Cullen Investments Ltd and Another v Julian Brown and Others
| Jurisdiction | England & Wales |
| Judge | Mark Anderson |
| Judgment Date | 27 February 2015 |
| Neutral Citation | [2015] EWHC 473 (Ch) |
| Docket Number | Case No: HC14B02796 |
| Court | Chancery Division |
| Date | 27 February 2015 |
2015 EWHC 473 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Mark Anderson QC
Case No: HC14B02796
Timothy Collingwood (instructed by Grosvenor Law) for the Claimants
Edward Davies (instructed by Blacklion Law LLP) for the First and Second defendants
Hearing dates: 15 th, 16 th January 2015
Mark Anderson QC:
This is a derivative action brought by the first claimant shareholder on behalf of Kauri Investments Limited. I have to decide whether to give permission under section 261 of the Companies Act 2006 to continue it.
The parties and the JVA
Cullen Investments Limited, as its name suggests, makes investments for profit. Mr Eric Watson is its chairman and ultimate beneficial owner. For present purposes it is unnecessary to distinguish between them and I shall refer only to Cullen.
Mr Julian Brown has been involved in property investment and management for a number of years. Mr Quentin Brown is his brother and a solicitor.
In about September 2005 Cullen and Mr Julian Brown entered into a joint venture in property investment and management. Heads of Agreement signed in October 2005 included the following provisions:
• "Cullen and JB wish to invest in property in the UK and Europe and Cullen has incorporated a UK company, Kauri Consulting Limited ("Kauri"), as the vehicle to do so." Kauri Consulting later changed its name to Kauri Investments Limited. References in this judgment to Kauri are to this company.
• Cullen and Julian Brown agreed to put equal equity into Kauri.
• Julian Brown was to be its full-time CEO with responsibility "to source and implement commercially attractive and profitable property deals on behalf of Kauri".
• Where funding for a property deal could not all be obtained from third party funders and the parties were not able to provide debt or equity funding on a pro rata basis to make up any shortfall then Cullen would consider providing any shortfall required by way of debt.
• If Cullen decided not to invest in a deal then Julian Brown would, subject to the other terms of the Heads of Agreement, have the right to undertake the deal in his own capacity.
• Julian Brown would provide all future UK and European property and opportunity deal flow to Kauri.
• "JB will not be prohibited to enter into UK and European property transactions in his personal capacity or otherwise as long as he has given Kauri first right of refusal and Kauri had declined and as long as the transactions concerned will not materially affect his duties as CEO of Kauri or result in a conflict with Kauri, or with the prior written consent of Cullen."
It was intended that a further, more formal and complete agreement would thereafter be negotiated and signed. Cullen and Mr Brown however pursued their joint venture for several years without making any such further written agreement. There is a broad consensus between them that their contract ("the JVA") is partly to be found in the Heads of Agreement, but partly to be discerned from their course of dealing over the years.
This derivative action concerns alleged breaches of their directors' duties on the parts of Julian and Quentin Brown. There are related proceedings brought by Cullen alleging breaches of the JVA by Julian Brown, breaches of fiduciary duty and conspiracy between him and his brother. It is alleged that Messrs Brown diverted opportunities and business away from Kauri and/or Cullen (as Julian Brown's joint venture partner), put themselves into a position of conflict and took a particular opportunity (known as the German Opportunity) for their own benefit.
Kauri cannot succeed in this claim if the acts complained of were authorised by the terms of the JVA, since the parties to the JVA were Kauri's only shareholders. Messrs Brown contend that the JVA did confer such authority. Therefore, although Kauri was not a party to the JVA, its terms will be important to the outcome of the claim. Those terms are also important to the question of whether Cullen has an alternative remedy.
The facts giving rise to the claim
Mr Watson and Mr Julian Brown were the original directors of Kauri. Quentin Brown was appointed a director in April 2007. Julian Brown was CEO until the breakdown in relations in 2012.
