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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Boughtwood v Oak Investment Partners XII, Ltd Partnership [2010] EWCA Civ 23 (28 January 2010) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2010/23.html Cite as: [2010] EWCA Civ 23, [2010] 2 BCLC 459

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IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
Mr Justice Sales
[2009] EWHC 176 (Ch)

		Royal Courts of Justice Strand, London, WC2A 2LL
		28/01/2010

Lord Justice Rimer :

Introduction

1. Before the court are (i) an appeal brought with the permission of Sales J against the order he made on 6 February 2009 following his 94-page judgment on a petition and cross-petition each presented under section 994 of the Companies Act 2006 (the 'unfair prejudice' section); and (ii) an application (adjourned to the full court by Lloyd LJ) for permission to appeal against paragraph 4 of the valuation instructions annexed to the consequential order that Sales J made on 26 February 2009, an application extended at the hearing to a challenge also to paragraph 14 of those instructions.
2. The company whose affairs were in question is QED Group Limited ('QED'), the heart of the dispute concerning the business that QED carried on through its wholly-owned subsidiary, PML Flightlink Limited ('PML'), and two other subsidiaries, PML Automotive Limited ('Automotive') and PML Systems Limited ('Systems'). The petitioner was Oak Investment Partners XII, Limited Partnership ('Oak'), a United States venture capital firm. The respondents were Martin Boughtwood ('Mr Boughtwood'), Andrew Boughtwood (his brother), Stephen Bennett and QED. Oak's complaint was that Mr Boughtwood had conducted QED's affairs in a manner unfairly prejudicial to Oak. The cross-petitioner was Mr Boughtwood, the respondents to his petition being Oak, PML and QED. Mr Boughtwood's complaint was that Oak had conducted QED's affairs in a manner unfairly prejudicial to him. Oak was a preferred shareholder in QED. In the proceedings it represented the interests of two other preferred shareholders with smaller interests.
3. It was agreed at the trial that Oak and Mr Boughtwood could not further work together and that the court should order one of them to buy the other's QED shares at a fair price. But who should buy out whom? The judge held that Oak should buy out Mr Boughtwood. Whilst there were matters in respect of which Oak's conduct could be criticised, they did not cause prejudice to Mr Boughtwood; and Oak's misconduct was minor in comparison with Mr Boughtwood's, whose conduct did unfairly prejudice Oak. Mr Boughtwood had even admitted that certain of his conduct had been unfairly prejudicial.
4. By his order of 6 February 2009 the judge dismissed Mr Boughtwood's cross-petition; and (on Oak's petition) ordered him to sell and transfer to Oak his shareholding in QED. He also ordered him to pay the costs of both petitions. He gave directions as to the instructions to be given to the independent valuer tasked to determine the price for the shares. In default of agreement as to their implementation, the parties could apply to Sales J. Differences did arise and Oak restored the petition on 26 February 2009 when the judge gave further directions by way of valuation instructions annexed to his order.
5. Mr Boughtwood's appellant's notice challenged the order of 6 February 2009 on eight grounds although one was abandoned just before the hearing. He contended that the judge had erred materially in his assessment of the facts and had made various errors of law. He claimed that the outcome should have been a dismissal of Oak's petition and an order on his cross-petition that Oak should sell its QED shares to him. His challenge to the order of 26 February 2009 was directed at paragraphs 4 and 14 of the annexed instructions.
6. Mr Peter Arden QC (who did not appear below) and Mr Max Mallin (who, with Mr David Peters, did) represented Mr Boughtwood. Mr Jonathan Crow QC (who did not appear below) and Mr Christopher Harrison (who, with Mr Donald Lilly, did) represented Oak. We heard the appeal and application on 28 and 29 July 2009. We announced our decision on 31 July 2009, which was (i) to dismiss the appeal against the order of 6 February 2009; and (ii) to give permission to appeal against paragraphs 4 and 14 of the valuation instructions, to dismiss the appeal against paragraph 4 and to allow the appeal against paragraph 14 in terms I will explain. We reserved the giving of our reasons for those orders. These are my reasons.

General nature of the appeal

7. Section 994(1) of the Companies Act 2006 provides:

'A member of a company may apply to the court by petition for an order under this Part on the ground –

(a) that the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or

(b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial'.

8. QED was a quasi-partnership between Oak and Mr Boughtwood. Both petition and cross-petition complained about things done in relation to the affairs of QED and the business of PML. It was agreed at the trial and before us that the conduct of PML's business qualified as conduct of the affairs of QED for the purposes of section 994. The reality was, the judge said, that there was a single business whose affairs were conducted through the combined corporate structure of QED and PML. It was also agreed that mismanagement of the affairs of a company could in principle amount to unfairly prejudicial conduct provided it was serious, subject to the caveat that the court will be astute not to 'second guess' legitimate business decisions that hindsight shows were not in the company's best interests. It was also agreed that conduct by one party to a quasi-partnership arrangement in respect of a jointly owned company that causes an irrevocable breakdown in the relationship of trust and confidence inherent in the arrangement is capable of being unfairly prejudicial conduct.
9. In paragraph [329] of his judgment, the judge summarised as follows his findings as to Mr Boughtwood's misconduct of the business of QED/PML:

'i) His persistent failure to adhere to his agreed management role as CTO, [Chief Technical Officer] and persistent attempts to assert a wider management authority in the business contrary to what had been agreed, thereby distracting and destabilising the management team.

ii) His failure to accept the decision of the PML board and management to continue with a burn rate broadly in line with the budget agreed in February 2008 and the business plan which was the foundation of Oak's investment in September 2007, and his related failure to give proper consideration to acceptance of financing proposals available to QED/PML in mid-2008 (in particular, the first proposal by SCDC [Second Creek Development Co LLC]) and thereafter (in particular, the second proposal by SCDC);

iii) His coup on 24 June to take control of QED and PML, thereby (a) destroying the relationship of trust and confidence which should have been the foundation of the quasi-partnership between him and Oak, (b) destroying the chance of accepting financing from SCDC under its first financing proposal, and (c) further disrupting and distracting the management of PML and impeding expenditure by PML on the speedy development of a viable motor;

iv) His further attempt in October 2008 to insist upon a bank mandate which would give him a right of veto over expenditure items, contrary to the intention under the joint venture that such matters would be for decision by the board and management of PML.'

10. Central to Mr Boughtwood's appeal was the assertion that the judge failed to characterise correctly the relationship between the parties and their respective rights and obligations in running the business, as a result of which he fell into error in relation to issues material to the case, including 'the destructive interference' issue (the finding in paragraph [329](i)) and 'the refusal to accept investment' issue (the finding in paragraph [329](ii)).

The story

11. I will not set out the judge's findings of fact in close detail, which would be a work of supererogation. The judge's judgment ([2009] EWHC 176 (Ch); [2009] 1 BCLC 453) is publicly available and its 330 paragraphs contain an exhaustive account of the story. My summary (albeit a long one, since much happened) is no more than that. I have included it so as to make my judgment intelligible on a stand-alone basis.

PML's early days: Mr Boughtwood's invention

12. In 2001 Mr Boughtwood bought a business called Flightlink, which manufactured joysticks and small industrial motors. He established PML Flightlink Ltd ('PML') as the vehicle to carry on that business. He owned all the shares. Through PML, he also devoted time, money and effort towards his invention, development and exploitation of an innovative 'in-wheel' electric motor technology known as the Hi-Pa drive system. The judge described it as potentially offering a revolutionary break from previous means of powering automobiles, saying it was 'an exciting new idea which offers potential to tap into what might prove to be a huge market for alternative propulsion systems.' PML attracted a high quality management team whose members were impressed by the idea and had high hopes for its commercial potential. The technology required, however, the dedication of substantial resources in research and development ('R & D') in order to develop the invention into a marketable product. The required resources exceeded what Mr Boughtwood could provide. PML did not lack competitors and to achieve success in the market, it was important for it to be ready with its product earlier than them. It needed outside investment.

The need for investment; Oak

13. PML's need for finance became pressing by early 2007. Mr Boughtwood had by then committed PML to contracts for the delivery of prototype motors with optimistic delivery dates, whilst the development of the technology was proving more troublesome than he had expected. It was clear that without more investment in R & D, PML was unlikely to meet its commitment to Volvo, its most important contract. Mr Boughtwood started looking for backers. He produced a draft business plan in February 2007. He was introduced to Jonathan Meyer as someone who could provide assistance in drawing up a business plan and in approaching venture capitalists for funding. Mr Meyer considered that Mr Boughtwood was overvaluing PML. He advised him that if he accepted money from a venture capital firm, he would have to relinquish control of PML.
14. Mr Meyer's contacts included Oak, a major American venture capital firm with experience of investing in technology start-up companies. The judge described its investment ventures as speculative and high-risk, pointing out that nine out of ten of the companies in which it invested failed, although success could bring high financial rewards. Oak normally takes a substantial shareholding alongside the company's founder member but not direct management control. Instead, it puts in place a management team: in particular, a board with representatives of itself, any other investor and the founder member, together with a Chief Executive Officer ('CEO') whom it requires to be independent of the founder member.
15. Mr Meyer and Mr Boughtwood met Bandel Carano, an Oak partner, in July 2007. Oak carried out due diligence investigations, for which it engaged as a consultant Craig Knight, a United States citizen to whom it had been introduced in April 2007. He had had a varied career involving experience in capital markets, investment banking and managing privately held companies, including those involved in vehicle manufacturing and marketing.

