Rock (Nominees) Ltd. v RCO Holdings Ltd.& Ors

This is an appeal by Rock (Nominees) Ltd (“Rock”) against an order made by Peter Smith J on 29 April 2003 dismissing Rock’s petition seeking relief under section 459 of the Companies Act 1985 against (1) RCO (Holdings) Ltd (in members’ voluntary winding up) (“the Company”), (2) ISS Brentwood plc (“Brentwood”), and (3) ISS (UK) Ltd (“ISS UK”). Brentwood and ISS UK are members of the ISS Group (“ISS”). Joined collectively as fourth respondents to the petition, although no relief is sought against them, are Mr Jahangeer Ahmed, Mr Simon Cox and Mr David Openshaw. The Company has adopted a neutral role throughout, and accordingly references hereafter to the respondents are references to the respondents other than the Company.

On 24 November 2000 the Company sold its shareholding in its wholly-owned subsidiary RCO Group Ltd (“Group”) to ISS UK for £30,117,784. At the date of the sale, ISS owned more than 96 per cent of the issued share capital of the Company, Rock owned a further 2.48 per cent, and a company called Rapid Reef Ltd (“Rapid Reef”) a further 0.96 per cent. The directing mind behind Rock and Rapid Reef is and has at all material times been Lord Ashcroft. The individual respondents were at that date directors both of the Company and of ISS UK. I will refer to them collectively as “the Respondent Directors”.

By its petition, Rock alleges that the sale was at an undervalue; that by their conduct in relation to the sale the Respondent Directors breached their fiduciary duties as directors of the Company; and that Rock has thereby been unfairly prejudiced as a member of the Company. On that basis it seeks relief under section 459.

The judge found that the Respondent Directors were “in a position of hopeless conflict” in relation to the sale, and that the manner in which the sale was conducted on behalf of the Company amounted to a breach of their fiduciary duties to the Company. However, he went on to find that the sale price was not an undervalue and that in consequence Rock had suffered no unfair prejudice. He accordingly dismissed the petition.

I granted permission to appeal on the papers on 2 June 2003.

By its grounds of appeal Rock challenges the judge’s finding that the sale was not at an undervalue, contending that in making that finding the judge took into account irrelevant matters and that on the evidence before him he ought to have made a contrary finding.

By a Respondent’s Notice, the respondents cross-appeal against the judge’s finding of breach of fiduciary duty by the Respondent Directors.

The Company has served a Respondent’s Notice directed only at the appropriate form of relief, should the appeal be allowed.

At all material times the Company carried on the business of supplying support services, principally in the healthcare and industrial sectors of the UK market. It provided a wide range of services including cleaning, catering, security, ground maintenance, waste management and car park maintenance. It carried on this business through two operating subsidiaries, which were wholly-owned by Group (which was in turn wholly-owned by the Company).

In early 2000, ISS identified the Company as a potential target for a takeover. In February 2000 Mr Jens Oleson, a senior vice-president of ISS, prepared a report (“the February Report”), in which he evaluated the benefits to ISS UK of acquiring 100 per cent of the shares in the Company. The February Report refers in particular to substantial cost and other benefits which, according to the February Report, would result from an amalgamation of the business of the Company with that of ISS UK. These benefits were referred to in the February Report as ‘synergies’, and for that reason (there is no other) I will so refer to them hereafter.

The synergies identified in the February Report included substantial cost savings achievable by the sale of the head office and by staff savings at senior level, and the benefit of cross-selling opportunities. It is common ground that the synergies were personal to ISS UK, in the sense that they would not have been available, or available to anything like the same extent, to any other possible purchaser.

At the time of the February Report, the Company’s shares were trading at 190.5p per share; their lowest level for some months. The February Report recommended a bid of between 247p and 266p per share (a premium of between 30 and 40 per cent on the current share price), concluding that “the window is open now”.

In the light of the favourable views expressed in the February Report, it was decided that ISS should made a takeover bid for the Company. In the event the bid was made by Brentwood, which had been incorporated for the purpose. The initial offer, which was confirmed by letter dated 3 May 2000, was 247p per share.

The Company’s board of directors (which did not at that stage include the Respondent Directors), after receiving advice from Dresdner Kleinwort Benson, recommended the bid for acceptance. According to Mr Raven, the Executive Chairman of the Company, whose evidence the judge accepted, the Company had had four previous approaches but, following ‘due diligence’, the highest offer it had received was 202p per share.

