Shepherd v Williamson and Another
| Jurisdiction | England & Wales |
| Judge | MRS JUSTICE PROUDMAN,Mrs Justice Proudman |
| Judgment Date | 24 September 2010 |
| Neutral Citation | [2010] EWHC 2375 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: 97/2009 |
| Date | 24 September 2010 |
In The Matter Of Phoenix Contracts (Leicester) Limited
And In The Matter Of The Companies Act 2006
[2010] EWHC 2375 (Ch)
Before: Mrs Justice Proudman
Case No: 97/2009
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
David Eaton Turner (instructed by Spearing Waite) for the Petitioner
Edward Davies (instructed by EMW Picton Howell LLP) for the First Respondent
Hearing dates: 10, 11, 12, 13, 14, 20 May 2010
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.
Mrs Justice Proudman:
This is the trial of a petition presented by Mr Martin Shepherd under s. 994 of the Companies Act 2006 seeking an order that his shares in the company Phoenix Contracts (Leicester) Limited (“the Company”) be bought by Mr Michael Roy Williamson at a fair value.
The Company was placed in administration on 4 th March 2010 and is not represented, but the administrators have consented to the continuation of the proceedings so far as they relate to the Company.
The sequence of events
The Company was incorporated on 18 th May 1992 as a private company limited by shares. It carried on business as a fit-out contractor undertaking refurbishment work on hotels, clubs and public buildings.
There were four founder members, Mr Williamson, Mr Shepherd, a Mr Coley and a Mr Walker, each of whom subscribed for 21,295 shares at £1 each. Mr Coley retired from the Company owing to ill-health in about 1995 and his shares were repurchased by the Company at nominal value. Mr Walker accepted redundancy on 9 th September 2002 and resigned as a director. On 11 th October 2002 his shares were transferred to Mr Williamson and Mr Shepherd at the fixed price of £2.50 per share as provided in the Company's articles of association.
On the basis that Mr Walker held an odd number of shares Mr Williamson acquired an extra share on the division of Mr Walker's shares. One of the questions I am asked to decide is whether he owns that share beneficially or holds it on trust for himself and Mr Shepherd equally. Since the transfer Mr Williamson is registered with 31,943 shares and Mr Shepherd with 31,942 shares in the Company.
The Company's articles of association imposed various restrictions on the transfer of shares. On 14 th October 1993 the four founder members entered into a shareholders’ agreement (“the Agreement”) which had the effect of entrenching the position of the members as directors so that they could not be removed without their consent: clause 10.1.15. The Agreement also contained a procedure (in clause 12) for resolving deadlock in general meeting by the determination of an expert.
On 5 th February 2002, the three then remaining shareholders altered the articles of association of the Company, permitting transfers of shares to the Company or to members of a shareholder's family who were directors. The amendment restricted any other transfer of shares unless they had first been offered for sale to existing shareholders in the proportions of their existing holdings at the fixed price of £2.50 per share.
Sale notices are provided for by article 8.4 of the amended articles. Article 8.5 includes the following provision:
“The shares comprised in any sale notice shall be offered to the Members (other than the proposing transferor) as nearly as may be in proportion to the number of shares held by them respectively…If any shares shall not be capable without fractions of being offered to the Members in proportion to their existing holdings, the same shall be offered to the Members, or some of them, in such proportions or manner as may be determined by lots drawn in regard thereto, and the lots shall be drawn in such manner as the Directors may think fit.”
Crucially, the new article 8.11 provided as follows:
“Upon a member ceasing for any reason to be employed in the Company or ceasing to be a Director of the Company he shall be deemed to have served a sale notice on the Company in respect of all the shares in the Company held by him on the date of such cessation or deemed cessation, unless the Directors otherwise agree.”
Another question I am asked to decide is whether, on the true construction of this provision, a sale notice is deemed to have been served upon a person ceasing to be an employee but remaining as a director or whether the provision is only applicable on cessation as both employee and director.
