“13.3 On a Share Sale the Proceeds of Sale shall be distributed in the order of priority set out in Article 13.2 unless the aggregate Proceeds of Sale distributed to the Living Bridge Investors is less than two times the Living Bridge Investment Amount in which case: 13.3.1 the holders of the A Ordinary Shares shall be paid the Issue Price of each such Share, together with a sum equal to any arrears or accruals of any dividends calculated down to and including the date of actual payment (the “A Share Proceeds”); 13.3.2 the holders of the B Ordinary Shares shall be paid the B Share Price of each such Share, together with a sum equal to any arrears or accruals of any dividends calculated down to and including the date of actual payment (the “B Share Proceeds”) plus an additional amount (the “Additional B Share Proceeds”) such that the A Share Proceeds, the B Share Proceeds and the Additional B Share Proceeds plus the Previous Distributions Amount in aggregate equal two times the Living Bridge Investment Amount; and 13.3.3 the balance of such assets shall be distributed amongst the holders of all the Equity Shares (other than the A Ordinary Shares) in proportion to their respective nominal values by reference to the total nominal values of those Equity Shares in aggregate…”
“Within the period commencing on the relevant Leaving Date and expiring at midnight on the date falling 9 months after such date, the Investors may direct the Company by an Investor Direction immediately to serve a written notice on a Leaver notifying him that he is, with immediate effect, deemed to have served one or more Transfer Notices in respect of such number and class of his Leaver's Shares as is specified in the Investor Direction (the "Sale Shares").”
“"Market Value" means such value as the transferor and (with Investor Consent) the Company shall agree within ten days after the date of the relevant Transfer Notice (or such longer period as shall be agreed between the transferor and (with Investor Consent) the Company) or, failing such agreement, such value as the Independent Expert shall determine pursuant to Article 18.3.4.”
“….. the completion of any sale of any interest in any Shares (whether in one transaction or a series of related transactions) resulting in the transferee (either alone or together with its Connected Persons) holding a Controlling Interest in the Company”
“………. an interest in shares in a company conferring in aggregate more than 50% of the total voting rights conferred by all the issued shares in that company, taking account at the relevant time of provisions regarding voting rights contained in the articles of association of that company”
“[Mr Richards] in particular continued to view the surplus cash/bonus issue as a matter needing resolution; throughout June and July he regularly pressed for further discussion concerning the operation of the Spur 57 model. Within [Livingbridge], however, plans were being progressed to remove [Mr Richards], and later also [Mr Purves], from the business.”
“In the absence of a requirement that the valuation assume that there is a Share Sale, it should not do so. Of course, in fact there has been no sale of any interest in any shares, but a transfer of shares back to the Company.”
“It seems to me that there is a very fine line between the court’s role and that of the expert here: where does construction of the parties’ agreement, which included the Company Articles of Association, end and the expert duty to assess market value begin? The impact, or otherwise, on Market Value (as defined) of a provision agreed between the parties designed to ensure a priority return to investors seems to me pre-eminently a matter for the expert and not one for the court. Moreover if the expert has decided, as E&Y has, that the redemption premium provision is to be taken into account in assessing the value of the Claimants’ shares, can this properly be said to be a “manifest error”, even if the court might take a different view? These are questions that I have found it very difficult to determine.”
“Happily, I have not in the end needed to as my view of Article 18.4 accords with that of E&Y. I have concluded that the phrase “...market value of the Leaver’s Shares...as if the entire share capital of the Company were sold in accordance with these Articles” necessarily includes a recognition of the type of shares held by the Leaver. The Claimants held Class C shares whose realisable value was subordinated to the holders of the Class A and Class B shares by the provisions of Article 13.3. Any buyer purchasing the Claimants’ shares would purchase subject to the restrictions affecting realisable value imposed by Article 13.3.”