On 4 May 2000 Mr Raven, with other directors of the Company including Mr Scholes (the Deputy Chairman), met Lord Ashcroft at his request.

By 10 May 2000 the offer had increased to 247p per share. By 12 May 2000 ISS had acquired 29.7 per cent of the Company’s issued share capital: just below the 30 per cent level at which a bid for all the shares would become mandatory under the City Takeover Code. The market price of the Company’s shares was also increasing. By 16 May 2000 it had risen to 260p per share.

On 12 May 2000 Lord Ashcroft had a further meeting with Mr Scholes. Mr Scholes’ evidence (which the judge accepted) was that at this meeting Lord Ashcroft made it clear that ISS would not succeed in acquiring 100 per cent of the Company, that he (Lord Ashcroft) was intending to buy into the Company and to retain his minority shareholding, and that the higher the offer by ISS the more likely was it that the Company would remain independent. Lord Ashcroft indicated that he was willing to do a deal at 272p per share, but he said that at that level Mr Scholes would have made him pay “£3M more than he need have done”. Mr Scholes left the meeting with the clear impression that Lord Ashcroft would not be willing to pay more than 272p per share.

On the same day (12 May 2000) the Company was informed that Rapid Reef (which had earlier acquired 75,000 of the Company’s shares) had acquired a further 525,000 shares, taking its total holding to 5.4 per cent of the Company’s issued share capital. Following further acquisitions by Rapid Reef and BB Holdings Ltd (another of Lord Ashcroft’s companies), by 23 May 2000 Rapid Reef and BB Holdings Ltd had together acquired an 11.3 per cent stake in the Company.

On 25 May 2000 ISS increased its offer to 280p per share. By that date, ISS had acquired 59.7 per cent of the Company’s issued share capital.

On 26 May 2000 Rapid Reef and BB Holdings Ltd accepted the ISS offer and sold their shares in the Company to ISS at a price of 280p per share. Rock, however, retained its shares (the judge found that Rock’s shareholding had been overlooked by ISS).

On the same day Lord Ashcroft faxed Mr Schmidt of ISS, saying:

“Congratulations on RCO. As you know I’ve now given you a clear run. You needn’t actually have paid up. We were also talking to the company but would not pay 280p – neither need you! But thanks for a small profit!! See you soon. Michael.”

Lord Ashcroft also faxed Mr Raven in similar terms. The “small profit” to which Lord Ashcroft referred in his fax to Mr Schmidt amounted, it would appear, to some £250,000. The judge commented that “small” is a relative word. More importantly, the judge, observing that he had not had the advantage of hearing Lord Ashcroft give evidence about the above-mentioned faxes, concluded that absent any other explanation from Lord Ashcroft the only conclusion he could draw was that Lord Ashcroft took the view that 280p was not merely a fair price but a high price for ISS to pay for the Company’s shares.

On 27 June 2000 the initial offer period expired. By that date, ISS had acquired 90.6 per cent of the Company’s issued share capital. However, that was not enough to enable ISS to compel the remaining shareholders to sell their shares. Accordingly on 28 June 2000 ISS extended the offer until further notice.

On the same day (28 June 2000) Rapid Reef came back into the picture, buying 101,000 of the Company’s shares (0.9 per cent of its issued share capital).

By 8 September 2000 ISS had acquired 96.26 per cent of the Company’s issued share capital. It needed to acquire only another 0.8 per cent to enable it to acquire the remaining 3.74 per cent compulsorily. However, the Rapid Reef acquisition, when aggregated with the shares already held by Rock, effectively prevented ISS from increasing its shareholding to the level necessary to enable it to achieve that objective. Attempts by ISS to contact Rapid Reef and Lord Ashcroft were unsuccessful. Lord Ashcroft was not willing to talk.

By this time, a strategic decision had been taken by ISS that, if it did not receive sufficient acceptances to enable it to “squeeze out” the minority shareholders, the two operating subsidiaries should be sold to ISS UK and the Company placed in members’ voluntary liquidation or an extraordinary dividend distributed. The judge found that by this stage there were no outside parties sufficiently interested in the synergies to wish to acquire the Company.