This raises the overarching question of whether a member could, in the context of this particular company, cease to be an employee without also ceasing to be a director. Mr Williamson asserts that the whole arrangement between the parties is to be found in the articles, the Agreement and an Anti-Embarrassment Deed (also entered into in 2002) whereby if the Company was sold within 2 years of a share sale the person selling his shares would obtain a proportion of the additional consideration.
Mr Shepherd asserts that after the departure of Mr Walker he and Mr Williamson discussed their position and those discussions resulted in an agreement or understanding (a) that the Company would be owned just by the two men, (b) that they would both be directly involved in the management of the Company as employees and shareholders and (c) if one of them were to leave the Company and the other wanted to buy his shares the purchase would be at the full market price rather than the £2.50 per share provided for by the Agreement. In other words, come what may they would participate 50:50 in the Company. As he put it, “it was time for the Company to look after us”. He said many times that he had complete trust and confidence in Mr Williamson at that time. In any event he alleges that after the departure of Mr Walker the Company constituted a quasi-partnership of the kind described in Re Westbourne Galleries [1973] AC 360 and there was consequently no room for a non-executive director. That is disputed by Mr Williamson and is also an issue I am required to decide.
In 2005 Mr Shepherd and Mr Williamson held talks with Harvey Ingram LLP (“Harvey Ingram”), then acting as the Company's solicitors, and the Company accountant to consider restructuring the Company. Proposals entailed the introduction of a new holding company and the associate directors were to have a stake in the business. There is no suggestion in the attendance notes at the time that the articles and the Agreement did not have full force and effect and it was suggested that as part of the restructuring the provisions about the fixed £2.50 purchase price per share would be amended. The notes acknowledge (in recording a meeting at which Mr Williamson was present) that the current position was that there was a quasi-partnership.
The restructuring was put on hold pending a potential third party sale. Neither the sale nor the restructuring came to anything.
Mr Williamson and Mr Shepherd were both executive directors and they were also close friends until the matters which caused them to fall out towards the end of 2007. By that stage the Company was prospering and the shares were worth many times the £2.50 provided for in the Agreement.
OFT Investigation
In about 2005 the Office of Fair Trading launched an investigation into collusive practices in the construction industry. One of those practices was the giving and taking of “covers”, that is to say, deliberately submitting a bid higher than other competing bids for a contract in the knowledge that it would not succeed. The object was to favour a chosen tenderer amongst those colluding; the parties could therefore make private arrangements about who would undertake which construction projects and how the price would be shared. It is common ground that the Company participated in covering prior to January 2006. It is also common ground that Mr Shepherd was not directly involved in any such practices, although there is a conflict of evidence about whether he knew that they went on. Mr Williamson's evidence was that the reason for the Company's participation in covering was merely that failure to make a bid at all might result in the contractor being removed from a client's tender list.
122 companies were subjected to the investigation including, from January 2006, the Company. The practice of covering was widespread in the industry and had been for many years, to the point where it had become such accepted practice (even being referred to in textbooks) that many participants did not realise that it was unlawful.
The Company cooperated with the OFT in the investigation and it was hoped that it would consent to a leniency agreement. On 4 th April 2008 Mr Williamson signed a leniency agreement on behalf of the Company providing for a 40% reduction in the penalty to be awarded against the Company, conditional on the Company continuing to cooperate and conditional also on the Company having refrained from any covering activity from January 2006 onwards. On 22 nd September 2009 the OFT published its findings and a fine of £91,053 was levied on the Company in accordance with the leniency agreement.
Meanwhile, in the spring of 2007, Mr Shepherd and Mr Williamson discussed arrangements which might enable Mr Shepherd to retire from the Company and negotiations were conducted between solicitors. Mr Shepherd wanted to realise his investment in full and was not prepared to retire unless he received full value for his shares rather than the fixed price of £2.50 per share provided for in the amended articles. The parties failed to reach agreement and...
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