Mr Justice Wyn Williams :
- In these proceedings, the Claimant seeks relief against the Defendants arising out of alleged breaches of express and implied terms of contracts of employment concluded between the Claimant and each Defendant. Further, in relation to the First Defendant and Second Defendant, the Claimant seeks relief arising out of alleged breaches of express terms of an agreement which, in this judgment, I will refer to as "the shareholder agreement" and alleged breaches of fiduciary duties by which, it is said, these two Defendants were bound. The trial before me has been concerned only with the issue of liability i.e. whether the Claimant has established against the Defendants a breach or breaches of the agreements and fiduciary duties to which I have referred.
- The evidence before me has been detailed and, in many important respects, conflicting. It is as well to state at the outset, however, that I have no intention of reviewing factual issues and making findings upon them unless I consider that they are important to the resolution of the main issues in this case. To adopt any other approach would make this judgment much longer and even more burdensome than it is bound to be.
- Inevitably there will be references in this judgment to extracts from witness statements. The principal witnesses in the case are Mr. Biden, Dr. Bonikowski and the three Defendants. Each of these persons made a number of witness statements. In this judgment reference to a witness statement in respect of any of these persons is a reference to the witness statement which was made by them in January 2008 and which was usually described in the hearing as their main witness statement for trial.
- With those introductory remarks I turn, first, to a description of the more important background facts. In the main, this section of my judgment will focus upon facts which are not controversial between the parties.
RELEVANT BACKGROUND FACTS
- The Claimant is a specialist provider of rehabilitation and case management services for persons who have suffered injury, usually as a consequence of an accident at work or on the road. The Claimant began providing these services in 2001. At that time it was (as it still is) controlled by two men Mr. Michael Biden and Dr Edmund Bonikowski. In the remainder of this judgment they will be referred to as MB and EB.
- EB is an experienced consultant physician and general practitioner. In the 1990s he developed an interest in rehabilitation. In the words of Mr Duggan, Counsel for the Claimant, the Claimant is the brainchild of EB. MB is a very experienced businessman who has held senior positions in international companies. In February 2001 MB and EB entered into a joint venture agreement. The agreement was, in summary, to carry on a business of providing rehabilitation and case management services and the Claimant was the vehicle chosen for the provision of those services. By the terms of the joint venture agreement EB became a 83.33% shareholder in the Claimant and MB became a 16.67% shareholder.
- The Claimant was registered in February 2001. As I understand it, it began to provide its services more or less straightaway. At the outset it was understood that EB would be much more actively involved in operating the business of the Claimant; he became its chief executive officer; MB was appointed its Chairman. The basis of the agreement between MB and EB was that they wanted to build a business with a capital value. They did not see the Claimant simply as a vehicle to establish a private practice for EB.
- From its inception, as I understand it, the Claimant also had one non-Executive Director. That was Mr Christopher Langford, a chartered accountant.
- In its early days and, indeed, thereafter, the Claimant targeted work from solicitors and insurers who were involved in personal injury litigation or potential litigation.
- On 20 November 2001 the Claimant's Board of Directors agreed that a person named Steve Williams should be appointed a director of the Claimant with responsibility for business development in the insurance sector. The Board also resolved that he should become a shareholder. On 21 November 2001 the Claimant and Steve Williams entered into a written agreement which was called a business development agreement. It is clear from its terms that this agreement was intended to be short-lived and replaced, after a probationary period, by a different contract between the Claimant and Mr Williams. On 31 March 2002 the Claimant and Mr Williams entered into a written contract which was called a service contract.
- Meanwhile on 19 December 2001 the Claimant's Board of Directors had resolved to recruit the Second Defendant. EB and the Second Defendant had met each other in or about 1997 when they were both working for the National Health Service. As I understand it the Second Defendant was then a nurse specialising in the care of those suffering from Parkinson's disease and/or other serious neurological diseases. It is clear that EB had formed a favourable impression of her skills. The prospect of the Second Defendant becoming an employee of the Claimant came about in late 2001. The Second Defendant was then working in a responsible post for the NHS in a hospital in Barnet. However, her home was in West London and she had to juggle the care of her child as well as holding down her job. Employment with the Claimant was attractive to the Second Defendant because the Claimant operated from premises in Ealing. Following discussions in the early part of 2002 a contract of employment was concluded between the Claimant and the Second Defendant. The contract was made in writing and it is dated 13 February 2002. The contract provided that the Second Defendant should take up her appointment with the Claimant on 5 June 2002 and that is what occurred. The contract specified that the Second Defendant was employed in the capacity of clinical services manager and her remuneration was a basic salary of £40,000 per annum and an entitlement to participate in any bonus scheme for "the managers employed by the company introduced by the directors ……."
- In 2003 David Imber became a director and shareholder of the Claimant. His responsibility was vocational rehabilitation. Further, additional non-executive directors were appointed, namely Roy Hurley and Heather Lawrence. Also in 2003 the Second Defendant became a shareholder. I deal with the details of her acquisition of shares later in this judgment.
- On 23 November 2003 the Directors of the Claimant approved a new Memorandum and Articles of Association. At or about the same time a document entitled "Shareholders and Subscription Agreement relating to Kynixa Limited" (hereinafter called "the shareholder agreement") was signed by the then existing shareholders. At that stage those persons were MB, EB Steve Williams, David Imber, Chris Langford, Heather Lawrence, Roy Hurley and the Second Defendant. The document is long and, in places, complicated and in due course it will be necessary for me to consider, in detail, some of its provisions. At this stage it suffices that I record that it was intended to and did supersede the joint venture agreement which had been signed by MB and EB at the commencement of the business. I should also record at this stage that the signatories to the agreement apparently intended and understood that new shareholders would become bound by the terms of this agreement. The existing shareholders proceeded on the basis that any new shareholder would sign a document which was entitled "Deed of Adherence" and which would have the effect of binding that shareholder to the terms of the shareholder agreement. An example of the Deed of Adherence (which was incomplete in the sense that it was undated and the name and address of the shareholder was left blank) was an attachment to the shareholder agreement.
- In April 2004 the Second Defendant received a substantial pay rise. It is common ground that this was, at least in part, motivated by the recognition that she was a valued, indeed, very valued, employee by this stage.
- In or about July 2004 the Claimant appointed the company known as Partners in People Limited as human resources consultant. I will need to consider why they were instructed and what they were instructed to do later in this judgment. It suffices that I record at this stage that in November 2004, following work undertaken by Partners in People, a document entitled "Statement of Principal Terms and Conditions" (hereinafter called "SPTC") was formulated and issued to employees of the Claimant. Further a document entitled "Employee Handbook" ("the Handbook") had been composed and this was also circulated to the Claimant's employees.
- While the work of Partners in People was in gestation the Third Defendant became an employee of the Claimant. She signed a contract of employment on 12 August 2004 and she commenced her employment on 6 September 2004. Her job title in the contract was "Relationship Manager."
- Following the production of the SPTC and the Handbook the Second and Third Defendants were issued with them. The Second Defendant signed the SPTC on 19 January 2005. EB had signed the document on 4 January 2005. The Third Defendant signed her copy of the SPTC on 20 January 2005.
- An issue arises for determination as to whether the SPTC signed by the Second and Third Defendants together with the Handbook constituted the terms of their employment from respectively 19 and 20 January 2005 or whether they were still bound by the terms of the first contracts which they had signed. The Second and Third Defendants assert that they ceased to be bound by any of the terms of the earlier contracts. The stance of the Claimant, however, is that the Second and Third Defendants remained bound by the earlier contracts save in those respects where the SPTC and/or the Handbook expressly or impliedly superseded the earlier terms. I deal with this issue, discretely, later in my judgment.
- It was in the autumn of 2004 that the First Defendant began his association with the Claimant. EB and the First Defendant had known each other for much of their lives. The First Defendant had qualified as a chartered accountant as a young man and he had considerable corporate experience by 2004. Between about 1997 and 2004 he was employed in very senior positions by Universal Salvage Ltd, a public company with very close links to insurers. EB considered it sensible to recruit the First Defendant in a senior position within the Claimant and he persuaded MB to the same view.
- In the summer of 2004 the First Defendant had set up a small car sales business using as his corporate vehicle a company called Kewferry Limited. Following discussions between EB and the First Defendant, Kewferry Limited agreed to undertake work for the Claimant by generating referrals from insurance companies. The terms upon which the Claimant and Kewferry were to do business were encapsulated in a letter dated 29 September 2004 from EB to the First Defendant. It is also the case, however, that on 2 October 2004 the First Defendant, on behalf of Kewferry Limited, signed a written confidentiality agreement. The agreement was produced by or on behalf of the Claimant and the First Defendant had no objection to signing the same. The agreement contained the following definition of confidential information: -
" 'Confidential Information' means any and all information in whatever form whether disclosed orally or in writing or whether eye readable, machine readable or in any other form including, without limitation, the form, materials and design of any relevant equipment or any part thereof, the methods of operation and the various applications thereof, processes, formulae, plans, strategies, data, know-how, designs, photographs, drawings, specifications, technical literature and any other material made available by Discloser to Recipient or gained by the visit by the Recipient to any establishment of Discloser whether before or after this Agreement is entered into, for the purpose of considering, advising in relation to or furthering the Negotiations (and any information derived from such information)"
Under the terms of the agreement Kewferry Limited undertook: -
"to maintain the Confidential Information in strict confidence and, save as provided herein, not to divulge any of the confidential information to any third party….."
- In December 2004 detailed discussions took place as to the role which the First Defendant should play in the Claimant. At a Board Meeting on 15 December 2004 a paper was put before the Board setting out a proposal to appoint the First Defendant to a role within the Claimant which was modelled on that of "a US style Chief Operating Officer". The minutes of that Board Meeting record that:-
"…Mr Hynes will be engaged on a contract with his trading company Kewferry Ltd for a fixed sum per month to include VAT and his personal expenses. In addition he would continue to benefit from the sales incentive incorporated in a letter to him dated 29th September in respect of referrals from certain named insurance companies."
The Board resolved to engage Kewferry Limited in accordance with that proposal subject to the First Defendant's agreement of terms.
- On 21 December 2004 a meeting took place between MB and the First Defendant. MB produced some notes in advance of the meeting to guide him through what he wanted to discuss with the First Defendant. The notes show that two of the issues which were to be discussed related to the corporate governance of the Claimant and to the joint venture and shareholder agreement which had been concluded earlier. It seems very likely, at the very least, that the First Defendant's attention was drawn to the existence of the shareholder agreement and that he was also informed, perhaps in general terms, of the basis upon which the Claimant was controlled.
