Anthony Kleanthous v (1) Theodoros Paphitis (2) Malcolm Stanley Cooke and Others
| Jurisdiction | England & Wales |
| Judge | Mr Justice Newey |
| Judgment Date | 07 September 2011 |
| Neutral Citation | [2011] EWHC 2287 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: HC10C04093 |
| Date | 07 September 2011 |
[2011] EWHC 2287 (Ch)
Mr Justice Newey
Case No: HC10C04093
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Richard Keen QC and Mr Andrew Hunter (instructed by Jones Day) for the Claimant
Mr Neil Kitchener QC and Mr Sam O'Leary (instructed by Mishcon de Reya) for the First Defendant
Mr Richard Snowden QC and Mr Ben Shaw (instructed by Reed Smith LLP) for the Second, Third and Fourth Defendants
Mr Michael Todd QC and Miss Mary Stokes (instructed by Ashurst LLP) for the Fifth and Sixth Defendants
Hearing dates: 5–8 July 2011
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
The Claimant, Mr Kleanthous, is a shareholder in Ryman Group Limited ("RGL"), the Fifth Defendant. By the application before me, he seeks permission under section 261 of the Companies Act 2006 to continue a derivative claim on behalf of RGL and one of its subsidiaries, Ryman Limited ("RL"), which is the Sixth Defendant.
The claim which Mr Kleanthous wishes to pursue arises out of the acquisition by Xunely Limited ("Xunely") of La Senza plc ("La Senza") in 1998. Xunely's owner, Mr Paphitis (the First Defendant), was (and is) also a director of RGL and the company's principal shareholder. In the present proceedings, Mr Kleanthous alleges that the acquisition of La Senza involved breaches of fiduciary duty on the part of Mr Paphitis and three other directors of RGL: the Second, Third and Fourth Defendants, respectively Mr Cooke, Mr Towner and Mr Childs. I shall refer to Messrs Paphitis, Cooke, Towner and Childs collectively as "the Director Defendants".
Basic facts
In 1998, RGL, which was then called "Chancerealm Limited", had three subsidiaries. One of these, RL, carried on a well-known stationery business. A second subsidiary, Contessa (Ladieswear) Limited ("Contessa"), had a lingerie business. The third subsidiary, NAG Communications Limited, had a mobile telephone business.
RGL's shareholders were Mr Kleanthous, Mr Paphitis and Mr Childs. Mr Paphitis was much the largest shareholder, with 72.4% of the shares. Mr Kleanthous and Mr Childs respectively held 15.5% and 12.1% of the shares.
RGL's board included two of its three shareholders: Mr Paphitis and Mr Childs. The other members of the board were Mr Cooke, Mr Towner and a Mr Ring. Mr Kleanthous was not a director. He had entered into a shareholders' agreement in 1996 under which he had undertaken that he would hold his shares for investment purposes only and would not:
"participate in or influence the affairs of [RGL] or any of its subsidiaries or seek or be entitled to any information in respect of the day-to-day management of [RGL] other than information available to all shareholders as prescribed by law".
Mr Paphitis is one of the "dragons" on the well-known television programme "Dragons' Den" and has a high public profile. Mr Childs has a background in marketing and was co-founder with Mr Paphitis of Movie and Media Sports Limited, a business which, Mr Childs says, occupied most of his time in 1998. For his part, Mr Cooke has many years' experience of senior management, especially in retail; he was a director of RL before Mr Paphitis became involved with it. Mr Towner is a solicitor and was a partner in Richards Butler (later to be incorporated into Reed Smith) until he retired in 1992; he is a non-executive director of RGL and RL ("the Ryman Companies"). In 1998, Mr Cooke and Mr Towner each had share options in RGL.
At the beginning of 1998, Suzy Shier, a retailer in Canada and the United States, owned through Suzy Shier Equities Inc, a wholly-owned subsidiary of Suzy Shier Limited, 60.2% of the issued share capital of La Senza. La Senza carried on a lingerie business and was listed on the London Stock Exchange's AIM market.
By early 1998, Suzy Shier was looking for buyers for its shareholding in La Senza. According to Mr Paphitis, he was approached about La Senza in February or March of 1998 and subsequently discussed with other directors of RGL the possibility of becoming involved with La Senza. Both Mr Paphitis and the other Director Defendants say that it was decided that it would not be appropriate for RGL to acquire La Senza.
