully negotiated contractual provision” (paragraph 160).  For the court to leave this out of account, value the shares accordingly, and order payment of £20.6m  “would be to put the petitioners in a better position than if there had been no unfairly prejudicial conduct” (paragraph 161).

[117]    The key battleground in the proof before the Lord Ordinary was Mr Gray’s contention that the allegations, his dismissal, and the invocation of the bad leaver provisions, were all part of a ploy to oust him, and of a wider campaign of unfairly prejudicial conduct.  This was wholly rejected by the Lord Ordinary.  He “independently” found it proved that the allegations were true.  In my view it necessarily followed that the request for an order requiring the respondents to buy out the petitioners at full value, namely, as matters now stand, at a sum in excess of £20m, fell to be refused.  Were it otherwise Mr Gray would escape the agreed consequences of his misbehaviour. 

[118]    The Lord Ordinary was being asked to resolve the main issue dividing the parties.  Thus the only other option presented to the court was the bad leaver valuation of £2.44m (for example, see statement 23 of the petition).  This explains why so much attention was paid to the veracity or otherwise of the bribery allegations.  Mr Gray averred that “Because of the circumstances in which his resignation would have occurred, he would further be treated for the purposes of those articles of association as a ‘bad leaver’”. 

[119]    Nonetheless it was argued before the Lord Ordinary, and again before this court, that even if it was proved that Mr Gray committed acts of gross misconduct, this option was not available because the necessary procedures for full implementation of the bad leaver provisions had not been completed.  However, the interruption was a direct consequence of the various proceedings, including those of declarator, suspension and interdict, etc, brought by Mr Gray, a person whom the Lord Ordinary found to have been motivated by “the advancement of his personal interests rather than, … the interests of the companies of which he has been a director and employee”. (paragraph 27)  In this regard it is instructive to read the agreed chronology of events lodged at the appeal hearing. 

[120]    If it could be demonstrated that, notwithstanding the proven misconduct, those procedures could not or would not be completed, different considerations might arise.  However, at paragraphs 132-140 the Lord Ordinary roundly dismissed all of the complaints of unfairly prejudicial conduct relating to the investigation and the disciplinary proceedings.  Some of them were “indicative of Mr Gray’s mindset that anyone who does not agree with him is prejudiced and/or part of a conspiracy against him”.  (paragraph 135)   Having forced the issue by raising this petition, I agree with the Lord Ordinary’s characterisation of those matters which have influenced your Lordship in the chair, as yet further objections of a “procedural nature” which run “contrary to the wide power conferred upon the court to decide what further order it is fair to make”. (paragraph 161)   Having held that the bribery allegations were well-founded, the Lord Ordinary was fully entitled to proceed on the basis that “the consequence of Mr Gray’s conduct is that the bad leaver provisions in the articles have become applicable”.  Indeed, during his evidence Mr Gray accepted that knowing involvement in the bribery allegations would justify his dismissal for highly damaging gross misconduct.

[121]    If that approach is wrong, I would still demur from the “middle ground” outcome proposed by counsel for Mr Gray on the last day of the appeal hearing, which requires the respondents to raise £18m to buy him out.  Rather I would fashion an order of the court which allowed the procedures to complete their course free of any further interference from Mr Gray.  At least that would remain true to the agreement of the parties.

[122]    The Lord Ordinary upheld certain of the complaints of unfairly prejudicial conduct, namely those concerning the 2011 Braid Asia audit;  but they were of relatively minor import, and did not trench on the misconduct issue.  They related to a wholly separate matter.  While it is those findings which entitle the petitioner to a remedy, I see no reason for them to alter the outcome;  but if they do, in my opinion it would involve no more than a small increase in the valuation to be paid in return for the shares.

[123]    As to the submission based upon an unfair penalty clause, it is plain that the reference to the issuing of the decisions of the UK Supreme Court in Cavendish Square Holding BV v Makdessi and ParkingEye Ltd v Beavis [2015] 3 WLR 1373, was a pretext, not a reason for this argument being raised for the first time in the Inner House.  I have considerable sympathy with the proposition that it comes too late, the respondents having been deprived of the opportunity to address it in the evidence.  In any event, I consider it instructive that the clauses considered in both appeals by the Supreme Court were upheld.

[124]    In Cavendish the view was taken that the relevant clauses were a mechanism for ensuring the co-operation of Mr Makdessi, a matter central to the goodwill of the company; thus it did not matter that a minor breach of the covenant might trigger the  clauses.   Given his attempts to undermine the business, Cavendish were entitled to pay less than full value for his shares.  This was a legitimate manner of gaining his compliance with the restrictive covenants.  Furthermore it was a matter of importance that the agreement was negotiated at arm’s length between informed and legally advised parties.  In Beavis it was held that there were legitimate reasons for the parking charge at issue, and that a wide range of interests were involved.  In the whole circumstances the charge was neither exorbitant nor unconscionable.

[125]    I consider that reasoning similar to that invoked in Cavendish and Beavis can be applied to the circumstances of the present case.  There was no question but that conduct of the kind undertaken by Mr Gray could be predicted to be, and in fact has been highly damaging, both financially and to the reputation of the business.  It is of course tempting to be heavily influenced by the now wide disparity between subscription and market value of the shares, but the question has to be tested by reference to the state of affairs at the time of the agreement.  In my view the bad leaver provisions were a legitimate and proportionate response to the issues and problems likely to arise if and when circumstances justified their implementation.  Furthermore, if one were to assume that the bad leaver formula is an unenforceable penalty, what happens then?  A different arrangement would involve re‑writing the parties’ contract.  How would one decide what the formula should be?  In a price-mechanism clause, there is no common law damages fall-back (Cavendish paragraph 83).  I would reject the submission based upon an alleged unenforceable penalty. 

[126]    It follows that, in my opinion, the reclaiming motion should be refused.