The offer closed on 20 October 2000, with ISS still short of the shareholding required to enable it compulsorily to acquire the minority holdings. On 25 October 2000 a meeting took place between representatives of ISS and Travers Smith Braithwaite, ISS’s solicitors, at which ISS’s strategy was further discussed. Following that meeting Mr Ahmed (one of the Respondent Directors), in his capacity as a director of ISS UK, prepared a valuation of the Company (“the November valuation”). The November valuation was a ‘stand-alone’ valuation, in the sense that it did not take account of the synergies. The November valuation put the value of the Company on a ‘stand-alone’ basis at the equivalent of £1.78 per share. On that basis, the offer of 280p per share represented a premium of more than 57 per cent.

ISS’s auditors, KPMG, were asked to review the November valuation, but without carrying out any valuation exercise themselves. KPMG concluded that the November valuation had been prepared “on a fair and reasonable basis and with due care and consideration”.

At all events, ISS decided to pay a price for the two operating subsidiaries (that is to say, for the shares in Group, which in turn owned the shares in the operating subsidiaries) equivalent to 280p per share in the Company, i.e. £30,117,784.

To implement the procedure, a letter was drafted by Travers Smith Braithwaite which purported to confirm an understanding between the Company and ISS that ISS would not be willing to allow the Company to benefit from the synergies unless the operating subsidiaries were wholly-owned by ISS UK. Referring to this letter, the judge said this (in paragraph 71 of his judgment):

“…. The letter is somewhat surreal, because everybody knew what was happening and the board meeting that took place was a largely illusory affair having been attended apparently by Mr Cox and Mr Ahmed [two of the Respondent Directors] and lasted a matter of minutes. The minutes of the meeting approving things had already been prepared in advance by [Travers Smith Braithwaite] and I do not accept for one minute that any discussion of quorum nor in fact any discussion at all took place. The exercise was purely to rubber stamp the done deal.”

Although the sale agreement is dated 24 November 2000, the sale was not implemented immediately: indeed, it was not announced publicly until September 2001 (some ten months later). The judge found that the reason for this delay was that the parties were concerned that there should be no prospect of Lord Ashcroft attempting to unravel the transaction. The parties took the view that by September 2001 it was too late to turn the clock back.

On 28 September 2001 the Company was placed in members’ voluntary liquidation.

The petition was presented on 14 May 2002.

The relevant statutory provisions are to be found in sections 459 and 461 in Part XVII of the Companies Act 1985.

Section 459 provides as follows (so far as material):

“(1)

A member of a company may apply to the court by petition for an order under this Part on the ground that the company’s affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or some part of its members (including at least himself) ….”

Section 461 provides as follows (so far as material):

“(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 –

….

(d)

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.

….”

Rock’s case as pleaded in the petition falls under two heads.

First, in paragraphs 30 to 36 of the petition, under the heading “Improper purpose”, it is alleged that the (“improper”) purpose of the sale was to achieve 100 per cent ownership of the assets of the Company without having to buy out the minority shareholders; that it was not in the best interests of the Company to sell its operating subsidiaries; further or alternatively that the sale would only have been in the Company’s best interests if the sale had benefited the shareholders of the Company “in a way that retaining their ongoing investment in the Company’s profits and Assets [i.e. the shares in Group] would not have done”. On that basis, it is alleged that the Respondent Directors acted in breach of their fiduciary duties to the Company.

Second, in paragraphs 37 to 40 of the petition, under the heading “Sale of the Assets at an undervalue”, it is alleged that the Respondent Directors “were aware or ought to have been aware that the value to [ISS] of acquiring [the] synergies exceeded market value of the Assets to a purchaser able to unlock those synergies”; alternatively that they were aware or ought to have been aware that there was a real value to [ISS] in avoiding the risk of competing for the Assets in the open market”; and that the sale price should have reflected that value. On that basis, it is alleged that the Respondent Directors failed to achieve the best price reasonably obtainable for the shares in Group.

Paragraphs 41 and 42 of the petition allege that ISS UK and Brentwood are liable for the breaches of fiduciary duty by the Respondent Directors. Paragraph 43 alleges loss.

By way of relief, the petition seeks an order that ISS UK, alternatively the Company, purchase Rock’s shareholding in the Company for a proper value.

On behalf of Rock, the judge heard oral evidence from Mr Andrew Wilson, a financial adviser to certain of Lord Ashcroft’s companies. Lord Ashcroft himself did not give evidence.

