Miss Barbara Dohmann QC/Mr David Chivers (Instructed by Messrs
Nabarro Nathanson) appeared on behalf of the Claimants
Mr Leslie Kosmin QC/Miss C Roberts (Instructed by Messrs Berwin Leighton) appeared
on behalf of the 1,2, & 4-8 Defendants
Mr David Richards QC/Mr Matthew Collings (Instructed by Lovells) appeared for 3rd Defendant (Mr Doughty)
Hearing: Tuesday 16.01. - Wednesday 7.02 2001
Signed:- ..................................................... The Honourable Mr Justice Hart
Date:- .....................................................
- This is a petition under Section 459 Companies Act 1985 in which the claimants allege that the affairs of the first defendant Nottingham Forest plc ("the Company") have been conducted in a manner unfairly prejudicial to them.
- The Company was until the events complained of in the petition the owner of the whole of the issued share capital in the second defendant Nottingham Forest Football Club Limited ("the Club"), which has since 1982 operated the football team known as Nottingham Forest. Prior to 1982 the team had been operated by an unincorporated members' club founded in 1865.
- The Company had itself been established in early 1997 as the vehicle whereby a consortium of investors (the Bridgford Consortium) successfully bid to acquire the whole issued share capital of the Club for some £16m. The members of the Bridgford Consortium consisted of the first claimant (as trustee of a trust of which Mr Irving Scholar was the principal beneficiary), the third defendant Philip Soar ("Mr Soar"), the second claimant (as trustee of a pension scheme for the principal benefit of Julian Ellis Markham ("Mr Markham"), the eighth defendant Nicholas Mark Leslau ("Mr Leslau"), Nigel Wray ("Mr Wray"), Singer & Friedlander Group plc ("S&F") and Singer & Friedlander Investment Funds plc ("the S&F Football Fund").
- Following that acquisition the directors of the Company were Mr Wray, as non-executive director and Chairman, Mr Soar, as chief executive officer and deputy Chairman, Mr Reid as financial director and Messrs Markham, Scholar and Leslau as non-executive directors. Mr Scholar also filled the role of "Director of Football", supervising the Club's manager and dealing with player contracts, the acquisition of new players and related activities.
- On 15 August 1997 the board of the Company (Mr Markham dissenting) resolved that the Company should be floated on AIM, and an offer for subscription of up to 5 million ordinary shares at 70p thereafter proceeded. Applications were received for some 3.7m shares and a sum of approximately £2m net of expenses was raised. The flotation did not, however, attract any mainstream institutional support. The Company's shares have since that date continued to be listed on AIM. One consequence of the flotation, significant for these proceedings, is that the provisions of a shareholders' agreement, dated 23 February 1997 and entered into between the members of the Bridgford Consortium, fell away.
- Relations between individuals on the board of the Company proved to be uneasy from a relatively early stage and they were to become worse. Mr Markham voiced his fears to Mr Wray in November 1997 that they had a 'potential tinder box'. Some of the problems stemmed from clashes of personality. Others probably owed to the imprecisely defined operational division of responsibilities between Mr Scholar as Director of Football, Mr Soar as Chief Executive Officer, and Mr David Bassett the then manager of the team. The problems encountered have also be to seen against the background of two other phenomena. The first was the quite rapid change in the investment climate so far as football clubs were concerned. I shall have to return to this. Suffice to say at this stage that the basis on which the Bridgford Consortium had invested had been that economic profit could in the medium term be earned by their investment. By 1999 perceptions had significantly altered. The second was the performance of the Club on the pitch.
- Following the creation of the Premier League in 1992, the Club played in the Premier League but were relegated to the first division at the end of the 1992-3 season. They won promotion back at the end of the next season but were then relegated once again in 1996-7. In 1997-8 they won promotion once more. By the time with which I am concerned (late 1998 onwards) they were looking likely to be relegated once again, having started the 1998-9 season with a disastrous string of losses. By this time morale was very low both on the board of the Company, at team level, and among the fans. At the team level, the Club had suffered adverse publicity when one of its key players (Pierre Van Hooijdonk) had refused to play in protest at the transfer by the Club of his fellow striker Kevin Campbell. Mr Scholar, who had remonstrated with the board in May 1998 that its parsimony in buying new players would result in relegation, felt vindicated but took no pleasure in that. Following the disastrous opening to the season the decision had been taken to terminate Mr Bassett's services and, in early January 1999, to employ instead the services of Mr Ron Atkinson. His employment was, however, only for the remainder of the 1998-9 season, and it was unclear whether he would be prepared to serve thereafter. In the event it became clear that he was not so prepared.
- In the meantime the troubles at the Club led to mounting disaffection with the board of the Company on the part of the fans. The board was seen by them as a collection of out-of-town investors who had invested for narrow financial motives and who did not have the proper degree of enthusiasm for the Club. Mr Scholar was known to be a passionate supporter of Tottenham Hotspur (indeed had at one time been Chairman of Tottenham Hotspur plc). Mr Markham was also a Spurs fan. Neither Mr Wray nor Mr Leslau were natural fans of the game of football. None of the foregoing had local Nottingham connections apart from their shareholdings in the Company. Mr Soar (who had and who wrote a history of the Club which was published in the Summer of 1998) seems to have shared in the odium suffered by the other members of the board. It was, in Mr Wray's words to me, "a pretty miserable experience".
- The "yo-yo" movement of the Club between the Premier League and the First Division posed a difficult question of financial strategy for the Company. There are glittering prizes to be won in terms of revenue from membership of the Premier League. This is the result, principally, of the share of television rights enjoyed by a Premier League club. Relegation does not cause an immediate loss of all income from that source since there is a system of 'parachute' payments whereby for the first two seasons after relegation a reduced income stream is still available (at half the rate previously enjoyed). Thereafter, however, that source dries up. The expert evidence agreed that there was a "massive financial divide" or "yawning chasm" between Premier and First Division revenues. The corollary is a similar divide in the amount that needs to be spent on acquiring and remunerating players appropriate for the task. In simple terms one cannot afford a Premier League squad on First Division revenues. As the claimants' expert Mr McDonagh, quoting from Deloitte & Touche Annual Review of Football Finance (1999), put it:
"parachute payments and the goodwill effect on attendances may initially mitigate against drastic and immediate falls in income .. [but] relegated clubs face a tough strategic decision [on the gamble whether] to go for broke or settle for a long-term Division One spot."
- All these pressures were actually or potentially building up in the autumn of 1998. Mr Wray had for some time been looking for a way to retire as Chairman. He felt ill-fitted for the role, and had suggested in the previous autumn that he resign in favour of Mr Soar, a suggestion which had been opposed by Mr Scholar and Mr Markham. By the end of October 1998 the solution to his dilemma appeared to have presented itself in the person of the fourth defendant Eric William Barnes (Mr Barnes). Mr Barnes was a local man, a long term Club supporter, with a long and distinguished career in business mostly spent in the employment of Great Universal Stores plc of which he was by then deputy chairman, being also the Chairman of the GUS subsidiary Experian, one of the largest employers in Nottingham. He appeared willing to join the board, and Mr Wray advocated this appointment to the other members of the board. With the exception of Mr Markham, they welcomed this appointment, which was in due course formally made on 8 January 1999.
- Mr Markham's objection to Mr Barnes' appointment was based not on any personal objection to Mr Barnes but on his belief, as he expressed it in a memorandum to Mr Wray dated 11 December 1998, that:
"the Board structures must be resolved before a decision is taken to increase members or otherwise change the constitution."
This was an issue which he felt had been incompetently dealt with by Mr Soar as chief executive. It was plain from all the evidence I heard that Mr Markham had by this time formed an intense dislike of, and distrust for, Mr Soar, which he made no effort at board meetings to conceal. It was also clear that Mr Scholar by this time shared some of Mr Markham's misgivings about Mr Soar. Mr Wray, as chairman, also found Mr Markham to be a difficult colleague on the board, much given to poring over the minutiae of board minutes and concerned to be involved in detail with operational matters. The final straw, so far as Mr Wray was concerned, was learning that Mr Markham had approached Mr Barnes and given him to understand that he should not count on his appointment. Mr Wray was so irritated by this that he decided he could no longer serve on the same board as Mr Markham. He asked Mr Soar to take legal advice to see what could be done. Mr Soar reported back to him on the point on 3 January 1999 in the course of a briefing note for a board meeting on 8 January. In short the note recorded that Mr Markham could be removed if all the other directors requested it, but that it could be assumed that Mr Scholar would not support this. Possible alternatives would be to ask Mr Markham to agree to be represented on the board by his son Paul (who was his alternate on the board and who was also on the board of the Club), or to propose Mr Markham's removal to an EGM.
- Someone in Mr Wray's office appears to have circulated this fax to all other members of the board. At all events both Mr Markham and Mr Scholar received a copy of it. They conferred and agreed not to reveal that they knew of it. Mr Markham was so alarmed by its contents, and what he perceived as the plot which was developing against him, that he resolved to, and did, make a secret tape-recording of the Board meeting. Thereafter, he took his concealed tape recorder to all board meetings and used it both then, and on other occasions in discussion with members of what he perceived to be the enemy camp. Mr Scholar was not privy to this activity. The resulting voluminous transcripts have added to the paper available to me at the trial, but little illumination to the central matters which I have to consider.
