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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Platinum Investment Trust Plc v Knox D' Arcy Asset Management Ltd [2006] EWHC 1893 (Ch) (25 July 2006) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2006/1893.html Cite as: [2006] EWHC 1893 (Ch)

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		25th July 2006

Mr Justice Pumfrey :

1. This is an action brought by Platinum Investment Trust Plc ("Platinum") for the purpose of rectifying a deed dated 19^th March 1996 ("the Deed") whereby Knox D'Arcy Asset Management Limited ("KAM") is to receive share warrants on a basis related to the performance of Platinum's investment funds, of which KAM was the manager.

2. In summary, it is Platinum's contention that the formula set out in the Deed for the purpose of calculating the number of warrants to which KAM was entitled is erroneous in a number of respects, and must be rectified by reference to a statement contained in the prospectus issued by Platinum dated 19^th March 1996 ("the Prospectus") which, it is said, contains a statement of the result that the calculation is intended to secure. The clause sought to be rectified has one unusual feature, which no doubt explains this litigation. The entitlement to warrants comes to an end on the earlier to occur of either

   "(i) an order being made or an effective resolution being passed for winding-up [Platinum] (except for the purpose of reconstruction, amalgamation or unitisation on terms previously approved by KAM in writing); or

   (ii) the fifth anniversary of the date of termination of KAM's appointment under the Management Agreement."

3. The Management Agreement came to an end in March 2002, but it is common ground that if there is an entitlement to warrants under the Agreement, it lasts until the financial year end in 2007.

4. There are in effect three issues to be determined in this case. The first is whether the Deed contains a mistake in the expression used to compute the entitlement to warrants. The second is whether the parties have already agreed a correction to that mistake. The third is whether the Agreement should be rectified, as Platinum contends, by the substitution of a new formula alleged to achieve the result stated in the Prospectus or (as KAM contends) to substitute a formula which is alleged already to have been agreed between KAM and Platinum. Neither party contends that the Deed should not be rectified.

   Background to the Deed

5. In 1995, Ingham Plc was the principal company in a small group of businesses, principally worsted spinning and the supply of classic car parts. At this time, a group of investors including Mr Anthony Loehnis, Lord Howard of Rising, Mr Christopher Mills, and Mr Richard Steele, together with Mr James Morton (at that time a director of Ingham Plc), approached the board of the company with a view to acquiring it and turning it into an investment trust. For this purpose, of course, the fact that Ingham Plc was publicly quoted was of considerable assistance. Negotiations took place, Ingham Plc being advised by Pinsent Curtis and Singer & Friedlander, and the investors being advised by Theodore Goddard, SBC Warburg and KPMG. The proposed incoming board also obtained advice from JO Hambro Capital Management Limited ("JO Hambro") who remained the Company Secretary until 31^st January 2003. The structure of the proposed transaction was straightforward. Ingham Plc was recapitalised by a placing and rights issue. It was intended to be renamed the Knox D'Arcy Trust Plc. Knox D'Arcy Trust Plc subsequently became Platinum Investment Trust Plc, and I refer to it by that name throughout this judgment. KAM was to be appointed to act as Platinum's investment manager. Mr Steele, who appears to have been the prime mover in the transaction, was a director of Platinum. KAM was one of two investment managers, the other one of which was called Knox D'Arcy Investment Management Limited ("KIM"). These companies formed part of a Knox D'Arcy group, and appear to have been directly or indirectly owned by an entity called Knox D'Arcy Holdings. The Prospectus for the placing and rights issue is of central importance to Platinum's case. In relation to KAM, it says this:

   "The company has entered into an agreement with KAM ("the Management Agreement") whereby KAM is responsible for procuring investment advice and management in respect of the investments to be made pursuant to the company's investment strategy, subject to the overall investment policy and instructions of the Proposed Directors from time to time. KAM has also agreed to procure certain administrative, accounting and secretarial services.

   KAM was incorporated in the Isle of Man on 19^th January 1996. The registered office of KAM is at 1-4 Goldie Terrace, Douglas, Isle of Man 1M1 1EB. KAM is a wholly owned subsidiary of Knox D'Arcy Holdings. The directors of KAM are Christopher Mills, Ralph Brunswick, Alexander Foley and Robyn Redmayne.

   KAM will be entitled to an annual fee for its services as described further below. The appointment is for an initial period of two years terminable thereafter on not less than 12 months' notice (which may be given at any time but may not expire prior to the third anniversary of the date of the agreement) by either party or earlier on the insolvency of either party."

