VB Football Assets v Blackpool Football Club & Ors

INTRODUCTION (1) Factual overview

The Fourth Respondent, Blackpool Football Club Limited (“Blackpool FC” (Footnote: ¹)), was formed on 26 July 1887, and became a limited company in May 1896. It played its first league match in 1896.

English football has five national leagues. (Footnote: ²) From the top, they are:

For the season just finished, Blackpool FC played in League Two, and has secured promotion to League One, where it will play in the 2017-2018 season. The history of Blackpool FC’s performance in English football, since 2007-2008 is as follows:

Prior to 5 June 2006, when (as will be described) a further 7,500 ordinary shares were issued, Blackpool FC’s issued share capital was 30,000 £1 ordinary shares. Of these shares, 1,393 (or 4.64%) were owned by 192 individual shareholders (the “Minor Shareholders”). The rest, 28,607 (or 95.36%) were owned by the First Respondent, Blackpool Football Club (Properties) Limited. Blackpool Football Club (Properties) Limited was previously known as Segesta Limited, and that was the name by which it was referred to during the course of the trial. I shall refer to it as “Segesta” in this Judgment.

Segesta itself is 97.2% owned by the Second Respondent, Mr. Owen Oyston. The Third Respondent, Mr. Karl Oyston, is Mr. Owen Oyston’s son.

As is usual, the Fourth Respondent (Blackpool FC) was joined so as to be bound by the outcome of these proceedings. It did not play an active part in the hearing before me. The effective Respondents (to whom I shall refer as the “Respondents” and which definition excludes Blackpool FC) were Segesta (the First Respondent), Mr. Owen Oyston (the Second Respondent) and Mr. Karl Oyston (the Third Respondent).

The Petitioner, VB Football Assets, is a limited liability company registered under the laws of Latvia. Until 3 December 2013, VB Football Assets was 100% owned by Mr. Valeri Belokon. Since 3 December 2013, a company known as AS BFFH has been the sole shareholder of VB Football Assets. AS BFFH is 50% owned by Mr. Belokon and 50% by Mr. Belokon’s brother, Vilori.

In 2005, Mr. Belokon was introduced to Mr. Owen Oyston. In time, the suggestion was made that Mr. Belokon invest in Blackpool FC. The negotiations regarding this investment and the agreement that was reached are considered in detail in this Judgment. For the present, the following points are to be noted:

Prior to VB Football Assets’ acquisition of a shareholding in Blackpool FC, Blackpool FC had four directors:

On the acquisition of its shareholding, Mr. Belokon and an employee of Mr. Belokon, Mr. Normunds Malnacs, became directors of Blackpool FC.

When considering subsequent events, it is a helpful and useful shorthand to refer to the “Oyston Side” and the “Belokon Side” as broad descriptors of the majority and 20% minority interests in Blackpool FC respectively. This is also a convenient way of referring generally to the persons acting on each Side. Essentially, on the Oyston Side were:

On the Belokon Side were:

Relationships between the Oyston Side and the Belokon Side in terms of running Blackpool FC up to Blackpool FC’s promotion to the Premier League in 2010 were – at least so far as Mr. Belokon was concerned – essentially harmonious and in accordance with, or at least not infringing, his understanding of the gentleman’s agreement. Mr. Malnacs had, perhaps, a different view of this and, again, this is a matter which will be explored.

Compared to the Championship, distributions to clubs participating in the Premier League are vast. During the course of the four seasons that Blackpool FC played in the Championship (2011-2012; 2012-2013; 2013-2014; 2015-2016), Blackpool FC received (for each season) £3,550,000. During its one season in the Premier League (2010-2011), Blackpool FC received £42,995,000, plus “parachute” payments intended to cushion difficulties clubs experience when demoted from the Premier League of:

Unfortunately, this vast influx of cash brought with it disharmony and what VB Football Assets contends was unfairly prejudicial behaviour on the part of the Oyston Side. The seeds for this began at a meeting between Mr. Owen Oyston, Mr. Karl Oyston, Mr. Belokon and Mr. Malnacs at the Dorchester Hotel on 23 May 2010. At this meeting, Mr. Owen Oyston “proposed to the meeting that he and [Mr. Belokon] should each have a facility to borrow between £3m and £5m”. The notes of the meeting record that Mr. Belokon and Mr. Malnacs “listened but were non-committal”.

It will be necessary to consider these matters in far greater detail, but I find that two related events led to the fracturing of the relationship between the Oyston Side and the Belokon Side:

I appreciate that Mr. Owen Oyston and Mr. Karl Oyston sought to put forward a different view in their oral evidence. They suggested that Mr. Belokon’s attempt unilaterally to exit Blackpool FC was a course of action that had nothing to do with them, but with difficulties related to Mr. Belokon’s other affairs. (Footnote: ⁶) I set out in Section

Although Mr. Malnacs continued as a director representing the Belokon Side on the board of Blackpool FC until March 2013, and was then succeeded in the role of director by Mr. Kaspars Varpins from March 2013, the period from May 2011 was characterised by:

During this period:

Mr. Belokon failed in his efforts to have VB Football Assets’ interest in Blackpool FC bought out and, on 15 September 2015, a petition alleging unfair prejudice under section 994 of the Companies Act 2006 was commenced by VB Football Assets (the “Petition”).

The allegations of unfair prejudice made in the Petition

Section 994 of the Companies Act 2006 provides, so far as material:

“(1)

A member of a company may apply to the court by petition for an order under this Part on the ground-

(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.

(1A) For the purposes of subsection (1)(a), a removal of the company’s auditor from office-

(a)

on grounds of divergence of opinions on accounting treatments or audit

provisions, or

(b)

on any other improper grounds,

shall be treated as being unfairly prejudicial to the interests of some part of the company’s members.”

Section 996 provides:

“(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-

(a)

regulate the conduct of the company’s affairs in the future;

(b)

require the company-

(i)

to refrain from doing or continuing an act complained of, or

(ii)

to do an act that the petitioner has complained it has omitted to do;

(c)

authorise civil proceedings to be brought in the name and on behalf of the company by such person or persons and on such terms as the court may direct;

(d)

require the company not to make any, or any specified, alterations in its articles without the leave of the court;

(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.”

In essence, two broad questions fall for determination:

The Petition contends that the affairs of Blackpool FC have been conducted by the Respondents to the unfair prejudice of the interests of VB Football Assets in the following respects:

The structure of this Judgment

Clearly, the question of the appropriate relief on the Petition cannot begin to be considered without a conclusion first being reached on the allegations of unfair prejudice that are advanced by VB Football Assets. Equally clearly, these allegations of unfair prejudice cannot sensibly be considered without detailed findings being

The structure of this Judgment is as follows:

The orders I am minded to make for the disposition of the Petition are set out in Section K.

THE FACTUAL WITNESSES

As I have explained in paragraph 17 above, I have tested the evidence of the various factual witnesses against the contemporary documents, conscious that the later recollection of these witnesses is fragile and that the contemporary documents may provide a better and clearer record of events. In making this comment, I should make clear that I intend no criticism of any of the witnesses.

VB Football Assets’ witnesses

VB Football Assets called the following witnesses:

The Respondents’ witnesses

The first four witnesses called by the Respondents (Mr. Belton, Mr. Dempsey Mr. Cherry and Mr. Dyer (Footnote: ¹²)) were drawn from Mr. Owen Oyston’s trusted team of advisers. In cross-examination, Mr. Belton was asked:¹³

Whilst I consider all four of these witnesses were doing their best to assist the court, their relationship with Mr. Owen Oyston (which generally had subsisted over many years) inclined them to lack objectivity when the business of the football club was being critically examined:

The fact is that the evidence of Messrs. Belton, Cherry, Dempsey and Dyer reflected their position as long-standing and loyal advisers to the Oyston Side, and I consider their evidence in that light.

During the course of their cross-examination, Mr. Owen Oyston and Mr. Karl Oyston both sought to suggest that they – Owen and Karl Oyston – were not the key decisionmakers in regard to Blackpool FC, but that they merely acted in accordance with advice given to them. (Footnote: ¹⁸) In this way, they sought to distance themselves from the corporate actions of the Oyston Group.

I do not find this plausible and I do not accept this evidence. In the ordinary course, it is not advisers who determine what happens. They provide advice for the decisionmaker and, having given that advice, if instructed to take certain steps by the decisionmaker, they do so. That, I consider, is how the Oyston Side operated. The documents that I have seen, and the evidence that I have heard, bear out the fact that it was Mr. Owen Oyston and Mr. Karl Oyston – and not their team – who effectively ran the show.

Both Mr. Owen Oyston and Mr. Karl Oyston showed themselves as decisive people who knew their own minds:

FACTUAL NARRATIVE (1) The original ownership of shares in Blackpool FC

Prior to 5 June 2006, when (as will be described) a further 7,500 ordinary shares were

The Oyston Group

Segesta itself is 97.2% owned by Mr. Owen Oyston. Its directors are, and at all material times were, Mr. Owen Oyston and Mr. Karl Oyston. Blackpool FC, as has been described, was substantially owned, and so controlled, by Segesta. Segesta itself was substantially owned, and so controlled, by Mr. Owen Oyston.

As I have noted, Segesta forms part of the Oyston Group, a group of companies owned and controlled by the Oyston family. In addition to Blackpool FC and Segesta, three other companies in the Oyston Group need to be described:

Blackpool FC’s use of the football ground

The ground or stadium at which Blackpool FC played was not actually owned by Blackpool FC but by Segesta. As at June 2006, the stands at the ground comprised the North-West and West Stands, which had been demolished and reconstructed in the period 2000 to 2005. These stands opened for football use in 2002. The fitting out of

I was provided with a chronology of the development of the stadium, together with costs, by the Respondents. It is appended to this Judgment as Annex 2. I should stress that this chronology was not agreed by VB Football Assets, and it was not supported by any witness called by the Respondents. It was not possible, in the course of the trial, to traverse the detail of this chronology – in particular, the costs it is said by the Respondents were incurred. On the other hand, it was not disputed by VB Football Assets that the Oyston Side had, over time, spent money on the stadium. Indeed, an “undisputed” but necessarily less populated chronology, setting out what was agreed by VB Football Assets, was helpfully produced by VB Football Assets. Nevertheless, because of its greater detail, I use the chronology at Annex 2 as a broad guide to the stadium’s development, without making any express findings as to the accuracy of the detail, and fully recognising that its content is not agreed by VB Football Assets.

I have seen no legal document setting out the terms on which Blackpool FC was entitled to use the ground. The only document on this point is a document constituting

It is entirely unclear whether Attachment 6 purported to summarise the legal arrangements already subsisting between Blackpool FC and Segesta or whether it amounted to a statement made for the purposes of the Subscription Agreement, intended to be binding, setting out for the first time the rights of Blackpool FC.

Moreover, it is not clear from this document whether the entitlement in Blackpool FC to access the stadium with no rental payments was limited to the stadium as constructed at the date of Attachment 6, or whether it extended to any parts of the stadium to be developed in the future.

I shall proceed on the basis that Attachment 6 set out the pre-existing basis upon which Blackpool FC was entitled to use the ground, and that this was binding in law on Segesta and legally enforceable by Blackpool FC.

I shall also proceed on the basis that Blackpool FC’s entitlement to use the “seating area of the stadium” as per paragraph 1) vi) of Attachment 6 extended to the seating area as it existed from time to time. In other words, if the seating was extended, the extended seating became the “seating area of the stadium” within the meaning of Attachment 6. Of course, I recognise that Attachment 6 simply deals with Blackpool FC’s rights of occupation. It says nothing about rights to the revenue – the “gate” receipts – derived from attendance at football matches.

Financial support by Mr. Owen Oyston

In general, in the years up to 2006, Blackpool FC had been loss-making. Blackpool FC had, to the extent necessary, been funded by Mr. Owen Oyston. This support is disclosed in the accounts of Blackpool FC for the year ending 31 May 2005. These accounts, I should say, appeared as Attachment 1 to the Subscription Agreement, and formed part of the agreement. Essentially, these accounts showed:

Mr. Belokon is introduced to Mr. Owen Oyston

In 2005, Mr. Belokon was introduced to Mr. Owen Oyston. In time, the suggestion was made that Mr. Belokon invest in Blackpool FC. It was as a vehicle for this investment that Mr. Belokon established VB Football Assets although, as will be seen, Mr. Belokon’s daughter, Vlada, does feature as a party to some of the agreements.

The Subscription Agreement

The Subscription Agreement was concluded on 5 June 2006 between Blackpool FC, VB Football Assets, Segesta and Mr. Owen Oyston. It provided as follows:

The First Vlada Loan Agreement

The First Vlada Loan Agreement was between Ms. Belokon and Segesta and provided as follows:

“WHEREBY:

(1)

VB, or such other person, firm, company or corporation as he in his absolute discretion shall nominate, will within 14 days of the signing of this Agreement, loan to [Segesta] the sum of £1,000,000…interest-free (“the Loan”).

(2)

The Loan is to be used for the purpose of the construction of the South Stand at Blackpool [FC] (“the Stand”) by [Segesta] or by such other person, firm, company or corporation as it in its absolute discretion shall nominate and is for a term of 20 years (“the Term”) from the date of the 1^st repayment of the Loan referred to in clause 3 hereof.

(3)

When the Stand has been practically completed and when the Stand has achieved an annual occupancy of 75% for an annual serviced accommodation income of £600,000 (whichever is the lower), then [Segesta] will on each annual occasion on which such level of occupancy or income is derived, make a repayment of part of the Loan to VB or to such other person, firm, company or corporation as he in his absolute discretion shall nominate, in the sum of £50,000 provided always that the repayment of the Loan shall commence no later than the 3^rd anniversary of it being made.

(4)

[Segesta] and VB hereby agree that there is no right to any repayment in respect of the Loan or any part of it whether of capital or interest other than as set out in this Agreement.”

I did not hear evidence from Ms. Belokon. Mr. Belokon’s explanation for her being a party to this and to subsequent agreements was that he wanted to get her involved in Blackpool FC. (Footnote: ²⁴) However, her role seems to have been little more than that of a cypher. As will be seen, Ms. Belokon was also party to the First South Stand Agreement dated 1 July 2008. (Footnote: ²⁵) However, when that agreement was cancelled and replaced with the Second South Stand Agreement dated 21 August 2008, to which Ms. Belokon was not a party, this seems to have been done entirely without her knowledge or consent. (Footnote: ²⁶) For the purposes of this Judgment, I shall treat Ms. Belokon as synonymous with VB Football Assets.

The Second Vlada Loan Agreement

The Second Vlada Loan Agreement was made some months later, on 14 April 2007. There was no evidence before me dealing explicitly with the relationship between the Subscription Agreement, the First Vlada Loan Agreement and the Second Vlada Loan Agreement: (Footnote: ²⁷)

The Second Vlada Loan Agreement was again between Ms. Belokon and Segesta and provided as follows:

“WHEREBY:

(1)

VB, or such other person, firm, company or corporation as she in her absolute discretion shall nominate will, within 14 days of the signing of this Agreement, loan to

[Segesta] the sum of £1,700,000…(“the Loan”) interest free for a term of 20 years (“the Term”) from the date of the first repayment of the Loan.

(2)

[Segesta] hereby undertakes that upon receipt of the Loan, [Segesta] will (i) transfer by way of gift, 50% of the Loan (i.e. £850,000) to Blackpool [FC]…and (ii) use the remaining 50% of the Loan (i.e. £850,000) for the purpose of the construction of the South and/or South-West Stands at [lack pool FC] by [Segesta] or by such other person, firm, company or corporation as it in its absolute discretion shall nominate.

(3)

When the South Stand has been practically completed and when the South Stand has achieved an annual occupancy of 75% or an annual serviced accommodation income of £600,000 (whichever is the lower), then [Segesta] will, on each annual occasion on which such level of occupancy or income is achieved, make a repayment of that part of the Loan which is not transferred to [Blackpool FC], (i.e. the capital sum of £850,000), to VB or to such other person, firm, company or corporation as she in her absolute discretion shall nominate, in the sum of £42,500 PROVIDED ALWAYS that, in any event, the repayment of the Loan shall commence no later than the 5 June 2009.”

The nature of the agreement reached between the parties

The rival contentions

It was the contention of VB Football Assets that the terms of these three agreements (the Subscription Agreement, the First Vlada Loan Agreement and the Second Vlada Loan Agreement) did not set out the totality of the understanding between the parties. Paragraph 17 of the Petition alleges that the Subscription Agreement:

“…was entered into, in the context and on the basis of a common understanding and intention shared by Mr. Belokon (on behalf of [VB Football Assets]) and [Mr. Owen Oyston] (on behalf of the First to Third Respondents) that: (1) Mr. Belokon would arrange the provision of loans in the sum of £2,700,000; and (2) pending the contemplated future conversion of those loans into a further tranche of shares in [Blackpool FC] to lead to parity between [VB Football Assets] and [Segesta], [Blackpool FC] would be run as a quasi-partnership between [VB Football Assets] and [Segesta]. Specifically, that quasi-partnership would involve: (1) [VB Football Assets] having equal rights in the management of [Blackpool FC] (including the right to appoint two of the five directors of [Blackpool FC]) and equal rights to profits generated by it; and (2) the business of [Blackpool FC] being conducted on the basis of mutual consultation and cooperation, and unanimity.”

What the Petition alleges is, therefore, a further understanding that goes beyond the words of the three written agreements in two respects:

These contentions were denied by the Respondents. Paragraphs 10 and 11 of the Amended Points of Defence plead (in response to paragraph 17 of the Petition):

“10.

In the premises paragraph 17 is denied. In particular it is denied that the Subscription Agreement was entered into on any such “common understanding and intention” as to the matters then mentioned as is their stated. In particular the Subscription Agreement:

–

a.

did not provide for the acquisition of any further shares in [Blackpool FC] by [VB Football Assets] or any other person. Accordingly the Respondents denied the assertion that the loans were in fact payments for further shares.

b.

did not provide for [VB Football Assets] being treated in any way other than as a 20% shareholder in [Blackpool FC]. Accordingly the Respondents denied the assertion that [Blackpool FC] would be run as a quasi-partnership equal powers and control.

c.

did not provide any right for [VB Football Assets] to appoint any directors let alone an equal number.

d.

is presumed to be an entire agreement and is not subject to any further terms or understandings or other agreement not contained within an expressed to be part of it.

11.

If the matters pleaded in paragraph 17 had been the intention of the parties to the Subscription Agreement they could and would have been readily expressed in that Agreement. Furthermore:

a.

If, which is denied, [VB Asset Holdings] held such understanding or intention as alleged paragraph 17, it was not an understanding shared by any of the other parties to that Agreement.

b.

In so far as [VB Asset Holdings] may claim that the omission of such terms from that Agreement was in order not to lose the tax benefits from substantial losses sustained by [Blackpool FC] is in previous years, and to defeat the Revenue, then such agreement would be tainted by illegality and would therefore be unenforceable.

c.

[Mr. Owen Oyston] was throughout the lengthy discussions and negotiations consistent in not jeopardising [Blackpool FC’s) tax losses and in not losing control of [Blackpool FC] without first having a public flotation of [Blackpool FC] to enable him to recover some monies for the millions that he had invested in it over the years to ensure its survival.

d.

[Mr. Owen Oyston] was clear in not offering parity of shareholding except in the case that a public flotation was possible and he referred to this in a letter to Mr. Belokon of the 3 April 2006…This was also reflected in a proposal (which did not come to fruition) dated 6 May 2006. It was made absolutely clear to [VB Football Assets] that utilisation of the tax losses and no parity until flotation upon a recognised stock exchange or AIM were ‘Red Line’ conditions.

e.

[VB Football Asset’s] case is that the ‘Original Loans’ were to be for the purpose of the acquisition of shares/options in [Blackpool FC]. However [VB Football Assets] agreed to invest these original loans in a 50:50 1000 year joint commercial venture with [Segesta] from which the potential revenues accruing to [VB Football Assets] from the joint venture would repay the loans to [VB Football Assets]. Accordingly [VB Football Asset’s] case that such loans were for the purchase of shares is not understood."

The battle lines were thus clearly drawn in the pleadings. The Respondents denied the existence of any kind of agreement going beyond that set out in the written agreements.

Analysis: was there a wider agreement; and, if so, what was its nature and what were its terms?

Although the provisions of neither of the Vlada Loan Agreements are particularly

In my judgment, the loans cannot be regarded as agreements separate in their own right. Viewed as self-standing agreements, they make no commercial sense. They need to be seen in a broader context.

The link between the three agreements emerges from the history of the negotiations and dealings between the parties both before and after 5 June 2006, when the Subscription Agreement and First Vlada Loan Agreement were concluded. Prior- and post-contract negotiations can be considered for the purpose of establishing whether an agreement was partly oral and – if so – what the terms of that agreement were: see McMeel, The Construction of Contracts, 2^nd ed. (2011) at [5.99] and [5.151] to [5.156]. They can also, as part of an inquiry into whether unfair prejudice exists, be relevant to the existence of “equitable considerations”. (Footnote: ²⁸) I therefore turn to consider the history of the negotiations.

In a letter dated 8 December 2005, Mr. Belokon proposed that he be allowed “to trade as Blackpool Football Club and to operate the Football Club and fulfil all its obligations to the Football League”, with a 20-year lease/licence, on match days only, of the football ground. The letter referred to a “purchase price that we discussed at our recent meeting”, although there is no evidence as to what that price was.

