Oak Investment Partners XII, Ltd. Partnership v Boughtwood & Ors, Court of Appeal - Chancery Division, February 06, 2009, [2009] EWHC 176 (Ch)

Resolution Date:February 06, 2009
Issuing Organization:Chancery Division
Actores:Oak Investment Partners XII, Ltd. Partnership v Boughtwood & Ors

Neutral Citation Number: [2009] EWHC 176 (Ch)

Case No: 5715/08 & 9860/08




Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 06/02/2009

Before :


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Between :

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Mr Christopher Harrison, Mr Donald Lilly (instructed by Simmons & Simmons) for the Petitioner

Mr Max Mallin, Mr David Peters (instructed by Needleman Treon) for the First and Second Respondents

Mr Thomas Sprange (instructed by Steptoe & Johnson) for the Third Respondent

Hearing dates: 8/12/08 - 14/1/09

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Draft 6 February 2009 15:37 Page 2

Mr Justice Sales:

  1. This is the hearing of an unfair prejudice petition (``the Petition'') and a cross-petition (``the Cross-Petition), both brought under section 994 of the Companies Act 2006. The Petition is brought by Oak Investment Partners XII, Limited Partnership (``Oak'') against Martin Boughtwood (``Mr Boughtwood''), Andrew Boughtwood (``Mr Andrew Boughtwood''), Stephen Bennett (``Mr Bennett'') and QED Group Limited (``QED''). The Cross-Petition is brought by Mr Boughtwood against Oak, QED and QED's principal wholly owned subsidiary, PML Flightlink Limited (``PML''). The Petition and the Cross-Petition both relate to the conduct of the affairs of QED and PML, together with two other subsidiaries of QED (PML Automotive Limited - ``Automotive'' - and PML Systems Limited - ``Systems''). On 28 November 2008 PML was put into administration by an order of the High Court. That order had the effect of suspending proceedings against PML by virtue of section 44 of the Insolvency Act 1986.

  2. Oak and Mr Boughtwood are the principal shareholders in QED. Oak is a major venture capital firm. In September 2007 Oak invested in PML, a company owned by Mr Boughtwood, by taking preferred shares in PML. There was a corporate re-structuring in November 2007 whereby QED became the holding company for PML, Automotive and Systems. The principal business of the new group remained in PML. It is common ground that PML originally, then QED and the businesses it controlled, were to be run as a joint venture between Mr Boughtwood and Oak in the nature of a quasi-partnership. The exact nature of this quasi-partnership and of the obligations which arose in relation to it will require careful examination in due course.

  3. PML had an established historic business, manufacturing joysticks and small electric motors for uses in various applications. This was referred to in evidence as PML's ``legacy business'', and is not of great significance in these proceedings. The principal business of PML, however, was developing new technology in the form of electric motors positioned in the wheels of cars and trailers (known as the ``Hi-Pa drive'' system), in order to reach a position where it could produce viable, robust prototype motors for supply to vehicle manufacturing customers, which could in turn be developed into motors incorporated into vehicles in a full commercial manufacturing process. This new technology was based on ideas of Mr Boughtwood. It was described by witnesses at the trial as a ``disruptive'' technology, meaning a technology which potentially offered a revolutionary break from previous means of powering automobiles (particularly via the internal combustion engine). In a world of global warming and concerns about security of oil supplies, the Hi-Pa drive system is an exciting new idea which offers potential to tap into what might prove to be a huge market for alternative automotive propulsion systems. PML has been able to attract a high quality management team who were impressed by the idea on which the system is based and have high hopes for its commercial potential. Despite a great deal of work, the system is still at a relatively early stage of development. The original good idea was not enough by itself; it required and requires the dedication of substantial financial resources to develop it into a viable product which could be taken to market.

