Reeves v Sprecher and Others

Hearing dates: 24 th, 25 th, 26 th January 2007

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

THE HONOURABLE MR JUSTICE LEWISON

Mr Reeves' case in outline

In the spring of 1999 Mr Craig Reeves was 26 years old and had been working in the hedge fund industry for some three years. The company for which he worked was precarious; and he left in August 1999. A few months before he left he began discussions with Mr Peter Sprecher about the possibility of going into business together in the investment management industry, principally in hedge funds. Mr Sprecher was a successful entrepreneur, but did not know about hedge funds. Mr Reeves knew about hedge funds, but had no money. In essence they agreed that Mr Sprecher would provide the capital for the new business; and Mr Reeves would provide the know-how.

Early on in the negotiations they agreed that there would be an on-shore company and an off-shore company involved in the new business. Mr Reeves says that it was also agreed that they would share the profits from the new business equally, although Mr Sprecher was to have voting control of the companies. The reason behind the decision to have an off-shore company was, according to Mr Reeves, that regulatory requirements were looser off-shore than they are in this country. Tax advantages may have played their part too.

It is common ground that Mr Sprecher and Mr Reeves reached an agreement about the setting up of the new business. A number of draft written agreements were prepared. However, it is also common ground that the full terms of the agreement were not embodied in any written agreement. So the agreement is partly oral and partly written.

In the event, two companies were incorporated in August 1999:

i) Platinum Capital Management Ltd ("PCM"), incorporated in England and Wales and

ii) Platinum Trading Management Ltd ("PTM"), incorporated in Nevis, in the Eastern Caribbean.

Mr Sprecher holds 51 per cent of the shares in PTM. Mr Reeves holds 49 per cent. PTM has a board of three directors: Mr Sprecher, Mr Reeves and Mr Mahalingam. Mr Sprecher lives in the USA, although he is a frequent visitor to England; Mr Reeves lives in England, and Mr Mahalingam lives in Switzerland. PTM has a registered office in Nevis, but it does not appear to have a conventional place of business there. It has two employees, who provide accountancy services. They are based in the Isle of Man. PTM has no place of business in England, no employees in England, no bank account in England and no assets in England. Mr Reeves says that the board have been careful to ensure that all decisions about PTM have been made off-shore.

Mr Sprecher and Mr Reeves, together with PTM and PCM entered into a written agreement. It bears the date 1 September 1999; although it may well be that it did not come into existence until many years later. Mr Reeves also entered into a service agreement with PCM under which he was appointed its managing director.

Mr Reeves and Mr Sprecher have fallen out. Mr Reeves says that the trouble started when Ms Sanghvi was recruited in March 2005 to act as PCM's compliance officer and chief operating officer. At Mr Sprecher's insistence she was also appointed as a director of PCM. From then on Mr Sprecher relied more and more on Ms Sanghvi and less and less on Mr Reeves. Mr Reeves says that Mr Sprecher embarked on a campaign to undermine Mr Reeves' authority as managing director of PCM; and asserted that he himself was the CEO of PCM. He repeatedly demanded that Mr Reeves should transfer some of his existing shareholding in PTM to Mr Mahalingam, some to a Mr Streit (a friend of Mr Sprecher's) and some to Ms Sanghvi. Mr Reeves refused all these demands. Mr Sprecher also put in front of Mr Reeves an agreement under which Mr Reeves was to agree to exchange his shares in PTM for common stock with no voting rights. Mr Reeves refused to sign.

Mr Reeves says that the final straw came when he was suspended as managing director of PCM and summoned to a disciplinary hearing. He says that the disciplinary hearing was, in effect, a kangaroo court based on trumped up charges which both Mr Sprecher and Ms Sanghvi knew to be false and baseless. He says that they had determined to cause PCM to dismiss him whatever he said at the disciplinary hearing, in furtherance of Mr Sprecher's desire to ease him out of Platinum and, if possible, acquire his shareholding. Mr Reeves says that he regarded the convening of the disciplinary hearing as amounting to a constructive (and wrongful) dismissal.