6. The remuneration of the investment managers KAM and KIM is described in two paragraphs on page 16 of the Prospectus. First, under the heading "Fees and Charges", the following appears:

   "Under the terms of the Management Agreement, KAM will receive an annual fee from the company equal to 2 per cent. of the net assets of the company. Out of this amount, it will pay a fee of 0.5 per cent. to JOH [Hambro] and 1 per cent. to KIM in respect of the services performed by them. It is anticipated by the Proposed Directors that all or at least the majority of the 1.5 per cent. receivable by KAM and KIM will be absorbed by KAM's and KIM's operating costs and expenses. All consideration due to KAM under its agreements with the company is expressed exclusive of VAT (if any). It is the Proposed Directors' intention to charge a proportion of the fees paid to KAM to the company's capital reserve, reflecting the company's policy of investing for capital growth."

7. Having thus described the basic remuneration payable to KAM, the Prospectus continues:

   "Management Warrants

   It is proposed that KAM will also be granted warrants to subscribe for Ordinary Shares at par on a performance related basis. The number of Management Warrants granted in each year will be determined in accordance with a formula so as to give the holder value equivalent to 20 per cent. of the increase in net asset value of the company over a cumulative increase in net asset value of 5 per cent. per annum.

   The Management Warrants will be granted in each year in accordance with the above-mentioned formula after publication of the company's annual accounts and will remain exercisable for a 5 year period following the relevant date of grant. Management Warrants will be non-transferable (other than to other members of the Knox D'Arcy Group) and there will be certain restrictions on the ability of KAM to dispose of any Ordinary Shares subscribed as a result of the exercise of the warrants.

   A summary of the Deed pursuant to which the entitlement to the Management Warrants arises is set out in paragraph 9(v) of Part IX."

8. The further summary of the Deed is indeed contained in the section of the Prospectus concerned with material contracts:

   "A deed dated 19^th March, 1996 between KAM and the company (the "Warrant Deed") under which KAM will be entitled to Management Warrants. The Warrant Deed is conditional upon, inter alia, the passing of the resolutions to be proposed at the EGM. KAM will be entitled to Management Warrants in each year after publication of the company's audited results and also in the event of a takeover, subject to there having been a cumulative increase in net asset value taking into account distributions made since Listing exceeding 5 per cent. per annum. The precise number of Management Warrants to which KAM will become entitled in each year will be determined by reference to a formula so as to give KAM value equivalent to 20 per cent. of the increase in net asset value of the company over the cumulative increase of 5 per cent. in net asset value per annum taking into account any distribution since Listing. In the event that as a consequence of a takeover offer any person acquires a majority of the voting rights which may be cast on a poll at a general meeting of the company, the formula may be adjusted so that, to the extent that the cash (or cash equivalent) offer price per share, CUL or other security exceeds the net asset value per share, CUL or other security, the higher value is used to calculate the entitlement to Management Warrants arising in consequence of the takeover. On the winding-up of the company KAM will not be entitled to any further Management Warrants but will be entitled, in respect of the final accounting period, to a cash payment calculated on the same basis as the entitlement to the Management Warrants was calculated for earlier accounting periods. The Management Warrants will entitle the holder to subscribe at par, (in the absence of any adjustment), to one Ordinary Share for every Management Warrant held.

   KAM's entitlement to Management Warrants will continue until the winding-up of the company or, if earlier, the fifth anniversary of termination of KAM's appointment under the Management Agreement. KAM is permitted to assign the benefit of the Warrant Deed to other companies in the Knox D'Arcy Group.

   The Management Warrants are not transferable other than within the Knox D'Arcy Group. KAM has also undertaken not, so long as its appointment under the Management Agreement shall not have been terminated, to dispose of any Ordinary Shares subscribed as a result of the exercise of any Management Warrants for a period of 5 years from the date of issue of such shares.

   The Warrant Deed provides for adjustments to be made to the terms of the Management Warrants in the event that there is any consolidation or sub-division of ordinary share capital, any reduction of issued share capital, any rights issue or any issue of shares by way of capitalisation of reserves or profits. The terms of the Warrant Deed also provide that the company shall not, except with the consent in writing of KAM, issue securities by way of capitalisation of profits or reserves (other than Ordinary Shares issued to holders of Ordinary Shares), modify the rights attaching to the Ordinary Shares or create another class of equity share capital which have rights more advantageous than those attaching to the Ordinary Shares or change its accounting reference date to any date other than a date in March, April or May."

