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OUTER HOUSE, COURT OF SESSION
[2024] CSOH 3
P887/22
OPINION OF LORD SANDISON
In the Petition of
(FIRST) ADRIAN RICHARD HAWKINS OBE and (SECOND) OTHMAN AKBAR RAFAY
Petitioners
for
an order under Sections 994 and 996 of the Companies Act 2006 in relation to
SUSTAINABLE PIPELINE SYSTEMS LIMITED
Petitioners: Ower, KC; Shoosmiths LLP
Respondents: Massaro; Stronachs LLP
19 January 2024
Introduction
Background
[1]
By this petition, two shareholders in Sustainable Pipeline Systems Limited ("the
Company") seek orders under sections 994 and 996 of the Companies Act 2006, claiming
that
the Company's affairs have been conducted in a manner that is unfairly prejudicial to their
interests as members.
The respondents to the petition are the Company itself and its four
directors (who are also the whole other shareholders in the Company). The matter came
before the court for a diet of proof for determination of the question of whether there had
indeed been such unfairly prejudicial conduct, leaving over for later determination if need
be the issue of an appropriate remedy for any such conduct.
2
Relevant statutory provisions
[2]
Sections 994 and 996 of the Companies Act 2006, so far as material, are in the
following terms:
"994 Petition by company member
(1) 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
that is unfairly prejudicial to the interests of members generally or of some
part of its members (including at least himself), or
(b) that an actual or proposed act or omission of the company (including an
act or omission on its behalf) is or would be so prejudicial.
...
996 Powers of the court under this Part
(1) 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.
(2) Without prejudice to the generality of subsection (1), the court's order may
(a) regulate the conduct of the company's affairs in the future;
(b) require the company
(i) to refrain from doing or continuing an act complained of, or
(ii) to do an act that the petitioner has complained it has omitted to
do;
(c) authorise civil proceedings to be brought in the name and on behalf of the
company by such person or persons and on such terms as the court may
direct;
(d) require the company not to make any, or any specified, alterations in its
articles without the leave of the court;
3
(e) provide for the purchase of the shares of any members of the company by
other members or by the company itself and, in the case of a purchase by the
company itself, the reduction of the company's capital accordingly."
Factual background
[3]
The Company's business is in the development of new technology for pipeline
manufacture, installation and monitoring, and in particular of a pipe product known as the
Mobile Automated Spiral Intelligent Pipe (MASiP). It was founded by the respondent
Dr Andrew Stevenson, who is a materials scientist. He is the majority shareholder in, and
Chairman and Chief Executive Officer of, the Company. Between 2016 and 2019, the
petitioners, Mr Adrian Hawkins and Mr Othman Rafay, each invested significant sums in
the Company. In March 2019 Mr Hawkins was appointed as a director of the Company.
Mr Rafay was not appointed as a director of the Company, but was invited to attend its
board meetings until autumn 2020.
[4]
Between December 2019 and April 2020, each of the petitioners, together with
Dr Stevenson and another respondent, Mr Christopher McCann, invested further sums in
varying amounts in the Company. Shares were allotted to each of them in that investment
round at a price of £150 per share. In or around July 2020, differences arose between
Mr Hawkins and Dr Stevenson about the propriety and utility of the Company applying for
a loan of £207,000 under the Coronavirus Business Interruption Loan Scheme (CBILS),
resulting ultimately in the resignation of Mr Hawkins from the board. In January 2021, the
petitioners were advised that the directors of the Company were proposing to allot further
shares to Dr Stevenson and Mr McCann at a price per share of £37. A further such
allotment, at a lower price still, was made in 2023.
4
[5]
The petitioners have three main heads of complaint under section 994, although each
carries with it a penumbra of associated concerns and is closely inter-related to the others.
Firstly, the petitioners complain that they have been excluded from involvement in the
management of the Company and have not been provided with the information necessary
for them properly to participate in the conduct of its affairs.
[6]
Secondly, they complain that they have not been remunerated for their work for the
Company, and specifically that a proposed share bonus scheme designed to operate as
deferred remuneration for that work was withdrawn, to their detriment.
[7]
The third and final group of complaints concerns share allotments. The petitioners
maintain that the allotment to Mr McCann in 2020 at the same price they paid in that round
was unfair to them, as it allowed Mr McCann to benefit from the progress which the
Company had made without being exposed to the same level of risk to which the existing
shareholders had been exposed. Further, and more substantively, they claim that they were
not invited to purchase shares in the Company at the beginning of 2021 when the board was
proposing to make a further allotment to Mr McCann, supposedly as an emergency fund-
raising measure. The petitioners claim that the Company had no need to raise cash urgently
at that time and that their shareholdings were unfairly devalued and diluted by the
allotment which then took place. They say that the further allotment in June 2023 had the
same effect.
[8]
The petitioners maintain that there has been an irredeemable breakdown in the trust
and confidence which they had in the respondents, that they cannot reach agreement for the
sale of their shares in the Company in light of the unfairly prejudicial conduct of its affairs
which they allege, and that the court's assistance is therefore required.
5
The evidence
[9]
Each of the witnesses provided one or more witness statements and was cross- and
re-examined.
Petitioners' case
Adrian Hawkins OBE (66)
[10]
Mr Hawkins stated that his working life had been in the welding industry,
culminating in the sale in 2019 of the company he had successfully built over the years,
Weldability SIF. He met Dr Stevenson in 2014 or 2015 through their mutual involvement in
the Hertfordshire Local Enterprise Partnership. He learned that Dr Stevenson had set up the
Company to develop a spiral wound pipe using intellectual property licensed by Scottish
Enterprise. Mr Hawkins had been asked to assist with potentially suitable welding
processes for the pipe, which he had done through Weldability. Ultimately it was
determined that a welding process was not required. Mr Hawkins had, however, got to
know well the pipe being developed during that project and had been impressed by it.
Dr Stevenson had asked him if he would like to invest in the Company, and had provided
him with business plans indicating completion of development and commercialisation of the
pipe by 2019-2020. He had invested £40,000 in the Company in 2016, and a total of £240,000
over the period 2016-2019.
[11]
Dr Stevenson wanted Mr Hawkins to be involved for his business experience in
commercialising products and managing people, as well as for his financial investment. He
wanted Mr Hawkins to be on the Company's board, but before Mr Hawkins had sold his
own company, Weldability, he did not want to take on that responsibility. He joined the
Company's board on 28 March 2019 following the sale of Weldability, having previously
6
been invited to attend board meetings as an observer. After joining the board, Mr Hawkins
had wanted to get the Company's pipe product into commercialisation and production as
soon as possible, but perceived that Dr Stevenson was more interested in research and
development, was not particularly interested in potential markets other than the oil and gas
industry, and ultimately wanted to sell on the pipe technology as a project or concept.
[12]
Mr Hawkins noted that he was an experienced businessman and had chaired a
number of organisations. He had known that in becoming a member of the Company he
was taking a risk with his investment, but he was confident in the technology he had seen
and got to know while collaborating with the Company. That collaboration had cost
Weldability £200,000, resulting in considerably greater loss to him when ultimately he sold
that company due to the valuation method applied. He had not read all of the Articles of
Association of the Company before becoming a member, but accepted that he had no
entitlement in the Articles to be appointed a director, nor to any remuneration. He did not
recall signing a Deed of Adherence to the pre-existing Shareholders' Agreement amongst the
Company's members, but accepted that he probably had done so and had not negotiated
any right to be, or to nominate, a director. He had agreed to amendments to the
Shareholders' Agreement in December 2019 without demur. He was aware that members'
pre-emption rights could be dis-applied with the consent of the holders of 80% of the issued
shares. Dr Stevenson had told him, pre-investment, that no paid management role was
available. He had relied on the content of the February 2016 business plan provided to him
in deciding whether to invest, and in particular on the experience and knowledge of the
Company's directors as reflected therein, but accepted that no guarantees had been given.
[13]
He had been friendly with Dr Stevenson, but disagreed with money being spent
exclusively on research and development in connection with the oil and gas industry when
7
progress could also or alternatively have been made in the water pipeline field. So far as his
assessment of the other respondents was concerned, Mr Doug Everard appreciated that his
shareholding was small in comparison with Dr Stevenson, and so did not challenge him, at
least in board meetings. Mr Aqeel Abdullah was a professional diplomat who might raise
his eyebrows from time to time in private conversations, but would not rock the boat at
board meetings. Mr Christopher McCann's expertise was in venture capital, not in pipe
engineering. Some of what had happened, and was being complained of, was the result of
Mr McCann's involvement in and influence on the Company.
[14]
When the COVID-19 pandemic broke out, the Company was unsure how its business
was going to continue. A CBILS loan was suggested, but Mr Hawkins was informed by
friends in the banking business that the Company did not qualify for such a loan as it was
not trading. However, Dr Stevenson and Mr Everard had insisted that they wanted every
director of the Company to sign a form so that the Company's bank, to which application for
the CBILS loan was being made, could assess their creditworthiness. Mr Hawkins had told
the board that the Company would not get the loan because it was not trading, and that he
did not want to sign the form. He was also concerned about bringing in third party lenders,
what the loan money was for, and how it would be repaid. At the board meeting on
10 August 2020, Dr Stevenson had explained that he wanted the loan to finance the
Company's required contribution to a grant scheme. Mr Hawkins suggested that, if the
Company needed money, the shareholders should all invest more in proportion to their
existing shareholdings, but Dr Stevenson had ignored that and insisted that if Mr Hawkins
did not sign the papers required for the CBILS loan application, he would be in breach of his
fiduciary duties to the Company and would have to resign from the board. In these
8
circumstances, Mr Hawkins had decided to resign. He had not subsequently been invited to
return to the board.
[15]
After his resignation, he was much less involved with the Company and was made
to sit on the sidelines. He was not invited to attend board meetings. He had been offered
the role of commercial adviser to the Company, which he accepted, but there were no duties
to be performed; it simply permitted his name to be used in documents which gave the
appearance of his continued involvement. He began to talk more at this stage with a fellow
investor in the Company, Othman Rafay, who shared his concerns about the lack of
commercialisation and return on his investment.
[16]
In 2019, the Company was paying its executive directors, Dr Stevenson and
Mr Everard, but there was no scheme for the remuneration of non-executive directors or
shareholders for the work they were doing for the Company. Dr Stevenson told those others
that he would create a growth share scheme so their efforts would be rewarded by further
share allotments, at a notional value of £21,000 per annum converted into shares valued at a
point when major investment was attracted to the Company. Mr Hawkins was persuaded
by this idea that the time and energy he was putting into the Company's affairs was being
seen as beneficial and that there would be some return on his investment. He was also
influenced by it to make his final investment in the Company, which amounted to £40,050,
in December 2019.
[17]
Mr McCann had then been appointed the Company's financial officer responsible for
the proposed bonus scheme, which the board meeting in March 2020 had agreed to
progress. Mr McCann had proposed a different share bonus scheme, maintaining that the
earlier scheme had proved unworkable for tax reasons. That new proposal was brought to
the June 2020 board meeting and agreed. On Christmas Eve 2020, Dr Stevenson had emailed
9
Mr Hawkins apparently proposing to reduce the notional rate of remuneration for the
scheme to £10,000 for all work done to that date, although the details were unclear. Queries
about that were referred to Mr McCann, who in turn referred them back to Dr Stevenson.
Subsequently the scheme was cancelled entirely, at least for Mr Hawkins.
[18]
In around March 2020, Mr McCann had first invested in the Company and had then
joined its board. He had been described as a seasoned venture capitalist, specialising in
energy and fundraising, and was supposedly tasked with finding a buyer for the Company.
He paid the same price for his shares as Mr Hawkins had paid in December 2019, namely
£150 per share, which Mr Hawkins was unhappy with as he had been involved at an earlier
stage in the life of the Company and had taken a greater risk with his capital. The price
of £150 paid by Mr Hawkins had been said by Dr Stevenson to be a 50% discount on the true
worth of the shares and was being offered as a reward for existing long-serving
shareholders. Mr Hawkins nonetheless accepted that he had waived his pre-emption rights
in relation to the investment round of early 2020.
[19]
A cash flow spreadsheet presented to the board on 10 August 2020 had suggested to
him that the Company had no cash flow concerns in the short or medium terms. At a
shareholders' meeting in September 2020, Dr Stevenson had said that there was no reason
for investors to introduce further funds as the Company's finances were stable. However,
Mr Hawkins was concerned about the Company's financial position and on 3 December
2020 had asked Dr Stevenson by email about the prospect of insolvency. He was told there
was no immediate such prospect and that a newsletter would shortly be prepared about the
Company's progress and prospects. On 7 January 2021 Dr Stevenson had emailed him
mentioning a potential new major investor and stating that the Company urgently needed
more cash to make commitments to move forward in 2021. The email stated that
10
Mr McCann had offered to invest £250,000 cash, provided he could improve his position in
the Company to an equity percentage of at least 5%. The price being paid by Mr McCann
was £37 per share. No request for investment from others was made. Mr McCann had then
invested at a price of £37 per share, which was a 75% discount from the previous price paid
by Mr Hawkins and Mr Rafay, who were not advised of the transaction in advance or
offered the opportunity of participating similarly in an investment in the Company.
Mr McCann's investment was presented as a fait accompli. A form consenting to the
disapplication of pre-emption rights had subsequently been sent to Mr Hawkins and
Mr Rafay, but neither of them had signed it. Mr Rafay had raised concerns with
Dr Stevenson, who had said that an emergency fundraising measure was required because
discussions with investors had proceeded much more slowly than anticipated, and that the
price being offered to Mr McCann was fair because otherwise he would be paying £200,000
for 1% of the Company's equity whereas Mr Hawkins and Mr Rafay would have paid the
same for 5% of the equity. Mr Hawkins had not been asked to invest, and in particular had
not been asked to invest on the terms offered to Mr McCann. All shareholders were not
consulted equally about the share allotment that took place; Mr Hawkins had been
deliberately excluded. Until that point, all members had been asked to invest when money
was being sought by the Company. Had he been asked to invest he would have done so.
The allotment to Mr McCann had been agreed to by Dr Stevenson, Mr Everard,
Mr Abdullah and Mr McCann alone. Since starting these proceedings, a suggestion had
been made that Mr Hawkins could invest now at the price paid by Mr McCann, but his faith
in the management of the Company had been destroyed by what had happened.
[20]
In May 2023 Dr Stevenson had said that the Company was facing insolvency in June,
and that Mr McCann was prepared to invest more at a share price of about £7. Mr Hawkins
11
had also been asked if he wanted to invest at that price, and had requested financial
information, but had only been presented with unaudited accounts which raised lots of
questions. He had asked for an independent third-party valuation of the Company, but
none had been provided. He and Mr Rafay had refused to consent to the disapplication of
their pre-emption rights. He wanted the other shareholders to buy his shares at fair value,
and thus provide a clean break between himself and the Company.
[21]
In cross-examination, Mr Hawkins stated that he was aware of the distinct roles of
shareholders and directors in a company. He had been provided with information about
where the Company intended to go and had made his investment under the Enterprise
Investment Scheme, which brought limited tax advantages. Dr Stevenson and Mr Everard
had appeared to be highly credible individuals.
[22]
He had taken the Company's 2016 business plan into account in deciding to invest,
and relied on the directors' knowledge in assessing and mapping out the future course of
the Company, but accepted that it offered no guarantees. As matters turned out, large
amounts of money were spent on research and development, but Dr Stevenson had no real
interest in involving the Company in actual business.
[23]
He had been on friendly terms with Dr Stevenson, but the latter dominated the
Company and wanted to keep spending money on research and development when
business opportunities were available in the water industry. Mr Hawkins had made his
views known to the board, but it wanted to focus on oil and gas pipelines despite the global
transition away from such energy sources.
[24]
He had offered to invest on a pro rata basis with other shareholders in the Company
in August 2020, on the basis that the CBILS loan then under contemplation was not taken.
No one was interested in that proposal. The Company was not trading and was not eligible
12
for the CBILS loan. There was no income to enable the Company to pay loan interest. All
the Company did was look for financial aid for research and development. It had no
customers for its product and thus no means of making a profit. He was willing to invest
further so long as no bank loan was taken by the Company. He had resigned from the board
on the basis that he was asked to do so by Dr Stevenson because he had refused to sign the
documentation which the bank wanted for the CBILS loan application. He was told that he
was in breach of his fiduciary duties and should resign. He had no other option. He had
been proven to be right about the Company not being eligible for the CBILS loan. After his
resignation, he was not invited to board meetings or to rejoin the board. Mr Rafay was no
longer invited as an observer either. They both wanted to know where their money was
being spent.
[25]
At the end of 2020, the Company did not need cash urgently. Dr Stevenson had said
as much to him in writing in December. The information document circulated on
18 December 2020 indicated that the Company could moderate its expenditure and continue
some sort of operation with help from its shareholders. Mr Everard's cashflow projections
had suggested that a loan from Innovate UK, a government-backed entity, would be
forthcoming and that the Company would cut its cloth to suit its resources. The Company
had always had cashflow issues on the horizon, and there was nothing to suggest that the
situation was any different at the end of 2020. However, he accepted that the board might
have been in good faith in determining that the Company did need funds then. He would
have been prepared to put money into the Company at that time if need be, but was not
invited to do so. Mr Everard had not telephoned him to talk about the situation. He had not
agreed to waive his pre-emption rights when asked to do so. All shareholders had not been
consulted equally about the allotment to Mr McCann. That had been approved at a board
13
meeting on 29 January 2021 by Dr Stevenson, Mr Everard, Mr Addullah and Mr McCann.
Mr Hawkins had made no offer of investment at that point, but he was not afforded a
reasonable opportunity to do so. In previous investment rounds, he had always been asked
to invest. On this occasion, he and Mr Rafay had been deliberately excluded from
participation. Had he been asked on this occasion, he would have invested again. His
holding had been diluted by the issue to Mr McCann, as had the holdings of other members.
He and Mr Rafay had taken a bigger gamble in investing than Mr McCann had, but the
latter had been allowed to invest at the same price initially, and then at a far lower price.
That was unfair.
[26]
In the 2023 investment round, the board had followed the correct procedure by
asking him and Mr Rafay to invest. The price was £7 per share. However, no accounts for
the Company had been provided. A valuation and audited accounts had been requested.
A balance sheet was provided but various entries were in the wrong place, and no audited
accounts were ever forthcoming. He could not comment on what Mr McCann was prepared
to pay, or whether the Company needed cash at that point. The board members had been in
favour of the allotment. Dr Stevenson, Mr Everard and Mr Abdullah had all agreed to be
diluted, but since Dr Stevenson had not spent much on his shares, he might not have been
overly concerned about that. Mr Hawkins and Mr Rafay had been diluted without their
consent.
[27]
The board meeting of March 2020 had agreed to a scheme for remuneration along the
lines of the allotment of growth shares to the value of £21,000 for work done to that date.
