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OUTER HOUSE, COURT OF SESSION
[2008] CSOH 72
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P1049/08
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OPINION OF LORD GLENNIE
in Petition of
WEST COAST CAPITAL
(LIOS) LIMITED
Petitioner;
for
An order under
section 994 of the Companies Act 2006 including interdict ad interim
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Petitioner: Dean of Faculty, McGrigors LLP
Respondents: Sellar QC (for Dobbies
Garden Centre plc), Dickson Minto
Reid QC (for Tesco
Holdings Ltd), Maclay Murray & Spens
15 May 2008
Introduction
[1] This
is a motion for interim interdict
seeking to prevent the board of Dobbies Garden Centres Plc ("the Company") from
putting to the vote at the Annual General Meeting of the Company on 21 May 2008
a resolution (a) to increase the authorised share capital of the Company by the
creation of an additional 12,750,000 new ordinary shares of 10 pence each, (b)
to authorise the directors to allot shares and (c) to approve the terms of an
Open Offer described in a circular to shareholders of the Company dated 9 April
2008. The motion triggered caveats as a result of which both the
Company and Tesco Holdings Ltd. ("Tesco") have appeared by counsel in
opposition.
[2] The
petitioner is West Coast Capital (Lios) Limited ("WCC"). It owns just over 29% of the issued share
capital in the Company. The other major
shareholder is Tesco, with about 65.5% of the issued share capital. The authorised share capital of the Company is
£1,275,000 and its issued share capital is £1,037,184. The Company operates throughout the United
Kingdom as one of the leading garden centre
retailers.
[3] In
this petition, WCC complains that the Company has conducted, and is conducting,
its affairs in a manner which is unfairly prejudicial to the interests of
members and in particular to its interests.
The petition is brought under section 994 of the Companies Act 2006,
which is the successor to section 459 of the 1985 Act. Since its terms are not identical, I set out
the material parts of section 994:
"994 Petition
by company member
(1) A member of a company may
apply to the court by petition for an order under this Part on the ground -
(a) that the company's
affairs are being or have been conducted in a manner that is unfairly
prejudicial to the interests of members generally or of some part of its
members (including at least himself), or
(b) that an actual or
proposed act or omission of the company (including an act or omission on its
behalf) is or would be so prejudicial."
The Petition runs to some
18 pages and refers to events starting in June 2007 when Tesco attempted
to take over the Company.
Events leading up to this
application
[4] I
should refer briefly to a number of matters which form an important part of the
background to this application and which have featured in the arguments
presented to the court.
[5] In
June 2007, Tesco offered to purchase the entire issued share capital of the
Company for £15 per share ("the Takeover Offer"). Tesco hoped to acquire all the shares in the
Company, including those of WCC. WCC announced
that it was considering making a rival bid, but ultimately decided not to do
so. In the meantime, it had purchased a
number of shares in the Company at a price higher than that offered by Tesco. The Tesco bid became unconditional on 17 August 2007 and the closing
date was extended to 14 September
2007. Tesco were
unsuccessful in their attempt to acquire all the shares in the Company, but
achieved a holding of over 65%. WCC was
left as a substantial minority shareholder.
[6] Soon
after its acquisition of a majority shareholding, Tesco appointed three of the
officers and directors of its parent company (Tesco Plc) as non-executive
directors of the Company to serve alongside two of the former directors who
remained. As a result, the board of the
Company comprises a majority of employees of Tesco Plc who, when acting as
directors of Tesco Plc, owe fiduciary duties to Tesco Plc but who, in their
role as directors of the Company, owe fiduciary duties to the Company. The potential conflict of interest to which
such a situation gives rise was addressed in guidelines which were drawn up to
deal with this particular situation and in letters signed by each of the three
directors addressed both to the Company and to Tesco Plc. Although no criticism was made of the
content of these letters, though some comment was made on the guidelines, the
thrust of the allegation by WCC is that the affairs of the Company are being
conducted by the board in the interests of Tesco and in a way which is unfairly
prejudicial to their interests as minority shareholders.
