Jackson v Dear & Anor

This is the trial of two preliminary issues as to the construction of a written agreement dated 29 September 2008 (the “Agreement”) between the claimant Alexander Jackson, the defendants Patrick Dear and Reade Griffith and various corporate entities including their wholly owned company Polygon Credit Holdings II Limited (“PCH II”). The issue falls to be decided on agreed facts, as set out in a statement prepared by the parties. They include all the facts to which the court may have recourse as part of the background matrix of fact relevant to the preliminary issues as to interpretation of the Agreement, to the extent that the court considers them relevant and of assistance for that purpose.

The preliminary issues concern the effect of the Agreement upon the constitution from time to time of the board of directors of a Guernsey company Tetragon Financial Group Limited (“TFG”) in which PCH II has at all material times held all the voting shares. In the barest outline, the Agreement provided for the voting shares of PCH II to be used so as to procure the nomination and appointment of Mr Jackson as a director of TFG at its next AGM, and his re-appointment at every AGM thereafter, unless and until the happening of one or more of five stated events (which have been labelled “Termination Events” in these proceedings) following which he might be removed as a director of TFG by PCH II as voting shareholder.

At all material times the Articles of Association of TFG made provision as to the constitution of its board of directors which provided for all to hold office (unless in the meantime removed) until the next AGM. The articles identified the voting shareholders as having the sole power of appointment of directors, and an unfettered power to remove them between AGMs. But it also conferred power on the directors themselves to remove one of their number, in particular by written notice given by all other directors: (see article 88(e)).

The issues of construction which I have to decide have arisen because, after Mr Jackson was appointed in 2008, then re-appointed in 2009 and 2010, his fellow directors including Mr Dear and Mr Griffith gave him notice pursuant to article 88(e). At the annual general meeting of TFG in November 2011, Mr Dear, Mr Griffith and (therefore) PCH II declined to re-appoint him, on the basis, set out in a letter to Mr Jackson in December 2011 that, since his fellow directors would remove him again under article 88(e) if re-appointed, any insistence on nomination and re-appointment would be “futile”.

The defendants’ case is that one of the Termination Events had in fact occurred by the beginning of 2011, so that pursuant to the Agreement they were through PCH II at liberty to remove Mr Jackson, and under no continuing obligation to re-appoint him. Mr Jackson denies that any such Termination Event has occurred, but the defendants’ alternative case is that, even if not, the Agreement contains nothing which inhibits the directors’ power under article 88(e) to remove Mr Jackson, and to remove him again if re-appointed so that, on their interpretation of the Agreement, Mr Jackson’s claim to be entitled to be re-appointed, and for specific performance of that entitlement, may properly be dismissed without an investigation of the very contentious factual basis for the assertion that a Termination Event has occurred.

The court is therefore invited to approach the questions of interpretation of the Agreement upon the untested hypothesis that no Termination Event has occurred but not, of course, upon the assumption that article 88(e), which is in perfectly general terms as to the circumstances in which it may be implemented, is applicable only to a situation where no such Termination Event could have occurred.

The two preliminary issues are precisely defined by the consent order of Deputy Master Jefferis of 30 April 2012, by reference to the Particulars of Claim. The first is whether (as alleged in paragraph 10 of the Particulars of Claim) it was an implied term of the Agreement that:

“(i)

Mr Jackson would not be removed as a director of TFG; and

(ii)

The parties to the agreement in cl.5(b) of the Agreement, namely Messrs Dear & Griffiths and PCH II, would procure that Mr Jackson would not be removed as a director of TFG

between Annual General Meetings of TFG for so long as Mr Jackson wished to be a director of TFG and provided that no cl.5(b) Termination Event had occurred.”

The second preliminary issue arises from the inclusion, in clause 7 of the Agreement, of a provision which a conveyancer would call a covenant for further assurance, in the following terms:

“The parties agree to take such other actions as may be reasonably required to authorise, and approve and otherwise give effect to this Agreement.”

The second preliminary issue is whether, as alleged in paragraph 15 of the Particulars of Claim:

“By reason of clause 7, the parties to the Agreement are required:

i)

To give effect to clause 5 of the Agreement;

ii)

Not to invoke article 88(e) of the articles of TFG in order to remove Mr Jackson from office as a director of TFG;

iii)

Not to invoke any other power to remove Mr Jackson from office as a director of TFG and

iv)

To take steps formally to disapply, delete or amend article 88(e) of the articles of association of TFG so as to remove the power of removal therein set out insofar as it might otherwise be invoked against Mr Jackson,

Provided in the case of (ii)-(iv) inclusive above that a clause 5(b) Termination Event has not occurred.”

Again in bare outline, the cases of the protagonists for and against these pleaded propositions may be summarised as follows. For Mr Jackson it is said that the unrestrained continuation of the article 88(e) power risks, as has occurred (on the assumption that no Termination Event has happened), rendering futile a primary obligation of the parties to the Agreement, namely to re-appoint Mr Jackson at every AGM after 2008. The parties should not be taken to have solemnly undertaken a futile obligation.