9. The Deed itself is undated in the copy that I have seen and is expressed to be entered into between Ingham Plc (to be renamed the Knox D'Arcy Trust Plc) and KAM. Leaving aside the definition for one moment, clause 2 confers the entitlement to warrants on the terms and conditions of the Deed. Clause 3 provides that KAM is entitled to the Relevant Number of Warrants calculated by reference to each Accounts Date, commencing with the Accounts Date in 1997 and continuing until the earlier to occur of the events to which I have referred above. The Relevant Number of Warrants is defined by clause 1.1 as meaning:

   "The number of Warrants (if a positive number) determined by the following formula

   

   where A is the Relevant Net Asset Value on the Relevant Accounts Date;

   B is the Hurdle Value on the Relevant Accounts Date;

   C is the average of the middle market quotations of one Ordinary Share as at close of business on the ten Business Days up to (and including) the Business Day before the Relevant Accounts Date;

   D is the Subscription Price; and

   E is the aggregate values of 0.2((A–B) in the calculations of the Relevant Number of Warrants on all previous occasions on which Warrants have been granted under this Deed."

10. In accordance with ordinary drafting technique, each of the capitalised phrases is a defined term. The following are important:

    "Relevant Net Asset Value" means, on any Relevant Accounts Date, the Net Asset Value per Share multiplied by the aggregate of (i) the number of Ordinary Shares in issue on Admission (ii) the number of Ordinary Shares comprised in any Further Issue(s) (iii) the number of Stock Units in issue on Admission (iv) the number of Stock Units comprised in any Further Issue(s) and (v) the number of any other Securities comprised in any Further Issue, in each case the Net Asset Value being calculated as at the Relevant Accounts Date;

    "Net Asset Value" means the aggregate value of the Company's investments and other assets (such valuation being made in accordance with the Valuation Principles) less all liabilities of the Company . . .

    "Net Asset Value per Share" means the Net Asset Value divided by the aggregate of the number of Ordinary Shares in issue, the number of Stock Units in issue and the number of other Securities in issue;

    "Hurdle Factor" means a factor of 1.05 per annum calculated on a day to day basis from the date of Admission (in respect of the Issue) or from the relevant Further Issue Date, as the case may be;

    "Hurdle Value" means, in relation to a Relevant Accounts Date:

    (a) the aggregate of

    (i) the Net Issue Proceeds multiplied by the Hurdle Factor; and

    (ii) any Further Net Issue Proceeds (in respect of a Further Issue whose Further Issue Date falls on or before the Relevant Accounts Date) multiplied by the Hurdle Factor,

    less

    (b) the Prior Total Return up to the Relevant Accounts Date; "

11. The evidence was that, prior to its execution, this document had passed through a number of drafts and had, in the normal way, been considered by the then board of Ingham, who in turn principally relied upon the consideration given to the various agreements by the incoming board of directors. Before turning in more detail to the mistakes alleged to be embodied in the Deed, and the intention of the relevant persons in relation to them, it is convenient to set out the errors alleged to be contained in the formula in the Deed quoted above.

    The Alleged Mistakes

12. Platinum's case is that the intention of the parties to the Deed is accurately set out in the passages from the Prospectus that I have quoted above. The Deed is alleged to fail to reflect the intention of the parties in five identifiable respects:

    (a) The formula set out in the Deed (the "Original Formula") fails to accommodate the possibility of increases or reductions in the share capital of the company. This follows from the calculation being based upon the net asset value of the company rather than on the net asset value per share. This issue was variously referred to at trial as the Gains on New Capital Issue or the "incomplete adjustments for non-performance-related events".

    (b) The cancellation of shares. This is said to be a difficulty arising from the calculation of relevant net asset value as net asset value multiplied by the ratio of aggregate shares to shares in issue and, on the face of it, having regard to the definition of the aggregate number of shares, includes cancelled securities.

    (c) Pre-existing assets of the company. The definition of "Hurdle Value" contained in the original formula fails to take into account the fact that the company already had assets as of the date of the Deed. This error was detected at the time of the first calculation of the Relevant Number of warrants and drawn to the company's attention by KAM. It was taken into account, together with other imperfections, in a document entitled "Supplemental Deed" which KAM alleges either constitutes or reflects a completed agreement that varied the Deed Formula.

