IN THE HIGH COURT OF JUSTICE
BUSINESS & PROPERTY COURTS OF
ENGLAND AND WALES
PROPERTY TRUSTS AND PROBATE LIST
Royal Courts of Justice
Rolls Building, Fetter Lane,
London EC4A 1NL
Before:
CHIEF MASTER MARSH
Between :
SOUTH DOWNS TRUSTEES LIMITED (as trustee of the South Downs Employee Benefit Trust) | Claimant |
- and - | |
(1) GH (2) IJ (3) KL | Defendants |
Georgia Bedworth (instructed by Macfarlanes LLP) for the Claimant
Leon Pickering (instructed by Macfarlanes LLP) for the First Defendant
James MacDougald (instructed by Macfarlanes LLP) for the Second Defendant
Philip Jenkins (instructed by Macfarlanes LLP) for the Third Defendant
Hearing dates: 16 February 2018
Judgment
This judgment arises from the hearing of this Part 8 claim on 16 February 2018. An interim order for anonymisation was made on 8 December 2017, before the claim was issued, and an order anonymising the proceedings, save for the identity of the claimant, was made at the hearing. The reasons for making those orders are explained later in this judgment.
The claimant is the trustee of the South Downs Employee Benefit Trust. I will refer to the claimant as “the Trustee” and the trust as “the EBT”. The Trustee entered into a sale and purchase agreement (“the SPA”) on 12 December 2017 for the sale of the EBT’s 73% interest in a company to which I will refer as “the Holding Company”. The Holding Company, through a series of subsidiaries, owns and controls a business that I will refer to as “the Utility”. The SPA was conditional upon the Trustee obtaining certain relief from the court. The EBT’s shares in the Holding Company have a value of tens of millions of pounds.
I will use the following additional abbreviations in this judgment describing the position as it was at the time of the hearing:
“The Purchaser” is the purchaser under the SPA.
“The Deed of Grant” is the deed entered into on 12 December 2017 as part of the sale transaction purporting to grant the Share Options.
“The Share Options” are the options referred to in the Deed of Grant.
“The Financial Adviser” is the merchant bank that has provided advice to the Trustee about the disposal of the EBT’s holding of shares.
“The Regulator” is the statutory economic regulator of the Utility.
“The Pot A Beneficiaries” are the class of beneficiaries under the EBT comprising former employees of the Utility who were employed at some point in the period from 30 September 2007 to 30 September 2011 who left their employment by retirement under the rules of the pension scheme, or by left their employment but by special dispensation continue to benefit from the EBT.
“The Pot B Beneficiaries” are current employees of the Utility whose employment started after 30 September 2011.
“The Joint Pot Beneficiaries” are current employees of the Utility whose employment started after 30 September 2007 but before 30 September 2011.
At the hearing, orders were made that:
The defendants represent respectively the three relevant classes of employee, namely the Pot A, Pot B and Joint Pot Beneficiaries and, in the case of Pot A Beneficiaries, their widows and widowers;
The Deed of Grant purporting to grant share options be set aside and declared void ab initio;
Pursuant to section 57 Trustee Act 1925 the Trustee had power to put into effect transactions set out in the SPA for the disposal of the EBT’s shares in the Holding Company;
The court sanctioned the Trustee entering into the SPA and approved the Trustee’s decision to complete the transaction on the basis that this was a ‘momentous decision’ and it was right for the Trustee to seek the court’s approval under the second limb of Public Trustee v Cooper.
The background to the application is set out in a full and helpful witness statement made by a director of the Trustee, to whom I shall refer as PMS, together with a supplementary statement. Due to the need to anonymise this judgment it is inappropriate to summarise the facts in the same level of detail as in the statements. In particular, it is neither appropriate nor necessary to explain fully the commercial background leading to the entry into the SPA. However, I will refer in more detail to the reasons why the Trustee decided it should enter into the SPA because the court’s sanction for the transaction is sought. The following summary sets out the essential background.
The EBT
The beneficiaries of the EBT are the former and current employees of the Utility, and other companies in the same group and their dependants. The EBT was settled in 2001 as part of a management buy-out of the Utility and is a discretionary trust. The broad financial structure of the buy-out has some significance for the structure of the classes of beneficiaries. The buy-out was funded by a substantial loan and some subordinated debt. At the time of the buy-out a bank held 45% of the shares (the A shares) in the Holding Company, the Trustee held 40% of the shares (the B shares) and the executive directors held 15% (the C shares). The subordinated debt was to be repaid out of the profits of the Holding Company and, until the subordinated debt was repaid, the B and C shareholders were not entitled to receive dividends or any other payments. The subordinated debt was paid off in 2011 at which point the A shares were converted into deferred shares with no economic value or rights of participation. This left the Trustee and Executive Directors with their respective shareholdings, namely (rounded) 73% and 27%.