- Side by side with this greater involvement on the part of the First Defendant, through Kewferry Limited, was the understanding that MB would be less involved than previously in the affairs of the Claimant – certainly in its day to day affairs. Further, quite well defined lines of demarcation were laid down for the responsibilities, respectively, of EB and the First Defendant. These lines of demarcation are summarised accurately in the table which appears in the document in Bundle 13 page 4572.
- It is common ground that by the summer of 2005 MB and EB thought it desirable that the First Defendant should become an employee of the Claimant. It is also common ground that from the early months of 2005 the relations between Steve Williams and David Imber on the one hand and MB and EB on the other were becoming strained. So much so that by the summer of 2005 David Imber had resigned as a director of the Claimant and was willing to sell the shares which he had acquired in the Claimant. It is now accepted by the First Defendant that Mr Imber's shares were purchased by MB and EB but then sold to him for the same price. That price was 15p per share and it is common ground that the price was a beneficial one for the First Defendant. The documentation evidencing these transactions was produced before me during the course of the trial and it speaks for itself. Later in this judgment I will have to deal, in detail, with the evidence surrounding the transactions and whether or not upon his acquisition of the shares the First Defendant became bound by the shareholder agreement. At this stage, it suffices that I record that he became a shareholder.
- In his evidence the First Defendant accepted that as from 13 July 2005 he became a director of the Claimant.
- It was not until 12 December 2005 that the First Defendant signed a SPTC. There is no very clear explanation in the evidence for the lapse in time. In any event nothing turns upon the timing of the signing of this document since the First Defendant accepts that he became bound by it. At some point in time he was also provided with a copy of the Handbook and, similarly, the First Defendant accepts that he became bound by its terms.
- I should also record that in September 2005 the First Defendant and the Claimant entered into an Option Agreement under the provision of Schedule 5 to the Income Tax (Earnings and Pensions) Act 2003 by virtue of which the Claimant granted to the First Defendant an option to acquire shares in the Claimant at a beneficial price. The Option is dated 22 September 2005.As I understand it, at or about the same time the Claimant and the Second Defendant also concluded such an agreement.
- It was in the autumn of 2005, on the basis of the evidence put before me, that MB and EB first became interested in the possibility of purchasing companies (or assets of such companies) operating in the same or similar fields of business as the Claimant or alternatively selling their shares in the Claimant. An organisation known as Human Focus (Human Focus Return to Work Ltd) was in the market for providing rehabilitation to injured people. It is clear that during the latter part of 2005 significant discussions occurred between representatives of the Claimant and Human Focus with a view to the Claimant acquiring the assets of that organisation. At a meeting which took place on 14 November 2005 and attended by MB, EB and the First Defendant it was agreed that an attempt would be made to purchase the assets and goodwill of Human Focus. It was also agreed that EB should be at the forefront of the negotiations.
- The negotiations did not come to fruition. Although there was some debate in evidence about the reasons why, it does not seem to me that such reasons are significant to the issues for my consideration.
- It was also in the autumn of 2005 that the Claimant attracted the attention of a group of companies known as the Parabis Group (hereinafter referred to as "Parabis"). Parabis is a multi-disciplinary professional services organisation. Companies within Parabis provide a number of different but related services. These services now consist of legal services, claims handling services, liability adjusting services, services in the field of health and safety, management services and rehabilitation. The structure of Parabis is described, in detail, in the evidence of Mr Timothy Roberts but, for present purposes, it suffices that I say that it is owned by a company known as Trilliam LLP and that the four principal shareholders in that company are four solicitors, two of whom are Messrs Timothy Roberts and Timothy Oliver.
- It is not entirely clear to me which of the services described above was provided by Parabis in the summer and autumn of 2005. It suffices that I record, however, that at that stage it did not provide rehabilitation services.
- For a significant period of time companies within Parabis have had a business relationship with a major insurer, namely, Royal and Sun Alliance (hereinafter referred to as RSA). Mr Timothy Roberts, personally, has had very significant business dealings with RSA for approximately 20 years.
- In September 2005 one of the companies in Parabis Ltd, was engaged by RSA to undertake a pilot scheme known as "BIPOC" (Bodily Injury Proof Of Concept). Mr Roberts had been extremely influential in formulating the concept behind this pilot scheme. The details of the scheme are not important but I should record that its core services included rehabilitation, fraud screening, legal expense insurance and medical reporting.
- BIPOC did not simply contemplate that rehabilitation would be provided to injured persons making a claim against policy holders of RSA. It contemplated that a pro-active team would exist who would make telephone calls to individuals known or suspected to be injured by the actions of a policy holder of RSA. Such individuals would be asked whether they were injured and likely to make a claim and, if so, they would be offered rehabilitation services. The idea was that such individuals would be offered rehabilitation before they instructed lawyers in the hope that (a) the rehabilitation would provide a cure for their injuries and (b) the legal costs which would be incurred if they instructed lawyers would be avoided.
- As at September 2005 there was no company or organisation within Parabis which could provide rehabilitation services. Accordingly it was necessary for such services to be provided by companies or organisations outside the Group. The Claimant was selected as the only provider under the BIPOC scheme. It seems to be common ground that the Claimant was so appointed in late 2005 and that it began providing work under the scheme from about December 2005 or January 2006. Timothy Roberts was influential in persuading RSA to appoint the Claimant as a provider.
- It is also common ground that in the same time frame discussions took place which involved, principally, Mr Roberts and EB with a view to ascertaining whether either the Claimant or its assets might be brought into Parabis. There was a dispute in the evidence before me as to why the discussions failed but, in my judgment, it matters not why this occurred. MB, EB and Mr Roberts agree that by March 2006 it was clear that the Claimant would not become part of Parabis.
- It is also important to note, however, that it was not just the Claimant which was the object of possible acquisition into Parabis. From late 2005 Mr Roberts and Mr Oliver had been engaged in discussions with representatives of Human Focus. In January 2006 Human Focus became part of Parabis. At that stage, therefore, there arose, for the first time, at least the possibility that a company within Parabis could provide rehabilitation services to those customers of the Group which required that service.
- By April 2006 MB and EB considered that the Claimant had achieved its first strategic objective. It was, in the words of MB, "a profitable rehabilitation business based on the insurance market." Not unnaturally this led to discussions as to the future. EB, in particular, was very keen to expand the activities of the Claimant into the public sector. The alternative possible strategy was to sell the Claimant.
- Discussions about these alternatives took place between MB and EB, in particular, although, on any view, the First Defendant was involved to a substantial extent. The result was that an agreement was reached that the Claimant would expand into the public sector. That would involve raising money to promote this expansion. At this early stage the First Defendant was, in my judgment, in agreement with this proposal although it is also correct that he never shared the same enthusiasm for an expansion into the public sector as EB.
- In May 2006 MB began the formal process of developing a new strategic plan for the Claimant. He considered that the Claimant should have two operating divisions selling the same services but to different market sectors. As I have said, however, it was necessary to an expansion in the public sector that there would be further funding of the Claimant. In the ensuing months it is clear that EB pursued, with vigour, his goal of an expansion of the Claimant's activities into the public sector. It seems equally clear that First Defendant became less and less enthusiastic about that prospect.
- The evidence before me dealt with many aspects of the history of the Claimant during 2006. In my judgment, the detail of the events which occurred between the Spring to the Autumn in the main throws little light upon the issues for my determination. It is worth recording, however, that in the summer the Second Defendant took up more share options, acquired more shares when a rights issue took place and was promoted within the Claimant to be Head of Business Development. Her promotion dispelled any lingering doubt, if any such doubt existed, that the Second Defendant was an extremely important employee of the Claimant and a person who was held in very high esteem by MB and EB.
- In the autumn of 2006 the possibility of a sale of the Claimant was being considered quite carefully. In September 2006 Kroll Corporate Finance was appointed as an advisor. At that stage there were potential purchasers of the Claimant. One was an organisation known as HCML; the other an organisation known as Corpore Ltd. At about this time, however, there was a downturn in the Claimant's trading fortunes. Since April 2006 the Claimant had been trading at a loss and by September 2006 "the situation was becoming very tight" adopting the words used by MB in his witness statement. It was also at about this time that MB concluded that further funding of the Claimant was not feasible.
- In mid-October 2006 the accounts for September 2006 were published and it became clear that the Claimant had suffered a very poor month financially. The First Defendant offered an explanation for this performance which MB, in particular, rightly or wrongly, found unacceptable.
- It was the First Defendant's responsibility to provide a report to the Board on the accounts and he duly did so. It is dated 27 October 2006. MB considered that some aspects of this report were unduly alarming and, accordingly, on 30 October 2006 MB sent an email to the First Defendant to which he attached what he described as "my slightly amended version of your report …………" The First Defendant did not respond to the email before MB took the decision to amend the report in accordance with his own draft and it was the report as amended by MB which was circulated to the Claimant's Board.
- By an email dated 1 November 2006 the First Defendant did respond. What he said was as follows: -
"I have read your version of my report and I am disappointed with the changes that you have made.
I have to say that I am not used to having my work checked and edited without having discussed it before it goes out."
- In his evidence to me the First Defendant explained that during the course of 2006 he had, increasingly, considered whether or not he should resign his directorship of the Claimant and also give up his employment. In short he had become disillusioned with his involvement with the Claimant. By November 2006 he was concerned about the plans for an expansion into the public sector and he was concerned about such plans for a sale of the Claimant as existed. The First Defendant told me that it was after MB had altered his report to the Board without consultation that he resolved that he would resign as a Director and an employee. It was, so he said, "the last straw."
- During the course of the evidence there was a heated dispute about precisely when it was that the First Defendant resigned. The date when he actually ceased to work for the Claimant and ceased to be a director was not in dispute. What was disputed was when he first gave notice of his intention to resign as an employee and director. As will become apparent pinpointing this date is not important to a resolution of the central issues for my determination. However I should say that it seems clear that, at the very latest, in November 2006 the First Defendant had resolved, in his own mind, that he would leave the Claimant. It also seems probable that he had communicated the possibility of his leaving at the latest by the Board meeting which took place on 20 November 2007 and that MB and EB would have been under no illusions that the possibility was becoming a probability within days thereof.
- Three other events which occurred in the autumn of 2006 are of importance. Two of these events concern the relationship between RSA and Human Focus. In or about September 2006 Mr. Roberts persuaded RSA to involve Human Focus in BIPOC. By September 2006 Human Focus had developed a rehabilitation product known as "physio-lite" which, essentially, was a process by which persons suffering from minor injury could engage in rehabilitation activities by following a programme on the internet. In that same time period Mr. Roberts persuaded RSA to instruct the three firms of solicitors which undertook work for injured people who were policy holders with RSA and whose claims were therefore being funded by RSA to use the services of Human Focus if there was a requirement for rehabilitation.
