Durose v Tagco

The petition under section 994 Companies Act 1985/1996 for relief under Part 30 (unfairly prejudicial conduct) was dismissed. The court held that the actions complained of were authorised by the parties' detailed investment documentation (including the Articles) and that pre-contractual assurances about so-called "swamping" or enhanced voting rights did not give rise to an equity capable of overriding the formal agreements. The judge found an insolvency event occurred in August 2019 because the petitioners failed to pay for allotted new shares, not because the investor engineered insolvency, and that the investor (Tagco/Waterland) was entitled to invoke the contractual swamping and catch-up mechanisms. The exclusion and suspension of the first petitioner was justified by findings of misappropriation of company funds and misrepresentations about funding; those findings meant no equitable ground justified relief.

This first-instance, nine-day trial concerned an unfair prejudice petition (section 994 Companies Act) brought by early shareholders of Gas Tag Limited following a private equity investment by Waterland (via Tagco BV) in December 2017. The petitioners alleged that the investor engineered an insolvency so as to trigger enhanced voting and issue shares to itself ("swamping"), thereby acquiring control and excluding the founders, and that pre-contractual assurances created a "legitimate expectation" that swamping would be a last resort only if the company was about to go under.

Parties and procedural posture:

• Petitioners: Paul Durose and five other founder shareholders.
• Respondents: Tagco BV (R1), Waterland Private Equity Fund VI CV (R2) and Gas Tag Limited (R3).
• Relief sought: petitioners sought relief for unfair prejudice under section 994 and ancillary orders under Part 30.

Issues the court framed:

1. Whether pre-investment statements (including an email of 16 October 2017 and internal documents) created equitable constraints or a legitimate expectation limiting the exercise of swamping rights;
2. Construction and effect of the 1 May 2019 offer (open offer of new shares and conditional sale of Ullathorne's shares), and the underwriters' obligations and timing;
3. Whether an insolvency event occurred and, if so, whether it was caused or engineered by the investor;
4. Whether Tagco/Waterland was contractually and equitably precluded from invoking the Articles' swamping and catch-up mechanisms;
5. Whether exclusion and suspension of Mr Durose was justified and if any misconduct disentitled him from relief.

Court's reasoning and findings:

• The court examined the documents, the negotiated investment agreements and Articles, and pre-contractual communications. It emphasised the commercial context: sophisticated parties, extensive legal advice and an entire agreement clause.
• The judge found that statements about a "ring-fenced" £30m and that swamping would be a last resort were either accurate restatements of the contractual position or statements of present intention and did not create an equity sufficient to displace the written agreements. Consequently, no legitimate expectation arose that would prevent Tagco invoking contractual rights.
• The Offer of 1 May 2019 was construed to require payment in cleared funds for the new shares before any obligation to transfer/purchase the sale shares crystallised. The underwriters' secondary obligation did not arise because the primary condition (payment in full) was not met. The shortfall by 22 August 2019 was £550,000.
• The company was in an insolvency event (unable to pay debts as they fell due) on or about 22 August 2019. The insolvency resulted principally from a combination of inadequate sales, excessive spend and the petitioners' failure to meet underwriting obligations; it was not shown to have been engineered by the investor.
• Tagco was contractually entitled to serve a voting adjustment notice and to issue shares under the Articles; those steps were taken in accordance with the Articles and related agreements. There were no equitable considerations sufficient to override those rights.
• The first petitioner was found to have misused company funds and to have misrepresented funding arrangements; suspension and subsequent exclusion were justified and did not give rise to unfair prejudice.

Subsidiary points: the court rejected the weight of certain evidence (notably the absent petitioner Mr Foy's witness statement) and made credibility findings (the judge found the first petitioner optimistic and unreliable on some points; Waterland witnesses were found credible).

The petition is dismissed. The court found that the contested conduct was authorised by the parties' investment documentation and Articles, that pre-contractual assurances did not create an equity or legitimate expectation to override those written rights, that an insolvency event occurred because the petitioners failed to pay for allotted new shares, and that the first petitioner’s suspension and exclusion were justified by findings of misuse of company funds and misrepresentations.