Since 2011 the beneficiaries of the EBT have received regular payments based on the distributable profits of the Holding Company.
The objects of the EBT, as they were amended in 2016, and so far as material, are:
“4.1 The object of the Trust is to encourage or facilitate the holding of Shares by Beneficiaries or for their benefit and otherwise to hold the trust Property on trust for the benefit of the Beneficiaries in accordance with the terms of the Trust.”
Under clause 5, the Trustee is given an absolute discretion to achieve the objects of the EBT by applying capital or income from the EBT’s assets to or for the benefit of the beneficiaries “… after consulting the Advisory Committee … but having regard to the Guidelines for Benefits.” The clause goes on to provide examples of what the Trustee may do which include:
“5.6 to bind itself to provide particular benefits in the future …:
5.7 to agree or adopt rules setting out the way in which it will exercise its powers;
5.8 to establish schemes for providing benefits;”.
An Advisory Committee may be set up under clause 11 of the EBT and the Guidelines for Benefits that are referred to in clause 5 are set out in the schedule. It is unnecessary to set out either provision.
Clause 7 contains a material restriction on the powers of the Trustee:
“At any time after all the A Ordinary Shares have converted to deferred shares, the Trustee will not transfer or otherwise dispose of its beneficial interest in any Shares its (sic) holds from time to time if such transfer or other disposal would result in the Trustee ceasing to have control (as defined in section 840 of the Income and Corporation Taxes Act 1988) of the [Holding Company] …”.
Clause 21 gives the trustee power to change all or any part of the EBT but, importantly, it prohibits any change being made to clause 7 (amongst other clauses).
Clause 19 provides that any other group company could agree to become the “Principal Company” for the purposes of the EBT.
The Trustees are entitled to have regard to the Guidelines for Benefits at Schedule 1 to the EBT and the views of the Advisory Committee when considering how to exercise their discretion concerning distributions. An Advisory Committee was set up in 2003 and was consulted by the Trustee. As a result, the Trustee decided there should be two categories of employee, Pot A and Pot B. At that time the subordinated loan was still in place and therefore there was no entitlement to make distributions. The view adopted in 2003 was therefore prospective, looking forward to the date when the class A shares became deferred shares. In the event this occurred in December 2011. At that point the Trustee reconstituted the Advisory Committee and consulted it in relation to the principles of distribution. The three classes of beneficiary, as defined earlier in this judgment was the product of that consultation and the Booklet explaining the principles of distribution to employees was updated.
The rationale behind the approach approved by the Trustee is clear. Up to the point the subordinated debt was paid off, employees in post during that period had contributed to the success of the business and thus assisted the debt to be cleared. If they had worked for any period between 1 January 2002 and 1 December 2011 they would benefit, even though they had retired during that period. The period between the buy-out and repayment of the subordinated debt was 10 years. Thus, to take an example, a payment of benefit in 2014 for a Pot A Beneficiary was paid as a proportion of the employee’s salary in 2004, suitably adjusted for inflation. However, benefit is only paid for the actual period of employment and in the example given an employee who retired in 2005 would not receive any benefit after 2015.
The beneficiaries who benefit from Pot B are the current employees. For reasons that are obvious, current employees benefit to a greater degree than those who have retired and the longer serving employees benefit the most. The longer serving current employees benefit from both Pot A and Pot B (they are the Joint Pot Beneficiaries). In the case of the longer serving employees, and in the case of retirees, the calculation relating to Pot A, as shown in the Booklet, relates back to the salary enjoyed 10 years previously, adjusted for inflation, and is payable at 6 monthly intervals based upon the relationship between the amount of the distribution and the adjusted salary, with 50% being paid at the payment date. In the case of benefit from Pot B (benefit which relates to current employment) this is calculated with reference to the employees’ current salary. Again, it is payable at 6 monthly intervals; the total amount is based on the relationship between the amount of the distribution and the salary, with 50% of being paid at each payment date. Examples are set out in the Booklet at pages 5 and 6. The Utility and its associated companies have had a stable workforce and so the majority of relevant employees are Joint Pot beneficiaries.
