Re TPD Investments Ltd

The petitioners brought an unfair prejudice petition under section 994 of the Companies Act 2006 and sought relief under section 996. The Court accepted that unfair prejudice had been established in relation to a number of matters conceded by the respondents (including the Cardiff transfer, the 2014 refinancing and the 2014 dilution) and ordered that the petitioners’ shares be purchased at a fair value to be agreed or determined.

The court rejected the petitioners’ principal complaints about a tranche of bank borrowing called "Loan D": it found that Loan D did not give rise to unfair prejudice, that the petitioners (through their representatives) had become aware of the private loan by late 2009, and that there was no concealment by the majority shareholders or breach of fiduciary duty in respect of Loan D. The judge declined to impose personal primary or secondary liability on the individual directors (Mr Matyas and Dr Wojakovski) for the conceded unfair prejudice.

On valuation the court set out which adjustments to the net asset value should and should not be made for the purposes of the share purchase order: in particular the bank profit-share and swap liabilities and prepayment/exit fees were treated as relevant, certain refinancing fees and accounting amortisations were excluded, and specific adjustments (including treatment of the Cardiff transaction and the Tonstate shareholder loan movements) were directed to be reflected in the fair value calculation.

Background and parties: The dispute concerned the joint acquisition and management of three hotels (the two Metropole Hotels and the Cardiff Hilton) by a joint venture vehicle, TPD Investments Ltd, owned by Destiny Investments (1993) Ltd, Property and Building Corporation Ltd and the Tonstate group (later TH Holdings Ltd). The petitioners (Destiny and PBC) brought unfair prejudice proceedings under section 994 Companies Act 2006 in respect of, among other matters, the off-market "Cardiff Transfer", the March 2014 refinancing and an associated March 2014 share issue which diluted the petitioners, and a tranche of borrowing referred to as "Loan D".

Procedural posture: The Part 7 claim brought by TPD and Tonstate was compromised early in the trial; several aspects of the unfair prejudice petition were conceded by the respondents, leaving a narrower set of issues: the nature and effect of Loan D (including whether it had been concealed and whether it gave rise to unfair prejudice or breaches of fiduciary duty), the correct notional share percentages (in light of concessions and alleged adjustments), the fair value of the petitioners’ shares, the form and timing of the purchase order, and whether individual directors should be made personally liable to purchase the shares.

Issues framed:

• Was Loan D a deliberate diversion of bank funding, concealed from the petitioners, and did it give rise to unfair prejudice or breaches of fiduciary duty?
• What notional share percentages (if any) should be adjusted to remedy any unfair prejudice?
• What is the fair value of the petitioners’ shares and which adjustments to NAV should be made (including treatment of swap liabilities, refinancing fees, sale costs, prepayment penalties, interest on withdrawn sums, and the Cardiff Hilton accounting treatment)?
• Should Tonstate/TPD or the individual directors be ordered to purchase the petitioners’ shares, and what timetable/terms should apply?

Court’s reasoning and conclusions:

• The court reviewed contemporaneous documentation and witness evidence and concluded that representatives of PBC and Destiny had, on the balance of probabilities, become aware of the private loan (Loan D) by late September 2009 and certainly by the Second Memorandum of 30 December 2009; accordingly the petitioners could not rely on a deliberate concealment which had not been the subject of an obligation to disclose during the arm’s length, "fully packaged" negotiations in 2006.
• The court accepted the respondents’ account that Loan D was structured as an unsyndicated tranche containing the bank’s profit share and that the bank required the security arrangements; the judge concluded there was no breach of fiduciary duty by the directors in relation to Loan D, and Loan D did not give rise to unfair prejudice. The repayment and the renegotiation recorded in the Second Memorandum benefitted TPD and the petitioners.
• The court refused to grant relief by re-writing the original share bargain (for example by increasing the petitioners’ notional percentage interest to reflect alternative capital contribution ratios), describing such a remedy as inconsistent with the parties’ original "take it or leave it" deal, and as likely to produce an opportunistic transfer of value.
• On valuation the judge directed that certain items should be treated as part of fair value: swap break costs/liabilities should be taken into account; reasonable selling costs and prepayment/exit fees that would be incurred on sale or refinancing should be allowed; the accounting amortised refinancing fee (a bookkeeping asset) should be excluded; interest on sums withdrawn by Tonstate should be recognised but at a realistic deposit rate (base rate plus 1%); and the failed transfer of £5m pursuant to the Second Memorandum should be reflected by treating the Tonstate shareholder loan movements in the audited accounts (the judge concluded the audited accounts correctly recorded a £10m debit in Tonstate’s shareholder loan account, and the £5m issue should be dealt with on that basis).
• The court ordered that Tonstate and TPD should be required to purchase the petitioners’ shares at a fair value (no minority discount) and should be given a specified period to effect purchase and repay shareholder loans (consistent with the commercial reality that sale of the underlying hotels would be the likely source of funds). The judge declined to impose primary or secondary personal liability on Mr Matyas or Dr Wojakovski: the level of their connection to the conceded unfair prejudice, and the lack of findings of dishonest or fiduciary breach, made personal orders unjust in all the circumstances.

Practical comment: The judgment illustrates the court’s careful assessment of documentary and witness evidence in unfair prejudice cases, the reluctance to infer concealment absent an obligation to disclose, the discretionary nature of remedies under section 996 (with the court declining to rewrite the original commercial bargain), and detailed guidance on valuation adjustments to be used in the share-purchase remedy.

First instance: The petition succeeded in part. The court ordered that Tonstate/TPD must purchase the petitioners’ shares at a fair value (no minority discount) with terms to permit repayment of shareholder loans and a reasonable period to effect purchase. The court held that Loan D did not give rise to unfair prejudice, there was no breach of fiduciary duty by the directors in respect of Loan D, there was no actionable concealment, and it was not just to impose personal primary or secondary liability on Mr Matyas or Dr Wojakovski. The court set out specific directions on valuation adjustments to determine fair value.