Eoghan Flanagan (Petitioner) v Liontrust Investment Partners Llp and Others
| Jurisdiction | England & Wales |
| Judge | Mr Justice Henderson |
| Judgment Date | 24 July 2015 |
| Neutral Citation | [2015] EWHC 2171 (Ch) |
| Docket Number | Case No: 6164 of 2013 |
| Court | Chancery Division |
| Date | 24 July 2015 |
[2015] EWHC 2171 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
Rolls Building
Royal Courts of Justice
Fetter Lane, London, EC4A 1NL
Mr Justice Henderson
Case No: 6164 of 2013
Mr Andrew Thompson QC and Mr Alex Barden (instructed by Bolt Burdon) for the Petitioner
Mr John Machell QC and Ms Jennifer Haywood (instructed by Macfarlanes LLP) for the Respondents
Hearing dates: 20, 21, 22, 23, 26, 27, 28 January, and 4, 5 and 6 February 2015
Index
| Topic | Para |
| I. Introduction | 1–36 |
| II. Further Background | 37–52 |
| (1) The distinction between hedge funds and long-only funds | 38–43 |
| (2) The significance of the AUM in a fund | 44 |
| (3) The relevance of the EM Index | 45–48 |
| (4) The management of the Liontrust Group | 49–52 |
| III. The law of limited liability partnerships: an outline | 53–59 |
| IV. The witnesses | 60–90 |
| (1) Mr Flanagan | 60–70 |
| (2) The main witnesses for Liontrust | 71–90 |
| (a) Mr Ions | 73–74 |
| (b) Mr Hughes-Morgan | 75–78 |
| (c) Mr Abrol | 79–80 |
| (d) Mr Collins | 81–82 |
| (e) Mark Allpress | 83–85 |
| (f) Simon Hildrey | 86–88 |
| (3) The other members of the LLP | 89–90 |
| V. Events leading up to Mr Flanagan's move to Liontrust, and the meeting at Christopher's Bar on 3 October 2011 | 91–123 |
| VI. The validity of the termination letters | 124–168 |
| (1) The first termination letter | 124–158 |
| Was a resolution by the Management Committee also necessary? | 146–154 |
| The consequences of the invalidity of the first termination letter | 155–158 |
| (2) The second termination letter | 159–162 |
| (3) The third termination letter | 163–168 |
| VII. Breach of Contract Issues relating to Mr Flanagan's exclusion from the LLP | 169–217 |
| (1)Did Mr Flanagan's exclusion breach his contractual rights under the LLP Agreement and the Side Letter? | 169–181 |
| Topic | Para |
| (2) Was the breach repudiatory? | 182–209 |
| (a) Renunciation | 165–208 |
| (b) Fundamental breach | 209 |
| (3) Did Mr Flanagan affirm the LLP Agreement? | 210–217 |
| VIII. Is the common law doctrine of repudiatory breach excluded? | 218–243 |
| IX. Other matters | 244–252 |
I. Introduction
This judgment deals with liability issues in an "unfair prejudice" petition under section 994 of the Companies Act 2006 brought by Eoghan Flanagan ("Mr Flanagan") in relation to the affairs of a limited liability partnership, Liontrust Investment Partners LLP ("the LLP"). Mr Flanagan joined the LLP on 4 October 2011 and claims still to be a member of it, although his membership has purportedly been terminated by notices of compulsory retirement served on him in August 2012, May 2014 and December 2014 respectively.
In this introductory section of my judgment, I will give an outline of the case and explain how the main issues arise.
Mr Flanagan is an experienced fund manager. He has worked in the asset management industry since 1997, when he joined Baring Asset Management as a graduate. In 2009 he joined a business called Occam Asset Management ("Occam"), with the title of Chief Investment Officer and Head of Emerging Markets. In March 2009, Occam launched a hedge fund called the Occam Emerging Markets Absolute Return Fund ("the Fund"), which was jointly managed by Mr Flanagan and a colleague, James Mellersh. By the Spring of 2010, the Fund had assets under management ("AUM") of US $355 million, and had made an absolute return of 25% since it started. This was, in fact, to be the high water mark of the Fund's performance. By the end of 2010, the AUM in the Fund had approximately halved in value and the absolute return from inception had fallen to 18%.
Occam was founded by Jonathan Hughes-Morgan, for whom Mr Flanagan had previously worked very successfully as a fund manager in a business called Thames River Capital ("Thames River"), which Mr Hughes-Morgan set up with a partner in 1998. It was Mr Hughes-Morgan who recruited Mr Flanagan to join Occam. Mr Mellersh had been a senior analyst in the Emerging Markets team at Thames River, and when Mr Flanagan joined Occam, Mr Mellersh agreed to go with him.