“In the end I return to the wording of Article 18.4 itself which seems to me to be clear: the expert is called upon to determine market value of the “Leaver’s shares”
“MRS JUSTICE MAY: So doesn’t that make it a share sell – MR LEIPER: That, with respect, the way I put the argument is in two stages. The first stage is to consider whether or not there is a share sale of the entire capital and if there is then 13.3… and I accept that it appears that it would fall within the definition of “a share sale”, but at that point what Article 13.3 does is it tells the sellers how they are to distribute the monies between themselves. For the purchaser, the purchaser determining the value of the company has no interest at all in what happens to the money that it pays to the sellers and that’s an internal matter. But in fixing the valuation of the entire share capital, then Article 13.3 just isn’t relevant to the purchaser. The purchaser is going to get the entire share capital and therefore it isn’t taking shares which have some way a lesser value, lesser potential future value. MRS JUSTICE MAY: But isn’t it relevant that the leaver’s shares in question are Class C shares, so they are valuing Class C shares. MR LEIPER: What they are doing is they should be taking a market value for the entire share capital and then they have to work out what proportion (inaudible) of the value of the company is held by the leavers. MRS JUSTICE MAY: That is what you say. MR LEIPER: Exactly, it is; precisely that’s what I’m saying, but there’s a reason to it, which is that what the valuer has to do is value the entire share capital. They have to look at the entirety. What the EY approach does (or the defendant’s approach does) is it adds a further stage, which is to say the market value has to take into account the fact that a specific type of share is going to be acquired by the purchaser, but that isn’t the exercise, the hypothetical exercise, which is being required by 18.4, which is that you have to reach a market value as if all of the shares were being sold at the same time. So the purchaser gets all of the shares; they can do what they like with them, they can vary the Articles; they have a completely free hand because they get the entire share capital and that’s what they are buying. So the value of the shares would be unencumbered by Article 13.3. That is there to deal only with the distribution of the monies as between the sellers. MRS JUSTICE MAY: I think I am understanding the difference in the position, but why in that case would it be necessary to identify in clause 18.4.1 “the leaver’s shares”; why wouldn’t it say that proportion of the purchase price attributable to the amount of shares held by the leaver? It is important, isn’t it, for these purposes the kind of shares that the leaver holds? MR LEIPER: I suggest it is not; it is a shorthand way of saying the shares that are held by a leaver (the definition is on page 42); all of the shares held by a leaver. It therefore is saying exactly what you suggested it might say in the alternative; a longer form way would be that part of the shares that the leaver holds at the time it was set. It is not specifically saying… if that were the approach, then it would be completely unnecessary to put in as if the entire issued share capital of the company were being sold because if you were only to look at the specific value of the specific leaver’s shares as at the date of their departure, then it is completely irrelevant what the valuation of the entire share (inaudible) would be. And it is precisely there where a purchaser would say, “Actually these shares are worth nothing to me because there is a redemption premium on them, which means that I’m not going to be able to do anything with them for some time.”
“The extent of his duties depends upon the terms and limits of that retainer and any duty of care to be implied must be related to what he is instructed to do.”
“hindsight is no touchstone of negligence”
“59. In this case, it is not alleged that the Respondents were negligent to take the view of the construction of section 28(4) that they appear to have done…The question is whether in the light of all the circumstances no reasonably competent solicitor in the position of the Respondents would have failed to give the specific warning that there was a significant risk that the EBT arrangement would fail to be tax effective…. 60. It is important to appreciate that the court is considering what advice ought to have been given by the reasonably competent practitioner in the particular factual circumstances at the time. Of course, the advice which a reasonably competent solicitor would give in the circumstances turns substantially upon the view that he could take of the provision on which it turns. It is also dependent upon whether contrary arguments as to construction are of sufficient significance to require specific mention when taken with the degree of risk inherent in the circumstances and the importance in those circumstances of a balanced view of the provision. As Salmon LJ noted in Dixie v Parsons the question turns in part upon the likelihood or otherwise of a dispute”
“Whilst Mr Lukins was, or ought to have been aware that his advice was being sought in somewhat controversial circumstances, this was not a situation in which he was actually aware that the construction of the Undertakings was likely to be controversial or in which, in my judgment, a reasonably competent solicitor in Mr Lukins’ position (with knowledge of the parties’ subjective intentions) ought necessarily to have appreciated or advised that there were highly arguable construction issues that ought to be taken …….”
“(1) Is the harm (loss, injury and damage) which is the subject matter of the claim actionable in negligence? (the actionability question) (2) What are the risks of harm to the claimant against which the law imposes on the defendant a duty to take care? (the scope of duty question) (3) Did the defendant breach his or her duty by his or her act or omission? (the breach question) (4) Is the loss for which the claimant seeks damages the consequence of the defendant’s act or omission? (the factual causation question) (5) Is there a sufficient nexus between a particular element of the harm for which the claimant seeks damages and the subject matter of the defendant’s duty of care as analysed at stage 2 above? (the duty nexus question) (6) Is a particular element of the harm for which the claimant seeks damages irrecoverable because it is too remote, or because there is a different effective cause (including novus actus interveniens) in relation to it or because the claimant has mitigated his or her loss or has failed to avoid loss which he or she could reasonably have been expected to avoid? (the legal responsibility question).”
