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High Court of Ireland Decisions |
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You are here: BAILII >> Databases >> High Court of Ireland Decisions >> Lee v. Buckle [2004] IEHC 146 (30 July 2004) URL: http://www.bailii.org/ie/cases/IEHC/2004/146.html Cite as: [2004] IEHC 146 |
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HC 269/04
RECORD NO. 2003/82 MCA
BETWEEN/
APPLICANT
RESPONDENT
Judgment of Miss Justice Laffoy delivered on 30th July, 2004.
Background
Lee Overlay Partners Limited (the Company) is a company limited by shares which was incorporated in the State on 4th March, 1999. The applicant is the President and Chief Investment Officer of the Company. On 29th June, 1999 the respondent accepted an offer of employment with Adrian Lee Services Limited (the Services Company), which was then known as Babol Limited and which is incorporated in the Isle of Man. The respondent contends that the Services Company was only a payroll company and that, in reality, his employer was the Company. The issue of the respondent's real employer is not a matter for determination on this application. The respondent's employment ceased with effect from 25th July, 2003. There is a dispute as to the basis of such cessation: the applicant contends that the respondent voluntarily left his employment; the respondent contends that he was constructively dismissed. There are proceedings pending before the Employment Appeals Tribunal in relation to the issue of the cessation of the respondent's employment. The basis of such cessation is not a matter for determination on these proceedings.
At the date of the cessation of his employment the respondent was the owner of 1,502 "A" ordinary shares of €1 each and 845 "B" ordinary shares of €1 each in the capital of the Company. His shareholding represented 21.45% of the share capital of the Company. It is common case that the ownership of shares in the Company is regulated by the agreement mentioned in the title hereof, namely, an agreement of 30th July, 1999 (the Shareholders Agreement) made between Warburg Pincus Ventures International, Lp. and others of the first part, the persons named as Management Shareholders in Schedule 1 to the Agreement, who include the applicant and the respondent, of the second part, and the Company of the third part. The governing law of the agreement is English law.
The provisions contained in sub-clauses 15 to 21 inclusive of clause 9 of the Shareholders Agreement regulate what is to happen to the shares of a Management Shareholder who ceases to be employed by the Company or the Service Company, as the case may be. In summary, the provisions deal with four different scenarios in which such employment may cease, namely:
(1) where it is the result of the Management Shareholder terminating his employment;
(2) where it is the result of the Management Shareholder having been dismissed from his employment;
(3) where it is the result of death, illness or disability; and
(4) where it is the result of some other circumstance.
The applicant contends that the respondent comes within the scenario set out at (1) above, having terminated his contract. The respondent contends that he was constructively dismissed and that he comes within the scenario referred to at (4) above. If the applicant is correct, then he has a right, referred to as a "Call Right" in the Shareholders Agreement, on giving not less than one month's notice in writing to the respondent to purchase the respondent's shareholding at a price being the lesser of par and "Fair Value", as defined. If the respondent is correct, then, while the applicant has a Call Right it is exercisable at Fair Value and the respondent has a right, referred to as a "Put Right", which is exercisable by one month's notice in writing and obligates the applicant to purchase all of his shares at Fair Value. Fair Value, in default of agreement, is open market value determined by an independent investment bank or corporate finance house appointed by agreement or, in default of agreement, by the Director General of the London Investment Banking Association. In the event of a Call Right being exercised and the respondent failing or refusing to do all acts or things necessary to effect the transfer of the shares, the respondent is deemed to have conferred an irrevocable authority on the Company to appoint a person to execute on his behalf a transfer of the respondent's shares in his favour.
On 9th July, 2003 the applicant served notice in writing on the respondent under the Shareholders Agreement of his wish to exercise his Call Right on the basis that the cessation of the respondent's employment fell within the scenario set out at (1) above. The applicant enclosed with the notice a cheque for €2,347, representing the par value of the shares, and a stock transfer form for execution. An issue arose as to whether the Call Right could be exercised prior to the termination of the respondent's employment and a similar notice was served by the applicant on 5th September, 2003 "to put the matter beyond doubt" and a further cheque for €2,347 was proffered, the previous cheque having been cancelled.