- Mr Wray's eventual solution to the problem of his own unwillingness to serve on the same board as Mr Markham was his own decision to resign both as Chairman and as director. He announced this to a board meeting of 9 April 1999. At the same meeting he informed the other members of the board that he had sold 2,515,000 shares in the Company to each of Mr Soar and Mr Barnes, confirming that he was retaining 4,500,000 shares (a 9.1% stake) as a long term investment. Mr Markham, who had earlier expressed an interest in relieving Mr Wray of some of his shares on terms which might enable Mr Wray to share in a profit on resale, asked Mr Wray whether he retained any interest in the shares. Mr Wray replied that he did not. This was not true. I return to this episode ("the Wray share sale") below.
- Mr Wray's resignation from the board resulted in the unanimous election of Mr Barnes as Chairman. The board also discussed and approved a proposal to add further to their number by the appointment of another distinguished local businessman, the sixth defendant Sir David White. Just shy of 70 years old he was of the same generation as Mr Barnes, the two of them being appreciably older than the other non-executives and Mr Soar. He had had a successful career which had culminated in board level appointments and chairmanships of a number of large national companies. He also had unimpeachable local connections, having been a director of inter alia, the Mansfield Brewery, involved with the Nottingham Health Authority, the Nottingham Development Enterprise, on the board of Governors of Nottingham Trent University, a trustee of Djanogly City Technology College and a Governor of Nottingham High School. He had been a Nottingham Forest fan since childhood and had been one of the original shareholders in the Club when it was first incorporated. He joined the board with effect from 19 April 1999, attending his first board meeting on 13 May.
- As at 13 May 1999 the board thus consisted of Mr Barnes, Sir David White, Mr Soar, Mr Markham, Mr Scholar, Mr Leslau, and the seventh defendant Mr Pelling. Mr Pelling had been employed as acting finance director since October 1998 and had joined the board on 14 December 1998 on his accepting the post of full time finance director from that date.
- A major item of business discussed by the Board on 13 May 1999 was the consideration of an investment proposal which had been made by the third defendant Mr Doughty (Mr Doughty). Mr Doughty was a relatively young man who had made a great deal of money through Doughty Hanson & Co Ltd., a company co-founded by him, a leading private equity fund manager in the UK, Europe and the USA. He was very highly thought of by HSBC, the Company's merchant bankers and advisers. He too was a long term supporter of the Club. He had also been involved in an unsuccessful consortium bid to acquire the Club in late 1996/early 1997, the then shareholders having preferred the Bridgford Consortium's bid to that of his own.
THE DOUGHTY PROPOSALS
- As put before the Board on 13 May 1999 Mr Doughty's proposal was, in summary, that he would invest £5m at 25p per share with an option to invest up to a further £7m at the same price prior to the end of the 2001/2002 season. Additional features of the proposal were that it was conditional on, inter alia, the Club being able to secure the services of Martin O'Neill as manager with John Robinson as his assistant, that Mr Scholar should resign as director of football and from the boards of the Company and the Club, and that Mr Soar would resign as chief executive within 12 months. It was clear that the proposal assumed that the price for the second tranche of the investment (which was to be at Mr Doughty's option) would be that Mr Doughty would receive majority voting rights in the Company. The board authorised HSBC to continue negotiations with Mr Doughty.
- A further board meeting was held on 17 May 1999 at Mr Markham's offices. Mr Doughty was invited to join the meeting in order to explain and expand upon his proposals. After he had left, the matter was debated and it was resolved by a majority of 5-2 (Mr Scholar and Mr Markham dissenting) that Mr Barnes and HSBC should continue to negotiate with Mr Doughty, and that Mr Barnes should be authorised to approach Mr O'Neill's current employer (Leicester City) with a view to talking to Mr O'Neill.
- By 24 May Mr Doughty, following further negotiations with HSBC, was in a position to refine his proposal and did so by a draft letter of that date. The proposal was now that the initial tranche of investment would be £6m and the second (optional) tranche also £6m. The other conditions remained. The proposals were discussed at a board meeting held on 26 May 1999. By this stage HSBC had identified the technical difficulties which lay in the way of the board's ability to accept and implement the proposal. The initial thinking had been that the injection of Mr Doughty's cash should take effect by way of £500,000 cash subscription (which could be done under existing powers) with the balance following through an underwriting by Mr Doughty of a rights issue. By 21 May 1999 Mr Wallis of HSBC had calculated that, in order to guarantee Mr Doughty 50.1% control following the second tranche, it would be necessary to secure the agreement of virtually every shareholder "other than the fans who subscribed for the public offer" not to take up their rights, and that this did not appear to be achievable. The alternative mechanism would be to proceed by way of a special resolution under section 95(1) Companies Act 1985 (as amended) authorising a subscription by Mr Doughty for the necessary numbers of new shares for cash. This route would, as a practical matter, require all the director shareholders to commit themselves in advance to voting in favour of such a special resolution. In particular it was obvious that such a special resolution would not be passed if Mr Scholar and Mr Markham were opposed to the proposal: between them their respective trustees (i.e. the claimants) held very nearly 25% of the issued share capital.
- These difficulties, and the proposals generally, were discussed further at a board meeting held on 26 May 1999. Mr Markham expressed reservations about the wisdom of either the board or himself making any commitment in relation to the proposals while they were still in the form simply of a draft letter. The upshot was, however, that the board resolved, on this occasion unanimously, to continue the negotiations with Mr Doughty on the basis of his direct subscription of £6m in cash with an option to subscribe a further £6m to enable him to acquire a controlling interest, and authorised HSBC to continue the negotiations with a view to obtaining a formal letter of offer from Mr Doughty.
- A further approach to Mr Doughty produced a revised letter of offer dated 28 May. This made it clear that it was essential to Mr Doughty that sufficient major shareholders would undertake to vote in favour of the required special resolutions so that shareholder approval was guaranteed in advance. The other conditions in the previous offers remained, save that there was no longer a requirement that Mr Scholar resign as a director of the Company. It was expected that the revised letter of offer would be discussed by the board on Wednesday 2 June 1999 following the long bank holiday weekend.
- That was not, however, to be. By 29 May Mr Barnes had learned that Mr O'Neill had made a final decision not to join the Club as manager. Mr Doughty's initial reaction on hearing this news was that he did not wish to proceed with the proposal. The Board meeting scheduled for 2 June was therefore cancelled. Mr Barnes, however, succeeded in persuading Mr Doughty to agree to re-visit the issue if another suitable candidate for manager could be found.
- Mr Barnes' hopes of reviving Mr Doughty's proposals received, however, a severe setback when he informed Mr Scholar on 3 June of his proposed course of action. Mr Scholar told him that his trustees (i.e. the first claimant) would not support the Doughty proposal should it go to a vote of shareholders. Mr Barnes also claims to have been told by Mr Scholar (although Mr Scholar denies it) that Mr Markham's trustees would similarly not support it. Although it is unnecessary for me to resolve the conflict of evidence I am satisfied that something was said by Mr Scholar to give Mr Barnes the impression that Mr Markham and his trustees would not support the new proposals. Whatever its source, the impression was in fact accurate. What is quite clear is that Mr Barnes thereafter proceeded on the basis that the proposals would not receive the support of either Mr Scholar or Mr Markham, and that it was therefore clear that, to the extent to which the proposals depended on the passing of a special resolution, they were not viable.
- The need to appoint a new manager was by now becoming pressing. Mr Barnes was not, however, prepared to proceed with the appointment of a new manager while the possibility of obtaining an investment from Mr Doughty remained. He so informed the other members of the board. In the meantime HSBC came up with an idea which would allow the Doughty proposals to proceed without the need for a special resolution of the Company. In concept the idea was, as Miss Dohmann and Mr Chivers described it in their opening skeleton argument, "simplicity itself". The Company would procure that the Club issue shares to Mr Doughty in return for the two tranches of cash, producing the end result of the Company being left as a holding company with a 49% minority shareholding in the Club, Mr Doughty obtaining a controlling 51% shareholding in the Club subject to such constraints as might be negotiated by way of a shareholders' agreement. Since the Company would not be selling or acquiring assets, or issuing shares, it was not envisaged that any shareholders' resolution of the Company would be required. The whole thing could be implemented by the board of the Company. By 8 June Mr Wallis of HSBC had spoken to the AIM panel on a "no names basis" and had been informed that shareholder approval would not be required by the Stock Exchange if this route were adopted.
- Negotiations continued with Mr Doughty throughout June on the basis that this was the route which could and would be adopted. Substantial progress was made in the negotiation of the necessary shareholders' agreement. Both Mr Scholar and Mr Markham had the sense that they were being kept in the dark. It is certainly the case that they were not at this stage kept informed of the development in HSBC's thinking or of the steps being taken by Mr Barnes and Mr Doughty to recruit a new manager. On 22 June, without prior warning, Mr Scholar resigned as a director. A week earlier he had written to Mr Barnes (after conferring with Mr Markham) complaining of lack of information as to Mr Barnes' then course of action, and asserting his own view that the priority was to proceed with the appointment of a manager. Also on 22 June Mr Markham wrote to Mr Barnes making a complaint in respect of lack of information, and also making characteristically plaintive noises about the lack of attention being given to matters of personal concern to himself (including his desire that Mr Soar should be made to answer for his conduct earlier in the year in connection with the fax dated 3 January 1999). Before he had received a reply to this letter, Mr Markham also resigned as a director, doing so by letter dated 29 June 1999.
