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Cite as: [2003] EWHC 936 (Ch)

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Neutral Citation Number: [2003] EWHC 936 (Ch)
Case No: 3249 of 2002


Royal Courts of Justice
Strand, London, WC2A 2LL
29th April 2003

B e f o r e :


Rock Nominees Ltd
- and -

(1) RCO (Holdings) Plc
(in members' voluntary liquidation)
(2) ISS Brentwood Plc
(3) ISS (UK) Ltd.
(4) Jahanger Ahmed, Simon Cox, David Openshaw



Mr R Potts QC and Mr A Thornton (instructed by Allen & Overy) for the Petitioner
Mr A Steinfeld QC and Miss E Weaver (instructed by Travers Smith Braithwaite) for the Second to Fourth Respondents
Mr A Gledhill (instructed by CMS Cameron McKenna) for the First Respondent
Hearing dates: 7, 8, 9, 10 and 14 April 2003



Crown Copyright ©

    Mr Justice Peter Smith:


  1. This is the trial of a Petition under Section 459 of the Companies Act 1985 brought by Rock Nominees Ltd. ("Rock") in relation to the affairs of the First Respondent RCO Holdings Plc ("RCO"), which is in voluntary liquidation. Neither the liquidators nor RCO were represented at the hearing.
  2. The petitioner is the holder of 266,300 shares of £0.10 nominal value in RCO, which itself has a nominal capital of fifteen million ordinary £0.10 shares, of which ten million, seven hundred and nineteen thousand were issued and fully paid up. Rock therefore held 2.48% of RCO's issued share capital.
  3. Rock held those shares and still holds them as a nominee for two companies. First it holds two hundred and one thousand, three hundred shares for Gambier Holdings Inc. ("Gambier") (a British Virgin Islands company). Second it holds sixty-five thousand shares for Kiwi Ltd. ("Kiwi") a Belize company.
  4. These acquisitions took place in 1998/1999.
  5. There is an association, to use a neutral word at the moment, between these companies and Lord Ashcroft and a further company Rapid Reef Ltd. ("Rapid Reef"), which with BB Holdings Ltd. ("BB Holdings") are wholly owned subsidiaries of Carlisle Holdings Ltd., ("Carlisle") a Belize company in which Lord Ashcroft has an interest. I will address that interest and the association further in this Judgment. Rapid Reef acquired its one hundred and one thousand shares in RCO on 28th June 2000, a date with some significance, as will appear in this Judgment.
  6. Despite the apparent connection between Kiwi and Gambier on the one hand, and Rapid Reef on the other, Rapid Reef is not a party to this Petition.

  8. The Petition arises initially out of the acquisition by the Second Respondent; ISS Brentwood Plc ("Brentwood") acquired 96.4% of the shares in RCO as a result of a take over offer. Subsequent to that the shares in RCO's wholly owned subsidiary RCO Group Ltd. ("Group") were sold to ISS (UK) Ltd. ("UK") under an agreement dated 24th November 2000, for a sale price of £30,117,784.00 (thirty million, one hundred and seventeen thousand seven hundred and eighty-four pounds).
  9. Group's business was the provision of facilities management and business support services, particularly cleaning, catering and security porterage. It carried on business through RCO Support Services Ltd. and RCO Contract Services Ltd., which were wholly owned subsidiaries of Group, which itself, as I have said, was a wholly owned subsidiary of RCO.
  10. The shareholders in UK are ISS Global and ISS A/S. ISS A/S is based in Copenhagen. ISS is a subsidiary of it and Brentwood is a subsidiary of that company.
  11. A Mr Ahmed, a Mr Openshaw and a Mr Cox are directors of ISS UK and were also appointed directors of RCO and were the directors in place at the time of the sale agreement dated 24th November 2000, referred to above ("the Sale Agreement").
  12. Following the sale of the shares to UK, as a result of the Sale Agreement, the result of which left RCO with cash of £1,209,923.20 (one million, two hundred and nine thousand, nine hundred and twenty-three pounds, twenty pence) and £28,907,860.80 (twenty-eight million, nine hundred and seven thousand, eight hundred and sixty pounds, eighty pence) outstanding as a debt due on demand from UK. RCO went into members voluntary liquidation on 28th September 2001. A Mr Finbarr O'Connell and a Mr Jeremy Simon Sprat of KMPG Corporate Recovery were appointed joint liquidators. KPMG were at all material times the auditors of Brentwood and UK. As appears further in this Judgment they also gave advice in respect of the Agreement.
  13. Mr Cox and Mr Ahmed swore a statutory declaration of solvency on 4th September 2001. According to that there is cash shown at the bank of £1,258,506.00 (one million, two hundred and fifty-eight thousand, five hundred and six pounds) and a loan of £32,446,838.00 (thirty two million, four hundred and forty-six thousand, eight hundred and thirty-eight pounds) with a net estimated realisation of surplus after paying debts of £30,609,921.00 (thirty million, six hundred and nine thousand, nine hundred and twenty-one pounds). The difference between those two respective figures and the figures in the Sale Agreement reflect interest that was chargeable at an initial agreed rate of 8% on the deposit and the balance of the purchase price. As a result therefore the price for shares as at March 2001 was £2.80, although the realisation (in interest terms) will be more.
  14. The liquidation has not been finalised although there appears to be no reason why the liquidation could not have been finalised some considerable time ago. As a result of the liquidation the return to shareholders will be a total of £3.13 representing a capital distribution of £0.28 and the proceeds consequent on liquidation to be £2.85. By 27th September 2002 the likely dividend had increased from £2.85 to £2.90 as set out in the joint liquidators' receipts and payments account for the period from 28th September 2001 to 27th September 2002.