    (d) "Historic out-performance". Quantity "E" in the Deed Formula is defined as the "aggregate values of 0.2 x (A–B) in the calculations of the Relevant Number of Warrants on all previous occasions on which Warrants have been granted under this Deed". "E" is, as Platinum contends, an attempt to create a high-water mark, the purpose of which is to preclude gains in previous years from being taken into account otherwise than as a mere threshold for the calculation. It is said to over-compensate for the payments of previous awards.

    (e) "Non-performance-related divergence between the share price and underlying net asset value."

    It will be observed that the denominator of the Deed Formula is expressed as what is in effect the difference between the subscription price per share and a quantity that can be taken to be the current market price. If the market price is at a discount by reference to net asset value per share, the Formula yields a number greater than it would be if market value tracked net asset value per share. The relationship is not linear, but reciprocal, with the result that as the discount becomes greater, the number becomes disproportionately large.

13. The contention advanced by Platinum is that these five errors must be corrected by the substitution of a new formula ("the Corrected Formula") as follows:
    

    The fundamental alteration made by the Corrected Formula is that the basis of computation changes from the net asset value of the Company to the net asset value per share. The substituted definitions are as follows:

    " "A" is the Relevant Net Asset Value on the Relevant Accounts Date;

    "Relevant Net Asset Value" means: on any Relevant Accounts Date, the Net Asset Value Per Share;

    "Net Asset Value Per Share" means: the aggregate of the values of the investments and other assets of the company and any subsidiaries as at close of business on the Relevant Accounts Date, including uninvested cash, less the aggregate of the current liabilities and other bank borrowings of the company and its subsidiaries, divided by the number of Securities in issue;

    "B" is the higher of: (a) the Hurdle Value at the Relevant Accounts Date and (b) the last Relevant Net Asset Value at which time Warrants were granted multiplied by the Hurdle Factor from the Relevant Accounts Date at which that Relevant Net Asset Value was achieved less the Prior Total Return up to the Relevant Accounts Date;

    "Hurdle Value" means, in relation to any Relevant Accounts Date: (a) 36.1p (being the agreed net asset value per share of the company as at April 1996 recorded in the 2001 letter) multiplied by the Hurdle Factor, less (b) the Prior Total Return up to the Relevant Accounts Date;

    "Prior Total Return means: as at any Relevant Accounts Date, the aggregate of (a) all dividends paid on all Securities (where relevant) from the date of Admission up to the Relevant Accounts Date; and (b) the amounts of all tax credits attaching to any such payments [the whole being] divided by the number of Securities in issue and multiplied by the Hurdle Factor for the period ended on the Relevant Accounts Date;

    "E" is the aggregate values of the number of Ordinary Shares in issue, the number of stock units in issue and the number of Securities in issue at the Relevant Accounts Date."

    Note that although the proposed definition of E refers to aggregate values it would be more accurate to refer to the total of the number of Ordinary Shares in issue, the number of Stock Units etc.

14. The definition of D is unchanged.

15. The basic change effected by this substitution is to calculate the number of warrants by reference to the increase in net asset value per share rather than net asset value. This alteration is fundamental to the Claimant's case: it is said to reflect the reference in the Prospectus to (for example) "a cumulative increase in net asset value taking into account distributions made since listing" in the summary of the material contracts in paragraph 9(v) and the reference in the details of the proposals on page 16 to "value equivalent to 20 per cent. of the increase in net asset value of the Company", since Platinum contends that in context, and despite the reference elsewhere in the document to Net Asset Value Per Share, a reference to net asset value is understood to be a reference to net asset value per share by reason of what I understood to be alleged to be an established industry usage.

16. It was agreed in the end that mistakes (b) and (c) could be identified only if the document were construed divorced from its context. My reaction was that a simple error in the definition of net assets at the outset would be resolved in the process of giving the document its correct meaning in context, following the principles articulated by Lord Diplock in The Antaios [1985] AC 191, 201 and by Lord Hoffmann in Mannai Investment Co Ltd v. Eagle Star Life Assurance Ltd [1997] AC 749. These two errors are, as it were, free-standing: their correction does not affect what may be described as the "shape" of the Deed Formula, whose performance, confronted by increases in managed capital and in the face of a disparity between market price and net asset value per share, remains unaffected. It is suggested by the Claimant that there is no dispute that there was an error in the high water mark, but I do not understand that to be accepted. The reason it is suggested that it is common ground that there is an error in relation to the high water mark is that the subsequent Supplemental Deed does alter the high water mark calculation, but the alteration proposed is not the same.