- By this time negotiations with Mr Doughty on the documentation of his proposed investment were well advanced. On 30 June HSBC obtained the confirmation of the AIM Panel, on a named basis, that the transaction did not require shareholder approval. On 23 June, however, the Company's solicitors, Berwin Leighton, had obtained leading Counsel's (Mr Kosmin QC) opinion on whether, as a matter of the general principles of company law, the proposed subscription agreement constituted such a material change in the nature of the Company's investment in the Club that it should be subject to a prior approval by an ordinary resolution at an EGM. His advice was to the effect that it would be safer to obtain such approval. That advice was re-iterated in a conference call on 1 July. One feature of the documentation as it then stood was a side-letter that was proposed recording the intention of the parties to "flip up" the investment into the Company. The terms of the draft "flip up" letter were as follows:
"This is to record that it is our common intention that, subject to independent shareholder approval and all applicable regulatory consents, and provided that by doing so I would not need to make a general offer for the share capital of Nottingham Forest PLC ("PLC") I will exchange my shares in Limited for shares in PLC at the earliest possible opportunity, so that shares in PLC confer on me the equivalent percentage of the voting rights as I then hold in Limited. As part of that transaction, the shareholders agreement recently agreed that between us in relation to Limited should lapse, although I do envisage formal arrangements to be made for my consultation on issues relating to the buying and selling of players' contracts, and perhaps more formal rights in connection with the replacement of a football manager.
Please sign this letter to confirm that this is your understanding. This letter is not intended to create legally binding agreements."
- In the event no "flip-up" letter was ever signed. One of the issues in the case is whether, notwithstanding the lack of documentation, an "understanding" nevertheless existed between the Company and Mr Doughty along the lines of the flip-up letter; and, if so, whether the circular issued to shareholders at the EGM was misleading in relation to this.
- As a result of Mr Kosmin QC's advice the board decided that the Doughty proposals should be put to an EGM of the Company. By this time the proposals were, in essence, that Mr Doughty would purchase approximately 40% of the Club for his initial payment of £6m (i.e. at 20.2p per share) with an option to purchase a further 15% for £6m. A board meeting held on 1 July 1999 formally resolved to finalise the negotiations with a view to proceeding thereafter to seek shareholder approval at an EGM. The same board meeting also resolved on the appointment of a new manager, David Platt. His services had been secured as a result of the joint efforts of Mr Barnes and Mr Doughty.
- The next board meeting of the Company took place on 12 July 1999 and had before it a draft Subscription Agreement (governing the relations between Mr Doughty and the Company following the former's proposed investment in the Club, a draft assets transfer agreement between the Company and the Club (providing for the transfer by the Company to the Club of assets then standing in the Company's name) and a draft of the circular to shareholders. The documentation was approved and a committee of the board authorised to implement the same. The minutes contain the following passage:
"The Chairman pointed out, in particular, that the exercise of the Option by the Investor would result in a change of control of the Subsidiary and the Company holding a minority interest on behalf of the public shareholders. The Chairman indicated that it was for the Board to decide whether the benefit of the substantial additional equity investment in the Subsidiary together with the various protections contained in the Subscription Agreement outweighed the fact that the Company would hold a minority interest in the Club if the Investor exercised the Option. The Chairman mentioned that an earlier proposal had been made for a similar subscription for an equivalent holding of ordinary shares in the Company; however, such alternative proposal would be subject to material conditions including a requirement for a special, rather than ordinary, resolution of the shareholders in general meeting and the current proposal had the benefit of earlier implementation to enable funding to be received prior to the start of the new football season."
A further piece of business had to be done that day if the board were to be sure that the proposals would be implemented at the level of the Club. This was the replacement of the existing board of the Club so far as it did not already consist of main board members by Mr Pelling, Mr Leslau and Sir David White. This was duly resolved upon, the necessary power for that purpose resting with the Company under Article 6.10 of the Articles of Association of the Club.
- Shareholders in the Company were thereafter circularised with the proposals, and the EGM took place on 28 July 1999. Mr Markham, who had himself circularised a number of the shareholders, was permitted to address the meeting twice on behalf of the second claimant. The voting, however, favoured the board, whose proposals were approved by 57% (1,700 shareholders) to 43% (51 shareholders). Sophisticated investors were entitled to be in two minds as to the best course to take: S&F voted its own shareholding (9.1%) against the proposal, but the S&F Football Fund (4.6%) voted in favour.
- Following the meeting the various agreements implementing the transaction were executed and 29,754,495 shares in the Club were allotted to Mr Doughty pursuant to his subscription of £6m.
- The petition was presented on 28 October 1999. The primary relief sought consisted of declarations that the resolution passed at the EGM was a nullity, and that the Subscription Agreement should be set aside, alternatively for an order that it be set on terms. The claimants maintained this position throughout the trial until 6 February 2001 when, during the course of Mr Richards' closing speech, Miss Dohmann indicated that this was no longer to be pursued. I have therefore only to consider the proposition that the individual defendants should be ordered to buy out the claimants' shareholdings.
THE GROUNDS FOR RELIEF
- Against this background, the claimants' contentions may be summarised as follows. First, it was contended that in orchestrating and implementing the transaction which the EGM approved the board acted for an ulterior purpose. That ulterior purpose was identified by Miss Dohmann in her opening submissions as:
"to enable Mr Doughty to acquire control of the assets of the Company (or control of the Company itself) while by-passing the legal and quasi-legal protection given to shareholders by the City Code, the Companies Articles of Association and the Companies Act 1985."
Secondly, it was submitted that the ordinary resolution passed at the EGM did not have the effect of curing this abuse of power by the board. The vice of the transaction was that the directors had adopted a mechanism which avoided the need for a special resolution. That being the vice it was obviously wrong to treat it as a curable by an ordinary resolution.
Thirdly, it was submitted that the ordinary resolution was in any event flawed by shortcomings in the circular to shareholders. The circular was said to be tricky in four important respects namely:
(1) In giving undue emphasis to Mr Doughty as the only possible investor in the Club, and failing to inform shareholders of another possible source of funds, namely a Mr Scardino;
(2) In failing to explain to shareholders the true rationale of the proposal, namely the wish to avoid putting a special resolution to shareholders;
(3) In failing to disclose the true contemplation of the board and Mr Doughty, namely that Mr Doughty would in due course become a shareholder in the Company instead of the club; and
(4) In concealing from shareholders the true nature of the interests of Mr Barnes and Mr Soar in the shares which they were respectively proposing to vote in favour of the transaction.
The circular was also alleged to be deficient in various respects relating to the amount of financial information and analysis provided to shareholders.
The effect of the transaction was alleged to have been substantially prejudicial to the claimants, reducing their shares of a worth of some 20-22p prior to the transaction to 3.5p per share afterwards. Since the effect of the transaction (if the option was exercised) was to cause the Company to lose control of the Club, the transaction was not in any objective sense in the best interests of the Company even if it might have been in the best interests of the Club.
- It was, finally, contended that even if the board were found to have acted properly in embarking on the transaction, the trickiness of the circular resulted in unfair prejudice to the claimants. This proposition depended on the fact that Mr Doughty's obligations to subscribe were conditional on the passing of the ordinary resolution by the EGM. Had that not happened, so the argument went, the prejudicial transaction would not have taken place.
- These submissions require me to re-visit in more detail certain aspects of the factual background, particularly in relation to Mr Scardino's alternative proposals, into the circumstances of the Wray share sale, and into the existence and significance of any continuing understanding as to "flip-up". The factual territory explored at trial went well beyond these matters, covering such matters as the manner in which Mr Barnes conducted the negotiations with Mr Doughty, the extent to which as Chairman he kept his board informed of their progress, whether Mr Barnes had complied with League etiquette in his approaches to Mr O'Neill, the degree to which members of the board discussed matters behind the back of Mr Markham, whether Mr Soar deserved the degree of personal dislike felt for him by Mr Markham, whether Mr Doughty had been responsible for a campaign of vilification of members of the board mounted by an unofficial Nottingham Forest web-site called "The Eye", the qualities of Mr David Platt as a manager, whether Mr Markham's conduct in secretly tape- recording his colleagues merited Mr Leslau's description of it as 'odious'; and so forth. None of these matters went to the central issues in the case, and it is unnecessary for me to dwell on them.