For the defendants it is said that the article 88(e) power is an important safeguard for the orderly and beneficial administration of the affairs of TFG by its board. The parties made in the Agreement no express provision about it, still less provision for its removal or suspension in relation to Mr Jackson, so that they should be understood to have concurred in its continuing full effect, notwithstanding the terms of the Agreement.

That simply stated but fundamental difference between the parties took up nearly two days of argument, including the by now almost obligatory citation of the ever-increasing number of Supreme Court and Court of Appeal re-definitions of the law as to contractual interpretation. As to those authorities, the point at issue in the present case appears to be the extent to which the traditional processes and rules about the implication of terms have been subsumed (if they were not always subsumed) into the more general task of ascertaining what the relevant agreement means.

Mr Jackson, Mr Dear and Mr Griffith co-founded the Polygon group in 2002, to develop and operate an investment fund as co-owners and managers, through an ultimate holding company incorporated in the Cayman Islands. Then or thereafter they also set up the Tetragon Group, for the development and management of a closed-ended investment fund regulated by the Guernsey Financial Services Commission. Subject to their joint co-ownership and foundation, the Tetragon and Polygon groups were run as separate structures.

It is sufficient to describe the structure of the Tetragon group from the time of its re-organisation for the purposes of an initial public offering in April 2007. TFG’s share capital was then divided into Voting Shares, all held by PCH II (a Cayman Islands company) incorporated to be the vehicle for the founders’ continuing ownership interest in the Tetragon group. The remainder of the shares were non-voting shares issued following the IPO. There are now some 132,100,000 non-voting shares. I was told that the non-voting shares are the mechanism whereby investors obtain and enjoy their investment in the underlying fund.

TFG owns Tetragon Financial Group Master Fund Limited (“TFGMF”). The management of the underlying fund is pursuant to an Investment Management Agreement conducted by Tetragon Financial Management LP (a Delaware company) pursuant to an independent Delaware and Cayman Islands ownership structure in which the founders and/or trusts or other entities associated with them have ultimate beneficial interests.

In early 2008 issues between the founders as to the management of the Polygon funds caused a falling out between, on the one hand, Mr Jackson and on the other, Mr Dear and Mr Griffith. Discussions took place between the founders with a view to Mr Jackson’s departure from the Polygon group.

On 19 May 2008 Mr Dear and Mr Griffith, together with entities associated with or controlled by them, prepared and sent documents to Mr Jackson (via his US lawyers) which purported (if valid) to terminate any continuing executive role or authority of Mr Jackson within the Polygon group. Through his solicitors Mr Jackson alleged that these steps contravened shareholders’ and other agreements relating to the Polygon group and sought undertakings not to withdraw or suspend his voting rights or to remove him as a director of the relevant companies. In the absence of a satisfactory response Mr Jackson, through one of his entities AEJ Holdco. sought injunctive relief from Henderson J on 23 May. After a provisional indication from the judge, undertakings substantially as sought were given by Messrs Dear, Griffith and their associated entities. Negotiations for Mr Jackson’s departure from the Polygon group, and a related re-organisation of interests in PCH II, continued under the shelter of those undertakings.

On 3 June 2008 the founders, PCH II and other associated entities entered into a letter agreement, expressed to be non-binding save for a choice of law and an undertaking to negotiate binding agreements, setting out the main structure of any settlement between them in relation to the Tetragon group. By clause 2 there was cited an intention to re-structure the ownership of PCH II such that each of the founders would receive a separate class of shares with at least 40 per cent for Mr Jackson.

Clause 2(d) recorded an acknowledgment of Mr Jackson’s request to become a director of TFG. It provided as follows:

“The parties acknowledge Alex Jackson’s request to be elected to the board of directors of Tetragon Financial Group Limited. Reade Griffith, Patrick Dear and Alex Jackson agree to work in good faith to develop a mutually acceptable structure to satisfy Alex Jackson’s request, acknowledging that certain practical and legal issues exist. The obligations of Holdco and Alex Jackson in this agreement are conditional on the implementation of arrangements satisfactory to Alex Jackson with respect to such request, including satisfactory protection against removal without his consent.”

In the event the founders have since then held their interests in PCH II in the proportions: Jackson 40 per cent, Dear 20 per cent and Griffith 40 per cent. Mr Jackson was not at that time, and never had been, a director of TFG.

It is convenient at this stage to set out all the material provisions in the constitution of TFG, since they were in place when the Agreement was made, must be taken to have been within the knowledge of the parties to the Agreement, and were not amended in any relevant respect thereafter. References to articles of TFG throughout this judgment are to the form of the articles as they were prior to, and at the time of, the Agreement.

By article 6 the authorised share capital of TFG was stated to be $1m divided into ten Voting Shares having a par value of $0.001 each, and 999,999,990 Unclassified Shares having a par value of $0.001 each. Unclassified Shares were to be issued as Non-Voting Shares.

By article 12 the Non-Voting Shareholders were not to have voting rights, save in relation to any adverse change to the rights attaching to the Non-Voting Shares, or as otherwise provided by law.

By article 80:

“Unless otherwise determined by Resolution of the Voting Shares, the number of Directors shall be seven. At no time shall a majority of Directors be residents of the United Kingdom.”

