Arbuthnott v Bonnyman & Ors, Court of Appeal - Chancery Division, May 08, 2014, [2014] EWHC 1410 (Ch)

Resolution Date:May 08, 2014
Issuing Organization:Chancery Division
Actores:Arbuthnott v Bonnyman & Ors

Case No: 3290 of 2012

Neutral Citation Number: [2014] EWHC 1410 (Ch)



Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 08/05/2014

Before :


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Between :

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David Chivers QC and Andrew Thompson (instructed by Herbert Smith Freehills LLP) for the Petitioner

Kenneth MacLean, QC James Potts QC and Sam O'Leary (instructed by Slaughter and May) for the Respondents

Hearing dates: 22nd, 23rd, 24th, 27th, 28th, 29th, 30th and 31st January, 3rd, 6th, 7th, 10th, 11th, 12th, 13th, 14th, 17th, 18th, 19th, 20th, 24th, 25th 26th February and 10th, 11th, 12th and 13th March 2014

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JudgmentMrs Justice Asplin :

  1. This case concerns claims of unfair prejudice under s.994 of the Companies Act 2006 made by the Petitioner, Mr Geoffrey Arbuthnott (``Mr Arbuthnott''), who is an 8.91% shareholder in the Nineteenth Respondent, Charterhouse Capital Limited (the ``Company'').

  2. The Company through various subsidiaries and limited partnerships carries on a well-known and very successful private equity business, trading under the name of ``Charterhouse'' (the ``Business''). After a management buyout from the HSBC group in 2001 the original shareholders of the Company were also the principal executives of the Business. Over time a number of the original executives have retired or left and a misalignment between the shareholding in the Company and the identity of the active executives in the Business has arisen.

  3. In January 2008, Mr Arbuthnott, one of the Founders, gave notice of retirement as a member of Charterhouse Capital Partners LLP (the ``LLP''), the main operating entity in the group of companies and LLPs in which the Company is interested (``the Group''). The LLP acts as investment adviser for the private equity funds managed by the Group. At the same time as retiring as a member of the LLP, Mr Arbuthnott retired as a director of the Company and other subsidiaries. However, he retained his 900 A shares of £0.01 each in the capital of the Company.

  4. On 11 November 2011, the Eighteenth Respondent, Watling Street Limited (``WSL''), a vehicle for the 1st to 11th Respondents who were also shareholders in the Company and the other active members of the investment management team, made an offer to acquire all shares in the Company for £15.15 million (the ``WSL Offer''). The WSL Offer was accepted by all of the members of the Company (other than Mr Arbuthnott), and they transferred their shares to WSL in February 2012. It was a condition of the WSL Offer, amongst others, that those who accepted it should vote in favour of an amendment to the articles of association of the Company. This duly took place. WSL proposes to exercise drag provisions in the Articles of Association in their amended form in order to acquire Mr Arbuthnott's shares. Mr Arbuthnott says that they would be better described as expropriation provisions.

  5. In summary, Mr Arbuthnott raises four claims of unfair prejudice although there was some dispute as to whether these have been extended in the course of the proceedings, something to which I will return. In any event, the four main elements set out in the Petition were:

    (i) First, that on 18 December 2008, he entered an oral agreement with Mr James Gordon Bonnyman the Chief Executive of the Company acting on its behalf (``Mr Bonnyman'') under which it was agreed that there would be an independent valuation of the Company which would form the basis of a negotiation between Mr Arbuthnott and the Company for the purchase of his shares (the ``Oral Agreement''). Mr Arbuthnott claims that the Company repudiated the Oral Agreement, causing him unfair prejudice;

    (ii) Secondly, that the Company failed properly to consider or investigate concerns which he had raised in 2006, 2008 and 2009, about the misuse of confidential information and acquisition processes within the Company;

    (iii) Thirdly, that subsequent amendments to the Shareholders' Agreement in 2009, which restricted the information rights of members, were improper and unfair;

    and lastly that

    (iv) The WSL Offer, the amendments of the Company's Articles of Association (the ``Articles'') which were a term of the WSL Offer, and the manner in which the WSL Offer was dealt with by the Company were carried out improperly in order to expropriate Mr Arbuthnott's shares at a gross undervalue rather than for any genuine corporate purpose.