““fault” means negligence, breach of statutory duty or other act or omission which gives rise to a liability in tort or would, apart from this Act, give rise to the defence of contributory negligence.”
“When contributory negligence is set up as a defence, its existence does not depend on any duty owed by the injured party to the party sued, and all that is necessary to establish such a defence is to prove … that the injured party did not in his own interest take reasonable care of himself and contributed, by his want of care, to his own injury. For when contributory negligence is set up as a shield against the obligation to satisfy the whole of the [claimant’s] claim, the principle involved is that, where a man is part author of his own injury, he cannot call on the other party to compensate him in full.”
“… the best approach for a judge to adopt in the trial of a commercial case is, in my view, to place little if any reliance at all on witnesses' recollections of what was said in meetings and conversations, and to base factual findings on inferences drawn from the documentary evidence and known or probable facts. … Above all, it is important to avoid the fallacy of supposing that, because a witness has confidence in his or her recollection and is honest, evidence based on that recollection provides any reliable guide to the truth.”
“We asked Adam about any other risks time and time again and it was probably the focus of nearly every conversation we had with Adam. Pretty much at the end of every meeting or call that Keith was involved in he would ask: "Adam, tell me how we're going to get fucked? I am 50 something years old and can't afford for this to go wrong and start again". I also expressed my concerns along similar lines and I remember that we negotiated gross misconduct being redefined to a narrow range of things because we wanted to mitigate this risk as much as possible as well (from being something frivolous to an actual proved event). I wanted to make sure that my remaining 30% shareholding in the holding company were absolutely going to be worth something to me whatever happened.”
“….. but these will still be subject to Mr Crossley reviewing those as part of the deal arrangement. So this is all the -- this is what a deal is gonna look like, we're gonna send that over to our lawyer and our lawyer is gonna review that in the round.”
“….. we had conversations in September cause we had Andy Lindsell added into some of those as well, so we certainly did have conversations with Adam Crossley around the leaver provisions and what effect they would have on me and my shares. And, you know, I think -- I think somewhere in the other leaver provisions there was provision that added in around, if I had a minimum amount, I'd get a salary or I wouldn't be restricted and that would have been part of the conversation we had with Adam Crossley around if we got X amount less for our shares, then my restrictions would fall down. So, you know, I may have got some of the times wrong, but I certainly had these conversations with Livingbridge, with the people you said in the email and with Adam Crossley.”
“Yes, and I remember having a conversation with Adam Crossley about this because the likelihood of our shares being worth less than 400K was something that we considered to be remote, given that the business had a value of£10 million and we had 30 per cent of it. So that was -- that's why we agreed that level.”
“Well, we done that deal on the basis of the advice we received and as -- as our claim sets out -- and well, my position is really clear on it, we wouldn't have done the deal if my shares were only worth a pound. It was -- it's the equivalent of selling your house and getting a mortgage on it for 30 per cent and then the bank coming back the day after you've taken the mortgage and owning all of your house. It just wouldn't have happened under any circumstances.”
“what I expected and what I wanted from the legal advice is this could happen and your shares could be bought for a pound and had I received that advice, that is the advice that Livingbridge had the benefit of and that's what I'd have expected to receive, that advice that my shares could have been bought for a pound.”
“Q. So your view was that the risk of not clearing the redemption hurdle was a very small one? A. Yes, or all of us assumed it was a small one, yes. Q. And that that was really a matter for the claimant's commercial judgment and your commercial advice? A. Yes, and it was called an exit redemption premium I think, wasn't it? Q. That sort of commercial decision making was nothing to do with the lawyers, is it? A. Well, I think the way it's drafted in the articles of association I would argue it is because I think, as we've seen, what's happened is that the redemption premium has been applied even though ISIS haven't had their exit. Q. Yes, well, could I put it this way, no one intended it to operate on a false transfer, it was always intended to operate on an exit? A. Yes, when we looked at the redemption premium, we looked at it on an exit basis. Q. That was the intention, wasn't it? A. That's what it was called, yeah. JUDGE RUSSEN QC: For the avoidance of doubt, you've each used the phrase "exit"; what do you mean, Mr Billingham, by "exit"? A. I suppose it would be living -- the exit -- the sale of the business. JUDGE RUSSEN QC: These two parties, about to themselves contract, exiting the business? A. Yes, so when they exit, when they sell it together, which couldn't happen for three years unless they both agreed it, that's -- that's when we understood that that's when it would kick in.”