Mr Reeves also says that he fears that Mr Sprecher is intent on causing PTM to allot new shares thus diluting Mr Reeves' 49 per cent shareholding. According to Mr Reeves, Mr Sprecher's intention is to do so without diluting his own shareholding.

The claims relating to PTM

Mr Reeves has issued proceedings in this court claiming against Mr Sprecher an injunction “on behalf of himself and on behalf of PTM to restrain Mr Sprecher from taking any further step to dilute Mr Reeves' interest in PTM without paying him fair compensation”.

Mr Reeves advances this claim in a number of ways. First, he says that he and Mr Sprecher made an express agreement that no further shares would be issued in any Platinum entity without the approval of 80 per cent of shareholders. Consequently, the issue of further shares in PTM would be a breach of contract. Second, he says that as a director of PTM Mr Sprecher owed PTM a duty to exercise his power as director only for proper purposes in the interests of PTM and not in order to promote his own interests. He says that an allotment of shares made in order to dilute his interest without diluting Mr Sprecher's interest would be a breach of fiduciary duty owed by Mr Sprecher to PTM. Since Mr Sprecher has voting control of PTM it is obvious that PTM will not sue Mr Sprecher. Consequently Mr Reeves says that he is entitled and ought to be allowed to bring a derivative action in this court against Mr Sprecher on behalf of PTM.

Mr Reeves also proposes to amend the Particulars of Claim to allege that shares in an American corporation, Platinum Capital Management USA LLC (“PCM USA”) are held on trust for PTM. This claim is an alternative to Mr Reeves' existing claim that under the terms of his agreement with Mr Sprecher he is himself entitled to a 49 per cent shareholding in that company. The proposed claim, which is also a derivative claim brought on behalf of PTM, is based on an allegation that it was a breach of Mr Sprecher's fiduciary duty to PTM to have failed to take steps to ensure that the shares in PCM USA were held on trust for PTM.

I am asked to give permission under CPR 19.9 for Mr Reeves to continue both these claims. PTM opposes the grant of permission on the basis that:

i) Disputes about the internal management of a company should be determined in its place of incorporation and

ii) This applies equally to questions whether a shareholder is entitled to bring a derivative action.

These questions were considered by Lawrence Collins J in Konameneni v Rolls Royce (India) Ltd [2002] 1 WLR 1269. He held that:

i) Although the courts of the place of incorporation do not have exclusive jurisdiction for making orders controlling the exercise of discretionary powers, those courts are “very likely indeed” to be the appropriate forum: para 55

ii) It may be wholly unjust to require recourse to an offshore haven to pursue fraudulent directors in a case which has no connection with the jurisdiction other than that it is the place of incorporation: para 66

iii) The courts of the place of incorporation will “almost invariably” be the most appropriate forum for the resolution of the issues which relate to the existence of the right of shareholders to sue on behalf of the company: para 128.

There is no doubt that as a matter of legal principle derivative actions are possible under the law of Nevis: section 75 of The Nevis Business Corporation Ordinance so provides. Equally there is no doubt that Nevis has an established judicial system in which a fair trial of the issues raised in the proposed derivative claims can be had.

So far as the claim relating to the prospective issue of further shares is concerned:

i) The decision to issue more shares must be a decision of the board, and the board always holds its meetings offshore;

ii) If the board does decide to issue more shares they will be issued in Nevis;

iii) The purpose of the claimed injunction is therefore a claim to restrain acts which will take place (if at all) outside the jurisdiction.

In my judgment this is not an exceptional cases of the kind to which Lawrence Collins J referred. No doubt in the sort of case that he was contemplating the foreign corporation would have had some assets within the jurisdiction; or the acts of the fraudulent directors might have been committed within...