By article 81, subject to provisions dealing with their death, resignation or removal, and the filling of vacancies, not less than a majority of directors were to be Independent Directors (as defined by reference to the standards set forth in the UK’s Financial Reporting Council’s Combined Code of Corporate Governance).

Under the heading Powers of Directors, article 83 provided as follows:

“(a)

Subject to the provisions of the Law, the Memorandum and these Articles and to any directions given by Resolution of the holders of Voting Shares, the business of the Company shall be managed by the Directors, who may exercise all the powers of the Company in any part of the world. No alteration of the Memorandum or these Articles and no such direction shall invalidate any prior act of the Directors which would have been valid if that alteration had not been made or that direction had not been given. The powers given by this Article shall not be limited by any special power given to the Directors by these Articles, and a meeting of Directors at which a quorum is present may exercise all powers exercisable by the Directors.

(b)

Subject to the Law, every discretion vested in the Directors shall be absolute and uncontrolled, and every power vested in them shall be exercisable at their absolute and uncontrolled discretion, and the Directors shall have the same discretion in deciding whether or not to exercise any such power.”

Under the heading Appointment and Retirement of Directors, article 86 provided as follows:

“The holders of Voting Shares by Resolution shall have power at any time, and from time to time, to

(i)

appoint any person to be a Director, either to fill a vacancy or as an additional Director (subject to the eligibility requirements hereof and any requirements of the Law), and

(ii)

remove any person from office as Director for any reason.”

Article 87 provided for a director to retire from office by giving notice.

Under the heading Disqualification and Removal of Directors, article 88 (which contains the provisions principally in issue in these proceedings), provided as follows:

“Without prejudice to the provisions regarding retirement contained in the Articles, the office of a Director shall be vacated if:

(a)

he ceases to be a Director by virtue of any provision of the Law or becomes prohibited by law from, or is disqualified from, being a Director; or

(b)

he becomes bankrupt or makes any arrangement or composition with his creditors generally; or

(c)

he resigns his office by notice to the Company; or

(d)

he becomes of unsound mind; or

(e)

he is given notice by all other Directors (not being less than two in number) to vacate office; or

(f)

he is absent from meetings of the Directors for four successive meetings without leave expressed by a resolution of the Directors and the Directors resolve that his office should be vacated; or

(g)

the Company so resolves by Resolution of the Voting Shares; or

(h)

he becomes a resident of the United Kingdom and, as a result thereof, a majority of the Directors are residents of the United Kingdom. ”

It will be noted that provisions in article 88 repeat, dovetail or otherwise overlap with provisions in articles 80, 86 and 87 to which I have already referred.

Under the heading Proceedings of Directors, article 93 provided that a resolution of the Directors required the affirmative vote of five Directors, provided that a quorum was present. Finally, under the heading Amendments, article 142 provided that subject to the requirements of the Law (defined as Guernsey company law) and article 12, the articles could only be amended by Resolution of the Voting Shares.

It will be noted, before leaving the articles of TFG, that the combined effect of the requirement for a majority of Independent Directors, and the requirement that a directors’ resolution should be carried by not less than five out of seven directors, meant that the independent directors could veto, but not insist on, resolutions affecting the management of the affairs of the company.

I am invited to treat provisions of Guernsey law in force at the time of the Agreement as part of the relevant background. There has been no dispute about these provisions and there is no need for me to be troubled with the status of Guernsey law as law or fact, in an English court. The relevant provisions come from the Guernsey Companies Law and are set out at paragraph 25 of the agreed Statement of Facts. They provide simply that every Guernsey company must have articles of incorporation which set out regulations for the conduct of the company, that a company may by special resolution alter its articles, that the business and affairs of the company must be managed by the board of the company, and that a person ceases to be a director if he is removed in accordance with the memorandum or articles.

The Agreement was, as I have said, made on (or as of) 29 September 2008, between Messrs Jackson, Dear and Griffith, PCH II and various other related entities, but not TFG. Clause 1 recorded the determination of the then shareholders’ agreement and any other relevant voting agreement (upon the basis of which the protective undertakings had been sought and given). Clause 3 referred to the 3 June letter agreement which I have mentioned. Clause 4 contained mutual non-disparagement undertakings between the three founders.

Clause 5, headed “Jackson Election; Tetragon Non-Independent Directors.” provided as follows:

“(a)

This Section 5 shall become operative upon receipt by Dear and Griffith of a written notice from Jackson prior to October 30, 2008 notifying them that Jackson wishes to be a director of Tetragon.

(b)