Oak invests in PML; Mr Knight becomes the Chief Executive Officer

16. By the autumn of 2007 PML needed further investment quickly if it was to deliver a potentially profitable product to the market. A major factor in Mr Boughtwood's decision to choose Oak as an investor was the speed with which it said it could invest: this was particularly important with regard to the Volvo contract because by September 2007 PML was falling behind on its obligations. Mr Boughtwood and Oak agreed that £20m (or $40m, reflecting the approximate conversion rate at the material times) was required to finance PML's R & D. Oak was prepared to invest only about £10m, and it was agreed that a second major investor would be required. As it would take time to attract a second investor, Oak agreed to make its investment first, in the contemplation that there would then be a further investment, probably from one of the investors whom Mr Boughtwood said were seriously interested. In the event, none did invest. This left Oak feeling let down by Mr Boughtwood, although the judge found he had not misrepresented the position. It was rather a case of his belief in his product being over-optimistic.
17. Oak invested on the basis of Mr Boughtwood's valuation of PML at $60m, one made before Oak's investment (a 'pre-money valuation'). Oak did not investigate its soundness. A term sheet produced in August 2007 contemplated a total investment by Oak and others of $40m, giving PML a 'post-money valuation' of $100m. The proposal was that Oak and other investors would hold 'A' preferred shares in PML which would represent 40% of its post-investment capitalisation. Oak intended to, and did, protect itself to the extent that if further investors invested on the basis of a lower valuation, its own shareholding would not be diluted: Mr Boughtwood's holding would suffer the dilution. This meant that he would be likely to be wary of further investment at a lower valuation and the judge said (paragraph [50]) that it was contemplated that Mr Boughtwood would have 'a contractual or practical veto' over further investment. Oak was thus 'to a considerable extent made the prisoner of Mr Boughtwood's own valuation expectations and of his assessment of how long PML could keep going without further investment, if further investment at a valuation of $60m was not forthcoming'.
18. The term sheet provided for PML's board to have seven directors, of whom three would be designated by a majority of the ordinary shareholders, one of whom would be the CEO; three would be designated by the investors, one of them by Oak; and one should be an industry representative unaffiliated with PML, designated by a common majority and acceptable to the holders of a majority of the investor shares. Oak wanted a CEO who was independent of the founder member, and Mr Boughtwood acknowledged that he would not be an effective CEO. In the run up to Oak's investment, Mr Boughtwood pressed Oak to agree to Mr Meyer being CEO. Oak disagreed, explaining that the appointment and removal of the CEO was to be by joint decision. The judge found that Oak would not invest before being satisfied that a suitable CEO had been identified and agreed upon. Its investment was bound up with the quality of management and above all of the CEO.
19. A full recruitment exercise to identify a CEO would, however, have taken months, whereas so to delay Oak's investment was unacceptable to Mr Boughtwood. Hermann Hauser, another venture capitalist, who was involved in the due diligence and whose company also became an investor with Oak, proposed Mr Knight as CEO. Mr Knight was acceptable to Oak. Mr Boughtwood had his doubts but as he wanted Oak's money, he agreed. Oak imposed no pressure on him and the judge found that he was reasonably happy to engage Mr Knight. However, the circumstances of Mr Knight's appointment left him with what the judge called (paragraph [59]) a 'lurking sense of unease'. He later came to feel that Mr Knight and Oak were conspiring against him.
20. There was a dispute as to whether (as Mr Boughtwood claimed) Mr Iftikar Ahmed (a junior Oak partner) had agreed with him in the early discussions about Mr Knight's appointment as CEO that Mr Boughtwood alone was to be entitled to remove Mr Knight if he became dissatisfied with him; or whether (as Mr Ahmed claimed) it required a joint decision of Oak and Mr Boughtwood. The judge accepted Mr Ahmed's evidence. He also resolved a further dispute about Mr Knight, rejecting Mr Boughtwood's evidence that Mr Knight had admitted to him at a pre-appointment dinner on 9 September 2007 that he had deliberately misled investors when attempting to raise finance for a potato project earlier in his career. The judge also rejected Mr Boughtwood's suggestion that even before Oak's investment in PML, Oak regarded Mr Craig as 'their man', whom they could and would control and with whom they had conspired in advance to co-operate against Mr Boughtwood.
21. Oak's investment in PML on 26 September 2007 was made in exchange for preferred shares. Mr Hauser acquired a smaller investment stake in PML through Providence Investment Company Limited ('Providence'). WS Investment Company LLC ('WSI'), a firm introduced by Mr Meyer, took a further, yet smaller, stake. The investors entered into a Subscription, Purchase and Shareholders Agreement with Mr Boughtwood and PML. It contemplated a second investment round by further investors. Oak paid some £8.5m for 3,590 preferred shares in PML; Providence, some £213,000 for 90 such shares; and WSI, some £42,000 for 18 such shares. The subscriptions went to PML. Oak, Providence and WSI also respectively paid Mr Boughtwood some £1.5m, £38,000 and £7,000 for part of his ordinary shareholding in PML, which the judge held was compensation for his loss of control of PML. The judge found that Oak's investment was made on the understanding of Mr Boughtwood and Oak that additional finance of about £10m would be required to realise PML's business plan for developing the Hi-Pa drive system.
22. The subscription agreement provided in clause 12.1 for a board composed of three Investor' Directors, three Ordinary Shareholder Directors and an Independent Director. Clauses 12.4 and 12.19 respectively provided:

'12.4 In accordance with the Articles, the Ordinary Majority shall be entitled by notice in writing addressed to the Company, to, from time to time, appoint as Directors any three persons (one of whom shall be designated as chief executive of the Board) and may at its cost remove from office any such persons so appointed and may appoint another person in his place by such written notice….

12.19 The parties agree that MB [Mr Boughtwood], the Company and Oak shall use their reasonable endeavours to find a suitable chief executive officer for the Company following Completion, with the intention that such appointment shall take place within 45 days of Completion.'

23. There was a dispute as to the sense of those provisions, which were later reproduced in the Shareholders' Agreement made on 13 November 2007 when there was a corporate restructuring, such provisions then applying to the board of QED, by then the parent of PML. Mr Boughtwood contended that, as the Ordinary Majority, he had a unilateral right to remove the three directors he appointed, and that as they included the 'chief executive of the Board', he had a right to remove Mr Knight as CEO. The judge disagreed and his finding (paragraph [77]), was that:

'… joint agreement on the appointment and approval of the CEO was a fundamental basis for Oak's agreeing to invest in PML as Mr Boughtwood knew and accepted. That Mr Boughtwood should not have the unilateral right to appoint or remove the CEO was regarded as a fundamental and necessary protection for Oak in the joint venture, so that Mr Boughtwood was bound by an equitable obligation flowing from the quasi-partnership nature of his relationship with Oak in relation to PML not to seek to remove or appoint the CEO on a unilateral basis'.

24. In his argument on the appeal, Mr Arden acknowledged some obscurity in the drafting of clause 12.4, pointing to its phrase 'chief executive of the Board', which he suggested may have been a mistake for 'chairman of the Board'. The position that he advanced was that clause 12.4 entitled Mr Boughtwood unilaterally to remove any of the three directors he had appointed, but not to terminate any such director's engagement as CEO.
25. Shortly after Oak's investment, and in accordance with what had been agreed, Mr Knight was appointed CEO of PML, Mr Meyer was appointed Chief Operations Officer ('COO') and Mr Boughtwood was appointed Chief Technical Officer ('CTO'). The judge made these findings as to their roles:

'[79]. The employment roles which had been agreed for Mr Knight, Mr Meyer and Mr Boughtwood (i.e. CEO, COO and CTO respectively) carried implications in broad terms for the respective areas of authority and responsibility for each of them in relation to the conduct of PML's business. Though there was some haziness around the margins of each of these jobs, it was agreed with reasonable clarity that Mr Boughtwood no longer had overall management control of the company as part of his employment responsibilities. Mr Knight was the senior executive employee of PML with authority across the range of the company's activities, subject to the board. Mr Meyer had the primary authority and responsibility for overseeing the production of motors for the delivery to PML's clients. Mr Boughtwood's primary responsibilities as CTO were to carry on R & D for PML in relation to the Hi-Pa drive motors and to ensure that steps were taken to protect PML's intellectual property in relation to the motors by drafting and registering effective patents. In addition, since Mr Boughtwood had been in charge of running the company until late September and work was ongoing within the company to try to meet the requirements for delivery of a viable prototype motor to Volvo, Mr Boughtwood retained responsibility for sorting out that delivery which was then outstanding'.

26. In paragraphs [80] to [91], in light of the quasi-partnership nature of PML's business, the judge considered more generally the nature of the relationship between Mr Boughtwood and Oak. He focused on the periods following both Oak's investment in PML and the corporate re-structuring of 13 November 2007, although at this stage he had not yet reached that re-structuring. The judge said it was appropriate to analyse the conduct of the affairs of PML and its business at two levels. The focus of the relationship between Mr Boughtwood and Oak was at the strategic level, as investors in a common undertaking. It included matters such as the investment of the additional £10m that PML needed. This was to be contrasted with the level at which the day-to-day management of PML was to be conducted. Oak's approach, with which Mr Boughtwood had agreed, was that the investors should leave the latter to the expert management team. The judge rejected Mr Boughtwood's assertion that Oak was under a quasi-partnership obligation to disclose to him every communication that it might have with Mr Knight and Mr Meyer regarding the business and, in particular, regarding Mr Boughtwood's conduct at the management level of PML (a number of emails of this nature were not so disclosed). There would, the judge held, only be an obligation to disclose communications affecting Mr Boughtwood's ability to pursue the joint enterprise at the strategic level. Further, it was legitimate for Oak at all times to have regard to its own interests:

'[82]. … The concept of quasi-partnership in the current context did not require Oak to subordinate its own commercial interests lock, stock and barrel to some notion of a joint interest with Mr Boughtwood nor to share in all cases its thinking or information relevant to the conduct of its relationship with Mr Boughtwood with him. … Oak's own self-interest was directly engaged in relation to these matters, since if the management team could not co-operate with each other and act together with reasonable harmony, Oak's investment in PML would be placed in considerable jeopardy. Oak had a legitimate interest to seek to be kept informed by management about problems which might arise between them and was, in my view, entitled to use its best judgment in terms of the use it made of that information with a view to resolving such tensions and problems as arose. Accordingly, it did not have an obligation to share all communications bearing upon such matters relating to Mr Boughtwood's day-to-day management and employment role within the company with Mr Boughtwood. … Mr Boughtwood also submitted that Oak had an obligation arising out of the quasi-partnership to exercise its various contractual rights and duties under the Articles of Association in respect of QED/PML so as to ensure that the management of PML's business was jointly controlled by Oak and Mr Boughtwood, including in relation to matters such as ordinary decisions at the day-to-day management level on items of expenditure and so forth. I do not accept this. In my judgment, the basis for the joint venture so far as management of this aspect of PML's business was concerned was the set of contractual provisions and provisions in the Articles of Association of PML and then QED and PML which established a regime which gave authority to decide such matters to the board of PML. That arrangement was further reinforced by agreement on Mr Boughtwood's role in the management of PML, which was to be confined to that of CTO rather than a role involving any more general right of decision-making in the management of PML's day-to-day business affairs (while Mr Knight was to be CEO). The quasi-partnership between Mr Boughtwood and Oak did not have the effect of creating obligations on Oak to procure that the regime which the parties had structured in that way should be by-passed so as to afford Mr Boughtwood some more general right of veto or involvement in the conduct of such affairs: cf O'Neill v. Phillips [1999] 1 WLR 1092, at 1098H-1099A.'

