Prescott v Potamianos & Anor [2019] EWCA Civ 932

“10. Dr Potamianos became a 40% shareholder of SEL and then the Company on the basis that he would be involved in its management. That is reflected in the Shareholders Agreement. He has however been subsequently excluded. Since January 2015, Dr Potamianos has become increasingly concerned about the manner in which the affairs of the SEL and the Company have been conducted (and his exclusion from management), as set out in further detail below. Some recent examples of conduct, which our client contends are unfairly prejudicial to him as a member of the Company, are set out below. This list is not exhaustive, and Dr Potamianos reserves the right to adduce further instances of unfairly prejudicial conduct should it become necessary to issue a petition. Exclusion of management where participation was part of the bargain between shareholders, and such exclusion is not justified, constitutes inequitable conduct.”

“10. Your client has always had a small role in management decisions. During the seven years that our client was the Managing Director of SEL he alone made the vast majority of management decisions. The only exception is that companywide pay reviews were carried out by all directors. During this time SEL was very successful and grew from £1,800,000 to £2,800,000. It was awarded a Queen’s award for exports in 2009. The winning of this award was facilitated entirely by our client, as was the hosting of a visit by the Duke of Kent in September 2009. We do not see any basis for asserting that there has been prejudicial conduct, let alone unfairly prejudicial conduct, on the part of our client.”

“It is sad that it has come to the point where your client requires board meetings to be recorded; it is a clear sign that the board is dysfunctional. However, Mr Prescott has no objection to the meetings being recorded if your client wishes to do so. We cannot given [sic] any assurances that no solicitors will attend. It is a matter for the boards. If the boards request us to attend then we will be happy to attend.”

“3. WRITTEN REPRESENTATIONS 3.1 The chairman confirmed that a letter had been received from Blake Morgan dated 31 March 2017 containing written representations of AP in relation to the proposal to remove AP as a director of the Company [i.e. SEL] (the Written Representations). The chairman confirmed that the Written Representations had been circulated to Sprintroom by the board of directors of the Company prior to the General Meeting and EP confirmed, in his capacity as corporate representative of Sprintroom, that such Written Representations had been received by Sprintroom. Further, the Written Resolutions were presented to the meeting. 3.2 The chairman noted that AP was not in attendance at the General Meeting in order to be heard on the proposed resolution to remove him from office as a director of the Company.”

“(4) Fourth, from the time that Dr Potamianos became a shareholder in SEL, Mr Prescott and Dr Potamianos reached agreement as to the form of return that they were each to obtain from the profits of SEL, namely that they would divide those profits in the same ratio as their respective shareholdings, and they implemented this agreement by the invoices raised by their respective service companies. (5) Fifth, Dr Potamianos undoubtedly participated in the management of the business of SEL, and did so pursuant to an agreement or understanding that he would do so. I do not consider that it is necessary to make findings as to the precise extent of his participation. I suspect that it was less than he would like to claim and greater than Mr Prescott was inclined to accept. I consider that, in broad terms, their respective management roles and inputs were carried over into SRL when SRL was incorporated, and it is plain from the contemporary documents relating to succession management that they each played a significant part in the day to day running of the business of SRL (albeit that they were often not in harmony). (6) Sixth, Dr Potamianos bore a risk in acquiring shares in SEL, in light of the considerations that (a) SEL might go into liquidation or (b) he might be unable to realise the full value of those shares because Mr Prescott might be unwilling to repurchase them at full value and he might be unable to find a purchaser for his shares in the company because he held a minority shareholding or because if he did find a purchaser Mr Prescott could prevent the transfer being registered. (7) Seventh, as Mr Prescott accepted in evidence, and as was in any event clear from the evidence before the Court, including the contemporary documents, the business of SEL was conducted informally and on the basis of trust and confidence. A prominent feature of this was the way in which individual work contracts were agreed and performed. As set out above, these arrangements had an element of artifice, in that they were priced in a manner that was geared to transferring money from SEL to Mr Prescott and Dr Potamianos at a level which was fixed by them in whatever way they considered was most tax advantageous. However, that does not colour or affect the fact that, in substance, each of these men trusted the other to identify what work needed to be done in their respective spheres of technical expertise, to carry out that work, and to deliver the resulting work product to SEL, all in the interests of SEL, and therefore, in light of their respective stakes in SEL, in their joint interests. That mutual trust and reliance was vital and fundamental to the continuation and success of the business of SEL. Those matters are not affected by the interpolation of service companies, the fact that the two men had frequent disagreements and differences of opinion as to how the business should be run, or the fact that Dr Potamianos adopted a stance with regard to the source code and associated documents that, as I have found, placed him in breach his fiduciary duties as a director of SEL due to his unhelpful and evasive nature, and placed him/BDL in breach of the Contracts discussed above. Nor are they affected by Clause 18 of the Shareholders Agreement, which stipulates that none of the provisions of that agreement shall be deemed to constitute a partnership between Dr Potamianos and Mr Prescott. I agree with Dr Potamianos that this Clause does not preclude a “quasi-partnership” from arising. (8) Eighth, viewed in the round, these features continued with the formation of SRL. In some respects, Dr Potamianos’ claim of “quasi-partnership” is stronger with regard to SRL, because at the time that SRL was formed and he and Mr Prescott became shareholders in the same proportions as they had held in SEL the above state of affairs had existed for several years. This situation therefore falls squarely within Arden LJ’s observation that it is “relatively easy” to establish that a relationship between shareholders constitutes a “quasipartnership” when “a company was formed by a group of persons who are well known to each other and the incorporation of the company was with a view to them all working together in the company to exploit some business concept which they have.”

