Daniel Lee & Anor v GSquare Capital II LP & Ors

On an application for strike out or summary judgment, the court may decide a clear point of construction where the parties have had a proper opportunity to address it and no further evidence is likely to affect the result. A compulsory share-transfer provision triggered by an employee becoming a leaver may be a primary obligation, even where the price depends partly on misconduct or breach of contract. Such a provision is not a penalty merely because a very bad leaver may receive nominal consideration. The penalty doctrine is not engaged where the transfer right is not itself conditional on breach. Whether a provision would nevertheless be exorbitant or unconscionable, if characterised as secondary, may require a trial.

The claimants held shares in P2U Holdings under articles which enabled GSquare, within 12 months of an employee becoming a leaver, to require a transfer of shares. The price depended on the leaver category. A very bad leaver was entitled to an aggregate price of £1.

GSquare served a July 2020 Transfer Notice requiring the claimants to transfer their shares and designating Mr Lee as a very bad leaver because of alleged involvement with CloudRX Ltd. The claimants disputed the designation and alleged that the transfer notice was invalid because it did not accurately identify the leaver category. They also alleged that article 16.3(d) was an unenforceable penalty.

The defendants applied to strike out or obtain reverse summary judgment on those issues. The central questions were whether the transfer notice was valid and whether the leaver provisions engaged the penalty doctrine.

1. Application granted on the two issues. The July 2020 Transfer Notice was valid, and article 16.3(d) was not an unenforceable penalty clause. The question whether Mr Lee was in fact a very bad or intermediate leaver remained for trial.
2. Article 16.1 required the transfer notice to identify the number of shares and the transferee. It did not require the notice to specify, still less accurately specify, the employee’s leaver category. Article 16.2 concerned the employee’s obligation to carry out the directed transfer, while the price and payment mechanism were dealt with separately. Reading in an accuracy requirement would produce commercially absurd consequences, particularly in light of the subsequent leaver provisions.
3. The relevant contractual trigger was Mr Lee becoming a leaver, not breach of contract. Article 16.1 therefore created a primary obligation, and article 16.3 operated as a price-adjustment mechanism. The penalty doctrine was not engaged. The court applied the reasoning in Signia Wealth Limited v Vector Trustees Limited and regarded the present case as a clearer example than Cavendish Square Holdings v Makdessi.
4. The court rejected the practical consequence of the claimants’ argument: treating article 16.3(d) as a penalty would require striking down article 16.1 and rewriting the parties’ bargain by imposing an alternative pricing formula, which the court could not do.
5. If article 16.3(d) had been characterised as a secondary obligation, the question whether the detriment was exorbitant, unconscionable or out of all proportion to GSquare’s legitimate interests would have required factual investigation at trial. That alternative issue was not suitable for summary determination.

Consequential orders were to be addressed at a later hearing.