Re Charterhouse Capital Limited; Arbuthnott v Bonnyman [2014] EWHC 1410 (Ch)
Following a 27-day trial, the Companies Court (Asplin J) has dismissed the petition under section 994 Companies Act 2006 brought by Geoffrey Arbuthnott, a former director of Charterhouse Capital Limited, the holding company for the well-known and leading private equity buy-out business. Kenneth MacLean Q.C. leading Sam O’Leary of One Essex Court and James Potts Q.C. of Erskine Chambers represented the successful respondents at trial.
The claim was brought following a restructuring of the shareholding in the private equity buy-out house made to address a growing misalignment between the shareholders of the Company (which included a number of retired members) and the active investment managers. In his petition Mr Arbuthnott alleged that he had suffered unfair prejudice in his capacity as a shareholder in Charterhouse based principally on (i) breach of an alleged oral agreement between himself and the Chief Executive of Charterhouse relating to the purchase of his shares; (ii) an alleged failure on the part of Charterhouse to investigate Mr Arbuthnott’s alleged concerns about Charterhouse’s conduct in the course of a number of acquisitions; and (iii) the amendment of the articles of association of Charterhouse and the making of an offer to acquire his shares and the intention to exercise drag rights under the amended articles of association, which Mr Arbuthnott alleged would amount to an expropriation of his shares at a gross undervalue. Mr Arbuthnott alleged that his shares in Charterhouse were worth approximately thirty times more than the £1.35 million which he would receive under the terms of the offer and sought an order for the purchase of his shares at what he alleged was their true value. The Petitioner and the Respondents relied on expert evidence both from private equity specialists and from expert accountants.
Asplin J rejected Mr Arbuthnott’s allegations. She rejected his evidence that there had been an oral agreement between him and the Chief Executive. She held that Mr Arbuthnott’s concerns relating to Charterhouse’s conduct in connection with a few acquisitions had been thoroughly investigated and could not be the basis for a claim for unfair prejudice. She concluded that the amendment of the articles of association had been valid and did not cause Mr Arbuthnott unfair prejudice. And she rejected Mr Arbuthnott’s case on valuation and the proposed exercise of drag rights. Mr Arbuthnott’s third main head of complaint occupies the majority of the judgment and raises the most interesting issues in the context of the amendment of a company’s articles, the exercise of drag rights, the valuation of shares in a privately held private equity house and their interaction with the unfair prejudice jurisdiction.
As far as the amendments to the Company’s articles were concerned, Asplin J held that they could be examined by the Court under both the common law principle of Allen v Gold Reefs of West Africa [1900] 1 WLR 656 and the statutory unfair prejudice jurisdiction which afforded the Court overlapping jurisdiction. She rejected Mr Arbuthnott’s case that the amendments to the articles were invalid as not being made bona fide in the interests of the company and being purely targeted at him so as to permit the expropriation of his shares. On the contrary, she held that there was no evidence that the shareholders had acted other than in good faith and there was evidence that the alignment issue—which the restructuring sought to resolve—was likely to be a serious impediment to future fund raising and the success of the business. Moreover, she held that the amendments to the articles had to be judged in the context of the drag rights conferred by the existing articles and shareholders’ agreement. In this context, the judge followed the approach of the Privy Council in Citco Banking Corporation NV v Pusser’s Limited [2007] UKPC 13and rejected the approach of the High Court of Australia in Gambotto v WCP Limited (1995) 182 CLR 432.
The Judge also rejected Mr Arbuthnott’s case that the directors of the Company had acted in breach of duty in failing to hold out for a higher offer price for the shares. On the contrary, the directors had acted properly to ensure that the offer was put to the shareholders so that they could decide whether to accept it or reject it.
The Judge comprehensively rejected Mr Arbuthnott’s case that the offer made for his shares was at a gross undervalue. She concluded that the criticisms levied by the Respondents’ counsel towards Mr Arbuthnott’s expert’s approach to valuation of the shares were ‘entirely justified’ and rejected his evidence that the shares in the Company were worth far more than the £1.35 million offered for them. She accepted that the only realistic purchasers for the shares were the continuing investment managers. In the result, the price offered for Mr Arbuthnott’s shares was not one about which he was entitled to complain and was incapable of founding a claim for unfair prejudice.
Finally, the Judge rejected a further argument raised by Mr Arbuthnott that he had been unfairly prejudiced by the non-payment of dividends by the Company after his retirement. The Judge held that Mr Arbuthnott had agreed to the Company being managed in a way which did not require the payment of dividends and had also agreed to a wider group structure which resulted in the majority of profits made by the fund management business being distributed amongst the active members of the investment team.
Kenneth McLean QC and Sam O'Leary of One Essex Court acted for the Respondents (instructed by Slaughter & May)
Full text of the Judgment available here