Parish & Anor v The Danwood Group Ltd [2015] EWHC 940 (QB)

[2015] EWHC 940 (QB)Case No A40LS061
IN THE HIGH COURT OF JUSTICE
QUEEN’S BENCH DIVISION
Venue LEEDS DISTRICT REGISTRY
MERCANTILE LIST
The Court House
Oxford Row
Venue Leeds LS1 3BGDate 2 April 2015
Before
His Honour Judge Behrens sitting as a Judge of the High Court in Leeds
Between
(1) JONATHAN PARISHClaimants(2) BRIAN OGDENClaimantTHE DANWOOD GROUP LIMITEDDefendant
Andrew Latimer (instructed by Hemingways Solicitors Ltd) for ClaimantsPaul Sinclair (instructed by Enyo Law LLP) for DefendantHearing Hearing dates: 26 - 31 January 2015, 11 March 2015
Approved JudgmentI direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic..............................
[1]Abbreviations In this judgment I shall adopt the following abbreviations: Bregal Capital LLP Bregal The Danwood Group Ltd Danwood Danwood Group Limited Employee Benefit Trust Danwood EBT Earnings before Interest Taxes Depreciation and Amortisation EBITDA Earnings Before Tax EBT Danwood Group Holdings Ltd Holdings Long Term Incentive Plan LTIP Steve Francis Mr Francis Brian Ogden Mr Ogden Jonathan Parish Mr Parish Phoenix Office Supplies Limited Phoenix PricewaterhouseCoopers LLP PWC Regent Associates Regent Articles of Association of Danwood Group Holdings Ltd the Articles Share Purchase Agreement the SPA[2]Introduction This is an action by Mr Parish and Mr Ogden for deceit and/or misrepresentation. It arises from the sale of their shares in Phoenix to Danwood on 30 January 2009. They were paid partly in cash and partly in C shares in Danwood’s holding company, Holdings, which is now known as Hykeham Group Limited.[3]In essence, the Claimants allege that they agreed to sell the entire share capital in Phoenix on the basis of representations that the C shares were worth £34.48 or alternatively £30 each. The C shares were to be allotted to Mr Parish under the terms of an LTIP scheme.[4]There are two groups of representations. The first group are partly oral and partly in writing. It is said that in October 2008 Mr Coles the Commercial Director of Danwood made an oral representation as to the value of the C shares. Following the meeting on 31st October 2008 Mr Coles sent a letter to Mr Parish. It is alleged that the final paragraph of the letter contains a representation that the C shares to be held under the LTIP would be equivalent to approximately £2 million.[5]The second alleged misrepresentation occurred in August 2009. Under the terms of the SPA Danwood still owed a sum in respect of the net assets of Phoenix. That sum was payable in cash. After some negotiation it was agreed that the payment would be made as to £1,500,000 in cash and the balance (£225,000) by way of 7,500 C shares. It is said that Danwood thereby represented that the C shares were worth £225,000 or £30 each.[6]It is said that the representations were untrue, were made recklessly or dishonestly. Alternatively reliance is placed on the Misrepresentation Act 1967.[7]A number of defences are made to the claim. It is not accepted that the alleged representations were made or are to be interpreted in the manner suggested by the Claimants. The representations were representations of opinion and not of existing fact. It is denied that the representations on their true construction were untrue. In so far as they were untrue they were believed to be true at the time they were made. There was no dishonesty or recklessness. Equally there was no negligence. It is said that liability for misrepresentation was excluded under the terms of the SPA and/or the LTIP. There is a dispute as to whether Mr Ogden has a valid cause of action. There is a challenge to the method of assessing damages claimed by the Claimants. 3. The facts 3.1 Mr Parish, Mr Ogden, Phoenix[8]Mr Parish was born on 23 August 1965. Fairly soon after leaving school he was employed by Montgomery Office Supplies. He started in logistics and then moved into a role as a sales representative. After gaining a good understanding of the local market and the necessary processes involved in running a business, he decided to set up his own company.[9]Mr Ogden was born on 27 March 1955. After university he qualified as a Management Accountant and eventually became the Finance Manager of Laporte Fluorides.[10]In 1989 Mr Parish approached Mr Ogden and asked for advice about setting up a business. After various discussions they wrote a business plan to determine if his venture was viable and if it would be possible to get support from the bank. At that time it was not envisaged that Mr Ogden would be involved in the business.[11]Phoenix was incorporated in September 1989. Mr Parish was the Managing Director. At that time the business was predominantly focused on delivering general office supplies and office furniture to local companies in the Sheffield area.[12]In paragraphs 8 to 24 of his witness statement Mr Parish set out in some detail the expansion of Phoenix from 1989 to 2006. Mr Parish’s account was uncontroversial and not really relevant to the issues I have to decide. I shall not lengthen this judgment by setting it out.[13]From a relatively early stage Mr Ogden came over to the office every Thursday evening to review the accounts and, at month ends, on a Saturday morning to close down the month accounts. In 1995 Mr Ogden was appointed as full time Finance Director of Phoenix.[14]Mr Ogden worked on all finance and operational matters and assisted Mr Parish with tender submissions for the company’s key educational markets. He also liaised with manufacturers and distributors to ensure a robust supply chain to support the business growth. Mr Parish and Mr Ogden worked hand in glove on a daily basis which often meant working together out of hours to achieve the company’s objectives.[15]By 2006 Phoenix’s EBT were approximately £600,000. By that time Mr Parish and Mr Ogden were the sole shareholders - Mr Parish held approximately 51% of the shares; Mr Ogden held the remaining 49%. 3.2 Mr Coles, Mr Daniels and Danwood.[16]Mr Daniels left University in 1968, where he studied Business Management, and joined Gestetner Duplicators Ltd as a management trainee. He left Gestetner 3 years later to run his own business in partnership with a colleague. They changed the name to Danwood when they expanded out of Lincolnshire. Mr Daniels was Chairman and Managing Director of Danwood from 1972 until mid-October 2012.[17]In the 40 years that Mr Daniels ran the business he built it up from nothing to an international business turning over circa £250,000,000 and employing 1900 people in 7 countries.[18]In October 2012 Mr Daniels was replaced as Managing Director by Mr Francis although he remained as Chairman of Danwood. In evidence he said that he was also sales director. He was suspended on 18th December 2012 and dismissed in January 2013. In evidence he stated that neither he nor his lawyers were given the reason for his suspension.[19]There was litigation between Danwood/Holdings and Mr Daniels relating to both Mr Daniels’ running of Danwood and to the value of Mr Daniels’ shares. That litigation was settled on confidential terms in November 2014. Those terms have not been disclosed. In the course of evidence Mr Daniels stated that during the negotiations he agreed that he would give evidence on behalf of Danwood in this litigation.[20]It is not in dispute that Danwood had an aggressive policy of acquisitions. Between 2004 and 2007 it acquired 32 companies in the UK and Ireland. It acquired 14 more companies between 2007 and 2012. In evidence Mr Daniels made the point that this was its business model. He accepted that Danwood had acquired companies at the rate of about 7½ per year since incorporation.[21]Mr Coles qualified as a chartered accountant in 1970. He had a chequered early career because in the early 1980’s he was convicted of an offence arising out of the failure of the company of which he was the Finance Director and was sentenced to 18 months imprisonment.[22]In 1998 or 1999 he was employed by Danwood and became the Finance Director. In 2005 his role changed to that of Commercial Director as a result of heart problems. In 2008 he was the Director in charge of the acquisitions team.[23]On 18 December 2012 Mr Coles was suspended by Danwood pending investigations. He was never told the nature of the investigations although he had a number of meetings with Danwood. He tendered his resignation at the end of January 2013 as a result of which he was placed on gardening leave. His contract terminated in July 2013. 3.3 Initial offer from Danwood[24]In 2006 Mr Parish and Mr Ogden discussed the options of exiting the business. After some research on the internet they decided to instruct Regent to act on their behalf.[25]Mr Parish and Mr Ogden had a number of meetings with Mr Asher of Regent. Although there was no professional valuation of Phoenix they were given a range of values between £5 and £7 million. According to Mr Parish they sent out 10 Information Memorandums . They had 5 responses one of which was from Danwood.[26]On 1st October 2007 a meeting took place between Mr Parish and Mr Ogden on behalf of Phoenix, Mr Daniels, Mr Coles and Mr England on behalf of Danwood and Mr Asher on behalf of Regent. The object was to enable each side to get to know the other, to understand Danwood’s interest in Phoenix and for Danwood to get an understanding of Phoenix’s activities.[27]On 29th November 2007 following a further meeting on 28th November 2007 Mr Daniels made a written subject to contract offer to purchase Phoenix with a proposed completion date of 28th February 2008. The essential terms of the offer were:[1]a goodwill figure of £2.4 million (based on 6 times EBT)[2]a figure for the net assets of Phoenix estimated to be £1.5 million[3]an earn out based on the additional EBT over £400k for the next two years. If an EBT in excess of £750k was achieved, an extra £2.1 million (i.e. 6 x £350k) would be paid.[28]In an acquisitions summary prepared at the end of November 2007 Mr England noted that Mr Parish informed Danwood that he had received 2 offers (£4.6 and £6.4 million) and was awaiting another and that Mr Parish was expecting to get over £6 million. In evidence Mr Daniels accepted that he was aware that Mr Parish was looking for a sum in excess of £6 million. 3.4 Project Gresty[29]In April 2008, Danwood completed an agreement with Bregal (an independent private equity firm based in London then known as Englefield) whereby Bregal made a substantial investment of £40 million into Danwood in return for equity. The deal was known as ‘Project Gresty’.[30]It is common ground that the acquisition of Phoenix was on hold whilst Project Gresty was being negotiated. The acquisition team at Danwood were fully occupied with Project Gresty.[31]As a result of Project Gresty the entire issued capital of Danwood was owned by a holding company, Holdings. Previously the shares in Danwood had been owned by the Directors (as to 58%), an employee benefit trust and other individuals.[32]The shares in Holdings were split into three categories – ‘A’, ‘B’ and ‘C’. The ‘A’ shares – constituting 30% of the company – were held by Bregal; the ‘B’ shares were held by the existing shareholders of Danwood; and a new category of ‘C’ shares was created as part of an incentive plan for senior employees (the LTIP).[33]As part of the Bregal deal, existing Danwood shareholders were given the sum of £2.42 and 0.4585 ‘B’ Shares in Holdings for each Danwood share they held.[34]The Articles provide that ‘C’ Shares are – bar some minor exceptions – non-transferable. The only mechanism by which value in ‘C’ Shares can be enjoyed by a ‘C’ Shareholder is on what is defined in the Articles as a “Liquidity Event” i.e. a “Disposal”, “Sale”, “Liquidation” or “Listing”. In essence, these amount to a situation in which Danwood is dissolved, bought out or has an initial public offering on some recognised exchange.[35]Clause 4 of the Articles sets out the mechanism by which the proceeds of any “Liquidity Event” will be shared between the ‘A’, ‘B’ and ‘C’ Shareholders. The effect of Clause 4 can be summarised as follows:[1]The net equity proceeds of the Liquidity Event are first divided 30% / 70% between the ‘A’ Shares (on the one hand) and the ‘B’ / ‘C’ Shares (on the other).[2]The 70% allocated to the ‘B’ / ‘C’ Shareholders will be applied first to the ‘B’ Shares up to a value of £47 million (plus 10% per annum from the date of the Articles).[3]Any remaining value will be applied to the ‘B’ and ‘C’ Shares proportionately to their nominal value.[4]Any amount allocated to the ‘A’ Shareholders which exceeds a defined “Threshold Return” shall be divided 15% / 85% to the ‘A’ Shareholders (on the one hand) and the ‘B’ / ‘C’ Shareholders (on the other).[36]Thus, as between the ‘B’ and ‘C’ Shareholders, up to a valuation of £47 million of Danwood (increasing at 10% pa), the ‘B’ Shareholders enjoy a disproportionate benefit of the value of the company. Beyond that valuation, however, the ‘B’ and ‘C’ Shareholders enjoy any increasing value in due proportion. Further, if the valuation reaches the ‘Threshold Return’ then the ‘B’ and ‘C’ Shareholders together enjoy the value disproportionately to the ‘A’ Shareholders.[37]As at the date of completion of Project Gresty no ‘C’ shares were issued. 800,000 ‘C’ Shares were issued on 6 March 2009 and a further 366,667 were issued on 28 September 2009. There are thus a total of 1,166,667 ‘C’ Shares now issued. 3.5 The June Heads of Terms[38]At the end of May 2008 a further set of Heads of Terms were sent to Mr Parish and Mr Ogden. The terms were in substantially the same form as the November Heads of Terms. Thus, they referred to the agreement for sale being subject to contract (although other terms were to have legal effect). The offer price was identical to that in the November Heads of Terms – that is to say the goodwill was valued at £2.4 million, the Net Assets were to be valued and the earn out remained in place on the same terms as before. The target date for completion was 31st August 2008. Both Mr Parish and Mr Ogden countersigned the Heads of Terms on 5th June 2008.[39]When he gave evidence Mr Parish pointed out that at that time he had been working with Danwood for 6 months. He said that he had been speaking to Mr Daniels on a regular basis and had even (at Mr Daniels’ request) been down to Portsmouth to write a report on Printware Ltd. 3.6 The September report from Mr Coles[40]On 26th September 2008 Mr Coles (with the assistance of other members of the acquisition team) prepared a briefing paper on the acquisition of Phoenix for the board meeting of Holdings that was to take place on 1st October 2008. The report is a lengthy document to which it is not necessary to refer in detail. It contains a section on Phoenix’s accounting model which includes:
