Granville Baird Capital Partners Ltd. v Blackden & Ors

In this action the Claimants make a claim for a contractual contribution from the Defendants towards the cost of mounting what turned out to be an unsuccessful Take-Over Bid for a company named Professional Staff Plc ("Professional"), a company engaged in staffing services. This is the trial of the issue of liability.

The proposed Take-Over was a Management Buy-out in which the Claimants, who are fund managers, agreed to provide financial backing. The Management Team consisted of the 1^st Defendant ("Mr Blackden") the 2^nd Defendant ("Mr Worrall") and the 3^rd Defendant ("Mr Culver).

The transaction was complicated by the fact that (1) Professional was a UK Company with UK and US subsidiaries which was listed on NASDAQ; and (2) it was a "take private" transaction: converting a publicly owned company into a private company.

The proposed Take-Over was given the name "Project Jockey" and the corporate vehicle involved was an off-the-shelf company, which came to be named First Saddle Limited ("First Saddle"). At an early stage it was agreed that the equity of First Saddle would be held as to 65% by the Claimants and 35% by the Defendants.

During the course of the Spring of 2000 a due diligence exercise was conducted on Professional by Pricewaterhouse Coopers and others. This revealed a potential problem in relation to the tax position of a subsidiary of Professional, S Com Plc.

Under an undated Investment Agreement, the Claimants (through various investment funds) agreed to subscribe for shares and Investor Loan Stock in First Saddle; and the Management agreed to subscribe for shares. The directors of First Saddle, who were appointed in accordance with the terms of the Investment Agreement, were Mr Fell and Mr Trotter (the Claimants appointees), Mr Blackden and Mr Culver (Management Team appointees), and Mr Hubert and Mr Gluchlick (independent directors). Mr Worrall, who was the Finance Director of Professional, acted as the Company Secretary.

The Investment Agreement was subject to the provision of funding by the Bank of Scotland ("BoS") and Intermediate Capital Group Ltd ("ICG"). On 20 July First Saddle entered into funding agreements with BoS and ICG. The latter was referred to as the Mezzanine Lender. It is unnecessary to refer in detail to these agreements and sufficient to note two points; first, the Banks’ obligation to provide Certain Funds, and secondly their right to withdraw in the event that First Saddle committed a Keystone Event of Default. The obligation to provide Certain Funds is, broadly, an obligation by funders of a Take-Over to make funds available throughout the period of the offer so as to enable a company to purchase the shares of the target company and to confirm this for the purposes of Rule 24.7 of the UK Take-Over Code. The Banks’ right to withdraw in the event of a Keystone Event of Default included a right to withdraw if First Saddle either broke its covenant not to vary its offer for Professional or defaulted on its repayment obligations.

On 5 July Mr Worrall sent a fax to GBCP enclosing what he described as "Thoughts on Cost Sharing". The enclosed document, headed "Jockey – Cost Contributions" appears to record a prior agreement as follows:

The attached file was headed "Jockey – Cost Contribution Scenarios" and included the following:

It is clear that the parties intended that, if the attempt to acquire Professional was unsuccessful due to a "technical failure", the Claimants were entitled to 35% of the costs from the Defendants; and that, if the acquisition was unsuccessful because the Claimants withdrew without cause, then the Claimants were not entitled to a 35% contribution to the costs.

It is the Claimants’ case that First Saddle was unable to acquire Professional due to a "technical failure": namely, its inability to get acceptances of 90%, or a lesser acceptable number, of the shares in Professional; and that they are entitled to recover 35% of their costs from the Defendants. The Defendants dispute this. The Defendants’ case is that the Claimants withdrew without cause due to a change of policy in relation to the Take-Over; and that, consequently, they are not entitled to any contribution.

It is convenient to note two points about the Agreement at this stage.