The transaction
In July 2017 an unsolicited offer was made by the Purchaser to buy the entire share capital of the Holding Company. The Trustee took advice from the Financial Adviser both about the offer and whether it was appropriate to enter into an exclusivity agreement with the Purchaser, rather than undertaking an auction process to test the market. This process involved the consideration of confidential and market sensitive information about the relevant market and considerations that might affect the competitive position of the Utility in that market. At the same time the Trustee took legal advice about its duties and powers.
The Trustee noted three key considerations and objectives in relation to any offer that was to be accepted:
The offer should reflect fair market value;
The offer should minimise disruption to the day-to-day operations of the business including maintaining the Utility’s independence, minimising the impact on employees and preserving the employment status and terms of employees;
The confidentiality of the process should be maintained.
As to the sale process, the Trustee gave careful consideration to whether a public or private auction was appropriate and considered the following factors:
There were some perceived advantages to an auction because it would allow comparison of different proposals and might result in a better offer than the one received from the Purchaser. However, in view of the relative transparency of the market, it was considered that the Trustee would be able to form a view about a fair value.
Confidentiality would be difficult to preserve in an auction process.
A public auction might attract strategic bidders who would compromise the Trustee’s desire for minimal disruption to employees.
An auction process could take some time to complete and this was undesirable in light of possible regulatory decisions on the immediate horizon.
On 20 September 2017 the Trustee took a decision to enter into an exclusivity agreement with the Purchaser taking into account two factors in particular. First, the offer made by the Purchaser was considered to be an attractive one and ahead of the majority of recent and current valuations observed in the market. Secondly, the Purchaser operated according to a business model that was likely to maximise the preservation of the current workforce and the Purchaser was willing to give assurances as part of its offer that no immediate steps would be taken to reduce the workforce.
Ultimately further negotiations led to the Holding Company and the Purchaser entering into the SPA. The structure for payment for the shares in the Holding Company involves the Purchaser buying three categories of shares that are defined in the SPA as the Option Shares, the Trustee Shares and the Loan Note Shares. The following is a brief, and necessarily incomplete, description of each category of shares:
Option Shares: Pursuant to clause 6 of the SPA the Trustee has granted share options to certain of the beneficiaries over approximately 40% of its holding of shares. The options are granted pursuant to the Deed of Grant which includes a schedule of the beneficiaries being granted share options. Each beneficiary is to be provided with a letter explaining the mechanism of the share options and enclosing a power of attorney in favour of attorneys for them, to sign and return. The attorneys will exercise the option prior to completion. The net effect of these arrangements is that the beneficiaries who have been granted the share options will participate in the sale as sellers. There are tax benefits that accrue from this arrangement.
Trustee Shares: The Trustees will sell the deferred shares. In addition, they will sell a residual portion of B shares. These comprise three tranches: (a) those shares in respect of which share options were granted where the option is not exercised; (b) shares retained to convert into cash to enable the expenses of the transaction to be paid and (c) the balance of the shares to be sold in exchange for loan notes.
Loan Note Shares: The balance of the B shares will be sold by the Trustee in exchange for loan notes. These are secured by a deposit of cash in a sum equivalent to the aggregate sum due under the notes.
The Pot A beneficiaries will receive their entire distribution as share options and the Pot B and Joint Pot beneficiaries will receive a mixture of share options and loan note options.
Hearing in Private
The general rule under CPR 39.2 is that hearings should be in public. There are exceptions to that general rule set out in CPR 39.2(3) and they include:
A hearing that “involves confidential information … and publicity would damage that confidentiality”.
A hearing that involves “uncontentious matters in relation to the administration of trusts …”.
In considering whether to order that a hearing should take place in private, the court must undertake a balancing exercise between the interests of the public and the interests of the parties. The authorities, without providing a complete set of factors, identify the following as being relevant to this case:
The court will be astute to protect the confidentiality of information and to ensure that it is not compromised to the detriment of the parties: see Dechert LLP v Eurasian Natural Resources Corp [2016] 3 Costs LO 327.
The court generally tries to give effect to agreements that commercial arrangements should be kept confidential: see Department of Economics, Policy and Development of Moscow v Bankers Trust Co [2004] EWCA Civ 314.