- One issue of fact which does lie at the centre of the case may be quite shortly disposed of. This relates to the board's motives in proceeding as they did. As to this it seems to me that the following matters were clearly established by the evidence. First, by April 1999 it was clear that the team faced relegation from the Premier League at the end of the season. At its board meeting on 9 April 1999 the board agreed that the aim should be to attempt to return to the Premier League within two years. The perception was that, if that were to be achieved, further funding had to be sought - to recruit a new manager, to maintain the existing squad to the highest standard and to purchase and pay for high quality new players. It was clear that the necessary funding would have to be by an injection of a substantial amount of new equity. It was equally clear that there was no prospect of being able to raise the money from institutional investors. If the strategy was to be pursued, it required the arrival on the scene of someone like Mr Doughty who was prepared to invest a substantial amount of money within a reasonably short time-scale. Mr McDonagh, the expert called by the claimants on valuation, himself accepted that with the board's strategy for an early return to the Premier League there was a compelling financial need for new equity finance. The claimants sought to cast doubt on whether the board ever had determined on that strategy, and on whether the strategy was objectively a wise one. The alternative was to settle for a period of consolidation in the First Division. I am satisfied that the board did, after full discussion, settle on the Premier League strategy and that that was a strategic decision at which a reasonable board could properly arrive. There was some evidence that, in the course of the consultation with Mr Kosmin, Mr Barnes had exaggerated the Company's financial plight, suggesting the possibility of insolvency if the Doughty proposals could not be implemented. I am satisfied, however, that the board's deliberations as a whole were not marred by any such exaggerated view. Secondly, Mr Doughty's position was throughout that he was only prepared to invest sums of the order being requested on two main conditions: first, that the money should go "onto the pitch". He was not interested in buying out existing shareholders. Secondly, his price for investing the full amount was that he should have a controlling interest. For this purpose it was irrelevant (until company law implications came to be considered) whether that controlling interest was at the level of the Company or the Club. The critical issue of principle facing the board was whether the amount which Mr Doughty was prepared to invest, and the terms on which he did so, justified the loss of overall control which the existing shareholders were thereby being asked to cede. That was undoubtedly a difficult decision for the board. It is significant that, while the magic ingredient of Mr O'Neill was still part of the package, all members of the board (including Mr Scholar and Mr Markham) were prepared to contemplate Mr Doughty's acquisition of a controlling interest in the Company as a price worth paying for the receipt of the funds he was prepared to inject: see the result of the board meeting on 26 May (paragraph 20 above). Thirdly, it is to my mind quite clear why the transaction took the form in which it did, namely an investment by Mr Doughty in the Club rather that in the Company. Once it was perceived that Mr Markham and Mr Scholar no longer supported Mr Doughty's proposal, the straightforward route of allotting Mr Doughty shares in the Company for his cash became impossible. The necessary 75% majority for a special resolution under Section 95 Companies Act 1985 disapplying the existing shareholders' pre-emption rights was not realistically obtainable. Another route had to be found.
IMPROPER PURPOSE
- With those findings of fact in mind, I return to the claimants' central submission that the board's adoption and implementation of the proposal represented a use by it of its powers for an improper purpose. I should emphasise that it was not submitted that the board at any stage acted in breach of any of the Company's articles of association. Nor was it suggested that this listed Company was of a type to which the notion of quasi-partnership equitable considerations was applicable. Shareholders in a company such as the present are entitled to proceed on the footing that the constitution of the company is as it appears in the company's public documents, unaffected by any such extraneous equitable considerations and constraints: see Re Blue Arrow plc [1987] BCLC 585 at 590 e-h (per Vinelott J); Re Leeds United Holdings plc [1996] BCLC 545 at 559c (par Rattee J); Re Astec (BSR) plc [1998] 2 BCLC 556 at 588d (per Jonathan Parker J) and Re Tottenham Hotspur plc [1994] 1 BCLC 655 at 659f-bbcd (per Sir Donald Nicholls VC). This was fully accepted by the claimants. The sole ground on which the claimants alleged the board to have acted unfairly was in exercising admitted powers for an allegedly improper purpose.
- Reliance was in this respect naturally placed on the decision of the Privy Council in Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821. That case concerned a battle for the take-over of RW Millar (Holdings) Ltd ("Millars") between the respondent ("Ampol") acting in concert with another ("Bulkships") on the one hand and the appellant ("Howard Smith") on the other. Ampol and Bulkships acquired 55% of Millars and bid $2.27 for the outstanding shares. The Millars' board recommended that that bid be rejected as too low. Howard Smith then made an offer at $2.50. Ampol and Bulkships countered with the observation that they proposed in the future to act jointly in the future operation of Millars and had no intention of selling. It looked therefore as if the outside shareholders had no alternative but to accept the Ampol offer. The Millars' board then hatched and implemented a plan to allot new shares to Howard Smith of sufficient size to convert Ampol and Bulkships into minority shareholders. The Millars' board was advised that the allotment could only be justified if Millars had capital requirements justifying the raising of cash by the allotment to Howard Smith. Millars found that it did have such capital requirements and proceeded with the allotment to Howard Smith accordingly. Ampol and Bulkships sued to have the allotment set aside. At the trial it was found as a fact that the primary purpose of the Millars' board had been to destroy the majority holding of Ampol and Bulkships and not, as the majority directors claimed, to satisfy Millars' need for capital. The ultimate purpose was to keep the Howard Smith offer alive. The trial judge set the allotment aside.
- It was accepted by both sides that the share issue was intra vires the Millars' board. It was also accepted that a valid exercise of the power required that it be made for a proper purpose. It was contended on behalf of Howard Smith that this could be established by showing that the board's motives had not been infected by any self-interest and that it had acted bona fide in what it perceived to be the interests of Millars. Ampol contended that, once it was accepted that the primary purpose of the issue had been other than the raising of capital, invalidity necessarily followed. In delivering the judgment of the Privy Council, Lord Wilberforce rejected both formulations. He said:
"In their Lorships' opinion it is necessary to start with a consideration of the power whose exercise is in question, in this case a power to issue shares. Having ascertained, on a fair view, the nature of this power, and having defined as can best be done in the light of modern conditions the, or some, limits within which it may be exercised, it is then necessary for the court, if a particular exercise of it is challenged, to examine the substantial purpose for which it was exercised, and to reach a conclusion whether that purpose was proper or not. In doing so it will necessarily give credit to the bona fide opinion of the directors, if such is found to exist, and will respect their judgment as to matters of management; having done this, the ultimate conclusion has to be as to the side of a fairly broad line on which the case falls.
"The application of the general equitable principle to the acts of directors managing the affairs of a company cannot be as nice as it is in the case of the trustee exercising a special power of appointment"(Mills v Mills, 60 CLR 150, 185-186, per Dixon J)."
After referring to cases where share issues for purposes other than the raising of capital had been upheld (in particular Marlow's Nominees & Pty Ltd v Woodside (Lakes Entrance) Oil Co [1968] 121 CLR 483 and Teck Corporation Ltd v Millar [1972] 33 DLR (3d) 288) he said this:
"By contrast to the cases of Harlowe and Teck, the present case, on the evidence, does not, on the findings of the trial judge, involve any considerations of management, within the proper sphere of the directors. The purpose found by the judge is simply and solely to dilute the majority voting power held by Ampol and Bulkships so as to enable a then minority of shareholders to sell their shares more advantageously. So far as authority goes, an issue of shares purely for the purpose of creating voting power has repeatedly been condemned: Fraser v Whalley, 2 Hem & M 10; Punt v Symons & Co Ltd [1903] 2 Ch 506; Piercy v S Mills & Co Ltd [1920] 1 Ch 177 ("merely for the purpose of defeating the wishes of the existing majority of shareholders") and Hogg v Cramphorn Ltd [1967] Ch 254. In the leading Australian case of Mills v Mills, 60 CLR 150, it was accepted in the High Court that if the purpose of issuing shares was solely to alter the voting power the issue would be invalid. And, though the reported decisions, naturally enough, are expressed in terms of their own facts, there are clear considerations of principle which support the trend they establish. The constitution of a limited company normally provides for directors, with powers of management, and shareholders, with defined voting powers having power to appoint the directors, and to take, in general meeting, by majority vote, decisions on matters not reserved for management. Just as it is established that directors, within their management powers, may take decisions against the wishes of the majority of shareholders, and indeed that the majority of shareholders cannot control them in the exercise of these powers while they remain in office (Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] 2 Ch 34), so it must be unconstitutional for directors to use their fiduciary powers over the shares in the company purely for the purpose of destroying an existing majority, or creating a new majority which did not previously exist. To do so is to interfere with that element of the company's constitution which is separate from and set against their powers. If there is added, moreover, to this immediate purpose, an ulterior purpose to enable an offer for shares to proceed which the existing majority was in a position to block, the departure from the legitimate use of the fiduciary power becomes not less, but all the greater. The right to dispose of shares at a given price is essentially an individual right to be exercised on individual decision and on which a majority, in the absence of oppression or similar impropriety, is entitled to prevail. Directors are of course entitled to offer advice, and bound to supply information, relevant to the making of such a decision, but to use their fiduciary power solely for the purpose of shifting the power to decide to whom and at what price shares are to be sold cannot be related to any purpose for which the power over the share capital was conferred upon them. That this is the position in law was in effect recognised by the majority directors themselves when they attempted to justify the issue as made primarily in order to obtain much needed capital for the company. And once this primary purpose was rejected, as it was by Street J, there is nothing legitimate left as a basis for their action, except honest behaviour. That is not, in itself, enough."
