The Hut Group Ltd v Oliver Nobahar-Cookson and Another
| Jurisdiction | England & Wales |
| Judge | The Hon Mr Justice Blair |
| Judgment Date | 20 November 2014 |
| Neutral Citation | [2014] EWHC 3842 (QB) |
| Docket Number | Case No: 2012 FOLIO 1356 |
| Court | Queen's Bench Division |
| Date | 20 November 2014 |
[2014] EWHC 3842 (QB)
The Hon Mr Justice Blair
Case No: 2012 FOLIO 1356
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Philip Edey QC, Andrew Fulton, Sarah Tresman (instructed by Quinn Emanuel Urquhart & Sullivan UK LLP) for the Claimant
John Odgers QC, George McPherson (instructed by DWF LLP) for the Defendants
Hearing dates: 8 th, 9 th, 13 th, 15 th, 16 th, 17 th, 20 th, 21 st, 22 nd, 23 rd,, 24 th, 30th and 31 st October 2014
This is a claim by The Hut Group Ltd ("THG"), a company based in Northwich in northern England with an online retail business. The claim is against Mr Oliver Nobahar-Cookson ("Mr Cookson"), a businessman also based in northern England, and the Trustee, Barclays Private Bank & Trust Limited ("the Trustee") of Mr Cookson's family trust (Oliver's Sebastian led Trust 2011, which is a Jersey trust ("the Trust"). The dispute arises out of the sale of Mr Cookson's business to THG in 2011 pursuant to a Share Purchase Agreement dated 31 May 2011 ("the SPA").
His business was an online sports nutrition business known as "MyProtein", which was the trading name of a company owned by the defendants called Cend ("Cend"). As part of the deal, the defendants transferred their shares in Cend Ltd to THG, and THG transferred shares in the combined company to the Trust in addition to the cash consideration which was split between the defendants.
Each party's complaint is as to the value of the shares transferred to them. As at the end of the trial, the parties' claims and counterclaims are as follows:
(1) THG claims £8,567,085 as damages for breach of warranty regarding Cend's Management Accounts for the period 30 September 2010 to 30 March 2011.
(2) The Trustee claims:
a. £12.5m as damages for breach of warranty regarding THG's Accounts and Management Accounts in respect of that part of the consideration for the sale which consisted of shares in THG: liability is admitted by THG, and the issue goes to quantum;
b. Damages for deceit in the sum of £13.5m; in closing, this claim was limited to two allegedly deceitful representations as to THG's EBITDA and the state of its audit.
In summary, THG says that by reason of adjustments required to Cend's Management Accounts, the defendants are in breach of the warranty as to the Management Accounts which they gave in the SPA. Apart from accountancy and factual issues as to whether such adjustments were required, the defendants say that the contractual time-bar/notification provisions in the SPA rule out the claim.
In summary, the Trustee says that THG was in breach of the warranties it gave in the SPA as regards the shares the Trustee was receiving in THG as part of the price. The breach is admitted by THG and resulted from an accounting fraud within the company. THG says that the Trustee's loss is only £2.2m, and contends that the fraud is not to be attributed to the company with the result that a contractual cap on damages of £7.24m applies. As to the deceit claim, among other defences, THG denies that any fraudulent representations to the Trustee were made and/or relied on.
Though reduced during the course of the trial, a large number of disputed points of fact reside within these parameters.
The proceedings
The proceedings began on 17 October 2012, the trial taking place over four weeks in October 2014. The claimant's factual witnesses were Mr Matthew Moulding, the Chief Executive Officer of THG, Mr Steven Whitehead, the Group Commercial Director of THG, Mr Darren Rajanah, currently THG's Chief Commercial Director and formerly its Finance Director, and Mr James Pochin, the Group Legal Director of THG. So far as necessary I will comment on the witnesses below. However, allegations of dishonesty are made by the defendants against Mr Darren Rajanah, which I will have to decide.
The defendants factual witnesses were Mr Cookson, the founder of the MyProtein business carried on by Cend, and along with the Trustee, the owner of the business until the sale to THG in 2011, Mr Andrew Irving, Vice President of Barclays Private Bank & Trust (Isle of Man) Ltd, which acted as administrator of the Trustee, and Mr Leslie Cunliffe, Director of Barclays Private Bank & Trust (Cayman) Limited who was a director of the Trust at the time of the SPA. The defendants also cross-examined Ms Louise Wade, formerly employed as a management accountant by Cend and later THG on the contents of a statement attributed to her by one of THG's witnesses (Ms Wade gave evidence by video link). Again, so far as necessary I will comment on the witnesses below.