Consideration should be given to whether allowing a hearing to take place in public would involve an enforced waiver of legal professional privilege. The principles of open justice should be balanced against the countervailing right to maintain such privilege – Dechert v Eurasian Natural Resources
The nature of the jurisdiction being exercised by the court is relevant: see JX MX v Dartford and Gravesham NHS Trust [2015] 1 WLR 3647
The fact that parties in a similar position to the claimant could conduct their affairs in private without resort to court proceedings is a relevant factor: Dartford & Gravesham.
In this case, the Trustee and the Purchaser have agreed, as between themselves, that confidentiality relating to the terms of the transaction should be preserved. Although this is an important starting point, it is by no means sufficient on its own. However, Miss Bedworth, who appears for the Trustee has provided five additional reasons which to my mind make a compelling case for the hearing to be in private and further measures to be taken to ensure that confidentiality is preserved. They are:
The Trustee is not free to conduct the negotiations and to conclude the transaction in view of the terms of the EBT and it reasonably requires the court’s approval of the transaction. A party who has no choice but to come to court is in a different position to a party involved in normal inter partes litigation. It is analogous to a minor coming to court for approval for a course of action or to a settlement.
The Trustee is entitled to keep information such as the advice it has received about the merits of the transaction and its negotiating strategy confidential from the Purchaser. Otherwise it would find it difficult to be candid with the court when asking for approval.
The parties to the claim have disclosed privileged information to the court. Each of the defendants is represented by independent counsel who have provided the court with an opinion from the perspective of their clients about the issues. Although the privilege of that advice is not maintained as between the parties to the claim, for practical reasons, it would be invidious for the opinions to be available to the Purchaser. It would be possible to direct that the opinions themselves remain confidential, but they have been discussed in court which necessitates the hearing itself being conducted in private.
This is not a case where a more limited derogation from the principle of open justice such as making confidentiality orders would have been adequate.
The Trustee has been astute at all times to prevent unrest in the workforce. It would inevitably have been very unsettling for employees to learn of the proposed transaction when the issue of job protection is one of the matters the court has to consider. The Trustee has consulted with members of the Advisory Committee but a wider dissemination of information about the sale could have been very detrimental.
I would only add three points. First, I was satisfied this was a suitable case in which to grant an interim order for confidentiality pending the full hearing when the issue could be examined in more detail. The interim order was of particular importance because, at the date it was made, the SPA has not been entered into and the commercial and market sensitivities were acute. Secondly, it is important to protect the identity of the individuals who have agreed to act as representative parties. Thirdly, the Regulator is aware of the proposed transaction and of the claim and has not wished to make any representations about it.
Although an interim order was made, different considerations apply at the hearing of the claim. The terms of the orders and the judgment in anonymised form will be available to ensure that the existence of the claim and the issues it considered are available to the public. However, much of the information considered by the court and the identity of the defendants will remain confidential. I am satisfied that the terms of the confidentiality order provides a satisfactory balance between the competing interests.
The representation order
The parties seek an order that the representation orders are made in relation to the three classes of employee who benefit from the EBT. Ordinarily, a sale of shares of this type would not need to be considered by the court. The circumstances here are unusual.
There are 61 A Pot beneficiaries, 99 B Pot beneficiaries and 158 Joint Pot beneficiaries. Only the B Pot and Joint Pot beneficiaries are current employees. There are, in addition, some former employees who are potential beneficiaries such as those who retired before the normal retirement age prior to 30 September 2007, those who worked on fixed-term contracts and those who are categorised as ‘bad leavers’. They will receive no benefit from the sale. However, the Trustee formed a view in the exercise of its discretion in 2002 about the employees who would benefit from the EBT and that view was re-affirmed in 2014. There was no practical possibility of the Trustee forming a different view and no reason for additional classes of potential beneficiaries to be represented. In addition, there may be a small number of new employees whose employment commenced after 12 December 2017 who will not benefit.
It would have been wholly impractical to have made all the beneficiaries of the EBT parties to the claim. The overriding and understandable concern was that the transaction should not be put in jeopardy by reason of the need to apply to the court. There are very real commercial sensitivities that arise from the transaction itself in view of the Utility being regulated. The more parties who were joined the greater the risk that confidentiality would be a risk solely because of the increased risk of inadvertent disclosure.
I am satisfied that there was no need in the circumstances of this case to require potential beneficiaries to be represented and I am satisfied there are good reasons to make the representation orders appointing a representative for each of the three classes of beneficiary.
