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England and Wales High Court (Chancery Division) Decisions |
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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Hawkes v Cuddy & Ors [2007] EWHC 2999 (Ch) (13 December 2007) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2007/2999.html Cite as: [2007] EWHC 2999 (Ch), [2008] BCC 390 |
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CHANCERY DIVISION
BRISTOL DISTRICT REGISTRY
2 Park Street, Cardiff CF10 1ET |
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B e f o r e :
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IN THE MATTER OF PART XVII OF THE COMPANIES ACT 1985 AND IN THE MATTER OF NEATH RUGBY LIMITED FREDERICK GERAINT HAWKES |
Petitioner |
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- and - |
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(1) MICHAEL CUDDY (2) SIMONE FRANCESCA CUDDY (3) NEATH RUGBY LIMITED (4) NEATH-SWANSEA OSPREYS LIMITED And Between: SIMONE FRANCESCA CUDDY -and- (1) FREDERICK GERAINT HAWKES (2) NEATH RUGBY LIMITED |
Respondents Cross-Petitioner Respondents |
____________________
Mr Robin Hollington QC and Miss Rebecca Page (instructed by Messrs. Geldards) for the Respondents/Cross-Petitioner.
Mr Christopher Parker (instructed by Messrs. Morgan La Roche) for the 4th Respondent.
Hearing dates: 23,24,25,26,29,30,31 October; 1,2,5,7,8,9, November 2007
____________________
Crown Copyright ©
Mr. Justice Lewison:
Introduction | 1 |
The Club before 2003 | 5 |
The re-organisation of Welsh Rugby in 2003 | 9 |
The Hawkes/Cuddy Agreement | 17 |
Neath Rugby Limited | 24 |
Neath's acquisition of the Club | 25 |
The liquidation of Gowerpark | 27 |
Mr Newman's advice | 28 |
The governance of Neath | 38 |
South West Wales Rugby Limited | 43 |
Governance of the Ospreys | 52 |
Financial matters | 56 |
The new stadium and games at the Gnoll | 58 |
Before the Liberty Stadium | 58 |
After the Liberty Stadium | 75 |
The StadCo variation | 97 |
May 2006 and the breakdown in relations | 103 |
The trade mark dispute | 117 |
The withdrawal of the players | 132 |
The media and the websites | 146 |
Neath's share in the Ospreys | 150 |
Mrs Cuddy's resignation | 152 |
Negotiations with the WRU to change the Regional Operating Agreement | 154 |
The position of Swansea RFC | 157 |
Mr Hawkes' attitude to regional rugby and the Ospreys | 159 |
Offers to settle | 163 |
Mr Hawkes' offer of 11 April 2007 | 164 |
Mr Hawkes' offer of 4 October 2007 | 165 |
Mr Cuddy's offer of 16 October 2007 | 166 |
Mr Hawkes' offer of 2 November 2007 | 167 |
The Cuddy/Swansea offer of 5 November | 168 |
Section 216 | 169 |
Abuse of process | 171 |
Mr Cuddy's duties as a director of Ospreys | 182 |
Who decides what are Neath's interests? | 196 |
Unfair prejudice | 198 |
The legislation | 198 |
The elements | 202 |
The affairs of the company | 203 |
Prejudice to the interests of members | 217 |
Unfairness | 218 |
Deadlock | 222 |
Frustration | 232 |
Illegality | 235 |
Offers to purchase | 239 |
Relief | 243 |
The general principles | 243 |
Demerger | 248 |
Effect on third parties | 251 |
Unfair prejudice: conclusions | 253 |
Failure to play games at the Gnoll | 254 |
Failure to transfer Neath's share in the Ospreys into Neath's name | 261 |
The withdrawal of the players | 263 |
The trademark proceedings | 267 |
The StadCo variation | 271 |
Unlawful participation in the management of Neath | 276 |
Discussions with the WRU | 281 |
Mr Eric Evans' view | 282 |
Deadlock? | 283 |
Demerger? | 288 |
Result | 290 |
Introduction
The Club before 2003
The re-organisation of Welsh Rugby in 2003
The Hawkes/Cuddy Agreement
"The deal was that I look after Neath and you look after the Region and Neath's interests in the Region."
Neath Rugby Limited
Neath's acquisition of the Club
The liquidation of Gowerpark
Mr Newman's advice
"Simone Cuddy was a Director of the Company and due to the proceedings with Gowerpark Mike Cuddy should ensure that his involvement with Neath Rugby Limited was kept to a minimum."
The governance of Neath
"Dear Geraint,
I appreciate that I have today become the owner of 50% of the shares in Neath and agreed to become a Director of the Company. However, my involvement will be via Michael at all times.
I am notifying you that I have authorised Michael to sign cheques in my name and the signature on the cheques will be as follows:-
S F Cuddy [the signature is in manuscript]
My understanding is that you will have the day to day running of the Company, and I will simply be required to sign off the company accounts and attend the occasional Board Meeting if appropriate.
Please notify Michael of anything you wish me to consider that affects the Company, and I will communicate back with you again via Michael.
If you wish to notify the Bank, then please do so.
I hope we have a long and successful relationship.
Regards,
Simone F. Cuddy"
South West Wales Rugby Limited
"33.1 Immediately upon the occurrence of an Event of Insolvency by or in relation to a Participating Club (the "Insolvent Participating Club") insofar as it is lawful:
(a) the shares and any other interest of the Insolvent Participating Club in [the Ospreys] shall be transferred forthwith to the WRU free from all encumbrances upon payment of £1 …
(b) the directors of [the Ospreys] nominated by the Insolvent Participating Club shall cease to be directors of [the Ospreys] and the WRU … shall be entitled to nominate an equivalent number of directors to replace those directors on the board of directors of [the Ospreys]."