[7] Before
the takeover, the Company had in place with the Bank of Scotland Plc a facility
under which, by October 2007, it owed £84.9 million to the bank. After the takeover the Company made
alterations to its borrowing arrangements.
On 30 October 2007
it entered into a ten year committed £110 million revolving loan facility
with Tesco Plc ("the Tesco Loan").
Under that facility it drew down sufficient funds to repay the Bank of
Scotland in full. It further announced
that it intended "to use the balance of the Facility provided by Tesco to
finance the Company's ongoing new stores development programme". Following this transaction, as at 31 October 2007, the Company,
or at least the group, had total borrowings of £89.7 million, of which
£4.1 million was repayable on demand or within a year and
£85.6 million was repayable after more than five years, with total share
capital and reserves amounting to £43.2 million. I am told that the Company's borrowings are
currently about £105 million.
[8] On
30 October 2007 the
Company announced that the board intended not to pay dividends. This was a reversal of the policy which had
been adopted prior to the appointment of directors by Tesco. It is said by WCC to be unusual for companies
to cease to pay dividends when they have not suffered poor operating
performance and are not concerned about their future ability to generate cash;
and they ask the court to infer a more sinister intent. The Company says that the change of policy was
to enable it to retain cash for use towards its ambitious expansion strategy.
[9] WCC, through another company
("Hortis") in which it has an interest, has a substantial interest in Wyevale
Garden Centres Limited ("Wyevale").
Wyevale is the UK's largest dedicated garden
centre group and a competitor of the Company.
In November or December 2007 there were discussions between
Mr Barnes (one of the two directors of the Company who remained from
before the Takeover Offer) and Mr Davidson (a partner in WCC and a
director of Hortis) about the possibility of the Company acquiring certain of
Wyevale's stores. Those discussions
ultimately came to nothing. They are
relied upon, however, by WCC for two reasons.
First, because, they say, at various times during the discussions
Mr Barnes indicated that he required to speak to or take instructions from
Tesco regarding the matter and secondly because the negotiations proceeded for
some of the time between Hortis and Tesco Stores rather than between Hortis and
the Company. WCC suggest that this
reveals a close alignment between the directors of the Company and the
interests of Tesco. The negotiations
later reached a stage, according to WCC, at which on 3 April 2008 a
director of Tesco Plc said that Tesco would be prepared to purchase WCC's
shares in the Company at a above what they were worth as, in effect, an
inducement for WCC to agree to the sale of some Wyevale properties to the
Company. Again, it is suggested that
this shows an intermingling and close alignment of the interest of the Company
and of Tesco.
[10] In March 2008 WCC was informed that the Company was proposing
to raise £150 million by way of an issue of new shares. The final version of the Prospectus outlining
this proposal was lodged in process. If
the resolution to give effect to this proposal is approved by shareholders at
the Company's AGM, the Company's capital will be doubled to £2,550,000 and shareholders
will be offered the right to subscribe at £12 each for 6 new shares for every 5
they hold. The offer as set out in the
Prospectus is referred to as the "Open Offer". The
Prospectus states that the board intends to use the proceeds of the Open Offer
to repay the Tesco Loan in full and to use the balance to finance a new store
development programme.
WCC's complaint of unfairly
prejudicial conduct
[11] WCC's case, as set out in the Petition and as developed in
submissions made by the Dean of Faculty on its behalf, is that the current directors
of the Company have consistently exercised their powers in Tesco's interests to
the prejudice of other shareholders including WCC, rather than for the purposes
for which those powers were conferred; and that they have failed to have proper
regard to the need to act fairly as between Tesco and other members of the
Company.