Then Mr McCann had come along and that was said to be unworkable. Mr McCann was
asked to draw up a new scheme using the same values. The board meeting of August 2020
set up a remuneration committee, but Mr Hawkins then resigned from the board. He had
14
been offered the post of commercial adviser to the Company, but that turned out to be a
sinecure and he was not actually asked to do any work in that or any other capacity.
Mr Rafay and he were sent letters by Dr Stevenson on Christmas Eve 2020 which mentioned
the figure of £10,000, but it was not clear whether that was in substitution for or in addition
to the figure of £21,000 previously mentioned. Enquiries in that regard had received no
answer. The executive directors had been taking large sums of money by way of
remuneration by the end of 2020, while at the same time saying that the Company had no
need for more cash. Mr McCann was milking the company in terms of acquiring shares at a
low price.
[28]
In re-examination, Mr Hawkins stated that the original remuneration scheme had
been approved by the board in March 2020 and all that remained to be settled were the
mechanics of how it was going to work. Then a new scheme was introduced by Mr McCann
in June. At the August board meeting, Mr Hawkins had been pressurised to sign the CBILS
loan application documents. He was not prepared to do that, and decided that he had to
resign. It was his decision.
Othman Akbar Rafay (40)
[29]
Mr Rafay, a cyber security management consultant, said that he knew the respondent
Mr Everard through a school association and became aware that he was working for the
Company. He was attracted by the Company's innovative pipeline and decided to invest in
it. His friend Mr Abdullah, an Omani diplomat, had decided at the same time also to invest.
Neither knew Mr Hawkins at that time. His decision to invest was based on business plans
showing a 5-year plan to full commercial implementation and sales. Similarly, before he
invested further in December 2019, Dr Stevenson had produced a presentation suggesting
15
that commercial sales would start in 2021-2022 and that there had been turnover of £527,000
in 2017-2018 and £750,000 in 2018-2019. He had only realised recently that what was being
talked about were government grants, not money generated by selling products. The
presentation had valued the Company at £50 100 million at that point. He had invested a
total of £240,000 in the Company; £40,000 in 2016; £80,000 in the course of each of 2018
and 2019; and £40,000 at the end of that year.
[30]
Mr Rafay confirmed that he was an experienced businessman and that he was aware
that his investment in the Company would be attended by some degree of risk. Before
investing, he had looked through the Company's Articles to some extent and had paid a
lawyer to go through them and see if anything stood out. He had expected the information
given in the 2016 business plan to be accurate. He had talked about the Company with
Mr Everard to some degree over a few months before investing. He had also understood
that he had no right to remuneration under the Articles, and that there was no restriction on
the allotment of shares by the board. He believed that he had adhered to the Shareholders'
Agreement in force at the time of his investment. He had signed the revised such
Agreement in December 2019, and indeed had taken legal advice on it. He was aware that
the holders of 80% of the issued share capital could decide to disapply pre-emption rights.
[31]
Once a member of the Company, he had come to appreciate that Dr Stevenson was
very much in charge. Mr Abdullah might privately disagree with Dr Stevenson, but would
always end up siding with him. Mr Rafay was invited to observe board meetings despite
not being a director. He did not work for the Company on a daily basis, and was not
involved in its routine management.
[32]
He had not known Dr Stevenson until he invested in the Company. He found
Dr Stevenson challenging to deal with from time to time. Although Mr Everard was easier
16
to deal with, it was Dr Stevenson who had the power in the Company and was in charge.
Originally, the shareholding in the Company had been split 90% to Dr Stevenson and 10% to
Mr Everard. When he, Mr Hawkins and Mr Abdullah first invested in 2016, it was based on
an enterprise value of the Company of £2 million. In subsequent fundraising rounds, all
shareholders were invited to invest. Just before Mr McCann's introduction as a shareholder,
Mr Hawkins and Mr Rafay were significant minority shareholders, with a stake of just
under 6.1% each, with Mr Stevenson on 73.9%. After Mr McCann's investment of £200,000
in the first quarter of 2020, he held around 1% of the share capital, resulting in a dilution for
Mr Hawkins and Mr Rafay to just under 5.7%, representing a potentially significant
reduction in the value of their holdings. Presently, the Company's shareholdings were:
Dr Stevenson - 70%; Mr Everard - 6.6%; Mr McCann - 6.5%; Mr Hawkins - 5.7%;
Mr Rafay - 5.7%; and Mr Abdullah - 5.5%. Investors had put a total of £1.27 million into the
Company, and it had received several times that amount in government grants.
[33]
He had understood that he had no right to be a director. He was offered a
directorship when he first invested, but did not wish to take up the offer as he was thinking
about setting up his own cyber security consultancy and wanted to keep his corporate
interests separate. He had been told that the door would always be open. Dr Stevenson had
invited him to every board meeting as an observer and he would provide a lot of advice and
comments. He had expected that situation to continue.
[34]
He had not been involved in the discussions Mr Hawkins had had with
Dr Stevenson about the CBILS loan. Dr Stevenson had said that Mr Hawkins was not
playing ball and the board would have to force him to resign. Mr Hawkins had been
looking for an income stream from the water industry, but that idea had been dropped by
the board for reasons unknown to Mr Rafay. After Mr Hawkins resigned from the board,
17
Mr Rafay was no longer invited to observe board meetings, with no explanation given by
Dr Stevenson. He had attended after the September 2020 board meeting virtually, not
having been invited to come in person. Mr Everard had told him that Dr Stevenson and
Mr McCann did not want him to attend. He ceased to receive board meeting minutes and
was given very little information about the Company's performance and financial situation,
despite telling Dr Stevenson that he wanted to be involved. His relationship with
Dr Stevenson and the other directors had broken down because Dr Stevenson had stopped
providing him with information or giving him the full picture about the Company and its
business.
[35]
As Mr Rafay was doing a lot of work for the Company by 2020, Dr Stevenson had
said that he wanted to provide a reward in the form of a bonus share scheme which would
pay out when there was free cash flow in the Company. Although he was not actively
involved in the Company's management, he had worked for it on an ad hoc basis. He was
referred to as an adviser. The original suggestion had been that Mr Rafay and Mr Hawkins
would be given £21,000 worth of growth shares linked to performance for the work they had
done to that date, so at an exit point those shares could be worth a lot more. At the next
board meeting, no one had any objections, so the matter was sent to the Company's
accountants to implement it. Then, in July 2020, he was told that there was to be a change
from growth shares to a share bonus scheme. On Christmas Eve 2020, the number being
mentioned had become £10,000, which he had assumed was in addition to the £21,000
already offered. Dr Stevenson had terminated the scheme without telling him and wanted
to put some other scheme in place to which he had not agreed. When lawyers were
instructed in connection with the matters which had come to form the subject matter of the
18
present litigation, discussions on the subject had ceased. He had ultimately received
nothing by way of remuneration.
[36]
In the second half of 2019, Dr Stevenson had indicated that a US company called
Prime Natural Resources was intending to make an investment in the Company of about
£17.5 million and was looking to purchase shares at £500 per share. He had offered to give
the current shareholders in the Company an opportunity to invest at a 50% discount which
would only be available to them, so that they could purchase at £150 a share instead of a
notional price of £300. Mr Rafay thought it best to top up his investment then, before the
share price increased, and had invested £40,000 in December 2019, as had Mr Hawkins.
[37]
A few months later, Mr McCann, who was a friend and business colleague of
Dr Stevenson, was allowed to invest at £150 per share even though he was not already an
investor. Mr Rafay had asked for an explanation from Dr Stevenson, but did not receive one
that he thought satisfactory. That seemed to change the whole dynamic of the Company,
with Dr Stevenson asserting control and Mr Hawkins ultimately resigning from the board.
Mr Rafay had signed a waiver of his pre-emption rights when Mr McCann became a
member of the Company. He had no issue with Mr McCann becoming a member; his issue
was with the price he paid for his shares. Mr McCann had not been on the same journey as
Mr Hawkins and himself, nor taken the same risks, but he still got the supposedly
advantageous price of £150 per share. When he had put that objection to Dr Stevenson, he
was just told that it was what it was, and that a business plan was a work of fiction. He did
not feel valued as a shareholder after that, but rather offended and insulted.
[38]
In January 2021, Dr Stevenson had allotted shares to Mr McCann and himself at
£37 per share. The first Mr Rafay had heard of this was when Mr Everard told him about it
in the course of a telephone call in early January. That the Company supposedly needed
19
money came as a surprise. In a discussion paper for the June 2020 board meeting there had
been a table and graph showing the Company's milestones and its enterprise value as it hit
those milestones. That noted that the value of the Company was £60 million, equating to a
share price of £437 per share. In July 2020, an investors' newsletter had said that Prime
Natural Resources was still interested in the Company. In August 2020, the Company had
provided a cash flow document which said that under the worst-case scenario, in
January 2021, the business would have over £232,000 in cash. On 9 August 2020, a business
plan gave the Company's valuation as $60 US million. On 3 December 2020, by email,
Mr Hawkins asked Dr Stevenson if the company would still be solvent in 6 months and had
been told that there was no immediate prospect of insolvency and that management would
prepare a newsletter on the Company's progress and future prospects. On 18 December
2020, Dr Stevenson issued an update to shareholders dealing with funding, stating that two
equity investors were in talks about initial investment, and mentioning that a UK-based
venture capital trust investor might invest at a valuation of £15 million, give or take about
£5 million subject to due diligence. There was nothing in that update to show that there was
an urgent need for cash, and no request for Mr Hawkins or Mr Rafay to invest further.
Mr Rafay raised concerns about the apparent share devaluation with Dr Stevenson, but most
of his questions were ignored and he had been told that the discounted price had been given
in order to be fair to Mr McCann. Mr Rafay would have been prepared to invest further so
long as that was pro rata with other shareholders. He had invested in 2016 thinking that the
Company was worth £2 million. He did not accept that the Company had a need for cash at
the end of 2020. The cash flow forecasts in the latter half of 2020 suggested that if external
funding was not won, cash burn rate could be reduced for several months and then
shareholders would be approached. In fact, at the end of 2020 the burn rate had been
20
increased and a 7-day period for fundraising had been imposed unnecessarily. The
Company's bank statements showed that remuneration to Dr Stevenson and Mr Everard
had increased towards the end of 2020, just when they were saying that the Company
needed cash. Mr Everard had telephoned him and told him that the board was going to
allot shares to Mr McCann at a price of £37 per share, and that that price had been fixed
between Dr Stevenson and Mr McCann, the latter of whom he described as being
opportunistic. There was no justification for the devaluation from an inferred valuation of
£60 million in June 2020. At the August 2020 board meeting, he and Mr Hawkins had
offered to invest more in the Company on a pro rata basis with the other shareholders, but
that was not taken up. The shareholders were not consulted, treated equally, or asked to
invest; Mr Everard had told him that the deal with Mr McCann was done, and that had
resulted in an 18% dilution of Mr Rafay's holding in the Company.
[39]
In May 2023, Mr Rafay and Mr Hawkins had been told through their solicitors that
the Company needed more investment and that Mr McCann had offered to invest based on
a valuation of the Company of £1 million. However, Dr Stevenson's valuations of the
Company had varied widely over time and so they had asked for an independent valuation
which Dr Stevenson had said was a waste of resources, even though he and Mr Hawkins
had offered to pay half the cost. Dr Stevenson had provided some management account
information to his solicitors, but it had not formed an adequate basis for investment.
[40]
In cross-examination, Mr Rafay stated that his investment had been on the basis of
the Enterprise Investment Scheme, which gave limited tax benefits. He had seen the 2016
business plan for the Company and, while he knew it was subject to review, expected the
information in it to be accurate. He had agreed to the revised Shareholders' Agreement in
December 2019, and thought he had had legal advice about it.
21
[41]
Mr Everard had 10% of the Company when Mr Rafay became involved, but it
transpired that he did not have as much sway in its affairs as Mr Rafay had previously
thought. Dr Stevenson controlled things. Mr Everard could form his own views, but in the
end would side with Dr Stevenson. Mr Abdullah was a friend whom Mr Rafay saw two to
three times a month. In private, he would agree with Mr Rafay about the Company's affairs,
but ultimately would also side with Dr Stevenson. Mr McCann was someone of
independent mind.
[42]
After becoming a member of the Company in 2016, he had been invited to board
meetings and Dr Stevenson would call him from time to time in order to ask his opinion
about things. He had told Dr Stevenson that he would like to become a director at the right
time, and had maintained that position until 2019. Mr McCann had become a member of the
Company in March 2020 and Mr Rafay had agreed to waive his pre-emption rights on that
occasion. He had not spoken to Mr McCann about his views on the share price issue which
arose at that time. He did not know Mr McCann well; Dr Stevenson described him as a
friend, had known him since 2007, and trusted and respected him.
[43]
When he invested in 2016, he thought the Company was worth £2 million. He did
not accept that the Company had a need for cash at the end of 2020. The cashflow forecast
circulated on 18 December 2020 suggested that the rate at which the Company was going
through cash could be reduced and then shareholders might be approached. Dr Stevenson
had told Mr Hawkins earlier that month that there was no need for money. In fact, the
Company started spending more money towards the end of 2020, to pay the executive
directors and more staff. Nonetheless, the cashflow forecast suggested that, even on the
worst-case scenario, money would not be a problem until April 2021. That situation did not
justify fundraising over a 7-day period in January. In early January, Mr Everard had
22
telephoned him and told him, before the relevant board meeting on 7 January, that it was a
done deal that the board was going to accept an offer of investment from Mr McCann at a
price of £37 per share, that price having been fixed between Mr McCann and Dr Stevenson.
In June 2020, it was being said that the value of the Company was £60 million. As late as
December of that year, it was being said that venture capital investors were interested in the
Company. There was no justification for a devaluation of the share price to £37. Everyone
should have been treated equally. In previous investment rounds, existing members had
been approached and asked for further investment. On this occasion, there had been no
prior consultation and Mr Rafay was reduced to asking questions after the decision to accept
Mr McCann's offer had been made in principle by the board. The deal was said by
Dr Stevenson to be fair to Mr McCann, but he was given preferential treatment and that was
not fair to Mr Rafay and Mr Hawkins. Mr Rafay's holding had in consequence been diluted
by 18%. At the board meeting in August 2020, Mr Rafay and Mr Hawkins had indicated
that they would be prepared to make further investment on a pro rata basis, but in December
they were not asked to invest.
[44]
In the 2023 investment round, the Company had asked Mr Rafay, through solicitors,
whether he wanted to invest. He and Mr Hawkins had asked for the Company balance
sheet and financial statements. They had no data on which to make an investment decision.
They wanted an independent valuation, as the share price had varied so widely. They
offered to pay half the cost of the valuation, but Dr Stevenson refused, saying it was a waste
of time and resources. The price per share being asked for in 2023 implied a valuation of the
Company of only £1 million, which made no sense when it was worth twice that in 2016
without all the progress that had meantime been made. He wanted to protect his
investment in the Company. The 2023 round had diluted his holding. Others had also been
23
diluted, but Dr Stevenson had not put in as much as Mr Hawkins and Mr Rafay, and
Mr Everard had received his shares for nothing.
[45]
Mr Rafay had not been involved in Mr Hawkins's discussions about the CBILS loan.
He simply wanted matters sorted out. There had been a disagreement amongst the
members of the board, but it had not reached boiling point. Mr Hawkins had wanted the
Company to diversify into water pipelines, and Dr Stevenson seemed to think that that was
a good idea, but it was dropped for some reason unknown to Mr Rafay. He had suggested
an Initial Public Offering based on hydrogen pipelines, which would also have been a
cheaper option than oil and gas, but Dr Stevenson did not want to lose control of the
Company. Mr Everard had told him that Dr Stevenson and Mr McCann did not want him
to attend the September board meeting.
[46]
In relation to remuneration, Dr Stevenson had said that a scheme would be put in
place if there was free cash in the Company. In March 2020 a mechanism was suggested to
reward him and Mr Hawkins for their investment in December 2019 and for the work they
had done to that date. At the March board meeting, no one had any objections to it, so the
matter was sent to the Company accountants to implement it. It was described as an "offer"
in other conversations and was to reward them so that the Company did well. Further
proposals had been laid before the board in the summer of 2020. On Christmas Eve that
year Dr Stevenson had sent him a further proposal, but it was unclear whether this was in
addition to or in substitution for what had previously been discussed. That never became
clear. After Mr Hawkins and Mr Rafay engaged lawyers, communication with the other
directors was undermined.
[47]
In re-examination, Mr Rafay said that the initial remuneration proposal involved
£21,000 worth of shares, and everyone was in agreement with that. Even after Mr McCann
24
revised the scheme, that was the sum being talked about as annual remuneration. The
August board meeting had established a remuneration committee to develop the
implementation details of the scheme. Then Dr Stevenson had forced Mr Hawkins to step
down from the board. Mr Rafay was not actively involved in the management of the
Company, but did work for it on an ad hoc basis. He and Mr Hawkins were referred to as
"advisors". He was never invited to a board meeting after Mr Hawkins had resigned,
although he had told Dr Stevenson that he wanted to be involved.
[48]
When Dr Stevenson replied in December 2020 to the enquiry made by Mr Hawkins
as to the solvency of the Company over the next 6 months, Mr Rafay had seen the reply and
thought that it meant the Company was fine for that period. The cashflow forecast of
18 December 2020 had mentioned various sources of funds, and indeed a £900,000 loan had
been secured in February 2021.
[49]
The balance sheet provided in 2023 suggested that the Company was worth
£5 million at that stage, even though the shares were being sold at a price which implied a
value of £1 million. He and Mr Hawkins had been asked to invest in 2023, unlike in 2021.
Respondents' case
Aqeel Malallah Abdullah (68)
[50]
Mr Abdullah stated that all of the decisions made by the board of the Company, of
which he was a member, had been taken in line with its constitutional arrangements and
with solicitors' advice. He had always voted on board decisions on the basis of what he
thought was in the best interests of the Company. He had been a friend of Mr Rafay when
they both invested in the Company. Board decisions were made after debate and hearing
different opinions from the board members, who would vote according to their own
25
opinions. He had seen nothing to suggest that Dr Stevenson and Mr McCann had acted
together to do down Mr Hawkins and Mr Rafay.
[51]
Dr Stevenson had told him that Mr Hawkins had not been forced off the board, but
that it was his own choice to leave. Mr Hawkins had never told him that he felt he was
being forced off the board, and was surprised to hear such a claim. He was aware of no
attempt to force Mr Hawkins from the board. He had made good contributions to the
Company and to board discussions; no one wanted him to leave.
[52]
There was no share bonus scheme for him or any of the other shareholders or
directors of the Company. As a non-executive director of the Company, he had received no
remuneration. The discussions in 2020 about a possible share growth scheme had come to
nothing.
[53]
In January 2021, he knew that the Company needed a cash injection to survive.
