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Significant decisions for the Private Equity sector in 2022

Posted on 22 December 2022

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We have identified four judgments from 2022 which are significant for those in the private equity sector and may have particular relevance for sponsors, shareholders, management teams and/or appointees to boards. In this overview we summarise the key points and some of the practical implications.

The decisions we address are:

  • BTI 2014 LLC v Sequana SA and others [2022] UKSC 25 - This Supreme Court decision has settled the question of whether a directors' fiduciary duty to act in the interests of the company should be understood as including, in certain circumstances, the interests of its creditors.
  • Barclay-Watt v Alpha Panareti Public Ltd [2022] EWCA Civ 1169 - In a further case concerning the scope of directors' liability, the Court of Appeal has set out a useful summary of the case law concerning the circumstances in which a director of a company may have personal liability for the tortious acts of that company.
  • Allianz Global Investors GmbH & Ors v Barclays Bank plc & Ors [2022] EWCA Civ 353 - This decision settles certain questions as to whether former shareholders can bring a reflective loss claim. It is a useful development of the "clear bright line" set out Sevilleja v Marex Financial Ltd [2020] UKSC 31.
  • TP ICAP Ltd v NEX Group Ltd [2022] EWHC 2700 (Comm) - The High Court rejected an application to strike out parts of a breach of warranty claim on the grounds that the notification of claims required by the share purchase agreement ("SPA") contained insufficient information.
BTI 2014 LLC v Sequana SA and others [2022] UKSC 25

What was the decision?

The Supreme Court decided that:

  • A director's duty to act in the interests of the company should consider the interests of the company's creditors "as a whole".
  • When the company is financially stable, the shareholders will have the predominant economic interest in the company and their interests will normally be aligned with the company's creditors.
  • However, when the directors know, or ought to know, that the company is insolvent, or bordering on insolvency, or when an insolvent liquidation or administration is 'probable', the directors should have regard to the company's general body of shareholders and creditors.
  • In the event that shareholders' and creditors' interests are in conflict, a balancing act that reflects the financial position of the company will be necessary. The court held that "as a general rule [...] the more parlous the state of the company, the more the interests of the creditors will predominate, and the greater the weight which should therefore be given to their interests against those of the shareholders".

The Supreme Court diverged from the Court of Appeal in ruling that the interests of creditors and shareholders are likely to remain aligned at the point when it merely appears that a company "is likely to become insolvent at some point in the future" (i.e. without the sense of imminency of a company 'bordering' on insolvency, or that this is probable), and therefore whether creditors' interests were paramount at that point. The court was split on whether the duty was engaged when an insolvent liquidation or administration is 'probable', with the majority considering that the duty arose in such circumstances.

The criteria for 'insolvency' in this context is its common meaning, being cash flow or balance sheet insolvency.

What does this mean in practice?

While the Supreme Court's decision broadly reflects the existing state of the law, it provides a comprehensive framework for considering directors' duties when a company is in financial difficulty, and clarifies the point at which the duty to consider the interests of creditors is engaged.

When it appears that there is no reasonable prospect of avoiding insolvency, directors will need to work through their decisions carefully and be mindful of their potential personal liability should they fail to properly consider the interests of creditors. There will, of course, be a degree of subjectivity in weighing up the factors necessary to comply with their duties; directors will be all too aware that their decisions, taken at often very difficult times, may come to be evaluated with the benefit of hindsight.

It is therefore important that directors obtain timely advice when considering actions that could prejudice creditors (for example, the payment of dividends), which may avoid problems arising or support a defence that a director acted honestly and reasonably in the circumstances. Directors should also be confident of having appropriate insurance for their personal liability.

A more in-depth analysis of this important case is available here.

Barclay-Watt v Alpha Panareti Public Ltd [2022] EWCA Civ 1169

What was the decision?

The case concerned an alleged breach of duty of care by Alpha Panareti Public Ltd ("APP") to UK investors by APP's sales personnel marketing new build properties constructed overseas without providing appropriate warnings of certain risks. The High Court found that APP had made numerous misrepresentations and given negligent advice, and in doing so had breached its duty of care to those investors, and therefore was liable for its tortious acts.

The company appealed the first instance decision to the Court of Appeal. The investors cross-appealed, arguing that the High Court should also have found one of the two directors of APP personally liable for the company's wrongdoing as a joint tortfeasor. The director in question was the managing director of APP and, it was argued by the investors, the driving force behind the marketing plan, although it was held by the High Court that he had no personal contact with the investors.

APP's appeal was unsuccessful. The investor's cross-appeal was also unsuccessful, and the director escaped personal liability:

  • The Court of Appeal upheld previous caselaw that a director could not have personal liability where they had not assumed a personal responsibility to the wronged party and a "special relationship" did not exist, and that assumption of personal responsibility had not been relied on.
  • In respect of whether the director had been an accessory to APP's tortious acts, the Court of Appeal again upheld previous case law on the test to be applied here (principally, whether a defendant assisted with the commission of the tortious act and that assistance must have been pursuant to a common design). The Court considered that it was important that the tortious acts here concerned negligent omissions, not deliberate deceit, and the director was not accused of deliberately preventing the company's sales personnel from giving appropriate warnings of the risks.

What does this mean in practice?

Although the impact of this decision on a director carrying out his duties properly will be limited, it should be of some comfort that the court declined to pierce the corporate veil on the facts of this case.

