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England and Wales High Court (Queen's Bench Division) Decisions |
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You are here: BAILII >> Databases >> England and Wales High Court (Queen's Bench Division) Decisions >> Beddow v Cayzer [2006] EWHC 557 (QB) (20 March 2006) URL: http://www.bailii.org/ew/cases/EWHC/QB/2006/557.html Cite as: [2006] EWHC 557 (QB) |
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QUEEN'S BENCH DIVISION
Strand, London, WC2A 2LL |
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B e f o r e :
____________________
ROBERT BEDDOW |
Claimant |
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- and - |
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NIGEL CAYZER |
Defendant |
____________________
Mr Stuart Adair (instructed by SJ Berwin) for the Defendant
Hearing dates: 13-17, 20th and 22nd February 2006
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Crown Copyright ©
Mr Justice Tugendhat :
THE PARTNERSHIP BETWEEN THE CLAIMANT AND MR BRUNNOCK
THE APPROACH TO MR GALLIERS-PRATT
"Mr Galliers-Pratt has wide experience of corporate life serving on the board of directors of a number of companies including Oriel PLC, a UK listed company engaged in international insurance broking. In October 1992 he founded and became chairman of Petersburg Long Distance Inc, which provides local, long distance and international telecommunication services in the former Soviet Union. In February 1995 he stepped down as Chairman of Petersburg Long Distance Inc to become Executive Chairman of Princess Resources Ltd a natural resources company which is listed on the Vancouver Stock Exchange".
"Mr Cayzer is the Chairman of the Board. Mr Cayzer has been chairman of Oriel Group PLC from 1989 to June 1998. He is also Chairman of the Oryx Fund Limited. Oryx Joint Investment Account and of the Oryx International Growth Fund Limited and a non executive director of Caledonia Investments PLC. He started work in 1973 for L.Messel &Company, before joining Anthony Gibbs and Sons in 1976. In 1984 he started Entertainment Completions Inc and in 1988 he established EFL Holdings Limited which acquired Film Finances Limited and became its chairman. Film Finances Limited was acquired by Dominion International Group in 1988 for whom he acted as a non executive director until his resignation in 1989".
"Rupert phoned after the weekend and stated with his brother Nigel Cayzer they would underwrite the project with an Omani investor group for £5,000,000. He stated that the initial idea '…would not be worth considering unless all parties had at least 7% of the equity each'".
THE APPROACH TO VPI
"The Group would be a prime candidate for flotation because of its growth potential and cash flow characteristics. The UK stock market is trading currently on over 18 times earnings. The Group would offer underlying earnings growth potential whilst being in the vanguard of a consolidating industry, which would appeal to both institutions and private clients alike and could justifiably trade on a premium rating. … In conclusion there are two alternative exit strategies, flotation or a trade sale. The comparable companies command multiples in excess of 40 x earnings and recent trade buyers in the UK Dental sector acquired companies at multiples in excess of 35 x".
"Stephen Brunnock, Robert Beddow and Rupert Galliers-Pratt, henceforth 'BBG', will take advantage of the consolidation within the veterinary market place by offering a well financed alternative to the partnership regime".
"1. An initial investment of £4 million with an 8% coupon, will be made available. The investors are overseas domiciled and are 'Bank of England Approved'. The VPI management will own 47% of the 'new' VPI.
2. A management committee of BBG and VPI will allow fluid access to monies …"
"I continued to have meetings with Beddow and Brunnock and with various third parties…. I understand from [the Defendant] that Beddow claims that he continued to spend time and skill on the development of the alleged joint venture (which did not exist) and in dealing with and following through matters arising from meetings. I do not recall seeing any evidence of this and although Beddow and Brunnock did send me various documents from time to time [and he refers specifically to the documents dated 16th and 17th March covering seven pages] none of these documents assisted me in progressing the proposed business"
"The proposal is as follows:
Structure
VPI management invest £300,000 for 40% of the equity. Our Group invest £450,000 for 60% of the equity and subscribe for 3.55 million pounds unsecured Subordinated Loan Stock 2005.
Coupon:
Y1 8%
2 8%
3 10%
4 10%
5 15%
6 15%
7 15%
This proposal is subject to the following conditions:
- Approval of the Business Plan we would enter into a Confidentiality Agreement.
- Confirmation of the £2.5m revolving debt facility.
- A satisfactory Shareholder Agreement.
- Two board seats.
- Operating committee for approval of acquisitions".
"Dear Mohammed
I am attaching a very brief summary of the proposal which we have submitted to the management of VPI (the veterinary business). I also attach the financial projections for the next five years.
The management of VPI have already identified the first twenty acquisitions. These are all established veterinary business located in the principle cities of southern England. Because they are all private businesses, they can be acquired on a PER of 4/5 but once consolidated into a group could be sold or listed on a PER of 15.