“355. At the end of the day, I consider that Dr Potamianos is right in submitting that it was the implicit agreement or understanding of both Mr Prescott and Dr Potamianos at and after the formation of SRL that Dr Potamianos’ rights would not be materially eroded or affected by the formation of SRL, and, in particular, that (a) he would be entitled to a seat on the boards of both SEL and SRL and (b) the later arrangements involving Mr Keen and Dr Gardiner did nothing to affect this implicit agreement or understanding. I detected nothing in the evidence to suggest that it was intended by either of the two men that the formation of SRL would or should produce any fundamental or significant change in the nature of their relationship, and I consider that Mr Prescott’s stance as reflected in the contemporary documents positively supports the contrary view. … 357. I have no difficulty in concluding that, for purposes of section 994 of the CA, the affairs of SRL included the affairs of SEL, not least because, as he frankly and inevitably accepted in cross-examination, Mr Prescott had and has control over both companies in practical terms and their dealings with one another were plainly not on an arm’s length basis. Indeed, as a matter of substance and practicality, the business of SEL was the key business for both Mr Prescott and Dr Potamianos, as that was the business to which they were able to contribute their technical skills and which took up most of their time and effort as regards development, sales, marketing and so forth. 358. For these reasons, and in accordance with Lord Hoffmann’s observations, it seems to me that the starting point in the present case is that it was inequitable for Mr Prescott to use his voting power to exclude Dr Potamianos from participation in the management of SEL without giving him the opportunity to remove his capital on reasonable terms.”

“396. In any event, Dr Potamianos’ removal as a director was not justified by his conduct, and, certainly, the contemporary documents, in particular in the form of the minutes dated 10 April 2017, do not explain why anyone considered that it did: the “Written Particulars of Concerns” had been answered by the “Written Representations”, and it was not fair to remove him without determining why, if it be the case, those answers were deficient. As it transpires, in accordance with my findings, the answers given in respect of what was probably the most significant single ground for concern, namely the source code dispute, were misguided. In my judgment, however, Dr Potamianos’ stance on that issue did not justify his removal as a director. It was inherent in the Contracts that conflicts of interest might arise between SEL on the one hand and Dr Potamianos/BDL on the other, and the history of this litigation and my ruling on the Source Code claim provide ample testimony that there were grounds for dispute that he was in a position to put forward in good faith in the interests of himself and BDL.”

“401. …I do not consider that all the additional matters relied on by both sides either add to Dr Potamianos’ case based on his exclusion from management in a manner that I have held to be inequitable, in particular by affecting the date at which his shareholding should be valued, or add to Mr Prescott’s case on the basis that they provide grounds for denying Dr Potamianos any relief, or alternatively because they affect the remedy that it is appropriate to grant.”