Subject to Section 5(a) above, Jackson, Griffith, Dear and PCH II agree that (i) at the next annual shareholders meeting for Tetragon Financial Group Limited, a Guernsey company (“Tetragon”), which shareholders meeting is expected to be held prior to December 31, 2008, PCH II shall, subject to applicable laws (including applicable stock exchange and regulatory requirements), (A) nominate each of Jackson, Griffith and Dear as the sole non-independent directors of Tetragon (each a “TFG Non-Independent Director”) and (B) vote all shares of Tetragon held by PCH II at such shareholders meeting in favour of the appointment of each TFG Non-Independent Director as a non-independent director of Tetragon and (ii) subject to applicable laws (including applicable stock exchange and regulatory requirements), to continue to nominate, and to vote all shares of Tetragon held by PCH II in favour of the appointment of Jackson as a TFG Non-Independent Director at each subsequent annual shareholders meeting for Tetragon; provided, however, that such right of Jackson to be nominated and reappointed shall terminate and the shares of Tetragon held by PCH II may be voted to remove Jackson as a director of Tetragon if Jackson (i) breaches his fiduciary duties or other obligations as a director of Tetragon under applicable laws (including applicable stock exchange and regulatory requirements), (ii) is found pursuant to a judgment by a court of competent jurisdiction, to have engaged in or to be responsible for fraud or wilful misconduct, (iii) is found by a competent authority not to be a fit and proper person to be involved in a regulated business or is otherwise disqualified from being involved in any part of the business of Tetragon or any of its subsidiaries or affiliates, (iv) transfers his interests in PCH and PCH II such that he holds, directly or indirectly through controlled affiliates, less than 15% of the aggregate voting and economic interests of either PCH or PCH II and their respective subsidiaries or (v) resigns as a director of Tetragon and notifies Griffith, Dear and PCH II that he does not wish to be reappointed as a Tetragon director; provided, further, however, that in the event Griffith or Dear transfer their shares in PCH II to a controlled affiliate (including, but not limited to, in the case of Griffith to REG Holdco), such transfer shall not be effective unless and until such transferee agrees to be bound by this Section 5.”

I shall continue to refer to the five specified events mentioned in the proviso as terminating Mr Jackson’s nomination and re-appointment entitlement, and entitling PCH II to remove him, as the Termination Events. It will be immediately apparent that, despite an element of overlap (such as resignation) the list of Termination Events is quite separate and distinct from the events and matters listed in TFG’s article 88 as giving rise to the vacation of office by a director, whether automatically or as the result of a directors’ resolution to remove.

Clause 7 contained the further assurance to which I have already referred in paragraph 8 above. Clause 8 provided for English law and a submission to the non-exclusive jurisdiction of the English courts.

PCH II’s articles were amended and re-stated on the same day as the Agreement. Article 68 required its directors to execute and deliver all ballots and written consent with respect to the voting shares of TFG (and TFGMF) and all other voting interests held by PCH II “as they may be directed by a Resolution of the Members”. Taken together with the definition of Resolution of the Members in article 1, this had the effect of enabling a majority of PCH II’s shareholders to control the exercise by PCH II of the voting rights attached to its 100 percent of the Voting Shares in TFG. It was common ground that this provision enabled the parties and now the court in effect to “look through” PCH II in any dispute about control of TFG and, for that reason, PCH II has not been joined as a party to these proceedings.

I need add little to my summary at paragraph 4 above. TFG’s articles were not altered as a result of the making of the Agreement. Such alterations as were made thereafter are immaterial.

Messrs Jackson, Dear and Griffith were duly nominated and appointed as directors of TFG, pursuant to clause 5 of the Agreement, at its next AGM on 17 December 2008. From then until January 2011, they remained, save for the independent directors, the only directors of TFG, all holding office from AGM to AGM, and being re-elected each time. The agreed facts do not show whether there was any change in the identity of the independent directors during that period.

Following Mr Jackson’s removal by notice under article 88(e) on 23 January 2011, and a resolution of PCH II as Voting Shareholder to alter TFG’s articles so that its number of directors should be no less than six, nothing was done by Mr Jackson to challenge that removal until on 21 October 2011 he requested a written undertaking from Dear, Griffith and PCH II that he would be re-appointed pursuant to clause 5 at the forthcoming AGM expected to take place in December 2011.

In response the continuing directors (including Mr Dear and Mr Griffith) signed a written resolution on 9 November 2011. It referred to the Agreement, to Mr Jackson’s removal, and to reasons why they (or rather the “Litigation Committee of the Fund”) considered that his continued appointment was untenable, and that he had been acting in breach of his duties as a director of the Fund. The resolutions were that:

The final paragraph of that draft was as follows:

“Based on consideration of the foregoing conduct on the part of Mr Jackson, each of the Directors of Tetragon have unanimously confirmed, as the Boards of Tetragon, their prior decision to each give notice to Mr Jackson to vacate office and resolved that were Mr Jackson to be reappointed to the Board of TFG, the Directors each intend to take immediate action to remove him as a director. His reappointment to the Board of TFG, being the board of a listed company, is untenable. Any insistence on nomination and re-appointment is futile and the Boards, on behalf of Tetragon, ask your client, in the circumstances, to desist in his request.”

I was treated by counsel both in writing and in their oral submissions to a helpful and in certain respects detailed citation of the ever increasing binding (and Privy Council) authorities on this subject, including Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101, Rainy Sky S.A. v Kookmin Bank [2011] 1 WLR 2900, Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988 (PC), Mediterranean Salvage & Towage v Seamar Trading & commerce Inc [2009] 1 C.L.C. 909, and Groveholt Ltd v Hughes [2010] EWCA Civ 538. Lord Grabiner QC for the defendants also adopted as part of his submission an article of his entitled the The Iterative Process of Contractual Interpretation, L.Q.R 2012, 128(Jan) 41-62.