If we proceed with an investment of £4 million pounds divided into £3.55 million of unsecured loan stock and £450,000 of equity, the projections will be accelerated by one year i.e. in the first full year the company should make circa £800,000 and in the fourth year the company should make circa £8 million (all pre tax).
The analyst who has been working on this transaction on our behalf believes that the business will be worth at least 15x earnings in year 4 which will give a total value of circa £84 million.
VCA (Veterinary Centres of America), which is listed on AMEX trades on a PER of forty times earnings.
Our group would earn 60% of the business which means that our shares could be worth £48 million pounds within 4 years".
"Mr Habib is Chairman of Allowance Housing Bank SAOG, Oman United Insurance SAOG, Shell Oman Marketing SAOG and several other companies in the Sultanate of Oman. He is also a director of the Orex International Growth Fund Limited.
Mr Mohammed H G Habib (an Omani National) is a fellow of the Chartered Association of Certified Accountants UK. He was the Chief Executive of the Oman National Insurance Company, the largest national insurance company in Oman and has brought financial and managerial experience, having served on the boards of several banks, manufacturing industries, hotels and financial institutions in Oman and overseas for the last fifteen years ".
"While I did seek to interest [the Defendant] by sending him various documents in relation to the proposal in the interim period [and he refers to the faxes dated 19th March, 27th May, 8th June and 29th June] he did not get involved at all until the end of June 1998".
"While [Mr Galliers-Pratt] had mentioned [a proposal that to set up a company to acquire, own and operate veterinary practices] to me in around March 1998 and had sought to get me involved at that stage, I was then too heavily involved in the sale of another business to give the proposal any consideration at all. Nevertheless, [Mr Galliers-Pratt] had sent me various documents [the faxes of 19th March, 27th May and 8th June]. By the end of June 1998, the sale of the other business had been completed and, when [Mr Galliers-Pratt] informed me that he had become too busy to take this proposal forward, I agreed to step in".
MOVING FORWARD INDEPENDENTLY OF VPI
"I have instructed S J Berwin to form a company which will be called Consolidated Veterinary Services. The initial shareholders will comprise the interests of the three of us. Please let me have the name of the entity in which you would like your shares to be held.
We have started to put together a business plan and private placement memorandum these should be completed by the end of June so that funding can take place during the month of July as planned.
In order to achieve the above, I have retained the services of one of the leading financial consultants to the veterinary industry (John Gripper). Harry Hyman, who is chairman of Nexus has agreed to undertake all the financial modelling and will serve as finance director to the company. Colin Spencer who is the IT consultant that we have used over the last two years, will undertake all the IT and systems management. S J Berwin will undertake the legal work.
I do not have a complete estimate of the costs which we will incur in order to produce the business plan and placement document. I would estimate that it would be somewhere in the region of US$30,000. I suggest that we split these costs between the three of us. Please confirm to me that you agree."
"The investor group (Rupert Galliers-Pratt/ Nigel Cayzer/ Mohammed Habib) has formed a limited company in the UK called Consolidated Veterinary Services.
Over the past few months the investor group led by Rupert Galliers-Pratt has undertaken a considerable amount of research into the opportunities which exist in the UK for acquiring groups of veterinary practices. This due diligence review has included a study of the financial performance of specific veterinary practices, methods of operation in the veterinary business, purchasing strategies for medicines and other raw materials, systems and controls.
As a consequence of the work that has been undertaken (described above) the investor group are completing a business plan (and private placement memorandum).
The target veterinary practices for acquisition will have the following characteristics:
- Well established business with a proven track record of profitability for a minimum of five years.
- Typically comprising between two and six veterinary partners.
- Average purchase price per practice £500,000 to £1,000,000.
- Price earnings ratio on purchase to be between 4 and 6 times.
- In built compound future growth rate 8/9%.
The company will raise £5m from new investors by issuing a convertible debenture which will pay a coupon of [8] %. This debenture will entitle the holder to convert into 50% of the equity of the company. The company will also negotiate an additional line of credit from a UK lending institution of up to £10m so that total funds available for the acquisition of veterinary practices will be circa £15m.
Once the funds have been utilised it is anticipated that the company will own a group of well managed, established veterinary practices in the UK producing earnings (after tax) but before debt service of the circa £3m. In the prevailing market conditions this company could be listed on the London Stock Exchange at a price earnings multiple of circa 20 valuing the company at £60m. From this should be subtracted a £10m bank debt which would leave a net valuation of £50m. The debenture holders would convert into 50% of the equity. Their equity would be worth £25m as compared to an original cost of £5m. It is anticipated that this whole exercise could be accomplished within 18 months.