The respondent, not accepting that the applicant is entitled to exercise a Call Right at a lesser of par and Fair Value, has not negotiated the applicant's cheque, nor has he executed the stock transfer form. On 22nd October, 2003 David J. Kirkpatrick, who was expressed to be acting pursuant to the irrevocable authority granted under the Shareholders Agreement, executed a stock transfer form transferring the respondent's shares to the applicant. On this application the applicant has averred that the transfer was subject to a mortgage and charge in favour of Warburg Pincus Equity Partners Lp. of 7th January, 2003 on foot of which in excess of US$1.85 million is secured.
On 21st November, 2003 the respondent served notice on the Company in accordance with Order 46, rule 6 of the Rules of the Superior Courts, 1986 that his shareholding in the Company is subject to the provisions of the Shareholders Agreement and "to stop the transfer" of the shares.
Following the cessation of his employment, the respondent took up employment with Merrill Lynch Investment Management. The applicant contends that the respondent's new employer is a competitor of the Company, but this is disputed. That dispute cannot be resolved in these proceedings.
In outlining the background to this application, I have recorded what has happened. For the avoidance of doubt, nothing in this judgment is to be taken as the expression of a view as to the proper compliance with the formalities prescribed in the Shareholders Agreement in relation to the exercise by the applicant of, and compliance by the respondent with, the Call Right.
This Application
On this application the applicant seeks an order ceasing the operation of "the Notice to Restrain Transfer of Stock", namely, the notice dated 21st November, 2003 in respect of the respondent's shares in the Company and served on that day. The evidence before the court is contained in four affidavits sworn by the applicant and three affidavits sworn by the respondent.
The Rules
Order 46 of the Rules deals with charging orders and stop orders. Part III, which contains rules 5 to 13 inclusive, deals with a notice to restrain transfer of stock.
Rule 5 defines the expression "company". I have no doubt that the Company comes within that definition. Rule 6, under which the notice of 21st November, 2003 was served provides as follows:
"Any person claiming to be interested in any stock standing in the books or inscribed in the register (within the jurisdiction) of a company may, on an affidavit by himself or his solicitor in the Form No. 27 in Appendix C, and on filing the same in the Central Office with notice in the Form No. 28 in Appendix C, and on procuring an attested copy of the affidavit and a duplicate of the filed notice authenticated by the seal of the High Court, serve the attested copy and the duplicate notice on the Company."
The title of Form No. 27 refers to the Chancery (Ireland) Act, 1867, although that Act is not referred to in the body of Order 46.
The effect of service of notice is dealt with in Rule 10 which, insofar as is relevant for present purposes, provides as follows:
"From and after the service of the attested copy of the affidavit and of the duplicate of the filed notice, it shall not be lawful for the company to permit the stock specified in the notice to be transferred . . . so long as the notice shall remain operative."
Rule 11, under which this application is brought, provides as follows:
"A notice filed under rule 6 may at any time be withdrawn by a person by whom or on whose behalf it was given on a written request signed by him, or its operation may be made to cease by an order to be obtained by motion on notice duly served on any other person claiming to be interested in the stock sought to be affected by the notice."
Rule 12 provides that if, while a notice under rule 6 continues in force, the company receives from the registered owner of the stock a request to permit the stock to be transferred, the company shall not be authorised, without the order of the court, to refuse to permit the transfer for more than eight days after the date of the request. Accordingly, the Rules envisage a notice served under rule 6 being rendered ineffective in any one of three ways: the withdrawal of the notice by the person who served it; an order under rule 11; or, where the notice is served by a person other than the registered owner of stock in the company's share register, by default in obtaining a court order restraining transfer under rule 12.
The text of Form No. 28 in Appendix C is of interest. The notice is addressed to the company in which the shares are held. It provides as follows:
"Take notice that the following stock (or shares) in the capital of your company (or as the case may be), namely (set out particulars) is comprised in (or settled by) and is now subject to the trust of the above-mentioned settlement (or will or as the case may be); and accordingly, this notice is to stop the transfer of the said stock (or shares) . . . pursuant to Order 46, rules 5 to 13, of the Rules of the Superior Courts."