  16. In this Judgment I shall split the factual chronology between events up to October 2000 and events thereafter. The first part deals mainly with the process of acquisition of the 96.4% of the shares in RCO by Brentwood.
  17. It starts with the acquisition by Rock in 1998/1999. The then board of RCO noted those acquisitions via Belize Bank, a bank associated with Lord Ashcroft, and they were sufficiently concerned to prepare a strategic defence called "Operation Rex", which was initially proposed to fend off Lord Ashcroft and then any other organisations which might make a hostile bid. That was prepared on 26th January 1999.
  18. ISS is a company that regularly targets potential acquisitions. RCO was one of those potential targets. It enjoyed a good reputation in the industry and in particular its chairman, Alan Raven. In 1999 ISS UK undertook some preparatory work with a view to making a bid. However the interest leaked out and the resulting publicity caused the share price to rise. ISS UK decided not to proceed.
  19. In early 2000 ISS decided to develop the potential acquisition. Jens Olesen senior vice president in charge of mergers and acquisitions support in Copenhagen contacted Mr Ahmed who was at that time the finance director of ISS UK to provide him with some information concerning a report Mr Olesen was preparing for the ISS A/S board on RCO. That led to the report dated 16th February 2000 described as "Project Premium UK" ("the February Report"). As appeared in the evidence, there were some controversial aspects as to the calculations put forward in this report. What it identified however, was a substantial financial advantage that could accrue to ISS in respect of "synergies" by virtue of its acquisition of RCO.
  20. I should say something about synergies. They are the perceived savings that can be achieved by an amalgamation of two businesses. Such savings in this case primarily fell into two categories. First, there were substantial overhead office savings achievable by the sale of the head office. Second, there were substantial potential staff savings that could be reduced at a senior level and third, the amalgamation of the business would potentially produce benefits of cross-selling.
  21. Those synergies were clearly valuable. They were of course personal to ISS. The value of the synergies would not necessarily reflect in the quoted market share of RCO from time to time. Mr Raven the former managing director of RCO, in giving evidence to me, said that they had had four approaches before ISS's offer and whilst relatively high figures had been offered initially of up to £2.70 per share, ultimately, after the various prospective acquirers' due diligence, the offers were substantially reduced, the best one being £2.02. At this time (February 2000) RCO's shares were trading at 190.5 pence fairly close to its lowest level over the last twelve months. According to the February Report that was an attractive level to issue an offer "before the assumed technical recovery of the share price takes place". It was described as a situation where "the window is open now".
  22. As I have said the valuation of those synergies in the February Report is a matter of controversy. If one looks at page 13, which is the Premium financial summary, it appears that the figures for the synergies valuation for the years 2000, 2001 and 2002 and recurring are respectively (assuming the rate of 12.12 DKK to the Pound) £1.5million, £3 million and £3 million. The same impression is given at page 23 of the report, where it describes synergy realisations in the year 2000 and following at the same level. Despite that apparent clear statement both Mr Olesen and Mr Ahmed said that the February Report showed in it's detail (based on giving effect to the conservative assessments at page 29 of the February Report) that the annual savings were £1.8 million only. Mr Burton, the Respondents' accountancy expert, also discerned that, from the body of the February Report. He, Mr Ahmed and Mr Olesen said anybody reading the report with knowledge of the ISS model on which the February Report was based would understand this. I confess, myself, to some difficulty, especially with the idea that the executive summary can in effect be out by nearly 100%, but I accept their evidence.
  23. What is clear however is that the capitalised value of the synergy savings was estimated at approximately £30million, which in itself was in excess of the stand alone value (i.e. the value of RCO without any synergy savings) by some £29.4 million maximum. With a share price of 190.5 pence, the total market value of the shares on the Stock Exchange was DKK 249.1 million being equivalent to approximately £25 million. The parameters for the price range were between 247 pence and 266.7 pence on that latter figure the takeover costs would, in cash outlay terms, be approximately £30 million.
  24. Thus the values of the synergies to ISS represented, in capital terms, in excess of 100% of the value of RCO without those synergies.
  25. As a result of the February Report, ISS decided to make a bid. I will now set out the documentation in respect of the bid.
  26. The February Report had recommended a price of between 247 pence and 266.7 pence. The latter was stated to represent a 40% premium of the current share price (190.5 pence). The February Report also, however, made it clear that even if the premium was exceeded, it would still be value creative.
  27. The bid process was started with a meeting between Mr Alan Raven, the managing director of RCO, and Waldemar Schmidt, the then chief executive officer of ISS A/S. That offer was confirmed in writing by a letter dated 3rd May 2000. There are a number of meetings thereafter and by 10th May the offer had been increased to 247 pence per share. In the intervening period on the 4th May 2000, Mr Raven, a Mr Mike Davies and a Mr Scholes representing RCO, met Lord Ashcroft at his request.
  28. RCO's board met to consider the offer of 247 pence and received advice from Dresdner Kleinwort Benson that the offer was fair and reasonable. The board resolved to recommend that its shareholders accept it. RCO's management held 6.8% of the shares. In addition, a substantial number of RCO's shares were held by institutional shareholders and ISS A/S was quickly able to secure irrevocable undertakings in respect of the management shares and for a significant number of RCO's shares held by institutions.
  29. Lord Ashcroft contacted Richard Scholes again on 12th May 2000, and told him that there was scope for agreement at just above the offer price, namely 272 pence. By 12th May 2000, ISS had secured 29.7% of the issued share capital, just below the 30% requirement for a mandatory bid under the City Takeover Code.
  30. At the meeting with Mr Scholes, Lord Ashcroft, according to a note Mr Scholes prepared, (which was not challenged) Lord Ashcroft told him that it was "crucial" to believe that Lord Ashcroft would buy and stay in as a minority. He said he was determined that ISS would not get the company and the higher they went the more likely it was that RCO would remain independent. He indicated willingness to do a deal at the price of 272 pence, but stated that at that level Mr Scholes would have made him pay "£3 million more than he need to have done".
  31. The meeting then broke up inconclusively, but Mr Scholes formed the distinct impression that Lord Ashcroft would not bid more than 272 pence.
  32. On the same day, under rule 8 of the Takeover Code, RCO was informed of an acquisition by Rapid Reef of five hundred and twenty-five thousand shares, making its interest in total five hundred and seventy-five thousand shares (5.4%). The price paid was 255 pence per share for five hundred thousand and 257 pence per share for twenty-five thousand. Rapid Reef was identified as a subsidiary of Carlisle. On 15th May 2000 a further one hundred and sixty-five thousand shares were purchased bringing the percentage up to 6.9%, a further seventy-five thousand were purchased on 16th May 2000, a further seventy-five thousand were acquired on 18th May and a further one hundred thousand on 19th May, so that by 23rd May 2000 Rapid Reef had nine hundred and forty thousand (8.8%) and BB Holdings Ltd. had fifty thousand (0.5%). Ultimately by 23rd May 2000, Carlisle, through Rapid Reef and BB Holdings Ltd. had an 11.3% shareholding in RCO.
  33. By 16th May 2000 the share price of RCO had risen to 260 pence.
  34. Lord Ashcroft sent Mr Raven a fax dated 23rd May 2000 where he asserted (quite wrongly in my view) that Mr Scholes had misled him by telling him that a recommended bid had to have a 3 in front of it. He indicated that he thought Mr Raven would be able to improve on 247 pence bearing in mind the fact that the price in the market at that stage and to indicate to the shareholders that he would not accept 247 pence even if ISS "goes unconditional at 50% plus". On that day further purchases totalling two hundred and twenty-five thousand shares had taken Rapid Reef's holdings to the figure of one million two hundred and fifteen thousand shares, being 11.3%.
  35. Mr Raven drafted a reply to Lord Ashcroft dated 25th May, correcting the assertion as regards Mr Scholes and expressing regret that the meeting apparently did not progress.
  36. On the same day ISS increased its bid to 280 pence per share, the bid then being mandatory, because by that time it owned 6,399,615 (six million, three hundred and ninety-nine thousand, six hundred and fifteen) shares representing 59.7%.
  37. That of course is substantially above the prices paid by Rapid Reef and £0.08 per share above the figure that Lord Ashcroft was prepared to pay. ISS of course had achieved majority control, thereby making the possibility of Carlisle making a counter offer remote.
  38. It should be noted that under the terms of the offer it was stated that it was ISS's intention to de-list the shares from the Stock Exchange. In addition although the word synergies (perhaps fortunately) was not used, any reader would understand that there would be savings intended from the combination. The offer at 280 pence was substantially over the closing middle market price.
  39. The next day Mr Olesen sent a fax to Tom Lindsay recording a conversation stating that ISS would be willing to acquire 1.13 million shares at the price of 280 pence on the basis that it was confirmed that they were the ones controlled/owned by Carlisle.
  40. The same day Lord Ashcroft sent a fax to Alan Raven, the wording of which is important:-
  41. "Alan,
    No problem, good luck. A good price. As you know I've given Waldemar a clear run"
  42. On the same day he sent a fax to Mr Schmidt and the words of that are also significant:-
  43. "Waldemar,
    Congratulations on RCO. As you know I've now given you a clear run.
    You needn't have actually paid up. We were also talking to the company but would not pay 280p – neither need you! But thanks for a small profit!! See you soon. Michael"
  44. I pause to note, that the sale produced a profit of £250,000.00 (two hundred and fifty thousand pounds) on shares that were acquired over the previous two week period. I suppose small is a relative word.
  45. I have not had the advantage of Lord Ashcroft giving evidence to explain these faxes, a point, which I shall deal with further in this Judgment. Absent any explanation the only conclusion I can draw from these faxes is that Lord Ashcroft decided to cease to be involved in RCO any further. The conclusion I draw from that is that he believed (indeed he said) 280 pence was a high price to pay. In that context, of course, his earlier discussions suggested he would only pay 272 pence and the prices he paid ranged between 255 pence and 257 pence, a matter of a few weeks earlier. I do not see it is possible to give any other interpretation to these faxes.
  46. Therefore, my conclusion is that Lord Ashcroft believed 280 pence per share was a fair price to pay for any shares he might have held in RCO. There is nothing surprising in that bearing in mind the market value of the shares, bearing in mind the capital February Report's analysis and bearing in mind the fact that the vast number of other institutional shareholders believed the same, because they all sold their shares save for a small amount, to which I shall make reference below.
  47. The Rock shares were not addressed. It is clear to my mind that the connection with Lord Ashcroft was overlooked. In the event however, that the Rock shares would have been compulsorily acquired under Section 429 Company Act 1985 ("the squeeze out provisions"), as ISS would have undoubtedly acquired the requisite 90% of the offered shares.
  48. On 30 May 2000 Carlisle Group notified RCO of the disposal of the shares and stated that Mr Michael Ashcroft, who was deemed only to be interested in the shareholding of Rapid Reef and BB Holdings, had consequently ceased to be interested in the company currently held by Rapid Reef Holdings and BB Holdings.
  49. Reference to Rock was studiously avoided. Unfortunately, the Rock shareholding was overlooked, although as I have set out above RCO were aware of a possible connection with Lord Ashcroft.
  50. It is quite clear at that stage RCO and ISS believed Lord Ashcroft had no interest remaining in RCO and had reasonable grounds for thinking that.
  51. On 27th June 2000, the initial offer period expired. At that time, ISS had 90.6% of the total issued share capital. That was not sufficient for the squeeze out provisions to operate. Accordingly on the next day (28th June 2000) ISS made the offer open until further notice. The offer notice made clear the percentage shareholding it had acquired (90.6%). Anybody with any feel of the market would be able to calculate the precise percentage still required to be bought to operate the squeeze out provisions.
  52. On the very same day, Rapid Reef purchased a further one hundred and one thousand shares. It represented 0.9% of the shares in RCO. Significantly, by the 8th September 2000, ISS had acquired 96.26% of the shares, but it required a further 0.8% to operate the squeeze out provisions.
  53. Therefore the Rapid Reef acquisition was the ultimate block on the operation of the squeeze out provisions. Significantly, the Rock shareholding could not of itself have achieved that, because of the other shareholding, which was in the market. It follows therefore that Lord Ashcroft's acquisition of this further 101,000 (one hundred and one thousand) shares, absent any explanation from Lord Ashcroft, can only have been done for the express purpose of blocking the legitimate expectation that ISS would be able to acquire the requisite percentage of shares to operate the squeeze out provisions. It was also, to my mind, contrary to his stated intentions in May, when he indicated he was no longer interested. As I say without this acquisition, Rock's shares would have been squeezed out.
  54. By 31st July 2000, Mr Olesen was aware that there were two foreign shareholders, whose shares were held by Charles Stanley. At that stage there was still an expectation that these could be squeezed out because the requisite numbers could be obtained. Mr Olesen said he did not know the identity of the shareholders at the time, but I find that surprising, bearing in mind the identification of the shareholders by the previous RCO board members. Mr Raven said that he believed he told the ISS team about the identity behind it, but Mr Olesen probably forgot that. Further, on the same day Flemings on behalf of ISS wrote to every shareholder, reiterating the offer and pointing out the consequences of a rejection, namely, that there was a risk that they would become a minority shareholder in an unlisted company. On 3rd August 2000, Rock pursuant to Section 212 of the Companies Act 1985 revealed the shareholdings held for the benefit of Gambier and Kiwi. I reject Mr Olesen's evidence that he did not know of those revelations. In any event, he must have known at the latest by the receipt of the fax of 15th August 2000 from Jasper Mogelberg, which identified the relevant shareholders. That fax also revealed (I suspect for the first time) that there had been a purchase by Rapid Reef, with which Lord Ashcroft was connected. Although the fax did not expressly link Lord Ashcroft to Rock, the evidence was there, as I have set out above. The fax made it quite clear, that in order to obtain 100% of the shares, either the Rock shares would have to be acquired or the Rapid Reef shares would have to be acquired. If those blocks had been separated the squeeze out would have operated.
  55. Mr Mogelberg had discussions with Charles Stanley as summarised in his fax of 5th September 2000 (significantly copied to Travers Smith Braithwaite, the Respondents' solicitors), but he had received no response. Attempts had been made to contact Rapid Reef, but Charles Stanley's response was "they have been instructed to take no actions and relay no direct contact".
  56. On 8th September 2000 ISS received the bad news that they had missed the squeeze out position by 0.8% due entirely to the shares held by Lord Ashcroft in Rapid Reef.
  57. The fax is also important because it said this:-
  58. "If we do not receive additional acceptance which will allow us to squeeze out the minority shareholders before 6th October, the two operating subsidiaries of RCO holdings should be sold to ISS UK and RCO Holdings should afterwards either be liquidated or an extraordinary dividend should be distributed"
  59. In this context it is plain that, by the latest at the end of July, when it was perceived that there were two foreign shareholders, I find that the identity of those foreign shareholders was perceived to be associated with Lord Ashcroft. Further as the February Report indicated (and as the offer letter indicated) ISS's intentions were to acquire 100% of the shareholding and to de-list the shares. They did not want any outside shareholders. Thus, they wanted the full benefit of the values of the synergies.
  60. That does not seem to me, to be unreasonable as the synergies arise out of the merger with ISS. The reality is that the synergies are savings that it alone can make. The synergies are of no value to RCO, other than as a potential bargaining chip on the sale of its business. The existing board did not seem to value these savings beyond the agreed offer. The synergies have no values to any other third parties unless they have a business, which can obtain the same benefits. In this context I find as a fact that there were no other outside parties interested sufficiently in the synergies to seek to acquire RCO. I refer to Mr Raven's evidence, which showed that interested parties had come and gone. Further once ISS's offer became known any interested bidder would have joined the bidding process. None did. My firm conclusion therefore, is that the only organisation that could exploit these synergies was ISS.
  61. Equally, I am clear and so find that ISS as early as August 2000, considered a fall back strategy to acquire the benefit of the synergies in the event that they failed to achieve the requisite squeeze out level. The earliest evidential indication of that is the fax of 8th September 2000. That did not exist in a vacuum and can only be sensibly interpreted as referring to a strategy, which had already been considered.
  62. Attempts were then made to contact Lord Ashcroft, on a chairman to chairman basis i.e. a dialogue between him and Mr Schmidt. However, Mr Olesen's email of 2nd October 2002 shows that Lord Ashcroft had not responded and was sitting Achilles like in his tent and doing nothing but holding onto the shareholding.
  63. It seems to me therefore that ISS were put in an impossible position. They had a legitimate right to seek to exploit for their benefit these synergies, which were entirely theirs. To that aim, they had offered what was a very fair price for the shares, which was demonstrated by the acceptances and by the sale by Lord Ashcroft of his 11.7% shareholding. If he did not think it was a fair price, he simply would not have sold. All the rest of the market thought it was a fair price. ISS therefore had a legitimate expectation that they should be entitled to enjoy the synergies for their own exclusive benefit, having paid prices at this level.
  64. The only thing that was stopping it was the after the event acquisition by Lord Ashcroft of one hundred and one thousand shares in Rapid Reef. I have not had the advantage of any explanation from Lord Ashcroft as to the motivation behind this purchase. Nor have I had the advantage of an explanation from Lord Ashcroft as to why Rock's shareholder clients were willing to allow their shares to remain in an unlisted company. At this stage I should say that it is a surprising decision, because apparently, the ultimate beneficiary of Kiwi and Gambier is a Charitable Trust. The retention of shares in such a small number in an unlisted company seems an odd thing to do. It is likely that such a retention would remove a ready marketability of the shares (contrast Lord Ashcroft's belief that £2.80 represented a premium price). Such a small shareholding would not be able to participate in the management or control of the company and finally, one way or another a ready availability to dividends might well be restricted. It does not in my opinion represent a sound investment for a charitable organisation. It appears to act solely on the advice of Lord Ashcroft, yet he has not graced these courts with his presence to explain his thought processes behind the decision of Gambier and Kiwi to retain their investment. The retention flies in the face of any sensible investment decision that a Charitable Trust investment manager would make, in my opinion.