The next communication was a letter from Mr. Dyer dated 14 March 2006 to Mr. Belokon, copied to a Mr. Nicholas Louis, who apparently was acting as a go-between between the parties. The letter appears very much to envisage running Blackpool FC on a “joint venture basis”:

“Subject to contract

I have spoken to Owen and Karl to see how we can simplify an entity in which you can participate on a joint venture basis on known risk levels and which could have a very healthy and profitable future.

…

I am pleased to advise you that we have spent £9.4 million on the construction and fitting out of the North and West Stands, using family money. So apart from a small overdraft of £250,000 arranged to support our cashflow we have no borrowings whatsoever other than loan to Owen. (Footnote: ²⁹) The loans to Owen carry no interest and Owen is prepared to undertake not to call the monies in during the period of any joint venture that we might undertake together. In any event a joint venture company will have no debt and no liens against it. It will be a completely new company, designed jointly for this specific purpose and without baggage.

You will see from the spreadsheets that we have selected 3 years from our recent past:-

2001/02 in which we made an operating profit of £904,758

2003/04 in which we made an operating profit of £373,248

2005/06 our worst year on record, which will show an operating loss of £483,576

…

To create clarity I am specifying those costs centres which will form part of the proposed joint venture company in which the Oystons/Belokon Holdings would have parity (50/50). I list them below…”

This letter appears to have been regarded by Mr. Owen Oyston as the basis for an agreement going forward. In an email to Mr. Rawlinson sent on 22 March 2006, Mr. Owen Oyston attached the letter – that is, the letter of 14 March 2006 described in paragraph 61 above – “which formed the base of our agreement” and which “Rod helped me to produce”. He instructed Mr. Rawlinson: “Could you please convert this letter into a formal contract keeping it as simple as possible”.

Neither the letter of 14 March nor Mr. Owen Oyston’s email of 22 March specify any price. However, on 30 March 2006, Mr. Dempsey was asked to call Mr. Owen Oyston as a matter of urgency to talk about the deal and was provided with a copy of the letter in order to do so. (Footnote: ³⁰) Mr. Dempsey’s handwritten notes, made at this time, refer to a

“joint company”, “we need control to enable us to carry forward tax losses” and “£4.5m”, which I consider to be a reference to the price being discussed between Mr. Owen Oyston and Mr. Belokon.

This reference to carrying forward tax losses was prescient. In the years up to 31 May

It was possible, provided certain conditions were met, for Blackpool FC to surrender its tax losses to the benefit of another company in the Oyston Group. However, the conditions that had to be satisfied were stringent: (Footnote: ³²)

Blackpool FC’s losses – the “Tax Losses” – were thus an important benefit to the Oyston Group, worth several million pounds. As Mr. Dempsey’s handwritten note anticipated, the Tax Losses were discussed with Mr. Owen Oyston. In a later, longer but less clear, handwritten note, Mr. Dempsey suggested that the joint venture proposed in the 14 March 2006 letter “means that the joint venture company would pay full tax and could not use existing [Blackpool FC] losses”. Similarly, Mr. Cherry (in a handwritten note of a telephone call he had with Mr. Owen Oyston on 31 March

It is evident from Mr. Dempsey’s note that alternative structures were debated, involving a loan by Mr. Belokon, a right to 50% share of the profits and the right “to convert loanstock into 20% of ordinary shares in [Blackpool FC] at any time”. I do not suggest that these alternative structures would have preserved the Tax Losses for the benefit of the Oyston Group: they would not have done, given my understanding of the tax position. What is clear, however, is that there were, from a relatively early

It appears that Mr. Owen Oyston met representatives of Mr. Belokon on 31 March 2006. This is evidenced by further handwritten notes, which appear to be the notes of several different persons. These refer to the parties wanting “to keep the essence of agreement intact as set out in letter but give (i) more substance (ii) more value”. The notes also refer to an investment split of 20% held by the Belokon Side, 75% held by the Oyston Side and 5% held by others, with “[s]hare options to take [the Belokon Side’s] shareholding to equal amounts to Oyston Family”. Again, the thrust of these notes involves attempting to keep the in-principle deal that had been reached, but also to retain the benefit of the Tax Losses.

The first draft agreement contains the following provisions:

“1.

[“Belokon Holdings” – the name of the vehicle Mr. Belokon was then envisaging would be used to acquire his interest in Blackpool FC] will subscribe for new shares in [Blackpool FC] equal to 20% of the enlarged share capital, subject to compliance with rules relating to minority shareholders and such that [Segesta] retains at least 75% of the enlarged share capital. The total subscription price payable by [Belokon Holdings] will be £4,500,000.

The retention of a 75% holding by [Segesta] is necessary to enable the new venture to utilise the existing £10,000,000 worth of tax losses. These losses would not be available otherwise or to a newly established joint venture company as was initially proposed.

2.

[Blackpool FC] will grant [Belokon Holdings] an option to subscribe for further new shares, subject to compliance with rules relating to minority shareholders, such that BH’s total holding after such exercise will be the same percentage of the enlarged share capital of [Blackpool FC] as that held by [Segesta]. The total subscription price payable on the exercise of this option will be the nominal value of the new shares. (This will be approximately £15,714 on the basis of the current capital structure.) To preserve the tax losses, this option may only be exercised in the event of and conditional upon the admission of [Blackpool FC’s] entire share capital to trading on a recognised stock exchange or the Alternative Investment Market.

…

4.

[Belokon Holdings] and [Segesta] will enter into a shareholders agreement relating to the operation of [Blackpool FC]. Its provision will include agreements that:

…

4.4

[Belokon Holdings] will be entitled to appoint a director of [Blackpool FC] and for so long as that person is Valeri Belokon for him to hold the title of “President of Blackpool [FC]” or “Chairman” or such other similar title as is required by [Belokon Holdings] and agreed to by [Blackpool FC] (such agreement not to be unreasonably withheld or delayed).

5.

[Blackpool FC] will enter into an agreement with (XYZ) Limited under which (XYZ) Limited will provide the services of Valeri Belokon as a consultant to assist [Blackpool FC] with its business strategy and in particular the development of its relationships with overseas clubs and players. The fee payable to (XYZ) Limited will be an amount equivalent to 50% of the net profits of [Blackpool FC] each year (subject to the adjustments referred to at clauses 4.1 and 4.2 above and after deducting any dividends to [Belokon Holdings]).

6.

[Blackpool FC] will enter into an agreement with (ABC) Limited under which (ABC) Limited will provide the services of Karl Samuel Oyston as a consultant to assist [Blackpool FC] with its business strategy and in particular its UK operations. The fee payable to (ABC) Limited will be an amount equivalent to 50% of the net profits of [Blackpool FC] each year (subject to the adjustments referred to at clauses 4.1 and 4.2 above).

7.

The agreements referred to at paragraphs 4 and 5 above will include provisions that if (XYZ) Limited waives its consultancy fee (or any part of it) in any year, then (ABC) Limited will do likewise.”

It is quite clear, and I so find, that this draft agreement was drawn up with a view to preserving the intent of the agreement set out in the letter of 14 March 2006, whilst ensuring that the benefit of the Tax Losses was also preserved. This, in my judgment, explains:

I do not suggest that Mr. Belokon was in agreement with this re-structured proposal, but I do find that it reflects the thinking of Mr. Owen Oyston. In a letter dated 3 April 2006, Mr. Owen Oyston sought to persuade Mr. Belokon of the virtues of the restructured proposal and of joining him in “our joint venture”:

“If you still want to form a new company, we will try to accommodate this but you will now know that there are some intrinsic problems which are difficult to overcome. Firstly in the history of the football industry no one has ever transferred players from one company to another in the circumstances that we are discussing. To attempt to do so would be costly and ultimately, we are advised by the Football League’s lawyers, unsuccessful. Secondly we do have a serious problem where we may not be able to exploit the very substantial tax losses that currently exist within Blackpool FC. We believe we have a very good chance of using these tax losses if we do our venture within the Football Club. Any withdrawal of these tax losses will affect us both adversely, although we are still attempting to find a route through this.

…

May I stress, if I was in your position with any significant reservations about a transaction or deal, then I simply wouldn’t do it. So I fully understand your stance and should this prove to be a stumbling block to our joint venture, it certainly will not affect our friendship or the prospect of our doing other business in the future. Both Karl and I are very comfortable and happy with you, your colleagues and your organisation and furthermore we trust you. It is unlikely that we can have such a relationship with another buyer and it is almost certain that we will not do business with anyone else if we cannot do business with you. Therefore there is no pressure upon you to make a quick decision. The only pressure upon us all is the pressure of the fans and the media.

…

If the current proposals which I faxed to you on Friday [This is the draft agreement described at paragraph 69 above] were to materialise, then on flotation you would enjoy the same number of shares and the same capital gain as myself, even though our total investments would be substantially unequal. I have agreed to this because I really believe that you and your team and Karl and I can work together and create an exciting outcome and if we were successful in reaching the Premier League, the sums would be so substantial that I would not be concerned about the extent of my past investment. I was able to confirm with Karl and advise your colleagues over the weekend that on joining the Premier League each club receives approximately £37m from television rights alone. This includes two parachute payments in the event that the club is relegated after one season. This figure of £37m does not take into account the increase in sponsorship, ticket sales and other associated revenues which would increase dramatically. It is my view in these great circumstances that Blackpool Football Club would be worth not less than £100m and probably a great deal more. I stress this is my opinion. I have never mentioned this potential before because I am sure, like me, you are aware of it and also aware of what our relatively modest investments could produce if we are successful.”

As I have noted, Mr. Owen Oyston is capable, when he wants to be, of both charm and persuasion, and this is an example.

It would appear that the Oyston Side was confident that some deal would be reached with Mr. Belokon. On the same day as this letter, Mr. Karl Oyston gave an interview to the Blackpool Gazette announcing that “a deal with millionaire banker Belokon had been agreed” and that “a substantial amount of cash” would be put into the club.

However, the negotiations were by no means complete. In a letter to Mr. Dyer, dated 5 May 2006, Ms. Lase wrote as follows:

“As a result of our negotiations on purchase of shares of Blackpool [FC] we would like to agree on the following terms.

As we have already discussed [Belokon Holdings] will purchase shares of [Blackpool FC] equal to twenty per cent of the share capital. At the same time [Belokon Holdings] and [Segesta] would conclude the Intent agreement about purchasing the additional amount of [Blackpool FC] shares. So the amount of bought shares of [Blackpool FC] and the amount of shares going to be purchased by [Belokon Holdings] would constitute the total amount of shares mutually agreed going to be the property of [Belokon Holdings].

[Belokon Holdings] would like to pay for twenty percent of [Blackpool FC] shares proportionately to the amount of these shares taking into consideration the total price of [Blackpool FC] shares mutually agreed.

At the same time [Belokon Holdings] would issue a long-term credit to [Segesta]. This credit would be issued in the amount of the rest sum of the total price of [Blackpool FC] shares determining the obligation of [Segesta] to use this credit as payment for purchasing rest of [Blackpool FC] shares according to Intent agreement.

So the price of the purchased shares of [Belokon Holdings] and the credit amount issued to [Segesta] together would constitute the total price of [Blackpool FC] shares mutually agreed.

In order to secure the credit obligations [Segesta] should issue a pledge in favour of [Belokon Holdings]. Besides that [Belokon Holdings] would like to receive from [Blackpool FC] and [Segesta] approval that there are no additional obligations of [Blackpool FC] not announced to [Belokon Holdings].

This letter took the proposal in the first draft agreement a little further:

The letter obviously received careful attention from the Oyston Side – marked-up versions of the letter were sent to Mr. Dempsey and Mr. Cherry.

There was a meeting on 5 May 2006 between Mr. Owen Oyston, Mr. Karl Oyston, Mr. Dyer, Mr. Rawlinson and Mr. Dempsey, with Mr. Cherry joining by telephone.⁴⁰

On the same day, Mr. Dyer responded (to Ms. Lase) to provide the confirmations sought by her regarding the liabilities of Blackpool FC:

“We can confirm that there are no off balance sheet liabilities of [Blackpool FC].

All the assets and liabilities are clearly disclosed on the balance sheet on the sets of financial statements that you have received. There are a number of post balance sheet events which will/have affected [Blackpool FC] which are:

1.

[Mr. Owen Oyston] has made an additional temporary loan to [Blackpool FC] of £210,000 which is to be repaid by the 31^st May 2006.

…

4.

The overdraft facility of £250,000 is in place until the end of June 2006. This is currently fully utilised but will be repaid by the 30^th June 2006. This is a working capital arrangement.

On the balance sheets you have received, you will have noted the loan between [Blackpool

FC] and [Segesta] and the loan to [Mr. Owen Oyston]. The current arrangements under which [Blackpool FC] is entitled to retain income of serviced accommodation are terminable at any time at the sole election of [Segesta]. In the interim the property related income will be used to repay the loan to [Segesta]. There will be no call upon the football, shop or Gold Bond revenues detailed on the schedule to repay the [Segesta] loan. Owen Oyston will not seek repayment of his loan (other than the temporary loan of £210,000) unless agreed by the Board.”

This, clearly, was the precursor to clause 9 of the Subscription Agreement. (Footnote: ³⁶)

The next draft agreement reflected the split between purchase of shares and an option to purchase shares suggested by Ms. Lase. The draft:

The total consideration was thus £4,500,000, but divided between a payment for shares (£900,000) and two loans (£2,600,000 and £1,000,000). One of these loans – the loan for £2,600,000 – was explicitly linked to the option to purchase further shares. A triptych of agreements was, therefore, contemplated.

Mr. Dyer and Mr. Owen Oyston faxed Ms. Lase a message on 5 May 2006, making

On 8 May 2006, Ms. Lase wrote to Mr. Owen Oyston:

“Tomorrow Valeri will arrive in Riga and I hope he will give me the handwritten document you have mentioned in your letter.

Today I have conversation with him. He is interested to start the process as soon as possible.

In such order he think that better is to separate the purchasing process in steps. Valery’s idea is that these steps wouldn’t be compulsory connected one with other. In first step he would like to buy 20% of Football club shares in way of taking part in new shares emission. After that you and Valeri would look at the results of first step and make decision about way and urgency of next steps.

Before starting to prepare any documents connected with upper mentioned Valeri’s idea I would like to know how do you feel about such schedule of deal.”

The Respondents placed a great deal of reliance on this letter, suggesting that it represented a substantive change of approach on the part of Mr. Belokon. Specifically, it was suggested by the Respondents that this letter indicated that Mr. Belokon now wanted to acquire 20% of the shares only, and then see how matters developed. In short, according to the Respondents, this letter represented an end to the plan for a “joint venture”, with Mr. Belokon now wanting simply to acquire a 20% stake and then “see how it went”. (Footnote: ³⁷)

I do not consider the Respondents’ reading of Ms. Lase’s letter to be correct, and I reject it. I do not consider that this letter was intended to change the substance of what was agreed. The proposal, instead, was to progress independently and as self-standing agreements the three elements of the deal – (i) the acquisition of the shares, (ii) the option and option-related loan, and (iii) the second loan – so as to progress matters more quickly. There is no evidence of any fundamental re-think of the deal, and I reject the suggestion that this communication from Ms. Lase constituted such a rethink. (Footnote: ³⁸) The Respondents’ reading of this letter is also, as will be seen, inconsistent with subsequent events.

At the time, the Respondents regarded the proposal as a fairly unremarkable development of the existing proposals, rather than a dramatic shift. An email from Mr. Owen Oyston’s personal assistant to Mr. Dempsey stated:

“The story continues…please see the attached email below. Could you call Owen on his mobile when you receive this email…”

Mr. Owen Oyston responded positively to this proposal on 9 May 2006, enclosing two draft press releases relating to Mr. Belokon’s purchase of shares and stating: “Needless to say in answer to your question we feel entirely relaxed about your proposals of proceeding step by step in order to achieve the fulfilment of our agreement.

Consistent with the suggestion that the various agreements be disaggregated, the next draft agreement, produced by the Belokon Side, dealt only with the purchase of 7,500 shares for a consideration of £1,800,000. There is no reference to any loans, nor to any option. This agreement was marked up by hand by the Oyston Side and resulted in various communications going back and forth between the Oyston Side and the Belokon Side.

On 22 May 2006, Mr. Rawlinson circulated to various of Mr. Owen Oyston’s advisers

On 23 May 2006, there was a meeting between the Belokon Side and the Oyston Side. Evidently, and unsurprisingly, the documentation of the various agreements was discussed. There are no detailed notes of what was discussed. On 26 May 2006, Mr. Dempsey sent to Mr. Rawlinson the latest versions of the transaction documents. On

On 5 June 2006, the Subscription Agreement and the First Vlada Loan Agreement were executed. The terms of these agreements have already been described: see Sections C(6) and C(7). Neither agreement makes any reference to an option to purchase further shares; furthermore, the total consideration payable under these agreements totals £2,800,000 (i.e. £1,800,000 under the Subscription Agreement and £1,000,000 under the First Vlada Loan Agreement).

Viewing the matter as at the date the Subscription Agreement and the First Vlada Loan Agreement were concluded (that is, 5 June 2006), what can be said is that these two agreements do not set out the whole story. These two documents do not represent

Subsequent events bear out the intention of the parties to continue negotiating a third agreement that would achieve both the objective of protecting the Tax Losses and Mr. Belokon’s desire for a parity shareholding with Segesta:

In light of this evidence, I conclude that:

It would, of course, have been open to the parties to agree to evade the tax consequences of granting an option by having a formal but secret side agreement. That, in all likelihood, would have been illegal. (Footnote: ⁴⁴) I do not consider that I should conclude that the parties elected an illegal or potentially illegal course without clear evidence. The parties should be presumed to proceed lawfully and I do not consider that I should go out of my way to find illegality. There is no substantial evidence of any intent to go beyond a gentleman’s agreement. To the contrary, there is some evidence that the parties considered this to be a gentleman’s agreement unenforceable in law. That evidence lies in:

I conclude that the gentleman’s agreement was reached between Mr. Owen Oyston and Mr. Belokon at the meeting referenced in Mr. Owen Oyston’s letter on 8 February 2007 – that is, the meeting in the Fenwick Arms.⁵¹ This meeting stands at the juncture when attempts to negotiate an option to buy shares ceased, and instead a draft of the Second Vlada Loan Agreement was put forward. At this point, as I find, Mr. Owen Oyston persuaded Mr. Belokon that:

There are a number of points on this aspect of the case that I should mention, before proceeding with the factual narrative:

The First South Stand Agreement

Later on in 2007, in an undated letter to Mr. Belokon, Mr. Owen Oyston referred to discussions that he and Mr. Karl Oyston had had with Mr. Belokon in Latvia, regarding the further development of the stadium – specifically, the South Stand. A proposed draft agreement was attached, which had the following terms:

Ms. Lase raised a series of questions regarding this proposal in November 2007, which were answered. On 27 May 2008, Mr. Owen Oyston reported on the preconstruction position regarding the South and South West Stands. Mr. Owen Oyston continued to press for an investment by Mr. Belokon, and a further draft agreement was produced in June 2008.

On 1 July 2008, an agreement was made between Ms. Belokon, Segesta, Blackpool

The Second South Stand Agreement

The First South Stand Agreement did not endure for very long. It was replaced by a further agreement (the “Second South Stand Agreement”), made between VB

The terms of the Second South Stand Agreement were broadly similar to those of the First South Stand Agreement:

Ms. Beinare’s email regarding the ownership of Blackpool FC

In an email dated 17 June 2009, Ms. Beinare emailed Mr. Rawlinson in the following terms:

“The initial intention of Valeri was to acquire in its ownership 50% of the share capital in [Blackpool FC]. At present he owns only 20% and all the other invested sums of money are not invested in share capital, but issued as loans. Such situation is because of UK legislation rules that allow to surrender the [Blackpool FC] losses to Segesta if Segesta owns not less than 75% in share capital of [Blackpool FC].

We understand the importance to preserve Segesta’s rights to use [Blackpool FC’s] losses, still we are thinking about legal ways how to change the present situation more closer to the initially planned one. We are having an idea that 30% of share capital of [Blackpool FC] could be pledged in favour of Valeri to ensure the loans. To my mind, in this situation, Segesta could still use the rights to have taxation relief due to surrender of losses. At the same time, the pledge of the shares would bring the present situation closer to the initial agreement between Valeri and Mr. Oyston.

I would like to get your opinion from legal point of view regarding possibility to pledge 305 of [Blackpool FC] share capital in favour of Valeri and at the same time to preserve Segesta’s rights to use the [Blackpool FC] losses.”

Mr. Rawlinson forwarded this communication to Mr. Owen Oyston. Mr. Rawlinson responded to Ms. Beinare as follows:

“When the initial, principal Agreement dated the 5^th June 2006 (“the Agreement”) was signed, there were exhaustive and detailed discussions about this point, over a period of many weeks.

When the Agreement was signed, it was not possible to accommodate what you are now proposing, either in writing or orally, as such an arrangement would have damaged the tax losses available and this would have caused Owen substantial losses and, indeed, would cause Mr. Belokon losses in the future from his income from the South Stand and the South West Corner.