First Saddle’s offer to purchase the shares of Professional at a price of US$8.34 per share was published on 24 July. The Board of Professional recommended acceptance of the offer. A Summary Term Sheet attached to the offer stated:

The terms of the Offer further provided that it would become unconditional in the event that acceptances were received from those holding at least 90% of the shares to which the Offer related. Under ss.428-430 of the UK Companies Act 1985 if an offeror has acquired or contracted to acquire 90% or more of the shares of a company, it can oblige the remaining shareholders to accept the offer. The ability to buy out the minority shareholders was an important feature of the Take-Over which was required so as to safeguard the financing banks security.

At the time of the Offer, Lord Ashcroft (the Chairman of Carlisle Holdings) held 246,000 shares in Professional. Between 21 July and 22 August a subsidiary of Carlisle Holdings bought a further 621,900 shares, making a total of 867,900 shares. This was more than 10% of the shares in Professional and enabled Lord Ashcroft and Carlisle Holdings to block the Take-Over if they wished (subsequent references in this Judgment to "Lord Ashcroft" are to be read as references either to Lord Ashcroft or to Carlisle Holdings as the context suggests). By the week commencing Monday 7 August Lord Ashcroft’s acquisitions and the implications for the Offer were known to First Saddle and its advisors.

Views differed as to how to address the potential problem of Lord Ashcroft’s strategic shareholding. Mr Blackden was in favour of approaching Lord Ashcroft to find out what he intended. However, the general consensus at First Saddle and among its advisors was that it would be better to wait and to see whether Lord Ashcroft would tender his shares by the closing date.

The conduct of the Offer had to comply with the rules of the US Security Exchange Commission and the UK Take-Over Code. Rule 16 of the Take-Over Code provides:

Compliance with the letter and spirit of Rule 16 was recognised at the time as a formidable inhibition to negotiating with Lord Ashcroft.

In the course of the period leading up to 22 August it is clear that the Claimants had become less attracted by the deal than they had been when Mr Trotter and Mr Fell had first proposed it. In the course of her cross-examination of Mr Trotter Ms Prevezer QC demonstrated that the anticipated profits had reduced, the costs had increased and that a problem had been identified in relation the potential tax liabilities of one of Professional’s subsidiaries, S Com Plc. This latter development led to Mr Trotter to make a file note on 17 August:

At about 2.00 p.m. there was a meeting of the Board of First Saddle at the Claimants’ offices when various matters were considered. First, how First Saddle should proceed if Lord Ashcroft did not tender his shares by the closing at 10.00 pm London time. There were two options: either to extend the offer (at least initially) to noon on 25 August so as to enable contact to be made with Lord Ashcroft or to announce that the Offer had lapsed. These options were reflected in the preparation of two draft Press Statements: one announcing the extension of the Offer, the other announcing that the Offer had lapsed. There was also a discussion about the S Com Plc liabilities. The discussion about S Com Plc concluded with Mr Hubert asking Mr Blackden and Mr Culver whether they would be prepared to put $2m from the sale of their shares into escrow. They agreed to consider this suggestion over night. As far as Mr Hubert was concerned the S Com Plc issue was irritating, but was not a deal breaker.

Later that evening there was a further meeting at the Claimants’ offices. The purpose of this meeting was to review the results of the Offer. At about 10.00 p.m. the receiving house in New York telephoned the result. The acceptances amounted to about 83% of the target shares. Lord Ashcroft had not tendered his shares. As a result of this there was a discussion at which it was agreed that an approach should be made to Lord Ashcroft by the Claimants’ Chairman, Lord Hodgson. Lord Hodgson and Lord Ashcroft were acquainted through their mutual involvement in the Conservative Party; and it was felt that an approach at this level was likely to be the most productive way of discovering Lord Ashcroft’s intentions. Lord Hodgson was asked to make a limited enquiry: whether Lord Ashcroft intended to tender his shares.