  66. Once ISS had realised the short fall in the shares, it clearly I find, embarked on a strategy to acquire the benefit of the synergies, and deprive the minority shareholders of any right (theoretical or otherwise) to participate in those synergies. As Lord Ashcroft was not willing to sell, nor willing to talk, (a point which fatally flawed the Petitioner's expert, Mr Tolkien, to which I shall make reference below), there was nothing else to do.
  67. Other possibilities which were canvassed by Mr Tolkien, (to which I shall make reference when I come to deal with the experts in a further section of this Judgment, he accepted in cross examination), were completely unattractive and would in all probability have led to a realisation of less than the £2.80 plus interest, which the liquidation route is going to achieve.
  68. Mr Olesen's email of 2nd October 2000 said that the two subsidiaries should be sold at fair market values, which should be confirmed by a valuation and he proposed to Mr Ahmed that they prepare the valuation together. This strategy was embarked upon shortly before the offer closed, which took place on 20th October. However, it was clear by the 2nd October, I suspect, that ISS knew that it was not going to obtain the squeeze out, because of the Rapid Reef shareholding.
  69. There was then a meeting at Travers Smith Braithwaite ("TSB") on 25th October 2000, where ISS, because it had been unable to effect the compulsory purchase of the outstanding minority shareholders, had decided to sell RCO's operating companies "to itself" at a market valuation to be determined (probably the equivalent £2.80 per share, the original acquisition share price), put RCO into members voluntary liquidation, and thereby pay off and eliminate the minority shareholders. The advice has not been revealed, but that does not in my opinion necessarily lead to an inference that the actions were contrary to the advice of TSB. That would be an improper way to seek to subvert the doctrine of privilege.
  70. This reflects a strategic decision made to go down this road, provided it could be done lawfully, to achieve indirectly the purpose, which ISS had intended, namely 100% acquisition of RCO and its business and the utilisation of the synergy values. The reference to £2.80 per share brings into play the fact that under Section 430A CA 1985, a subsequent acquisition of further shares after the closing date for a period of three months can only be done at the offer price. That date would have expired on 8th January 2001. It follows therefore that during that period if any shares were to be acquired they could only be acquired at that price at least.
  71. The decision was made to involve ISS's auditors KPMG in the process. Their understanding is set out in a letter of 1st November 2000 to Mr Ahmed, in which KPMG Corporate Finance set out the terms of its engagement. The fee estimated was £25,000.00. Mr Ahmed (somewhat unconvincingly to my mind) suggested that they did not want to use full accountancy valuations because they would cost a lot (£100,000.00 (one hundred thousand pounds)). In the overall picture, whilst £100,000.00 is a lot of money, it is a relatively modest sum. What I find is that ISS wanted to be fair, if they could, but also did not wish to jeopardise their desire to acquire the synergy values by 100%.
  72. KPMG were retained solely to provide a review of the valuation exercise being carried out. It was made clear they were not reviewing the actual valuation.
  73. On 17th November 2000, having received a valuation prepared entirely by Mr Ahmed their review concluded "it is our view that the valuation had been prepared on a fair and reasonable basis and with due care and consideration." The worth of that statement is completely undermined by the previous paragraph, which concluded, "Specifically our work did not constitute a valuation".
  74. Mr Ahmed's report concluded that at the date it was prepared the stand alone value of RCO was £1.78 per share, and thus a price of £2.80 represented a premium of 57.3%. In his evidence before me he insisted that the November valuation included synergies. I reject that evidence. It is self-evident on its content that no synergies are included in the valuation.
  75. It might create considerable difficulties to ISS in this case if it had paid £1.78, in effect for the shares to acquire the synergies. However, ISS paid £2.80 and that is the price set out in the Sale Agreement. As I have said by virtue of Section 430B(4) Companies Act 1985 it was obliged to pay at least that price, but that does not mean that the price did not represent a full price including a value that could be fairly claimed by RCO for the synergies.
  76. To implement the procedure a letter was drafted by TSB, which is undated. Mr Potts QC criticised this letter as being self-serving. He is right to criticise it in that respect, but I find that the first paragraph accurately reflects the thought processes of ISS at that time. It said:-
  77. "We write to confirm the understanding between us that neither us nor any other member of the ISS Group is prepared to finance the development of the companies in RCO Group nor allow them to enjoy any synergies with the ISS Group unless they are wholly owned subsidiaries of the ISS Group."
  78. As far as I can see that has been ISS's thought processes right from the start. The letter is somewhat surreal, because everybody knew what was happening and the board meeting that took place was a largely illusory affair having been attended apparently by Mr Cox and Mr Ahmed and lasted a matter of minutes. The minutes of the meeting approving things had already been prepared in advance by TSB and I do not accept for one minute that any discussion of quorum nor in fact any actual discussion at all took place. The exercise was purely to rubber stamp the done deal.
  79. The significance of this of course is that Mr Cox and Mr Ahmed, who decided the transaction in theory on behalf of RCO, simultaneously decided the transaction on behalf of ISS and indeed they signed the sale agreement on both sides. The sale took place at a price determined by Mr Ahmed in his capacity as director and employee of ISS. It is fair to say that in the normal world it is unusual for a purchaser to dictate a price. There would of course be no squeak of opposition from RCO because the opposition is represented by Mr Ahmed and Mr Cox. TSB apparently represented both sides. ISS's auditors, KPMG then prepared their review and were willing, as I have set out above to act as liquidators in the voluntary liquidation. Given their role as auditors and "reviewers" of the Sale Agreement, KPMG must either have been supremely confident or blissfully unaware of the potential conflicts that would arise if they became liquidators charged with the duty to satisfy themselves that the liquidation (and antecedent company transactions) had proceeded properly. Not surprisingly, KPMG as liquidator has not challenged any of the transactions.
  80. These transactions were not implemented immediately, but a substantial period of delay took place, until September 2001, when they were revealed publicly. I reject Mr Ahmed's evidence and Mr Olesen's evidence that it was delayed for that period because they were busy with other things. The amount of money left lying around accumulating interest militates against such a casual approach to the finalisation of the transaction. The reality is, I find, that they did not implement the liquidation until they were absolutely sure there was no prospect at that stage of Lord Ashcroft unravelling the transaction, because by then the synergies had been fully implemented and it would be impossible to go back.
  81. It was plain in cross examination that neither Mr Cox nor Mr Ahmed properly understood their fiduciary duties as directors of RCO and ISS. Mr Ahmed did not appreciate for example, the potential conflict that might arise from the fact that he derives income and share options through his employment by ISS, which could be said to show he has an indirect interest in ensuring ISS obtains the synergies at the lowest possible price. The declaration that was drafted into the minutes was therefore a self serving declaration and did not accurately reflect the affairs. It is quite plain, and I so find that there was a potential for conflict as between the directors of RCO and ISS if they were the same people acting on the same advice, as there is no true arms length independence. He had an inherent interest because of his employment. However, I accept Mr Steinfeld QC's submission that breach did not prevent him from voting see article 97 of RCO's Articles of Association and McPherson –v- European Strategic Bureau Ltd. [1999] BCLC 203 at 216 – 218.
  82. When the proposed liquidation was announced Mr Wilson who did give some form of evidence on behalf of the Petitioner sent Lord Ashcroft an internal memo dated 10th September 2001. History does not record his response. The memo says that the liquidation will produce £3.13 and that the final bid price was £2.80 and he then asks:-
  83. "do you want me to research rights of minority shareholders in voluntary liquidation".
  84. After a flurry of the usual form of inter solicitor sparring the present petition was issued.
  85. A major significant factor to my mind is that Rapid Reef has not joined in the Petition. This adds significance in two areas. First (absent an explanation from the silent Lord Ashcroft) it leads me to conclude that Rapid Reef believes its minority shareholding has not suffered unfair prejudice. This makes the stance of Rock seriously questionable and in the event, as I have decided in this case, completely untenable. Second the absence of Rapid Reef as a party has had a devastating impact on Mr Tolkien's expert evidence, as I shall set out in the section dealing with the expert evidence.
  86. I will now go on to consider the evidence.
  87. The key factual issue was to determine the value of the underlying assets sold under the Sale Agreement. If the price represented the best price reasonably obtainable there would be no unfair prejudice. If it was not there would be prejudice.