Dr Stevenson, Mr McCann and Mr Everard had told him that, and also that Mr Hawkins
and Mr Rafay had not offered to invest. Offers to invest had been received from
Mr McCann and Dr Stevenson. Mr Rafay's subsequent questions about the allotment had
been answered by Dr Stevenson. Accepting the offers from Mr McCann and Dr Stevenson
made in January 2021 was, in his opinion, in the best interests of the Company. It caused his
own shareholding to be diluted by the same amount as those of Mr Hawkins and
Dr Stevenson (0.3% each), but the investments were necessary for the Company to survive.
[54]
In 2023, the Company had further cash difficulties and Mr McCann had offered to
make a further investment. Mr Hawkins and Mr Rafay had refused to make a further
investment after being offered the opportunity of doing so. The board had approved the
investment from Mr McCann, along with a smaller investment from Dr Stevenson, on
22 June 2023.
26
[55]
In cross-examination, Mr Abdullah stated that he received no remuneration as a non-
executive director of the Company. There was no scheme for such remuneration. Extensive
discussions about the possibility of such a scheme had taken place, but had not come to any
resolution. He was friends with Mr Rafay and Mr Hawkins, but did not always discuss
matters with either of them before board meetings. He had known in January 2021 that the
Company needed cash to survive. Dr Stevenson, Mr Everard and Mr McCann had made
that clear. Dr Stevenson and Mr McCann had invested then for the sake of the Company.
He had been told that Mr Hawkins and Mr Rafay had not offered to invest, but had no direct
knowledge of the matter of what offers might have been made, either at that time or
previously.
[56]
Mr Hawkins had not been forced to resign from the board in August 2020. He had
gone of his own free will. Dr Stevenson had told him so.
[57]
In re-examination, Mr Abdullah stated that the board had never approved any
non-executive director remuneration scheme, so far as he was aware. He was aware that a
disagreement about applying for a CBILS loan had arisen between Mr Hawkins and the rest
of the board in August 2020, but had no recollection of any wider concerns on the part of
Mr Hawkins. There had been no attempt to remove Mr Hawkins from the board;
Mr Hawkins had never told him that he felt he was being forced off, and he was surprised to
hear that that was apparently his current position. Mr Hawkins had made a good
contribution to the Company and there was no reason to get rid of him.
[58]
He had no knowledge of Mr Hawkins ever having been given lesser or different
information about the Company's affairs than himself. That the Company needed cash in
early 2021 was something that the other directors had told him, and he had no reason to
doubt them.
27
Ian Douglas Everard (63)
[59]
Mr Everard stated that he was a Fellow of the Energy Institute and had worked in a
variety of companies, holding positions including Chairman, CEO, Managing Director,
Operations Director, business development, technical and commercial leadership roles in
the private, public and third sector.
[60]
He had been introduced to the pipeline technology that was now being developed by
the Company when he was working as Interim Commercialisation Director of ITI Energy, a
subsidiary of Scottish Enterprise. In that role he was responsible for taking the research-led
projects in their portfolio into the commercialisation phase. He had proposed and
implemented a search for a suitably qualified Commercialisation Champion for the pipeline
technology and Dr Stevenson had formed the Company to take on that role in 2010.
Mr Everard had completed his interim assignment at ITI Energy and had left to undertake
other management consultancy jobs. A couple of years later, Dr Stevenson had invited him
to join the board of the Company, which he did in December 2012. Since then, they had
been working together to bring the technology through the design, development and
proving stages to market. The Company had received around £3.7 million of public funding
and investment of approximately £1.4 million, which had allowed it to validate the
technology, create a supply chain, employ a viable team and procure a site to get ready for
potential customer visits.
[61]
His current role at the Company was as Chief Operating Officer responsible for the
site operations, contracts, procurement, human resources, bid management, finance and
quality, and health and safety. He and Dr Stevenson were the two executive directors of the
Company. He owned approximately 6% of the Company shares.
28
[62]
The business plans which Mr Hawkins and Mr Rafay had supposedly relied upon in
making their investments in the Company had made it clear that they were reasonable
estimates of likely progress, but depended on assumptions about revenues and investment.
Mr Hawkins was well aware, as an experienced businessman, that no investment was
without risk. Mr Everard had spent 6 months discussing the technology with Mr Rafay, and
his investment had been managed and recorded by the Company's lawyers. It was always
clear that this was a start-up company developing technology into a conservative industry
and that there was no certainty about outcomes.
[63]
The first round of investment involving Mr Hawkins and Mr Rafay was in 2016,
when the share price was agreed by negotiation and based on a valuation of the Company of
£2 million. For subsequent rounds of investment the executive directors developed a
milestone-based CAP Table approach to show their view of how value was being enhanced
within the Company as a result of technology development. This was discussed at board
meetings but always on the understanding that it was an internal view of value, which
would then be subjected to negotiation with potential investors.
[64]
Mr Everard and Dr Stevenson had worked together to try to engage with and secure
UK and US venture capital, which exercise had demonstrated the need for more specific
prototyping, testing, accreditation and site work prior to commercial sales. They had been
unable to obtain UK venture capital funding due to the early stage of development of the
pipe. Mr Everard had always spoken freely at board meetings and offered his thoughts,
regardless of whether Dr Stevenson, or any other shareholder, had a viewpoint that did not
align with his own. All decisions by the board, including those relating to the acceptance of
investment offers, had been made to serve the best interests of the Company. The Board had
29
always borne in mind fairness to the shareholders and any decisions made which might
serve to dilute any shareholder's interests had been taken very seriously.
[65]
During 2020 the Company had attracted the attention of a Houston-based investor,
Prime Natural Resources, Inc., and was in discussions about a possible investment. With the
advent of COVID-19 restrictions, that prospect had failed, although Prime Natural
Resources had subsequently issued Letters of Interest to the Company on 15 October 2021
and 18 November 2022.
[66]
Once Prime Natural Resources had paused their investment interest in 2020, the
Company was left in a potentially precarious position and in June of that year he had been
asked to investigate the possibility of a CBILS loan of £207,000 from the Company's bank,
the Clydesdale, bringing it to the board for an initial decision at the August 2020 board
meeting. Whilst he had had some indicative terms from the bank, he was unable to progress
the matter without actually making an application. The bank required a form setting out
personal information to be completed for each director. All of the directors except
Mr Hawkins had agreed to supply their information. There was no question about the
Company's legal entitlement to apply for the CBILS loan. It was a two-stage application
process and the bank had already confirmed that the Company was eligible for the loan,
based on preliminary information that Mr Everard had supplied. At the board meeting on
10 August 2020 Mr Hawkins did not agree with the majority decision to continue to pursue
the loan, and on the same day confirmed that he would not sign the required bank form.
Mr Hawkins had resigned from the board the next day. The application had been made to
the bank but was declined by it on 21 September 2020. That was following a bank Credit
Committee review that was only sought after the second stage of the formal application, and
which could not be completed until the directors' information was provided. Mr Everard
30
and Dr Stevenson had provided multiple cashflow forecasts showing different scenarios
demonstrating both the requirement for cash and how it was intended to use it. A larger
loan application to the UK Government entity Innovate UK was also declined but a
subsequent second application to it for a loan of £900k was successful in March 2021 and
had been drawn down over the next 12 months.
[67]
Mr Hawkins had resigned after disagreeing with the decision of the rest of the board
to apply for the CBILS loan in August 2020. He had not been forced to resign. Dr Stevenson
had advice that obstructing the decision of the board put Mr Hawkins in a difficult position.
He accepted that Mr Hawkins felt that he had been forced to resign, but that was not the
case. The offer Mr Hawkins had made to invest at that time had been conditional on
Dr Stevenson investing correspondingly. After his resignation, Mr Hawkins had not been
invited to rejoin the board, and Mr Rafay had also ceased to receive invitations to attend the
board.
[68]
A share bonus scheme to remunerate Mr Hawkins and Mr Rafay for their
contributions to the Company had been discussed and explored but tax advice had not been
favourable. It was never put in place for any of the directors or shareholders. Mr Everard
stated that he was currently the Chief Operating Officer of the Company, and had been on
the board since 2012. Until about mid-2020, the bulk of his remuneration had come through
his service company. Research and development grants were structured so as to allow him
to be paid that way. Once he began working for the Company effectively full-time in 2020,
Mr McCann had expressed some doubts about the tax treatment of such remuneration, and
he had changed to payment via the Company payroll. The rate of payment was determined
by the remuneration committee (composed of Mr McCann and Mr Abdullah, with
Dr Stevenson as a non-voting member); it was about £2,000 per month pre-tax for corporate
31
administration. His remuneration (and that of Dr Stevenson, to some extent) had increased
in the second half of 2020, but that largely reflected his standard amount plus further sums
due to him in consequence of a contract with Innovate UK.
[69]
In the run up to the share issue in 2021, the Company had been suffering from an
immediate call on cash resources. That was something it had faced periodically, as
Mr Hawkins was aware. At the end of 2020, the Company needed to know that it had the
cash available to make the medium-term commitments which its contracts required.
Mr Hawkins had enquired about the Company's solvency in December 2020, but that was
not the issue; it was cash flow for development in the medium term. Perhaps
Dr Stevenson's response to the enquiry had been too precise. Mr Hawkins had not been
asked to invest at the start of 2021, but he had not been prevented from investing either. The
same went for the other existing shareholders. It was not possible to pester existing
shareholders to invest further, and it was not thought that Mr Hawkins was interested in
investing further. All of the investment processes had started with informal discussions,
and only when the potential offer basis had been clarified to a degree had the formal process
then kicked in, and had been run using the advice of the Company's solicitors. An analysis
of the Company's cashflow position provided in advance of the board meeting of 10 August
2020 and discussed at the meeting ought to have demonstrated how precarious that
.position was. An email had been sent to the board members on 7 August noting that the
attached cashflow spreadsheet showed four scenarios:
"a base case assuming two innovate projects and some operator income but no
investment, the same case with investment, a worst-case scenario of no innovates, no
immediate income and cash burn reduced to an absolute minimum and an
intermediate case where only 1 Innovate project and half the operator income comes
in and investment delayed to Dec 2021."
32
The notes to the scenarios clearly indicated that cash was extremely tight and that there was
a real need for further funding, whether by investment or loan or both. They read as
follows:
"Without any further contract wins in 2021 and without any further investment and
no CBILS loan the company will run out [of] cash on this model in March 2021. With
the CBILS loan the company can survive through to January 2022 with relatively
low-key operations focussed on completing the accreditation documentation to get
the next level of DNV endorsement but the constructability trials would not be
started until there was at least £200k from Pipeline operators or some other contract
source. On any of the scenarios it is desirable to have the CBILS loan to bridge the
gap caused by COVID."
In the event, one of the Innovate grant bids included in the August 2020 scenarios was won,
so the worst case was avoided, but the Company still had to contribute £43,000 of its own
funds. A further communication to members on 18 December noted that further investment
from shareholders would be needed. The price Mr McCann offered, and which was
accepted, was relative to the position of the Company at the time in question. It had been
open to Mr Hawkins and Mr Rafay to offer to invest at that same price and therefore avoid
any dilution. The effect of the investment round in early 2021 was dilution of all
shareholders except Mr McCann (given he was the one principally making the investment).
Mr Hawkins and Mr Rafay had been diluted by 0.3%, Mr Everard by 0.4% and Dr Stevenson
by 3.2%. There never was a market value for the Company's shares. Prices could be related
to the Company's value should possible large-scale investment being discussed at the time
take place, but such investment never came. He had not been happy with the shares price
offered by Mr McCann at the start of 2021, but it was the only offer on the table and the
Company needed the cash, so there was little option but to take it.
[70]
Due to personal circumstances in mid-2021, Mr Everard chose to raise some capital
by offering some of his shares in the Company to the other shareholders. Only Mr McCann
33
made an offer, and in May 2021, Mr Everard sold him 1,386 shares at a price of £26.70 per
share, which was based on the average price Mr McCann had paid for investing in the
Company to date over two rounds, discounted for the fact that there would be no Enterprise
Investment Scheme tax reliefs or benefits available to him in respect of those shares.
[71]
In cross-examination, Mr Everard stated that he had been remunerated between 2012
and 2020 for his work as chief operating officer and executive director of the Company by
way of charging professional fees to the Company's grant-funded projects via his service
company, Woodlands Power Limited, at a rate of approximately £2,000 per month. Those
rates were more than a start-up company could typically have afforded. The Company
could not have met payroll commitments during periods when it had no revenue. By
mid-2020, his work for the Company was becoming more full-time in nature than
previously, and Mr McCann had raised a concern that charging fees via a service company
was no longer proper in those circumstances. Thereafter, he was remunerated for corporate
administration via the Company's payroll.
[72]
Mr Hawkins had resigned from the board after declining to complete the forms
required by the lending bank in connection with the CBILS loan that the board had agreed
should be applied for in August 2020. Mr Hawkins was against the making of any loan
application at all. He was not forced to resign. He would have told Mr Everard had there
been any discussions with Dr Stevenson in which he had been pressurised to resign. All that
Dr Stevenson had said was that he had advice that the fiduciary duties of board members
put Mr Hawkins in a difficult situation. Mr Hawkins had offered to make a further
investment in the Company, but it was conditional on the majority shareholder,
Dr Stevenson, investing correspondingly. That offer had not been ignored, but it had not
been taken up either. Mr Hawkins had not been asked to rejoin the board after the failure of
34
the CBILS loan application. Nor had Mr Rafay been further invited to observe board
meetings. It was untrue that Mr Everard never disagreed with Dr Stevenson in public; they
sometimes disagreed both in private and at board meetings (although he could not
immediately think of any specific example of the latter).
[73]
Mr Everard agreed that the Company's bank statements showed that payments
of £1,600 net of tax had been made to himself and Dr Stevenson in May, June and July 2020,
which had slightly increased in August. In September, Dr Stevenson had received a reduced
amount, while he had had the usual amount. In October, November and December 2020
Mr Everard had received £4,080, £4,760 and £4,760 respectively. He had received
about £10,000 in December, £3,920 of which he believed to be travel expenses. The increased
payments had been due to work charged to a project the Company was working on. There
had never been a remuneration scheme for non-executive directors. An initial growth share
scheme had been abandoned. A revised bonus scheme had been devised by Mr McCann in
June 2020 and sent to a remuneration committee for the details to be ironed out and to be
brought before the September board meeting. By that time Mr Hawkins and Mr Rafay had
ceased to be involved in the management of the Company.
[74]
The Company had had £150,000 in its bank account in July 2020, dropping
to £130,000, £105,000, £65,000, £65,000 and £15,000 respectively in each subsequent month of
the year. In January 2021, £150,000 had been paid in. By that stage the Company urgently
needed to make commitments for the grant-aided project it was engaged in, and had to
know that the requisite cash would be available to it. In December 2020, Dr Stevenson had
told Mr Hawkins that there was no immediate prospect of insolvency. That had been a very
precise statement - perhaps too precise, since there was still a need for cash in order to
enable the development work of the Company to proceed, as the cash flow statements
35
provided to members since August had made clear was a real prospect should hoped-for
external investment not be secured.
[75]
Mr Hawkins and Mr Rafay had been asked to waive their pre-emption rights on
7 January 2021. In common with other shareholders, they had not been asked to invest, but
neither had they been told that they could not do so. They had not been pestered to invest.
Mr Everard had telephoned them both at the time, but had not said that what was
happening with Mr McCann was a "done deal". The deal with Mr McCann was a fair one
and the Company was in a difficult position. He knew that his was the only offer on the
table. It was a "take it or leave it" situation. Dr Stevenson had negotiated with him and was
reluctant to make the deal, but Mr Everard thought it was the best available. Mr Hawkins
and Mr Rafay had bought shares in December 2019 at £150 each, a 50% discount on a
notional valuation associated with a large institutional investment, but there was no market
value for the Company's shares. In January 2021, Dr Stevenson might have been curt in
responding to Mr Rafay's enquiries about the allotment to Mr McCann, but there was a real
cash flow problem which had to be solved. The context was that Mr Hawkins had not been
demonstrating any commitment to the Company and was not interested in further
investment.
[76]
In re-examination, Mr Everard stated that he had voted to accept Mr McCann's offer
because the Company desperately needed funds in order to be able to fund its contribution
to work in respect of which it would in due course receive grant aid. He was not happy
with the price, but the Company needed the cash. The investment offer which Mr Hawkins
had made in August would have required a pro rata contribution from Dr Stevenson, which
was not a credible offer. Mr McCann's offer had required some further investment from
Dr Stevenson, but was not a requirement for a pro rata contribution. Mr Hawkins and
36
Mr Rafay had their own views as to how the Company's business should proceed, leading to
the resignation of the former, but decisions had to be made by the majority shareholders.
Christopher McCann (76)
[77]
Mr McCann stated that he was a Chartered Accountant with experience over many
years in corporate finance and private equity enterprises. He had known Dr Stevenson
since 2003 and was introduced by him to the Company in January 2020. He had been
impressed by the potential for the pipe but appreciated that the development timescale
would be lengthy, capital requirements high and technical risk considerable. The oil and gas
industry was also a conservative market that was going to be difficult to break into. It was
correct that he and Dr Stevenson enjoyed a friendly business relationship, but they were not
personal friends outwith that context.
[78]
Mr Hawkins had been focused on quick sales and had little understanding of the
regulatory process and the procedures that oil and gas companies would follow. His
suggestion that the Company should explore opportunities for use of the products for water
so that it could start generating an income was looked into, but it was ultimately decided
that the Company's limited resources should be focused on the oil and gas industry.
Dr Stevenson wanted commercial sales, as he was well aware that without sales, the
business could not raise the major funding that it required for full commercialisation.
However, he was also very aware of the regulatory and other procedures that required to be
followed and he had a realistic approach to commercialisation.
[79]
There had never been a remuneration scheme agreed for non-executive directors or
advisors of the Company. That remained the position. When he became a director of the
Company, he was asked to consider a scheme for such remuneration. He was of the view
37
that the Company could not afford to pay remuneration in cash, but designed a contingent
bonus scheme which would only pay out when the Company could afford it, ie when it was
generating free cash flow of at least £5 million per annum. Draft Heads of Terms for such a
scheme were accepted in concept by the board, subject to getting tax advice and a formal
legal agreement. Before those conditions could be implemented, Mr Hawkins resigned from
the board and Mr Rafay ceased co-operating with it. The scheme would have been costly
and would have absorbed valuable management time. In view of that, the scheme was
abandoned and Mr McCann and Mr Abdullah continued to work as non-executive directors
without payment. Mr Hawkins and Mr Rafay had in effect withdrawn their labour and had
no contract of employment, so they were owed no remuneration.
[80]
He became a shareholder in the Company in March 2020, taking advantage of the tax
benefits of the Enterprise Investment Scheme. At the end of June 2020, he joined its board as
a non-executive director and took a particular interest in the financial side of the business.