“398. …Dr Potamianos complains that Sameaim has continued to invoice SEL and to be paid by SEL while he and his own service company, BDL, have been shut out from doing so since disputes arose and, more particularly, he was excluded from management. Dr Potamianos asserts that this was in breach of a promise made by Mr Prescott on 15 July 2016 that Sameaim would stop invoicing SEL, and, in any event, that it has allowed Mr Prescott to extract monies from SEL in a way that is prejudicial to Dr Potamianos. In my judgment, the answer to this complaint is that Mr Prescott and SEL should be held to the bargain that was made with Dr Potamianos in or about 2007, to the effect that they would each invoice SEL and be paid by SEL in a manner that was proportional to their respective shareholdings. Accordingly, for every £6 that Sameaim Limited has been paid which is not matched by a payment of £4 to BDL since relations broke down, I consider that BDL is entitled to be paid a balancing payment (save that (a) in so far as the payments that were made to Sameaim Limited were used to pay Dr Fells, that element of those payments should be left out of account, and (b) I will hear submissions as to whether BDL is entitled to charge VAT in light of the fact that, in the events which have happened, BDL has not performed any services for SEL). That may seem like rough justice in light of the fact that BDL and Dr Potamianos have made no contribution to SEL since that time, but, as against that, it is relevant to have regard to my finding that Dr Potamianos was unfairly excluded from management, and to set this decision in the context of my determination of wider issues as to the valuation date and other terms of buy-out discussed below.”

“261. When it became apparent that SEL on the one hand and BDL and Dr Potamianos on the other had a difference of understanding as to the rights to the Source Code, and when SEL asked where it was and how SEL could access it, I consider that Dr Potamianos was not entitled to act in a manner that was detrimental to SEL by being evasive or misleading, including by dissembling as to those matters. SEL was entitled to be provided with a candid statement of his position, so that it had an opportunity to decide how to respond to it, for example by working round his denial of rights and access.”

“(10) In my opinion, Dr Potamianos is unable to justify acting in this way by relying either on the terms of the Contracts or on any genuine disagreement that he may have had with SEL’s stance as to ownership of, and rights of access, to the Source Code. He was in a position to behave as he did because he alone knew what Source Code had been created and where it was stored, and he alone had that knowledge because of the trust that had been placed in him by SEL with regard to those matters. He was using that knowledge, obtained by him in that way, for his own ends, seeking to gain an advantage for himself in his wrangling with Mr Prescott and other SEL personnel. All this was contrary to the duties that he owed to SEL, and was detrimental to SEL for the reasons that I have identified above.”

“326. If the shareholder agreed to or acquiesced in or was complicit in the conduct complained of, or led those controlling the company to act in the manner complained of, that may affect whether that conduct is unfair, as may misconduct on the part of the shareholder, which may justify (for example) exclusion or removal as a director (see Hollingtonon Shareholders Rights, 8th edn (“Hollington”) at [7-142] and [7-144]; Minority Shareholders – Law, Practice and Procedure, 5th edn, ed Joffe (“Joffe”) at [6.158] and [6.161]).”

“There will, however, be cases where the excluded minority has brought his exclusion upon himself by his own wrongful or unconscionable conduct. The courts then have to wrestle with the individual facts of particular cases to determine whether the majority were justified in excluding the minority …”

“385. For his part, Mr Prescott argues that the rights and wrongs of all the allegations made by Dr Potamianos should be examined in detail on the basis that this is a case in which it is necessary or at least appropriate to investigate whether and to what extent Dr Potamianos is to blame for the events with which those allegations are concerned. This is against the background that, in his witness statement in the Source Code claim, Mr Prescott describes Dr Potamianos as a “textbook sociopath” and the arrangement whereby he allowed Dr Potamianos to acquire a 40% shareholding in SEL as a “Faustian pact” that he had only entered into in order to ensure the future of SEL.”