27. As for further investment in PML, the judge held that whilst Mr Boughtwood was entitled to have regard to his own interest, he owed certain equitable obligations to Oak. He had agreed that a further £10m would be needed to carry out the business plan. He was a director of PML (and later QED) and owed them fiduciary obligations to take decisions in their best interests. Both the subscription agreement and the November 2007 agreements contemplated a further round of financing and that Oak's position should be protected by an anti-dilution provision if such investment was made at a pre-money valuation of less than $60m. It was thus contemplated that further financing might have to be at that lower level and that Mr Boughtwood would have to take such a risk. In the circumstances the judge found that Mr Boughtwood had an obligation to consider in good faith any serious proposals for further investment up to £10m and not unreasonably to withhold his agreement to such investment. Clause 4 of the Shareholders' Agreement entitled QED up to 31 December 2007 to complete a further round of equity investment 'pursuant to, and subject to, terms substantially similar to, and in no event more favourable than, the terms of the Subscription Agreement …'. Clause 4 dealt, however, only with the position up to 31 December 2007. After that, any further investment was a matter for agreement between the quasi-partners, save that Mr Boughtwood would have to suffer any dilution occasioned by any investment at below the valuation level at which Oak had invested.
28. As for Oak's and Mr Boughtwood's respective obligations at the management level, the judge found that:

'[90]. At the management level, Oak owed Mr Boughtwood an equitable obligation arising from their quasi-partnership not to interfere with (and not to procure or assist other members of the management team, including Mr Knight and Mr Meyer, to interfere with) Mr Boughtwood's proper rights of participation in management decisions. Conversely, in light of the fundamental importance for the joint venture that the CEO and management team should run the business in accordance with their own best judgment for the joint benefit of the shareholders, and the risk to the success of the joint venture if the management team was disrupted, Mr Boughtwood owed Oak an equitable obligation for the purposes of application of section 994 not to seek to act outside his own proper management role nor to interfere in the areas of management responsibility which had been properly assigned to other members of the management team. In my judgment, the extent of the rights and obligations of Oak and Mr Boughtwood respectively in relation to the management level were governed by the agreement about individuals' management roles they reached in September 2007 and then, with greater clarity, in November 2007.

[91]. Put shortly, it was agreed that Mr Boughtwood would not have extensive decision-making rights, or rights below board level. His role was confined to that of CTO. Mr Knight and Mr Meyer were to be the principal executive officers of the company who, subject to the board, decided how PML's business should be run on a day-to-day basis and how it should produce a viable prototype motor on the basis of the existing Hi-Pa drive concept and deliver such motors to PML's customers. In the event, Mr Boughtwood found it difficult to respect that agreement and accept such a limited role for himself and sought to assert a wider authority, which led to tensions and disruptions within the management team.'

Tensions emerge; the Kroll report; the restructuring; QED

29. By late October 2007 strains were emerging in the relationships. It was by then clear that PML could not meet its Volvo commitment in the near future and it failed to deliver a viable prototype motor to Volvo by the end of October. Mr Boughtwood could not accept the restrictions on his former role as senior manager and was unhappy to leave the management to Mr Knight, who in turn found it frustrating to have to deal with Mr Boughtwood. Mr Knight's fury with his interference was reflected in his email of 22 October 2007 to Mr Ahmed (calling Mr Boughtwood 'a bully [who] imposes his will without regard to the work done by others'). Mr Ahmed relayed it to Mr Carano, referring to Mr Boughtwood as 'completely delusional', as resenting a CEO who would always 'side' with Oak and as having threatened to undo the Oak deal. Mr Ahmed's prophetic assessment was that 'we may have a longer term issue here with [Mr Boughtwood], whether it is [Mr Knight] there [ie as CEO] or someone else. He clearly has a management style issue.'
30. During October 2007 Index Ventures emerged as a possible further investor. It commissioned Kroll Associates SA to report on PML's management team. The report on Mr Knight was negative and Kroll disclosed it to Oak. A summary presented to Mr Ahmed and Mr Glassmeyer included the following:

'At best, Craig appears to be a man 1) at war with his ex-wife, 2) who got financially overextended, 3) got cross wise with this co-founder, 4) got into a customer dispute and 5) has a hazy memory or is not as crisp as he should be.

At worst, Craig is someone 1) who cheated on his wife, 2) screwed his partner, 3) ripped off a customer, 4) stole from Jay Leno and 5) lied on his resume.

It's an easy call in the latter scenario – you fire him.

In the former scenario, you are on notice that disputes and broken relationships follow him and that his financial circumstances are going to be applying uncommon pressure on him.'

31. Mr Glassmeyer raised this with Mr Knight and was satisfied by his explanations, as he explained to Mr Ahmed. Oak concluded that these matters did not warrant serious concern about Mr Knight or require his removal. Oak did not, however, disclose any of this to Mr Boughtwood, who complained in the proceedings that Oak's duties as a quasi-partner required it to do so. The judge agreed. He found, however, that the information was not withheld dishonestly, nor did its withholding point to the existence of a special relationship between Oak and Mr Knight. Moreover, Oak was still pressing Index to invest and so the Kroll report would be likely to be canvassed with Mr Boughtwood at some stage if he had not spurned Index, as in fact he did.
32. Mr Boughtwood's point about the non-provision of this information was that, had he been given it, it would have confirmed his views about Mr Knight's honesty and he would have exercised his claimed right under clause 12.4 of the subscription agreement to remove him. The judge did not accept this:

'[104]. I have already found that Mr Boughtwood has exaggerated his alleged concerns about Mr Knight's honesty. He had only recently professed himself to be happy with Mr Knight's recruitment as CEO. Oak was happy with Mr Knight's performance as CEO thus far and took the position that the Kroll report did not cast significant doubt on his qualities as CEO. The main points of the report disclosed were, as summarised by Mr Ahmed to Mr Carano in an e-mail of 9 November 2007, that Mr Knight had gone through a messy divorce with significant financial repercussions and had followed a reputable firm's tax advice which, through no fault of his, had led him into difficulties in relation to payment of his taxes. This did not give good grounds to remove someone who was providing good service in a difficult role. In light of resistance from Oak I do not think it likely that Mr Boughtwood would at this stage have pressed for the removal of Mr Knight. However that may be, even if Mr Boughtwood had wanted to remove Mr Knight as CEO on the basis of the report, I do not consider that he could properly have done so unilaterally: see paragraphs [74] – [77] above. Oak would not have agreed to Mr Knight's removal, and in my view it would have acted reasonably in doing so, since in truth the matters in the report did not show that Mr Knight was dishonest and did not otherwise significantly cast doubt on his ability to be an effective CEO for PML.'

33. Index proposed a $10m contribution at $30m pre-money and $60m post-money valuations, which would have left the investors with a combined shareholding in excess of 50% of PML, reducing Mr Boughtwood's holding to just below 30%. Index's valuation reflected its concern about 'the less than trustworthy management team'. The proposal came to nothing because Mr Boughtwood regarded the valuation as unacceptably low. This was a source of frustration to Oak but the judge regarded Mr Boughtwood as entitled to take his stand. It was early days and better offers might be forthcoming. In fact, Oak agreed that the Index offer should not be pursued as Index was only proposing to invest $10m rather than the required $20m.
34. On 13 November 2007 there was a corporate re-structuring under which Mr Boughtwood and Oak exchanged their PML shares for shares in QED, which became the immediate parent of PML and also of Automotive and Systems, both recently incorporated. As a result of that share exchange, Mr Boughtwood held all QED's ordinary shares (representing about 68% of its issued share capital) and Oak held about 97% of QED's preferred shares (representing about 30% of its issued share capital), the balance being held by Providence and WSI. Article 12 of QED's Articles of Association contained the anti-dilution provision protecting Oak's holding in QED. Article 19 governed the Board of Directors. The Shareholders' Agreement was entered into. As for PML, any addition to or removal from its board required the agreement of Oak and Mr Boughtwood. The judge summarised the group's constitution and the Shareholders' Agreement in paragraphs [108] to [121].
35. By an assignment made in November 2007, QED acquired the intellectual property rights ('IPR') of PML's business for £750,000, which remained unpaid. PML's cash resources were intended also to be hived up to QED but that never happened. A route to its achievement was for PML to re-purchase its shares from QED, but that required statutory declarations as to PML's solvency for a year, whereas by December 2007 it was apparent that, after any such purchase, no such declarations could be made: they were precluded by the burn rate of PML's business plan and lack of further investment.
36. Following QED's acquisition of PML, the business was carried on by PML. Although Oak held almost all the preferred shares and Mr Boughtwood all the ordinary shares, the rights attached to the former placed Oak and Mr Boughtwood in a position approximately equivalent to equal shareholders. The personnel involved in the affairs of QED and PML were as follows.
37. At QED, between 13 November 2007 and 24 June 2008, its board comprised Messrs Boughtwood, Knight, Carano and Ahmed. Oak persuaded Mr Boughtwood to appoint Mr Knight as one of 'his' directors. Oak appointed Messrs Ahmed and Carano as 'its' directors. For practical purposes, Mr Boughtwood and Oak were equally represented.
38. On 13 November 2007 the board of QED discussed the management structure of its business by reference to a structure chart. Mr Knight was shown as the CEO with a direct line of responsibility to the board. Below him, and reporting to him, were Mr Meyer (COO), Peter Christie (the sales director, whom Mr Boughtwood had known since 1998 and recruited in October 2007) and Nicholas Rich (the finance director, whom Mr Meyer recruited in October 2007). Mr Boughtwood was shown on the same level as Mr Knight, with a line indicating (so the judge found) that his reporting responsibilities as CTO were to Mr Knight. The judge rejected Mr Boughtwood's claim that this showed him as having a general overview role in the management of PML, preferring the view advanced by Mr Carano, Mr Ahmed and Mr Knight. The judge said that this was supported by other documents, in particular an email of about 6 January 2008 from Mr Knight to Mr Boughtwood that the judge explained in paragraph [124]. Mr Knight there pointed out to Mr Boughtwood the limits of his role as CTO and reminded him to stop micromanaging or second-guessing the management team within areas that were their exclusive responsibility. He required Mr Boughtwood to respect the agreed chain of command and reminded him that on 13 November 2007 it had been agreed that Mr Boughtwood's first priority was to improve PML's IP position by developing the patents. Mr Boughtwood neither challenged that account of the management responsibilities, nor complained about the email. The judge found that it was agreed on 13 November 2007 that Mr Boughtwood would not have any general management oversight function but had the specific role of CTO. The main operational functions of PML were the responsibility of Mr Meyer (COO) reporting to Mr Knight but not to Mr Boughtwood.
39. At PML, between 13 November 2007 and 24 June 2008 the directors were Mr Boughtwood, Mr Knight and Mr Meyer. The judge found that Mr Knight was not just the CEO of QED, but of the group's business and thus also of PML. Mr Christie, Mr Rich, Timothy Bycroft and Andrew Watts were (or became) members of PML's management installed in it after Oak had invested in the business. Mr Bycroft (whom Mr Boughtwood and Mr Meyer recruited in February 2008) became the vice-president of PML's operations. Mr Watts (whom Mr Meyer recruited on 10 March 2008) became vice-president for software, systems and applications for PML.

