Daniel Lee (in his personal capacity and as Trustee of the Westerby Private Pension – D M Lee) v Gsquare Capital II LP
| Jurisdiction | England & Wales |
| Judge | Master Pester |
| Judgment Date | 30 November 2023 |
| Neutral Citation | [2023] EWHC 3017 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: BL-2023-000135 |
[2023] EWHC 3017 (Ch)
Master Pester
Case No: BL-2023-000135
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
Business List (ChD)
Rolls Building
Fetter Lane
London EC4A 1NL
Matthew Bradley KC (instructed by Pinsent Masons LLP) for the Claimants
Joe Smouha KC and Bibek Mukherjee (instructed by Goodwin Procter (UK) LLP) for the 1 ST and 2 ND Defendants
Hearing date: 13 September 2023
APPROVED JUDGMENT
This judgment was handed down remotely by circulation to the parties or their representatives by email. The date and time for hand-down is deemed to be 4pm on 30 November 2023.
A. Introduction
This is my judgment on an application dated 16 May 2023 (“the Application”) by the First and Second Defendants (“GSquare” and “P2U Holdings” respectively) to strike out, alternatively to obtain reverse summary judgment on, certain identified paragraphs in the Particulars of Claim and the Reply. The respondents to the Application are the First and Second Claimants (“Mr Lee” and “the Trustees”). Where I refer to GSquare and P2U Holdings collectively, without distinguishing between them, I will refer to them as “the Applicants”. Likewise, where I refer to Mr Lee and the Trustees collectively, I will refer to “the Respondents”.
The Application requires me to decide two issues:
(1) Whether a letter, referred to by the parties in their statements of case as the “July 2020 Transfer Notice”, is valid (“the Validity Issue”); and
(2) Whether clause 16.3(d) of the Articles of Association of P2U Holdings (“the Articles”) is an unenforceable penalty clause (“the Penalty Issue”).
In terms of the evidence, I have a witness statement from Oliver Glynn-Jones in support of the Application; a witness statement in response from Mr Lee; and a further witness statement from Mr Glynn-Jones in reply. Mr Lee also submitted a further statement shortly before the hearing, which he had no permission to serve, but which GSquare and P2U Holdings did not object to my reading. The witness evidence relates to the Penalty Issue, and raises matters concerning the extent to which the relevant provisions of Article 16, which GSquare and P2U Holdings seek to uphold, were exorbitant, unconscionable and serve no legitimate interest.
I consider further below the extent to which it is necessary and appropriate to consider this evidence on the Application.
I would also add at the outset that, whatever I decide on the Application, these proceedings will continue to trial. Several important issues between the parties will remain live and cannot be resolved on the Application. Mr Lee also claims relief against the Third and Fourth Defendants, and this is again unaffected by whatever I decide.
B. Background
I can take the relevant background from the statements of case. Mr Lee founded the Fifth Defendant (“P2U”) in 1999. P2U's principal business, or at least a significant part thereof, was acting as an NHS contracted distance-selling pharmacy, managing repeat prescriptions directly for patients at no costs to those patients. Patients would sign up directly with P2U. Thereafter, future prescriptions ordered either via P2U or other patient-facing services would be sent electronically to P2U for dispensing and delivery to the patient.
Mr Lee was employed by P2U until March 2018 pursuant to an executive director service agreement. He held shares in P2U both personally and via his pension plan. Mr Lee and the Trustees are the current trustees of Mr Lee's pension plan, a trust in the form of a Self-Invested Personal Pension called “the Westerby Private Pension – D M Lee”.
As of 2017, the Third and Fourth Defendants (“Mr Livingstone” and “Mr Dannatt”) were each directors of P2U, as respectively its CEO and CFO. In September 2017, Mr Livingstone and Mr Dannatt were mandated and authorised by the board of directors of P2U to explore and put in place what is described as an “exit/fundraising process”. This led to the eventual sale of all shares in P2U to GSquare/P2U Holdings, as explained below. Mr Livingstone and Mr Dannatt led these negotiations on behalf of P2U's shareholders. Mr Livingstone and Mr Dannatt are separately represented from GSquare, P2U Holdings and P2U. Neither Mr Livingstone nor Mr Dannatt are parties to the Application and, as I have already mentioned, the Application does not touch on the issues between Mr Lee and the Trustees on the one hand and Mr Livingstone and Mr Dannatt on the other.