The tax advice we received at the time of the Agreement, which Owen, Mr. Belokon and his advisers accepted, is that we could not give a written or even an oral agreement without losing the benefits of the accumulated tax losses, which would result in a very substantial loss of income for Mr. Oyston and so that is one of the reasons why the status quo was preserved on the signing of the Agreement. Indeed, as I said previously, Mr. Belokon will benefit substantially from these losses when the [South West Corner] and [South Stand] come on stream in terms of revenue.”

It is worth observing that the only reason Mr. Rawlinson put forward for not adopting the course suggested by Ms. Beinare was the Tax Losses. There was no response along the lines “parity was never agreed”. It is also worth observing that – certainly until the First and Second South Stand Agreements – Mr. Belokon would have been indifferent as to the preservation of the Tax Losses: the only beneficiary – apart from Blackpool FC itself – would have been the Oyston Group.

The player trust

At one of their meetings, Mr. Belokon floated the idea of a “player trust”, whereby he would fund (on terms favourable to Blackpool FC) the purchase of new players for the club. Mr. Owen Oyston reacted enthusiastically and a trust agreement between VB Football Assets and Blackpool FC was agreed.

The board meeting of Blackpool FC on 12 November 2009

The board of Blackpool FC met on 12 November 2009. Mr. Malnacs was reappointed as a director and “would overview accounting department”. Mr. Owen

The Zabaxe debt

In a draft letter dated 17 December 2009 – which was, however, sent in some form to Mr. Belokon – Mr. Owen Oyston informed Mr. Belokon that Blackpool FC had, in 2000, owed some £944,642.28 to Zabaxe. That debt had been paid by Segesta in the form of shares in Blackpool FC. The letter then stated that “[a]s a result of a legal technicality, that has now come to light, the share issue to Zabaxe was invalid.” Accordingly, the shares returned to Segesta and the debt owed by Blackpool FC revived. Mr. Owen Oyston proposed that a deed be entered into, whereby Zabaxe would release Blackpool FC from the debt in exchange for Segesta agreeing to pay the debt. The letter concluded that “I thought that I should set out the situation and its background fully so that you and [Mr. Malnacs] are fully aware of the situation when the matter is brought up at the Club’s Board Meeting”.

There is something of an air of unreality about all this formality. Zabaxe, Segesta and Blackpool FC were all controlled by Mr. Owen Oyston, although Blackpool FC was the only company having a significant third party minority shareholder in the shape of VB Football Assets’ shareholding. Previously, there had been no mention of Zabaxe holding shares in Blackpool FC.

The matter caused a degree of confusion in the Belokon camp (see Ms. Beinare’s email of 18 January 2010) and resulted in an email from the Oyston Side saying that “[t]his whole procedure is to the advantage of [Blackpool FC] and to the disadvantage of Segesta, as the burden is being removed from [Blackpool FC] and being taken on board by Segesta.”

In any event, on 22 March 2010, Blackpool FC passed the following special resolution:

“(a)

[Blackpool FC] enters into a novation agreement with [Zabaxe] and [Segesta] whereby

[Zabaxe] releases [Blackpool FC] from its debt of £944,652.28 in consideration of [Segesta] accepting liability for the debt in place of [Blackpool FC] and promising to repay the same to [Zabaxe].

Blackpool FC’s promotion into the Premier League

In May 2010, Blackpool FC secured promotion to the Premier League. As a result, it would have been clear to all that a large influx of money would be coming Blackpool FC’s way.

The Enterprise Investment Scheme case

On 21 May 2010, the First-tier Tribunal (Tax) handed down judgment in Segesta Limited v. The Commissioners for Her Majesty’s Revenue and Customs [2010] UKFTT 235 (TC). The decision, which was an appeal against HMRC’s refusal to authorise Segesta to issue Enterprise Investment Scheme (“EIS”) certificates to Mr. Owen Oyston in respect of a subscription by him in December 1999 for shares in Segesta, gave rise to a charge to tax, payable by Mr. Owen Oyston, of several million pounds. I shall refer to this decision as the “EIS Decision”.

Post-promotion meetings

Shortly after Blackpool FC secured promotion, on 23 May 2010, Mr. Belokon, Mr. Karl Oyston, Mr. Owen Oyston and Mr. Malnacs had a meeting at the Dorchester Hotel. According to Mr. Belokon, this was one of a number of celebrations of Blackpool FC’s promotion to the Premier League (see paragraph 34 of Belokon 1: “I celebrated [Blackpool FC’s] promotion with Owen Oyston, Karl Oyston and Normunds Malnacs on numerous occasions, including at the Dorchester on 23 May 2010 and at Claridge’s on 25 June 2010”).

These meetings were not, however, purely celebratory. Some took place well after promotion; and matters of substance were discussed. Unfortunately, precisely what was discussed at these meetings is a matter of contention, exacerbated by the fact that there are relatively few pertinent contemporary documents. It will be necessary to consider a number of these meetings. The first of these, as I have noted, was the meeting at the Dorchester Hotel.

The Dorchester meeting: 23 May 2010

A meeting took place at the Dorchester Hotel on 23 May 2010 between Mr. Owen Oyston; Mr. Karl Oyston; Mr. Belokon and Mr. Malnacs.

The minutes

Minutes of the meeting were kept, although it was unclear who by. (Footnote: ⁴⁹) What is clear is that the minutes were produced (inferentially in soft copy) to Mr. Owen Oyston, who inserted or had inserted in bold his own comments, under the heading “OJO’s views”

Mr. Belokon’s recollection

Mr. Belokon describes a meeting at the Dorchester Hotel in the following terms: (Footnote: ⁵¹)

“At the celebration on 23 May 2010 at the Dorchester Hotel I asked again about formal shareholder parity. Owen Oyston reassured me that he would discuss with his tax advisors the possibility of formally making me an equal shareholder. As [Blackpool FC] would not accumulate further losses due to Premier League money, I thought it likely that we could now arrange for formal parity. At the celebrations Owen also raised the possibility of taking a minimum of £5 million out of the Club to pay litigation costs, potential future litigation costs, and other personal “things” regarding which I was not given any further detail. He said that I should do the same. I dismissed the discussion at the time and I had no interest in the proposal. My view was that the new cash available in the Club should be used to invest in the squad and consolidate our position in the Premier League. At no point did I agree that Owen should take any money from the Club for his or his family’s personal use.”

This is broadly consistent with the minutes. In cross-examination, Mr. Belokon accepted the accuracy of point 10 of the minutes, namely that he raised the question of

Mr. Malnac’s recollection

Mr. Malnacs said the following in relation to this meeting: (Footnote: ⁵⁴)

“35.

On the day after the Club’s victory over Cardiff in the play-off final, I attended a celebratory dinner with Mr. Belokon, Karl and Owen Oyston. Owen and Karl Oyston were very excited by the prospect of the large sums of money that would flow into the Club from the Premier League. For the purposes of providing this witness statement I have reviewed what appear to be Owen Oyston’s notes of that meeting. As far as I can recall these notes reflect the topics discussed. They show Karl’s and Owen’s desire to benefit personally from the Club’s new found riches. At point 4 of these notes, Owen suggested that he and Mr. Belokon should be able to take personal loans from the Club of between £3-5 million. The note records that myself and Mr. Belokon did not agree. We were not happy with the suggestion that millions of pounds should be flowing out of the Club. Mr. Belokon and I wanted the Premier League money to be invested in the Club. It was likely that the Club would need to purchase players during the summer transfer window and we considered that any funds the Club had should be used for that purpose, not for loans to directors.

36.

I recall that at this evening Mr. Belokon was very tired and uninterested in discussing business and we were non-commital about any of the Oyston’s suggestions at that time.

Owen’s note describes various uses he had in mind for the Club’s new-found money. These included paying off a judgment from the tax authorities relating to one of his other companies, re-financing the Travelodge hotel that he owned, and avoiding the sale of a flat that he had purchased. Mr. Belokon and I did not agree to any of those courses of action.

37.

At the same meeting, we raised that this was an appropriate time for Mr. Belokon to receive a further 30% of the shares in the Club to give him parity with Segesta. Owen seemed reluctant now that the Club was so valuable but said he would look into it.”

Mr. Malnacs acknowledged that the minutes were much more detailed than his unaided recollection, but he did not dispute their accuracy. (Footnote: ⁵⁵) He did make the following observation in cross-examination:⁶⁴

“It was strange to me, you just won, everyone is ecstasy, and they start counting money and talking how to get this money out of the club, so that was strange. And second, it was time to raise this question of parity, and Oystons says we have to talk with our tax advisers. We did not suggest that there is need to agree on price or whatever. We just basically said yes, we have to – but first we have to talk to tax adviser.”

Mr. Owen Oyston’s recollection

Mr. Owen Oyston’s witness statement does not specifically mention the Dorchester meeting. Indeed, paragraphs 48 to 53 of Owen Oyston 1 – which describe Blackpool FC’s promotion to the Premier League – do not contain any specific description of any meeting between Mr. Belokon, Mr. Malnacs, Mr. Karl Oyston and Mr. Owen Oyston.

In cross-examination, Mr. Owen Oyston accepted that the minutes “are a reflection of what we discussed”. (Footnote: ⁵⁶)

Mr. Karl Oyston’s recollection

Mr. Karl Oyston’s witness statement also does not specifically mention the Dorchester meeting. Like the statement of Mr. Owen Oyston, paragraphs 13 to 17 of

Mr. Karl Oyston accepted that he had no reason to disagree with the minutes, although he made the perfectly fair point that these were minutes, and would not have recorded everything that was said. (Footnote: ⁵⁷)

Synthesis

I consider the minutes to be a reliable statement of what was said at the Dorchester meeting. I also consider that the interpolations of Mr. Owen Oyston, as recorded in those minutes, essentially reflect Mr. Owen Oyston’s thinking.

In my judgment, the position at the time of the Dorchester meeting was as follows:

It is my conclusion that, from this point on, the Oyston and the Belokon Sides were in opposition, although that was not yet evident to Mr. Belokon. Mr. Owen Oyston took Mr. Belokon’s “non committal” response as a “No”, and proceeded to take steps to circumvent it.

Getting money out of Blackpool FC

On 26 May 2010, Ms. Conlon sent the following email to Mr. Belton and Mr. Dyer:

“Can you let Owen and Ian Cherry have copies of the notes Owen gave you at the last meeting and the latest draft of the Trust document as soon as possible? Owen is wanting to meet with you, Ian and Rod on the 10^th June, probably at Sharrow Bay now, with an overnight. Is this ok for you? Ian will be contacting you today to discuss how Owen can pay the tax from the moneys coming into [Blackpool FC]. Ian thinks that [Blackpool FC] could buy the shares back and this would not have tax implications and be a simple way of sorting out the problem. Furthermore, the £944K that is now owed as a loan from Zabaxe to Segesta, could also be repaid with the money coming out of Zabaxe via Owen’s loan account. Please discuss these matters with Ian because Ian is having a tel con with Michael Sherry, our barrister, tomorrow and I am sending a copy of this note, in strict confidence, to Ken and to Rod asking them to be present at the tel con.”

Ms. Conlon followed this up with a further email later that day, to Mr. Belton and Mr. Cherry:

“Howard, I forgot to mention to you and Ian about the £4,361,000 that is currently owing to

Protoplan from [Blackpool FC]/Segesta. What would happen if this loan was repaid by [Blackpool FC] in one fell swoop and furthermore would it be possible to sell further shares to Valeri which of course would reduce my 75%?

As you will appreciate, Valeri is anxious to become a full partner in terms of shares, even though there is a contract signed which is valid for the next few years and which restricts him to 25%. Can you put this on the agenda as well please for our meeting at Sharrow Bay on the 10th/11th.

Also, Ian, can you ask Michael Sherry the ramifications of repaying this £4.36m and how would it affect my tax situation?

I am hoping Ian can put a note to Michael Sherry before the tele con setting out these various points. Which would include also, are there any grounds for appeal? I have told Carol to tell HMRC we are considering an appeal, but if they are realistic on the repayment programme of the tax, we might not appeal.”

Mr. Cherry responded on the same day:

“Owen

This loan is repayable by Segesta to Protoplan and could be repaid by Segesta without any tax implications. However Segesta does not have any funds. It previously assigned the benefit of the stadium rental to [Blackpool FC] and this has reduced the loan due from [Blackpool FC] to Segesta to aound £2,000,000. You may wish to consider rescinding the arrangement and taking the rental receipts into Segesta immediately.

The overall problem is that any income from football will go into [Blackpool FC] and it is my understanding that you agreed not to take this money out when you agreed the loan arrangement with Valeri Belokon. However, this year’s income will almost certainly utilise all the tax losses available and leave [Blackpool FC] with a considerable profit. It will be possible to declare a dividend and pass 80% of the profit to the holding company. Thereby putting Segesta into funds. Not unreasonably when you consider that Segesta will have to build the Stadium to accommodate the Football Club. I have asked Rod to let me know when he has further details about the timing of the receipts.”

These discussions, which occurred almost immediately after the Dorchester meeting, did not involve the Belokon Side, and I find that to have been deliberate. Mr. Owen Oyston cannot have been unaware of the fact that Segesta had no money, but that Blackpool FC did (or would have) because of its promotion to the Premier League.

Mr. Owen Oyston’s plan seems to have been to identify debts owed by Segesta to other companies in the Oyston Group, and to treat these obligations as obligations to be discharged by Blackpool FC, at least indirectly through payments from Blackpool FC (which had money) to Segesta (which did not). To this end, two debts were identified:

There was no evidence before me regarding precisely how these debts had been incurred by Segesta. However, given the details provided by the Respondents regarding work done at the stadium (which is replicated in Annex 2 to this Judgment), and given that VB Football Assets did not challenge the fact that money had been

But that does not mean to say they were Blackpool FC’s debts. So far as Blackpool FC was concerned, the Oyston Side was in something of a straightjacket:

Thus, even assuming the Zabaxe and Protoplan debts were debts properly incurred by Segesta:

Concern regarding this straightjacket was expressed in communications over the next few days. Mr. Cherry expressed the view that clause 6a(i) of the Subscription Agreement precluded the use of the Premier League monies in this way. I consider that he was right, for the reasons I have given in paragraphs 133 to 134 above.

Mr. Rawlinson disagreed with Mr. Cherry’s position. He was asked by Mr. Owen

This, of course, fails to address the purpose for which monies were being drawn out. No doubt monies could be paid away e.g. to acquire a football player. The question was whether the monies could be paid away to discharge the (past) Zabaxe and Protoplan debts.

On 27 May 2010, there was the following exchange. Mr. Oyston asked Mr. Rawlinson (but in an email copied to Mr. Belton and Mr. Cherry):

“Jim

You said yesterday that there were no constraints. Is that not the case? If there are constraints it won’t prevent [Mr. Owen Oyston] taking out a loan against cash in the football club will it? Also will it prevent Zabaxe being repaid? Also will it prevent £4.m+ which is owed to Protoplan being repaid?”

Mr. Oyston was thus contemplating the payment out of Blackpool FC of around £10 million – about £1m to Zabaxe; a loan of about £5m to himself; and a payment to Protoplan of about £4m.

Mr. Cherry replied:

“The problem we face is that Segesta has no funds and therefore cannot pay any monies either as loan repayment, trade debt repayment or share repurchase. Any funds are likely to arise in [Blackpool FC]. Therefore we should immediately rescind the arrangement to let [Blackpool FC] have the use of the stadium income. This can then accrue in Segesta before being used to pay Protoplan as at present.

A separate agreement needs to be negotiated with Belokon Holdings to allow the repayment of the Segesta outstanding loan. This is I understand from Rod around £2,000,000.

A further method needs to be agreed to realise funds into Segesta from [Blackpool FC] both to facilitate the stadium development and the repurchase of [Mr. Owen Oyston’s] shares.

As an alternative [Mr. Owen Oyston] could consider the sale of some of his shareholding to [Mr. Belokon] to make him an equal partner in the whole business…”

Mr. Rawlinson responded, stating that the question was “simply…whether or not

The tax meeting

On 1 June 2010, a meeting took place between Mr. Owen Oyston, Mr. Chadwick, Mr.

Mr. Cherry’s immediate response was that the agreements with VB Football Assets meant that this could not be done without the consent of Mr. Belokon. This resulted in an uncompromising directive from Mr. Owen Oyston to Mr. Rawlinson that he (Mr. Rawlinson) “send the agreements to barrister as he wants to break it”.

There was also some discussion about Mr. Belokon wanting a parity shareholding. Mr. Owen Oyston is recorded as saying:

“[Mr. Belokon] wants parity in shares although there is no agreement for this but no price agreed.”

This, of course, is rather different to what Mr. Owen Oyston told Mr. Belokon at their meeting at the Dorchester. (Footnote: ⁶²) To the Oyston Side, Mr. Owen Oyston was stating that Mr. Belokon had no right to parity. Legally speaking, that was, of course, entirely right.

Preparing to put the matter to the board of Blackpool FC

There had been no discussion of taking monies out of Blackpool FC with the Belokon

This email is remarkable in the absence of consideration that it gives both to the interests of Blackpool FC and to the minority shareholders, including (but not limited to) VB Football Assets. Given that there had been no material communication with the Belokon Side since the Dorchester meeting, it is evident that Mr. Owen Oyston read “non commital” as “no”.

Mr. Karl Oyston’s response was:

“I agree on the whole and think we may overkill if we share too much information so would advise less is best. Don’t forget I currently have signatory control over [Blackpool FC] finances so can transfer money to Segesta for building work or whatever you require. (Footnote: ⁶³) Let’s for once not over egg the pudding?”

The Blackpool FC board meeting of 25 June 2010/Dinner at Claridge’s

Introduction

On 22 June 2010, Mr. Malnacs confirmed that the next Blackpool FC board meeting would be on 25 June 2010 at Mr. Belokon’s bank office at 77 Brook Street. His email

In the event, no material was circulated in advance of the meeting; and the meeting did not take place in the formal environment of JSC Baltic International Bank, but informally over dinner, at Claridge’s Hotel. (Footnote: ⁶⁴)

The evidence in Belokon 1

In his witness statement, Mr. Belokon says: (Footnote: ⁶⁵)

“During further celebrations on 25 June 2010, at Claridge’s Hotel, we discussed a number of matters in very general terms, including developing the Stadium to meet Premier League requirements, [Blackpool FC’s] future in the Premier League, and the potential profits that would flow from this. Our discussions were, in accordance with the informal setting, not of a nature as to lead to concluded decisions or agreements. Again, Owen talked about ways for both of his companies and mine to receive cash from the Club, out of the new Premier League money. While I was happy for the shareholders to receive an appropriate dividend, I again made clear that the majority of the money should be used to consolidate the Club’s success.”

The evidence in Malnacs 1

In his witness statement, Mr. Malnacs says: (Footnote: ⁶⁶)

“38.

At a further dinner to celebrate the Club’s promotion I met with Mr. Belokon, Karl Oyston and Owen Oyston at Claridge’s hotel in London. At that event, Karl Oyston proposed that the East Stand in the Stadium needed to be re-developed to increase capacity and maximise the revenue that [Blackpool FC] would earn from ticket sales, as a result of the higher attendances that were expected during the Premier League season. The Oystons also explained that it was necessary to build a media centre before the Premier League season began in August, in order to comply with Premier League requirements. The East Stand was owned by Segesta and outside of the scope of the [Second South Stand Agreement]. However, as a major shareholder in the Club, we expected VBFA to be presented with financial information by Segesta on plans, like these, to develop the Stadium and we expected to agree the details before any work began. This was required by Clause 8 of the Shareholders Agreement. Mr. Belokon and I listened to the proposals at Claridge’s, which were of a general nature.

39.

The meeting at Claridge’s was an informal occasion, not a [Blackpool FC] Board meeting, and no resolutions were passed or minutes taken. While we had planned to hold a Board meeting that day at Mr. Belokon’s London offices, ultimately this did not take place. I took the conversation with the Oystons at face value: that they were informing us of their intention to develop the East Stand. While there had been some discussion about how to use the additional funds available to [Blackpool FC] this did not include business plans or budgets for using this money to finance the East Stand redevelopment. A number of proposals were mentioned but none were agreed.”

The evidence in OJO 1 and KO 1

The meeting is addressed in neither Mr. Owen Oyston’s, nor in Mr. Karl Oyston’s, witness statement.

The “aide memoire” attached to Mr. Owen Oyston’s email of 22 September 2010

In terms of a document evidencing what was said at this meeting, there is what purports to be a note, by Mr. Owen Oyston, of what was (or some of what was) discussed. (Footnote: ⁶⁷) That note was attached to a lengthy email sent by Mr. Owen Oyston to Mr. Malnacs on 22 September 2010 (which I consider further at the appropriate point in the chronology) in which Mr. Owen Oyston wrote:

“Subject to Contract

Dear Normunds

I enclose the list of liabilities and debtors of [Blackpool FC] and [Segesta] which [Mr. Dyer] sent to you on the 24^th August 2010 showing £6.6m owing to [Mr. Belokon] and companies and £5,983,682 owing to me and my companies. I assume your request for this information from [Mr. Dyer] was stimulated by my discussions with [Mr. Belokon] concerning the repayment of various monies.