- The third event of importance was the incorporation of a company known as Flexsure Ltd. This step was taken by the First Defendant with the agreement of the Second Defendant. The First and Second Defendant told me that this step was taken because they had become concerned about the potential sale of the Claimant to competitors. In short they were concerned that they would be surplus to requirements in the event of the Claimant becoming part of a competitor organisation. That was so, in particular, according to the First Defendant in the event of an acquisition by HCML. Flexsure was incorporated so as to protect the First and Second Defendant in the event of their redundancy since it could be used as a vehicle to promote such business as they determined was desirable.
- In their oral evidence the First and Second Defendants asserted, unequivocally, that Flexure Limited had never traded; it had never had a bank account and it did nothing (and they did nothing in relation to it) which was possibly or conceivably in conflict with the Claimant or any duties which the First and Second Defendants owed to the Claimant.
- The events of November and December 2006 and January to May 2007 are crucial to the resolution of many of the issues between the Claimant and the Defendants. Some of the evidence about the relevant events in that time-scale will be considered in detail later in this judgment. In this section of my judgment it is sufficient that I record the following undisputed facts.
- Each of the Defendants ceased to work for the Claimant and commenced working for Scion Management Limited (hereinafter referred to as "Scion"), one of the companies within Parabis. The First Defendant ceased to work for the Claimant on 16 March 2007. Until that date he had remained a director of the Claimant and its Chief Operating Officer. He had concluded a contract with Scion before that date. His contract with Scion is dated 12 February 2007 and it was sent by the First Defendant to Scion on or about that date. He had indicated his intention to resign, of course, in November 2006; his letter of resignation is dated 9 March 2007. The Third Defendant ceased working for the Claimant on 5 April 2007 (having resigned on 14 March) and her contract of employment with Scion is dated 19 March 2007. It was delivered to Scion on or about that date. The Second Defendant ceased working for the Claimant on 27 April 2007 (having resigned by letter dated 3 February 2007). Her contract with Scion is dated 28 February 2007 but she alleges that she did not deliver to Scion until many days after that.
- The First Defendant began working for Scion on 19 March 2007. The Second and Third Defendants began their employment with Scion on 8 May 2007. Following the departure of the First Defendant, the Second Defendant was appointed Chairman of a Business Continuity Committee which was constituted by the Claimant to smooth the transition which was inevitable given the actual departure of the First Defendant and the imminent departure of the Second and Third Defendant.
- At no time did the Defendants inform the Claimant that they intended to work for Scion and at no time after their departure from the Claimant did they volunteer the fact that they had gone to work for Scion.
- On 16 May 2007 the Claimant discovered that the Third Defendant was working within Parabis. It was not until 25 May 2007 that it discovered that the First and Second Defendant were also employed within the Group.
THE EXPRESS AND IMPLIED CONTRACTUAL TERMS WHICH BIND THE DEFENDANTS
(a) The First Defendant
- The First Defendant admits that he is bound by the SPTC signed by him and those parts of the Handbook which impose obligations upon him.
- The Claimant asserts, however, that the First Defendant is also bound by the shareholder agreement. That assertion is vigorously disputed by the First Defendant and I turn to deal with this issue in detail.
- The earliest point in time at which the Claimant asserts that the First Defendant was aware of the existence of the shareholder agreement is December 2004. It was in that month that the Claimant was giving consideration to appointing the First Defendant (through his company Kewferry Limited) as the chief operating officer of the Claimant. Both MB and EB assert in their evidence that the projected role of the chief operating officer included responsibility for compliance with corporate policies and, so they say, it was in this context that the First Defendant was required to familiarise himself with corporate policy. Both MB and EB say that it was inevitable that in order to familiarise himself with such policy the First Defendant would have to obtain and understand the shareholder agreement.
- It is to be noted that neither MB nor EB assert in their witness statements that they gave the First Defendant a copy of the shareholder agreement at this stage. Both, however, assert that in meetings in December 2004 the First Defendant was made aware of its existence and its general thrust.
- In his witness statement the First Defendant does not deal, in detail, with the events of December 2004. In his oral evidence, however, he was not disposed to accept that any significant information was given to him in December 2004 about the shareholder agreement and he asserted, unequivocally, that he did not have a copy of the document at that stage.
- As I have said earlier in this judgment it seems likely that the existence of the shareholder agreement was made known to the First Defendant in December 2004. I doubt, however, whether its contents were explained to the First Defendant at any meeting either with MB or EB in anything other than the most generalised way.
- The First Defendant's main account of the events leading him to becoming a director, shareholder and employee of the Claimant is set out in paragraphs 16 to 25 of his witness statement. As can be gleaned from paragraph 23 of that witness statement the First Defendant suggests that underpinning the various discussions he had with MB and EB in the summer of 2005 was an acceptance by all three men that the insurance business of the Claimant would be sold by June 2006. The First Defendant was at pains to point out to me that his wish and understanding was that he would be involved as an employee or director of the Claimant for a comparatively limited period and that the aim as of the summer of 2005 was to build the Claimant's business to a point which would allow of a profitable sale in a timescale of about 12 months.
- It seems to me that the most reliable guide to the content of the negotiations and discussions between MB and EB and the First Defendant from the summer of 2005 to late 2005 (which is the relevant time period in relation to the issue under consideration) is the documentation which was generated in that period.
- By early July 2005 it is clear that discussions about the First Defendant assuming a central role within the Claimant had taken place. I say that by virtue of the terms of an email sent by MB to EB on 6 July 2005. The first paragraph of that email reads as follows: -
"I think we can easily achieve what you want for Martin as long as he is willing to buy some shares. The Shareholder Agreement allows us under Clause 11.2 to assign the benefit of the deed "to any person". As we have exercised our rights under the agreement with respect to David's shares we can now assign those to Martin – he would thus have a core share holding to compensate him in the event that any sale is made. We then also assign him the share option released by David's departure under the revised condition that they vest at capital valuations of £6M, £8M, £10M, £12M, £14M and £16M. This would give him about £220,000 at the bottom end and around about £1.2m at the top of the range with a little over £500,000 at £10m. This is slightly more generous than he has suggested. You can do the precise calculations."
According to a note prepared by EB on 13 July 2005 it was proposed to the Remuneration Committee of the Claimant (and thereafter the Board) that the First Defendant should be allowed to purchase from MB and EB shares which they had acquired from Mr Imber; that the First Defendant be appointed as a Director of the Claimant and he should become an employee of the Claimant at a salary of £40,000 per annum. The minutes for the Board Meeting which took place on 13 July 2005 show that the Board did appoint the First Defendant as a Director from that date. The minutes are silent as to the proposal that the First Defendant should become an employee at a salary of £40,000 per annum.
- On 21 July 2005 EB sent an email to Mr Ian Murphie to the effect that he had now finalised the share option which was to be granted to the First Defendant and this email was copied to the First Defendant and MB.
- On 22 July 2005 MB sent an email to First Defendant and the relevant part of the email for present purposes is as follows: -
"I assume you were now becoming an employee? If not, we may have a problem with the share options, so if think not please let me know so we can discuss."
On 26 July 2005 the First Defendant replied indicating that he agreed that it would be necessary for him to be an employee.
- Between 22 August 2005 and 24 August 2005 there was a flurry of emails relating to the First Defendant's acquisition of shares in the Claimant. It is to be recalled that these shares were formerly owned by Mr Imber but, by this time, they had been purchased from him by MB and EB. MB had purchased 10,648 shares and EB had purchased 43,986. Each Stock Transfer Form is dated 23 June 2005 and the price paid was 15p per share. A very important email in this chain is one sent by EB to the First Defendant in the evening of 22 August 2005. It reads as follows: -
"Martin
When Mike and I sell the shares we bought from David to you we will be required to get you to sign a Deed of Adherence to Shareholder Agreement, possibly two, one for each transaction. Naturally you will need to read the Agreement before doing this. Chris will be able to let you to have a copy of it (though there is one in my desk drawer if that it is easier for you) and the appropriate forms.
Regards Ed"
The reference to Chris in that email is a reference to Mr Langford.
- Documentation produced during the course of the trial shows that on that same date, 22 August 2005, both MB and EB signed share transfer forms. Each was a transfer of the shares they had acquired from Mr Imber to the First Defendant. There was also produced in evidence a share certificate dated 22 August 2005. That showed the First Defendant to be the registered proprietor of the shares in question.
- No evidence was adduced before me as to whether the transfers and the share certificate were signed before or after EB sent the email to the First Defendant and copied it to both Mr Langford and MB.
- On 23 August 2005 Mr Langford sent an email to EB to the effect that he assumed that the First Defendant would need to sign a revised or new copy of the shareholder agreement which would be provided by the Claimant's solicitors. On 24 August 2005 MB replied to Mr. Langford The relevant part of his email reads: -
"Chris
Martin needs only to sign the Deed of Adherence that was included in the original Shareholder Agreement as Schedule 2. I have attached a copy for reference, you will have to insert the relevant dates and details. Martin should of course be supplied with a copy of the original Shareholder Agreement and satisfy himself that he is happy to be party to the Agreement……."
MB copied this email to the First Defendant.
- On 25 August 2005 Mr Murphie sent to MB the relevant documentation relating to the share option. By an email of 26 August 2005 EB informed the First Defendant of the fact that the paper work in relation to the share option was ready for review and signature and continued: -
"Also I have signed a Deed of Transfer in respect of the shares I am selling to you and I anticipate Mike will also have signed one. I have returned mine to Chris so that he can put together the new share certificate."
- On 7 September 2005 EB sent an email to the First Defendant in which he explained the number of shares that the First Defendant was purchasing, respectively, from MB and himself and the price payable to each of them in respect of those shares. He concluded the email by informing the First Defendant that: -
"Chris has sent the paperwork to the stamping office and will be issuing you a certificate for the total 54,634 shares in the next couple of days"
On 16 September 2005 EB sent an email to Mr Langford. That email makes it clear that the First Defendant had received no share certificate and that he had not paid either EB or MB for the shares to be purchased. An email from EB to the First Defendant dated 26 September 2005 makes a further enquiry as to whether or not the First Defendant had received a share certificate. In my judgment the email carries with it the implication that EB and MB had yet to be paid for the shares. It also suggested that the share option should be signed before a Board meeting which was due to take place on 19 October 2005.
- On 18 October 2005 EB sent a reminder to the First Defendant that the share option was to be signed on the following day.
- There exists a note made by EB of an apparent discussion between the First Defendant and EB on 20 October 2005. So far as relevant to the issue presently being considered the note reads: -
"Share options
MH to take me through Articles of Association and to Shareholder Agreement Explain alternative ways to creating a market in the shares. Negotiate conditions upon which options vest."