  89. The only evidence offered by the Petitioner, was that of Andrew Stephen Wilson, who was described as being financial adviser to Carlisle, who also advises other entities in which Carlisle and Lord Ashcroft have an interest. He also stated that he had primary responsibility for the affairs of Kiwi and Gambier.
  90. It is not being unfair to Mr Wilson to say that it is about the only clear part of his evidence. Before he actually gave evidence we had the somewhat surprising spectacle of finding something like 75% of the witness statement being struck out, as Mr Potts QC conceded in effect the material there, consisting largely of assertions, expressions of opinion and usurpation of my role, should never have been there in the first place. The second disadvantage Mr Wilson has is that he was not there when the material events took place. The third disadvantage Mr Wilson has is that he has clearly been put up to avoid revealing as little as possible about the Ashcroft empire and its connections. The evidence showing the connection between Gambier and Kiwi and Lord Ashcroft and Carlisle was completely unsatisfactory. Mr Wilson said that the ultimate beneficiary of Kiwi and Gambier was a Charitable Trust which he believed was offshore. He did not know the terms of the Trust, he had not seen the Trust deed, he did not know who the Trustees were and he had never had contact with them. Equally he did not know who the directors of Kiwi and Gambier were, and he had had no contact from them. His sole contact was Lord Ashcroft who was "interested" in the Charity, but not in any way in which Mr Wilson was able to explain with any clarity. He was unable to explain the investment strategy behind the retention of the shares in the ultimately unlisted company. He apparently acted solely on the instructions of Lord Ashcroft and he had no basis for understanding that Lord Ashcroft had any authority to act on behalf of Gambier and Kiwi.
  91. He was unable to assist in relation to the Rapid Reef arrangements and he was unable to assist as regards the investment strategy and policies behind Lord Ashcroft's various decisions.
  92. In short, his evidence was completely useless. What was of significance was not what he said but what he did not say.
  93. The sole purpose of his evidence was to provide an evidential platform for suggesting that the Rock shareholding had a right to extract a substantial amount if ISS wished to buy it out, representing the synergies, or a percentage of them. This led to quite extraordinary claims for valuation as set out in Mr Tolkien's report. Mr Wilson in cross examination asserted that one shareholder could equally assert that blocking power and thus demonstrated that if Rock was entitled to the enhanced value representing this ability to block, there was nothing to stop any other shareholder doing likewise. In fact, if there is any basis for this type of claim it appears to be right to this extent. If the minority shareholders are sought to be compulsorily acquired, an offer has to be made and 90% of the minority shareholders acquired, so that the squeeze out provisions can be applied again. In view of the shareholding of Rock and Rapid Reef, either can stop that exercise operating. Thus any attempt by ISS to acquire a shareholding of the minorities with a view to squeeze out must necessarily involve the acquisition of both Rock's and Rapid Reef's shares.
  94. This led Mr Potts QC in his closing submissions to base the Petitioner's claim for sale at an undervalue, on the Respondent's evidence, a somewhat unusual course.
  95. In this context of course Rapid Reef's absence from these proceedings must have a significant effect. Mr Wilson was unable to elucidate to the court as to what were the thought processes behind Rapid Reef and its acquisition of shares and absence from the proceedings, as I have set out earlier in this Judgment. Absent an explanation from Lord Ashcroft, the conclusions are that Rapid Reef is staying out in the hope that the court will determine that Rock is entitled to the substantial payment it seeks, whereupon, Lord Ashcroft will then emerge with Rapid Reef and claim the same amount.
  96. The evidence of Lord Ashcroft was vital to this case. It seems to me that absent his explanation for the May faxes, absent his explanation for the decision to sell Rapid Reef's 1.2 and 1.5 million shares on 28th/29th May 2000, absent his explanation for the subsequent acquisition by Rapid Reef and absent his explanation for the refusal to meet ISS in October 2000, and finally absent his explanation as to why Rapid Reef is not a party to this action but Rock (presumably on his advice per Mr Wilson) is, the court has been deprived of a significant amount of evidence, which is necessary to consider in deciding whether the Petition is made out. At the start of the trial I adverted to the decision of the Court of Appeal in Thompson –v- Bryant Homes Northern [2002] EWCA Civ 1079.
  97. That case considered the inference to be drawn from the absence of a witness. Although in that decision the court's conclusion was that an explanation had been given to explain the absence, in the absence of any proper explanation adverse inferences ought to be drawn by the court, see Wisniewski –v- Central Manchester Health Authority (Court of Appeal 1 April 1998).
  98. In the absence of an explanation (and none has been given beyond Mr Potts QC's submission that his evidence is not relevant, which I reject) Lord Ashcroft's absence is significant. I conclude from his absence that (1) he believed £2.80 is a very full price representing the value of the shares in Rock, (2) that he misled ISS and RCO in May 2000 as to his intentions, (3) that he deliberately acquired Rapid Reef shares on 28th June to block the squeeze out by ISS and (4) the reason why he did not talk and the reason why he acquired the shares was to force ISS into paying him a large unmeritorious amount of money to enable it to achieve its legitimate commercial expectations, when it spent the large amount of money it did in acquiring RCO's shareholding. To my mind this is unacceptable conduct. It is particularly galling that such conduct is then used as a platform to present a Section 459 Petition alleging that his interests as a minority shareholder have been unfairly prejudiced. As Peter Gibson LJ said in Re Ring Tower (no. 2) [1989] BCLC 427 at 437 A, the jurisdiction should be carefully controlled to prevent it from becoming an instrument of oppression. It is difficult to see how this Petition can be described as anything other than an instrument of oppression, designed to unlock for Lord Ashcroft monies, which bear no relation to the value of the shares and bear no relation to any commercial or legitimate interest he would have in the shares in RCO. Euphemistically this practice (which I understand is a not unheard of practice in the City) is described as "green mail". The proper word to my mind is blackmail. It is the kind of thing, which brings the City into disrepute, to my mind. The purpose of the City is to raise finance to enable companies to develop businesses for their own and the country's well being. Where matters are dealt with in speculation and profits are made, which are then gathered off shore, when there is no merit and no exposure to the kind of risks associated with companies, that to my mind is not legitimate.
  99. These are the reasons why Lord Ashcroft will not present himself to this court for cross examination. He was not content with a small £250,000.00 (two hundred and fifty thousand pound) profit, earned in a matter of weeks. He now seeks to extract millions from the Respondents. He does not stop there however. I have no doubt that if the Petition was successful he would then seek to extract further millions through the Rapid Reef shareholding. All of this extraction is sought merely as a device to block the legitimate expectations of the overwhelming majority of the shareholders in the company and against the belief of all shareholders that £2.80 represented a good price for the shares, and his own belief that it represented such a fair price and against the backcloth of him giving a clearly misleading impression that he was out of the race and giving ISS a legitimate expectation that he was no longer opposed to them acquiring 100% shares in RCO.

