Paul Richards & Anor. v Speechly Bircham LLP & Anor.

The claim was a first instance professional negligence action brought by two former shareholders/directors of IP Solutions UK Ltd against their transactional solicitors in respect of losses said to have arisen from the sale and subsequent events following the 2014 Livingbridge investment. The central legal issue was whether the firm was negligent in failing to advise that the contractual Redemption Premium Provision (the "RPP") and the drafting of article 18.4.1 of the new company's articles could operate to reduce the Market Value of the claimants' shares on a forced transfer (a "Leaver" scenario).

The court held that the firm owed the usual duty of a reasonably competent private equity solicitor, that it fell below that standard by failing to identify and warn of the material legal risk created by the interaction of article 18.4.1 and the RPP, and that this breach caused a lost chance of agreeing an alternative commercial outcome. The judge rejected that the claimants were contributorily at fault for the outcome. The court accepted valuation evidence for the counterfactual sale scenario and awarded damages for the loss of a substantial chance, after credits, in the sum of £1,454,000.

Background and parties: The claimants (Mr Richards and Mr Purves) sold IPS UK and rolled part of their equity into a newly capitalised company in which Livingbridge invested in December 2014. The defendants were the solicitors who advised the claimants on the transaction. After completion the claimants were dismissed by the acquirer and litigation (the "Leaver Litigation") followed; the High Court held they were wrongfully dismissed but, in subsequent proceedings, held that because of the RPP their shareholdings had only nominal value.

Nature of the application/relief sought: The present proceedings are a professional negligence claim. The claimants allege negligent advice and/or failure to advise, and seek damages for the reduction in value of their rolled-over equity and for legal costs incurred in the Leaver Litigation.

Issues before the court: (i) scope and standard of the solicitors' duty in a private equity transactional retainer; (ii) whether the firm breached that duty by failing to identify and warn about the risk that the RPP might be taken into account in determining "Market Value" under article 18.4.1; (iii) construction of article 18.4.1 and whether it properly required the RPP to be taken into account; (iv) causation and proof of loss, including whether the loss was a loss of a real or substantial chance (two counterfactual scenarios were pleaded); (v) valuation methodology and expert disagreement on EBITDA and multiples; and (vi) contributory fault and mitigation.

Reasoning (concise): The judge reviewed the retainer and the contemporaneous drafting/negotiation and concluded the firm was retained to review and negotiate the Articles and that article 18.4.1 and the Leaver provisions were squarely within the retainer. The court found the risk that the RPP could operate to denude value in a Leaver valuation to be a material legal risk which the firm should have identified and explained to the claimants, even though the precise concatenation of events that later occurred was unlikely. On construction the judge concluded (differently from May J in the earlier Quantum Judgment between the claimants and the company) that article 18.4.1, properly read, did not require the valuer to accept the RPP as determining market value; but that finding did not absolve the firm from liability for failing to draw attention to the legal risk and to attempt to obtain a contractual carve-out. On causation the court rejected the claimants' Scenario 1 (that Livingbridge would have agreed a carve-out) as not a real and substantial chance; it accepted Scenario 2 (the claimants would have walked away and found an alternative investor) and assessed the chance of achieving the counterfactual sale at 75%. The court preferred the claimants' valuation expert on the key assumptions (EBITDA and multiples) and awarded damages for the lost chance of concluding an alternative transaction, together with a share of litigation costs that were causally connected to the negligent advice, totalling £1,454,000. Contributory fault was rejected.

The claim succeeds. The court held that the defendant solicitors breached their duty as transactional advisers by failing to identify and warn of the material legal risk that the wording of the articles (article 18.4.1) could be read so as to admit the Redemption Premium Provision into a Leaver valuation and failed to take steps to seek a contractual carve‑out. The judge found that (i) the firm was negligent in that respect; (ii) the claimants proved on the balance of probabilities that, had they been adequately advised, they would have rejected the deal and sought an alternative transaction (Scenario 2) and there was a 75% chance of completing an alternative deal at higher value; (iii) experts’ valuation evidence supported a midpoint valuation used for damages; (iv) contributory fault was not established; and (v) damages for the lost chance and connected legal costs were assessed at £1,454,000.