It is unlikely that this discussion actually took place. I say that since on 23 October 2005 EB sent an email to the First Defendant which clearly proceeded on the basis of a meeting to take place in the future and which anticipated that at such a meeting the First Defendant would discuss with EB the Articles of Association, the shareholder agreement and the principle of a market for the shares. The First Defendant replied to that email on 25 October 2005. It is necessary to quote the email in full.
"ED
Looks fine by me. As we briefly discussed I am not certain how easy it will be to make a market in the shares as the business is currently constituted, but we can discuss it with David McGurk.
I think it worthwhile putting down what the basics of the agreement were that we arrived at in July this year. My package then was £5500 per month (including VAT) for approx 3 days work per week + the commission deal. The objective had been to principally bring the business to profitability and improve sales.
In July we agreed that the objective was to drive the business on as much as we could over a one year period and then step out. Since we felt Sarah Preston was key to this we also agreed this with her.
Since I expressed that I did not wish to be tied to Kynixa for a number of years I agreed that this could be sensible arrangement on the basis that I would earn a minimum capital sum of around £100,000 + the potential to achieve a lot more if certain valuations were achieved via share option package. We did discuss at the time that a sale may not be made, but you may decide to continue going if that was deemed to be appropriate. We agreed that I would take a reduction in salary to £4000 per month (coming onto the company payroll) and increase my hours to that which would be necessary to move the business forward as we agreed. The commission deal would be waived as part of this arrangement.
As we discussed last week in the evening, the way the option agreement is constructed, the options only vest when the business is sold; not when certain valuations are achieved. This is not in line with what we agreed since, again as we discussed, it may be that you do not wish to sell out in June of next year and therefore the options would vest. In particular, the development of the DWP strategy and the probability of raising a block of money for implementing it in the new year makes it highly unlikely that a sale would be achieved in the period we originally talked about.
The objective was to have a pot of money that was realizable in this time frame, but which could continue to be invested if I wished. If we can not achieve this with the shares and options as was originally discussed then my original pay package would seem the more appropriate since it may not deliver as much potential upside, but would at least be within my control and would deliver the cash element.
Regards"
- It is clear that a meeting took place between the First Defendant and MB on 16 November 2006. This meeting was wide-ranging but it also dealt with the issue under consideration. On 17 November 2005 the First Defendant sent an email to MB in which he set out what he claimed had been agreed between EB and himself in the discussions which had taken place in July. In many ways this email reiterated that which had been set out in his email of 25 October 2005. Nonetheless given the importance attached to the email by Mr. Bacon for the First Defendant I reproduce the relevant parts in full: -
"Mike
I thought yesterday was very useful, thanks for the meeting. As we discussed I have set out below the original agreement that I had with Ed and the subsequent one that was supposed to take it's place from Aug 1st.
The agreement from 1st Jan was relatively simple and consisted of a package as follows. Basic monthly retainer of £5500 incl VAT for 3 days+ of work. MH to cover all expenses inside that figure. + The commission deal as per letter of 29th Sept 2004. This covered the following companies to start with – RSA, RBS, Allianz/Cornhill, Groupama, Link, Wren and Equity Redstar. The idea was each INA £100 + Vat + £100 for conversion to case management. + £20 for each Solutions product. In addition, any other pieces of business that I brought in would have the same commissions. These terms to run for 3 years from my initial involvement.
The idea then became to replace this arrangement with me committing more time to the business and coming onto the Board. The specific timeframe agreed with Sarah, Ed and myself was to "go for it" over the course of the year to July 31 2006 with an exit of some sort or other. I explained that I was happy to take a salary reduction, work more hours etc at the expense of my other interests, but only if there was a guaranteed minimum payout of £100,000 at that time with a large upside to offset what I was foregoing with the commission and the extra hours needed at Kynixa away from my other interests.
The payout of the £100k and the upside would be provided by shares which I would purchase and options exercisable on meeting certain valuations, we agreed that a sale may not be appropriate, but there would be a mechanism to achieve value for us both. As has become apparent over the last few months, the way the various agreements are structured means delivery of the July agreement is very difficult to make happen.
I thought it might be interesting to run these figures against the first year of RSA, using the figures that David McGurk is using. I have attached the model.
I look forward to seeing you tomorrow
Regards
Martin."
- It is common ground that the First Defendant did become a shareholder in the Claimant by acquiring shares from MB and EB which were formerly owned by Mr. Imber. The witness statements of MB, EB and the First Defendant do not disclose when the First Defendant paid for the shares and when a share certificate was delivered to him. The emails to which I have referred above suggest that the share option was executed on or about 19 October 2005 although as I have said the share option signed by MB, EB and the First Defendant is dated 22 September 2005.
- What does seem to me to be crystal clear, however, is that no transfer of the shares took place prior to the email sent by EB to the First Defendant on 22 August 2005. I appreciate that the share transfer forms and the share certificate is dated 22 August 2005. It is clear, however, that the consideration payable by the First Defendant to MB and EB was not paid until many weeks later and it is very unlikely that the share certificate was handed over before the price for the shares was paid.
- The Claimant does not assert that the First Defendant signed the Deed of Adherence which would have bound him to the terms of the shareholder agreement. Equally it does not suggest that the First Defendant either in writing or orally expressly agreed to be bound by the agreement. Nonetheless, Mr Duggan, for the Claimant, submits that the shareholder agreement became binding upon the First Defendant as a consequence of the following chain of events. Firstly, and crucially, he submits that the effect of the email of 22 August 2005 from EB to the First Defendant was to make the offer to sell shares to the First Defendant conditional upon his agreement to be bound by the shareholder agreement by signing the Deed of Adherence. In that same email, submits Mr Duggan, the Claimant informed the First Defendant of the need to understand the shareholder agreement before signing the Deed of Adherence and (by implication) before acquiring the shares and it informed him of how he could obtain a copy of the agreement and the Deed of Adherence. Mr Duggan submits that in the aftermath of that email the First Defendant did or said nothing prior to purchasing the shares to suggest that he did not wish to be bound by the shareholder agreement. In those circumstances, submits Mr Duggan, upon purchase of the shares he became bound by the shareholder agreement.
- An issue of fact arises as to whether or not it is correct that the First Defendant did nothing in relation to the shareholder agreement and the Deed of Adherence after 22 August. The email of 24 August 2005 sent by MB to Mr Langford was copied to the First Defendant. The email had attached to it a Deed of Adherence which had not been completed. It was the oral evidence of the First Defendant that upon receipt of that email he made it clear that he could not sign a Deed of Adherence until it was properly completed.
- This suggestion appeared first in the Defence of the First Defendant. At paragraph 21(1) of the Defence the following allegation is pleaded: -
"It is admitted that there was correspondence with Mr Hynes regarding the Deed of Adherence and Shareholders Agreement and that an incomplete draft Deed of Adherence was sent to him. On receipt, Mr Hynes made it clear that he could not sign it since it was incomplete in many respects. He asked for a complete version to be sent to him for his consideration, but this never happened. He was never provided with a copy of the Shareholders Agreement."
- It is to be observed that the First Defendant did not plead the identity of the person, on behalf of the Claimant, to whom he "complained" about the Deed of Adherence.
- The First Defendant deals with this issue in paragraph 18 of his witness statement. The relevant sentences read: -
"I was asked to sign a Deed of Adherence to the Shareholders Agreement. After I bought the shares (but not before this time), I was emailed a copy. It had not been completed in any shape or form and I distinctly recall saying to Ed that I could not sign until it had been completed and that, if he wish me to sign it, then he needed to get me a proper copy. The copy of the Deed of Adherence was exactly of the same format as it can be seen in Exhibit EB1 (page 4474 – 4475)."
- The Deed of Adherence which appears at page 4474 of the Trial Bundles is indeed incomplete. It is incomplete, however, only to the extent that the date of signing is not included and the party and his/her address who is to sign the Deed is not included.
- In the specific case of the First Defendant, therefore, the only missing part of the Deed of Adherence sent to him was his own name and address and the date when the Deed was to be executed.
- In those circumstances it seems to me to be highly unlikely that the First Defendant would have raised with EB those details as reasons why he could not sign the Deed. Further, EB does not accept that the First Defendant raised with him the fact that there were missing parts to the Deed of Adherence.
- It also to be observed that the First Defendant, in his witness statement, suggests that the Deed of Adherence sent to him arrived after he had bought the shares. Although it is correct that the Share Certificate is dated 22 August 2005 it is obviously not correct that the shares had been purchased on that date. As I have said it is clear that the consideration was paid by the First Defendant to MB and EB many weeks after that.
- On this factual issue I do not accept that the First Defendant raised the incomplete nature of the Deed of Adherence as a reason why he could not sign it. I am fortified in that conclusion by my assessment of EB. I simply do not accept that he is the sort of man who would have ignored what the First Defendant had to say about the Deed of Adherence if the Deed had been raised with him. Yet, in reality, that is what must have occurred if the First Defendant's evidence is accurate.
- In my judgment what occurred was that MB and EB made an assumption that a Deed of Adherence had been signed at the time they accepted the purchase monies for the shares. Thereafter, they had no reason to think about it until this litigation came into existence.
- I do not necessarily ascribe any sinister motive to the First Defendant in not signing the Deed of Adherence. I am satisfied, however, that he said or did nothing between the email of 22 August 2005 and his paying for the shares and receiving the Share Certificate which suggested that he was not prepared to sign the Deed of Adherence or that he had not, in fact, done so.
- This finding of fact, however, does not impact upon the principal point taken by Mr Bacon as to why the First Defendant is not bound by the shareholder agreement. In summary, Mr Bacon submits that a proper interpretation of shareholder agreement, itself precludes anyone becoming bound by it unless the person in question is a signatory either to the agreement itself or to the Deed of Adherence.
- Mr Bacon relies for that submission principally upon Clause 11 of the Agreement. This Clause is headed "Assignment" and it is necessary to set out the whole of the Clause so as to understands the point taken by Mr Bacon.
"Assignment
11.1 This deed shall be binding upon and shall enure for the benefit of each party to it and its personal representatives, permitted assigns and successors in title (as the case may be) but shall not be assignable save as provided in this clause 10.
11.2 Each Shareholder may assign the benefit of this deed to any person to whom it transfers any Ordinary Shares pursuant to the Articles of Association, in which case such transferee shall execute a deed of adherence substantially in the form set out in Schedule 2 and subject to executing such deed of adherence, such assignee shall be entitled, and shall be assumed to have, all the benefits of this deed which would have been conferred on it if it had been a Shareholder at the date hereof and thereafter all references to the Shareholders in this deed shall be read and construed as including such person as if it had been an original party hereto.