- The significance of Howard Smith v Ampol in English law has been reduced as a result of the enactment (in 1980) of what is now Section 89 of the Companies Act 1985. That section (which was enacted to give effect to provisions in the second EC Directive on Company Law, 77/91/EEC) requires a company proposing to allot equity securities to make an offer to each existing shareholder to allot to him on the same or more favourable terms a rateable proportion of those securities. Contravention of the section gives rise to a statutory claim for damages against the company and its responsible officers: see Section 92. Section 95 provides that directors may be given power to make an allotment as if section 89(1) did not apply, if they are so authorised by the articles of association or by special resolution. Such a special resolution has to be preceded by a recommendation of the directors and the provision to shareholders of specified financial information: see s.95(5)).
- Central to the claimants' case is the proposition that the purpose of the board in adopting the course which it did adopt was to avoid the protection afforded to minority shareholders by the section 95 requirement of a special resolution before the s.89 rights of pre-emption can be disapplied. I have already quoted Miss Dohmann's opening formulation of this proposition. The same point was put by her in a number of other ways, viz:
"..... to avoid the perceived difficulties associated with shareholders exercising their rights in the Company";
"to allow Mr Doughty to acquire control without making a bid to shareholders"; and
"if one asks the question 'why was the investment made in the Club?' the answer is not 'because we wanted to raise funds for the Club' but 'because we believed that an investment in the Company would be blocked'."
"The question of whether to pursue an early return to the Premier league is a matter for the Board. So is the question of what funds the Board will seek to raise to achieve that target. However, it is not for the Board to decide on what equity structure will support that strategy - that is a matter for shareholders. The Board cannot introduce a shareholder against the will of the existing shareholders simply because it has adopted a strategy which it cannot otherwise afford to pursue (regardless of whether it considers that strategy to be in the best interests of shareholders). If the requisite majority of shareholders does not approve the investment, the Board must either:
(a) work within their means (whether or not that requires the strategy to be abandoned); or
(b) seek alternative funding."
- It is worth emphasising at this point the respects in which these submissions proceed on a different line of attack from that which was successful in Howard Smith v Ampol. The contrast is best shown by considering what the situation would have been had the Club not existed (so that all the business activity took place at the Company level) and had Section 89 not been in force. In those circumstances the board of the Company would have issued shares to Mr Doughty as originally envisaged, and given him an option to subscribe for further shares giving him control. The City Code would have required an ordinary resolution of the company approving the share issues (a so-called whitewash resolution) in order to relieve Mr Doughty of the obligation of offering to acquire all the outstanding shares. In such a scenario, however, the motivations of the board in issuing the new shares would, on the findings I have made, have been for the entirely proper purpose of raising capital for the Company. What distinguishes the present case from Howard Smith v Ampol is that the board of the Company were presented with an obstacle to the achievement of that proper purpose in the shape of the requirement for a special resolution under Section 95. The accident that the business activities were carried on in the wholly owned subsidiary, the Club, opened the way to the solution which was adopted. That solution achieved the same economic effect as an injection of capital at the level the Company would have achieved, and avoided the obstacle of the special resolution. Moreover, the solution provided a threshold to the achievement of precisely the same legal effect as would have been achieved at the level of the Company. This was the significance of the understanding in relation to "flip-up": i.e. that Mr Doughty would in due course exchange his controlling interest in the Club for an equivalent controlling interest in the Company. Because Section 89 only applies to allotments for cash (see Section 89(4)), there would be no need for a special resolution on the return journey.
- The claimants' attack on the transaction is, therefore, best put, not on the basis that there was no genuine and primary purpose to secure capital for the Club, but on the basis that the means adopted to secure that end were an improper (and in section 459 terms unfair) evasion of obstacles laid in their path by statute. That thesis requires them to demonstrate either that the statute impliedly prohibits such an exercise of their powers, or that there was something inherent in the powers which were used which made it improper for them to be exercised in such a manner.
- The power actually exercised by the Board of the Company in order to implement the transaction was the power of general management conferred by Article 110 of the Company's Articles, providing in common form that "[s]ubject to the provisions of the statutes, the Memorandum of Association, these Articles and to any directions given by the Company in the general meeting by special resolution, the business of the Company shall be managed by the Board, which may exercise all such powers of the Company whether relating to the management of the business of the Company or not". Using this power the Board took the following steps:
(1) it exercised the power reserved to the Company by Article 6.10 of the Club's Articles to reconstitute the Club's board;
(2) it entered into the Subscription Agreement;
(3) it voted its shares in the Club in favour of the requisite special resolutions to increase the Club's share capital and allot new shares in the Club to Mr Doughty
Given a genuine desire to raise capital for the Club, it is in my judgment difficult to see how it can be said that the Company's powers were in any of these respects being exercised for a purpose foreign to their proper ambit. The power to reconstitute the board of the Club was plainly being exercised in order to achieve the very purpose for which it had been conferred; so too the powers to increase and allot share capital in the Club.
- The claimants sought to meet that point by arguing that, however justified the exercise of the relevant powers might have been viewed at the level of the Club, the exercise by the Company of its powers could not be justified at the level of the Company. As Miss Dohmann and Mr Chivers put it in their closing submissions:
"The truth is that the Director Defendants are unable to formulate a purpose for which the board of the Company exercised the Company's powers. That is unsurprising, because all of the capital raising powers were exercised at Club level. The board of the Company was not concerned with raising one penny for the Company; its only function in the scheme was to pass control of the Club to Mr Doughty. The Board may well have believed that it was acting bona fide in the best interests of the shareholders, but its purpose was nonetheless improper - namely to avoid the matter going to a special resolution of shareholders."
- This criticism seems to me misplaced for two main reasons. First, the function of the Company had always been that of a holding company. All the business activities, and in a practical sense all of the assets, were concentrated in the Club. Capital raised at the Company level would only ever be raised for the purposes of the Club. There was a sense therefore in which anything that was good for the Club would be good for the Company. That would plainly not necessarily hold true if the price of achieving a good for the Club was a material loss of the Company's interest in the Club. The transaction did (potentially) involve such a material loss, and for that reason careful consideration did need to be given to the interests of the Company, and its shareholders, distinct from the interests of the Club. It is important, however, to bear in mind that, had the blocked route at Company level in fact been open, no such dicotomy between the interests of the Company and the Club would have existed. Yet the impact on the existing shareholders of the Company would have been the same. In valuation terms that was recognised by Mr McDonagh, the claimant's expert. Raising capital at the Club level was no more inimical and no less beneficial to the interests of the existing shareholders of the Company than raising it at the Company level would have been.
- Secondly, I am satisfied as a matter of fact that the board did pay careful attention to the interests of the Company. The oral evidence of the directors, in particular of Mr Leslau and Sir David White (each of whom I found to be impressive witnesses - mature, sophisticated, and fully alive to the nature of their duties), made it clear that they were fully aware of the gravity of the steps being proposed so far as the Company was concerned. Moreover I am satisfied that those who negotiated on the Company's behalf the elaborate terms of the Subscription Agreement were also fully alive to the need to protect the separate interests of the Company. In this connection I note in particular the provisions in Clause 7 dealing with the representation of the Company and Mr Doughty on the board of the Club, with the distribution of voting power as between them on the matters there set out, and the provisions of Clause 8 giving mutual rights of pre-emption to the Company and Mr Doughty, and preventing either side from selling to a third party purchaser without procuring that the other side be bought out on no less favourable terms ("the drag-along" clause). The fact that better terms might have been negotiated does not mean that the board were ignoring the interests of the Company.
- One is left, therefore, with the bare fact that what was achieved by the transaction was something which was no worse for the Company than what would have been achieved had the board been able to secure the passage of a special resolution enabling the transaction to take place at the level of the Company. It is clear that such a special resolution would not have been passed. It is clear that, absent a special resolution, the transaction could not have been implemented at the level of the Company: Mr Doughty was throughout insistent that he would only proceed on the basis of a transaction which guaranteed him at the outset a controlling interest upon injection of the second tranche. It is also clear that neither of the claimants would in fact have taken up rights had the board sought to proceed down the route of an underwritten rights issue. The defendants submitted that this fact alone disentitled the claimants from seeking relief. I do not agree. The claimant's case is not that they lost the chance to exercise rights of pre-emption under section 89. Their case is that they lost the chance (which they would have taken) to vote their share against a special resolution disapplying those rights of pre-emption. If they are right that the board was bound to proceed, if at all, by the route of such a special resolution, then what they lost was the ability to block the transaction. Whatever view one may take of the merits of their choosing to exercise that power, it is entirely intelligible that they should feel a sense of grievance at being deprived of it.
- The question is, were they unfairly deprived of it? At the risk of some over-simplification of the issue, this is a case where the board had a legitimate end in view, and there were available to the Company two theoretically possible ways of achieving that end, one of which did in terms, and the other of which did not, require the consent of 75% of the shareholders. Upon what basis is it to be asserted that the board, in choosing the unobstructed route, was acting beyond its powers? It must be because the unobstructed route is only apparently unobstructed: in fact it is subject to a tacit limitation that it must not be used when the other route is closed. In my judgment, however, there is no foundation for this tacit limitation. If such a foundation is to be found it must be sought in the statutory provisions which have the effect of closing the other route. It does not however appear to me to be possible to construe Sections 89 to 95 of the 1985 Act as having that effect. So to construe them would involve writing into the statute some quite elaborate "anti-avoidance" provision. I would add that even were it possible to write in some such provision it would have to be made to fit, so far as remedies are concerned, with the express provisions of Section 92 which seems to assume that a breach of the relevant provisions does not entail the invalidity of the contravening allotment.
