South Downs Trustees Ltd (as trustee of the South Downs Employee Benefit Trust) v GH
| Jurisdiction | England & Wales |
| Judge | Chief Master Marsh |
| Judgment Date | 16 May 2018 |
| Neutral Citation | [2018] EWHC 1064 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: PT-2017-000244 |
| Date | 16 May 2018 |
[2018] EWHC 1064 (Ch)
IN THE HIGH COURT OF JUSTICE
BUSINESS & PROPERTY COURTS OF
ENGLAND AND WALES
PROPERTY TRUSTS AND PROBATE LIST
Royal Courts of Justice
Rolls Building, Fetter Lane,
London EC4A 1NL
Chief Master Marsh
Case No: PT-2017-000244
Georgia Bedworth (instructed by Macfarlanes LLP) for the Claimant
Leon Pickering (instructed by Macfarlanes LLP) for the First Defendant
James MacDougald (instructed by Macfarlanes LLP) for the Second Defendant
Philip Jenkins (instructed by Macfarlanes LLP) for the Third Defendant
Hearing dates: 16 February 2018
This judgment arises from the hearing of this Part 8 claim on 16 February 2018. An interim order for anonymisation was made on 8 December 2017, before the claim was issued, and an order anonymising the proceedings, save for the identity of the claimant, was made at the hearing. The reasons for making those orders are explained later in this judgment.
The claimant is the trustee of the South Downs Employee Benefit Trust. I will refer to the claimant as “the Trustee” and the trust as “the EBT”. The Trustee entered into a sale and purchase agreement (“the SPA”) on 12 December 2017 for the sale of the EBT's 73% interest in a company to which I will refer as “the Holding Company”. The Holding Company, through a series of subsidiaries, owns and controls a business that I will refer to as “the Utility”. The SPA was conditional upon the Trustee obtaining certain relief from the court. The EBT's shares in the Holding Company have a value of tens of millions of pounds.
I will use the following additional abbreviations in this judgment describing the position as it was at the time of the hearing:
i. “The Purchaser” is the purchaser under the SPA.
ii. “The Deed of Grant” is the deed entered into on 12 December 2017 as part of the sale transaction purporting to grant the Share Options.
iii. “The Share Options” are the options referred to in the Deed of Grant.
iv. “The Financial Adviser” is the merchant bank that has provided advice to the Trustee about the disposal of the EBT's holding of shares.
v. “The Regulator” is the statutory economic regulator of the Utility.
vi. “The Pot A Beneficiaries” are the class of beneficiaries under the EBT comprising former employees of the Utility who were employed at some point in the period from 30 September 2007 to 30 September 2011 who left their employment by retirement under the rules of the pension scheme, or by left their employment but by special dispensation continue to benefit from the EBT.
vii. “The Pot B Beneficiaries” are current employees of the Utility whose employment started after 30 September 2011.
viii. “The Joint Pot Beneficiaries” are current employees of the Utility whose employment started after 30 September 2007 but before 30 September 2011.
At the hearing, orders were made that:
i. The defendants represent respectively the three relevant classes of employee, namely the Pot A, Pot B and Joint Pot Beneficiaries and, in the case of Pot A Beneficiaries, their widows and widowers;
ii. The Deed of Grant purporting to grant share options be set aside and declared void ab initio;
iii. Pursuant to section 57 Trustee Act 1925 the Trustee had power to put into effect transactions set out in the SPA for the disposal of the EBT's shares in the Holding Company;
iv. The court sanctioned the Trustee entering into the SPA and approved the Trustee's decision to complete the transaction on the basis that this was a ‘momentous decision’ and it was right for the Trustee to seek the court's approval under the second limb of Public Trustee v Cooper.
The background to the application is set out in a full and helpful witness statement made by a director of the Trustee, to whom I shall refer as PMS, together with a supplementary statement. Due to the need to anonymise this judgment it is inappropriate to summarise the facts in the same level of detail as in the statements. In particular, it is neither appropriate nor necessary to explain fully the commercial background leading to the entry into the SPA. However, I will refer in more detail to the reasons why the Trustee decided it should enter into the SPA because the court's sanction for the transaction is sought. The following summary sets out the essential background.