[12] This case is developed in the Petition by reference to a number
of matters. WCC complain that, in 2007,
at a time when they knew that there were other potential bidders for the Company,
the then directors took steps which facilitated Tesco's Takeover Offer and
reduced the chances of any competing offer being made. WCC say that Tesco is kept fully informed of
developments at the Company while the board fails to answer their legitimate
questions. Further, WCC say that in
their handling of the Wyevale negotiations, Mr Barnes and Ms Brown,
the two non-Tesco appointed directors remaining on the board, appear to have
become so aligned with Tesco that at times it was uncertain on whose behalf
they were acting and at other times they may in fact have been negotiating on
behalf of Tesco. These matters, if
proved, may well be relevant to the overall investigation of the claim that the
affairs of the Company have been conducted for Tesco's benefit and to the
prejudice of WCC and other minority shareholders. However, the court is not at this stage
concerned either with the claim as a whole or with the overall merits. It is concerned only with the motion for
interim interdict to prevent the putting of a particular resolution at the
Company's AGM, and the focus of the enquiry at this stage must be on the merits
of the claim only in so far as it relates to the unfairness or impropriety of
putting that resolution and, more generally, and on the unfairness or
impropriety of the Open Offer which the putting of that resolution to
shareholders for their approval is designed to facilitate. For the purpose of this application,
therefore, it seems to me that the importance of these matters is that they are
simply part of the evidence put forward by WCC to lend credence to its main
contention that, having failed to buy their shareholding legitimately in 2007,
the management of the Company and/or Tesco, by putting forward this resolution
in implementation of their plan to raise £150 million by the Open Offer, are
attempting to squeeze WCC out of the Company
[13] Of more immediate relevance to the issues directly under
consideration, therefore, are WCC's complaints about the decision of the board (a)
to abandon its previous policy and terminate the payment of dividends and (b) to
raise £150 million by means of the Open Offer.
Neither, so it is said, has been properly explained and neither makes
commercial sense. The new dividend
policy makes the Company a less attractive investment for minority shareholders
such as WCC and it is averred that the primary purpose of the change of policy
was to discourage participation in the Company by minority shareholders such as
WCC. Whilst Tesco might have a clear
interest in achieving this, it is not a legitimate objective for the board of
the Company to pursue. The Open Offer,
if it goes ahead, would force WCC to elect (if it is to remain a shareholder)
between (i) making a further very substantial investment of some £44 million in
a company which is run contrary to its interests and (ii) allowing its
shareholding in the Company to be diluted.
No definite opportunities for expansion have been identified requiring
the raising of £150 million; nor is there shown to be any requirement for the
Company to repay the Tesco loan which was drawn down only 6 months ago, or any
commercial advantage in it so doing.
Taken together, the dividend policy and the Open Offer are said to be
two prongs of an attack designed to force WCC out of the Company or weaken its
position in it. If the minority shareholders
do not take up their rights, Tesco's interest in the Company will increase to
84.3%, sufficient to enable them to pass any Special Resolution and de-list the
Company. By seeking interdict, WCC seek
to stop this going ahead. WCC claims
that it will suffer irreversible prejudice if it is allowed to proceed.
[14] It should be noted that although, in the petition, WCC's
primary claim is for interdict, it puts forward an alternative claim for relief
in the form of an order either requiring Tesco to purchase its shareholding at
a fair price to be decided by the court or for it to be allowed to purchase
Tesco's shareholding at such a price. In
support of this alternative claim, and having narrated that since the Takeover
Offer the affairs of the Company have consistently been conducted in a manner
unfavourable to WCC but to the benefit of Tesco, it says this (in Statement
39):
"there appears
no prospect of any alteration in this state of affairs in the future so long as
Tesco is the majority shareholder controlling the board of directors of the
Company. The most efficient way to free
the Petitioner from such unfair prejudice is for Tesco to buy the Petitioner's
shares at a fair valuation or for the Petitioner to purchase the shares owned
by Tesco at such valuation.
Accordingly, your Lordships are further or alternatively respectfully
requested to exercise the powers conferred by section 996(2)(e) of the
Companies Act 2006 to order Tesco to purchase the Petitioner's shares or
alternatively to order Tesco to sell its shares to the Petitioner."
I shall return to this in due
course in considering the arguments relating to the balance of convenience.
[15] Much of the bare factual narrative in the petition was admitted
by the Company and by Tesco in answers which were helpfully lodged prior to the
hearing. The main areas in which they differed
from WCC was in their challenge to WCC's characterisation of the directors'
conduct, in their rebuttal of the inferences sought to be drawn from the
primary facts, and in their denial of the improper motives which WCC sought to
impute to them. It is sufficient to deal
with these matters when I come to assess the strength of WCC's claim. First, however, I should summarise the law
applicable to the decision which I have to make.