"The accounting model adopted by Phoenix is ultra-conservative andif the company were to develop the number of customer sitesthat they believe they could, then the model is unsustainablegiven the impact of working capital on the business withoutfurther support. The model used by Phoenix is simply atraditional rental model where the rental is spread evenlyover the life of the contract and costs are driven throughdepreciation, interest and normal operating costs"
[41]It then sets out an analysis of the profitability of one contract using this accounting method and compares it with the profitability using Danwood’s accounting and cost structure. The analysis suggested an overall increase in profitability of £304,921 over 4 years.[42]According to Mr Coles Danwood’s treatment of contracts such as this was approved by its then auditors – Ernst & Young. In 2012 Danwood changed its auditors. Its new auditors (PWC) took a different view and considered that Danwood’s accounting model was not in accordance with accounting practice.[43]In any event Mr Coles’s report drew attention to this model and made the point that it completely changed the financial dynamics of Phoenix. The report concluded by setting out the terms of the proposed deal including the provisions relating to earn out. 3.7 The Board Meetings on 1st and 8th October 2008[44]The acquisition of Phoenix was discussed at a Board Meeting of Holdings on 1st October 2008. Mr Daniels made the point that Danwood had a long list of acquisitions that were being worked on. He queried whether they should continue in the current climate. Mr Lazarus suggested that they should continue with the acquisition policy but should be robust in pricing negotiations.[45]There was further discussion at the Board Meeting of Danwood on 8th October 2008. Mr Daniels described the business of Phoenix and the purchase price including an earn out.[46]There was a discussion on the acquisition during the course of which Mr Daniels said his priority was Admiral, Phoenix, Copyplan and then others. It was agreed that Phoenix’s financials needed to be well understood as part of the due diligence. 3.8 The change from the earn out to the LTIP[47]Some time in early October 2008 Mr Daniels decided that the offer for Phoenix would no longer include an earn-out. Instead there would be an offer of an LTIP. This change is not reflected in any Board Minutes but Mr Daniels said that he discussed it with his co-directors.[48]As the subsequent discussions are central to the dispute it is convenient at this stage to summarise the LTIP. The LTIP[49]The details of the LTIP are contained in an 18 page document signed by Mr Parish on completion. The first 8 pages of the document are a summary of the general terms of the scheme initially written by Mr Coles (with assistance) sometime in 2006 but amended later. The remaining 10 pages are the terms of the scheme itself.[50]The LTIP was a vehicle designed to provide share benefits to Divisional Board Members and their families. It consisted of the award of C shares in Holdings based on performance criteria and (in Mr Parish’s case) Mr Parish’s continued employment with Danwood.[51]Provided Mr Parish met the performance criteria and was still in employment after 4 years the C shares would then vest.[52]The shares to be vested are held in an Employee Benefit Trust based in Guernsey. The shares to be vested were to be held in the trust and notionally allocated for Mr Parish’s benefit. If the conditions attaching to the award were met the trustees were to segregate the shares into a separate fund for Mr Parish and his family.[53]The shares to be issued were free shares and not options. As such Mr Parish was not buying at a certain price with the hope that the price would increase and then only receiving the difference in value on sale.[54]On the other hand the shares that were the subject of the LTIP were C shares. The rights attached to such C shares were those contained in Holdings’ Articles. These included the fact that (in general) the shares were only realisable on a Liquidity Event. Furthermore in assessing their value the complicated procedure set out in clause 4 of the Articles had to be undertaken. The conversation between Mr Daniels and Mr Parish[55]It is by no means clear when the initial conversation between Mr Parish and Mr Daniels about the LTIP took place. Neither Mr Parish nor Danwood have a contemporaneous note of it. Furthermore there is a dispute as to whether it was a face to face meeting or a telephone conversation.[56]Both Mr Parish and Mr Ogden say that the LTIP was first discussed over the phone. Mr Ogden was not party to the telephone call but he says that Mr Parish reported the phone call to him shortly after he received it.[57]Mr Daniels says it was discussed at a meeting in Lincoln. In cross-examination he expressed himself as “virtually certain” about this “because I would never, as part of my professional business life, hold a conversation like that, negotiating terms of anything that was important, with anyone, be it a customer, supplier, over the telephone. It is justnot what I do.”[58]There is some support for Mr Daniels’ recollection in an email dated 17th October 2008 sent by Mr Ogden on behalf of Mr Parish to Mr Daniels. In that email Mr Parish thanked Mr Daniels for the meeting “today” and looked forward to working with him. The second paragraph of the email reads: I just wanted to confirm that the initial payment is based on 6 times last years earnings before tax and the value of the balance sheet. As agreed today the earn out will be based on shares against Group performance and that I can distribute these to incentivise key personnelrelated to the commercial objectives if I so wish. [My italics][59]When asked about this Mr Parish accepted that there must have been a meeting but said he had forgotten about it and had not referred to it in his witness statement. He accepted the LTIP must have been discussed at the meeting but he thought that the meeting in Lincoln was to do with contracts, Managed Print and all sorts of other things. Mr Parish thought the phone conversation took place about a week before the email.[60]Mr Parish deals with the phone call in paragraphs 81 to 84 of his witness statement. In view of the importance attached to this conversation by Mr Latimer I shall set them out in full.81. I received a telephone call from Colin Daniels who informed me that he had been having a few problems regarding cash funding for acquisitions that he had in the pipeline now that the venture capitalist was on-board. He advised me that he needed to replace the earn-out element of the acquisition with shares in an LTIP scheme but that it would equate to the same value. He stated that there were very few people with shares and that shares were only issued to limited numbers of executives and thus it was in his words “an exclusive club”.82. Colin went on to say that the Board members were getting older, and as such, he needed a succession strategy and part of issuing shares to people like me helped to facilitate that strategy but that it would result in a four year earn-out. Colin Daniels said that I was a key part of the acquisition but that he would not expect Brian to work past one year so I would need to sort things out in the background with Brian as the earn-out would cover a period that ran on after Brian had left the business.83. I asked him to clarify that what he was saying was that the scheme had the same value as the earn-out but involved shares instead of cash payments and was over a longer period, but nothing else had changed. Colin Daniels said that my understanding was correct but that I would still have to achieve the yearly targets to be awarded the shares just like the position would be with the earn-out.84. I told him that I would obviously speak to Brian about this and Colin Daniels said he would ask Richard Coles to call me to organise a meeting with me to go through the details. I said I would discuss this with Brian and I would await Richard’s call.[61]In cross-examination Mr Parish agreed that he needed more detail and that he was waiting for a further discussion with Mr Coles before he made any decision in the matter because he needed more detail. He appreciated that Mr Daniels did not have a full understanding of the scheme and that Mr Coles was its architect.[62]Mr Parish’s evidence was that Mr Daniels said that he needed to replace the cash-earn out for shares, but it would be of the same value[63]He commented that he would not give up £2 million for nothing. Later in his evidence he described the LTIP as a direct replacement for the earn-out. He repeated that he had made it clear that he was looking for a minimum of £6 million as the price for Phoenix.[64]Mr Daniels discusses the meeting in paragraphs 21 to 23 of his witness statement. Much of it is devoted to the email of 17th October 2008. He does, however, say (in paragraph 22) that he believes that he told Mr Parish that: if and when he was awarded shares under the LTIP, and those shares were ultimately turned into cash, he could do whatever he wished with the money.[65]In cross-examination he acknowledged that he could not remember everything about the meeting: Q. “You cannot actually remember that conversation with Mr Parish, can you ? A I can remember very little about it, so I am telling you what I believe I can remember. Q. Just to be clear, when you say that you believe you can remember, it is very important if you just tell us what you actually have a recollection of and what you are trying to piece together to assist the court; just so the judge knows. Of course, they are not quite the same thing. A. I have certain knowledge that the Board had rejected purchasing Phoenix on the basis that there was going to be an earn–out. That was off the table. I had to speak to Jonathan and I had to tell him that I had to give him information about the LTIP and what that could be worth to him if he bought into the LTIP and joined the company on that basis. That I can remember. I can remember not much else about the conversation. I can remember Jonathan talking about wanting to incentivise other members of staff and I believe (and this is only a belief) that I would have said something like, "Jonathan, if you earn the money, it is your money. So you can do what you want with it." I cannot remember that, but I think that it is something I would have said."[66]He did, however, give a number of relevant answers: Q. You told Jonathan Parish that Danwood needed to replace the earn-out element of the acquisition with an LTIP of equivalent value, did you not? A. I told Jonathan Parish that for reasons that I either would have explained to him or not, because I cannot remember everything about that meeting, that the earn-out was off the table, that the company would not go ahead with an earn-out, but we wanted to discuss with him an alternative that we thought he would find acceptable. Q. Jonathan asked you to clarify what you were saying and to confirm that the scheme had the same value as the earn-out, except it was shares rather than cash. That is right, is it not? A. No, I told Jonathan there was an opportunity over four years to earn what he wanted to achieve in terms of a £2 million pay-out, an opportunity to earn over a period of four years. That is why the 58,000 shares were offered to him, which was the same equivalent as all the other Managing Directors had, which were the equivalent of what we hoped were going to be worth £2 million. Q. In fact, you confirmed to Mr. Parish, when he said, "Can you clarify that it was going to be the same value in the LTIP as in the earn-out?", that that understanding was correct and you simply went on to talk about the targets or hurdles that he would have to hit in order to get the earn-out, did you not? A. I confirmed to him that if he had achieved his hurdles to achieve his 14,500 shares each year by making his targets, we hoped that after four years his shares would be worth £2 million and hopefully, as the years went by, more. The meeting between Mr Parish and Mr Coles[67]It is common ground that there was a meeting between Mr Parish and Mr Coles following the conversation with Mr Daniels. It was not a long meeting and it covered a number of topics. Both Mr Parish and Mr Coles agreed that the discussion about the LTIP only lasted about 10 minutes.