“394. Nor do I consider that Dr Potamianos’ conduct was so serious as to justify his exclusion from management altogether, as effectively happened by the formation of a Sub-Committee which although inspired by the need to consider and deal with issues concerning the source code was (in the words of Mr Keen) “formed …to run the business generally whilst such issues were ongoing”, and still more by his removal as a director. In fact, unhappy and divided though they may have been in many respects, Mr Prescott and Dr Potamianos (and others) managed to hold things together throughout all the ups and downs concerning Mrs Macdonald, the expenditure on Peregrine House, the retention of Mr Van Der Wee, the Business Plan, and so forth, without excluding Dr Potamianos from management. The dispute over the source code represented a more significant issue, and justified the establishment of a Sub-Committee for the purposes initially identified in the minutes dated 26 September 2016 (i.e. “to consider the difficult issues relating to [Dr Potamianos]”). In my judgment, that was sufficient to address that issue, and to enable Dr Potamianos to continue to be involved in management (and, indeed, to provide ongoing programming services) in spite of its existence and while SEL took legal advice as to SEL’s position and potential remedies. 395. In fact, the Sub-Committee assumed a wider role, which had the effect of excluding Dr Potamianos more generally, which I do not accept to have been justified because the source code dispute was “inextricably intertwined” with all of SEL’s other business.”

“16. Some conclusions of fact are, however, not conclusions of primary fact of the kind to which I have just referred. They involve an assessment of a number of different factors which have to be weighed against each other. This is sometimes called an evaluation of the facts and is often a matter of degree upon which different judges can legitimately differ. Such cases may be closely analogous to the exercise of a discretion and, in my opinion, appellate courts should approach them in a similar way.”

“417. The submission for the RBs was that an appellate court should only interfere with a trial judge’s primary findings of fact, or with his conclusions based upon an evaluation of facts, if it is satisfied that the judge was plainly wrong, exceeding the generous ambit within which a reasonable disagreement over the evaluation of facts is possible. This was said to be justified by the well-known case of Assicurazioni Generali SpA v Arab Insurance Group (Practice Note) [2003] 1 WLR 577, paras 9– 10, 12, 16–17. The RBs also relied upon the decision of the Supreme Court in Henderson v Foxworth Investments Ltd 78. [2014] 1 WLR 2600 in which it was held that, in the absence of some identifiable error, such as a material error of law or the making of a critical factual finding which had no basis in the evidence, an appellate court would not interfere with the factual findings of the trial judge unless it were satisfied that his decision was “plainly wrong” in the sense that it could not be reasonably explained or justified and so was one which no reasonable judge could have reached. We invited the parties’ attention, in addition to these cases, to In re B (A Child) (Care Proceedings: Threshold Criteria) [2013] 1 WLR 1911. 418. Reflecting upon the helpful submissions made to us on these authorities, this is not a case in which challenges are made to the judge’s findings of primary fact at all. It seems to us that, even if they were put at their highest from the point of view of the RBs, the relevant issues would be largely akin to the question considered by the Supreme Court in In re B as to whether the trial judge’s evaluation of whether the “threshold” requirements of the Children Act 1989 in that case had been met on the findings of primary fact made at the trial. Lord Wilson JSC characterised the issue as an “evaluative” determination (at para 44) and said: “Like all other members of the court, I consider that appellate review of a determination whether the threshold is crossed should be conducted by reference simply to whether it was wrong.” (See also Lord Neuberger PSC at para 61, Lord Kerr JSC at para 110, Lord Clarke JSC at 138, and Baroness Hale JSC at paras 202–203.) 419. In In re B, some members of the court said that it is not possible to lay down any single clear rule as to the proper approach to be taken by an appellate court where the appeal is against an evaluation: see e g per Lord Neuberger PSC at para 60 and Lord Kerr JSC at para 110. However, in a case such as the present, as it seems to us, a question such as whether the judge’s view that there had been breaches of the Imperial duty is to be upheld, should be determined by asking simply whether he was or was not “wrong” rather than whether he was or was not “plainly wrong”. 420. In our judgment, Henderson, much relied on for the RBs, is not inconsistent with that conclusion, because, when read with care, it can be seen that the appeal involved a challenge to the findings of primary fact made by Lord Glennie, the Lord Ordinary, as trial judge. The issue on appeal was indeed, therefore, whether his decision was “plainly wrong”