Lord Hodgson telephoned Lord Ashcroft and made the enquiry. Lord Hodgson’s recollection was that Lord Ashcroft told him that he had had previous dealings with the management of Professional and was not interested in facilitating a Management Buy-out at what he considered was a cheap price. It is clear, both from Lord Ashcroft’s statement and the recollection of others to whom the conversation was reported, that Lord Ashcroft also said that he would be prepared to negotiate with First Saddle, that he thought that the mezzanine provider (ICG) had a good deal and mentioned the possibility of taking their place. He also said that First Saddle could contact 'his man' in London. This was a reference to Mr Andrew Wilson. In §19 of his statement Lord Ashcroft stated:

Lord Ashcroft’s response was passed on to Mr Fell and some of the advisors late at night on 22/23.

In my view what occurred on 23 August should properly be regarded as a continuous meeting, from approximately 11.30 am to 2.00 pm, which was interrupted. It is clear that there was a First Saddle Board Meeting which begun at about 11.30 am. The Board Meeting subsequently broke up while some of the participants followed up points which had been made at the meeting. Some time after 1.30 pm the Board reconvened and a decision was taken not to extend the offer. Some time before the reconvened Board Meeting, Mr Fell spoke to the Defendants in the absence of Mr Hubert and Mr Gluchlick. This was referred to as the Management Team Meeting. It is convenient to summarise the evidence by reference to this chronology.

At 11.30 a report was made to the Board about Lord Hodgson’s telephone conversation with Lord Ashcroft the previous night. It is common ground that the meeting was told and understood that (as Mr Blackden put it)

There is an issue as to what was then agreed. It was the Defendants’ evidence that a positive decision was made to contact Lord Ashcroft again and to discover what he wanted; and, that in order to do this, it was agreed to extend the deadline for acceptance of the offer until 12.00 noon New York time on 25 August. The evidence of the witnesses called by the Claimants was that these points were discussed as possibilities but that no decision was made.

It is an unsatisfactory feature of the case that there is no adequate contemporaneous record of the Board’s discussions and no formal record of the resolution that was ultimately passed by the Board. It is surprising that in a transaction in which First Saddle had the benefit of professional advice no one considered that a note should be taken of what occurred. The only contemporaneous record is an ambiguous handwritten note of Mr Worrall headed "FS Board Meeting"

Under the heading "re Carlisle" Mr Worrall wrote:

One of the issues in the case is whether it was agreed at this stage of the meeting that the time for tendering should be extended to noon on 25 August. Mr Worrall’s note is not particularly helpful in resolving this issue since it not clear that he is recording decisions of the First Saddle Board. For example an earlier reference:

I am not sure it matters very much whose recollection is correct about what occurred at this initial stage of the Board Meeting. Even if the Defendants are correct in their evidence that a decision was taken by the Board to talk to Lord Ashcroft, it was plainly a decision which could be reversed.

There is also an issue as to whether the costs of any extension to 25 August was discussed. Mr Hubert’s evidence was that there was a discussion in broad terms either at this early stage of the Board Meeting or at the reconvened Board Meeting; and, that in the meantime, he had been told by Skadden Arps that there were "significant costs" in extending for a further few days arising out of the need to comply with SEC requirements. The Defendants did not recall any discussion about costs and Mr Blackden described the evidence from Claimants’ witnesses (Mr Trotter and Mr Hubert) as "revisionism".

When the Board Meeting broke up Mr Hubert asked Mr Wolfendon of BoS and Mr Morrell of ICG whether their banks would be prepared to support the acquisition of less than 90% of the shares. Mr Wolfendon had previously indicated that he would not; and repeated this. ICG followed the lead of BoS.

It is clear that, at some stage, Mr Fell (with Mr Trotter) asked for a meeting with the Defendants. At this Management Team Meeting, Mr Fell emphatically told the Defendants that he did not want to do the deal and his "gut" told him not to.