The affidavit in Form No. 27 of Appendix C is designed to show that the deponent has a beneficial interest in the stock or shares.
The provenance of rules 5 to 13 is also interesting. Similar provisions are to be found in rules 5 to 13 of Order XLVI of the Rules of the Supreme Court (Ireland) 1905. Rule 4 of the same Order provided that no writ of injunction should thereafter be issued under the Chancery (Ireland) Act, 1867 (30 & 31 Vict., c. 44), s. 171. In fact s. 171 had been repealed by the Statute Law Revision (No. 2) Act, 1893 (56 & 57 Vict. c. 54). A notation in Wylie on "The Judicature Acts (Ireland)" (1906) states that rules 5 to 13 superseded the provisions of ss. 171 to 174 of the Act of 1867.
There are remarkably few significant variations between the provisions of the 1905 Rules and the current provisions. One significant variation is that the 1905 Rules applied only to public companies, not to private companies. Rule 10 in relation to the effect of service of a notice provided that service should have the same force and effect against the company –
"as a statutory writ of injunction duly issued under the Chancery (Ireland) Act, 1867 . . . would have had if these rules had not been made."
It was noted in Wylie that the effect of service was merely temporary and that it required to be followed up by proceedings to restrain a transfer, referring to rule 12, which was in similar terms to rule 12 of the current Order 46.
Submissions
Before outlining the submissions made on behalf of the applicant and the respondent, it is necessary to record that it is accepted that, for the purposes of the application, once the applicant exercises his Call Right, the respondent is obliged to sell his shares to the applicant. In other words, it is accepted that the application can be determined on the basis that what is in dispute between the parties is the quantum of the purchase price; whether it is the lesser of par and Fair Value, as defined in the Shareholders Agreement, or Fair Value as so defined. An averment by the respondent that the measure of Fair Value for his shareholding is €4 million, provoked an averment in response from the applicant that such quantification is "wildly incorrect".
It is acknowledged that this is an unusual application. Counsel were unable to identify any authority directly in point, and it would appear that there is no modern authority.
Applicant's Submissions
Counsel for the applicant advanced two grounds on which it was urged that the proper course for the Court is to cease the effect of the stop notice.
First, he submitted that a stop notice served under Order 46, rule 6 is akin to a lis pendens registered against land. Each is a means of giving notice that there is a dispute in relation to a res and of protecting the interest in the res of the person registering the lis pendens or serving the stop notice. The rationale of affording this means of protection is that the res in dispute has an intrinsic value. Shares have an intrinsic value because of the rights which ownership of them vests in their owner. However, by analogy to the position which pertains in relation to a lis pendens, which is vacated when the registrant no longer has a claim to the land, a stop notice should be ceased when the person who has served it can no longer claim the shares. In the instant case, as it is accepted that there is an obligation on the respondent to sell the shares to the applicant, the respondent does not have rights in relation to the res, rights qua shareholder, which require to be protected by a stop notice.
Secondly, it was submitted that to allow the stop notice to continue would have the practical consequence of permitting the respondent to acquire a quasi security for his monetary claim against the applicant before obtaining judgment, which the court should not allow. In support of this submission, counsel referred to the decision of the Supreme Court in O'Mahony v. Horgan [1995] 2 IR 411, in which the Supreme Court set out the criteria which should be established prior to the grant of a Mareva type injunction. In setting forth the principles underlying the grant of Mareva injunctions, Hamilton C.J. stated as follows at p. 417:
"The common law, traditionally, expresses the principle that the plaintiff is not entitled to require from the defendant, in advance of judgment, security to guarantee satisfaction of a judgment that the plaintiff may eventually obtain."
