Oak Investment Partners XII, Ltd. Partnership v Boughtwood & Ors

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.

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.

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.

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.

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.

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.

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.

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.”

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 its affairs conducted through the combined corporate structure of QED and PML.

It is agreed that mismanagement of the business affairs of a company could in principle amount to unfairly prejudicial conduct of those affairs for the purposes of section 994. In order to do so, however, the mismanagement must be serious, and the court will be astute not to ‘second guess’ legitimate management decisions taken upon reasonable grounds at the time, albeit as events transpired they may not have been the best decisions in the interests of the company: Fisher v Cadman [2006] 1 BCLC 499 at [95]; Re Macro (Ipswich) Ltd [1994] 2 BCLC 3545 at 404-406 per Arden J; Re Elgindata Ltd [1991] BCLC 959, 993-994 per Warner J.

It is also common ground that conduct by one party to a quasi-partnership arrangement in respect of a jointly owned company (involving an agreement that both parties should co-operate in the conduct of the company’s affairs) which causes an irrevocable breakdown in the relationship of trust and confidence inherent in that arrangement is capable of being considered unfairly prejudicial conduct of the company’s affairs for the purposes of section 994: see Rackind v Gross [2004] EWCA Civ 815, at [16].

A further legal issue arose which was not common ground. Part of Oak’s case against Mr Boughtwood is that he sought to exert managerial powers in the conduct of the business which went well beyond what had been agreed between him and Oak, and thereby upset and disrupted the management team and distracted them from their proper focus on advancing PML’s business. On the facts, Mr Boughtwood disputes that the managerial powers he sought to exert went beyond what had been agreed. But in any event, as a matter of law, he submits that such conduct did not involve him using the organs of the company (such as the board of directors of QED or PML) to achieve his purposes in the course of disputes within management, and therefore could not qualify as unfairly prejudicial conduct for the purposes of section 994. Oak, on the other hand, submits that it may do.

In my view, in an appropriate case, where a significant shareholder such as Mr Boughtwood (who, as a result of being such a shareholder, is appointed to a management role within the company) then engages in a course of conduct in that role involving improper assertion of rights of control over the practical management of the affairs of the company, that conduct is capable of being conduct of the affairs of the company in an unfairly prejudicial manner for the purposes of section 994. Such conduct seems to me to fall squarely within the language of section 994(1)(a). Such an interpretation also accords with the broad equitable jurisdiction which that provision is intended to confer upon the court, which is required to take account of all the myriad different ways in which the affairs of a company may in practice be carried on.

The precise distribution of management decision-making authority in any particular company may be a matter of chance. In some companies, the board itself may take a wider range of day-to-day management decisions than in others, where greater scope is left to the directors or employed managers acting alone. It is difficult to see why the application of section 994 should turn upon such fortuitous matters: the jurisdiction under that provision is above all a jurisdiction concerned with substance rather than form. In my view, conduct of a shareholder/director who acted in breach of fiduciary duty in the carrying on of his company’s affairs (but not through use of any company organ) would be conduct capable, in principle, of attracting relief under section 994. There is often a very fine line between duties of employees engaged as senior managers of a company and the fiduciary duty of skill and care owed by a director of a company carrying out similar tasks. I can see no reason in principle why, in an appropriate case, conduct by a person employed as a senior manager in a business, even if not a director, should not be relevant to the grant of relief under section 994. Moreover, the cases on mismanagement of a company’s affairs referred to in paragraph [10] above contemplate that complaint may be made under section 994 even if the mismanagement is not the product of business decisions taken by the board of a company, but by individual directors or others.

Mr Mallin for Mr Boughtwood submitted that there is a distinction between conduct of the affairs of a company falling within section 994 and conduct “dehors the company”, which does not. He referred to an example given by Harman J of a director who steals from a safe, in Re a Company (1761 of 1986) [1987] BCLC 141, at 148. In broad terms, I accept the distinction (although I would wish to reserve my position in relation to the particular example given by Harman J; it seems to me a great deal may depend on the facts: if mismanagement by a director in breach of his duty of skill and care may found a petition under section 994, I have difficulty in seeing why a director’s theft from his company in breach of his fiduciary duty may not). Conduct of anyone involved in a company may be so far removed from actually carrying on the affairs of the company that it does not amount to the conduct of the company’s affairs for the purposes of section 994. But in my view, section 994 is concerned with the practical reality which obtains on the ground in relation to the conduct of a company’s affairs, and there is no sound reason to exclude the possibility that what someone does in exercising or purporting to exercise managerial powers as a director or senior employee should not in principle qualify as conduct of the affairs of a company for the purposes of that provision.

The basic approach to be adopted under section 994 in this context is set out by Lord Hoffmann in the leading speech in O’Neill v Phillips [1999] 1 WLR 1092, in particular at 1098C-1099H. I set out that passage in full here, because of its importance in directing the approach I should adopt in the present case:

“(5)

‘Unfairly prejudicial’

In s 459 Parliament has chosen fairness as the criterion by which the court must decide whether it has jurisdiction to grant relief. It is clear from the legislative history (which I discussed in Re Saul D Harrison & Sons plc [1995] 1 BCLC 14 at 17-20) that it chose this concept to free the court from technical considerations of legal right and to confer a wide power to do what appeared just and equitable. But this does not mean that the court can do whatever the individual judge happens to think fair. The concept of fairness must be applied judicially and the content which it is given by the courts must be based upon rational principles. As Warner J said in Re J E Cade & Son Ltd [1992] BCLC 213 at 227: ‘The court … has a very wide discretion, but it does not sit under a palm tree.’

Although fairness is a notion which can be applied to all kinds of activities, its content will depend upon the context in which it is being used. Conduct which is perfectly fair between competing businessmen may not be fair between members of a family. In some sports it may require, at best, observance of some rules, in others (‘it’s not cricket’) it may be unfair in some circumstances to take advantage of them. All is said to be fair in love and war. So the context and background are very important.

In the case of s 459, the background has the following two features. First, a company is in an association of persons for an economic purpose, usually entered into with legal advice and some degree of formality. The terms of the association are contained in the articles of association and sometimes in collateral agreements between the shareholders. Thus the manner in which the affairs of the company may be conducted is closely regulated by rules to which the shareholders have agreed. Secondly, company law has developed seamlessly from the law of partnership, which was treated by equity, like the Roman societas, as a contract of good faith. One of the traditional roles of equity, as a separate jurisdiction, was to restrain the exercise of strict legal rights in certain relationships in which it considered that this would be contrary to good faith. These principles have, with appropriate modification, been carried over into company law.

The first of these two features leads to the conclusion that a member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted. But the second leads to the conclusion that there will be cases in which equitable consideration make it unfair for those conducting the affairs of the company to rely upon their strict legal powers. Thus unfairness may consist in a breach of the rules or in using the rules in a manner which equity would regard as contrary to good faith.

This approach to the concept of unfairness in s 459 runs parallel to that which your Lordships’ House, in Ebrahimi v Westbourne Galleries Ltd [1972] 2 All ER 492, [1973] AC 360, adopted in giving content to the concept of ‘just and equitable’ as a ground for winding up. After referring to cases on the equitable jurisdiction to require partners to exercise their powers in good faith, Lord Wilberforce said [1972] 2 All ER 492 at 500, [1973] AC 360 at 379:

‘The words [‘just and equitable’] are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act 1948 and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The “just and equitable” provision does not, as the respondents [the company] suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.’

I would apply the same reasoning to the concept of unfairness in s 459. The Law Commission, in its report on Shareholder Remedies (Law Com No 246) (1997) para 4.11, p 43 expresses some concern that defining the content of the unfairness concept in the way I have suggested might unduly limit its scope and that ‘conduct which would appear to be deserving of a remedy may be left unremedied’. In my view, a balance has to be struck between the breadth of the discretion given to the court and the principle of legal certainty. Petitions under s 459 are often lengthy and expensive. It is highly desirable that lawyers should be able to advise their clients whether or not a petition is likely to succeed. Lord Wilberforce, after the passage which I have quoted, said that it would be impossible ‘and wholly undesirable’ to define the circumstances in which the application of equitable principles might make it unjust, or inequitable (or unfair) for a party to insist on legal rights or to exercise them in a particular way. This of course is right. But that does not mean that there are no principles by which those circumstances may be identified. The way in which such equitable principles operate is tolerably well settled and in my view it would be wrong to abandon them in favour of some wholly indefinite notion of fairness.”

This is a case in which critical findings of fact made below depend to a large degree upon my assessment of the various witnesses who were called to give evidence. Mr Boughtwood made strong attacks on the credibility and honesty of the main witnesses for Oak, Bandel Carano (“Mr Carano”, the lead investment partner at Oak in relation to the investment in PML and QED), Iftikar Ahmed (“Mr Ahmed”, a more junior investment partner at Oak who assisted Mr Carano), Mr Knight and Mr Meyer. This was an important part of Mr Boughtwood’s case, as part of his allegation that they conspired together to take steps to undermine his interest in QED/PML, which they denied. Oak in turn attacked the credibility and honesty of Mr Boughtwood.

Mr Carano is a businessman who has some 25 years of experience in the venture capital industry. He impressed me as having clear business judgment and a thorough understanding of the venture capital market and the investment risks associated with start-up technology companies such as PML trying to develop new technical ideas into viable commercial products which can be sold into the market. Although there are points of criticism which may be made about his conduct in relation to Mr Boughtwood, Mr Carano also impressed me as an honest and credible witness.

Mr Ahmed joined Oak in 2004, and has had less business experience than Mr Carano. Nonetheless, he is clearly an intelligent and well-informed businessman who is very familiar with the workings of the venture capital market. As with Mr Carano, there are points of criticism which may be made about Mr Ahmed’s conduct in relation to Mr Boughtwood, but he also impressed me as an honest and credible witness.

Mr Knight is a US national who has his home in the USA. He has had a varied business career involving experience in capital markets, investment banking and founding and managing privately-held companies including companies involved in vehicle manufacturing and marketing. He had first been introduced to Oak in April 2007 as someone whom Oak might wish to engage to assist them at some point in the future if an appropriate investment opportunity arose. On that occasion he had provided his curriculum vitae to Mr Ahmed and matters had been left on the basis that if anything came up for which Oak thought Mr Knight might be suitable, it would bear him in mind. Mr Knight had no further contact with Oak until about early August 2007, when he was contacted by Mr Ahmed and asked to act for Oak as a technical consultant on Oak’s due diligence exercise in relation to consideration of an investment in PML. It was not Oak but Hermann Hauser (“Mr Hauser”), another venture capitalist who personally took a small investment stake in PML alongside Oak in September 2007, who originally suggested that Mr Knight would make a good CEO for the business.

Mr Knight has been the target of attacks by Mr Boughtwood on his honesty and in relation to his competence as CEO for PML’s business since about June 2008, and in certain respects since September 2007. These were pursued with vigour in cross-examination. Understandably, Mr Knight has reacted to this with a growing sense of animosity and hostility to Mr Boughtwood, which affected his evidence in certain respects. In working with Mr Boughtwood at QED/PML he found that Mr Boughtwood would interfere in his own and others’ management decisions, and this also fuelled his dislike for Mr Boughtwood in a manner which affected his conduct and his evidence.

In particular, at places in his evidence Mr Knight sought to make argumentative points. One of these was the claim in his witness statement that it was “ridiculous” for Mr Boughtwood to allege that he (Mr Knight) had planned with Oak to divest Mr Boughtwood of his interest in the QED group by allowing PML to run through its funding and then have its business sold at a low value, since Mr Knight had the benefit of share options for ordinary shares in QED which ranked with Mr Boughtwood’s ordinary shares in QED so that he would be deprived of value for his shares in the same way as Mr Boughtwood if such a plan was carried through. However, it emerged from the evidence of other management witnesses called by Oak that they would expect any investor (including Oak) which acquired the business in future to ensure that the value of their share options was substantially protected upon any transfer of control, since an important part of the value of the business was bound up with the retention of the services of these skilled personnel. When the same point was put to Mr Knight, he accepted it, and accepted that this part of his witness statement was misleading. If Oak acquired the business of PML at the end of the day, excluding Mr Boughtwood from it, his expectation was that his share options would be protected. So, contrary to his evidence, his understanding was that his position was markedly different from that of Mr Boughtwood in that respect.

There are also criticisms which may be made about Mr Knight’s conduct in relation to Mr Boughtwood in running the business.

But having made these points, and approaching Mr Knight’s evidence with a degree of scepticism in light of them, Mr Knight impressed me as a credible and honest witness. When confronted with argumentative parts of his evidence which were not sustainable on closer analysis, he acknowledged the fact. He was also, in my view, open in his evidence about matters which reflected in some respects poorly upon himself. These arose out of his frustration with and growing hostility to Mr Boughtwood. They do not indicate that he acted dishonestly. Furthermore, on the main points, Mr Knight’s evidence was corroborated to a substantial extent by the contemporaneous documents and by the evidence of other honest and credible witnesses, including Mr Carano, Mr Ahmed and Mr Meyer.

I found Mr Meyer to be a straightforward, honest and credible witness. I found his evidence to be fair and balanced, notwithstanding the attacks made by Mr Boughtwood on his honesty and credibility. Mr Meyer’s first involvement with PML was through Mr Boughtwood. Mr Meyer has experience in the venture capital industry, providing consultancy support to start-up companies and advising on management, product and market strategy and funding. In February 2007 Mr Meyer was introduced to Mr Boughtwood as someone who could provide assistance in drawing up a business plan for PML and approaching venture capitalists for the funding which Mr Boughtwood needed to obtain in order to develop his Hi-Pa drive concept into a commercially valuable product. Mr Boughtwood was impressed by him and engaged him. In the period leading up to Oak’s investment in September 2007 Mr Boughtwood pressed it to accept Mr Meyer as CEO of the business, which Oak declined to do. It was only much later that Mr Boughtwood sought to suggest that Mr Meyer had thrown in his lot with Mr Knight and Oak, and had joined with them in conspiring to run PML’s business into the ground so that it could be acquired by Oak at an under-value for its own benefit to the exclusion of Mr Boughtwood. In my view, however, where Mr Meyer agreed to decisions taken by Mr Knight in the running of PML’s business, or crossed swords with Mr Boughtwood in relation to decisions taken by himself within his own area of responsibility as COO, he did so on the basis of his own honest assessment of what was in the best interests of PML and its business. He was not party to any conspiracy with Mr Knight or Oak to undermine Mr Boughtwood or deprive him of his interest in QED/PML.

The other members of the senior management of PML who were called by Oak all impressed me as conscientious professionals who were honest, straightforward and credible witnesses. They were Mr Christie, the sales director (who had known Mr Boughtwood since about 1998 and had previously had a good personal relationship with him; he was recruited by Mr Boughtwood and joined PML in October 2007); Mr Rich, the finance director (who was recruited by Mr Meyer and joined PML at the end of October 2007); Mr Bycroft, vice-president of operations for PML (who was interviewed by Mr Boughtwood and Mr Meyer and joined PML in mid-February 2008); and Mr Watts, vice-president of software, systems and applications for PML (who was recruited by Mr Meyer and joined PML on 10 March 2008). Each of them had himself experienced and witnessed incidents of irascibility and inappropriate brow-beating of employees of PML by Mr Boughtwood, and was upset by matters such as the surreptitious interception of their e-mails by Mr Boughtwood in mid-2008. They were open in their evidence that in light of their experiences they would prefer PML to be owned by Oak rather than by Mr Boughtwood. Mr Watts, in particular, was clearly hostile to Mr Boughtwood. A particular attack was made on the credibility of Mr Christie in light of certain statements he made on video to a journalist at a motor show regarding the performance of Hi-Pa motors, but it did not impress me. I found that each of the management team, including Mr Watts and Mr Christie, did his best to be truthful and fair in giving his evidence in court.

My impression of Mr Boughtwood as a witness was more mixed. He clearly has a passionate belief in the importance of his Hi-Pa drive invention, that viable and robust in-wheel motors will in due course be produced by PML and that PML will then be able to tap into a huge commercial market for its products. This belief has had two effects. First, it has made Mr Boughtwood an eloquent advocate of the Hi-Pa drive system, with his advocacy being blended with an element of marketing puff and over-optimism which coloured his approaches to customers of PML before Oak invested in September 2007 and his approaches to Oak and other investors. So, for example, from about early 2007 Mr Boughtwood caused PML to enter into a number of contracts with customers to supply them with working prototype in-wheel motors within a matter of weeks or months, which delivery commitments it transpired PML could not fulfil, because its motors were not yet at the necessary stage of development. These delivery promises were based on an over-optimistic assessment of what could be achieved, rather than dishonest claims about what PML could do. When Mr Christie joined PML, he had to devote considerable effort to unravelling these contracts and trying to limit the commercial damage to PML’s reputation which arose from them. The failure of PML to meet tight delivery deadlines agreed by Mr Boughtwood in early 2007 in relation to its most important customer, the Swedish car manufacturer Volvo, had a deleterious effect upon its relationship with Volvo which affected PML’s dealings with it and the assessments of potential investors about the commercial prospects for PML’s business. Again, these delivery deadlines were not set dishonestly by Mr Boughtwood, but on the basis of an excess of optimism on his part about what could be achieved.

Similarly, Mr Carano, Mr Meyer and others felt that in their early contacts with Mr Boughtwood he had given them the impression that a BMW Mini had been fitted with the Hi-Pa drive system as a demonstration car and had been driven with it, whereas in fact that was not the case. This evidence was put forward by Oak in an attempt to discredit Mr Boughtwood and to question his honesty. However, it did not appear to me that Mr Boughtwood had lied about the Mini. There was no clear representation about the Mini or the performance of the motors which was established by Oak and then established by it to have been a deliberately false representation on the part of Mr Boughtwood. On the contrary, it was clearly established on the evidence of Mr Meyer and Mr Ahmed that Oak was informed in the course of due diligence before its investment in September 2007 that the Mini had never run with the Hi-Pa drive motors, even if that information was not passed on to Mr Carano internally within Oak. Oak’s decision to invest was based on the views of technical experts it had engaged to report to it about the potential viability of the system rather than on whether the Mini had or had not been driven using the system. I consider that Oak was left with an impression about the state of development of the system because of Mr Boughtwood’s ability to communicate his passionate belief about what could be achieved, rather than because of any distinct or dishonest misrepresentations on his part. In the event, Oak has not pleaded in these proceedings that there was any misrepresentation by Mr Boughtwood which induced it to invest in PML. Similarly, although Mr Meyer gave evidence of an incident in which Mr Boughtwood complained about the way in which he had sent the Mini to the car engineering company Lotus Engineering (“Lotus”) to have the Hi-Pa drive system fitted (see paragraph [143] below), and suggested that an inference might be drawn that Mr Boughtwood had previously misrepresented the position in relation to the Mini to Lotus, I did not think that there was any sufficient basis to allow such an inference to be drawn.

The second effect of Mr Boughtwood’s passionate belief in the Hi-Pa drive system was that he considered the value of PML’s business to be high, and expected others to recognise this. When Oak invested in September 2007 Mr Boughtwood’s own valuation of PML’s business immediately before the investment was $60m (or £30m, adopting a conversion rate of 2:1, which I do for simplicity in this judgment and which was broadly the rate during most of the relevant period). Oak did not carry out a detailed valuation exercise of its own so as expressly to endorse this, but nor did it dissent from it. As time went on, however, and other investors were approached, it transpired that they put a much lower value on PML, discounting for the risk inherent in a technology start-up company of this kind. Mr Boughtwood found it very difficult to accept this, which affected his conduct in relation to seeking the further round of investment which had been contemplated as necessary when Oak invested in PML.

It also affected him in making representations to Oak in the later stages of the relevant events that he was in a position to fund the purchase by him from Oak of its shares in QED, which Oak was prepared to consider. I find that a point was reached when it had become clear to Mr Boughtwood that any chance of financing such a purchase at a price acceptable to Oak with funding provided to him by another investor was highly speculative, yet he still maintained to Oak that he actually had financing in place to support such an offer (see paragraphs [277] - [278] and [286] below). In my view, out of desperation not to lose the possibility of such a purchase to save PML and free himself from Oak and based on his own optimistic belief that if Oak agreed he would be able to persuade another investor to step in, Mr Boughtwood lied to Oak and to the court about the actual state of his funding.

I also find that Mr Boughtwood lied in the account he gave in the witness box about his conversation with Mr Knight on 19 May 2008, in his suggestion that Mr Knight on that occasion told him that Oak wanted him out of the business (paragraphs [187] – [188] below). This was put forward to provide a colour of justification for the actions he took on 24 June 2008 (paragraphs [215]ff below), but in my view was untrue and deliberately so.

In relation to other matters, I found Mr Boughtwood overall to be less reliable than the other witnesses. I think his evidence was coloured by a degree of wishful thinking, desperation and passionate belief in the moral rightness of his own case. The impression that Mr Boughtwood was not always a careful witness was reinforced by a considerable laxity and lack of full candour on his part in relation to disclosure of documents in the course of the proceedings. Details of e-mail contact between Mr Boughtwood (using his wife’s e-mail account) and Mr Bennett emerged only because Mr Bennett gave disclosure of them, whereas it appears that Mr Boughtwood or his wife had deleted them from her computer despite warnings from the solicitors for Oak that all relevant documents should be preserved. At the hearing, it emerged that Mr Boughtwood had not been punctilious in giving disclosure of documents, since he referred to certain documents and recordings which he had not disclosed. Accordingly, where there were significant conflicts between his evidence and those of other witnesses, unless indicated otherwise I prefer the evidence of those others.

Finally, Mr Boughtwood called Mr Newman, the sales manager of PML since about 2003, to give evidence. Mr Newman was employed at a level below Mr Christie. Mr Newman was an honest witness, who was disaffected from the main management team led by Mr Knight and who had had a good experience of working with Mr Boughtwood and respected and admired him. However, on the most significant aspects of the case he was seeking to give evidence about matters, or to comment on what Mr Knight, Mr Meyer and Mr Christie had done, in relation to which he did not have the full picture. As a result, I concluded that I could place little weight on his evidence where it conflicted with theirs. He complained that customer developments he had proposed had been rejected by the management team, and Mr Boughtwood relied upon this in support of his conspiracy allegation that Oak, Mr Knight and Mr Meyer were deliberately trying to run down PML’s business. But I find that the reason the avenues referred to by Mr Newman were not pursued was that they did not reflect the main business objective which the management had decided upon, to ensure that PML developed a viable and robust prototype motor for supply to Volvo and other motor manufacturers, and would have involved a costly diversion of PML’s resources away from that central task. In my view, this was a legitimate business judgment properly open to the management of PML.

Mr Boughtwood has had extensive experience managing companies, particularly in the automotive field. He also has an interest in inventing and developing new products. In 2001 Mr Boughtwood purchased a business called Flightlink, manufacturing joysticks and small industrial motors, and established PML as the vehicle to conduct that business. PML continued to carry on this business (the legacy business referred to above), but Mr Boughtwood also invested considerable time, money and effort in working on his own ideas leading up to the creation of the concept of the Hi-Pa drive.

The development of a novel technological concept such as the Hi-Pa drive into a commercially viable product capable of being mass produced requires very extensive investment in research and development (”R&D”). It became clear that to realise the commercial potential of the Hi-Pa drive PML would require financial resources well beyond those that Mr Boughtwood was able to provide.

For the very reason that there is a huge potential market for a viable alternative to the internal combustion engine, a range of companies around the world are investing in research to try to find ways to produce vehicles powered by electricity. The Hi-Pa drive, though an exciting idea, does not want for competition. It is an important aspect of the background to the present proceedings to appreciate that where it is sought to introduce a product based on new technology to exploit a potential commercial opportunity a huge premium is attached to the speed with which that product can be developed into a commercially viable form which can be marketed and sold. The first company to bring a viable product to market to realise a particular commercial opportunity can hope to make a very large amount of money from selling its product. Other companies which may be in the same race, but only develop their product some time later, may find that they have in practice missed the commercial opportunity which they were competing for. The outcome in their case may be that considerable sums are invested in R&D only to find that at the end of the day there is no market for the product which they develop.

No-one could be sure how advanced the R&D of companies seeking to develop products similar to or competing with the Hi-Pa drive might be. Different assessments on the part of Mr Boughtwood and Oak as to how far in advance of the competition PML might be in developing the Hi-Pa drive into a commercially viable product was one factor among several which had an effect upon various different commercial assessments which they respectively made in the course of their relationship.

Linked to Mr Boughtwood’s strong belief in his invention and over-optimistic assessments about how quickly any problems in developing it could be resolved was his confidence that PML had a substantial lead in time over the competition. From late 2007 this affected Mr Boughtwood’s attitude to how PML should spend its existing resources in developing the Hi-Pa motor (he wanted a slower “burn rate” than did Oak, Mr Knight and Mr Meyer, so that although it would take longer to produce a viable motor PML could eke out its existence for longer without a further round of investment) and to the related question of how urgent the need was for PML to find a further investor to complete a second round of funding (he thought that PML could exist for a relatively extended period without further funding without sacrificing its crucial lead over the competition in getting to market).

Oak, Mr Knight and Mr Meyer, on the other hand, were more sceptical about how advanced the development of the Hi-Pa drive system really was and how long it would take to deal with problems which had emerged with it, were more doubtful whether PML could retain its time advantage over the competition, and so were convinced that it was necessary for PML to hire good quality engineers and accelerate its development programme to produce a viable motor as quickly as possible. Consequently, they believed that a high burn rate was required and that it was urgent and increasingly critical for a second round of investment to be secured for the business.

PML’s need to secure substantial external finance had first become pressing by early 2007. Mr Boughtwood had caused PML to enter into contracts to deliver a prototype Hi-Pa drive motor with excessively optimistic delivery time commitments, and the development of the motor was proving more troublesome than Mr Boughtwood had expected. From PML’s point of view the most important of these contracts was with Volvo. Mr Boughtwood promised Volvo delivery of a working prototype Hi-Pa drive motor in 2007, but it was becoming clear that without significant additional investment in R&D PML was not likely to be in a position to effect such delivery. A failure to deliver would damage PML’s potentially valuable commercial relationship with Volvo, perhaps irreparably.

Accordingly, in early 2007 Mr Boughtwood commenced a search for financial backers who could provide the substantial funding that would be necessary to develop the Hi-Pa drive to a viable prototype stage which could be delivered to Volvo and then developed further into a version which would be capable of industrial commercial production. In February 2007 he produced a draft business plan for PML explaining that the company had been dedicated to the development of the Hi-Pa drive system over the previous five years and that it now sought funding to strengthen the management team and to progress the development of the system in order to take full advantage of PML’s lead over the competition, which he analysed. His assessment was that PML was perhaps two years in advance of the competition in developing its technology.

Mr Boughtwood did not himself have significant experience in raising investment finance. He needed to approach venture capital institutions. He was introduced to Mr Meyer. Mr Boughtwood explained to Mr Meyer that he had tried to raise finance for PML from various sources but had not been successful. He engaged Mr Meyer to rewrite PML’s business plan using information provided to him by Mr Boughtwood about the Hi-Pa drive product, the market and PML’s projected sales.

Mr Meyer thought that Mr Boughtwood had an inflated view of PML’s value. He was seeking to raise £10m in return for a very small stake in the company. Mr Meyer told him that in his experience this would not be regarded as implying a realistic valuation of the company. He told Mr Boughtwood that if he accepted money from a venture capital firm he would have to relinquish control of the business.

Mr Meyer rewrote the PML business plan in a way better calculated to attract the attention and interest of venture capital firms. The plan referred to the fact that PML had a signed contract with Volvo and the possibility of another contract with Lotus which represented revenue of £1.75m in 2007 and a potential of over £300m within five years. Based on information supplied by Mr Boughtwood, the business plan included reference to the Mini which, it was said, PML had converted to hybrid electric form as a proof of concept demonstrator model. The plan again included an assessment of the potential market for the product and of the competitors which PML assessed it faced. Under the heading “Routes to market” the plan identified Volvo, Lotus and Volkswagen as its initial target customers. It stated that Volvo was working on developing a hybrid electric vehicle using PML’s technology, with a view to making this a key feature of its marketing at the Frankfurt Motor Show in September 2007. The business plan stated that “PML will establish a major US subsidiary to represent the company in North America.” It was clear that the US market and US motor manufacturers were of potentially considerable significance for PML.

The new business plan was used by Mr Boughtwood and Mr Meyer in approaches to sources of venture capital. Mr Meyer introduced PML to a number of venture capital firms in the UK and the USA. A number of these firms visited PML in the course of the fund-raising round. Through one of Mr Meyer’s contacts in the USA, PML was introduced to Oak. On 12 July 2007 Mr Boughtwood and Mr Meyer flew to California to meet Mr Carano. Mr Carano was interested in investing in PML’s business and Oak representatives visited PML’s premises in the UK shortly thereafter to conduct due diligence investigations into PML, its technology and its financial position. Oak engaged Mr Knight as a consultant in this due diligence exercise.

Mr Boughtwood told Oak that he had other venture capital providers who were seriously interested in investing in PML at Mr Boughtwood’s valuation of the company at $60m, and that Oak was by no means his first choice as investor. Oak appreciated that, if it wished to invest, it was in a race against others to do so. One of Oak’s selling points was the speed with which it could make a decision and put money into the company. Mr Boughtwood needed money for PML quickly, to enable it to meet its delivery commitments to Volvo as promptly as possible.

