Vercoe & Ors v Rutland Fund Management Ltd & Ors

Key legal principles and decision: The court held that the defendants (Rutland Fund Management Ltd, the Rutland Funds and Mr Cartwright) breached contractual and confidentiality obligations owed to the claimants (Mr Vercoe and Mr Pratt) arising from two signed confidentiality letters (the September and November contracts). The court found that the defendants used confidential information supplied by the claimants to pursue and complete the acquisition of Harvey & Thompson Limited and associated assets without involving the claimants, contrary to the agreed limitation on use of that information. Remedies were awarded by reference to a notional commercial price for releasing the defendants from those negative contractual/confidentiality obligations (a Wrotham Park type valuation), assessed in equity as an allocation of management equity that would have been reasonable in the circumstances. The claim that the defendants owed fiduciary duties was rejected.

Background and parties. The claimants (Duncan Vercoe and John Pratt, with MAS Corporation Limited added) identified an acquisition opportunity in the pawnbroking business (H & T) and prepared a business plan. They sought venture capital support and entered two model confidentiality letters with Rutland Fund Management Ltd (RFML) in September and November 2003. The business plan named a proposed management buy-in team including Mr Middleton, Mr Vercoe and Mr Pratt. RFML (with associated Rutland funds and Mr Cartwright) subsequently approached the US parent Cash America and acquired H & T (and Svensk Pantbelaning) in 2004-2006, later realising substantial profits. The claimants alleged breaches by RFML of the written confidentiality agreements, breach of confidence, and breach of fiduciary duty arising from RFML's conduct in excluding them from the completed acquisition.

Nature of the claim and relief sought.

• The claimants sought (i) enforcement of the confidentiality agreements against RFML, (ii) relief for breach of confidence against RFML, the Rutland Funds and Mr Cartwright, and (iii) relief for alleged breach of fiduciary duty; remedies asserted included damages and, alternatively, an account of profits.

Issues for decision. The court framed and decided these principal issues:

• Construction: the legal effect of the September and November confidentiality letters and whether they obliged RFML to involve each named member of the proposed management buy-in team if RFML proceeded with the acquisition;
• Factual findings: the credibility of witnesses and whether RFML (and its agents) knowingly misled or concealed its position on the role of the claimants;
• Defences: whether the claimants had acquiesced, waived or been estopped from enforcing the agreements;
• Remedies: whether damages or an account of profits was the appropriate remedy for breaches of contract/confidence, and how to quantify compensation.

Court’s reasoning and outcome on issues.

• Construction: The court held that the September and November letters were intended to protect the proposed management buy-in team and to limit use of the disclosed "Confidential Information" to the "Permitted Purpose" (the management buy-in described in the business plan). RFML therefore contracted to hold the information confidential and to use it only for that purpose; those obligations were owed to each member of the management team named or to be identified in the plan.
• Findings of fact: The court made detailed credibility findings. It accepted much of the claimants' evidence about how RFML, and in particular Mr Cartwright and Mr Slatter, formed and concealed views about excluding Mr Pratt and downgrading Mr Vercoe, and found that RFML and its agents acted in a "shabby" and sometimes deceptive manner (including an untruthful letter of intent). The court found that RFML did not, however, act as a fiduciary for the claimants.
• Waiver/estoppel: The court rejected the defendants' plea that the claimants had waived or were estopped from enforcing the contracts. It found that Mr Pratt effectively was excluded in March 2004 (and accepted RFML repudiated as to him then), whereas Mr Vercoe stayed engaged but reasonably pressed for assurance and was not barred from enforcing his rights.
• Remedies: The court declined to order an account of profits. It held that the appropriate remedy for the contractual and confidential-use breaches was damages assessed by reference to a notional commercial price for release from the negative covenant (a Wrotham Park type assessment taking account of the commercial context and the parties' positions). Applying that approach the court assessed the reasonable equity allocations that would have purchased release: 2.5% (equivalent) for Mr Pratt and 5% (equivalent) for Mr Vercoe, and awarded damages accordingly. The fiduciary duty claim failed.

Wider context. The court explained the commercial background to management buy-ins and buy-outs and emphasised that, in venture capital transactions, precise terms (particularly management remuneration and equity) are often finalised late in the deal process; that context influenced both construction and remedy. The judgment also analysed the circumstances in which an account of profits may be refused in favour of Wrotham Park type relief.

First instance: claim allowed in part. The court held that Rutland Fund Management Ltd breached the September and November confidentiality agreements and, with Mr Cartwright and the Rutland Funds, misused confidential information by acquiring H & T and related assets without involving the claimants. The court awarded damages by reference to a Wrotham Park style notional commercial buy-out (assessed as an equivalent equity allocation of 2.5% for Mr Pratt and 5% for Mr Vercoe). The court rejected the claim that defendants owed fiduciary duties and declined to order an account of profits.