    Subsequent History

17. The error in respect of the opening net assets was detected early, and by 31^st July 1997 the minutes of a meeting of a Committee of the Board of Platinum records that Hambro would re-work the calculation of Management Warrants based on opening net assets at 30^th April 1996. A letter of 26^th August 1997 signed by Mr Loehnis on behalf of Platinum contains the requisite Warrant Statement and records that quantity B in the formula is to be £29,135,222. This is the total of the sums raised by the placing and rights issue and the existing assets of Platinum, and is therefore correct. In 1998, a fax from one R C O Hellyer to Mr Steele reveals a difficulty in computing the warrant entitlement by Mr Hellyer which appears to have been resolved in favour of KAM. In a manuscript set of workings, Mr Hellyer sets out the High Water Mark as "the higher of the Relevant Net Asset Value used for previous award of warrants or the Hurdle Value on the latest Relevant Accounts Date". As I understand it, this represents a result slightly unfavourable to KAM, but nothing turns on this.

18. By 7^th August 1998, an attendance note by Mr Goodworth, a solicitor and partner at Theodore Goddard, records that Mr Steele had informed him that the language in the Deed had been identified last year as being wrong, "giving rise to an entitlement to more warrants than intended". The note records that the excess entitlement had been waived in the previous year, but that Mr Steele preferred the Deed to be changed. In an internal note of 8^th September 1998 to a solicitor at Theodore Goddard, Mr Forbes, who was evidently intended to do the drafting work, Mr Goodworth records three things of significance:

    "1. KAM say that the narrative description in the Prospectus is the correct one in the sense that it reflected the intention of the parties;

    2. That under the formula in the Deed as executed more warrants would have been issued to KAM than had been intended. And

    3. KAM's view was recorded in a draft letter which suggested an alteration to the formula and definitions."

    This proposed alteration in fact reflects the manuscript alteration made to the manuscript by Mr Hellyer in the preceding July. The principal feature of the alteration is to delete E and to redefine B so as in effect to represent the highest Relevant Net Asset Value thus far achieved, which is a better approach to a High Water Mark.

19. Negotiations took place on the form of the letter setting out the proposed alterations, and it was eventually despatched, signed by Mr Brunswick on behalf of KAM, to Mr Hellyer of Hambro, who were providing the secretarial services on behalf of Platinum. This letter again refers to the Prospectus and states that "the clear and stated intent was to reward KAM for performance at a rate equivalent to 20% of the cumulative out-performance…above a cumulative hurdle rate of return of 5% per annum". Theodore Goddard also contacted the London Stock Exchange for clearance for the alteration to the Deed, together with a written explanation, and on 25^th September 1998 a board meeting took place at which Mr Loehnis, Mr Steele, Mr Morton and Lord Howard were present. Item 5 of the minutes of that meeting is as follows:

    "Management Warrants Deed

    It was reported that an amendment was required to the Management Warrant Deed to reflect more accurately the intention of the parties at the time the documentation was entered into. It was noted that Theodore Goddard, the company's lawyers, were dealing with the Stock Exchange to confirm that the proposed changes qualified as a "small transaction" in terms of the Listing Rules. The Board reviewed the proposed amendment to the Warrant Deed and resolved to enter into the Supplemental Deed, subject to confirmation from the Stock Exchange that the amendments were a "small transaction". Any two directors or a director and the Company Secretary were authorised to sign the document on behalf of the company."

20. The purpose of obtaining Stock Exchange clearance was to avoid the necessity to circulate all the shareholders of the company, which would have been an expensive operation. On 24^th November 1998, it appears that the Stock Exchange finally indicated that the transaction as proposed would be a small transaction, and Robson Rhodes, the auditors of Platinum, were asked to confirm by letter that the amendments were fair and reasonable so far as the shareholders of Platinum were concerned. At a meeting of the Board on 4^th December 1998, it was agreed to obtain such a letter from Robson Rhodes and a draft appears in the documents at 4^th December 1998. The Stock Exchange required an undertaking to record the transaction in the next published annual accounts pursuant to Rule 11.8 of the Listing Rules.