The judge noted that Mr Wilson had not been concerned with the material events, and was not qualified to give expert evidence. He concluded that Mr Wilson had clearly been put forward as a witness so that as little as possible should be revealed about Lord Ashcroft’s empire and its connections. The judge described Mr Wilson’s evidence as “completely useless”.

The judge also had before him an expert report by Mr Richard Tolkien, an independent adviser on corporate finance issues retained by Rock. Mr Tolkien was cross-examined on his report.

Mr Tolkien’s report did not address the question whether the price obtained for the shares in Group was an undervalue. Rather, it was directed to the various options which, in his opinion, were available to ISS in relation to Rock’s minority interest. The main thrust of his report was that ISS should have negotiated with Rock to buy out Rock’s interest, and that for its part Rock was in a position to compel ISS to pay, in effect, a ransom price for its shareholding. However, it became apparent in the course of Mr Tolkien’s cross-examination that he was unaware of the existence of Rapid Reef’s holding of 101,000 shares, and that his report had been prepared on the erroneous basis that the acquisition of Rock’s shareholding by ISS would eliminate all the minority shareholders. Further, he had not been told that attempts by ISS to deal with Lord Ashcroft had in any event been rebuffed.

In the absence of any valuation evidence supporting Rock’s case that the sale price was an undervalue, Mr Robin Potts QC (appearing, with Mr Andrew Thornton, for Rock) was constrained to rely on the February Report as the basis for Rock’s case on that issue. However, the judge rejected Mr Potts QC’s submission that the February Report could be treated as a valuation of the shares in Group. He concluded (in paragraph 134 of the judgment):

“It was nothing of the kind. It was a document which assessed possibilities which might accrue to ISS if the bid process was successful and 100 per cent of the shares acquired.”

For the respondents, the judge heard oral evidence from Mr Scholes and Mr Raven, whom he found to be “impressive, honest and straightforward witnesses”. He was less complimentary about Mr Cox and Mr Ahmed, concluding (as mentioned earlier) that neither of them properly understood their fiduciary duties as directors of the Company and of ISS UK.

On the issue of undervalue, the respondents adduced expert evidence as to the value of the shares in Group at the date of the sale in the form of a report by Mr Raymond Burton, a forensic accountant. Mr Burton’s evidence was to the effect that the sale price of £30,117,784 (which equated to a price of 280p per share for the Company’s shares) was a proper price which took full account of the synergies; and that he would have valued the Company’s shares (bringing the synergies into account) at only 205p per share: i.e. 75p per share less than the final offer price.

As to the allegations of breach of fiduciary duty by the Respondent Directors, the judge found (in paragraph 74) that neither Mr Cox nor Mr Ahmed properly understood their fiduciary duties as directors of the Company and of ISS UK; and that the sale was not at arm’s length. He noted (in paragraph 91) that an independent valuation could have been obtained as a cross-check as to the reliability of Mr Ahmed’s November valuation.

In paragraph 101 of his judgment, the judge said this:

“Mr Ahmed and Mr Cox were in a position of hopeless conflict, because wearing their garments as directors of [the Company] they had to exploit ISS who wanted the synergies. Wearing their garments as directors of ISS they wanted to pay as little as possible.”

The judge accordingly concluded (in paragraph 103) that the conduct of the Respondent Directors, and the manner in which they disposed of the shares in Group, constituted a breach of their fiduciary duties to the Company. Having so concluded, he turned to what he described as “the next and most important question”, viz. whether such breaches of fiduciary duty had caused Rock any loss which could be the subject of justifiable complaint under section 459.

On the undervalue issue, the judge found (in paragraph 120) that:

“[a]ll the evidence in the case demonstrated that ISS were not prepared to pay more than £2.80 per share to acquire [Rock’s] minority interest …. because ISS believed that that price represented a fair price over and above the assets and thus by inference included a premium element representing the value of the synergies which could not otherwise be released.”

He also took into account the market price of the Company’s shares at 190p per share in February 2000, and the fact that the Company’s (then independent) board had recommended the offer to its shareholders. He concluded (in paragraph 122) that Mr Scholes and Mr Raven had not perceived the value of the synergies as justifying an offer in excess of 280p per share. He also took into account Lord Ashcroft’s expressed view that the shares were overpriced at 280p. He continued (in paragraph 124):

“All the contemporary evidence therefore shows that £2.80 reflects a fair value for the shares and that figure includes a premium element for the synergies. I am asked by [Rock] to disregard that evidence as being irrelevant. I do not think it is irrelevant; it is valuable, useful, contemporary material to cross check any other evidence that is before the court.”