When he was introduced to the business, there were two major factors which affected the
pricing of the shares he bought. Firstly, the investment round had already commenced and
existing shareholders had committed funds at a price of £150 per share, which capitalized
the business at around £20 million. Secondly, Dr Stevenson had received a visit from Prime
Natural Resources, a substantial US investor which indicated that it was prepared to
consider an investment of £20 million at a capitalization of £60 million. He had seen
the 2020 - 2025 business plan but primarily relied on his confidence in the management team
and the pipeline technology. Accordingly, he invested £199,950 to acquire 1,333 Ordinary
Shares in March 2020 under the EIS scheme. He would never have considered paying
double the price in comparison with other investors in the 2020 round. He had never seen a
38
situation where a new investor agreed to pay a higher price in a single investment round
compared to existing shareholders.
[81]
During the course of 2020, efforts to raise capital from UK and US sources proved
fruitless due to the perception that the business was at too early a stage to merit investment.
Towards the end of 2020 it was clear that the Company was approaching a liquidity crunch
and the business was facing insolvency in early 2021. Government-funded grants or loans
were potentially available, but would take more time to get than the Company had. He
considered that the market for early-stage investment in the business was non-existent, and
that he had a choice either to cut his losses, or provide additional capital to give the business
a chance of survival. He made clear to Dr Stevenson that any further investment from him
would be on hasher terms than before, and that other existing shareholders should have the
right to avoid dilution. In the event, no other shareholder except Dr Stevenson offered to
invest. Mr McCann invested £250,009 at a price of £37 per share for 6757 shares. The
procedure followed was the one specified in the Shareholders' Agreement. Mr Hawkins
and Mr Rafay raised no objections to the share issue at the time. There was nothing to stop
them or the other shareholders making an offer of investment at the same time. They were
told of the financial position of the Company and the terms of the offer Mr McCann was
making. They made no offer. Dr Stevenson was unhappy that the share price had dropped,
but was realistic about the situation. The suggestion that Mr Hawkins and Mr Rafay would
have been prepared to invest further at that stage was only made during the litigation, not
before. In truth, it was apparent that they were no longer interested in supporting the
Company with fresh capital in early 2021.
[82]
The Company had still not raised external capital. It was facing insolvency again
in 2023. Mr McCann stepped in again with a £125,000 investment, as had Dr Stevenson
39
with £20,000. An identical procedure for raising this capital was used as had been the case
in the earlier non-controversial fundraisings. Mr Hawkins and Mr Rafay raised no objection
to the procedure and could themselves have participated in the fundraising, but chose not to
do so.
[83]
In cross-examination, Mr McCann stated that the valuations of the Company which
had been stated from time to time in connection with potential institutional investment were
high estimates, would have been subject to a great deal of due diligence, and would
probably not actually have been achieved. The Company's business plans had been drawn
up in good faith, but no one could foresee the future. The capital requirement of £10 million
or so which the plans had envisaged being raised had never been met, so their goals were
never achieved.
[84]
He recognised Dr Stevenson as someone who had built a complex business in the
past and had faith in the Company's management team, more so than in the valuations in
the business plans. He had initially invested £199,950 for 1,333 shares at a price of £150 each.
Dr Stevenson had told him that Mr Hawkins and Mr Rafay thought that he should have
paid a higher price than them, but he had not discussed the matter with them. He
considered it fair that he should pay the same price as them in the same allotment round.
[85]
By the end of 2020 and the start of 2021, the Company was facing a deepening
liquidity crisis which looked as if it might come to a head in March or April 2021. It was
unable to take a UK Government grant because of the need for it to make an upfront
financial contribution to the work which the grant would have facilitated. The Company
might have had to be mothballed to avoid insolvency. Institutional investors did not want
to buy into the Company because they thought its development work was at too early a
stage and posed too high an investment risk. A document circulated to all shareholders on
40
18 December 2020 had included a cash flow forecast prepared by Mr Everard from which
the situation clearly appeared, and which had been accompanied by a suitable narrative. In
these circumstances he was prepared to invest further in the Company, but only on tougher
terms than before. There was no point in a formal valuation of the Company at that stage,
but he had a value of £5 million in mind as being the level at which he would be willing to
buy further shares. That would reflect the difficulties which the Company was facing. He
had driven the share price in the transaction, and the board had had no real choice but to
accept that. It appeared that he was the only one willing to put in further substantial sums
at that time, which disappointed him. He did not wish to damage the Company's prospects
by paying too low a price for more shares. His purchase had resulted in no more than trivial
dilution to the other members' shareholding proportions, well below the proportion which
the Stock Exchange regarded as material in the case of listed companies. Although he could
not say exactly what the other shareholders had been told, they had been informed about
the board's intention to accept his investment offer on 7 January 2021, which was
tantamount to being a signal to them that they could offer too. He was also aware that
Dr Stevenson had told Mr Rafay on 14 January that he was welcome to make an investment
offer, and Mr Hawkins had been told the same. There were only six shareholders in the
Company, and all had had everything explained to them equally. The transaction had been
an acceptable rather than particularly good one for Mr McCann; the share price had
subsequently fallen and no one else, other than Dr Stevenson, had made a further
investment. The Company remained extremely fragile and was surviving rather than
flourishing.
[86]
In relation to remuneration for non-executive directors, no scheme had ever been
agreed. He had been in favour of a scheme which would reward work for the Company but
41
which would have no impact on its cash position. The scheme initially drawn up had
turned out, upon accountancy advice being rendered, to be incompatible with the retention
of the tax benefits of the Enterprise Investment Scheme under which the shareholders'
investments had been made, and was thus unworkable. He had drafted a further scheme
which had been presented to the board and was due to be discussed and possibly approved
at its September 2020 meeting. However, by that time Mr Hawkins had resigned from the
board and there had been a deterioration in relations with him and Mr Rafay. There was
little to no prospect of them being convinced to do work which would have qualified for
remuneration under the draft scheme, and it was decided to drop it. It would have involved
the performance of specific roles and tasks. Attending or observing board meetings was not
qualifying work. Mr Hawkins did not understand the degree of regulation which would be
encountered in the oil and gas field and the degree of development of the pipe which would
be required to enter that market. He wanted to take the Company in a completely different
direction, to the water pipeline market, but that was not what most of the board wanted.
It had become clear that the board was not going to be able to work effectively with
Mr Hawkins or Mr Rafay. The resignation email sent by Mr Hawkins had referred to an
offer of investment he was supposed to have made, but Mr McCann was unaware of any
such offer. An offer of remuneration had been made by Dr Stevenson to Mr Rafay on
Christmas Eve 2020 but nothing had come of it.
[87]
He did not understand the position taken by Mr Hawkins, that he had somehow
been asked to pledge his own credit in connection with the proposed CBILS loan to the
Company; all that the Bank wanted was a routine identity check in respect of each of the
directors, and by refusing to go along with that, Mr Hawkins was effectively vetoing the
board's decision to apply for the loan. Overall, he had had little exposure to Mr Hawkins in
42
connection with the affairs of the Company, and did not know how useful he had been to it,
although he acknowledged that Mr Hawkins had had a successful business career and on
that account might well have had a contribution to make.
[88]
The process adopted for the 2023 share allotment was the same as had been adopted
in 2021. Advice had been taken from the Company's lawyers on each occasion, and the
litigation was underway by 2023.
[89]
In re-examination, Mr McCann stated that his offer to invest in January 2021 was not
conditional upon obtaining at least a 5% holding in the Company as a result of the allotment
then, although he did regard that as a desirable outcome for him.
Dr Andrew Stevenson (75)
[90]
Dr Stevenson stated that he was a Chartered Engineer and Chartered Physicist, and
had worked as an industrial scientist, businessman and inventor. The Company had been
founded to develop an innovative approach to pipeline manufacture, installation and
monitoring, using intellectual property developed and patented by Scottish Enterprise. He
had incorporated the Company in late 2010 as sole director and 100% shareholder in order
to develop a working prototype and raise investment finance. He was sole director and
shareholder until Mr Everard joined the Company as an unpaid director in December 2012
and became a shareholder in 2015. A Shareholders' Agreement had been developed by the
Company's lawyers and entered into between himself and Mr Everard on 25 August 2015.
The Company had only a single class of shares. Mr Hawkins and Mr Rafay signed a deed to
adhere to the Shareholders' Agreement on 17 December 2019.
[91]
He had met Mr Hawkins in 2014 through Hertfordshire Local Enterprise Partnership
Board and became aware of his company Weldability SIF. Around 2015, Mr Hawkins had
43
expressed interest in making an investment in the Company. The Company and
Weldability had partnered in two successful bids for Innovate UK funding in 2016/17.
Mr Rafay had been introduced to Dr Stevenson by Mr Everard and Mr Abdullah had been
introduced via Mr Rafay.
[92]
A business plan was prepared in February 2016 and was reviewed as part of various
other documentation and discussions, prior to the investments in the company by
Mr Hawkins, Mr Rafay and Mr Abdullah. The business plan and discussions had made it
very clear that the Company was a high-risk venture with no guarantee that targets would
be met, and that it would have no immediate revenues. The 2016 business plan for the
Company was carefully prepared by Dr Stevenson and Mr Everard to the best of their
knowledge at the time.
[93]
The investment process followed for each investment round was set out by the
Company's legal advisors. All shareholders were notified of an investment offer received
and given the opportunity to make their own offers. Mr Abdullah and Mr Rafay each
invested £20,000 in June 2016, with Mr Rafay also paying a £4,000 option fee. Mr Hawkins
had invested £40,000 in September 2016, and Mr Abdullah and Mr Rafay had further
invested £80,000 and £20,000 respectively around September and October, with further
investments in March and April 2017 of £20,000 and £80,000 respectively. Mr Hawkins
made further investments of £20,000 in October 2017 and £60,000 in November 2018. By the
end of that "Round 1" investment, by November 2018 Mr Hawkins, Mr Rafay and
Mr Abdullah had each invested £120,000 at the same Company valuation of more than
£2 million. After that round, Dr Stevenson held 100 of the shares in the Company,
being 77.5%. Mr Everard held 11 of the shares, being 8.5%. Mr Rafay, Mr Abdullah and
Mr Hawkins each held 6 shares, being 4.7%. At a share price of £20,000 this total of
44
129 shares valued the Company at £2.58 million. Mr Abdullah had invested a
further £80,000 in June 2018, Mr Rafay £80,000 in November 2018 and Mr Hawkins £80,000
in April 2019. They each purchased a further two shares at a price of £40,000 each. This
brought the total number of shares issued to 135 and at a share price of £40,000 the
Company valuation would be £5.4 million. At this stage they had each invested a total
of £200,000. They each held 8 shares, being 5.9% of the equity in the Company. The price
per share was dramatically higher at this stage because subsequently, on 17 December 2019,
the original £0.01 Ordinary Shares in the Company had been converted to £0.00001 Ordinary
Shares.
[94]
Under the Shareholders' Agreement there was no right for Mr Hawkins or Mr Rafay
to participate in the management of the Company in any way. They were invited to
participate in board meetings but there was never any expectation that they would
participate in the day-to-day management of the Company. Only Mr Everard and
Dr Stevenson ever worked full time in the business. Mr Hawkins and Mr Rafay were
invited to join the board to monitor how investment funds were spent at closer proximity
than from the distance of annual accounts and reports, but initially both declined. After
Mr Hawkins sold Weldability he accepted the invitation to join the board in March 2019.
Mr Rafay never became a director but was invited to attend board meetings as an observer.
After Mr Hawkins joined the board, he became progressively more aggressive in board
meetings and tended to behave as if he was a majority owner and not a minority investor.
He did not really want to enter in board debate about decisions or accept a majority
decision. That became an increasing problem. He became particularly adamant that the
Company should stop development work and start sales, but industry feedback was that
more development was needed. In July 2020 a strong difference of opinion about loans as a
45
finance instrument emerged between Mr McCann and Mr Hawkins. The former thought
that they were a useful way of financing the company that reduced the need for equity
investment and the latter was very strongly opposed to any form of loan. There was a
majority board decision in favour of seeking a loan, but Mr Hawkins became quite
belligerent in his insistence that it should not be applied for. The Company's bank required
directors to complete identity check forms before they would issue the terms of loan or give
a decision on eligibility. Mr Hawkins refused to provide that information. In effect he
obstructed the application to the bank despite the majority board decision to proceed.
Eventually at a board meeting on August 10 all directors other than Mr Hawkins were in
favour of proceeding with a CBILS loan application. Following this decision Mr Hawkins
noted via email to the other directors that on the advice of his accountant and solicitor he
was declining to sign the form required by the bank. He submitted his resignation the next
day by email. That resignation was accepted. Dr Stevenson still wanted to keep
Mr Hawkins involved in the business as he felt that his sales skills could be a good asset. He
offered Mr Hawkins a position as commercial advisor, which he accepted. However, no
agreement was reached on what his responsibilities would be or what the remuneration
would be for his services. Dr Stevenson did not ask Mr Hawkins to resign from the board;
rather, Mr Hawkins issued a resignation letter the day after he was outvoted at a board
meeting and refused to comply with a reasonable request to provide identity information to
the Company's bank. Dr Stevenson accepted his resignation, but did not request it. It was
true that Dr Stevenson was contemplating asking Mr Hawkins to resign unless his
behaviour could become more constructive, but in the event he resigned voluntarily, which
was a disproportionate reaction to being asked to complete simple documentation. After the
resignation of Mr Hawkins, Mr Rafay never tried to attend a board meeting. He had been
46
influenced by Mr Hawkins and had become increasingly critical of the Company. He
declined an invitation to attend the September 2020 board meeting in person. After
March 2021, when solicitors acting for Mr Hawkins and Mr Rafay made unreasonable
demands for remuneration that had never been agreed, the board chose not to invite him to
further meetings as there was no real reason to do so.
[95]
There was no agreement to remunerate the board for taking office as directors nor for
their work in that respect. Mr Hawkins, through Weldability, did partner the Company in
two Innovate UK projects and was offered a marketing opportunity for Weldability in Oman
in January 2018. Mr Rafay and Mr Abdullah had also been involved in marketing events in
Oman on the Company's behalf. Around 2016, Dr Stevenson formed the view that if a
shareholder took a more active role in the company than just attending board and other
intermittent meetings, then a way to remunerate him should be found. He suggested this in
informal discussion with all shareholders. The suggestion had led to a lot of discussion to
find a tax efficient scheme but there never was a conclusion and no remuneration scheme
had ever been finalised or set up for shareholders. Neither Mr Hawkins nor Mr Rafay had
ever worked in the business on any regular basis and no roles or responsibilities had ever
been agreed with them.
[96]
There was no particular process entered into to arrive at the share value or a
Company value. There would be an initial price proposed and a negotiation between the
prospective investor and other shareholders if there were differing views on what the share
price should be for that particular investment round.
[97]
In January 2020 a director of a US investment firm said that it was interested in
making an investment of £20 million to commercialise fully the technology for the US
market. Such an investment would have meant that the Company would have been
47
properly capitalised for commercial exploitation - a full team could be recruited, all tests and
trials completed and a fleet of pipe-making machines commissioned for a credible market
entry. The Company could also be properly marketed internationally. The optimism
generated by this interest led to a further investment round in late 2019 and early 2020 at a
valuation of £20 million, in order to encourage a share price negotiation with a venture
capital investor to start at a valuation of £60 million. That was never an actual valuation of
the Company determined through any valuation process or by reference to any particular
metric. It was an indication of a possible starting point for negotiation with a venture capital
investor wanting to make a major investment in the Company.
[98]
The shares were subdivided in 2019 after which Mr Hawkins, Mr Rafay and
Mr Abdullah each held 8000 shares. Mr Hawkins and Mr Rafay each invested
around £40,000 for 267 shares in December 2019. Dr Stevenson invested £100,000 for
666 shares and Mr McCann invested around £200,000 for 1333 shares in March 2020.
The valuation of the Company used for this investment round was £20.2 million. This came
about because the board was aware that the minimum investment level of the US investor
was £20 million and it would likely want to have 25% of the Company equity. That would
mean a valuation of £80 million, and it was thought that a previous round with a new
experienced investor like Mr McCann, who had run a large venture capital company, would
encourage such a high valuation to be offered. After that investment round the
shareholdings in the Company were: Dr Stevenson 73.2%; Mr Everard 8.0%; Mr Hawkins
and Mr Rafay 6.0% each; Mr Abdullah 5.8%; and Mr McCann 1.0%.
[99]
During 2020 the COVID-19 pandemic limited the ability to continue with site testing
and no progress was made in discussions with the potential US investor. Mr McCann did
make several introductions to potential investors but these did not lead to an investment.
48
Mr Hawkins did not offer to invest at the board meeting on 10 August 2020. Had he done
so, Dr Stevenson would have welcomed such an offer. A proposal to invest from
Mr Hawkins at that stage would, however, have been a complete change of attitude from
him. In September 2020 new Innovate UK project funding was won. The Company would
find it difficult to find the 30% contribution which was required. A board meeting was held
on 30 September, followed immediately by a shareholder meeting which was attended by
Mr Hawkins and Mr Rafay. A shareholder report on progress since 2016 was produced and
it was made clear that the Company needed funds. During early December 2020
Dr Stevenson was engaged in email correspondence with Mr Hawkins, with the latter
asserting that the Company was at risk of insolvency, but making no offer to invest.
Dr Stevenson stated that there was no immediate prospect of insolvency because at that
stage the Company did have the funds to meet its obligations as they fell due, and
Dr Stevenson was aware that he had some cash that he could provide to the Company if
needed. A letter from Dr Stevenson to Mr Rafay dated 15 December 2020 had left open to
Mr Hawkins and Mr Rafay an opportunity to offer to invest. Around mid-December 2020,
Mr McCann had said to Dr Stevenson that he wanted to improve his percentage
shareholding position in the company but not at the previous high share price. He made an
offer towards the end of December. By the end of 2020 the Company was in danger of not
meeting the Innovate UK contract requirements. The lack of funding became more acute
and although there was no immediate prospect of any formal insolvency because there was
no debt, development work would have had to have stopped and the technology would
have had to be mothballed. That would have spelled the end of the company's aspirations.
[100]
By January 2021, the cash situation had continued to become more acute. On
1 January the Company's current account had only around £15,000 in it. There were
49
supplier and payroll payments amounting to around £21,000 required by the end of January
and the cash flow forecast showed around £150,000 due to be paid out by the end of March.
Dr Stevenson transferred funds to the Company to address the immediate issues and in
anticipation (from prior discussions) that further investment would soon come from
Mr McCann. Dr Stevenson deposited £25,000 on 7 January, £10,024 on 11 January and a
further £15,000 on 14 January.
