Martin Boughtwood v Oak Investment Partners XII, Limited Partnership

This appeal concerned competing petitions under section 994 of the Companies Act 2006 in respect of a quasi‑partnership (QED Group Limited and its trading subsidiary PML Flightlink Ltd). The judge at first instance (Sales J) found that the relationship between Oak and Mr Boughtwood was a quasi‑partnership and that, on the facts, Mr Boughtwood had engaged in conduct (notably the secret boardroom coup of 24 June 2008 and persistent interference outside his agreed CTO role) which amounted to unfairly prejudicial conduct within section 994. The judge also found some limited breaches of Oak's disclosure obligations but held that they caused no prejudice. In exercise of the court's wide discretion under section 996 the judge ordered a buy‑out of Mr Boughtwood by Oak and gave valuation instructions to a valuer. On appeal the Court of Appeal upheld the judge's factual findings and discretionary buy‑out order but allowed in part an appeal as to the valuation instructions: paragraph 4 (liquidation preference to be taken into account) was upheld and paragraph 14 (a mandatory rule that ordinary shares be valued at nil if QED’s value was below a fixed threshold) was set aside so that the valuer may determine value, if any, for the ordinary shares.

The case arose from competing petitions under section 994 Companies Act 2006 in a dispute between a founder (Mr Boughtwood) and a venture capital investor (Oak) in a quasi‑partnership corporate structure. Oak alleged that Mr Boughtwood had acted unfairly prejudicial to its interests in the conduct of QED/PML by overreaching his agreed CTO role, obstructing planned fundraising and carrying out a secret coup on 24 June 2008 that disrupted management and prevented an imminent investment. Mr Boughtwood cross‑petitioned alleging that Oak and management excluded him and withheld information.

The issues framed and decided included:

• whether the parties formed a quasi‑partnership and the scope of the mutual duties that followed;
• whether Mr Boughtwood’s interference in management and his 24 June 2008 conduct amounted to unfairly prejudicial conduct under section 994;
• whether Oak breached any disclosure obligations to Mr Boughtwood and whether any such breach caused prejudice;
• whether Mr Boughtwood unreasonably refused investment offers and breached obligations in relation to further funding;
• the appropriate remedy and the court’s exercise of discretion under section 996, including valuation instructions to an independent valuer (issues arising under the Articles, notably the Liquidation Preference and a threshold clause in the valuation directions).

The judge made extensive factual findings, including that (i) the parties had agreed a management division under which Mr Knight was CEO, Mr Meyer COO and Mr Boughtwood CTO with no general management control; (ii) Mr Boughtwood repeatedly acted beyond his CTO role, disrupting management and undermining trust and confidence; (iii) his secret 24 June 2008 coup destroyed the quasi‑partnership; and (iv) Oak had withheld some information (eg the Kroll report and a Chrysler approach) but that withholding caused no prejudice. The judge concluded that the fair remedy was to order Mr Boughtwood to sell his QED shares to Oak and to give valuation instructions that reflected QED’s constitutive rights, including the Liquidation Preference but refused to bind the valuer to treat ordinary shares as automatically nil below a fixed company valuation.

On appeal from Sales J ([2009] EWHC 176 (Ch)), the Court of Appeal (Rimer LJ, with which Moses LJ and Rix LJ agreed) dismissed the appeal against the substantive buy‑out order, endorsing the judge’s factual findings and discretionary balancing. The court allowed in part the challenge to the valuation instructions: it rejected the submission that the Liquidation Preference should be disregarded, but held that paragraph 14 impermissibly fettered the valuer and must be removed so that the valuer may determine whether ordinary shares have any value even if QED’s total value is below the stated threshold.

The court therefore dismissed the appeal against the main orders and allowed the valuation appeal in part, remitting valuation on the corrected instructions.

The Court of Appeal dismissed the appeal against Sales J’s substantive order that Mr Boughtwood be bought out by Oak (concluding his conduct, particularly the 24 June 2008 coup and repeated interference outside his CTO role, amounted to unfairly prejudicial conduct; Oak’s limited disclosure failures caused no prejudice). The court gave permission to appeal two valuation instructions: it upheld the requirement that the valuer take account of the Articles’ Liquidation Preference (paragraph 4) but allowed the appeal against paragraph 14, holding that the valuer must be free to decide whether the ordinary shares have any value even if the company’s aggregate value is below the stated threshold.

Appeal from the High Court of Justice, Chancery Division, Companies Court (Sales J) ([2009] EWHC 176 (Ch)). Permission to appeal given on specified valuation instruction paragraphs; Court of Appeal heard 28–31 July 2009 and delivered judgment dismissing the appeal against the principal order of 6 February 2009 and allowing in part the challenge to the valuation instructions annexed to the consequential order of 26 February 2009 (paragraph 14 set aside; paragraph 4 upheld).