Oak carried out due diligence alongside other venture capitalists with which it had had dealings in the past and who it hoped would invest alongside it in PML. These included Mr Hauser, a businessman with considerable experience in financing technology start-up companies, and Amadeus Capital Partners Limited (“Amadeus”). Amadeus was in the lead in conducting the due diligence in relation to PML so far as its technology was concerned. The technical due diligence included discussions with Mr Boughtwood, review of a technical report which Mr Boughtwood had obtained from a Professor Zhu at Sheffield University and obtaining advice from technical experts. Mr Ahmed worked with Amadeus in relation to the technical due diligence. In the course of the due diligence exercise Mr Meyer, Amadeus and Mr Ahmed learned that the Mini described in the business plan had not in fact ever run.

Mr Meyer and Mr Boughtwood discussed the financing options available to PML at length in order to make a decision which venture capital organization to accept as investor. Mr Meyer’s view was that PML was a small company which was struggling to survive and which needed to obtain cash quickly in order to deliver a potentially profitable product to the market. Without further investment, the company would struggle to survive on its legacy business, which did not generate significant profits and would never deliver the Hi-Pa drive system to market. A major factor in Mr Boughtwood eventually deciding to choose Oak as the venture capital firm to invest in PML was the speed with which Oak indicated they could make their investment in the company, which was particularly important with regard to PML’s relationship with Volvo. Both Mr Boughtwood and Mr Meyer were concerned that unless funding could be obtained quickly for PML the business opportunity represented by the Hi-Pa drive would slip away from it. The urgency with which Mr Boughtwood regarded the need for funding at this stage is supported by an e-mail that he sent to Mr Ahmed on 22 September 2007, in which he protested at delays in finalising agreement on Oak’s investment in PML. Mr Boughtwood pointed out that by then PML was over two weeks beyond the four-week target date for delivery to Volvo and five weeks from the Volvo demonstration date. He said:

“Every day is going to matter if we are to succeed in delivering a working vehicle to Volvo. …

IT IS URGENT that we close so that Volvo has the best chance of success. Even one day late will be no good to Volvo.”

This emphasis on speed on the part of both Mr Boughtwood and Oak had a number of effects which had an impact upon later events. First, Mr Boughtwood and Oak agreed that investment of £20m ($40m) would be required to finance PML’s R&D to develop a viable motor for market. Oak was prepared to invest only about £10m, and it was agreed that a second major investor would be required. But rather than tying in a second investor at the outset (which would have taken time to achieve), Oak agreed to make its investment first, in contemplation that there would be a second round of investment shortly thereafter, probably from one of the other investors Mr Boughtwood said were seriously interested in investing. In the event, none of those investors did invest. This left Oak with a feeling that it had been let down by Mr Boughtwood (although in my view he did not misrepresent the position to Oak - albeit Oak may have been influenced by Mr Boughtwood’s own passionate but over-optimistic belief that other investors would indeed be forthcoming - and Oak knew very well that it was taking a commercial risk) and with a concern that PML’s business plan was not properly funded and required additional investment which became increasingly acute as time went by with no second investor agreeing to invest.

Secondly, it seems that Oak did not seek to enter into a debate with Mr Boughtwood about his valuation of PML at $60m (that might have deterred him from choosing Oak as investor), but rather acquiesced in that valuation and sought to protect itself in the contractual documentation eventually entered into by an anti-dilution provision, so that if a second investor invested at a lower valuation Oak’s shareholding would not be diluted by that investment. This placed the risk of a second investor not accepting Mr Boughtwood’s valuation of $60m (but adopting a lower valuation) upon Mr Boughtwood, since in that situation the anti-dilution protection for Oak would mean that there would be a magnified dilution effect in relation to Mr Boughtwood’s own stake in the company. A side-effect of the anti-dilution protection for Oak was therefore that Mr Boughtwood would be likely to be very wary of further investment at a valuation of PML below his $60m valuation, and wary of Oak’s assessments of proposed investments at lower valuation levels (since Oak’s interest in PML would be protected, but his would be substantially eroded). His belief in the validity of his valuation had also been reinforced by Oak’s apparent acceptance of it. Moreover, it seems also to have been contemplated that Mr Boughtwood would have a contractual or practical veto over further investment into PML. This meant that Oak was to a considerable extent made the prisoner of Mr Boughtwood’s own valuation expectations and of his assessments of how long PML could keep going without further investment, if further investment at a valuation of $60m was not forthcoming.

Thirdly, the parties rushed into closing Oak’s investment in September 2007 before a proposed new corporate structure for the business could be fully worked out and put in place. Oak invested by taking shares in PML and putting its funding into PML. After the initial investment, a new and more elaborate corporate structure was worked out and implemented on 13 November 2007, with QED, owned by Oak and Mr Boughtwood and certain other minor shareholders, now in place as holding company for PML, Automotive and Systems, which all became its wholly owned subsidiaries. The general idea was that each subsidiary would in due course be the vehicle for a different aspect of the business, as it developed, and that QED would hold the cash resources as a group treasury company and would hold the relevant patents and intellectual property rights (“IPR”) in the business, to license use of the technology to each subsidiary company as required. In the event, on 13 November 2007 PML did assign ownership of its IPR to QED, but the transmission of the cash resources in PML to QED proved to be a more complex matter and had to be postponed. It never took place, because of legal impediments, so the cash resources remained at the PML level and subject to direct control by the PML board (composed of Mr Knight, Mr Meyer and Mr Boughtwood) rather than the board of QED (on which Mr Boughtwood and Oak were in practice equally represented).

This feature of the corporate structure was accepted by Mr Boughtwood at the time. But later, as he fell out with Oak and Mr Knight and became suspicious of Mr Meyer, it led him to suggest that the corporate structure and the leaving of the group’s cash resources at the PML level (under the effective control of Mr Knight and Mr Meyer, while the Oak board was deadlocked) was part of their scheme to deprive him of proper influence and control over the conduct of the business. I reject that suggestion. In my view, the separation of the IPR and the cash resources in the QED corporate structure, and the continued location of the cash resources in PML were consequences of the hastiness with which Oak’s investment was implemented in September 2007.

Oak produced a Memorandum of terms for purchase of preferred stock in PML dated 13 August 2007 (“the Term Sheet”). The Term Sheet outlined the terms and conditions of Oak’s proposed investment along with one or more co-investors in PML. It was stated to be an expression of intention only and was not to be construed as a binding agreement. It was signed by Mr Ahmed for Oak and by Mr Meyer for PML. Mr Boughtwood accepted that it represented the pre-contract terms agreed by him and Oak.

In the terminology of venture capitalists, when a venture capital investment is to be made in a business, one can speak of a pre-money and a post-money valuation of the company. The pre-money valuation is the value ascribed to the company or business before the investment is put into it. The post-money valuation is the pre-money valuation plus the amount of the new capital investment made in the business. Typically the extent of the shareholding that a venture capitalist will take in a business will be in the proportion that the venture capitalist’s investment has to the post-money valuation of the company. In the negotiations between Mr Boughtwood and Oak, Mr Boughtwood’s view was that PML’s existing value (i.e. the appropriate pre-money valuation) was $60m. On the basis of a pre-money valuation of $60m for PML with a proposed aggregate investment of $40m by Oak and other venture capitalists, the Term Sheet contemplated that the post-money valuation of PML would be $100m. It was proposed that the venture capitalist investors should take a form of preferred shares in the company (series A preferred shares) which would give them certain rights and that on the basis of an investment of $40m the preferred shares would represent 40% of the post-money capitalisation of the company.

The Term Sheet included the following terms:

“Purpose of Financing: The purpose of the financing is to provide the Company with capital to fund technology development, sales and marketing and general corporate purposes. In addition, up to USD $6 million may be used for the redemption of a portion of the ordinary shares held by Mr. Martin Boughtwood on terms reasonably satisfactory to the Investors and Mr. Boughtwood.

Board of Directors: The number of directors on the Company’s board of directors shall be seven (7) and shall be designated as follows:

(i)

three (3) directors shall be designated by the holders of a majority of the then outstanding ordinary shares (a “Common Majority”), one (1) of whom will be the Chief Executive Officer of the Company;

(ii)

three (3) directors shall be designated by the Investors (the “Investor Designees”), one (1) of whom shall be designated by Oak; and

(iii)

one (1) director shall be an industry representative unaffiliated with the Company who will be designated by a Common Majority and shall be mutually acceptable to the holders of a majority of the then outstanding shares of Series A Preferred (an “Investor Majority”). …

(2)

Liquidation Preference. In the event of any liquidation or winding up of the Company, the holders of the Series A Preferred shall be entitled to receive, in preference to the holders of all other classes or series of capital stock of the Company, an amount equal to one times (1x) the Series A Original Cost plus any accrued but unpaid dividends thereon (the “Series A Liquidation”). … ”

The Term Sheet stated that the investors would use their best efforts to close the transaction within four weeks of its signing. In the event, there was some slippage. The formal documentation for Oak’s investment was signed on 26 September 2007 and its investment of about £10m was made on that date, before any other major investor was in place to provide the further £10m which Mr Boughtwood and Oak agreed to be necessary to fund PML’s business plan.

As set out in paragraph [4] above, Oak attaches great importance to the recruitment of a CEO independent of the founder member and to the recruitment of good quality management. That usual approach was underlined in the present case by the fact that Mr Boughtwood himself acknowledged that he would not be an effective CEO for PML, and that one of the reasons that funding was required was to be able to bring in people who would strengthen the management team. According to the business model which Oak sought to promote, the control of the business at board level should be divided between Oak and its co-investors, Mr Boughtwood and the CEO to be appointed. The provisions in the Term Sheet set out this basic arrangement, which I find was explained to Mr Boughtwood. He had pressed for Mr Meyer to be appointed as CEO, but Oak would not accept his appointment in that role and Mr Boughtwood understood that he would have no right to insist upon his appointment. Instead, Oak explained and he understood and agreed that the basis for Oak’s investment was that a CEO should be chosen who was acceptable to both of them, and that his appointment and removal would have to be achieved by joint decision.

It was in relation to this requirement that the speed with which both sides wished to close the investment had a further effect. Oak would not have invested before it was satisfied that a suitable CEO had been identified and agreed upon. This was a perfectly legitimate requirement on Oak’s part: it would have run too big a risk to invest before that, since the value of its investment was inextricably bound up with the quality of the management (and above all of the CEO) of the business. A full recruitment exercise to identify a CEO would have taken about three to six months. To delay Oak’s investment for that long would not have been acceptable to Mr Boughtwood.

In those circumstances, it was Mr Hauser, not Oak, who proposed that Mr Knight might be a suitable candidate to be appointed as CEO. Mr Knight was available. He had acquired knowledge of PML’s business through being involved in the due diligence exercise. Mr Knight was an acceptable candidate so far as Oak was concerned. Mr Boughtwood was doubtful about him, but appreciated that if he wanted speedy investment by Oak a CEO acceptable to Oak would have to be in place and Mr Knight was the only available candidate on hand. Mr Boughtwood chose to agree to the appointment of Mr Knight as CEO in respect of the business. Oak did not apply any improper pressure on him to do so, and at the time he was reasonably happy to engage Mr Knight. However, the circumstances in which Mr Knight was chosen left Mr Boughtwood with a lurking sense of unease that he had been forced to pick someone who might not be the best person for the job and that Mr Knight had been forced on him by Oak. This sense became more acute as time passed and Mr Boughtwood came to feel that Mr Knight and Oak were conspiring against him.

So far as Oak was concerned, however, Mr Boughtwood had freely agreed that Mr Knight should be CEO. Oak would have been very concerned if Mr Boughtwood had indicated that he could not accept or had major reservations about working with Mr Knight as CEO of PML, since making an investment into a company with a potentially divided management could have been disastrous from Oak’s point of view. Oak’s strong desire was to have a management team in place which could work in a spirit of co-operation and harmony with each other to promote the common goals that they all should have for the business.

It is in relation to Mr Boughtwood’s consideration of the appointment of Mr Knight as CEO that certain conflicts of evidence need to be considered. First, Mr Boughtwood’s evidence was that in the course of discussions at about this time Mr Ahmed said to him that if Mr Knight was appointed as CEO Mr Boughtwood would have the right to dismiss him from that position at any stage if for any reason he was dissatisfied with him. Mr Boughtwood suggested that it was because of this assurance that he felt sufficient confidence to agree to the appointment of Mr Knight as CEO. Mr Ahmed denied that he had made any such promise or representation to Mr Boughtwood. His evidence was that he had only indicated to Mr Boughtwood that “we” (i.e. Oak and Mr Boughtwood together) could decide to remove Mr Knight as CEO at any time.

On this dispute I prefer the evidence of Mr Ahmed. I found the commercial reasoning explained by Mr Carano and Mr Ahmed as to why Oak required a CEO to be in place who was not subject to control by the founder member compelling. It makes it extremely unlikely that Mr Ahmed would have made the particular agreement orally which Mr Boughtwood now alleges. I also consider that Mr Ahmed’s version of events is supported by an e-mail Mr Boughtwood sent him on 5 September 2007, in which Mr Boughtwood addressed the question of appointment of a CEO. He referred to Oak’s non-negotiable requirement for Mr Meyer not to take the role of CEO and continued:

“However, I am happy to meet again with Craig [Knight] to determine his level of suitability. I certainly feel Craig is a man I can work with.

If Craig is subsequently deemed unsuitable, you suggested we start a search process. I am also comfortable with this approach if required.”

The use of the word “we” was plainly a reference to Mr Boughtwood and Oak acting together and not to Mr Boughtwood acting alone. There is no suggestion in this e-mail or other contemporary documents that Mr Ahmed had agreed that Mr Boughtwood would have a unilateral power of removing Mr Knight as CEO.

Meanwhile, Oak was giving consideration to whether it could accept Mr Knight as CEO. Mr Ed Glassmeyer, a senior figure in Oak with great experience, had a meeting with Mr Knight. Mr Glassmeyer’s assessment of Mr Knight was glowing. He considered Mr Knight to be very impressive and to be a “truly remarkable fit” for the CEO in PML. The fact that Oak was making this sort of assessment of Mr Knight at this stage indicates, in my view, that it had not pre-selected Mr Knight as a person it wished to foist upon Mr Boughtwood as CEO.

On 9 September 2007 Mr Boughtwood had dinner with Mr Knight to discuss PML and to help Mr Boughtwood make an assessment whether he would accept Mr Knight as CEO. It is in relation to this dinner that a second conflict of evidence arises. According to Mr Boughtwood, during the dinner Mr Knight told him a story about an incident in Mr Knight’s business career when he had been trying to attract investment for a technology company producing genetically modified seed potatoes. According to Mr Boughtwood, Mr Knight told him that the genetically modified potatoes did not taste good and that he had deliberately hoodwinked the investors by serving them ordinary potatoes while pretending that they were the genetically modified kind. Mr Boughtwood’s evidence was that he was alarmed by this confession of dishonest misleading of investors on the part of Mr Knight and was therefore concerned that Mr Knight would not be a suitable person to be CEO of PML. Mr Knight denies that he told Mr Boughtwood a story in which he confessed to taking dishonest action in relation to investors. He accepted that there had been discussion at their dinner of an incident involving potatoes, but his recollection was that he had simply told Mr Boughtwood a story of being a young investment banker out on the road trying to persuade people to buy potatoes, which had involved eating excessive quantities of potatoes so that he became sick of them. He denied that he had ever lied to investors in the manner that Mr Boughtwood suggested.

On this dispute I prefer the evidence of Mr Knight. It seems implausible that Mr Knight, in the course of a meeting where his suitability for appointment as CEO was being discussed, would have made a confession of previous dishonest conduct to Mr Boughtwood. My assessment of Mr Knight is that he was an honest witness. There was no immediate complaint by Mr Boughtwood to Oak that Mr Knight had made a confession of dishonesty to him or that Mr Boughtwood had the concerns about his honesty which he now says he did. In Mr Boughtwood’s e-mail of 22 September 2007 to Mr Ahmed he said he had “a few concerns regarding [Mr Knight’s] employment contract” – i.e. his expressed concerns were limited to the detail of the employment contract which was to be offered to Mr Knight: he did not there suggest that he had reservations about Mr Knight’s personal morality or about the principle of his appointment as CEO of PML. On the contrary, he stated: “I am very keen that [Mr Knight] joins us…”.

The first complaint that Mr Boughtwood made to Oak in relation to this was on 2 October 2007 (after it had been agreed that Mr Knight should be appointed CEO and after Oak had invested in PML) in a telephone conversation between Mr Boughtwood and Mr Ahmed. The same day Mr Ahmed alerted Mr Carano to this potential problem by e-mail. Mr Ahmed had encouraged Mr Boughtwood to speak with Mr Knight to try to clear up any issues between them. Mr Carano asked for detail about the issues that Mr Boughtwood had with Mr Knight. Mr Ahmed reported back with this account, which he had taken from Mr Boughtwood:

“Apparently at a dinner meeting, after a few pints of beer, Craig and Martin opened up and were discussing personal histories. Craig mentioned that he was CEO of a biotech company that was developing seeds for a new kind of potato that grew very fast, but that the potatoes grown this way tasted horrible. But Craig presented the potatoes mixed with some other additives to mask the taste when he presented the potatoes to investors. He got the money but Craig thinks he misled the investors.”

This account seems to me to be a long way from the true position in relation to Mr Knight’s employment history. He never had been CEO of a biotech company. This suggests that Mr Boughtwood did not have a very precise recollection of what had been said at their dinner (and it also does not accord with the account now given by Mr Boughtwood in his witness statement). Moreover, Mr Boughtwood was not saying that whatever it was Mr Knight might have done would necessarily make him inappropriate to be CEO. His complaint appears to have been curiously muted. Mr Ahmed’s assessment was that Mr Boughtwood was fundamentally worried about bringing in a new CEO from a field of one. In my view, that was an accurate assessment: see paragraph [59] above. I consider that Mr Boughtwood was at this stage testing the water with Oak to see whether there might be scope to persuade it, now it had actually made the investment that he had sought, to search around for a new CEO, and he introduced a garbled version of what he had actually been told to try to shake Oak’s confidence in Mr Knight. Mr Ahmed pressed Mr Boughtwood to try to sort out his differences with Mr Knight.

Shortly after this Mr Boughtwood had another dinner with Mr Knight and reported back to Mr Ahmed. Mr Ahmed reported what Mr Boughtwood told him in an e-mail of 3 October 2007 to Mr Carano in these terms:

“I just got off the phone with Martin – called me back after he finished a long dinner with Craig. They hit it off very well and had a very good session. Martin cleared all his perceptions/misperceptions and he is at peace with Craig and is very “excited” about being partners with Craig. So, we are off to the races here. I wanted to keep you posted.”

It is clear that on this further occasion Mr Knight gave Mr Boughtwood a satisfactory impression. Mr Boughtwood did not repeat his allegations that Mr Knight’s honesty was in question. If Mr Knight had really confessed to dishonest conduct on the previous occasion, I do not think that Mr Boughtwood would have been satisfied so easily when he met him again.

A further matter which arose in the period before finalisation of Oak’s investment was an e-mail exchange between Mr Knight and Mr Ahmed on 10 September 2007, when it was contemplated that Mr Knight could be CEO of PML. Mr Knight floated the idea that perhaps the company should be located in southern California with a minor UK presence. He said that he had an idea how this might be broached with Mr Boughtwood “after we fund of course” (indicating that he thought that Mr Boughtwood might be put off from proceeding with investment by Oak if he thought that the company would be removed from the UK, where he was located). Mr Ahmed responded, agreeing with the idea that the company should perhaps be a Californian or “at the very least” a US company and that it would be too risky to raise this at that time and that it was a matter which might be discussed after closing. Mr Boughtwood’s case was that this was an early indication of Oak and Mr Knight plotting together to control the business in a way with which he would not agree, and to take steps to remove him from PML, since it was unlikely, as they knew, that he would be prepared to relocate from the United Kingdom to the USA. In my view, this is to read too much into this exchange.

This was an idea floated by Mr Knight which in fact was not returned to by him after the closing of the investment by Oak. Once in place as CEO, he did not suggest that the company should relocate the main part of its operations to the USA. Considerably later on, in June 2008, Mr Knight stopped off to look at a property in a business park near to his home in the United States as a possible US office for PML. Some architectural plans were sent to Mr Knight after this visit. I accept his evidence that the visit was a casual one which he made simply because he saw an advertising billboard in relation to these premises; that it was the estate agent’s marketing office which drew up the architectural plans and sent them to him as a marketing device (rather than he who caused architectural plans to be drawn up); that the premises he looked at were only suitable for a US marketing operation for PML rather than a full re-location of its business there; and that this incident did not reflect an intention on Mr Knight’s part to procure the relocation of PML to the United States. In fact, the architectural plans are for a small-scale showroom facility, not for a full-scale head office and production facility such as would have been required by PML if it were to relocate to the USA. In my view, the examination of these premises does not indicate a covert intention on the part of Mr Knight to seek to remove PML’s main operations to the USA. His interest in a possible marketing office for PML in the USA was in fact in line with the original business plan drawn up by Mr Boughtwood in February 2007, and was in line with the obvious need for PML to undertake major marketing operations for its products in the USA as one of the major automotive manufacturing markets in the world. So far as concerns the initial idea floated by Mr Knight in September 2007 about a relocation to the United States, I do not consider that it was surprising or disreputable that such an idea should have crossed Mr Knight’s mind, nor that it was something which he should mention to Oak, nor that it was something that Oak might contemplate in a very vague and tentative fashion. It was not taken further by either Mr Knight or Oak and, in my view, falls very far short of supporting the conspiracy allegation which Mr Boughtwood has made against them.

Also in the period before the closing of Oak’s investment in PML there were discussions and e-mail exchanges between Mr Carano and Mr Ahmed regarding the composition of the board of PML after the investment took place. I regard this as completely unsurprising. It is obvious that Oak needed to consider carefully what the decision-making processes would be in the company into which it was investing £10m. The composition of the board at PML was discussed with Mr Boughtwood and was covered in the documentation being prepared with a view to finalisation of Oak’s investment. By 20 September 2007 it was clear that Oak would be the only major provider of funding at the first closing of investment, and that there would have to be a gap in time before the second proposed investor of £10m was located and invested. In that context, Mr Ahmed sent Mr Carano the following e-mail:

“The board at PML is supposed to be 3 common (including CEO), 3 investors and 1 independent mutually acceptable to board and investors.

Since Oak will be the only investor at the first close, and Martin is thinking of having Jon [Meyer] be his second common nominee, you will have a board that will be – Martin, Jon, Craig and Bandel! So, you will be effectively split and will have to depend on Martin’s whims. May I suggest that I add myself to the board at this stage and then get off as soon as you have other investors or get more qualified candidates to represent the investors. So, at close it would be – Jon, Martin, Craig, you and I – that way, between Craig, you and I, you will be able to retain leverage on the board if we need to. Let me know what you think.”

Mr Carano responded to indicate his agreement and Mr Ahmed instructed the lawyers for Oak drawing up the contractual documentation accordingly.

Mr Mallin for Mr Boughtwood suggested that Mr Ahmed’s e-mail indicated that Mr Knight was regarded by Oak as their man who could be controlled by Oak or least depended on routinely to support Oak when voting on the board of PML. This was one of the pieces of evidence relied upon by Mr Boughtwood as part of his case to suggest that there was a conspiracy between Mr Knight and Oak to undermine or remove the proper control which Mr Boughtwood should have over PML’s affairs. I do not accept these suggestions. In my view, Mr Ahmed’s e-mail contained a natural and legitimate consideration of a problem which he identified arising out of the fact that by this stage there was no investor in place alongside Oak. Mr Ahmed was making the assumption that Mr Meyer should be regarded as aligned with Mr Boughtwood. That was a not unreasonable assumption for him to make, given that Mr Boughtwood had recruited and worked with Mr Meyer and had pressed for Mr Meyer to be included in the PML board and indeed to be CEO. So far as concerns Mr Knight’s position, the e-mail is consistent with the explanation which Mr Ahmed and Mr Carano gave of Oak’s desire to have a CEO on the board independent of the company’s founder member. The difficulty which Mr Ahmed foresaw and was seeking to address was that if the board of PML was split 2/2, Mr Boughtwood would have an effective veto over company decisions. But if he (Mr Ahmed) were also on the board, the numbers would be such that Oak would be in a position to appeal to Mr Knight’s independent judgment on the business merits of any decision to be taken and, if Mr Knight agreed with Oak, Mr Boughtwood would not be in a position of enjoying a veto. The e-mail does not, in my view, indicate that Oak and Mr Knight had agreed in advance to co-operate against Mr Boughtwood’s interests, or that they conspired against Mr Boughtwood in the way that he suggests in the Cross-Petition. In my view, the e-mail represented a legitimate and appropriate way for Oak to react to a business difficulty which Mr Ahmed had identified.

On 26 September 2007 Oak completed its investment in PML. On that date a Subscription, Purchase and Shareholders Agreement was entered into between Oak, Providence Investment Company Limited (“Providence”, the investment vehicle for Mr Hauser), WS Investment Company LLC (“WSI”, an investment vehicle associated with a US law firm which Mr Meyer had succeeded in interesting in investing), Mr Boughtwood and PML (“the Subscription Agreement”). The Subscription Agreement reflected what had been set out in the Term Sheet. It contemplated that there should be a second investment round by a further investor yet to be identified. Under the subscription arrangements Mr Boughtwood owned the ordinary shares in PML (although it was also contemplated that there should be a share option scheme put in place to issue ordinary shares to employees) and therefore represented the “Ordinary Majority”. The investors took preferred shares, which had special rights attached to them.

Under the terms of the Subscription Agreement, Oak paid £8,501,012.30 for 3,590 preferred shares in PML, Providence paid £213,117.30 for 90 preferred shares and WSI paid £42,623.46 for 18 preferred shares. These monies were paid as contributions to PML’s own funds. In addition, as contemplated in the Term Sheet, Oak, Providence and WSI paid Mr Boughtwood substantial sums for some of the shares owned by him (£1,498,925.01 from Oak, £37,887.52 from Providence and £7,103.91 from WSI). In effect Mr Boughtwood was paid money personally by Oak and its associated investors as compensation for his loss of control of PML. In these proceedings, Oak represents the interests of all these preference shareholders.

The Subscription Agreement provided in clause 12.1 for a board composed of three Investors’ Directors, three Ordinary Shareholder Directors and an Independent Director. Clause 12.4 provided:

“In accordance with the Articles, the Ordinary Majority shall be entitled by notice in writing addressed to the Company, to, from time, appoint as Directors any three persons (one of whom shall be designated as chief executive of the Board) and may at its cost remove from office any such persons so appointed and may appoint another person in his place by such written notice.”

Clause 12.19 provided:

“12.19

The parties agree that MB [i.e. Mr Boughtwood], the Company and Oak shall use their reasonable endeavours to find a suitable chief executive officer for the Company following Completion, with the intention that such appointment shall take place within 45 days of Completion.”

There was an issue at trial regarding the effect of these provisions. Mr Boughtwood submitted that clause 12.4 conferred a right upon him (as the Ordinary Majority) to appoint and remove the three Ordinary Shareholder Directors as he chose, and that since those directors included the CEO this meant that he had a unilateral right to appoint and remove the CEO. Oak submitted that clause 12.4 imposed an obligation on Mr Boughtwood to use one of the Ordinary Shareholder Director slots for the CEO, but that his rights of appointment and removal of the CEO (as distinct from the other Ordinary Shareholder Directors) were limited by implication from clause 12.19, and could only be exercised by agreement with Oak.

There is no doubt that Oak’s suggested interpretation of these clauses together would produce the position which I have found Mr Boughtwood and Oak agreed should actually apply, and the intended protection for Oak in relation to appointments to and removals from the board of PML was later made explicit in the documentation agreed for the corporate restructuring of 13 November 2007 (see clauses 10 and 12.20(A) and paragraph 7 of Schedule 5 to the Shareholders Agreement of that date). But the natural language used in clauses 12.4 and 12.19 does not readily lend itself to such an interpretation. The mere fact that clause 12.19 contemplated that each of the named parties should use their reasonable endeavours to find a suitable CEO does not, as a matter of language, imply that the eventual appointment should be jointly agreed, nor does it necessarily imply that the general language used in clause 12.4 was to be cut down and limited in relation to appointment and removal of a CEO.

The question then arises whether the interpretation of these two provisions operating together should be informed by the prior agreement made by Mr Boughtwood and Oak that the appointment and removal of the CEO would have to be a joint decision agreed by both of them. In my view, it should be. In the light of that prior agreement, I accept Oak’s submission about the objective interpretation of clauses 12.4 and 12.19 read together. But even if I am wrong about that, it is also my view that joint agreement on the appointment and removal of the CEO was a fundamental basis for Oak’s agreeing to invest in PML, as Mr Boughtwood knew and accepted. That Mr Boughtwood should not have the unilateral right to appoint or remove the CEO was regarded as a fundamental and necessary protection for Oak in the joint venture, so that Mr Boughtwood was bound by an equitable obligation flowing from the quasi-partnership nature of his relationship with Oak in relation to PML not to seek to remove or appoint the CEO on a unilateral basis.

