In brief
- A director of two aerospace manufacturing companies had acted unilaterally and without board authority to undermine a proposed transaction that the board had identified as being in the companies' interests
- His actions included: lobbying government ministers to intervene in the transaction; misrepresenting the companies' position to regulators; and deliberately unsettling their banking relationships. The court held that he did this in furtherance of his own personal interests in securing employment with a prospective new owner of the Gardner business.
- In doing so the director had breached his duties to the company under the Companies Act 2006 (CA 2006).
This case raises important questions about the scope of directors' duties under the CA 2006, in circumstances where a director's personal interests diverge from the board's agreed strategy. Although an extreme example, this case provides important guidance for advising directors and companies, particularly where a director's personal interests conflict with those of the company.
Background
Gardner Aerospace Holdings Limited (the Parent Company)'s subsidiaries manufacture parts for the aerospace industry. In early 2017, the Parent Company was acquired by Ligeance Aerospace Technology Company Limited (LAT), a Chinese company listed on the Shenzhen Stock Exchange. In February 2018 Mr Upton was engaged by the subsidiary Gardner Group Limited (GGL) as CFO, becoming a director of both the Parent Company and GGL in May 2018. In July 2021 Mr Upton became interim CEO following the prior CEO's departure.
In January 2022, the Parent Company's owner, LAT, agreed to enter into a proposed debt-for-equity swap transaction (the Transaction) with a Chinese state-owned investment fund, Sichuan Development Holding Company Limited (SDH). If completed, the Transaction would result in SDH's shareholding in LAT, and therefore indirectly in the Parent Company, increasing from 14 per cent to 32 per cent. Due to the Parent Company's activities having "military and dual use", this increase in the ultimate ownership of the Parent Company by a foreign state entity meant that the Transaction was notifiable as a "trigger event" under the National Security and Investment Act 2021 (commonly referred to as the NSIA 2021). As a result, SDH submitted a notification of the Transaction to the Department for Business, Energy and Industrial Strategy ("BEIS") on 3 February 2022.
Following the notification, the Secretary of State issued a 'call-in notice' on 16 March 2022, recording that the Secretary of State reasonably suspected that the Transaction might give rise to a risk to national security. The Secretary of State subsequently issued a Final Order on 10 October 2022. The national security risk identified concerned the military and dual use applications of sensitive information and know-how held by the claimants, and the potential that their technology could be used to develop military capabilities.
Meanwhile, a new director, Mr Philipp Visotschnig, was appointed to the Parent Company on 3 May 2022. Mr Visotschnig replaced Mr Upton as CEO on 1 July 2022, and Mr Upton was informed that he would not be retained as a director or employee of the claimants shortly thereafter.
The claim: director alleged to have acted in his own personal interests against the company
The claimants asserted that Mr Upton was personally opposed to Chinese ownership of the Parent Company and GGL through LAT; that he had known from December 2021 that he would not be retained as CEO; and that because of this he engaged in conduct prejudicial to the Parent Company and GGL.
The alleged breaches were:
- Lobbying politicians for the issue of the 'call-in notice', and the imposition of onerous conditions in the Final Order;
- Negatively misrepresenting the Transaction and its implications to BEIS' Investment Security Unit;
- Engaging with potential purchasers of the Parent Company without proper authority and encouraging them to lobby BEIS to take a negative view of the Transaction and LAT's continued ownership of the Parent Company; and
- Negatively misrepresenting to the GGL's bankers ("NatWest") the level of uncertainty associated with investment from LAT or SDH.
According to the claimants, Mr Upton pursued this course of conduct not to advance the interests of the claimants, but with a view to either: obtaining an order for divestment of LAT's interest in the Parent Company; or otherwise, undermining LAT's desire and ability to remain owner of the Parent Company. They alleged that Mr Upton's ultimate aim was to facilitate a sale of the Parent Company to a new buyer that would retain him in employment. Mr Upton denied any breach.
The cited duties which Mr Upton was alleged to have breached were:
- The duty to exercise powers for a proper purpose (section 171(b) of CA 2006);
- The duty to act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of their members (section 172 of CA 2006);
- The duty to exercise reasonable care, skill and diligence (section 174 of CA 2006); and
- The duty to avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company (section 175 of CA 2006).
The judgment
Mr Justice Richard Smith found Mr Upton in breach of his duties across all four heads of alleged misconduct.
Seeking political intervention in the NSIA process
The court found that Mr Upton acted in breach of his duties by lobbying Members of Parliament to subject the Transaction to close governmental scrutiny. It held that he had taken these steps unilaterally and with the express aim, at the minimum, of the imposition of investment and job guarantees.