    Relief sought

  6. The relief which Mr Arbuthnott seeks is either that he be permitted to purchase the shares of the 1st to 17th Respondents now held by WSL, at the price which applied under the WSL Offer or alternatively, that his shares be purchased by the Respondents at a fair and proper value determined by the Court or by a valuer appointed by the Court, reflecting the pro rata value of those shares on the basis of a willing buyer and a willing seller for the entirety of the issued share capital of the Company. In the further alternative, Mr Arbuthnott seeks injunctive relief in relation to the purchase of his shares and the remuneration policy applied by the Company.

  7. In closing it was also submitted that an amount should be added to the purchase price payable by the Respondents or awarded in relation to the dividends foregone by Mr Arbuthnott during the period from his retirement in 2008 until the WSL Offer in 2011 and in particular in respect of 2009 and 2010.

    Witnesses and Experts

  8. It seemed to me that all of the witnesses of fact were straightforward and sought to assist the court, although in some cases their recollection of events was clouded by the passage of time and what in some cases appeared to be a reconstruction of events in light of the issues raised by Mr Arbuthnott. If and to the extent that I found parts of the evidence to be unreliable I will mention it expressly below.

  9. I heard expert evidence on the Private Equity business from Mr Morton on behalf of the Respondents and Mr Florman for Mr Arbuthnott. They not only produced their initial reports and a joint memorandum but were also both the author of two supplemental reports.

  10. Mr Florman is the former Chief Executive Officer of the British Private Equity & Venture Capital Association. He has experience of having set up his own private equity firm, and worked for seven years at Doughty Hanson, a firm which is accepted to have been within Charterhouse's peer group. He also advised 3i in its purchase of Adler in 1999 and sold his own small financial services business.

  11. Mr Morton is a chartered accountant who has 29 years experience in corporate finance, the last 26 of which were spent as adviser to and in relation to the main participants in the private equity industry. It was not disputed that during his career he had advised on more change of ownership transactions of private equity fund management companies than anyone else in Europe.

  12. There were also lengthy reports, supplemental reports and two joint memoranda from the valuation experts. Mr Mitchell was instructed on behalf of Mr Arbuthnott and Mr Eales on behalf of the Respondents.

  13. Mr Mitchell is National Head of Share and Business Valuations at BDO LLP and since 2001 has been exclusively involved in the valuation of private companies and shares in them and has given expert evidence in relation to the valuation of a private equity house based in Hong Kong and a number of hedge funds (amongst other things).

  14. Mr Eales is the Global Leader of Ernst & Young's Valuation & Business Modelling team. He is a member of the International Valuation Standards Council standards board, a member of the Chartered Institute for Securities & Investments, a certified Royal Institute of Chartered Surveyors (``RICS'') Business Valuer, a Fellow of the RICS and a Member of the Licensing Executives Society. Amongst other things he is also a former chairman of the Society of Shares and Business Valuers in the UK and Chairman of the RICS Business Valuation Board.

    Background to Charterhouse in more detail

  15. Charterhouse Development Capital Limited (``CDC'') (now a wholly-owned subsidiary of the Company) was established as a subsidiary of Charterhouse plc in 1965. In 1985 Charterhouse plc was acquired by the Royal Bank of Scotland (``RBS''). Thereafter, in 1993, RBS sold Charterhouse plc to Crédit Commercial de France (``CCF'') and Berliner Handels-und Frankfurter Bank.

  16. In 1997, CCF took 100% control of Charterhouse plc and in 1999 there were rumours in the market that ING might acquire CCF. At that time, Mr Bonnyman who took the lead in relation to the negotiation of the proposed buy-out received a number of letters from investors signalling their dissatisfaction at this potential arrangement and a preference for CDC to be independent of a larger group. In 2000, HSBC was considering the acquisition of CCF and once again a number of CDC's investors wrote to Mr Bonnyman expressing their concerns. It was Mr Arbuthnott's evidence that he was of the opinion that Mr Bonnyman had solicited the correspondence as a bargaining tool in the negotiations for the purchase of CDC from HSBC.

  17. In any event, in July 2000, CCF was acquired by HSBC. After the acquisition, discussions began regarding a possible management buy-out of CDC. Mr Bonnyman took the lead. HSBC proposed a high valuation for CDC and in addition, proposed that it should retain 25% of future carried interest in the current investment fund for a period of 5 years after the buy out had been completed. Mr Bonnyman's response was that it would not be acceptable either to the CDC team or to its investors were HSBC to retain carried interest in the future. He made clear that, from the point of view of the CDC team, the entire point of the buyout was to acquire all of the carried interest in...

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