You may recall that [Mr. Belokon], yourself, [Mr. Karl Oyston] and I met for an informal meeting at Claridges Hotel on the 25^th June 2010 and after a private discussion with [Mr. Belokon] it was agreed verbally to repay monies to [Mr. Belokon] and his companies and monies to me and my companies. It was [Mr. Karl Oyston] who proposed this initially and I embraced it because I thought it demonstrated fairness and reward for the parties who had supported the Club in difficult times. [Mr. Karl Oyston] also felt that that it would make the Football Club so much stronger when it had discharged its liabilities and borrowings.

…

I am sure that [Mr. Belokon] will recall that I asked him if he wanted the repayment of the various loans that he and his companies had made to [Blackpool FC] and Segesta and he replied in the affirmative.

Following our private meeting, I then wrote a brief note to [Mr. Belokon] which eventually I decided not to send but instead to read to him at our next meeting, so it became an aide memoire. (Footnote: ⁶⁸) I enclose this document now, which I used when reciting my proposals to [Mr. Belokon], which I thought he had approved. Indeed, I have discussed these repayments as well as other private matters relating to the possible floatation of the Club etc, on other occasions with [Mr. Belokon]. Again, I was reluctant to put anything in writing to [Mr.

Belokon] concerning such a delicate matter, but with [Mr. Belokon’s] agreement I have now instructed an agent who is seeking further information before proceeding with the task at hand. (ie the flotation or sale of [Blackpool FC]

The reason why I did not send it and did not discuss it at the board meetings is, to be blunt, that I was concerned that a certain gentleman might leak the information inadvertently to third parties and I felt it was mutually beneficial to both [Mr. Belokon] and myself in not airing our discussions and agreements publicly.

…

I did advise [Mr. Belokon] also that I was seeking a loan from [Blackpool FC] to deal with certain personal matters, but until now I had decided not to ask for a loan, but to fall in line with my agreement with [Mr. Belokon] to repay the outstanding moneys.

In short, I am simply implementing what we agreed to do at various meetings, being the only sensible course of action to take, especially now we have decided to either float or sell [Blackpool FC]. It makes absolute sense to settle all these matters as it won’t make one jot of difference to the price of the shares or the purchase price that we might receive. Indeed it may well encourage a buyer to pay more because we have a clean balance sheet.

After so many years of having such a good relationship between the board members, I am very sorry that there has been such a misunderstanding.”

Mr. Owen Oyston’s attached “aide memoire” concerning the meeting on 25 June 2010 read as follows:

“Draft 1 : 30^th June 2010

My Dear [Mr. Belokon],

May I confirm the discussions and agreements that we reached in principle at our informal meeting at Claridge’s Hotel in London on the 25^th June 2010?

This is not a comprehensive list but covers some of the main points which will come into operation after receipt of sufficient monies coming into [Blackpool FC] from the Premier League.

1.

It was agreed to repay to [Mr. Belokon] or to his Companies certain monies as follows:

(A)

The sum of £1,000,000 loaned to [Segesta] under the short form of Agreement dated the 5th June 2006

(B)

The sum of £850,000 being part of the monies the subject of the loan to [Segesta] under the Agreement dated the 14^th 2007.

(C)

On releasing the South Stand and South West Corner Stands back to Segesta, Segesta will repay £4,750,000 subject to tax advice from Baltic International Bank (“BIB”) and [Mr. Cherry] and/or [Mr. Belton].

2.

It was agreed that Segesta will complete the South Stand and the South West Corner stand and erect the new temporary de luxe stand with roof etc to accommodate over 5,000 people and the media centre.

3.

[Blackpool FC] will loan £13,000,000 to Segesta to carry out the above and its other obligations agreed at the meeting.”

The “aide memoire” thus purports to show that the parties had reached a number of agreements “in principle” regarding the use of the Premier League funds. However, there is no evidence as to when the “aide memoire” was composed. It is entirely possible that it was written significantly after the event, with the aim of persuading the Belokon Side, in conjunction with the 22 September 2010 email, that significant disbursements out of Blackpool FC had been agreed. Certainly, the “aide memoire” stands in significant contradistinction with the witness statements of Mr. Belokon and Mr. Malnacs, which recall a discussion with regard to the spending of Blackpool FC’s money, but without the degree of firmness of conclusion expressed in the “aide memoire”. With that in mind, I turn to the cross-examination of the various witnesses.

Evidence given in cross-examination

Mr. Belokon’s evidence (Footnote: ⁶⁹) was that there was a discussion about the monies coming into Blackpool FC, including the paying of dividends, but he recollected a disagreement between himself and the Oyston Side with regard to investment in the club: (Footnote: ⁷⁰)

“…unfortunately, that’s where we disagreed with Oystons family. They thought they didn’t want to invest any more and they thought that the amounts that already had been invested were enough…”

Mr. Belokon recollected seeing or having summarised to him – after the event, and probably by Mr. Malnacs – the aide memoire.⁸¹ His view was that “we had a discussion but we didn’t come to a final conclusion”. (Footnote: ⁷¹) To be fair, the aide memoire does not itself purport to set out final conclusions or decisions, but I consider that Mr. Belokon’s recollection of the Claridge’s meeting is that the aide memoire over-stated the “agreements that we reached in principle” (to quote from the opening words of the aide memoire). The furthest Mr. Belokon was prepared to go was that the matters in the aide memoire were discussed. (Footnote: ⁷²)

Mr. Malnacs’s evidence was along similar lines. He accepted that promotion to the Premier League entailed work being done to the stadium and that the Belokon Side was not, in principle, opposed to Blackpool FC spending this money. However, this was an informal dinner, and he expected matters to be discussed and agreed in greater detail and with more formality:

Mr. Malnacs was absolutely clear that there were no agreements in principle at this meeting, at least in his presence. (Footnote: ⁷³) Indeed, Mr. Malnacs’ view was that some of the matters listed in the aide memoire were not even discussed at this dinner.

Mr. Owen Oyston and Mr. Karl Oyston, on the other hand, sought to attach a higher degree of formality or significance to what was said at the meeting. Thus, the reference, in the aide memoire, to a loan of £13 million to Segesta was used as a basis for contending that the Belokon Side had been put on notice of the intention to pay £4.2 million to Protoplan: (Footnote: ⁷⁴)

Synthesis

To the extent that the Respondents seek to contend that any agreement, even an

In my judgment, there was a deliberate decision at the time on the part of the Oyston Side to keep the discussion informal, because Mr. Owen Oyston knew that a specific discussion would result in disagreement, given his plans for the Premier League monies coming to Blackpool FC.

Preparations for making payments out

In an email to Mr. Belton dated 26 July 2010, with the subject “Trust Fund”, Mr. Owen Oyston asked Mr. Belton:

“Can you confirm that everything is in order with this transaction and we can now proceed to draw out £6.9m from [Blackpool FC] to Segesta and other companies as on the 6^th August 2010?”

This email makes no mention of the intended purpose of the £6.9m drawing. It is addressed to no-one on the Belokon Side.

Mr. Belton replied saying:

“Yes. Funds can be withdrawn from [Blackpool FC] to Segesta and then to the various companies but there should be letters between the companies asking for funds to be paid to them to show an audit trail”.

On 2 August 2010, Mr. Cherry emailed Mr. Owen Oyston:

“Now that the time is upon us when the first receipt of monies from the Premier League will be forthcoming it is worth reiterating the strategy that we put in place in June.

As you remember we transferred your Protoplan shares into a trust. That triggered a capital gain at the favourable rates that existed of 18% before the budget. That gain will be due for payment on the 31^st January 2012.

The second part of the strategy was for Segesta to repay Protoplan the outstanding monies due of around £4.6million. [Mr. Dyer] has the exact amounts.

In addition Segesta was to repay around £900,000 owed to Zabaxe and £250,000 owed to [Mr. Owen Oyston] personally. Both of these amounts would be transferred to [Mr. Owen Oyston] in settlement of his loan accounts.

You would need to give [Mr. Dyer] instructions to make the transfers when the Premiership monies are received.”

In order to produce the “audit trail” mentioned by Mr. Belton (see paragraph 162 above), demands for repayment (dated 3 August 2010) were produced. The first of those letters is expressed to be from Mr. Owen Oyston personally to Blackpool FC and it reads as follows:

“As you are aware, I have loaned to [Blackpool FC] various sums over the past few years. These loans were made because of my love for the Football Club without any thought of repayment.

Now that we have achieved our dream of entering the Premier League I am seeking repayment of the loan moneys totalling £275,942.28 and I therefore give notice of calling in the loan and would be pleased to receive the funds within the next thirty days.”

The second letter is expressed to be from Ms. Conlon on behalf of Protoplan to Segesta and it seeks repayment by Segesta of the debt of £4,200,581.63 owed by it in connection with the construction by Protoplan of the North, North West and West Stands of the stadium in 2003.

The third letter is expressed to be from Ms. Conlon on behalf of Zabaxe to Segesta and it seeks repayment by Segesta of the debt of £944,652 owed by it in connection with a loan.

All three of these letters are described on their face as “draft”, and it is not definitely known whether “final” versions were produced. None were before the Court, but there is some later reference (see paragraph 176 below) to these letters from which it can be inferred that they were, indeed, sent.

Mr. Owen Oyston produced a file note dated 5 August 2010 in connection with these various debts entitled “Segesta/[Blackpool FC] repayment of moneys to [Mr. Owen Oyston]/Zabaxe/Protoplan” in which (inter alia) he noted:

“…

6.

£4,200,581.63 owed to Protoplan for construction.

7.

£944,652 owed to Zabaxe.

8.

RD charged with raising these cheques after clearing with HB/JR.

…

10.

Have agreed to pay [Mr. Belokon] the money he put into the south stand over the year 2010/11 rather than from this first tranche.

11.

[Mr. Owen Oyston]/[Mr. Cherry]/[Mr. Belton]/[Mr. Dyer]/ to meet over dinner in private room next Thursday. Meet 2pm at Clifton Arms. [Mr. Dyer] will prepare an agenda for the meeting. [Mr. Rawlinson]/[Mr. Stephenson] to attend.

12.

All funds [Mr. Karl Oyston] needs must come out of Segesta apart from the bonuses. Segesta cannot pay these direct as in the future if there are problems creditors could come back against [Blackpool FC].”

To the extent that this file note represents that the Belokon Side was in agreement with these steps (and the reference in point 10 to an agreement with Mr. Belokon tries to give this impression), the file note is misleading. None of these matters had been agreed with the Belokon Side. None of the communications referenced in this Section were seen, at the time, by the Belokon Side.

The meeting on 12 August 2010

Item 11 of Mr. Owen Oyston’s file note (paragraph 168 above) referred to a meeting to be held between Mr. Owen Oyston, Mr. Cherry, Mr. Belton and Mr. Dyer “over dinner in private room next Thursday”. This meeting took place on 12 August 2010. There is a handwritten note of (some of) the discussion at that meeting. The author is unknown. Reproduced, but in typed not handwritten form, the material parts of the note read:

“Flip 850 (1), 1000 (1), 4750 (2), repayments to VB

Repayments to PP 4.2 (1), OJO/ZAB (2) – schedule staggered”

These lines appear to relate to the “strategy” of making repayments to VB Football Assets on the one hand and to Mr. Owen Oyston and his associated companies on the other.

Obviously, the content of such a rough, handwritten, note must be treated with caution, simply for fear of misreading something that is not pellucid. With that caution in mind, my reading of the first quoted line is that the references to repayments of “850”, “1000” and “4750” to “VB” are references to the repayments of the debts of £850,000, £1,000,000 and £4,750,000 owed by Segesta to VB Football Assets pursuant to the Second Vlada Loan Agreement, the First Vlada Loan Agreement and the Second South Stand Agreement respectively. Similarly, I consider that the second quoted line is likely to relate to the repayment of debts owed to Protoplan (for which the amount of £4,200,000 is specified), Mr. Owen Oyston and Zabaxe, which are, of course, the repayments contemplated in the email correspondence and letters of demand set out above. The numbers in brackets (“1” and “2”), which are circled in the handwritten note, may be an indication of the order in which the repayments were going to be made.

Mr. Karl Oyston’s position as chairman

Although, ultimately, he remained in place as chairman of Blackpool FC, on 18 August 2010 Mr. Karl Oyston emailed Mr. Malnacs, Mr. Belokon and Mr. Owen Oyston to explain that by reason of his personal circumstances (bankruptcy), he had to resign as chairman. Given that Mr. Karl Oyston remained in place, the point is of marginal importance, save to note that Mr. Cherry was concerned that, as a result, the Oyston Side might lose control of the Blackpool FC board. In an email to Mr. Owen Oyston dated 19 August 2010, Mr. Cherry noted:

“…the remaining directors of [Blackpool FC] are yourself, [Mrs. Oyston], Gavin [Steele],

Normunds [Malnacs]. Without a chairman it means the Oyston family no longer control this Board. You may wish to consider appointing a nominee as soon as possible.”

Mr. Malnacs’ query regarding the liabilities of Blackpool FC

In an email dated 24 August 2010, Mr. Malnacs asked Mr. Dyer for a statement of Blackpool FC’s liabilities “to Segesta and related companies”.

Mr. Dyer responded promptly on the same say, providing figures not merely for Blackpool FC, but also for Segesta (which Mr. Malnacs had not requested):

“[BLACKPOOL FC]

£

[Mr. Owen Oyston] Loan account 275,942

SEGESTA

[Mr. Owen Oyston] Loan account 562,506

[Protoplan] ([Mr. Owen Oyston]) 4,200,582

[Zabaxe] ([Mr. Owen Oyston]) 944,652

[Ms. Belokon] Loan account 1,850,000

[VB Football Assets] Loan account 4,750,000”

This list would not have troubled Mr. Malnacs. The only liability of Blackpool FC that Mr. Dyer had identified was that owed to Mr. Owen Oyston – and this had been identified prior to the Subscription Agreement. The other figures were all liabilities of Segesta. It will, however, be noted that two of these items – the Protoplan debt of £4,200,582 and the Zabaxe debt of £944,652 – were to be discharged by Blackpool FC, according to the discussions that had taken place on the Oyston Side. That point was not made by Mr. Dyer to Mr. Malnacs.

The payment of the £4.2 million Protoplan debt and the initial response of the Belokon Side

In an email dated 25 August 2010, Mr. Dyer informed Mr. Cherry, Mr. Belton and

The sum of £4,200,604.63 was paid out of Blackpool FC’s account with NatWest (account number 91854954) on 17 September 2010.

It is to be inferred that Mr. Malnacs queried this payment – although his initial query was either made orally to the Oyston Side or else has not survived in the documents before me.

In any event, Mr. Owen Oyston sought to justify this payment. On 22 September 2010, Mr Owen Oyston emailed Mr. Malnacs in the terms set out in paragraph 151 above, referring to the Claridge’s meeting, seeking to explain the payment, and enclosing the 30 June 2010 file note set out in paragraph 152 above. Mr. Owen Oyston’s email also referred to the list of liabilities of Blackpool FC and Segesta referenced in paragraph 174 above.

On 23 September 2010, Mr. Malnacs wrote a memo to Mr. Belokon, Mr. Owen Oyston and Mr. Karl Oyston in the following terms:

“Following our earlier discussions, this is a formal notification that on September 17, 2010 Blackpool [FC] has made a payment in amount of GBP 4,200,581.63 to Segesta…This transaction seems to be out of scope of the concluded agreements between the two major shareholders. Therefore, I would like to draw your attention for a need for a board meeting to resolve the issue and sign necessary agreement, if deemed necessary.”

Mr. Karl Oyston responded in an email the next day, 23 September 2010:

“Hi all, please find below a schedule of the monies I wish to repay to the shareholders along with the timing of payments. This process will involve the dismantling of at least two of the shareholder agreements along with no doubt many other issues that Normunds, Rod and myself will work on so that solutions and ongoing policies can be agreed. To that end I have asked Rod to prepare a schedule of income that should rest with both [Blackpool FC] and Segesta along with a suggestion on how future joint costs should be apportioned. I have asked Rod to conduct an exercise to evaluate the best way to deal with the areas that [Blackpool FC] currently uses within the stadium that are also none match day income generators and I will formulate a strategy with Normunds regarding these.

1/ 4,200,000 Segesta paid

2/ 1,850,000 Vlada Jan 10^th 2011

3/ 4,750,000 VBFA Jan 30^th 2011

4/ 562,506 OJO Jan 30^th 2011

5/ 944,652 Zabaxe Aug 15^th 2011

6/ 275,942 OJO Aug 15^th 2011

The concept is relatively simple and the issues are also relatively easy to resolve. I would like to propose that following our internal deliberations we have a meeting to discuss the issues we identify along with any others we fail to.”

It will be noted that items 2 and 3 involve payments back to the Belokon Side, and that the payments to the Oyston Side and to the Belokon Side are roughly equivalent.

Mr. Malnacs acknowledged receipt the same day, but said nothing of substance in response.

It is plain that, notwithstanding Mr. Owen Oyston’s attempts to justify the payment, the payment had not been agreed by the Belokon Side. Paragraph 39 of Belokon 1 states:

“Normunds [Malnacs] informed the other board members by way of a written memo that this payment had never been approved and was out of the scope of the [Subscription] Agreement. I then asked Karl and Owen to meet me in Latvia to discuss why this payment had been made…”

I accept this evidence. (Footnote: ⁷⁶) However, given the terms of Mr. Karl Oyston’s 24 September 2010 communication, it is clear that far more than just the payment of the £4.2 million would be in issue: the Oyston Side was proposing a whole series of payments out of Blackpool FC funds.

The meeting in Riga, Latvia, on 7 October 2010

The meeting in Latvia is not discussed in either OJO 1 or in KO 1. Mr. Belokon describes it in paragraph 39 of Belokon 1:⁸⁸

“…I made it very clear at our meeting in Riga on 7 October 2010 that the Oystons’ actions were unacceptable and not in the spirit of our equal partnership. The Oystons persisted in maintaining that the payment was in line with the agreements concluded between the parties.

Notwithstanding my objections at this meeting, the money was not paid back into the Club.”

Paragraph 55 of Malnacs 1 states:

“Mr. Belokon arranged a meeting with Karl Oyston and Owen Oyston in Riga on 7 October 2010 to discuss the payment, which I also attended. It was clear to me before that meeting and at all times that Mr. Belokon had never approved the contents of Owen’s aide-memoire. It was during this visit that Karl and Owen Oyston explained that the purpose of the £4.2 million payment was to settle an undisclosed debt owed by Segesta to Protoplan Limited, a company owned by Owen Oyston. Mr. Belokon was not happy with the Oystons’ actions and made this clear at this meeting. The Oystons seemed to think that somehow the payment of £4.2 million was within the spirit of the agreements between [VB Football Assets] and [Blackpool FC] and Segesta.”

In cross-examination, Mr. Malnacs stressed that the removal of the £4.2 million was a serious matter. (Footnote: ⁷⁷)

I accept that Mr. Belokon’s purpose in calling the meeting was to make clear that he had not sanctioned and that he disapproved of the payment away of the £4.2 million. However, to the extent that he and Mr. Malnacs suggested that this was the only matter discussed in Riga (and I am not at all sure that they were suggesting this), I reject that. As I have already noted in paragraph 181 above, Mr. Karl Oyston was proposing a whole series of payments out – to both the Oyston and the Belokon Sides – and I find it inconceivable that these payments were not discussed.

This conclusion is supported by a whole series of emails, both between the parties and within each side, debating how the relationship between the Oyston Side and the Belokon Side might be restructured. These documents show a wide-ranging debate between the two sides seeking to resolve the question of, essentially, how the Premier League monies should be used and (relatedly) how their relationship should be rearranged. I consider that these communications reflect the sort of discussion that took place in Riga.

It is unnecessary to set out the detail of the proposals going between the Oyston and the Belokon Sides. That is because no way forward was agreed, either at the meeting in Riga, nor in its immediate aftermath. The last, Riga-related communication was on 13 October 2010, without common ground having been found. However, the difference in viewpoint between the Oyston Side and the Belokon Side was now clear to the Belokon Side. As I have found, I consider that the Oyston Side had been conscious of the difference in view since the Dorchester meeting in May 2010.

Debate regarding the nature of the Protoplan payment

Communications between the Oyston Side and the Belokon Side

Between 13 October 2010 and 11 November 2010 there are no written

Mr. Malnacs’ response was as follows:

“Thank you for useful explanation. However, what is certain difference between 1,5M advance which was used for the construction of the East Stand and was approved the board and 4,2M payment whose status is still to be resolved.”

From this, it is clear that the Protoplan payment to Segesta remained to be approved.

Debate internal to the Oyston Side

At around the same time, there were a series of emails internal to the Oyston Side, apparently seeking to justify the Protoplan payment and to consider further payments out of Blackpool FC:

In addition Mr. Rawlinson sent to Mr. Owen Oyston a detailed memorandum regarding the effect of the various agreements with the Belokon Side. Mr. Rawlinson was asked and sought to answer two questions:

In an email dated 19 November 2010, Mr. Owen Oyston wrote to Mr. Karl Oyston in the following terms:

“Further to our conversation I have asked Sarah to arrange a convenient time when Ian, you and I can sit down and formalise the way forward over the next 5 years. I know we have had various discussions on the subject but we now need Ian to produce a report which will spell out the best way forward (e.g. Segesta to be paid by way of management charges from Blackpool [FC] etc). You might also spell out that Segesta has every right to borrow money from its subsidiary (Blackpool [FC]) but in the interest of fairness and diplomacy (nothing to do with business) we will consider the various routes for the future which we can then discuss the next Board meeting.