“I don't recall that being the case. I mean, Wayne was a CEO and still -- a founder CEO and still -- I think he still held 80 per cent of -- of the equity, roughly, at the time. So he was still the senior party, but obviously BGF would have had consent matters.” “But I don't recall BGF being against it, it was more that they hadn't been -- I don't think Wayne had brought them into the process at that stage because they were looking at this other one.”
“Well, as I said, I think we probably said rather than draft heads of terms for both let's focus on the ISIS offer for now because, as it says, GCI were closing another deal, so we had a bit more time anyway, there was no rush for GCI.”
“[I]f we are unable to proceed with the GCI deal with a deal structure similar to the terms outlined above then we should park the process and review our options again in January 2015.”
“15. During what became a longer than expected process, transactional activity in the telecoms sector remained buoyant, and had the transaction not completed with ISIS there would have been an opportunity to go back to the other parties that had made offers, particularly GCI, to start negotiations again. This period would also have allowed new parties to review the business and to consider making an offer as new potential buyers were entering the sector as a result of increased private equity investment in communications technology providers (both directly and indirectly). 16. During the exclusive process with ISIS, Wayne Martin, founder and CEO of GCI, made it very clear to the Claimants and Knight that should negotiations not complete he would be very interested in revisiting their offer.”
“(a) the subject asset has recently been sold in a transaction appropriate for consideration under the basis of value, (b) the subject asset or substantially similar assets are actively publicly traded, and/or (c) there are frequent and/or recent observable transactions in substantially similar assets.”
“[i]t depends what evidence you’ve got available to you. And sometimes when you are valuing a company the market comparables is all you’ve got or the comparable transactions, and so in – if that is all you’ve got, then that might be what you have to rely on. But if you’ve got information about the actual company and you’ve got what people are actually willing to pay for it and companies have done detailed due diligence and have given you all the information you need, then you don’t need to go to rule of thumb, multiple of valuation and try and infer values when you’ve got the hard evidence available to you.”
“all the detailed data that I relied on for the transaction was back at December 2014, so I thought I ought to see what I can do to update it, so I tried to see if there was any evidence from the comparables and what I found was that some went up and some went down. It's not particularly helpful, so I widened my range. So the high end of the range went up a little bit and the low end of the range went down a little bit. So -- so it wasn't a particularly conclusive exercise, it wasn't a particularly clear evidence of movement.”
“JUDGE RUSSEN QC: So -- then you've done a sort of negative against IP Solutions in relation to the DOLM [sic] and you've done a positive in relation to the control premium? A. Correct. JUDGE RUSSEN QC: So the point, as I presently understand you, Mr Skeels, is that your point about control premium is: please bear in mind that the figures in the table at page -- sorry, table 5.2, are not reflective of control premia? A. Correct, effectively what those are -- yes, so what I've done is I've taken the market capitalisation effectively of each of the comparable companies and I've grossed it up by 30 per cent and then reduced it by 44 per cent to end up at a multiple that can then be used to value the company. JUDGE RUSSEN QC: For an off-market purchase of a majority stake in IPS UK? A. Indeed. I'm not saying that you would pay a premium or not for IPS, I'm just saying in terms of the methodology used to come up with a value of the business, you have to make those adjustments to make that data comparable.”
“[I]t is thus apparent that there is a strong body of opinion that control premiums should not be applied unless there are very specific circumstances that justify one.”
“I'm slightly puzzled because I'm using control premium to deal with the comparable companies.”
“[A]fter application of the DLOM and Control Premium, the Average EBITDA multiple derived from Comparable Companies is 7.5x and the median is 7.8x.”
“If you look at the empirical data for listed company takeovers where effectively people have bought a controlling stake or companies have bought a controlling stake in that business, generally speaking the price that ends up being paid is somewhere between 25 and 40 per cent higher than the day before the announcement of the transaction.”