  101. I have already described the procedure that the Respondents adopted to deal with the recalcitrant Lord Ashcroft. Mr Cox and Mr Ahmed were directors of both RCO and ISS. As I have said they were therefore on both sides of the transaction. Whilst the presence of an indirect personal interest (as set out above) will not affect the result, I do not see how it can be argued that it is sensible that the same directors act on both sides of the transaction. Of course if both sides had a 100% shareholding in the same entity behind them, there would not be a problem; see for example re Duomatic [1966] 2 Ch 365 (assuming of course that there are no problems posed by creditors). If there was a breach, all of those who would have been entitled to complain about the breach could waive it. There is nothing significant about that. A further complicating factor of course is that Mr Ahmed qua employee of ISS, prepared the report, which fixed the price that RCO sold to ISS. That compounds the difficulties. The problem could have been addressed by a full review by KPMG, who could have addressed the issue as to the price. Mr Ahmed in cross examination said that option was not considered because accountants are expensive, and the exercise would have cost £100,000.00 (one hundred thousand pounds). Putting aside Mr Ahmed's own accountancy background, I find the answer disingenuous. In the absence of any explanation of a credible nature I conclude that KPMG would not have been willing to provide a full valuation. As I have set out earlier in this Judgment, they patently did not do so. An independent valuation could have been obtained to cross check Mr Ahmed's calculations. Another alternative would have been an agreement to sell as between the companies at a price determined and agreed to be binding by third party. I can well understand why commercially none of these alternatives would be attractive to ISS. Another alternative was that posed by Mr Fishman, the insolvency expert called by the Petitioner, namely the liquidator selling the assets. Although he accepted that it was the usual practice in a voluntary liquidation for the assets to be sold by the company in advance of the liquidation, the possible conflicts in the absence of a resolution of those before hand, could have been addressed by sale by the liquidator.
  102. I am firmly of the view, as I set out later in this Judgment, when I come to Mr Tolkien's evidence, that a sale by a liquidator would not have achieved a better price than that was obtained, i.e. £2.80 per share.
  103. Finally, to complete the possible conflicts, as I understand it, TSB acted for all parties concerned. They clearly drafted the letter which was signed by Mr Cox at the meeting and they drafted the minutes of RCO, which made the decision. At that time they were acting also for ISS.
  104. Mr Steinfeld QC submits that as 96.4% of the shareholders in RCO agreed to the transaction, that cannot be the subject matter of a complaint. If that were correct, there would never be a 459 Petition, when the assets are appropriated to the detriment of the minority, if the majority approve it. The authority relied upon by him, namely Bamford –v- Bamford [1970] 1 Ch 212 as Harman LJ said (page 237-238);
  105. "It is trite law, I had thought, that if directors do acts, as they do every day, especially in private companies, which, perhaps because there is no quorum, or because their appointment was defective, or because sometimes there are no directors properly appointed at all, or because they are actuated by improper motives, … and then find that everything has been so to speak done wrongly done … such directors can, by making a full and frank disclosure and calling together the general body of the shareholders, obtain absolution and forgiveness of their sins; and provided the acts are not ultra vires the company as a whole everything will go on as if it had been done all right from the beginning."