I should record that, at this stage, Mr Culver, offered to put £5m in an escrow account. This was the culmination of a series of discussions which, as I have already recorded, began the previous day when Mr Hubert had suggested that Mr Culver and Mr Blackden secure £2m in escrow to deal with BoS’s concerns about possible liabilities arising from S Com Plc’s business. Mr Culver and Mr Blackden had promised to consider this request; and had each offered earlier on 23 August to place their shares in First Saddle in escrow to a value of £ ½ million. Mr Fell then said that the Bank were now asking for £5m in escrow. Unsurprisingly Messrs Blackden and Culver considered this request unacceptable, although later Mr Culver made the offer that I have already referred to.

It is the Defendants’ case that during the course of this Management Team Meeting there was increasing anxiety as to which of the two Press Releases should be released in time for the 2.00 pm deadline. It is the Defendants’ evidence that, after initially deferring the decision, Mr Fell eventually authorised the publication of the Press Statement which announced that the offer had lapsed. Mr Fell denied this. He said, as is correct, that it was a matter for the Board. Mr Trotter said that he could not recall Mr Fell authorising the release of the Press Statement.

The final stage of the 23 August Board Meeting took place when Mr Fell took the Defendants back into the room where the earlier meeting had taken place.

Mr Hubert said that his task was to stand back and deal with the issues objectively. After some discussion, Mr Hubert proposed that a formal vote be taken on a resolution not to extend the offer period. That vote was carried by 3 votes (Messrs Fell, Trotter and Gluchlick) to nil. Mr Hubert’s evidence (which I accept) was that he would have voted in favour if necessary (making it 4 votes in favour). Messrs Blackden and Culver abstained.

It is the Defendants case that the decision had already been made by Mr Fell (acting on behalf of the Claimants) at the Management Team Meeting.

The area of factual dispute is relatively limited and is largely confined to what occurred on 22-23 August. It is clear that the atmosphere was tense. The Take-Over was technically complex, the parties were acting under tight time constraints and they had to comply with regulatory demands. It was a transaction to which both parties had committed time and energy, in the hope of significant reward.

In addition to these inherent features of the Take-Over, there were particular issues which were perceived in different ways by the participants: the growing doubts of the financiers and the position which should be adopted in relation to Lord Ashcroft’s acquisition of a blocking shareholding. Mr Hubert appositely described the atmosphere as "febrile".

This background is relevant to understanding what I find to be two relevant features of the meeting. The first is, what has been referred to as, the "mood of the meeting". The Claimants’ witnesses described the mood of the meeting on the morning of 23 August as negative: there was a feeling of resignation that there was not much that could be done in the face of Lord Ashcroft’s blocking shareholding. The Defendants’ evidence was that the mood of the meeting was positive: there was a feeling that the time limited for acceptances should be extended so as to provide an opportunity to talk to Lord Ashcroft and that such a discussion might be productive.

In my judgment this difference of view led to the Defendants’ having a false appreciation of the views of the other members of the Board; and this led them to believe that there was a complete change of approach as 2.00pm approached and made them think that the Independent Directors had been "got at" in some way.

I considered the witnesses who gave evidence to be truthful; although I found that the Defendants’ evidence was coloured by their unrealistic views as to the progress of the Offer. I should however mention two points about the evidence. First and for reasons which I will come to, I did not accept the evidence of Mr Fell about the release of the Press Statement. Secondly, I found the evidence of Mr Worrall less helpful than that of the other Defendants. Mr Worrall spent too much of his time in the witness-box arguing the case rather than answering the questions he was asked.

In deciding the issues of fact I gained most assistance from the evidence of Mr Hubert and Mr Gluchlick, the independent members of the Board of First Saddle. Ms Prevezer QC expressly disavowed any challenge to their independence and, in my view, she was right to do so. They were both experienced in this field of business and had direct experience of take-overs. Having heard them give evidence I am quite satisfied that they endeavoured to act in the best interests of First Saddle and performed their duties as directors carefully and conscientiously during the course of the Take-Over. If their appointment was intended to give First Saddle the benefit of directors who would act properly in the company’s best interest and independently of the potentially conflicting interests of the shareholders then that intention was fully achieved.