The judge then turned to Mr Tolkien’s report. Noting that Mr Tolkien did not know of Rapid Reef’s holding, or that ISS’s attempts to negotiate with Lord Ashcroft had been rebuffed, the judge concluded (in paragraph 128) that Mr Tolkien’s preferred position, viz. a negotiated settlement, was not sustainable.

The judge then turned to the February Report, and to the expert evidence of Mr Burton, saying this (in paragraphs 133 to 139 of the judgment):

“133.

I have already observed that Mr Tolkien did not address the asset value question at all. Mr Potts QC then sought to rely upon the Respondents’ evidence as a basis for the Petitioner’s case.

134.

His main reliance is on the February Report. He, in his submissions to me, repeated on a number of occasions that this was a valuation. It was nothing of the kind. It was a document which assessed possibilities that might accrue to ISS if the bid process was successful and 100% of the shares acquired. It was self evidently not a valuation. Its maker (Mr Olesen) did not have any access to the financial information of RCO. Any synergy realisations were prospective and speculative. Even then, it valued the shares at between 247 – 266 pence per share. ISS of course paid £2.80 when (principally) Lord Ashcroft intervened in May 2000 and secured for himself the small profit already referred to.

135.

There is no question of ISS paying pound for pound for the synergies. That would have meant that the price to be paid reflecting those synergies would be £53,647,526.00 (fifty-three million, six hundred and forty-seven thousand, five hundred and twenty six pounds). Mr Potts QC’s submissions are simply that that figure should be divided between the shareholders. ISS pay the bulk of it (and then have it returned of course) and the minority are paid out at the same rate. This ignores the fact that ISS plainly had paid a premium at £2.80. To require them to pay again requires in effect to pay twice over. It also requires them in effect, notionally to pay for the full value of the synergies. There is no realistic possibility of ISS ever agreeing to such an arrangement. As I have already observed, there were no other players in the market, and I do not see why ISS should be treated in such an unfair way.

136.

I have already identified the other contemporary assessments to the value of RCO, which bear no relation to this figure. I cannot believe all the other people got it so wrong.

137.

Finally, in this context, there is the report of the Respondents’ expert, Mr Burton. I found him to be a credible witness. He was plainly (unlike Mr Tolkien) experienced in these kind of synergy purchases. His report came up with a value of the assets at £2.05 per share (including a value for synergies). This he arrived at, not (as he frankly admitted in his report) revaluing all the assets, but on starting with the synergy valuations and reconsidering those figures in the light of further matters that he discovered. I accept (although reluctantly as I have already said) that the true figure for annual synergies was £1.8 M. Starting with that figure he reduced the synergy valuations to take into account management charges which would be applied when the assets were brought within the umbrella of the ISS Group. These were, he accepted, not scientifically calculated costs. The reason for that is that he considered it an impossible exercise and one which companies operating in groups like this would not do so. He drew comfort (and this was not challenged) from the fact that where inter company management charges like this are levied, where the holding company is outside the UK, and not subject to UK corporation tax, the Inland Revenue checks the basis of the management charge to ensure that a proper level of tax is levied within the UK to reflect the true profits. I found this compelling.

138.

Taking those into account, he reduced the values of the synergies to £420,000.00 per annum. Mr Potts QC attacked this vigorously in his closing submissions. He also challenged it in cross examination. However, Mr Burton withstood the cross examination and remained unshaken. I accept that a valuation of the assets or even the management charges would not have been a realistic possibility at this stage. I accept Mr Burton’s evidence therefore. If there was some evidence countering it or if it was contradicted by other contemporary valuations (or even an expert report from the Petitioner) there might have been some basis for challenging it.

139.

However, as I have said the contemporary values, valued the shares at £2.80 per share and the actual valuation that Lord Ashcroft put on it somewhat ironically was about the same figure £2.02. Mr Tolkien did not address the issue. The only matter which is out of line with all of these is the February Report. However, as I have said, this is not a valuation and I do not think that it is right to treat is as such, and say as Mr Potts QC did that the company has lost £30 million in value between February and November. It is not evidence of a sale at an undervalue in November 2000. There is no basis for me rejecting Mr Burton’s independent expert opinion, which shows that £2.80 per share reflects a premium for the shares including any reasonable figure that could be extracted from ISS for its synergies.”