“64. In conclusion, the references cited above show clearly in my view that to limit intervention to a “significant error of principle” is too narrow an approach, at least if it is taken as implying that the appellate court has to point to a specific principle - whether of law, policy or practice - which has been infringed by the judgment of the court below. The decision may be wrong, not because of some specific error of principle in that narrow sense, but because of an identifiable flaw in the judge’s reasoning, such as a gap in logic, a lack of consistency, or a failure to take account of some material factor, which undermines the cogency of the conclusion. However, it is equally clear that, for the decision to be “wrong” under CPR 52.11(3), it is not enough that the appellate court might have arrived at a different evaluation. As Elias LJ said (R (C) v Secretary of State for Work and Pensions[2016] EWCA Civ 47; [2016] PTSR 1344, para 34): “… the appeal court does not second guess the first instance judge. It does not carry out the balancing task afresh as though it were rehearing the case but must adopt a traditional function of review, asking whether the decision of the judge below was wrong.” 65. It follows that in the present case it was sufficient for the Court of Appeal to consider whether there was any such error or flaw in the judge’s treatment of proportionality. If there was not, there was no obligation (contrary to Mr Southey’s submission) for the Court of Appeal to make its own assessment.”

“…The need for appellate caution in reversing the judge’s evaluation of the facts is based upon much more solid grounds than professional courtesy. It is because specific findings of fact, even by the most meticulous judge, are inherently an incomplete statement of the impression which was made upon him by the primary evidence. His expressed findings are always surrounded by a penumbra of imprecision as to emphasis, relative weight, minor qualification and nuance (as Renan said, la vérité est dans une nuance), of which time and language do not permit exact expression, but which may play an important part in the judge's overall evaluation. It would in my view be wrong to treat Benmax as authorising or requiring an appellate court to undertake a de novo evaluation of the facts in all cases in which no question of the credibility of witnesses is involved. Where the application of a legal standard such as negligence or obviousness involves no question of principle but is simply a matter of degree, an appellate court should be very cautious in differing from the judge’s evaluation.”

“114. Appellate courts have been repeatedly warned, by recent cases at the highest level, not to interfere with findings of fact by trial judges, unless compelled to do so. This applies not only to findings of primary fact, but also to the evaluation of those facts and to inferences to be drawn from them. The best known of these cases are: Biogen Inc v Medeva plc [1977] RPC1; Piglowska v Piglowski [1999] 1 WLR 1360; Datec Electronics Holdings Ltd v United Parcels Service Ltd [2007] UKHL 23 [2007] 1 WLR 1325; Re B (A Child) (Care Proceedings: Threshold Criteria) [2013] UKSC 33 [2013] 1 WLR 1911 and most recently and comprehensively McGraddie v McGraddie [2013] UKSC 58 [2013] 1 WLR 2477. These are all decisions either of the House of Lords or of the Supreme Court. The reasons for this approach are many. They include i) The expertise of a trial judge is in determining what facts are relevant to the legal issues to be decided, and what those facts are if they are disputed. ii) The trial is not a dress rehearsal. It is the first and last night of the show. iii) Duplication of the trial judge's role on appeal is a disproportionate use of the limited resources of an appellate court, and will seldom lead to a different outcome in an individual case. iv) In making his decisions the trial judge will have regard to the whole of the sea of evidence presented to him, whereas an appellate court will only be island hopping. v) The atmosphere of the courtroom cannot, in any event, be recreated by reference to documents (including transcripts of evidence). vi) Thus even if it were possible to duplicate the role of the trial judge, it cannot in practice be done.” i) The expertise of a trial judge is in determining what facts are relevant to the legal issues to be decided, and what those facts are if they are disputed. ii) The trial is not a dress rehearsal. It is the first and last night of the show. iii) Duplication of the trial judge's role on appeal is a disproportionate use of the limited resources of an appellate court, and will seldom lead to a different outcome in an individual case. iv) In making his decisions the trial judge will have regard to the whole of the sea of evidence presented to him, whereas an appellate court will only be island hopping. v) The atmosphere of the courtroom cannot, in any event, be recreated by reference to documents (including transcripts of evidence). vi) Thus even if it were possible to duplicate the role of the trial judge, it cannot in practice be done.”

“…In the first place, the offer must be to purchase the shares at a fair value. This will ordinarily be a value representing an equivalent proportion of the total issued share capital, that is, without a discount for its being a minority holding. The Law Commission (paragraphs 3.57–62) has recommended a statutory presumption that in cases to which the presumption of unfairly prejudicial conduct applies, the fair value of the shares should be determined on a pro rata basis. This too reflects the existing practice. This is not to say that there may not be cases in which it will be fair to take a discounted value. But such cases will be based upon special circumstances and it will seldom be possible for the court to say that an offer to buy on a discounted basis is plainly reasonable, so that the petition should be struck out.” “…In the first place, the offer must be to purchase the shares at a fair value. This will ordinarily be a value representing an equivalent proportion of the total issued share capital, that is, without a discount for its being a minority holding. The Law Commission (paragraphs 3.57–62) has recommended a statutory presumption that in cases to which the presumption of unfairly prejudicial conduct applies, the fair value of the shares should be determined on a pro rata basis. This too reflects the existing practice. This is not to say that there may not be cases in which it will be fair to take a discounted value. But such cases will be based upon special circumstances and it will seldom be possible for the court to say that an offer to buy on a discounted basis is plainly reasonable, so that the petition should be struck out.”