The company would adopt the same model as Veterinary Corporation of America, a company listed on the NASDAQ which currently trades on a PER of 42. VCA was incorporated in the United States to acquire groups of veterinary practices. The UK company would follow exactly the same model. It is possible that the business could be sold to VCA as an alternative to seeking a UK listing".
THE DEFENDANT'S APPROACH TO OMANI INVESTORS
"this report has been prepared solely for Rupert Galliers-Pratt, Chairman and Chief Executive Officer of Princess Resources Limited for the purpose of developing Consolidated Veterinary Services. It is based on the aims and objectives provided to Anval Limited by Mr Galliers-Pratt at a meeting on 9th June 1998… additional information had been provided to J Gripper during two informal meetings and telephone conversations all prior to 9th June 1998".
"none of these 'ideas' were of any use or benefit to the proposal. I would not have induced Beddow and Brunnock to invest their time and skill in the project because, in my view they simply did not have the skills or experience necessary to assist in moving this project forward… as far as I am aware, no significant steps were ever taken by Beddow in progressing this proposal… although [Mr Foster, Mr Parkin and Mr Pound and Mr Robinson] were mentioned to Beddow who in turn may have mentioned them to [Mr Galliers-Pratt] (and/or me), [Mr Galliers-Pratt] (and I) would have 'found' them independently of him. Further the Claimant most certainly did not secure their services".
"Although these figures are not produced with the rigour of John Gripper, they are an approximation of his methodology. Even using a 1.5 x multiplier it can be seen that the Barton Veterinary Hospital could be purchased on a P/E multiple of below 7x. …. Could you please fax this information to both Harry and your brother"?
27th JULY – THE DEFENDANT TAKES OVER
THE RELATIONSHIP BREAKS DOWN
"Further to my conversation this morning with Mrs Gripper my Omani associates have asked if the invoice can be issued to one of their companies who will be paying the bill without VAT. The name of the company is Gulf Securities Corporation… [an address is given in Vaduz Liechtenstein]. If you could re issue the invoice and send it to me I would arrange for it to be passed on.
In the meantime they are wiring you the balance of the money in the sum of £1,734 which is minus the VAT payment.
If this is a problem please can you call me… "
"With regard to non-executive fees, I would rather like to charge a fee that was commensurate with the other fees paid to other Non-Executive Directors.
Finally to compensate us for considerable amount of work that we have done and for our commitment to the transaction, I would like to propose that we receive an equity carrier equivalent to that being granted to the Managing Director of 3% of the Company's equity".
"It has been assumed that the purchase price of practices approximates on average to 1 times turnover and that the freehold property accounts for nearly 50% of the purchase price… Based on a capital outlay of £15 million and an average practice purchase price in the region of £940,000, over a five year period this will amount to the purchase of 24 practices. The Company has agreed terms to acquire a leading veterinary practice located in the South East. The practice has four partners with annualised revenues of approximately £750,000 and a net profit before partners drawings of £300,000. A cash price of £830,000 has been accepted subject to contract by the vendors. Included in this is a property worth £350,000. This represents a purchase p.e of six times fully taxed earnings".
THE OMANI FUNDING FAILS
"The equity structure will be a significant factor for the venture capitalists may consider it not unreasonable for [Mr Robinson] to have at least as large an equity stake as any other investor. I know that this is a sensitive point for you which we will need to discuss further".
"As you know myself and Robert have instigated and been involved for over a year in this project. Rupert and Nigel's involvement with this idea was on their assurance of their and their Middle East contacts sourcing easy finance.
Given Nigel's failure to raise the funds from Oman, and their lack of recent experience in raising monies in London we're concerned the project will fail through the time constraints that Venture Capitalists operate under if they are not approached at the right level.
Our financiers have known about and expressed great interest over the past year in the Corporate Veterinary Market. They were not officially approached on Nigel's insistence and because of his confidence in Oman. Also because of this we have not even met Bruce or seen a full business plan except for the failed prospectus.
We would like to be in the position to present both Bruce and yourself to these investors and have the business model available to shorten the due diligence process.
In order to facilitate the raising of the required monies we need a meeting as soon as possible.
We fully appreciate your involvement and now just wish to see it completed and profitably go forward.
I look forward to hearing from you.
Regards
Steve and Robert"
"Due to the way this was presented to me at the beginning it appeared that Rupert (whom I have not met) and Nigel were controlling the fund raising efforts. It became difficult for us to deal with anyone other than Nigel who had apparently taken over. However, Bruce and I are interested only in a viable project and Bruce has been offered a package by Nigel on that basis. My inputs (not inconsiderable) have been in an effort to get this project up and running in time to acquire the Barton practice.
Currently Bruce is dealing with Nigel's contacts at Arthur Andersen. I have some experience with this organisation and they are not cheap although apparently very effective.