- Accordingly I reject the claimants' central proposition that the defendant directors used their powers for improper purposes in acting as they did in relation to the transaction. An additional point raised by the claimants by their pleading but not developed in argument was whether the transaction breached the City Code. In fact it is clear that the transaction did receive the blessing of the Take-Over panel. There was therefore nothing in this point.
- Had I reached a different conclusion it would have been necessary to consider the question of principle whether the subsequent ordinary resolution of the Company had the effect of curing the breach by the defendant directors. The claimants recognised that the decision of Buckley J in Hogg v Cramphorn [1967] 1 Ch 254 and of the Court of Appeal in Bamford v Bamford [1970] 1 Ch 212 presented a formidable difficulty for the argument that it did not. They submitted, however, that the true principle of those cases was that an ordinary resolution applied only to matters capable of waiver by a bare majority. That seems to me somewhat to beg the question, but it does serve to illustrate that the nature of the limitation on the directors' powers for which they were contending was something different from, and going beyond, the limitation recognised and applied in Howard Smith v Ampol. Beyond recording the submission, and noting that while the Supreme Court of South Australia has doubted the reasoning in Bamford v Bamford (see Residues Treatment v SR Ltd [1988] 51 SASR 196) it is plainly binding on this court, I need say nothing further about the submission.
THE CIRCULAR
- I should, however, set out my findings on the question of whether or not the ordinary resolution was validly passed. This is partly because this matter may go further and there are relevant facts to be found. There is also the claimants' subsidiary argument that, the Subscription Agreement itself having been conditional upon shareholder consent being obtained, they have suffered prejudice if no such consent would have been forthcoming had the circular not been tricky. I turn therefore to consider the issues raised as to the "trickiness" of the circular (see paragraph 33 above).
- Undue emphasis given to Mr Doughty as the only possible investor while failing to inform shareholders of Mr Scardino's approach.
The bare facts of Mr Scardino's approach are these. Mr Albert Scardino is a North American who is enthusiastic about the merits of UK football clubs as investments, having regard in particular for their potential role in the development of local television channels. In the autumn of 1996 he and two colleagues (a Mr Jonathan Barnett and Mr Peter Storrie) had expressed an interest in joining the Bridgford Consortium. Their interest had not been encouraged, and they had formed a rival consortium with a view to making a bid of £20m, half of which was to be put in by Mercury Asset Management (MAM). On the eve of the bid MAM withdrew. Negotiations had then taken place between Mr Scardino and Mr Doughty with a view to the latter's participation in MAM's place but these proved abortive. The "Scardino" bid had therefore to be withdrawn.
- Sir David White had worked closely with Mr Scardino in relation to these matters. He was to have been the Chairman of the Club had the proposals prospered. On 8 June 1999, Mr Scardino, having been following the recent press coverage closely, called Sir David White with a view to seeing whether he might be able to invest in the Company. Sir David arranged a meeting for the following day with Mr Barnes. At that meeting Mr Scardino told Sir David that he could line up about £3.5m for investment. Mr Barnes told him they were looking for about £6m. Mr Scardino responded that he thought he could raise that if an investment of £6m would buy control. The meeting lasted about two hours, and sufficient progress was made to justify a further meeting held on the following day attended by Mr Wallis of HSBC and Mr Scardino's financial adviser Mr Millar.
- Salient points from the meeting which took place on the 10 June were recorded by Mr Wallis in a contemporaneous attendance note. First Mr Scardino talked of being able to attract institutional funding, mentioning in particular Electra, of some £5m. Secondly his financial projections assumed a target rate of return on turnover of 20%. Thirdly, Mr Scardino expected that he would not be ready to bid until early August. The Company was then looking to appoint a new manager, and having funding in place, by the beginning of July. Mr Scardino left the meeting with the understanding that, subject to signing an appropriate confidentiality agreement, he would be given full access to relevant financial information.
- Mr Scardino never was supplied with a form of confidentiality agreement to sign. He sought to chase the matter up in various ways, in particular by telephone calls to Sir David on about 18 June and to Mr Barnes on 23 June. From these he learned that the Company was in discussion with another bidder and that this was why he was not being supplied with financial information. There was subsequently no advance on that position.
- The claimants criticise Mr Barnes for the nature of his response to Mr Scardino's approach, and assert that the circular was misleading in not having referred to it. The main criticism of Mr Barnes was that, not only did he not allow Mr Scardino access to the financial information necessary to allow Mr Scardino to work up a proposal, but that he never sought to use the fact of Mr Scardino's alternative proposal even as a negotiating ploy with Mr Doughty. This was of a piece with the picture which the claimants sought to present of Mr Barnes having been in an unseemly hurry to close a deal with Mr Doughty under which Mr Doughty would be given control of the Club. My attention was drawn to the fact that negotiations were broken off with Mr Scardino as soon as Mr Doughty returned to the UK from the USA on 11 June 1999.
- In my judgment these criticisms were not justified. Mr Barnes, and the remainder of the board, were entitled to take the view that Mr Scardino's proposals did not represent a realistic alternative to those of Mr Doughty. The amount of money being proposed was substantially less. Mr Scardino's ability to raise it within the timescale required by the board was highly suspect: in this respect he admitted to me that the statement made by him in his final letter to Mr Barnes dated 24 June 1999 that "We are in the process of raising funds from individual and small institutional investors ......." was misleading. Moreover his ability to raise it at all was open to serious doubt. HSBC had already concluded that there was no institutional demand for investment in the Company. The prospect of being able to "sell" an investment in the Company on the basis of a 20% return on turnover was perceived to be quite unrealistic. In cross-examination Miss Dohmann invited Mr Doughty's expert Mr Shutkeever to comment on Mr Scardino's proposals. He commented:
"I think, in the circumstances of the time where there was a situation, where, on the one hand, there was a potential investor with significant personal wealth, with no financing issues, who had stepped up to the plate and said "I want to do this transaction", and then there is somebody who comes along - I think perfectly well-intentioned and I don't doubt that - and says, "I might be able to put together a deal, I will have to raise money from other people" at a time when there is no realistic prospect, I think, of raising money from people who thought that they would actually make a return on it. Was it right? .... Would it be a reasonable thing, in those circumstances, to proceed with the transaction from the guy who had the money and wants to do the deal? Well, yes, absolutely."
- That accords with my own judgment of why it was that Mr Barnes (with the benefit of HSBC's advice) discounted Mr Scardino's proposals. Given what they reasonably perceived to be the scale of the Company's immediate requirements, the Doughty proposals and the Scardino proposals were in different categories and not truly comparable. To have mentioned the Scardino proposals in the Circular as if they represented a viable alternative might itself have been misleading.
- Failing to inform the shareholders that the true rationale of the proposal was to avoid a special resolution.
The explanation given in the Circular was as follows:
"The Board has concluded that conventional sources of equity finance are not available to the Company. The potential sources of finance are therefore limited and the Board is pleased to have been able to agree terms for a substantial investment by Mr Doughty.
In finalising the structure of Mr Doughty's proposed subscription for shares directly into NFFC, the Board took into account several considerations, principally the requirement of greater certainty in putting the transaction into effect within a timescale which reflects the imminent commencement of the football season and the need to secure the services of a high calibre manager."
What is suggested is that shareholders should have been told that the structure had been crafted specifically to avoid the need for a special resolution to disapply shareholders' statutory rights. For reasons which I have already given, any reference to a special resolution to disapply statutory rights would itself have had to be carefully crafted if it were not itself to become a source of potential confusion. There was in fact no realistic prospect of the Board proposing any such resolution for the simple and sufficient reason that, on the best available information, such a resolution would not have carried. Further, there was no real prospect, absent such a resolution, of the shareholders being given an opportunity to exercise their statutory rights of pre-emption. The only thing which shareholders were being denied was the possibility that 25% of their number would block a transaction which their board considered to be in the interests of the Company and which it was content to leave to be decided by a majority. It is difficult to see how patient explanation of the fact that the structure of the transaction had been dictated by the perceived inability of the board to command a 75% vote could have been decisive, or even persuasive, in inclining one of the majority to vote the other way.
- That, or some similar, reasoning seems to have been shared by Mr Markham. In his lengthy and eloquent arguments to the shareholders, both written and oral, he did not regard it as material to draw their attention to this element of "vice" in the proposals. That does not surprise me. Moreover, there is every reason to suppose that shareholders generally would have appreciated what the board's proposals involved. It was certainly not lost on journalists: see reports in the Daily Telegraph for 24 June 1999 and the Sunday Express for 25 June 1999.
- Failing to disclose the true contemplation of the board and Mr Doughty, namely that Mr Doughty would in due course become a shareholder in the Company instead of the Club.
What the Circular said was:
"In the event that the Agreement becomes unconditional, it is the intention of the Board to explore possible routes through which the shareholding structure of the Group may be simplified"
The claimants say that this was misleading. On their case the agreement or understanding that the 'flip-up' would occur existed as a matter of fact and ought to have been disclosed.
