Daniel Lee & Anor v GSquare Capital II LP & Ors

The court decided an application by GSquare and P2U Holdings to strike out or obtain reverse summary judgment on two discrete issues arising from Article 16 of the articles of association of P2U Holdings. First, the court held that a transfer notice dated July 2020 was valid: Article 16.1 requires identification of how many shares and to whom they are to be transferred and does not impose an implied requirement that the Investor Majority must "accurately" specify the shareholder's type of "Leaver" for the notice to be valid. Second, the court held that Article 16.3(d) (a provision fixing the aggregate price for a "Very Bad Leaver" at £1) is not an unenforceable penalty because the compulsory transfer regime is a primary obligation triggered by becoming a Leaver rather than a clause that is solely a sanction for breach.

The court applied the usual tests for strike out and summary judgment (CPR r.3.4(2) and r.24.2 and authorities such as Swain v Hillman and Easyair) and the penalty doctrine test as formulated in Cavendish v Makdessi, concluding that Article 16 must be construed as a primary contractual mechanism and that it would be inappropriate for the court to excise the pricing formula and substitute a new bargain.

Background and parties:

• The claim arises out of the 2018 sale of Pharmacy2U Limited ("P2U") to entities affiliated with GSquare. Following completion, P2U Holdings became the parent company and adopted new articles including Article 16 governing compulsory transfers on an employee becoming a "Leaver".
• Claimants: Daniel Lee (personal and as trustee of his pension trustee) and WPA Trustees Limited. Defendants/applicants on this application: GSquare Capital II LP and P2U Holdings. Other defendants (not part of the present application) include two former directors and P2U.

Nature of the application and relief sought:

• The First and Second Defendants applied (16 May 2023) to strike out or obtain reverse summary judgment on identified paragraphs of the Particulars of Claim and Reply. The application focused on two issues: (i) whether the July 2020 Transfer Notice was valid (the "Validity Issue"); and (ii) whether Article 16.3(d) (the £1 price for a "Very Bad Leaver") was an unenforceable penalty (the "Penalty Issue").

Relevant facts:

• Mr Lee was a founder and formerly an executive director of P2U and held shares personally and via his pension. GSquare acquired P2U in March 2018 and the shareholders entered a shareholders' agreement and new articles (Article 16 governs compulsory transfers).
• Mr Lee became a Leaver on 4 December 2019. On 26 July 2020 GSquare served a Transfer Notice designating Mr Lee a "Very Bad Leaver" and requiring transfer of his B1/B2 shares. The shares were ultimately transferred under the articles' default mechanism on 11 August 2020.
• The Trustees had earlier issued a separate Part 8 claim in relation to B1 shares; that claim was settled by consent and those B1 shares were restored to the Register.

Issues framed by the court:

1. Whether Article 16.1 or the July 2020 Transfer Notice required the Investor Majority to specify and "accurately" identify the category of Leaver in order for the notice to be valid.
2. Whether Article 16.3(d) was an unenforceable penalty under the law as restated in Cavendish v Makdessi.

Court's reasoning and conclusions:

• On construction, Article 16.1 requires specification of the number of shares and the transferee; it does not require the Investor Majority to specify the category of Leaver as a precondition of validity. Article 16.2 imposes an obligation on the Leaver to transfer on the terms set out in Article 16 but does not render the transfer notice invalid if it does not "accurately" identify the Leaver category. The definition provisions (eg for "Leaver Excess Amount" and "Subsequent Bad/Very Bad Leaver") demonstrate that classification can be effected by different means; implying an accuracy requirement would produce commercially absurd results.
• On the penalty point, the court applied Cavendish and related authorities. It concluded that Article 16 is a primary contractual mechanism triggered by an employee becoming a Leaver (not solely by breach), and Article 16.3(d) is a price adjustment mechanism. Treating Article 16.3(d) as a penalty would require excising or re-writing the parties' bargain, which the court will not do. Although the court recognised that, if Article 16.3(d) were characterised as a secondary obligation, assessment of whether the £1 price was unconscionable would require trial evidence, the primary-obligation construction rendered the penalty doctrine inapplicable.

Procedural outcome and remaining matters:

• The application was determined in favour of the applicants on both issues. The court emphasised that the wider proceedings continue to trial and several live factual and legal issues remain, including claims against the third and fourth defendants and contested issues about whether Mr Lee was actually a Very Bad Leaver.

The court allowed the defendants' application. It held that the July 2020 Transfer Notice was valid because Article 16.1 requires only specification of the shares to be transferred and the transferee, and not an implied requirement to "accurately" identify the category of Leaver. The court also held that Article 16.3(d) is not an unenforceable penalty because the compulsory transfer regime operates as a primary contractual mechanism triggered by becoming a Leaver and the pricing provision is a permissible price-adjustment; striking it down would require re‑writing the parties' contract.