What is nonsense, as we said, is that the minority shareholder should seek to control the company and the significant resources that have come into the company.”

A (further) proposal from the Belokon Side

On 23 November 2010, Mr. Malnacs sent to Mr. Karl Oyston “the first draft proposal on how we could proceed with the various issues. I have listened to your dad, Valeri and I try to take into account all parties interests. This is definitely not the final product, just first draft of my proposal. Please, have a look and then let’s discuss. Like I wrote earlier, it would be good to meet you on Sunday or early next week, so we could move forward and prepare final paper by Saturday.” Obviously, this was a continuation of the discussions the parties had had in Riga and immediately thereafter.

The discussion paper which accompanies this email stated:

“Investment restructuring/payment back to shareholders

You and your dad has repeatedly stated that you want shareholders investments paid back. The major disagreement is about what constitutes “investment”. Since Valeri became shareholder, the shareholders have made the following investments: Valeri: equity 1,8m, Vlada’s gift (payment for remaining 30% of shares) 850k, Vlada’s loan to Segesta 1,85m, SS construction 4,75m, Trust fund 1,5m; your dad (Segesta) has invested 1m in SS construction. Valeri and your dad agreed that they start at a blank sheet, with [Blackpool FC] without liabilities except loans to [Mr. Owen Oyston] (400,136) and Segesta (3,793,719) which should be repaid only from serviced income accommodation revenue.

The three payments you listed (4,2 to Protoplan, 562K to [Mr. Owen Oyston], 944 to Zabaxe) as “investments”, all incurred before Valeri’s involvement and are not mentioned in the signed agreements, hence they should not be repaid by the [Blackpool FC] football revenues. I understand your dad’s desire to cover all pre-Valeri football losses, but then it should be explicitly agreed with Valeri. Thus, at the moment, from Valeri’s point of view 4,2m [Blackpool FC] transfer to Segesta is a loan whose status and terms should be clarified.

From discussions with Valeri, I understand that he is ready for certain concessions. Prior to his involvement, [Blackpool FC] had accumulated transferable loss of 10,8m (in accordance to Rod) which could be considered your dad’s benefit. At 28% corporate income tax this would have brought 3,024m in tax savings to Segesta. Then it is no secret that [Blackpool FC]’s financial success is down to Valeri’s beliefs and readiness to risk money and your ability to fight players wages and agents. I think your dad and Valeri agreed to pay you a bonus of 1m. the two components together would constitute slightly over 4m. maybe with some bargaining Valeri would agree to declassify 4,2m as expense for [Blackpool FC]? This expense would also help us reduce your profit for the year, with no corporate tax payable assuming we stay up and pay bonuses.

But then your plans to repay the other two amounts should be scratched.

Valeri has stated that he does not wish to dismantle the existing agreement, but is happy to negotiate and conclude new agreements. This implies that Segesta would start repaying the loan to Vlada (2 x 92,500 for 2009 and 2010), and to VBFA for South Stand profit for season 2009/10 (estimated at 63,361). Segesta would also be entitled 63,361.

Shareholding

Since this season will definitely use up accumulated loss of the previous years, there is no reason why we should not formally increase Valeri’s shareholding to parity with your dad. We should set a timetable for this.

…

East Stand

East Stand is being financed with [Blackpool FC] money, with total cost estimate about 1,9 million. [Mr. Owen Oyston] insists that the stand should be the property of Segesta who owns the land and planning permission. In this case, from accounting point of view, this 1,9 million is considered [Blackpool FC] loan to Segesta. Since [Blackpool FC] is the only beneficiary, it would make sense that [Blackpool FC] “writes off” the debt. It could be done by Segesta invoicing [Blackpool FC] for management services in the amount of construction costs spread over say 5 years (roughly 400,000 a year). New agreement for this should be drafted. All income from East stand would be property of [Blackpool FC] (initial agreement Article 8(ii) and annex 6).

…

Liquidity management and investments

Good financial performance will leave us with spare cash.

We agreed to invest some company cash into investments. I think we already agreed that we will diversify our investments and avoid risky assets. Decisions would be made on each case separately.

It seems to me that the two shareholders are happy to take out some money in form of profit. We should find some ways to take profit out without tax and balance sheet implications – to reduce tax burden and do not spoil balance-sheet (create liabilities)”

Mr. Karl Oyston’s response to this draft was quite negative:

“Normunds, before we go any further I want to take some strategic financial planning advice initially from Ian Cherry and thereafter from whoever answers the points that we need further advice upon. It seems nonsensical that we attempt to resolve any issue without being in possession of this information. I would suggest that we requested an adjournment of the board meeting pending this advice and I have asked for the meeting to be arranged by Rosemary.

I

have read your first draft which perhaps underlines how far the board is split on where we go from now and how we deal with the massive influx of cash and unprecedented profits. My feeling is that it should be dealt with as the shareholders wish and neither should stymie or seek to control the other and I believe this is possible. Let me know if you agree to the advice prior to our meeting? I’m happy in the meantime to continue working on the draft.”

Mr. Malnacs responded:

“Of course, advice from Ian Cherry is always useful and would be needed sooner or later. However, I am not sure what you mean by “strategic financial planning” advice? Ian cannot help us to decide on the future of trust fund, what we do with East stand, etc. I see more need for his advice on how to do transactions from tax point of view once we have agreed on key points.

I

am not sure about delaying this process. As I said earlier, our financial year ends end of December, and we need to agree on things and make necessary transactions by then. Anyway, you do want to meet Ian, let’s do it together early next week.

Let’s try to talk today – I’m eager to know what you seem to be no happy about with my proposal.”

For only a few days, Mr. Malnacs appears to have kept a diary for the purpose of keeping Mr. Belokon informed. His entry for 29 November 2010 states:

“Discussion with Karl [Oyston] on investment restructuring. He reiterated his vision to repay investments to shareholders. He considered there is no difference between [Mr. Owen Oyton] and [Mr. Belokon] investments and he wants everything to be paid back to investors. If [Mr. Belokon] gets back his 4,75 [South Stand] investment, he still would be entitled to [South Stand] profit. However, he suggested to draft new agreement outlining all revenue streams. Karl was quite hesitant to settle 50/50 shareholding parity now, but believed it could be done after the end of fiscal year. He emphasised that Segesta owns 80% and technically could do whatever they want. We agreed to pay back players trust fund asap – will do the calculations make payment on Wednesday. Karl did not like the idea of paying dividends, has then money should be paid also to the small shareholders (around 3% shares), he would rather prefer to return money to shareholders through management fees. This indeed will not be bad, as would decrease taxable income. He thought that all issues should be resolved on meeting with our auditor likely to scheduled December 17.”

The Belokon Side inquires about corporate governance

In an email dated 2 December 2010, Ms. Beinare asked Mr. Rawlinson for his help in understanding “the provisions regarding quorum required for meeting of Directors, as well as majority of votes necessary to make the decisions. Can you help me with this?”

This provoked a concerned internal communication from Mr. Owen Oyston’s personal assistant to Mr. Rawlinson:

“Please do not respond to this until you have met with Owen with Ian Cherry on standby on the phone. We will say to Anda [Beinare] that any director who has support of over 75% of the shares can call for a special resolution and put forward this resolution is to the board. They need to understand that they have no control. Can you please tell [Mr. Owen Oyston]:

1.

If he can call an EGM with Segesta’s 76% share of [Blackpool FC]?

2.

What the quorum is in the Articles of Association?

3.

Highlight any restrictive clauses or clauses relevant to control in the Articles.

4.

Get a copy of the Memo & arts asap and take [Mr. Owen Oyston] through them when he comes in.”

The meeting on 17 December 2010

On 17 December 2010, a meeting on “shareholders investments” took place. The note of the meeting was prepared by Mr. Malnacs (see his email of the same date). The note recorded as present Mr. Owen Oyston, Mr. Karl Oyston, Mr. Cherry, Mr. Rawlinson and Mr. Malnacs. The note stated:

“1.

4,2m payment. The Oystons and Ian Cherry believe that the payment was valid and in spirit with the original agreement. Moreover, from the legal point of view, the original agreement does not preclude [Blackpool FC] to make the payment to settle [Blackpool FC] mother company traded debt which incurred to build the West and North Stands. This has allowed [Blackpool FC] to achieve Premier League status.

[Mr. Owen Oyston] reiterated that in his private conversation with Valeri [Belokon], Valeri wanted to get all his investment back – this is the reason why the 4,2m payment was made.

[Mr. Cherry] confirmed that the 4,2m payment can be classified as advanced management fee and written off as a cost about 1m a year. This would reduce [Blackpool FC] taxable income.

2.

East Stand

The Oystons propose the following:

-

[East Stand] is Segesta property,

-

Stand was financed by [Blackpool FC] and now Segesta owes [Blackpool FC] 1,5m

-

If Valeri agrees with other arrangments, then Segesta will get x% of East Stand revenues until debit is repaid and then all revenue is BFC revenue. If there are disagreements, Segesta might keep rights to get all East Stand revenue and just repay the 1,9m debt.

-

There is a need to draw an agreement on [East Stand] loan.

3.

South Stand

The Oystons propose the following:

-

Valeri gets back his 4,75m investment

-

South Stand agreement is scrapped

-

Currently the [South Stand] fit-out is financed by [Blackpool FC] which will create [Blackpool FC] loan to Segesta

-

[South Stand] revenue is split into football and non-football revenue; football revenue is allocated to [Blackpool FC], non-football revenue to Segesta – first to repay [Blackpool FC] loan for fit-out, then profit

4.

Valeri’s investments repayment:

-

[Mr. Cherry] confirmed, in case Valeri chooses to get back his investments, both 4,75m to [VB Football Assets] and 1,85m to Vlada, there is no problem these monies to be repaid from Segesta.

-

Originally, Karl proposed the following payback schedule:

1/ 4,200,000 Segesta paid

2/ 1,850,000 Vlada Jan 10^th 2011

3/ 4,750,000 VB [Football Assets] Jan 30^th 2011

4/ 562,506 [Mr. Owen Oyston] Jan 30^th 2011

5/ 944,652 Zabaxe Aug 15^th 2011

6/ 275,942 [Mr. Owen Oyston] Aug 15^th 2011

Which is missing Vlada’s 850K payment (gift) to BFC. The Oystons are happy to repay this money as well.

…

6.

50/50 shares parity

[Mr. Owen Oyston] said he has never received any offer from Valeri about buying shares.

Nobody wanted to comment on this and thought that [Mr. Owen Oyston] should speak with Valeri directly on this subject.”

Mr. Malnacs circulated his note, and received the following drafting suggestion from Mr. Cherry, who suggested that the “final situation proposed” be summarised:

“In summary the proposal is for both major shareholders to receive payment of the whole of the monies loaned to [Blackpool FC] (please set out the schedule as per Karl). Thereafter [Belokon Holdings] will be left with a 20% stake in [Blackpool FC] which has cost some £1.8 million. That shareholding would be worth considerably more than this cost in todays value. For example Blackburn Rovers FC recently sold for £50 million. The group as a whole would have no external debt. After the accumulated losses of £13.85 million have been wiped out [Blackpool FC] is free to declare a dividend which will accrue 20% to [Belokon Holdings]. At the current rate of profitability the club should make circa £20 million in 2012. Even if half of this amount is retained it will still leave [Belokon Holdings] with a potential dividend of £2 million in 2012. In addition [Belokon Holdings] benefits from the use of the stadium and all football related revenues even though it has not paid anything towards the construction of the stadium. By any reckoning this is a fair division of revenues. Furthermore Segesta will be responsible for the repayment of any loans advanced from [Blackpool FC] (subject to agreement on the East Stand). [Belokon Holdings] will continue to accrue the right to future dividends.”

The Oystons were, however, plainly concerned that Mr. Belokon was not agreeing or going to agree to the proposals being made. Indeed, Mr. Malnac’s note really does no more than set out the parties’ positions: there is no record of any agreement.

Subsequently, a draft note (it is not clear who produced it, but it must have been someone on the Oyston Side) raised concerns about Segesta “spending from the proceeds of the moneys coming into [Blackpool FC] from the Premier League” without consent from Mr. Belokon. This draft resulted in an email from Mr. Owen Oyston to Mr. Karl Oyston, urging that the issues be ironed out and Mr. Malnacs’ concerns satisfied.

The proposal to discharge the mortgage over the Travelodge

The “Travelodge” is a hotel located nearby the stadium in which Blackpool FC plays, and is owned by Segesta.

On 4 February 2011, Mr. Owen Oyston emailed Mr. Karl Oyston in the following terms:

“You will recall that we were left with a Travelodge mortgage of £4.7m and the mortgage lasts for only 5 years which means we have probably just about 3 years to run. I think we should pay this mortgage off or reduce it dramatically in accordance with our wish to extricate ourselves from Banks.

Can you put your thinking hat on about how we best deal with it and I am sending a copy of this to Ian and Howard to seek their advice on how best to deal with it as the money would have to come from Segesta/[Blackpool FC].”

Mr. Malnacs (who did not see this communication) was asked to consider the costs of early repayment of the mortgage, although he was not told why he was being asked to undertake this task. His considered view was that there was a cost to early repayment, which would be substantial (about £132,000). The mortgage also had a hedging element, with a third party, to ameliorate the effect of interest rate changes.

Without the involvement of the Belokon Side, the Oyston Side began to consider how a transaction to repay the lending in respect of the Travelodge might be structured. In an email to Mr. Karl Oyston, copied to Mr. Owen Oyston, Mr. Rawlinson set out his understanding of what was intended:

“Following our conversation yesterday, can I please set out what I understand to be what you want in this matter, to be put into a form of Agreement between [Blackpool FC], Segesta and [Mr. Owen Oyston].

[Blackpool FC] will loan Segesta c. £4,894,035 interest free (or whatever is needed to discharge the charge in favour of Lloyds TSB), to enable Segesta to discharge the outstanding Mortgage/Loan Lloyds has over the Travelodge.

Owen will enter into a Legal Charge of the Travelodge in favour of Segesta as security for the loan and the payment to Lloyds by Segesta.

Owen will then, at his absolute discretion, pay to [Blackpool FC], 22 equal annual payment of £222,446.14 (to equal the full amount of the loan of £4,894,035.18), such payment to be payable quarterly at £55,601.04 per quarter.

[Mr. Karl Oyston] suggested that the difference between the annual rent receivable from Travelodge) currently £451,448 p.a., which rent is subject to upward only review in accordance with the Index of Retail Prices) and the amount to be paid by Segesta to [Blackpool FC] under this arrangement (£222,446.14), with that difference currently being £228,991.86, should, at the absolute discretion of Segesta, be split equally between Segesta and [Blackpool FC].

I’m unclear as to whether or not that difference, in this example £228,991.86, i.e. c £114,000 each to [Blackpool FC] and Segesta, if the payment being made to [Blackpool FC] is in further accelerated payment/reduction of the Loan or is a gratis payment.

Can I please have comments and observations asap, so that I can prepare the required agreement?

I understand [Mr. Owen Oyston] wants to complete this by the end of the month and if I hear from you soon, I can deal with that time limit fairly easily.”

Mr. Rawlinson spoke further with Mr. Owen Oyston and, on 18 February 2011, circulated to Mr. Karl Oyston and then to the Oyston Side more generally the following further thoughts:

“[Mr. Stephenson] has advised [Mr. Owen Oyston] today that the hedging fund arrangement is with a third party and therefore Lloyds cannot negotiate a deal. In these turbulent times, Mr. Oyston is anxious. However, if the capital to Lloyds TSB is paid off, then, of course, there would be no further interest to be paid to Lloyds. We would then only pay the interest to the third party hedging fund which, this quarter, would be £25/27,000. If interest rates climb, these payments will reduce and if interest rates fall, the fund may even have to pay us interest. However, in such an uncertain world, [Mr. Owen Oyston] would like to pay off the mortgage completely and the hedging fund penalty of c. £131,000, which takes the repayment to c. £4,894,035.18 and he thinks we are well rid of them.

The other incentive to pay off the Lloyds mortgage/hedging fund arrangement, is that the £4.894 million would have a safe home. The information you gave your Dad over the phone, which apparently, you say, appeared in the Evening Gazette, should indicate caution, if you know what he means.

Therefore [Mr. Owen Oyston] is suggesting the following, which will not be documented or legally binding

1.

[Blackpool FC] loans Segesta c. £4,894,035.18, which includes the c. £131,000 to get rid of the hedging fund.

2.

Segesta then redeems the mortgage with Lloyds, including the hedging fund arrangement.

3.

[Mr. Owen Oyston] will not enter into a Legal Charge of the Travelodge site, in favour of Segesta…, or anyone else. The loans will be informal and effected in the next 2 or 3 days, without any written documentation. This will avoid the months and months of toing and fro-ing between the various parties.

4.

[Mr. Owen Oyston] will continue to receive the income from the Travelodge, as now and currently at £451,448 per annum, for a minimum of 25 years and a maximum of 50 years, as Travelodge have an option for a further 25 year term at the expiration of the first 25 year term.

5.

[Mr. Owen Oyston] proposes to pay Segesta the sum of £250,000 per annum which leaves £201,000 clear from the Travelodge income, before tax.

6.

[Mr. Owen Oyston] proposes that Segesta pays to [Blackpool FC], the sum of £200,000 p.a., At its discretion, which Segesta can then continue to pay, if it so wishes, for up to 50 years.

7.

Segesta retains the difference of £50,000 p.a. therefore Segesta and [Mr. Owen Oyston] will receive a total of £251,000 annually.

8.

Over the informal and potential 50 year repayment programme, which payments are at the discretion of Segesta, [Blackpool FC] will receive £10,000,000 plus a discretionary percentage increase, based upon the 5 yearly rent reviews.

9.

The £200,000 p.a. payment to [Blackpool FC] represents 4.09% on the loan of £4,894,038.18 which will increase as [Blackpool FC] receives its share of the rent reviews.

10.

Karl is to invest simultaneously in BIB, up to a maximum of £2 million (depending on funds) as a sign of our good faith and on the best terms possible, in accordance with Normund’s email.

11.

The whole of these arrangements are to be effected immediately and on an informal basis.”

In fact, contrary to the original intention that these arrangements be undocumented, steps were taken to draw up some draft agreements. In an email dated 24 September 2011, Mr. Rawlinson listed the agreements to be drawn up:

“Just so that I’m clear on what you require.

As I see it, you want 3 documents/agreements as follows:

1.

An Agreement between [Blackpool FC] and Segesta under which [Blackpool FC] loans to Segesta the sum of £4,900,000, such loan to be repaid by Segesta to [Blackpool FC] by up to 50 years at the rate of 250,000 in respect of capital and interest. If the repayments are in respect of capital and interest, what is to be the interest rate applied and how with the annual payment of £250,000 to be apportioned between capital and interest?

2.

An Agreement between Segesta and [Mr. Owen Oyston] for an interest-free loan to be made from Segesta to [Mr. Owen Oyston] in the sum of £4,900,000 (or in the exact sum of the redemption monies to be paid to Lloyds??) For a period of up to 3 months.

3.

In the event that [Mr. Owen Oyston] makes the loan of £2,000,000 to Segesta set out below, an Agreement between Segesta and [Mr. Owen Oyston] that Segesta will repay the £2,000,000 within 4 months.

4.

An Agreement between [Mr. Owen Oyston] and Segesta for [Mr. Owen Oyston] to sell the Travelodge to Segesta for £6,500,000 (plus VAT of £1,300,000), totalling £7,800,000.

Unless and until I am instructed otherwise, all these agreements are presently to remain unsigned and undated.

I understand that to cover the difference between the initial loan of £4,900,000 and the sale price (including VAT), of £7,800,000 (the difference being £2,900,000), [Mr. Owen Oyston] it is prepared to loan Segesta up to £2,000,000 (I believe interest free) from his personal account, if [Blackpool FC] can loan to Segesta the balance of the difference, £900,000. When Segesta recovers the VAT, which is to be repaid to [Mr. Owen Oyston] within 4 months of it being loaned, Segesta repays the VAT to [Mr. Owen Oyston].

What about the difference between the loan from [Mr. Owen Oyston] of the £2 million and the VAT repayment of £1,300,000 i.e. £700,000? Where does this come from? Presumably from the monies which Segesta holds in its accounts?”

Payment of £4.9 million in respect of the Travelodge

On 24 February 2011, £4,900,023 was withdrawn from Blackpool FC’s NatWest account (account number 91854954) and paid into Segesta’s HSBC account (account number 22005204).

In a memo dated 2 March 2011, Mr. Rawlinson sent to Mr. Owen Oyston (copied to Mr. Belton and Mr. Cherry) three first drafts of the various agreements he had drafted.

In an email (sent, in fact from Mr. Rawlinson’s email account, but authored by Mr. Owen Oyston) dated 10 March 2011, Mr. Owen Oyston explained the state of play to Mr. Belton:

“Howard,

As you know, [Blackpool FC] has loaned to Segesta £4.9m.