The applicable law
(i) The application for interim interdict
[16] In order to succeed on an application for interim interdict, the petitioner must first show that he has a prima facie or good arguable case on the
merits or, as it is sometimes put "a case to argue and a case to answer": Reed Stenhouse (UK) Ltd. v
Brodie 1986 SLT 354, cited with approval in Toynar Ltd. v Whitbread &
Co. plc 1988 SLT 433. The court is
limited to an assessment of the averments made in the petition, the documents
lodged in process and statements made by counsel at the bar in the course of
argument. It cannot decide
disputed issues of fact at this stage.
[17] Next, if he succeeds thus far, the petitioner must show that
the balance of convenience favours the grant of interim interdict. In
assessing the balance of convenience the court may have regard to the relative
strength of the cases put forward for each party in averment and argument as
one of the factors going to make up that balance: Boehringer Ingelheim GmbH v Munro Medical Supplies Ltd. 2004 SC 468 at para.[16], applying dicta of Lord Fraser of Tullybelton in NWL Ltd. v Woods [1979] 1 WLR 1294 at
1310; but it should guard against the temptation "to weigh in a fine balance
the respective strength of parties' cases." An assessment of the relative strengths and
weakness of the parties' position becomes of more importance however, and may
have to be undertaken, when the grant or refusal of interim interdict will have the practical effect of settling the
issue for good.
[18] Where the balance of convenience is
otherwise even, the court will tend to err on the side of preserving the status quo, as in Boehringer; but there is no invariable rule to that effect. In Re a
Company [1985] BCLC 80, Harman J expressed the view that the preservation
of the status quo had more force in
the case of litigation under s.75 of the 1980 Act, the predecessor of s.994,
than in the ordinary case where interim
orders were under consideration. I can
see that in many cases under what is now s.994 it may be appropriate, in the
interests of justice, to regard the desirability of maintaining the status quo as a factor to be taken into
account in assessing where the balance of convenience lies, rather than leaving
it as the preferred default position when all other things are equal; but I
would not be inclined to accept this as a rule of general application. In Re
Posgate & Denby (Agencies) Ltd. [1987] BCLC 8 Hoffman J, as he then
was, approached the question of whether or not to grant an interlocutory
injunction on the basis that the rules in American
Cyanamid Co. v Ethicon Ltd. [1975] AC 396 applied by analogy, without any particular emphasis on the need to
maintain the status quo, and this
despite the fact that the decision of Harman J was cited in argument. His approach was cited with approval by the
Court of Appeal in Callard v Pringle [2007] All ER (D) 91 ([2007] EWCA Civ 1075). The court there took the
view that Harman J's observations about the desirability of maintaining the status quo should apply "where, and only
where, the failure to maintain the status
quo may affect the remedy sought in the petition."
(ii) The approach under s.994 of the 2006 Act
[19] I was referred to a number of authorities on the general
principles applicable to the jurisdiction under s.994 and its predecessors and
on specific issues arising thereunder. I
do not propose to refer to them all. The
following general points seem to me to be of particular importance to this
case. First, it is important to have in
mind that fairness and unfairness (in the context of assessing whether conduct
is "unfairly prejudicial") are not abstract concepts. They are used in the context of a commercial
relationship, where the parties' rights and expectations are governed by contract,
namely the articles of association, and, possibly, by other agreements or
understandings, as well as by the fiduciary duties which directors owe to the
company. It will generally, though not
invariably, be necessary for a petitioner to show that the conduct complained
of was in breach of some such agreement or duty: see e.g. Re Saul Harrison & Sons plc [1995] 1 BCLC 14, O'Neill v Phillips [1999] I WLR 1092.