The questions we need to address are these:
1. Is the AA project going to raise the cash in the required timeframe?
2. What is the position with Bruce in respect to his package and his future role? He has put a lot of personal effort into the business plan but all through Nigel and therefore the plan is Nigel's. Bruce has given freely of his time so his inputs are his copyright but there are other elements to the plan. It contains information on financing which neither Bruce nor I would claim any competency in. The background of the plan is based on Anval's input which was commissioned and paid for by Nigel. Whilst I am aware that you two initiated this process, we need be cautious about how we proceed to be sure we do not alienate Nigel or indeed breach his trust.
3. Bruce is reluctant to make any investment in this project himself. He is taking a risk with his career by not taking a secure position with a PLC (he has a number of offers). Do your financiers expect him to put up much of his own cash?
4. How quickly can you put the financing together?
5. Where will Nexus sit if you proceed on your own question? (we do have our own financial controller available).
Bruce has been in further discussions today so we may have some movement. I am happy to meet up with you and I am sure that if it is the most secure way forward Bruce will be happy to join our discussions whilst respecting his role with Nigel.
Give me a call tomorrow".
"Bruce tells me that he has worked with Arthur Andersen to prepare a better quality document and I have suggested to him that he ensures that he has a minimum of shared copyright to it as he has put a great deal of effort into its preparation. If AA are not able to raise the funds quickly then we could use this document for presentation to A N Other".
"We are still concerned that the [venture capitalists] will be very uncomfortable that the original quote "introducers", non operating management, who are no longer associated with the transaction, should participate to such an extent in the sweet equity. I understand you need some mechanism to reward them and this could comprise of some form of shares but at a much lower level, a "finders fee" or cash bonus on exit. I believe the principle I raised in my earlier fax, that of Bruce receiving not less than any other members of the management team is still valid.
Obviously you will want to behave absolutely correctly in proposing any arrangement to the original introducers. Before posing a particular solution, it would be helpful to understand the basis of any agreement in place, and what elements are negotiable. The nub of the matter is that if the [venture capitalist] will not back CVS (or leave sufficient "room" for it to be attractive to you, Harry and Bruce) then the introducers will get nothing anyway".
"He then stated the monies would not be underwritten but would definitely be available by 1st October 1998 after his visit to Oman, this did not happen and communication deteriorated further.
Using [Mr Foster's] surgery as a template he approached Arthur Andersen to produce a business plan without [our] knowledge or approval.
He has ignored repeated phone calls and emails and has refused to answer any of our questions. Furthermore we have been consistently promised the AA report but have never received it even though we were willing to raise the monies on our project".
"We are having a major communication problem with Nigel Cayzer, he has consistently failed to provide information he has promised. I was wondering if you could send a copy of the presentation material and the shareholding structure.
I hope the meeting with 3i goes well and wish you a very Merry Christmas…"
"As I told Robert I have now received a copy of the full plan but as Nigel has paid for some of AA's costs and has committed to the rest it is difficult to send you a copy (talk to Robert!!).
However Nigel is expecting to get a firm offer any day and when he does I will put pressure on Nigel to get together with all the team (you and Robert plus Geoff [Parkin] and John [Foster]) to discuss the way ahead."
I would keep pressing him for the report. In fact if I was in your shoes I would put your request in writing reminding him of the fact that this initiative is yours. Then if he refuses you have something tangible to act upon.
I will be ringing Robert later to bring him up to date with yesterday's meeting".
"1. I hereby acknowledge receipt of the "Financial Model" and "Business Plan Presentation" for Consolidated Veterinary Services Limited (herein after called CVS). I understand that I have been made privy to these documents in good faith as a founder member of the team who initiated the establishment of Consolidated Veterinary Services Limited and in that capacity will use the documents only for my own information (except and insofar as agreed under (2) below). I hereby not to disclose either the whole or any part of these documents to a third party without the express agreement of either Nigel Cayzer Esq., or Arthur Andersen Corporate Finance Group.
2. Notwithstanding (1) above as a founder of the CVS team I am at liberty to discuss the contents of the documents with other founder member Steve Brunnock but will not make any additional copies and will undertake to ensure that the proprietary rights over this documents namely those of Nigel Cayzer and Arthur Andersen, are fully respected and protected."
THE PROJECT COMES TO FRUITION
"I note your request for me to talk to you before passing information to Brunnock and Beddow. I am entirely happy for you to communicate all information to these two and for me to stay out of the loop. However, they are pursuing me constantly because they claim to receive no information from you at all. As you will recall, my involvement in CVS came through Brunnock and Beddow. I met you some time later. I can understand why they expect to be kept informed of progress.
I am very aware that but for you this project would not have succeeded. Both the energy and cash you have expended have got us to the present position. Last week I spoke to Brunnock, who is much more the professional of the two and reminded him of what you have done. This is probably what prompted his email to you. I also asked him to keep a lid on Beddow's who was getting very excited about being kept in the dark.