Subject to one point to which I shall return, the principles established by those authorities were not significantly in dispute between Lord Grabiner and Mr David Chivers QC for the claimant. It is sufficient for me to summarise those principles, to the extent material for present purposes, as follows:

The point of potential difference between counsel arises from Lord Grabiner’s submission that, in both the Mediterranean Salvage case and in the Groveholt case (which followed it at paragraph 45) the Court of Appeal has perhaps rowed back a little from, or declined fully to accept into English law, Lord Hoffmann’s analysis of the modern function of the implication of terms in the Belize case, at paragraphs 16 to 27. In the Mediterranean Salvage case he referred in particular to Lord Clarke’s affirmation of the continuing vitality of the necessity test in relation to implied terms, at paragraph 15, and to his approval at paragraph 17 of the well-known observation of Sir Thomas Bingham in Philips Electronique Grand Public SA v British Sky Broadcasting Ltd [1995] EMLR 472 that, by comparison with interpretation of express language:

“the implication of contract terms involves a different and altogether more ambitious undertaking: the interpolation of terms to deal with matters for which, ex hypothesi, the parties themselves have made no provision. It is because the implication of terms is potentially so intrusive that the law imposes strict constraints on the exercise of this extraordinary power.”

Leaving aside for the moment the further assurance promised in clause 7, the express obligations with regard to the appointment and re-appointment of Mr Jackson as a director of TFG are all to be found in clause 5 of the Agreement. He is to be appointed at the next AGM and re-appointed at every AGM thereafter unless and until a Termination Event occurs. In that event he may be removed, and the obligation to re-appoint him ceases. The obligations to appoint and re-appoint and the conditional right to remove Mr Jackson are all expressed in terms of the obligation or right (as the case may be) to achieve those outcomes by the exercise of PCH II’s voting shares in TFG.

Although Lord Grabiner’s main submission was that the express terms of the Agreement sufficiently covered the relevant ground to exclude any implied terms, even he acknowledged that clause 5 had necessarily to have implied into it an obligation not to remove Mr Jackson between AGMs, in the absence of a Termination Event, by the exercise of PCH II’s voting rights. The necessity for that implied term is, plainly, to spell out what the Agreement means. But beyond that, he submitted, the Agreement did not go. It was plainly drafted with both PCH II’s and TFG’s articles well in mind. PCH II’s articles were re-formulated so as to facilitate the performance of the Agreement by the exercise of its voting rights in TFG, whereas TFG’s articles, including article 88, were (it must be assumed) deliberately left in place, unaltered and in full force and effect.

Lord Grabiner advanced a range of submissions as to why that outcome was both legally correct, and in accordance with business common sense. As to legal correctness, his starting point was that the obligations to nominate, appoint and re-appoint Mr Jackson in clause 5 of the Agreement were expressly made subject to applicable laws. Those include the company law of Guernsey, which provides that a person ceases to be a director if he is removed in accordance with the memorandum or articles. Accordingly, clause 5 was subject to Mr Jackson’s potential removal under any of TFG’s articles, including but not limited to article 88(e).

As to business commonsense, he submitted that it was plain in relation to most of the provisions in article 88 for the vacation of office by a director that these were not, and could not sensibly have been intended to have been, overridden by the Agreement. Thus, in the event of bankruptcy (article 88(b)) or insanity (article 88(d)), neither of which are Termination Events under the Agreement, it would be extraordinary if Mr Jackson were, because of the Agreement, not to vacate his office as a director. Similarly, in the event of Mr Jackson being absent from four successive meetings, there was no reason to suppose that, by the Agreement, the directors were disabled from removing him under article 88(f). As for article 88(e), Lord Grabiner submitted that, although not expressed to depend upon some unsatisfactory conduct by the director being removed, it was a provision usually designed to enable directors to remove one of their number with whom it had become impossible to work (i.e. for some good reason connected with the management of the company’s affairs), and that Mr Jackson was protected from its indiscriminate use against him by Mr Dear and Mr Griffith both by the requirement that it be exercised by the directors as fiduciaries in good faith, and by the requirement that all the independent directors should concur in its exercise. He pointed out that there was in the present proceedings no challenge to the bona fides of the exercise of the article 88(e) power against Mr Jackson, even though there was a real issue as to whether a Termination Event had occurred.

Underlying Lord Grabiner’s submissions was the undoubted background fact that the Agreement had been negotiated not at the commencement of a quasi corporate partnership between persons having trust and confidence in each other, but as part of the settlement of a dispute caused by a breakdown in trust and confidence (in relation to the affairs of Polygon), in circumstances where the parties were both legally advised, very much at arms length, and may be supposed to have determined with more than usual precision in express terms the precise boundaries of their commitments towards each other in the future.

Finally, Lord Grabiner pointed again to the fiduciary nature of the directors’ powers under article 88, submitting that the Agreement should not lightly be interpreted as imposing any advance fetter upon the fiduciary obligations of Messrs Dear and Griffith (once appointed directors of TFG), by contrast with their beneficial rights as persons enabled to direct the exercise of PCH II’s voting rights in TFG. He made much of the point that the power in article 88(e) served to protect the interests of TFG’s non-voting shareholders from disruption to the smooth management of TFG’s business by a troublesome director. They would, he suggested, rightly be horrified at the thought that the founders had agreed, in a document to which they were not privy, to cut down the ambit of that protection.