Secondly, the unfairness of which complaint is made must be unfairness
to the shareholder in his capacity of a shareholder of the company: O'Neill v Phillips (supra) at
p.1105. This is obvious, but it needs to
be borne in mind where, as here, the shareholder complaining about unfairly
prejudicial conduct has a significant interest in a competitor of the
company. Third, the court will not readily
review the decisions of directors of questions of management of the company,
such as raising finance or matters of commercial judgement, if arrived at in
good faith: Howard Smith Ltd. v Ampol Petroleum Ltd. [1974] AC 821,
particularly at pp.832 and 836, Re
Elgindata [1991] BCLC 959, 993g-994f.
[20] The qualification of good faith is important. A management decision taken in bad faith may
well give rise to a successful application under s.994. Thus, it is at least possible that a decision
of the board to seek approval for a share issue could be regarded as unfair
prejudice, even though the offer could be taken up pro rata by existing shareholders, if it were shown that the board
or the majority shareholders knew that the minority for whatever reason could
not or, for good reason, would not take up their entitlement: Re a Company [1985] BCLC 80 (Harman J), Re a Company [1986] BCLC 362 (Hoffman
J). Objectively in such a case, there
might be prejudice to the minority in terms of their interest in the company
being diluted; and that prejudice might be classified as "unfair" prejudice if
it could be inferred from the knowledge and presumed intent of the majority
that they were acting for an improper purpose.
(iii) Ss. 171 and 172 of the 2006 Act
[21] It is no doubt because of the need to show that the conduct of
the directors or the majority is in breach of some agreement or duty that the
Dean of Faculty drew my attention to ss.171 and 172 of the 2006 Act. There was no equivalent in the earlier
Companies Acts, but these sections appear to little more than set out the
pre-existing law on the subject. They
provide as follows:
"171 Duty
to act within powers
A director of a
company must -
(a) act in accordance with the company's
constitution, and
(b) only exercise powers for the purposes
for which they are conferred.
172 Duty
to promote the success of the company
(1) A director of a company must act in the way
he considers, in good faith, would be most likely to promote the success of the
company for the benefit of its members as a whole, and in doing so have regard
(amongst other matters) to -
...
(f) the need to act fairly
as between members of the company."
On behalf of WCC reliance was
placed particularly on s.171(b). It was
submitted that the resolution intended to be put to the AGM for approval was
not motivated by a genuine desire to raise money. Rather it was a device to force WCC out of
the company by presenting them with a "no win" situation: either to pay £44
million to preserve their proportionate shareholding in a company in which they
were being treated unfairly; or refuse to take up their entitlement and see
their interest in the Company diminished.
The Dean of Faculty accepted that the test was subjective and that it
was necessary to consider the actual motivation of the directors. But by reference to Howard Smith Ltd. v Ampol
Petroleum Ltd., he submitted that it was permissible to look objectively at
the conduct of the directors and the circumstances surrounding their
decisions. The purpose for which the
power to allot shares is conferred, albeit not limited to the raising of
capital for the company, must at least be for the intended commercial benefit
of the company. If it could be shown
from expert and other evidence that the decision to raise £150 million, and to
do so in the particular manner proposed, had no commercial justification and
indeed made no commercial sense, the court would be entitled to infer that the
directors in so acting were not exercising their powers for the purpose for
which they were conferred. I would
accept this. The test, so it seems to
me, is essentially one of looking at the purpose or purposes for which the
directors were exercising their powers, i.e. their motivation. If an improper motivation can be shown, if
only by inference from an objective assessment of all the surrounding
circumstances, the basis of a case of unfairly prejudicial conduct might be
established. Indeed, I understood Mr
Sellar QC, who appeared for the Company, to concede that if it could be shown
that the directors were acting in the way alleged, that would show a breach of
duty under s.171(b). That concession
was, in my opinion, correctly made.
(iv) The remedies available under s.996 of the
2006 Act
[22] The powers of the court when unfair prejudice is established
are set out in s.996 of the 2006 Act.
This provides, so far as material to the present case, as follows:
"996 Powers
of the court under this Part
(1) If the court is satisfied
that a petition under this Part is well founded, it may make such order as it
thinks fit for giving relief in respect of the matters complained of.
(2) Without prejudice to the
generality of subsection (1), the court's order may -
(a) regulate the conduct of
the company's affairs in the future;
(b) require the company -
(i) to refrain from doing or
continuing an act complained of, or
(ii) to do an act that the
petitioner has complained it has omitted to do;
...