I think we need to be very careful. We cannot afford to have them creating a storm with any of the potential investors. Beddow is the risk and I find him very difficult to handle. I am almost tempted to suggest that we ignore them and proceed under "UDI". However, there are two risks. The first is the reaction of the investors if they find out we have a skeleton in our cupboard and the other is with Barton. John Foster was also brought in by Brunnock and Beddow and it was they who initiated the discussion about purchasing his practice. John is an honourable man and he is in regular contact with Beddows (as is Parkin). For the sake of peace all round we must handle this professionally. I will not be informing them of any further progress but I would like this matter resolved once you get back".
"With regard to our fees: we performed a great deal of the modelling work and co-ordinated the production of the information memorandum. We have also introduced BOS as a funding partner.
I would like to suggest a fee payable in cash and equity in the new company for the modelling work and preparing the prospectus a fee of £25,000 and for the introduction of BOS a fee of £50,000 (approximately 1% of funds raised). If these amounts were acceptable then we would take up to one third of the fee as equity in CVS".
"Opening equity split of 55% Nash Sells, 45% Management/ Investors
Once Nash Sells has achieved a target IRR on funds invested of 35% additional equity alone or for shareholders will be split in a ratio of 40% to Nash Sells, 60% to Management Team".
"Based on the financial model and an exit in year 5 these equity terms represent an IRR of 50.2% to Nash Sells, with a final equity split of 46.4 % to Nash Sells and 53.6% to management. Funds returned to Nash Sells on exit are c. £19.4 million …
"Investors" includes Nigel Cayzer, Harry Hyman and some small involvement for two individuals who generated the idea initially".
"In addition once you have returned from Muscat I think we should sit down and agree the level of fees that Nexus will be entitled to following our previous fax and how the sweet equity is going to be divided".
"As discussed we would like to take up any 'sweet equity' and we are quite comfortable with the notion of our fee being capitalised in this respect. On the numbers which we discussed yesterday which I, of course, understand are only first indications at this stage a 4% stake could be made available to Nexus Structure Finance Limited which would involve a cost of £28,000. On the basis that our fees for preparation of the model and the introduction came to at least that, we would be happy to proceed. We would also wish to be represented on the board as a non-executive director and although I understand the position with regard to fees here, I share your view that the company should not get free access to substantial amounts of my time without paying for it".
"Rupert's statement that it would not be worth considering unless we received 6 – 7% each, the only reason that Nigel is involved is because of my connection to his brother and the "promise" that the Oman Investment Group would write a cheque and would be underwritten".
"A new issue/new business, particularly in a start up relies on consolidation, is basically enabled by five undertaking:
(1) The idea.
(2) A board of directors to implement the business strategy.
(3) The first acquisition that enables the proof statement of the business plan.
(4) The business plan.
(5) Capital raising.
What can be seen by the chronological order of events in the appendix is that Robert and I were responsible for the majority of criteria needed to successfully launch a new business. This is not adequately rewarded by a 1- 1½% position each, as obviously we would not have been prepared to give away the project for 3%. Furthermore we were both more than willing after completing the first three stages to be actively involved with the final two stages, particularly as we had open commitments to raise monies, but after the instigation of the deal we were effectively snubbed.
The crux of our position is thus to have our oral contract honoured and be put on an equal footing, particularly as Nigel, his brother, and Harry Hyman [were] more than willing to walk away from CVS twice through not understanding the dynamics of the industry.
I realise that this puts you in a difficult position, but would appreciate any help in arguing this position with Nigel before taking any other action."
"I recommend that you extend the report to give a breakdown of how you would expect the equity to be split. I believe the total available to us is 42.5 % not the 45% I said because we have to use some for our share options for the senior people in each acquisition. Bruce's share is 13.5 % not the 12.5 % I thought. A further 11% or thereabouts is earmarked for the other members of the Executive Management Team including Geoff Parkin and John Foster. The remainder is what I think you should refer to. Of course you can challenge the executive allocation but Nash Sells have been responsible for this allotment…something to do with concentrating our minds!!
If you don't address the share split the document will read too much like a protest. I think that if you can keep the tone more factual than critical it will also encourage a more sympathetic… [illegible]
For instance in 14 I would have worded it more like this….Nigel Cayzer was doubtful that a deal could be financed based on a business model prepared in conjunction with Harry Hyman … [illegible] was based on a report commissioned from Anval. There was a lack of understanding about … [illegible] practices were priced which was corrected by us demonstrating our pricing model. A price for Barton was then agreed…. or something similar.
I leave it up to you. Nigel is aware I have received a document but I have not discussed the contents. I have told him you will be sending it to him later today. Once he receives it I will talk to him about your comments".