“Q ……… Can we then go to your supplemental report which is 13 at C/2581. You here describe at 3.2.2 the principle of control premium. And could you just read that paragraph 3.2.2 to yourself? (Pause) A. Yes, I've read that. Q. So in effect what you are describing here is that on occasion a buyer will pay a premium because they believe that they're particularly able to create additional value over and above other purchasers of the same interest? A. That's what I say there, yes. Q. And so a business is for sale in its entirety, so 100 per cent. There are two possible purchasers. One is prepared to pay a certain value, but another is prepared to pay a premium because they believe that they are going to be able to achieve particular synergies, create additional value, more than the other purchaser will be able to; that's what you are describing here? A. That's right, yes. Q. And that is different, isn't it, from identifying the difference between paying to acquire a small number of trading shares and paying to acquire a controlling majority? A. I think so, yes, yes. Q. Now, if we could look, please, at the joint report at C/35. So looking at the right-hand column -- sorry, I'll give you a moment to find the page. A. Okay. (Pause) Yes. Q. So looking at the right-hand column, your overall position is that no control premium should be applied. Mr Skeels suggests a figure of 30 per cent is a reasonable estimate for a control premium. You make a number of criticisms of that, which we went through yesterday. You haven't suggested an alternative reasonable estimate, have you? A. Zero. Q. Okay. A. I've said no control premium, so yes. Q. So you are saying no control premium, it's zero and that's it. So there isn't an alternative hypothesis where you posit a figure of say 20 per cent, you just aren't prepared to go there? A. No, I've seen no evidence that supports the application of a control premium, so I have applied a zero control premium. Q. Now, could I ask you to look back in your original report at 2234 in C. JUDGE RUSSEN QC: Just on that point, you say it's zero, Mr Taylor. Is that because, as I read in your principal report, paragraph 4.2.5, that the exercise of reaching market value is: "... a hypothetical one which assumes that neither the buyer nor the seller is under any compulsion, transaction is at arm's length [et cetera]. This means that FMV is an impersonal standard of value rather than a personal standard of value." Tell me if that is a different point, but is that part of the reason why you say you don't look to the hypothetical willing buyer and assume that buyer's acquiring a majority or -- A. No, that's a slightly different point, this would -- being an impersonal standard is -- is taking into account that there are no synergies. So if – when buying a company you could combine them and make savings, then there would be a particular value to you for getting those synergies and so you would be willing to pay more. The control premium is more that if you have control over the whole company you can improve it in some way that would increase the value of the company. So you would be willing to pay more because you think if you control it you can do better than it's doing at the market -- at the multiple of the -- of the market price, yes. JUDGE RUSSEN QC: Thank you. Yes, thank you, I interrupted you, Mr Leiper. MR LEIPER: Just looking back, if we may, at C/2581, paragraph 3.2.2, you are describing whether or not you take into account synergies. So if when buying a company you'd combine them and make savings, so there would be particular value to you for getting those synergies and so you would be willing to pay more, that's what you are describing in that paragraph, 3.2.2, isn't it? A. Yes. Q. And that is what you describe as the principle of control premium? A. Yes, yes. Q. But in your answer to his Lordship you said that the control premium was different. It's more that if you have control over the whole company you can improve it in some way. So you appear don't you -- just let me finish the question -- you appear, don't you, to be confusing your definitions of control premium? A. In the exhibits that I attached and discussed the control premium we can see that there's schools of thought that there are different levels of control premium, one is financial control premium and one is strategic control premium, and we are being a little ambiguous in our language in not explicitly saying which one we're talking about. And they're in my exhibits and there are charts that show them, we can -- I can find a reference and for, my Lord, if that would be helpful. But yes, there are two different aspects of control premium and we have been confusing them a bit. Q. Well, you say "we", you've been very clear in your supplemental report about how you are defining the principle of control premium, haven't you? A. I have taken the view that there is no control premium and that is putting both of them together. Q. You have been -- if I may repeat the question – you have been very clear in your definition of control premium for the purposes of your supplemental report in paragraph 3.2.2, haven't you? A. I think, no, it's -- it's usually by operating the company in a more efficient manner or by benefiting from synergies, and then when a buyer perceives that a company's profit is not being maximised, I'd say that definition now of control premium is -- is the two effectively put together in what I am now apologising for being a slightly ambiguous way when we could have gone deeper into the theory of control premium and split them out. Q. I am not going to go over your earlier answers, let's move on. ………”
“[G]enerally, we would prefer not to discount multiples by completely subjective amounts – it makes a mockery of conducting the comparable company exercise. It is sometimes necessary where there are limited comparables or a proxy sector has to be used but in a contentious situation this approach would be attacked. Moreover, if the adjustment is significant, and 25% is, it starts to suggest a lack of real comparability anyway. A preferred approach is to identify different potential forecasts.”
“[W]e have sought to identify transactions in the market where the acquired company is sufficiently comparable to IPS to support a valuation.”
“Well, it's the same answer as I gave for the companies, there's never a direct list of completely and exactly comparable transactions, it's the job of the valuer to find ones which are comparable enough to be used in the exercise and obviously that's a matter of subjective judgment.”