"3. Directors and board meetings
3.1 At all times whilst this agreement remains in force each Shareholder shall whilst it remains a shareholder in the Company be entitled to appoint and maintain in office a person to act as director and shall have the right to remove from office any such person so appointed. At the date hereof Neath has appointed Mr Cuddy to the Board and Swansea has appointed Mr Blyth to the Board.
3.2 Each Shareholder shall refrain from exercising its voting rights and other powers of control available to it in relation to the Company to seek to remove from office a director appointed by the other Shareholder pursuant to the powers granted to that other Shareholder by clause 3.1 above.
3.3 The quorum for any meeting of the Board shall be not less than two directors of whom one shall be a director appointed by Neath and the other a director appointed by Swansea.
3.4 Unless otherwise agreed the Shareholders shall procure that board meetings be convened and held at least monthly unless the Board otherwise agree and that a written agenda specifying the matters to be raised at any meeting of the Board shall be sent to all directors entitled to receive notice of any such meeting together with the notice convening the meeting or (sic) not less than seven days prior to the date of the meeting. It is further agreed that (unless, in any particular case, the Shareholders shall otherwise agree in writing) no resolution relating to any business may be proposed or passed at any meeting of the Board unless the nature of the business is specified in the agenda.
4 Business of the Company
4.1 The business of the Company shall unless and until otherwise agreed by the Shareholders be confined to the management and operation of the professional rugby union team called "the Ospreys" and all things incidental and conducive thereto
6. Conduct of the Company's business
It is agreed and acknowledged by the Shareholders that whilst this agreement remains in force:-
6.1 the business of the Company shall be managed in accordance with normal commercial principles …
6.3 they will at all times during the term of this agreement act in good faith to each other in relation to matters concerning the business and affairs of the Company; and
6.4 they will use and exercise the votes controlled by them at all meetings of the Company and its Board in order to ensure the observance of the terms of this agreement.
8 Promotion of Company's business
Each of the Shareholders covenants with its other to use all reasonable endeavours to promote and develop the business of the Company to the best advantage in accordance with good business practice and the highest ethical standards.
9 Chairman's Casting Vote
The Shareholders agree that notwithstanding the provisions of the Articles of Association of the Company at any meeting of the Board or of the shareholders of the Company, the Chairman thereof shall not in the event of an equality of votes whether on a show of hands or a poll, be entitled to a second or casting vote.
10. In the event that the Company's rights to play first class rugby at the [Liberty] Stadium are terminated by reason of the insolvency of [StadCo] and in the event that the Company is unable (having used all reasonable endeavours) to negotiate terms for the playing of first class rugby at the Stadium which are satisfactory to both Shareholders (acting reasonably) within such timescales as are necessary to enable the Company to continue playing such games at the Stadium it shall play all such games at the Gnoll Neath until such time (if at all) as the Company can negotiate such satisfactory terms as aforesaid in respect of the Stadium.
13.5 This agreement (together with all agreements and documents executed contemporaneously with it or referred to in it) constitutes the entire agreement between the Shareholders and supersedes all prior agreements and understandings whether oral or written with respect to that subject matter."
Governance of the Ospreys
Financial matters
The new stadium and games at the Gnoll
Before the Liberty Stadium
"OSPREYS COMMIT TO MORFA AND THE GNOLL
2 September 2004, 3:36 pm
The Neath-Swansea Ospreys today made clear the playing arrangements agreed in light of the regional side's move to the Morfa stadium next season.
Ospreys joint managing director, Mike Cuddy, had already made clear at last week's supporters consultation meeting that the regional side are committed to playing at least 13 games at Morfa during next year's season, in the balance to be played at Neath's Gnoll ground. The arrangement emulates the likes of leading Irish rugby team Munster and French side Toulouse, who both operate dual playing venues.
With 18 home games anticipated for the Ospreys during season 2005/2006, the decision should see around five games played at Neath's historic Gnoll ground.
Speaking today Ospreys joint managing director Mike Cuddy said:
"When reaching initial agreement over the playing arrangements for next season, it seemed clear that we needed to strike the right balance between the commercial interests of the Ospreys and the use of the new Morfa stadium.
"In order for the stadium, commercially, to be a resounding success, we obviously needed to ensure that the majority of our games, would be played at what will be a truly world class facility. Equally, we were aware that there were games in the rugby calendar that would be inappropriate to be played at Morfa due to the size of the anticipated crowd and the resultant costs of manning the stadium.
"By splitting games between Morfa and the Gnoll, the Ospreys will be able to effectively manage commercial pressures and interests, whilst keeping a strong element of regional rugby at the Gnoll which, on current projections, will see around five games played in Neath next season."
Ospreys' chief executive Andrew Donald added:
"With a year to go before the new Morfa Stadium is up and running the Ospreys are now talking to potential sponsors in preparation for the 2005/2006 season. As part of these negotiations, the biggest question coming back at us was how many games would the Ospreys be playing at the stadium and our position now answers this question.
"By operating a dual stadium system, emulating the likes of Munster and Toulouse, we will be making the most of Morfa, its facilities and commercial opportunities, whilst also making the most appropriate use of the Gnoll. As a result, redevelopment will continue at the Gnoll over the next season, to ensure a crowd capacity of around 12,000.
"With our supporters consultation exercise now well underway and with the opening of the stadium so close at hand, we will keep a watching brief on the policy and are prepared to make changes, where necessary, in the interests of both the Ospreys and regional rugby. Commercial interests will ultimately and logically determine the level of matches to be played at each available ground."
"To have a regionally branded team playing out of a Swansea branded stadium does not sit easily with Mike, Geraint or myself."
"if as appears likely there are more than 13 games, then it would be Neath Rugby Limited's decision as to which games were played at the Stadium and which games were played at the [Gnoll]."