"I realise that the relationship between you and Robert is 'difficult' but I am sure we can reach an amicable agreement. Furthermore we would be happy to introduce the project to our established contacts in the debt market".
"I have read your letter to Brunnock. Did you have legal opinion and has it remained unchanged in that they have no 'legal' rights?
Assuming this to be the case the only comment I would make is that they will contend that you have effectively kept them out of the development of the business over the past seven months. You and I both believe that they could have asserted their position if they had wished and sat on your doorstep if that was the only way to 'resume control'. Their isolation (their claim) is to some extent true but as you rightly said at the time there was little to talk to them about until funders were found.
I think it might be better to focus on the absence of any well prepared business plan with exit strategy, five year projections and cash flow forecasts as a means of emphasising the weakness of their claim, thereby justifying the concentration by you and others in making up for this deficiency before we could obtain successful funding. You may wish to state that this was done without any input from them rather than imply that they were not active out of choice. .. "
"I am in receipt of your recent e-mail addressed to Nigel Cayzer setting out the chronology of the understanding of you and Robert in respect of the current project.
While there is no denying that insofar as Nigel Cayzer and his brother Rupert are concerned, you introduced to them the idea of corporatizing the veterinary industry. As far as those of us who are involved in the business in particular myself and Bruce you partially played a role of marrying up an idea with people capable of executing it. In the case of Bruce Robinson he had two offers to become involved in the corporatization of the veterinary practices, one put to him by Nigel Cayzer and another by an existing listed company.
You also undoubtedly helped in the introduction of the Barton Practice although all the negotiations have been done by Nigel subject to the meeting that took place in early August. What you have not been involved in is the enormous amount of work that has taken place over the last seven months from an idea into financial models, business plans and funding which has been done by the executive management team assisted by Nigel Cayzer and Arthur Andersen.
The question of the scale of your participation in the company has been discussed by the management team and bearing in mind that Nigel feels there is a strong moral obligation to recognise your early contribution by offering an equity stake in the company, we believe that by making 4% (as opposed to 3% that was discussed at your meeting at Arthur Andersen) is both fair and equitable. We can see no basis on which we believe that you will be entitled to 9% and neither ourselves nor the venture capitalists would be prepared to countenance this.
I hope that you will find this offer acceptable and I look forward to hearing from you".
"As for those of us who will be involved in the business, in particular Brian Pound and myself, you played a role in marrying up an idea with people who had contacts who could ultimately be capable of executing a plan.
Both Nigel and Brian have put this point to Nash Sells and Partners (NSP) our potential funders in requesting equity investment from yourselves. NSP's response is quite explicit in that it is not their policy to award people who are not directly associated with their investment, unless specifically agreed with them in advance. As at no time during the negotiations with NSP have you been involved with them, their current position is that they are unwilling to consider any equity investment from you. For the same reasons, I tend to support NSP's view in that the current transaction is too distant and too far removed from any discussions Nigel may have been involved in some months ago. Also the concept cannot be claimed as an original idea….
Having said this and as the potential future Chief Executive of the company, it falls to me to divide up the available equity and in considering Nigel's view that there is a strong moral obligation to recognise your contribution by offering you and equity stake in the company, I will be pursuing negotiations with NSP to make 3% available, as I believe this to be both fair and equitable. I can see no basis to justify arguing for a larger holding.
I am prepared to support this level of investment but in order not to waste valuable time I would appreciate your acceptance of this as a full and final settlement equity position, obviously subject to NSP's agreement.
I need your answer by return prior to concluding negotiations with NSP and the final subscription agreements".
"With regards to the discussion on promoters holding equity stake in the above company and in particular SJB Brunnock and R Beldons [sic], NSP have received no information or influence or had contact with them. It is not our policy to reward people who are not directly associated with our investment unless specifically agreed with us in advance. I have been involved in this project for over three months and my colleagues over five. At no time did we believe any of the efforts to convince NSP to become a Venture Capital partner in this project has involved them. I am therefore unwilling to consider an equity investment by them. I know Nigel had tried to convince us of their involvement but the current transaction is too distant and too far removed from any discussion he may have been involved in some months ago, in addition we have looked at similar propositions for different UK and US veterinary groups to make us know the idea is not proprietorial".
"As far as your claims are concerned, it is the company's view that you do not have any legal entitlement to any equity in the company. Nevertheless, without prejudice to that contention, at the insistence of [the Defendant] and on the grounds that there is a moral obligation to recognise your initial contribution, I have persuaded NSP to permit you an allocation of 1.5% of the equity. In my view and that of the Board, this is more than fair and equitable.
The proposal is a non-negotiable proposal and accordingly, I look forward to receipt of your acceptance of this offer in full and final settlement of your equity position by signing the attached document …"
"In connection with the above will you please transfer the sum of £17,142.80 to: [and there is given the address of a Bank in Liechtenstein] Account name: Gulf Securities Corporation, Account number: … GBP Account.