The Deed of Grant
The Deed of Grant grants share options to the beneficiaries in accordance with a table attached to it. PMS’s second witness statement explains that the table contains a series of mistakes in relation to the options such that it confers almost 10,000 fewer options than was intended, and allocates the options in a manner that is highly detrimental to the Pot A Beneficiaries and advantageous to the Pot B and Dual Pot Beneficiaries. It is clear from the undisputed evidence contained in the witness statement that a serious but inadvertent error occurred. Its significance is brought home by a table containing the corrected figures. In round terms, the allocation made to Pot A beneficiaries should have been 2.5 times larger.
The Trustee invites the court to set aside the Deed of Grant so that a new Deed of Grant can be executed with the errors corrected. The court’s jurisdiction to do so is now settled following the decision of the Supreme Court in Pitt v Holt; Futter v Futter [2013] UKC 13. The principles were helpfully summarised by Etherton C in Kennedy v Kennedy [2014] EWHC 4129 (Ch) at [36] as being:
There must be a distinct mistake and not a mere misprediction.
The mistake must be serious.
The mistake must be sufficiently serious as to make it unconscionable on the part of the done to retain the property.
Significantly, counsel for all three classes of beneficiary support the order for recission being made, despite in the case of Mr MacDougald and Mr Jenkins, who appeared respectively for the Pot B and the Joint Pot beneficiaries, it being in the interests of their clients for the order to be opposed. Their approach was entirely proper and realistic because this is the clearest possible case for the court to exercise its power to set aside. There are no countervailing considerations that might affect the jurisdiction to make an order or the exercise of the court’s discretion to do so.
Section 57(1) Trustee Act 1925
The core issue for the court concerns the restrictions in clause 7 of the EBT that affect the Trustee’s ability to dispose of shares in such quantity as will lead to a loss of control over the Utility. Under the SPA the Trustee intends to dispose of the entire holding of shares. Alongside an application made under s.57(1) Trustee Act 1925, the Trustee seeks the court’s approval to the transaction under the principles summarised in Public Trustee v Cooper where the trustee is not surrendering its discretion to the court but rather is seeking the court’s blessing on the basis that the transaction is particularly momentous. On any view the disposal of the entire holding of shares that will lead to the Trust being wound up falls into this category of decision. The two jurisdictions are quite separate but the considerations they involve have a considerable measure of overlap.
Section 57(1) Trustee Act 1925 provides:
“Where in the management or administration of any property vested in trustees, any sale … or other disposition … or other transaction, is in the opinion of the court expedient, but the same cannot be effected by reason of the absence of any power for that purpose vested in the trustees by the trust instrument, if any or by law, the court may by order confer upon the trustees … the necessary power for the purpose on such terms and subject to such provisions and conditions, if any, as the court may think fit …”.
The scope of section 57(1) was considered by the Court of Appeal in Re Downshire Settled Estates [1953] 1 Ch 216 in the judgment of Evershed MR and Romer LJ at page 248:
“In our judgment, the object of section 57 was to secure that trust property should be managed as advantageously as possible in the interests of the beneficiaries and, with that object in view, to authorise specific dealings with the property which the court might have felt itself unable to sanction under the inherent jurisdiction, either because no actual “emergency” had arisen or because the position which called for intervention was one which the creator of the trust could not reasonably have foreseen; but it was no part of the legislative aim to disturb the rule that the court will not rewrite a trust, or to add to such exceptions to that rule as had already found their way into the inherent jurisdiction.”
The distinction between on the one hand the exercise of powers relating to the management or administration of trust property and on the other hand the rewriting of a trust is an important one, as Evershed MR explains in Re Downshire Settled Estates. However, subject to that important qualification, section 57 has been applied in a wide variety of circumstances. Examples can be seen in Alexander v Alexander [2011] WTLR 187 (the absence of power in a will to dispose of or purchase land) and Re The Portman Estate [2015] EWHC 536 (Ch) (the harmonisation of powers across a number of funds and the inclusion of a power to trade).
On a first reading, section 57(1) is not obviously apt to deal with a provision such as clause 7 of the EBT which contains an express restriction on the powers of the Trustee on the basis that the absence of a power (a void) is different to there being a power that is expressly limited in some way. That issue was considered by Morgan J in Alexander where a will provided that the trustees should have no power to grant or dispose of any freehold or leasehold estate or interest in a cottage or any part of it, or to purchase land, out of the proceeds of sale. He concluded at paragraph [16] that section 57 gave the court power to override an express restriction on the powers of trustees, subject to the qualification that the settlor’s wishes or directions are relevant when the court comes to consider how to exercise the discretion which is given by section 57(1). It is plainly right to construe section 57(1), and the words “management and administration”, broadly when considering the jurisdiction it gives to the court, provided the court has firmly in mind that the power does not permit the court to rewrite the trust itself.