GSquare is a private equity house, specialising in investments in healthcare companies in Europe. In February 2018, GSquare sent a binding offer letter to purchase 100% of P2U's share capital. In very brief summary, the structure of the proposed purchase involved the incorporation of a new company, which would become P2U Holdings, in order to acquire the entirety of the issued shareholding in P2U.
On 16 March 2018, GSquare completed its acquisition of P2U's business. The shareholders in P2U (including Mr Lee and the Trustees) sold all their shares in P2U to P2U Holdings by a Share Sale Agreement dated 16 March 2018 (“the SSA”), with the effect that P2U Holdings became the parent company of P2U. Pursuant to the SSA, shares in P2U Holdings were issued to GSquare and to the existing shareholders, including the Respondents. As well as shares, Mr Lee also received a cash consideration of £895,118.45.
On the same date, all the shareholders in P2U Holdings, including the Respondents and GSquare, entered into a shareholders' agreement in respect of P2U Holdings (“the Shareholders' Agreement”). As contemplated by the Shareholders' Agreement, P2U Holdings (known at the time as “GSHPE Bidco Ltd”) adopted the new Articles on 29 March 2018.
On 29 March 2018, Mr Lee's existing service agreement was novated to P2U Holdings (“the Service Agreement”).
On 4 June 2019, Mr Lee was given six months' notice of redundancy and placed on garden leave, to expire on 4 December 2019. For the purposes of the Articles, Mr Lee therefore became a “Leaver” on 4 December 2019, which thereby became his Termination Date, as defined under the Articles. This is agreed: see Particulars of Claim, paragraph 50; Defence, paragraph 12.
Pursuant to the terms of the Articles, Article 16.1, GSquare was entitled, within 12 months of the Termination Date (that is, by 4 December 2020), to require an employee who was also a Leaver to transfer some or all of his shares, and those of his Permitted Transferee (as defined), to a specified person. By the July 2020 Transfer Notice, on 26 July 2020 GSquare purported to exercise this right, by requiring Mr Lee and the Trustees to transfer their B1 and B2 shares in P2U Holdings to it. Mr Lee and the Trustees did not consent to or effect the transfer. However, again pursuant to the Articles, Article 16.10, there is a mechanism whereby if a shareholder does not execute the transfer, the defaulting shareholder is deemed to have irrevocably appointed a person nominated by the “Investor Director” (as defined) to be his agent to execute, complete and deliver a transfer of those shares in favour of the proposed purchaser against receipt by P2U Holdings of the consideration due for the shares. P2U Holdings is then to hold the consideration on trust for the relevant shareholders. The shares were transferred by this mechanism on 11 August 2020.
In September 2020, the Trustees issued a Part 8 claim against GSquare and P2U Holdings seeking rectification of the Register of Members of P2U Holdings, so as to restore the Trustees to that Register as the holder of 9,047 B1 shares in P2U Holdings. The ground of that claim was that Article 16 of the Articles had no application to the Trustees' B1 shares (as opposed to the B2 shares). Those Part 8 proceedings were ultimately not contested, and resulted in an order by consent (i) declaring that the July 2020 Transfer Notice in respect of the Trustees' B1 shares and the actions taken pursuant to that Notice were void, and (ii) ordering the retrospective amendment of the Register of Members of P2U Holdings.
The price to be paid for the transferred shares is specified in Article 16.3. The price differs, depending on whether the Transferee is designated as a Good Leaver, a Bad Leaver, an Intermediate Leaver or a Very Bad Leaver. In the July 2020 Transfer Notice, GSquare designated Mr Lee a Very Bad Leaver “… as a result of his involvement with another company called CloudRX Ltd”. GSquare's position is that Mr Lee was in breach of various restrictive covenants in the Service Agreement and/or the Shareholders' Agreement. In consequence, GSquare alleges that the price payable for his transferred shares is just £1. Mr Lee in turn maintains that that price is a gross undervalue of shares which he says, on any view, are worth several million pounds.
Mr Lee disputes the allegation that he is or was a Very Bad Leaver. The question whether Mr Lee was, or was not, in breach of the restrictive covenants is a matter to be determined at trial, which in turn will determine whether the designation as a Very Bad Leaver is correct. Mr Lee claims damages for breach of contract as against GSquare, on the basis that the provisions of the Service Agreement and the Shareholders' Agreement on which GSquare relies to contend that Mr Lee was in breach of his duties so as to be a “Very Bad Leaver” have in fact not been breached, and that he is not in fact a “Very Bad Leaver”. However, the Respondents' claim is not limited to damages, but also seeks a declaration that...
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