    As he said it is done every day and if the majority will not give and approve the directors must pay for it. He referred to the well known case of Regal (Hastings) Ltd. –v- Gulliver [1967] 2 AC 134.

  106. However, that authority and the authorities referred to is not authority for the proposition that the directors can commit a fraud on the minority, and that it is not challengeable by the minority because the majority have approved it. If for example, (and this was a question I posed to Mr Steinfeld QC in argument) Mr Ahmed and Mr Cox had agreed to sell the assets for £1.00 (one pound) to ISS, would that have been challengeable? His answer was yes. Any transaction which would fall within the exception to the well known rule in Foss –v- Harbottle was challengeable before the provisions of Section 459 and the provisions it replaced were enacted. The minority was then given a right to bring a derivative action on behalf of the company. Thus if the directors proposed to sell the assets at a great undervalue and the majority of the shareholders agree, the minority can cause the action to be brought to restore the assets to the company.
  107. There is nothing magical or new in that proposition. Thus in the present case if the assets were sold at an undervalue, the effect is the minority shareholding suffers. The majority do not suffer, because the depression of the assets value in RCO merely swells their corresponding (and greater) interest in the shares in ISS.
  108. The directors of RCO had a duty to obtain the best price reasonably obtainable for the assets. Mr Potts QC referred me to the decision of Jacob J in re Trans Tec Automotive (Campsie) Ltd. [2001] BCC 403. The facts there were somewhat unusual. The company had gone into receivership. It supplied parts to Ford Motor Company. It operated a "just in time" policy, which is a modern practice whereby companies no longer carry any stocks, but simply order products as and when required. The Receivers perceived that Ford would have a need for these parts short term and proposed to charge a significant price increase from it on a long term basis. Ford was very unhappy about this and sought the appointment of a provisional liquidator on the basis it would not agree to the receivers' terms and the business was capable of being sold as a going concern. Ford argued that the company's assets were in jeopardy, the actions of the receivers in seeking to exploit Ford's position was improper, and the receivers' conduct amounted to blackmail.
  109. Mr Justice Jacob dismissed Ford's application, quite robustly, and I can well see why he did. The duty on directors is no different to the duty owed by trustees as enshrined in the decision of Buttle –v- Saunders [1950] 2 All ER 193.
  110. Any power that a director exercises; if it is done bona fide, is not challengeable. If it is done with the purpose of harming the minority or expropriating the value of their assets, or wrongfully excluding them, then it might be challengeable on the basis of a Section 459 Petition. That is why the section was enacted.
  111. In the present case it is clear as I have said that ISS was motivated to secure for itself the 100% benefit of the synergies and it was not willing under any circumstances to share the benefit of those synergies beyond the price that it was willing to pay and had paid, namely £2.80.
  112. Mr Ahmed and Mr Cox were in a position of hopeless conflict, because wearing their garments as directors of RCO they had to exploit ISS who wanted the synergies. Wearing their garments as directors of ISS they wanted to pay as little as possible. I have already set out above the way in which that apparent conflict could have been resolved, but it cannot be resolved by the majority simply voting the transaction through.
  113. The same applies to another alternative suggested by Mr Steinfeld QC, namely a company reconstruction. He referred me to the decision of the Court of Appeal in Re BTR Plc [2000] 1 BCLC 740. However, that decision is not (see the reasoning at pages 741-742 and 746-748) in the judgment of Chadwick LJ, authority for the proposition put forward by Mr Steinfeld QC. The case decides that where there is a reconstruction, the court will exercise a discretion as to the competing disputes between the parties at a reconstruction and "hold the ring between different interests; and to decline to sanction a scheme if satisfied that members having one interest have sought to take advantage over those having another" (page 747). What that decision says therefore, is the court will not sanction a scheme, which will in effect disadvantage another shareholder. There is nothing surprising about that either.
  114. It follows from the above that the actions taken by the Respondents and the manner in which they disposed of the shares, in my opinion, constituted a breach of fiduciary duty by the officers of the company. The next and most important question, however, is whether that action occasioned the Petitioner any loss, which can form a justifiable complaint in a 459 Petition.

  116. As I said earlier in this Judgment, as the arguments and the case developed the key issue was the value of the assets transferred by the Sale Agreement. Paragraph 37 et seq. of the Petition says:-
  117. "37. The Directors were aware or ought to have been aware that synergies would be unlocked once the RCO companies were developed within a wholly owned subsidiary of ISS Group. The directors were aware or ought to have been aware from the documentation on which they relied at the meeting of 24th November 2000 that the synergies that would be unlocked for the benefit of the ISS Group alone were in the region of £1.8 M to £3 M annually. The directors are aware or ought to have been aware that the value to ISS Group of acquiring these synergies exceeded market value for the Assets to a purchaser unable to unlock those synergies.
    38. Alternatively the directors were aware or ought to have been aware that there was a real value to the ISS Group in avoiding the risk of competing for the assets in the open market. The directors were therefore aware or ought to have been aware that the assets could be sold for a price that reflected that value to the purchaser.
    39. The directors ought to have sold the assets for a price that reflected the value to the purchaser of the synergies referred to at paragraph 37 above or the value of avoiding the risk of competing in the open market referred to at paragraph 38 above, as this was the best price reasonably obtainable in the circumstances.
    40. The Directors did not achieve the best price reasonably obtainable for the assets and therefore did not sell the assets for the permissible reasons set out at paragraph 29 above. Accordingly the directors acted improperly, alternatively negligently, and thereby breached their fiduciary duties to the Company".
  118. The permissible actions referred to in paragraph 29 were that if the sale was for a lawful purpose, namely to promote and further the best interests of the company, and the directors obtained the best price reasonably obtainable for the assets.
  119. Those decisions of course can be made by the directors and they are capable of review by majority, but not as I have set out earlier in this Judgment, at the expense of the minority shareholders.
  120. It is therefore incumbent on that allegation as pleaded by the Petitioner for it to prove that the sale of the assets under the Sale Agreement was in breach of that duty and that the sale was at an undervalue. It is usual for a Petitioner making such an allegation to allege that the price (in this case) £30,117,789.00 (thirty million, one hundred and seventeen thousand, seven hundred and eighty-nine pounds) calculated by multiplying the number of asset shares in the Company by the mandatory offer price of £2.80 per share was not the best price reasonably obtainable.
  121. It would then be normal for the petitioner to allege what would have been the best price reasonably obtainable and to prove that, usually by expert evidence.
  122. The most surprising aspect of this case is that the financial expert called by the Petitioner, Richard Tolkien was expressly not asked to express an opinion on the value of the assets sold by the Sale Agreement.
  123. Mr Wilson's evidence was of course useless. He was not qualified as an expert and his evidence was irrelevant to the issue before me. What was interesting about Mr Wilson's evidence was that he viewed the position of Rock to be that of a shareholder, which if it wished to be bought out could dictate its price because it could block the squeeze out and the 100% acquisition by ISS.
  124. This is the thrust also of Mr Tolkien's report. I should deal with Mr Tolkien's report because of the way in which he addressed it and the way in which the case is pleaded (and the way Mr Potts QC dealt with it in his closing submissions), when none of those is the same.