The EBT
The beneficiaries of the EBT are the former and current employees of the Utility, and other companies in the same group and their dependants. The EBT was settled in 2001 as part of a management buy-out of the Utility and is a discretionary trust. The broad financial structure of the buy-out has some significance for the structure of the classes of beneficiaries. The buy-out was funded by a substantial loan and some subordinated debt. At the time of the buy-out a bank held 45% of the shares (the A shares) in the Holding Company, the Trustee held 40% of the shares (the B shares) and the executive directors held 15% (the C shares). The subordinated debt was to be repaid out of the profits of the Holding Company and, until the subordinated debt was repaid, the B and C shareholders were not entitled to receive dividends or any other payments. The subordinated debt was paid off in 2011 at which point the A shares were converted into deferred shares with no economic value or rights of participation. This left the Trustee and Executive Directors with their respective shareholdings, namely (rounded) 73% and 27%.
Since 2011 the beneficiaries of the EBT have received regular payments based on the distributable profits of the Holding Company.
The objects of the EBT, as they were amended in 2016, and so far as material, are:
“4.1 The object of the Trust is to encourage or facilitate the holding of Shares by Beneficiaries or for their benefit and otherwise to hold the trust Property on trust for the benefit of the Beneficiaries in accordance with the terms of the Trust.”
Under clause 5, the Trustee is given an absolute discretion to achieve the objects of the EBT by applying capital or income from the EBT's assets to or for the benefit of the beneficiaries “… after consulting the Advisory Committee … but having regard to the Guidelines for Benefits.” The clause goes on to provide examples of what the Trustee may do which include:
“5.6 to bind itself to provide particular benefits in the future …:
5.7 to agree or adopt rules setting out the way in which it will exercise its powers;
5.8 to establish schemes for providing benefits;”.
An Advisory Committee may be set up under clause 11 of the EBT and the Guidelines for Benefits that are referred to in clause 5 are set out in the schedule. It is unnecessary to set out either provision.
Clause 7 contains a material restriction on the powers of the Trustee:
“At any time after all the A Ordinary Shares have converted to deferred shares, the Trustee will not transfer or otherwise dispose of its beneficial interest in any Shares its (sic) holds from time to time if such transfer or other disposal would result in the Trustee ceasing to have control (as defined in section 840 of the Income and Corporation Taxes Act 1988) of the [Holding Company] …”.
Clause 21 gives the trustee power to change all or any part of the EBT but, importantly, it prohibits any change being made to clause 7 (amongst other clauses).
Clause 19 provides that any other group company could agree to become the “Principal Company” for the purposes of the EBT.
The Trustees are entitled to have regard to the Guidelines for Benefits at Schedule 1 to the EBT and the views of the Advisory Committee when considering how to exercise their discretion concerning distributions. An Advisory Committee was set up in 2003 and was consulted by the Trustee. As a result, the Trustee decided there should be two categories of employee, Pot A and Pot B. At that time the subordinated loan was still in place and therefore there was no entitlement to make distributions. The view adopted in 2003 was therefore prospective, looking forward to the date when the class A shares became deferred shares. In the event this occurred in December 2011. At that point the Trustee reconstituted the Advisory Committee and consulted it in relation to the principles of distribution. The three classes of beneficiary, as defined earlier in this judgment was the product of that consultation and the Booklet explaining the principles of distribution to employees was updated.
The rationale behind the approach approved by the Trustee is clear. Up to the point the subordinated debt was paid off, employees in post during that period had contributed to the success of the business and thus assisted the debt to be cleared. If they had worked for any period between 1 January 2002 and 1 December 2011 they would benefit, even though they had retired during that period. The period between the buy-out and repayment of the subordinated debt was 10 years. Thus, to take an example, a payment of benefit in 2014 for a Pot A Beneficiary was paid as a proportion of the employee's salary in 2004, suitably adjusted for inflation. However, benefit is only paid for the actual period of employment and in the example given an employee who retired in 2005 would not receive any benefit after 2015.
The beneficiaries who benefit from Pot B are the current employees. For reasons that are obvious, current employees benefit to a greater degree than those who have retired and the longer serving employees benefit the most. The longer serving current employees benefit from both Pot A and Pot B (they are the Joint Pot Beneficiaries). In the case of the longer serving employees, and in the case of retirees, the calculation relating to Pot A, as shown in the Booklet, relates back to the salary enjoyed 10...
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