Segesta in turn has paid this £4.9m as part of the purchase price for the [Travelodge] from [Mr. Owen Oyston] as at price of £6.5m (subject to valuation) plus VAT. Stamp duty payable by Segesta must also be taken into account.

The difference between £6.5m and £4.8m is £2.6m.

As you also know, it is my intention to permit Segesta to owe me personally this £2.6m which will be reflected in my Segesta loan account. This money can then be paid in the future when Segesta is in funds.

I understand that the full VAT of £1.3m is payable when the transfer has been completed in order for it to be later refunded.

Can the completion date take place just before the VAT repayment date, so that the £1.3m will only be out for a short time ([Mr. Stephenson] says this can be done)?

…

[Blackpool FC] will loan the £1.3m to Segesta and receive it back on the VAT repayment date. [Blackpool FC] will also loan the Stamp Duty of £260,000.

I’m now leaving [Mr. Rawlinson] to finalise these negotiations and complete the various agreements on the basis as outlined already.”

Discovery of the payment

In an email sent by Mr. Malnacs to the Blackpool FC board, Mr Malnacs identified various outstanding issues requiring resolution. The first of these was the payment of £4.2 million by Blackpool FC to Segresta which Mr. Malnacs said “did not have board approval and was not agreed upon”.

The fourth issue that Mr. Malnacs identified related to the Travelodge payment:

“On February 24, 2011 [Blackpool FC] made a transfer of 4.9 million to Segesta. I understand the monies used to refinance Segesta loan from a commercial bank and now Segesta owes money to [Blackpool FC]. I still have not been informed about the terms of the [Blackpool FC] loan to Segesta. It is disappointing and not in line with good corporate governance that the Club has provided a long-term credit without board’s approval and prior information.”

Mr. Karl Oyston responded in an email dated 18 March 2011. He made the point that a meeting between Mr. Owen Oyston and Mr. Belokon to agree matters ought to precede any board meeting of Blackpool FC, which was probably good common sense, given the situation. As regards Mr. Malnacs’ fourth point – the £4.9 million loan – he said:

“As far as the funds utilised to provide [Blackpool FC] with a far higher return both immediate and longer term from removing the external funder from the Travelodge and Segesta taking ownership, I will provide a copy and details of the agreement as soon as I have finalised the finer points. Rest assured the return is substantially higher and more secure than any other use of money we have as yet identified.”

Further progression of the Travelodge transaction

In an email dated 15 April 2011, Mr. Rawlinson circulated to “everyone” (that is, everyone on the Oyston Side and no-one on the Belokon Side (Footnote: ⁷⁸)) final drafts in relation to the transactions between Blackpool FC, Segesta and Mr. Owen Oyston. The email not only attached the draft agreements, but also a proposed notice and agenda for a meeting of the board of Blackpool FC.

No date was given for that meeting, but a meeting (albeit not one of the Blackpool FC board) appears to have been held on 12 April 2011. The minutes of that meeting were circulated by Mr. Owen Oyston to Mr. Cherry and Mr. Belton on 15 April 2011.

In an email exchange between Mr. Rawlinson and Mr. Dyer on 18 April 2011, it was noted that Blackpool FC had already advanced £4,900,000, leaving a balance of £3,160,000 to be paid over. This money would not be available until the week ending 10 June 2011.

In anticipation of a meeting of the Blackpool FC board, a further draft of the proposed agreement between Blackpool FC and Segesta was circulated. On this occasion, one of the recipients was Mr. Malnacs, who on reading the agreement discovered that Blackpool FC would be lending not £4.9 million, but £8.06m:

“I thought you needed 4,9m to refinance bank loan? Now you want 8.06m?”

The meeting of the Blackpool FC board was fixed for 14 May 2011. There is, however, no evidence that such a board meeting ever took place. (Footnote: ⁷⁹) It may be that the meeting at Grange St Paul’s took the place of a board meeting. If so, it was a very select gathering: present only were Mr. Owen Oyston and Mr. Belokon.

The meeting at Grange St Paul’s in May 2011

In terms of finding the facts, this is another controversial meeting. Neither Mr. Malnacs nor Mr. Karl Oyston can assist, for neither was present. It is best to begin with what Mr. Belokon and Mr. Owen Oyston said in their respective witness statements.

Mr. Belokon’s recollection (as per his witness statement) was as follows: (Footnote: ⁸⁰)

“I met with Owen Oyston on 8 May 2011 at Grange St Paul’s to discuss the payments of £4.9 and £4.2 million from the Club to Segesta. I did not receive an adequate explanation as to why the Club’s funds had been transferred to Segesta. At this meeting I also raised with Owen when I would receive the remaining 30% of the shares in the Club that we had agreed I would receive. Owen refused to confirm when the remaining shares would be transferred to me. It was clear at this meeting that I would have to exit my investments in the Club.”

Mr. Belokon was able to date the meeting to the weekend of 7 or 8 May 2011, because he recollected it took place after a very significant football match between

Mr. Belokon’s recollection was that he simply had a meeting with Mr. Owen Oyston, and that no subsequent dinner was involved, whereas Mr. Owen Oyston asserted that after the meeting at Grange St Paul’s, they went on to dinner at Claridge’s. The significance of this dinner will become apparent, but Mr. Belokon’s evidence was: (Footnote: ⁸³)

“I don’t have a recollection of us meeting and then going to Claridge’s.”

His evidence was that he did not have dinner with Mr. Oyston. (Footnote: ⁸⁴)

Mr. Oyston’s witness statement says as follows: (Footnote: ⁸⁵)

“56.

In December 2010 although [Mr. Malnacs] has suggested that the date could have been in May 2011, I was having dinner in Claridge’s Hotel with [Mr. Belokon and another dinner guest in the main restaurant. At the time we had been promoted to the Premier League. [Mr. Belokon] appeared agitated and resentful. I could sense there was something wrong. Suddenly, he expressed the view that he wanted me to make up his shares to 50% in [Blackpool FC]. I said “how much are you prepared to pay?”. I reminded him if he had 50% of the shares he would have control, he just stared at me.

He later said “One way or another I’ll get that 50%”. He then turned to my guest: “Don’t get too attached to Owen, he’ll be dead in 12 months!” My guest was visibly shaken by this remark. And then he said: “And Karl will be dead within two years!” [Mr. Belokon] had more to drink and became more argumentative and aggressive, saying “I want half the shares”. At first I wondered whether this was some kind of macabre joke. But it was not said with any humour at all and did not appear to be a joke. He repeated the statement more than once, stressing that he felt he deserved 50% because of what he had done for the club. As the night progressed he drank more and became visibly disturbed and I tried to ameliorate the situation., I recall thinking that the problems of Kyrgyzstan with his bank were troubling so I did not react to his aggression.

57.

This traumatic event was central to the breakdown of the relationship. I simply had refused to be bullied into giving shares away for nothing to satisfy [Mr. Belokon’s] share demands. No one travelled to Latvia again for meetings and even when we had planned meetings in the UK, security was always a priority. When [Mr. Belokon] came to Quernmore Hall to meet with me there was security in place. I did tell [Mr. Malnacs] about it, and that we were concerned. We discussed it and he said “You’ve got to find a solution to the problem”. At no time did [Mr. Belokon] make any claim that night or later that there was any private or secret arrangement between us until years later when he made his legal claims on 14^th September 2015.”

As I have noted, no-one suggests Mr. Malnacs attended this meeting; nor does anyone suggest Mr. Karl Oyston attended, although Mr. Karl Oyston did say (paragraph 34 of Karl Oyston 1 and in cross-examination (Footnote: ⁸⁶)) that he was told about the conversation shortly afterwards. I am not inclined to attach very much weight to this corroboration. The evidence of the “guest” would have been helpful, and Mr. Owen Oyston could, no doubt, have produced evidence from her. He declined to do so, and neither VB Football Assets nor the Court was inclined to press him on this. The upshot is that Mr. Owen Oyston has deprived himself of potentially valuable evidence, which might have borne out his story. It would, no doubt, be permissible to draw inferences from Mr. Owen Oyston’s failure to call the “guest” or to produce evidence from her: it might be suggested that the fact that Mr. Owen Oyston did not call the “guest” is of itself suggestive that the story is untrue. However, I decline to decide this point relying upon inferences drawn from evidence not called. I propose to evaluate what happened in light of the evidence that was before me.

The opening words of paragraph 56 of OJO 1 indicate a degree of uncertainty about the date of the meeting. In his evidence in-chief, Mr. Owen Oyston accepted that his

He therefore accepted that the second sentence of this paragraph (“At the time we had been promoted to the Premier League”) had to be incorrect. (Footnote: ⁸⁷)

Mr. Owen Oyston’s witness statement also lacks the critical detail of the initial meeting at Grange St Paul’s, leading on to the dinner. Although in cross-examination Mr. Owen Oyston added further detail, the fact that this detail emerged in the course of cross-examination, rather than in his evidence in-chief, only underlined the fragility of Mr. Owen Oyston’s recollection. (Footnote: ⁸⁸)

I am driven to conclude that the dinner did not take place. I consider that Mr. Belokon’s recollection of a simple meeting at Grange St Paul’s is more reliable than Mr. Oyston’s somewhat baroque version. What is more, the story of the threats I find inherently unbelievable:

Having determined the major factual bone of contention between Mr. Belokon and Mr. Owen Oyston on the point of the threats, there is not actually much between their two versions, apart from that. Mr. Belokon had two concerns: the payments away of £4.2 million and £4.9 million and the question of parity. He was meeting Mr. Owen Oyston to see if there was a way forward. There was not, as both Mr. Belokon and Mr. Oyston agree. When the meeting ended, the divisions between the two camps were greater than ever.

Mr. Malnac’s description of the aftermath of this meeting – and in particular, its effect on Mr. Belokon – is compelling and I accept it:¹⁰⁴

Mr. Owen Oyston’s reaction after the Grange St Paul’s meeting

In an email dated 16 May 2011, Mr. Owen Oyston made the following request of Ms. Conlon:

“Re Valeri Belokon File in particular the negotiations and paperwork that led to the 2006 contract

Rosemary could you get this file(s) at and I want [Mr. Rawlinson] to go through the file(s) and dig out any information which shows that I never agreed to give my shares to [Mr. Belokon] in relation to parity.

[Mr. Cherry] has already found some documentation which shows that [Mr. Belokon’s] people were seeking an option at the same price to be paid for the 20% but at the end of the day because of the tax implications we couldn’t agree to it.

My last memory on subject is that I did agree to selling the shares that would give him parity with me but no price was ever discussed or finalised other than the initial paperwork from [Mr. Belokon’s] people as mentioned above.

Please can you dig out the file(s) and send with my post this evening.”

The next day, on 17 May 2011, an email was sent to Mr. Chadwick on behalf of Mr. Owen Oyston:

“Please can you get to [Blackpool FC] tomorrow at 9am to speak to [Mr. Dyer] about the [Belokon] agreement.

There appears to be a misunderstanding between [Mr. Belokon] and [Mr. Owen Oyston] over what was agreed at the time he bought the 20% of the [Blackpool FC] shares. At a recent meeting in London he told [Mr. Owen Oyston] that he believed that when he bought the 20% stake in [Blackpool FC] there was a clear understanding that he will also be buying share parity with me (i.e. with the same number of shares that [Mr. Owen Oyston] has).

Owen would therefore like you to go through all the files to find any correspondence, emails, documentation, agreements which will further offer clarification to this misunderstanding. But if you start with [Mr. Dyer] as the football club he will give you anything he has on the matter which may be of assistance.”

Mr. Cherry was also asked for his views, and reviewed his old files. In a letter dated 18 May 2011, he summarised his understanding of the agreement that had been reached between the parties.

All this is entirely consistent with the battle-lines having been drawn between the Oyston Side and the Belokon Side: Mr. Owen Oyston was making sure of his position, and was preparing for battle.

The meeting at the Savoy in June 2011

Another meeting took place between Mr. Owen Oyston, Mr. Karl Oyston, Mr. Belokon and Mr. Malnacs. The meeting is not specifically discussed in OJO 1 or KO 1. The witness statements of Mr. Belokon and Mr. Malnacs say as follows.

Paragraph 45 of Belokon 1 states: (Footnote: ⁹¹)

“I waited until the end of the Premier League season to inform Karl and Owen of my decision to exit my investments. This took place at a meeting at the Savoy in June 2011, at which Normunds Malnacs was also present. At this meeting I told Owen and Karl that I intended to exit my investments in [Blackpool FC] and asked them to prepare a proposal for this exit…”

Mr. Malnacs’ statement is confused by reason of the uncertainty in the Respondents’ case as to the timing of the meeting when threats were said to have been made by Mr. Belokon. Malnacs 1 states:

“70.

Despite a notice of Board meeting and agenda being circulated, a board meeting did not in fact take place and I never agreed to the terms of the Travelodge loan being entered into by the Club. A meeting did, however, take place at the Savoy hotel in London in around June 2011, at which Mr. Belokon, Owen Oyston, Karl Oyston and I were present. I have read the comments at paragraph 20(a) of the Defence, which refers to a further meeting at Claridge’s on 1 December 2010. I am not aware of such a meeting taking place.

71.

I confirm that Mr. Belokon did not threaten any of the Oyston family at that meeting. It was, however, at this meeting that Mr. Belokon made a firm statement to the Oystons that he was thinking about exiting his investment in the club…It was at this meeting that Owen Oyston showed me a letter from Ian Cherry in which he stated that Mr. Belokon was entitled to 50% of the shares in the Club.”

Mr. Malnacs’ statement refers to a letter, authored by Mr. Cherry and shown to him, on this occasion, by Mr. Owen Oyston after Mr. Karl Oyston and Mr. Belokon had left, which apparently confirmed Mr. Belokon’s entitlement to a parity shareholding. In an email to Mr. Karl Oyston dated 20 June 2011, Mr. Malnacs made reference to this letter:

“Once you left us in Savoy, we, of course, kept drinking and discussing our issues. Then your dad showed me a letter from Ian Cherry. I was pretty drunk by then, but I think that according to Ian’s records the intentions were that [Mr. Belokon] initially pays 1,8m for 20% and provides 2,7m loan which is turned into purchase price for the remaining 30% once parity is to be established. In addition, Valeri would have to pay some nominal few quid.”

In cross-examination, Mr. Malnacs maintained this recollection, and I accept that he genuinely believed it. (Footnote: ⁹²) It was not possible for Mr. Malnacs to identify the document he was shown, but it does seem to me overwhelmingly unlikely that Mr. Owen Oyston would show to anyone on the Belokon Side a document that undermined so fundamentally his position. What I suspect Mr. Owen Oyston showed Mr. Malnacs was either the draft Subscription Agreement, which did contain an option to buy further shares¹⁰⁷ or the letter from Mr. Cherry to Mr. Oyston summarising the history of the negotiations which made reference to this draft. (Footnote: ⁹³) No doubt Mr. Owen Oyston was seeking to persuade Mr. Malnacs of the correctness of his (Mr. Owen Oyston’s) position, and Mr. Malnacs misunderstood. In any event, I reject the suggestion that there exists some formal statement on paper of the gentleman’s agreement.

Mr. Belokon seeks to exit Blackpool FC

By this stage, Mr. Belokon clearly just wanted to extract himself from Blackpool FC on some reasonable basis. Both Mr. Belokon and Mr. Malnacs drafted letters of resignation from the Blackpool FC board in May, but they did not send them. Mr. Belokon also drafted a letter setting out the basis on which he could be bought out – the draft is dated 7 June 2011 – but this, too, was not sent.

Mr. Owen Oyston, too, was applying his mind to how relations between the Oyston Side and the Belokon Side might be improved. There are – again in draft and not sent – various letters trying to put matters on a better footing.

Mr. Karl Oyston took a far harder line, and it was he who drafted the email that was in fact sent to Mr. Belokon. This email, dated 13 June 2011, referred to “our recent Board meeting” and simply listed the various agreements that had been reached between the Oyston and Belokon Sides. It concluded:

“As you may be aware I would like to discuss some small-scale restructuring to allow the income from the Football Club to go directly into the Football Club and a split of non-football revenue but this is entirely a matter for the Board. The Football Club has also funded much of the fit out for the South Stand and will of course be funding construction and fit out of the South East corner along with construction of the East Stand. These matters need to be discussed and the position confirmed.

I would also like the Board’s views on investing money between £3 and £5 million in London which should hopefully have a far higher return than current Bank rates. We currently have approximately £6 million on the NatWest money market and £2 million with BIB, the first parachute is payable half in August circa £8 million and the rest over the season. I would welcome anyone’s views on investments that will yield security and an acceptable return.”

This letter was followed by the following email sent on 20 June 2011:

“Hello all, following on from our meeting in London I have as requested been looking at the agreements I previously sent to you all with a view to unravelling them.

When the agreements are taken in isolation it is a relatively simple process.

The two initial loans totalling 2.7m will simply have to be repaid albeit early.

The loan for the South and South-West stands similarly can be repaid in total 4.75m.

The trust fund that was created to buy players has now had the capital repaid but there remains a potential further payment dependent upon the sale of any or all of three players. My view is that this must run until the players depart by whatever means as this may well only take a further couple of years.

The most difficult aspect is of course the shareholding in [Blackpool FC] that was initially purchased for 1.8m. I would suggest that [Mr. Belokon] is free to sell the shares if he so wishes and that the club will provide a fallback price of 1.8m should [Mr. Belokon] not be able to dispose of the shares elsewhere.

Ideally all of the above repayments would be over a period of time so that the club can attempts to return to the Premier League and not be starved of capital.

I haven’t discussed this with any of you or any of the clubs legal tax advisers as I’m keen we keep matters between ourselves at this stage.

I am of course hopeful that all of the above will not become a reality as I believe we have done such great things as a group that our collaboration should continue.”

In essence, the proposal was that the Belokon Side receive back what they had paid into the club, without taking into account the Premier League monies that Blackpool FC was receiving.

Mr. Malnacs’ response was sent on the same day:

“I have not managed to speak to [Mr. Belokon] yet about his expectations about price of his investments. I hope it was not him involved in fighting scenes at Ascot race! :)

Is not that I expect or hope anything to change, but you might be interested in the following. Once you left us in Savoy, we, of course, kept drinking and discussing issues. Then your dad showed me a letter from Ian Cherry. I was pretty drunk by then, but I think that according to Ian’s records the intentions were that [Mr. Belokon] initially pays 1,8m for 20% and provides 2,7m loan which is turned into a purchase price for the remaining 30% once parity is to be established. In addition, [Mr. Belokon] would have to pay some nominal few quid. (Footnote: ⁹⁴)

As I wrote above, I don’t know [Mr. Belokon’s] thoughts, but I can give you my thoughts on your valuations.

2,7m – fairly easy – just early repayment, I wonder if [Mr. Belokon] would want some interest for it.

4.75m – investment in [South Stand]. He invested (and risked) money to make return. You (your dad) had provided quite specific figures on expected return over 999 years. So, I would expect that [Mr. Belokon] would expect some return on that amount – not just return of the nominal.

Trust fund – no idea if [Mr. Belokon] is happy to still keep the interest.

Shares: If he bought bottom of league one club shares for 1,8, I imagine he will expect to sell them at substantially higher price, especially taking into account of this and the subsequent years profit to which he is entitled to. If I were you, I would buy the shares yourself – you might not be able to deal as swiftly with the future partners as you did with me and [Mr. Belokon].”

Mr. Belokon sought to get an improved offer. On 30 June 2011, he wrote:

“I wanted to thank you once more for our common journey in the English football – you must agree with me that we had many memorable moments to remember all our lives! Unfortunately, I have decided to exit our partnership for the reasons we both are well aware of stop as I stated, I want to exit the club in the most favourable way for you and the Blackpool Football Club. Therefore, in our London meeting I offered you to prepare a proposal for the purchase of all my investments into [Blackpool FC].

As you remember, it was you who convinced me to invest in Blackpool FC in various ways. I set quite an ambitious target, which, I hope you agree, was reached with my direct and substantial contribution. Now I have received a proposal from Karl (see the attached) to buy back all my investments. I would like to ask your official confirmation in writing within seven days that this is indeed your as a shareholder proposal. In case of not receiving any message, I will take it as confirmation.

As I said earlier, I would like to focus on good things in our partnership and remain in good relations.”

Mr. Owen Oyston responded on 12 July 2011. Although the tone of the letter is much more conciliatory than that of Mr. Karl Oyston’s email (“I have read your letter with great sadness and I asked [Mr. Malnacs] if you would convey my sincere wish that you rethink your intention to pursue the course of action outlined in your letter. We have extraordinary relationship and I think it is in our mutual interest to continue it”), the offer was substantially the same as that made by Mr. Karl Oyston.