In doing so, Mr Upton failed to promote the success of the claimants for the benefit of their members as a whole (in breach of section 172 of CA 2006), and by seeking to further his own prospects of employment by Gardner under new ownership, he also placed himself in a position of conflicting personal interests (in breach of section 175 of CA 2006).
Prejudicial communications to the Investment Security Unit
On 8 April 2022, Mr Upton sent a 'remedies letter' to BEIS on behalf of the claimant companies' management team without sharing it with the board of the Parent Company, LAT, or Mr Visotschnig. The letter attempted to 'sink' the Transaction by proposing divestment of the Parent Company by LAT. It also disparaged LAT ownership as being damaging to the claimants' interests. Mr Upton accepted in evidence that it was a "reasonable assumption" that he was telling His Majesty's Government (HMG) that the Transaction "would be a bad thing for Gardner".
In seeking unilaterally to undermine the Transaction in furtherance of his own plan and personal interests, and without disclosure of his actions to the board of the Parent Company, Mr Upton breached his fiduciary and contractual duties. He also exercised his powers as a director for improper purposes, having sent the 'remedies letter' for the purpose of pursuing the Parent Company's involuntary divestment. These actions were in breach of his duties under section 171(a) and (b) of CA 2006.
In a further letter to the Investment Security Unit dated 11 July 2022, Mr Upton deliberately exaggerated or distorted matters in order to suggest controversy and even confrontation with LAT. That letter was sent privately from Mr Upton's personal e-mail account and was heavily edited prior to sharing a version with Mr Visotschnig. This demonstrated that Mr Upton was aware that his actions were not in accordance with the companies' interests. Mr Upton was again found to be in breach of his fiduciary and contractual duties, as well as section 171(a) and (b) of CA 2006.
Engagement with potential purchasers
Mr Upton reached out to third parties that might be interested in purchasing the Companies in order to facilitate an order from HMG for the divestment of the Parent Company. He encouraged these companies to lobby government officials in order to make a divestment appear more achievable.
The court concluded that Mr Upton's dealings with these third parties were not undertaken to further the claimant companies' liquidity shortfall contingency planning. Rather, they were for the purpose of pursuing the Parent Company's involuntary divestment, which was an improper purpose.
Communications with NatWest
Mr Upton deliberately undermined assurances he had given to NatWest on behalf of the claimant companies at a meeting by suggesting in a subsequent letter that "on-going… weighs on LAT's ability to provide further cash." The court held that this implication that LAT would not be able to provide the claimant companies with secure funding was not warranted. However, Mr Upton deliberately made this suggestion in order to unsettle NatWest and heighten concern that GGL would not be able to meet its banking obligations.
The court held that the communications with NatWest were not sent for the purpose of the proper conduct of the GGL's banking relationship, but for the improper purpose of advancing Mr Upton's plan for the Parent Company's divestment and his own personal interests. Again, this was a breach of Mr Upton's duties as a director of the claimant companies.
Key takeaways
This decision provides important guidance on the scope of directors' duties under CA 2006 in the context of regulatory processes and national security investment reviews.
The judgment confirms that:
- The duty under section 172 of CA 2006 to promote the success of the company for the benefit of its members as a whole requires a director to work in accordance with the strategy agreed by the board. Actively working to undermine that strategy for personal gain will constitute a breach of that duty.
- Where a director acts to further his own personal prospects of employment, they place themselves in a position of conflicting personal interests with the company, irrespective of whether they also hold genuine concerns that align with their actions.
- A director who exercises their powers for an improper purpose, including by making representations to a regulator for the purpose of pursuing an outcome that is directly contrary to the company's agreed strategy and interests, will be in breach of section 171(a) and (b) of CA 2006, even where those representations contain some factual basis.
Practical implications for companies and directors: what this case means
This decision is a striking illustration of the breadth of a director's fiduciary obligations. It also demonstrates the courts' willingness to scrutinise a director's true motives in circumstances where those motives appear to have been contrary to the interests of the company.
This case also raises several points of practical significance. First, it is a reminder that directors involved in regulatory processes must ensure that all material communications with government bodies are disclosed to, and authorised by, the board. Directors cannot simply rely on the absence of a formal prohibition to justify that conduct.
Second, the case highlights the risks that arise where a director facing uncertainty surrounding their future employment allows personal interests to cloud the ability to discharge their duties. The conflicts of interest provisions under section 175 of CA 2006 apply wherever there is a real, sensible possibility of conflict. The court will scrutinise carefully the extent to which personal interests may have influenced a director's actions.
What makes this case exceptional is the degree to which Mr Upton worked against the strategy of the board – and the extent to which he went to hide his actions. Nonetheless, the judgment provides helpful commentary on how director's duties arising under the CA 2006 are applied in practice.