11.3 All deeds of adherence executed pursuant to clause 11.2 shall be executed by the Company for itself and as attorney for all those persons who are then parties to this deed. Such parties hereby (or, as the case may be, by executing a deed of adherence) appoint the Company as its attorney for such purpose and warrant and undertake that they shall confirm and ratify and be bound by all lawful acts of the Company made as their attorney pursuant to the power contained in this clause 11.3 and such authority and appointment shall take effect as an irrevocable appointment pursuant to section 4 of the Powers of Attorney Act 1971.
11.4 Each of the Company and the Shareholders undertake to each other that they will procure to the extent of their respective rights (whether as Directors or Shareholders or otherwise) that:-
11.4.1 no person is registered as the holder of any Shares (whether upon transfer or transmission or by issue) except in accordance with the Articles of Association and this deed;
11.4.2 no person shall be so registered unless he has previously entered into a deed of adherence in substantially the form set out in Schedule 2; and
11.4.3 no transfer of any interest in Shares is permitted or made except in accordance with the provisions of the Articles of Association."
- In his Written Closing Submissions Mr Bacon makes the following points about the interpretation of the agreement. He submits that the agreement makes it clear that there is no obligation on a shareholder who transfers shares to assign the benefit and burden of the agreement. It is a matter of choice for that shareholder. That being so it is plainly possible, so he submits, for a transferee shareholder not to be bound by any of the terms of the shareholder agreement. Mr Bacon's second proposition, however, is that if it is intended to assign the benefit of the Deed and (by implication) the burden, the Deed of Adherence must be signed.
- Mr Bacon derives his first proposition from the use of the word "may" in the first line of Clause 11.2. He derives his second proposition from the remainder of Clause 11.2.
- In my judgment his first proposition is not well founded. Clause 11.2 cannot be read in isolation. It must be read in the context of the whole of the agreement and, of course, in particular, Clause 11. In those circumstances it seems to be to be very unlikely, as a matter of objective interpretation, that the parties to the shareholder agreement intended that a shareholder bound by the agreement could sell his or her shares to a person who would not become so bound. That, as it seems to me, is wholly inconsistent with Clause 11.4 and although the provisions of the Articles of Association in relation to transfer of shares are detailed and complex there is nothing in those provisions which is inconsistent with the plain meaning of Clause 11 4. In my judgment the proper interpretation of Clause 11 read as a whole is that the parties to the shareholder agreement intended and agreed that any transferee of shares should become bound by the shareholder agreement.
- It is also the case, in my judgment, that the parties to the shareholder agreement intended and agreed that a person acquiring shares in the Claimant would become bound to it by signing the Deed of Adherence. Indeed the shareholder agreement imposes obligations upon the parties to the agreement to ensure that the Deed is signed. It does not seem to me, however, that this uncontroversial proposition leads to the conclusion that a person acquiring shares cannot be bound by the terms of the shareholder agreement unless he/she signs the Deed of Adherence. No principle of the common law or statutory provision was advanced to support that conclusion. Such a conclusion flies in the face of the well established principle of the law of contract which is to the effect that contracts can be made without the need for formality (in the absence of any statutory provision to the contrary) provided the essential rules relating to offer, acceptance, the intention to create legal relations and the provision of consideration are met.
- In the instant case there was clearly an offer by EB and MB to sell the First Defendant shares in the Claimant at the price of 15p per share. In my judgment the offer carried with it a condition which had to be fulfilled in order that the offer could be accepted. The condition was that the First Defendant would upon acquisition of the shares become bound by the shareholder agreement. By the email of 22 August 2005 that condition was made plain. The First Defendant was informed how he could obtain a copy of the shareholder agreement. It was not incumbent upon MB and EB to provide him with a copy of the agreement in those circumstances. Thereafter, as I have said, without raising any issue of any kind about the shareholder agreement (or for that matter the Deed of Adherence) the First Defendant purchased the shares. In my judgment, at that point in time he became subject to the terms of the shareholder agreement. It may be that, thereafter, the Claimant or MB and EB could have insisted that he signed a Deed of Adherence. In my judgment, however, that is academic since, as I have said, I consider that he became bound by the shareholder agreement upon purchase of the shares.
- During the course of oral submissions Mr Bacon raised the fact that an aspect of the oral agreement reached in discussions in July 2005 had not been honoured. He sought to suggest that this might be a reason why the First Defendant was not bound by the shareholder agreement.
- In his evidence, MB conceded that in November 2005 he had discussions with the First Defendant about the First Defendant's salary and that an adjustment was made to his salary following those discussions since the salary paid to the First Defendant between July and November had apparently not accorded with what had been discussed in July. I have no reason to doubt what MB said about this. However, I cannot see how this in some way meant that the First Defendant was not bound by the shareholder agreement upon purchase of the shares. The terms upon which he was to purchase had been made clear and there is no evidence that the First Defendant considered at any time that the failure to pay an agreed rate of pay was a reason why he was some how in a position to purchase shares but on terms different from those offered by MB and EB.
- It is clear, too, that the First Defendant raised issues in October and November 2005 about the terms of the share option agreement. The best evidence of the First Defendant's "complaints" in this respect are, of course, the emails which he sent, respectively, on the 25 October and 17 November which are set out at paragraphs 69 and 70 above. In those emails he was complaining, in effect, that the share option agreement did not represent, in its written form, what had been discussed.
- I have no reason to suppose that the First Defendant's complaints about the share option agreement were not genuine. It seems to me, however, that those complaints cannot possibly be a reason why he would not be bound by the shareholder agreement. The first and most obvious reason is that prior to these complaints the First Defendant had signed the share option agreement and, therefore, became bound by its terms. Further, of course, he had purchased the shares and, on my analysis, had become bound by the shareholder agreement before he made the complaints. I simply do not see how complaints, subsequently, can relieve him of the contractual obligation under the shareholder agreement which I have held he had already assumed.
- It follows that I have reached the clear conclusion that the shareholder agreement binds the First Defendant.
- The First Defendant acknowledges that he was subject to an implied duty of fidelity by virtue of his employment by the Claimant. Both Mr Duggan and Mr Bacon acknowledge that the scope of such a duty is difficult to describe in the abstract. They both urged me to the view that the appropriate course is to consider the factual complaints made by the Claimants; to decide whether or not the complaints are well founded and then consider whether in the context of the First Defendant's employment his proved acts or omissions constitute a breach of his duty of fidelity. That being so I do not propose to attempt any exposition of the scope of the duty. Rather I will consider whether or not the First Defendant was in breach of his duty when I consider the Claimant's allegations against him later in this judgment.
(b) The Second Defendant
- The Second Defendant admits that she is bound by the shareholder agreement subject only to her contention that some of its provisions are unenforceable.
- The Second Defendant also admits that she is bound by the SPTC and the Handbook and that she is subject to an implied duty of fidelity. In relation to this latter duty I will adopt the same approach for the Second Defendant (and indeed the Third Defendant) as I propose for the First Defendant.
- The Claimant contends that the Second Defendant is also bound by the contract of employment which she signed on 13 February 2002. The Second Defendant accepts that she was bound by that contract from the commencement of her employment until she signed the SPTC. She contends, however, that the SPTC superseded her earlier contract so that its terms ceased to bind her. The point is of some importance only because the contract signed on 13 February 2002 contains covenants in restraint of trade whereas the SPTC does not.
- During the course of the closing submissions I made it crystal clear that my provisional view was that the earlier contract ceased to have effect once the SPTC had been signed. It did not seem to me that Mr Duggan strenuously argued the contrary. Nonetheless, it is important that I deal with this issue in some detail.
- In about July 2004 MB approached Mr David Mattinson who is the Managing Consultant of the company known as Partners in People Limited (hereinafter referred to as PP). PP is a company which provides a range of human resources and personnel management consultancy services to employers, managers and personnel professionals. Following discussions between MB and Mr Mattinson, PP produced to the Claimant a detailed document in which it set out the services it might provide in respect of "employment advice and support" to the Claimant. On 1 September 2004 PP and the Claimant entered into a written agreement. The agreement contemplated that PP would provide advice and support to the Claimant on a wide range of employment matters which included: -
"The production of document packs for new employees, consisting of two copies of individual Statement of Principal Terms and Conditions and the Employee Handbook….."
There was specifically excluded from the scope of the service to be provided by PP.
"Contracts for Directors or Senior Managers"
- Although the initial contact was between MB and Mr Mattinson it is common ground that once the agreement had been signed between PP and the Claimant it was the Second Defendant who was the point of contact on behalf of the Claimant.
- Her evidence has always been that she understood that PP had been appointed to provide revised contracts of employment for all of the Claimant's employees save for those who were subject to a service agreement. It is not fruitful to dwell upon whether or not the Second Defendant had understood her instructions about this issue correctly. It is common ground that such instructions as she received came from MB and both MB and the Second Defendant, in their oral evidence, were disposed to accept that there could easily have been a misunderstanding between MB and the Second Defendant about the category of employees whose contracts were to be reviewed.
- MB's stance at trial was that by the Autumn of 2004 the Second Defendant was a senior manager so that the contract of employment which she had signed in February 2002 was not intended to be the subject of review. To repeat, the Second Defendant's understanding was different and, as I have said, ultimately the Claimant does not suggest that the Second Defendant was wilfully misunderstanding her instructions.
- Whatever the state of mind as between the Second Defendant and MB it is clear that Mr Mattinson understood that his task was to produce the SPTC and the Handbook and that these documents were intended to supersede the contracts of employment of all employees to whom the SPTC and handbook were issued. It is to be observed that neither Mr Mattinson nor the Second Defendant produced any notes of the discussions between them and no letters or emails was sent between the two in the period between 1 September 2004 and the production of the SPTC and handbook which throws any particular light upon how Mr. Mattinson came to that understanding.
- In order that Mr Mattinson could review existing contracts of employment it was obviously necessary that he should be provided with examples. Although the evidence about what was provided to Mr Mattinson is not entirely clear the likelihood is that he was simply given a copy of the Second Defendant's then existing contract of employment.
- As I have said the then existing contract of employment of the Second Defendant contained restrictive covenants. In a letter which Mr Mattinson wrote to the Claimant's Solicitors in December 2007 he asserted that it was at the Second Defendant's suggestion that the SPTC should not include restrictive covenants. In paragraph 16 of his witness statement dated 10 January 2008 he makes the same point.
- The Claimant makes no complaint about the fact that the SPTC contains no restrictive covenants. It's stance in these proceedings, to repeat, is that its senior employees (if any) who had signed contracts of employment in similar form to that which was signed by the Second Defendant in February 2002 remained bound by the covenants within those contracts.
- I should also record that the SPTC was approved by the Board of the Claimant before it was rolled out.