“As always with PE you could look at the valuation a number of ways, but broadly valuations on day 1; o Isis paying£5.5m for a 35% stake (and£5.4m loan note)=£10.31 o Paul and Keith receiving£2m each to dilute them by 17.5% (and factoring in a 25% 'share of loan note)=£10.08m This is clearly a huge premium on the Day 1 valuation of a trade deal”
“…… is worth about 5 million and it owes about 5 million, and then they have tried to give an upside to the various parties as to what might happen in the future by issuing shares in Newco. But at the time of the transaction those shares in Newco have no value because Newco has just got debt and an asset that are of equal and opposite value.”
“It’s all to do with structuring. At the end of the day, if someone’s paying 5.5 million for a 35 per cent stake surely to get to 100 per cent valuation you’d divide five and half by the 35%.”
“Yes, I think I'm taking the -- my view of what the business is worth prior to the transaction happening, and effectively saying it cannot have changed value at that level over -- over a two-day period. So on the day before, all of that value is attributable to the vendors; the day after they effectively have received 4.6 million and there's a balance of -- they own 60 per cent of the company which has whatever that debt is 5.5 million of debt 5.7 million of debt in it and the enterprise value is the same, you take off the 5.7 of the debt and what's left is effectively the value for the total equity of the business at that point in time.”
“4. Entry pricing Due to management rolling into ordinary equity we are measuring entry pricing on a money back basis. Having agreed the deal pre-FD costs the business is expected to achieve£1 .2m EBITDA outturn and a 4.75x entry multiple. Annualised Run Rate at31st October 2014 is£1.38m (adjusted for FD costs and CTO payrise) implying an entry multiple of c 4.2x. We are comfortable with entry pricing in the context of both comparables and trading multiples provided by Oakley with trading peers and comparable transaction c7-9x. The discount applied to entry is based on two factors i) immature business model and ii) dealer contribution to overall profitability. However, smaller assets continue to attract similar multiples, validated by the acquisition of Proximity Communications (FYDEC13 EBITDA of£1 .3m) to Maintel earlier in October for c.7.4x. Proximity had lower growth and margins and only 50% recurring revenue vs IPS c90% recurring revenue.”
“I propose that we acquire a further 10% from Kevin and Paul at a cost of£1m . This is a premium to the current valuation we have applied of 7.5x the earnings of£1.1 m . ISIS will therefore hold 45% of Newco and Kevin and Paul will hold 21.5% each.”
“The business is currently valued at£8.25m by Isis based on£1 .lm EBITDA rate multiplied by 7.5.”
“Value co 7 x 5 x 1.1 EBITDA -> 8.2% 2m cash 1.589m rolled -> 17.2 hard 26.5 with sweet 65%”
“For our “high” earnings estimate we would consider that the Company could be priced using the 8+4 FY15 forecasts (£897k ) less the super profit attributable to the Co-op contract (£131k ), arriving at£766k . This estimate of maintainable earnings would likely represent the highest possible metric given it takes no account of the downward trajectory of earnings compared to FY14 and does not reflect management’s concern that EBITDA would further decrease (a concern reflected in the December 2015 forecasts).”
“The July 15 reforecast represents a downgrade from Dec 14. Although revenue was still projected to grow, the EBITDA forecast declined by 32%. BDO chose to use the lower EBITDA figure (£897k ) as the basis of their maintainable earnings figure apparently without making their own assessment of: • why earnings had moved from growth to decline; • why the change was so abrupt (32% drop in EBITDA in seven months); • which costs had increased most significantly and whether those increases were temporary; and • whether the “operational and strategic issues” reported to them were (i) as significant as claimed and (ii) relevant in circumstances where, even by the Company’s own figures, it was forecast to bounce back to high growth within two years. In ‘normal’ circumstances, we would agree that the July 15 reforecast would probably present the most appropriate set of figures to adopt since they were prepared relatively close to the valuation date. However, BDO has failed to acknowledge that there is some dispute as to whether the July 15 reforecast is a fair representation of the business at that point, or whether the increased costs result from changes which Livingbridge had made (or intended to make) during FY2015 and which would unfairly prejudice the Shareholders if included in the valuation.”
“I think that anybody looking at the expected future level of the performance of a company that has reforecast so many times in a short timescale I don't think they'd place much value in future forecasts. So I think the actual historic numbers are probably safer than looking at forecasts still.”
“……….. given that the numbers that we have for post the deal are a matter of dispute between the parties, and actually we're only talking about 7 or 8 months afterwards, I took the view that the most contemporaneous numbers to use were the model that was agreed by both sides prior to the transaction taking place would be the best starting point to look at to use -- to generate the EBITDA number.”