Under section 57(1), the court needs to be satisfied of three matters to make an order (see the judgment of Birss J in Re The Portman Estate at [15] summarising the conclusions of Morgan J in Alexander):
There is no power to carry out the transaction which the trustees wish to carry out under the trust deed (or provisions governing the trust);
It is expedient that the trustees should be able to enter into the relevant transaction;
The Court should consider the exercise of its discretion in order to confer the power on the trustees.
In this case, there is an anterior point, namely the court must be satisfied that the course of action the Trustee wishes to take is one which can properly be regarded as the ‘management and administration’ of property. The property of the EBT is the holding of shares and the essence of the trust from its inception was that employees of the Utility and associated companies would benefit from the success of the business. Dealing with those shares, looked at generally, is undoubtedly management and/or administration. What is intended here is much more fundamental. The Trustees are intending to sell the entire holding of shares, converting them to cash, and they will distribute the entire proceeds after payment of the expenses associated with the transaction. In short, the EBT will cease to exist as a necessary consequence of transaction. I am satisfied, however, that (a) the Trustee is intending to exercise powers of management and administration and (b) it is not intending the re-write the trust. This is not an instance of the trust arising phoenix like from the transaction in a different guise. Instead, the Trustee is intending to exercise the ultimate power of management, namely to bring the trust to an end.
The Trustee has, subject to the restriction in clause 7, power to sell the assets of the EBT and to distribute the proceeds. The objects of the EBT, as amended, are expressed in broad terms and, although reference is made to holding shares for the benefit of employees, clause 5 entitles the Trustee to achieve that object by applying capital or income. I can see no difficulty in regarding the sale as being an application of powers of management or administration by converting the trust assets from one form to another and in distributing the cash received. Miss Bedworth describes the former as the exercise of the classic administrative power. I agree save I would characterise it as the exercise of a management power, administration generally being a matter of function as opposed to management being the exercise of a discretion. The distribution of trust assets, even where it leads to the winding up of the trust can be seen in a similar way. This is not a rewriting of the trust. Rather it is the implementation of the objects of the EBT, albeit in a one-off, final manner. Quite different question arises when the court considers the second and third stages, namely expediency and discretion.
The transaction contained in the SPA is structured on the basis that the first tranche of shares is disposed of by the grant of share options. The Trustee seeks approval not for the grant of share options but for authority to dispose of the shares. The manner in which the disposal takes place is not directly a matter for the court when considering section 57.
There is no difficulty with the first condition in view of the terms of clause 7 of the EBT. Power to sell the shares in the manner proposed is absent. A different conclusion would be reached if the Trustee had power to alter the EBT and confer on itself the necessary power: see Re SMP Trustees Limited [2012] EWHC 772 (Ch).
Consideration was given to using the power contained in clause 19 of the EBT to substitute another group company to become the “Principal Company” as a means of sidestepping the restriction in clause 7. However, clause 19 gives a fiduciary power and its use in this manner would clearly be a fraud on that power. Therefore, the Trustee has no ability to alter the EBT in this case to give itself power to override clause 7.
The question of expediency is related to the transaction that the Trustee wishes to enter into but is prevented from doing so by the absence of the necessary power. There is a useful discussion about the meaning of ‘expedient’ and how the court should apply the test in section 57 in Lewin on Trusts 19th Ed. at [45-023 and 45-024]. It is common ground between all counsel that the test of expediency must be applied by reference to the interests of all the beneficiaries, looked at together. It is a matter of weighing the advantages and disadvantages overall without regard to the particular circumstances of individual beneficiaries. The transaction may not be advantageous to all the beneficiaries or may be more advantageous to some rather than others. That would not prevent the transaction being expedient if it is for their overall advantage or benefit.
I have had the benefit of helpful and thorough submissions on this subject. Counsel appearing for the defendants have provided their respective clients with an opinion on the merits of the transaction and the court has read those opinions. I am grateful to them for their assistance. However, I do not propose to record their submissions, or refer to the opinions in detail in this judgment, particularly where they relate to details of the background to the transaction. I will only say that based on the evidence provided to the court, the timing of the sale is advantageous. In any event, as it seems to me, the court has a limited role, when considering expediency, to examine the financial aspects of the transaction in detail. It suffices to consider at a relatively high level the benefits and risks. The court is only concerned with the benefits that accrue from the transaction for the current constituency of employees and former employees.