[101]
Mr McCann had specified his investment offer as conditional on Dr Stevenson
investing what he could alongside him. On 7 January 2021 an emergency board meeting
was held to discuss his offer and the cash situation, and to agree on the share price
suggested. All directors agreed that it was in the best interests of the Company to accept the
investment offer made by Mr McCann and supplemented by Dr Stevenson. An investment
letter was issued by email to all shareholders the same day. Enclosed with the letter was a
shareholder consent form. Mr Hawkins and Mr Rafay had not made any investment offer
during December. The 7 January letter was intended both as a notification and as an
invitation to them to make an investment offer. It said that the board had met and approved
the offer and since the directors held more than 80% of the Company shareholding it also
said that the requisite approval for the disapplication of pre-emption rights had been met.
The letter stated a 7-day deadline for a response because Mr McCann's investment was
urgently needed and it was not possible to let the investment round drag on as it had done
in 2016 and 2017. Mr Hawkins and Mr Rafay had always been slow to make any
investments they offered. No offer was forthcoming from them. They could have offered to
invest at any point. As shareholders they had the right to offer investment pro rata to their
percentage holding and further funding offers would have been welcome. Minority
shareholders could not be allowed to block an investment which was approved by the
50
requisite majority, and could not dictate the share price. Mr Hawkins had made no specific
offer to invest since 2019, when he offered and invested £40,000. At no time during 2020
or 2021 did either Mr Hawkins or Mr Rafay give any indication that they wanted to invest
further in the Company. As at January 2021 and thereafter they had no intention of
investing and made no offer to invest.
[102]
The position of those not investing was actively considered and despite the 7-day
notice issued on 7 January, the board minute accepting Mr McCann's investment was not
actually signed until 29 January, specifically to give Mr Hawkins and Mr Rafay time to
respond and make their own investment offers, as they saw fit. The board position
remained that either or both of them could avoid dilution by offering to invest on the same
terms as the others investing then. That offer had been repeated and rejected. The same
terms remained available to all shareholders.
[103]
On 13 January Mr Rafay expressed concern that the share price had gone down.
Dr Stevenson replied, repeating that Mr McCann's offer was the only one received and
stating that any shareholder was free to make an offer of investment. Mr McCann
deposited £250,009 on 15 January as his investment. Mr McCann expected Dr Stevenson to
invest in the Company alongside him to show confidence in the future, so the latter agreed
to convert funds he had loaned into equity investment at the same share price as paid by
Mr McCann. There was little room for negotiation about the share price as Mr McCann was
very clear what he was prepared to offer and Dr Stevenson was not in a strong position,
there being no major investor on the horizon. Dr Stevenson did not think that the implied
£5 million Company valuation was unfair in the circumstances.
[104]
After the January 2021 investment round the shareholdings were: Dr Stevenson 70%;
Mr Everard 6.6%; Mr Hawkins and Mr Rafay each 5.7%; Mr Abdullah 5.5%; and
51
Mr McCann 6.5%. The effect of that round on the percentage shareholdings was as follows:
Dr Stevenson - 3.2%; Mr Everard - 1.4%; Mr Abdullah, Mr Hawkins and Mr Rafay
each - 0.3%; Mr McCann - +5.5%. In March 2021 the Company's financial position was
substantially improved by winning a £900,000 Innovate UK loan repayable over 7 years with
a repayment holiday.
[105]
In 2023 the Company had suffered further setbacks which were more serious in
financial terms than in 2021. It had exhausted the £900,000 loan from Innovate UK and had
to pay quarterly interest and also repayments in 2024. The company had however got closer
to the possibility of commercial sales. A new business plan had been prepared. There had
to be a further emergency investment round. Mr McCann was the only shareholder offering
to invest. His investment offer was at a very much lower valuation that considerably
diluted Dr Stevenson's share position, but he could see no alternative as no other
shareholder had offered to invest. Mr Hawkins and Mr Rafay had had an ongoing
opportunity to offer to invest since becoming shareholders, and that remained the case. The
shareholders were a small group which was in frequent communication. There was no need
to develop specific formal invitations. Nevertheless, express invitations to offer to invest
had latterly been made to Mr Hawkins and Mr Rafay, with an indication of willingness to
allow them to invest at the same price as the last round. That offer had been declined. A
new business plan had been prepared, but the Company's financial position remained
extremely worrying and it might not long survive.
[106]
In cross-examination, Dr Stevenson stated that he had founded the Company in 2010
after Scottish Enterprise had spent £3 million on development costs. Mr Everard had been a
shareholder since 2012 and a director since 2015. He and Mr Everard remained the only
52
executive directors of the Company. There was a separate management board for the
day-to-day operation of the Company.
[107]
The pipeline would require to have a Technology Readiness Level grading of 9 under
the US Department of the Environment scale before it could be sold for use in the oil and gas
industry. When the petitioners joined the Company, it was somewhere around 2, 3 or 4 on
that scale and was presently at about 7. There had been no commercial sales to date.
[108]
The petitioners had been invited to become directors of the Company when they first
invested, as was fair and common practice. Each had initially declined, but had been
observers until Mr Hawkins joined the board after selling Weldability.
[109]
In the 2019 investment round, the share price made available to individual angel
investors was £150, which was 50% of the notional price at which the shares would then
have been marketed to institutional investors, although there were none of the latter. When
that investment round began, there had been no interest from Mr McCann, and Mr Hawkins
and Mr Rafay had only put in £40,000 each out of a total requirement by the Company for
cash of £300,000. It was only after that that Mr McCann had come forward to invest in the
round.
[110]
The Company had prepared documents for circulation to potential investors which
set out its potential if it got adequate funding, but in the event it had had to survive with
drip funding, which had prevented it achieving that potential.
[111]
In relation to the remuneration of the non-executive directors, Mr Hawkins had good
sales skills and Mr Rafay had IT skills. Dr Stevenson thought it fair to explore whether they
could work usefully for the Company and have some remuneration for that. There had been
a whole series of discussions but no conclusion was ever reached. The first scheme which
had been developed, in about March 2020, was abandoned when the Company's
53
accountants advised that it was incompatible with the Enterprise Investment Scheme under
which investments in the Company had been made. When COVID-19 had come along,
meetings had become virtual and that had had an unfortunate effect on relationships
between the Company's members. When Mr McCann had joined the board, he was asked to
produce an alternative remuneration scheme. That had been developed and discussed at
the August 2020 board meeting, being remitted for final decision to the September meeting,
by which time Mr Hawkins had, after becoming increasingly aggressive, resigned from the
board. Dr Stevenson had written to Mr Hawkins and Mr Rafay on Christmas Eve 2020
making an offer of remuneration in respect of their work to that date, in order to bring the
matter to a conclusion and keep shareholders supportive, but that offer had never been
accepted. No tax or legal advice had ever been obtained in relation to an alternative scheme
to that first conceived and then abandoned.
[112]
Mr Hawkins had resigned after refusing to sign an identity check form in respect of
the proposed CBILS loan application. He had not opposed the making of the application at
the relevant board meeting, but had unexpectedly resigned the next day. Dr Stevenson had
reluctantly accepted that resignation. The post of commercial adviser to the Company had
been offered to him, which would have allowed him to benefit from any remuneration
scheme which might subsequently have been set up. Mr Hawkins had not been told to sign
the bank form or resign by Dr Stevenson, nor otherwise forced to resign; he had engineered
the whole situation himself. He was against further development work being done. That
was a legitimate position to take, but was not favoured by the majority of the board.
Mr Hawkins had made no definite offer to invest in the Company since late 2019, when he
invested £40,000. Dr Stevenson was desperate for investment, but all Mr Hawkins did was
54
say that he had cash to invest and talk in vague terms about potential investment without
coming forward with a specific offer.
[113]
Mr Hawkins and Mr Rafay had been invited to join in a virtual meeting after the
board meeting in September 2020, and had done so. Thereafter, no invitations to attend or
observe board meetings had been issued to either of them. They were hostile, so there
seemed little point in issuing such invitations. Had Mr Rafay asked to be invited, he would
have been. Reports to shareholders about the Company's financial position had been made
in October and December 2020, making it clear that money was needed and giving them the
opportunity to consider their positions. By 18 December 2020, in particular, it was clear that
the Company needed money to service a grant it had secured, and could not make the
necessary commitments without further investment. It became apparent around then that
institutional investment was not going to be forthcoming in the short term. Dr Stevenson
was anxious not to put pressure on anyone to invest and did not positively ask anyone to do
so. There was, however, an open invitation to offer to invest within the Shareholders'
Agreement. Every member had the same opportunity to invest as every other member.
Email exchanges with Mr Hawkins in December 2020 had been aggressive and insulting on
his part. Given the hostility which Mr Hawkins had manifested, Dr Stevenson did not
expect him to make an offer. Mr McCann's investment offer, which he had indicated was
available in principle in December 2020, had unlocked the Company's ability to function
in 2021. The board had decided to accept Mr McCann's offer of investment and close the
investment round within a 7-day period in early 2021 because of the Company's history of
extended such rounds. Dr Stevenson did not want his shareholding to be diluted, or for the
share price to be depressed to the level Mr McCann was prepared to pay, but the Company
needed money and Mr McCann's offer was the only one on the table. The institutional
55
investors being wooed at that time had not come forward with terms - had they done so, he
would have preferred to deal with them. They had been talking about far higher valuations
for the Company, in a range between £15 million and £60 million. Mr McCann's presence on
the board was attractive to institutional investors because of his experience. It was fair to
accept his offer of investment, and the board had decided to do so. The board included the
holders of 80% of the issued share capital of the Company, which was what was needed to
dis-apply pre-emption rights. Mr Rafay had raised queries about the board's proposal to
issue shares to Mr McCann and the Company's need for money had been made clear to him.
The same, accurate, information had been given to all the shareholders. Mr Hawkins and
Mr Rafay had no interest in further investment. The allotment to Mr McCann diluted them
very little, and they did not have to provide cash that they did not want to invest. The board
had not formally approved the share allotment to Mr McCann until 29 January 2021, to give
time for any issue raised by members to emerge and be dealt with. Neither Mr Hawkins nor
Mr Rafay had agreed to waive their pre-emption rights, although their consent was not
required given that the holders of 80% of the issued share capital of the Company had
agreed. Advice had been taken from the Company's solicitors as to how to proceed, and the
Company had been advised that it was safe to do what it had then done. When solicitors
acting for Mr Hawkins and Mr Rafay had raised complaints in March 2021 about the share
issue to Mr McCann, Dr Stevenson had offered to re-open the share round at the same price
as had been afforded to Mr McCann, but that offer had not been taken up; rather,
Mr Hawkins and Mr Rafay had said that they were not interested in investing at any price.
[114]
In re-examination, Dr Stevenson stated that Mr Hawkins had suggested that he
might invest further capital in August 2020 on a pro rata basis with the other shareholders,
but no actual offer had actually been made. Mr Hawkins had said that he would not be
56
willing to invest further if bank borrowing was used, and his antipathy to further
development of the pipe made no sense, as a developed product was what institutional
investors and the market wanted. Relations with Mr Rafay were not that good, although he
remained more professional than Mr Hawkins. He had never asked to join the board,
despite being asked on several occasions. Once Mr McCann joined the board, there was a
suitable number of directors for the Company.
[115]
As to remuneration, neither Mr Hawkins nor Mr Rafay had made a significant
contribution to the Company, although Mr Rafay's organisation of a seminar in Muscat, and
the assistance of Mr Hawkins (through Weldability) to enable the Company to get and
exploit a grant had been moderate such contributions.
Petitioners' submissions
[116]
On behalf of the petitioners, counsel moved the court to sustain their fourth
plea-in-law to the extent of finding that the Company's affairs had been conducted in a
manner unfairly prejudicial to their interests, and to fix a hearing thereafter to determine
further procedure.
[117]
The powers afforded to the court in terms of section 994 were wide and flexible: In re
Macro (Ipswich) Ltd [1994] 2 BCLC 354 at 404. In order to succeed in persuading the court
that an order should be made in terms of section 996, the petitioners required to establish
that the Company's affairs were being conducted, or had been conducted, in a manner that
was unfairly prejudicial to them at least, or that an actual or proposed act or omission of the
Company was such that it would be so unfairly prejudicial. The court required to consider
the commercial realities of the individual case, and its determination would depend upon
57
the facts of the particular case, and upon its assessment of whether or not the conduct in
question was, or had been, sufficient to warrant the granting of an order.
[118]
The test was an objective one. Bad faith did not need to be established, nor did it
have to be shown that any wrongdoer acted with the intention of causing prejudice to the
aggrieved shareholder. Fairness was to be judged according to the commercial relationship
between the parties, which was governed by the Company's articles of association and the
Shareholders' Agreement entered into between the parties.
[119]
The key applicable principles were set out in the speech of Lord Hoffmann in
The concept of fairness had to be
applied judicially and the content which was to be given to it by the court had to be based
upon rational principles.
The context and background were especially important.
The
manner in which the affairs of a company might be conducted was tightly regulated by rules
to which the shareholders had agreed. However, the exercise of strict legal rights might be
restrained if that exercise would be contrary to good faith. A member of a company would
not ordinarily be entitled to complain of unfairness unless there had been some breach of the
terms on which he agreed that the affairs of the company should be conducted. There
would nonetheless be cases in which equitable considerations would make it unfair for those
conducting the affairs of the company to rely upon their strict legal powers. Thus unfairness
might consist in a breach of the rules or in using the rules in a manner which equity would
regard as contrary to good faith. Reference was made to
Grace v Biagioli & Others
[120]
The conduct complained of had to be both unfair and prejudicial. The components
were distinct: Re Saul D Harrison & Sons plc [1994] BCC 475, [1995] 1 BCLC 14 at 31.
Unjustifiably excluding the petitioners from management decisions, or taking such decisions
58
in secret or without informing them could amount to unfair prejudice: Robertson, Petitioner
[2014] 2 BCLC 116
. Prejudice
David Richards J at [630]. Allotting further shares in the company in order to dilute a
minority shareholder's shareholding was a classic example of unfairly prejudicial conduct.
[121]
The evidence of Mr Hawkins and Mr Rafay should be accepted as credible, reliable
and supported by the contemporaneous documentary evidence. It should be preferred to
the evidence of the petitioners.
[122]
In relation to the respondent witnesses, Mr Abdullah was seeking to assist the court,
but much of his evidence was a second-hand account of what others had told him about
relevant events. Mr Everard was credible but his evidence about the circumstances of the
resignation of Mr Hawkins was also largely hearsay. Mr McCann should not be regarded as
credible or reliable. He was acting in his own self-interest and was keen to dismiss the
contribution of the petitioners to the Company. He dismissed the valuations placed on the
Company by the executive directors as being plainly wrong. He acted in his own interests
in orchestrating his further investment in the Company in January 2021, having no regard to
the effect of that investment on the petitioners. He accepted that he was effectively the one
"running the show, and setting the share price". Similarly, the court should find that
Dr Stevenson was neither credible nor reliable. He refused to accept, in the face of clear,
contemporaneous documentation to the contrary, that he repeatedly told the petitioners one
thing, whilst doing another. He repeatedly sought to gloss or read words or meaning into
documents. He refused to accept the plain meaning of the words in the documents which he
himself had drafted, which he presented to the petitioners, and upon which they relied. His
position in relation to seeking investment from existing shareholders was odd. He
59
repeatedly referred to not wanting to "put pressure" on existing shareholders, when in fact
he simply did not ask them to invest, or offer them the opportunity to do so.
[123]
In relation to that aspect of the petitioners' case concerning the issue of shares to
others, the acceptable evidence clearly established that the petitioners were brought on
board to benefit the Company, both by way of financial investment and for their expertise.
They did their best to assist. They invested in the Company in good faith and sought to
assist its development, attending board meetings and providing advice to the board. They
did so on the basis of information provided to them by the executive directors, Dr Stevenson
and Mr Everard. That information (which included investment opportunity documents and
reports to shareholders, as well as emails from the executive directors) suggested that the
Company was developing well, meeting its milestones and generating interest, or potential
interest, from institutional investors at very substantial valuations. In late 2020, no
information was given to the petitioners which suggested that there was a need for
"emergency" funding. On the contrary, Dr Stevenson confirmed by email to Mr Hawkins
on 7 December 2020 that there was no immediate prospect of insolvency. The cash position
at that time was not as poor as the respondents now maintained. There was no need for the
"emergency" fundraising in early January 2021 (or at least no need for such fundraising on
such a short timescale) whereby Mr McCann was allowed to invest at a price of £37 per
share, and from which the petitioners were excluded. The earlier offer made by
Mr Hawkins further to invest in the Company had been ignored. The issue of shares to
Mr McCann in January 2021 at a price of £37 per share was both unfair and prejudicial to the
interests of the petitioners. They were not offered the opportunity to invest on the same
terms.
60
[124]
The documentary material before the court supported the petitioners' position on the
unfairly prejudicial nature of the share issue to Mr McCann in January 2021. The board
meeting of 25 October 2019 had approved valuations for the Company for the purposes of
institutional investment at £25/30 million for 2019 and £50/60 million for 2020 (in the latter
case after successful manufacturing field trials) and approved the issue of shares to existing
shareholders before the end of November 2019 at a 50% discount to the price implied by the
valuation for 2019 (ie £150 rather than £300). The petitioners had invested at the £150 price.
An investment opportunity document for the Company dated 30 October 2019 described
Mr Hawkins as a member of the board of the Company and as an angel investor in it. The
value of the Company for the purposes of institutional investment was stated as being
£50 million-£100 million, with tenfold returns possible. It went on to suggest that the
Company had reached a stage of technical development of the pipe justifying a current
valuation of £60 million, implying a price of £437 per share.
[125]
On 1 July 2020 Dr Stevenson had emailed the other pre-existing shareholders
confirming that Mr McCann had been permitted to invest at the "agreed share price for this
round", ie £150, despite the fact that that price had previously been said to represent a 50%
discount for existing shareholders, which he was not. An email sent by Mr Hawkins to the
other shareholders in the Company intimating his resignation from the board stated that he
had offered to invest cash in the Company at his current level of stock holding, but that that
offer had been ignored in preference to seeking external bank funding. On 2 December 2020
Mr Hawkins emailed Dr Stevenson asking for an assurance that the Company would be
"solvent in six months' time as the cash flow runs out and we run out of runway". The next
day Dr Stevenson responded, stating: "There is no immediate prospect of insolvency and
management will prepare an in-context newsletter in the timescale indicated on the
61
companies progress and future prospects." The exchange had continued, but nowhere in it
was there any mention of any alleged need for emergency fundraising. A report had been
made to shareholders on 18 December 2020, containing a cashflow forecast which stated that
the Company was in discussions with more than one potential new equity investor and
anticipated new equity finance of £2 million in the first quarter of 2021. It also referred to
loan and grant income. It did not mention any need for emergency fundraising.