Shortly after Oak made its investment, and in accordance with what it had agreed with Mr Boughtwood beforehand, Mr Knight was appointed as CEO of PML and Mr Meyer was appointed as COO. In accordance with what had been agreed with Oak, Mr Boughtwood was appointed as Chief Technical Officer (“CTO”) of PML. Steps were then taken to recruit other members of the management team.

The employment roles which had been agreed for Mr Knight, Mr Meyer and Mr Boughtwood (i.e. CEO, COO and CTO respectively) carried implications in broad terms for the respective areas of authority and responsibility for each of them in relation to the conduct of PML’s business. Though there was some haziness around the margins of each of these jobs, it was agreed with reasonable clarity that Mr Boughtwood no longer had overall management control of the company as part of his employment responsibilities. Mr Knight was the senior executive employee of PML with authority across the range of the company’s activities, subject to the board. Mr Meyer had the primary authority and responsibility for overseeing the production of motors for delivery to PML’s clients. Mr Boughtwood’s primary responsibilities as CTO were to carry on R&D for PML in relation to the Hi-Pa drive motors and to ensure that steps were taken to protect PML’s intellectual property in relation to the motors by drafting and registering effective patents. In addition, since Mr Boughtwood had been in charge of running the company until late September and work was ongoing within the company to try to meet the requirement for delivery of a viable prototype motor to Volvo, Mr Boughtwood retained responsibility for sorting out that delivery which was then outstanding.

Although it is common ground that the relationship between Oak and Mr Boughtwood in relation to PML’s business was a quasi-partnership, putting the matter in such broad terms leaves open to question what the precise content of the obligations as between Mr Boughtwood and Oak respectively arising out of that quasi-partnership was to be. In my view, it is appropriate to analyse the conduct of the affairs of PML and its business at two levels. The focus of the relationship between Mr Boughtwood and Oak was at the strategic and constitutional level as investors in a common undertaking. This is to be contrasted with the level at which the day-to-day management of the company was to be conducted. Oak’s investment approach, which Mr Boughtwood understood and agreed, was that the investors should stand back from the day-to-day management of the business, leaving that to the expert management team who were put in place, under the direction of the CEO. Indeed, at certain points (see e.g. his e-mail of 31 December 2007, paragraph [137] below) Mr Boughtwood himself was at pains to emphasise to Oak that it should not be seeking to involve itself in or control the day-to-day management of PML. The aspects of the relationship between Oak and Mr Boughtwood which are relevant at the strategic investment level included matters concerning the introduction of the additional investment of £10m, which both recognised at the outset as required to implement PML’s business plan, and matters set out in the Subscription Agreement.

In my view, the observations of Lord Hoffmann in O’Neill v Phillips set out at paragraph [16] above are important in suggesting limits to the quasi-partnership concept on which both sides sought to rely for different purposes. Mr Boughtwood sought to suggest that there was a quasi-partnership obligation upon Oak to disclose to him every communication it might have with Mr Knight and Mr Meyer regarding the affairs of PML, and in particular regarding Mr Boughtwood’s conduct at the management level in PML. Mr Boughtwood identified a significant number of e-mails between Oak and Mr Knight and Mr Meyer discussing such matters which were not revealed to him at the time. But, in my opinion, save in so far as concerned matters which affected the ability of Mr Boughtwood to pursue the joint enterprise at the strategic investment level which he had entered into with Oak, there was no contractual or equitable obligation upon Oak to share these communications with him.

Further, I consider that it was legitimate at all times for Oak to have regard to its own interests vis-à-vis Mr Boughtwood within the arrangements that they had made with each other and to adopt positions in relation to him on the basis of its own internal consideration of relevant matters apart from Mr Boughtwood and without sharing all its own internal e-mails or its communications with the management of PML affecting its consideration of the conduct of its investment relationship with Mr Boughtwood. The concept of quasi-partnership in the current context did not require Oak to subordinate its own commercial interests lock, stock and barrel to some notion of a joint interest with Mr Boughtwood nor to share in all cases its thinking or information relevant to the conduct of its relationship with Mr Boughtwood with him.

Thus, in my judgment, the quasi-partnership relationship which Oak had with Mr Boughtwood did not require it to share with him discussions that it might have with Mr Knight and Mr Meyer, as the senior members of the management team, about Mr Boughtwood’s role within that team (in particular when they raised with Oak difficulties which had arisen between them in relation to the attitude that he was taking to his role within the management team and were seeking both to inform Oak about those difficulties and to obtain Oak’s advice and support in resolving those difficulties). In an ordinary employment context it would not be incumbent upon managers in a business to disclose their internal discussions about an employee, who was said to be acting in breach of his employment role, and about how such a problem should be dealt with, to the employee concerned. In such a context, it would be fair and legitimate for the managers considering the problem to debate between themselves how the problem might best be dealt with without disclosing their communications to the employee concerned, particularly where such disclosure would be likely to exacerbate the problem which they were trying to resolve. In my view, that is the proper characterisation of the bulk of the e-mail traffic in question which passed between Mr Knight and Mr Meyer, and when Oak was brought into the discussion no quasi-partnership equitable obligation arose on the part of Oak to disclose that traffic to Mr Boughtwood.

Mr Boughtwood himself raised points affecting disputes which he had with Mr Knight and Mr Meyer at the management level directly with Oak without copying his communications to Mr Knight and Mr Meyer. This conduct reinforces the impression that the members of the management team regarded it as appropriate as between themselves to keep the major investor in the company, Oak, abreast of any matters which might disrupt the harmony of the management team and to do so without necessarily sharing such communications with those members of the management team who were being discussed in them.

Oak’s own self-interest was directly engaged in relation to these matters, since if the management team could not co-operate with each other and act together with reasonable harmony, Oak’s investment in PML would be placed in considerable jeopardy. Oak had a legitimate interest to seek to be kept informed by management about problems which might arise between them and was, in my view, entitled to use its best judgment in terms of the use it made of that information with a view to resolving such tensions and problems as arose. Accordingly, it did not have an obligation to share all communications bearing upon such matters relating to Mr Boughtwood’s day-to-day management and employment role within the company with Mr Boughtwood.

Mr Boughtwood also submitted that Oak had an obligation arising out of the quasi-partnership to exercise its various contractual rights and rights under the Articles of Association in respect of QED/PML so as to ensure that the management of PML’s business was jointly controlled by Oak and Mr Boughtwood, including in relation to matters such as ordinary decisions at the day-to-day management level on items of expenditure and so forth. I do not accept this. In my judgment, the basis for the joint venture so far as management of this aspect of PML’s business was concerned was the set of contractual provisions and provisions in the Articles of Association of PML and then QED and PML which established a regime which gave authority to decide such matters to the board of PML. That arrangement was further reinforced by agreement on Mr Boughtwood’s role in the management of PML, which was to be confined to that of CTO rather than a role involving any more general right of decision-making in the management of PML’s day-to-day business affairs (while Mr Knight was to be CEO). The quasi-partnership between Mr Boughtwood and Oak did not have the effect of creating obligations on Oak to procure that the regime which the parties had structured in that way should be by-passed so as to afford Mr Boughtwood some more general right of veto or involvement in the conduct of such affairs: cf O’Neill v Phillips at 1098H-1099A.

On the other hand, Oak sought to suggest that there was some binding quasi-partnership obligation upon Mr Boughtwood to accept further investment into PML even at a pre-money valuation considerably lower than $60m (where acceptance of such investment would have a magnified dilution effect upon Mr Boughtwood’s shareholding in the company, because of the anti-dilution protection he had agreed Oak should have). In my view, certain equitable obligations did arise upon Mr Boughtwood in relation to this matter, but they were less extensive than Oak appeared to suggest. Mr Boughtwood, like Oak, was entitled to have some regard to his own interest in relation to his dealings with Oak in the context of their joint investment. He was not obliged simply to take any step that Oak might press upon him as being in the interest of PML or as being necessary to protect Oak’s investment in PML.

However, certain features of the case combine to indicate that Mr Boughtwood did have some equitable obligations relevant to the application of section 994 in relation to the question of further investment in PML’s business. First, he agreed with Oak at the time it invested that additional funding of some £10m would be required in order to carry out the business plan for development of the Hi-Pa drive motor which was the basis for their joint venture, even though it was contemplated that his agreement to such funding would be required. Secondly, he was himself a director of PML and (later) QED, and accordingly owed them fiduciary obligations to take decisions in the best interests of them as companies. Thirdly, the Subscription Agreement and the later agreements entered into with Oak on 13 November 2007 contemplated that there should be a further round of financing and, in relation to that, that Oak’s position should be protected by an anti-dilution provision should the financing be at a pre-money valuation below $60m. Mr Boughtwood and Oak thus contemplated that financing might have to be accepted at a lower valuation, and that Mr Boughtwood should take the risk of that.

In the light of these matters, I consider that Mr Boughtwood had an obligation to Oak arising out of their quasi-partnership to give consideration in good faith to any serious proposals for further investment of up to £10m obtained in the venture capital market and not unreasonably to withhold his agreement to accept such investment, having regard to the business needs of PML as determined by its board, the prospects of obtaining finance at the requisite level from any other source and his acceptance of the risk of dilution of his shareholding in his agreements with Oak.

At the management level, Oak owed Mr Boughtwood an equitable obligation arising from their quasi-partnership not to interfere with (and not to procure or assist other members of the management team, including Mr Knight and Mr Meyer, to interfere with) Mr Boughtwood’s proper rights of participation in management decisions. Conversely, in light of the fundamental importance for the joint venture that the CEO and management team should run the business in accordance with their own best judgment for the joint benefit of the shareholders, and the risk to the success of the joint venture if the management team was disrupted, Mr Boughtwood owed Oak an equitable obligation for the purposes of application of section 994 not to seek to act outside his own proper management role nor to interfere in the areas of management responsibility which had been properly assigned to other members of the management team. In my judgment, the extent of the rights and obligations of Oak and Mr Boughtwood respectively in relation to the management level were governed by the agreement about individuals’ management roles they reached in September 2007 and then, with greater clarity, in November 2007.

Put shortly, it was agreed that Mr Boughtwood would not have extensive decision-making rights, or rights of consultation or participation, in relation to management of the business for decisions below board level. His role was confined to that of CTO. Mr Knight and Mr Meyer were to be the principal executive officers of the company who, subject to the board, decided how PML’s business should be run on a day-to-day basis and how it should produce a viable prototype motor on the basis of the existing Hi-Pa drive concept and deliver such motors to PML’s customers. In the event, Mr Boughtwood found it difficult to respect that agreement and accept such a limited role for himself and sought to assert a wider authority, which led to tensions and disruption within the management team.

By late October 2007, a number of strains were emerging in the various relationships which had been created. It became clear that even with Oak’s investment, PML was not going to be able to meet its obligations to deliver a viable prototype in-wheel motor to Volvo in the near future. PML was seeking to unravel delivery commitments it had made to other customers. Mr Boughtwood was indicating that he could not fully accept the restriction upon his former role as senior manager in the company inherent in the arrangements that he had made with Oak. He was unhappy leaving management to Mr Knight. Mr Knight in turn was finding it frustrating to deal with Mr Boughtwood and raised his concerns in an e-mail to Mr Ahmed on 22 October 2007. He emphasised that he needed to have the authority as CEO to manage PML:

“You cannot put the CEO in a place where his authority is continuously second guessed or overturned.

Martin believes strategy is Bullocks [sic]. A 100 day plan is rubbish.

We do not need to worry about marketing or positioning because customers will just come to us.

He is going along with it because it doesn’t intrude on him.

He is a bully and imposes his will without regard to the work done by others.

Martin does not believe in team and has never even had a PML employee meeting. No wonder the existing business is such a mess.

In the past decisions were made and then rescinded.

You should clearly understand that no matter who the CEO is unless he has clear authority to make decisions Martin will second guess all deci[sions].”

Mr Ahmed forwarded Mr Knight’s e-mail to Mr Carano and gave his assessment in these terms:

“I have been speaking with both Martin and Craig and trying to get Martin to cooperate and accept the new arrangements. Martin says all the right things to me… that he will cooperate and work as partners with the CEO… etc etc. But he clearly resents the fact that there is a new CEO now and he has lost control. Last Thursday, he wanted to write a long e-mail to you and I about how much he detests the fact that this is an “Oak CEO” imposed on him and he had to select from a field of one… that the CEO board seat was a common nominee but that he has no faith on someone Oak brought in since the CEO will always “side” with Oak on the board and that he is left alone. He even threatened to return the money … and undo the deal… he is completely delusional, in my opinion. I asked him not to precipitate an unnecessary confrontation by writing an e-mail to the board and hardly ever would such a situation that he is really worried about come to head. But it appears that we may have a longer term issue here with Martin, whether it is Craig there or someone else. He clearly has a management style issue. Maybe that is why he was comfortable with Jon Meyer, because Jon was happy “reporting” to Martin.”

Also by this stage it was becoming apparent that the other investors which Mr Boughtwood had suggested to Oak would be likely to be willing to invest in PML at a pre-money valuation of $60m were not going to be forthcoming. Therefore, Oak and Mr Boughtwood were now in discussion with a European venture capital firm called Index Ventures (“Index”).

Meanwhile, work was continuing to arrange to put in place the new corporate structure with a new company, QED, introduced as the holding company for PML, Automotive and Services. QED was to be introduced as the holding company for PML by means of a share exchange. Speechly Bircham, the lawyers for PML, were closely involved in drawing up the relevant documentation and advising. In light of the proposed structure referred to in paragraph [51] above, Speechly Bircham proposed that the IPR of PML should be transferred to QED for a price of £750,000. Since the financial resources within the group were held by PML, it was proposed that the consideration of £750,000 for the IPR should for the present be represented by a debt due from QED. It was also noted at this stage that the question of how to transfer the millions of pounds remaining of Oak’s investment from PML into QED might not be a simple matter, since the investment money represented paid-up share capital of PML. Work on the corporate reconstruction of the group continued against the background that further work might be required to arrange for the transfer of funds in PML into QED.

PML failed to deliver a viable prototype motor to Volvo in late October 2007, as Mr Boughtwood had promised. In November 2007, the PML board agreed that Mr Knight should take over conduct of PML’s contact with Volvo and seek to negotiate a new, realistic delivery timetable.

In late October 2007, Index conducted its own due diligence exercise in relation to a possible investment by it as the second round investor into PML. Index indicated that it valued PML on a pre-money basis (i.e. prior to the investment by Oak in September 2007) at only $30m, rather than the $60m which Mr Boughtwood had in mind. Index also proposed only to invest a further $10m, rather than the $20m which was being sought.

As part of Index’s due diligence it commissioned investigation by Kroll Associates SA (“Kroll”) into the members of the management team. The report dated 30 October 2007 produced for Index by Kroll was disclosed by Index to Oak. It reported that Mr Knight had gone through a messy divorce in the USA, had taken steps following tax advice from Arthur Andersen which had gone badly wrong and resulted in him owing very considerable sums to the US tax authorities, raised some questions about Mr Knight’s management record with another company he had been involved in and highlighted some points in relation to his curriculum vitae which might require clarification.

A man called Tony Downer in Oak was given the report to review. He reported on 1 November 2007 to Mr Ahmed and Mr Glassmeyer with this summary assessment:

“At best, Craig appears to be a man 1) at war with his ex-wife, 2) who got financially overextended, 3) got cross wise with this co-founder, 4) got into a customer dispute and 5) has a hazy memory or is not as crisp as he should be.

At worst, Craig is someone 1) who cheated on his wife, 2) screwed his partner, 3) ripped off a customer, 4) stole from Jay Leno and 5) lied on his resume.

It is an easy call in the latter scenario – you fire him.

In the former scenario, you are on notice that disputes and broken relationships follow him and that his financial circumstances are going to be applying uncommon pressure on him.”

Mr Glassmeyer met Mr Knight to go over the matters mentioned in the Kroll report on 2 November 2007. Mr Knight gave explanations satisfactory to Mr Glassmeyer about the concerns which had been raised. Mr Glassmeyer concluded in an e-mail to Mr Ahmed of 3 November: “I see him more in the first characterisation by Tony rather than the second.” Index also continued with its investigations in relation to Mr Knight, contacting various referees in relation to him. The referees were generally extremely positive about him. Oak did not disclose any of this material to Mr Boughtwood.

Mr Boughtwood submits that, in light of their quasi-partnership relationship, Oak should have disclosed the Kroll report to him. I agree. The Kroll report raised matters which potential investors might be concerned to know about (in fact, Index indicated its concerns to Oak about the matters in the report, albeit it was not put off by them from making an investment offer). The quasi-partnership between Mr Boughtwood and Oak operated at the investment level, and required them to treat themselves as engaged in a joint venture to, inter alia, attract further investment into the business. As Oak knew and intended, Mr Boughtwood was pursuing possible sources of further investment in parallel with Oak. Mr Carano’s evidence was that, in approaching any potential investor, he personally would have wished to be informed about the matters in the Kroll report, in case they were raised with him by the potential investor. Knowing about them would have enabled him to deal more effectively with any concerns arising in relation to those matters: forewarned would be forearmed. Applying the same logic, it is my view that Oak should have sought Index’s consent to release the report to Mr Boughtwood (there is no indication Index would have refused to give consent – indeed, if it pursued their offer of investment into negotiations with Mr Boughtwood it is almost inevitable that it would have raised these matters with him itself), and supplied the report to him to enable him to be forewarned about these matters in any negotiations he had with other potential investors.

I do not, however, think that the non-provision of the report by Oak was a decision taken dishonestly to deprive Mr Boughtwood of information he needed. Nor do I think that it indicates that Oak had any special relationship with Mr Knight. Oak had satisfied itself that the matters in the report did not warrant serious concern or the removal of Mr Knight, and the impression I had was that Oak did not really consider in depth or at all whether it ought to be provided to Mr Boughtwood to assist him in his efforts to obtain investment. Moreover, Oak was still at that stage pressing Index to invest, so the Kroll report was likely to be canvassed with Mr Boughtwood at some stage if he did not spurn Index’s advances (which, in the event, he did).

Mr Boughtwood submits that if he had had the Kroll report, it would have confirmed his suspicions about Mr Knight’s honesty and he would have exercised his right under clause 12.4 of the Subscription Agreement to remove him as CEO. He submits that he has suffered unfair prejudice because Oak’s failure to disclose the report deprived him of that opportunity.

I do not accept this. I have already found that Mr Boughtwood has exaggerated his alleged concerns about Mr Knight’s honesty. He had only recently professed himself to be happy with Mr Knight’s recruitment as CEO. Oak was happy with Mr Knight’s performance as CEO thus far and took the position that the Kroll report did not cast significant doubt on his qualities as CEO. The main points the report disclosed were, as summarised by Mr Ahmed to Mr Carano in an e-mail of 9 November 2007, that Mr Knight had gone through a messy divorce with significant financial repercussions and had followed a reputable firm’s tax advice which, through no fault of his, had led him into difficulties in relation to payment of his taxes. This did not give good grounds to remove someone who was providing good service in a difficult role. In light of resistance from Oak I do not think it likely that Mr Boughtwood would at this stage have pressed for the removal of Mr Knight. However that may be, even if Mr Boughtwood had wanted to remove Mr Knight as CEO on the basis of the report, I do not consider that he could properly have done so unilaterally: see paragraphs [74] – [77] above. Oak would not have agreed to Mr Knight’s removal, and in my view it would have acted reasonably in doing so, since in truth the matters in the report did not show that Mr Knight was dishonest and did not otherwise significantly cast doubt on his ability to be an effective CEO for PML.

Index informed Oak that it remained interested in investing in PML but was uncomfortable with the valuation that was being put to it. Index had spoken in detail to contacts at Volvo who had informed it that PML’s relationship with Volvo was endangered by PML’s repeated missing of deadlines for delivery of in-wheel motors. PML under Mr Boughtwood had made promises to deliver a prototype motor in February 2007 but missed that deadline and then subsequently promised deliveries in April 2007, June 2007 and late October 2007 and had missed every deadline. Index’s assessment was that: “Unless PML transforms itself into a company that takes deadlines seriously and starts to deliver, it will be kicked out of places like Volvo pretty soon.” In addition, Index identified a concern that it had with what it characterised as “the less than trustworthy management team”, focusing on Mr Knight. It felt that Mr Knight was someone who had “pushed the envelope in business dealings more than we would like in a CEO of a business at this stage.” Taking these matters into account, Index did not consider that it would be comfortable at a $100m post-money valuation (i.e. $60m pre-money valuation).

Index proposed making an offer at a $30m pre-money and $60m post-money valuation (i.e. with only a $10m contribution by itself). It was in fact content to accept Mr Knight as the CEO of the business. Such an offer would have left the investors with a combined shareholding in excess of 50% of the company, reducing Mr Boughtwood’s shareholding to slightly less than 30%.

Mr Boughtwood did not get to the stage of detailed negotiations with Index, because he rejected what he regarded as the unacceptably low valuation which Index put upon PML. This was a source of frustration for Oak, which was very concerned to ensure that additional investment money was put into PML as quickly as possible. At this stage, I consider that Mr Boughtwood’s position was legitimate. It was not long since Oak had been prepared to invest at a $60m pre-money valuation, and it was not clear whether it might be possible to obtain a better offer elsewhere. It also appears that Oak agreed that the Index offer should not be pursued, since Mr Carano was unhappy at this stage that Index was proposing only to invest $10m, rather than the required $20m.

On 13 November 2007 the new corporate structure was put in place with QED as the holding company of PML. Although Mr Boughtwood suggested in his evidence that he had not seen all the relevant documents which were signed and approved on that date, Mr Meyer’s evidence, which I accept, was that a full pack of the documents was provided to Mr Boughtwood in advance of that date. I think it is very likely that Mr Boughtwood examined these documents with care before signing them and I so find. On this occasion Articles of Association were adopted for QED. These included Article 8, which provided for special rights for a return of capital to holders of preferred shares (the class of share held by Oak) in these terms:

“8.1

On a return of capital or assets on a Liquidation Event, capital reduction or otherwise the surplus assets of the Company remaining after payment of its liabilities shall be distributed (to the extent the Company is lawfully permitted to do so) in the following order of priority (as adjusted for any Reorganisation) (the “Liquidation Preference”).

(A)

first, in or towards paying to each holder of any Preferred Share £11,839 on each Preferred Share [i.e. the amount which had been paid by Oak and the other investors for each preferred share it had taken in PML and now exchanged for a preferred share in QED] … together with any accrued amounts thereon (including declared but unpaid dividends), and so that if there shall be insufficient surplus assets to pay such amounts in full the amount payable to each such Preferred Shareholder shall be abated pro rata to the amounts otherwise due to each of them, and

(B)

second, the balance of such surplus assets then remaining (if any) shall be distributed amongst the holders of the Ordinary Shares and the holders of the Preferred Shares on a pro rata basis according to the number of Ordinary Shares held by such holders and those that would be held by such holders on an as converted basis in respect of Preferred Shares at the then applicable Conversion Rate.

8.2

Other than with the prior written approval of an Investor Majority (i) a Share Sale, or (ii) an Asset Sale (or any similar or analogous transaction) [which was defined to include the sale of the business of any of QED’s subsidiaries] … , (“Relevant Event”) will be regarded as a Liquidation Event and the entitlement of the Shareholders to consideration in relation to any such Relevant Event shall be determined in accordance with the Liquidation Preference as if the consideration receivable was available for distribution by the Company. …”

The new QED Articles also contained at Article 12.1 an anti-dilution provision in favour of Oak in these terms:

“12.1

Anti-dilution

(A)

If the Company shall issue further Preferred Shares, in addition to the Subscription Shares (as defined in the Subscription, Purchase and Shareholders’ Agreement), (the “New Shares”) at a price per share of less than £11,839, the Company shall issue to each Preferred Shareholder such number of additional preferred Shares so as to result in that Preferred Shareholder’s total shareholding of Preferred Shares being increased by multiplying the number of shares held by the following fraction

£11,839

The New Share Price

where the “New Share Price” is the price per share at which the New Shares are issued.

(B)

Any additional Preferred Shares issued pursuant to Article 12.1(A) shall, to the extent permitted by law, be issued by way of bonus issue, for no consideration. To the extent that this is not permitted by law, such additional Preferred Shares shall be subscribed for at a price per share of no more than par.

(C)

Upon any such issuance of additional Preferred Shares pursuant to this Article 12.1, the amount of £11,839 payable on each Preferred Share to each holder of Preferred Shares by way of Liquidation Preference pursuant to Article 8 1(A) shall be varied so that it is equal to the New Share Price.

(D)

Following the issue of additional Preferred Shares for an aggregate purchase price of £9,699,330.50 through one or more equity financings, this Article 12.1 shall lapse and shall have no further force and effect in relation to any subsequent equity financings.”

Article 19 of the QED Articles governed the Board of Directors. The number of Directors was to be a maximum of seven unless that was increased by a special majority. Article 19.2 provided that Oak was to have the right to nominate and appoint one person as a Director and the right to remove such person with or without cause. Article 19.3 provided for investors in the company (including Oak) to have the right to nominate and appoint two Directors and to remove them with or without cause. Article 19.4 provided for the shareholders representing an Ordinary Majority (i.e. Mr Boughtwood) “with the prior written approval of Investors representing an Investor Majority [i.e. at this point Oak], such approval not to be unreasonably withheld or delayed” to have the right to nominate and appoint one person as the Independent Director and to remove such Director with or without cause. Article 19.5 provided for Ordinary Shareholder Directors in these terms:

“The Shareholder(s) representing an Ordinary Majority, for such time as they hold Shares, shall have the right

(1)

by notice in writing to nominate and appoint three persons to be Directors, one of whom shall be appointed as chief executive officer;

(2)

to remove with or without cause, any such Ordinary Shareholder Directors so appointed; …”

On the same date a Shareholders Agreement was entered into between Oak, Providence, WSI, Mr Boughtwood, QED, PML, Automotive and Systems (“the Shareholders Agreement”). Mr Boughtwood and the investors terminated the Subscription Agreement but recorded in Recital (E):

“(E)

The Parties wish to enter into this Agreement to regulate the affairs of the Company and the Subsidiaries in the manner set out in this Agreement (in order effectively to replicate the arrangements between them under the Subscription Agreement, but which as a result of the Share Exchange Agreement need to relate to the Company and the Subsidiaries, and this Agreement is entered into in consideration of this).”

Clause 4 of the Shareholders Agreement was in the following terms:

“4.

Second Investment Round

4.1

The Company shall be entitled, during the period up to 31 December 2007, to complete one further round of equity investment for the Company pursuant to, and subject to, terms substantially similar to, and in no event more favourable than, the terms of the Subscription Agreement (such investment being the “Second Investment Round”. Such Second Investment Round shall, to the extent practicable, be effected pursuant to a supplement to this Agreement.

4.2

The investors in the Second Investment Round (the “Second Round Investors” shall not pay a total aggregate consideration for any Shares (whether purchased from MB [i.e. Mr Boughtwood] or issued by the Company) of in excess of £9,699,330.50. Of such total aggregate consideration, the Second Round Investors shall not pay more than £1,454,899.60 in aggregate for any Shares purchased from MB and shall not pay more than £8,244,430.90 in aggregate for any Shares issued by the Company.

4.3

Each Second Round Investor shall:

(A)

pay a total aggregate consideration of all the Shares which it intends to acquire of at least £100,000; and

(B)

have been approved in advance by both Oak and MB (which approval shall, in each case, not be unreasonably withheld, conditioned or delayed). …”

Clause 10 of the Shareholders Agreement was as follows:

“10.

Reserved Matters

The Company [i.e. QED], [PML], Automotive and Systems (so far as it is lawful for them to do so) and MB each hereby undertake to the Investors that they shall each use their respective rights and powers to procure (as regards MB, so far as he is able using his best endeavours) that:

(A)

none of the matters set out in paragraphs 1 to 4 of schedule 5 (inclusive) shall be transacted, carried out or approved by the Board or the Company or the board of any Group Company or any Group Company without the prior written consent of an Investor Majority; and

(B)

none of the matters set out in paragraphs 5 to 15 of schedule 5 (inclusive) shall be transacted, carried out or approved by the Board or the Company or the board of any Group Company or any Group Company without the prior written consent of a Supermajority.”

The “Supermajority” referred to was a majority of two-thirds of the ordinary and preferred shares voting as a single class. Paragraph 7 of schedule 5 referred to any appointment or removal of any member of the board of directors of a subsidiary of QED (i.e. including PML). Article 15 of PML’s new Articles of Association provided that QED could at any time appoint or remove directors of PML. Accordingly, absent any change in their shareholdings, any addition to or removal from the board of PML required the agreement of Oak and Mr Boughtwood. This point was reinforced by clause 12.20(A) of the Shareholders Agreement, which also provided that any appointment to the board of a subsidiary or change in the size of such a board would require the consent of a Supermajority.