By early 2011, Occam was in a steadily deteriorating financial position and Mr Hughes-Morgan was anxious to find a purchaser for the business. Negotiations took place with the Liontrust group, a much larger asset management organisation with AUM then well in excess of £1 billion. Liontrust, for its part, was looking to expand its business through the acquisition of other established asset management operations. Occam was seen by Liontrust as a potentially valuable acquisition, despite its precarious financial state, because its funds, managers and sales force would fit in well with Liontrust's business and largely complement it. The negotiations were initiated, and then supervised on behalf of Liontrust, by John Ions, the chief executive officer of the principal company in the group, Liontrust Asset Management Plc ("LAM Plc").
The negotiations bore fruit in a Business Purchase Agreement dated 1 August 2011 ("the Business Purchase Agreement"), under which the main consideration payable by Liontrust was agreed to be 3% of Occam's AUM at completion, provided that the AUM had not meanwhile fallen below a floor of $150 million, and £187,500 in cash. Occam had five funds under management, of which the Fund represented about 50% of the AUM. Unfortunately, however, the Fund was by now experiencing a period of very poor performance. In the months of August and September 2011, it made losses of 6.76% and 17.29% respectively, and by the end of September the cumulative return from inception had fallen to a loss of 11%, while the AUM in the Fund had fallen to $70.1 million. The "floor" proviso in the Business Purchase Agreement was breached, thereby entitling Liontrust to walk away from the deal. In fact, Liontrust chose not to do so, the terms were renegotiated, and the sale completed on 4 October 2011.
Mr Flanagan had for various reasons been reluctant to join in the move to Liontrust, but eventually he agreed to do so. In due course, I will need to examine in detail the events which led up to completion, what assurances were given to Mr Flanagan by Liontrust, and whether (as he alleges) an oral collateral contract was made at a meeting which he attended with Mr Ions, Adrian Collins (the chairman of LAM Plc) and Mr Hughes-Morgan at Christopher's Bar on the evening of 3 October 2011.
The upshot of this meeting, according to Mr Flanagan's pleaded case, is that Liontrust bound itself contractually, in consideration of Mr Flanagan's agreement to join in the move and become a member of the LLP, to make all reasonable efforts to promote the Fund after the acquisition "with their own client base and/or generally". Further or alternatively, Mr Flanagan says that Liontrust made representations to similar effect upon which he relied when deciding to become a member of the LLP.
At this stage, I need to say a little more about the organisation of the Liontrust Group, and the role of the LLP within it. The core business of the group, before the acquisition of Occam, was in the UK retail fund management market. Large parts of that business, such as the management of UK unit trusts and of segregated portfolios for investors, are of no direct relevance to the present case. But the group also provided a number of specialist funds, which (after the acquisition) were run as sub-funds of an open ended investment company acquired by Liontrust from Occam, Liontrust Umbrella Fund Plc (later renamed Liontrust Global Funds Plc ("LGF")). For tax reasons, LGF was based in Dublin. Following the acquisition of Occam, the Fund became one of the sub-funds of LGF.
In 2010, Liontrust entered into new arrangements for procuring the services of its fund managers, and the LLP was established for that purpose. It was incorporated on 22 January 2010 under the Limited Liability Partnerships Act 2000 (" LLPA 2000"), the original subscribers being LAM Plc and its wholly-owned subsidiary Liontrust Investment Services Limited ("LIS"). On 7 July 2010, LAM Plc and LIS entered into (i) a limited liability partnership agreement between themselves, under which LIS made a capital contribution to the LLP of £1.195 million in order to provide it with regulatory capital; and (ii) a business contribution agreement, pursuant to which the LLP acquired the entire regulated business of LIS (with the exception of certain excluded assets) by way of a further capital contribution. On the following day, the individual fund managers joined the LLP on the terms set out in a further limited liability partnership agreement governing their relationship with the LLP and each other. LAM Plc resigned as a member, so the parties to the governing limited liability partnership agreement were LIS, the individual members and the LLP itself. It is convenient to refer to this agreement as "the LLP Agreement", while recognising that it was amended and restated from time to time. The version in force when Mr Flanagan joined the LLP on 4 October 2011 was dated 11 April 2011. The version in force at the time of Mr Flanagan's purported compulsory retirement, and on which the questions of construction which I have to determine turn, was dated 19 July 2012.
I will need to examine some of the terms of the LLP Agreement in detail later in this judgment, but for now a brief summary will suffice. The capital of the LLP was almost entirely provided by LIS, which was recorded as having made an initial contribution of £5,300,162. The individual members contributed only £5,000 each, which was usually left on call. The income (or revenue) profits for each financial year were divisible between the individual members (other than...
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