“There is an abundance of recent high authority on the principles applicable to the construction of commercial docuCments, including Investors Compensation Scheme Ltd v West Bromwich Building Society[1998] 1 WLR 896 ; Chartbrook Ltd v Persimmon Homes Ltd[2009] AC 1101 ; Re Sigma Finance Corporation[2010] 1 All ER 571 ; Rainy Sky SA v Kookmin Bank[2012] 1 Lloyd’s Rep 34 ;[2011] 1 WLR 2900 ; Arnold v Britton[2015] AC 1619 ; and Wood v Capita Insurance Services Ltd [2018] Lloyd’s Rep Plus 13;[2017] AC 1173 . The court’s task is to ascertain the objective meaning of the language which the parties have chosen in which to express their agreement. The court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. The court must consider the contract as a whole and, depending on the nature, formality and quality of drafting of the contract, give more or less weight to elements of the wider context in reaching its view as to the objective meaning of the language used. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other. Interpretation is a unitary exercise; in striking a balance between the indications given by the language and the implications of the competing constructions, the court must consider the quality of drafting of the clause and it must also be alive to the possibility that one side may have agreed to something which with hindsight did not serve his interest; similarly, the court must not lose sight of the possibility that a provision may be a negotiated compromise or that the negotiators were not able to agree more precise terms. This unitary exercise involves an iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated. It does not matter whether the more detailed analysis commences with the factual background and the implications of rival constructions or a close examination of the relevant language in the contract, so long as the court balances the indications given by each.”
“Phase Three: Heads of Terms to Completion We will review the heads of terms offered by the preferred buyer and offer advice on key terms and timetable. Once heads of terms have been agreed we will set out a detailed timetable for the transaction and await the buyer to commence formal documentation. We will assist in the due diligence process to ensure that any requirements of a prospective purchaser can be met with minimum disruption to IPS and will provide a secure electronic data-room to host any information. We will liaise with the legal advisers to ensure that the deal progresses smoothly and provide support and input into the asset purchase agreement as required with a view to maximising value, minimising your deal costs and completing the transaction within the agreed timetable.”
“Share rights - Exit (article 13.3)-we have added a definition of Previous Distributions Amount so that this is taken into account when calculating the 2 x ISIS Investment Amount for the B Shares. See also the amendment to ISIS Investment Amount referred to above. …………….. Transfer arrangements - Market value (clause 18.4) - we have made this clear that no minority discount should be applied in determining the market value of a Leaver's shares”
“In terms of the legal analysis, the value of their shares is affected by the redemption premium in Article 13.3. This is a consequence of the fact that the buyer of any shares will acquire them subject to the rights that attach to those shares. It is not a function of them each holding a minority interest in the company.” iii) The view expressed by BDO LLP in a valuation report dated26 April 2016 obtained by the Company where they said: “the Livingbridge Priority Return represents a priority claim on the capital of the business and would therefore need to be factored into the valuation regardless of whether the valuation approach was pro-rata or minority.” iv) The terms of Mr Morris’s witness statement (in the Leaver Litigation) dated10 June 2016 . At paragraphs 32 to 34 of that statement Mr Morris said that the Claimants had agreed the RPP as reflecting his condition that “no other shareholders would accrue any value unless and until Livingbridge had made a two-times return”
“Transfer arrangements - Market value (clause 18.4) - we have made this clear that no minority discount should be applied in determining the market value of a Leaver's shares.”
“Hi Paul thank you for the revised heads, as per Keith's email below we are both happy with the heads, I understand Paul B has forwarded to Speechleys to sanity check but the key commercial areas are all fine with us we and look forward to pushing ahead and getting this deal completed in October .”
“Just as a heads up - had a quick call with Paul R, he has concerns about the value of his shares if he becomes a leaver as well as the timing of receiving cash if he is a leaver. I made the point that this was covering old ground but suggested we discuss together on the call this afternoon”. iii) The Claimants’ evidence, which I accept and which is supported by Ms Cockburn’s email just quoted, is that they repeatedly raised with Mr Crossley their concern that their equity in the Company should be protected: see Section I above. I do not rely upon their evidence to hold the Firm liable as if it had somehow guaranteed their shareholding was free of any transactional risks aside from the Company’s commercial and financial misfortune, or what Mr Richards referred to as preserving value for him “whatever happened”
“Had anyone advised me that the result of agreeing the deal with Livingbridge was that I could be dismissed the day after the transaction and only get£1 for the remaining 30% of my shares then I absolutely would not have proceeded. Why would anyone gamble that kind of money in receiving£2m for 12.5% and risking losing the remaining 30% of their shares for£1 ? It does not make sense. I was trying to de-risk and take some money off the table, not to gamble the remaining value of my shares that I retained.”