Clause 11.2 of the Shareholders Agreement provided as follows:

“Without prejudice to the provisions of clause 10, the Company [QED] and MB shall procure that all decisions (other than those which are taken in the ordinary course of trading) made by, or on behalf of the Company or any of the Subsidiaries which are material to the Company and the Subsidiaries as a whole, are approved either at a properly convened meeting of the Board [of QED] or by a resolution of all of the Directors in writing. Without limiting the generality of the foregoing, the Parties shall use their respective rights and powers as directors and/or shareholders in the Company to procure that the following matters be reserved for the [QED] Board’s consideration and resolution (including the approval of at least one Investors’ Director):

(A)

approving or amending in any material respect, annual operating and capital budgets of the Company and its Subsidiaries or make any capital expenditure not included in the annual budget, which individually is in excess of £35,000 or, when any capital expenditure, is aggregated with all other capital expenditures not included in the annual budget, such aggregate amount is in excess of £125,000; and

(B)

establishing company policies and procedures regarding investments and expenditures.”

There was debate about the proper construction of clause 11.2 at trial. In my view, the first sentence of the provision imposed no obligation on the Investors, but operated for their protection by imposing obligations on QED and Mr Boughtwood. Contrary to the submission of Mr Mallin, it itself contained no obligation on the Investors to procure that any decisions at all were taken or approved by the board of QED. Nor was there any equitable obligation imposed on Oak by virtue of the quasi-partnership to seek to use such powers as it had (e.g. via Article 15 of PML’s new Articles of Association, in co-operation with Mr Boughtwood) to produce a board of PML which would refer such matters to the board of QED: see paragraph [86] above. I would add that, in any event, the main points in relation to which Mr Boughtwood crossed swords with Mr Knight and Mr Meyer (e.g. in relation to expenditure by PML) all appeared to me to fall into the category of decisions taken in the ordinary course of trading, and so would not fall within any obligation arising under or in relation to clause 11.2 for that additional reason (this provision in fact emphasises the general intention that the day-to-day management of the business was to be left at the PML level).

The second sentence of clause 11.2 contained a distinct obligation which was binding on all the “Parties” to the Shareholders Agreement (I reject the submission of Mr Harrison for Oak that the word “Parties” in this context meant only QED and Mr Boughtwood, who were referred to in the first sentence). But this obligation did not assist Mr Boughtwood. The matters about which he complained did not fall within paragraphs (A) and (B). For example, he complained in the later part of 2008 about expenditure by PML directed by Mr Knight and Mr Meyer, which he maintained should have been avoided. But the expenditure was in line with the annual budget for the QED group agreed in February 2008, and neither paragraph (A) nor paragraph (B) created a right for Mr Boughtwood to insist upon review of the budget to decrease expenditure which had already been agreed upon. Again, the fact that these paragraphs relate to high level strategic matters emphasises that decisions on the ordinary day-to-day running of the business were to be left for resolution at the PML level.

Clause 12 of the Shareholders Agreement made similar provision in relation to the Board of Directors as Article 19 of QED’s Articles of Association. It provided for the appointment of up to three Investors Directors, three Ordinary Shareholder Directors and an Independent Director. Clause 12.4 was in these terms:

“In accordance with the Articles, the Ordinary Majority shall be entitled by notice in writing addressed to the Company, to, from time to time appoint as Directors any three persons (one of whom shall be designated as chief executive of the Board) and may at its cost remove from office any such persons so appointed and may appoint another person in his place by such written notice.”

Clause 12.5 provided:

“In accordance with the Articles, an Ordinary Majority, with the prior written approval of an Investor Majority, shall be entitled by notice in writing addressed to the Company, to, from time to time, appoint the Independent Director and may at its cost remove from office any such person so appointed and may appoint another person in his place by such written notice with the prior written approval of an Investor Majority.”

Clause 12.19 provided:

“The Parties agree that MB, the Company and Oak shall use their reasonable endeavours to find a suitable chief executive officer for the Company following Completion, with the intention that such appointment shall take place within 45 days of Completion.”

Clause 21 of the Shareholders Agreement provided that in the event of any conflict between the terms of the Shareholders Agreement and the Articles of QED, the parties agreed that the provisions of the Shareholders Agreement should prevail.

Also on 13 November 2007 there was a board meeting of PML attended by Mr Boughtwood, Mr Ahmed and Mr Carano at which the board approved the transfer of PML’s IPR to QED for the price of £750,000. The minutes recorded that the directors considered this to be a fair assessment of the market value of the IPR. The board also noted that PML had recently formed two subsidiaries, Automotive and Systems.

The same day there was a meeting of the QED board (Mr Boughtwood, Mr Carano, Mr Ahmed and Mr Knight). Mr Knight’s appointment as director was approved. The management structure for the conduct of the business of PML was discussed with reference to a structure chart. This showed Mr Knight as CEO with a direct line of responsibility to the board. Below Mr Knight with reporting lines to him were Mr Meyer as COO, Mr Christie as Sales Director, Mr Rich as Finance Director, as well as a General Counsel to be appointed and the marketing and communications function of the company. The chart showed, below Mr Meyer and with lines of responsibility reporting to him, a vice-president of engineering to be appointed (Mr Watts was appointed to this position with effect from 10 March 2008), together with those responsible for the engineering, production and sales and operations functions in PML, and Automotive customer projects. The structure chart showed Mr Boughtwood to one side of Mr Knight on the same level with a line indicating that Mr Boughtwood’s reporting responsibilities as CTO were to Mr Knight in the same way as the other senior management. Mr Boughtwood sought to suggest in his evidence that this indicated that he was to have a general overview role in relation to the entire management of PML, but Mr Ahmed, Mr Carano and Mr Knight denied that this was the case. I accept their evidence, which seems to me to be supported by the clearly defined reporting lines shown on the structure chart.

It is also supported by other documents, in particular an e-mail of about 6 January 2008 from Mr Knight to Mr Boughtwood in which Mr Knight set out the operational areas for PML that had been agreed were no longer Mr Boughtwood’s responsibility, and indicated that his role was confined to that of CTO dealing with ensuring protection of PML’s IPR by improving its patent portfolio, R&D for new product development and providing consultation on existing products when requested to do so by those responsible for production. In his e-mail Mr Knight pointed out that general management of PML’s business was now the responsibility of Mr Meyer and himself and invited Mr Boughtwood to focus on his role in innovating and creating new technologies for PML. Mr Knight pointed out that Mr Boughtwood should not seek to micromanage or second-guess the management team within the areas which were their responsibility. He required Mr Boughtwood to respect the chain of command which had been agreed. Mr Knight reminded Mr Boughtwood that on 13 November 2007 it had been agreed that Mr Boughtwood’s first priority was to work to improve PML’s intellectual property position by developing the patents to protect his invention (i.e. as CTO). Mr Boughtwood did not respond to Mr Knight to dispute his account of their respective management responsibilities, nor did Mr Boughtwood seek to complain about what Mr Knight had said to Oak. In my view, these features of the case strongly support the evidence given for Oak that agreement on these respective management roles had been reached on 13 November 2007.

I therefore find that it was agreed on 13 November 2007 that Mr Boughtwood would not have any general management oversight function, but would have the specific role of CTO. The main operational functions of PML, including production of in-wheel motors for supply to customers, was to be the responsibility of Mr Meyer, as COO, reporting to Mr Knight (but not to Mr Boughtwood) as CEO. I find that agreement was reached on the demarcation of management roles in this way to confirm and underline the basic division of responsibilities which had been agreed at the time of Oak’s investment in late September 2007 and in the light of what Oak and the senior members of the management team, apart from Mr Boughtwood, regarded as the unfortunate and disruptive experience of Mr Boughtwood trying to assume more general management authority in a way that by-passed and undermined the authority of Mr Knight as CEO in the period leading up to this agreement.

Various further issues arose at the trial regarding the interpretation of the Shareholders Agreement, QED’s Articles and the agreement in relation to management responsibilities in PML. First, an issue arose as to the proper construction of clause 4 of the Shareholders Agreement. In my view, clause 4.1 created an entitlement on the part of QED (acting by its Board) to choose to issue further shares to investors worth about £10m in the period up to 31 December 2007, in relation to which Mr Boughtwood and Oak had rights of veto (which were not to be exercised unreasonably): clause 4.3(B). Clause 4 contemplated that the second round of financing should be completed by the end of 2007. It made no provision for what should happen after 31 December 2007, but it appears by implication that no party to the Shareholders Agreement should have any right under that Agreement against the other parties to require a second round of financing to be accepted after that date.

It is clear from the evidence that Oak in fact considered that Mr Boughtwood had a right to veto any additional investment which might be proposed. That was also Mr Boughtwood’s understanding, according to his evidence. Oak did not attempt to force the issue with Mr Boughtwood under clause 4.3(B) in the period up to 31 December 2007 (it is unclear why not - it is possible that no financing proposal acceptable to Oak was forthcoming in that period or that Oak was concerned that if Mr Boughtwood did not freely consent to further investment from a further investor that the spectacle of dissension between the founder member and the existing investors in the company would, in practical terms, have scared off any potential investor). After that time, in my view, Mr Boughtwood had a right to veto further financing, but subject to the obligation referred to at paragraphs [88] – [89] above.

An issue also arose as to the proper construction of QED’s Articles and the Shareholders Agreement in relation to the appointment of a CEO for QED. These provisions followed the earlier equivalent provisions in clause 12 of the Subscription Agreement. In my view, the points made at paragraphs [74] – [77] above apply equally here.

Mr Mallin submitted that Recital (E) to the Shareholders Agreement showed that the parties intended to replicate the arrangements under the Subscription Agreement which had governed the position when PML was the only company in which Oak had invested, but transposing that to the position which was to apply now that QED had been introduced as the holding company for PML. In a general sense Recital (E) does indicate such an intention, but it was not itself a contract term and that general objective must be read subject to the detailed terms which the parties agreed in the body of the Shareholders Agreement. Clause 10 of the Shareholders Agreement is in the form of an undertaking to the investors, and is not a provision which Mr Boughtwood is himself able to rely upon. Clause 11.2 also does not assist Mr Boughtwood: see paragraphs [115] – [117] above.

In the restructuring, the board of PML was established as Mr Boughtwood, Mr Knight and Mr Meyer. Mr Knight was appointed as CEO of the business. An issue arose at trial whether he was just regarded as CEO of QED (as Mr Boughtwood suggested) or as CEO of QED and PML (as Oak submitted). There was some lack of clarity, arising from the fact that there was really only one business, but two companies (leaving aside Automotive and Systems). In my view, however, there was a clear intention that Mr Knight was to be the CEO of the business, and that implied that he was CEO of PML as well as of QED.

After the corporate restructuring on 13 November 2007 work continued with a view to arranging for the hiving up to QED of the Oak investment monies still held by PML. Various methods for achieving this were considered. The advice received by PML was that the best method would be for PML to arrange a re-purchase of its own shares from QED. However, as PML’s auditors, Sheen Stickland LLP, in particular advised, that would require up-to-date management accounts for PML and projected accounts for the whole QED group to show that both PML and the group would remain solvent for a period of a year after such a transaction, to support statutory declarations of solvency over that period which would be required.

It already appeared by early December 2007 that the board of PML might have difficulty in issuing statutory declarations to confirm that PML, as part of the QED group, would remain solvent for 12 months after the proposed share purchase. The burn rate contemplated by PML’s business plan (and the absence of a second round of funding) represented a serious impediment to achieving such a hive up. There was an e-mail exchange between Mr Boughtwood and Mr Meyer on 4 December 2007 in which they each indicated an unwillingness to remain on the board of PML and sign a statutory declaration of solvency that would be required to enable the share re-purchase to take place.

At about the same time, another venture capital firm, Wexford, was looking at PML’s business with a view to considering whether to make a further investment. It made no offer, however. The terms on which Wexford was prepared to consider investing involved them wishing to have full control of the company, which was not acceptable to either Mr Boughtwood or Oak.

With the failure in obtaining further investment from Index, Wexford and the sources that Mr Boughtwood had indicated in September that he had in mind, an issue arose as to how PML and QED should use the remaining finance available to them from Oak’s investment and how long they could continue as going concerns in the absence of attracting further investment. On about 12 December 2007 Mr Knight reported to Mr Ahmed that Mr Boughtwood was insisting that Mr Knight should develop an austerity budget to extend PML’s existing funds over two years. This was a matter which was to grow into a point of dispute between Mr Boughtwood on the one hand and Mr Knight, Mr Meyer and Oak on the other, since Mr Boughtwood’s proposal conflicted with their views as to the appropriate strategy and burn rate in the circumstances in which the business found itself (see paragraph [39] above).

On 14 December 2007 Index indicated that it remained interested in investing in PML, but only at the valuation and deal size it had already proposed. This remained unacceptable to Mr Boughtwood. One proposal from Mr Knight was that PML’s legacy business should be shut down in order for PML to focus all its attention and resources on developing the in-wheel motor. Mr Boughtwood did not agree with this proposal. Mr Carano’s reaction, set out in an e-mail of 26 December 2007 to Mr Ahmed, was that Oak needed to review its legal options “to force a full financing or to liquidate [meaning, I think, the legacy business]” if Mr Boughtwood proved to be obstinate. Mr Mallin submitted that this was an indication that Oak was adopting an illegitimate attitude to its relationship with Mr Boughtwood, that it intended to undermine Mr Boughtwood’s proper rights of involvement and control in respect of PML’s business and that it did not accept that it should treat Mr Boughtwood as a quasi-partner. In my view, however, it was entirely natural and legitimate that Oak personnel should consider internally their options how to deal with the developing problem of Mr Boughtwood taking a radically different view from Oak of what should be done in relation to PML, and to consider what options it might have to bring Mr Boughtwood into line with Oak’s own view. Oak did not take any action improperly to undermine Mr Boughtwood’s position.

Mr Carano’s frustration with Mr Boughtwood and the position in PML manifested itself in an e-mail dated 27 December 2007 to Mr Knight and Mr Ahmed, copied to Mr Boughtwood and Mr Meyer:

“It has been almost two months since our last [Board] meeting and I have yet to see an e-mail status report on the state of play at Volvo, [patent] filing strategy … and the R&D delivery schedule, as we had agreed to do weekly. You all had committed to timely communication and I find it irresponsible that you have yet to notify or strategize with us on the urgent nature of meeting Volvo’s new delivery dates --- I don’t even know what schedule, if any, has been agreed to with Volvo? Do they even remain a customer? What about the urgent need to file IP patent applications …? What about our [hiring of a vice-president of Engineering]? What is the status of the motor working at full speed and torque? ….

I think we need to have an emergency meeting to address these issues as soon as possible. Your actions have left me little confidence that QED/PML will be successful without a drastic change in focus and effort. First, I expect a full and comprehensive status report by e-mail to bring us up to date so we can make rational decisions based on accurate information on how to move forward. We also need to address how to complete the financing since Wexford and other financing options discussed at our last [Board] meeting have utterly failed. This is a very serious matter and must be finalized soon. In the US, these events would warrant a rescission suit and an immediate liquidation of the company to recover capital for the defrauded investor which in this case is Oak. I remain open minded and I will evaluate honest and accurate information if my views are distorted. However, my 25 years of experience in the company building business tells me we are in a very treacherous state and we will need to decisively come together as a team on a rational plan in order to have an opportunity to scale the venture Oak originally funded with Martin’s personal commitment on required actions, financing strategy and business plan.”

Mr Boughtwood responded with an e-mail in which he sought both to placate Mr Carano and answer the charges that he had made. He disagreed that there had been agreement to provide weekly reports to Oak and proposed that there should simply be a formal monthly report process rather than involving Oak in information at the management level. Mr Boughtwood informed Mr Carano that patent matters were properly in hand and gave an update on the current performance of the motor. He objected to Oak becoming involved in the management of the company. He objected to the characterisation of the failure of additional financing as a “fraudulent act”.

Mr Carano responded on 31 December 2007 in more emollient terms. He emphasised the importance of meeting Volvo’s expectations, and asked for simple reports about progress in relation to that. He concluded:

“Finally, assuming you still want to work with us, we do need to complete the $40 million fund raise in order to achieve the business plan. We have relied on your representations about the interest of other investors and have been very flexible in accommodating them. However, we must conclude this financing over the next 60 days or risk serious financial restructuring. I would be happy with any investor at this point to take the balance of the round.

I want to end by also agree[ing] that we need to work together constructively if we are going to be successful building PML and I am very willing to meet to discuss how to better manage our relationship.”

On 3 January 2008 Mr Boughtwood sent an e-mail to Mr Knight commenting on what Mr Boughtwood described as Mr Carano’s “bizarre state” which needed soothing attention. Mr Boughtwood proposed that Mr Knight should take up the search for funding and treat it as his number one priority. Mr Boughtwood asked Mr Knight to assume responsibility for production of formal monthly reports. On 5 and 6 January there were e-mail exchanges between Mr Knight, Mr Carano and Mr Ahmed. Mr Knight sought and received support from Oak for action by Mr Knight to admonish Mr Boughtwood for getting involved in non-CTO matters and encouraging him to concentrate on important issues within his remit as CTO regarding QED/PML’s IPR. Mr Knight’s frustration with Mr Boughtwood intruding into his areas of responsibility was evident in these exchanges. Mr Knight also sent Mr Ahmed, Mr Carano and Mr Meyer “in absolute confidence” a draft of his letter to Mr Boughtwood referred to in paragraph [124] above. In my view, these were legitimate communications on Mr Knight’s part, and there was no onus on Oak to disclose them to Mr Boughtwood: see paragraphs [81] - [83] above.

On 7 January Mr Boughtwood e-mailed Mr Carano again. Mr Carano and Mr Boughtwood had re-established a reasonably friendly working relationship. Mr Carano had backed down from his accusations of fraud and incompetence. They agreed that the terms requested by Wexford were unacceptable and Mr Boughtwood confirmed that he preferred to continue with Oak as an investor rather than Wexford. They agreed that Mr Knight should give securing further investor funding his priority attention. They agreed that it would be desirable to secure the second round financing of the outstanding $20m as soon as possible. Mr Boughtwood recorded the target to have the further funding in place by about July 2008. Mr Boughtwood recorded the following:

“I outlined my desire to constrain spending until we were sure the round was completed, but you would rather us spend at the rate originally budgeted. We agreed that controlled spending in the next 6 months should not cause a problem. Other than the high cost of the new offices, there should be no conflict here. Budgets need to be redrafted and Craig should have this done in good time for Jan 14^th report.”

In the event, there was some slippage in the proposed timetable for agreeing new budgets and they were finalised only at the QED board meeting on 15 February 2008.

Also around this time Mr Boughtwood sought to cut across the authority of Mr Meyer as COO in relation to a new delivery commitment which PML had given Volvo in late 2007. It was agreed that PML would deliver a prototype motor system in early January 2008 for installation in a Volvo vehicle for testing. Every morning in the six weeks up to Christmas 2007 Mr Meyer held a meeting with the engineering team to discuss the work which needed doing to meet this commitment. Although this was on the operational side of the business, and so outside Mr Boughtwood’s remit as CTO, Mr Meyer as a courtesy invited Mr Boughtwood to these meetings. He did not attend. The motors were due to be shipped to Volvo on 7 January, but on 6 January Mr Boughtwood told the engineers that he would not allow the motors to be sent until another round of testing had been completed.

In Mr Meyer’s view, such tests could clearly not be completed in time, and a further failure to meet a delivery deadline for Volvo would almost certainly have destroyed PML’s chances of success with Volvo. He had already taken steps to limit Volvo’s expectations, by explaining that the motors were an early prototype which still had flaws which were being worked on. Volvo had accepted that position. Mr Meyer therefore instructed the engineers to proceed to ship the motors. Mr Boughtwood lost his temper with Mr Meyer at this, and shouted and swore at him in front of other PML employees.

There was a further similar incident of Mr Boughtwood abusing Mr Meyer when he learned that Mr Meyer (again within his remit as COO) had sent the Mini test model to Lotus for its engineers to instal the Hi-Pa drive and actually get the Mini to run.

On 16 January 2008 Mr Meyer e-mailed Mr Carano and Mr Ahmed to tell them of his concern that Mr Boughtwood and Mr Knight “may be at each other’s throats regarding the best way to deal with the legacy business of PML”. Mr Meyer proposed a course of action to deal with the legacy business as an operational issue rather than a strategic issue, and for him to take on the responsibility of dealing with it. In my view, this was an entirely sensible e-mail for Mr Meyer to send, alerting Oak as the main investor in PML to a developing problem within the management, proposing a solution, and seeking to secure Oak’s support for that solution. Mr Carano forwarded Mr Meyer’s message to Mr Knight and Mr Knight indicated his agreement to Mr Meyer’s proposal.

In early February 2008 Mr Rich circulated a draft set of budgets for PML, Automotive, Systems and the QED group. By this time it was being contemplated that there might be an option to appoint a corporate director of PML to make a statutory declaration as to the ability of the company over the next 12 months to meet its obligations. This still raised questions as to how PML and QED would use the remaining resources which had been provided by Oak’s investment. Although Mr Boughtwood’s wish was to try to husband these resources, the strong view of Mr Knight, Mr Meyer and Oak was that the commercial logic was that there would be no point to or benefit from Oak’s investment unless PML managed to get to market with a viable product capable of commercial production very speedily. In their view it was critical that PML should spend the money that Oak had invested by recruiting good quality engineers and working as fast as possible to overcome the technical difficulties still being experienced with the Hi-Pa drive motors to produce a viable working prototype motor which could be supplied to customers, in particular Volvo, to persuade them to work with PML’s technology as a potential part of their own future car development. So far as they could see, there was no point in PML simply husbanding its resources to a point where they simply ran out later rather than sooner, but without attaining PML’s commercial objectives: see paragraph [39] above. Mr Boughtwood took a different view: see paragraph [38] above.

Decisions as to the burn rate at which PML was to spend its resources were also bound up with the projections which had to be produced about the solvency of PML and the QED group over the coming 12 months. If PML spent its resources at a high rate in order to fulfil the business plan and achieve the hoped-for commercial advantage which Oak, Mr Knight and Mr Meyer wished to pursue (in the absence of further investment being introduced), the solvency of PML and of QED over a twelve-month period could not be safely vouched for by whoever was to make the required statutory declaration.

On 12 February 2008 there was a management meeting attended by Mr Boughtwood, Mr Knight, Mr Meyer and Mr Rich at which the proposed budget for the QED and PML was discussed in detail. There was a conflict of evidence as to what was agreed, but I prefer the evidence of Mr Rich, Mr Knight and Mr Meyer that agreement was reached on the main parameters for the budget which enabled Mr Rich to finalise budgets for each company in the group and a QED consolidated budget for approval by the QED Board at its meeting on 15 February 2008. The question of the budget and how the QED group resources were to be spent had been a major outstanding issue since December 2007 and I consider that it is highly likely that it was discussed in detail between the principal members of management who attended this meeting and agreed by them all (including Mr Boughtwood). They needed to be able to come to agreement on it in order to present a united management front in presenting the budget to the Oak representatives at the forthcoming QED Board meeting on 15 February.

The QED consolidated budget which was agreed in its essentials on 12 February and approved and adopted by the QED Board (including Mr Boughtwood) on 15 February showed the cash available running down from about £7.3m in January 2008 to a cash deficit by November 2008, as it was expended on the costs of recruiting staff and developing the Hi-Pa drive motor. On these figures it was clear that PML’s auditors would not accept or advise that QED and PML would remain solvent for a twelve-month period in the absence of obtaining further investment. It was also clear that the statutory declarations which would be required for PML to buy back its own shares from QED could not be given. The practical effect of this was that the cash which Oak had injected into PML in September 2007 had to remain at the PML level.

Mr Boughtwood suggested that this was the result of a deliberate strategy by Oak and Mr Knight (and perhaps Mr Meyer) to retain practical control of the cash resources of the group at the PML level (where Mr Boughtwood could be outvoted on the PML Board by Mr Knight and Mr Meyer), and below the QED level (where Mr Boughtwood had equal rights of control with Oak). I reject this. In my view, there was no such deliberate strategy by Oak, Mr Knight or Mr Meyer. None of them put any deliberate impediments in the way of hiving up PML’s cash to QED. It simply proved to be impossible to achieve that hive up given the business plan agreed in September 2007 and the budget that all the senior management, including Mr Boughtwood, agreed on 12 February 2008 and which the QED Board, again including Mr Boughtwood, approved on 15 February - absent the introduction of a further round of financing. As to that, it was Oak which was pressing most strongly for acceptance of further funding, and Mr Boughtwood who was resisting it.

Moreover, in light of the facts that the foundation of the quasi-partnership between Mr Boughtwood and Oak from the outset was that Mr Boughtwood would not have control over PML’s business and that it should be run at a day-to-day level by its management; that Mr Boughtwood and Oak had agreed his role within management as that of CTO, while Mr Knight and Mr Meyer had the wider responsibilities of CEO and COO; and that Oak and Mr Boughtwood had entered into agreements on 13 November 2007, when the group’s cash resources remained in PML, which gave control over those resources to the PML board and protected the PML board against changes in its membership, there was no over-arching obligation upon Oak arising from the quasi-partnership to take steps to provide Mr Boughtwood with any wider powers of control over the resources available to PML. It is worth pointing out that at the PML level, Mr Boughtwood had greater rights of control than did Oak, since Oak had no appointee of its own on the PML Board. It is likely that this was one factor which led Mr Boughtwood to accept these arrangements in November 2007. It later transpired that Mr Knight and Mr Meyer, in complete good faith, did not accept his views about what PML should do, but I do not think that Mr Boughtwood is in a position to complain about the decision-making structure which he had agreed should be put in place.

It was also part of Mr Boughtwood’s case that Mr Knight and, from some point, Mr Meyer conspired with Oak to ensure that QED/PML was driven into insolvency with the object of enabling Oak to purchase PML’s business and associated IPR held by QED at a low price, thereby enabling Oak to gain control over them for a low price and to exclude Mr Boughtwood from participating in their true commercial value. I reject this case on the facts. In my view, the management of PML and the Board of QED set the budget for QED and PML in February 2008 as a budget which they bona fide believed to be in the best interests of QED and PML’s business. Mr Boughtwood agreed with the budget at that time. Thereafter it was Oak and Mr Knight in particular who made strenuous efforts to try to secure further funding for QED and PML from a new investor. If their strenuous and increasingly desperate efforts to secure further funding had been successful, the insolvency of the business would have been averted. The fact that they engaged in these efforts is inconsistent with Mr Boughtwood’s allegations against them.

Also inconsistent with those allegations is the fact that as it became less likely after February 2008 that additional funding on terms acceptable to Mr Boughtwood could be secured for QED and PML, Mr Knight and Mr Meyer, with the acquiescence of Oak, reduced the spending of PML by considerable amounts below the budget, so far as they reasonably could consistently with the important object of trying to develop the Hi-Pa drive motor with all speed. They did this by cutting back on various items which had been budgeted for, such as capital expenditure. The overall effect of their cutbacks was to save some £1,104,291 or 14.5% of the projected expenditure under the budget by October 2008. The spending rate picked up again from about September/October 2008, but the principal reason for that was that PML was by that stage having to spend considerable sums on professional fees of Speechly Bircham and PwC for advice in relation to dealing with PML’s approaching insolvency and attempts to sell the business of PML to realise value for its shareholders. These elements of expenditure had not been budgeted for in February 2008. Another significant element of the burn rate at this time was expenditure to make ready a Ford F150 pick-up truck equipped with Hi-Pa drive technology for the important SEMA motor show in the USA in November 2008. The decision to exhibit at the SEMA show was clearly, in my view, a legitimate business judgment, as an effort to establish with Ford and the US market the attractiveness of PML’s Hi-Pa drive system.

The efforts of Mr Knight and Mr Meyer to moderate PML’s burn rate budgeted for in February 2008 strongly support their denial that they were acting with the intention of deliberately driving QED/PML into insolvency for the benefit of Oak.

In support of his case that this was in fact their objective, Mr Boughtwood made criticisms of aspects of spending by PML which they sanctioned. In my view, none of these criticisms indicated that Mr Knight and Mr Meyer were deliberately trying to run PML’s business into the ground. On the contrary, I find that they genuinely believed that the expenditure which is criticised by Mr Boughtwood was required in the interest of PML’s business and its shareholders. Mr Boughtwood’s criticisms and my findings in relation to them are as follows:

In support of his case that Mr Knight and Mr Meyer engaged in excessive expenditure, Mr Boughtwood sought to rely on a report which he caused PML to obtain in July 2008 from a consultancy firm called Appian Management Ltd (“Appian”) run by a Mr Davies. That report was in very summary terms and did not begin to present a fully worked-out business case to justify the reduced level of expenditure which Mr Davies thought might be achievable. The Appian report does not provide any good grounds for rejecting the evidence of Mr Knight and Mr Meyer as to what they thought was in the best interests of PML. If anything, the cursory nature of the Appian report and the lack of any detailed reasoning in it tends to support the view that the judgements made by Mr Knight and Mr Meyer were perfectly reasonable judgements.

On 15 February 2008 a QED Board meeting was held attended by Mr Boughtwood, Mr Carano and Mr Knight, as directors of QED, together with Mr Andrew Boughtwood, Mr Hauser, Mr Meyer and Mr Rich. The budget was unanimously approved by the Board.

The minutes of the Board meeting contained the following item:

“1.3.10

Restructuring – The Company has now been restructured with one holding company (QED Group) and two active subsidiaries (PML Flightlink and PML Automotive). [Mr Knight] proposed a further restructuring to merge PML Flightlink with PML Automotive to form one trading entity under QED Group, which will simplify administration and remove the problem of moving investment funds out of PML Flightlink (unanimously accepted).”