Having outlined the emergence of the Mareva type injunction, Hamilton C.J. highlighted one of the limits of the Mareva relief in the following passage at p. 419:
"In Polly Peck International Plc v. Nadir [1992] 4 All ER 769 both the Master of the Rolls and Scott L.J. stressed that such relief is not intended to give security in advance of judgment but merely to prevent the defendant from defeating the plaintiff's chance of recovery by dissipation of assets."
In his first affidavit the applicant has averred that the Company is prejudiced by the respondent remaining a shareholder of the Company because, as such, he is entitled to examine the books, records and accounts of the Company and the Company is obliged to supply him with all information in such form as he may reasonably require to be kept properly informed about the business and affairs of the Company. The Company also wishes to hold its annual general meeting and, in order to do so, it would be necessary to send copies of the annual accounts to the members of the Company. The applicant has expressed concern about such "potentially commercially sensitive information" being available to the respondent. In his second affidavit the applicant has averred that it is very difficult to market the services of the Company effectively in circumstances where shares are held by individuals other than the investment professionals who are employed by the Company.
In his first affidavit the applicant has undertaken to pay such additional sum as may be due and owing to the respondent if it transpires that the respondent is entitled to Fair Value for his shares.
Respondent's Submissions
Counsel for the respondent pointed out that there was no evidence before the court that the applicant had sought to ascertain the lesser of par and Fair Value. He had tendered par, which he was not entitled to do.
It was submitted that the applicant is not entitled to get a benefit on this application which he would not get otherwise. Having exercised his Call Right at par, the applicant is trying to get the benefit of a judgment in his favour that the respondent is bound to sell at par. He is getting ownership and control of the respondent's shares. What the court has to weigh in the balance, it was submitted, is the respondent endeavouring to protect his assets in reliance on Order 46 and the applicant trying to protect his position before determination of the value of the respondent's shares.
It was submitted that the analogy of a lis pendens is not apt. In the case of a lis pendens there are two parties: the claimant and the legal owner. Here there are three parties: the legal owner; the Company; and the claimant. A lis pendens is registered against the legal owner. In the instant case, as a stop notice has been served by the legal owner, it was submitted that the applicant could seek an injunction restraining the respondent from disposing of his shares pending resolution. That situation would be the equivalent of the registration of a lis pendens.
This is not a situation in which the respondent is seeking to gain an advantage before the trial of an action, it was submitted. That is what the applicant is endeavouring to do, not having advanced Fair Value for the respondent's shares.
It was submitted that the affidavits did not disclose any potentiality for damage to the applicant or the Company, or any prejudice.
Further, it was suggested that in determining the issue as to whether to cease the stop order, the court should apply the normal principles which are applied in determining whether an interlocutory injunction should be granted as set out by the Supreme Court in Campus Oil Ltd. v. Minister for Industry and Energy [1983] I.R. 88. It was submitted that there is a fair issue to be tried as to whether the respondent is entitled to Fair Value for his shares and that the balance of convenience favours continuing the stop notice until such time as that issue is determined. On this point, counsel for the applicant responded that this is not an interlocutory application. It is an application which will lead to a final order.
Finally, it was suggested that if the restraint on the transfer is not to continue, the proper course is for the applicant to lodge in court a substantial sum to meet the respondent's claim.
Conclusions
It seems to me that the first step is to identify the function of the court in this matter. Its only function is to determine whether the operation of the notice served by the respondent under rule 6 should cease. In the absence of any guidance in the Rules and in the absence of any modern authority, this determination must be based on principle.
There is a dispute between the parties which arises out of the respondent's ownership of shares in the Company. There are no proceedings in existence in this court in relation to that dispute. It has been conceded, properly in my view, that for the purposes of these proceedings the dispute can be regarded as a dispute in relation to the appropriate price to be paid to the respondent for his shareholding. The outcome of any proceedings initiated by the respondent to have the dispute resolved, if successful, would be a monetary award.
While the lis pendens procedure differs from the stop notice procedure the jurisprudence which has evolved in connection with the former does afford guidance as to how the issue which arises on this application should be determined.