"Now that things are all sorted out shall we issue press release to neath people securing games at neath so come out and support ospreys and neath etc. You and I will be gods over this in neath mike. Freedom of the town and all that."
"We should make it clear in the articles that games will continue to be played at the Gnoll, with an expected minimum of 5 matches (and potentially up to seven) being played there next season…. The Gnoll will be redeveloped over the next few years to ensure that it continues to be a suitable home for the Ospreys."
"Gnoll redevelopment plans are to continue as previously agreed and Geraint/Mike to meet with Derek Vaughan [the leader of Neath Port Talbot Council] in respect of discussing the full project and the urgent short term improvements required (re seating capacity/clubhouse improvements/changing rooms upgrade/media facilities)"
"Gnoll redevelopment update – being a general update re progress and also what "needs" to be done as a minimum to enable Neath to be able to host Ospreys matches from next season and whether the council will be prepared to give support for the urgent work that needs to be carried out."
"13 fixtures will be played at the new stadium with the balance of fixtures played at the Gnoll – The make up of these fixtures is not agreed but it is likely to include a mix of quality friendlies (against first class opposition) and competition fixtures."
After the Liberty Stadium
"Gnoll upgrade … Council has made a commitment to fund £800-£900k of the £1.4 m cost of the new stand. The balance will be funded by Neath from a re-mortgage of the club shop."
"I believe from discussions with Mike that we can for the time being continue to assume we are still on track for Borders and Glasgow at the Gnoll – I think Ospreys and Neath staff need to meet ASAP to ensure the logistical issues are not an issue next year and we do not get another "Connacht"."
"MC and GH will continue to discuss the Gnoll development with NPT Council. The Gnoll is to remain the Ospreys alternate ground, but it was recognised that updating is urgently required. It will be stressed in the meeting with the Council leader that the ground updating is required for Neath RFC use, let alone if the Ospreys are to regularly play at the ground."
"Mike [Cuddy] was passionate about the redevelopment of the Gnoll and … he was caught between his wish to see the Gnoll developed and improved and the detrimental effect that playing at the Gnoll as opposed to the Liberty Stadium would have had on the Ospreys."
"Although we have focused our rugby at the Liberty Stadium this year we are keen to maintain our links with the Gnoll and it remains our intention to schedule a number of fixtures each season at the ground… The Gnoll has been our alternate venue for this season and it is intended that the facility will be upgraded to make it suitable for regional rugby fixtures in the longer term."
"Mr Cuddy was hoping for half of the games to be played at the Gnoll. However, over time Mr Blyth, I believe, tried to change Mr Cuddy's mind to play all the games at the Liberty Stadium."
"And Mike Cuddy was adamant that we still had to maintain and play a certain amount of games at the Gnoll. However, Mr Blyth, through various reasons of -- whatever his reasons were, I think he did not think -- there was an element of snobbery, possibly. He did not want to play regional games out of the Gnoll. And also I think in time Mr Cuddy saw from a business sense that it would make sense for him to play all the games at the Liberty Stadium and align himself with the Swansea benefactors."
"Q. You would agree with what?
A. The fact that Swansea felt that all of the games should be played at the stadium because it was commercially beneficial to the Ospreys.
Q. And Swansea felt that very strongly, did they not?
A. Yes, I would say so.
Q. And they ultimately persuaded Mr Cuddy that that was the right commercial decision for the Ospreys to make?
A. It seems that way, yes.
Q. I put it to you that, throughout, Mr Cuddy had done his best to represent the interests of the Neath club, had he not?
A. Up until this point [September 2005], I would say that Mike was batting for Neath."
"As a director of the Ospreys I have a duty to carry out my role in the best interests of the Ospreys not the interests of Neath Rugby as if it were the sole shareholder. That is precisely what I have done. Hawkes' real complaint is that I have not preferred the interests of Neath Rugby to those of the Ospreys."
"I am torn between the best interests of Neath and the best interests of the Ospreys. The Ospreys is Neath's biggest asset. If the Ospreys carried on losing the money at the rate they had lost for the two years prior, we would not have had an Ospreys. And it is in my opinion that it is in the best interests of Neath to play the games at the [Liberty] stadium."
"There is a number of issues at the time … that you could look at. And one of the biggest -- there are two in my mind: one, the finances. Mr Hawkes said categorically, "I am not putting any more money into the Ospreys." That is fine, I had to agree with it. So the main objective for myself is to make sure that the Ospreys becomes a sustainable business, and in the first two years it wasn't; it lost a million and a quarter. And I believe that playing games out of a new stadium, which is totally neutral from the tribalism of St Helens and the Gnoll and the Brewery field, has made a significant difference to the support of it, the way the Ospreys are perceived as the only true region, and the balance sheet. And I think that is in the best interests of Neath, that the Ospreys is healthy on the field and healthy, financially, off it."
The StadCo variation
i) Liability for losses should be capped at 50 per cent even if Swansea City Football Club were to become insolvent andii) The position in respect of maintaining the option of playing matches at the Gnoll was to remain unaffected by the new arrangements.
"liability for future losses is capped at 50% for the Ospreys even if the Swans become insolvent. … The issue of fixtures at the Gnoll is already covered in enduring agreements and is therefore not addressed further."
May 2006 and the breakdown in relations
"Mike has also asked me to emphasise his and Simone's insistence that no further liabilities are incurred without Simone's agreement. In particular no further contracts are to be entered into without Simone's agreement. Any and all further payments made by the company whether by cheque, cash, bank transfer or otherwise are to be authorised by both directors. Please confirm that you will adhere to this request."