  126. Mr Tolkein is obviously a very experienced and highly regarded financial director who has been a director with Deutsche Bank, HSBC and other financial institutions. Significantly, however, he had no direct experience of dealing with a dispute of the nature which faced the court, namely how is the value of the minority shareholders to be addressed when that minority's rights are sought to be expropriated by the majority.
  127. His report in paragraph 7.3 addressed a number of options that he said were available to ISS. The first was to share the synergy benefit with the minority. This ISS was plainly not willing to do.
  128. The second was to seek a sensible way forward and attempt to negotiate (he says with Lord Ashcroft significantly). He says in this part of his report (paragraph 7.3.2) "this could have involved the preparation of an independent valuation report on an agreed basis. No attempt was made to contact Rock. Although it is apparent … that an attempt was made informally to communicate with Lord Ashcroft before on 2nd October 2000 it is not known whether this was with the purpose in mind of offering to purchase Rock share in RCO. I am informed that no further step was taken by the ISS Group to contact Rock until 5th September 2001 …".
  129. The third option was to propose a voluntary winding up by RCO including dealing with the assets. His fourth option was to sell the assets on the open market.
  130. In cross examination Mr Tolkien acknowledged that all the other three options were less attractive and unlikely to achieve a better result in net terms than the £2.80 that was already on offer.
  131. The main thrust of his report was on the basis of paragraph 7.3.2 namely; it would be advisable to negotiate a sale of the minority shareholding. In a further part of his report (paragraph 10.2) he said:-
  132. "The ISS Group by causing the sale of RCO's assets to the ISS Group removed from Rock its interest in the trading assets of RCO via its 2.48% shareholding in RCO. It thus removed Rock's ability to sell that shareholding with an interest in the underlying assets to a third party. It also denied Rock the opportunity for commercial negotiation on the terms it would sell its shares to a purchaser wishing to acquire a 100% interest in the assets of RCO and enable it properly to access the full synergies which it had estimated to be worth £1.8 M to £3.8 M per annum."

    Whether ISS had valued the synergies at that level is a matter to which I shall return to in this Judgment.

  133. In his revised paragraph 10.7 Mr Tolkien valued Rock's shareholding as being worth between 5% of £1.8M of the annual synergies, which equate as approximately £7.00 per share and two years purchase of the synergies on the same basis which would have valued the shares at £12.00 per share.
  134. This is of course an extraordinarily high value to attribute to 2.48% of a shareholding in a private unlisted company. It is self evident to my mind that ordinarily, such a small shareholding in a private unlisted company has little or no worth in the sense that its ability to receive dividends is likely to be restricted, its ability to influence the board is likely to be restricted and its ability to sell the shares is likely to be restricted. That is not a hard and fast rule of course, but it is generally regarded as the position as regards such a shareholding. Nevertheless, Mr Tolkien's report values this minority shareholding at a price of between two and a half and four times the price paid to acquire the shares in the bid process which started in May 2000. Incidentally, the same factor of course applies to the 1.2 million shares Lord Ashcroft sold in May 2000.
  135. Mr Potts QC attacked that analysis, because it failed to address the difference between the sale of the shares on the market and the sale of the assets to a particular (and unique) purchaser who could exploit those synergies in a way in which no other organisation was able so to do. I understand the point, but I do not accept that it is necessarily as strong as he submits. I say that for this reason. Whilst ISS is a special purchaser, the assets in the hands of RCO have no value beyond that which ISS is prepared to pay for them. It might be willing to pay a premium to acquire the benefits, but it knows as part of the bargaining exercise that no one else is going to compete with it. It therefore knows that if RCO wishes to achieve a premium on these synergies, it will only obtain it from it. It therefore will only deal at a price that it is willing to pay. The ability to exploit these synergies is therefore limited by that fact. All the evidence in the case demonstrated that ISS were not prepared to pay more than £2.80 per share to acquire this minority interest, the evidence was, because ISS believed that that price represented a fair price over and above the assets and thus by inference included a premium element representing the value of the synergies which could not otherwise be released.
  136. There is a further factor. It is quite clear that ISS believed that Lord Ashcroft had behaved improperly to them. I have found already that he misled them in May 2000 and ISS might not unreasonably take the view that they would not be prepared to deal with Lord Ashcroft and reward his behaviour at any price. In other words it might take a principled stance that it was not going to submit to greenmail. Mr Potts QC urged me to deal in realities, and ask whether or not ISS would wish to do such a matter which might cost it more. Fortunately, not everybody is motivated solely by reference to a sordid commercial gain, especially when it perceives that sordid commercial gain is being extracted from it. I can well understand why (perhaps like Peter Beswick in the well known case of Beswick –v- Bewick [1968] AC 58) ISS felt that enough was enough. That is plainly the view that ISS took. Mr Potts QC submitted that there was no evidence to substantiate that, but the reality is that if that was not the stance, this action would not have been fought by ISS.
  137. The other matter that is significant is that if the Petitioner's case is right, a large number of other people and organisations missed the synergy point. I have already observed that the possible realisation of the synergies was reflected in the offer documentation. It was out in the open. The price at that time was £1.90 per share and a premium reflecting the value of the synergies appears to have been arrived at in the market at £0.90, namely £2.80. Further, one cannot ignore the board of RCO. I found Mr Scholes and Mr Raven to be impressive, honest and straightforward witnesses. If there was a value to be exploited in the synergies, which they would be well aware of, they were in a position to exploit them (for example) by not recommending the offer. I cannot believe that they had any perception of the value of the synergies as being greater than the share price which they recommended, which ultimately again was £2.80 per share.
  138. Finally one cannot ignore Lord Ashcroft. He thought the shares were dear at £2.80. He presumably knew of the synergies then and he has not of course come to court to explain why £2.80 was a high price for him then, but now he needs up to £12.00 a share.
  139. All the contemporary evidence therefore shows that £2.80 reflects a fair value for the shares and that figure includes a premium element for the synergies. I am asked by the Petitioner to disregard that evidence as being irrelevant. I do not think it is irrelevant; it is valuable, useful, contemporary, material to cross check any other evidence that is before the court.