- Mr Mattinson was unequivocal in his evidence as to his understanding of the status of SPTC and the Handbook. He understood that these documents would become the contractual terms upon which any person to whom they were issued was employed.
- The SPTC issued to the Second Defendant contains the following provisions: -
"The Company provides you with this Statement of your Principal Terms and Conditions of Employment, which complies with the Employment Rights Act 1996. It should be read in conjunction with the Company's Employee Handbook, a copy of which has been given to your with the Statement.
This Statement and the Handbook (except where otherwise indicated) form the basis of your contract of employment with the Company".
It suffices for me to say that neither that SPTC nor Handbook contained any hint or suggestion that the earlier contract of employment remained extant in any material way. I should also record that the SPTC is signed by EB on behalf of the Claimant.
- In my judgment any objective reader of the SPTC and the Handbook in the position of an employee of the Second Defendant would consider that the SPTC and the Handbook constituted the terms upon which he or she was employed by the Claimant as from the date specified by the SPTC. It is inconceivable, in my judgment, that any employee who signed the SPTC and received the Handbook would think that discrete parts of an earlier contract of employment survived and bound him or her.
- In the case of the Second Defendant there is no evidence whatsoever to suggest that she was informed, either orally or in writing, that the contract of employment signed by her in February 2002 survived in any material form following her signing of the SPTC. In the absence of a clear communication to that effect I simply do not see how she could remain bound by it.
- There is this further point. The SPTC undoubtedly sets out what are intended to be the principal terms of the Second Defendant's employment. It is silent about covenants in restraint of trade. On any rational basis such covenants are principal terms in a person's contract of employment. The failure to include any such covenant within the SPTC, in my judgment, further supports the view that the terms of the earlier contract of employment were intended to be discharged upon the signing of the SPTC.
(c) The Third Defendant
- The Third Defendant accepts that she is bound by the SPTC and the Handbook. She also accepts that she was subject to a duty of fidelity.
- In these proceedings, the Claimant seeks to assert that the Third Defendant is bound by the contract of employment which she signed on 12 August 2004. It contains restrictive covenants in identical form to those within the contract of employment signed by the Second Defendant in February 2002.
- All the reasons why I have concluded that the Second Defendant was not bound by the contract which she signed in February 2002 once she had signed the SPTC apply with equal force to the Third Defendant. I unhesitatingly hold that she is not bound by the contract which she signed on 12 August 2004.
- In her case there are two additional reasons why I come to that conclusion. The first is that the Third Defendant's evidence was to the effect that at some stage before she signed the SPTC the Second Defendant told her that it superseded the contract of employment which she signed in August 2004. I accept that evidence. The second reason is that on 23 December 2004 the Second Defendant wrote to the Third Defendant about her contract of employment. That letter, which appears at Bundle 12 at page 4442 should be read as if incorporated fully into this judgment. It suffices that I say that any employee who received such a letter and who was considering its contents objectively would, in my judgment, understand that his/her existing contract was to cease to have effect once he/she had signed the SPTC.
- I should add for completeness that Mr Bacon urges me to accept that such a letter would have been received by the Second Defendant and that this was also a reason why she was not bound by her contract of February 2002. I do not accept that submission for the simple reason that it is hardly likely that the Second Defendant had sent a letter to herself and if another person had sent it to her a copy would have surfaced in the course of disclosure and just as likely the Second Defendant would have produced the letter sent to her or given evidence that she received such letter.
- It follows from the preceding paragraphs of this section of my judgment that none of the Defendants were subject to covenants in restrain of trade by virtue of their contracts of employment. However, the First and Second Defendant were subject to the provisions of the shareholder agreement. It therefore becomes necessary to consider whether the covenants admittedly in restraint of trade which are contained within that agreement are enforceable. It is to that issue which I now turn.
The Covenants in Restraints of Trade contained within the shareholder agreement
- The covenants in question are to be found in Clause 7 of the agreement. They read as follows: -
"7.1 Each Shareholder who is at any time connected with the Company undertakes with the Company that he shall not at any time whilst he is connected with the Company or for a period of 12 months from the date on which he ceases to be connected with the Company, do or permit any of the following without the prior approval of the Board:-
7.1.1 either solely or jointly with or on behalf of any person directly or indirectly carry on or be engaged or interested (except as the holder for investment of securities dealt in on a recognised stock exchange) in any business competing with the Business;
7.1.2 solicit the custom of any person who is, or has been at any time, in the previous 6 months, a customer of the Business for the purpose of offering to such customer goods or services similar to or competing with those of the Business;
7.1.3 solicit or entice away or endeavour to solicit or entice away any consultant, Director or employee of the Group engaged in the Business; or
7.1.4 cause or permit any of their connected persons or any person (other than a member of the Group) directly or indirectly under his control or of which he is an employee, officer or partner to do any of the foregoing acts or things;
PROVIDED ALWAYS that in this clause 7.1 the Business shall mean the business of the Group as carried on at the date when the Director ceased to be connected with the Company and the reference in sub-clause 7.1.2 to the previous six months shall be to the 6 month period prior to that date."
7.2. Without prejudice to their duties and obligations under common law, each Shareholder undertakes with the Company that they shall not at any time whilst they are interested in Shares or for a period of 12 months from the date on which they cease to be interested in Shares, do or permit any of the following without the prior written consent of the Board:-
7.2.1. divulge to any third party whatsoever (save to the extent required by law or any regulatory authority having jurisdiction over the Shareholder) or use, take away, conceal, destroy or retain for his own or another's advantage or to the detriment of any Group member any intellectual property, accounts, financial or trading information or other confidential information of whatsoever nature which they may receive or obtain in relation to the business, finances, dealings or affairs of any Group member or the Business including, without limitation to the foregoing, any confidential information concerning products, processes, customers, suppliers, staff or plans of any Group member or the Business; or
7.2.2. say or do anything which is or is intended or likely to be harmful to the reputation or goodwill of the Company or any other member of the Group.
7.3 Nothing contained in clauses 7.1 or 7.2 shall prevent any Shareholder who has ceased to be connected with the Company or any of their connected persons from being the holder or beneficial owner of any class of securities in any company if such class of securities is listed on a recognised stock exchange, and he or she (either singularly or together with his or her connected persons) neither holds nor is beneficially interested in more than a total of 3 per cent of any class of the securities in that company.
7.4. Each undertaking contained in clauses 7.1. and 7.2. shall be, and is, a separate undertaking by the Shareholder expressed as giving it and shall be enforceable by the Company separately and independently of the right of the Company to enforce any one or more of the other undertakings contained in this clause 5 and in the event that any of such undertakings shall be found to be void but would be valid if some part thereof were deleted then such undertaking shall apply with such deletion as may be necessary to make it valid and effective."
- It is to be observed that the covenant set out at Clause 7.1 is a covenant on the part of a shareholder who is "connected with the company". That phrase is defined within the shareholder agreement to mean: -
"An individual being an employee, officer or consultant of any member of the Group" (See Clause 1.2.5)
- Put shortly, Mr Bacon submits that all of the covenants contained in Clause 7.1 are unenforceable. He makes that submission on the basis that each is to bind the shareholder in question for a period of 12 months after he or she has ceased to be connected with the company. He submits that such a period of time is too long. He also submits that Clause 7.1.1 is unenforceable since there is no justification for an anti-competition clause.
- Before turning to deal in detail with these submissions I set out the relevant principles of law which are to be applied. I am most grateful for the researches of Counsel which resulted in a comprehensive volume of relevant authorities. It seems to me, however, that my starting point (and virtual end point) is to adopt, gratefully, the exposition of the law by Gloster J in Brake Brothers Limited v Ungless [2004] EWHC 2799. Her exposition is to the following effect.
"(1) Covenants in Restraint of Trade are prima-facie unlawful and accordingly are "to be treated with suspicion" see per Laddie J in Countrywide Assured Financial Services Limited v Smart ChD 7 May 2004.
(2) It is for the covenantee to identify a legitimate business interest that is capable of protection.
(3) It is for the covenantee to show that the covenant extends no further than is reasonably necessary to protect that interest and the court will enforce the covenant only if it goes no further than is reasonably necessary to protect the trade interest or other legitimate interest of the previous employer: see, for example Scott LJ (as he then was) in Scully UK Limited v Lee [1998] 1 ICR 259
(4) The Court will scrutinise more carefully covenants in employment contracts, as opposed to ordinary commercial contracts where it will more readily uphold the covenant as being agreed between parties of assumed equal bargaining power.
(5) A covenant should be assessed for its validity at the date upon which the contract was made.
(6) A covenant will be upheld if the employer can show that it has been designed to protect his legitimate interests that, properly construed, the covenant extends no further than is reasonable necessary to protect those interests: see Mason v Provident Clothing Supplies Limited [1913] AC 724; Herbert Morris v Saxelby [1916] 1 AC 688.
(7) If a covenant can be construed in two ways, one of which leads to its invalidity, then the Court should prefer the alternative construction: see Turner v Commonwealth and British Minerals Limited [2000] 1 IRLR 114 at para. 14.
(8) A covenant should be interpreted in the context of the agreement as a whole so as to give effect to the intention of the parties.
(9) The legitimate interests which justify the imposition of a covenant in restraint of trade are (i) trade connection, (ii) trade secrets or confidential information akin to a trade secret; (iii) staff stability.
(10) Trade connection is established where it can be shown, by virtue of his position with the employer, the employee will have recurrent contact with customers or, as in this case, suppliers, such that the employee is likely to acquire knowledge of and influence over the customers or suppliers.
(11) An employer has a legitimate interest in maintaining the stability of his workforce.
(12) In order to determine whether an item of information is a trade secret or confidential information akin to a trade secret, the Court should have regard to a number of factors as described by the Court of Appeal in Faccenda Chickens v Fowler [1987] 1 Ch 117 at pages 137B to 138H, including the nature of the employment and the nature of the information itself. It is clear that this must be a trade secret or information of such a highly confidential nature as to require the same protection. This was explained by Lord Shaw in Herbert Morris v Saxelby (supra) at page 714 as follows: -
'Trade secrets, the names of customers, all such things which in sound philosophical language are denominated objective knowledge - these may not be given away by a servant; they are his master's property, and there is no rule of public interest which prevents a transfer of them against the master's will being restrained. On the other hand, a man's aptitudes, his skill, his dexterity, his manual or mental ability - all those things which in sound philosophical language are not objective, but subjective - they may and they ought not to be relinquished by a servant; they are not his master's property; they are his own property; they are himself. There is no public interest which compels the rendering of those things dormant or sterile or unavailing; on the contrary, the right to use and expand his powers is advantageous to every citizen, and may be highly so for the country at large. This distinction, which was also questioned in argument, is just as plain as the other.