This item records the acceptance by the QED Board, including Mr Boughtwood, of Mr Knight’s proposal that there should be one active company (PML) below QED which would have available to it all the financial resources then located in PML. On that model, what had been perceived to be the need for QED to fulfil a group treasury function with control over all group funds would be removed, and the difficulties associated with moving the funds in PML into QED linked to the impossibility of appropriate statutory declarations being made would be avoided.

It was part of Mr Boughtwood’s case in support of his allegation that this represented part of Oak’s illegitimate strategy with Mr Knight to avoid control of group funds at the QED Board level and locate the practical control of the funds at the PML level (see paragraphs [51] – [52] and [149] above) that he was not given a proper opportunity to consider this proposal. I do not accept this. I find that the restructuring of the QED group had been fully discussed with Mr Boughtwood at the management meeting on 12 February. He was not taken by surprise on 15 February. If Mr Boughtwood had felt that he was being presented on 15 February with a matter that he had not had proper opportunity previously to consider, I have no doubt that he would have objected at that point, but he did not. He agreed to the proposal which had been made.

Further, Mr Knight’s proposal made commercial sense in the context of the situation which had arisen through no fault of Mr Knight or Oak, in which it was not possible for the money in PML to be hived up to QED in order for QED to fulfil a function as group treasurer. Mr Knight made his proposal in good faith in the interests of the QED group for this good commercial reason, and not in pursuit of some plan to dilute or remove Mr Boughtwood’s control over the use to which the money in PML might be put.

In early March there was a further run-in between Mr Boughtwood and Mr Meyer concerning the testing of the motors before a further delivery to Volvo. The software for the motors had been upgraded and tested. But, at the last minute, Mr Boughtwood sought to insist upon the installation of other new software in the motors the night before an important demonstration for Volvo. Mr Meyer thought that the installation of untested software at that stage might be disastrous, and overruled him.

The evidence of Mr Christie, Mr Watts and Mr Bycroft showed that this was not an isolated incident. Mr Boughtwood sought to exert authority in relation to a range of management issues well outside his remit as CTO. He sought to act as a sort of shadow CEO, second-guessing and criticising the decisions of other senior managers within their areas of responsibility. He would be abusive and unpleasant if his wishes were thwarted. This was disruptive and a major distraction for the management of PML away from their primary task of trying to produce a viable, robust prototype motor. It also over time seriously undermined the relationship of trust and confidence between them and him, and meant that his presence in the management structure on site at PML created a poisonous atmosphere. It reached the point in the end where it would be very doubtful whether the senior managers at PML would wish to remain with the company if Mr Boughtwood returned to take charge.

On 7 March Mr Knight e-mailed Mr Ahmed and Mr Carano to alert them to the continuing problem of Mr Boughtwood stepping outside his role as CTO and treating himself as having wider management authority in PML and QED. Mr Boughtwood had made criticisms of decisions taken by Mr Meyer which Mr Knight considered did not fall within his remit. Mr Knight suggested that Mr Boughtwood and his R&D team should be moved to a new advanced R&D centre at a new location away from the primary business to reduce the scope for his interference in management decisions by Mr Meyer and Mr Knight. In my view, in the circumstances which had arisen, this was a legitimate communication from Mr Knight to Mr Carano and Mr Ahmed. I do not consider that Mr Knight or Oak breached any responsibilities they had in relation to Mr Boughtwood by not disclosing this e-mail to him. My comments at paragraphs [81] - [83] above apply.

On 9 March Mr Boughtwood e-mailed Mr Meyer to complain about the actions he had taken in relation to the test at Volvo in early March. In the e-mail Mr Boughtwood questioned Mr Meyer’s integrity. He claimed that Mr Meyer had agreed that he would never change a course of action agreed by Mr Boughtwood unless Mr Boughtwood’s agreement with the change was obtained. (In fact, Mr Boughtwood overstated the position: no such agreement had been made). Mr Boughtwood continued:

“Your failure to follow this agreement is a major cause of concern and is the key reason I proposed to Craig that you formally report to me – at least this way you may feel more inclined to honour such promises.”

Mr Boughtwood indicated that he would not accept decisions by Mr Knight and Mr Meyer as CEO and COO respectively. Mr Boughtwood said that he had “an absolute requirement” to be intimately involved in such decisions. He indicated that if Mr Knight and Mr Meyer did not accept this, they should leave the company. He accused Mr Meyer of taking a decision to proceed with the testing by Volvo without installation of new software which was “tantamount to negligence”.

In my view, neither the strictures against Mr Meyer in relation to his decision nor the claims by Mr Boughtwood of a right to be involved in all management decisions were justified.

These tensions were again brought to the attention of Oak. By e-mail of 10 March from Mr Carano to Mr Knight, Mr Ahmed and Mr Meyer, Mr Carano indicated that he supported Mr Knight and Mr Meyer over this conflict in relation to management roles. Mr Carano indicated that he would like there to be a complete separation of Mr Boughtwood in his R&D function from engineering (i.e. production), sales, marketing and business development. Engineering should focus on producing a first viable prototype motor. Mr Carano pressed for PML to hire a vice-president of engineering as soon as possible “to counterbalance [Mr Boughtwood’s] technological bullying!!!” In my view, it was legitimate for Oak to debate these matters with Mr Knight and Mr Meyer without involving Mr Boughtwood in the discussion: see paragraphs [81] - [83] above.

Oak was so concerned at the disharmony in the management team that Mr Ahmed made an urgent visit to PML’s offices to try to address the problem. He urged Mr Knight, Mr Meyer and Mr Boughtwood to find a way of working better together. He re-iterated the point in a subsequent e-mail sent to them on 11 March. In his e-mail Mr Ahmed also stated that it was important “that there be no second guessing of decisions each of you make in the best interests of the company at any time”. This was a moderate and reasonable way of asking Mr Boughtwood to confine himself within the CTO role which he had accepted.

Mr Meyer’s evidence was that Mr Boughtwood apologised to him for his behaviour in relation to the Volvo matter and agreed that Mr Meyer’s decision not to allow the engineers to upgrade the software at the last minute was correct. This is reflected in Mr Meyer’s contemporaneous e-mail of 12 March to Mr Carano, Mr Ahmed and Mr Knight. Although Mr Boughtwood denied that he had made an apology which embraced these matters, I prefer Mr Meyer’s evidence on this point. Mr Meyer’s evidence that Mr Boughtwood had perhaps grudgingly come to accept that the decision he had taken in relation to the Volvo tests was a reasonable one is also supported by an e-mail from Mr Boughtwood to Mr Hauser on 17 March 2008, explaining that although Mr Meyer’s decision was taken in opposition to Mr Boughtwood’s instructions, it was a decision which was “not too unreasonable!”. In his e-mail, Mr Meyer indicated that he thought that Mr Boughtwood should move into a pure R&D role, which Mr Boughtwood had indicated to him was what he wanted to do. To support that process, Mr Meyer indicated that PML had recruited Mr Bycroft as vice-president of manufacturing and Mr Watts as vice-president of software and systems.

Meanwhile, Mr Knight continued with his work to identify and attract further investment into PML. He drew up a report for QED and PML dated 2 May 2008, setting out the steps which had been taken on this front. He listed a range of investor groups whom he had met. Although in these proceedings Mr Boughtwood complained that Mr Knight had focussed only upon Californian venture capital companies and had not considered other possible sources of investment in the form of European venture capital firms, sovereign wealth funds and high net worth individuals, it is clear from this report that that was not the case. In particular, Mr Knight had met with Index and another firm called Consensus, which were both European based; he had met with the Mubadala group, which represented a Middle-Eastern sovereign wealth fund; and he had met with the Smith Family Trust, which was the investment vehicle for a high net worth individual family. Mr Knight reported:

“This is a tough environment to raise money. All the investors have expressed concern over the valuation achieved in the first closing…”

He reported that only Index and the Smith Family Trust had given an indication on valuation. Index suggested a valuation of $60m post money with a $10m-12m investment by them. This implied a valuation of about $30m pre-money. The Smith Family Trust suggested a valuation of $60m-70m post-money and were interested in a $5m-10m investment. Mr Knight indicated that the issue causing most concern among investors was the likely time to market in relation to products being developed by PML.

On 7 May 2008 there was a meeting of the QED Board attended by Mr Boughtwood, Mr Carano, Mr Ahmed and Mr Knight (by telephone), as well as Mr Meyer and Mr Rich. Mr Carano emphasised at the meeting the critical importance of obtaining further funding for the PML business. His concern was that if PML left obtaining further funding to a point when it was approaching insolvency, it would find it difficult to persuade venture capital firms to accept a good valuation of the company and to invest at that valuation. Rather, there would be a risk that venture capital investors would hold back to let the company slide into insolvency and then step in at a much lower valuation. To guard against this, Mr Carano stated that QED/PML should close the further funding round before the summer holidays began (i.e. before the delays in any further funding decisions by investors which would inevitably occur once the holiday season began). Mr Carano stated his view that QED/PML’s best chances of further investment were with a firm called NEA, Index and the Smith Family. He said that PML/QED should ask for best and final offers for closing by the end of June. This was agreed and the board approved as an action point in relation to this that Mr Knight should chase current funding options and invite best and final offers for closing by the end of June.

I find that Mr Boughtwood along with the rest of the board agreed with this course of action. Mr Boughtwood’s evidence was that this was simply a target to be aimed at, but the board minute and the agreed action plan indicate that in fact everyone agreed that the urgency to obtain further investment before PML’s financial situation became precarious was such that matters had to be brought to a head by requiring final offers to be made by the end of June. It was not a target date. Mr Boughtwood’s agreement on this was no doubt predicated on the commitment by PML to a relatively intensive burn rate in accordance with the views of Mr Knight, Mr Meyer and Oak and broadly in line with the February budget. Later, in June, he took steps to try to change that commitment by seizing control of the PML Board.

However, on the footing that the existing commitment of PML to its burn rate remained in place, it is significant that Mr Boughtwood’s own judgment at this stage was that the urgency for PML to get in additional funding was such that final offers had to be in by the end of June. He accepted the commercial reasoning put forward by Mr Carano, that the value of QED/PML and its ability to attract the finance it needed would deteriorate once it began to approach insolvency. He accepted that the final test of the market for further funding should be by the end of June. He implicitly accepted that, subject to reconsideration if offers of financing were only made on the basis of unexpectedly harsh or unusual terms, PML’s business needs were such that the funding then available should be taken. He implicitly accepted that this would be in the best interests of the company, even if the valuation of PML given by the market was less than $60m pre-money and the acceptance of such funding would mean additional dilution of his shareholding by comparison with Oak’s (because of the anti-dilution protection for Oak which he had accepted).

On 8 May 2008 Mr Boughtwood raised an issue with Mr Rich concerning Mr Knight’s expenses in relation to company business. Mr Knight had been incurring considerable expenses in travelling to meet investors on behalf of QED/PML. He had e-mailed Mr Rich with details and Mr Meyer had approved advances being made to him against such expenses. Mr Rich explained this position to Mr Boughtwood on 8 May. Mr Boughtwood claimed that this was in breach of an agreement reached on 12 February at the management meeting that Mr Boughtwood’s signature and approval would be required for all Mr Knight’s expenses. Mr Boughtwood accused Mr Rich of assisting in payments to Mr Knight which were tantamount to fraud. (Mr Rich’s dominant recollection of the meeting was that he had been accused by Mr Boughtwood of being involved in fraud; Mr Boughtwood’s account was that he had only said that Mr Rich’s involvement was tantamount to fraud and Mr Rich accepted that Mr Boughtwood’s statement may well have been qualified in this way). Mr Rich was shocked by the charge that Mr Boughtwood had levelled against him. Mr Rich sent an e-mail to Mr Knight, Mr Boughtwood and Mr Meyer which indicated that Mr Boughtwood wanted an explanation of what was happening in relation to Mr Knight’s expenses and said:

“It was previously agreed that Martin would sign Craig’s expenses and therefore as a Management Team you need to decide whether that advance should occur.”

There was a dispute on the evidence whether that ever had been agreed. Mr Knight and Mr Meyer denied that it had been. The brief minutes of the management meeting of 12 February did not record such an agreement. It seems unlikely that, at a time when Mr Knight and Mr Meyer were concerned that Mr Boughtwood should not overstep the proper limits of his role as CTO, they would have agreed to such an extension of control for Mr Boughtwood in relation to Mr Knight’s expenses as Mr Boughtwood later claimed. Mr Rich’s evidence was that although he included reference to such an agreement in his e-mail of 8 May, he did so only because Mr Boughtwood had told him that such an agreement had been made and because he was in a state of shock at having been accused of involvement in fraud and at that point had no immediate recollection of his own about what had been said on the subject at the meeting on 12 February and saw no reason to question Mr Boughtwood’s account. His evidence before me was that he had no direct recollection of what had happened at the meeting on 12 February in relation to this point but that, on reflection, his view was that such an agreement had not been made, since if it had been he thinks he would have set it out clearly in the minutes of that meeting which he drew up. I accept his explanation and the evidence of Mr Knight and Mr Meyer that no such wide-ranging agreement on Mr Knight’s expenses had been made.

Mr Knight responded to Mr Rich’s e-mail that the only expenses that it had been agreed that Mr Boughtwood would countersign were any first-class air fare for Mr Knight to China. Otherwise Mr Meyer was capable of signing for Mr Knight’s expenses and the procedure should not change.

Mr Meyer e-mailed Mr Knight on 8 May to say that:

“Martin needs to be removed from the office immediately. He spreads a poisoned culture which affects the whole building and results in poor morale in everyone from shop floor to senior management.”

In the circumstances, I regard this as a natural and reasonable response on Mr Meyer’s part to Mr Boughtwood’s latest attempt to exert management control to which he was not entitled, including by levelling charges of fraud or something close to fraud against his colleagues.

Also on 8 May Mr Meyer e-mailed Mr Knight to report that Mr Boughtwood had told Mr Meyer to put Mr Bycroft on notice of termination for poor product quality. Mr Meyer did not consider that this was appropriate and indicated that he was very happy with Mr Bycroft’s performance. He also reported that Mr Boughtwood had told Mr Watts that no product should be shipped from the company without Mr Boughtwood’s sign-off and that failure to ensure this would be a sackable offence. These were further indications that Mr Boughtwood refused to regard himself as constrained to act within the parameters of his CTO role. Mr Meyer and Mr Knight drew these continuing problems with Mr Boughtwood to the attention of Mr Carano and Mr Ahmed in e-mails that day. Mr Meyer reported that Mr Boughtwood was unpredictable: he could be reasonable one minute and completely unreasonable the next. His view was that Mr Boughtwood was undoubtedly innovative but had no management ability. He concluded:

“Martin feels he doesn’t answer to anybody, and that nobody should be able to do anything without his permission. In no way does Martin consider Craig to be the CEO.”

Mr Knight supported Mr Meyer’s view that Mr Boughtwood spread a poisonous culture affecting morale in the company and that he should be removed from the office. He proposed that Mr Boughtwood should be invited to relocate with his R&D team to new premises and devote himself to building an advanced R&D centre and to the development of PML/QED’s intellectual property. Mr Knight’s assessment, which seems to me to be a reasonable one, was that Mr Boughtwood’s behaviour was a reaction to the reality of his situation in which further funding was needed by the company but was now unlikely to be forthcoming at the high valuation of $60m pre-money which Mr Boughtwood thought was appropriate. Mr Knight’s own anger and frustration with Mr Boughtwood were reflected in the intemperate terms he used. He stated:

“[Mr Meyer’s] comments reflect the views of the entire management team and I believe it is time to deal with Martin assertively. It is not in my nature to tolerate assholes. We have put up with Martin’s bipolar behaviour because we were afraid he would bolt with the IP in his head… he has unloaded a lot of it and he has no other financial alternative in his life than to stick with it. The time has come however, where we have a larger issue to deal with, company morale, our ability to execute and management and employee confidence in [Mr Meyer] and me to lead.”

At trial, Mr Boughtwood pointed to that passage in support of his claim that Mr Knight was acting pursuant to a strategy for him and Oak to get what they needed out of Mr Boughtwood in terms of his invention, to back him into a corner and then to deprive him of proper control over the business. Mr Knight’s comment was undoubtedly put in offensive terms, but in my view that reflected the frustration which Mr Knight then felt regarding Mr Boughtwood’s continued wilful refusal to abide by the agreement which had previously been reached about their respective roles within the company, and his very real concern that Mr Boughtwood’s behaviour was undermining the harmoniousness and effectiveness of the management team and the workforce so as to jeopardize the success of the venture. In my view, these concerns were objectively justified. I do not find that Mr Knight’s comment leads to the conclusion that he was determined to exclude Mr Boughtwood from proper control over the company. In my view, Mr Knight’s e-mail shows that in accordance with his evidence, he wished Mr Boughtwood to remain with the company but properly confined within the parameters of the R&D role which it had been agreed he would pursue as CTO. In my opinion, there was nothing untoward in Mr Knight raising these issues directly with Oak without copying Mr Boughtwood into the e-mail exchanges: see paragraph [83] above. It was clearly proper that Oak should be informed about the position, since it was primarily Oak’s money invested in the business which was now in serious jeopardy.

Meanwhile, Mr Knight continued his round of meetings with venture capitalist firms to try to secure the further round of funding which PML required. On 15 May 2008 Mr Knight reported by e-mail to Mr Carano, Mr Ahmed and Mr Meyer concerning the continuing tensions with Mr Boughtwood in relation to the management role he was seeking to assume and contacts which Mr Knight had had that day with the Smith Family seeking to encourage them to invest in the company. Mr Knight said the following:

“Martin does not understand anything but direct confrontation dealing with him in a subtle manner is a waste of breath.

Jon [i.e. Mr Meyer] and I will deal with Martin on Monday. We will make one last effort to persuade him in a reasonable and very calm manner if it fails we will need to hold a board meeting to confirm his role in the company. The entire management team wants him out.

He has absolutely no support on the management team.

Ifty [i.e. Mr Ahmed] lets connect by phone. I would prefer you let Jon and I deal with Martin. We appreciate your offer but we need to wash our own laundry.

On a more positive note, I spent all day with the Smith family and they are now looking at a $10 million investment at a $30 pre [i.e. pre-money valuation]…the old man would like to wait until October and help you steel [sic – it is common ground this means “steal”] it, but the kids are more reasonable.

They have engaged counsel, technical advisors and are scheduling a due diligence meeting.

I have laid the ground work in an e-mail to Martin this morning for the $30 pre discussion.

I am sure he will be resistant but he has no other choice. …”

The “old man” referred to was Miles Smith Jr., the oldest member of the Smith Family. The “kids” were the younger members of the family. Mr Knight had had a long friendship with the Smith Family before he became involved with PML. Mr Boughtwood’s case is that this e-mail shows that Mr Knight was canvassing with Oak a plan to allow PML’s financial position to deteriorate so that in October the Smith Family and Oak could co-operate in order (in slang US business parlance) to “steal” the company (i.e. acquire it at a low value, and then take the benefit of any increase in its value to the exclusion of Mr Boughtwood).

I reject this allegation. Mr Knight’s evidence, which I accept, was that Miles Smith Jr. had indeed raised this as a possible scenario, but Mr Knight thought it was misguided and argued against it. Mr Knight’s position was that it would be commercially deleterious to allow a start-up company such as PML to be driven towards insolvency before getting in additional investment (there could be no guarantee it would ever recover, and meanwhile it could lose its timing advantage against the competition in the race to bring a viable product to market). He considered that, contrary to Miles Smith Jr.’s proposal, the Smith Family should be encouraged to invest now, at a good valuation from PML’s point of view. That is what he argued for, and his e-mail indicates that he succeeded in persuading the younger members of the Smith family that this was the right course. Accordingly, they were prepared to invest their money to undertake a due diligence examination of PML’s business. The terms of Mr Knight’s e-mail support the account he gave in his evidence.

In mid-May there was a further incident regarding an attempt by Mr Boughtwood to exercise management control over Mr Meyer’s activities. A further shipment of Hi-Pa drive motors to Volvo was planned for 26 May. On 14 May Mr Boughtwood e-mailed Mr Meyer to lay down his requirements in relation to quality checks before any shipment of Hi-Pa drive components was made. He required Mr Meyer to agree the test requirements for each item with him. He stated that deliveries should not take place unless a number of people, including Mr Boughtwood himself, had all signed off to approve the delivery. Mr Boughtwood set out a detailed list of inspections that he required to be conducted. It was clear that he was complaining that these sorts of tests had not been conducted previously (“most of the above will be retrospective now…”), and that he was requiring that these tests should be carried out in relation to future deliveries to Volvo, including the forthcoming delivery to Volvo (they “should be implemented for any incomplete build from now on…IT IS CRITICAL THAT THESE OR SIMILAR ARE INSTALLED NOW”). Mr Meyer’s evidence was that he objected to this as a further interference by Mr Boughtwood, outside his role as CTO, with matters properly within Mr Meyer’s remit as COO. I consider that this complaint is justified.

E-mail contact between Mr Meyer, Mr Knight and Oak continued regarding actions that might be taken in relation to Mr Boughtwood to confine him within his CTO role.

On 16 May there were e-mail exchanges within Oak, involving Mr Bandel and Oak’s US counsel, Mr Herling, on the question how Oak might handle its relationship with Mr Boughtwood. Mr Carano wrote:

“Martin will not ‘agree’ to the financing, but will need to be aggressively ‘forced’ into it. I believe that directly and legally challenging him will serve to create a ‘negotiation’. Martin basically lied to Oak … about the state of the company … We need to use this fact, and the fact that we now control the [board] and the entire team is willing to testify to both his abusive and threatening behavior and his unethical and lying portrayal of the company to investors, customers and employees as leverage to clean this company up in a restructuring of both management structure and capital structure. We do not need Martin for the first two generation of product [i.e. those already being produced for customers] or IP filings. PML will succeed or fail independent of Martin’s continuing technical contribution. However, Martin can kill the company by preventing PML’s ability to attract world class engineering talent …”

This e-mail reflected Mr Carano’s unhappiness about the state of development of the Hi-Pa drive motors and his feeling that he had been misled about it by Mr Boughtwood when he invested. It also reflected Mr Carano’s frustration that Mr Boughtwood had been dismissive of further financing at pre-money valuations below $60m, in circumstances where Mr Carano regarded the finalisation of the further round of funding which had been agreed to be necessary increasingly urgent. In that situation, I do not think that it is surprising or wrong that he should have been considering with his lawyer the options which might be available to Oak to force the issue, including whether action could be taken to remove Mr Boughtwood. No unfair or improper action was in fact taken against Mr Boughtwood by Oak based on this internal debate within Oak. Mr Boughtwood pointed to Mr Carano’s reference to Oak controlling the board (presumably that of QED) as indicating that Mr Knight was “Oak’s man” and was conspiring with Oak against him. In my view, however, it did not carry that meaning. I consider that this was simply a reference to the fact that in the circumstances which then obtained Oak understood that Mr Knight’s views as to the commercial merits of how to proceed were aligned with Oak’s and against those of Mr Boughtwood. Mr Carano’s use of the word “now” also supports the view that Oak did not regard Mr Knight as its “man” from the outset, and that Oak’s ability to control the board was contingent upon how he himself viewed the commercial position at that point in time.

On 19 May 2008 there was a meeting between Mr Knight, Mr Boughtwood and Mr Meyer to discuss various matters which were coming to a head. Mr Meyer wrote up a minute of the meeting. Mr Knight reported on expressions of interest from potential investors. All the investors that he had met had stated that their interest was predicated on a pre-money valuation of between $20m and $30m. They would not match the original $60m pre-money valuation at which Oak had invested, because market conditions had changed and PML was now about a year behind its original business plan. Mr Boughtwood wanted PML to reduce its expenditure to reduce or eliminate the need for additional financing, but Mr Knight pointed out that Oak did not agree with that approach and wished to see additional investment of $20m as originally agreed. Mr Knight recommended that Mr Boughtwood should accept the financing available at the $30m pre-money valuation. Mr Knight said that he would need an answer from Mr Boughtwood on this before formally replying to investors. Mr Boughtwood said that he would let Mr Knight know his decision by 26 May (in fact, he failed to revert by that date). Mr Knight also took up with Mr Boughtwood the limits of his role as CTO, which was to focus on future technology and filing patents. Mr Knight requested Mr Boughtwood to operate within the bounds of the CTO role. Mr Knight also raised with Mr Boughtwood recent issues relating to his unacceptable behaviour in his relationship with other employees. He said that the senior management team were unanimous in their disapproval of Mr Boughtwood’s “aggressive and abusive behaviour”. Mr Knight emphasised that these issues needed to be resolved as a matter of urgency to maintain morale in the company and not to put off potential investors. Mr Knight proposed that the best way to deal with the problems that had arisen with Mr Boughtwood was that he and his R&D team should move to a different building off site where they would be separate from the day-to-day operations of the company. Mr Knight proposed that Mr Boughtwood should establish an advance research facility at a new location of Mr Boughtwood’s choice. Mr Boughtwood said that he thought that this would be a good solution and thanked Mr Knight for the proposal. It does not appear that Mr Boughtwood seriously disputed the complaints which Mr Knight had raised with him and he appeared to accept the solution to the tensions which had arisen within the management team which was proposed by Mr Knight.

At this point, Mr Meyer left the meeting but Mr Knight and Mr Boughtwood had a further discussion. There is a dispute in the evidence as to what happened. For the first time at the hearing it emerged that it would be Mr Boughtwood’s case that at this point Mr Knight told him that Oak wanted him out of the business and that he should seek to get the best deal he could. Mr Knight denied that he had said any such thing. This was a late suggestion by Mr Boughtwood. It had not featured in letters written by solicitors acting for Mr Boughtwood dated 30 June and 11 July in which his complaints in relation to the management of the business had been set out. It did not appear in his witness statements. There was no contemporaneous complaint in the documents by Mr Boughtwood about this matter either to Mr Knight or to Oak. On the contrary, on 21 May Mr Boughtwood e-mailed Mr Carano and Mr Ahmed in friendly, routine terms and made no complaint to them: he simply reported on matters within PML and indicated that he was still thinking about the funding situation. It is clear from the minutes of the part of the meeting attended by Mr Meyer that Mr Knight’s proposed way forward was that Mr Boughtwood should remain with the business rather than be pressed to leave it. Mr Knight had indicated that he was prepared to support extra funding being made available by QED/PML for the proposed new research institute (and see also paragraph [201] below). Moreover, in early June Mr Boughtwood did not indicate to Mr Bennett that Mr Knight had told him that Oak wanted him out of the business: see paragraph [197] below. Nor did he say that to Mr Rich when explaining his actions of 24 June to him: see paragraph [231] below.

For all these reasons, I do not find the account by Mr Boughtwood of what Mr Knight said on 19 May to be credible and I prefer Mr Knight’s evidence on this point. In Mr Boughtwood’s case at trial, the alleged conversation with Mr Knight on 19 May assumed considerable importance, as the principal justification for Mr Boughtwood’s planning to seize control of QED/PML throughout June, culminating in his conduct on 24 June. In my view, Mr Boughtwood’s evidence on this point was a deliberate invention by him. The true reasons why Mr Boughtwood’s attention shifted to seizing control of QED/PML were that it was becoming clear to him that further investment would not be forthcoming at the $60m pre-money valuation he desired; he did not wish to suffer the additional dilution of his interest in QED which would result from investment at a lower pre-money valuation; he thought that the lower valuations then available might just reflect a poor general investment environment and could improve if PML could eke out its existing resources for longer; and so he wished to take control over PML’s rate of expenditure, to cut it back severely from what Mr Knight, Mr Meyer and Oak thought appropriate.

In his e-mail of 21 May to Mr Carano Mr Boughtwood indicated his unhappiness at the lower valuations of PML being suggested by potential investors. Mr Carano replied by e-mail the same day pointing out that PML had fallen behind with the milestones in its business plan which had been contemplated when Oak invested, so lower valuations were to be expected. Mr Carano stated that the original revenue and profit plan that Oak had relied on for the original valuation was “wildly naïve” and its expectations in relation to the product’s development were more than two years delayed. Mr Carano indicated that he felt that a pre-money valuation of $25m to $30m (i.e. $65m to $70m post-money valuation, taking account of a total investment of $40m) reflected the full fair value of PML. He pressed for final offers to be asked for from the four sources of capital which were expressing serious interest at that time, namely Index, NEA, Venrock and the Smith Family. He gave this warning, emphasising the critical need for PML to develop as quickly as possible a viable motor which it could market:

“Without closing on the additional equity, we will be a dead company since we need to rapidly scale engineering over the next 18 months to develop hardened products for this highly competitive marketplace or we will be a footnote in the history of the electric in-wheel motor.”