Continuing difficulties

40. The cracks in the relationships that were apparent at the start continued to manifest themselves. At about the time that Index was considering an investment, so was another firm, Wexford. As, however, it was only prepared to invest on the basis that it obtained full control, its overtures were unacceptable to both Oak and Mr Boughtwood. By December 2007, with no further investment in sight, there was a difference between Mr Boughtwood and Oak as to PML's future. Mr Boughtwood proposed a two-year austerity budget, whereas Mr Knight, Mr Meyer and Oak believed that PML had to accelerate its development programme at all speed, for which it needed further investment as soon as possible. Oak's view, with which Mr Boughtwood disagreed, was that one solution was to shut down PML's legacy business and focus all its resources on the Hi-Pa programme. In December 2007 Oak indicated that it might review its legal options with a view to enforcing either further investment or the shut down of the legacy business, which the judge held to be a legitimate consideration. There was a developing problem with Mr Boughtwood; and Oak was entitled to consider what options it might have to bring him into line with its views. Mr Carano's frustration was expressed in an email of 27 December 2007 to Mr Knight and Mr Ahmed and copied to Mr Boughtwood. Mr Boughtwood answered it, and Mr Carano responded, emphasising the need for further finance and saying:

'We have relied on your representations about the interest of other investors and have been very flexible in accommodating them. However, we must conclude this financing over the next 60 days or risk serious financial restructuring.'

He emphasised the need to manage the relationship better. The judge explained the email exchanges in paragraphs [136] to [138].

41. Email exchanges in January 2008 reflected Mr Knight's frustration at Mr Boughtwood's insistence on involving himself in non-CTO matters, upon which Oak supported Mr Knight. January also brought forth something positive: the parties agreed that Mr Knight should give priority to securing further investment. Mr Boughtwood recorded that the target date for it to be in place was about July 2008. New budgets, directed at constraining spending in the meantime, were agreed at the QED board meeting on 15 February 2008.
42. Mr Boughtwood continued to involve himself in matters outside his remit. In January he sought to cut across Mr Meyer's authority as COO in relation to a new delivery commitment given to Volvo. The judge explained in paragraphs [141] and [142] that he sought (unsuccessfully) to interfere with a delivery of motors to Volvo. Mr Meyer countered his interference, taking the view that, had Mr Boughtwood had his way, he would almost certainly have destroyed PML's chances of success with Volvo. This led to a scene in which Mr Boughtwood swore and shouted at him in front of other PML employees. There was a similar incident concerning Mr Meyer's decision to send a test model to Lotus.
43. The budget agreed on 15 February 2008 showed that PML's cash resources of about £7.3m as at January 2008 would be in deficit by November 2008. Absent further investment, no declaration of solvency in relation to PML for the forthcoming 12 months could be made, which continued to prevent a restructuring enabling PML's cash to be hived up to QED. Mr Boughtwood asserted that this was part of Oak's strategy, because at the PML level he could be outvoted on the board, whereas on the QED board he had equal rights of control with Oak. The judge rejected this, explaining that it was rendered impossible by the business plan agreed in September 2007 and the budget agreed in February 2008. The key to the solution of the problem was more funding, for which Oak was pressing and which Mr Boughtwood was resisting. The judge pointed out that Mr Boughtwood was in fact in a stronger position than Oak at PML board level, because Mr Meyer could be regarded as 'his' appointee and Oak had no appointee on the board. In the event, both Mr Knight and Mr Meyer began to disagree with Mr Boughtwood's strategy for PML, but the judge found that they did so in complete good faith; and that Mr Boughtwood could not complain about a board structure to which he had agreed in November 2007.
44. Part of Mr Boughtwood's case was that Mr Knight – and, later, Mr Meyer – conspired with Oak to achieve the insolvency of QED/PML with the object of enabling Oak to purchase the business and associated IPR at a low price. The judge rejected that theory in paragraphs [151] to [159]. The budget set in February 2008 was one that the participants in its formulation (who included Mr Boughtwood) believed to be in the best interests of the business. Following that, it was Oak and Mr Knight who made the running to raise funding; and had they succeeded, the eventual insolvency would have been avoided. As it became less likely that funding would be achieved, Mr Knight and Mr Meyer (with Oak's agreement) reduced PML's spending below the budget so far as practicable but only so far as consistent with the need to develop the Hi-Pa with all speed.
45. In March 2008 Mr Boughtwood trespassed again on Mr Meyer's turf: he sought, on the eve of a demonstration for Volvo, to insist on the installation in the motors of new, untested software. Mr Meyer regarded this as potentially disastrous and overruled Mr Boughtwood. The judge said:

'[161]. The evidence of Mr Christie, Mr Watts and Mr Bycroft showed that this was not an isolated incident. Mr Boughtwood sought to exert authority in relation to a range of management issues well outside his remit as CTO. He sought to act as a sort of shadow CEO, second-guessing and criticising the decisions of other senior managers within their areas of responsibility. He would be abusive and unpleasant if his wishes were thwarted. This was disruptive and a major distraction for the management of PML away from their primary task of trying to produce a viable, robust prototype motor. It also over time seriously undermined the relationship of trust and confidence between them and him, and meant that his presence in the management structure on site at PML created a poisonous atmosphere. It reached the point in the end where it would be very doubtful whether the senior managers at PML would wish to remain with the company if Mr Boughtwood returned to take charge.'

46. On 7 March 2008 Mr Knight emailed Mr Ahmed and Mr Carano alerting them to the problem of Mr Boughtwood stepping outside his role as CTO and treating himself as having wider management authority. On 9 March 2008 Mr Boughtwood complained to Mr Meyer about his actions in relation to the Volvo demonstration and questioned his integrity, making (the judge found) an unfounded assertion that Mr Meyer had agreed that, without Mr Boughtwood's agreement, he would never change a course of action that had earlier been agreed. Mr Boughtwood said he would not accept decisions by Mr Meyer and Mr Knight as COO and CEO and claimed 'an absolute requirement' to be intimately involved in such decisions. The judge found Mr Boughtwood's criticisms of Mr Meyer unjustified. He related in paragraphs [165] and [166] Oak's suggestions directed at calming the management waters that Mr Boughtwood was troubling. He accepted Mr Meyer's evidence that Mr Boughtwood later apologised for his behaviour in relation to the Volvo matter, an apology Mr Boughtwood denied he had made.

Quests for further investment; more difficulties

47. Whilst all this was happening, Mr Knight was seeking further investment. Mr Boughtwood criticised him in the proceedings for looking only at Californian venture capital firms, but the judge found that Mr Knight searched more widely (paragraph [168]). Mr Knight's report of 2 May 2008 pointed out that it was a tough assignment, as all the investors had expressed concern over the valuation made when Oak invested. At a QED board meeting on 7 May 2008 all present (including Mr Boughtwood) agreed that best offers for further investment should be sought with a view to a closing by the end of June, Mr Carano stating that he considered that the best bets were NEA, the Smith family and Index. Contrary to Mr Boughtwood's evidence, the judge found that the end of June was not a mere target date. He found that Mr Boughtwood recognised that the ability to attract finance would deteriorate once QED/PML approached insolvency and that he:

'[171] … implicitly accepted that, subject to reconsideration if offers of financing were only made on the basis of unexpectedly harsh or unusual terms, PML's business needs were such that the funding then available should be taken. He implicitly accepted that this would be in the best interests of the company, even if the valuation of PML given by the market was less than $60m pre-money and the acceptance of such funding would mean additional dilution of his shareholding by comparison with Oak's ….'.

48. The next chapter of conflict was Mr Boughtwood's accusation that Mr Rich had reimbursed expenses to Mr Knight incurred in his quests for funding, being reimbursements that Mr Boughtwood said were tantamount to fraud. The basis for the charge was a claimed agreement on 12 February 2008 that Mr Boughtwood was to sign for and approve all Mr Knight's expenses. Mr Knight accepted that it had been agreed that Mr Boughtwood would have to counter-sign for any first-class air fares to China, but that was all. Otherwise, as the judge found, Mr Meyer could sign for Mr Knight's expenses. Mr Meyer's response to this incident was an email to Mr Knight, which the judge found to be a natural and reasonable one. It read:

'[Mr Boughtwood] needs to be removed from the office immediately. He spreads a poisoned culture which affects the whole building and results in poor morale in everyone from shop floor to senior management.'