“If I had been told that the Leaver provisions were impacted by the redemption premium I would absolutely not, no way at all, in any circumstances let the deal happen. We were not under any pressure to do the deal, the business was flying, we were earning a huge amount of money. We were growing year on year.”
“Deal Structure”) contained the following which perhaps suggested that Livingbridge did regard the Market Value provision in the Articles as having some real value for the Claimants in certain leaver situations. It said: “3. Material legal Issues Founder shares have the following leaver provisions for removal for under performance: 1/3rd vests at completion 2/3rds vests after 12 months Full vesting after 24 months There is also a vesting associated with Founder resignation: 1/3rd vests at completion 2/3rds vests after 12 months Remaining 1/3rd does not vest All other conditions are in line with our standard positions.”
“No, I would have walked away from [the Transaction]. You know, I was – you know 2014 was probably one of the best years of – of my life, we were living a really good lifestyle, we were doing really well, we were growing a very successful business, our business was recognised in the industry as being an early adopted or cloud communications. We won numerous industry awards. We were shortlisted for the Times Tech Target Award and, you know, we could have grown the business quite easily for another year or two to£15 million organically. What we felt we wanted to do was get a partner that would drive that on quicker, but I certainly wouldn't have resist – sorry, I certainly wouldn't have risked the value that I had tied up in my shares …..”
“If the deal was not based on us getting full share value, there would have been no deal, none at all and this would have been the case even if Livingbridge had been the only deal out there because we were not desperate. It was desperation, it wasn't a fire sale, we weren't struggling. The business was not going backwards. We had no debt, we had no outside investment or bank loans, … You know, we had a huge amount of cash in the bank, and we were paying ourselves handsomely. This wasn't a struggling business …”
“We were not under any pressure to do the deal, the business was flying, we were earning a huge amount of money. We were growing year on year.”
“… transactional activity in the sector remained buoyant, and had the transaction not completed with ISIS there would have been an opportunity to go back to the other parties that had made offers, particularly GCI, to start negotiations again. This period would also have allowed new parties to review the business and to consider making an offer as new potential buyers were entering the sector as a result of increased private equity investment in communications technology provides (both directly and indirectly). … Since 2014 the telecoms sector has seen significant increases in volumes of transactions for communication technology providers like IPS and increases in valuations for such companies.”
“The ICT market was a growing market and one which was buoyant from a transaction perspective. There was a lot of private equity and trade interest in transactions. That transaction activity has continued right to this day and it continues to attract private equity investment. Had Paul and Keith not gone with Livingbridge deal there would have been other options, they may not have been immediate, but over the next 6 months or so they would have had lots of opportunities with both trade buyers and other private equity fir ms as the business was performing well.”
“I recall that there was a perception that the UC market was growing and a good market to be investing in, yes.”
“The M&A market for UC assets is buoyant with the sector proving attractive to a broad set of trade and private equity buyers. Ongoing growth in customer demand for UC solutions, particularly amongst SMEs, and convergence across the telecoms, hosting and IT space should continue to fuel appetite within these groups over the medium term.”
“Based on the above we are satisfied that there should be sufficient trade appetite to provide an exit route at our target exit multiple of ~7-9x EBITDA. This is in line with the entry valuation range (see page 3 for comparable transactions) and Oakley has confirmed that the current market valuations appear to be sustainable over the next four years.”
“We expect increasing appetite and interest in the UC sector from both trade (integrated telcos, data/telco only players and managed IT service players) and PE driven by increasing importance and demand by SMEs, continuing attractive market growth dynamics and continuing IPS' attractive financial profile.”
“Well, what I haven't done is done an actual calculation of the each of the implied value of each of those transactions. For example, the GCI Telecom Group offer, if you were to do an analysis of that you effectively discount the future earnings that might come from it, actually in total adds up to something like£9.6 million .”
“So if the business had grown as we were forecasting, there would have been a significant payment at the end as well.”
“The Claim is finally decided in your favour, whether by a court order, a deemed order, an award or by an agreement by which you are to receive any one or more of (a) a declaration that you are good leavers: or (b) damages for wrongful dismissal; or (c) an order for costs in the High Court proceeding.”
“….. in relation to your claims in the High Court and Employment Tribunal against IP Solutions Group Limited ("the Opponent") for a declaration and compensation as a result of the termination of your employment with immediate effect on29 July 2015 ”
“For the avoidance of any doubt I make it clear that in my view, even taking all matters together, there was insufficient to justify summary dismissal, whether under clause 14 of the service agreement or at common law.”