  141. Here we come to the unfortunate part of Mr Tolkien's report. I have sympathy with him, because two matters were withheld from him, which affected his report and ultimately destroyed it. I have already observed that he was not asked to report on the essential parts of the Petitioner's plea, namely sale at an undervalue. No explanation has been put forward for this. Nor has any explanation been given as to why Mr Wilson's evidence did not address that either.
  142. The two matters that were withheld from Mr Tolkien were as follows.
  143. First he was not told that Mr Schmidt's attempts to deal with Lord Ashcroft had been rebuffed (see Mr Olesen's email of 2nd October 2000). He was equally not told what Flemings (via Mr Mogelburg) told ISS in his fax of 15th August 2000. They said "we have repeatedly tried to contact [Kiwi and Gambier] but so far to no avail. Rapid Reef Holdings is owned by Michael Ashcroft". This was reinforced by a further email from him dated 5th September 2000 where he said this:-
  144. "I have talked to Charles Stanley (Rock's brokers) several times during the last couple of weeks to urge Kiwi and Gambier to accept the offer but they seem committed to keep their ownership stake in RCO …furthermore I have sought to contact Rapid Reef Holdings (presumably owned by Ashcroft) to convince them to accept the offer. Again Charles Stanley's response had been that they had been instructed to take no actions and relay no direct contact ".
  145. Thus the fundamental belief of Mr Tolkien that his preferred position, namely a negotiated settlement, had not taken place because of the sale and Lord Ashcroft had therefore been deprived of that opportunity, was not sustainable.
  146. Even if it was, the suggested way to my mind, is simply not a way in which a 459 Petition can be addressed. Mr Tolkien acknowledged he had no experience of such a procedure himself, but referred to one which he had been told about by somebody who remained unidentified. How would such an arrangement take place? One could well imagine how Lord Ashcroft would respond to such a meeting. He would in reality fix upon a price that he wanted and sit there until he got the precise price he wanted. I suppose (absent any evidence) that would have been £12.00 per share. If that position had been made clear at the start, the meeting would have been a very short one indeed. Independent valuations could have been produced, but there is no evidence to show that Lord Ashcroft would have been willing to accept anything an independent valuation would have achieved. He would simply demand a figure that he would want to transfer the shares. If that figure was not offered, there was nothing that the other side could do.
  147. The final exposure of Mr Tolkien came in relation to the new (to him) discovery that Rapid Reef had 101,000 shares. Nobody had told him that. His evidence was entirely based on the proposition that an acquisition of Rock shares would eliminate the minorities. It is quite plain that it would not. The acquisition of Rock shares would not eliminate the minorities, in particular the Rapid Reef shares. Rapid Reef (and in effect any body which had more than 10% of the balance of the shares to avoid a fresh Section 429 attack) was in the same position as Rock. It appears from the share register that the two organisations that were in that position as I have said earlier in this Judgment were Rock, on behalf of Gambier and Kiwi, and Rapid Reef. Lord Ashcroft was controlling both sides of that; neither of them alone could assure ISS of 100% control. Rapid Reef is not a party to the present proceedings. It follows therefore that even if Mr Tolkien's proposed procedure was the preferred and acceptable procedure it would not have achieved (as he acknowledged) the result, namely the acquisition of 100%. There would be no point in ISS paying such a large sum (and considerable dangers, bearing in mind Rapid Reef lurking in the shadows awaiting the result).
  148. This was acknowledged by Mr Tolkien in response to three questions I put to him. I set out in full the questions and answers (day 4 page 120-121). It is as follows:-
  149. "MR JUSTICE PETER SMITH: I have some questions for you. Given your discovering today of the Rapid Reef shareholding, do you accept that the figures that you put in your report in relation to the value of the Rock shareholding on its own are no longer sustainable?
    A: Yes. I think they should apply to the two shareholdings.
    MR JUSTICE PETER SMITH: Given that, if we look at a situation in November 2000 when RCO is de-listed and you are talking about a 2.4 per cent shareholding in a de-listed company, is it realistic to believe that ISS, given the presence of the Rapid Reef shares in the background, would be willing to pay anything more than par to acquire Rock shares alone?
    A: No.
    MR JUSTICE PETER SMITH: You confirmed to Mr Potts that if the negotiations do not work, as indeed you confirmed to Mr Steinfeld, your other proposed courses of action are unattractive, attractive and least attractive. If Lord Ashcroft does not tango, that means that ISS has no option, there is nothing for them to do that is attractive that will actually achieve a better value for the shares than what they did?
    A: That is correct."
  150. To my mind that was the end of the Petitioner's case. It had no evidence showing the case put forward in Mr Wilson's evidence and Mr Tolkien's report were sustainable.
  151. I have already observed that Mr Tolkien did not address the asset value question at all. Mr Potts QC then sought to rely upon the Respondents' evidence as a basis for the Petitioner's case.
  152. His main reliance is on the February Report. He, in his submissions to me, repeated on a number of occasions that this was a valuation. It was nothing of the kind. It was a document which assessed possibilities that might accrue to ISS if the bid process was successful and 100% of the shares acquired. It was self evidently not a valuation. Its maker (Mr Olesen) did not have any access to the financial information of RCO. Any synergy realisations were prospective and speculative. Even then, it valued the shares at between 247 – 266 pence per share. ISS of course paid £2.80 when (principally) Lord Ashcroft intervened in May 2000 and secured for himself the small profit already referred to.
  153. There is no question of ISS paying pound for pound for the synergies. That would have meant that the price to be paid reflecting those synergies would be £53,647,526.00 (fifty-three million, six hundred and forty-seven thousand, five hundred and twenty six pounds). Mr Potts QC's submissions are simply that that figure should be divided between the shareholders. ISS pay the bulk of it (and then have it returned of course) and the minority are paid out at the same rate. This ignores the fact that ISS plainly had paid a premium at £2.80. To require them to pay again requires in effect to pay twice over. It also requires them in effect, notionally to pay for the full value of the synergies. There is no realistic possibility of ISS ever agreeing to such an arrangement. As I have already observed, there were no other players in the market, and I do not see why ISS should be treated in such an unfair way.
  154. I have already identified the other contemporary assessments to the value of RCO, which bear no relation to this figure. I cannot believe all the other people got it so wrong.
  155. Finally, in this context, there is the report of the Respondents' expert, Mr Burton. I found him to be a credible witness. He was plainly (unlike Mr Tolkien) experienced in these kind of synergy purchases. His report came up with a value of the assets at £2.05 per share (including a value for synergies). This he arrived at, not (as he frankly admitted in his report) revaluing all the assets, but on starting with the synergy valuations and reconsidering those figures in the light of further matters that he discovered. I accept (although reluctantly as I have already said) that the true figure for annual synergies was £1.8 M. Starting with that figure he reduced the synergy valuations to take into account management charges which would be applied when the assets were brought within the umbrella of the ISS Group. These were, he accepted, not scientifically calculated costs. The reason for that is that he considered it an impossible exercise and one which companies operating in groups like this would not do so. He drew comfort (and this was not challenged) from the fact that where inter company management charges like this are levied, where the holding company is outside the UK, and not subject to UK corporation tax, the Inland Revenue checks the basis of the management charge to ensure that a proper level of tax is levied within the UK to reflect the true profits. I found this compelling.
  156. Taking those into account, he reduced the values of the synergies to £420,000.00 per annum. Mr Potts QC attacked this vigorously in his closing submissions. He also challenged it in cross examination. However, Mr Burton withstood the cross examination and remained unshaken. I accept that a valuation of the assets or even the management charges would not have been a realistic possibility at this stage. I accept Mr Burton's evidence therefore. If there was some evidence countering it or if it was contradicted by other contemporary valuations (or even an expert report from the Petitioner) there might have been some basis for challenging it.
  157. However, as I have said the contemporary values, valued the shares at £2.80 per share and the actual valuation that Lord Ashcroft put on it somewhat ironically was about the same figure £2.02. Mr Tolkien did not address the issue. The only matter which is out of line with all of these is the February Report. However, as I have said, this is not a valuation and I do not think that it is right to treat is as such, and say as Mr Potts QC did that the company has lost £30 million in value between February and November. It is not evidence of a sale at an undervalue in November 2000. There is no basis for me rejecting Mr Burton's independent expert opinion, which shows that £2.80 per share reflects a premium for the shares including any reasonable figure that could be extracted from ISS for its synergies.
  158. I accept of course as I have said that Mr Ahmed did not do a valuation on that basis. However, he stumbled on the result, because ISS remained committed to honouring the offer of £2.80 (beyond the 20th January 2001), which it was obligated to do.
  159. That represents a further substantial profit for Lord Ashcroft. The burden is on the Petitioner to sustain its case. This is one of those cases where it has failed to discharge the burden (see Rhesa Shipping Co SA –v- Evans [1985] 1 WLR 948). Rock certainly had an interest to justify presenting a petition, but its interests were neither prejudiced nor prejudiced in an unfair way, for the reasons I have set out above.
  160. Mr Steinfeld QC in his written submissions (repeated orally) submitted that the Petition was a cheeky one. I agree with him.
  161. I will therefore dismiss the Petition and hear submissions as to the consequences of my decision in respect of costs.

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