(e) provide for the purchase
of the shares of any members of the company by other members or by the company
itself and, in the case of a purchase by the company itself, the reduction of
the company's capital accordingly."
These powers are very wide. Sub-section (1) makes it clear that the court
has a discretion to do what is just and equitable in the circumstances to
remedy the injustice complained of: see Re
Bird Precision Bellows [1986] Ch 658.
The relief set out in sub-section (2) may be regarded as illustrative,
though not exhaustive, of the options which the court has available to it. In the petition WCC seek relief under
paras.(2)(b)(i) - which is equivalent to interdict - and 2(e).
Discussion
Has
WCC established a prima facie case?
[23] Before
turning to the central question of the Open Offer, I should deal briefly with
the inferences which WCC seek to draw from the other matters of which they
complain. The picture they paint is one
of the directors of the Company favouring and aligning their interests with
Tesco. On the material that I have seen,
I am not satisfied that an arguable case to this effect has been made out. I do not accept the criticism of the conduct
of the directors during the currency of the Takeover Offer. Nor, once Tesco became the majority
shareholder, was there anything surprising or improper in three directors of
Tesco Plc being appointed to the board of the Company and forming a majority of
the board. Such appointments are common
in the event of a takeover (even a partial takeover). In the event of a partial takeover, there
are obviously questions to be resolved about the duties owed by the directors (i)
as directors of the Company and (ii) as directors of the company which
appointed them to the board. But
arrangements were put in place and I have seen nothing that persuades me that
there is an arguable case that those arrangements were inadequate. It is inevitable that there will be close
contact between the board and the majority shareholder, but provided that the
board make decisions in the interests of the Company as a whole there is no
room for complaint. Further, I am
satisfied, on the information before me, that the guidelines drawn up to help
deal with the position were properly focussed on the desire to assist the Company
develop its business and did not give Tesco control over its activities.
[24] The allegations
in the petition concerning the negotiations for the possible purchase of
certain Wyevale properties are instructive.
WCC make much of the fact that a director of the Company was involved in
discussions which involved the possible purchase of properties by the Company
and also a possible deal involving Tesco.
Mr Reid QC, who appeared for Tesco, explained by reference to the answers
lodged by Tesco that the proposal for linking a purchase by the Company for
some of the Wyevale stores with an offer by Tesco to buy out WCC's interests in
the Company was in fact initiated by Sir Tom Hunter of WCC in a telephone
conversation with Sir Terry Leahy, the Chief Executive of Tesco Plc, in March
2008 (or, if it was not initiated by him, it was at least encouraged by
him). There would be nothing improper
in such a deal being discussed; but this, so it seems to me, puts into context
the otherwise somewhat confusing averments made by WCC in its petition regarding
this matter and removes any inference that in these negotiations the directors
of the Company were acting in Tesco's interests and against that of WCC.
[25] The
main criticism, of course, is that to which I have referred in para.[13] above,
and concerns the change of policy about the declaration of a dividend and the
proposal to raise some £150 million by a share issue in order to finance
the expansion of the Company's business.
The thrust of WCC's case was that there was no apparent commercial
justification for this decision. The
Tesco loan had only been in place for some six months and did not require
repaying. There was no concrete
information about any specific targets for expansion. In those circumstances, to raise
£150 million to repay the borrowings and to put the remainder on bank
deposit whilst some vague expansion plan was considered did not make
sense. The Dean of Faculty on behalf of
WCC pointed to differences between draft 9 of the Prospectus and the Prospectus
in its final form, and suggested that the explanation for repaying the Tesco
loan had changed between the two versions.
He suggested that part of the reasoning concerning tax considerations
was demonstrably invalid, and in this context referred to a report prepared for
WCC by Price Waterhouse Coopers. He
produced a report by Rothschild which criticised the raising of such a large
amount with no identified targets for expansion as inconsistent with both
financial theory and market practice.