[68]According to Mr Parish’s witness statement (paragraphs 89 – 92) Mr Coles explained:[1]that the LTIP was a Long Term Incentive Plan for a select number of directors and was very tax efficient.[2]that each year Mr Parish had to achieve targets to secure the shares[3]that even though Mr Ogden was not expected to be with Danwood in 4 years time, as the LTIP replaced the earn-out Mr Ogden had an interest in the LTIP.[4]that Mr Parish would be at the higher end of the share allocation based on the number of shares required to replace the cash earn out of £2.1 million. He made it clear that the shares would have the same total value.[69]In cross examination Mr Parish expressed the view that at that point there was some uncertainty about some elements of the scheme and how it was drafted. He agreed with Mr Sinclair that at the end of the meeting he still required further information which Mr Coles was to provide in writing. He was however clear that the decision to go ahead with the LTIP was based on the oral representations by Mr Daniels and Mr Coles. When asked about the representations by Mr Coles he said I reiterated it was at the same value as the original earn-out and he said "Yes", and he is going to need to allocate a large number of shares to get to that point in the scheme.[70]He also said that Mr Coles specifically said that the value of the shares under the LTIP would be of equivalent value to the amount of the earn-out.[71]Mr Coles dealt with the meeting in paragraphs 26 and 27 of his witness statement. He made the point that the LTIP was not intended to be a direct replacement of equivalent value to the earn-out. He made the point that he explained the basic mechanism of the LTIP to Mr Parish. There was no suggestion that Mr Parish was acting for Mr Ogden.[72]In cross-examination Mr Coles accepted that only a select number of directors were involved in the LTIP. He did not say that the LTIP was tax efficient. In his view it was not. Rather the way in which the shares were held could be tax efficient. He had the LTIP with him and went through it with Mr Parish. He did not compare the LTIP with the earn-out. His purpose was to explain how the LTIP worked not to make comparisons. He did explain that Mr Parish would have to meet a yearly hurdle. He did not discuss the position of Mr Ogden. He did not discuss the earn-out. The discussion related purely and simply to the mechanism by which the LTIP worked.[73]Later he explained that his personal motivation was to explain the workings of the LTIP. He rejected suggestions that he misrepresented the LTIP in order to secure the deal which was a high priority for Danwood or that his motive was to sell the LTIP to Mr Parish. The letter sent by Mr Coles to Mr Parish[74]Following the meeting between Mr Parish and Mr Coles on 31st October 2008 Mr Coles wrote to Mr Parish to provide more details of the LTIP. As can be seen from the first paragraph he enclosed a draft of the LTIP with the letter. As the letter is central to the allegations made by the Claimants I shall set it out in full. SUBJECT TO CONTRACT: LTIP Dear Jonathan Following our meeting last week, I am enclosing a draft of the Long Term Incentive programme (LTIP) that we discussed. I have set out a few points below to help you put the scheme in context. The Group Board has a strategic objective to increase turnover to a minimum of £400 million by 2013. This will be achieved through a blend of organic growth and acquired turnover and we hope should produce an EBITDA of circa £50 million. It is, of course difficult to value this in today’s market, but we would not expect to float in good market conditions at less than a multiple of 10, which would not be unreasonable for a business of the scale and market position of Danwood by 2013 As part of the re-organisation in April 2008 when we brought Englefield into the Company a new holding company was formed called Danwood Group Holdings Ltd which effectively owns 100% of the operating company, the Danwood Group Ltd. The total issued share capital is 11,166,667 shares broken into 3 classes. A class represents 30% of the Company and is owned by Englefield. B class represents 60% of the Company and is owned by the previous key managers and directors. C class represents 10% of the Company and is owned by the Company’s Employee Benefit Trust. The A and B shares are closed to new participants so the LTIP will receive C shares. Sufficient shares have been ring fenced in the LTIP sub trust of the EBT to meet the demands as the LTIP share vestments. The purpose of the LTIP scheme is to encourage divisional directors to grow their business units in line with the Company’s growth and profit objectives. The cost of the shares to you is simply as a result of your own endeavours in achieving the budgets you will in any event set in the first place. There is therefore no cash outlay for you, so you are effectively backing your own commercial judgement. The number of shares available to each LTIP participant is strictly limited to a maximum of 58,000 C shares and we have included you at the top of this scale. This figure was selected to give an indicative value of circa £2 million on final investment, which of course should continue to rise as the business continues to grow over the years ahead. This therefore should be seen as a starting point and certainly not the end game. If you have any issues you want to explore in more detail please ring me. Best wishes Yours sincerely Richard Coles[75]It is the Claimants’ case that the letter constitutes a representation that 58,000 C shares had a value in October 2008 of approximately £2 million. Danwood does not accept this analysis. It is Danwood’s case that the figure of £2 million was the forecast value of 58,000 C shares when they vested in 4 years time.[76]As will appear later in this judgment the meaning of the letter has to be interpreted objectively. I have to consider what a reasonable person with the relevant background knowledge would have understood from the words used in the context in which they were used.[77]In those circumstances the subjective views of the parties as to what the words meant are by no means decisive. In those circumstances it is not necessary to summarise the whole of the cross-examination on the letter. Mr Parish’s views can be seen from the following passages from his cross-examination: Q. We will talk about net assets later, but looking at this,where it says, "the value of circa £2 million on final investment", you knew -- it is obvious -- that means in four years' time, does it not? A. It may be a higher figure. Q Yes, it may be higher. A. It may be a higher figure. It says it is a starting point a well, which is the other area that you seem to be – the position in this letter reflected my understanding of the conversations. It is that it was circa £2 million for the shares at a starting point and I think that somewhere in here it states that it should be seen as a starting point and certainly not an end game, not four years down the line and Iget the same value that I had got in June Heads of Terms, orBrian and myself had got in the June Heads of Terms. Then slightly later:92. MR. SINCLAIR: It is, "This figure was selected to give an indicative value of circa £2 million in four years' time."93. A. That is right, yes. It is saying that, but obviously the£2 million comes back to the original earn-out figure, so it is somewhat ironic that the maximum number of shares you can actually have comes back to our earn-out figure as well.94. Q. What this sentence is not saying is, "This figure is selected to give an indicative value of £2 million today."95. A. No, the previous paragraph, which you seem to want to ignore,is saying it is a starting point.96. JUDGE BEHRENS: No, it is actually the next sentence.97. A. Sorry, it is the next sentence.98. JUDGE BEHRENS: It is there. It is the final sentence.99. A. I apologise.100. JUDGE BEHRENS: It is there, but ----101. A. It is saying it is a starting point and not an end game. That clearly says to me that the growth will be in the future. The future is tomorrow. That is saying that the company now has investors. It is pushing growth. Its vision is to get to £400 million and the risk that me and Brian were taking was effectively, now we have investors in, would the shares go down or could they go up? With an investment capital company102. the size of Bregal behind it, it was very unlikely if financial information was reported correctly in regard to that so our risk was very minimal. The only decision we had was, are we prepared to take shares instead of cash?[78]When Mr Coles gave evidence he was referred to paragraph 30 of his witness statement: I did not intend that the wording of the letter dated 31 October 2008 should be construed as making any form of guarantee as to what the future (or indeed current, as seemingly alleged) value of the ‘C’ shares might be – hence the cautious wording I chose to use:
“an indicative value of circa £2m, which of course should continue to rise”
. It was not the case, as alleged at Paragraph 23 of the Reply, that the £2m figure was “presented as being both the minimum value of 58,000 shares and a fair substitute for the earn-out provision”. The letter does not present any “minimum value” and nor does it make any reference to the earn-out that had previously been considered, which was never a “substitute” for the LTIP. It is a matter of basic valuation accounting that the ‘C’ Shares could not possibly be worth anything unless and until there was a Liquidity Event as defined in the Articles. I do not consider that I misled Jonathan as to how the LTIP would operate, or what the ‘C’ Shares might be worth in the future if our projections proved to be accurate.[79]In cross-examination he adhered to that position. His object in writing the letter was simply to reflect the position of the LTIP. He said the letter was to indicate the sort of hope value Danwood had in the business moving forward. He denied that the letter was written dishonestly or intended to convey the meaning that the C shares were worth £2 million at that time.[80]The figures put forward by Mr Coles are supported by a spreadsheet which he had prepared at the time. That spreadsheet has been criticised by Mr Clements (the Claimants’ expert) but it does show a forecast 2013 value for the C shares of £32.13 per share which would value 58,000 C shares at about £1.9 million. It is not suggested that he showed Mr Parish this spreadsheet at the time. 3.9 The conference in mid November 2008[81]In November 2008 Mr Parish was invited to and attended a conference where presentations were given by a number of senior executives including Mr Daniels. In his presentation Mr Daniels referred to Danwood’s ambition to achieve a £400 million turnover by 2013. Thus the figure of £400 million referred to in the October 31st letter was shared by Mr Daniels, the managing Director. 3.10 Events leading to completion The Email of 3rd November 2008[82]On 3rd November 2008 Mr Parish sent Mr Coles an email in which he stated that he had read the LTIP document and raised two queries. One related to tax, the other to the LTIP targets. In his query Mr Parish referred to “the aim of £400 million revenue”. Mr Coles answered both the queries the same day. The November 2008 Heads of Terms[83]On 13th November 2008 Danwood sent to Mr Parish and Mr Ogden new Heads of Terms. This document made no mention of the earn out (which had, of course been replaced) or the LTIP. Otherwise it was similar to the earlier Heads of Terms. The target date for completion was 1st December 2008.[84]The Heads of Terms were signed by Mr Parish and Mr Ogden on 17th November 2008 Events leading to completion[85]It is not necessary to set out the events in any detail. However a number of points need to be made:[1]Both sides had legal advice. Mr Parish and Mr Ogden instructed Trevor Ironmonger of Ironmonger Curtis. Danwood had the benefit of 2 in house solicitors (Ross Eaglestone and Scythia Cross) in its acquisition team.[2]On 18th November 2008 Mr Ironmonger sent a long email to Mr Eaglestone. One of the matters he referred to was the LTIP. After making the point that it was not referred to in either the draft SPA or the Heads of Terms he referred to the draft LTIP document that had been sent to Mr Parish. The email continued: Whilst a useful illustration of the scheme, to properly consider this we do all need to see the full proposed documents as specific to Jonathan. Indeed, I am told that you are designing the LTIP around Phoenix. Please provide details of the rights that attach to the C ordinary shares together with a copy of the articles As this scheme is effectively now offered in place of the previously proposed earn out, it is of course an important part of the deal and should also be in place upon Completion. Can you please let us have the necessary LTIP and employment documents as soon as possible[3]On 27th November 2008 Mrs Cross sent to Mr Ironmonger a draft service agreement for Mr Parish. In the email she made the point that she had not referred to the LTIP:
“as I am told that from a tax perspective it’s preferable to keep it in an entirely separate document. [Mr Eaglestone] will supply a copy of the LTIP document as soon as it has received final approval from our tax advisers.”