21. At this stage, it appears that the downturn in the market was becoming apparent, and Platinum contemplated for the first time buying back shares and/or CULs (zero coupon convertible unsecured loan stock issued pursuant to the placing). Such a transaction would, if the stock was trading at a discount to net asset value per share, have the effect of increasing net asset value per share without any corresponding performance in the underlying investments. In order to deal with this possibility, copies of the Supplemental Deed, marked up with further alterations, are to be found in the documents, together with discussion of the form the further alterations should take. By June 2000 it appears that Robson Rhodes were happy with the revised form of words to deal with the possibility of buy-back, and a spreadsheet model was used to test it. In any event, it appears that in financial years ending 1999, 2000 and 2001 no entitlement to warrants arose.

22. At a board meeting on 12^th July 2001, there was further discussion of the calculation of the number of warrants to which KAM was entitled. Mr Steele tabled a side letter relating to these matters, which was required to be redrawn so as to cover certain issues relating to the Deed and also the Management Agreement separately. The approved letter, addressed to KAM and signed by Mr Loehnis, is dated 6^th September 2001 and is as follows:

    "The Deed

    There are two points relating to the Deed which require qualification. Firstly, the number of Management Warrants to be granted to [KAM] is to be determined each year so as to give KAM value equivalent to 20 per cent. of the increase in the net asset value of [Platinum] over a cumulative increase in net asset value of 5 per cent. per annum using as the starting net asset value the aggregate of the new money raised and the net assets of the company prior to the raising of the new money in 1996. For the avoidance of doubt, this amount totals £27,747,830 and equates to 36.1 pence per share. This principle was outlined in the Listing Particulars dated March 1996 and has been applied in practice through KAM's waiver of any greater entitlement which would arise from the strict application of the formula as currently specified in the Deed. The second issue relates to the adjustment required to the net asset value to take account of share buybacks, new issues and reductions in capital when calculating the number of warrants to be granted. The Deed currently specifies that an adjustment to the net asset value should be made to take account of these factors and that the auditors should confirm that the application of this principle is correct. Whilst we understand that the mechanism for this has been agreed by the auditors, for the sake of good order we think that this, together with the above amendments, should be reflected in the wording of the Deed so as to clearly give effect to the original intention as represented to shareholders in the Listing Particulars."

23. While the definitions of the Deed include all CULs and ordinary shares, it does not seem to me that the Deed purports to make provision for every kind of variation in the share capital that might take place. Clause 6 makes that apparent. It is entitled "Adjustments" and is as follows:

    "In the event of any variation of the share capital of the Company by way of :

    (i) the issue of any shares of whatever class or any other securities of the Company to shareholders by way of capitalisation of reserves or profits or by way of rights; or

    (ii) sub-division or consolidation of the ordinary share capital of the Company; or

    (iii) reduction of the issued share capital of the Company;

    or any other circumstance arises which reasonably calls for an adjustment of any of the provisions of the terms of this Deed, then the terms of any outstanding warrants shall be adjusted in such manner as shall be fair and reasonable so as to ensure that the interests of KAM are not prejudiced, diluted or otherwise adversely affected."

24. Clause 6.2 provides for a reference in the event of dispute in accordance with Clause 12, which itself provides for a reference to an expert accountant nominated, in default of agreement, by the President of the Institute of Chartered Accountants. I read the second paragraph of the letter of 6^th September 2001, which I have referred to above, as being a reference to this provision.

25. In February 2002, a new group of investors represented by Intelli Corporate Finance took control of Platinum, which then acquired its present name. Later in that year, there was a further issue of securities, together with a redemption of the outstanding CULs. The result was a doubling in the size of Platinum's net assets. It is common ground that there was no entitlement to warrants in year end 2002 and year end 2003, and that a Warrant Statement was issued for 2003. KAM claims to be entitled to 6,350,626 warrants in respect of year end 2004, computed on the basis of the formula as amended, but not including the further proposed amendments to the draft Supplemental Deed relating to the increase or decrease in issued capital.