For Mr Jackson, Mr Chivers’ main submission was that the plain intent and effect of the Agreement, enshrined in clause 5, was that Mr Jackson should be appointed, re-appointed, and therefore remain a director of TFG for as long as a Termination Event did not occur, the happening of such an event being sufficient both to permit his immediate removal, and to discharge the other parties to the Agreement from any continuing obligation to re-appoint him. He submitted that any interpretation which enabled Mr Jackson to be removed, and which then rendered his re-appointment futile, would undermine the main express obligations of Mr Jackson’s counterparties under the Agreement so that an appropriately tailored implied term needed to be identified to avoid that obviously unintended result.

I admit to having found this issue finely balanced, but in the end I have been persuaded, notwithstanding Lord Grabiner’s submissions, that implied terms broadly in accordance with those asserted in paragraph 10 of the Particulars of Claim are necessary to spell out the meaning and effect of the Agreement, to the extent that the further assurance in clause 7 is insufficient for that purpose (a point to which I shall return). In setting out my own reasons for that conclusion I have largely been persuaded by Mr Chivers’ detailed submissions, so that it has been unnecessary for me to rehearse them in advance.

I reject Lord Grabiner’s submission based upon the provision in clause 5 that Mr Jackson’s rights of appointment and re-appointment were expressly subject to applicable laws. For reasons which will become apparent, there would be no breach of Guernsey company law in identifying by implied term or by reference to clause 7 of the Agreement an obligation on the defendants not to concur in bringing about Mr Jackson’s removal under article 88(e).

Nonetheless I accept Lord Grabiner’s starting point, which is that the Agreement, and clause 5 in particular, must be interpreted in the context of the then existing constitution of TFG, constituted by the whole of its memorandum and articles of association including, but not limited to, article 88. It was upon TFG as thus constituted that the Agreement was intended to operate, and the parties did not consider it necessary to re-formulate that constitution or abrogate any part of it.

In relation to Mr Jackson’s status as a director of TFG, the Agreement was concerned, and concerned only, with his nomination, appointment, re-appointment and removal. It did not purport to address circumstances where he might cease to hold office, otherwise than by removal, save in the limited sense that some of those circumstances (such as disqualification or resignation), coupled with the statement that he did not wish to be re-appointed, were also Termination Events, dis-applying any continued obligation to re-appoint him. Furthermore, the Agreement was concerned, and concerned only, with the exercise or non-exercise of powers vested in PCH II as voting shareholder to bring about Mr Jackson’s nomination, appointment, re-appointment or removal. It did not purport expressly to fetter the fiduciary obligations of Mr Dear and Mr Griffith, if appointed directors of TFG, but it did impose obligations upon them to procure the exercise by PCH II of its voting rights in TFG, for the purpose of giving effect to the Agreement: see clause 7.

The precise inter-relationship between clause 5 of the Agreement and article 88 calls for close analysis. In general terms, article 88 is not about removal, but about the circumstances in which an office of a Director “shall be vacated”. Of the eight specified vacation events, five are purely automatic, in the sense that they require nothing to be done by way of removal, either by the holder of the Voting Shares or by the Directors. They are sub-paragraphs (a) to (d) and (h). Although not expressly so described, sub-paragraphs (e), (f) and (g) are by contrast all in substance about removal. The last of them (removal by Resolution of the Voting Shares) is plainly governed by the express and implied terms of the Agreement, and applicable without breach of it only if a Termination Event has occurred. Sub-paragraphs (e) and (f) require steps to be taken either by all, or (because of article 93) five, of the directors to remove a director from office.

Putting sub-paragraphs (e) and (f) on one side for the moment, an implied term that Mr Jackson “would not be removed as a director of TFG” between annual meetings in the absence of a Termination Event has no controlling or undermining effect upon the remaining parts of article 88. There is no reason to treat the Agreement as meaning that he was entitled to remain a director pending the next AGM upon becoming bankrupt or insane, or upon becoming a resident of the United Kingdom with a result that a majority of the directors were UK residents. Nor do the happening of any of those events necessarily impact upon Mr Jackson having a substantial (rather than futile) right of re-appointment at the next AGM. Thus he might obtain the annulment or discharge from his bankruptcy or recover his sanity. Under sub-paragraph (h) even if still resident in the UK, under the Agreement he would prima facie be entitled to be re-appointed in preference to any other UK resident candidates for appointment, at the next AGM. The vacation of office under sub-paragraph (a) would, if due to disqualification, follow a Termination Event. If due to any other illegality, not constituting a Termination Event, then his right to re-appointment at the next AGM would be subject to that illegality having ceased to apply by then. Similarly, mere resignation under sub-paragraph (c), unaccompanied by notice of a wish not be re-appointed (which would be a Termination Event) would not of itself stand in the way of his re-appointment at the next AGM, nor render it futile.

Of the remaining two sub-paragraphs, it is convenient to take (f) first. A resolution of the Directors to remove Mr Jackson from office because of truancy (i.e. absence from four successive meetings of the Directors without leave) would not of itself render his re-appointment at the next AGM futile. If re-appointed, he would be easily able to avoid giving ground for further removal under sub-paragraph (f) thereafter, by attending the requisite number of meetings.