49. In paragraphs [176] to [178] and [182], the judge made further findings as to Mr Boughtwood's continuing interference in areas outside his remit as CTO and as to the frustration it was causing Mr Meyer, Mr Knight and Oak. The judge found the concerns being voiced by Mr Meyer and Mr Knight about Mr Boughtwood to be objectively justified. By 15 May 2008 Mr Knight was reporting to Oak that 'The entire management team wants him out. He has absolutely no support in the management team.'
50. By then the fruit of a day that Mr Knight had spent with the Smith family was that they were looking at a $10m investment at a $30m pre-money valuation and preparing for a due diligence meeting. Mr Knight relayed that to Mr Boughtwood by email, whilst informing Oak that he was 'sure he [Mr Boughtwood] will be resistant but he has no other choice. …'. At a meeting on 19 May 2008 between Mr Knight, Mr Boughtwood and Mr Meyer, Mr Knight explained the expressions of interest from potential investors but that their interest was predicated on a pre-money valuation of between $20m and $30m: they would not match the $60m pre-money valuation at which Oak had invested because market conditions had changed and PML was about a year behind its business plan. Mr Boughtwood wanted PML to reduce its expenditure so as to reduce the need for more finance, whereas Mr Knight explained that Oak disagreed and wished to see additional investment of $20m as originally agreed. He recommended that Mr Boughtwood should accept the financing available at the $30m valuation. Mr Boughtwood said he would give Mr Knight his decision by 26 May 2008 but did not. Mr Knight also raised with Mr Boughtwood the problems arising from his continued interference in PML's management, which needed to be resolved in order to maintain morale in PML and not to put off investors. His proposal was that Mr Boughtwood and his R & D team should move to a different building.
51. In paragraph [187] the judge rejected as incredible - and as 'a deliberate invention' - Mr Boughtwood's assertion at the trial (the first time he had raised it) that at this meeting, following Mr Meyer's departure from it, Mr Knight told him that Oak wanted him out of the business and that Mr Knight was to seek the best deal he could. The judge found that Mr Boughtwood advanced this assertion as the principal justification for his coup in June 2008 by which he seized control of QED and PML, a justification that the judge's finding undermined. The judge found that the reason for the coup was that Mr Boughtwood was not prepared to accept any investment at less than a $60m pre-money valuation because he did not want to suffer a dilution of his interest in QED. He wanted to take control of PML's rate of expenditure and cut it back severely from what Mr Knight, Mr Meyer and Oak thought appropriate.
52. In late May and early June 2008 email exchanges reflected Mr Boughtwood's and Oak's different views as to the right pre-money valuation for further investment. In the meantime, Mr Rich was tying up administrative matters, including Mr Knight's employment contract, which it was proposed (and the group's solicitors, Speechly Bircham agreed) should be, and was, backdated to 4 December 2007. It was signed on about 8 June 2008. Mr Boughtwood's case was that this was a dishonest attempt to bolster Oak's case that Mr Knight was a CEO of PML. The judge rejected that, finding that Mr Knight was such a CEO and that this was an administrative tidying up exercise.

Mr Boughtwood's coup

53. In early June 2008 Mr Boughtwood started to plan his coup. Of course he kept it secret from Oak, Mr Knight, Mr Meyer and everyone at PML. At the same time he was exchanging emails with Mr Carano about further investment, the exchanges reflecting their difference of approach. Mr Carano's stance was that it was essential in the best interests of everyone to raise $20m before the end of July, with any rejection of financing putting PML 'in dire risk': by the autumn of 2008 investors would give PML an even lower valuation. The judge held that view to be genuine and to have a compelling commercial logic to it.
54. In June 2008 Mr Knight spoke to Chrysler in the USA, with whom he had had earlier discussions in April 2008 that came to nothing, as did Chrysler's further approach. Mr Knight told Oak of it but not Mr Boughtwood. This formed another complaint by Mr Boughtwood of the non-disclosure of material information. The judge found that it should have been disclosed but that, for the reasons explained in paragraph [206], it caused him no prejudice.
55. On 13 June 2008 Second Creek Development Co LLC ('SCDC'), a Smith family vehicle, produced a term sheet outlining its proposed investment, based on pre- and post-money valuations of $20m and $60m, which would dilute Mr Boughtwood's interest. It proposed carrying out due diligence. It also proposed a change of the QED board so as to include two SCDC appointees and reduce Mr Boughtwood's control at board level. SCDC had been briefed by Mr Knight about Mr Boughtwood's behaviour and it considered he should operate away from the company. Mr Boughtwood was told of SCDC's approach and was unhappy with it.
56. By 19 June 2008 NEA, another possible investor, had withdrawn its interest. It too had suggested a $20m pre-money valuation. Apart from SCDC, only Venrock retained an interest, although only SCDC went to the expense of visiting PML to carry out a due diligence exercise, in which it engaged by 23 June 2008. On the same day, Mr Boughtwood obtained a letter from John Coombes in Monaco, one expressing an interest in a 7-10% equity stake in QED at a pre-money valuation of $60m. At a dinner that day, Mr Carano told Mr Boughtwood that if further investment was not achieved by the end of June, Oak would wish PML's business to be sold. Mr Boughtwood repeated that PML should reduce its expenditure.
57. On 24 June 2008 Mr Boughtwood effected his coup. The judge described the scheme as follows:

'[215]. On 24 June Mr Boughtwood had put in place detailed plans to remove Mr Knight as CEO and director of QED and PML, appoint Mr Andrew Boughtwood and Mr Bennett as additional directors of QED so as to secure control of the board of QED at the meeting and then to use his majority on the board of QED to remove Mr Knight as CEO and director of PML, appoint Mr Boughtwood as CEO of PML and appoint Mr Andrew Boughtwood and Mr Bennett as additional directors of the PML board so as to secure control of the PML board for Mr Boughtwood. These plans involved having in place formal letters giving notice of the various changes and appointments for delivery that morning to the offices of Speechly Bircham in London by Mr Boughtwood's then solicitors, Eversheds. The element of surprise was critical for Mr Boughtwood's plan, since if Oak was alerted to what he intended to do, it could have appointed additional directors of its own to the QED board according to its rights under the Shareholders' Agreement and QED's Articles of Association so as to block Mr Boughtwood's move. This meant that Mr Boughtwood did not give proper advance notice of the proposed changes as required by QED's Articles of Association. Mr Boughtwood was counting on being able to achieve a temporary majority on the board of QED so as to effect a change in the board of PML before Oak could take defensive action to appoint further directors to the board of QED. Once Mr Boughtwood had secured the change in the board of PML, he calculated that if Oak appointed further directors to the board of QED that board would then revert to being deadlocked, with the practical effect that it could not unwind the changes to the board of PML which he had made. The practical result which he hoped to achieve by these means was to secure the control of the PML board and business for himself, using his majority on that board (with Mr Andrew Boughtwood and Mr Bennett) to outvote Mr Meyer if necessary.'

58. At the QED board meeting on 24 June 2008, the opening discussion was as to investment needs. Mr Boughtwood would not agree to the SCDC investment at a $20m pre-money valuation. Mr Carano said that if SCDC's offer was insufficient and Mr Coombes' offer was not made by 4 July 2008 (an extension of the deadline), QED should sell the PML business. Mr Boughtwood said the company should constrain its spending so that its current funding lasted for 12 months. He then produced a letter removing Mr Knight from the QED board and as CEO. He purported to appoint two additional directors to the QED board, who joined the meeting. He said he was taking up the position as temporary CEO. A resolution was passed removing Mr Knight from the PML board (Mr Boughtwood denied that Mr Knight had been the CEO of PML). Mr Carano, Mr Knight and Mr Meyer left the meeting, saying they disputed the legality of what had been done.
59. Confusion reigned. Oak regarded Mr Boughtwood's actions as a declaration of war. SCDC stopped its due diligence and walked away. Mr Knight sought to remove Mr Boughtwood as CTO. Mr Boughtwood denied his authority to do so and excluded him from the group's offices. Oak appointed Mr Knight and Craig Lang as investor directors of QED.
60. One claimed justification for Mr Boughtwood's coup was his assertion that Oak was seeking to drive him out of the business, which I have said the judge rejected as deliberate invention. Mr Boughtwood also said that Oak had lost nothing by SCDC's exit, since he was within his rights to reject the SCDC proposal as being at too low a valuation. The judge disagreed, for reasons given in paragraph [227], where he explained that no offer was forthcoming from Mr Coombes, whose late expression of interest was speculative and depended on due diligence. He said that in the circumstances by then prevailing, Mr Boughtwood's fiduciary duties and quasi-partnership equitable obligations required him to accept the SCDC offer. By an amendment to his pleadings shortly before the trial, Mr Boughtwood admitted that his actions of 24 June 2008 constituted unfair prejudice in relation to Oak. The judge found that they did. They cost Oak the chance of further investment by SCDC. He found that Mr Boughtwood's actions destroyed the relationship of trust and confidence which should have existed between him and Oak as quasi-partners and said (paragraph [228]) that 'Oak could not be expected to trust him any more as a partner in their joint venture'.
61. After 24 June 2008 Mr Boughtwood was in practical control of PML's business. He curtailed its expenditure, causing a hiatus in terms of the drive to get the Hi-Pa motor up and running as soon as possible. Oak consulted Simmons & Simmons. Correspondence was exchanged between them and Eversheds, Mr Boughtwood's solicitors, as to the lawfulness of his conduct. On 1 July 2008 Mr Boughtwood had an aggressive and confrontational meeting with the PML management team, requiring them to acknowledge him as CEO and impliedly threatening them with dismissal if they did not. In early July Mr Coombes conducted some due diligence at PML over two days.