At this stage, therefore, Mr. Belokon was holding, contrary to his expectations, a minority interest in Blackpool FC where (because of the controlling majority interest) his wishes were being overridden. Moreover:

The “tax meeting” on 27 July 2011

On 27 July 2011, a “tax meeting” was held with Mr. Owen Oyston, Mr. Cherry, Mr. Rawlinson, Mr. Belton and Ms. Conlon all present. The minutes or notes of that meeting discuss various aspects of the Oyston businesses. At paragraph 3.4 there is recorded a discussion as to whether the minority shareholders in Blackpool FC should be bought out. Paragraph 3.5 then notes:

“[Mr. Cherry] says [Mr. Belokon] would be foolish not to take his loans back and then sit on the shares as the shares of only cost him £1.8m and these are worth appreciably more in due course if not now. [Mr. Cherry] thought the Club was worth £50m as we still have the parachute payments now out of the Premiership…”

A later, mis-numbered, paragraph 3.2 records Mr. Owen Oyston noting that the profits of Blackpool FC would be £10 million in this current year, and that even taking into account Blackpool FC’s previous losses (i.e. the Tax Losses) some tax would have to be paid by the Club. The minutes go on to note:

“Best to pay the tax at Corp Tax rate currently 30% and leave the money in. Once [Mr. Belokon] gone could distribute the profit as dividend to Segesta and no tax consequences as it is a dividend within the group. Then leave the money there until we need to use it. This is after getting rid of [Mr. Belokon’s] and the minority shareholders interests. Have plenty of capital allowances and claim all expenses we are entitled to. The dividends are paid out of post-tax monies.”

Conclusion of the Travelodge loan agreement by Blackpool FC and further payments in respect of the Travelodge and payment of the Zabaxe debt

On 8 August 2011, the agreement whereby Blackpool FC agreed to lend money to Segesta was concluded. It was signed by Mr. Dyer on behalf of Blackpool FC and Mr. Owen Oyston on behalf of Segesta.

The loan agreement provided as follows:

“1.

[Blackpool FC] has agreed to lend to Segesta the sum of £8,125,000 (Eight Million one hundred and twenty five Thousand Pounds) (“the Loan”) for the purposes of acquiring the freehold and property situate thereon and known as the Travelodge Hotel Bloomfield Road Blackpool more particularly registered with Title Absolute at HM Land Registry under Title Number LA 97016 (“the Property”).

2.

The Loan is apportioned as to £6,500,000 for the purchase price of the Property, £1,300,000 for the VAT payable to HMRC on the purchase price of the Property and £325,000 for the stamp duty payable to HMRC on the transfer of the Property.

3.

The Loan is to be repaid as is hereinafter set out.

NOW IT IS HEREBY AGREED between the Parties as follows:

IN CONSIDERATION of the Loan made by [Blackpool FC] to Segesta, Segesta hereby agrees (but at its absolute discretion):

1.

To repay to [Blackpool FC] within 14 days of receiving the refund from HMRC of the VAT paid on the purchase of the Property in the sum of £1,300,000 and

2.

To repay to [Blackpool FC] within 28 days after the date of the transfer of the Property the further sum of £1,600,000 (“the Further Sum”) in reduction of the Loan

3.

To pay the balance of the Loan (being the Loan, less the VAT and less the Further Sum) to [Blackpool FC] together with the interest at the rate of 4.58% p.a. by up to either 50 annual payments of £250,000 p.a., (“the Annual Payment”) or up to a maximum of £12,760,000, whichever comes first, in respect of capital and interest, such payments to be paid quarterly, each in the sum of £82,500, with the first payment to be made on the ____ day of _____ 2011.

4.

That in the event that the rent payable under a Lease of the Property (“the Lease”) in favour of Travelodge Hotels Limited for a term of 25 years (with an option for a further term of 25 years) computed from the 21^st April 2008 at an initial years rent of £451,448 (“the Rent”) subject to upwards only reviews of the Rent every five years from 21^st April 2008 and otherwise reviewed in accordance with and upon the terms as set out in the Lease (the benefit of which Lease is to vest in Segesta), increases or decreases (“the Increased or Decreased Rent”) from the current annual figure receivable of £451,448 then, in those circumstances, Segesta hereby agrees that the Annual Payment referred to in clause 1 above will be increased or decreased pro rata from the Annual Payment compared to the Increased or Decreased Rent.”

It will be necessary to consider the terms of this loan, and its financial reasonableness, in due course: this is done in paragraphs 363 to 364 below.

On 30 August 2011, Mr. Rawlinson confirmed that the sum of £944,652.28 in respect of Zabaxe had been paid by Blackpool FC to Segesta, and that the balance of the £8,125,000 in respect of Travelodge (being an amount of £3,225,000) had also been paid. These two amounts total £4,169,652.28. This sum was transferred out of Blackpool FC’s NatWest bank account on 30 August 2011.

The “Global Witness” letter

On 21 September 2011, Mr. Karl Oyston received a letter from “Global Witness”, a non-governmental organisation based in London that campaigns for greater transparency in the natural resource and banking sectors. This letter raised a number of questions regarding Mr. Belokon’s relations with Blackpool FC. Mr. Karl Oyston forwarded the letter to Mr. Owen Oyston and to Mr. Belokon, but otherwise determined to ignore it.

Mr. Belokon’s letter of 4 October 2011

In a letter dated 4 October 2011, Mr. Belokon signalled his intention that he and Mr. Malnacs be “substituted with other two of my representatives in Board member positions. Neither of them would be based in Blackpool, nor would they take active part in football club management. They would only follow the economic affairs of the company and would fulfil other responsibilities of members of a board”.

Mr. Owen Oyston’s reaction (expressed in an internal memo) was that Mr. Belokon’s decision meant that he was not selling his shares, and that “[t]he fact we will save the best part of £10m by not buying him out gives us a great opportunity to invest further monies in this chaotic market”. Accordingly, the Oystons withdrew the offer they had made to buy Mr. Belokon out.

Ultimately, although Mr. Malnacs was (as will be described) replaced by Mr. Varpins, Mr. Belokon did not cease to be a director, although he did not actively participate in Blackpool FC.

Mr. Malnacs’ inquiry about payments away

Mr. Malnacs continued to inquire about payments out of Blackpool FC. Thus, on 7 December 2011, he emailed as follows:

“It came to my attention that there have been several payments from [Blackpool FC] accounts to Segesta amounting more than 13.6m GBP in August and November. I request explanation about the status and purpose of the payments to all board members. I also would like explanation why all board members were not notified in advance about such a substantial transfers? Again.”

It is not clear precisely which payments away Mr. Malnacs had in mind when writing this email. Although the payments of £4.2m (see Section C(28)), £4.9m (see Section C(35)) and £4.1m (see Section C(43)) amount to just under £13.6m, they were not made in the time-frame identified by Mr. Malnacs. It is worth stressing again that payments other than the ones described so far were being made out of Blackpool FC. The payments on which this Judgment focusses are those of which VB Football Assets makes specific complaint. It is not necessarily the case that these other payments were made for purposes unrelated to Blackpool FC. Although I have expressed certain reservations about the content of Annex 2 to the Judgment (see paragraph 38 above), I do accept (as did VB Football Assets) that some payments – albeit not transparent to the Belokon Side – were made to the benefit of Blackpool FC. Mr. Malnacs’ email may well be a reference to such payments; it is certainly illustrative of the fact that important information was being kept from the Belokon Side by the Oyston Side.

This request for information did not result in any improvement in the relationship between the Oyston and Belokon Sides. Mr. Karl Oyston responded to this request in the following terms:

“Frankly Normunds you could not be more offensive or less use to the company if you tried.

Your attitude and manner leave much to be desired.

You have been of no assistance to the company whatsoever for many months, may I remind you that as a director you have afiduciary duty to the company along with a duty to attend board meetings, not only if they interest you.

Your demands for information that is not ready to distribute as a result of board meetings not taking place and decisions not being made are not helpful and show a massive lack of both acumen and judgement.

Perhaps you should step down without delay and let your replacement attend a board meeting so important decisions can be made that will affect the future direction of the company and its shareholders?

It is maybe time for you to stop point scoring in an attempt to justify your position and do what is right for the company and its shareholders?”

A proposal that “certain bonuses” be paid

In a memo dated 4 January 2012, Mr. Owen Oyston sought the payment to himself of “certain bonuses”:

“As you know I have asked you to read carefully all the documentation and contracts that we have had with [Mr. Belokon] since the beginning to ensure that there are no prohibitions, restrictions or limitations in [Blackpool FC] paying to its directors bonuses in relation to their past services to [Blackpool FC] for which they were not remunerated.

As you are aware, I have served 25 years in the harness of [Blackpool FC] and in the initial year saved them from extinction, loaned money interest free, converted loans into shares to strengthen [its Blackpool FC’s] balance sheet, made temporary loans every time they were in trouble, again interest-free and provided financial support for their borrowings. So now after the success of the Premier League and the strong financial position of the Club, the chairman is putting down on the agenda a proposal that certain bonuses are paid.

The question is…are we able to do this without any problems or restrictions?”

In an email to Mr. Karl Oyston dated 5 January 2012, Mr. Owen Oyston proposed that the club pay bonuses of £5 million to himself, £1 million to Mr. Belokon and £50,000 to Mr. Malnacs.

Mr. Malnacs’ view of matters appears in a “draft note to new [Blackpool FC] members”

In an undated note to the proposed new Blackpool FC board members, Mr. Malnacs made the following comments about the transfers of money out of Blackpool FC:

“On September 17, 2010 [Blackpool FC] made a transfer of 4,2m to its parent company Segesta. The payment was not approved by the board, nor was agreed with [Mr. Belokon]. I wrote an official memo to the board members…, but an agreement has never been reached. On December 17, 2010 in an official meeting…the Oystons claimed that the payment was in spirit with the concluded agreements and should be written off as management fees over few years. However, in company’s interim audit… the transfer is classified as a loan to Segesta.

On February 24, 2011 [Blackpool FC] made a transfer of 4.9 million to Segesta to refinance Segesta loan from a commercial bank. As I pointed out in a memo to the board…it was disappointing and not in line with good corporate governance that the Club has provided a long-term credit without board’s approval and prior information…I still have not been informed about the terms of the [Blackpool FC] loan to Segesta.

In August and November [Blackpool FC] made transfers to Segesta in amount of 13,9m. I did not get answer why it has been done. Possibly to repay debts to [Mr. Belokon], possibly partially for constructing SE corner?”

Although the last paragraph in the above quotation refers to the possibility of a repayment to Mr. Belokon, I am not aware of any such repayment having been made by the Oyston Side.

The 20 January 2012 board meeting

On 20 January 2012, a meeting of the Blackpool FC board took place. Amongst others, Mr. Karl Oyston and Mr. Malnacs were present; Mr. Owen Oyston and Mr. Belokon were not. There are two versions of the minutes of this meeting, one set written by Mr. Malnacs in an ironic and somewhat bitter tone, (Footnote: ⁹⁶) the other set written in a more standard form by an unknown person. Both deal with the transfers of money out of Blackpool FC. Mr. Malnacs’ version reads:

“On December 7, 2011 Mr. Malnacs enquired on the transfers from [Blackpool FC] accounts to Segesta amounting more than 13.6m GPB in August and November. Mr. Oyston explained that they were very worried about the NatWest financial health and decided to transfer money to Lloyds TSB which has the healthiest balance sheet in English bank industry. The transfers were made to Segesta as it takes time to open an account for [Blackpool FC]. The balances as

Lloyds yielded little or no interest, which Mr. Malnacs wasn’t happy about.”

The other version reads:

“Clarification of loans to Segesta

[Mr. Malnacs] sought this clarification and [Mr. Morozov] asked if there were any written agreements in place. [Mr. Karl Oyston] and [Mr. Dyer] replied that the only written agreement currently being finalised was for Segesta’s purchase of a Travelodge Hotel. For the rest of the loans agreement needs finalising by the Board, this involves agreements on income and costs between Segesta and [Blackpool FC] (in conjunction with the current South stand agreements) for the East stand and the south-east corner.

Points of view were put forward by [Mr. Karl Oyston] and [Mr. Malnacs], and it was left that this would be a separate agenda item for detailed discussion at the next Board meeting.”

It will readily be apparent that the “official” minutes are rather less informative than the “spoof” minutes. The reference in the “spoof” minutes to movements of monies from Blackpool FC’s NatWest account to another account in the name of Segesta involved a transfer of some £5.5m, ostensibly to ensure that these monies were housed with the most financially robust institution, given the prevailing financial difficulties.

Mr. Dyer explained this in his witness statement (paragraph 22 of Dyer 1) on which he was cross-examined: (Footnote: ⁹⁷)

Further signs of a deteriorating relationship and a failure to provide information

A further sign of the deteriorating relationship between Mr. Malnacs and Mr. Karl Oyston can be seen in an email exchange between them in late January 2012. Essentially, Mr. Malnacs wanted more information, and in particular wanted relevant information to be provided sufficiently ahead of board meetings to enable Mr. Malnacs, if necessary, to consult with Mr. Belokon. Mr. Karl Oyston did not directly respond to these points, but instead criticised Mr. Malnacs:

“Normunds, maybe a good idea would be for you to stop complaining all the time and actually do something positive. You are as capable as I am of researching and presenting ideas to the board to minimise our corporation tax payment. Why not spend your time on worthwhile activity as I am a little bit tired of your constant sniping from the sidelines whilst doing nothing helpful or productive.

I am currently busy with the end of the transfer window. You seem to have gone from being nearly full-time in club activities to nil, unless you have more pressing matters I suggest you prepare the information you wish the board to be given and I will review and look to approve it adverse distribution. Rod will no doubt be willing to assist in your task notwithstanding your unforgivable insults directed at him last week.”

It is clear that the Oyston Side limited the information that the Belokon Side received from the narrative so far: there were discussions, and payments made, of which the Belokon Side was entirely ignorant. Whilst I equally have no doubt that Mr. Malnacs received some information, he did not receive the information he wanted or needed and he did not receive it when he needed it.

Mr. Campbell explored this with Mr. Dyer in cross-examination. (Footnote: ⁹⁸) The following exchange gives an indication of the extent to which the Oyston Side was prepared to keep Mr. Malnacs informed: (Footnote: ⁹⁹)

Mr. Dyer’s failure to answer these straightforward questions speak volumes.

The 2 February 2012 board meeting and aftermath

The next meeting of the Blackpool FC board took place on 2 February 2012. Neither Mr. Belokon nor Mr. Malnacs were present; Mr. Owen Oyston and Mr. Karl Oyston, as well as Mr. Dyer, were present. Mr. Malnacs had requested that the board meeting be put off, partly because Mr. Belokon could not be in London and partly because he felt it would only be worth meeting after he had received further information. Mr. Karl Oyston declined to put off the meeting, and it went ahead as planned.

Item 6.3 of the minutes records a proposal that Blackpool FC was to make an accrual of £7 million for directors and staff of the company from the previous financial year. This would appear to be a continuation of the idea of making a payment to the directors of Blackpool FC as described in Section C(47). Mr. Karl Oyston was to “prepare a tax efficient recommendation for [the] distribution of [a] payment that will be approved by the Board at the next meeting, with payments to be made shortly afterwards”.

On receipt of the minutes, Mr. Malnacs responded by an email dated 8 February 2012:

“As I stressed before, it only makes sense for us Latvians to attend board meetings, if relevant information has been circulated in advance so I have time to study it and consult with [Mr. Belokon] if necessary. Please, let me to remind company secretary Mr. Dyer that he still has not supplied me with the requested information:

1.

Full list of debtors as of end financial year 2010/11.

2.

Full list of creditors as of end financial [year] 2010/11.

3.

Split of Segesta ‘advanced management fees’.”

Mr. Malnacs followed up with an email to Mr. Karl Oyston on 13 February 2012 in which he wrote:

“Let me kindly remind you and your team that you still have not provided answers to my questions or draft audit report. If we don’t get the requested information, we do not see much sense coming to the board meeting this Friday. Please, do send the requested information immediately, so we can prepare for the board meeting.”

In a subsequent email to Mr. Cherry on 16 February 2012, Mr. Malnacs wrote:

“I was told that at the moment you are finalizing [Blackpool FC’s] draft report for year 2010/11. [Mr. Karl Oyston] wants us to approve it at the board meeting already this Friday. I am definitely not ready to approve the audit on such a short notice, especially since I have not been given accounts-related answers to my questions, and certain differences of opinion between the two major shareholders you are aware of.

Therefore, would [you] kindly send us draft report as soon as possible so we can study, and, if necessary pose questions?

I believe that it is very important that the accounts reflect the two payments in question (4.2m and 4.9m) as separate entities, since they were not made with the board’s permission or consultation and the two major shareholders have not reached an agreement on their status yet. I don’t understand why [Mr. Dyer] puts them together in ‘advance management fees’, which I believe, is not correct.”

The £11 million payment proposal

Also on 16 February 2012, Mr. Karl Oyston sent an email to Mr. Malnacs, attached to which were the draft audited financial statements for 2010-2011. In his email, Mr. Karl Oyston wrote:

“Please find enclosed a copy of the draft financial statements for [Blackpool FC]. I have gone through them in detail with [Mr. Dyer] and am happy that they will be presented to the board at the board meeting tomorrow for approval.

You will note at page 13 there is an amount of Group undertakings of £11,521,885 which represents the total amounts owed by Segesta. This is the amount that is affected by the restructuring agreements regarding the South & South East stands and requires discussion as soon as the major shareholders can be assembled at a board meeting, which I will leave you to arrange. This also includes the now concluded agreement between Segesta and [Blackpool FC] in relation to the Travelodge. We will let you have a copy in due course.

You will also see a note on page 11, note 8.1 relating to an accrual for remuneration payable to [Zabaxe] on behalf of my father’s long term involvement and support of Blackpool FC. Zabaxe has agreed to make a loan, if requested and following advice on terms of such a loan from [Mr. Cherry] and [Mr. Belton], to Blackpool FC of up to £8.177m.”

Thus, the original proposal (discussed at the 2 February 2012 board meeting) for a payment to the directors of Blackpool FC had changed from “a payment of £7m for directors & staff of the company” to a payment of £11,000,000 from Blackpool FC to Zabaxe “on behalf of my father’s long-term involvement and support of Blackpool FC”.

The draft audited financial statements for 2010-2011 appended to the email, which reflected this payment, were due to be approved by the board at a meeting on the following day, 17 February 2012. The £11 million payment was listed in the draft audited financial statements under the heading “Directors’ remuneration” as an entry for “Emoluments and other benefits”.

Mr. Malnacs objected to the draft audited financial statements and in particular to the £11 million proposed payment. In an email addressed to Mr. Karl Oyston dated 16 February 2012, Mr. Malnacs wrote:

“As I expected, the draft audited financial statement includes a few things that are not acceptable to me and [Mr. Belokon]. This is reason I requested draft report at least few days before the board meeting – not less than 24 hours – so we can discuss and maybe agree.

First, how could you decide on making 11 million worth emolument to one shareholder, without board’s other major shareholder’s approval or at least a meaningful discussion?! This is out of any acceptable corporate governance norms, even without mentioning the moral aspect of the transaction! We don’t question [Mr. Owen Oyston’s] contribution to the club, but any transfers of that size must be agreed with the board or the other shareholder.

As I mentioned before, neither am I happy with how the Segesta debt to [Blackpool FC] is reflected in one figure [of] 11.5m. We want clear split of that amount into [its] components. I really can’t understand why despite so many requests I still can’t get a split of that amount?

These are only two issues that I noted in such a short notice. I am sure I would have more questions once I have studied the draft report in more detail. In any case, neither me nor [Mr. Belokon] are happy with the draft report and we request postponement of the board meeting where the audit is approved. We understand that the approved audit report must be filed with the company house shortly; however, you have had enough months to timely prepare the audit report, so we can analyse, discuss and approve it.”

Mr. Karl Oyston’s reply of the same date was addressed to the board and was as follows:

“Further to [Mr. Malnacs’] email I think the time has come for me to make some suggestions as to how we resolve the current position which is affecting the performance of [Blackpool FC] and its prospects of success. I will not postpone tomorrow’s Board Meeting scheduled to approve this year’s accounts and will not debate the various matters relating to the accounts via email. I would suggest that we consider arriving at a point whereby either [Mr. Belokon] or [Mr. Owen Oyston] take each other’s shares in [Blackpool FC] and to that end I suggest that [Mr. Malnacs] obtains [Mr. Belokon’s] instructions on the following 2 options: -

Option A

[Mr. Belokon] makes an offer to [Mr. Owen Oyston] to buy the whole of his shareholding in [Blackpool FC].

Option B

Mr. Malnacs’ response, again of the same date, was as follows:

“I fully agree that this saga can go forever and is not in the interests of anybody. My personal view is that indeed it is much better solution if any of the two parties just sell the shares to the other.

In the summer [Mr. Belokon] wanted out and asked for valuation of his shares and investments. Please, be reasonable and agree that your proposal was not near right either from financial or morals positions. I have not spoken to [Mr. Belokon] for a while, but imagine he still could be open to a reasonable offer. When I have a chance I will try to speak to him about your proposal, [Mr. Karl Oyston].

As for audit report, I am really tired of repeating – we need time to analyse the figures before approving the audit. We can have a reasonable board meeting discussion only [if] we have had information for few days. So, please, postpone the meeting tomorrow. Otherwise, I have no option, but not to approve the audit and report it to our auditor and, if necessary, to pursue the matter further. Again, it is not in anybody’s interests. Please!”

Mr. Malnacs took the further step of writing a letter to Mr. Cherry on 17 February 2012 to reiterate his objections regarding the draft audited financial statements, stating:

“This is to officially notify you as Blackpool FC auditor that I am not able to approve [Blackpool FC’s] draft audit report for season 2010/11 prepared by you.