    The Law

26. There is little dispute as to the applicable principles. For a written agreement to be rectified, it must be shown that (i) the document sought to be rectified was not in accordance with the parties' common intentions at the time of its execution, and (ii) the document in its proposed form does accord with their contemporary intentions, albeit that there was no pre-existing enforceable contract in the sense in which it is sought to rectify the document. See Crane v. Hegeman-Harris Co Inc [1939] 1 All ER 662; Joscelyne v. Nissen [1970] 2 QB 86, CA. These two cases talk of "convincing proof" or some stronger word such as "irrefragable". Clear evidence of the outward expression of the parties' common intention inconsistent with the document is required, even though that evidence may establish that the words of the document were deliberately chosen under a common misapprehension as to their effect when properly interpreted – see Snamprogetti Ltd v. Phillips Petroleum Company (unrep) [2001] EWCA Civ 889, and Re Butlin's Settlement [1976] Ch 251. I would further observe that the frequently repeated requirement for "convincing proof" is nevertheless no more than a statement that the standard to be satisfied by an applicant to rectify is the balance of probabilities, and that balance must take account of the fact that what is being sought to be contradicted is the evidence provided by the terms of the document itself. Finally, the requirement of an "outward expression of accord" is properly to be understood not so much as a legal requirement before rectification can be ordered as an indication of the cogency of the evidence needed to establish the required common intention - see Munt v. Beasley (unrep) [2006] EWCA Civ 370.

27. Platinum contends that there is no doubt that in the present case the parties intended to achieve the result set out in the extract from the Prospectus that I have quoted at the beginning of this judgment. However, it does not follow that because the results intended to be achieved by the formula do not invariably achieve that result, then there has been a mistake which justifies me in rectifying the agreement. A common intention that a particular result should be achieved must, it seems to me, be capable of being translated into a single, correct clause before it is a candidate for substitution for the words appearing in the document. That is not to say that there should be one way only of expressing the provision to be substituted; but it does mean that the Court is not permitted to proceed by way of successive approximation to the ideal clause. The evidence in this case was that no single clause can expect to cover all eventualities. Let me give a simple example in relation to the quantity "C" in the Deed Formula. This is defined as a species of mean share price. It is, I think, pretty clear on analysis that this is not a sensible choice. It runs the risk of over-rewarding the fund manager if the shares are trading at a discount – precisely the opposite of what might be thought to have been intended. Oddly, none of the individuals with expert skills who saw the formula at the time noted this possibility, and Mr Mills, from Hambro, who was not involved in the front line of negotiations, only saw the problem after he had signed his witness statement. Its shortcomings were never put to the three witnesses who had played an active role in the negotiations (Lord Howard, Mr Loehnis and Mr Steele) and Mr Morton, who was the one director who transited from the Ingham board to the incoming board, had not noted that there was a problem with it.

28. In the upshot, I listened to a great deal of evidence that did not bear on the issues I have identified. Mr Morton and Mr Mills on behalf of Platinum gave evidence which ultimately did not support the contention that the parties always intended to make the formula depend upon Net Asset Value per Share. On this issue, it was really very difficult to get over the fact that both Net Asset Value and Net Asset Value per Share are defined terms together with the fact that the Deed passed through a number of drafts and had been considered both by KAM and by the outgoing and incoming boards. I was struck by the consistence of definition in the documents. Let me take an example. On 28 February 1996, Avril Rothwell of Pinsent Curtis faxed a "Summary of Warrants Deed" and a statement of the Formula both to Mr Welton of Singer & Friedlander and to Mr Sheppard at Ingham plc. This summary describes the formula as containing elements that were "difficult to follow", but in the summary of quantity "A" in the formula it says this:

    'A = NAV on the relevant accounts date (NAV per share and per unit of CULS, as calculated in the Articles, times number in issue on admission and issued subsequently).'

29. Thus the board of Ingham received an accurate précis of the effect of the Deed and of its formula. Mr Morton did not "exclude the possibility" that A was a Net Assets figure and that he understood that to be the case. (Mr Morton also accepted that "some revisions were agreed" to the Deed and put to the Board. He could not remember why the amending Deed was not executed.)

30. Equally, the summary prepared by Pinsent Curtis makes it clear that C is a share price and this would have been apparent to the Board of Ingham, as Mr Morton accepted. Given that the contrary was not put to Lord Howard, Mr Loehnis or Mr Steele, I find as a fact that it was the parties' common intention at the date of the Deed that A should be a Net Assets Value as defined in the Deed and that C should be a market price per share calculated as specified in the Deed.

31. Turning to the High Water Mark, Historic Outperformance or E, many of the same observations may be made. The purpose of a High Water Mark is to ensure that until performance exceeds the High Water Mark, performance-related compensation should not be payable. E is thus intended to prevent fees being paid more than once in relation to the same increase in net assets. The question is whether E, which is defined in the Deed as the "aggregate values of 0.2 x (A–B) in the calculations of the Relevant Number of Warrants on all previous occasions on which Warrants have been granted under this Deed", should grow by the Hurdle Rate (5%) with each successive year. While I accept that this may give a more satisfactory result, it was not agreed between the parties that E should increase in this manner.