On 2 June 2008 Mr Boughtwood e-mailed Mr Knight on the subject of the valuation of PML in relation to the next round of financing. The pre-money valuation of about $30m which was being proposed was well below the $60m figure which he desired. He pointed out that this was a substantial change to his expectations and would result in a substantial dilution of the interests of himself and the other common shareholders (including Mr Knight and members of the management team who had accepted share options as part of their remuneration package), but not of Oak’s interest. Mr Boughtwood indicated that he could not agree to the valuations being put forward; therefore any due diligence by potential investors should be regarded as being at their own risk. Mr Boughtwood said that he was pursuing alternative investors who he thought would consider a higher price and hoped to have that concluded before the next Board meeting. He said: “It may not come to anything, but at worst it will help us to accept the need for such a substantial down round [i.e. reduction in pre-money valuation if investment had to be taken from one of the proposed venture capital firms]”. Mr Boughtwood said:

“In parallel with the last ditch investor search, I am preparing a proposal that will hopefully get this round in place smoothly, should I find no better price offers.

As noted above, my desire to achieve the best possible valuation for us all should not be viewed as anything other than just that. At present I am still not convinced that this is the best we can achieve, but accept that these discussions cannot go on indefinitely.”

This e-mail further supports my conclusion at paragraph [171] above that Mr Boughtwood recognised that (assuming no change to PML’s policy on expenditure) PML had to get in additional investment before the summer break. The investor search he and Mr Knight were carrying out in parallel was described by him as a “last ditch” exercise. He indicated that he accepted that it would produce a proper test of the available market for investment finance at that stage, and also that if the offers Mr Knight had identified were in fact the best that could be achieved, that would allow him to accept the need to take the additional financing on offer even at the lower valuation.

At about this time Mr Rich was seeking to tie up various loose ends in relation to the administration of companies within the QED group. He checked on the position in relation to the paperwork relating to Mr Knight’s employment contract. PML’s solicitors, Speechly Bircham, reported that the situation was slightly confused. There was on file a signed undated contract for Mr Knight with Automotive. The work permit application which had previously been made in relation to Mr Knight specified PML as the employing company. Speechly Bircham proposed that the contract should be revised to show PML as the employer. They proposed that the contract should be backdated to 15 February 2008. In response to this, Mr Knight proposed that since the work permit was issued for him on 4 December 2007 that would be the appropriate date for the contract. Speechly Bircham agreed with that proposal.

In my view, this was a simple and straightforward administrative tidying up operation. Moreover, I consider that the issuing of an employment contract for Mr Knight with PML reflected the practical and legal reality as it had applied since 2007 and, in particular, since the decision in February 2008 to merge PML, Automotive and Systems into one operating subsidiary of QED. Mr Knight had been described as “the proposed new Chief Executive Officer” of PML in the disclosure letter dated 26 September 2007 signed by Mr Boughtwood, the business card issued to him described him as CEO of PML, Mr Boughtwood had introduced Mr Knight to the employees of PML as their CEO in December 2007 and he was held out by Mr Boughtwood to customers of PML as PML’s new CEO from late 2007. These points are important, in light of Mr Boughtwood’s allegation at trial that the signing and backdating of Mr Knight’s employment contract with PML was part of a deliberate and dishonest attempt by him and Mr Meyer to bolster Oak’s case that Mr Knight was CEO of PML, when in fact he was not. I reject this allegation.

On 4 June 2008 Speechly Bircham sent Mr Knight an amended contract of employment showing PML as his employer with a start date of 4 December 2007. Speechly Bircham proposed that Mr Meyer should sign the contract on behalf of Flightlink and invited Mr Meyer and Mr Knight to sign the contract. Mr Knight signed the contract on about 8 June 2008 and entered the date of 4 December 2007 on the first page (in line with clause 1 of the contract as drafted by Speechly Bircham, which showed that date as the commencement date of his employment, and as approved by Speechly Bircham in his previous discussion with them). The contract was not countersigned by Mr Meyer at that stage but was left by Mr Knight as an administrative matter to be tidied up with him at some future point in time.

Mr Boughtwood suggested that it was significant, as showing some nefarious intent, that Mr Knight signed and backdated the written employment contract with PML without dating his signature on the document. I do not accept this. A number of contractual documents were contained in the papers which had been signed (but where the actual date of signing was not stated) by various individuals, including by Mr Boughtwood, and in my view there was nothing unusual or untoward in the fact that Mr Knight did not date his signature on the PML employment contract. Mr Knight’s actions were in line with responsible legal advice, and the document which he signed reflected the true underlying position.

In early June 2008 a significant new chapter in the history began. Mr Boughtwood started to plan a coup to take over control of the board of QED by surprise and (before Oak could take corresponding action to restore the balance of voting rights on that board) then to cause the QED board to dismiss Mr Knight as CEO of PML and appoint other directors of PML (his brother, Mr Andrew Boughtwood, and a business contact, Mr Stephen Bennett) so that Mr Boughtwood, with their support, would be able to outvote Mr Meyer on the PML board and control PML’s business. On 3 and 4 June 2008 Mr Boughtwood left telephone messages for Mr Bennett asking him to contact him in relation to a possible appointment for him as a non-executive director. Mr Bennett had experience of assisting in turning round ailing companies by tightening control over expenditure.

Mr Bennett was joined as a Respondent to Oak’s Petition and he put in a full witness statement in these proceedings. That statement stands as his unchallenged evidence in the case. Mr Bennett confirmed to Mr Boughtwood on 4 June that he was willing to meet him. They met the next day. Mr Boughtwood complained to Mr Bennett that his interest in the business had been marginalised and that he and Mr Knight had differences of opinion. Mr Bennett’s evidence continued as follows:

“Martin Boughtwood went on to explain that the Board of QED was seeking to raise further finance. Martin Boughtwood felt that this was inappropriate and wanted to continue to trade through to Spring 2009 and introduce heightened control and improved utilisation of the substantial cash deposits (amounting to some £5.4 million) and raise new money in the Spring of 2009 by which time he considered that global investment confidence would be re-established.”

On the basis of what he had been told by Mr Boughtwood, Mr Bennett agreed to accept appointment as a director of QED and of PML. Mr Boughtwood kept his plan a secret from Oak, Mr Knight, Mr Meyer and everyone at PML.

On 4 June Mr Knight sent Mr Carano and Mr Ahmed an e-mail reporting on his discussions with Index and NEA and also on a discussion he had had that day with Mr Boughtwood, who said he wanted Mr Knight to act as a broker with Mr Carano. Mr Boughtwood had told Mr Knight that he had three potential investors who should be ready to make an offer by the end of the month. (Again, it is significant that Mr Boughtwood was treating the deadline for funding offers from potential investors as that which had previously been agreed by the QED board). Mr Knight indicated scepticism about that and suggested that he and Mr Meyer would have an offer on the table before then to bring matters to a head.

On 4 June Mr Boughtwood also e-mailed Mr Carano. He urged him to be more optimistic about the value of QED/PML. He mentioned that he had been in discussions with some possible alternative investors. He referred to Oak’s anti-dilution protection and emphasised the effect of a lower valuation upon the management team (with their share options) and himself. He suggested that the business should be prudent in the way it spent its funds “and take investment at low valuation only at the latest time, without of course being too late!” He noted that he realised that Mr Carano’s views did not accord with his but said that he hoped they would be able to reach a rational conclusion by the next board meeting. Mr Carano replied by e-mail the same day. In relation to the burn rate he pointed out that redesign work was required to deal with problems of noise and reliability in relation to the motor and that that was necessary to “deliver proof to potential customers that we have something real, not vision”. He continued:

“We MUST get these redesigned motors to customers by the fall (a full year late) to have any chance at becoming a leading vendor of electric motors to the plug-in or hybrid car industry. This will require aggressive staffing of production quality engineering and manufacturing and software personnel. …

If you have developed another potential investor, terrific, let’s get them to make an offer ASAP. However, we MUST raise at least another $20 million before the end of July from one or more investors who can provide the best terms for the company. Any rejection of a viable financing now will put PML in dire risk because we must deliver great electric motors this fall or we will entirely miss the market. Moreover, waiting until we ship our redesigned motors in late fall to try to raise capital will put us at further risk of becoming insolvent before funds can be secured. In addition, PML will likely face even a lower valuation proposal from investors in the late fall who will understand that PML would soon be running out of money and will still not have secured a production contract from a major [motor manufacturer]. Consequently NOW is the best time for PML to complete our required financing under the best possible terms by negotiating with multiple interested parties for the highest valuation while raising the absolutely required additional $20 million. This objective is in the best interest of ALL parties, you, Oak and management.”

In other words, in Mr Carano’s view there was no scope for cutting back PML’s costs as Mr Boughtwood had suggested, and it was essential to obtain further investment as soon as possible and before the summer break.

In my opinion, there was a compelling commercial logic in what Mr Carano said, and it undoubtedly represented his genuine view. He was not averse to Mr Boughtwood seeking alternative investment, but he quite properly emphasised the commercial risks for PML if further investment was not secured quickly. Mr Carano’s advice corresponded with similar advice which Mr Meyer gave Mr Boughtwood by e-mail on 3 June. Mr Carano’s position was inconsistent with Mr Boughtwood’s allegation at trial that Oak was trying to drive PML into the ground in order to acquire it at an undervalue. On the contrary, Mr Carano wished to ensure that there was a proper test of the market to obtain further financing on the best available terms before the summer break so that PML would survive as a viable business and avoid insolvency.

On Thursday, 5 June Mr Knight and Mr Boughtwood met for about three hours in the evening at a hotel near PML’s offices. They again discussed the need for further financing for PML and the relationship between Mr Boughtwood and the rest of the management. Mr Knight reported on their discussion to Mr Carano, Mr Ahmed and Mr Meyer by e-mail on 9 June. Mr Knight reported that Mr Boughtwood was resigned to accepting the new round of financing. Mr Boughtwood wanted Mr Knight to act as a broker between him and Oak. He claimed that he wanted to resign from the company completely since he did not want to be part of an organisation where he was not involved in operations. Mr Boughtwood canvassed the idea that Oak and the new investors should pay him a substantial sum for his shares, but Mr Knight responded that that was an extreme position which would get him nowhere. Instead, Mr Knight raised with Oak a range of negotiating issues which for the most part were predicated on Mr Boughtwood remaining with PML, but perhaps taking additional money in the new financing round for himself in recognition of the dilution of his shareholding. The position adopted by Mr Knight in this discussion is not consistent with him trying to drive Mr Boughtwood out of the company, rather the reverse. It is also inconsistent with any suggestion that Mr Knight had told Mr Boughtwood on 19 May that Oak wanted him out of the company.

On 6 June Mr Knight travelled to the USA to meet potential investors. On 10 June Mr Knight e-mailed Mr Carano, Mr Ahmed and Mr Hauser about an approach from Chrysler. He said:

“We had a great call with the president of Chrysler ENVI this afternoon. Chrysler has determined that they need to be in production with an all wheel drive Jeep (either as a full electric or series hybrid) in 2011. After reviewing all available technologies they have decided to go with our in wheel motors. They want to start development immediately with the intent to assemble 15-18,000 vehicles in 2011. Production would scale after that to over 100,000 a year by 2015. Chrysler is coming over to the UK on June 30^th to establish a working framework. A 123 is the battery supplier. They will begin development with our current motor and ultimately use our mid size motor.

This is a significant opportunity and is our first western [motor manufacturer] production intent vehicle.

We will let you know when the contract is signed I am sure it will take several weeks.”

Mr Knight’s evidence about this was that it referred to contact with Chrysler which appeared promising but led to nothing. Mr Knight had had sporadic discussions with Chrysler which petered out at the end of April 2008. At the end of May, Mr Knight was contacted again and asked to take a call from Chrysler which was set for early June. This was the call to which his e-mail referred. Mr Knight’s evidence was that he became over-excited about this contact, which in truth was exploratory and contained no firm indication that Chrysler would follow through with any contract. His indication about Chrysler’s production made huge (and unjustified) assumptions, at a stage where PML did not yet have a robust prototype motor available. I accept this evidence. In my view, Mr Knight was getting increasingly desperate for good news (it looked at the time as though Index would not be proceeding with an offer of finance), and invested this call with far greater significance than it really had. Mr Ahmed’s response was similarly wildly optimistic for the same reason:

“Holy cow, this could be HUGE. But we need to close the financing before Martin gets all unrealistic on valuation again!!”

Mr Knight responded that he had not told Mr Boughtwood about this approach.

Mr Carano’s reaction was more realistic. His response to Mr Knight (“Is this real??... It seems like your plan should call for $2 billion in revenues in 2015…”) was written in a sarcastic manner in order to try to remind Mr Knight not to get carried away with what was obviously a mere speculative and unrealistic possibility. Mr Carano was right to be sceptical. Nothing came of Chrysler’s approach. When Mr Knight sought to follow up on the contact, and asked for a note confirming the discussion, nothing was provided. Mr Knight informed Mr Carano that he wanted to play this opportunity down until the financing was done so as to keep Mr Boughtwood’s expectations under control. Mr Carano responded to agree with this, indicating that Mr Knight should treat it at the level of a conversation until a contract was signed after the financing round.

Mr Boughtwood complains that the decision by Mr Knight and Oak not to inform him of the Chrysler approach shows once again that Oak and Mr Knight were conspiring together to withhold information which should have been provided to him. The picture here is somewhat mixed. Mr Carano regarded the Chrysler approach as having no substance to it. On that view, there was no requirement to pass on information about it. Mr Knight accepted in his evidence that information of this kind would usually be shared between directors, that on reflection he felt he was wrong not to disclose it to Mr Boughtwood, but that his reason for doing so was his own frustration with Mr Boughtwood’s failure to be realistic about the valuation of PML’s business at this critical stage of trying to get investors interested in financing PML before the summer break and his anxiety that this information would lead Mr Boughtwood to be unrealistic once more. I accept this account. He took this decision on his own initiative, not at the suggestion of Oak. Mr Ahmed was initially more impressed by the information than Mr Carano, but he assumed that if investors did proceed to make an offer of financing and carried out due diligence they would have complete and unrestricted access to Mr Boughtwood to discuss all matters affecting the business, and that the information about Chrysler’s approach would be bound to come to Mr Boughtwood’s attention at that stage. Accordingly, for him the issue of disclosure was really one of timing. He did not want Mr Boughtwood’s thinking on valuation to become inflamed at this point, so that he might reject overtures from a potential investor because of the pre-money valuation they suggested before engaging in a serious negotiation with them.

In my judgment, the information about the approach by Chrysler should have been disclosed by Mr Knight and Mr Ahmed, on their assessment of it, to Mr Boughtwood. It was information of potential relevance to negotiations with potential investors (Mr Knight did in fact deploy it in correspondence with potential investors in an effort to encourage them to invest), and so fell within the category of information which should have been disclosed by Mr Knight to Mr Boughtwood as his fellow director and disclosed by Mr Ahmed to Mr Boughtwood on the basis that it was information relevant to the obtaining of further funding for PML which fell within the scope of the joint venture quasi-partnership between Oak and Mr Boughtwood (see paragraph [101] above). However, the failure by Oak to disclose the information did not amount to a repudiation by Oak of the quasi-partnership, since Mr Ahmed contemplated that the information would be likely to be provided to Mr Boughtwood in due course, if there proved to be any substance in it. Oak itself, by its main representative (Mr Carano), was highly sceptical about the information and it would not have been unreasonable to wait for a period to assess the information before deciding whether there was a requirement for it to be passed on to Mr Boughtwood. It did in fact quickly appear that there was no substance to it, and Mr Boughtwood suffered no prejudice in any of his dealings with potential investors as a result of not receiving the initial e-mail report by Mr Knight.

On 13 June Second Creek Development Co. LLC (“SCDC”), the investment vehicle for the Smith Family, put forward a term sheet setting out the broad parameters within which it would be prepared to consider investing in PML. This gave a pre-money valuation of $20m and post-money valuation of $60m (Oak’s initial $20m plus SCDC’s proposed $10m and $10m from a yet to be identified further investor). SCDC wished to carry out due diligence. It also proposed changing the configuration of the QED board to two Oak appointees, two SCDC appointees, one further investor appointee, Mr Boughtwood and the CEO. The SCDC proposal would thus not only have substantially diluted Mr Boughtwood’s shareholding but also his rights of participation and control at board level. SCDC indicated that they were not in favour of further monies being paid to Mr Boughtwood personally for his shares, that they had been briefed by Mr Knight about Mr Boughtwood’s behaviour and agreed that he should operate apart from the company and that they were familiar with “founder problems” (giving as an example a situation in which they had invested and removed the founder from another company). It appears that Mr Boughtwood was informed about this approach. He was unhappy with what was proposed.

Mr Knight arranged for SCDC to visit PML on 23/24 June to conduct their due diligence.

On 19 June Mr Knight informed Mr Boughtwood, Mr Meyer, Mr Ahmed and Mr Carano that NEA had decided not to invest in PML. NEA’s analysis had suggested a $20m pre-money valuation, but even that price it thought was too high for the risks involved. Mr Knight observed that this left PML with only the Smith Family and perhaps Venrock (another venture capital firm) who still had an interest in investing, and of these two SCDC was the only firm to make the trip to visit PML’s facility and incur significant due diligence costs.

Meanwhile, Mr Boughtwood and Mr Bennett were in touch with each other to plan for a coup to effect a transfer of power on the board of QED at the forthcoming board meeting on 24 June.

Mr Boughtwood also continued with his efforts to obtain further investment for QED/PML at a higher valuation for the business than the venture capital firms that Mr Knight had been in discussion with. Just before the board meeting, on 23 June, he obtained a letter from a Mr John Coombes, a high net worth individual living in Monaco with whom he had been put in touch. Mr Coombes wrote that “subject to contract and due diligence” he was interested in making an investment in QED. His proposal was initially to acquire an equity stake of approximately 7-10%. The shares acquired would be at par with the initial Oak investment at a pre-money valuation of $60m. He confirmed that he would be able to move quickly with this opportunity.

Also on 23 June Mr Knight was attending on the SCDC team on their due diligence visit. In the course of this he had an e-mail exchange with Mr Ahmed in which he casually reported on a conversation he had had with the Smiths:

“What would you say to a 15 million pre [i.e. pre-money valuation] put martin at less than 8 percent

Music to my ears”

Mr Ahmed responded:

“… 15pre sounds just about right to me. We need Martin down to a position of no influence and no rights. And then you all can execute on your plan…”

Mr Boughtwood pointed to this exchange as evidence to support his case that Oak was conspiring with Mr Knight to remove him from a position of having any control over the company. Mr Knight’s evidence was that the Smith representatives had been jokingly taunting him that perhaps their proposed $20m pre-money valuation was too much, and that maybe they should substitute a $15m valuation. His e-mail to Mr Ahmed was written in a similar joking manner, and the “music to my ears” reference reflected his frustration with Mr Boughtwood’s interference in the management of PML (about which he had made no secret with Mr Ahmed), which would be likely to be curtailed if his shareholding was substantially reduced. Mr Ahmed’s e-mail reflected a similar frustration with Mr Boughtwood, whose interference in the management of PML was impeding it in carrying out its project. The tone of the exchange was undoubtedly unpleasant and hostile to Mr Boughtwood, but their frustration with him was not unreasonable. They denied that the exchange indicated any plan by them to try to get a low valuation from SCDC or to take concrete action unfairly or improperly to reduce Mr Boughtwood’s rights and influence. I accept this evidence. Mr Knight continued to negotiate as hard as he could with SCDC to obtain the best possible valuation proposal from them.

On the evening of 23 June there was a dinner attended by Mr Boughtwood, Mr Knight, Mr Meyer and Mr Carano. There is a dispute on the evidence as to what exactly was said at this meeting, but it is clear that Mr Carano was agitated and annoyed. He said that unless further funding could be secured, Oak would have to regard its investment in QED as a failed investment. Mr Carano wanted the company to recruit good engineers to get the Hi-Pa motor into a viable state. He said that if further investment was not secured within the next seven days (i.e. by the end of June deadline that had been agreed at the QED board meeting on 7 May) Oak would wish PML’s business to be sold to try to realise the maximum amount of value for it at that point. Mr Boughtwood argued that Mr Carano’s proposal to continue with a substantial expenditure programme for PML was mistaken and that PML should rather seek to reduce its expenditure and conserve its existing cash resources. Mr Boughtwood asked Mr Carano whether he would be willing to sell Oak’s shareholding in the company and, if so, at what price. Mr Carano’s response was that he would sell at $20m, reflecting the protective rights in relation to Oak’s preferred shares. Mr Carano and Mr Boughtwood were at loggerheads, and Mr Boughtwood left the dinner at this point.

On 24 June Mr Boughtwood had put in place detailed plans to remove Mr Knight as CEO and director of QED and PML, appoint Mr Andrew Boughtwood and Mr Bennett as additional directors of QED so as to secure control of the board of QED at the meeting and then to use his majority on the board of QED to remove Mr Knight as CEO and director of PML, appoint Mr Boughtwood as CEO of PML and appoint Mr Andrew Boughtwood and Mr Bennett as additional directors of the PML board so as to secure control of the PML board for Mr Boughtwood. These plans involved having in place formal letters giving notice of the various changes and appointments for delivery that morning to the offices of Speechly Bircham in London by Mr Boughtwood’s then solicitors, Eversheds. The element of surprise was critical for Mr Boughtwood’s plan, since if Oak was alerted to what he intended to do, it could have appointed additional directors of its own to the QED board according to its rights under the Shareholders Agreement and QED’s Articles of Association so as to block Mr Boughtwood’s move. This meant that Mr Boughtwood did not give proper advance notice of the proposed changes as required by QED’s Articles of Association. Mr Boughtwood was counting on being able to achieve a temporary majority on the board of QED so as to effect a change in the board of PML before Oak could take defensive action to appoint further directors to the board of QED. Once Mr Boughtwood had secured the change in the board of PML, he calculated that if Oak appointed further directors to the board of QED that board would then revert to being deadlocked, with the practical effect that it could not unwind the changes to the board of PML which he had made. The practical result which he hoped to achieve by these means was to secure the control of the PML board and business for himself, using his majority on that board (with Mr Andrew Boughtwood and Mr Bennett) to outvote Mr Meyer if necessary.

The QED board meeting was attended by Mr Boughtwood, Mr Carano and Mr Knight as directors, and by invitation, by Mr Andrew Boughtwood, Mr Meyer and Mr Rich. Unbeknown to Oak and the PML managers, Mr Bennett was waiting in a room close by to be called in. The meeting started in routine fashion, working through the agenda which had been circulated (which contained no reference to Mr Boughtwood’s planned changes). Mr Boughtwood then stated that he had been talking to several potential investors and referred to the letter of intent from Mr Coombes. It appears from the minutes that Mr Boughtwood may have given a somewhat garbled account of the terms which Mr Coombes was offering (referring to an investment of £3m then £7m after he had driven the Mini), that due diligence had yet to be completed but that he felt there was a strong possibility of the funding completing. Mr Boughtwood stated categorically that he would not accept investment at a pre-money valuation of $20m, which was what the Smith Family were proposing. Mr Boughtwood considered that there was sufficient time to seek funding at a higher valuation. Mr Carano disagreed with this and said that if the Smith Family offer was insufficient or the other offer from Mr Coombes was not forthcoming by 4 July (i.e. slightly later than the deadline of 30 June which had previously been agreed) then QED should appoint an investment bank to sell the business for the best possible price. Mr Carano complained that Oak had invested on the basis of what they had understood to be a motor at a more developed stage and on the basis of an understanding that there was a group of other investors ready to complete the initial funding. Mr Carano said that the current version of the motor was not a production version and for that reason he wanted PML to hire more staff to make a working production grade motor by early 2009. The company needed the additional $20m to get to production and the board should be looking to take the best offer on the table by 4 July. Mr Boughtwood did not consider that Oak had been let down in relation to other investors. He thought it had been reasonable to believe that other investors would invest. He disagreed that the problems with the motor were as severe as Mr Carano indicated. It was agreed, however, that the company was approximately a year behind where it thought it would be in terms of development of the motor.

In his evidence, Mr Boughtwood sought to suggest that he waited to decide whether to activate his plan to see whether Mr Carano would, in his view, behave reasonably or not. However, a set of notes taken by Mr Andrew Boughtwood at the meeting indicate that Mr Andrew Boughtwood sent the necessary text message to Eversheds instructing them to issue and deliver the letters and notices to Speechly Bircham in London very early on in the meeting, before any discussion took place with Mr Carano. It is likely that these notes are accurate and that Mr Boughtwood had already decided before the start of the meeting to put his plan in to action.

At this point in the meeting Mr Boughtwood stated that the company should constrain its spending to ensure that currently available funding lasted for twelve months. He wanted to review the whole cost structure. He produced a letter removing Mr Knight from the board of QED as one of his directors and relieving him of his position as CEO. He said that in addition to the delivery of the letter at the meeting the notice of removal had been served at the registered office of QED at Speechly Bircham’s offices in London.

Mr Boughtwood then purported to appoint two further directors of QED, Mr Andrew Boughtwood and Mr Bennett, and Mr Bennett was invited to join the meeting. Mr Boughtwood announced that he was taking up the position as temporary CEO in place of Mr Knight. Mr Boughtwood then proposed a resolution that Mr Knight be removed from the board of PML in what he described as the best interests of the company. That resolution was carried by three votes (Mr Boughtwood, Mr Andrew Boughtwood and Mr Bennett). Mr Carano and Mr Knight refused to participate.

Mr Carano, Mr Knight and Mr Meyer then left the meeting, stating that they disagreed with the legality of what was being done. Mr Rich had been designated at the outset of the meeting to take the minutes and was left in an awkward position as to what to do. He stayed at the meeting to document the resolutions which had been passed.

The steps taken by Mr Boughtwood and his board appointees at the QED board meeting on 24 June represented a declaration of war, so far as Oak was concerned. Oak felt very strongly that Mr Boughtwood had no right to remove Mr Knight as CEO and director of QED and PML. Therefore, as a stop-gap measure and to restore his position on the QED board, QED appointed Mr Knight as an Investor Director under Article 19.3 of the QED Articles of Association. Later, Oak appointed Mr Craig Lang as its third Investor Director.

A position of considerable confusion arose in the company. The SCDC due diligence team ceased their work and went away. Mr Knight got Speechly Bircham to e-mail the senior management team to maintain that he remained a director of QED and also its CEO. Eversheds, for Mr Boughtwood, objected to this confirmation and maintained that Mr Knight had indeed been effectively removed as CEO.

Mr Knight, purporting to act in his capacity as CEO, sent Mr Boughtwood an e-mail terminating Mr Boughtwood's employment as CTO. Mr Boughtwood responded by denying that Mr Knight had the authority to do this and by excluding Mr Knight from QED/PML’s offices.

In his pleadings Mr Boughtwood has now accepted that his actions on 24 June amounted to unfair prejudice in relation to Oak. This was by an amendment to his Defence shortly before the commencement of this trial made (presumably) after reflection on critical comments about what he had done by Lindsay J at the hearing for an interim injunction sought by Oak (see paragraph [242] below). He also accepts that Mr Andrew Boughtwood and Mr Bennett were not validly appointed as directors of PML and Mr Knight was not validly removed from his position as a director of PML.

However, Mr Boughtwood submitted at trial that there was considerable justification for him taking the steps he did, since at the time Oak was seeking improperly to reduce his control over the business and to drive him out (it is in relation to this that his evidence about his meeting with Mr Knight referred to at paragraphs [187] – [188] above had particular significance); that Oak suffered no relevant prejudice through loss of the SCDC financing proposal, since he was well within his rights to reject it (as he did at the meeting) in any event as an offer at too low a valuation and on unacceptable terms; and that he cured any unfair prejudice which might have arisen by later making an offer to purchase Oak’s shares. I will address this third point later in this judgment, when I examine the various settlement proposals which were made.

So far as the first point is concerned, I have already addressed it in my account of the position leading up to 24 June. I do not accept that Oak was acting as Mr Boughtwood alleges.

As to the second point, in my opinion Mr Boughtwood was not entitled to dismiss the SCDC proposals out of hand on 24 June. He had agreed at the QED board meeting on 7 May that QED/PML urgently needed to find the second round of finance before the summer break, and that final offers from any potential sources of funding should be obtained by the end of June (see paragraphs [169] – [171] and [190] – [191] above). Absent a change in PML’s board (which he now accepts he did not lawfully achieve on 24 June) there was no prospect of a significant change in its business plan, and so no basis for any change in his view about the need for, and desirable timing of, the additional financing round for QED/PML. The funding market was being tested in a “last ditch” effort, and if it transpired by about the end of June (or by 4 July, the date proposed by Mr Carano on 24 June) that an SCDC offer at $20m pre-money valuation was the best final offer available, then in my view Mr Boughtwood would have been obliged at that stage (by reason of his fiduciary duties to QED/PML and by reason of an equitable duty arising out of the quasi-partnership with Oak) to agree to accept it: see paragraph [171] above. The proposal from Mr Coombes in his letter of 23 June was at a very early stage, depended on his due diligence and was therefore speculative. It was legitimate for Mr Boughtwood to require a final offer from him (if one was eventually forthcoming) to be considered alongside any other final offers (at this point it seemed the only one would be from SCDC), but it was not legitimate for him at this stage to take action which destroyed any chance that SCDC would proceed to make an offer and enter a serious negotiation to invest. SCDC had shown that it was a serious investment prospect, since it had incurred the costs of due diligence. In the event, no firm offer was forthcoming from Mr Coombes. Accordingly, Mr Boughtwood’s actions on 24 June did cause Oak substantial unfair prejudice, since they caused QED/PML to lose a serious chance of the further investment which was necessary for the success of the Mr Boughtwood/Oak joint venture.