Despite several requests to share above mentioned draft report at least few days in advance of the board meeting, I received it only on February 16, 2012 evening, with the board meeting scheduled on February 17, 2012 at noon to approve it. Needless to say, this is not an adequate time to study the draft report, especially given the fact that recently I have been denied financial information form Mr. Dyer and Mr. Karl Oyston on few occasions. Even a quick view at the draft report highlighted at least two issues:

1.

£11,000,000 emolument to Mr. Owen Oyston was never discussed or agreed at a formal board meeting or meeting between the two major shareholders. It is not acceptable to propose an emolument of such a magnitude without proper discussions and on such a short notice, and in an environment of number of unresolved issues between the two major shareholders.

2.

I also believe that the draft audit should single out two [Blackpool FC] payments (£4.2 and £4.9m) to its parent company Segesta which, again, were made without board’s approval and prior information.

Apart from these two issues, there is additional time needed to study the draft report in details. I have asked Mr. Karl Oyston to postpone the board meeting for a week, but he seems to be ignoring my request. Therefore, in case the board meeting goes ahead as planned today and the draft audit report is approved, I request that the final audit reflect my disagreements above.”

Mr. Cherry’s responded to Mr. Malnacs by a letter of the same day, in which he stated:

“I feel that many of the items need to be discussed with your fellow directors/shareholders rather than ourselves.

…

The only point for which I feel I can reply is regarding the loan from [Blackpool FC] to Segesta. We believe that the disclosure is adequate to comply with accounting standards and Companies Act Disclosure and does not require any further detail.

…

I regret I am unable to act on the final paragraph of your letter to amend financial statements without Board approval.”

The 17 February 2012 board meeting

As planned, a meeting of the Blackpool FC board took place on 17 February 2012. In attendance were Mr. Karl Oyston, Mr. Owen Oyston and Mr. Rod Dyer. Mrs. Oyston and Mr. Malnacs participated in the meeting by telephone, the latter for a limited period only.

The minutes record as follows:

“Matters arising – further to paragraph 6.3 of last meetings minutes where it was agreed to make an accrual of £7M for directors and staff. Following further discussions with the company’s advisors it was advised that the amount be lifted to £11m and paid as remuneration to the director Mr OJ Oyston. The payment would be made to the director’s service company Zabaxe Ltd.

Mr. OJ Oyston disclosed to the meeting his interest in Zabaxe Limited and the remuneration, and therefore would not take part in the agreement of this proposal. After discussion the meeting confirmed the accrual and payment to Zabaxe Limited of £11M, proposed by [Mr. Karl Oyston], seconded by [Mrs. Oyston] and passed by the meeting.

At this point [Mr. Malnacs] was invited to join the meeting by telephone conference so that his opinions could be heard. [Mr. Malnacs] initially stated he could not discuss his objections on the phone, but then he wanted his objections to the course of action that we being approved by the Board noted, these had also been put in writing to the auditor and the auditor had responded.

It was pointed out that aspects of the information requested by [Mr. Malnacs] related to Segesta Limited and not [Blackpool FC] so these requests had not been complied with.

At this point the conference call with [Mr. Malnacs] came to an end.”

Even on the face of it, there are a number of oddities about this minute:

The draft financial statements reflecting the £11 million payment were approved by the board after Mr. Malnacs had left the meeting and, ultimately, the payment was incorporated in Blackpool FC’s finalised audited financial statements.

In a note attached to his email dated 20 February 2012, Mr. Malnacs followed up with the board to note his disappointment that his objections had not been taken into account and to object to the content of the minutes. That note read as follows:

“Thank you for the draft minutes of your [fruitful] and honest board meeting. I hereby would like to express my objections and propose changes to the draft minutes.

1.

Apologies and participation

First, I disagree with my participation status in the meeting. As I clearly stated on the outset of the short phone conversation, I was not prepared to participate in the meeting as I was not given sufficient time to analyse the information provided and consult with Mr. Belokon, if necessary. I have clearly and repeatedly stated that I need information for the board meeting at least three days before the meeting. Otherwise I don’t see sense coming and participating in the meeting unprepared. I only asked the board to take into account my two objections mentioned in my official letter to our auditor dated February 16^th: i) £11 emolument, ii) non[segregation] of [Blackpool FC] loan to Segesta. Sadly, but foreseeably the board meeting failed to respond to my objections.

2.

Minutes of previous meeting

I already raised my objections to paying £11m emolument to Mr. Owen Oyston without proper discussions with the other major shareholder. On February 14, 2012 I clearly asked Mr. Karl Oyston and [Mr. Dyer] to provide any details (see attached email) about the proposed emolument payments, but did not get any answer. The proposed structure is clearly disadvantageous to Mr. Belokon and not acceptable on financial or moral grounds.

I have sympathies with [Mr. Karl Oyston’s] disappointment not to be able to convene for a full board meeting, including Mr. Belokon for some time. However, given the history of making major decisions without board discussions or approval (i.e. £4.2m and £4.9m transfers), it might seem pointless to attend the board meeting since the decisions are made outside the boardroom. In addition, I am always willing and willing to participate in board meetings and represent Mr. Belokon, if you do send me the relevant information at least three days prior to the board meeting.”

The payment of £11 million is made

The payment of £11 million was made on 21 February 2012, as can be seen from Zabaxe’s bank statement for the relevant period. The contemporaneous invoice drawn up by Zabaxe (also dated 21 February 2012) describes the payment as “director’s remuneration”. As will become clear, this payment came to be described differently.

Publicity surrounding the payment

The payment was criticised in the media after Blackpool FC’s 2010-2011 accounts were filed at Companies House and thus made publicly available. An article published online by the Daily Mail on 3 March 2012 entitled “REVEALED: The Premier League owner who was being paid £11m while his club were being relegated” was particularly critical:

“For [Blackpool FC’s] financial accounts for that 2010-11 campaign, filed in the past 48 hours and relating to their first season in the top flight for 39 years, reveal that one of

[Blackpool FC’s] six directors was paid a staggering £11 million in remuneration for the season that ended with the club’s relegation back to the Championship.

And the unnamed director, paid through his company, Zabaxe, was [Mr. Karl Oyston’s] father, Blackpool’s multi-millionaire majority shareholder, [Mr. Owen Oyston].

…

Already supporters, politicians, players and industry observers have condemned the £11m director’s remuneration as ‘shocking’ and ‘barely believable’.

…

The £11m paid to a single director is understood to be more than for the wages paid to [Blackpool FC’s] first-team and the manager combined during their one season in the Premier League.”

Mr. Karl Oyston subsequently gave an interview to the Guardian, which resulted in an article being published online on 6 March 2012 which quoted Mr. Karl Oyston as having said as follows:

“We have done all this on professional advice. We were advised that if we left the money in the football club it could attract a very large tax bill, which would fall on the football club.

The money has been paid to my father’s company, and if the club needs it for the next stage of development, which is to build a new training ground, I am sure my father will lend it to the club interest-free, as he always has over 25 years of ownership

…

The £11m was paid out as part of sound tax planning – we are UK-based and believe in paying our taxes but still have to plan sensibly. I understand, it was paid to Zabaxe as a salary and people will draw the conclusion it is a salary to my father. We could have explained it better. But the money is in an Oyston company; the football club is an Oyston company too, and that money is there should we require it.

But frankly, after the way he has supported the club all these years, if it was an £11m salary to my father, so what?”

Exit Mr. Malnacs; enter Mr. Varpins

Mr. Varpins became a director of Blackpool FC in March 2013, replacing Mr. Malnacs. However, whereas Mr. Malnacs was (at least for periods of time) based in Blackpool, Mr. Varpins was not. He knew very little about the club, when he joined the board. (Footnote: ¹⁰⁰)

2013 onwards

I do not consider the events from March 2013 onwards to be of assistance in determining the Petition. Apart from some further payments made out of Blackpool FC which VB Football Assets contend were not for the benefit of the club and were unfairly prejudicial, the period between March 2013 and 29 September 2014 (when VB Football Assets’ then solicitors wrote to the Respondents complaining about a number of matters, some of which ultimately found their way into the Petition) is characterised by ever more destructive conduct between the Oyston Side and the Belokon Side. This ranged from venting grievances in public, to arguing about whether or not to take further forward a proposal to buy Blackpool FC, to the Oyston Side not finalising the accounts of Blackpool FC because of the Belokon Side’s failure to consent to them. It is unnecessary to consider this conduct. The fact is that the reason for this is the history described in Sections C(28) to C(56) – the denial of the gentleman’s agreement; the payments out of Blackpool FC; and the overruling of the minority Belokon Side by the majority Oyston Side.

These factors lead to the stalemate that has persisted from 2013. It is these factors (considered in Sections E, F and G) – plus the question of the articles of association, which I consider separately in Section H – that will determine the outcome of the Petition. The later conduct is no more than a symptom arising out of these earlier grievances.

The period after 29 September 2014, when VB Football Assets’ solicitors sent a letter before action, strikes me as still less relevant. (Footnote: ¹⁰¹) By this time, both VB Football Assets and the Respondents had solicitors advising them on their conduct. Even more so than the previous period, I do not consider the events of this period helpful to the questions I must determine. If anything, it is the conduct prior to March 2013 – plus, perhaps, the question of the change to the articles of association – that will be determinative. If this conduct was unfairly prejudicial, then I do not see how it can be cured by the Respondents’ later conduct; if it was not unfairly prejudicial, then I fail to see how the later conduct can make it so.

UNFAIR PREJUDICE: SECTION 994 (1) Introduction

Section 994 of the Companies Act 2006 provides so far as material:

“(1)

A member of a company may apply to the court by petition for an order under this Part on the ground-

(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.

The requirement of section 994 are relatively clear and the law was not extensively debated before me. In order for the Petition to succeed, VB Football Assets must show:

Standing

It was not disputed that VB Football Assets is a member of Blackpool FC. Nor was it disputed that Blackpool FC itself was an organisation in respect of which a remedy might be granted pursuant to sections 994 and 996 of the Companies Act 2006. VB Football Assets obviously has standing to bring the Petition.

The acts and omissions of which VB Football Assets complains consist of the management of the affairs of Blackpool FC

The acts and omissions complained of by VB Football Assets were set out in paragraph 24 above. Essentially:

I consider that all three of these grounds amount to “acts” or “omissions” of

The words “affairs of the company” are also wide and should be construed liberally. (Footnote: ¹⁰²) They encompass all matters which may come before the company’s board for its consideration; but matters which are not considered by the board are not necessarily incapable of being a part of that company’s affairs. The phrase includes all aspects of the company’s affairs and business.

“Prejudice” to “interests” which is “unfair”

A member who has presented a section 994 petition must establish that the conduct of the company’s affairs of which he complains is unfairly prejudicial “to the interests of [the company’s] members generally or some part of its members (including at least himself)”.

Paragraph 6.65 of Minority Shareholders (Footnote: ¹⁰³) says this on the meaning of “interest”:

“The primary source of a petitioner’s rights as a member, and hence of his ‘interests’, is the constitution of the company, and a breach of his rights arising under the memorandum or articles will usually affect his interests as a member. Such interests include the ‘real value of [the petitioner’s] shares and extend, at least in quasi-partnership cases, to ‘outsider rights’, such as the right to be a director. Rights conferred by collateral agreements such as shareholders’ agreements may also affect the petitioner in his capacity as member…”.

The interests of a member are not limited to his strict legal rights under the constitution of the company or under collateral agreements. As Hoffmann J. noted in Re A Company (No. 00477 of 1986) [1986] BCLC 376 at 378-379, “[t]he use of the word ‘unfairly’ in [section 994], like the use of the words ‘just and equitable’ in section 122(1)(g) of the [Insolvency Act 1986] enables the court to have regard to wider equitable considerations…”.

The requirement of “prejudice” is also to be liberally construed. In O’Neill v. Phillips [1999] 1 BCLC 1 at 15, Lord Hoffmann said that “the requirement that prejudice must be suffered as a member should not be too narrowly or technically construed”. Whilst “prejudice” may often be economic – in the sense that the value of the petitioner’s shareholding is diminished or jeopardised (Footnote: ¹⁰⁴) – prejudice is capable of being established otherwise than in a pure economic sense. In Re Coroin Ltd (No. 2) [2012] EWHC 2343 at 630 David Richards J. stated:

“Prejudice will certainly encompass damage to the financial position of a member. The prejudice may be damage to the value of his shares but may also extend to other financial damage which in the circumstances of the case is bound up with his position as a member. So, for example, removal from participation in the management of a company and the resulting loss of income or profits from the company in the form of remuneration will constitute prejudice in those cases where the members have rights recognised in equity is not at law, to participate in that way. Similarly, damage to the financial position of a member in relation to a debt due to him from the company can in the appropriate circumstances amount to prejudice. The prejudice must be to the petitioner in his capacity as a member but this is not to be strictly confined to damage to the value of his shareholding. Moreover, prejudice need not be financial in character. A disregard of the rights of the member as such, without any financial consequences, may amount to prejudice falling within the section.”

The conduct complained of must not merely be prejudicial, but unfairly so. One element without the other will not suffice: (Footnote: ¹⁰⁵)

“The conduct must be both prejudicial (in the sense of causing prejudice or harm to the relevant interest) and also unfairly so: conduct may be unfair without being prejudicial or prejudicial without being unfair, and it is not sufficient if the conduct satisfies only one of these tests…”

“Fairness” is obviously a flexible concept, but it must “be applied judicially and the content which it is given by the courts must be based on rational principle”.¹²¹

In Grace v. Biagioli [2006] 2 BCLC 70 at [61], the Court of Appeal deduced the following principles from the speech of Lord Hoffmann in O’Neill v. Phillips [1999] 2 BCC 1:

“(1)

The concept of unfairness, although objective in its focus, is not to be considered in a vacuum. An assessment that conduct is unfair has to be made against the legal background of the corporate structure under consideration. This will usually take the form of the articles of association and any collateral agreements between shareholders which identify their rights and obligations as members of the company. Both are subject to established equitable principles which may moderate the exercise of strict legal rights when insistence on the enforcement of such rights would be unconscionable.

(2)

It follows that it will not ordinarily be unfair for the affairs of a company to be conducted in accordance with the provisions of its articles or any other relevant and legally enforceable agreement, unless it would be inequitable for those agreements to be enforced in the particular circumstances under consideration. Unfairness may, to use Lord Hoffmann's words, “consist in a breach of the rules or in using rules in a manner which equity would regard as contrary to good faith”…; the conduct need not therefore be unlawful, but it must be inequitable.

(3)

Although it is impossible to provide an exhaustive definition of the circumstances in which the application of equitable principles would render it unjust for a party to insist on his strict legal rights, those principles are to be applied according to settled and established equitable rules and not by reference to some indefinite notion of fairness.

(4)

To be unfair, the conduct complained of need not be such as would have justified the making of a winding-up order on just and equitable grounds as formerly required under section 210 of the Companies Act 1948.

(5)

A useful test is always to ask whether the exercise of the power or rights in question would involve a breach of an agreement or understanding between the parties which it would be unfair to allow a member to ignore. Such agreements do not have to be contractually binding in order to found the equity.

(6)

It is not enough merely to show that the relationship between the parties has irretrievably broken down. There is no right of unilateral withdrawal for a shareholder when trust and confidence between shareholders no longer exist. It is, however, different if that breakdown in relations then causes the majority to exclude the petitioner from the management of the company or otherwise to cause him prejudice in his capacity as a shareholder.”

Unfairness can either consist of some breach of the terms on which it has been agreed that the affairs of the company should be conducted or arise out of “equitable considerations”. In Re Saul D Harrison & Sons plc, [1995] 1 BCLC 14 at 19, Hoffmann L.J. stated:

“How can it be unfair to act in accordance with what the parties have agreed? As a general rule, it is not. But there are cases in which the letter of the articles does not fully reflect the understandings upon which the shareholders are associated. Lord Wilberforce drew attention to such cases in a celebrated passage of his judgement in Ebrahimi v. Westbourne Galleries Ltd [1973] AC 360 at 379, which discusses what seems to me to be the identical concept of injustice or unfairness which can form the basis of a just and equitable winding up…Thus the personal relationship between a shareholder and those who control the company may entitle him to say that it would in certain circumstances be unfair for them to exercise a power conferred by the articles upon the board or the company general meeting…”

In O’Neill v. Phillips [1999] 2 BCLC 1 at 7-9:

“One of the traditional roles of equity, as a separate jurisdiction, was to restrain the exercise of strict legal rights and certain relationships in which it considered that this would be contrary to good faith. These principles have, with appropriate modifications, been carried over into company law…there will be cases in which equitable considerations 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 when using the rules in a manner which equity would regard as contrary to good faith.

This approach to the concept of unfairness in [section 994] runs parallel to that which your Lordships House, in Ebrahimi v. Westbourne Galleries Ltd [1973] AC 360, adopted in getting content to the concept of ‘just and equitable’ as a ground for winding up…

I would apply the same reasoning to the concept of unfairness in section [994]…Lord Wilberforce…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 equitable (or unfair) for a party to insist on legal rights what 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 would be wrong to abandon them in favour of some holy indefinite notion of fairness…”

It is plain that such equitable considerations can really only be held to apply in the case of private companies: in the case of public companies, where shareholders have subscribed for shares on the basis of published documents, it is difficult to infer a legitimate expectation from arrangements outside the ambit of the formal constitution of the company (including, perhaps, public documents such as the prospectus). (Footnote: ¹⁰⁶)

Blackpool FC, however, is a private company and – if the facts warrant it – there is space for equitable considerations or legitimate expectations to be taken into account when considering whether unfair prejudice within the meaning of section 994 exists. For the reasons given in Section C(9)(ii) above, I find that the legal agreements concluded between the parties regarding VB Football Assets’ participation in Blackpool FC (that is, the Subscription Agreement, the First Vlada Loan Agreement and the Second Vlada Loan Agreement) did not set out the entirety of the understanding between Mr. Belokon and Mr. Owen Oyston.

I have found that the parties, quite deliberately and in order to preserve the Tax Losses, did not incorporate into these agreements the understanding according to which Mr. Belokon was, in due course, to acquire parity of shareholding in the Blackpool FC and, in the meantime, was to have a joint say in the operation of Blackpool FC. As I have determined in paragraphs 92 to 94 above, the noncontractual understanding between Mr. Belokon and Mr. Oyston was:

Accordingly, when considering the three grounds of unfair prejudice summarised in paragraph 307 above, I do so not merely on the basis of the strict legal rights subsisting between Segesta and VB Football Assets, but also on the basis of the legitimate expectation that I have described and found to exist.

The next sections consider the various allegations of unfair prejudice advanced by VB Football Assets.

THE GENERAL OPERATION OF BLACKPOOL FC (1) Duties on directors

As has been described, Blackpool FC is part of a group of privately-owned companies comprising the Oyston Group. Although Mr. Karl Oyston is the chairman of Blackpool FC, it is Mr. Owen Oyston who calls the shots, and Mr. Karl Oyston implements these. (Footnote: ¹⁰⁷)

As well as sharing, in effect, a common owner in the shape of Mr. Owen Oyston, the companies in the Oyston Group (including Blackpool FC) tend to share common advisers and employees. Thus, as has been described, Mr. Cherry is the auditor not only of Blackpool FC, but of other companies within the Oyston Group. The same is true of Mr. Dyer, in his role as financial controller.

There is nothing instrinsically wrong in such organisation. However, it can lead to a blurring in terms of relevant officers losing sight of the duties that they owe to a specific company, with perhaps an improper focus on the interests of other companies in the group or other interests altogether.

The duties that a director owes to his company are trite. A director is obliged:

It will be necessary to have in mind these elemental duties in respect of the allegations of unfair prejudice that are made by VB Football Assets.

Transfers of money between entities within the Osyton Group

Mr. Dyer was the financial controller of about seven or eight companies within the Oyston Group.¹²⁴ Making transfers of monies between these companies was – mechanically speaking – extremely straightforward. It simply required the authority of the cheque signatory – Mr. Owen Oyston in a couple of cases, Mr. Karl Oyston in all cases – and Mr. Dyer would create an entry in the ledgers of the paying company and the payee company as appropriate. (Footnote: ¹⁰⁸)

In cross-examination of Mr. Dyer, Mr. Campell hypothesised an instruction from Mr. Karl Oyston for Blackpool FC to pay an invoice for tractors received by another company in the Oyston Group as he sought to explore how the Oyston Group dealt with the potential conflict of interests that might arise: (Footnote: ¹⁰⁹)

I consider in paragraphs 349 to 354 and 375 to 379 below the suggestion of Mr. Dyer that none of the payments out of Blackpool FC had a detrimental effect on the company. For the present, it suffices to say that I regard the suggestion as entirely incorrect. What matters for present purposes is the fact that Mr. Dyer’s answers demonstrate a complete failure to consider the separate position of Blackpool FC.

Of course, Mr. Dyer was just company secretary and financial controller of Blackpool FC. He did as he was told by Mr. Owen Oyston and Mr. Karl Oyston. But his answers demonstrate exactly the state of mind Mr. Owen Oyston and Mr. Karl Oyston had towards Blackpool FC. Essentially, Mr. Owen Oyston and Mr. Karl Oyston considered they were free to move monies about the Oyston Group pretty much as they pleased and without specific consideration of the position of Blackpool FC: