Saxon Woods Investments Ltd (a company incorporated under the laws of the Bahamas) v Francesco Costa
| Jurisdiction | England & Wales |
| Judge | Mr Simon Gleeson |
| Judgment Date | 22 February 2024 |
| Neutral Citation | [2024] EWHC 387 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: CR-2021-000718 |
[2024] EWHC 387 (Ch)
Mr Simon Gleeson
Case No: CR-2021-000718
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
COMPANIES COURT
Royal Courts of Justice, Rolls Building
Fetter Lane, London, EC4A 1NL
Edward Davies K.C. and Jack Rivett (instructed by Stephenson Harwood LLP) for the Petitioner
Richard Hill K.C., Lara Hassell-Hart and Honor Brocklebank-Fowler (instructed by Joseph Hage Aaronson LLP) for the First Respondent
(The other Respondents did not appear and were not represented)
Hearing dates: 10th–13th, 16th–20th and 23rd–26th October, 1st–2nd November 2023
APPROVED JUDGMENT
Introduction
Although it has involved a great deal of evidence, this is at heart a very simple case. An agreement (the Shareholders Agreement, or “SHA”) was entered into between the Eighth Respondent, Spring Media Investments Limited (“the Company”) and its shareholders (including the Petitioner and investment entities for the First Respondent) to the effect that they would work together in good faith towards a sale of the Company (an “Exit”) by the end of calendar year 2019, and would give good faith consideration to any opportunities for a sale prior to that date. In the event that no Exit was achieved by that date, the SHA provided that the board of the Company should instruct an investment bank to “cause” an Exit. No such Exit was achieved, and, four years after that deadline, the Company remains unsold.
The Petitioner's case, in a nutshell, is that the Company did not in fact work in good faith towards such an Exit, and that when the 2019 deadline passed, they did not engage an investment bank to “cause” an Exit. The essence of the First Respondent's case is that, on a true construction of the SHA, the Company's actions did not breach it, and both he and the Company did in fact do everything that the clause required. In particular, he says that he caused an investment bank, Jefferies, to be retained by the Company, and that everything that happened thereafter was done on the advice of that investment bank. He also argues that, even if this had not been the case, the board did not consider that a sale executed on the timetable specified in the SHA would maximise value for shareholders, and that a decision in these circumstances not to proceed with the sale did not constitute a breach of the agreement, and therefore did not constitute any sort of unfair prejudice to the Petitioner.
The basis of the Petitioner's case is that Mr Costa has caused the Company to be in breach of the SHA. However, this action is not a claim for breach of that contract. It is a petition under s.994(1) of the Companies Act 2006 to the effect that the failure to perform the obligations contained in the SHA constituted conduct which resulted in unfair prejudice to the Petitioner, and that that failure was caused by the First Respondent.
As is common with 994 petitions, the issues between the parties are complex and emotional, and have deep roots. A very great deal of evidence was presented, and the principals were extensively cross-examined over multiple days. I regret to say that not all of the evidence or cross-examination seemed to me to have been entirely germane to the issues which I am required to determine, and quite a lot of it seemed to me to be an attempt to attack the character of the other party, with each accusing the other of a degree of dishonesty. I have considered all of this evidence in detail, although for the sake of brevity I have not addressed it in detail in this judgment. However, it may be helpful to set out here that I do not consider that either of the principals involved in this dispute have behaved dishonestly. Mr Costa is clearly a passionate man, and at several important junctures seems to have allowed his passions to overrule his judgement. Mr Loy, by contrast, seems to have put the worst possible construction on Mr Costa's conduct, seeing conspiracy where in fact there was none. Although each clearly believed it of the other, neither was in fact engaged in a nefarious scheme to promote his own interests over those of the Company or the other investors. The conflict which emerged between them is one which could and should have been avoided. Sadly, it was not.
Finally, as an introductory point, I should note that I did not hear any evidence as to the valuation of the Company, and any such determination must be made at a further hearing.
The Claim
The statement of claim proceeds as follows:-
(1) The Company has acted in breach of clause 6.2 of the Shareholders' Agreement.
(2) Mr Costa's conduct in relation to the purported Exit process involved breaches of the duties which he owes to the Company as a director.
(3) As a result of Mr Costa's conduct, the affairs of the Company have been conducted in a manner which is unfairly prejudicial to the interests of Saxon Woods as a member of the Company within the meaning of section 994(1) of the Act.
(4) Mr Costa was therefore responsible for, and/or was at least sufficiently connected to, that unfairly prejudicial conduct.
(5) Mr Costa should therefore be required to purchase the Petitioner's shares in the Company on the grounds that Mr Costa is responsible for the unfairly prejudicial conduct and/or he and/or his actions are so connected to the unfairly prejudicial conduct that it would be just to grant a remedy against him.
No relief is sought against the Company or any other shareholder. In the absence of any claim for damages against the Company for breach of the SHA, the allegations in respect of breach of duty are simply a foundation for the unfair prejudice claim, which in substance is the only cause of action.
There is a further issue regarding the Company's payment of Mr Costa's legal expenses of this action which will be dealt with separately.
None of the shareholders, other than Saxon Woods, have taken any part in the proceedings, save (in the case of HDO, Bay Capital and Khattar Holdings) to confirm that they do not intend to do so. The sole active respondent to the Petition is Mr Costa who is the chairman of the Company and the holder of a substantial economic interest in the Company.
The Shareholders' Agreement
The relevant provisions of the Shareholders' Agreement are Clauses 6.2 and 6.3. Clause 6.2 provides:
“6.2. Investment Period. The Company and each of the Investors agree to work together in good faith towards an Exit no later than 31 December 2019 (the “Investment Period”). In addition, the Company and each of the Investors agree to give good faith consideration to any opportunities for an Exit during the course of the Investment Period. In the event that an Exit has not occurred upon the expiry of the Investment Period, in addition to any rights provided by Clause 3.5(d) and Article V, the Board of Directors shall engage an investment bank to cause an Exit during the Investment Period at a valuation devised by such investment bank and on such terms as shall be consented to by the Board of Directors, which consent shall not be unreasonably withheld.”
Clause 6.3 provides:
“6.3. Exit Process. If an Exit is proposed in accordance with the terms of this Agreement, each of the Investors shall: (i) give such co-operation and assistance as is reasonably required in connection with the proposed Exit, which shall include cooperation and assistance in the preparation of any information memorandum/“teaser” and the giving of presentations to potential purchasers, investors, financiers and their advisers, as well as assisting on any due diligence exercise conducted in relation to an Exit; and (ii) procure (insofar as it lawfully can) that such Exit is achieved in accordance with such proposal.”
An “Exit” for this purpose is defined as:
“the sale of all or substantially all of: (i) the issued equity share capital of the Company; or (ii) the business or assets of the Company (whether through the shares of a Subsidiary or otherwise), in each case on arm's length terms as part of a single transaction or a series of transactions”.
As a preliminary point, there is a manifest error in the drafting of Clause 6.2. The wording of the clause defines the period up to the end of 2019 as the “Investment Period”, but provides that if an Exit has not been secured within this period, the board shall engage an investment bank to cause an Exit “during the Investment Period”. Both parties accepted that this was clearly a drafting error, and that what was intended was that if an Exit was not secured within the Investment Period, an investment bank should be instructed to cause an Exit thereafter.
Finally, it is relevant to some of what follows that the SHA contains “drag and tag” provisions in the ordinary form – indeed, it would be surprising if it had not contained such provisions. The relevance of these provisions in this case is the “drag” element. This has the effect that if a majority of shareholders decides to sell their shares to a third party, the minority holders can be compelled to sell their shares to that buyer for the same price.
The Facts
There are two streams of factual narrative which have to be considered – one relating to the financial position of the Company, and the other to the developments as regards the Exit. It is necessary to deal with...
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