It is clear that at the 2.00 p.m. meeting on 22 August the consensus was to extend the offer until 25 August; but that no formal decision was made at this meeting. I also find that no such decision was made at the Board Meeting at 11.30 am on 23 August. The matter was undoubtedly discussed again, but I accept the emphatic evidence of Mr Trotter, Mr Hubert, Mr Gluchlick and Mr Fell that no final decision was taken either way. The matter of further talks was left open; but the preponderant view was that there was little to be gained by such talks.

The Claimants’ case is that, once it was clear that Lord Ashcroft was not prepared to tender his shares at the Offer price, there was no point in further negotiation. As Mr Gluchlick put it:

The situation facing First Saddle was stark. Lord Ashcroft held a blocking share of over 10% of the shares in Professional. BoS and ICG had made it quite clear that they were not willing to reduce the acceptance level below 90%. At its highest Lord Ashcroft had indicated that he was prepared to talk. The only possibility that would save the Offer was that he might be persuaded to tender his shares by 25 August. In my view that was a remote possibility. There was no indication at the time, and there has been no credible evidence since, that Lord Ashcroft would have tendered his shares by 25 August.

Mr Blackden said it might have been possible to do a deal with Lord Ashcroft and, for this reason, it was worth extending the date for acceptances till 25 August. However, he candidly accepted in evidence that he could not say what such a deal might have been. Various hypothetical deals were put to the Claimants’ witnesses by Ms Prevezer QC in the course of cross-examination; but each possible deal was likely either to have been of no commercial interest to Lord Ashcroft or to have offended against Rule 16. I should add for the sake of completeness that the suggestion that the shareholders of Professional might have approved a preferential deal for Lord Ashcroft in General Meeting was highly unlikely.

Mr Culver appeared to accept that there was some discussion about costs but said that no figures were mentioned. Again, it seems to me that the focus of attention and the appreciation of the individual members of the Board is likely to have been different. The Defendants undoubtedly wanted an approach to be made to Lord Ashcroft which might salvage the Take-Over. However, I accept Mr Hubert’s evidence that he had in mind the costs implicit in an extension and asked Skadden Arps about them. I am more sceptical about the Claimants’ evidence that the advantages of being able to cash-in the currency swap on 23 August rather than 25 August was discussed. This struck me as a point which had grown in importance in hindsight.

I have concluded that the Defendants’ evidence on this point is accurate. It plainly made an impression on each of them. It is common ground that Mr Fell felt strongly that the deal should not go ahead; and he was (in my view) capable of acting decisively if he thought it necessary. Mr Hollander QC said that it would not have been appropriate for Mr Fell to have acted in this way since it required a decision from the Board. In the event, however, the decision to publish the Press Statement announcing the lapse of the Offer was consistent with the resolution of the Board.

This is primarily a legal question. However, I find that when Mr Fell told the Defendants at the Management Team that he did not want to do the deal, he was expressing a personal view and giving them advance notice of the way in which he would vote at the Board Meeting of First Saddle. I accept the evidence of Mr Hubert and Mr Glucklich that neither of them was aware of what had occurred at the Management Team meeting and that Mr Gluchlick voted (and Mr Hubert would have voted) on the resolution exercising their independent judgment.

The aim in construing the Agreement is to find the meaning which the document would convey to a reasonable person having all the background knowledge reasonably available to the parties, including anything which would have affected the way a reasonable man would have understood it, but excluding previous negotiations and declarations of subjective intent, see for example ICS Ltd v West Bromwich Building Society [1998] 1 WLR 896, Lord Hoffmann at 912-913.

Neither party suggested that the background knowledge reasonably available to the parties went further than the contractual documents (and late drafts) relating to the Offer and the applicable regulations and codes.

