Robert Gordon Kidd Against (first) Paull & Williamsons Llp And (second) Burness Paull Llp
| Jurisdiction | Scotland |
| Judge | Lord Tyre |
| Judgment Date | 03 February 2017 |
| Neutral Citation | [2017] CSOH 16 |
| Court | Court of Session |
| Published date | 03 February 2017 |
| Date | 03 February 2017 |
| Docket Number | CA211/15 |
OUTER HOUSE, COURT OF SESSION
[2017] CSOH 16
CA211/15
OPINION OF LORD TYRE
In the cause
ROBERT GORDON KIDD
Pursuer
against
(FIRST) PAULL & WILLIAMSONS LLP and
(SECOND) BURNESS PAULL LLP
Defenders
Pursuer: A Smith QC, J Brown; Levy & McRae
Defender: RW Dunlop QC, Paterson, Fordyce; BTO Solicitors LLP
3 February 2017
Introduction
[1] The pursuer was until September 2009 the owner of the whole share capital of a company incorporated in Scotland called ITS Tubular Services (Holdings) Limited (“ITS”). The business of ITS consisted of the provision, at various locations worldwide, of downhole tools and drilling equipment to the oil industry, together with ancillary services. The first defender is a limited liability partnership incorporated on 24 February 2009 to carry on the business formerly conducted in Aberdeen and elsewhere by the firm of solicitors known as Paull & Williamsons (“P&W”). The second defender was created in December 2012 by a merger of Burness LLP and the first defender.
[2] The pursuer is a former client of P&W and, subsequently, of the first defender. In this action he sues the defenders jointly and severally for the sum of $210 million in respect of loss and damage which he claims to have sustained as a consequence of the sale in September 2009 of part of his interest in ITS. The loss and damage is said to have been caused by the first defender’s breach of contract, fault and negligence, breach of fiduciary duty and fraudulent misrepresentation. At the end of a debate which took place between 13 and 16 December 2016, the pursuer moved for summary decree in respect of his case based on breach of fiduciary duty and on fraudulent misrepresentation, and the defenders moved for dismissal of the action.
Factual Background: The Sale of ITS
[3] The pleadings of both parties are lengthy and complex. They cover much ground which it is unnecessary to narrate in detail for the purposes of the present opinion. What follows is a summary of relevant factual matters pled by the pursuer which are either admitted by the defenders or which do not appear to be seriously in dispute. Until about October 2007, the pursuer was in full time executive control of ITS and its subsidiaries. In 2007 he wished to step back from management and to pursue a sale of his interest in ITS. He decided to appoint a new executive director or directors with a view to making the business attractive to potential purchasers. Mr Jeff Corray was a partner in KPMG in Aberdeen who specialised in corporate finance. He was a professional adviser to ITS and familiar with its business. Following discussions with the pursuer, Mr Corray accepted appointment as a director and CEO of ITS, with effect from 1 October 2007. The pursuer subsequently acceded to a recommendation by Mr Corray that Mr Scott Milne, a director at KPMG in Aberdeen, also be appointed as a director of ITS, with responsibility for corporate development. The pursuer’s involvement in executive management thereafter reduced.
[4] With the pursuer’s authority, Mr Corray began to attempt to identify a potential purchaser of ITS. The pursuer envisaged that he would personally receive a sum of around $50 million, with an equivalent sum being invested in the company, in return for which the investor would acquire around a one-third interest. Such a potential investor would probably be a private equity fund looking to achieve growth in the value of the business with a view to realisation of its investment at a profit within a period of five years or less, probably by a sale of the entire business or an initial public offering. By February 2008 an expression of interest had been received from 3i Investments plc. P&W were instructed by Messrs Corray and Milne to act as solicitors in connection with the proposed sale of some of the pursuer’s shares in ITS and the investment of funds by 3i. The P&W partner primarily responsible for carrying out these instructions was Mr Scott Allan. Mr Corray also appointed Messrs Simmons & Co (“Simmons”), a firm of investment bankers, to advise on the corporate finance aspects of a deal.