“105. As to paragraph 55: (a) Mr Prescott had hoped that after he had informed BDL that it would not be getting any more contracts from SEL without handing over the source code a consensual solution to the issue would be reached. Mr Prescott therefore suspended Sameaim from invoicing SEL so [as] not to inflame the situation and in the interests of SEL resolving its dispute with the Petitioner and BDL. When it became apparent that BDL and the Petitioner did not intend to hand over the source code, there was no reason for Sameaim to continue to suspend its invoicing. (b) Mr Prescott is unable to admit or deny the figure of £135,000 absent proper particulars of the time period over which it is alleged that payments totalling this amount were made to Sameaim. (c) Save as aforesaid, paragraph 55 is denied.”

“30. …Such a price would have to reflect:- a. the fact that your client’s allegations of unfairly prejudicial conduct are unfounded; b. the fact that it appears from your letter to this firm dated 24 October 2016 that SEL will have to take legal proceedings against [BDL], the company owned by your client and his wife, to obtain delivery up of the source code … c. the fact that in any event SEL has concerns about the quality of the source code it will ultimately obtain; and d. the fact that your client is a minority shareholder; and e. the fact that your client’s shares have very limited marketability. 31. Our client proposes that the parties jointly instruct a share valuation expert with experience in valuing companies owning intellectual property to prepare a formal, CPR-compliant report. The report would need to set out:- • The value of your client’s shares on the basis of his 40% holding without applying any discount; and • The value of the minority discount to be applied, in the event that it is to be applied. This proposal is on the basis that the parties agree to be bound by the valuations. It will clearly be for the parties to agree or the Court to decide whether the minority discount is to be applied. This proposal is also on the basis that the parties agree the contents of the instructions to the expert and share the cost of the report.”

“However, I am in no position to decide whether this offer, or for that matter whether the increased offer of this amount plus a post-sale 4 year contract for BDL at £60,000 pa on top, was fair and reasonable. On the contrary, I consider that the resolution of those issues requires expert valuation evidence. Therefore, in accordance with the Order made on the CMC, they fall to be determined at a further trial.”

“376. In these circumstances, I am unable to conclude on the material at present before me that Mr Prescott made an offer for Dr Potamianos’ shares that was so manifestly fair and reasonable as to have the consequence that whatever conduct Dr Potamianos succeeds in establishing was not unfairly prejudicial. It is therefore necessary to consider the unfair prejudice complained of. At the same time, it may transpire that, once expert valuation evidence is obtained, one or more of Mr Prescott’s offers was, in fact, fair and reasonable so as to have that consequence. It follows that (on the basis that the point about the timing of his offers is not being conceded by Mr Prescott) the question of liability for unfair prejudice and, accordingly, whether relief for unfair prejudice is appropriate (i.e. whether any buy-out order is appropriate) must depend on the determination of these issues at the further trial. This is unfortunate, but seems to me to be the inevitable consequence of the split trial that was ordered on the CMC.”

“ … The question for the court is always whether in all the circumstances of the case the applicant has satisfied the conditions required to have the petition struck out, or summary judgment in his favour given on it. These [counsel] accurately summarised as being that it must be shown that the continued prosecution of the petition after the making of the offer amounts to an abuse of process, or was bound to fail. The issue is highly sensitive to the facts and circumstances of each case, the consideration of the nature and terms of any offer made can only ever be an intermediate step in the process”

“It would, after all, be too easy for a party to make an offer which apparently complied with the guidelines but which it had little or no realistic possibility of satisfying. In order to be a reasonable offer, there must be a realistic prospect, a reasonable likelihood, that the offer all will be able to pay the price likely to be decided upon by the independent expert appointed to value the shareholding.”