The joint venture enjoyed success in its early years. I can take a brief summary from the first witness statement of the claimants' solicitor Mr Paul Tracey:
"Over the period of about 2005 to 2008 Julian Brown and Mr Watson and/or Cullen entered into a number of investment projects through Kauri Investments and ad hoc SPV structures. These deals included the purchase of two logistics terminals in Poland in about September 2005, the purchase of a German logistics park known as Zeppelin Park in about May 2006 and projects in 2007 called the ABC Portfolio and the Broadway Portfolio."
In 2008 the German Opportunity arose. This is described by Mr Tracey as follows:
"In or around early 2008 Julian Brown raised a new opportunity in the German residential property market (the German Opportunity) with Mr Watson and Cullen. He raised it (among other occasions) in an email to Mr Watson dated 16 February 2008, copied to Quentin Brown and various Cullen employees. The German Opportunity consisted of entering into a joint venture with a joint venture partner in Germany; the partner was Hagen Kahmann or a corporate vehicle under his control (CAB Invest GmbH). The proposal was to exploit residential refurbishment opportunities across Germany on a rolling basis and it was intended to become self-financing. The proposal included opportunities to provide management and acquisition services and to take an equity stake in property investment deals which the joint venture would then undertake.
It was proposed that the deals would be geared and leveraged. As Julian Brown explained in his email dated 4 April 2008, the intention was to find an equity partner for the majority of the equity. The intention (for the initial 5 projects) was to fund the balance of the equity equally with CAB Invest (forecast to be a commitment of €325,000 each)."
A new corporate structure was set up for the venture. Kauri Guernsey 1 Limited ("KG1") was established to hold shares in Kauri Holdings S.a.r.l. which was to hold the property acquired pursuant to the German Opportunity. The set-up costs of this new structure were borne by Kauri, obviously (as both sides agree) in anticipation of the German Opportunity being exploited for the benefit of the joint venture.
However the parties could not agree about how the joint venture's participation in the investment was to be funded. In December 2006 Cullen and Kauri had entered into a facility agreement pursuant to which Cullen was from time to time to provide funding to Kauri. Mr Brown wanted to use this facility to fund Kauri's participation in the German Opportunity. Quoting again from Mr Tracey's evidence (which obviously describes the negotiations from Cullen's perspective),
"There followed a period of several months during which there were further discussions and negotiations concerning the terms upon which Cullen might provide the funding requested, including the additional funding. As explained in Mr Leahy's email dated 9 June 2008, Julian Brown was seeking that Cullen provide €697,000 by way of funding in relation to Kauri CAB; €197,000 for stage 1 in 2008, €250,000 for stage 2 in 2008 and €250,000 for stage 2 in 2009. In an email dated 14 June 2008 Mr Watson proposed that as part of the additional financing the existing financing be restructured; in particular he proposed that the interest rate be increased to 27.5 % across the whole of the facility (compounded annually). As his email explained, he proposed this as a solution in place of diluting the interest of Julian Brown in their joint venture. It also reflected increased risk to Cullen at that time in providing additional funding. The rate of interest was also (I am informed by William Gibson and believe) reflective of the level of interest that Cullen (and/or Mr Watson) was itself being asked to pay."
Mr Edward Davies, counsel for the defendants, was highly critical of that proposal, saying that it represented an opportunistic attempt by Mr Watson to achieve an exorbitant rate of interest for Cullen at Kauri's expense. Indeed Mr Davies was critical of Cullen's entire approach to funding the German Opportunity, making particular complaint about what he categorised as unreasonable stipulations, including for an annual management fee of £30,000.
As well as negotiating with Cullen, Julian Brown continued to negotiate with financiers to provide the majority of the funding for the German Opportunity. Although the amounts proposed varied as the negotiations progressed, Kauri and its partner CAB Invest were to provide only a very small proportion (at one stage put at €697,000 Euros each) and the rest was to be borrowed from other investors. In an email on 28 th November 2008 Julian Brown said that he had found such investors. Cullen's response, in an email of 3 rd December, was that new loan documentation was being prepared for Cullen's future funding of Kauri. Mr Brown was not happy with that response as is apparent from his email in response the same day.
Mr Brown travelled to Auckland to meet senior Cullen executives in December 2008. It is common ground that the German Opportunity was discussed. Mr Brown says that the discussion included...
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