The trade mark dispute
"I had a number of meetings with Andrew Donald, the Chief Executive of the Ospreys, and Geraint Hawkes when Neath Shop was being put together. During these meetings, I arranged to have a number of samples available to discuss my intention to target a number of different markets. I had been working on trendier designs aimed at those at college age as well as the more traditional designs. I also wanted to put together merchandise that would appeal to the higher end of the market, based upon quality clothing such as those produced by Ralph Lauren and/or Polo. All issues concerning these ranges were discussed with Neath-Swansea Ospreys Limited representatives. Once the designs were finalised, Neath Shop ordered the merchandise with the backing of Neath, which took the entirety of the risk in the event that the merchandise was not sold."
"One of my first tasks …was to meet with Deena Barton of Neath Rugby to select a range of non-KooGa original merchandise, i.e. produced by official and authorised suppliers. … During June 2005, my colleague at the time, Louise Valetta and I met with Deena Barton on a number of occasions at the Neath club shop. Deena had sourced some potential suppliers who had sent her designs of various clothing and various gift items, some of which are listed on the attached file exhibited to SL1. We discussed which products we thought would sell along with any amendments to the designs we thought would improve the products. On 1st July 2005 I sent Deena a list of Ospreys products for her to go ahead and order on the understanding that the quantities would be split between the Liberty Stadium and the Neath club shops."
"Roger Blyth wrote several letters to Mr Hawkes asking him to remove the merchandise from the shop. Roger's first instinct was to report the matter to Trading Standards immediately. However, I was keen to preserve the Ospreys' relationship with [Neath] and Mr Hawkes as far as possible and persuaded Roger to take a softer approach and either speak to Mr Hawkes or write to him. I understand that Mr Hawkes refused to remove the merchandise from the shop despite several hand-delivered letters over a period of some weeks from the Ospreys. Roger Blyth therefore eventually, on advice from the Ospreys' solicitors, called Trading Standards. I was not involved at all in any of this."
The withdrawal of the players
"It has been agreed that the company will process the salary payments through its payroll system accounting for relevant PAYE liabilities in respect of [the named player]. Payment will be made in accordance with the relevant contract value stated in the signed copy of the contract held by the company. In accordance with the agreement between the company and the club, the club are liable for 100% of the contract including employers National Insurance contributions.
Such payments will be paid to the player monthly in arrears. The company will then advise the club, by way of an invoice, of the payments actioned. Settlement of the amount will be required within seven days."
"1. If you require the services of the six players for the remainder of the season you are required to pay the amount of £7,309.75 owing up to the end of December 2006 together with the total amount of all six contracts from 1st January 2007 to 31st May 2007. Payment of both amounts must be made by 10th January 2007.
2. No contracted Ospreys players will be available to [Neath] whilst there are any monies owing to [the Ospreys] from [Neath]."
"Our interpretations of what was agreed obviously differ and will no doubt be cleared up in due course but in the meantime are you saying that if the amount of £5,297.75 is paid by neath that all these players will be made available?"
The media and the websites
"Disillusioned with regional rugby?
Then come back to the black and enjoy tribal rugby at the Gnoll."
Neath's share in the Ospreys
Mrs Cuddy's resignation
Negotiations with the WRU to change the Regional Operating Agreement
The position of Swansea RFC
Mr Hawkes' attitude to regional rugby and the Ospreys
Offers to settle
Mr Hawkes' offer of 11 April 2007
Mr Hawkes' offer of 4 October 2007
Mr Cuddy's offer of 16 October 2007
Mr Hawkes' offer of 2 November 2007
The Cuddy/Swansea offer of 5 November
Section 216
Abuse of process
"In Lawrance v. Lord Norreys, 15 App.Cas. 210, the House of Lords was convinced, on a consideration of the history of the litigation, that the plaintiff's claim was without any solid basis and that the story told in the pleadings was a myth. It was an exceptional case; but so, in my judgment, is this. I am similarly convinced, on a consideration of the history of the campaign which Lonrho has waged against the Fayeds, that the present claim has no foundation in fact and is not made in good faith and with a genuine belief in its merits, but has been manufactured to provide a vehicle for a further public denunciation of the Fayeds. I have no doubt that it is an abuse of the process of the court, and I will strike it out accordingly."
"Not only do I believe that any remedy which might conceivably be available to the plaintiffs would be minimal, but also I firmly believe that the court should not be used for what is in truth simply a continuation of their half of this vendetta by the plaintiffs in the artificial form of an action at law .... Master Topley referred in his judgment in this case to the fact that 'Neither party has shrunk from blackguarding the other in public, and each has used the courts as a rooftop to crow vilifications against their adversaries.' So far as is properly in my power, I do not propose to allow that to happen again. I am convinced that exactly that is the objective of the plaintiffs, and would be the aim of the defendants if they were to have to defend and counterclaim against the present pleading. There is no need to say more."
"If an action is not brought bona fide for the purpose of obtaining relief but for some ulterior or collateral purpose, it may be struck out as an abuse of the process of the court. The time of the court should not be wasted on such matters, and other litigants should not have to wait till they are disposed of. It may be that the trial judge will conclude that this is the case here; in which case he can dismiss the action then. But for the court to strike it out on this basis at this stage it must be clear that this is the case. I cannot agree with the judge that the point is so plain as to be unarguable."