Quite apart from this prejudice to Oak, in my judgment Mr Boughtwood’s actions on 24 June destroyed the relationship of trust and confidence which should have existed between him and Oak in respect of their quasi-partnership: see paragraph [11] above. Mr Boughtwood had schemed surreptitiously so as deliberately to override protections for Oak in the control and management of the business and take control of it for himself. Oak could not be expected to trust him any more as a partner in their joint venture.

After the board meeting on 24 June Mr Boughtwood met the PML management team. He was accompanied by Mr Andrew Boughtwood and Mr Bennett. Mr Boughtwood said that he had had no option but to appoint himself as interim CEO. Later, on 30 June, Mr Boughtwood provided a letter to the senior management team setting out his explanation as to his legal authority to remove Mr Knight and install himself as temporary CEO.

After 24 June Mr Boughtwood was in practical control of PML’s business. He recruited Mr Davies, through his consulting firm Appian, to carry out a review of the company’s spending.

On 26 June Mr Boughtwood had a conversation with Mr Rich in which he told Mr Rich that the fundamental reason for his actions on 24 June, out of number of issues, had been the fact that the funds Oak had invested were still in PML and had not been moved up to QED.

In the period 24 June to 24 July Mr Boughtwood substantially curtailed expenditure by PML. This represented a hiatus in terms of the drive to get a viable Hi-Pa motor up and running as quickly as possible.

The management team were in contact with Oak, which reassured them about its support for the business. Oak paid for them to have independent legal advice. Oak also guaranteed six months salary for any of them who might be sacked as a result of making a witness statement.

On 27 June Mr Knight informed Mr Carano that he had sought to put “several road blocks” in front of Mr Boughtwood gaining access to the Mini. This appears to have been an effort to impede Mr Boughtwood in his efforts to persuade Mr Coombes to invest in PML. Mr Knight’s evidence was that he did this because he did not accept that Mr Boughtwood should have control of the business. It appears, however, that Mr Coombes was still able to conduct a due diligence examination of PML’s business. This did not result in him making a firm offer to invest.

Oak urgently consulted its lawyers. On 27 June 2008 Messrs Simmons & Simmons for Oak wrote a letter before action to Eversheds for Mr Boughtwood. The letter claimed that the purported removal of Mr Knight as a director of PML was in breach of clauses 10(B) and 11.2 of the Shareholders Agreement, since the board meeting of QED had not been properly convened for that purpose. They also maintained that there was no valid resolution of the board of QED to remove Mr Knight from the office of CEO of QED or to effect Mr Boughtwood’s appointment to that position. Oak also maintained that Mr Knight remained an employee of PML as CEO. It protested at Mr Boughtwood’s exclusion of Mr Knight from QED/PML’s premises and from access to corporate information. It protested that Mr Boughtwood had acted in breach of the quasi-partnership on which his relationship with Oak was founded. The letter concluded with a reminder that Mr Boughtwood should keep secure any relevant documents so as to give proper disclosure in due course.

Eversheds, for Mr Boughtwood, responded by letter of 30 June. Mr Boughtwood maintained his right to remove Mr Knight as director and CEO of QED and as director of PML. He denied that Mr Knight had ever been CEO of PML. Mr Boughtwood accepted the characterisation of the venture as a quasi-partnership. At this stage he disagreed that he had acted in breach of that quasi-partnership. Mr Boughtwood identified the principal issues as those relating to the running of the business (his concerns over what he regarded as inadequate control of expenditure, of which he gave as an example the issue concerning control of Mr Knight’s expenses; exclusion of Mr Boughtwood from the management of the business and his marginalisation in it; and the dispute between himself and Oak concerning the future funding for the business).

On 1 July Mr Boughtwood joined a meeting of the PML management team. I accept the evidence of the members of the team who attended who described him acting in an aggressive and accusatory manner, demanding that they acknowledge him as CEO against an implied threat that if they did not they would risk being fired from the company. Mr Meyer said that they would accept him as CEO provided that they had a clear and unambiguous letter from lawyers saying that he was.

In about early July Mr Coombes commenced his due diligence inquiries in relation to PML’s business. In mid-July a gentleman called Barney (the PML managers were not told his surname) spent a couple of days at the business asking the management team questions about it.

In an e-mail dated 2 July from Mr Meyer to Mr Knight, copied to Mr Carano and Mr Ahmed, Mr Meyer offered to sign Mr Knight’s employment contracts with PML and Automotive (which had previously been signed by Mr Knight: see paragraph [194] above), providing Oak would be willing to fund his legal defence should that be necessary. He said that he thought it was “crazy” to claim that Mr Knight had never been CEO of PML and Automotive, since that is how he had been recognised by Mr Boughtwood and everyone else. It was agreed that Mr Meyer should sign the contracts, and he did so.

Mr Boughtwood was very critical of this action by Mr Meyer, and accused him of signing a back-dated document to create a deliberately false impression that Mr Meyer had been CEO of PML since December 2007 in order to bolster Oak’s case in the Petition. In my view, however, there was nothing wrong about Mr Meyer proposing this course of action and then signing the PML contract. This action simply involved recognising what was already, in Mr Meyer's view (and mine), the true underlying legal relationship between Mr Knight and PML. Given the aggressive action that Mr Boughtwood had taken on 24 June, it is unsurprising that Mr Meyer should have been concerned that his signing the employment contract might lead Mr Boughtwood to take some form of legal proceedings against him. I reject the suggestion by Mr Boughtwood that his agreement to sign Mr Knight’s PML employment contract was part of a conspiracy to misrepresent the true position and to undermine Mr Boughtwood's proper position in the company.

Discussions continued between Mr Boughtwood and Oak but no resolution proved possible. Simmons & Simmons sent a further letter before claim on 10 July to which Eversheds responded on 11 July. On 14 July Oak issued the Petition and an application notice seeking interim injunctive relief against Mr Boughtwood, Mr Andrew Boughtwood, Mr Bennett and QED.

The hearing of the application for interim injunctive relief took place before Lindsay J on 22 and 23 July. Lindsay J gave judgment on that application on 23 July. He applied familiar American Cyanamid principles and granted the injunction which Oak sought to restore the position in relation to control of PML’s business pending trial of the Petition. Lindsay J concluded at paragraph 35 of his judgment that the manner in which things had been done on 24 June was manifestly not in accordance with the Articles. He was critical of Mr Boughtwood’s behaviour in the context of a quasi-partnership, observing that it seemed to him to deserve to be described “by words such as ‘stunt’ or ‘tricks’, and certainly was a surprise”. He continued: “That is no way to run a quasi-partnership that is attempting to pursue a multi-million pound technology.”

Lindsay J made an order dated 24 July restraining Mr Boughtwood, Mr Andrew Boughtwood and Mr Bennett from denying that Mr Knight was the CEO of PML and from impeding him in carrying out his duties as such; from denying that Mr Knight was a director of PML, and from impeding him from acting as such; restraining Mr Andrew Boughtwood and Mr Bennett from purporting to act as directors of PML; restraining Mr Boughtwood from purporting to act as CEO of QED; restraining each of them from holding out Mr Davies as CEO or employee of or consultant to PML or QED; and requiring each of them to take all necessary steps to assist with the restoration of the bank mandate of PML in the form it existed immediately before 24 June 2008. This last point related to steps which Mr Boughtwood had taken to remove Mr Meyer as a signatory on PML’s bank account.

After Mr Knight was restored to his position as director and CEO of PML by the order made by Lindsay J, PML pressed on with its plans to try to develop the motor as quickly as possible. Mr Knight also continued the search for further investors in the company (as did Mr Boughtwood). As had been predicted in May, July and August were not a productive time for this activity. However, in early September 2008 he did persuade SCDC to make a further proposed offer of investment.

On 9 September SCDC sent a letter proposing an investment, but with the company now valued at $9m pre-money and $29m post-money, of which SCDC proposed to provide only $5m and contemplated that a further $15m investment from other investors should be secured. SCDC indicated that they would not participate while ongoing legal issues continued to be outstanding between Mr Boughtwood and Oak. SCDC stated that their valuation had been affected by the legal dispute which had slowed the momentum of the company as well as by their realisation that the motor was at an earlier stage in the development cycle than they had initially thought.

This new proposed investment was completely unacceptable to Mr Boughtwood. He suggested that the collapse in the SCDC valuation is evidence of a strategy hatched with Mr Knight and Oak to “steal” the company being brought to fruition; but in my view, it is no such thing. I find that there had been no collusion between Mr Knight, Oak and SCDC. The reduction in SCDC’s valuation of the business was unsurprising in light of the problems which existed within QED/PML and the fact that by September it was getting perilously close to running out of money. This was the scenario which Mr Carano had always feared might happen if PML left it too late to get in the additional funding that it needed, and about which Mr Meyer had warned Mr Boughtwood.

Meanwhile, on 8 September Mr Boughtwood, through his new solicitors Messrs Needleman Treon, made an open offer to purchase Oak’s shareholding in QED at a fair valuation to be carried out by an independent accountant of the total value of the company, with issues regarding the proportion of the total value to be attributed to the respective shareholdings of Oak and Mr Boughtwood to be brought before the court for summary determination if not agreed or resolved by an alternative mechanism. In the event that Mr Boughtwood was unable to complete the purchase of Oak’s shares within six weeks at the relevant valuation, then he proposed to sell his shares in QED to Oak at a fair valuation determined according to the same mechanism. At the trial, Mr Harrison for Oak accepted that this was an open offer capable of acceptance by Oak to create a binding legal contract, the practical details of which could be worked out via the mechanisms set out in the letter.

Mr Boughtwood’s offer did not include payment of Oak’s costs in relation to events down to that point in time. However, by further letter from Needleman Treon dated 22 September 2008 Mr Boughtwood agreed to pay Oak’s costs of the Petition down to that point as part of his open offer. Mr Boughtwood relies upon O’Neill v Phillips at 1107A-C and points to this open offer as a reasonable offer to Oak in all the circumstances which cured any unfair prejudice arising out of his actions on 24 June.

Oak refused to accept this offer. It submits that it is not reasonable to expect it to be, in effect, driven out of QED by Mr Boughtwood on these terms. Mr Boughtwood was in the wrong, and should not be able to take advantage of his own wrongdoing now to seek to buy out Oak’s interest. I accept this submission. In my judgment, Mr Boughtwood’s offer did not cure the prejudice which his actions had caused to Oak. In particular,

On 18 September 2008 there was a PML board meeting. Mr Knight prepared a CEO report for that meeting in which he stated that PML was facing a liquidity crisis and that unless it could obtain funding by November it would become insolvent. Mr Knight reported on the current position in relation to trying to attract additional investment into the company. He referred to a number of factors tending to reduce the desire of venture capital firms to invest. These included the uncertain circumstances surrounding the litigation between the QED shareholders. Mr Knight referred to his understanding that Mr Boughtwood had had contact with several prospective investors. Mr Boughtwood had not disclosed the names of those investors to Mr Knight so Mr Knight said he looked forward to Mr Boughtwood updating the board at the meeting. Mr Knight provided a detailed update for the board on initiatives with customers.

At the board meeting a bankruptcy partner at Speechly Bircham attended to provide the board with advice. He advised the directors about their responsibilities in relation to the position which would arise once the company became insolvent. He recommended that they should appoint an insolvency practitioner without delay to provide them with advice. Mr Boughtwood protested that his proposals to reduce the “burn rate” had not been accepted. Mr Knight’s response was that the view had been taken that to reduce the “burn rate” was not in the best interests of the company, since it was vital to retain its intrinsic value and any reduction in expenditure would have had a negative effect and put off investors. It was imperative for the company to maintain itself as an attractive investment opportunity. Despite this disagreement it was unanimously resolved at the meeting that it was essential for an insolvency practitioner to be appointed without delay. Mr Knight asked Mr Boughtwood whether he was going to respond to his request for the names of the other investors approached by him. Mr Boughtwood said that a potential Abu Dhabi investor approached by him was unlikely to proceed in the short term, principally because of the shareholder dispute. So far as other potential investors were concerned, Mr Boughtwood confirmed that he would provide details of whom he had contacted shortly. Mr Boughtwood reported that it was unlikely an offer of funding would be forthcoming from Mr Coombes, bearing in mind the shareholder litigation. The latest SCDC offer was discussed and it was resolved that it should be referred to the QED board for its approval, as it appeared to be the only potential offer available. Mr Boughtwood did not agree with that recommendation, as he considered that the pre-money valuation did not reflect the true value of the company.

Later in the meeting Mr Knight raised the question of the assignment of PML’s IPR in favour of QED in November 2007 for consideration of £750,000. QED had not made that payment and following discussion it was resolved to demand immediate payment of that sum by QED. It was proposed that if payment was not received from QED, PML should notify QED that it was treating the deed of assignment as void for lack of consideration. Mr Boughtwood objected to this resolution on the basis that he did not recognise the PML board’s legal ability to make such decisions.

At trial, Mr Boughtwood was critical of the efforts made by Oak, Mr Knight and Mr Meyer to have the IPR returned to PML at a time when PML was facing insolvency. He said that this proposal again showed that Oak’s strategy was to get the whole QED/PML business, including the IPR rights, located at the PML level, and then arrange for Oak to purchase the business from the insolvent PML at an undervalue. I reject this claim. The separation of the IPR from the rest of the business was an historical anomaly; the value of the IPR would be greater in the context of PML’s business and vice versa, so it made commercial sense to try to unite them in any sale of the business to maximise value for the shareholders in PML (i.e. QED and, through QED, Oak – with the benefit of its preference recovery – and Mr Boughtwood); and Mr Knight and Mr Meyer acted throughout in accordance with responsible advice from insolvency advisers at PwC to the effect that they should try to reunite the IPR and the business to maximise value.

On 23 September PML sent a formal letter to QED asking to know their intentions regarding payment of the £750,000 due under the deed of assignment between PML and QED.

Shortly after the PML board meeting on 18 September, Mr Knight and Mr Rich interviewed insolvency practitioner firms. As a result PML engaged PwC to advise the board. PwC was provided with detailed information about PML and its business. PwC had under review as options a sale of the business as a going concern; a cessation or reduction of trading pending further investment; an insolvency of the company (including a sale of the business and assets effected by an administrator); and the raising of additional short-term finance.

Mr Knight prepared a report updating the QED board about these matters for its meeting on 26 September. In his opinion, until the litigation was resolved QED would not be able to raise additional temporary financing. The suggestion of the cessation or reduction of trading pending further investment was, in his view, untenable since there would be a serious loss attached to losing momentum with employees, customers, partners and suppliers. His recommendation to the QED board was that QED should sell PML as a going concern. He recommended that PwC’s engagement should be extended to include advice on an accelerated mergers and acquisitions (“AMA”) process. Mr Knight’s report gave his view that insolvency of the company would be a “most unfortunate turn of events”.

On 25 September Mr Bennett resigned as a director of QED. He had concluded that the situation in relation to QED and PML was more complicated that he had first thought. He did not wish to continue to be embroiled in the dispute between Mr Boughtwood and Oak. Mr Boughtwood nominated Mr Tim Gosselin as a replacement non-executive director of QED.

On 26 September a QED board meeting took place. Mr Ahmed chaired the meeting. Mr Gosselin’s appointment as director was confirmed. There was discussion about the demand by PML for payment of the £750,000 due under the assignment of the IPR of 13 November 2007. Mr Ahmed noted that as matters had transpired there was only one operating unit within the group and the initial purpose of having a tiered group structure no longer existed. The non-payment of the money due from QED would expose QED to possible insolvency. Mr Ahmed suggested that a solution would be for QED to return the IPR to PML in exchange for a release of the payment obligation. Mr Boughtwood pointed out that the original intention had been to hive up the funds in PML to the QED level as well. He referred to the decision at the PML board meeting in February 2008 not to hive up the money to QED. His recollection was that he had been told that it would be a costly procedure but now believed that the board had been misled about that and had made the wrong decision. Mr Ahmed said that it was important that QED work out what to do in the present circumstances. Mr Boughtwood said that he himself would be prepared to lend monies to the company to enable it to pay PML. He was asked to revert to the board with a formal written proposal. Mr Carano said his preference was for there to be an equity investment into QED rather than the company taking on additional debt. His concern was that if the company took on additional debt it would rather accelerate any insolvency. He said that he would like these issues discussed with an insolvency adviser. There was further discussion about the expenditure being incurred by PML/QED. Mr Boughtwood objected that, in his view, the company was spending too much cash. In Mr Carano’s view, however, the key issue was that the motor was not functioning and that customers had been disappointed. There were significant costs which had to be incurred to develop a saleable motor. In his view, there was no real current value to the business as an R&D company, which was why it was necessary to develop a motor and to spend money in doing that.

Mr Knight outlined the position in relation to financing proposals. Mr Ahmed’s view was that the SCDC offer was the only equity investment offer on the table and that QED had no choice but to explore it further. Mr Boughtwood objected that, in his view, the SCDC pre-money valuation of $9m was far too low. Mr Boughtwood said that he was not sure whether the potential offer from Mr Coombes, referred to in his letter of 23 June, might still be valid and noted that Mr Coombes had concerns over problems with the product and with the shareholder dispute. However, he said these issues could be resolved and Mr Coombes might still be a possible alternative investor. Mr Carano said that it was essential to explore all financing options including SCDC, Mr Coombes, possible sale of the legacy business, possible sale of the IPR and all other fund-raising options. He pressed for Mr Knight to continue his discussions with SCDC and for Mr Boughtwood to approach Mr Coombes again.

The board proceeded to review directors’ and executors’ expenses. Mr Ahmed said he did not think there had been any instances of claims for unjustified expenses. Mr Boughtwood said that, in his view, there had been fraud or collusion between Mr Rich and Mr Knight. Mr Rich objected strongly to this. Going forward it was resolved that Mr Ahmed would review and approve Mr Knight’s expenses, and that the board of QED should agree an expenses policy.

On 29 September Mr Boughtwood e-mailed Mr Carano, Mr Ahmed, Mr Andrew Boughtwood and Mr Gosselin with a table of complaints against Mr Knight, including in relation to his expenses, alleged poor business management taking the business to the point of insolvency, failure to secure funds from investors and allegedly misleading the board in February 2008 regarding the hiving up of funds from PML to QED, and inviting a vote to remove Mr Knight from the boards of QED and its subsidiaries.

In September and October the burn rate in PML was pushed upwards by a number of factors, including legal fees and PwC fees in relation to insolvency advice and significant expenditure in relation to the conversion of the Ford F150 truck and preparation for the SEMA motor show. At the same time PML was seeking to save money where it could. There was a recruitment freeze. There was a continued reduction in the planned expenditure on capital items.

On 1 October Mr Boughtwood made a further offer to purchase Oak’s shareholding in QED on the basis of a $30m valuation for $21.84m to be finalised within six weeks, and in the event that Mr Boughtwood failed to secure funding for the proposed purchase, then Oak would purchase Mr Boughtwood’s shareholdings for $8.2m. Oak declined to accept that offer. In my view, it was reasonable for it to do so. In fact, Mr Boughtwood would not have been able to fund the purchase price for Oak’s shares, and by this stage what he wanted for his own was far in excess of what they were really worth.

On 3 October 2008 PML sent QED a demand for payment of the £750,000 by 6 October, and warning that PML proposed to issue a winding up petition against QED. On 7 October PML issued a winding up petition in respect of QED and served it at QED’s registered offices. These were steps taken by PML without prior discussion with Oak, and in accordance with responsible advice from PwC.

In a report dated 6 October PwC presented options to the PML board. PwC suggested that an AMA process prior to an administration might be the best route available to improve the prospects of selling the business of PML as a going concern at a value better than might be achieved in an insolvency. They suggested that, given the importance of the IPR to the value of PML’s business, the PML directors should focus on resolving the separation of the IPR from the trading company.

On 6 October Mr Boughtwood e-mailed Mr Carano and Mr Ahmed to say that a loan facility of £750,000 would be available immediately to QED at an interest rate of 1% per month, repayable at the end of two months, and secured by a fixed charge over the IPR owned by QED. Mr Carano and Mr Ahmed did not regard this as an acceptable proposal. It would simply transfer the indebtedness of QED from PML to some third party (it was unclear whether Mr Boughtwood was offering to make this loan personally) in circumstances where a high rate of interest was being imposed and repayment would be required in the near future, failing which the lender would exercise his security rights over the IPR held by QED, so removing them from the QED/PML group. On the other hand, to avoid these problems, they were prepared to consider an equity injection by Mr Boughtwood into QED of that amount.

Mr Ahmed responded on 6 October. He asked to see the term sheet/letter of indication that Mr Boughtwood had received from the potential investor. He observed that an equity financing proposal would be preferable. He stated his view that it would be “utterly foolish” to take on such a short-term loan since it was unclear how QED could fund the interest payment as it had no cash flow. He suggested that this was “nothing more than a charade and a veiled attempt to grab ownership of the IP (for the paltry UKP 750k) as QED is sure to default on this loan at the end of the two-month period”. In view of later debate between the parties about the valuation of the IPR, some witnesses were asked to comment on Mr Ahmed’s use of the term “paltry”. He himself was not asked questions about this, and I find it difficult to be sure precisely what he meant by it. I do not think that this e-mail indicates that he had applied his mind in any carefully thought out way to what he might regard as the precise valuation to be attached to the IPR held by QED. Rather, in light of the importance of the IPR for the viability of PML’s business, I think Mr Ahmed was indicating that £750,000 would be a paltry sum for rights which, once transferred away from QED/PML, might place the value of PML’s business in jeopardy. The same day Mr Ahmed for Oak rejected Mr Boughtwood’s proposal to vote to remove Mr Knight as CEO.

On 7 October Mr Carano e-mailed Mr Ahmed and Mr Boughtwood to say that he agreed with Mr Ahmed that QED’s only viable option was to raise equity rather than taking on debt in its current situation. He pointed out that the other rational solution would be to transfer the IPR back to PML so that PML could find a buyer for its business without the “fatal limitation” of not owning the IPR.

Also on 7 October Jane Henry of Speechly Bircham e-mailed Mr Boughtwood to say that a conflict of interest appeared to have arisen as between QED’s interests and PML’s interests for those with responsibilities to both companies. In light of that, she was tendering her resignation as company secretary and Speechly Bircham was ceasing to provide any further legal advice to QED. Mr Knight was to resign as director of QED. She suggested that perhaps Mr Boughtwood should consider his position on both the boards of PML and QED in the light of possible conflicts of interest. Mr Boughtwood, however, continued in his roles as director of PML and director of QED.

The same day there was a PML board meeting, attended by representatives from Speechly Bircham and PwC. PwC presented its report to the board. PwC’s advice in the circumstances was that an AMA process should be started straight away. Mr Knight and Mr Meyer resolved by a majority that PwC should be appointed to start the process. Mr Boughtwood voted against that proposal on the basis that another firm of accountants should be approached and that a decision should be delayed until after a QED board meeting. Mr Knight asked Mr Boughtwood to prepare a note as to how he proposed to handle his apparent conflicts of interest as a member of the boards of each of PML and QED.

In relation to the restoration of the bank mandate as ordered by Lindsay J (see paragraph [243] above), PML’s bank, Lloyds/TSB, later became unsettled by an attempt to obtain certain cards for gaining access to PML’s account. The bank, in light of that, indicated that it would only revert to the original mandate arrangements if the four signatories on the bank account, namely Mr Boughtwood, Mr Meyer, Mr Rich and another officer of PML, Mr Brockway, signed an instruction to that effect. Mr Boughtwood used that situation as an opportunity to try to regain practical control over spending by PML. He refused to sign the necessary instruction to restore the mandate unless it was agreed that he would have a right of veto over items of expenditure of £25,000 or more. Oak made a further application to court which came on before me on 17 October 2008, seeking an order requiring Mr Boughtwood to co-operate in giving an instruction to Lloyds/TSB to revert to the original mandate arrangements. I gave judgment for Oak on that application made such an order. In the light of the findings which I have now made after trial, I consider that this action by Mr Boughtwood was a further step taken by him contrary to the arrangements with Oak regarding the management of QED/PML’s business and an addition to the unfairly prejudicial conduct which he had engaged in contrary to Oak’s interests.

On 16 October Oak responded to Mr Boughtwood’s open offers. Oak stated its belief that no meaningful value could be ascribed to the ordinary shares held by Mr Boughtwood in light of what it described as the significant underperformance of the business in terms of delay in delivering to customers and the precipitous drop in valuation of smaller technology companies in light of the “global economic meltdown”. Despite this, Oak proposed a settlement whereby it would acquire all of Mr Boughtwood’s interest in QED for $500,000. This offer was stated to be open until 22 October. It was unacceptable to Mr Boughtwood.

On 20 October Mr Ahmed sent an e-mail to Mr Boughtwood and others on the QED board proposing that QED should agree to reassign the IPR to PML in return for release of its debt of £750,000. This would avoid a diversion of resources by PML and QED, in dispute with each other, and would enhance the value of PML by uniting the IPR with the business, so improving the value of PML for its shareholder QED.

On 21 October there was a QED board meeting held by means of a telephone conference. By agreement this was recorded and a transcript produced. The board was deadlocked and could not resolve to accept a proposed loan of £750,000 for a limited period where repayment would not be required for six months.

On 22 October Mr Boughtwood’s solicitors wrote to the directors of QED seeking approval for the appointment of an independent director (a Mr Groom) as Independent Director. The directors’ approval was required by no later than 9.00 am on 24 October. This proposal was put forward to resolve the deadlock on the board of QED, particularly in relation to the winding up petition.

By letter of 27 October Simmons & Simmons objected to the appointment of Mr Groom as an independent director on various grounds, including that insufficient information had been provided, that Oak could not be expected to form a view as to his suitability in matter of days and that he did not appear to be an “industry representative” as required under the Shareholders Agreement. They invited Mr Boughtwood to provide further information about Mr Groom, which Oak would then consider carefully, along with an opportunity to interview Mr Groom. Mr Boughtwood did not provide such information, nor did he make any further proposal for the appointment of an Independent Director.

By e-mail dated 27 October from Mr Boughtwood to Mr Carano, Mr Boughtwood made a further open proposal to Oak. He wrote:

“I can confirm I now have funds available.

On the basis that I can demonstrate to you the funds exist, are you interested to sell at $21m?”

As his evidence emerged in cross-examination, however, it was clear that Mr Boughtwood had no financing or funds in place. He had been putting out feelers through various contacts, but had had no firm indication of interest of any substance. He was simply not in a position where he could honestly have said to Oak, as he did in his e-mail, that he did have funds available. I find that he deliberately lied to Oak about this, to keep the negotiation going and in a desperate attempt to buy himself time to find some source of finance.

On 28 October PWC produced a sales memorandum for the AMA process and began to canvass expressions of interest.

On about 28 October 2008 PML’s management learned that Mr Boughtwood had used his administrator’s rights in relation to PML’s IT system to gain access to the e-mail accounts of five members of PML’s management team without their knowledge. Mr Boughtwood’s explanation for this was that he had learned that Mr Meyer had removed some e-mail correspondence of Mr Knight from the system. Mr Meyer’s evidence was that he had not accessed the IT system to delete e-mails but had simply responded from a request from Mr Knight to go into his e-mail box and forward to him e-mails which he was unable to access while excluded from the company premises.

Oak was critical of Mr Boughtwood’s actions in removing PML’s IT backup tapes and using them to review e-mail correspondence of the managers. It was suggested that this reflected adversely on his honesty. I do not think it does. Mr Boughtwood was very suspicious of Mr Meyer and Mr Knight, and indeed of the other managers, and I accept that his action was motivated by a desire to preserve evidence which he thought was under threat and which might be lost. He genuinely thought he had a right to access the e-mail correspondence in this way. I think his action was ill-advised, but not dishonest. It is unsurprising that it added to the ill-feeling against him on the part of the other members of the management team.

At this point it is also relevant to refer to another point of criticism of Mr Boughtwood by Oak. It emerged in the course of preparation for trial that Mr Boughtwood had secretly recorded certain telephone calls and meetings involving representatives of Oak, without the consent of Oak or the other participants. Again, Oak suggested that this showed that Mr Boughtwood was dishonest. I disagree. Mr Boughtwood was very suspicious of Oak and I accept his evidence that he wanted to create a record of events in case of disputes later on. I think that Mr Boughtwood’s actions in this regard were ill-advised and underhand, but did not show that he was dishonest in giving his evidence. In my view, however, his recourse to this sort of behaviour in relation to Oak is rightly regarded by Oak as incompatible with a relationship of trust and confidence between them, and has further contributed to the breakdown in that relationship for which he bears responsibility.

By letter dated 29 October Simmons & Simmons responded to Mr Boughtwood’s latest open offer to purchase Oak’s shares for $21m, subject to a number of conditions which were set out in the letter. Oak’s proposal was stated to remain open only until 8.00 pm on 30 October, by which time Mr Boughtwood was required to state his acceptance and also provide reasonable evidence “such as a bank statement or similar document” that he did actually have funds available. The letter emphasised that funds needed to be readily available and proposed that Mr Boughtwood should place the funds into an escrow account by the close of business on 5 November. The timing was stated to be important both because of the QED group’s pressing financial position and because the hearing of Oak’s Petition was scheduled for mid-November, so that if a settlement were to occur, it needed to occur promptly. In my view, given Mr Boughtwood’s unequivocal statement that he now had funds available, this was a reasonable response by Oak.