- On the facts it is clear that no agreement existed, in the sense of any legal commitment. It is also clear that the parties deliberately refrained from entering into any such agreement, however carefully conditioned. Even the side letter in the form of the latest draft (see paragraph 26 above) was eschewed. It is less clear why this was so. Distaste for it seems to have emanated from the consultation with Mr Kosmin QC on 1 July. Thereafter Mr Doughty's side of the transaction can be seen pressing for it against the resistance of the Company. It seems to me possible that, to the extent that Mr Kosmin QC had disapproved the side-letter, he had done so in the context of advising whether the transaction should be put to the Company in general meeting rather than simply being implemented by the board. But it is also possible that, when digested, his disapproval of the side letter also made sense in the context of camouflaging the transaction against an attack in the very form in which the claimants launched it. It does not appear that there were any regulatory requirements (whether of AIM or of the Take-over Panel) which caused suppression of the side-letter.
- Taking the view that they had followed advice in not having the side-letter, the defendant directors were careful to say that there existed no "understanding" having equivalent effect. This was in an important sense true. Neither side was, or regarded itself, as bound by any such understanding. That is not to say that either side had set its face like steel against the possibility of putting into effect what had originally seemed, from both points of view, a sensible tidying up operation. In those circumstances I do not think that the formula lit upon by the draftsman of the Circular (and approved by the board) can be seriously criticised as misleading.
- In concealing from shareholders the true nature of the interests of Mr Barnes and Mr Soar in the shares which they were respectively proposing to vote in favour of the transaction.
As a result of the Wray share sale (see paragraph 13 above) each of Mr Soar and Mr Barnes had acquired 2,515,000 shares from Mr Wray. The transaction had been announced to the board on 9 April 1999, but its documentation (which was complex) took place in the days which followed. The transaction with each took the ostensible form of a share sale agreement, purportedly "free from all claims, charges, liens, encumbrances, options, rights of pre-emption or equities ..." for £704,200 (i.e. at 28p per share). In fact there was a supplemental agreement and a side-letter, executed as a deed. The supplemental agreement provided for the proceeds of any sale to be applied to recoupment of the costs of financing the purchase price out of the proceeds and provided for any profit to be divided between Mr Wray and the purchaser in the ratio 70:30. The side-letter gave Mr Wray a right of pre-emption on any sale by the purchaser. The purchase price in fact was financed by a facility granted by Singer & Friedlander against a cash-backed guarantee given by Saracens Ltd (a company controlled by Mr Wray) and a guarantee from Mr Wray. Mr Wray agreed to indemnify the purchaser against any sums demanded by S&F under the facility and to procure that Saracens waive any rights of subrogation which might arise in its favour. Under and by virtue of these arrangements the only money which the purchaser would ever have to find or personally finance in connection with the transaction was an initial £50,300.00 (always assuming that Mr Wray was solvent when S&F demanded to be repaid). Stripped to its essentials, the agreements provided each of Mr Barnes and Mr Soar with 2,515,000 shares at a "true" cost of 2p per share, subject to rights of pre-emption in Mr Wray's favour and on terms that Mr Wray was entitled to 70% of any "profit" on a future sale.
- Mr Wray's motives in reducing his shareholding in this manner were explained by him as his desire to rid himself of the criticisms, then receiving publicity, that he was interested in more than 10% of more than one football club (contrary to Premier League and Football League rules). The suggestion was that he was "interested" in the relevant sense in Watford Football Club. Anxious to avoid these criticisms and to see the surplus shares in hands he trusted he found Mr Soar's and Mr Barnes' willingness to take the shares on the above terms welcome.
- The Wray share sale is problematic in a number of respects. There is a question as to whether Mr Wray's right to participate in future profits and his right of pre-emption gave rise to a notification obligation under s.198 Companies Act 1985. There is the question of whether the notification to the Stock Exchange (which took the form of an announcement of a sale at 28p per share) was regular. A question also arises as to whether (assuming, which he has always denied, that Mr Wray was interested in more than 10% of Watford Football Club) Mr Wray remained in breach either of the rules of the Premier or of the Football League. In addition, it was urged on me by Miss Dohmann that the willingness of the participants to indulge in these highly artificial arrangements (and to stand by while Mr Wray told Mr Markham that he had no further interest in the shares) told poorly on their general credit as witnesses.
- I should interpose that there was some doubt on the evidence that the money to be provided by S&F for the purchase consideration under the share sale agreement ever did move in its pre-determined circle. For present (or possibly any) purposes I do not think this much matters.
- What appears to me likely (and Miss Dohmann did not quarrel with this) was that the principal motive for structuring the sale price as 28p, and announcing it as such, was a desire to conclude the transaction without upsetting the narrow market which existed in the Company's shares. I add that this motive was not informed by any interest other than that of the Company itself. If the transaction was designed with that in mind I am surprised that it seems to have occurred to no-one that announcing the share sale as having taken place at that price was potentially highly misleading. The fact (if it be the case) that the listing rules do not require disclosure of the means whereby a particular transaction has been financed should not be allowed to obscure the fact that the means chosen to finance a particular transaction may be (as they were here) contrived to produce a wholly artificial price. HSBC disclaimed any knowledge of the arrangements at the time the original announcement was made (through them) to the Stock Exchange. Confronting the full facts in August 2000, HSBC's conclusion was that the announcement had been defective but only in not disclosing the right of pre-emption. It was, they insisted before me, otherwise uncontroversial. Without having had any further expert evidence on the point, or been taken to the relevant rules, I limit myself to saying that I found this evidence surprising.
- None of this, however, seems to me relevant to the question of what should have been said in the Circular about the Wray share sale agreement. The claimants identified the vice of the Circular in this respect in the impression it conveyed that each of Mr Barnes and Mr Soar, in recommending the proposals, was "putting his money where his mouth was". It was suggested that had shareholders appreciated that each was in fact insulated from any loss arising on disposal, and had they appreciated that Mr Wray was still interested in these shares, that would have been material to their decision whether or not to vote in favour of the proposals.
- I do not accept that argument for two reasons. First, as a matter of fact there is no evidence before the court that any shareholder would have voted differently had he known the true facts. The defendant directors adduced the evidence of a number of shareholders who supported the proposals. No attempt was made to cross-examine them on the effect of a hypothetical disclosure of the Wray share sale agreement. No evidence was called by the claimants on the point. Secondly, it is difficult to see why shareholders who were influenced by the knowledge that Mr Soar and Mr Barnes were voting in favour of the resolution on the incorrect supposition that they were at substantial risk should change their minds when told that it was Mr Wray who was in fact at risk and Mr Wray was similarly proposing to vote in favour of the resolution.
- A circular to shareholders must give a fair, candid, and reasonably full explanation of the purpose for which the meeting is called. In Kaye v Croydon Tramways Company [1898] 1 Ch 358 at p.369 Lindley MR used the word "tricky" to describe a document which had, as he found, "been most artfully framed to mislead the shareholders". This circular did not, in my judgment, suffer from that vice. The question is "not whether the circular might not have been differently framed, but whether there is any reasonable ground for supposing that such imperfections as may be found in the circular have had, with or without other circumstances, the result that the majority (who have approved the proposal placed before them) have done so under some serious misapprehension of the position" (see per Lord Wright MR, Romer LJ and Clauson J in Re Imperial Chemical Industries [1936] 1 Ch 587 at 618). In answering that question in the present case, I take into account the fact that there is no evidence that any shareholder was in fact misled by any of the alleged imperfections in the circular, whether taken singly or cumulatively (cf per Lord Maugham LC in Carruth v Imperial Chemical Industries Ltd [1937] AC 707 at 769).
- Accordingly I have come to the conclusion that the resolution passed at the EGM was validly passed. It is unnecessary for me therefore to consider what the position would have been had I found the Circular to have been flawed but the conduct of the directors in all other respects proper and intra vires. Had the EGM voted the proposals down, it seems to me unclear whether Mr Doughty would have exercised his right to insist on an affirmative vote before committing himself. While he had no doubt been prepared to enter into the transaction without the matter being put to shareholders at all, the position would probably have been different had the shareholders rejected the proposals. Accordingly I am inclined to think that the claimants would have been entitled to complain of unfair prejudice had they been able to prove nothing more than that the EGM would have voted differently but for some trickiness of the Circular.
- In the result I find that the claimants have suffered no unfair prejudice. That is sufficient to dispose of the case. If I am wrong, however, on the question of the fairness of the transaction, the question arises as to whether the claimants have suffered any prejudice. This question is, of course, closely allied to the question of the nature of the remedy to which they might be entitled if prejudice could be shown.
PREJUDICE
- On these questions I heard evidence from three expert witnesses. Mr Trevor McDonagh, a partner in Deloitte Touche, gave evidence for the claimants. His expertise is valuation of businesses, companies, quoted and unquoted securities, intellectual property and intangible assets generally, both in the UK and abroad. The early part of his career was in the Share Valuation Division of the Inland Revenue, which he left in 1986. He is, and has since 1995 been, the partner in Deloitte Touche responsible in the UK for business valuations. Mr Christopher Osborne, a partner in Arthur Andersen, gave evidence for the director defendants. He specialises in "the application of financial and economic analytical techniques to commercial and regulatory disputes". Recent experience included his giving expert evidence on behalf of the Premier League in the action brought by the Office of Fair Trading in the Restrictive Practices Court. Mr Doughty relied on the evidence of Mr Adam Shutkever, an investment merchant banker formerly with Deutsche Bank, where he had been at one time heavily involved in advising football clubs and potential investors in such clubs.