[4]On 11th December 2008 Mr Eaglestone sent to Ironmonger Curtis a copy of Holdings’ Articles, and the LTIP.[5]At a Board meeting of Holdings on 22nd January 2009 Mr Daniels reported that the Phoenix acquisition would be completed on 30th January 2009. The Board also authorised the issue of C shares. The relevant minute reads: The proposal of issuing 800,000 C shares at a price of 5p per share was discussed. It was agreed that the price fairly reflected the current market value of the C shares. It was agreed that the 800,000 shares can be issued.[6]Pursuant to this resolution the 800,000 C shares were in fact formally issued on 6th March 2009. 3.11 Completion[86]Completion duly took place at Danwood’s offices on 30th January 2009. At the completion meeting a suite of documents were signed and exchanged. These included the SPA, Mr Parish’s LTIP, and employment contracts for both Mr Ogden and Mr Parish.[87]Mr Ogden was in fact offered an LTIP but when he pointed out that this was a mistake it was withdrawn.[88]Under the terms of the SPA the sum of £2.4 million was payable on completion. The sum payable in respect of the Net Assets was payable within 7 days of agreement and determination of the completion accounts in accordance with a procedure set out in Schedule 6.[89]Under clause 4.2.1 and Schedule 1 the sum of £2.4 million was payable as to 49.25373% to Mr Ogden and 50.746262% to Mr Parish. However under clause 4.6 it was open to the Sellers to agree between themselves a different proportion.[90]On 29th January 2009 Mr Ironmonger invoked the power under clause 4.6 by sending Mrs Cross an email which included: Please note that for the purpose of the agreement Schedule 1 [Mr Ogden] and [Mr Parish] want the initial cash consideration to be paid as follows: Mr Parish £1,350,000 55.59% Mr Ogden £1,050,000 44.41% Total £2,400,000 100%[91]This document is relied on in support of the allegation that Mr Parish was acting as Mr Ogden’s agent in the negotiations for the LTIP. It is Mr Parish’s case that when Mr Daniels first mentioned the LTIP in October 2008 Mr Daniels told him that he would have to sort Mr Ogden out as it was not intended that Mr Ogden would work for 4 years so as to qualify for shares under the LTIP. As a result of that discussion Mr Ogden and Mr Parish agreed that the LTIP shares would be held by Mr Parish for himself and Mr Ogden in the proportions set out above.

Then slightly later:

[92]Mr Parish, however, accepted that he did not inform anyone at Danwood of the terms of his agreement with Mr Ogden. Furthermore as can be seen from the wording of the email the payment instruction only refers to the “initial cash consideration” and is, of course different from the proportions in Schedule 1. 3.12 Payment for Net Assets[93]On 3rd April 2009 Mr Ogden sent Phoenix’s draft completion accounts to all relevant parties at Danwood. Those completion accounts valued the net assets at £1,831,675. Included within that figure was long leasehold property valued at £1,287,020.[94]It is common ground that there was a dispute between Nigel Ward (the Director of Danwood who was dealing with the matter) and Mr Parish over the value of the properties. It is not necessary to set out the details of the dispute save to note that Mr Ward considered that the properties were overvalued.[95]Schedule 6 contained a mechanism for the resolution of the dispute which both parties were keen to avoid. Accordingly in an effort to avoid the process, on 10th July 2009 Mr Parish sent an email to Mr Daniels proposing a compromise. It is not necessary to set out the compromise in detail as it contained a number of elements. One of the elements related to bad debts. Another proposal was to reduce the £1,287,020 value of the properties by £104,249 to £1,182,771 and to divert that sum to Mr Parish’s LTIP.[96]There were further negotiations which resulted in a proposal by Mr Ward at the beginning of August 2009. Regrettably the email of that proposal cannot now be found.[97]On 9th August 2009 Mr Parish sent Mr Ward an email which is central to the second part of their claim. It reads: Hi Nigel, After reviewing your proposal regarding the asset value I wish to table the following which is very much in line with your correspondence and our discussion with the objective of moving forward before the board next week. 1. Your proposal effectively restructured the figures to 1,445k cash and 280 LTIP 2. To bring to a close. 1,500 cash and 225 LTIP (at a share value of 30.00 per share making a total number of shares 7500) 3. Colin also stated that he intended to [align] my salary with the other MDs to 150k to create parity. I appreciate you are going away today but if it would be possible to confirm the position by close of business I would be grateful. Thanks Jonathan[98]There were further negotiations at least in part over the bad debts. In an internal email from Mr Ward to other members of Danwood dated 1st September 2009 Mr Ward said: [Mr Parish] and I have agreed a payment of £1.5m less the Bradford debt (presumably still £110k …) This values the properties at £955k which I think is OK[99]On 3rd September 2009 Mr Ward sent Mr Parish an email stating that he thought the matter was agreed and that subject to updating the accounts Danwood would remit £1,399,647. The email continued: 131. Myself or Colin will outline on a separate note that this year’s performance … satisfies your first LTIP hurdle; that there are a further 7500 C shares allocated to you and to outline your bonus percentage for the forthcoming financial year.[100]On 15th September 2009 Lizzie Taylor (an Acquisition Accountant employed by Danwood) emailed Mr Ogden confirming receipt of the accounts showing net assets of £1,499,489 and asking for confirmation that that sum was to be split in accordance with the percentages in Schedule 1. Mr Ogden emailed back the same day that the moneys were to be split as to 56% for Mr Parish and 44% for himself.[101]It is the Claimants’ case that there was a representation by Mr Ward that the C shares were at that time worth £30 a share.[102]Both Mr Parish and Mr Ogden were cross-examined as to whether Mr Ward actually represented any value for the shares at all. In the light of the allegations now made the answers are important.[103]Mr Parish’s answers to questions about the 9th August 2009 email included: MR. SINCLAIR: The proposal put to you was 1.445 cash, but then he actually proposed 8,000 shares, did he not? He did not propose a figure of money. He proposed 1.445 cash and 8,000 shares in the LTIP? A. And 8,000 shares came back ---- JUDGE BEHRENS: Just answer the question. Do not analyse it. If you cannot remember, just say "I cannot remember". A. I cannot remember. JUDGE BEHRENS: I do not want you to work out what 8,000 shares comes to, because I can do that if I have to. MR. SINCLAIR: Do you remember that when Mr. Ward made this offer to you, it was a certain amount of cash, which I think we can see is 1.445 cash, and he also offered a number of shares, which was 8,000? A. Correct. Q. What you have done in this e-mail is, you have rewritten his offer in a slightly different way. You have said: "Your proposal effectively restructured the figures to 1.445 cash and 280 LTIP", by which you mean £280,000 in the LTIP? A. Correct, as everyone has been talking about putting the balance, the payment -- I think there are words like "payment" and "balance" in these e-mail chains -- into the LTIP. It is not -- it is an asset figure. Are we saying now we are going to give another £300,000 discount as well? Q. What Mr. Ward was not doing was offering you a specific amount of money going into the LTIP. He was offering a specific number of shares, and what you have done is rewritten that in your own way to identify an amount of money going into the LTIP. That is why you used the words "effectivelyrestructured", because you were rewriting what he offered you in your own way? A. That is not correct. We went to a meeting after this, and that is where the figure changed to 1.5 and 250,000, where Nigel said the figure in regard to the shares and where Brian and him negotiated to get down to £30 a share, to cover off the interest, because we were not being paid cash.[104]Mr Ogden’s evidence included the following exchange: MR. SINCLAIR: Please can we look at paragraph 128 of your statement. This refers to a meeting that you had with Nigel Ward in August 2009, where you say:
"Nigel had suggested that there the £1,445k was paid in cash and the remaining amount of £280k would be transferred into Jonathan's LTIP. Nigel Ward suggested that there should be a transfer of 8,000 C Shares"
. Can you now recall that, or is that ---- A. I can recall that, because that was a conversation that we had, that there was a balance of 280,000 and Mr. Ward suggested 8,000 C Shares. Q. Can you remember that Mr. Ward suggested the number of 8,000 for the C Shares? A. Yes. Q. You can remember that? A. I can. JUDGE BEHRENS: This would be after the e-mail, would it? A. Yes, because we were expecting 1.725 in cash. Then an e-mail came, and it obviously had on it 1.445 million, which was a long way short of 1.725 million, and so we said, "Can we comeand see you and discuss it", with the aim of getting the 1.445million up as high as we could. MR. SINCLAIR: Do you think that Mr. Ward said in terms, "Well,the remaining amount of 280,000 that we are in dispute about,that is equivalent to 8,000 C Shares, and so we will give you that"? A. I believe it was suggested 8,000 C Shares for the balance of the net assets, and the balance for the net assets was £280,000. Q. Yes. But is that what Mr. Ward was saying, both those things? he say, "There is £280,000. So, instead of giving you that in cash, we will give you the equivalent in shares, which is 8,000 shares"? A. No. I think he said, "I propose 8,000 shares." I do not think he used the word "equivalent", but he knew he was talking about a balance of £280,000. Q. He never made an actual representation to you, did he, that the shares were worth £35 per share? That is something that you worked out ---- A. Yes, by dividing ---- Q. --- by looking at his offer? A. Yes, that is correct. Q. In the end, the proposal that was arrived at was slightly different: it was £1.5 million in cash and 7,500 shares; is that right? A. That is correct, yes. We tried to negotiate the cash higher, but I think Nigel just said that we have cash flow problems, for whatever reason. It was evident that we were not going to push the cash figure up much higher without falling out. 3.13 Events following completion 2009[105]On 28th September 2009 a further 366,667 C shares in Holdings were issued. As a result there were a total of 1,166,667 C shares issued.[106]In October 2009 Mr Daniels emailed Mr Ogden (with copies to Mr Parish and Mr Coles) confirming that Phoenix’s performance qualified for the first year of the LTIP scheme. 2010[107]Sometime in 2010 Mr Parish discovered that no C shares had been allocated to him. On 31st August 2010 Mr Daniels sent an internal email to Mr Wilson (who was responsible for the day to day administration of the LTIP) stating that the 7,500 C shares resulting from the agreed negotiation should have been deposited into his sub-trust but that the shares earned in years 1 and 2 would not be deposited until the end of the 4 year period. Mr Parish was said to agree with this.[108]In September 2010 Mr Parish attended a presentation prepared by Mr Ward to discuss the 2009/2010 results. Amongst the items discussed was a share valuation. In summary that valuation valued the C shares at £4.14 as at 30th September 2010 with a projected valuation of £8.11 for the next year.[109]In his witness statement Mr Parish described himself as “spooked” by these valuations as they were less than the sums previously represented to him. In cross-examination he described himself as “shocked”, and “horrified”. 2011[110]Mr Parish did not raise the question of the LTIP until February 2011. On 24th February 2011 he sent an email listing a number of items he wished to discuss with Mr Daniels. Amongst the items was a 15 minute discussion in the presence of Mr Ogden about the LTIP.[111]The meeting took place on 7th March 2011. Minutes were prepared by Mr Parish (and were sent to Mr Daniels’ personal assistant on 14 March 2011) and read: JP outlined a challenge with respect to the value attributed to the C shares with regard to the work-out structure agreed prior to completion. CD assured JP it would be resolved but suggested JP organise a meeting with [Mr Coles] to resolve the number of C or B shares required to bring the plan back in line with the agreed value.[112]Following that email Mr Parish sent an email to Mr Coles on 7th April 2011 which includes "Good afternoon, Richard. Colin asked me to drop you a line after a positive and constructive meeting we had recently regarding a number of divisional topics. The item he asked me to liaise directly with yourself was with respect to my LTIP with the objective of repositioning in line with the expectations communicated as part of the acquisition … The LTIP was structured in such a way as to provide a value of circa £2 million after four years (the original figure of the “Earn-out” on acquisition was to be £2.1 million) and to achieve this 58,000 C shares were to be allocated via the LTIP. The price per share would therefore be £34.48. The C share valuation at 30 September 2014 was £4.14 … The forecast valuation at 30 September 2011 for C shares is £8.11 …. As can be clearly seen there is a large difference in share value between that “allocated” against that forecast. …[113]Danwood rely on that email as being inconsistent with the suggestion that there was any representation as to the 2008 value of the C shares. It refers to the use of the words “expectations” and “forecast”.