In paragraph 92 of the judgment, the judge concluded that a sale by a liquidator would not have achieved a better price than that which was in fact obtained.

The judge went on to conclude (in paragraph 141) that whilst Rock had a sufficient interest to give it status to present the petition, “its interests were neither prejudiced nor prejudiced in an unfair way”. In paragraph 142 he expressed his agreement with the submission of Mr Steinfeld QC (appearing, with Miss Elizabeth Weaver, for the respondents) that the petition was a cheeky one. He accordingly dismissed it.

In the course of his judgment, the judge expressed strong disapproval of the strategy adopted by Lord Ashcroft, as described earlier. In paragraphs 89 and 90 of his judgment, he said this:

“89.

In the absence of an explanation (and none has been given beyond Mr Potts QC’s submission that his evidence is not relevant, which I reject) Lord Ashcroft’s absence is significant. I conclude from his absence that (1) he believed £2.80 is a very full price representing the value of the shares in Rock, (2) that he misled ISS and RCO in May 2000 as to his intentions, (3) that he deliberately acquired Rapid Reef shares on 28th June to block the squeeze out by ISS and (4) the reason why he did not talk and the reason why he acquired the shares was to force ISS into paying him a large unmeritorious amount of money to enable it to achieve its legitimate commercial expectations, when it spent the large amount of money it did in acquiring RCO’s shareholding. To my mind this is unacceptable conduct. It is particularly galling that such conduct is then used as a platform to present a Section 459 Petition alleging that his interests as a minority shareholder have been unfairly prejudiced. As Peter Gibson LJ said in Re Ring Tower (no. 2) [1989] BCLC 427 at 437 A, the jurisdiction should be carefully controlled to prevent it from becoming an instrument of oppression. It is difficult to see how this Petition can be described as anything other than an instrument of oppression, designed to unlock for Lord Ashcroft monies, which bear no relation to the value of the shares and bear no relation to any commercial or legitimate interest he would have in the shares in RCO. Euphemistically this practice (which I understand is a not unheard of practice in the City) is described as “green mail”. The proper word to my mind is blackmail. It is the kind of thing, which brings the City into disrepute, to my mind. The purpose of the City is to raise finance to enable companies to develop businesses for their own and the country’s well being. Where matters are dealt with in speculation and profits are made, which are then gathered off shore, when there is no merit and no exposure to the kind of risks associated with companies, that to my mind is not legitimate.

90.

These are the reasons why Lord Ashcroft will not present himself to this court for cross examination. He was not content with a small £250,000.00 (two hundred and fifty thousand pound) profit, earned in a matter of weeks. He now seeks to extract millions from the Respondents. He does not stop there however. I have no doubt that if the Petition was successful he would then seek to extract further millions through the Rapid Reef shareholding. All of this extraction is sought merely as a device to block the legitimate expectations of the overwhelming majority of the shareholders in the company and against the belief of all shareholders that £2.80 represented a good price for the shares, and his own belief that it represented such a fair price and against the backcloth of him giving a clearly misleading impression that he was out of the race and giving ISS a legitimate expectation that he was no longer opposed to them acquiring 100% shares in RCO.”

In paragraph 121 of his judgment, when discussing the counter-strategy adopted by ISS, the judge described Lord Ashcroft’s dealings in relation to the Company and its shares as being “motivated solely by reference to sordid commercial gain”.

Stripped of unnecessary verbiage, Rock’s grounds of appeal boil down to a single substantive challenge to the judge’s decision: viz. that in concluding that the sale was not at an undervalue the judge had regard to irrelevant factors and failed to attach any, or any sufficient, weight to the strength of the Company’s bargaining position vis a vis ISS in November 2000; it being contended that in November 2000 the Company was in a position to extract a ransom price from ISS for the shares in Group, substantially in excess of the price in fact obtained.

Rock also complains about the language the judge used in expressing his distaste for Lord Ashcroft’s conduct.

Mr Potts QC accepts that by its petition Rock seeks to extract from ISS, via the Company, the kind of ransom which, it contends, the directors of the Company should have extracted from ISS, had they fulfilled their fiduciary duties.

Mr Potts further accepts (as he accepted before the judge) that the only issue in the case is the issue of undervalue, and that, even if the Respondent Directors breached their fiduciary duties to the Company, that will avail Rock nothing if the sale was not at an undervalue.