Sub-paragraph (e) gives rise to altogether different considerations. It is a form of provision commonly to be found in partnership articles, and may be supposed to have been transposed to TFG because it was (at least as between its founders) a quasi partnership company. It is specifically designed to enable the directors (or partners) to remove a colleague without showing cause, enabling the parties to bring about a form of business or corporate “no fault” divorce where partners (including quasi corporate partners) have fallen out, it is clear that the minority must go, but neither clear, nor necessarily provable, that the minority is the party at fault. In the present case TFG’s constitution contained a similar no fault removal power in article 88 (g), by use of the Voting Shares, but it is common ground that this was strictly circumscribed by the Agreement, and applicable only if a Termination Event had occurred.

The difficulty with the continued conferral of the same power upon the directors, exercisable only with the active concurrence of Messrs Dear and Griffith once appointed, is that it creates the risk of enabling to be done at board level what the Agreement clearly prohibits at Voting Shareholder level, equally without cause, let alone conditioned upon the happening of a Termination Event, and capable if repeated (or as here threatened to be repeated) of rendering illusory Mr Jackson’s apparently unqualified right of re-appointment in the absence of a Termination Event. It would in particular place him at risk of removal, and render his re-appointment futile, in circumstances where he had committed no breach of his fiduciary duties as director of TFG.

It is in this context that the continued inclusion of sub-paragraph (e) within article 88 after the making of the Agreement is all the more surprising. A common feature of all the Termination Events is that Mr Jackson should have done something (whether reprehensible or not) to justify his removal and the loss of any right to re-appointment. Furthermore, the circumstances in which he was, for the first time, appointed a director of TFG pursuant to the Agreement arose from the loss of, rather than the existence of, a relation of trust and confidence between him, Mr Dear and Mr Griffith.

It is true that, as Lord Grabiner pointed out, not every instance of removal under article 88(e) would necessarily render Mr Jackson’s right of re-appointment illusory. He might, for example, be charged with a serious count of fraud, or placed under investigation by a competent authority as to his fitness to be involved in a regulated business. He might be a defendant in directors’ disqualification proceedings. In all those cases he might be, pro tem, removed as a director for the preservation of the reputation of TFG, without prejudice to his re-appointment at the first AGM after he had (if successful) cleared his name in the relevant proceedings or regulatory investigation. Should he fail to do so, a Termination Event would almost inevitably by then have occurred. Nonetheless article 88(e) clearly creates broad scope for the undermining of the substance of the rights apparently conferred upon Mr Jackson by clause 5.

Lord Grabiner’s more fundamental point was that, taking article 88 as a whole, a number of its sub-paragraphs could operate in circumstances which, in the absence of a Termination Event, might or might not render Mr Jackson’s right of re-appointment illusory, but that the fact that in certain circumstances they might do so was no basis for the implication of some term disabling the ordinary operation of article 88, or any part of it. Insanity, insolvency, truancy, or removal under article 88(e) were all circumstances following which, depending upon different outcomes, Mr Jackson might have a real, or purely fanciful, right of re-appointment. That was simply a businesslike consequence of the parties’ express bargain.

I consider that it is at this point that the principle that a party must do nothing of his own motion to render an agreement inoperative, coupled with the further assurance in clause 7 of the Agreement, become of decisive force. Following the appointment pursuant to clause 5 of Mr Dear and Mr Griffith as directors of TFG at the 2008 AGM, Mr Jackson could not be removed under article 88(e) without their active concurrence, even though he might vacate office automatically due to insanity or bankruptcy without them having to do anything at all. Automatic loss of office due to insanity or bankruptcy may fairly be regarded as a risk willingly undertaken even though it might render this business agreement inoperative. By contrast, having the agreement rendered futile as the result of removal from office caused by active steps taken by other parties to the agreement stands in a separate category altogether. Such an outcome cannot fairly be described as a risk willingly undertaken. It is settled law that a contracting party is entitled to assume that the other parties will do nothing of their own motion to render the agreement inoperative.

Suppose that the independent directors, desiring to put an end to friction on the board, came to Mr Dear and Mr Griffith and invited them to concur in the removal of Mr Jackson under article 88(e), and to the making of a statement that such a removal would be repeated after any re-appointment. The critical question in my judgment is whether in those circumstances Mr Dear and Mr Griffith would commit a breach of the Agreement by doing so. The consequence of them doing do would be to render Mr Jackson’s reappointment futile, so that they would be doing something of their own motion to render the Agreement inoperative. It would be no less a step taken of their own motion merely because the other directors asked them to do it. In that context the phrase ‘of his own motion’ merely means voluntarily.

The principal argument to the contrary is that they would in such circumstances be bound to act in accordance with their perception of their fiduciary duty, a process which the Agreement should not lightly be interpreted as constraining, and which would not be voluntary if inaction would be a breach of fiduciary duty. But the constitution of TFG, in conjunction with their power to control the exercise by PCH II of its Voting Shares, gave Mr Dear and Mr Griffith at least three ways of ensuring that a refusal to concur in the removal of Mr Jackson under article 88(e) would involve them in no such breach of fiduciary duty.