[114]Mr Coles did not reply until 22 June 2011. In his reply he said: I fully appreciate the need to address these issues but they are complex and go hand in glove with a project I am currently working on which has an impact on the equity structure of the Company. I have to complete this within the next week so I will then promise to move straight on to your issues.[115]When he gave evidence about this email Mr Coles said: The discussions about share value and the share structure of the company were not isolated to Jonathan Parish at all. It was the entire younger management team of the company coming through, who were working with the business to grow the business. They were the ones that were growing it. There were a lot of the senior management who had reached either maturity or near maturity, as in near pension age, and they were having a disproportionate amount of the value of the business in terms of the way the business was structured at that stage. Our view was that the business was structured incorrectly to be able to deal with the business moving forward. … As I said already, we were negotiating with Bregal to try to establish a new share structure for the business that would fairly benefit the younger members of the company. Q. But the reason you were doing it was not merely a concern for fairness; it was that if promises had been made to Jonathan Parish and Brian Ogden, if you could restructure with Bregal, the C Shares might start to be worth something? A. No, the principle was to get rid of the whole C share structure and completely redistribute the way the C Shares operated.[116]Mr Parish and Mr Ogden had a meeting with Mr Coles in August 2011 when the share value was discussed. Mr Parish alleges that Mr Coles said that he understood that Mr Parish had been “spooked” by Mr Ward’s presentation, that he knew what had been agreed and that Danwood was not going to rip him off. Mr Coles said he needed more time to sort it out and would get back to Mr Parish.[117]Mr Coles remembered that Mr Parish and Mr Ogden came to see him. He had no recollection of using the words attributed to him by Mr Parish. He repeated the explanation that he was negotiating with Bregal to try to establish a new share structure for the business that would fairly benefit younger members of the Company. He explained that he was trying to get rid of the whole C share structure and redistribute the way the C shares operated.[118]On 25th October 2011 PWC replaced Ernst & Young as the auditors of Danwood and Holdings. In the course of the 2011 audit PWC were made aware of what they describe as accounting irregularities. 2012[119]On 7th and 8th February 2012 there was an email exchange between Mr Parish and Mr Coles in which Mr Coles confirmed that Mr Parish had achieved the LTIP qualification for the third year. Mr Coles’ email continued: I know it seems to have gone on for ages but I am now aware of all the facts that will enable us to revisit the LTIP scheme and other methods of equity incentivisation within the Company. Hopefully I will shortly be able to provide something more concrete to support Colin’s statements about the broader all employee share scheme.[120]By May 2012 it had become apparent that Danwood had had 3 years of no growth in EBITDA despite £40 million in acquisitions. On 2nd May 2012 Mr Daniels sent an email to senior executives (including Mr Parish) pointing this out and that it should not be allowed to continue.[121]In July 2012 Mr Parish was offered the job of Group Director rather than his job of Managing director of the Northern Division. There are a number of emails about this. It is not necessary to refer to them in detail. Mr Parish raised a query relating to the question of whether he had qualified for the fourth year of the LTIP. Mr Parish described the LTIP as being “of major importance” and being “a major part of the acquisition process”. He did not complain of the misrepresentation at that time.[122]On 5th October 2012 Mr Parish sent an email to Mr Coles which included: "Obviously I'm due to shares based on the performance related earn out and in this year, like the previous years, I have had formal confirmation I have achieved the gate, so would this not be classed as receivable or is this only applicable when the shares vest in December 2012 at the forecasted rate of £34.00 to get back to the £2 million agreed based on the maximum amount of shares being 58,000, which was put aside to accommodate the expectation of circa £2.1 million earn out at the point of acquisition.”[123]When it was suggested to him that that showed that the £2 million was a forecast of the value at December 2012 Mr Parish did not accept this. He gave the following explanation: No. I am saying that is exactly what we were expecting as part of the earn-out. This was a replacement for the earn-out. So, the starting point and the beginning is the £2 million. They will grow, hopefully, over the next few years, especially with the venture capitalist behind the business. We did not give away £2 million.[124]On 16th October 2012 Mr Francis was appointed as CEO in place of Mr Daniels.[125]On 6th November 2012 Mr Francis gave a presentation entitled “Strengthening for the Future” in which he acknowledged that for each of the last 3 years there had been on average £3.5 million overbooked revenues and that EBITDA had been overstated by an average of £4 million annually.[126]On 23rd November 2012 Mr Wilson sent Mr Parish an email confirming that 7,500 shares were transferred to his EBT subtrust in 2010 and that he had earned a total of 14,500 shares in each of the 2009, 2010 and 2011 years.[127]On 18th December 2012 Mr Daniels and Mr Coles were suspended.[128]On 20th December 2012 Mr Wilson sent Mr Parish an email in which he stated that the current market value of the C shares was nil and there were 7,500 C shares held in Mr Parish’s subtrust. 2013[129]Mr Parish replied to Mr Wilson on 3rd January 2013. He expressed concern that the shares appear to be valueless as he had always understood they had “substantial value”. He queried why only 7,500 shares were in his name.[130]A further reply was received from Mr Francis on 8th January 2013. He accepted that the scheme, when launched, was perhaps not communicated as transparently as one might expect. He pointed out that with Mr Coles and Mr Daniels on suspension it was difficult to gather the necessary information to be more definitive.

The email continued:

[131]On 22nd January 2013 Mr Daniels resigned as a director of Danwood and Holdings. He ceased to be employed from that date. On 31st January 2013 Mr Coles resigned as a director and gave 6 months notice to end his employment. He was placed on gardening leave throughout that period.[132]On 30th January 2013 Mr Collis (a Director of Danwood) sent an email to Mr Parish to confirm the share values allegedly discussed with Mr Daniels. It includes: The share value was set at £35 per share to cover the business transfer and £30 per share to cover the shortfall in the asset value of the buildings.[133]Mr Parish was asked about this email in cross-examination and the fact that Mr Collis was not called to give evidence. His answers included: Q. And Mr. Collis was never there in any discussion about theLTIP prior to the acquisition of Phoenix, was he? A. No, but he was aware, because he worked in the office and hewas the Director of Phoenix and he was part of the transition, which is stated, I think, in Mr. Daniels' statement, I think. Q. He was never there when you had these discussions with Mr. Ward about the net asset value? A. He was not at the net asset meeting, no. Q. He is a friend of yours who was planning to give evidence in these proceedings on your behalf, was he not? A. Roger was a colleague of mine, and he was a colleague of Colin's, and a friend for 15 to 20 years, which is why I recorded this conversation, because I suspected what would happen. Q. And he has not proved himself to be a very reliable person, has he, in fact? You were planning to call him, and the decision was taken not to call him, because he was not a witness of truth? A. I believe that is what counsel has put forward, yes.[134]On 23rd April 2013 Mr Parish secretly recorded a telephone conversation he had with Mr Daniels. At that time Mr Daniels was heavily involved in litigation with Danwood. That litigation was compromised in November 2014 on confidential terms. 3.14 Mr Berg[135]Mr Berg was appointed as Group Finance Director of Danwood on 15th September 2008. His contract was terminated on 12th December 2008. It is not necessary to go into the grounds of the termination.[136]When he was interviewed by Mr Daniels before his appointment Mr Berg was told that Danwood wanted to bring someone onto the Board who had experience of listed companies because the idea was for Danwood to be ready for flotation in 3 years.[137]He was told his package would include a substantial sum by way of shares in Danwood to be held on his behalf in a LTIP. He was told that the shares would be worth £1 million.[138]Mr Berg was not given any details and assumed (perhaps wrongly) that he would be granted share options rather than actual shares. In any event he did not initially appreciate that there were different classes of shares. Equally he does not seem to have known the structure of what he was being offered.[139]Mr Berg had a meeting with Mr Coles shortly after he joined but was told that his share entitlement had not been sorted out and would be dealt with soon.[140]Mr Berg became concerned about the value of the shares following a presentation given by Mr Wilson at the end of October 2008. On 3rd December 2008 he had a meeting with Mr Daniels when he raised the question of the shares. On 12th December his contract was terminated.[141]There was a dispute as to how much he was owed by Danwood. The dispute was compromised in the summer of 2009. 4. The Law Fraud[142]Mr Sinclair drew to my attention three relevant principles in fraud cases:[1]The burden of proof lies on the Claimants to establish their case. They must persuade the Court that it is more probable than not that Danwood made fraudulent misrepresentations. Although the standard of proof is the same in every civil case, where fraud is alleged cogent evidence is needed to prove it, because the evidence must overcome the inherent improbability that people act dishonestly rather than carelessly or innocently. [See In Re B [2009] 1 A.C 11][2]The claim in fraud must be decided on the basis of the pleaded representations. As Lord Millett explained in Three Rivers District Council v The Governor and Company of the Bank of England (No 3) [2003] 2 AC 1 (at [184-6]):
“184 It is well established that fraud or dishonesty ... must be distinctly alleged and as distinctly proved; that it must be sufficiently particularised; and that it is not sufficiently particularised if the facts pleaded are consistent with innocence ... This means that a plaintiff who alleges dishonesty must plead the facts, matters and circumstances relied on to show that the defendant was dishonest and not merely negligent, and that facts, matters and circumstances which are consistent with negligence do not do so. 185 It is important to appreciate that there are two principles in play. The first is a matter of pleading. The function of pleadings is to give the party opposite sufficient notice of the case which is being made against him. ... 186 The second principle, which is quite distinct, is that an allegation of fraud or dishonesty must be sufficiently particularised, and that particulars of facts which are consistent with honesty are not sufficient. This is only partly a matter of pleading. It is also a matter of substance. As I have said, the defendant is entitled to know the case he has to meet. But since dishonesty is usually a matter of inference from primary facts, this involves knowing not only that he is alleged to have acted dishonestly, but also the primary facts which will be relied upon at trial to justify the inference. At trial the court will not normally allow proof of primary facts which have not been pleaded, and will not do so in a case of fraud. It is not open to the court to infer dishonesty from facts which have not been pleaded, or from facts which have been pleaded but are consistent with honesty. There must be some fact which tilts the balance and justifies an inference of dishonesty, and this fact must be both pleaded and proved.”
[3]In assessing whether a statement was made fraudulently the test is based on the defendant’s subjective understanding of the utterance. Thus in Akerhielm v de Mare [1959] AC 789 Lord Jenkins said:
“The question is not whether the defendant in any given case honestly believed the representation to be true in the sense assigned to it by the court on an objective consideration of its truth or falsity, but whether he honestly believed the representation to be true in the sense in which he understood it albeit erroneously when it was made.”