Mr Paphitis says that he was approached about La Senza again at the beginning of June 1998. On this occasion, Mr Paphitis explains, Suzy Shier offered to sell its shares in La Senza for just £1 subject to the provision of an indemnity in respect of certain ongoing liabilities of La Senza, which largely related to equipment leases. According to Mr Paphitis, he and his fellow directors remained of the view that RGL should not undertake the acquisition, but he decided (with the blessing of other directors) that he would like to take on La Senza in a personal capacity. The evidence of the other Director Defendants is to broadly similar effect.
Matters came to a head during the night of 3–4 June 1998, during which there were negotiations which ultimately led to Mr Paphitis agreeing to buy Suzy Shier's shares in La Senza through Xunely, a newly-acquired shelf company. In the course of these negotiations, Mr Paphitis asked Mr Cooke, Mr Towner and Mr Ring whether they would agree to RGL lending Xunely the funds (some £1.4 million) required to buy the shares in La Senza held by shareholders other than Suzy Shier (Suzy Shier having apparently called for proof of Mr Paphitis' ability to fund the purchase of these shares) and giving a guarantee in respect of Suzy Shier's exposure to liabilities of La Senza (Suzy Shier having apparently stated that a third party guarantee was required).
In Mr Cooke's words, "[a] board meeting was convened between those directors [of RGL] present in the meeting room at Gouldens' offices". Mr Towner wrote out minutes of this meeting in manuscript. These recorded that Mr Paphitis, Mr Cooke and Mr Towner were present and that Mr Ring, who was "unavoidably absent but had participated in negotiations", was in agreement. The minutes stated that it had been resolved that:
i) A loan of up to £1.8 million should be made to Xunely to finance its acquisition of La Senza at an interest rate of 3% above base rate and with security over Xunely's assets;
ii) A guarantee should be given in respect of "the possible liability of La Senza to Suzy Shier Limited on terms to be agreed by the Board";
iii) A management agreement should be entered with Xunely on terms to be agreed.
The minutes went on to record that the board members present "confirmed that in their opinion the matters, having been discussed in detail, were of commercial benefit to [RGL]". However, in the course of submissions Mr Neil Kitchener QC, who appears with Mr Sam O'Leary for Mr Paphitis, accepted that Mr Childs had not been given notice of the 3 June "board" meeting and so that it could not have constituted a valid board meeting.
It seems that it was also that evening that Mr Cooke and Mr Towner became directors of Xunely, as did Mr Ring. Mr Cooke and Mr Towner were later to acquire share options in Xunely, but not, it seems, until late 2001. Thereafter, Mr Cooke and Mr Towner respectively had share options of 7.62% and 3.55% in RGL and 7.5% and 2.55% in Xunely. Mr Childs has never held shares or share options in Xunely nor been a director of the company.
On 4 June 1998, an agreement was entered into under which, among other things, Xunely agreed (a) to buy Suzy Shier Equities Inc's shares in La Senza for £1 and (b) to indemnify Suzy Shier companies in respect of guarantees they had given in relation to La Senza. Further, RGL covenanted that it would procure that Xunely performed its obligations under the agreement and, in particular, would pay Suzy Shier any sums which Xunely failed to pay.
Mr Childs says that he recalls being told by Mr Paphitis during the morning of 4 June 1998 that he had bought La Senza. Mr Paphitis says that he told Mr Childs that day that Mr Cooke, Mr Towner and Mr Ring had accepted appointments as directors of Xunely.
In the following days, there were press reports about Xunely's acquisition of La Senza. The Independent, for example, reported on 5 June 1998 that:
"Suzy Sher Equities [had] sold its 60 per cent controlling stake for a token pounds 1 to Xunely, a newly created company controlled by Theo Paphitis and his family, the owners of Rymans the stationers and Contessa Ladieswear".
The Financial Times referred in an article dated 18 June 1998 to "Financial support from a company associated with its prospective new owner" having enabled La Senza to continue trading.
On 15 June 1998, there was a board meeting of RGL. This was attended by Mr Paphitis, Mr Cooke, Mr Childs and Mr Ring. The minutes contained the following account of events:
"The Chairman [i.e. Mr Paphitis] confirmed that he had discussed with members of the Board the possible acquisition of La Senza by Chancerealm [i.e. RGL] but a decision had been reached that, in view of the extremely parlous financial situation of La Senza it would not be sensible to acquire that company and bring it with[in] the Chancerealm group. Whilst Mr Paphitis, having discussed a number of issues relating to that acquisition with Mr Ring and Mr Cooke, was confident that the situation could be turned round, if the financial figures of La Senza were incorporated in the Chancerealm Group profits at this time it would have a damaging effect on the Chancerealm Group profits notwithstanding that the shareholders' value in the...
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