The Offer was made by First Saddle; and it is important to note that the structure of the Board of First Saddle did not give a majority either to the Claimants (and their appointees) or to the Defendants (and their appointees). The balance was held by the independent directors. Furthermore, all members of the Board were obliged to act in the best interests of First Saddle.

There are two points which arise from the words "GPCP withdraw - without cause" simply as a matter of impression. First, although it is possible that a withdrawal due to the Claimants funding failing to materialise might apply after the Offer was issued if there was a breach of the Investment Agreement, the examples suggest that the parties had in mind a withdrawal by the Claimants before the Offer was issued. This is clear both from the examples given for "GBCP withdraw - without cause" and the contrast drawn with the examples given for "GBCP withdraw - for cause". Secondly, although a repudiation of the Investment Agreement would fall within the term "GPCP withdraw", an expression of opinion by an employee about the wisdom of proceeding with the transaction after the Offer had been made, however trenchantly expressed, would not.

The words "Technical Failure" and the examples given suggest a situation which has arisen after the Offer has been made: either some act of a regulatory body preventing the Offer succeeding or the failure to attract the required 90% acceptances. In each case the cause of the failure cannot be attributed to the act of either party and the "inability to get 90% or other acceptable number" is the inability of First Saddle.

In the present case it is clear that, although Mr Fell expressed strong adverse views and (with Mr Trotter) voted against extending the Offer, the decision not to extend the offer (and the reason why the attempt to acquire Professional did not succeed) was the decision of the Board of First Saddle not to extend the Offer. The Claimants had not withdrawn in the sense intended by the Agreement; the Offer failed (and the reason why the attempt to acquire Professional did not succeed) was for the technical reason that the required 90% had not been reached.

The Defendants have at different times advanced different reasons as to why this is not so.

First, they have contended that the decision not to extend the time for acceptance of the Offer was taken by the Claimants. For the reasons I have already given this is wrong both as a matter of fact and analysis.

Secondly, they have tentatively suggested that the decision was "in reality" made by the Claimants because Mr Hubert and Gluchlick followed the Claimants’ lead and did not exercise independent judgment. Quite properly, no challenge was made to the impartiality of these directors and it was not suggested that they had acted in breach of their fiduciary duty. For this reason, as well as the reasons I have already given, I reject the Defendants’ suggestion both as a matter of fact and analysis.

Thirdly, they have submitted that, once the Claimants and the funding banks made it clear that they "did not wish to proceed", it was not in the interests of First Saddle to proceed. So far as the funding banks were concerned I am quite satisfied that, whatever their misgivings about the transaction, they were scrupulous in leaving it to First Saddle to decide whether or not to extend the period for acceptance of the Offer. What they made clear was that they were not prepared to reduce the level of acceptances below 90%. I have already dealt with the position of the Claimants.

Fourthly, in her closing submissions, Ms Prevezer QC submitted that the factual situation might not have amounted to either "Technical Failure" or "GBCP withdraw - without cause". It might be possible to envisage a failure of the Offer which was not covered by the Agreement; but, for the reasons I have given, I find that the situation was one of "Technical Failure" due to the inability of First Saddle to get acceptances of 90% of the shares.

Finally, Ms Prevezer QC submitted that, because the right to claim a contribution to the costs depended on the "attempt to acquire" Professional being "unsuccessful", an inability to procure acceptances of 90% of the shareholding did not entitle the Claimants to a contribution if a revised and higher offer might have succeeded. It seems to me that, as a matter of commercial sense, the Agreement applies to the offer made (and, possibly, such higher offer as First Saddle agreed). It did not provide a defence to the Claimants’ claim if some different and unspecified offer might (on a remote hypothesis) have succeeded.

I should also add that the conclusion that I have come to seems consistent with the information provided to the shareholders of Professional by Lord Ashcroft and Mr Blackden when they were later involved in a successful acquisition of the company in May 2003 at a price of US$2.10 per share:

It follows that there must be judgment for the Claimants on the issue of liability.