Needleman Treon responded by letter of 30 October stating that it was impossible to obtain confirmation that funds were available within the short deadline imposed by Oak. They requested Oak to allow Mr Boughtwood until 4.00 pm on 31 October to provide evidence of funds being available.

Simmons & Simmons responded by letter the same day referring to Mr Boughtwood’s statement in his e-mail of 27 October and, in light of that, declined to grant any further extension of time. By this stage Oak was sceptical of Mr Boughtwood’s ability to raise significant funding in relation to QED/PML. Oak did not wish to be drawn into a negotiation leading nowhere and designed to provide time for Mr Boughtwood. In my view, given the history of failed attempts by Mr Boughtwood to raise funding and the categorical nature of the assurance he had given Oak on 27 October, this response by Oak, in light of the approaching trial and steadily deteriorating position of QED/PML, was reasonable.

Mr Boughtwood did not have funds available to him for the transaction he proposed. His response to the Simmons & Simmons letter was an e-mail on 30 October to a number of individuals at Oak to protest at the timetable that Oak was seeking to impose upon him. He stated, “I am able to close the deal and have given this statement”, and protested at what he called “bullying” by Oak and an extreme approach taken by them to make the deal impossible. In my view, however, Oak’s decision to flush out Mr Boughtwood on the question of financing of a settlement deal had revealed him to be in a lesser state of preparedness than he had represented to it. Mr Boughtwood’s assertion in this e-mail that he was able to close the deal was a statement which, in my judgment, was not remotely justified by any information he had about the availability of funds. It was a statement which he could not honestly have made in light of the information available to him.

Simmons & Simmons responded by letter dated 31 October to say that although Oak’s offer had lapsed, that did not prevent Mr Boughtwood from providing evidence of the funding which he maintained was available and to propose terms of settlement in light of such evidence. The letter said in terms that Oak was sceptical that Mr Boughtwood did in fact have funding available. Oak invited Mr Boughtwood to provide evidence of his funding as soon as possible and stated that if he was unable to do so even by 4.00 pm on 31 October (the time his own solicitors had proposed) Oak would consider that no credit could be given to his assertions. Mr Boughtwood provided no evidence of funding in response to that. He in fact had none which he could provide.

On 31 October there was a board meeting of PML attended once again by PwC representatives and representatives of Speechly Bircham. PwC reported that they had drawn up a list of some 25 potentially interested parties to approach in the AMA process with an information memorandum about PML’s business. There were then discussions of an offer by Mr Boughtwood to take an assignment of PML’s claim against QED in return for payment of £750,000 for the IPR. Mr Boughtwood, however, disputed the validity of the debt owed by QED to PML, and required PML to repay the £750,000 if it transpired that the debt was not valid. Mr Knight said it would not be acceptable for PML to find itself in the position of being sued by Mr Boughtwood for the return of the money. QED did not itself dispute its indebtedness. Therefore it would be necessary for Mr Boughtwood to acknowledge that the debt existed before consideration could be given to an assignment of the debt. Mr Knight observed that the value of PML would be undermined if it accepted Mr Boughtwood’s offer, as PML would not have any licence to use the IPR and so the value of its business would be jeopardised. The point of the winding up proceedings was to seek to make QED focus on a satisfactory solution for PML. Mr Knight said that it would therefore be necessary for Mr Boughtwood to revert to the QED board in order to get approval for an acceptable licence to be put in place. Once these matters had been addressed, consideration could be given to Mr Boughtwood’s offer to take an assignment of the debt. Mr Shires of PwC said that the winding up petition had been a tactical move, since PML needed to be satisfied as to the availability of the IPR which were sitting with QED. Mr Shires indicated that a simple loan from Mr Boughtwood to PML would be acceptable, but that was not acceptable to Mr Boughtwood. PwC advised that although the formal cut-off time of 9.00 pm on 6 November was in place for offers for PML, some degree of flexibility should be allowed and that offers would therefore not be submitted to QED before 7 November. Mr Shires emphasised the need for a tight timetable in an effort to secure a deal before the company became insolvent and had to go into administration. He said that all potential purchasers would understand this constraint. The list of potential purchasers put together by PwC included investors whom Mr Boughtwood had approached, such as Mr Coombes.

A disciplinary meeting in relation to Mr Boughtwood’s unauthorised accessing of the e-mail accounts of PML personnel was set for 6 November. However, on 5 November Mr Rich received a telephone call from Mrs Boughtwood to say that Mr Boughtwood had been taken ill and would not therefore be attending the disciplinary meeting. At the end of the call she told Mr Rich that she and Mr Boughtwood had recorded conversations from other meetings and that potential witnesses should be careful not to perjure themselves if they were thinking of making a statement. This appeared to Mr Rich to be a threat and unsurprisingly he was indignant about it. He informed Mr Meyer and Mr Knight about it.

By letter dated 31 October from Mr Knight for PML to Mr Boughtwood, Mr Boughtwood was suspended from his employment pending a disciplinary investigation in relation to his accessing of PML’s IT system and removing copies of the backup tapes which had been taken by him and not returned. On 3 November Simmons & Simmons wrote to Needleman Treon inviting them to specify any measures which they considered needed to be taken to ensure that Mr Boughtwood’s suspension would not impede his ability to defend the Petition.

By letter dated 4 November from Needleman Treon, they set out a further offer from Mr Boughtwood to purchase Oak’s shares in QED for $21m, with a proposal that if Mr Boughtwood was unable to complete the purchase of Oak shares by 14 November, Oak should then purchase all of Mr Boughtwood’s shares in QED for $500,000. There should be full waiver of all other claims on either side. However, this was not a straightforward offer by Mr Boughtwood. In his evidence under cross-examination he made it clear that he considered the price for his shares of $500,000 to be ludicrously low and that he would never have entered into any binding legal agreement to that effect until he was completely confident that he in fact had in place the funding which would enable him to buy Oak’s shares for $21m. At this time it remained the case that Mr Boughtwood had no funding in place and only the speculative and increasingly far-fetched prospects of obtaining such funding to purchase Oak’s shares.

By e-mail from Simmons & Simmons dated 6 November, Simmons & Simmons gave a preliminary response to Mr Boughtwood’s offer of 4 November. They stated that one condition in Oak’s counter-offer would be that by the following day Mr Boughtwood should provide reasonable evidence such as a bank statement or similar document that he did actually have the funds available. This was confirmed in a formal letter from Simmons & Simmons later the same day. Simmons & Simmons proposed that the $21m should be transferred by close of business on 12 November. If Mr Boughtwood did not effect the purchase by that time, Oak should purchase Mr Boughtwood’s shares at a price of $250,000. All other claims between the parties would be waived. The offer was stated to be open until noon on 7 November.

By letter of 7 November Needleman Treon responded to say that the counter purchase price by Oak of Mr Boughtwood’s shares should remain $500,000 and that, on the footing that Mr Boughtwood would have to sell his shares at that price if he could not provide the purchase price of $21m by 14 November, he declined to provide evidence that he had the funds available to complete the purchase. They complained again about the tight deadlines being imposed by Oak. They proposed an alternative deadline which would involve Mr Boughtwood providing evidence of funding by 10 November and completing purchase of the shares by 17 November.

On 7 November there was a PML board meeting. Mr Boughtwood was absent and attended only a part of it by telephone. PwC gave an update of the position in relation to the AMA process. PwC reported that seven very good prospects had emerged and it was hoped that some might make an offer shortly. They reported that an online data room had been set up but as yet no access had been given to it since access was to be provided only when genuine bids or indicative bids were received. At the meeting an offer tabled by Oak was reviewed. It comprised £300,000 in cash and the assumption by the purchaser of all liabilities of PML (totalling some £1.7m) and an unsecured promissory note for £7.2m rising to £8m if ownership of the IPR was resolved in PML’s favour prior to closing. Mr Knight and Mr Meyer, with advice from PwC, concluded that this was an attractive offer which ought to be pursued. The board discussed a draft letter to QED explaining that PML’s close-down costs were approximately equal to its remaining cash, so that its financial position in relation to solvency was critical. By the letter PML also asked that the IPR situation with QED be resolved either by return of the rights to PML or by grant of an exclusive irrevocable licence to PML. It was resolved that this letter should be sent. Mr Knight proposed that Oak’s offer ought to be recommended to the QED board subject to any better offer being received for early completion by 14 November so as to prevent any further liabilities being incurred to the detriment of creditors. PwC confirmed that that seemed a satisfactory course but that it was important to leave the way open to any other offers being received during the course of the next seven days. However, PwC acknowledged that if the sale of PML or further funding did not take place by 14 November, then the directors would have no alternative but to apply to put the company into administration.

On 11 November a letter purporting to be from the Dubai branch of Standard Chartered Bank was faxed to Needleman Treon. It was addressed to QED Group Limited, UK. It was headed “Balance Confirmation”. It was in these terms:

“This is to confirm that the presenter of this letter is maintaining a banking relationship with us since 02 April, 2000. The conduct of this account is satisfactory and the balance as of today is GBP 13,000,000 (GBP Thirteen Million Only)”

Mr Treon of Needleman Treon showed this document to Mr Bacon of Simmons and Simmons outside court on 14 November. It was put forward as the confirmation of funding available to Mr Boughtwood. It was unsatisfactory in its own terms since it did not identify who the account holder was or what their relationship with Mr Boughtwood might be. But in any event evidence from Standard Chartered Bank in this case shows unequivocally that this letter was a forgery and was not a true communication from the Dubai branch of Standard Chartered. Mr Boughtwood’s evidence was that he thought that this was a genuine Standard Chartered letter. On the available material, I accept his evidence. The court was not in a position to get to the bottom of precisely how this fake document came to be produced. The very fact that fake documentation was being brought into existence tends to underline the fact that in reality Mr Boughtwood did not have funds available to complete any transaction with Oak.

On 12 November Mr Boughtwood sent Oak a further formal offer marked “subject to contract” to purchase Oak’s shares for £10,299,930, being the initial price which Oak had paid when it invested. The letter stated “funds are confirmed available (my lawyer can now verify)”. There was no provision for Oak to purchase Mr Boughtwood’s shares if he failed to complete the transaction. Instead, Mr Boughtwood made an alternative offer to sell his entire shareholding to Oak for £4m. Simmons & Simmons responded by e-mail the next day with various observations to the effect that the offer as stated would not be acceptable but seeking verification that funds were indeed available as Mr Boughtwood had intimated.

By letter dated 13 November from Needleman Treon Mr Boughtwood indicated, subject to contract, that he would be prepared to accept a fallback position that if he was unable to complete purchase of Oak’s shares, Oak would be entitled to purchase his shares for $500,000.

Simmons & Simmons responded with a letter dated 14 November containing a final counter-offer on behalf of Oak, subject to contract, to settle the proceedings. Under this offer Mr Boughtwood would have to enter into settlement agreements by 6.00 pm on Monday 17 November and complete with payment of $21m to Oak by close of business on 18 November. If he did not pay that sum then Oak would be entitled to purchase all of Mr Boughtwood’s shares upon payment of $250,000. This was not acceptable to Mr Boughtwood.

Also on 14 November PwC reported to the board of PML that it had received three offers for the business of PML which it now had under active consideration. These included an offer from Oak.

By letter dated 17 November, Simmons & Simmons indicated that Oak was prepared to accept Mr Boughtwood’s primary offer that he would purchase Oak’s shares for £10.3m provided that was completed by 21 November, failing which Oak would purchase Mr Boughtwood’s shares for $250,000. They sought Mr Boughtwood’s agreement by the following day. Needleman Treon responded by letter of 18 November to say that Mr Boughtwood had had to go into hospital that morning. They said that Mr Boughtwood would require until 24 November for the completion of the purchase. By a second letter on 18 November, written after taking instructions from Mr Boughtwood, it was proposed that the completion of Mr Boughtwood’s purchase of the Oak shares should take place by 25 November. Later the same day, Simmons & Simmons responded to agree to Mr Boughtwood’s proposal that settlement documents should be executed by noon on 20 November and that his purchase of Oak’s shares should take place by 25 November.

By letter written on the morning of 19 November, Needleman Treon referred to a PML board meeting to take place that day at which the question of placing PML into administration would be under consideration along with offers, including from Oak, to purchase the company’s assets. In view of the settlement discussions, Needleman Treon suggested that Oak, as shareholders and directors of QED, should instruct the directors of PML to defer any decision to place PML in administration until after 25 November. They also sought confirmation that Oak would not seek to purchase the assets of PML pursuant to the offer it had made to PwC until after 25 November. The reason for seeking this assurance was that Mr Boughtwood did not wish to agree to purchase Oak’s shares in QED only to find that at the same time Oak had purchased the assets of PML.

At about 11.00 am on 19 November a board meeting of PML was held, with Mr Boughtwood attending by telephone. PwC reported to the board. There were at that stage proposals from Mr Boughtwood in relation to the acquisition of PML’s business and a proposal from Oak to acquire PML’s business. PwC required more time to review these proposals and compare them. At the same time PwC advised that it would be appropriate to continue progressing finalisation of the documentation for the proposed Oak purchase which was the most advanced offer then available. Mr Boughtwood said that he hoped to provide his own marked-up offer documents later that day. It was noted that the insolvency of PML was imminent. PwC advised that the directors were therefore bound to continue with the sale process even if other settlement discussions between Mr Boughtwood and Oak were continuing elsewhere.

The PML board meeting resumed at 3.00 pm the same day. PwC advised that it was important that they should be in a position to analyse all offers on the table on Thursday 20 November. At this point it seems that it was contemplated that if PwC were to be appointed as administrators, an application would be made to court to achieve that.

By letter dated 19 November, Needleman Treon objected that it was contrary to the compromise that they were trying to achieve that, on the one hand, Oak should sell its shares in QED to Mr Boughtwood while at the same time Oak appeared to be pursuing its offer to purchase the assets of PML through PwC. They stated that it was implicit that the proposed purchase by Mr Boughtwood of the Oak shares in QED would include the assets of PML. Needleman Treon sent a further letter on 19 November emphasising that Mr Boughtwood could not proceed with the proposed settlement if Oak was proposing to pursue its offer to acquire the assets of PML. This was a reasonable stance for Mr Boughtwood to adopt.

Mr Bacon of Simmons & Simmons responded in relation to this concern by e-mail on the evening of 19 November. He made the point that Mr Boughtwood was himself pursuing his offer to purchase the assets of PML whilst at the same time seeking to sell his interest in QED to Oak if he did not complete the proposed agreement by the due deadline. Mr Bacon continued: “In those circumstances we are surprised that your client requires an explanation”. Mr Bacon also attached an e-mail he had sent to Speechly Bircham on 19 November in which he referred to the settlement negotiations between Oak and Mr Boughtwood. Mr Harrison sought to suggest that the inclusion of this e-mail should have indicated to Mr Boughtwood that Oak had no intention of proceeding with its offer to purchase the assets of PML if a settlement was reached with Mr Boughtwood. I accept that Oak was negotiating in good faith with Mr Boughtwood and that in fact it had no such intention, but on any objective interpretation Mr Bacon’s two e-mails fell far short of providing the undertaking and assurance that Oak would not seek to purchase the assets of PML which Mr Boughtwood required. It should have been a simple matter for the assurance sought by Mr Boughtwood to have been given, but Simmons & Simmons did not set out such an assurance. It is not surprising, therefore, that Mr Boughtwood did not proceed with the settlement negotiation for that reason. But in my view, it is also clear that Mr Boughtwood would not have entered into any settlement agreement without being completely sure that he had financing in place to ensure that he could complete the transaction by buying Oak’s shares, so eliminating the possibility that he had to sell his own shares in QED for what he regarded as a ridiculously low price. In fact, on the evidence before me, he did not have any realistic prospect of achieving such financing. Therefore, the failure by Oak to give the assurance sought by Mr Boughtwood that it would not proceed with its offer to acquire the business of PML had no significant effect on the course of events. I also reject the suggestion by Mr Boughtwood that Oak’s failure in this regard shows that it had a general strategy to (in some sense) steal the QED/PML business from him.

On 20 November there was a further meeting of the PML board, with Mr Boughtwood attending once again by telephone. PwC provided an updated report on the current situation of PML. PwC’s assessment was that PML was balance sheet insolvent although it did have cash at bank. The only question for consideration was how the directors should maximise the return for creditors. Mr Meyer made the point that it would not be possible to sell the shares in PML as there was deadlock on the QED board. Likewise, any sale of the assets of PML would not get approval from QED. He said the only possible solution was to sell the business and assets of PML once it had gone into administration. It was reported that the settlement negotiations between Mr Boughtwood and Oak had fallen down. There appeared to be no realistic prospect of either shareholder of QED providing any funding in order to keep the company in existence. PwC advised that it was important to conclude a deal for sale of PML’s business as soon as possible in order to preserve PML’s goodwill. Mr Meyer proposed a resolution to appoint PwC as administrators in order to conclude the sale of the business and assets of PML and such a resolution was agreed in the event that no satisfactory deal had been concluded on a timely basis which would improve the position of the creditors over and above what placing the company administration could achieve. Mr Knight and Mr Meyer voted for this while Mr Boughtwood voted against the resolution. Mr Knight and Mr Meyer voted to appoint Mark Shires and Robert Birchall of PwC as joint administrators. PwC concluded by advising that at this point the most appropriate route would be to sell the business and assets of PML through administration.

That evening Mr Boughtwood e-mailed Oak to complain that Oak’s pretence at negotiating a settlement at the QED level while at the same time attempting to purchase the business at the PML level indicated that it was not negotiating in good faith. He accused Oak of destroying the value in the business and of continuing with attempts to “steal” the business for Oak. Mr Boughtwood accused Oak of being party to a conspiracy to defraud him from the very beginning. He said that he now had no choice but to mount a full and robust defence.

On 21 November there was a further meeting of the PML board, with Mr Boughtwood again attending by telephone. PwC confirmed that they were working on the Oak draft documents and that no formal written offer had been received from Mr Boughtwood. Mr Boughtwood indicated that his lawyer would produce a mark-up of the asset purchase document by close of business that day (it was in fact never received). PwC advised that Mr Boughtwood would also have to provide proof of funds in the form of a confirmation from his bank addressed to PwC. Mr Boughtwood stated that confirmation would be coming from Standard Chartered Bank in Dubai. PwC reported an offer from a third party in relation to which it had concluded that the offer was not a realistic one worth pursuing in the limited time available. The current version of the Oak offer was for Oak to pay £300,000 and assume all liabilities of PML (currently £1.75m) on completion conditional upon PML withdrawing the winding up petition against QED. Oak would on this basis run the risk that it would acquire the business and assets of PML but without the IPR or any licence from QED to use them if it lost its action against Mr Boughtwood. Oak also proposed to give a promissory loan note in the sum of £7.25m which would be payable within 12 months of the disputed IPR being transferred to PML.

At trial, Mr Boughtwood submitted that this sudden reduction in the value of Oak’s offer for the business again demonstrated that it had an illegitimate objective to acquire the business at an undervalue, and so (in some sense) “steal” it from Mr Boughtwood. I do not accept this. Oak was negotiating in good faith. It was entitled to seek to make an offer which took account of likely competition (or lack thereof) to acquire the business. The fluctuations in its offer simply reflected its assessments of what it needed to offer to purchase the business, in light of the current market for it.

At the meeting on 21 November Mr Boughtwood maintained that his offer for PML’s business was superior to Oak’s. PwC advised that until they saw formal written documentary confirmation of Mr Boughtwood’s offer they could not compare it with that of Oak. Mr Boughtwood was reminded that he had been sent the draft documentation a week previously but had not yet produced a mark-up. There was discussion whether the Oak offer should be accepted that evening. Mr Knight stated his concern that if PML did not complete the Oak offer then, it might place creditors at greater risk since there was no guarantee that it would not be withdrawn or modified.

At the hearing, Mr Boughtwood submitted that Mr Knight (and Mr Meyer) showed an unwarranted enthusiasm to accept the offer by Oak as quickly as possible, and that this supported his case that there was a conspiracy between them and Oak to enable Oak to purchase the business at an undervalue. He suggested that Mr Knight and Mr Meyer could have had no genuine belief that the Oak offer might be withdrawn or modified. I do not accept this. Oak was following its own interests in the offers it was making for the business, and Mr Knight and Mr Meyer could have had no assurance that it might not change its mind. It had already done so once, to produce a lower offer on 21 November. In addition, they could not be sure what effect the worldwide economic downturn and its serious impact on motor manufacturers might have on Oak’s position if the timetable became extended. Also, as directors of PML, which was now insolvent, they entirely properly wished to secure an outcome as quickly as possible which protected PML’s creditors.

Mr Knight and Mr Meyer stated that they believed that accepting the Oak offer would be in the best interests of the company and canvassed the idea that the company pass a resolution to go into administration as soon as the documentation with Oak was finalised. Mr Boughtwood objected to this and asked that PML wait until he produced his further documentation. PwC advised that it was appropriate to give Mr Boughtwood until close of business that day to produce evidence of funds and written offer documents, and Mr Boughtwood agreed to provide these materials by then. On that basis Mr Knight and Mr Meyer, as the majority on the board, resolved that PML was insolvent and that it should pursue the offer currently advanced by Oak (in conjunction with any offer received from Mr Boughtwood by close of business that day) and work towards finalising the legal documentation. Once the documents were ready for signature it was proposed that the company should file for administration and appoint Mr Shires and Mr Birchall of PwC as joint administrators. Mr Boughtwood voted against these resolutions.

Mr Boughtwood did not provide marked-up documentation or evidence of funding within that timetable. Instead, Mr Boughtwood applied to court ex parte for an interim injunction to prevent PML being put into administration and to restrain sale of the business. Such an injunction was granted and then extended until 28 November, on which date a contested hearing took place before Norris J. At this stage the trial of the Petition and Cross-Petition was due to start on Monday 1 December. Mr Meyer filed a short witness statement requesting the court to make an administration order in respect of PML immediately. Mr Boughtwood filed evidence to oppose that course.

In that evidence (the first witness statement of Mr Treon in these proceedings) Mr Boughtwood also made an offer to acquire PML’s business on terms that Mr Boughtwood would pay £500,000 immediately, would pay a further £7.5m within four weeks of the IPR being available to be transferred to PML, provided they were transferred within 12 months and that he would assume all liabilities of PML. The witness statement referred to and exhibited a document as proof of funds. That document was another letter which purported to be from the Dubai branch of Standard Chartered Bank. It was dated 26 November and addressed to Mr Treon. It was in these terms:

“We confirm that we are holding funds for our customer who has instructed us to make available the sum of up to £4.5 million (sterling) to your client Martin Bought Wood a director/part owner of a company incorporated in the United Kingdom by the name of PML Flight Link Ltd to assist him in funding the operation of that company or the acquisition of the assets of that company. We must advise you that although the funds are available on short notice, properly executed documents need to be presented to us before the funds are released. Our customer’s requirements are known to and have been agreed to by your Representative Mr Bought Wood. …”

It is clear from the evidence from Standard Chartered adduced by Oak that this document also was a fraudulent document, which had not in fact been issued by the Dubai branch of Standard Chartered Bank. Again, Mr Boughtwood says that he believed the document to be genuine. As before, I accept his evidence. Again, the fact that a fake document was produced at this stage serves to underline that in fact no funding was available to Mr Boughtwood.

Norris J declined to adjourn the hearing of the application and made an administration order. In view of the disputes between the parties as to what should happen with the business of PML, which in substance was part of the subject of the Petition and Cross-Petition, Norris J put in place a regime to govern the sale of PML’s business, under which it would be necessary for Mr Boughtwood to be given a period of notice of any proposed disposal of the business to Oak so as to afford him an opportunity to apply to court if he thought it necessary to do so.

Meanwhile, on 26 November Mr Boughtwood flew to Kuwait to have discussions with a potential source of funding in respect of offers he might make in relation to the QED Group and PML’s business. He met representatives of Dana Investment Company KSCC (“Dana”). In a sixth witness statement of Mr Treon this explanation for Mr Boughtwood’s trip to Kuwait was given:

“Mr Boughtwood told me that he had been in advanced discussions with a couple of parties and to finalise the funding arrangements with one of the parties, he told me he was required to go to Kuwait at very short notice for 24 hours, to sign the necessary documents. He left in the evening of 26 November 2008 and was due to return to this country early on Friday 28 November 2008.”

Shortly after his arrival, Mr Boughtwood was taken ill and had to be admitted to hospital. A Mr McGreggor, a representative of Dana, called Mr Treon to say that Mr Boughtwood had possibly had a heart attack. Mr Treon’s evidence was that on Sunday, 30 November he spoke to Dr Awwad, the doctor with care of Mr Boughtwood, who explained that Mr Boughtwood had been admitted to hospital on 28 November with severe chest pains and that preliminary tests showed that he had had an angina attack, and “almost certainly a mild heart attack and perhaps two”. Dr Awwad said that a full medical report would be made available on 1 December. In a further witness statement from Mr Treon dated 1 December he said that he had spoken to Mr Boughtwood who had just been discharged, but could not fly for some 24 hours, and who said that he had been told that his test results indicated that he had had a mild heart attack and that he should inform his doctors in the UK to continue to observe his condition.

On the basis of this evidence, an application was made to me on 1 December on Mr Boughtwood’s behalf to adjourn the commencement of the trial for one week. I acceded to that application.

Up to and at trial Oak pressed Mr Boughtwood for a copy of the full report from Dr Awwad which had been mentioned in Mr Treon’s evidence. It appears that none was produced by Dr Awwad. At the hearing Mr Boughtwood was cross-examined as to his honesty in telling Mr Treon that it was likely that he had suffered from a heart attack. It was suggested that such medical notes as were produced did not support that contention. Mr Boughtwood was also cross-examined as to the honesty of the account that he had, through Mr Treon, put before the court explaining the circumstances of his trip to Kuwait.

So far as the first point is concerned, it seems to me clear that Mr Boughtwood did suffer some major heart problem while he was in Kuwait. It seems credible that the possibility of his having suffered a heart attack was discussed with him by Dr Awwad and I see no basis for disbelieving his evidence in the witness box on that point, or as put forward through Mr Treon’s witness statements.

In relation to the second point, however, the account which Mr Boughtwood put forward to the court through Mr Treon’s sixth witness statement to the effect that he had been in advanced discussions with a couple of parties, had gone to Kuwait to finalise the funding arrangements and to sign the necessary documents, was untrue. In my view, it was put forward dishonestly to the court.

The most that Mr Boughtwood was able to secure from Dana was a very general expression of interest set out in a letter from Dana to Mr Treon dated 27 November 2008. In that letter Dana confirmed that it was “holding the necessary funds for the purpose of investment in QED Group Limited and its subsidiary companies”. No detail about the amount of the proposed investment was set out. The letter also stated: “This investment is conditional on conclusion of due diligence to the satisfaction of Dana…”. This was very far indeed from finalisation of the funding arrangements or the signing of necessary documents to finalise the funding arrangements.

In my judgment, none of the various offers made or proposed to be made by Mr Boughtwood in this phase was capable of undoing the unfair prejudice which Oak has suffered as a result of his behaviour.

After hearing, I was informed that the winding up petition brought by PML against QED was dismissed by the court on 21 January 2009, as it had not yet been advertised. I was also informed that the administrators of PML completed the sale of PML’s business on 27 January 2009. The purchaser was Electric Motor Works Limited, a company owned by Oak.

The remedial power available to the court under section 996 of the 2006 Act is a very wide one. Section 996 provides, so far as is relevant, as follows:

“(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-

…

(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.”

The court’s powers under section 996 include a power, in an appropriate case, to require a respondent to an unfair prejudice petition to sell his interest in the company in dispute to the petitioner: see eg Re Nuneaton Borough AFC Ltd (1989) 5 BCC 792. This is an atypical order to make, since it is more usual that the petitioner is seeking an order that his interest be bought out by the respondent. But in the present case it is striking that both Oak, in the Petition, and Mr Boughtwood, in the Cross-Petition, seek orders allowing them to buy out the interest of the other and so remain in control of QED themselves.

In my judgment, this is an appropriate case in which such an order should be made in favour of Oak. Although there are points, as set out above, on which Oak’s conduct is properly open to criticism (particularly in relation to the failure to disclose the Kroll report about Mr Knight – paragraph [101] above - and the failure to disclose the contact with Chrysler – paragraph [206] above) Oak’s conduct did not in fact cause actual prejudice to Mr Boughtwood. Moreover, Oak’s misconduct was very minor by comparison with that of Mr Boughtwood.

For the reasons given above, I find that Mr Boughtwood conducted the business of QED/PML in a manner unfairly prejudicial to Oak by, in summary:

In the circumstances of this case, I consider it is appropriate to make an order under section 996 in favour of Oak requiring Mr Boughtwood to sell his shares in QED to Oak. That is the order which best meets the overall justice of the case. It is unnecessary to consider Oak’s alternative claim for a winding up order. At the hearing the parties agreed that it would be sensible for argument regarding the parameters for establishing the price at which Mr Boughtwood or Oak should be required to sell their shares in QED to the other to be adjourned until after the hand down of this judgment. Accordingly, I will hear argument in light of this judgment what the detailed terms of the order should be.