Misrepresentation Misrepresentation[143]A useful recent summary of the relevant law is contained in the judgment of Popplewell J in Moto Mabanga v Ophir Energy [2012] EWHC 1589 (QB) at [24]-[30]: 24. The relevant principles applicable to claims based on misrepresentation, which are relevant both to the tort of deceit and to claims under Section 2(1) of the Misrepresentation Act 1967, include the following. 25. Whether any, and if so what, representation was made has to be judged objectively according to the impact that whatever is said may be expected to have had on a reasonable representee in the position, and with the known characteristics, of the actual representee. See MCI WorldCom International Inc v Primus Telecommunications Plc [2004] EWCA Civ 957 per Mance LJ at paragraph 30; Raiffeisen ZentralBank Osterreich AG v Royal Bank of Scotland Plc [2010] EWHC 1392 (Comm); [2011] 1 Lloyd’s Reports 123, per Christopher Clarke J at paragraph 81. The reference to the characteristics of the representee is important. … 26. In the case of an express statement, the court has to consider what a reasonable person would have understood from the words used in the context in which they were used: IFE Fund SA v Goldman Sachs International [2007] 1 Lloyd’s Reports 264 per Toulson J at paragraph 50 (upheld by the Court of Appeal at [2007] 2 Lloyds Reports 449). The answer to that question will depend on the nature and the content of the statement, in the context in which it was made, the characteristics of the maker and of the person to whom it was made and the relationship between them: Raiffeisen ZentralBank v RBS per Christopher Clarke J at paragraph 82.27. In the case of an express statement which is made in a document, the context will include the other terms of the document and the terms of surrounding documents passing between the parties. When considering a written representation, the task is to determine how the words would have been understood by the parties, not in a vacuum, but having regard to all the surrounding circumstances known to the parties. It is important in this context, just as when seeking to determine the true construction of a contract, to consider the full terms of the relevant document, not merely the extract which is said to contain the express statement amounting to a misrepresentation. This is not some arbitrary rule of construction. It accords with the commercial expectations of businessmen. One sentence in a letter is not written or read in isolation. It is written or read in the context of the whole letter and would be intended and understood as such.28. …29. Statements of opinion are not normally actionable if they consist of no more than contentions or arguments as to the effect of a document whose terms are equally known to both parties…30. Statements of opinion will generally carry with them an implied representation that the opinion is honestly held. In such cases there is no misrepresentation if the opinion was expressed in good faith: Economides v Commercial Union Assurance [1998] QB 587. A statement of opinion may also carry with it an implied statement of fact that the maker knows facts which justify his opinion or has reasonable grounds for expressing the opinion. Such an implication may more readily be drawn where the representor is in a stronger position than the representee to know of, or to ascertain, the relevant facts: see Smith v Land and House Property Corporation (1884) 28 Ch.D. 7; Brown v Raphael [1958] Ch 636. Whether such implication in fact arises depends in each case on the express terms of the representation and the circumstances in which it was made, including the characteristics of the representor and representee, the relationship between them, and the relative state of their knowledge. 5. The pleaded allegations of misrepresentation/fraud The Amended Particulars of Claim[144]In paragraph 13 of the Amended Particulars of Claim it is alleged:[1]That (at the meeting in October 2008) Mr Daniels said he wished to replace the earn out provision with the equivalent value of shares under a share scheme called an LTIP and suggested that Mr Parish should meet with Mr Coles.[2]That at the meeting with Mr Coles, Mr Coles represented that Danwood proposed replacing the earn out provision worth a maximum of £2.1m with the equivalent value of shares under the LTIP.[145]In paragraph 18 of the Amended Particulars of Claim it is alleged that in the letter of 31st October 2008 Mr Coles represented to the First Claimant that the C shares provided under the LTIP would be equivalent to approximately £2m worth of shares.[146]In paragraphs 30 and 31 of the Amended Particulars of Claim it is alleged that during the negotiations in the summer of 2009 Mr Ward represented by conduct that 8,000 C shares in Holdings were worth £280,000 (giving a value of £35 per share) and that 7,500 C shares in Holdings were worth £225,000 (giving a value of £30 per share).[147]In paragraphs 40 and 41 of the Amended Particulars of Claim the Claimants alleged that the representations were untrue at the time they were made and thereafter. The Particulars to paragraph 41 make it clear that the allegations are that 58,000 C shares were not worth £2 million as at October 2008 and that 7,500 C shares were not worth £225,000 in August/September 2009.[148]In paragraph 42 of the Amended Particulars of Claim the Claimants allege that the representations were made dishonestly or recklessly. The Particulars indicate that the Claimants’ case is that Mr Daniels and/or Mr Coles and/or Mr Ward knew that 58,000 C shares in Holdings were not worth £2 million in October 2008 and that 7,500 or 8,000 C shares were not worth £225,000 or £280,000 in the summer of 2009. Alternatively they were reckless as to whether the C shares could have had those values at the relevant times. The Defence[149]In paragraph 10 of the Amended Defence issue is taken as to whether Mr Daniels represented that the LTIP was a direct substitution of equivalent value and whether Mr Coles made any representation about the value of the C shares at the meeting with Mr Parish.[150]In paragraph 13 of the Amended Defence issue is taken as to whether the letter of 31st October 2008 on its true construction contained a representation that the C shares awarded under the LTIP would be equivalent to approximately £2 million worth of shares.[151]In paragraph 23 and 24 of the Amended Defence issue is taken as to whether Mr Ward expressly or impliedly represented that 8,000 C shares in Holdings were worth £280,000 (giving a value of £35 per share) and that 7,500 C shares in Holdings were worth £225,000 (giving a value of £30 per share).[152]In paragraph 32 of the Amended Defence it is denied that any representations that were made were untrue; it is asserted that they were statements of opinion honestly and reasonably held by their makers and which were based on the assumptions stated in the letter of 30th October 2008.[153]In paragraph 34 and 35 of the Amended Defence issue is taken as to the reliance of the Claimants on the representations. It is expressly denied that any representations were made dishonestly, recklessly or negligently. The Reply[154]With limited exceptions the Amended Reply does not in substance add to the issues set out above though it does go into considerable detail in relation to the arguments the Claimants seek to put forward.[155]In paragraphs 92 and 93 of the Amended Reply it is alleged that even if the statements were statements of opinion they are actionable because they were not reasonably and honestly held. Comments[156]In his closing submissions Mr Sinclair distinguished between 3 types of representations about share value. Type A is a representation that the existing value of a share is £x. Mr Sinclair acknowledged that such a representation was actionable. In principle I agree though it is possible that such a representation may be a representation of opinion. Whether such a representation has been made depends on the matters set out in paragraphs 25 – 27 of Popplewell J’s judgment. Type B is a representation that the future value of the share will be £x in (say) 4 years time. He submits that this is not actionable though there may be an implied representation that the representation was honestly held. I agree. This is covered in paragraph 29 and the first two sentences of paragraph 30 of Popplewell J’s judgment. Type C covers the situation in the remainder of paragraph 30 of Popplewell J’s judgment.[157]Mr Sinclair submits that the Claimants’ case is that all of the representations are Type A representations i.e. representations as to the existing value of the shares. That is the effect of the pleadings, and the way the case has been prosecuted. He referred me in particular to Mr Latimer’s opening where he referred to the C shares being worth £34.48 at the date of the letter Day 1, p 9 line 24 , to the cross-examination of Mr Coles where it was put to Mr Coles that the purpose of the letter was to convey to Mr Parish and Mr Ogden that the C shares were worth £2 million on the date of the letter Day 4, p 547, 3 - 13 and to an exchange on Day 4 when Mr Sinclair expressed concern as to the cross examination of Mr Coles on his spreadsheet. Mr Latimer described as “a straw man” the suggestion that the valuation in the spreadsheet gave rise to a cause of action. It was not and had never been in issue.[158]Mr Sinclair points out that there is no alternative claim pleaded based on the honesty or reasonableness of Danwood’s belief as to the value of the C shares when they finally vested after 4 years. Nor was such a case put in cross-examination.[159]I agree with those submissions. Accordingly the central question for me to decide is whether Danwood (either by Mr Coles or Mr Daniels) represented that the value of 58,000 C shares was approximately £2 million in October 2008 or (by Mr Ward) that the value of 8,000 C shares was £280,000 and/or that the value of 7,500 C shares was £225,000 in the summer of 2009. 6. Assessment of witnesses[160]As both Counsel appreciate there is a great deal of common ground between the parties. So much so that Mr Latimer was able to list a considerable body of facts as undisputed.[161]However there are crucial factual differences as to what was said by Mr Coles and Mr Daniels at their meetings with Mr Parish in October 2008 and of course there are disputed allegations that Mr Coles, Mr Daniels and Mr Ward were dishonest/reckless.[162]In those circumstances it is necessary to form an assessment of the main witnesses. Perhaps, unsurprisingly, Counsel invited me to accept the evidence of the witnesses called on behalf of their respective clients. Mr Latimer’s submissions[163]Mr Latimer relied on what he describes as Mr Daniels’ approach to the evidence based on the taped conversation where he agreed to back Mr Parish and Mr Ogden up, to the fact that Mr Daniels did not disclose the letter of claim that Danwood had made against him and that Mr Daniels had only agreed to give evidence for Danwood as part of the settlement of his dispute with Danwood. Mr Latimer made the point that Mr Daniels was in touch with Mr Collis (the author of 30th January 2013 email but who was not called to give evidence).[164]He pointed to the fact that Mr Coles had to correct his witness statement in relation to other litigation involving Danwood, and that Mr Coles had known Mr Daniels as a friend for a long time. Mr Coles agreed that some of the comments in his witness statement had been prepared by lawyers.[165]He relied on the independent evidence of Mr Berg. He suggested that the effect of Mr Berg’s evidence was that Mr Daniels represented that the share options had a value of £1 million in September 2008.[166]He pointed out 3 factors that he suggested gave Mr Daniels and/or Mr Coles the incentive to lie. These were Danwood’s aggressive acquisitions policy, the financial pressures facing Danwood and the priority afforded by Danwood to the acquisition of Phoenix.[167]He reminded me that Mr Coles had a criminal conviction and that he was not now a chartered accountant. Mr Sinclair’s submissions[168]Mr Sinclair was critical of Mr Parish and Mr Ogden’s evidence. He submitted that(i) the evidence was incoherent or lacked credibility on key points;(ii) the evidence was inconsistent with the contemporaneous documentation;(iii) the evidence was, in some respects, suspiciously detailed considering the material events occurred years ago;(iv) they clung to evidence in their witness statements – even on relatively unimportant matters – rather than concede their recollection may be faulty.[169]Examples given by Mr Sinclair included the insistence that the meeting with Mr Daniels was over the telephone. Mr Sinclair also submitted that Mr Parish and Mr Ogden “had embarked on a fairly impressive course of manufacturing evidence to try to support their claim”. He cited a number of examples including the clandestine taping of conversations with Mr Daniels and Mr Collis, and the email from Mr Collis.[170]He placed a different interpretation on Mr Berg’s evidence from that suggested by Mr Latimer. Insofar as his evidence was alleged to amount to similar fact evidence of attempts to mislead parties about the value of ‘C’ Shares it lacked any probative value. His evidence amounted to a statement that Mr Daniels had told him that he “would” receive £1 million of ‘C’ Shares (which he took to mean share options Day 3, page 359, line 12 ) and that he was dissatisfied when he later attempted to get this deal “sorted out”. Mr Berg realised that the value of the share options depended on the performance of Danwood. It was not alleged that Mr Daniels made any representation about the then value of the C shares.[171]Mr Sinclair submitted that Mr Coles was a transparently honest and careful witness, doing his best to recall the events in question about which he was asked. By contrast to Mr Parish and Mr Ogden he did not adopt a blanket oppositional approach to cross-examination but considered questions as they came, accepted criticism on occasion and stated where he could not remember events e.g. Day 3 page 444-5 on the unpleaded question of whether the documents could have stated more clearly the ‘C’ Shares had not yet been issued .