Oak's petition; restoration of the status quo

62. On 14 July 2009 Oak presented its petition and issued an application notice for interim injunctive relief, which was heard by Lindsay J over 22 and 23 July 2008. Lindsay J ordered a restoration of the position in relation to the control of PML's business pending the trial of the petition, expressing in critical terms the view that Mr Boughtwood's actions of 24 June 2008 had manifestly not been in accordance with QED's Articles of Association. The judge said that:

'[243] Lindsay J made an order dated 24 July restraining Mr Boughtwood, Mr Andrew Boughtwood and Mr Bennett from denying that Mr Knight was the CEO of PML and from impeding him in carrying out his duties as such; from denying that Mr Knight was a director of PML, and from impeding him from acting as such; restraining Mr Andrew Boughtwood and Mr Bennett from purporting to act as directors of PML; restraining Mr Boughtwood from purporting to act as CEO of QED; restraining each of them from holding out Mr Davies as CEO or employee of or consultant to PML or QED; and requiring each of them to take all necessary steps to assist with the restoration of the bank mandate of PML in the form it existed immediately before 24 June 2008. This last point related to steps which Mr Boughtwood had taken to remove Mr Meyer as a signatory on PML's bank account.'

63. The position thereafter, until judgment on 6 February 2009, was as follows. As for QED's board, Oak and Mr Boughtwood each had the right to appoint three directors each, and Oak took extra-curial steps to equalise its representation on the board. From then on, the 'Boughtwood' directors were Mr Boughtwood, Andrew Boughtwood and Mr Bennett (who, upon his resignation on 25 September 2008, was replaced by Tim Gosselin); and the 'Oak' directors were Mr Ahmed, Mr Carano and Mr Lang. Absent agreement between both camps, the board was potentially deadlocked. As for PML's board, Mr Boughtwood, Mr Knight and Mr Meyer remained directors. The effect of the balance of board power in each of QED and PML was that, if there were agreement between the two camps in the QED board as to the conduct of the business by PML, that decision could be implemented. If not, then in practice Mr Boughtwood could not control the affairs of PML. Although he was a director of PML, he was invariably in disagreement with Mr Knight, with whom Mr Meyer invariably agreed. Mr Meyer was originally a Boughtwood appointee: but the judge found that where Mr Meyer agreed with Mr Knight or disagreed with Mr Boughtwood, he made his decisions in the best interests of PML.

Continued troubles; PML becomes insolvent

64. Following the judicial restoration of the status quo ante, PML pressed on with the development of the Hi-Pa motor. Mr Knight and Mr Boughtwood continued to search for investors. In September 2008 SCDC proposed an investment of $5m at $9m pre-money and $29m post-money valuations but said that they would not participate whilst the legal dispute continued: they said it had slowed the momentum of the business and had affected their valuation. The judge said of the SCDC offer:

'[246] This new proposed investment was completely unacceptable to Mr Boughtwood. He suggested that the collapse in the SCDC valuation is evidence of a strategy hatched with Mr Knight and Oak to "steal" the company being brought to fruition; but in my view, it is no such thing. I find that there had been no collusion between Mr Knight, Oak and SCDC. The reduction in SCDC's valuation of the business was unsurprising in light of the problems which existed within QED/PML and the fact that by September it was getting perilously close to running out of money. This was the scenario which Mr Carano had always feared might happen if PML left it too late to get in the additional funding that it needed, and about which Mr Meyer had warned Mr Boughtwood.'

65. On 8 September 2008 Mr Boughtwood offered to buy Oak's QED shareholding at a fair value, later offering to pay Oak's costs of its petition down to the date of the offer. Oak declined the offer, taking the view that Mr Boughtwood should not be entitled to take advantage of his own wrongs in relation to the affairs of the business to drive Oak out of it. The judge agreed with Oak, explaining in paragraph [249] why Mr Boughtwood's offer did not cure the prejudice that his actions had caused Oak. He said that Oak had made a speculative investment at high risk, whereas the offer treated it merely as a normal commercial investor. Mr Boughtwood's conduct had damaged the business and was likely to have reduced its value for the purposes of the offered buy-out. Moreover, his conduct of 24 June 2008 had destroyed the trust and confidence which was the foundation for the quasi-partnership and, as Oak wished to remain as a participant in the business, the fairer outcome would be for Mr Boughtwood to withdraw from it.
66. At a PML board meeting on 18 September 2008 Mr Knight reported that, absent funding by November, PML would be insolvent. The board was advised about their responsibilities. It resolved, Mr Boughtwood dissenting, that the SCDC offer should be referred to the QED board. QED had still not paid PML the £750,000 for the November 2007 assignment of its IPR and PML resolved to demand payment; and that, if none was made, it would treat the assignment as void. Mr Boughtwood objected to this resolution as he did not recognise the PML's board entitlement to make such decisions. On 23 September 2008 a letter was sent to QED asking as to its intentions for the payment of the £750,000. PML engaged PricewaterhouseCoopers ('PwC') to advise the board on insolvency matters.
67. A QED board meeting on 26 September 2008 discussed the non-payment of the £750,000. It was suggested that the IPR might be returned to PML in exchange for a release of the debt. Mr Knight was to explore SCDC's offer further and Mr Boughtwood (who objected to it) was to approach Mr Coombes again. On 29 September 2008 Mr Boughtwood circulated emails with more complaints against Mr Knight and invited a vote for his removal from the boards of QED and its subsidiaries.
68. On 1 October 2008 Mr Boughtwood made a further offer to buy Oak's shares, which, the judge found, was rejected on reasonable grounds. On 3 October 2008 PML demanded payment by QED of the £750,000. None was made and on 7 October 2008 PML presented a winding up petition against QED. Mr Boughtwood offered QED a loan facility of £750,000 (from an undisclosed source), which Oak declined (it would merely transfer QED's liability to a different creditor) although it would consider a £750,000 equity injection by Mr Boughtwood into QED.
69. In October 2008 a problem arose in relation to the restoration of the bank mandate in compliance with Lindsay J's order. The bank, Lloyds TSB, had said that it would only revert to the original arrangements if the four account signatories signed an instruction to that effect. Mr Boughtwood (one of the four) seized upon this as another opportunity to regain control over PML's spending, by insisting on a personal right of veto on items of expenditure of £25,000 or more. Oak returned to court on 17 October 2009 for an order requiring him to agree to the restoration of the original arrangements. The application came before Sales J, who made the order. He found that this:

'[271] … was a further step taken by [Mr Boughtwood] contrary to the arrangements with Oak regarding the management of QED/PML's business and an addition to the unfairly prejudicial conduct which he had engaged in contrary to Oak's interests.'

70. Proposals were exchanged in October 2008 with a view to a buy out by one or other side. They came to nothing but included an offer from Mr Boughtwood on 27 October 2008, which gave his confirmation that he had funds available and asked if Oak was interested in a sale at $21m. He was cross-examined about this and the judge found that his claim to have such funds available was a lie, one uttered so as to keep the negotiation going and buy himself time to find a source of finance. In late October 2008 PML's management team found that Mr Boughtwood had accessed the email accounts of five of its members without their knowledge. The judge found that this was ill-advised but not dishonest. Mr Boughtwood had acted as he did to preserve evidence he thought might be lost (although he had deleted his own emails relating to his coup). The judge also found that, in preparing for the trial, Mr Boughtwood had acted ill-advisedly, but not dishonestly, in secretly recording the telephone calls of Oak representatives and others. He accepted Oak's assertion that they regarded conduct of this sort as incompatible with a relationship of trust and confidence between them as quasi-partners. It contributed further to the breakdown of that relationship.
71. The petition and cross-petition were due for hearing in November 2008. In those circumstances, Oak put Mr Boughtwood under some time pressure to prove that he had his claimed $21m funds available: any settlement needed to be effected promptly. Mr Boughtwood objected to Oak's alleged bullying, which was perhaps a bit rich, as he had no funding. On 4 November 2008 he again offered to purchase Oak's QED shares for $21m, on terms that if he could not complete by 14 November 2008 Oak could buy his shares for $500,000. The judge found that he had no intention of committing himself to those terms until he was confident that he had $21m in place, when at the time he 'had no funding in place and only the speculative and increasingly far-fetched prospects of obtaining such funding to purchase Oak's shares'.
72. On 11 November 2008 a fake letter purportedly from the Dubai branch of Standard Chartered Bank was produced as confirmation of £13m of funding available to Mr Boughtwood. Mr Boughtwood's evidence, which the judge accepted, was that he thought the letter was genuine. The judge said that he could not get to the bottom of how the fake letter came to be produced. Further offers and counter-offers were made. Consideration was being given to whether PML needed to be placed in administration.
73. On 20 November 2008 the PML board noted that the settlement negotiations had broken down and resolved (Mr Boughtwood opposing) that PML be placed into administration, with a view to the early sale of its business. There followed competing offers from Oak and Mr Boughtwood to buy the business although Mr Boughtwood's offers were again unsupported by funding (another fake letter that he had funding purported to come from the Dubai branch of Standard Charted Bank, again Mr Boughtwood claimed he thought it was genuine, and again the judge accepted his evidence).
74. Mr Boughtwood obtained an interim injunction preventing the making of an administration order but on 28 November 2008 Norris J made one. The administrators were two partners in PwC. The order prevented them selling the business or assets of PML to any party to the petitions without first providing Oak's and Mr Boughtwood's solicitors with five business days' notice of any such sale, its material terms and all available material relating to the purchaser's funding.
75. The hearing of the petitions commenced on 8 December 2008 and concluded on 14 January 2009. On 21 January 2009 PML's winding up petition against QED was dismissed for want of advertisement. On 27 January 2009 PML's administrators sold its assets and business to Electric Motor Works Limited, an Oak subsidiary, for some £5.8m. That sale could not include the associated IPR, which was vested in QED. The need for the IPR meant that it was important for Oak to achieve success on its petition and obtain control of QED.