A registered lis pendens is a creature of statute. Section 10 of the Judgments (Ireland) Act, 1844 provides that no lis pendens can bind or affect a purchaser or a mortgagee who has no express notice of it, unless and until a memorandum containing the requisite details concerning the suit is registered in court. The objective of the system of registration of a lis pendens introduced in the 1844 Act was to provide a mechanism whereby a person pursuing a claim in respect of land could give notice to the world at large of the litigation in which he was pursuing his claim, so that a person dealing with the owner of the land would take the land in specie free of such claim if the claimant was not protected by registration of the pending action, and, conversely, such registration would preserve the land in specie to satisfy the claim, if successful.
The vacation of a lis pendens is also governed by statute. Section 2 of the Lis Pendens Act, 1867 (which the Supreme Court in Flynn v. Buckley [1980] I.R. 423 held applied to Ireland) provides that the court before which the property sought to be bound is in litigation may "upon the determination of the lis pendens, or during the pendency thereof, where the court shall be satisfied that the litigation is not prosecuted bona fide, make an order, if it shall see fit, for the vacating of the registration without the consent of the party who registered it . . ." It is well settled that a court will vacate a lis pendens when the claim in the litigation will only result in an award of damages (cf judgment of Costello J. in O'Connell v. McCarthy [1982] I.R. 161 at p. 178). The rationale for continuing its registration no longer exists when the claim cannot be satisfied by getting the land in specie, for example, where there is a decree for damages in lieu of specific performance, as happened in O'Connor v. McCarthy.
The differences between the lis pendens procedure and the stop notice procedure are obvious on the face of the text of Form No. 28, which is quoted above. First, the stop notice is addressed to the company, not to the world at large. Secondly, the stop notice operates like an injunction restraining the company from transferring the shares, whereas priority as between claimants is determined by the existence of the lis pendens.
On the basis of the terminology of Forms Nos. 27 and 28, I think it is reasonable to infer that the primary objective of the procedure provided for in rules 5 to 13 of Order 46 is to protect a beneficial interest in shares against actions by the person who is registered as the owner of the shares in the share register of the company. Having said that, no point was taken on this application that the person who is registered in the share register as the owner of the shares cannot avail of the procedure. Given the existence of the mechanism in the Shareholders Agreement whereby the respondent's ownership of the shares in the share register can be deleted without his consent, in my view, the respondent was entitled to avail of the procedure.
Reading the provisions of rules 5 to 13 inclusive as a whole, in conjunction with the relevant forms in Appendix C, it is clear that the procedure provided for is to give the company notice of a claim to the shares adverse to the title of the person who may appear as the owner of the shares in the share register. The claim does not have to be a claim which is being pursued in litigation. However, it is clearly envisaged in rules 11 and 12 that the company is not to be restrained from effecting a transfer of the shares indefinitely without the intervention of the court. The note in Wylie referred to above supports this interpretation.
As to when the court should exercise its jurisdiction to cease the operation of the stop notice, I am satisfied that the core submission made by counsel for the applicant is correct: that once it is acknowledged that the ultimate outcome of the respondent's claim, if he is successful, will be a monetary award and not the retention of the shares, the respondent is not entitled to have the stop notice continued. The procedure is designed to preserve the shares in specie while there is an unresolved claim or a dispute as to the entitlement to the shares in specie, so that they will be available to satisfy the claim, if successful. It operates until that claim or dispute is resolved or the court otherwise orders. The rationale for continuing the stop order no longer exists when the claimant ceases to be entitled to the shares in specie.
As it is acknowledged in the instant case that, whatever the outcome of the dispute between the parties, the respondent will not be entitled to retain the shares in specie, in my view, the procedure provided for in rules 5 to 13 is defunct, because its underlying rationale no longer exists.
The dispute between the parties as to the appropriate price for the respondent's shares, having regard to the proper interpretation of the circumstances of the respondent ceasing to be in the employment of the Company or the Service Company, remains. On this application, which is solely related to the issue as to whether the operation of the stop notice should cease, the court can express no view on, or make no provision whatsoever in relation to, that dispute.
Order
There will be an order ceasing the operation of the notice served by the respondent on the Company on 21st November, 2003.