"The phrase manifestly cannot embrace every advantage sought or obtained by a litigant which it is beyond the court's power to grant him. Actions are settled quite properly every day on terms which a court could not itself impose upon an unwilling defendant. An apology in libel, an agreement to adhere to a contract of which the court could not order specific performance, an agreement after obstruction of an existing right of way to grant an alternative right of way over the defendant's land -- these are a few obvious examples of such proper settlements. In my judgment, one can certainly go so far as to say that when a litigant sues to redress a grievance no object which he may seek to obtain can be condemned as a collateral advantage if it is reasonably related to the provision of some form of redress for that grievance. On the other hand, if it can be shown that a litigant is pursuing an ulterior purpose unrelated to the subject matter of the litigation and that, but for his ulterior purpose, he would not have commenced proceedings at all, that is an abuse of process. These two cases are plain; but there is, I think, a difficult area in between. What if a litigant with a genuine cause of action, which he would wish to pursue in any event, can be shown also to have an ulterior purpose in view as a desired by-product of the litigation? Can he on that ground be debarred from proceeding? I very much doubt it."
Mr Cuddy's duties as a director of Ospreys
i) A fiduciary duty as a director of Ospreys to the Ospreys to act in good faith in the interests of the Ospreys. It is true that Mr Cuddy was nominated as a director of the Ospreys by Neath but the duties of a director nominated by a particular shareholder are no different from the duties of a director who is a shareholder: he must act in good faith in the interests of the Ospreys as a whole and he must exercise his own independent judgment. This was Mr Cuddy's duty inside the Ospreys' boardroom;ii) A duty to consult with Mr. Hawkes over the business of the Ospreys, but this duty was consistent with Mr. Cuddy's fiduciary duty to act in the interests of the Ospreys. It was a duty owed outside the Ospreys' board room.
"'The principles to be applied in cases where the articles of association of a company confer a discretion on directors ... are, for present purposes, free from doubt. They must exercise their discretion bona fide in what they consider—not what a court may consider—to be in the interests of the company, and not for any collateral purpose."
"So long as the interests of all concerned were in harmony, there was no difficulty. The nominee directors could do their duty by both companies without embarrassment. But, so soon as the interests of the two companies were in conflict, the nominee directors were placed in an impossible position. … It is plain that, in the circumstances, these three gentlemen could not do their duty by both companies, and they did not do so. They put their duty to the co-operative society above their duty to the textile company in this sense, at least, that they did nothing to defend the interests of the textile company against the conduct of the co-operative society. They probably thought that "as nominees" of the co-operative society their first duty was to the co-operative society. In this they were wrong. By subordinating the interests of the textile company to those of the co-operative society, they conducted the affairs of the textile company in a manner oppressive to the other shareholders."
"In the performance of their duties as directors and in the performance of their duties imposed by the trust deed, House and August were bound to ignore the interests and wishes of their employer, the bank."
"Or take a nominee director, that is, a director of a company who is nominated by a large shareholder to represent his interests. There is nothing wrong in it. It is done every day. Nothing wrong, that is, so long as the director is left free to exercise his best judgment in the interests of the company which he serves. But if he is put upon terms that he is bound to act in the affairs of the company in accordance with the directions of his patron, it is beyond doubt unlawful (see Kregor v. Hollins by Avory J.), or if he agrees to subordinate the interests of the company to the interests of his patron, it is conduct oppressive to the other shareholders for which the patron can be brought to book: see Scottish Co-operative Wholesale Society Ltd. v. Meyer."
"It is both realistic and not improper to expect that such directors will follow the interests of the company which appointed them subject to the qualification that they will not so act if of the view that their acts would not be in the interests of the company as a whole."
"Directors usually act in accordance with the wishes and interests of a party that has brought about their appointment and on whose goodwill their continuation in office depends unless that places them in breach of their duties."
"The answer, in my judgment, is that the appointee's primary loyalty is to the company of which he is a director. He is obliged to act in the best interests of that company. He is quite entitled to have regard to the interests or requirements of his appointor to the extent those interests or requirements are not incompatible with his duty to act in the best interests of the company. Whether having regard to the appointor's wishes is a matter of entitlement or obligation must depend on the terms, express or implied, of the agreement pursuant to which the director was appointed. In this respect the Hawkes/Cuddy Agreement must be seen in the context of the structure of SWWRL. It was agreed that Neath would be joint sponsor (with Swansea) of SWWRL and would be the owner of 50% of the shares in SWWRL. Against that background I think it was an implied term of the Hawkes/Cuddy Agreement that, to the extent compatible with his duty to SWWRL, Mr Cuddy would protect the interests of Neath (whatever those might be) when acting as a director of SWWRL. That would include providing Mr Hawkes with such information as he might reasonably require about the affairs of SWWRL."
Who decides what are Neath's interests?
Unfair prejudice
The legislation
"A member of a company may apply to the court by petition for an order under this Part on the ground
(a) that the company's affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or of some part of its members (including at least himself) or
(b) that any actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial."
"If the court is satisfied that a petition under this Part is well founded, it may make such order as it thinks fit for giving relief in respect of the matters complained of …"
The elements
i) The acts or omissions of which he complains consist of the management of the affairs of the company;ii) That the conduct of those affairs has caused prejudice to his interests as a member of the company and
iii) The prejudice is unfair.
The affairs of the company
i) The interdependence of Neath and the Ospreys in relation to their core businesses in relation to players, venues and merchandising;ii) The impact on Neath of the StadCo agreement and its variation;
iii) The attendance by Mr Cuddy at Neath board meetings to discuss the affairs of the Ospreys and to consider what the "Neath position" might be.
i) To the extent that Mr Cuddy was or should have been advocating Neath's interests on the board of the Ospreys he was acting in the affairs of Neath;ii) The businesses of Neath and the Ospreys were so intertwined that the one can be regarded as the business of the other;
iii) Where Mr Cuddy was wearing both a "Neath hat" and an "Ospreys hat" (for example in relation to the trademark proceedings; and in particular the use of Neath's confidential information in furtherance of the Ospreys' cause) he was acting in the affairs of Neath;
iv) Mr Cuddy's refusal to allow solicitors to represent Neath in the trademark proceedings was purely a Neath matter;
v) Where the Cuddy share has been used to protect Mr Cuddy's position as a director of the Ospreys that is also a purely Neath matter.