An excellent concrete example of the latter point may be found in the present case. The second head of the injunction claimed is "from divulging or communicating . . . information as to the customers or affairs of the plaintiff company and from otherwise divulging or using such information". This [is] purely objective, and it was with exact correctness made the subject of a separate claim'
A trade secret has also been defined as information used in a business, the disclosure of which to a competitor would be liable to cause real or significant harm to the owner of the information and the dissemination of which has either been limited or not encouraged: see Lansing Linde v Kerr [1991] 1 WLR 251 at 260B to D per Staughton LJ. Other factors include whether the employer impressed upon the employee the confidentiality of the information (the attitude of the employer towards the information provides evidence which may assist in determining whether the information can properly be regarded as a trade secret); whether the relevant information can be easily isolated from information which the employee is free to use; and whether it is information, the use of which a man of average intelligence and honesty would regard as improper.
(13) It is clear that an area or non-competition covenant may be justified where the interest to be protected is trade secrets or confidential information akin to a trade secret, notwithstanding that there is an obligation present in the contract not to divulge confidential information post termination. Such a covenant, the authorities show, may be justified because it can be difficult for a former employer to police compliance with an obligation relating to trade secrets or confidential information akin to a trade secret. In addition, such a covenant can be justified by the fact that there are serious difficulties in identifying precisely what is, or what is not, a trade secret, or confidential information akin to a trade secret; see Littlewoods Organisation v Harris [1997] 1 WLR 1472 at pages 1479A-E, where Lord Denning said:
"But experience has shown that it is not satisfactory to have simply a covenant against disclosing confidential information. The reason is because it is so difficult to draw the line between information which is confidential and information which is not: and it is very difficult to prove a breach when the information is of such a character that a servant can carry it away in his head. The difficulties are such that the only practicable solution is to take a covenant from the servant by which he is not to go to work for a rival in trade. Such a covenant may well be held to be reasonable if limited to a short period."
Likewise in CR Smith Glaziers Limited v Greenan (1993) SLT 1221, the court said at page 1223F:
". . . it is well established that a prohibition against disclosing trade secrets is practically worthless unless it is accompanied by a restriction upon the employee possessed of secrets against entering the employment of competitors."
See also Printers & Finishers Limited v Holloway [1965] 1 WLR 1 at page 6; Faccenda Chicken Limited v Fowler [1987] 1 Ch 117 at pages 137G-138G; Turner v Commonwealth & British Minerals Limited [2000] IRLR 114 at para 18; Kall-Kwik Printing v Rush [1996] FSR 114 at page 124. However, the courts will scrutinise their covenants with particular care because of their broad anti-competition effect, enquiring whether a lesser form of restriction (for example a non-solicitation clause) might not have given the employer sufficient protection and have been a more proportionate form of embargo than one which bars out competitive employment in the whole of the United Kingdom; see Office Angels Limited v Rainer-Thomas [1991] IRLR 214 paragraphs 45-58 and Countrywide Assured Financial Services Limited v Smart (supra).
In any event, a balance has to be struck between the degree of protection legitimately required by the Claimant (which is permissible) and the degree of restriction or legitimate use of skill and knowledge and legitimate competition (which is impermissible); see Office Angels (supra) at para 58. In considering the anti-competitive effect of the area covenant, the court should consider whether the existence of the provision would diminish the Defendant's prospects of employment; Stenhouse Australia Limited v Phillips [1974] AC 391 at page 124C-D.
In cases where a restrictive covenant is sought to be enforced the trade secret (or confidential information akin to a trade secret) must be particularised sufficiently to enable the court to be satisfied that the employer has a legitimate interest to protect, but no more than that; see Scully UK Limited v Lee (supra) [1998] IRLR 259 at para 23.
The covenant to protect the use or disclosure of trade secrets (or confidential information akin to a trade secret) does not depend upon the employee taking documents or memorising the contents of documents. It can properly apply to trade secrets (or confidential information akin to a trade secret) which the employee may carry away in his head; see, eg, Polly Lina Limited v Finch [1995] FSR 751 at page 757."
- Mr. Duggan for the Claimant invites me to place considerable reliance upon the decision in Thomas v Farr Plc [2007] IRLR 419. In that case the Claimant (who was also the Appellant in the Court of Appeal) had held a number of posts, culminating in that of managing director of the Defendant, which was an insurance broker specialising in services for social housing, in particular housing associations. The Claimant's contract of employment contained a non-competition clause under which he covenanted not to, without written consent, directly or indirectly:
"………at any time during the restriction period …….. to be engaged or concerned or interested or participate in any business which is the same as or in competition with the business or relevant part thereof anywhere in any restricted territory provided always that this paragraph shall not restrain [the Claimant] from being engaged or concerned in any business concern in so far as the [Claimant's] duty or work shall relate solely to: (a) geographical areas where the business concern is not in competition with the business; or (b) services or activities with which the [Claimant] was not concerned to a material extent during the twelve months prior to the termination date ………."
The "restriction period" was twelve months from the date of termination.
- The issue of whether or not the non-competition clause was enforceable was decided as a preliminary issue by Ramsey J who held that the clause was enforceable. The Court of Appeal upheld the decision of Ramsey J. Mr. Duggan urges me to the view that the factors which influenced the Court in Thomas to uphold the covenant were factors which were also of considerable importance in the instant case. Those were (a) the fact that the Claimant was employed in a very senior position; (b) the fact that he had been exposed to information which the Defendant was entitled to require to be kept confidential after the termination of his employment; (c) the fact that there would be difficulty in policing the non-solicitation and confidentiality clauses which also bound the Claimant and (d) the fact that it was very difficult in cases such as Farr (and in the instant case according to Mr. Duggan) to know where exactly the line might lie between the information which remained confidential after the end of employment and information which did not.
- The other point of some importance which emerges from the decision in Thomas is that the court makes it clear that the reasonableness of the restraint is to be judged at the time when the employee is promoted to the most senior position he/she achieves with the employer. Indeed, there was no issue about it between the parties. In the case of the Claimant in Thomas he was first made the subject of the restraint in issue when he started employment with the Defendant. In due course he was promoted and eventually reached the position of managing director. The Court of Appeal endorsed the approach of the Trial judge who had considered the issue of whether the restraint was enforceable at the time when the Claimant became managing director. This point is of some significance to the position of the Second Defendant.
- I should also mention one other authority upon which Mr. Duggan relies. In Systems Reliability Holdings Plc v Smith [1990] IRLR 377 the Defendant began working for a company (ECS) as a computer engineer engaged in the reconfiguration of IBM main frame computers. He became highly skilled in the modification and rebuilding of the latest generation of IBM's 3090 computer and was instrumental in making ECS a leading company in computer services. He was dismissed on grounds of misconduct on 1 February 1990. During the course of his employment with ECS the Defendant had purchased shares totalling 1.6% of the holding in the company. After his dismissal the Plaintiffs acquired all the shares in ECS and the Defendant received £247,000 for his 1.6% holding. The share sale agreement contained a restrictive covenant under which "none of the specifically restricted vendors [would] during the restricted period directly or indirectly carry on or be engaged or interested …….. in any business which [competed] with any business carried on at that date of this agreement …… by the company or any of its subsidiaries". The Defendant was one of the specifically restricted vendors and the restricted period was in effect one of 17 months from the date of the sale. There was also a restriction upon the use of confidential information. A short time after his dismissal and the sale of his shares in ECS the Defendant set up his own business supplying computer services. The Claimant sought and obtained an injunction retraining the Defendant from acting in breach of the covenants restricting competition and restraining the use of confidential information. During the course of his judgment Harman J said this:-
"54. The position in this case is that [the Defendant] was selling his fraction – a small fraction but nonetheless his fraction of the company. He was getting for that a very substantial sum of money, £247,000. He was being paid a price no different from the price paid to other vendors. He got it in a different make-up of consideration because he received it all in cash and none in shares and with no deferred buy-out. But his price was no different from the price paid to others. It seems to me that in those circumstances it is right, and the courts should allow, covenants in restraint of trade as between vendor and purchaser to be reasonable when a vendor sells and a purchaser buys the whole of a business from a number of vendors, some of whom have only small participations in the goodwill and business which is being sold. In my belief the courts would be stultifying themselves to hold that only what were called controlling shareholders or persons having major interests can be bound.
55. It is quite true that the restrictions in this agreement apply in part to persons who seem to have no likelihood of detailed knowledge of the business being sold nor conceivable prospect of competition. There are included, for example, two persons who are trustees of a settlement for the benefit of grandchildren of one of the founders…… whom I have previously mentioned. Those trustees plainly have never been in the business as trustees, have plainly no prospect as trustees of entering into a competing business and a covenant really is utterly inappropriate to them. There are also three children of Mr Ingle – one of them plainly a married woman, one of them his son and another an unmarried daughter – who may or may not have anything to do with competition but who are there because they are shareholders. It may well be that if the Court were asked to enforce a covenant against those persons it would say that it was not reasonable so to do because they had never in any way engaged (if that were the proved fact, which it is not before me but I am assuming) in the business being sold and to have no prospect of effectively competing on the back of the knowledge they had obtained in the business being sold.
56. In my judgment Mr. Serota's argument is entirely correct when he says that the fact that the covenant may have been taken from some persons against whom it cannot be enforced does not mean that the same covenant cannot be taken from persons who have all those knowledges and interests and against whom it is reasonable to enforce it. In my view the prime argument by Mr Hoyle that this was in truth a covenant to be looked at in the light of the severe restrictions on reasonableness to be adopted from master and servant type cases is not the appropriate basis. This is a true vendor and purchaser and there is no public policy that I can see that should prevent [the Defendant] taking himself out of competition for a comparatively limited time – 17 months in the upshot; a time which on the evidence in this case I find as a fact to be entirely reasonable and sensible………."
- It is to be observed at the outset that the restrictive covenants under consideration in this case (clause 7.1) are contained within an agreement between shareholders. To that extent they arise in a different context from that in which such covenants have normally been considered by the courts. Almost without exception (on the basis of the authorities provided to me) covenants in restraint of trade have been considered in the context of contracts of employment and in the context of contracts for the sale of a business.
- It is of importance to note, however, that the covenants impugned in this case apply only to shareholders who are connected with the Claimant as defined. As is obvious, employees of the Claimant who are shareholders are within the category of persons to whom the covenants apply. In my judgment, therefore, the principles set out above are those upon which I should determine whether or not these covenants are enforceable. In reaching my conclusion upon enforceability, however, it is clear that the emphasis to be given to one relevant factor over another needs to reflect the fact that the persons against whom the restraint are sought to be enforced are both employees and shareholders.