[5] The proposed transaction with 3i fell through. In about September 2008, Messrs Corray and Milne instructed Simmons to expose a minority interest in ITS to the private equity market. The indicative terms provided by Simmons to prospective investors were a total equity investment of $100 to $150 million, including payment of a minimum of $50 million to the pursuer, in exchange for a minority stake in ITS. Proposals were received in October 2008 from Lloyds TSB Development Capital Limited (“LDC”), TA Associates Limited (“TA”), and Lime Rock Partners (“Lime Rock”). The proposals differed significantly in their terms. LDC’s offer was to invest $125 million including a payment of $50 million to the pursuer, leaving 76% of ordinary equity in the hands of the pursuer and/or the executive directors. TA’s offer was to invest $130 million, including $55 million to the pursuer, in exchange for a 34.5% interest in ITS. Lime Rock’s initial offer was for payment of $5 million to the pursuer and a further investment of $45 million into the company, in exchange for a 27.5% interest. None of those proposals was a firm offer capable of acceptance.
[6] Negotiations were conducted with the three interested parties. According to averments by the defenders which are not admitted by the pursuer, those negotiations encountered difficulties because of the global financial crisis and the consequent decline in oil prices. In December 2008, both LDC and TA indicated that they were unable to put forward firm investment proposals. A revised indicative proposal was submitted by Lime Rock in January 2009 and negotiations between Mr Corray and Lime Rock continued. A fresh indicative proposal was subsequently submitted by TA in June 2009, but shortly thereafter TA advised that they were not in a position to proceed with it.
[7] On 26 January 2009, a letter of engagement was sent by P&W to the pursuer and to ITS under Mr Allan’s reference, stating inter alia as follows:
“We refer to Scott Milne and Jeff Corray’s recent meetings with our Scott Allan and Ken Gordon.
We write to set out our understanding of our scope of work and secondly detailing our business terms for doing that work. This letter sets out the terms upon which we will act for you and certain information which we are required to give you under Law Society of Scotland rules. The attached Terms of Business apply except where they are inconsistent with the express terms of this letter.”
The scope of work, in summary, was the carrying out of a due diligence exercise and production of a report on ITS and its subsidiaries addressed to Lime Rock. One of the Terms of Business annexed to the letter of engagement dealt with conflicts of interest:
“9.1 Subject to certain exceptions, the practice rules of the Law Society of Scotland prevent us from acting for two or more clients whose interests conflict or potentially conflict. If we believe we may be prevented from advising you or any Other Beneficiaries in connection with any matter as a result of such a conflict we shall advise you or any Other Beneficiaries of this as soon as the potential conflict is identified. In those circumstances, we may require you or any Other Beneficiaries to seek independent legal advice elsewhere and may require to decline to undertake further work on your or any Other Beneficiary’s behalf.”
[8] There are major factual issues between the parties as to the extent to which the pursuer was kept informed by Messrs Corray and Milne, and/or by Mr Allan, of the progress of negotiations and of the options from time to time available to him, and, consequently, whether he was enabled properly to understand the import of the transactions into which he was advised to, and did, enter. These are not matters for determination in this opinion. It is sufficient for present purposes to narrate that on 26 September 2009, agreements were entered into between the pursuer and others on the one hand and Lime Rock on the other. These included:
(i) a share purchase agreement between the pursuer and Lime Rock for the sale of 6,612 A ordinary shares in ITS for the sum of $10 million;
(ii) an investment agreement among ITS, the pursuer, Lime Rock, and Messrs Corray and Milne and another director, providing for:
- subscription by Lime Rock of $45 million for 29,752 A ordinary shares in ITS;
- the grant of a right to Lime Rock to appoint and remove up to two directors of ITS; and
- prohibition of appointment of directors of ITS without Lime Rock’s consent, such consent not to be unreasonably withheld;
(iii) amendment of the articles of association of ITS:
- to confer upon Lime Rock’s shares a fixed cumulative preferential dividend at an annual rate of 10% of the issue price per share;
- to confer upon Lime Rock a first priority on return of capital on liquidation; and
- to remove the pursuer’s casting vote at board meetings.
Post-sale Events: Pursuer’s Averments
[9] According to the pursuer’s averments, ITS experienced financial difficulties in late 2012. These, it is averred:
“…were substantially caused by gross mismanagement of its affairs by its executive directors, including Messrs Corray and Milne. The mismanagement included a complete failure effectively to manage the company’s cash flow… The failure to manage cash receivable was compounded by excessive and unauthorised capital expenditure on plant and equipment, and by the expenditure of very substantial (and in many cases excessive and unnecessary) sums on professional fees”.
This is said to have resulted in alleged breaches of ITS’s bank covenants. The pursuer further avers that by this time Lime Rock, a US entity, wished to terminate its interest in ITS as soon as possible because of political difficulties caused by ITS subsidiaries’ trading in jurisdictions, including Iran, which were subject to US...
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