The evidence contains three worked examples of the financial expectations of the three classes of beneficiary. They provide a useful illustration of the reasons why all the parties consider that the expediency test is satisfied.
A Pot A Beneficiary who received £1,547 gross at the November 2017 payment would expect to receive £12,376 on the same basis over the next 4 years. The allocation of share options would produce proceeds of sale of £104,211.
A Pot B beneficiary who received £930 gross at the November 2017 payment would expect to receive around £7,440 on the same basis over the next 4 years. The proposed allocation of share options and loan note options would produce proceeds of sale of £99,607.
A Dual Pot Beneficiary who received a combined payment in November 2017 of £1,972 gross would expect to receive around £15,776 on the same basis over the next 4 years. The proposed gross allocation of the proceeds of sale from the exercise of share options and funds from loan notes would be £166,009. The evidence suggests that such a payment is about 8 times the current level of salary for this employee.
These illustrations are not based on the premise that 4 years is necessarily the appropriate period for capitalising the income payments. However, it can be seen readily that the capital sum that will be received is very substantial when compared with the amount of income received over 4 years. Even if a much longer period of income receipt is taken, the capital sum is attractive. From the point of view of the intended recipients, the amounts involved are properly described as ‘life changing’ and with the obvious advantage of being received as a lump sum. And they are in all cases several times the amount of the employee’s salary.
The transaction does bring with it some risks for current employees, that is the Pot B and Joint Pot Beneficiaries. (Such risks have no relevance to Pot A Beneficiaries who run no future risks at all. Instead of the likelihood of receiving payments twice annually, that are dependant on the performance of the Utility in a market that must have uncertainties, they receive a lump sum). Current employees face the uncertainty that comes from a change of employer. Inevitably, there is the possibility of changes being made that will affect the workforce and there may be some redundancies, or changes to terms and conditions. Importantly, if an employee is made redundant, that would not affect any right to benefit from the sale because the ‘bad leaver’ provisions that affect such entitlement do not apply to a loss of employment due to redundancy.
The negotiations with the Purchaser have taken into account the nature of the Purchaser and its business model. The Trustee considers that the risk of the business being restructured with job losses in the short term is unlikely. In addition, there is some limited protection provided under the SPA. Clause 15.5 prohibits the Purchaser from selling onward to a similar regulated business for a period of 4 years.
The provisions of clause 15.7 are important. The Purchaser undertakes to “the Sellers” for the period of one year after completion that it will:
“15.7.1 not undertake or pursue any programme of compulsory redundancy …;
15.7.2 not terminate the employment of the Employees, other than in the ordinary course of business of the Group or for Cause ….;
15.7.3 provide employment benefits to the Employees which are substantially the same, equivalent to, or represent an improvement to, the benefits provided to such Employees as at the date of this agreement; and
15.7.4 not materially adversely change the terms of employment of the Employees,
in each case, save as may be required by applicable law.”
“The Sellers” is a defined term and comprises the Trustee and each Option Seller (in other words each employee who benefits from the transaction). During the course of the hearing, I raised concerns about whether the undertaking provided a contractual right that was, in reality, enforceable by the employees. They are not parties to the contract, although it confers a benefit on them. Clause 17.11 excludes the accrual of rights to third parties, save in limited circumstances that do not appear to apply. Although I was not addressed in detail on the mechanics of the SPA it seems that even if an employee were in a position to take the risk of bringing proceedings against the Purchaser, the strength of such a claim must be doubtful and the Trustee will not be in a position to enforce such rights on behalf of employees because the Trustee will hold only limited funds pending the EBT being wound up. It is therefore necessary to see the undertakings given to employees as statements made in good faith but of limited legal value. In any event, the undertakings remain current for only a relatively short period. The protection they afford must be seen to be as binding only in honour.
The Utility operates in a market that is subject to changes. They will make it increasingly difficult for benefits to be paid to the beneficiaries of the EBT at the same level as they have been paid recently. The timing of the sale is therefore convenient. In addition, the Trustee has received careful advice about the sale price and has been advised by the Financial Adviser that the price is a good one.