On that basis, other criticisms were made in the Rothschild report of
the decisions taken by the board. The
Dean of Faculty asked rhetorically: what on earth is the board doing raising
£150 million when it had identified, at most, one target worth only
£8 million? why was it seeking to
justify repayment of the loan by reference to tax concerns which had no
validity and, even if they did, would cost the company only a relatively small
amount? would any reasonably informed
equity investor provide, as WCC was being asked to do, £44 million purely
for the purpose of paying off the Tesco loan and putting the balance in a bank
deposit pending suitable acquisitions? The
inference, he submitted, was that this being done to make the position of the
minority shareholders unattractive and to discourage their continued
involvement in the Company.
[26] The
problem with this approach, so it seems to me, lies in the fact that WCC are in
effect asking the court to second-guess the directors of the Company in their
decisions as to whether to raise funds for expansion and, if so, how to do
it. Through no fault of its own, WCC is
able to put before the court only a partial picture. It is essential to its argument that the
board of directors has not identified any targets for expansion, except
possibly one valued at about £8 million.
But Mr Sellar QC reminded me that the Company had for a number of years
had ambitions to expand; and he told me on specific instructions that the
Company had in fact identified and was working on two further proposed acquisitions,
one worth £45 million and another worth £20 million. These had not been disclosed to WCC for good
reason, namely that, through its interest in Wyevale, WCC was a competitor of
the Company. If that is right, and I
can understand why the information was not made known to WCC, it seems to me to take away much of the force
of the criticisms made not only by the Dean of Faculty in his submissions to
the court but by Rothschild in its report.
It is unrealistic to expect the board to propose a new share issue each
time it wishes to make an acquisition. Mr Sellar
pointed out that the decisions taken by the board of directors were based on
advice from their financial advisers, Brewin Dolphin, and were supported at
appropriate times by legal advice, though this seems to me to be of less
importance. A letter from Brewin Dolphin
to the Company responding to the Rothschild report was lodged in process. Mr Sellar also submitted that the advice
given to WCC about the taxation point was based on an incorrect assumption in
that it was addressing the existing loan facility whereas the relevant question
related to an increased loan if the Open Offer did not proceed.
[27] At the
stage of an application for interim
interdict, the court is necessarily presented with an incomplete and
fast-moving picture. The information
about the future acquisitions which are currently being negotiated is an
illustration of this. Taken in
isolation, some of the criticisms made by WCC by reference to the Rothschild
report, and the apparent absence of any identified targeted acquisitions, might
seem to have some force. But put in the
context of the information which the Company can put before the court, which it
had had good reason not to tell WCC before the court application, the force of
those criticisms is removed. What the
court is then being asked to do is to adjudicate between competing commercial
interests and to form views as to the motivation of the directors of the
Company on the basis of an incomplete snapshot of what is going on. It would not be right for me to attempt to
reach detailed conclusions on the particular submissions made to me - those
arguments will no doubt develop if the petition continues beyond this stage -
but my conclusion on the material put before me is that WCC have not
established a prima facie case that
the board of directors is acting in an improper manner towards them or that the
conduct of the Company's affairs is or threatens to be unfairly prejudicial to
their interests.
Balance of convenience
[28] Even if
I had formed the view that a prima facie
case had been made out that there was unfair prejudice within the meaning of
section 994 of the Act, I would have refused to grant interim interdict. In my
opinion, the balance of convenience points very firmly in the other direction.
[29] On
behalf of WCC, the argument was put in this way. If interim
interdict was granted, but at the end of the day it was decided that WCC
was wrong in its complaints, then all that would have happened would have been
that the Open Offer was delayed by some months. Technically, of course, it might lapse; and
it was recognised that Tesco's commitment to underwrite it came to an end at
the end of June 2008. But there was no
reason why Tesco would not be prepared to underwrite a new offer on similar
terms. On the other hand, if interdict
were refused, the position of WCC would be irretrievably damaged. They would have had to invest £44 million
to maintain their position in the Company or see their interest diluted. If they did not take up their entitlement to
the new shares, Tesco would acquire a sufficient shareholding to push through
any Special Resolution and achieve the delisting of the Company which they
wanted. They would thus achieve by this
route what they had failed to achieve by the Takeover Offer in June 2007. It was submitted that I should preserve the status quo pending determination of the
issues in the petition.