"With the control that Mr Hozier exercised over the drawing of cheques, Electronics was able to, and did, decide which creditors of the company should be paid. Since in addition Electronics was able to withhold payments received by it from foreign customers for the account of the company its direct financial control was very strong indeed. Electronics was, in effect, treating the financial affairs of the two companies as that of a single enterprise over which it had control. I should mention that the company and Electronics both banked at the same branch and shared a total borrowing limit on both accounts.
We are not, therefore, dealing with a case of a company which is simply running its own affairs in a manner which is harmful to the interests of shareholders in its subsidiary. It seems to me that Electronics, when it withheld payments from the company, was doing so as part of general control of the financial affairs of the company. It exercised that general control by deciding how much the company should receive (by withholding sums due to the company) and restricting the company's ability to spend money (by the signature requirements on cheques drawn by the company).
In my view Electronics, when it withheld from the company payments which were due to the company, was conducting the affairs of the company."
"'In speaking of "its affairs" in connexion with a company, the natural meaning of the words connotes "its business affairs". What are "its affairs" when the company is in full control? They must surely include its goodwill, its profits or losses, its contracts and assets including its shareholding in and ability to control the affairs of a subsidiary, and perhaps in the latter regard a sub-subsidiary such as Atholl Houses, Ltd. In ordinary parlance, the affairs of the applicant company must surely have included its shareholding in T.G. Tickler, Ltd., and its power in virtue of that shareholding to control the board of that subsidiary and the disposition of Atholl Houses, Ltd., the wholly owned sub-subsidiary."
"The observations of Phillimore J demonstrate that the expression 'the affairs of the company' is one of the widest import which can include the affairs of a subsidiary. Equally, I would hold that the affairs of a subsidiary can also be the affairs of its holding company, especially where, as here, the directors of the holding company, which necessarily controls the affairs of the subsidiary, also represent a majority of the directors of the subsidiary."
"'The words "affairs of a company" are extremely wide and should be construed liberally: (a) in determining the ambit of the "affairs" of a parent company for the purposes of s 320, the court looks at the business realities of a situation and does not confine them to a narrow legalistic view; (b) "affairs" of a company encompass all matters which may come before its board for consideration; (c) conduct of the "affairs" of a parent company includes refraining from procuring a subsidiary to do something or condoning by inaction an act of a subsidiary, particularly when the directors of the parent and the subsidiary are the same …"
"The essence of the decisions of the Court of Appeal in the two cases I have cited was in my view that it may in certain cases be possible to say that conduct of the affairs of one company also constitute conduct of the affairs of another when the first company either is controlled by or has control of the other. That, if I may say so, is perfectly understandable. However, that principle is of no avail to the petitioners in the present case, in which IL had no power to control the company and was subject to no power of control by the company. Mr Green sought to argue that the first to third respondents as directors of the company had control over IL. This they clearly did not. They had control over IL but as shareholders of that company. In my judgment, the fact that they also had control over the company cannot be said to make the affairs of one company the affairs of the other, and I so decide. In my judgment, it is a point that can and should be decided now on this application at this stage and not allowed to go to a trial."
Prejudice to the interests of members
Unfairness
"In deciding what is fair or unfair for the purposes of [s 994], it is important to have in mind that fairness is being used in the context of a commercial relationship. The articles of association are just what their name implies: the contractual terms which govern the relationships of the shareholders with the company and each other. They determine the powers of the board and the company in general meeting and everyone who becomes a member of a company is taken to have agreed to them. Since keeping promises and honouring agreements is probably the most important element of commercial fairness, the starting point in any case under [s 994] will be to ask whether the conduct of which the shareholder complains was in accordance with the articles of association."
"In [s 994] Parliament has chosen fairness as the criterion by which the court must decide whether it has jurisdiction to grant relief. It is clear from the legislative history ... that it chose this concept to free the court from technical considerations of legal right and to confer a wide power to do what appeared to be just and equitable. But this does not mean that the court can do whatever the individual judge happens to think fair. The concept of fairness must be applied judicially and the content which it is given by the courts must be based upon rational principles ...
In the case of [s 994], the background has the following two features. First, a company is an association of persons for an economic purpose, usually entered into with legal advice and some degree of formality. The terms of the association are contained in the articles of association and sometimes in collateral agreements between the shareholders. Thus the manner in which the affairs of the company may be conducted is closely regulated by rules to which the shareholders have agreed. Secondly, company law has developed seamlessly from the law of partnership, which was treated by equity, like the Roman societas, as a contract of good faith. One of the traditional roles of equity, as a separate jurisdiction, was to restrain the exercise of strict legal rights in certain relationships in which it considered that this would be contrary to good faith. These principles have, with appropriate modification, been carried over into company law.
The first of these two features leads to the conclusion that a member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted. But the second leads to the conclusion that there will be cases in which equitable considerations make it unfair for those conducting the affairs of the company to rely upon their strict legal powers. Thus unfairness may consist in a breach of the rules or in using the rules in a manner which equity would regard as contrary to good faith."
"Similarly, as Lord Hoffmann points out, 'unfairness' may arise from agreements or promises made, or understandings reached, during the life of the company which it would be unfair to allow the majority to ignore. Applying traditional equitable principles, equity will not hold the majority to an agreement, promise or understanding which is not enforceable at law unless and until the minority has acted in reliance on it. In the case of an agreement, promise or understanding made or reached when the company was formed, that requirement will almost always be fulfilled, in that the minority will have acted on the agreement, promise or understanding in entering into association with the majority and taking the minority stake. But the same cannot be said of agreements, promises or understandings made or reached subsequently, which are not themselves enforceable at law. In such a case, the majority will not as a general rule be regarded in equity as having acted contrary to good faith unless and until it has allowed the minority to act in reliance on such an agreement, promise or understanding. Absent some special circumstances, it will only be at that point, and not before, that equity will intervene by providing a remedy to the minority which is not available at law."