The essence of the complaints in the two petitions

76. Oak's main complaints were that Mr Boughtwood acted in a way unfairly prejudicial to its interests in QED and PML by seeking to take an improperly intrusive role in PML's management beyond what had been agreed he should do; by improperly promoting his own personal interests over those of QED and PML by failing to agree to additional funding for them when such funding was necessary to fulfil the parties' joint venture; and by improperly seeking to take control of QED by the steps taken by him in June 2008.
77. Mr Boughtwood disputed all this and complained that Oak had withheld important information from him, and had conspired with Mr Knight and Mr Meyer improperly to exclude him from involvement in the management of PML's business, to undermine his rights and influence in relation to the control of QED and PML and ensure that PML's business was so run as to drive it into insolvency so that Oak could then acquire it at a fraction of its true value. Mr Boughtwood also contended that, if he had stepped outside the limits of his agreed duties, his conduct did not involve his use of the organs of QED and so could not qualify as unfairly prejudicial conduct. The judge disagreed with that in principle, saying that:

'[13] … in an appropriate case, where a significant shareholder such as Mr Boughtwood (who as a result of being such a shareholder, is appointed to a management role within the company) then engages in a course of conduct in that role involving improper assertion of rights of control over the practical management of the affairs of the company, that conduct is capable of being conduct of the affairs of the company in an unfairly prejudicial manner for the purposes of section 994. Such conduct seems to be to fall squarely within the language of section 994(1)(a). Such an interpretation also accords with the broad equitable jurisdiction which that provision is intended to confer upon the court, which is required to take account of all the myriad different ways in which the affairs of a company may in practice be carried on.

[14] The precise distribution of management decision-making authority in any particular company may be a matter of chance. In some companies, the board itself may take a wider range of day-to-day management decisions than in others, where greater scope is left to the directors or employed managers acting alone. It is difficult to see why the application of section 994 should turn upon such fortuitous matters: the jurisdiction under that provision is above all a jurisdiction concerned with substance rather than form. In my view, conduct of a shareholder/director who acted in breach of fiduciary duty in the carrying on of his company's affairs (but not through use of any company organ) would be conduct capable, in principle, of attracting relief under section 994. There is often a very fine line between duties of employees engaged as senior managers of a company and the fiduciary duty of skill and care owed by a director of a company carrying out similar tasks. I can see no reason in principle why, in an appropriate case, conduct by a person employed as a senior manager in a business, even if not a director, should not be relevant to the grant of relief under section 994. Moreover, the cases on mismanagement of a company's affairs referred to in paragraph [10] above [Fisher v. Cadman [2006] 1 BCLC 499; Re Macro (Ipswich) Ltd [1994] 2 BCLC 354; Re Elgindata Ltd [1991] BCLC 959] contemplate that the complaint may be made under section 994 even if the management is not the product of business decisions taken by the board of a company, but by individual directors or others.'

78. The judge's conclusion, after his exhaustive account of the facts, was that a buy out order should be made in favour of Oak. I have set out in paragraph [9] above his summary in paragraph [329] as to why he found Mr Boughtwood's conduct to have been unfairly prejudicial to Oak.

The appeal

79. In line with the considerable length of most written material in this litigation, the skeleton argument prepared by Mr Mallin and Mr Peters for the appeal ran to 151 paragraphs. The appeal as presented to us by Mr Arden fell within a smaller compass, referable largely to his abandonment of the challenge to the judge's rejection of Mr Boughtwood's 'conspiracy' case, a conspiracy said to have been directed at driving PML into insolvency. Mr Arden instead focused the appeal on the grounds the judge had identified when giving permission to appeal, his submissions being targeted at the integrity of the judge's overall conclusions at paragraph [329].
80. The points the judge identified when giving such permission were that there was no authoritative guidance about the obligations of the parties in a quasi-partnership case of the present type

'… and that it is arguable that the obligations owed to Mr Boughtwood by Oak in terms of sharing information and management of the company's business were more extensive than the Court has decided.'

The judge also considered it arguable that he had been wrong in his 'rulings as to the extent of Mr Boughtwood's obligations under the quasi-partnership as to acceptance of further investment into the business and as to his conduct in relation to the management of the business …'. He added that:

'If the obligations of Oak were more extensive and/or the obligations of Mr Boughtwood were less extensive, it is arguable that Oak's conduct prior to 24 June 2008 was more substantially to the detriment of Mr Boughtwood and more seriously in breach of the quasi-partnership and/or that Mr Boughtwood's conduct was less seriously in breach of the quasi-partnership than the Court has found, such that on balancing the rights and wrongs on each side it is arguable that overall Oak was more seriously in breach of the quasi-partnership than Mr Boughtwood and the order should be set aside.'