This can be done by telegraphic transfer or Swift
Please let me know when this has been effected"
"I myself am not a shareholder of [CVSUK]. I was offered equity but did not wish to purchase it. With the consent of NSP, shares offered to me were purchased by a contact of mine, the Perth Business Corporation. I do not have any legal or beneficial interest in the Perth Business Corporation or the shares that it purchased".
"Perth Business Corp., whose registered office is at Morgan and Morgan Swiss Tower… Panama".
THE CLAIMS IN THIS ACTION
"The Defendant (by [Mr Galliers-Pratt] his agent) and the Claimant and [Mr Brunnock] agreed to engage in a join venture pursuant to their agreement ("the February agreement") whereby:
(i) In return for the introduction to the Claimant's scheme and the Claimant's and [Mr Brunnock]'s continued involvement therein, [Mr Galliers-Pratt] and the Defendant would obtain £5 million which would be underwritten by them and would further obtain debt finance in the sum of between £5-10 million pounds (and were able to provide such investment);
(ii) [Mr Galliers Pratt] and the Defendant would use a company as the vehicle to launch the Claimant's scheme, with the aim of floating the same on the stock market or trade sale, of which the Claimant and [Mr Brunnock] would be entitled to a one quarter share each of the equity available after the equity transferred to the investors, such shares not to be less than a 7% stake each:
(iii) The Claimant and [Mr Brunnock] should continue to develop the scheme and assist in the establishment of a board of directors for the company".
"If, which is not the Claimant's primary case, the February agreement fell short of a binding agreement to progress towards the establishment of a company with the shareholdings and investments set out above, then the parties nonetheless entered an agreement in the nature of a joint venture to the effect that each would work towards the development of the joint venture ("JV") and the establishment of such a company. There were implied terms in the February agreement to the following effect … [that is to the same effect as in the alleged February Agreement and]:
(iii) each would hold confidential information of and about the JV…."
HOW TO RESOLVE THE CONFLICT OF EVIDENCE
"…Faced with a conflict of evidence on an issue substantially effecting the outcome of an action, often knowing that a decision this way or that will have momentous consequences on the parties' lives or fortunes, how can and should the judge set about his task of resolving it? How is he to resolve which witness is honest and which dishonest, which reliable and which unreliable? …
The normal first step in resolving issues of primary fact is, I feel sure, to add to what is common ground between the parties (which the pleadings in the action should have identified, but often do not) such facts as are shown to be incontrovertible. In many cases, letters or minutes written well before there was any breath of dispute between the parties may throw a very clear light on their knowledge and intentions at a particular time. In other cases, evidence of tyre marks, debris or where vehicles ended up may be crucial. To attach importance to matters such as these, which are independent of human recollection, is so obvious and standard a practice, and in some cases so inevitable, that no prolonged discussion is called for. It is nonetheless worth bearing in mind, when vexatious conflicts of oral testimony arise, that these fall to be judged against the background not only of what the parties agree to have happened but also of what plainly did happen, even though the parties do not agree.
The most compendious statement known to me of the judicial process involved in assessing the credibility of an oral witness is to be found in the dissenting speech of Lord Pearce in the House of Lords in Onassis v Vergottis [1968] 2 Lloyds Rep. 403 at p.431. In this he touches on so many of the matters which I wish to mention that I may perhaps be forgiven for citing the relevant passage in full:
''Credibility' involves wider problems than mere 'demeanour' which is mostly concerned with whether the witness appears to be telling the truth as he now believes it to be. Credibility covers the following problems. First, is the witness a truthful or untruthful person? Secondly, is he, though a truthful person telling something less than the truth on this issue, or though an untruthful person, telling the truth on this issue? Thirdly, though he is a truthful person telling the truth as he sees it, did he register the intentions of the conversation correctly and, if so has his memory correctly retained them? Also, has his recollection been subsequently altered by unconscious bias or wishful thinking or by over much discussion of it with others? Witnesses, especially those who are emotional, who think that they are morally in the right, tend very easily and unconsciously to conjure up a legal right that did not exist. It is a truism, often used in accident cases, that with every day that passes the memory becomes fainter and the imagination becomes more active. For that reason a witness, however honest, rarely persuades a Judge that his present recollection is preferable to that which was taken down in writing immediately after the accident occurred. Therefore, contemporary documents are always of the utmost importance. And lastly, although the honest witness believes he heard or saw this or that, is it so improbable that it is on balance more likely that he was mistaken? On this point it is essential that the balance of probability is put correctly into the scales in weighing the credibility of a witness. And motive is one aspect of probability. All these problems compendiously are entailed when a Judge assesses the credibility of a witness; they are all part of one judicial process. And in the process contemporary documents and admitted or incontrovertible facts and probabilities must play their proper part'.