32. What did happen to E was this. When KAM came to propose alterations to the Deed in the letter of 18 September 1998, it proposed the alteration of the Deed formula as follows:

    Relevant Number of Warrants =

    Where

    B is redefined as the higher of:

    (a) the Hurdle Value at the Relevant Accounts Date, and

    (b) the highest Relevant Net Asset Value on any previous Relevant Accounts Date.

    E no longer needs to be defined.

    The "Hurdle Value" at the Relevant Accounts Date should be re-defined as:

    a) the aggregate of

    (i) £27,747,830 (being the Net Asset Value of the Company as at April 1996 as stated in the Company's relevant audited accounts) multiplied by the Hurdle Factor; and

    (ii) any Further Net Issue Proceeds … multiplied by the Hurdle Factor; less

    b) the Prior Total Return up to the Relevant Accounts Date."

33. This formula also does not increase the value of B, which is clearly intended to be some form of High Water Mark, by the Hurdle Factor. B only increases if the Hurdle Value has overtaken the highest previous Relevant Net Asset Value.

34. I heard expert evidence from Mr Bagot on behalf of Platinum and Mr Tapley on behalf of KAM which considered whether, and to what extent, the three formulae were deficient in the three respects discussed above that they identified at a pre-trial meeting as being the significant differences between them. Of this evidence, I found the most important to lie in Mr Bagot's statement that all performance fee arrangements "are different so there is no consensus as to how to run a performance fee" and Mr Tapley's investigation of other agreements which confirmed the accuracy of that observation. This being so, it is not possible to say that there exists a formula which is a closest approach to the general statement contained in the Prospectus.

35. I found the stress testing to which the various formulae were subjected ultimately unhelpful. Certainly it demonstrated that there existed factual circumstances in which the formulae would yield results which might be considered unfair or anomalous. In my judgment this is not to the point. It is irrelevant that the parties might have made a better agreement than they did – the imperfections do not amount to a common mistake if the formulae were considered by the parties and approved.

36. In exercising the jurisdiction to rectify, the one thing the Court cannot do is to construct an agreement which the parties did not themselves make. If, as Platinum suggests in this case, parts of the proposed rectification can be selected ("Where does the Court stand if on construing the Deed it finds that some but not all of the discrete mistakes identified by [Platinum] are established?"), it does not alter the fact that the Court must know what the parties agreed. At the date of the Deed, what the parties agreed was the Deed formula. They agreed also that the Deed formula achieved the objective stated in the Prospectus although they clearly recognised that it might not always do so, particularly in the event of a capital reduction.

    The KAM formula

37. I have already set out what happened in 1998 and the evolution of the KAM formula. KAM agreed the KAM formula with Platinum, but its implementation was overtaken by the collapse in the market. There is no doubt, however, that the effect of KAM's "waiver" was to reduce the number of the warrants allowed by the Deed formula and its substitution of the numbers produced by the KAM formula. This was a detriment to KAM and a benefit to Platinum. In any event, the agreement was complete, but the requisite formalities were not carried through, a reflection of the fact that no warrants were even arguably due and of the close relationship between KAM and Platinum at the time. I use the word "formalities" because in the letter of 6 September 2001 Platinum refers to the reduction having been "applied in practice" and suggests that "for the sake of good order … [it] should be reflected in the wording of the Deed…". While the amendments to the formula had been agreed by Platinum's board, it is right to note that this letter deals also with the question of capital reductions, but amendments to deal with this were never put to the board.

38. In my judgment there was a binding agreement between KAM and Platinum as of late 1998 as to the formula: the agreed formula was the KAM formula. The parties recognised that further consensual alteration might take place, but there was no obligation on them to make such alterations, and they were also satisfied that the KAM formula satisfied the statements contained in the Prospectus concerning KAM's entitlement to warrants.

39. In the result, the application to rectify the agreement fails. The defendants succeed on their counterclaim to the extent indicated, and I will hear counsel on the form of the order if it cannot be agreed.

40. I should add that questions relating to the possible relevance of section 89 of the Companies Act 1985 to the relief sought should be gone into on any argument on the order.