Ultimately, the very significant benefits from the sale weighs far more heavily in the scales than any other considerations. The additional risks that arise for current employees (they do not apply to Pot A Beneficiaries) from a change of ownership are more than negligible. Steps have been taken to mitigate them by obtaining the contractual provisions in the SPA to which reference has been made. In addition, the Trustee has carefully investigated the purchaser and established it is an entity that invests in infrastructure and makes long-term investments. I am satisfied that it is expedient to grant the Trustee the power it needs in order to effect the transaction both with regard to the requirements of section 57 and the need for the court to consider carefully the exercise of a discretionary power.
Public Trustee v Cooper
The Trustee seeks the court’s approval or blessing for its decision to enter into the transaction under the second limb of the Public Trustee v Cooper test (Footnote: 1). On any view the decision is a ‘momentous’ one as it will lead to the EBT being wound up. The initial purpose of the EBT was to hold the shares for the benefit of employees and the sale amounts to a major change of approach. But the Trustee is right to take a flexible view of its role and the need and benefit of continuing the EBT in what is likely to be a less beneficial era for the Utility.
The Trustee is not surrendering its discretion to the court. The Trustee has made a decision that it is desirable to sell its holding of shares on the basis of the terms set out in the SPA. There are two elements to consider. First, is the decision to sell the assets of the EBT a reasonable one and, secondly, is the manner in which the proceeds of sale are to be distributed reasonable? The evidence placed before the court demonstrates the care that has been taken by the Trustee in reaching a decision to sell its holding of shares. The decision making process has been structured and logical and it has ranged much more widely than looking at purely financial considerations. As to the distribution of the proceeds of the sale, the Trustee has applied the approach to applying benefit that emerged from the review undertaken in 2002. The internal logic of this approach is that those who should benefit are the employees whose work has played a part in the success of the Utility leading to it being able to repay the subordinated debt.
Similar consideration to those reviewed when looking at expediency for the purposes of section 57 are in play although the test is not the same. Under the second limb of the Public Trustee v Cooper test, the court is looking to see whether the decision falls within a range of reasonable decisions, without needing to express a view about whether the decision should be characterised as being ‘right’. Here, it could not be said here that the Trustee’s decision is an unreasonable one. It is unnecessary to go further.
The court must also be satisfied that the Trustee’s decision is not vitiated by any conflict of interest. It was noted by the Defendants that AB is both a director of the Trustee and a minority shareholder. Paragraph 14 of the Trustee’s Articles of Association permitted NS to play a part in the decision making process. Nevertheless, the question of whether his involvement might create a material conflict was carefully investigated and PMS’ second witness statement demonstrates that the potential conflict of interest was recognised and managed appropriately. There is no reason to conclude, either connected with NS’ involvement or otherwise, that there has been a conflict of interest that has vitiated the Trustee’s decision.
Afternote
Without watering down in any way my observations about the help that has been provided by counsel and in the evidence, I would record a point I mentioned during the hearing but which has not been the subject of submissions. The defendants have had the benefit of advice from independent counsel who appeared at the hearing to speak to the advice they had provided. Counsel in each case were instructed by a lawyer at Macfarlanes LLP, who also act for the Trustee. There are some claims where it is conventional, and entirely proper, for one firm of solicitors for act for all parties. Normally this is where the approval of the court is sought and there is no objection to the approval being given by the other parties. Normally this is where approval from the court is sought and there is no, or limited, objection to the approval being given by the other parties. It is, however, an exceptional course of action. I do see real advantage in a case such as this one, where the trustee’s ability to enter into the transaction is at stake, for separate law firms to be instructed to act. It might increase the cost of the claim, although with separate fee earners within Macfarlanes having dealt with the defendants the increase cost would not be substantial.
Here, the claim concerned rather more than an approval because the court was required to consider the issue of expediency under section 57. Where the trustee’s ability to enter into the transaction is at stake, as opposed to whether approval should be given, I can see advantage in separate law firms being instructed to act for the representative parties. The costs of the claim are one concern, but they are not the only one.
To my mind, there are at least two advantages from representation being provided by independent law firms. First, it reduces the possible perception by persons who were not parties to the claim that there might have been collusion in allowing the claim to proceed undefended. This is of particular importance where the court is asked to make a representation order. An independent member of the bar instructed by the law firm which is acting for all parties is not the same as the same member of the bar being instructed by an independent law firm. Secondly, there will be some degree of added stringency by a law firm, which has not had prior involvement, looking at the proposed transaction, with the possibility that further lines of enquiry may be pursued to ensure the evidence is complete or additional benefits negotiated for the representative group.
In this case, despite some reservations, I was content with the arrangements that had been made. It should not be assumed, however, that in future in a similar case objection will not be taken by the court.