Every judge is familiar with cases in which the conflict between the accounts of different witnesses is so gross as to be inexplicable save on the basis that one or some of the witnesses are deliberately giving evidence which they know to be untrue….more often dishonest evidence is likely to be prompted by the hope of gain, the desire to avert blame or criticism, or misplaced loyalty to one or other of the parties. The main tests needed to determine whether a witness is lying or not are, I think, the following, although their relative importance will vary widely form case to case:
(1) the consistency of the witness's evidence with what is agreed, or clearly shown by other evidence, to have occurred;
(2) the internal consistency of the witness's evidence;
(3) consistency with what the witness has said or deposed on other occasions;
(4) the credit of the witness in relation to matters not germane to the litigation;
(5) the demeanour of the witness.
The first three of these tests may in general be regarded as giving a useful pointer to where the truth lies. If a witness's evidence conflicts with what is clearly shown to have occurred, or is internally self-contradictory, or conflicts with what the witness has previously said, it may usually be regarded as suspect. It may only be unreliable, and not dishonest, but the nature of the case may effectively rule out that possibility.
The fourth test is perhaps more arguable…
MY ASSESSMENT OF THE WITNESSES
WAS THERE AN AGREEMENT ON 11TH FEBRUARY 1998
THE POSITION OF THE DEFENDANT ON 11TH FEBRUARY
WAS THERE AN AGREEMENT IN JULY 1998?
WERE THE CLAIMANT'S RIGHTS AFFECTED BY THE EVENTS AFTER SEPTEMBER 1998?
THE EFFECT OF THE CLAIMANT REJECTING CVSUK'S OFFER
THE CLAIM IN EQUITY
"(1) A Pallant v Morgan equity may arise where the arrangement or understanding on which it is based precedes the acquisition of the relevant property by one of those parties to that arrangement. It is the pre-acquisition arrangement which colours the subsequent acquisition by the defendant and leads to his being treated as a trustee if he seeks to act inconsistently with it…
(2) It is unnecessary that the arrangement or understanding should be contractually enforceable. Indeed, if there is an agreement which is enforceable as a contract, there is unlikely to be any need to invoke the Pallant v Morgan equity; equity can act through the remedy of specific performance and will recognise the existence of a corresponding trust. On its facts Chattock v Muller is, perhaps, best regarded as a specific performance case. In particular, it is no bar to a Pallant v Morgan equity that the pre-acquisition arrangement is too uncertain to be enforced as a contract - see Pallant v Morgan itself, and the Time Products case - nor that it is plainly not intended to have contractual effect - see Island Holdings Ltd v Birchington Engineering Co Ltd.
(3) It is necessary that the pre-acquisition arrangement or understanding should contemplate that one party ("the acquiring party") will take steps to acquire the relevant property; and that, if he does so, the other party ("the non-acquiring party") will obtain some interest in that property. Further it is necessary, that (whatever private reservations the acquiring party may have) he has not informed the non-acquiring party before the acquisition (or, at the least, before it is too late for the parties to be restored to a position of no advantage/no detriment) that he no longer intends to honour the arrangement or understanding.
(4) It is necessary that, in reliance on the arrangement or understanding, the non-acquiring party should do (or omit to do) something which confers an advantage on the acquiring party in relation to the acquisition of the property; or is detrimental to the ability of the non-acquiring party to acquire the property on equal terms. It is the existence of the advantage to the one, or detriment to the other, gained or suffered as a consequence of the arrangement or understanding, which leads to the conclusion that it would be inequitable or unconscionable to allow the acquiring party to retain the property for himself, in a manner inconsistent with the arrangement or understanding which enabled him to acquire it. …
(5) That leads, I think, to the further conclusions: (i) that, although, in many cases, the advantage/detriment will be found in the agreement of the non-acquiring party to keep out of the market, that is not a necessary feature; and (ii) that, although there will usually be advantage to the one and co-relative disadvantage to the other, the existence of both advantage and detriment is not essential - either will do. What is essential is that the circumstances make it inequitable for the acquiring party to retain the property for himself in a manner inconsistent with the arrangement or understanding on which the non-acquiring party has acted. Those circumstances may arise where the non-acquiring party was never "in the market" for the whole of the property to be acquired; but (on the faith of an arrangement or understanding that he shall have a part of that property) provides support in relation to the acquisition of the whole which is of advantage to the acquiring party. They may arise where the assistance provided to the acquiring party (in pursuance of the arrangement or understanding) involves no detriment to the non-acquiring party; or where the non-acquiring party acts to his detriment (in pursuance of the arrangement or understanding) without the acquiring party obtaining any advantage therefrom."
PERTH BUSINESS CORPORATION
CONCLUSION