Mr Potts submits that the February Report establishes that ISS valued the synergies at a figure which establishes that the Company was in a position to negotiate a far higher price for the shares in Group than the price which was in fact paid (being a price equivalent to 280p per share in the Company), even allowing for the fact that ISS could not be expected to pay for the synergies on a pound for pound basis. He points out that the contents of the February Report were known to the Company (through the Respondent Directors, in their capacity as directors of ISS UK). He submits that that knowledge put the Company in a position to demand a ransom price. He likens the position of ISS to that of a developer who has purchased land which is effectively landlocked, and that of Rock to the owner of a ransom strip over which the developer needs access. He also submits that by November 2000 the Company had ISS “over a barrel” for the further reason that between February and November 2000 the process of realising the synergies had continued, to the point where by November 2000 the process was irreversible.

Mr Potts submits that Mr Burton’s evidence is, as he put it, “simply incredible”. He submits that Mr Burton’s evidence is completely at odds with the value which ISS UK itself ascribed to the synergies in the February Report: he puts the discrepancy at some £30M, on the basis that the February Report valued the Company at some £58.4M (including the synergies at a value of some £35.6M). On that basis, he submits, Rock’s minority interest was worth some £1.4M. He submits that the February Report is the best evidence as to the value of the assets of the Company acquired by ISS. By contrast, Mr Burton valued the synergies at only £1.8M per year. In reaching that valuation, submits Mr Potts, Mr Burton was in error in a number of respects, one of which was to bring into account notional management charges reflecting the administrative cost of achieving the synergies. He submits that if Mr Burton’s evidence were to be accepted it would lead to the conclusion that the Company’s shares were substantially overpriced at 280p per share.

Mr Potts further submits that it is regrettable that the judge should have seen fit to express himself in such extreme language when referring to Lord Ashcroft’s strategy and motives, particularly since such matters were in any event immaterial to his decision.

Mr Steinfeld QC submits that the Company was never in a position to demand a ransom from ISS, and an independent board of directors could not have obtained any higher price for the shares in Group than was in fact obtained. He points out that it was always open to ISS to place the Company in members’ voluntary liquidation, and then to leave it to the liquidator to sell the Company’s assets on the open market. He referred us to a passage in the cross-examination of Mr Tolkien where Mr Tolkien agreed that a sale by a liquidator would be unlikely to achieve as high a price as a sale by the directors of the Company prior to liquidation. He relies strongly on the judge’s finding that ISS would not in any event have paid more than 280p per share.

He further submits that Mr Potts’ analogy with a ransom strip is a false analogy, since ISS was not at any stage in the position of having bought an asset which it was unable to exploit without the cooperation of Rock. He points out that, for all we know, if ISS had received an offer in excess of 280p for its shares in the Company it might have decided to sell out and take its profit.

He also referred us to a passage in the transcript of Mr Potts’ closing submissions to the judge, where Mr Potts expressly agreed with the judge’s observation that the synergies were not available to any other possible purchaser, and that “there is nobody else within a mile of being interested in this company”.

Mr Steinfeld submits that Mr Burton adopted an entirely orthodox approach to the valuation of the shares in Group. He started with the November Report, and checked whether the assumptions in that report were reasonable. In relation to the synergies, Mr Burton took the view that it was reasonable to reflect the administrative costs of achieving the synergies by reference to the management charges in fact raised by ISS (the level of which had been accepted by the Inland Revenue). He then reached the conclusion that the sale price was a fair price, taking into account the synergies. That conclusion, submits Mr Steinfeld, was one which the judge was fully entitled to accept; the more so since no valuation evidence had been adduced by Rock.

In any event, Mr Steinfeld points out, the judge’s conclusion on the undervalue issue was not based solely on Mr Burton’s evidence; in reaching that conclusion the judge also took into account a number of other factors as set out in his judgment.

Mr Steinfeld further submits that in any event the judge was wrong to find that the Respondent Directors breached their fiduciary duties to the Company. Whatever may have been the shortcomings in the mechanics of the sale process, they did no more than commit the Company to a lawful transaction, on proper terms.

As explained earlier, the only issue in the case is whether the sale price for the shares in Group was an undervalue. If it was not, then (as Mr Potts rightly accepts) Rock has no case for relief under section 459(1).