[126]
On 7 January 2021 a special board meeting had taken place, the minute of which
disclosed that, in order to address the funding needs of the business, the board had agreed
to close an investment round as quickly as possible at a price which was left blank in the
minute, to invite shareholders to waive their pre-emption rights, and to see if any further
offers would be forthcoming within 7 days. Mr Hawkins and Mr Rafay were not in
attendance at the meeting and were unaware of any investment round. Neither had been
asked whether they wished to invest further in the Company. On the same day
Dr Stevenson had emailed all shareholders stating that the Company urgently needed cash
to make commitments to move forward in 2021 and attaching a letter from the board which
indicated that Mr McCann had offered to invest £250,000 cash provided he could improve
his position in the Company to an equity percentage of at least 5%, that he was performing
the important role of finance director unpaid, and that it seemed fair that he should be at a
similar shareholding level to other shareholders, which in effect meant offering him shares
at a lower price than previously. It further stated that the board considered the lower price
to reflect current market value and that Dr Stevenson would also be contributing some
further funds on the same basis. It noted that the board agreed that it was in the best
interests of the Company to proceed on that basis and that if the consent of the holders of at
62
least 80% of the shares in the share capital of the Company was obtained, a board meeting
would be held to approve the contemplated issue and allotment of shares.
[127]
Mr Rafay had posed certain questions about this proposal to Dr Stevenson on
13 January 2021, to which he had responded. He had stated that the low share price
proposed was an emergency fundraising measure and was designed to be fair to
Mr McCann. It served to confirm that the offer of investment to Mr McCann at £37 per share
was unfairly prejudicial to the interests of the petitioners. The offer was designed to be fair
to Mr McCann, not to them. They were not asked to invest at a price of £37 per share.
Mr Everard confirmed that the board had decided not to include the petitioners in the
January 2021 fundraising round. The minutes of the Board meeting on 29 January 2021
confirmed the allotment of shares to Mr McCann and Dr Stevenson. Finally, the Company's
bank statements for the latter part of 2020 and January 2021 disclosed that the Company's
cash position was not as dire as Dr Stevenson had suggested.
[128]
The next aspect of the petitioner's case concerned exclusion from management. The
court should conclude that Mr Hawkins was pressured to, and did, resign as a director of
the Company as a result of the actions of Dr Stevenson. Following his resignation, neither
petitioner was invited to attend board meetings, on the basis of a deliberate decision by the
remaining directors to exclude them. It follows that, from August 2020, both petitioners
were excluded from involvement in the management of the business of the Company.
Mr Hawkins was a director of the Company until he resigned on 11 August 2020. Having
Mr Hawkins on the board was a benefit to the Company, and his credentials were used to
boost the Company's profile. He was forced to resign, having been put under pressure from
Dr Stevenson to do so, given that he was not prepared to sign the paperwork requested by
the Company's bank in connection with the proposed application for a CBILS loan.
63
Mr Hawkins was aware that non-trading companies were not entitled to apply for such a
loan. The loan application was later made, and rejected. It follows that the position in
respect of the loan application taken by Mr Hawkins was correct. He was not invited to
rejoin the board once notice of the rejection of the application was received by the Company.
He was offered by Dr Stevenson, and accepted, a role as a commercial adviser to the
Company. That suggested that his role was viewed by Dr Stevenson as integral to the
development of the Company. The evidence of Mr Hawkins was that he felt that this would
be a continuation of his role in the Company, with a different name.
[129]
Mr Rafay was invited to, and did, attend meetings of the board of directors as an
observer. After Mr Hawkins resigned as a director, Mr Rafay was no longer invited to
attend board meetings. The roles of the petitioners in the Company were clearly viewed as
sufficiently important and time consuming to justify the offer of remuneration made to
them.
[130]
The final aspect of the petitioners' case concerned the failure of the Company to
remunerate them for work done by them, despite an agreement having been reached that
such remuneration would be provided. Each of the petitioners was offered remuneration in
the form of growth shares in the Company, which shares were not issued. That had been
agreed upon by the board, who later approached accountants who raised issues with the
scheme.
[131]
The minutes of the board meeting on 25 October 2019 recorded that it had been
agreed to consider the grant of share options for directors undertaking specific tasks in line
with milestones. Subsequently, Dr Stevenson had emailed Mr Rafay stating that the
Company planned to implement a growth share scheme for non-executive directors in
recognition of their contribution to the Company, and proposed that growth shares
64
of £21,000 in value (at a price of £150 per share) would be issued when the scheme was
established. The minutes of the board meeting on 24 March 2020 noted that it had been
resolved to commission the Company's accountants to develop a growth share scheme
along the lines suggested. However, it became apparent on advice from the accountants
that the growth share scheme was unviable due to adverse interactions with the Enterprise
Investment Scheme, and Mr McCann had drafted a substitute share bonus scheme which
was circulated by Dr Stevenson on 25 June 2020 after the June board meeting. That scheme
was said to have the purpose of replacing normal non-executive director fees with a
deferred payment. At the board meeting held on 10 August 2020 it was resolved to set up a
remuneration committee to frame implementation details for the scheme, once it had been
put into terms drafted by lawyers, for recommendation to the September meeting.
Mr Hawkins took from that resolution that the offer made by way of remuneration had been
accepted as proposed, and would be implemented. On 24 December 2020 Dr Stevenson had
written to Mr Rafay offering him £10,000 by way of units in the deferred bonus scheme in
respect of his services to the Company to the end of 2020.
[132]
In these circumstances, the petitioners moved the court find that they had suffered
unfair prejudice, to uphold their fourth plea-in-law to the extent of finding that the
Company's affairs had been conducted in a manner unfairly prejudicial to their interests,
and to fix a hearing thereafter to determine further procedure.
Respondents' submissions
[133]
On behalf of the respondents, counsel submitted that only a limited number of
factual issues were in dispute between the parties. On such issues, the evidence of the
respondents should be preferred. Both of the petitioners were frustrated with the direction
65
of the Company as determined by the majority of the board. Both were experienced
businessmen and expected their views to be taken seriously. They did not like being in the
minority. Mr Hawkins clearly had substantial disagreements with the respondents, and that
had led him to overstate his position on occasion. Mr Rafay had a narrative which he
wished to convey in his evidence, regardless of the questions he was asked. That led him,
too, to overstate his position from time to time, as when he asserted that he might still have
been willing to invest in the Company in 2023 after commencing these proceedings asking to
be bought out of it. Both petitioners appeared to have retrospectively rewritten history in
their own minds in order to advance their case. For example, both gave evidence that they
were unhappy about Mr McCann joining the Company as a shareholder in the terms that he
did, but on 1 March 2020 both had signed a document confirming their agreement to it.
Both of them had similarly overstated what had been said to them in the correspondence
about remuneration.
[134]
The respondents, by contrast, had sought to address all the questions put to them,
and made concessions when appropriate to do so. Their evidence demonstrated a degree of
self-reflection, and indeed willingness to accept where things could have been done
differently, which was notably absent from the petitioners' evidence. The absolutist position
of the petitioners was to their detriment. The court ought to conclude that the Company
was being run by experienced businessmen, each of whom brought different perspectives
and skills to the board.
[135]
As to the applicable law, a concise summary had been given by Lord Tyre in Gray v
Braid Group (Holdings) Ltd [2015] CSOH 146 at paras [22] - [24]. It was emphasised that the
petitioners had to establish both prejudicial and unfair conduct - Gray at [22]. The concept of
fairness had to be applied judicially and the content given to it had to be based on rational
66
principles and viewed in context - O'Neill at p 1098. Something that was unlawful, such as
by being in breach of the Articles of Association, was not necessarily unfair - Gray at [23].
Reference was also made to West Coast Capital (Lios) Ltd [2008] CSOH 72 at para [19] and to
signed up to management of a company lawfully by the directors in accordance with its
Articles of Association and any shareholders' agreement. This was not a quasi-partnership
company, or a company where there was a relevant underlying relationship of trust and
confidence amongst the members.
[136]
The critical issue in this case was the allotment of shares by the directors. The
starting point was that the allotment of shares was a lawful thing for the directors to do.
Section 550 of the 2006 Act authorised the directors of a company to allot shares, subject only
to restrictions in a company's Articles of Association.
[137]
The written agreements governing the relevant rights of members of the Company
could be summarised as follows: Dr Stevenson and Mr Everard had entered into a
Shareholders' Agreement in 2015. Both petitioners signed Deeds of Adherence to that
Agreement when they became members in 2016. The Company adopted new Articles of
Association on 17 December 2019, and both petitioners signed the written resolution
adopting the new Articles on that date. On the same date the then members of the
Company entered into a deed varying the Shareholders' Agreement.
[138]
Clause 2.2 of the 2015 Shareholders' Agreement required each shareholder to use his
reasonable endeavours to promote and develop the business to the best advantage of the
Company. Clause 4.1 of that Agreement entitled Mr Everard to appoint one director to the
board of directors for as long as he had 5% of the issued share equity of the Company. No
other shareholder had similar rights. The December 2019 variation made certain changes to
67
that provision, but did not alter the fact that it was only Mr Everard who had this right.
Clause 5.1 of the Agreement provided that certain matters were "Reserved Matters"
requiring the prior written approval of shareholders holding at least 70% of the issued
equity share capital. Those "Reserved Matters" included both increasing the amount of the
Company's issued share capital, and establishing any share option, bonus or incentive
scheme of any nature for directors or employees. Clause 6.1 provided that the Company
was to be supervised and managed by the board. Clause 9 imposed certain restrictions on
the transfer of shares. Clause 16 provided that the terms of the Agreement were the entire
terms agreed between the parties and that no other representations or assurances had been
relied upon. Clause 19 provided that the parties did not intend the creation of a partnership.
[139]
Clause 2.2(b) of the 2019 variation to the Shareholders' Agreement disapplied the
right which Mr Everard had previously enjoyed to veto any waiver of pre-emption rights.
The parties agreed by way of clause 2.1 in the 2019 variation that other than insofar as
expressly varied the 2015 Shareholders' Agreement remained in full force and effect.
[140]
Article 4 of the 2019 Articles provided that the minimum number of directors was
two. Article 8(10)(c) provided that a director with an interest in a transaction was still
entitled to vote, provided that the interest was declared to the board. Article 10 made
provision for the allotment of further shares. Article 10.2 provided that if the Company
proposed to allot any shares, it first had to offer an allotment to all shareholders on the same
terms. Article 10.2 was however subject to Article 10.6, which provided that:
"The provisions of articles 10.2 and 10.3 shall not apply to the issue and allotment of
equity securities made with the prior written consent of the holders of at least 80% of
the issued share capital of the company for the time being and the issue and
allotment of such equity securities shall be at the disposal of the directors who may
allot, grant options over or otherwise dispose of them to any persons at those times
and generally on the terms and conditions they think proper."
68
Article 12 made provision for how shares could be sold and at what price.
[141]
This was, accordingly, a case where there was a detailed series of contractual
provisions governing the circumstances in which the directors were entitled to allot shares.
If those provisions were followed, that ought to be the end of the matter. There was a
presumption that directors exercising such a power did so bona fide: Charles Forte Investments
Ltd v Amanda [1964] Ch 240 per Willmer LJ at p 253 - 254 and Danckwerts LJ at p 260 - 261,
affirmed in Village Cay Martin v Acland [1998] BCC 417 at 424. The court would not
ordinarily review the decisions of directors on questions of management of the company,
such as raising finance, or on matters of commercial judgement, if arrived at in good faith:
West Coast Capital (Lios) Ltd [2008] CSOH 72 at [19]. There was no evidence of bad faith in
this case.
[142]
No case was stated that there had been any breach of the terms of the Company's
constitution or Shareholders' Agreement. The petitioners agreed to a variation of the terms
of their contractual relationship with the Company and other members in December 2019
without seeking to negotiate different terms. The Company was admittedly not a
quasi-partnership, but rather consisted of shareholders who were experienced businessmen
and investors (a point which was said to be "very important" by Lord Hoffmann in O'Neill).
The reasonable expectation of the parties was that they would abide by their legal
obligations, but nothing more. The petitioners would require to show that actions which
they could not have reasonably envisaged at the time the parties re-negotiated their
commercial relationship in December 2019 had occurred and amounted to unfair prejudice.
[143]
At a high level, the point could be made that the dispute was about the direction of
the Company. The petitioners felt that there needed to be a quicker route to
commercialisation. The majority of the board disagreed. That disagreement, exacerbated by
69
the reduced opportunities to have discussions in person to resolve issues as a result of
COVID-19 in 2020 - 2021, came to a head in around August 2020 when Mr Hawkins resigned
from the board. That was exactly the sort of disagreement that required to be resolved on a
board: it was not the sort of disagreement that entitled the petitioners to a remedy under the
2006 Act. It was always known to the petitioners that they were investing in a high-risk
business venture that might or might not make a return.
[144]
The primary ground of complaint of the petitioners was that their shareholdings had
been devalued and diluted unfairly by way of the January 2021 allotment, without any
proper or commercial rationale. However, the decision to allot shares in 2021 was one taken
unanimously by the board on 29 January 2021. It was to allot a further 8,109 shares (6,757 to
Mr McCann and 1,352 to Dr Stevenson) in return for an investment of £250,009 from the
former and £50,024 from the latter. The effect of that allotment was to dilute the holdings of
all shareholders with the exception of Mr McCann. The petitioners were not singled out for
treatment to their prejudice, and the extent of the dilution was 0.3% each, which was de
minimis. The directors exercised their right to allot the shares by disapplying the
pre-emption rights in accordance with Article 10.6 of the Company's Articles of Association,
just as the petitioners had agreed could be done just over a year earlier in December 2019.
Article 10.6 of the Articles expressly disapplied the obligation on the directors of the
Company first to approach the petitioners to see whether they wished to invest on the same
or similar terms. There was no obligation on the directors to consult with the petitioners,
nor to approach them inviting investment. Nonetheless, the petitioners were told about the
proposed investments from Dr Stevenson and Mr McCann immediately after the board met
on 7 January 2021. The petitioners were both experienced businessmen and did not need to
be told that they could make an offer to invest at the same, or better, terms than were being
70
offered by those individuals. However, in an email to the petitioners on 13 January 2023,
Dr Stevenson expressly told them that if they wished to make an offer, that would be
considered by the board. They made no offer. Had they done so, it would have been taken
seriously. The respondents decided that it was in the best interests of the Company to
accept the offers of investment made by Dr Stevenson and Mr McCann. There was no
evidence that they acted in bad faith in doing so, and indeed in evidence both petitioners
distanced themselves from any such suggestion. It was not the role of the court to decide
whether the decision had an acceptable commercial rationale, as matters of commercial
judgment were to be left to the directors of the Company.
[145]
In any event, the 2021 allotment had to be understood in its context. There had been
a deterioration in the relationship between Mr Hawkins and Dr Stevenson in particular, and
Mr Hawkins had become disillusioned with the Company, as could be seen from the tone of
his communications in the latter half of 2020. There had also been a deterioration in the
relationship between Mr Rafay and Dr Stevenson. Neither petitioner was in a position
where he wanted to invest further money in the Company in early 2021, and Dr Stevenson
had no reason to suppose that either of them did. The petitioners had offered no positive
evidence of what they were willing to invest and on what terms. They had not established
that they had been deprived of an opportunity that they would otherwise have taken up.
In those circumstances there was no unfairness to them.
[146]
In any event, there had been no prejudice. The petitioners did not wish to invest,
and the value of their investment was improved by the development of the Company's
technology enabled by the 2021 investment round. The Company in any event subsequently
offered to allot further shares to the petitioners at the price paid by Mr McCann in
January 2021, but the petitioners declined that offer. Nor was it the case that Mr Hawkins
71
had made offers to invest which had been rebuffed by the respondents. As Mr Hawkins
stated in his resignation email of 11 August 2020 and in a follow-up letter of 21 August, any
further investment from him was conditional on all shareholders investing in proportion to
their shareholding and on the Company not taking on further loan funding. In replying to
the resignation email on 14 August, Dr Stevenson had noted that he was happy to discuss
further funding proposals on the same terms as Mr McCann had invested in March.
Mr Hawkins had accepted that he made no subsequent offer to invest.
[147]
As to the commercial rationale for the decision taken in January 2021 (with which the
court should not concern itself, that being properly a matter for the directors), Mr McCann
considered that the Company was approaching a liquidity crunch in late 2020 and saw his
choice as being one of deciding whether to invest more to keep the business alive, or
effectively lose his investment. Without further investment, the risk was that the Company
would have to be mothballed. In order to access an available government grant
worth £800,000, the Company would require cash flow to meet costs whilst payment of that
funding was awaited. Mr McCann explained that the decision on how much to offer for the
shares was his. He explained that his investment was based on calculating a notional value
of the Company which was considerably lower than that at which he had invested in
March 2020, and roughly in line with what he understood the petitioners had invested for.
External investment had not materialised. Dr Stevenson was unhappy about the share price
being offered by Mr McCann but felt he had no choice but to recommend it to the board and
ultimately took the view it was fair. Mr McCann insisted that Dr Stevenson should invest
something, but his shareholding in the Company was still diluted as a result of the
allotment. Mr Everard considered that it was in the Company's best interests to accept the
offer from Mr McCann, notwithstanding that it diluted his own interest by 0.4%. He
72
explained that the Company needed to know that it had funds in place to make
commitments to third parties, even although it would later receive grant income, as the
Company would need to meet outgoings in the first instance, and would only recoup them
around 3 months later. Each of the respondents explained how difficult it was to value a
start-up company which had no sales revenue. The likely need for further investment in the
Company in early 2021 was not news to the petitioners. Mr Everard had explained that
there was detailed discussion about the Company's finances, and the fact that a crunch point
would be reached in early 2021, at the August board meeting. He had provided detailed
financial information to each of the parties, including the petitioners, on 7 August 2020.
That information indicated, in short, that the Company could have cashflow problems
around the start of 2021. Similar views had been expressed at the meeting in September
attended virtually by the petitioners. The terms of the communications from Mr Hawkins to
Dr Stevenson in early December 2020, enquiring about the Company's solvency, made it
clear that the petitioners were aware of financial difficulties. Dr Stevenson was able to
advise that the Company was not at risk of insolvency, but that was not the same as saying
that it was in a good financial position. That the Company needed cash was again reiterated
in information sent to shareholders on 18 December 2020, including a cashflow statement
showing the Company's costs as a figure printed in red and greater than the income unless
new equity investment of £2,000,000 was obtained in the first quarter of 2021. The text
specifically noted that some members of the board had indicated they could cover further
investment if the need were to arise. The petitioners could have been in no doubt that this
was a company in need of cash to be able to grow.
[148]
On the issue of being involved in the management of the Company, the petitioners'
status as shareholders neither conferred any right of participation in management nor made
73
it inequitable for the other shareholders to refuse to admit them to management absent an
understanding that the shareholder would be concerned in management: Baker v
Potter
[2005] BCC 855 at [90] - [91]. It was not in any event unfair if
a petitioner voluntarily withdrew from management: Maresca v Brookfield Development and
[149]
Mr Hawkins had not been excluded from the management of the Company. He was
on its board and concerned in its management until he resigned on 11 August 2020. His
resignation email should be taken at face value. In it, he explained the reason for his
decision to resign, which stemmed from a fundamental disagreement with the other
members of the board as to the direction of the business. He had repeated his position that
he chose to resign in his email to Dr Stevenson of 3 December 2020. He was not forced off of
the board; rather, he was asked to comply with the majority decision. That was his
obligation in terms of Article 3.3 of the 2019 Articles. Mr Rafay had never been concerned in
the management of the Company. He was invited to attend board meetings for a period.