- Clause 7.1.1 is, in my judgment, widely drawn. It restrains the persons to whom it applies from carrying on either directly or indirectly any business which competes with the business of the Claimant; it restrains a person from being interested in any such business and, importantly in the context of this case, it restrains a person from being engaged in any business. The phrase "engaged in any business" is apt to cover employees of that business but is obviously intended cover a wider category of persons than that.
- It is also the case, in my judgment, that Clause 7.1.1 restrains the persons to whom it applies from being engaged in any activity in a competing business even though the activity in which the person is engaged may bear little relation to the activity in which the person was engaged when he or she was employed by the Claimant.
- At first blush the Clause applies to any employee who is a shareholder. It applies regardless of the seniority of the employee and it applies regardless of the extent of his or her shareholding. I deal with this point more fully in a moment.
- To repeat, in my judgment, this Clause is of an ambit which is very wide.
- During the course of closing submissions I suggested that the likelihood was that if Clause 7.1.1 was enforceable against the First Defendant it was enforceable against the Second Defendant and vice-versa. Mr Bacon did not accede to that proposition and I can understand why that is so. I turn next, therefore, to deal with the circumstances in which each became bound by the shareholder agreement and the features of the employment of each with the Claimant which are relevant to the issue of whether Clause 7.1.1 is enforceable against them.
The First Defendant
- The First Defendant became bound by the shareholder agreement when he purchased shares from MB and EB in September 2005. He purchased the shares in question at a beneficial price and his purchase of the shares was very much linked to his aspirations in relation to the Claimant. The First Defendant made no secret of the fact and, indeed, it was his positive case, that by the summer/autumn 2005 he envisaged that he would be engaged with the Claimant for no more than about one more year. His goal was to promote the Claimant's business so as to facilitate a profitable sale of the business of the Claimant in or about the summer of 2006. By purchasing shares, as he did, in 2005 the First Defendant hoped and anticipated that approximately one year later he would sell them at a very substantial profit. At or about the same time as he purchased his shares the First Defendant entered into the share option agreement. No doubt, he hoped that by so doing and in the event of a sale of the Claimant his profit would be enhanced. In my judgment, the First Defendant's decision to acquire the shares was a calculated commercial decision carrying with it the prospect of very substantial profit.
- At the time the First Defendant entered into the shareholder agreement he was either the most senior or a very senior employee of the Claimant. He was the Chief Operating Officer. He enjoyed the complete confidence of the Claimant's Board of Directors and he had very substantial autonomy in how the business of the Claimant was conducted. He was privy to every scrap of information (confidential or otherwise) which was relevant to the running of the Claimant's business. He was also privy, in large measure, if not completely, to the hopes and aspirations which MB and EB held for the Claimant. There can be no doubt that if the Claimant had confidential information which was worthy of protection (as to which see below) the First Defendant was wholly familiar with it.
- It also seems to me to be an obvious conclusion that the First Defendant was known to and knew many of the personnel who constituted the Claimant's major customers. In the summer/autumn 2005 all the Claimant's major customers were insurers or solicitors and there can be no doubt that the First Defendant knew many of the people within the insurers and solicitors who were responsible for providing work to the Claimant.
The Second Defendant
- As I said earlier in this judgment the Second Defendant first became a shareholder of the Claimant in 2003. As I understand it she acquired her shares on or about the first anniversary of her commencing her employment with the Claimant. She purchased 36 shares (later these shares were converted to 3600 in number). According to the Second Defendant the Claimant made shares available to her in lieu of a bonus although this is disputed. MB's evidence was that it was the policy of MB and EB to encourage senior employees and staff to participate in share owning and even at this stage it was obvious that the Second Defendant was a valuable employee.
- At or about the same time the Second Defendant was given a 3% pay increase (so that her annual salary became £41,200) and she was given a bonus of £4,000 according to the Claimant (although as I have said this may be a matter of dispute). The Second Defendant was the first employee of the Claimant who was not also a director to become a shareholder. At the time when she acquired these shares, of course, the shareholder agreement did not exist.
- Her account of her signing the shareholder agreement is contained in paragraph 13 of her principal witness statement. She says that in November 2003 there was a rights issue and as a shareholder she was entitled to subscribe for some shares. She chose to take up the offer and paid some £2000 of her own money for 1334 shares. That meant that she was then the owner of 4934 shares in the company but, on any view, that was a very small proportion of the company's shareholding. Coincidental with her acquiring the shares she was given a shareholder agreement to sign and she accepts that MB spoke to her about the agreement although she has no recollection of what he said. It was in these circumstances that the Second Defendant became bound by the shareholder agreement.
- One thing that the Second Defendant says in her witness statement which I do not accept is that she considered the shareholder agreement not to be material because her shareholding was so tiny. I do not think that the Second Defendant is the sort of person who signs a legal document without giving it her full attention. I have no doubt that when she signed the shareholder agreement she knew that it contained covenants in restraints of trade which were more onerous than the covenants within her contract of employment and that she took a deliberate decision to accept the restraints in return for a greater number of shares.
- In my judgment the Second Defendant, just like the First Defendant but in different circumstances, took a reasoned decision to acquire a small shareholding in the Claimant in the hope that this would provide monetary gain in due course. My view as to that is reinforced by the fact that the Second Defendant, in 2006, again subscribed for shares when the opportunity arose and, of course, she entered into a share option agreement in 2005.
- As of November 2003, as I have said, the Second Defendant was clearly a valued employee. However, on the evidence, it is not entirely straight forward to pinpoint the nature of the work which the Second Defendant was undertaking at about that time. It seems to me, however, that MB's evidence about her work in the early years of her employment is likely to be accurate at least in general terms. Her job description was the clinical services manager. She engaged in work which involved formalising and documenting the Claimant's internal procedures, documenting processes and procedures which were intended to give the Claimant a competitive advantage over its customers, organising case management delivery following the undertaking of clinical assessments, carrying out case management herself and negotiating with insurers to fund the work. Nothing in the Second Defendant's own evidence contradicts this assessment of the work which she did between June 2002 and about November 2003 when she became bound by the shareholder agreement.
- Subsequent to the signing of the Shareholder Agreement it is common ground that the Second Defendant became increasingly important to the business of the Claimant. In the years between 2003 and January 2007 her salary rose to £75,000 per annum. At the time when she tended her resignation she was, without doubt, crucial to the success of the business of the Claimant. Her job description from 17 July 2006 onwards was Head of Business Development. It suffices that I say that she was intimately connected with all the important aspects of the Claimant's business. She does not seek to assert otherwise.
- I next turn to deal with the evidence adduced as to the information which was known to both the First and Second Defendant and which the Claimant asserts it was necessary to protect by imposing upon the First and Second Defendants the restraints which appear in the shareholder agreement.
- It is not disputed that the First and Second Defendant had access to all the important information about the Claimant's business activities. That was so when they became bound by the shareholder agreement and it continued to be so. It may be that the Second Defendant was not informed about some aspects of the proposals to sell the Claimant or acquire an interest in some of its competitors or their assets but, to repeat, it is clear that the First and Second Defendant knew of or had access to all relevant information about the Claimant's business activities.
- The Claimant's case has proceeded on the basis that some, at least, of this information must have been confidential and was worthy of protection. Mr Duggan submits that much of the information to which the First and Second Defendant were privy would, for example, properly be categorised as trade secrets in the sense that the disclosure of such information to a competitor would be liable to cause real or significant harm to the Claimant.
- At first blush, however, there has been little attempt, expressly, in this case to identify precisely the information owned by the Claimant which falls into that category.
- In part, that may be because the First and Second Defendant have not, in reality, suggested that none of the information to which they had access and about which they knew could be regarded as confidential and did not amount to trade secrets. Nonetheless, it seems to me that it is necessary that I should scrutinise the evidence with some care to satisfy myself, if it be the case, that the First and Second Defendant had knowledge of information which is properly to be regarded as confidential and worthy of protection.
- The starting point, of course, is the definition of confidential information contained within the shareholder agreement (supra paragraph 19). There can be no doubt that much of the information to which the First and Second Defendant were privy satisfied that definition. It seems to me, also, that there is a comparatively easy and fruitful way of undertaking an analysis of whether the Claimant owned information which was confidential and worthy of protection. It is to consider the information which the First Defendant admits he sent to his home email address during the last months of his employment with the Claimant. I stress that at this stage of my judgment I am not considering whether the sending of that information to the First Defendant's own email address and any use made of it thereafter was in breach of contract or a breach of the Defendant's fiduciary duty to the Claimant as a director. To repeat, I consider the material sent simply so as to make a judgment about whether or not it was confidential and worthy of protection.
- One of the Appendices to Mr Duggan's Opening was a list of the documents which the First Defendant emailed to his home address between 3 October 2006 and 12 March 2007. Mr Duggan listed those documents in reverse date order. There were twenty seven items sent within the time frame specified and having considered that documentation in detail it seems to me that many of those documents can properly be categorised as documents which contain confidential information or trade secrets. I highlight those documents about which I am confident that conclusion is justified.
- On 18 January 2007 the First Defendant emailed to his home a document entitled Report on Northern Operations for November 2006. The Claimant asserts that the report describes plans for continued development of the Claimant's presence in the north of England. On 22 January 2007 the First Defendant emailed a number of documents to his home address which contained actual historical financial performance data and the financial forecast for 2007/2009. On 30 January 2007 the First Defendant emailed to his home address an email which is described by the Claimant as a dialogue between the First Defendant and MB about short term cash flow pressures within the Claimant. On 8 February 2007 the First Defendant emailed two documents to his home address. The first document contained part of an analysis of the Claimant's financial performance prepared by MB. The second was a copy of a financial model which was being used for forecasting in the period up to March 2010. On the same day the First Defendant emailed a document described as a discounting model which contained a financial model of the Claimant's potential use of an invoice discounting facility in the period 2007/2009. On 12 March 2007 the First Defendant emailed two documents, a company report for the period April 2006 to 22 February 2007 and a Quality Team Structure. The Company Report contained a full list of all the Claimant's customers (then 96 in total) and how much they were billed during the period both for the Claimant's services directly and indirectly for the services of third parties working on the Claimant's rehabilitation programme. The Quality Team Structure was a document prepared by an employee of the Claimant called Mandy Kelly on 15 February 2007 in which she describes in detail her role as quality assurance lead, the structure of the Claimant as it related to this role, the Claimant's specific aims on quality, the roles of others within the quality team, a quality assistant, clinical/vocational auditors, clinical/vocational supervisors, trainers and process auditors. This document is described as being critical to maintain the Claimant's position (as it perceives it to be) as a leading edge innovator in the industry. It represented many years evolution based on experience.
- As I have said I am quite satisfied that both First and Second Defendants had access to the sort of information which I have described in the preceding paragraph. I should say for the avoidance of doubt that although it was the Firs