La Micro Group (UK) Ltd v La Micro Group, Inc.
| Jurisdiction | England & Wales |
| Judge | Sir Christopher Floyd,Lord Justice Newey,Lord Justice Lewison |
| Judgment Date | 05 October 2021 |
| Neutral Citation | [2021] EWCA Civ 1429 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2021/0656 |
[2021] EWCA Civ 1429
Lord Justice Lewison
Lord Justice Newey
and
Sir Christopher Floyd
Case No: A3/2021/0656
A3/2021/0698
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
BUSINESS LIST (ChD)
HHJ JARMAN QC
Royal Courts of Justice
Strand, London, WC2A 2LL
William Buck and William Hooper (instructed by Fladgate LLP) for the First Defendant/Appellant
Alex Barden (instructed by Schofield Sweeney) for the Second Defendant/Appellant
Andrew Twigger QC, Paul Strelitz and Oliver Hyams (instructed by Owen White Limited) for the First and Second Respondents
Alexander Polley (instructed by O'Melveny & Myers LLP) for the Third Defendant/ Respondent
Hearing dates: 27–28 July 2021
Approved Judgment
The three main individual protagonists in these appeals, Mr Roman Frenkel, Mr Arkadiy Lyampert and Mr David Bell, have a history of hard-fought litigation in this country and in the United States going back to 2010. Before that time the three men had been business partners and friends. The first appellant, LA Micro Group Inc (“Inc”), is a Californian company which was owned and controlled by Mr Frenkel and Mr Lyampert. The first respondent, LA Micro Group (UK) Limited (“UK”), is an English company in which Mr Bell is a director and shareholder. These proceedings concern a dispute over the current beneficial ownership of the shares of UK following the falling out between Mr Frenkel and Mr Lyampert. The issue is whether Inc has a 51% beneficial interest in those shares, as Inc and Mr Frenkel contend, or whether the shares are beneficially owned by Mr Bell and Mr Lyampert, as they contend. The appeals are from the order of HHJ Jarman QC sitting as a deputy High Court Judge dated 4 March 2021. He granted declarations that the shares in UK were owned by Mr Bell and Mr Lyampert; that it was they who were entitled to UK's distributable profits; and that Inc was not a beneficial owner of any of the shares in UK, or entitled to any share of its distributable profits. Inc now accepts following the judgment of HHJ Jarman that it is not entitled to claim a share in UK's distributable profits, but Inc and Mr Frenkel appeal against the refusal of the declaration as to the beneficial ownership of the shares.
In the course of this judgment I will need to refer to three first instance judgments which have had to consider the facts giving rise to this dispute, albeit for different purposes. The first in time is a judgment of Miss Amanda Tipples QC (as she then was), sitting as a deputy High Court Judge, dated 13 September 2017 (“the 2017 judgment”): Frenkel v Lyampert and others [2017] EWHC 2223 (Ch). The 2017 judgment was given in proceedings (“the 2015 proceedings”) brought by Mr Frenkel against Mr Lyampert, Mr Bell and UK for a declaration that Mr Frenkel was entitled, in his personal capacity and independent of Inc, to a 25.5% shareholding in UK. The second judgment (“the jurisdiction judgment”) was given by Nugee J (as he then was) at an interim stage in the present proceedings on 3 June 2020: [2020] EWHC 1405 (Ch). The jurisdiction judgment was given on an unsuccessful challenge by Inc and Mr Frenkel to the jurisdiction of this court to try the present claim. The third judgment is the judgment of HHJ Jarman under appeal: [2020] EWHC 1405 (Ch). In referring to the 2017 judgment I have to bear in mind that Inc was not a party to the 2015 proceedings. Although Inc accepts that it is not in a position to challenge some of the facts found by Miss Tipples, it is not bound by her findings and conclusions. In any event, the present case raises some different issues.
Mr Lyampert and Mr Frenkel met in California in 1998 and together ran a small business buying and selling computer equipment. That did not last, but in 2001 Mr Lyampert established a new company, namely Inc, got back in touch with Mr Frenkel, and agreed to go into business with him again through Inc. Mr Frenkel and Mr Lyampert each owned 50% of the shares in Inc. Inc's business was the purchase and resale of high-end computer parts.
Shortly after Inc was set up in 2001, it started trading with an English company called Bstock, owned by Mr Bell. That led to discussions about a joint venture between Mr Bell on the one hand, and Mr Frenkel and Mr Lyampert (and also Mr Alex Gorban, a senior employee of Inc) on the other hand. By July 2004 there was an agreement in principle for the setting up of a new UK company, and on 1 July 2004 Mr Bell's accountants acquired an off-the-shelf company for this purpose, which changed its name to LA Micro Group (UK) Ltd on 11 August 2004. This was UK. Mr Bell was appointed director and secretary and became the sole shareholder, holding the one issued share. On 3 August 2004 Mr Lyampert was appointed as a second director.