Expert accountancy and valuation evidence was given by Mr Nick Whitaker of BDO LLP for THG, and by Mr Robert Parry, of Baker Tilly Restructuring and Recovery LLP, for the defendants. Both are well qualified and experienced. However, I accept the defendants' submission that the credibility of Mr Whitaker's evidence was undermined by (1) a report tendered during the factual evidence at trial (his second supplemental report) in which he changed the basis on which he opined that a reduced multiple was applicable in the case of THG's damages claim (as explained below a reduction in the multiple has the effect of greatly increasing the claim), and (2) evidence given after the end of his cross-examination by which he adjusted the discount he considers appropriate in respect of the Trustee's damages claim. Both the multiple and the discount are central to the valuations.
However I should also state that Mr Whitaker and Mr Parry cooperated well with each other at trial to define the quantum issues without the necessity of a further hearing which might otherwise have been required. The court expresses its appreciation to both of them for their work in that regard.
(1) The facts
The parties
THG is an online retail business with a proprietary technology platform which powers its own sites and those of third parties. It was set up in 2003 by Mr Moulding, its CEO since 2008 when he joined THG full time. Since it started trading in 2004, the company has grown organically and also grown significantly by way of acquisitions. To give an idea of its current size, it had revenue for 2013 of around £185m.
From about 2009 Mr Moulding, then THG's majority shareholder, began to prepare the company for a future listing by way of Initial Public Offering (IPO) on the main market of the London Stock Exchange. As part of that process, PwC was appointed as THG's auditors at the start of 2009, and the board was strengthened (according to the agreed chronology, PwC are no longer THG's auditors, having resigned on 8 February 2013). A new Chief Financial Officer, Mr Paul Meehan, began work towards the end of 2010 (he started to be involved at THG part time from the summer).
Cend trading as "MyProtein" was founded by Mr Cookson, and like THG, his company started trading in 2004. Its annual online sales of whey-based sports nutrition products grew to £16m by September 2010, rising to about £27m by September 2011, the year of the sale of the company. From 2008, Mr Cookson started looking to sell Cend, which it is common ground was a successful business. With that in mind, KPMG became the company's auditors and audited its accounts to year end 30 September 2010.
On 4 December 2009, the Jersey Trust was set up by Mr Cookson for tax reasons. This led to a split in the shareholding of Cend:
(1) 100,000 A Shares were held by Mr Cookson personally.
(2) 100,000 B Shares in Cend (which, unlike the A Shares, had no voting rights) were held by the Trustee (the second defendant) in the Trust.
The offer for Cend made by THG
In 2010, Mr Cookson appointed financial advisers called Altium Capital Ltd ("Altium") to assist in preparing to sell the business and then manage the sale process of Cend. In fact, Altium was also (or became) one of THG's advisers in respect of the anticipated IPO. Mr Whitehead, who was the THG officer responsible for mergers and acquisitions, had previously worked for Altium.
On 4 February 2011, Altium circulated its Information Memorandum on the company to potential buyers. A number of non-binding offers followed. The private equity bidders eventually withdrew, but Mr Cookson says that Pepsico remained an interested party.
As part of its strategy of acquiring existing online businesses, THG was looking to enter the sports nutrition sector. In fact, by the time that Cend came to market, a target had already been identified. As at March 2011, THG had already raised nearly £21m from investors, part of which was earmarked for the acquisition. However, on learning that Mr Cookson was actively looking for a buyer for Cend, THG became interested in Cend as an alternative acquisition. Mr Moulding approached Mr Cookson directly, and there were then further discussions also involving Altium.
Following a meeting on 7 April 2011, THG made an initial, non-binding offer for Cend in an email sent on 8 April 2011 from Mr Whitehead to Altium together with an information pack attached. The email was duly forwarded to Mr Cookson, who was one of three people to whom Mr Whitehead addressed his message ("Oliver [Cookson], Simon, and Andy", the latter two being Altium people).
The offer was based on an enterprise value for Cend of £58m, made up of cash of £30m, plus shares representing 12% of the combined company with an indicative value of £28m (based on a combined company value of £233m). THG emphasises that Mr Whitehead said in the email that Mr Cookson would "need to undertake...
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