There was no legal right to attend board meetings as an observer. He had been invited to
join the board on several occasions by Dr Stevenson but chose not to accept. Mr Hawkins
did not ask to rejoin the board after his resignation. Mr Rafay had not asked to join the
board at any stage.
[150]
On the issue of remuneration, the petitioners had no right to receive a financial
reward in respect of the capital they invested in the Company. There was no evidence that
the Company had distributable reserves to enable a dividend to be paid to shareholders. It
ought to have been apparent to the petitioners that they were investing in a start-up
company. If it became a profitable company, the petitioners would at that stage receive a
financial reward for the investment of their capital. No right to remuneration had been
74
provided for in the Articles or in the revised Shareholders' Agreement agreed in
December 2019. No specifics were given as to what work the petitioners were supposed to
have done which would entitle them to remuneration. No role had ever been agreed for
them. They were obliged under the Shareholders' Agreement to use reasonable endeavours
to promote and develop the business, with no expectation of receiving remuneration.
[151]
There had been discussions amongst the parties in 2020 about creating a scheme
which might provide financial reward for past work and to incentivise future work for the
Company. In particular, on 3 March 2020 Dr Stevenson had emailed Mr Rafay noting that
the Company planned to implement growth shares for non-executive directors. He set out a
proposal which was intended to be agreed in principle at the next board meeting. He noted
that the purpose of the scheme was to motivate towards future objectives and contributions
as well as the past, and observed that he was discussing the proposed scheme with lawyers
and tax accountants. On 24 March 2020, the board resolved to commission the Company's
accountants to develop a growth share scheme. However, the advice received meant that
such a scheme was not viable, as it would harm the Enterprise Investment Scheme relief for
all parties, and it was unanimously agreed not to continue with it. In June 2020, Mr McCann
had been commissioned to consider a different scheme that could work. On 24 June, he had
prepared a discussion document, setting out a scheme that could apply to non-executive
directors. Mr Rafay would need to have become a director to qualify for the scheme, and
Mr Hawkins would need to have remained a director, or else specific roles would have had
to have been agreed with them. The purpose of the scheme was to incentivise future
contributions. On 1 July 2020 Dr Stevenson had explained to the petitioners that any scheme
would need to be drawn up by lawyers and approved by the board. At the board meeting
on 16 August 2020 it had been noted that a draft had been requested from lawyers and
75
would be discussed at a subsequent board meeting. It was resolved that Mr McCann should
set up a committee to work on implementation details. Mr Hawkins had resigned from the
board shortly thereafter, and would thus no longer qualify for the scheme. Mr Rafay had
never joined the board. There never had been a scheme. Following the deterioration in the
relationship between the parties, there was no realistic possibility of the petitioners doing
further work for the Company and there was no need to put in place a benefits scheme for
them. The petitioners had not been singled out for special treatment. Neither Mr Abdullah
nor Mr McCann received any remuneration from the Company or participated in any
reward scheme. Only Dr Stevenson and Mr Everard, who worked in the Company full time
and were the executive directors, and the Company's other employees, were remunerated.
There had been no attempt to particularise what precisely the petitioners contended they
were required to be remunerated for.
[152]
In conclusion, the petitioners had clearly reached the stage where they wished to
withdraw their investment from the Company. They disagreed with how the respondents
were managing the Company and no longer felt valued. However, that was different from
being the victims of unfair prejudice. A route to exit from the Company was set out in the
Articles. The petitioners were trying to use the mechanism of these proceedings to attempt
to leverage a more advantageous exit from the Company than would otherwise be available
to them or any other member. There was no proper basis to make a finding that the
respondents had been managing the Company in a way which was unfairly prejudicial to
the petitioners.
76
Decision
Witnesses
[153]
I had no difficulty in accepting the evidence of all the witnesses in the case as
generally credible and reliable in relation to matters of primary fact. Where differences in
their testimony appeared, those differences were plainly either the result of varying
perspectives being brought to bear on the significance of those facts, on matters of
hypothesis, or on issues of no materiality, directly or indirectly, to the resolution of the
points in dispute.
[154]
So far as could be determined from the relatively brief period which they each spent
giving evidence, all of the members of the Company brought unique attributes and
personalities to their joint enterprise. A basic understanding of those features assists in
understanding how events played out as they did and stand now where they do.
[155]
Dr Stevenson is at heart a scientist, and would prefer to devote himself as much as
possible to the technical aspects of the Company's progress rather than micro-managing the
difficulties of various other kinds which present themselves from time to time in matters
corporate. Absent his efforts, it is difficult to see that the Company would have advanced
remotely so far as it has in the development of its pipe technology. It should not be thought,
however, that his scientific bent entails any very significant degree of unworldliness.
Further, he is a polite and gentlemanly individual who expects similar standards from those
with whom he deals. He has a tendency to express himself, at least in writing, in a manner
which is susceptible to misunderstanding, at least by those who do not share his mindset,
though I would reject any suggestion that his propensity for mild ambiguity is a deliberate
choice on his part.
77
[156]
Mr Everard is an accomplished company administrator and a man of patent and
complete honesty. His abilities admirably complement the technical skills of Dr Stevenson
and he can retain a balanced view of people and events, and maintain relationships, in
circumstances where others might find that difficult. I formed the impression that, although
he might find it unseemly to engage in public disagreement with Dr Stevenson, he would in
no way be inhibited in expressing his views clearly and persuasively in private. He is not
merely Dr Stevenson's cipher.
[157]
Mr McCann is an experienced accountant and has evident skills in the corporate
finance and venture capital fields. He appears to approach issues predominantly from the
standpoint of financial analysis. That can give rise to a very business-like manner which at
times may appear brusque and better suited to more impersonal corporations than the
Company. His capacity for understanding points of view with which he disagrees, and
demonstrating patience with those who espouse them, seems somewhat limited. These
features mean that he is someone for whom those who cross him might readily form a firm
dislike.
[158]
Mr Abdullah has valuable connections in those echelons of Omani society which will
be useful in the marketing of the Company's pipe in the oil and gas industry in that
Sultanate at the right time. I found his evidence the least useful of all the witnesses, not
because he was remotely seeking to be unhelpful, but firstly because he appeared to take a
less acute interest in the affairs of the Company than others, and consequently tended only
to be able to relate matters at some remove from first hand, and secondly because diplomacy
for him seemed to be more a calling than merely a profession.
[159]
Mr Hawkins is a self-made man with considerable and very well-founded confidence
in himself and his own abilities. He has been an extremely successful businessman, with all
78
that that entails, and has also contributed most valuably to the public interest. His manner
can at times be rather bluff, but remains very personable. The suggestion that he is used to
being at the head of a business, and therefore may find it trying to be merely a cog in a
larger wheel, has some traction. It does not take the benefit of hindsight to appreciate that
he and Mr McCann would be likely to form a volatile mix.
[160]
Mr Rafay is an intelligent and articulate individual with a background in complex IT
issues. He is thoughtful and measured in his actions and communications. Naturally
enough, he takes a keen interest in his substantial investment in the Company and the
matters likely to affect its value. His alignment with Mr Hawkins is by no means the result
of the exertion of any influence on him, but is the product of his own careful consideration
of what he wants from his investment in the Company.
[161]
In addition to the combination of talents just described being available to the
Company, its pipeline technology appears, once it has been developed to the necessary
extent, to have the prospect of changing radically the markets which it enters and thus to be
extremely valuable. That the Company's potential worth is so high has been both a prime
driver for the attraction of the private investment which it has enjoyed and equally a cause
of the disagreements which have led to the current dispute.
The law
[162]
The law in relation to section 994 of the 2006 Act is not controversial and only a few
remarks need to be made about it in the context of this case. It is not suggested that any of
the actions complained of by the petitioners amount to breaches of the provisions of the
Company's Articles of Association or of the Shareholders' Agreement. It is equally not
contended that the Company is a quasi-partnership, at least in the sense that that word is
79
used in the context of applications of this sort. It was submitted on behalf of the
respondents that the combination of those circumstances resulted in the prospect of the
Company's affairs having been conducted in an unfairly prejudicial manner being more
theoretical than real. I do not accept that submission; while in the abstract those
circumstances are not particularly conducive to a finding of unfair prejudice, the question
must always be whether conduct prejudicial to the interests of the petitioners was,
objectively viewed, fair or equitable in the particular context against which it occurred.
While it is true that the Articles and Shareholders' Agreement do not forbid what is said to
amount to unfair prejudice in this case, nor do they mandate it. In such circumstances a
close examination of what is said to have happened, how and why, is necessary before any
conclusion can be reached as to the presence or absence of unfairly prejudicial conduct. That
examination, as has often been remarked, must be conducted along rational lines and
proceed by reference to criteria apt to inform a decision on the equities of the situation, for
example by asking whether like circumstances have received the same or similar treatment,
or whether clearly-based understandings or expectations inherent in the nature of the
parties' relationships as members of the Company have been observed or departed from.
Often a shorthand indication to the fairness, or otherwise, of particular conduct may be
found by asking whether the respondents would be likely to have regarded it as fair had it
been done to them rather than by them. Finally, although it may be tempting in the course
of the analysis to split the notion of unfair prejudice into its constituent parts of unfairness
and prejudice, it is important to remember that the statutory concept is a unitary one and
that to draw artificial distinctions between its two ingredients risks distorting it
unnecessarily and unhelpfully. Against that background, each of the petitioners' complaints
may be examined in turn.
80
Exclusion from management, etc.
[163]
Neither petitioner had any right in terms of the Articles of Association or
Shareholders' Agreement to be involved in any particular way, or at all, in the management
of the Company, and each accepted that in the context of these proceedings. Nonetheless,
each was offered a place on the board of directors when he made his initial investment
in 2016. Dr Stevenson accepted in his evidence that the making of such an offer to investors
in the position of the petitioners was, in his opinion at least, fair and common practice in
comparable companies. Neither petitioner immediately accepted the offer of a place on the
board, but Mr Hawkins did so after the sale of Weldability in 2019 and Mr Rafay was
habitually invited to observe, if not technically to participate in, the business of the board
until autumn 2020. The board meeting in August 2020 was the last attended by Mr Hawkins
and observed by Mr Rafay. Although each was invited to, and did, join the members of the
board virtually after completion of the board meeting in September that year, neither was
present at, observed or participated in the meeting itself. Thereafter neither was invited to
play any role, even as an observer, in the business of the board, or otherwise to take part in
the management of the Company, although it may be noted that neither actually made any
request to be allowed to do so.
[164]
Dealing firstly with the complaint of Mr Hawkins about exclusion from participation
in the management of the Company, the obvious hurdle which he faces is that, in point of
form at least, that came about because of his own resignation from the board. I accept the
submission for the respondents that someone who resigns, at least if truly voluntarily, from
the role which he maintains he should still be fulfilling in the management of a company,
has no claim to have been treated in an unfairly prejudicial manner because he no longer
81
occupies that role. That places the focus on whether Mr Hawkins did indeed voluntarily
resign as a member of the board, or whether his resignation was in effect forced upon him.
One does not require to look further than the evidence of Mr Hawkins himself in order to
resolve that issue. He stated that he had not been forced out, but rather had decided to
resign after Dr Stevenson told him that he would be in breach of his fiduciary duties to the
Company if he continued to refuse to sign the papers preliminary to the application for the
CBILS loan which the majority of the board wished the Company to make. That account of
events fits with the terms of his resignation email and with my assessment of the robustness
of his character. I do not accept - as Mr Rafay maintained - that Dr Stevenson was
determined to force Mr Hawkins to resign from the board. Nor do I accept Dr Stevenson's
view that Mr Hawkins himself engineered the situation which led to his resignation by
making an entirely unnecessary fuss about the CBILS paperwork. Mr Hawkins genuinely
did not wish his name to be associated in any way with a loan application by the Company
in circumstances where he believed - on easily comprehensible grounds - that it would be
unable to make the necessary repayments and thus fall into default. That was a quite
reasonable point of view and I do not find it easy to see that his refusal to be associated with
the application in such circumstances would have put him in breach of his fiduciary duties
or his obligation in terms of the Shareholders' Agreement to use his reasonable endeavours
to promote and develop the Company's business to its best advantage. Mr Hawkins was, by
mid-2020, already very discontented with what he perceived as the extremely slow progress
being made by the Company towards market and thus revenues, and it was becoming
increasingly clear to him that his views on that subject were not going to prevail on the
board or amongst the Company's members, particularly since Mr McCann had, earlier in the
year, joined both bodies. The spat (for in truth it is difficult to see it as anything more) about
82
the CBILS paperwork was the final straw, the occasion rather than the cause of his
resignation. Put another way, it was the lack of sympathy which Mr Hawkins had for the
direction of the Company which the majority of the board had determined to take at both
macro and micro levels which caused him to resign. A voluntary resignation from the board
consequent upon a disagreement with reasonable business strategies favoured by the
majority of the board cannot give rise to a complaint of unfairly prejudicial exclusion from
the Company's management. Nor can Mr Hawkins, having voluntarily resigned from his
role on the board, in equity require the provision to him of some alternative (and
presumably lesser) role in the management of the Company. His claim to have been the
object of unfairly prejudicial conduct by way of exclusion from the management of the
Company fails.
[165]
Turning to Mr Rafay, his situation is quite different. Until August 2020, he had a
standing invitation to attend the Company's board as an observer, and indeed had been
asked whether he wished to become one of its members. The invitation was then
withdrawn and the question of his joining the board has not subsequently been raised.
When asked to explain why invitations to observe the board had ceased to be issued to
Mr Rafay, Dr Stevenson stated that Mr Rafay's solicitors had issued unreasonable demands
on his behalf in connection with the subject matter of the present litigation, particularly in
relation to his claim to be entitled to remuneration. However, that correspondence did not
begin until well into 2021, and thus cannot be accepted as an explanation for the withdrawal
of the invitations from and after September 2020. Another explanation advanced by
Dr Stevenson was that it became appropriate to draw a clear line between members and
directors in the conduct of the Company's affairs. Whatever the abstract merits of that
proposition, there is no hint in the contemporaneous material of such a consideration having
83
been entertained at or around the relevant time, and certainly nothing of the sort was
communicated to Mr Rafay. It appears to me to be a subsequent rationalisation of a decision
taken on different grounds. The practically inevitable inference to be drawn from the
evidence was that Mr Rafay was seen by the remainder of the board as being under the
influence, if not entirely in the orbit, of Mr Hawkins, and the voluntary departure of the
latter from the board was seen as an opportune moment to exclude the latter as an observer.
I accept that there may be circumstances in which someone who has, by settled practice,
been a long-standing observer of a board may for one reason or another come to present
such difficulties to its smooth operation as to make it fair to withdraw his invitation to
observe. In the present case, however, one cannot identify anything particular said or done
by Mr Rafay which would justify the conclusion that he fell into that category, and all that
the respondents could say was that he was in some undefined sense "hostile" to them, an
allegation which seemed to me not to represent anything more than a (true) claim that, in
the strategic matters which divided them and Mr Hawkins, he tended to side with the latter.
While I accept that an observer of a board has no particular status in law, has no vote on
board resolutions, and otherwise participates in its business only to the extent permitted by
its members, observer status undoubtedly confers certain practical advantages for an
investor in a company, not least the opportunity to understand the detail of the board's
discussions and the reasons for its decisions, along with the dynamics of its operation, in a
way not otherwise available. No doubt these considerations formed at least part of the
reasons why Mr Rafay was offered, and accepted, the opportunity to observe the board in
the first place. The withdrawal of his invitation to do so represent a material detriment to
his interests as a member of the Company.
84
[166]
I do not consider that the members of the Company, if asked about the issue in the
abstract and before the events of autumn 2020, would have considered it fair as amongst
themselves that observer status and its concomitant advantages should be withdrawn from
one of their number who had done nothing whatsoever to disrupt the operation of the board
and who continued to be entirely civil and reasonable in his relations with its members,
simply because he had aligned himself with a minority view as to the direction in which the
Company should be taken. In any event, I do not consider that any fair-minded and
objective observer of the Company's affairs would conclude that the withdrawal of observer
status in such circumstances was an equitable measure to take. Nor do I accept the
suggestion that it was up to Mr Rafay to ask for his invitations to be continued if he wished;
he did not require to ask to be invited before September 2020 and in any event I do not
accept Dr Stevenson's evidence that the invitations would have been renewed on request;
they ceased for a reason and that reason (Mr Rafay's perceived closeness to Mr Hawkins)
would in my view have prevailed over any such request. It follows that I accept that
Mr Rafay has been the object of unfairly prejudicial conduct by the withdrawal of his
invitations to attend the Company's board meetings as an observer.
[167]
The question of whether it would be unfairly prejudicial to Mr Rafay to decline any
request made by him actually to join the Company's board, given the offers previously
made to him in that regard, remains an open one. He has made no such request, and so
cannot yet have suffered any unfairly prejudicial treatment by its being refused. It suffices
to say for present purposes that many of the observations made and reasons given in
connection with the withdrawal of his observer status might well read over relatively easily
to the context of a refusal of any request he might make to join those of his fellow minority
investors who do enjoy a seat on the board.
85
Remuneration
[168]
The sequence of events concerning the deferred remuneration schemes considered
from time to time by the board emerged very clearly from the evidence. Dr Stevenson
conceived (in 2019, before Mr McCann's involvement with the Company) that those
directors of the Company who were not receiving remuneration, namely all the directors
except himself and Mr Everard, might be incentivised and rewarded by having a scheme
which would remunerate them for work done by them for the Company beyond attendance
at and participation in board meetings. At least some of the rationale for that idea seems to
me to have been to assuage the growing concerns of Mr Hawkins and Mr Rafay that returns
on their investment would remain elusive if the Company continued its slower than
anticipated road to commercialisation and revenue creation. Since the Company had no
cash to fund such a scheme, the remuneration would have to be deferred until such time as
it did, and so the focus was on a scheme which used shares as a proxy for cash until that
time was reached. The first scheme, which concerned itself with growth shares, was
abandoned when the Company's accountants pointed out its incompatibility with the
Enterprise Investment Scheme under which the relevant members had made their
investments. By that stage in mid-2020, Mr McCann had joined the board. He was tasked
with, and did, produce an alternative scheme dealing with bonus shares. That was
approved in principle by the board at its August meeting, and the matter was due to be sent
for approval by the Company's solicitors and accountants before proposals for its
implementation were to be brought before the September meeting for final approval.