In August 2004 Mr Lyampert, accompanied by Mr Gorban (but not by Mr Frenkel), came to the UK to finalise matters. In the course of those discussions it was orally agreed that the company should be owned 49% by Mr Bell. The dispute in the 2015 proceedings was about who was to own the other 51%. Mr Frenkel's case was that he and Mr Lyampert were each to own 25.5% personally; Mr Lyampert's case was that the 51% was to be owned by him alone. Mr Bell's case was that Inc was to hold 51% of the shares. Miss Tipples decided in the 2017 judgment that the agreement was that 51% of the share capital of UK was to be owned by Inc.
Agreement was also reached at the same time about trading arrangements between UK and Inc. In essence, each company would supply the other with equipment and hardware without any mark-up (i.e. at or near cost). If Inc sold hardware to UK at cost and UK made a profit, the profits would remain with UK; but it was agreed that UK's profits would be split between the parties, with 50% going to Mr Bell. There was a dispute in the 2015 proceedings as to who was to be entitled to the other 50% of the profits. Mr Frenkel's case was that it was agreed that they should be paid 50% to Mr Bell, and 25% each to him and Mr Lyampert or their nominees; Mr Bell's case was that it was agreed that dividends or profits should be split between himself and Inc. The 2017 judgment decided that it was agreed that the profits would be split equally between Mr Bell and Inc. In practice, although the first payments were made to Inc, thereafter 25% of profits were paid into an investment vehicle owned by Mr Frenkel and 25% into an investment vehicle owned by Mr Lyampert. I will refer to all the arrangements agreed at this time as “the 2004 agreement”.
In 2008 or 2009 a second share in UK was issued to Mr Lyampert. Mr Bell's evidence was that he was told by his accountant that another share had to be issued; that he did not take any steps to issue shares in the proportion 49/51 as he simply did what was requested of him. He thought 50/50 would be close enough; and that he could not recall why it was issued to Mr Lyampert rather than Inc, although it appears that he thought it may have been something to do with the fact that Mr Lyampert was the other director of UK.
One of the many issues debated before us was how, as a result of the 2004 agreement, the shares in UK were intended to be held. One possibility is that the agreement provided that shares would be issued to Inc and Mr Bell so as to establish a shareholding in the agreed proportion (e.g. a total of 100 shares with 51 going to Inc and 49 going to Mr Bell). This never happened, but the agreement to issue shares in that proportion, being a specifically enforceable contract, could create a constructive trust of the shares of which Inc and Mr Bell were the beneficiaries. Another possibility is that the agreement created an express trust of the two individual shares which had been issued, so that each share was held by its respective owners in the proportions 51% for Inc and 49% for Mr Bell. Which of these analyses is correct is relevant to some of the arguments concerning the effect of the events of 2010.
In early 2010 Mr Frenkel and Mr Lyampert fell out. On 8 February 2010 Mr Frenkel took steps to dissolve Inc by giving notice to Mr Lyampert. The next day Mr Lyampert spoke to Mr Bell on the telephone and told him that Mr Frenkel had closed down Inc and taken the staff with him to a new company; he (Mr Lyampert) would try and carry on with Inc as best he could. Mr Frenkel also telephoned Mr Bell. Mr Bell's evidence was that Mr Frenkel said to him (of UK): “ It's your business and I want nothing to do with it”. Mr Bell flew to California in March 2010 and met both Mr Lyampert and Mr Frenkel. Mr Lyampert told him that Inc would get over this damaging time and Mr Bell agreed that he would continue to trade with Inc. Mr Frenkel, according to Mr Bell, repeated to him “ The company [i.e. UK] is yours. I want nothing to do with it.” Miss Tipples accepted that Mr Frenkel told Mr Bell that UK was “yours”; and that from then on Mr Bell understood and proceeded on the basis that Mr Frenkel was not interested in any way in UK. Mr Bell and UK contended before HHJ Jarman that these words (“the Frenkel disavowal” as I shall call them) amounted to an irrevocable disclaimer of Inc's beneficial interest in the shares of UK. HHJ Jarman accepted that the Frenkel disavowal had been uttered and had this effect.
In 2010 Mr Bell and Mr Lyampert also set up new trading arrangements between the two companies. Instead of supplying each other at cost, they would apply the usual margins; they would also be free to compete with each other. So far as the...
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