In my judgment Mr Potts’ submission that in November 2000 the Company was in a position to extract a ransom from ISS as the price for its shares in Group is misconceived, for two main reasons. In the first place, the judge found that ISS would not have paid more than 280p per share for the shares in the Company. It follows that ISS would not have paid more than the equivalent price for the Company’s assets (i.e. the shares in Group). So any ‘ransom demand’ by the Company would have received short shrift from ISS. Secondly, ISS was at all material times in a position, in right of its majority shareholding, to place the Company in members’ voluntary liquidation and thereby to put the Company in a position where it had no alternative but to realise its assets on the open market. Given that, as Mr Potts accepted in his closing submissions to the judge, there was no other possible purchaser within a mile of ISS, once again any attempt by the liquidator to extract a ransom would have been an empty threat and would have been treated as such by ISS.

For the same reasons, Mr Potts’ submission that the fact that the Company happened to know (via the Respondent Directors) of the contents of the February Report somehow strengthened its negotiating position is equally misconceived. An independent board of directors of the Company would have been in no stronger position in negotiating with ISS by reason of the fact that it had by chance acquired a copy of the February Report. ISS’s response would have been exactly the same.

So, putting aside any suggestion of ‘ransom’, the issue is simply whether the price in fact obtained for the shares in Group was the best price reasonably obtainable. As to that, the evidence before the judge (which, as pointed out earlier, did not include valuation evidence adduced by Rock) admits of only one answer: it was the best price reasonably obtainable, for the reasons the judge gave.

In particular, I can discern no substance in any of Mr Potts’ criticisms of Mr Burton’s evidence. As I see it, Mr Burton adopted an entirely orthodox and conventional approach to valuation, and his conclusion is fully supported by the materials before him and by his reasoning. Moreover, his conclusion is powerfully corroborated by the other factors to which the judge referred in his judgment. In the circumstances, far from criticising the judge for accepting Mr Burton’s evidence, it would to my mind have been extraordinary had the judge not accepted it.

In submitting that the February Report was a valuation of the Company for the purposes of deciding what ISS should pay for it (or for its assets) Mr Potts was attempting to turn the February Report into something which (as the judge rightly concluded) it plainly was not. The fact that the February Report itself recommended a bid between 247p and 266p per share is enough to demonstrate the fallacy in Mr Potts’ submission.

As to the judge’s finding of breach of fiduciary duty on the part of the Respondent Directors, it is plain that, as the judge found, the Respondent Directors were “in a position of hopeless conflict”. Further, they would undoubtedly have been well-advised to obtain an independent valuation. However, no harm was in fact done and no damage or prejudice caused. Nor is there any question of the Respondent Directors being personally accountable in any way. That being so, it seems to me to be inappropriate to reach a conclusion that they breached their fiduciary duties, as it were, in the abstract. The clumsy manner in which the sale was carried through is not in itself sufficient, as it seems to me, to found a finding of breach of fiduciary duty in circumstances where no relief or remedy is required from the court. So, although it makes no difference whatever to the final result, I would for my part allow the cross-appeal on that issue.

Lastly, I turn to Mr Potts’ complaints about the language which the judge adopted when describing Lord Ashcroft’s strategy and motives. In expressing himself as he did, the judge plainly had in mind the (on the face of it) clear message in Lord Ashcroft’s fax to Mr Schmidt (quoted earlier), which led ISS to believe that Lord Ashcroft was no longer interested in the Company. However, I accept Mr Potts’ submission that Lord Ashcroft’s strategy was entirely lawful (indeed, Mr Steinfeld did not contend otherwise). Equally, it goes without saying that the pursuit of commercial gain is an entirely legitimate objective. That being so, it was in my judgment unnecessary and inappropriate for the judge to have expressed himself in such extreme language. However, the fact that he chose to express himself as he did has no impact on the conclusion which he reached on the issue of undervalue: a conclusion which, for the reasons I have given, was in my judgment plainly correct.

In dismissing the petition, the judge described it as “cheeky”. I think it is worse than that. Rock has sought to use the court’s jurisdiction under section 459 as, in effect, another weapon in the tactical battle with ISS. By its petition Rock seeks to extract the ransom of which (as he would have it) it was wrongly deprived when ISS decided to adopt the strategy of buying the Company’s assets rather than buying out the minority shareholders. It seems to me that that may well be an abuse of process. However, since Mr Steinfeld did not seek to rest his case on that foundation I will not consider it further.

I would dismiss this appeal.

I agree

I also agree.