[172]Mr Sinclair submitted that Mr Daniels was an honest witness and that he was candid about where he could remember matters and where he could not. Mr Daniels’ rejection of the material allegations made against him in cross-examination was observably genuine.[173]It is plain from the secretly-recorded transcript of Mr Parish’s conversation with Mr Daniels that (rightly or wrongly) he felt let down by Danwood. His evidence was that his provision of a witness statement was not a term of the settlement of his dispute Day 4, page 622 lines 18 - 23 : A. They asked me, as part of the settlement, if I would be prepared to stand up and give an honest testimony at this trial. I had always said, even before the settlement was agreed and signed, that I would stand up and be counted because I thought that what was happening here was totally wrong and I was very happy to come and challenge it. Discussion[174]I derive little assistance from the evidence of Mr Berg. When read as a whole I do not think it supports Mr Latimer’s submission that Mr Daniels represented to Mr Berg that the then value of the C shares was £1 million. The facts are not sufficiently similar to be of any probative value. Nor do I accept the submission that Mr Daniels misled Mr Berg.[175]Nor do I accept the submission that Mr Daniels gave evidence as part of the settlement of his dispute with Danwood. I have set out the answer he gave above. I regard the failure by Mr Daniels to produce the letter of claim by Danwood as immaterial. It is simply not relevant to anything I have to decide. The terms of the settlement were confidential and I saw no reason to require the disclosure.[176]Equally I derive little assistance from Mr Sinclair’s submission that Mr Parish and Mr Ogden have attempted to manufacture evidence. The emails they sent were quite open. Whilst it is true that Mr Parish tape recorded conversations the tape recordings are admissible as evidence.[177]I do not accept that Mr Coles and Mr Daniels had the incentive to lie suggested by Mr Latimer. There was no dispute that Danwood had cash flow problems. These were disclosed to Mr Parish. That was the reason that the earn out came off the table. Equally Danwood’s acquisition policy was not a secret and did not provide an incentive to lie. I do not accept that Danwood was desperate to acquire Phoenix at any cost. It is quite clear from the Board minute of 8th October 2008 that Danwood was looking at a number of other companies including Phoenix. Admiral was much larger than the others. Even though Phoenix may have been second in priority there is nothing in the note or any of the other minutes to suggest that Danwood or Mr Daniels was so desperate that it needed to lie to obtain Phoenix.[178]Both Mr Coles and Mr Daniels struck me as honest witnesses. Both were prepared to make concessions as to what they remembered and what they did not. It has though to be remembered that the relevant events took place in 2008 and 2009 and in such a case their evidence has to be tested against the contemporaneous documentation.[179]I think there is force in the other criticisms Mr Sinclair made about the evidence of Mr Parish and Mr Ogden. I agree in particular that their evidence was inconsistent with key contemporaneous documents. The three most important such documents are the emails of 17th October 2008 (which expressly refers to a meeting on that date), and the emails of 7th April 2011 and 5th October 2012 both of which expressly use the word “forecast” and which indicate that the value was to be £2 million after 4 years. I found Mr Parish’s explanations for these emails unconvincing. I also agree that neither Mr Parish nor Mr Ogden were willing to make any concessions and stuck to their evidence. A good example of this was the question of whether the discussion between Mr Parish and Mr Daniels in October 2008 was by phone or at a face to face meeting. In the light of the email Mr Parish was forced to concede that there must have been some meeting on 17th October when the LTIP was discussed and that he had forgotten about it. He was still adamant and had a detailed recollection of the phone conversation about a week before. [Incidentally this evidence would mean that the phone call took place on about 10th October 2008 rather than “towards the end of October 2008” as pleaded in paragraph 13 of the Amended Particulars of Claim and repeated in paragraph 13 of the Amended Reply].[180]In all the circumstances I think I have to treat Mr Parish and Mr Ogden’s evidence with caution.[181]As Mr Collis was not called to give evidence and was not present when any of the discussions took place between the parties which are said to contain the representations relied on by the Claimants, I attach no weight to the email he sent on 30th January 2013. 7. The representations[182]There are four relevant occasions where representations are said to have been made – 7.1 The conversation between Mr Daniels and Mr Parish[183]I have set out the rival versions of the conversation in section 3.8. I shall not repeat them. A number of points can be made:[1]I think it more likely than not there was only one conversation which took place at the face to face meeting on 17th October 2008. In so far as there was a phone call it was to set up the meeting. Thus Mr Parish’s recollection that the discussion took place on 2 occasions – once on the phone and at the meeting – is wrong.[2]There is considerable common ground over what was said at the meeting. Much of what is contained in paragraphs 81 to 84 of Mr Parish’s statement is common ground. The dispute between the parties relates to whether anything was said about the value of the shares[3]There are different versions of what Mr Daniels is alleged to have said about the value of the shares in the LTIP. 1) In paragraph 81 of his witness statement Mr Parish alleges that the words used were “it would equate to the same value” 2) In paragraph 13 of the Amended Particulars of Claim the words used were alleged to be “he wished to replace the earn out provision with the equivalent value of shares under a share scheme called an LTIP” 3) Mr Parish’s evidence was that Mr Daniels said that “he needed to replace the cash-earn out for shares, but it would be of the same value”. 4) In paragraph 49 of Mr Ogden’s statement he says that Mr Parish told him that Mr Daniels had said that “he wanted to replace the earn-out element of the acquisition with shares and that it would equate to the same value although it would be over a four year period instead of around 3 years.”[4]As set out above Mr Daniels acknowledged that he did say that he hoped the shares would have a value of £2 million after 4 years.[5]It is, of course unsurprising that the versions are slightly different in view of the lapse of time. Indeed in re-examination Mr Parish accepted he could not remember the precise words used. It is, however, to be noted that in none of the versions is Mr Daniels alleged to have made any representation that the value of the C shares as at October 2008 was £2 million.[6]The use of the word “would” in all of the versions points to a future rather than present time. Furthermore as the earn-out would not in any event be earned for at least 2 years it is difficult to see how the word “equivalent” can refer to a present time.[184]I have already indicated that I am approaching Mr Parish’s evidence and that of Mr Ogden with caution. In the light of the answers given by Mr Daniels I find that the value of the shares was discussed at the meeting. However I am satisfied and find as a fact that the representation made by Mr Daniels was as to his opinion of the future value of the shares after 4 years. Not only is that in accordance with Mr Daniels’ evidence, it is also how a reasonable person would have understood the word “would” in the versions given in evidence by Mr Parish and Mr Ogden in the context of the LTIP which did not vest for 4 years.[185]I am satisfied that Mr Daniels’ opinion of the future value of the shares was one that was honestly held by him at the time. It was, after all, based on figures which were repeated at the conference in November 2008.[186]It follows in my view that there was no misrepresentation at the meeting. 7.2 The meeting between Mr Coles and Mr Parish[187]I have set out the rival versions in section 3.8 and will not repeat them. It is common ground that there was a meeting and that a small part of the meeting (about 10 minutes) was devoted to an explanation of the workings of the LTIP. It is also common ground that Mr Parish asked for further information to be provided in writing.[188]It is to be noted that in his witness statement and in one of his answers in cross examination Mr Parish said that Mr Coles used the word “would” when he described the future value of the shares.[189]Mr Coles denied that there was any conversation at all about the value of the shares. His sole purpose was to explain how the LTIP worked not to make comparisons.[190]I prefer the evidence of Mr Coles. It follows that no representation at all was made at this meeting. 7.3 The letter of 31st October 2008.[191]I have set out the terms of the letter and shall not repeat them. I have to assess what a reasonable person with the characteristics of Mr Parish would have understood from the words of the letter in the context in which they were used. The context includes the whole of the letter and the terms of surrounding documents passing between them including the draft LTIP document which was sent with the letter.[192]I accept that the context will include:[1]the previous offers made by Danwood which included the £2.1 million earn out if the relevant EBT was achieved over the following two years.[2]the fact that the LTIP was offered in substitution for the earn-out.[3]the fact that (as was known to Danwood) Mr Parish and Mr Ogden had been looking for a minimum of £6 million for their shares.[4]the fact that (as was known to Mr Parish) Danwood had cash flow problems.[5]the fact the basic terms of the LTIP were very different from the terms of the earn out. It is not necessary to list all the differences but they would include: 1. The earn out was by way of a cash payment; the LTIP was by way of non-transferable shares in a private company. 2. The earn out involved a maximum figure in pounds; the LTIP involved a maximum number of shares. 3. The earn out was paid after a 26 month period; the LTIP involved receipt of shares after a four year period ending on 1st December 2013.[193]The second paragraph of the letter sets out Danwood’s aspirations. These include a turnover to a minimum of £400 million by 2013, an EBITDA of circa £50 million, and to float with a multiple of at least 10.[194]The next 3 paragraphs of the letter describe the share structure of Holdings after the investment by Bregal. It is not in dispute that it contains a mistake where it states that: The total issued share capital is 11,166,667 shares broken into 3 classes.[195]Whilst the 1,166,667 ‘C’ shares were authorised in Holdings’ articles, they were not issued in October 2008. They were issued in March and September 2009.[196]It is not necessary to refer to the next paragraph. The penultimate paragraph is central to the allegation of misrepresentation. After setting out that Mr Parish would be entitled to a maximum of 58,000 shares the crucial two sentences read: This figure was selected to give an indicative value of circa £2 million on final investment, which of course should continue to rise as the business continues to grow over the years ahead. This therefore should be seen as a starting point and certainly not the end game[197]Mr Sinclair points to the use of the words “indicative value” and “final investment”. He points to the fact that final investment means in 2013 (i.e. after 4 years). Thus on its true construction this sentence would mean that an indicative value of the shares when they vest finally would be circa £2 million. Thus he submits that the reference in the following sentence to “starting point” is a reference to the period after the period before final (in)vestment.[198]Mr Latimer, on the other hand points to the use of the words “starting point” and “continue to rise” in the penultimate paragraph of the letter. He submits that on their true construction the words must refer to the present (i.e. October 2008). Thus the representation is that the value of 58,000 C shares in October 2008 is circa £2 million.[199]I prefer the submissions of Mr Sinclair. In my view a reasonable person with the background knowledge of Mr Parish would understand that paragraph to be a forecast of the indicative value of the C shares on final vesting. I agree with Mr Sinclair that reference to final investment is a clear pointer to 1st December 2013 which is the date in the LTIP when they finally vest.[200]Despite Mr Parish’s evidence to the contrary I find that he understood the letter to be a forecast of the future rather than the current value of the C shares. To my mind the emails that Mr Parish sent on 7th April 2011 and 5th October 2012 show that at that time he considered that the letter comprised a forecast of future rather than present value. Each of the emails uses the word forecast. A fair reading of them clearly shows that that is what Mr Parish understood the position to be. I cannot, with respect, accept Mr Parish’s (and Mr Ogden’s) explanation to the contrary.[201]It follows in my view that the representations that were made in the letter of 31st October 2008 were expressions of Mr Coles’ opinion of the future value of the C shares on 1st December 2013[202]The opinions were honestly held by Mr Coles. This is shown by the spreadsheet he relied. It may be that the spreadsheet is flawed but that does not mean that Mr Coles’ opinion was not honestly held.[203]It follows that there was no misrepresentation in the letter. 