Deadlock
"Refusal to meet on matters of business, continued quarrelling, and such a state of animosity as precludes all reasonable hope of reconciliation and friendly co-operation have been held sufficient to justify a dissolution. It is not necessary, in order to induce the Court to interfere, to show personal rudeness on the part of one partner to the other, or even any gross misconduct as a partner. All that is necessary is to satisfy the Court that it is impossible for the partners to place that confidence in each other which each has a right to expect, and that such impossibility has not been caused by the person seeking to take advantage of it." (Emphasis added)
"It has often been argued, and was so in this House, that its authority is limited to true deadlock cases. I could, in any case, not be persuaded that the words 'just and equitable' need or can be confined to such situations. But Lord Cozens-Hardy M.R. clearly puts his judgment on wider grounds. Whether there is deadlock or not, he says, at p. 432, the circumstances
'are such that we ought to apply, if necessary, the analogy of the partnership law and to say that this company is now in a state which could not have been contemplated by the parties when the company was formed ...'
Warrington LJ adopts the same principle, treating deadlock as an example only of the reasons why it would be just and equitable to wind the company up."
"It is sometimes said that the order in that case was made on the ground of 'deadlock.' That is not so. As Mr. Frank Russell K.C., who was counsel for the appellant, pointed out, although Mr. Rothman and Mr. Weinberg were not on speaking terms they communicated through third parties, the company's business was flourishing and the articles contained a provision for arbitration to which resort could be had in the event of their failing to agree on any point. The reason why the petitioner succeeded was that the court thought it right to make the order which it would have made had Mr. Rothman and Mr. Weinberg been carrying on business under articles of partnership which contained no provision for dissolution at the instance of either of them. People do not become partners unless they have confidence in one another and it is of the essence of the relationship that mutual confidence is maintained. If neither has any longer confidence in the other so that they cannot work together in the way originally contemplated then the relationship should be ended - unless, indeed, the party who wishes to end it has been solely responsible for the situation which has arisen. The relationship between Mr. Rothman and Mr. Weinberg was not, of course, in form that of partners; they were equal shareholders in a limited company. But the court considered that it would be unduly fettered by matters of form if it did not deal with the situation as it would have dealt with it had the parties been partners in form as well as in substance." (Emphasis added)
"I do not think that there is any support in the authorities for such a stark right of unilateral withdrawal. There are cases, such as Re a company (No 006834 of 1988), ex p Kremer [1989] BCLC 365, in which it has been said that if a breakdown in relations has caused the majority to remove a shareholder from participation in the management, it is usually a waste of time to try to investigate who caused the breakdown. Such breakdowns often occur (as in this case) without either side having done anything seriously wrong or unfair. It is not fair to the excluded member, who will usually have lost his employment, to keep his assets locked in the company. But that does not mean that a member who has not been dismissed or excluded can demand that his shares be purchased simply because he feels that he has lost trust and confidence in the others. I rather doubt whether even in partnership law a dissolution would be granted on this ground in a case in which it was still possible under the articles for the business of the partnership to be continued. And as Lord Wilberforce observed … one should not press the quasi-partnership analogy too far." (Emphasis added)
"one of the grounds on which it has been the practice of the Court to decree a dissolution is where there is a small number of partners equally, or nearly equally divided, so that it is impossible that the business of the company can be carried on. That is a rule that would very seldom be applicable to a company under the Companies Act, never certainly where the company appeals to the public for subscriptions to its shares, because if the directors are equally divided, or if there is such a division as makes it difficult to carry on the company's affairs, the remedy of the shareholders is to turn them out and to elect an harmonious board of directors. But then this is not a company that is formed by appeal to the public. It is what, for want of a better name, I may call a domestic company, the only real partners being the three brothers of a family, the other shareholders having only a nominal interest for the purpose of complying with the provisions of the Act. In such a case, it is quite obvious that all the reasons that apply to the dissolution of private companies on the grounds of incompatibility between the views or methods of the partners would be applicable in terms to the division of the shareholders of this company, and I agree with your Lordships that this is a case in which it would be just and equitable that this company should be wound up, and the partners allowed to take out their money and trade separately." (Emphasis added)
i) that the winding-up jurisdiction is, at the very least, no wider than the section 994 jurisdiction: a proposition which is consistent with a winding-up order being the death sentence on a company and with the statutory recognition in section 125(2) of the Insolvency Act 1986 that a winding-up order is an order of last resort; andii) if the conduct is not unfair for the purposes of section 994, it cannot found a case for a winding-up order on the 'just and equitable' ground.
Frustration
"I do not suggest that exercising rights in breach of some promise or undertaking is the only form of conduct which will be regarded as unfair for the purposes of section [994]. For example, there may be some event which puts an end to the basis upon which the parties entered into association with each other, making it unfair that one shareholder should insist upon the continuance of the association. The analogy of contractual frustration suggests itself. The unfairness may arise not from what the parties have positively agreed but from a majority using its legal powers to maintain the association in circumstances to which the minority can reasonably say it did not agree: non haec in foedera veni. It is well recognised that in such a case there would be power to wind up the company on the just and equitable ground (see Virdi v. Abbey Leisure Ltd [1990] B.C.L.C. 342) and it seems to me that, in the absence of a winding up, it could equally be said to come within section [994]."
Illegality
"A partnership is in every case dissolved by the happening of any event which makes it unlawful for the business of the firm to be carried on or for the members of the firm to carry it on in partnership."