The first was to cause PCH II to give a direction under article 83(a) requiring the directors not to implement article 88(e) against Mr Jackson in the absence of a Termination Event. That raises the question whether, within the meaning of article 83(a), the exercise of the power conferred by article 88(e) would be part of the management of the business of TFG. In my judgment it would, because it would be difficult to imagine a bona fide use of article 88(e) otherwise than in connection with the better management of the company’s business.

The second method which Mr Dear and Mr Griffith could employ would be to procure that PCH II use its Voting Shares for the purpose of exonerating them from the consequence of any breach of fiduciary duty which might otherwise have been constituted by their refusal to concur. As the 100 per cent owner of the Voting Shares, PCH II was in a position to provide such exoneration, pursuant to principle in Re Duomatic [1969] 2 Ch 365, provided only that TFG was solvent at the time, and not rendered insolvent by that decision. I reject Lord Grabiner’s submission to the contrary, based upon the supposed prejudice which might thereby be occasioned to the non-voting shareholders in TFG. Re Duomatic was itself a case in which the power was held to be capable of exercise by voting shareholders, in a company with both voting and non-voting shareholders, and regardless of the interests of the latter: see generally Gore Browne on Companies (45^th Ed) at para11[3].

The third method available to Mr Dear and Mr Griffith was to procure that PCH II resolve upon a change in TFG’s articles, so as to amend article 88(e) by disabling it as against Mr Jackson, for as long as no Termination Event occurred. This was expressly permitted by TFG’s article 142, and nothing in article 12 or Guernsey company law would have prohibited it.

I recognise that this analysis might require some concrete steps to be taken by the defendants, so as to ensure that a refusal, of their own motion, to participate in a removal of Mr Jackson under article 88(e) did not amount to a breach of fiduciary duty on their part. The question necessarily therefore arises whether the Agreement and in particular the further assurance promised in clause 7, required them to take any such steps. Lord Grabiner described the further assurance as a typical piece of unthinking boilerplate which added nothing to the meaning of the Agreement, not least because it was qualified by the requirement that any such steps should be requisite to “give effect to” the Agreement, and its effect for present purposes depended upon the addition of the alleged implied term that, notwithstanding article 88(e), Mr Jackson would not be removed in the absence of a Termination Event.

I reject that submission. In Brady v Brady [1989] 1 AC 755, the House of Lords had to consider the effect of a similar provision for further assurance in an agreement for a corporate re-organisation, which, if carried out in a particular way, would fall foul of the provisions against the provision of financial assistance by a company for the purchase of its own shares then to be found in section 151 and following of the Companies Act 1985. Those provisions contain a facility for private companies to take further steps which would have the effect of dis-applying section 151, and Lord Oliver (giving the leading speech) decided that, provided that effect could be given to the agreed re-organisation in a lawful manner, the provision for further assurance required the defendants to structure the re-organisation in such a way as achieved the statutory dis-application of section 151 by the taking of the requisite further steps. It was a necessary part of his conclusion that the requisite steps fell within, rather than without, what he called “the framework of what has been agreed”.

In my judgment there is no reason to give the further assurance in clause 7 of the Agreement in the present case any lesser effect than its equivalent was given in Brady v Brady. Nor do I consider (contrary to Lord Grabiner’s submission) that the taking of one of those three alternative steps by Messrs Dear and Griffith would be a step falling outside the framework of the Agreement. They are simply means whereby, within their powers as shareholders of PCH II and the existing constitution of TFG, they could take available steps, in accordance with Guernsey law, to ensure that they could avoid committing a breach of the Agreement without putting themselves at risk of breach of fiduciary duty as directors of TFG.

The result of the foregoing analysis (the length of which is no more than responsive to the detail and sophistication of counsel’s submissions) is that the meaning of the Agreement is that the defendants were contractually obliged, after securing the appointment of Mr Jackson as a director of TFG in 2008, not themselves to take any steps to remove him thereafter, unless and until the happening of a Termination Event. It matters not whether that meaning is to be spelt out by the implication of the terms pleaded in paragraph 10 of the Particulars of Claim, or because of the general rule that a party to a contract must do nothing of his own motion to render its further performance impossible or, I would add, futile.

Further, the parties of the Agreement are in my judgment required, as pleaded in paragraph 15 of the Particulars of Claim, in order to give effect to clause 5 of the Agreement, not to invoke article 88(e) of TFG’s articles in order to remove Mr Jackson from office as a director, nor any other power to remove him from office, unless and until the happening of a Termination Event. Insofar as necessary to avoid compliance by the defendants with those obligations from constituting a breach of their fiduciary duties as directors of TFG, then the defendants are obliged pursuant to clause 7 of the agreement to take such lawful steps as are available to them as controlling shareholders of PCH II to absolve themselves from, or to dis-apply what might otherwise have been, a fiduciary duty to concur in Mr Jackson’s removal pursuant to article 88(e). I have outlined three alternative methods whereby the defendants may lawfully achieve that result. It is not necessary for the court to choose between them, or prescribe one rather than the others.

I will hear submissions upon the form of an appropriate declaratory order, if its terms cannot be agreed.