- The principal focus of the expert evidence, and the principal question on which Mr McDonagh parted company from Messrs Osborne and Shutkever was the value in May/June 1999 of the entire share capital of the Company, or a significant minority holding, (a) before and (b) after the transaction with Mr Doughty.
- There was substantial agreement between the experts in a number of matters: first, that the AIM price gave no guidance as to the value or marketability of either 100% of the equity or a significant minority holding; secondly, that by 1999 there was no institutional interest in football club shares. There had been a period of enthusiastic interest in the early to mid 1990s which had waned since in or around the middle of 1997. During that period a number of clubs had floated, the Company being one of the last (possibly the last) to do so. The current lack of appetite by investors stemmed from the fact that, except in the case of a handful of clubs, experience suggested that it was impossible to derive an investment return from a football club. As Mr Shutkever put it:
"With success on the pitch imperative in order to finance the transfer fees and wage demands of players, a vicious circle is produced, driving up player values ever higher and widening the gap between the large and small clubs.
Early hopes that pay-per-view television would provide a crock of gold proved to be over optimistic. Mr McDonagh made essentially the same point when he said:
"I consider that it is probably fair to say that for most clubs outside the Premier League (and for that matter many clubs in the Premier League) their business is aimed not primarily at providing short term financial returns for their shareholders, but at providing a successful football team for the benefit of the club members and the local community .... In such circumstances profitability ... becomes more of an indicator of a club's ability to invest in new players, youth development, stadium improvements etc, rather than an indicator of likely dividend returns to shareholders."
For these reasons conventional value drivers, and valuation methods, are inappropriate to most football club shares. The primary driver of value of a controlling interest in a football club is the desire of individuals (or a group of individuals) to control or have significant influence over the club. That desire would not arise from any expectation on the part of the investor that he would see a financial return. It was simply the desire to own or control a football club for its own sake. Mr Osborne described the valuation principle applicable to this as the valuation of a consumable, rather than an investment.
- Mr McDonagh's approach to valuation assumed that at any given time, and particularly in May/July 1999, there was a prospect that within a reasonable timescale some person would emerge willing to buy out existing shareholders in the Company at a "control price". Following the transaction that person would no longer have any incentive to pay a control price for the Company's minority shareholding in the Club (or, after the exercise of the option and the flip-up, any of the minority shareholdings in the Company), since the purchase would not give control. Nor, given Mr Doughty's proposed desire not to sell his holdings, would there be any reasonable prospect of such a purchase achieving an exit (which, if achievable, might be at the control price given the 'drag-along' provisions of the Subscription Agreement). To reflect these depreciatory factors it was appropriate to discount the valuation of the claimants' shareholdings after implementation of the transaction by 80% to 90%.
- Mr Osborne and Mr Shutkever disagreed. Mr Osborne found it difficult to imagine a willing buyer of 100% of the Company. The only significant potential investors might be wealthy benefactors or media companies. Such investors would normally wish (like Mr Doughty) to subscribe for new shares so that capital could be introduced into the Club. However, even assuming the imaginary willing purchaser, there was no rational basis on which to arrive at the price which he might be willing to pay and any of the existing shareholders might be willing to sell. The same remained true after the implementation of the Doughty transaction. The only rational basis on which to make a comparison between the value of the claimants' shares before and after the transaction was by reference to a scenario in which these shareholdings were gradually realised over a period of years through sales on the AIM. The effect of the transaction was neutral so far as this was concerned or even (since the immediate effect of the transaction on the AIM share price was positive) beneficial. Mr Shutkever held a similar opinion. The claimants' stakes were not realisable prior to the transaction: no strategic investor willing to purchase them existed. Had a determined effort been made to sell those stakes, a buyer might have been found but only "at a substantial discount to the implied value" of the final proposal from Mr Doughty. Implementation of the transaction had no adverse effect on the value of those stakes. If anything it would have marginally enhanced that value because of the generally heartening effect of the injection of new capital by a committed supporter of the Club. This would outweigh the concomitant negative factor of there now being a controlling shareholder.
- The validity of these opinions depends heavily on the answer to the question whether there was, prior to the implementation of the transaction, any likelihood of an investor emerging within a reasonable time scale who was prepared to pay a control premium to existing shareholders. The only persons identified by Mr McDonagh as falling into that category during the relevant period were a Mr Lewis, Mr Doughty himself, and Mr Scardino. Mr Lewis had made a proposal to the board in January 1999 to inject £3m into the Club for approximately 20% of the equity, a guarantee of being Chairman, and a say in the appointment of a new manager. In relying on this example Mr McDonagh overlooked the fact that this was not an offer to buy any part of the existing equity. In relation to Mr Scardino, Mr McDonagh appears to have been under the false impression that Mr Scardino had indicated at some point that he was prepared to pay £6m for 50.1% of the existing equity. That was not the case: the Scardino proposal was at all times structured as a proposal to subscribe for new equity rather than to buy existing shares. Mr Doughty also had no interest in buying existing shares.
- The fact that these examples crumbled under examination is not, however, in my judgment wholly destructive of Mr McDonagh's basic thesis. What they do show is that there were individuals in the market who (a) were willing to invest in the Club provided that their money went "on to the pitch" and (b) wanted control of the Club in return for their investment. What Mr Osborne and Mr Shutkever do not analyse is what such an individual might have been prepared to do if told that he could have control but only at the price of buying out existing shareholders. The strength of the claimants' position (if they are correct in saying that the twin aims of injecting new money and obtaining control could only be achieved by a special resolution) is that they could effectively thwart the ambitions of these potential investors. At some point they might calculate that the potential investor would be prepared to swallow the pill of paying money to existing shareholders, and that enough of their fellow shareholders might be persuaded to join with them in delivering control to the investor. However long a shot that might be, it was arguably a better position to be in than to be locked into a company in which Mr Doughty owned, or potentially owned, a controlling majority.
- In the final analysis, therefore, the comparison between the pre-transaction and post-transaction position of the claimants is the difference between the value of their chance of being able to use their blocking power to force through a sale by a controlling bloc of existing shareholders to a determined purchaser and the value of the prospect of Mr Doughty at some point in the future himself becoming disenchanted with his investment and selling out to such a person. Both prospects seem to me to have been relatively remote. If the Doughty proposals had been blocked, the evidence suggests that the Company and the Club would have had no alternative but to settle for a medium term strategy of consolidation within the First Division, with a majority of shareholders resigned to nursing their financial losses until fortune smiled again on the team and with no prospect of another potential investor being willing to buy them out in the meantime. I am not persuaded that the loss by the claimants of their power to block a special resolution resulted in any measurable financial loss to them.
- Had I been persuaded that the defendants should be ordered to buy out the claimants' shares it would have been necessary to fix a price at which that should be done. The conclusions which I have reached on the question of prejudice render it difficult for me to say what this would have been. If I am wrong about prejudice, it must be because there was a reasonable prospect of an individual paying a control premium for 100% of the equity in May/June 1999. Basing himself on the offers from Messrs Lewis, Scardino and Doughty, Mr McDonagh postulated that such an individual might have been prepared to pay 25p to 28p per share (valuing the Company at £11-12m). He applied a discount of 20% to the claimants' shareholdings to allow for the contingencies that no such offer would be made and that the Club's performance might deteriorate, arriving at a value of 20p to 22p per share. He derived some support for this approach from the fact that Mr Markham had suggested in March 1999 a willingness to buy out S&F (a 9.1% holding) at 32.5p per share and that Mr Scardino had elicited from Mr Scholar that the latter was not prepared to sell at 28p per share.
- Although no-one relied upon it, the fact is that the only transaction in a substantial minority holding which ever took place was the Wray share sale, which took place at a price of 2p per share. The future profit-sharing arrangements make this a wholly unreliable guide.
- Had I been required to decide the point (which assumes that I am wrong on the question of prejudice) I would, faute de mieux, have accepted Mr McDonagh's starting point of £11-12m as the price at which the board might have recommended shareholders to accept a bid for the Company had it been made, but then discounted that by far more than 20% to reflect the possibility that such a bid might never have been made in the foreseeable future. I think that such discount should be at least 50%. That is consistent with my accepting on the factual evidence that it was more likely than not that no such offer would in fact have been forthcoming. On that basis I would have fixed the price of a compulsory buy-out at no higher than 13.25p per share.
- Given the conclusions which I have reached it is unnecessary to say anything on a final point which was argued concerning whether Mr Doughty remained a proper party to these proceedings once the claimants had abandoned their claim that the transaction ought to be rescinded. Since the question whether the court has a jurisdiction which it ought to exercise against a third party such as Mr Doughty is likely to be highly dependant on the particular unfairly prejudicial conduct of which complaint is made, it does not seem profitable to consider whether, had I come to a series of different conclusions, it might have been possible or appropriate to make Mr Doughty liable in whole or in part for the consequences.