7.4 August/ September 2009[204]The context of these negotiations is that Danwood were required to pay Mr Parish and Mr Ogden for the net assets of Phoenix. There was a dispute between the parties as to the value of the buildings and the parties were seeking a compromise without going through the disputes procedure in the SPA.[205]When they gave evidence neither Mr Parish nor Mr Ogden alleged that Mr Ward made an express representation about the value of the C shares. That appears from the passages of the evidence set out above and also a short passage cited in Mr Sinclair’s closing submissions where Mr Parish acknowledged he could not remember whether Mr Ward offered a number of shares or a value of the shares to go into the LTIP.[206]Furthermore I agree with Mr Sinclair that the use of the word “effectively” in the emails of 9th August 2009 and 4th September 2009 strongly supports the view that the figures for the LTIP were as a result of a calculation by Mr Parish.[207]In those circumstances I am not satisfied on the balance of probabilities that Mr Ward made any express representations about the value of the C shares. In so far as values are referred to they are as a result of calculations by Mr Parish or Mr Ogden.[208]Equally I am not satisfied that there was any implied representation. As noted above there was a dispute as to the amount payable. In those circumstances it is impossible to say that the shares were being offered at any particular value.[209]It follows in my view that that there was no misrepresentation in the summer of 2009. 8. Conclusion[210]In the light of my conclusion that there were no misrepresentations this action fails and must be dismissed. 9. Other issues[211]A number of other matters were canvassed during the trial and in the closing submissions. In the circumstances it is not strictly necessary to deal with them. Furthermore any observations I make would necessarily be obiter.[212]However in deference to the full argument that I have received I shall express my views on some of them briefly. 9.1 Mr Ogden[213]Mr Ogden has been a party to the proceedings from the start. However he has never been a beneficiary of any shares in the LTIP. It was never envisaged that he would work for the 4 years necessary to qualify for the shares to vest.[214]He was however a minority shareholder in Phoenix and would have been entitled to a share of any earn-out in the SPA. However once the earn-out was removed from the SPA he had no such entitlement.[215]It is not in dispute that there were discussions between Mr Ogden and Mr Parish about this. Mr Parish said that this came about because Mr Daniels told him that he would have to sort Mr Ogden out. In any event Mr Daniels and Mr Parish came to an arrangement that the proceeds of the LTIP shares would be split between them on a 56/44 basis. No one at Danwood was informed of this arrangement.[216]The original Defence took the point that the claim as pleaded disclosed no cause of action on behalf of Mr Ogden. As a result the claim was amended. In summary the allegation was that the representations by Mr Daniels, Mr Coles and Mr Ward were made to Mr Parish in a dual capacity – partly to him in a personal capacity and partly to him as agent for Mr Ogden.[217]As Mr Sinclair points out Mr Ogden did not participate in the October discussions, Mr Ogden did not participate in the LTIP, and the letter of 31st October 2008 was not addressed to him.[218]In those circumstances I agree with Mr Sinclair that it is difficult to see how, looked at objectively it can be said that the representations can be said to have been made to Mr Parish as agent for Mr Ogden. The fact that Mr Parish and Mr Ogden had entered into a private arrangement as to how to share the proceeds of sale of the LTIP shares does not, to my mind, make Mr Parish Mr Ogden’s agent for the purpose of receiving the representations. 9.2 Exclusion Clauses[219]There is considerable debate in the pleadings, skeleton arguments and closing submissions as to whether the terms of the SPA and the LTIP excluded liability for non fraudulent misrepresentations, constituted an entire contract, and/or prevented the Claimants from asserting that they had relied on any misrepresentations. There is further debate as to whether the terms (if they have the effect suggested by Mr Sinclair) are reasonable within section 3 of the Misrepresentation Act 1967.[220]I have deliberately not set out the relevant clauses because any discussion would substantially add to the length of this already long judgment.[221]I express no views as to any of the issues set out above save to comment that the parties were agreed that in the event of a finding of fraud or deceit the exclusion clauses would be of no effect. 9.3 Value of the shares[222]On 4th June 2014 Judge Kaye QC made an order relating to expert evidence which included: The experts’ reports shall be restricted to determining the value of the C shares as at 31st October 2008, 9th August 2009, and the date of the report.[223]In the light of the nature of the Claimants’ allegations it is not difficult to see why the order was couched in these terms.[224]The Claimants’ report dated 19 December 2014 was provided by Mr Clements a partner in Grant Thornton. He valued the C shares on the 3 days at £nil, £0.05 and £0.01. The basis of his valuation is at paragraphs 4.1 to 4.10. In summary as the C shares had not been issued at 31st October 2008 they were of no value; he noted that the C shares had been issued at £0.05 in March 2008 and thought it right to take that value as the value on 9th August 2009. The value at the date of the report was taken to be their nominal value.[225]The Defendant’s report dated 7 January 2015 was provided by Mr Plaha, a partner in BDO. He was instructed to estimate the prospective value of the C shares based on the information available to the Directors on 31st October 2008 and 9th August 2009. It is not necessary to analyse his report in detail. It is to be noted that he had to make a number of assumptions (some of which he set out in paragraphs 1.12 and 6.1). One of the assumptions was that the exit date was 30th September 2013.[226]In paragraph 7.1 of his report Mr Plaha concluded that the value of the C shares at the exit date depended on the assumptions he had made with regard to turnover, EBITDA, multiple, debt and interpretation of the Articles. He then produced a table with 28 different valuations varying from £0.75 to £36.38 per share.[227]On the first day of the trial Mr Latimer objected to this report both because it was late and second because it was not in accordance with Judge Kaye’s order.[228]Mr Sinclair’s advocacy persuaded me that a prospective valuation might be relevant. I accordingly permitted the Defendant to rely on the report. This led to a further detailed report from Mr Clements.[229]When the experts gave evidence there was no cross-examination on Mr Clements’ first report. The cross-examination focussed on the assumptions made by Mr Plaha with particular reference to the spreadsheet relied on by Mr Coles when he wrote his letter.[230]Mr Latimer was critical of Mr Coles’ spreadsheet because it omitted the cost of acquisitions and is hard to reconcile with other spreadsheets relied on by Mr Coles. He suggested that Mr Coles’ spreadsheet used the wrong figure for EBITDA. He also drew attention to the extreme difficulty (which Mr Plaha acknowledged) of forecasting a share value 4 years ahead. In paragraph 89 of his closing submissions Mr Latimer submitted that the attempt by Mr Plaha to produce a prospective valuation failed because[1]Danwood was trying to do the impossible and project figures 4 years into the future when 12 months would be regarded as fairly long range;[2]Danwood was not generating the cash to make the projected acquisitions;[3]Danwood’s own expert witness quite properly admitted the limitations of the exercise he had been asked to undertake.[231]In his closing submissions Mr Sinclair accepted that the market value of the shares were those suggested by Mr Clements. He submitted that the only relevance of the “hope” or “projected” value of the shares was in support of the contention that the prediction of the future value was honestly made. He submitted that it was not part of the Claimants’ case that if the representations were predictions as to the future they were not honestly made.[232]In paragraph 76 of his closing submissions Mr Sinclair sought to answer the criticisms of Mr Coles spreadsheet. It is not necessary for me to deal with the points in detail. He pointed out that there is no pleaded case that the estimate was made negligently.[233]I agree with Mr Sinclair that there is nothing in the expert evidence to undermine the conclusion I have already expressed that the representations made by Mr Daniels and Mr Coles were made honestly.[234]In the circumstances I accept the evidence of Mr Clements as to the value of the C shares on the first two dates in his report. I am not able to form any realistic view as to the prospective value of the shares on either of the dates.[235]I have dealt with this issue in more detail than I would otherwise have done because there is an issue over the costs of Danwood’s expert Mr Plaha. I have been asked to approve a significant increase in the sums mentioned in the original costs budget. I have no hesitation in refusing this application. Having now understood the pleaded issues (see section 5 above) and the nature of Judge Kaye’s order I am quite satisfied that the instructions to Mr Plaha went beyond what Judge Kaye had authorised. Furthermore the end result was of limited assistance. My provisional view is that none of the costs of Mr Plaha should be allowed and that the Claimants should be entitled to set off against the costs they will inevitably be ordered to pay the costs of Mr Clements’ second report and of his attendance at the trial. 9.4 Quantum[236]The question of quantum does not arise in the light of the findings I have made. Furthermore there are differences between Mr Sinclair and Mr Latimer as to the correct principles to be applied. I do not intend to lengthen this judgment by an analysis of the relevant law. I would however comment that Mr Sinclair’s analysis is predicated on the assumption that if the representation had not been made Mr Parish and Mr Ogden would have gone ahead in any event. If the position is that that the deal would not have gone ahead and if they had been able to sell their shares in Phoenix to an alternative buyer for the £6 million that they were looking for then it would not follow that their loss was zero as submitted by Mr Sinclair.[237]There are, of course, two big “ifs” in the scenario I have suggested above. However as these are events which come after the representations the proper course may have been to treat this as a “loss of a chance” case and to direct an enquiry to assess the relevant chances. This is what happened in one of the cases that was cited to me.[238]However in the circumstances I do not need to consider the matter further. 10. Costs budgeting[239]I propose to deal with the costs budgeting issues quite shortly. Danwood seek to increase their cost budget in respect of 3 matters Disclosure[240]Danwood seeks to increase its budget in relation to disclosure by £8,938. The approved budget is £43,976.30. The increase is said to be due very largely to 62.3 hours of paralegal time (£6,230) and 7.3 hours of fee earner time (£1,898) above what had been anticipated due to the fact that the Claimants gave a very substantial volume of disclosure and due to the need to deal with the Claimants’ requests for additional disclosure.[241]Shortly before the trial the Claimants made a wide ranging request for significant additional disclosure. This was followed by a heavily contested application for specific disclosure which was refused by HH Judge Bird. Judge Bird reserved the question of costs until trial. I can see no reason why the costs of that application should not follow the event. Thus Danwood will be entitled to the costs of that application. Those costs will include dealing with the application which will have to be assessed in due course by the costs judge if they are not agreed. In those circumstances it is not appropriate for me to increase the costs budget in respect of the application.[242]Mr Latimer submitted that the Claimants’ disclosure was limited (running to about 300 documents) and was in accordance with their Disclosure Report.[243]In those circumstances I am not satisfied it is appropriate to increase the budget in relation to Disclosure. Witness Statements[244]The approved witness statement budget was £47,071. This was based on an assumed four witness statements. In fact, five witness statements were exchanged. Danwood therefore seeks and additional £10,000 in respect of costs incurred by two fee earners on the case.[245]In answer to this Mr Latimer pointed out that the witness statements were not long and that there had not been any significant development in the litigation compared with the position as it existed in June 2014.[246]I agree with Mr Latimer’s submissions. I see no reason to increase the costs budget in relation to the witness statements. Experts[247]The approved expert report budget for Danwood was £20,000. This budget was set before the expert had been identified. According to the expert, the fees are now going to be a total of £69,864 and therefore an increase of £49,864 is sought by Danwood.[248]I have dealt with the expert’s costs in section 9.3 above. The increased costs were in my view incurred because the instructions to the expert went beyond what was permitted by Judge Kaye’s order. The application is refused. 11. Conclusion[249]For the reasons set out above the claim fails and will be dismissed.[250]I cannot leave this case without thanking the legal representatives on both sides for the assistance they have given me in the presentation of the case, the clear and helpful skeleton arguments and closing submissions and by completing the case, or at least the evidence, within the allotted time.