However, this judgment will not protect a director that (i) has in some manner assumed personal responsibility to the wronged party for the tortious act, or (ii) made a conscious decision that the company should make the tortious act in question and so give rise to liability as an accessory. Directors should seek legal advice if they consider that there is any risk of this being the case.

Allianz Global Investors GmbH & Ors v Barclays Bank plc & Ors [2022] EWCA Civ 353

What were the decisions?

Marex restricted the principle barring the recovery of "reflective" loss to claims brought by current shareholders of a company which itself has a claim against the same defendant on the basis of the same facts. Such shareholder claims amount to claims for the diminution of the value of the company's shares, and the principle holds that the company itself is the proper claimant in these circumstances. This narrowing of the scope of the "reflective" loss principle therefore opened the way for claims by other categories of claimants, such as the creditors of a company or trustees, in similar circumstances. 

However, the test for whether a former shareholder, who has disposed of their shares and therefore could be said to have crystallised their losses (being the diminution of the value of their shares) at the point of disposal, and therefore bring a claim that would otherwise be barred by the reflective loss principle, was subject to conflicting decisions of the Court of Appeal in Nectrus Ltd v UCP plc [2021] EWCA Civ 57 and the Board of the Privy Council in Primeo Fund v Bank of Bermuda (Cayman) Ltd [2021] UKPC 22.

The key issue considered in Nectrus and Primeo was at what point should the court assess the claimant's status for the principle barring reflective loss claims in respect of shareholders. The Court of Appeal in Nectrus ruled that this point was at the time the claim is made. The Board in Primeo declined to follow this approach, and held that the appropriate time to assess the principle was at the time the former shareholder had suffered the actionable loss (which could, of course, be at the time they were a current shareholder and barred by the reflective loss principle).

As a Privy Council decision, the Primeo decision is not binding on the English courts, although such decisions are often influential. Accordingly, when the High Court was required to consider this issue in Burnford & Ors v Automobile Association Developments Ltd [2022] EWHC 368 (Ch), it felt bound to follow the Court of Appeal's decision in Nectrus, notwithstanding that composition of the Board that decided Primeo included five of the seven justices that decided Marex, the landmark case in this area.

However, the Court of Appeal in Allianz has now resolved the uncertainty, following Primeo and distinguishing Nectrus.

What does this mean in practice?

The appropriate point at which to assess whether the reflective loss rule could bar a claim by a former shareholder is the point at which the (former) shareholder suffers the actionable loss which is also suffered by the company, and not when the shareholder sold or redeemed their shares, or at the point a claim is actually brought.

For a practical example, the claimant in Primeo suffered loss arising from a breach of obligation before they became a shareholder in the company, but brought the claims when it was a shareholder. Per Marex, their claim should have been barred; however, the claim was allowed on the basis that the principle must be assessed at the time the actionable loss was suffered, when they were not a shareholder. On the other hand, this decision makes clear that a claim that would be barred by the reflective loss principle cannot be made into a valid claim by selling the shares and "crystalising" the loss.

More information on the prohibition of 'reflective loss' claims and the Marex case is available here.

TP ICAP Ltd v NEX Group Ltd [2022] EWHC 2700 (Comm)

What was the decision?

The claim relates to the sale of the entire issued share capital of ICAP Global Broking Holdings Limited ("ICAP") by NEX Group (the "Seller") to TP ICAP (the "Buyer"), and the alleged breach of warranties under the SPA by the Seller.

In its application to strike parts of the Buyer's claim out, the Seller contended that the Buyer had not given valid contractual notifications of the alleged breaches, which related to warranties in respect of the Seller's awareness of governmental non-routine investigations into ICAP and litigation with a value in excess of £0.5m. The Seller's awareness was defined in the SPA as being the actual knowledge of eight named individuals. Further, the warranties required that such investigations or litigation must have or would have "a material adverse impact" on the operation of ICAP's business. The SPA stated that the Seller would not be liable for a warranty claim unless the Buyer had given the Seller written notice of such a claim "stating in reasonable detail the nature of the [claim]" by the second anniversary of the completion of the deal. The Buyer issued two notifications to the Seller in respect of a regulatory investigation into ICAP within the specified time period.

Before the High Court, the Seller argued that the Buyer's notifications were ineffective for the purposes of the SPA as (i) the notifications given by the Buyer failed to identify the named individuals in the SPA with the requisite knowledge, and (ii) the notices failed to identify a material adverse impact to ICAP's business.

The High Court rejected both of the Seller's arguments. The SPA did not expressly state that a notification must identify the individuals with knowledge of the breaches and it was arguably obvious that the Buyer's understanding of 'awareness' would be as defined in the SPA and limited to the named individuals. Further, there was no commercial purpose for implying a requirement that notices should expressly identify a material impact on the business into the SPA, as this was a pre-requisite of issuing such a notice.

What does this mean in practice?

It should be noted that this judgment concerns a strike out application and therefore the bar the Seller needed to reach was high, being to show the Buyer's case was unarguable at trial, and the outcome of this case should it reach trial will be of interest.

However, the court's ruling in this application is a reminder of the reluctance to extend express contractual terms agreed between the parties, not least in circumstances where do to so would not make commercial sense and would result in little practical effect. It demonstrates that technical arguments in relation to the compliance with contractual notice obligations must be firmly rooted in express contractual wording if they are to succeed.

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