  4. Oak has extensive experience of investing in technology start-up companies like PML. This is a speculative and high risk form of investment. Nine out of ten of the companies in which Oak invests fail, but when one succeeds the financial rewards can be very high. It often prefers to invest alongside other venture capitalists, to share the risk involved. The business model it seeks to apply is to provide investment by taking a substantial shareholding stake in a company alongside the company's founder member and any other investor, but without direct management control for itself. Instead, it seeks to put in place a competent and experienced management team to run the business. In particular, it seeks to put in place a board with representation for itself, the founder member and any other investor together with the Chief Executive Officer (``CEO'') of the business, who is required by Oak to be independent of the founder member. This means that no one party can control the board and the business, and decisions at board level have to be taken through a process of debate and persuasion on the business merits of any proposal.

  5. Oak invested about £10m in PML in September 2006, of which about £8.5m was provided as finance for the business and about £1.5m was paid to Mr Boughtwood for part of his shareholding. That investment was made on the common understanding between Mr Boughtwood and Oak that additional finance of about a further £10m would be required to enable PML's business plan for development of the Hi-Pa drive system to be realised. Oak did not wish to make that further investment itself, since it wanted the investment risk to be spread between itself and another investor. In the event, as set out below, no further financing from another investor was secured. The consequence of that, combined with the rate at which PML has used up the funding which was available to it, has been that PML became insolvent and was put into administration on 28 November 2008, with partners in PricewaterhouseCoopers (``PwC'') appointed as administrators. The administrators have since sold the business and assets of PML to a company called Electric Motor Works Ltd, which is a wholly owned subsidiary of Oak.

  6. In brief summary, Oak complains in the Petition that Mr Boughtwood acted in a manner unfairly prejudicial to its interest in QED and (through it) in PML by, in particular, seeking improperly to take control of QED by steps taken by him at a board meeting on 24 June 2008 so as to enable himself improperly to take control of PML by changes to the board of PML, seeking to take an improperly intrusive and extensive role in the management of PML beyond what had been agreed he should do and improperly promoting his own personal interests over those of QED and PML by failing to agree to accept additional funding for QED and PML by way of the issuing of equity in QED in circumstances when such additional funding was necessary to fulfil the joint venture on which he had embarked with Oak. The relief sought by Oak is an order that Mr Boughtwood be required to sell his shares in QED to Oak. In the alternative to its claim for relief under section 994, Oak seeks an order for winding up of QED on the just and equitable ground under section 122(1)(g) of the Insolvency Act 1986.

  7. For his part, Mr Boughtwood claims in the Cross-Petition that Oak has acted in an unfairly prejudicial manner in relation to his interest in QED and (through it) in PML, by withholding important information from him and by conspiring with Craig Knight (``Mr Knight''), the CEO appointed to manage PML's business, and Jonathan Meyer (``Mr Meyer''), the Chief Operating Officer (``COO'') of PML, improperly to exclude Mr Boughtwood from involvement in the management of PML's business, to undermine his rights and influence in relation to the control of QED and PML and to ensure that PML's business was run in such a way as to drive it into insolvency so that Oak could acquire the business for itself at a fraction of its true value. The relief sought by Mr Boughtwood is an order requiring Oak to sell its shares in QED to him.

    The Legal Framework

  8. Section 994(1) of the 2006 Act provides:

    ``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.''

  9. Both Oak and Mr Boughtwood complain about things done by the other in relation to the affairs of QED and also in relation to the conduct of PML's business. It is common ground that the conduct of PML's business qualifies as the conduct of the affairs of ``the company'' (ie QED) for the purposes of application of section 994 in the present case. This is clearly correct. It is established that in some circumstances the conduct of the affairs of one company can count as the conduct of the affairs of another company for the purposes of section 994. It is necessary to look at the business realities: see the review of the authorities by Lewison J in Hawkes v Cuddy [2007] EWHC 2999 (Ch) at [203]-[213]. Having regard to the business realities in the present case, it is clear that the conduct of the affairs of QED and those of PML were closely interlinked. Although the corporate structure adopted in November 2007 had certain legal implications arising from the separation of the joint investment vehicle (QED) from the direct control of the business (which remained at the PML level), the practical reality was that there was a single business with...

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