However, immediately after the August meeting, Mr Hawkins resigned as a director of the
Company and Mr Rafay in effect became persona non grata to the board on account of its
86
perception of his association with Mr Hawkins. In these circumstances, as Mr McCann most
candidly explained, the rationale for continuing with a scheme which would be costly in
both tangible and intangible resources to the Company ceased to exist, as those who might
benefit from it had been reduced to Mr McCann himself and Mr Abdullah, neither of whom
was particularly interested in those potential benefits. A decision was made not to proceed
with the scheme which had been agreed in principle in August, so no legal right to
participate in any such scheme or draw benefit from it ever came into existence. The matter
appears still to have troubled Dr Stevenson somewhat, since as late as Christmas Eve 2020
he wrote, rather unexpectedly, to Mr Hawkins and Mr Rafay, offering them each a reduced,
one-off bonus share allocation worth £10,000 to cover everything done by them for the
Company to the end of that year, which offer neither accepted. The question is thus whether
the Company's unilateral withdrawal of the contemplated remuneration scheme and its
failure to provide some such other scheme from which Mr Hawkins and Mr Rafay might
have drawn benefit constitutes unfairly prejudicial conduct.
[169]
It is true that matters might have turned out differently despite the resignation of
Mr Hawkins from the board in August 2020. The role of commercial adviser to the
Company which he was offered immediately after his resignation from the board might
have transpired to have had some actual responsibilities and involved him in substantial
work for the benefit of the Company. Mr Rafay could have become a non-executive
director, or the proposed scheme tweaked to enable him to take benefit from it despite not
being on the Company's board. It might even be thought that these things should have
happened had a rather more balanced view been taken of the circumstances of the
resignation of Mr Hawkins and the position of Mr Rafay thereafter, and that it was in some
sense at least unfair to them that they did not happen, although the row about share
87
allotment which broke out in January 2021, the details of which are yet to be related, would
probably have made such an outcome difficult to say the least.
[170]
However, the essential point is that there was nothing inherent in their capacity as
members of the Company, or in the relationships which had been established amongst those
members, which gave Mr Hawkins or Mr Rafay any equitable right or interest to have
established a remuneration scheme in which they could participate. They had no good
reason, whether as members or otherwise, to expect that Dr Stevenson would wish to initiate
a remuneration scheme in the first place, would have had no valid ground for complaint had
the board decided not to accept in principle either of the schemes (or indeed any scheme)
put before it for approval, and likewise have no basis in law or equity to maintain that the
ultimate decision to discontinue plans for a remuneration scheme from which they might
have taken some benefit had matters taken a different course, was unfairly prejudicial to
their relevant interests. Such a scheme was at no point anything more than a possible
benefit which the Company might have decided to confer or withhold as it saw fit. The
petitioners' claim to have been unfairly prejudiced by the decision which was in fact made
cannot succeed.
Share allotments
[171]
When Mr McCann became a member of the Company in March 2020, he was
allowed to purchase his shares at the price of £150 each. That vexed Mr Hawkins and
Mr Rafay, who understood that that price was reserved for existing shareholders, and was a
discount of 50% on the "true" price of the shares. Their belief that the shares had a true
price at all, and that the supposed discount was available only to existing members, had
their source in what had been said by or on behalf of Dr Stevenson, notably a board minute
88
of 25 October 2019. In fact, in the context of a company which not only had sold no product,
but had no product to sell, and whose value lay almost entirely in intellectual property
which had yet to be shown to be capable of any material degree of commercialisation, the
shares were never at any point truly worth more than what someone was prepared to pay
for them. From time to time the board issued business plans or investment opportunity
documents which in various ways talked up the Company's prospects and thus its apparent
value. These documents were issued in good faith in the various contexts in which, and for
the various purposes for which, they were produced, but in the event the Company never
attracted the institutional investment which would have allowed it to develop the pipe in
the manner and at the speed which it wished, and the potential capital values which such
development might have inferred were never made real. As to the "discount" for
established investors, Dr Stevenson explained that he had been contrasting the price which
was being asked from individual investors in that investment round with the entirely
notional price which would have been asked from large institutional investors (had there
been any) wishing to buy into the Company. I accept that that was what he meant, but also
that Mr Hawkins and Mr Rafay genuinely and reasonably understood that the distinction
being drawn was between existing and new investors of whatever stripe, and felt
themselves aggrieved by the introduction of Mr McCann to the Company at the same share
price as they had paid in that round. Ultimately Mr Hawkins and Mr Rafay were asked to,
and did, consent to Mr McCann's introduction to the Company on the terms proposed. It
follows that this particular matter cannot properly now form the subject of complaint on
their part. Its significance lies in the fact that when the Company next allotted shares to
Mr McCann in January 2021 at what Mr Hawkins and Mr Rafay considered to be an unduly
advantageous price, that was perceived by them as a blow upon an established bruise.
89
[172]
There is a great deal of further context to the share allotment to Mr McCann in
January 2021. Firstly, at or around the time of the August 2020 board meeting, Mr Hawkins
had indicated that he would be prepared to invest further in the Company as part of an
exercise in which the other shareholders would equally invest pro rata to their existing
shareholdings. This would have provided funds to the Company by a means alternative to
the CBILS loan which was then being contemplated. However, that proposal was regarded
by most of the board as unviable because it would have involved Dr Stevenson, as by far the
majority investor, introducing a correspondingly larger sum of money than every other
investor put together, and it was at least doubtful whether he would be able to do so.
Matters were not advanced to the stage where any specific sums or possible share prices
were discussed. Instead, a mild argument almost immediately broke out between
Mr Hawkins and Dr Stevenson when the latter implied that Weldability had gained
considerable advantage from its association with the Company. Mr Hawkins resented that
suggestion and demanded an apology for it, which he did not get.
[173]
Mr Rafay's evidence was that he made an offer to invest along with Mr Hawkins on
the same terms. That was not clearly recalled by others or vouched by the documentary
evidence available, but I accept his own evidence that that is what happened. Although no
funds were raised in consequence of these offers, the significance of them was that they left
Dr Stevenson and Mr Everard, at least, convinced of the proposition that Mr Hawkins and
Mr Rafay were not interested in further investment in the Company other than, possibly, on
pro rata terms which Dr Stevenson would find difficult to impossible to meet.
[174]
Secondly, throughout the last quarter of 2020, the Company issued a series of
communications to shareholders setting out its developing financial position. As often in its
history, it was running out of money to fund the research and development activities which
90
the board wished it to keep up. The communications, which culminated in a newsletter
dated 18 December 2020, indicated if read moderately closely that the Company hoped to
receive institutional investment, grant and loan income, but that if it did not, it might well
run out of cash to continue its activities, at least on their existing scale, in the early months
of 2021. Early in December 2020, and presumably in response to the content of the
communications issued prior to that date, Mr Hawkins had emailed Dr Stevenson and asked
whether there was a risk of the Company falling into insolvency in the following 6 months
or so. Dr Stevenson had replied that there was no such risk, but the email chain (into which
the other members of the Company were copied) continued with various exchanges in the
course of which Mr Hawkins expressed himself towards Dr Stevenson in a sarcastic and
mildly rude manner. Even though the tone of the conversation was not such as greatly to
upset anyone of ordinary sensibilities for very long, it cemented the view on the part of
Dr Stevenson and Mr Everard that Mr Hawkins entertained a hostile attitude to the
Company and its management. Mr Rafay played no active part in the exchanges.
[175]
Matters stood thus when, in the course of December, Mr McCann offered to invest
further in the Company with a view to enabling it to continue to operate as the board
wished and to increase his own shareholding to around 5% of the shares in issue. He was
willing to invest around £250,000 and the extent of the augmentation of his shareholding
which he wished to achieve by way of that investment resulted in a price per share which he
was willing to offer of £37. He also wished Dr Stevenson to put some further funds of his
own into the Company, although nothing amounting to anything remotely close to the sum
which a pro rata investment by him would have entailed. Although Dr Stevenson was not
happy with the share price brought out by the proposed transaction, he felt that he had little
option but to accept the proposal if the Company was going to be able to continue with its
91
planned development trajectory. The proposal was accordingly brought before the board
(consisting of Dr Stevenson, Mr Everard, Mr Abdullah and Mr McCann) on 7 January 2021
and accepted in principle. Unlike the process on previous occasions on which the Company
had sought investment from existing members, only the members of the board were aware
of the proposal reasonably in advance of its acceptance, and the members not on the board
(ie Mr Hawkins and Mr Rafay) were not asked whether they wished to invest as well. The
evidence of Mr Everard, which I accept, was that the failure to involve Mr Hawkins and
Mr Rafay in the potential investment opportunity was not the result of inadvertence, but of a
deliberate decision to leave them out of the process. Although part of the rationale for that
decision was a genuine belief on the part of Dr Stevenson and Mr Everard that Mr Hawkins
and Mr Rafay had no interest in investing further in the Company, at least on viable terms,
I find that another part was a tacit view on the part of Dr Stevenson, at least, that the
Company would do better without any increased involvement on their part, in any event if
the sums necessary for its progress could be obtained elsewhere.
[176]
Mr Everard contacted Mr Rafay and also, I find, Mr Hawkins by telephone on the
day of the board meeting and just before it was held, to inform them of what it was going to
do. A letter to similar effect was sent to them, as to all members, later in the day by
Dr Stevenson. He asked them to waive their pre-emption rights and to consent within a
seven-day period to the proposed allotment to Mr McCann. No express invitation was at
that stage issued to them to make any investment offer of their own, despite the possibility
of such offers having been contemplated and noted in the minute of the board meeting.
All of this came as an unwelcome surprise to Mr Hawkins and Mr Rafay, since they had
understood from the correspondence between Mr Hawkins and Dr Stevenson in early
December that the Company had no immediate need for funds and would, if necessary,
92
scale back its planned activities in 2021 if money became very tight. That was, of course, not
quite what Dr Stevenson had said when he indicated that there was no immediate prospect
of insolvency, but again it was an available and reasonable overall inference from what was
said. On 13 January 2021 Mr Rafay put by email a series of pertinent questions to
Dr Stevenson about the proposed allotment, which the latter answered. The other members
of the Company were copied into the correspondence. Mr Hawkins and Mr Rafay were
ultimately informed that they were free to make any investment offer which they wished,
although the communication again fell rather short of an invitation to do so. In the event,
they neither waived their pre-emption rights, consented to the allotment to Mr McCann, nor
made any offer of their own. On 29 January (the matter having been delayed beyond the
7-day pause originally proposed by the board to give Mr Hawkins and Mr Rafay the
opportunity to do what they saw fit) the proposed allotment was made to Mr McCann
(along with that to Dr Stevenson). Mr Hawkins maintains that he would have made an
investment offer had he been asked to do so at the same time as Mr McCann. Mr Rafay says
the same, although in his case it would, according to him, have been an offer to invest pro
rata with the other members.
[177]
Does that sequence of events amount to conduct of the Company's affairs in a
manner unfairly prejudicial to Mr Hawkins and Mr Rafay? I accept first of all that the board
had a proper reason to seek further investment at the start of 2021. Most of the potential
funding sources to which it was looking at that stage had either come to nothing or were still
uncertain. It had secured a government grant from Innovate UK, but in order to access
those funds in due course it required in the short term first to be able to enter into (and have
the means to pay for) various contractual arrangements to enable it to perform the activities
which the grant arrangements required it to undertake. I do accept that there was no
93
absolute necessity for the Company to choose to take that path; it could (as had been hinted
in the shareholder communications in the last quarter of 2020) have decided instead to wind
down and mothball its operations and await the coming of more auspicious overall financial
circumstances. However, it had not undertaken in any sense to its members that it would
take any such course of action, and once the opportunities offered by the award of the grant
had presented themselves, it was an entirely reasonable course of action by the board to seek
the internal funding which would enable the Company to take advantage of them. I
accordingly reject any suggestion that Mr McCann's investment offer was taken up without
any good reason for the Company to have accepted any such offer.
[178]
However, in not informing the members of the Company as a whole that funds were
to be sought, and inviting them all to make such offers as they saw fit, the board departed
from what had occurred on all previous occasions on which internal funding had been
sought. In doing so, it acted in a way which was contrary to the reasonable expectations
which its previously consistent course of action had created amongst its members as a
whole. Although Article 10.6 of the Company's Articles of Association disapplies the
default rule provided by Article 10.2 that any proposed allotment should be offered to all
shareholders on the same terms, if the holders of at least 80% of the existing issued share
capital provide their prior written consent, it says nothing about informing members of a
proposed allotment and enquiring whether they are interested. Whether it was fair not to
do so in any particular situation depends on the close examination of all the circumstances
already described.
[179]
Having identified that the Company would benefit from further funding, the board
had no good reason not to ask Mr Hawkins and Mr Rafay whether they were interested in
putting up some or all of those funds on the same basis as (or even on a different basis from)
94
that proposed by Mr McCann. Its failure to do so constituted an inequitable difference in
treatment amongst members who considered, and were entitled to consider, themselves in
this regard to have the same status, rights and interests as every other member. The fact that
Mr Hawkins and Mr Rafay were perceived not to be interested in further investment did not
result in it being fair not even to ask them whether in fact they were, and if so on what
terms. Dr Stevenson maintained that he did not want to pester members into providing
more money to the Company, but a single communication explaining the position and
asking whether a member was interested in investing further can hardly be so described.
Equally, the very short period originally afforded for Mr Hawkins and Mr Rafay to respond
to the proposed allotment to Mr McCann (said to have been selected to avoid a protracted
period of vacillation on the part of members as to whether to invest) was not justified by the
exigencies of the situation, as its subsequent extension without apparent detriment to the
Company's interests demonstrated. There was nothing intrinsically unfair about the board's
decision ultimately to accept Mr McCann's investment offer, but the manner in which it
chose to go about doing so, though not contrary to the express provisions of the Articles or
Shareholders' Agreement, was nonetheless unfair in the sense driven at by section 994 of the
2006 Act.
[180]
In order to justify the intervention of the court, however, the conduct of the
Company's affairs which is complained of must meet the composite statutory test of being
unfairly prejudicial to the interests of the petitioners. In this context, that means that either
or both of Mr Hawkins and Mr Rafay must establish on a balance of probabilities that their
position as members of the Company is in some material sense worse than it would have
been had the unfairness which has been identified not occurred. I do not accept the
respondents' submission that the fact that the holdings of other shareholders were diluted to
95
a similar or even greater degree in comparison to those of Mr Hawkins and Mr Rafay means
that they were not relevantly prejudiced by the allotment to Mr McCann. Similarly, the fact
that the Hawkins/Rafay dilution, viewed in terms of the proportion which each of their
holdings bore to the entire issued share capital of the Company, was relatively small, does
not persuade me that it falls to be viewed as de minimis. Viewed in terms of the proportion
of the holdings themselves which the dilution effected, it was material, particularly in the
context of a company with an extremely high potential future share price. However, since
the problem with what happened in the conduct of the Company's affairs was not the fact of
the allotment to Mr McCann, but the manner in which that allotment was approached, the
fact and size of the petitioners' consequential dilution is not in the first instance the proper
object of an enquiry into any prejudice suffered by them. Rather, the question is whether the
petitioners' ultimate position would be different, and if so materially worse, had a fair
allotment process been adopted.
[181]
I do not consider that, had Mr Hawkins and Mr Rafay been informed in advance of
the board's wish to raise further shareholders' funds at the end of 2020 or the start of 2021,
and of Mr McCann's offer, and been expressly invited to consider whether they wished to
participate in a fundraising round at that stage, that matters would today stand any
differently from how they do. The giving of such intimation and the making of such an
invitation would, no doubt, have resulted in all the questions which were asked by Mr Rafay
on 13 January 2021 being asked (and answered) rather earlier than in fact occurred, but I do
not accept that it would have resulted in Mr Hawkins or Mr Rafay making any offer to
invest on terms reasonably acceptable to the board. So far as Mr Hawkins was concerned,
he had already expressed serious misgivings about the strategic direction in which the board
was guiding the Company, viz. further research and development designed to make the
96
pipe fit in due course for marketing to the oil and gas industry. His views on that subject
had been a, if not indeed the, material factor in his resignation from the board in
August 2020. The continuation of that strategic direction was precisely why further funds
were being sought by the board in January 2021 and I do not accept that that would have
been a direction which Mr Hawkins would have been prepared to support with further
funds of his own, whether at the share price being discussed with Mr McCann or otherwise.
Since August 2020, relations between Mr Hawkins and Dr Stevenson in particular had
further deteriorated, as evidenced by the rather ill-tempered correspondence between them
about Weldability and the prospect of the Company's insolvency which took place in
August and early December 2020 respectively. Even had Mr Hawkins been prepared in
January 2021 to explore further the prospect of an investment round pro rata with other
members which he had mooted in general terms in August 2020 (which I doubt),
Dr Stevenson for one would not have been able to contribute his required share, Mr McCann
would probably not have been prepared to invest in a round which did not see his
percentage holding increase significantly from the 1% he then held, and the board would
have been justified in refusing such a proposal as an unworkable means of raising the funds
which the Company needed. Finally, I observe that, had Mr Hawkins truly been interested
in further investment in the Company in January 2021, he was eventually offered (albeit
rather later than would have been appropriate) the opportunity to make such proposal as he
saw fit in that regard, even if that still fell short of a positive invitation. He made no offer,
and I do not consider that an earlier positive invitation would have made any difference to
his decision in that regard. The disrespect which he saw (with some justification) as
inherent in the board's failure to issue him with such an invitation to invest may well not
97
have improved the situation, but it did not make the difference between a willingness and
an unwillingness to invest on his part.
[182]
In relation to Mr Rafay, although his antipathy to the direction in which the board
was taking the Company was less well-established than in the case of Mr Hawkins, and the
froideur which existed between him and the board by January 2021 emanated from it rather
than from him, his own evidence was that then (as in August 2020) he would have been
willing to invest further in the Company only on a pro rata basis. For the reasons already
noted, that sort of approach would have been unlikely to have raised the funds which the
board considered that the Company needed at that point and would have been reasonably
rejected by it. Again, the fact that Mr Rafay was belatedly asked to make such offer as he
saw fit and made none tells against the claim that any invitation made just a little earlier
would have been favoured with a more positive response. In conclusion, then, in relation to
the January 2021 share allotment to Mr McCann, although Mr Hawkins and Mr Rafay were
treated unfairly in the respect already described, ultimately the conduct of the Company's
affairs complained of was not prejudicial to their interests as members, and their complaint
under section 994 in this connection fails.
[183]
No separate issue arises in relation to the 2023 share allotment. Although this
litigation was by then well underway, and parties were at arms' length and corresponding
through solicitors rather than directly, Mr Hawkins and Mr Rafay were asked appropriately
whether they wished to invest, but after due consideration declined to do so. Neither the
process nor the ultimate allotment was attended by any element of unfairly prejudicial
conduct.
98
Conclusion
[184]
The case shall be put out by order for discussion of what further procedure or orders,
if any, may be required in light of the content of this opinion.
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