[30] I do
not accept these arguments. The effect
of granting interim interdict would
not only be to prevent the present proposals going ahead without any certainty
that they would be reinstated on the same terms. Of greater importance is the fact that the
current negotiations for acquisitions would inevitably collapse, since sellers
would not simply wait to see what was the outcome of protracted litigation, and
the expansion of the Company's business would be halted or significantly
delayed. I cannot ignore the fact that
WCC, through its interests in Wyevale, is a major competitor of the Company and
the effect of granting interim
interdict in this case would be to advantage Wyevale and, indirectly, WCC. I have already indicated that I do not
necessarily consider preservation of the status
quo to be the overriding consideration in all cases. But even if I did, I would have to ask: what
is the status quo here? The Company has, and has had for some time,
plans to expand. Those plans, and the
negotiations presently under way to acquire new outlets, are surely part of the
status quo. By granting interim interdict I would be interfering with the Company's ability
to compete with its competitors, including a competitor in which WCC has a
significant interest. The court should
not be used to further the interest of one or other party in a commercial
tussle.
[31] Further,
it seems to me that there are other remedies short of granting interdict which
will protect WCC if its case of unfair prejudice is ultimately successful: c.f.
per Hoffman J in Re Posgate & Denby
(Agencies) Ltd. (supra) at p.15. In cases of unfair prejudice under
section 994, the expedient course will often be an order that one party
buy out the other's interest in the Company.
If the allegations made by WCC in its petition are found to be valid,
that is at least one possible remedy that the Court will consider. On behalf of WCC it is said that it would be
unfair if Tesco, having failed to achieve a buy-out of WCC's interest in the
Company by legitimate means in June 2007 could, by engaging in unfairly
prejudicial conduct, achieve that result by a legitimate means. There is, of course, considerable force in
this. On the other hand, Mr Sellar
submits that the circumstances narrated in the petition show that in reality
these parties cannot carry on together as major partners in the Company. Decision making will constantly be impeded
and there would be the prospect of renewed applications to the court for
interdict whenever WCC felt that its interests were being unfairly
treated. Although the Dean of Faculty
rejected this analysis, I note from the passage in the Petition, which I have
already set out at para [14] above, that WCC itself says that there
appears to be no prospect of any improvement in the future so long as Tesco
remains the majority shareholder; and that the most efficient way to free it
from unfair prejudice is for a buy-out one way or the other. In my opinion, this is likely, at the end of
the day, to reflect the reality of the position. If, ultimately, a sale of shares is ordered,
the court has a discretion to order that the shares be valued on such basis as
will safeguard the party who has been unfairly prejudiced from the drop in
value, if any, caused by the unfairly prejudicial conduct. Although such an exercise is not always
easy, it is often carried out and, with the help of experts, a solution can be
arrived at. It seems to me that the
grant of interdict at this stage would simply prolong the battles between the
parties in circumstances where even WCC recognise that the relationship within
the Company cannot continue.
[32] Finally,
I should add this. I have approached
the question of balance of convenience without regard to the merits of the
parties' claims. If I had come to the
view that WCC had shown a good arguable case on the merits, and if I had found
the balance of convenience otherwise to be fairly even, I would have thought it
appropriate to take account of the relative strengths and weaknesses of the
case in coming to a decision as to whether to grant interim interdict. That is
because the grant of interim interdict
at this stage effectively prevents the Open Offer from proceeding and, more
importantly, causes a significant delay to the Company's expansion plans. It would not be just, in my opinion, to grant interim interdict having this effect
unless the court were satisfied that WCC had a strong prospect of succeeding at
the end of the day. In my opinion it
does not have a case of that strength.
Even if I had formed the view that it had crossed the threshold of a prima facie case, I would have taken the
weakness of that case into account as a factor in deciding to refuse
interdict. As it is, however, I do not
need to do that since I have formed a clear view that the balance of
convenience was strongly against grant of interdict in any event.
Disposal
[33] Accordingly,
I refuse the motion for interim
interdict.