"A cautionary note must be entered. Prior knowledge of the matters complained of in a petition will always be a most relevant consideration in deciding cases under section [994]. Sometimes it will be decisive. But there may be cases, perhaps relatively rare, where this fact may be outweighed by sufficiently cogent countervailing factors. The fact that shareholders are locked into a position where a company is continuing to carry on business unlawfully may be such a factor. In the present case it will be a matter for the trial judge to decide how this tension between competing considerations should be resolved."
Offers to purchase
"This was a somewhat unusual case in that Mr. Phillips, despite his revised views about Mr. O'Neill's competence, was willing to go on working with him. This is a position which the majority shareholder is entitled to take, even if only because he may consider it less unattractive than having to raise the capital to buy out the minority. Usually, however, the majority shareholder will want to put an end to the association. In such a case, it will almost always be unfair for the minority shareholder to be excluded without an offer to buy his shares or make some other fair arrangement. …But the unfairness does not lie in the exclusion alone but in exclusion without a reasonable offer. If the respondent to a petition has plainly made a reasonable offer, then the exclusion as such will not be unfairly prejudicial and he will be entitled to have the petition struck out. … If there is a breakdown in relations between the parties, the majority shareholder should be given a reasonable opportunity to make an offer (which may include time to explore the question of how to raise finance) before he becomes obliged to pay costs. As I have said, the unfairness does not usually consist merely in the fact of the breakdown but in failure to make a suitable offer."
"Although I can readily accept that there may well be cases in which, if there are equal shareholders, a reasonable offer from one might not lead a court to say that the petition was 'bound to fail', even if the refusal of the offer was unreasonable, because even in such circumstances it might not be plain and obvious that the petitioner must go, it seems to me that the starting point should normally be, even in such a case, a consideration of whether a reasonable offer has been made."
Relief
The general principles
"The whole framework of the section, and of such of the authorities as we have seen, which seem to me to support this, is to confer on the court a very wide discretion to do what is considered fair and equitable in all the circumstances of the cases, in order to put right and cure for the future the unfair prejudice which the petitioner has suffered at the hands of the other shareholders of the company."
"I would emphasise the limit imposed by statute on the relief which may be given under [s.996] viz. the order is for giving relief in respect of the matters complained of. As Oliver LJ said in Re Bird Precision Ltd [1986] Ch. 658 at 669D, the very wide discretion conferred on the court to do what is considered fair and equitable is 'in order to put right and cure for the future the unfair prejudice which the petitioner has suffered at the hands of the other shareholders of the company'. If the matters complained of have been put right and cured and cannot recur, it is hard to see how the court could properly give relief."
"Once unfair prejudice is established, the court is given a wide discretion as to the relief which should be granted. Although [s 996(1)] speaks in terms of relief being granted 'in respect of the matters complained of', the court has to look at all the relevant circumstances in deciding what kind of order it is fair to make. It is not limited merely to reversing or putting right the immediate conduct which has justified the making of the order. In Re Bird Precision Bellows Ltd Oliver LJ described the appropriate remedy as one which would 'put right and cure for the future the unfair prejudice which the petitioner has suffered at the hands of the other shareholders of the company'. The prospective nature of the jurisdiction is reflected in the fact that the court must assess the appropriateness of any particular remedy as at the date of the hearing and not at the date of presentation of the petition; and may even take into account conduct which has occurred between those two dates. The court is entitled to look at the reality and practicalities of the overall situation, past, present and future."
Demerger
"In my opinion, this Court should not embark on the course of attempting to divide the assets in this case. Indeed, save in a situation of a limited range of assets with little interconnection between them, I doubt if it would ever be appropriate for a court to attempt such a task. The Court should not be placed in a position where:
(i) it may have to make commercial judgments;
(ii) it runs the risk of being dependent on commercial or political negotiations;
(iii) it may have to make contingent or alternative orders, subject to the outcome of commercial or political negotiations."
Effect on third parties
"(1) There is no allegation of impropriety in the petition or points of claim in respect of the running of the company. …(2) Mr West has not been an employee of the company since August 1998, and since January 1998 has not been greatly involved in the management of the company. (3) Even when he was involved in management, Mr West's role as marketing director involved him spending long periods of time abroad. The teaching and day-to-day management of the company lay in the hands of the respondents. (4) The non-shareholder member of the board of directors is opposed to Mr West. (5) There is no evidence that any of the employees of the company want Mr West to return. (6) There has been an irretrievable breakdown in relations between Mr West and the respondents."
Unfair prejudice: conclusions
Failure to play games at the Gnoll
Failure to transfer Neath's share in the Ospreys into Neath's name
The withdrawal of the players
The trademark proceedings
The StadCo variation
Unlawful participation in the management of Neath
Discussions with the WRU
Mr Eric Evans' view
Deadlock?
Demerger?
i) It would reduce Neath to the status of a club unconnected with regional rugby in Wales. This in turn would:
ii) Prejudice Neath's ability to attract, develop and retain quality players;
iii) Prejudice Neath's membership of the Welsh Premier League;
iv) Prejudice Neath's ability to attract sponsorship and gate money.
Result
i) gives Mr Hawkes eyes, ears and a voice on the board of the Ospreys;ii) cures for the future the lack of consultation that I have found to have been established;
iii) preserves the 50:50 relationship between Neath and Swansea as members of the Ospreys;
iv) preserves the good working relationship between Mr Blyth and Mr Cuddy;
v) pays attention to the expressed position of Swansea;
vi) gives Mr Hawkes effective control of Neath while not imperilling Mr Cuddy's position on the board of the Ospreys, thus preventing any future deadlock in the affairs of Neath;
vii) retains for Neath the benefit of its most valuable asset, and
viii) does not endanger the Regional Operating Agreement by triggering a potential forfeiture.