Submissions in support of the appeal

81. Mr Arden said that, in addition to his point that there was no direct authoritative guidance, the judge effectively identified these questions as arising: (i) was there a wider 'information sharing' obligation than he had found; (ii) was he right in his rulings as to Mr Boughtwood's obligations in relation to the acceptance of further investment ; (iii) was he wrong in his findings as to Mr Boughtwood's involvement in functions outside those allocated to him; (iv) if wrong in any such respects, was he wrong in his conclusions about the actions of the parties in the run-up to 24 June 2008; and (v) if and to the extent that he was wrong in any such respects, did that make wrong his disposition of the petitions? Mr Arden accepted that central to the balancing exercise that the judge had to make was the coup of 24 June 2008, which admittedly constituted unfairly prejudicial conduct, although Mr Boughtwood's case was that it was mitigated, if not excused, by the circumstances in which he then found himself. If, however, the judge was wrong about the earlier period, might that require the events of 24 June 2008 to be given different weight in the overall balancing exercise?
82. Mr Arden said that the judge was right that there was no authoritative guidance as to the approach to a section 994 petition in relation to a quasi-partnership company with the characteristics of QED. He did not, however, identify any novel features of the case which appeared to me to require the clarification or the development of any of the fairly well established principles relating to 'unfair prejudice' petitions. He rightly foresaw that Mr Crow would submit that the disposition of an unfair prejudice petition relating to the affairs of a quasi-partnership company will turn on its particular facts. In essence, his own submissions were in line with that.
83. Mr Arden said that in approaching the case, it was necessary to consider the context in which the claims arose. The background was the coming together of two very different entities. PML was originally a small business, with a small turnover and a relatively small number of employees, some 35 at the time of Oak's investment and increasing to about 70. Its business was its original legacy business; and, critically, the new technology relating to the Hi-Pa system, which was seen as the profitable way ahead. It was essentially a one-man band, with Mr Boughtwood owning it, running it, possessing the know-how and dealing with customers. What he needed, however, was money. Oak – which had the required money - was a substantial investor. It came into PML with an expectation of limited participation, but at least with a requirement for protection and representation at board level and the right to veto certain types of decision, which was provided for in the new constitution. The Oak investment resulting in the conception of the new entity of QED was not, however, a one-way street: Oak provided money, and Mr Boughtwood a business. Both accepted that the arrangement was a quasi-partnership in which, Mr Arden said, there were to be equal rights of control.
84. The new arrangement involved the creation of a new structure. Mr Arden addressed first the findings of the judge as to the limits of Mr Boughtwood's role as CTO. The question, said Mr Arden, was as to what the parties would expect to happen under the new structure, particularly in the short to medium term. Notwithstanding the introduction of a new executive structure, it would not be realistic for the parties to expect that structure to define the roles of the individuals rigidly. He submitted that the evidence did not support the finding of any such rigid definition and that the judge did not identify any such evidence. The skeleton argument in support of the appeal developed this (essentially negative) point at some length, although Mr Arden did not do so in his submissions. He also made clear that he was not questioning the judge's primary findings of fact.
85. Mr Arden accepted that at the outset various titles were allocated to various individuals but he said they were not accompanied by a detailed job description. In Mr Knight's case, for example, his service contract included none (it was unclear whether Mr Boughtwood had a written service agreement and we were not shown any). The judge himself, in paragraph [79], had acknowledged 'some haziness around the margins of each of these jobs'. The structure chart to which he referred showed Mr Boughtwood on the same level as the CEO, although apparently with no-one reporting to him. Mr Arden said one would not expect there to be a bright line between the various individuals' different functions and that one would expect that, at least for a time, Mr Boughtwood would continue to carry on the essential functions he had performed before. In particular, it would not be reasonable for the parties to expect him wholly to drop the important functions he had formerly undertaken when running PML since it would be unrealistic to expect such a fundamental change in management functions. For example, it would not have been expected that Mr Boughtwood would give up his dealings with Volvo.
86. The incidents which Mr Arden identified as those upon which the judge relied as illustrating that Mr Boughtwood had wrongfully exceeded his role as CTO were three Volvo incidents (paragraphs [141], [142], [160] and [182]), a Lotus incident (paragraph [143]), incidents involving Mr Bycroft and Mr Watts (paragraph [176]) and a generalised list of complaints (paragraph [161]). Mr Arden submitted that Volvo was an aspect of PML's business in which the judge had found Mr Boughtwood was entitled to be involved, which materially reduced the list of complaints of so-called destructive interference.
87. Mr Arden submitted initially that even the items on this more limited list could not be characterised as conduct of 'the … affairs' of QED so as to be conduct within section 994(1) because Mr Boughtwood was not thereby acting through the organs of QED. He then abandoned that submission and confined his case to the points that such acts (i) could not have been acts of unfair prejudice because they were no more than commercial mismanagement, and (ii) cannot have been prejudicial because the QED board could have stopped Mr Boughtwood's interference, by dismissing him, although it did not.
88. Mr Arden then turned to Mr Boughtwood's complaint about the non-provision of information. Oak had information including (i) communications within Oak itself; (ii) information on matters of management and investment flowing from (in particular) Mr Knight; and (iii) information relevant to other company or investment matters coming from third parties (in particular the Kroll report, Index's reaction to it and Chrysler's expression of investment interest in June 2008). Mr Arden did not suggest that Oak was under a duty to disclose information within category (i). But he submitted that it did have a duty of disclosure in relation to information in categories (ii) and (iii). He said there was at least a duty of disclosure to the QED board (of which Mr Boughtwood was a member); additionally, or alternatively, there was a duty of disclosure to Mr Boughtwood arising under Oak's obligations as his quasi-partner.
89. As regards disclosure to the board of QED, Mr Arden said that where information comes into the hands of a director that is material to the company, it ought to be so disclosed. If, for example, Mr Ahmed had received information at Oak that was material to QED's affairs, he should, as a director of QED, have disclosed it to the QED board. As to the obligation to share information at the quasi-partnership level, it was necessary to consider first if there was any contractual obligation of disclosure. If there was not, it was necessary to identify the extent of any equitable obligation of disclosure, which may involve considerations of the quasi-partners' obligations of good faith one to the other. Mr Arden did, however, experience some apparent difficulty in explaining how such equitable obligations were to be identified.
90. If, however, there was an obligation on the part of Oak or its representative directors to disclose material information either to the QED board or to Mr Boughtwood directly as an Oak quasi-partner, and it was breached, the effect would be that the person refusing to make such disclosure was effectively arrogating to himself the use of such information. Mr Arden referred in particular in this context to the Kroll incident. He said that the Kroll report represented material information relating to QED that had come into the hands of Oak's QED directors and which they were under a duty to disclose to the QED board. The information concerned matters relating to Mr Knight's fitness as QED's CEO, the effect of his appointment on a prospective investor, and the level at which such investor would be prepared to invest. The failure to provide it to Mr Boughtwood meant that he was unable, either as a quasi-partner or as a director of QED, to consider that information and what he might do with it. He was thereby excluded from the opportunity of making or promoting a potentially critical management decision. Oak had taken one view of the effect of the Kroll report, but had deprived Mr Boughtwood of the opportunity of taking another. Had he been able to raise this matter at board level, he might have been able to advance the case that Mr Knight's position as CEO was damaging to QED and could have proposed a resolution for his dismissal. Such a resolution could only have been opposed by the other QED directors if they had done so on the basis that it was in the best interests of QED. If the board became deadlocked, it is possible that at that stage there would have been some unfairly prejudicial conduct.
91. The judge of course found that the Kroll report should have been disclosed to Mr Boughtwood but that its non-disclosure did not cause him any prejudice. The difficulty with Mr Arden's submission is that the judge considered this head of complaint and found as facts that Mr Knight was not dishonest and had not conspired against Mr Boughtwood and that it was unlikely that Mr Boughtwood would have pressed for Mr Knight's removal as CEO. Even if he had wanted to press for it, he could not have achieved it unilaterally and Oak would have acted reasonably in refusing to join in his dismissal. I would accept that the Kroll incident manifested a breach of the disclosure duty owed by Oak to Mr Boughtwood which resulted in his being wrongfully deprived of the exploitation of a possible opportunity; but the judge found that it had no prejudicial effect on him.
92. Mr Arden said there was similarly a duty on Oak's representative directors on the QED board to disclose to the board the email traffic flowing to Oak that related to management issues, namely that directed at criticisms of Mr Boughtwood. Again, the weight of this point was diluted by the fact that, as Mr Arden accepted, there were in fact discussions between the quasi-partners about the management problems that Mr Boughtwood was regarded as creating. Mr Arden said, however, that that was not a complete answer, since for Mr Boughtwood to understand the true nature of the alleged problems, he had to see these email exchanges.
93. As regards further investment in QED, Mr Arden said that the difficulty arose from the failure to obtain all the necessary investment at the same time as Oak had made its investment, and at the same value as was then attributed to PML. By clause 4 of the Shareholders' Agreement the parties agreed to QED committing them (up to 31 December 2007) to accepting further investment on substantially the same terms. But there was no contractual provision governing investment after then, other than that imposing a dilution of Mr Boughtwood's rather than Oak's shareholding if any investment was at a lower valuation than that at which Oak had invested. The judge found that both parties had the right to veto the issue of shares to an investor, describing it in paragraph [50] as a 'contractual or practical veto', although he did not explain what he regarded as the source of the contractual right.
94. If there was such a right of veto, in what circumstances, asked Mr Arden, could Mr Boughtwood be restricted from exercising it? The judge approached that question by saying that Mr Boughtwood had to act reasonably having regard to QED's interests. Mr Arden suggested that the judge had thus drawn on Mr Boughtwood's fiduciary duties as a director, whereas those duties were not the relevant ones, since they were owed exclusively to QED and could not be introduced by way of an equitable restraint upon his right of veto.
95. Mr Arden submitted that the correct approach was that Mr Boughtwood's rights as a quasi-partner entitled him to exercise his veto in circumstances in which, having regard to his own interests, he did so in good faith. That proposition was a difficult one, as Mr Arden recognised. It would be odd if, in relation to a matter as fundamental as the continued existence of the quasi-partnership, a quasi-partner need do no more than consult his own personal interests and then make whatever selfish decision he likes so long as he acts in good faith. A quasi-partner's obligations cannot, one might think, be satisfied by his consideration merely of his own personal interests. Mr Arden did not abandon his 'good faith' submission but said in the alternative that the relevant test may simply be one of reasonableness, thus requiring Mr Boughtwood to act reasonably in making his decision to veto further investment.
96. On the facts, Mr Arden submitted that either way the judge was wrong to find that Mr Boughtwood had acted in an unfairly prejudicial way in failing to give proper consideration to the SCDC proposal in June 2008. Whether the test was a 'good faith' or a 'reasonableness' one, he could not be criticised in that respect. For one thing, he thought he had a more beneficial expression of interest from Mr Coombes and it was reasonable for him to want to explore that before accepting the SCDC offer. Quite apart from the fact that it was at a materially lower pre-money valuation, the SCDC offer also involved a change in the configuration of the QED board; and Mr Knight had briefed SCDC about Mr Boughtwood's behaviour (paragraph [207]). If reasonableness is the test, it cannot be said that Mr Boughtwood had acted unreasonably.
97. More generally in relation to further investment, Mr Arden pointed out that the judgment reflected the fundamental disagreements between Oak and Mr Boughtwood as to the value of the business. There had never been any independent valuation of PML. It was not suggested that Mr Boughtwood's own belief as to its value was other than genuinely held, albeit that the judge also referred to his over-optimistic belief as to the time it would take the company to resolve its technological problems. Oak invested in September 2007 on the basis of an assumed pre-money value of $60m. By early May 2008 Index was suggesting an investment on the basis of a pre-money valuation of about $30m; by 21 May 2008 Mr Carano was expressing the view that the pre-money valuation was $25m to $30m; and SCDC's offer in June 2008 was based on a pre-money valuation of $20m, a drop of $40m since September 2007. An investment at that level would cause a material dilution of Mr Boughtwood's holding, as to which he was legitimately concerned; and, at the time, Mr Coombes was said to have in mind an investment at a pre-money valuation of $60m.
98. In all these circumstances, it cannot, Mr Arden submitted, be said that Mr Boughtwood's refusal to accept the SCDC offer amounted to unfairly prejudicial conduct. He also said that it was not even prejudicial since SCDC's proposal was only at a term sheet stage and there was no guarantee that it would develop into an offer that QED would be entitled to accept. He made the point that Mr Boughtwood was not resisting any investment at all, he was doing no more than resisting the timing in which Oak was seeking to achieve it. He considered that the burn rate could be reduced and the date for achieving the required investment deferred.
99. Related to the 'acceptance of investment issue', was the question of PML's budgets. In this connection, the judge had held that Mr Boughtwood had conducted PML's affairs unfairly prejudicially by failing to accept the decision of the PML board and management to continue the burn rate broadly in line with the agreed February 2008 budget (paragraph [329(ii)]). Mr Arden submitted that this conclusion was tied to nothing preceding it in the body of the judgment: there was, he said, no primary finding that anything Mr Boughtwood did in relation to the budget amounted to unfairly prejudicial conduct. His belief was that the burn rate could be curbed and the need for investment correspondingly relaxed. The judge identified no obligation preventing Mr Boughtwood from objecting to PML's adherence to its February 2008 budget. As a PML director he was entitled to have a continuing opinion on its budget and to voice it.
100. Mr Arden dealt next with the events of 24 June 2008. Mr Boughtwood accepted that his conduct was unfairly prejudicial. It was, however, explicable by the circumstances in which he found himself. In particular, it was targeted at Mr Knight, in whom he had lost all trust; but it included that he had been crammed into a role narrower than he regarded himself as entitled to occupy and that he considered himself entitled to oppose the SCDC offer. He had acted on legal advice and believed he was entitled to act as he did. He intended his measures to be no more than temporary: he was not intending a permanent boardroom coup, nor could he have achieved that. These considerations did not excuse Mr Boughtwood's conduct, but they did explain it.
101. Mr Arden turned to the bank mandate issue that arose in October 2008. Had the judge been right on all that had gone before, this may have been an item of added prejudice. If, as Mr Arden submitted, he was materially wrong as to what had gone before, it was, viewed overall, of limited significance.
102. Taking all the submissions together, Mr Arden said that a re-consideration of the discretionary exercise before the judge required a decision the other way round: namely, a buy out of Oak by Mr Boughtwood. The PML business was originally Mr Boughtwood's, who had invented the technology which was now represented by the IPR in QED. Oak was a purely commercial investor. The judge's order meant that Mr Boughtwood can now, at most, hope to receive only money instead of the chance to develop the technology he had created. If an order in favour of Mr Boughtwood were to be made, Mr Boughtwood could be given a short time within which to find the money, in default of which Oak would be entitled to buy him out. Mr Arden was not able to provide the court, in response to its inquiry, with an immediate explanation as to whether Mr Boughtwood was in a position to raise the funds. It was a surprising feature of Mr Boughtwood's appeal that he had not even equipped Mr Arden with instructions as to his ability to pay for the shares he was claiming to be entitled to buy. The court's inquiry led to the late production by Mr Boughtwood of a witness statement indicating that, were the court to order a sale in his favour and a valuation were to be made, he expected to be able to raise the necessary funds but would require several weeks to do so.

Submissions in response to the appeal

103. Mr Crow advanced forceful responsive answers to the whole of Mr Boughtwood's case. He opened with some general points. Mr Boughtwood had admitted in his re-amended Defence that his conduct of 24 June 2008 was unfairly prejudicial (as was acknowledged in paragraph 103 of Mr Mallin's opening submissions for the trial). That admission effectively related not just to the boardroom coup, but to the consequential abandonment of the agreed budget and the delay in the process of getting the product to market. The trust and confidence between the parties was thereby destroyed and the status quo was not restored for a month. Mr Boughtwood had achieved a halt to the agreed progress of the business for that period. His actions in that respect had triggered the court's jurisdiction to make an order under section 996 even before the trial had started.
104. Mr Boughtwood had sought to defend his actions of 24 June 2008 by saying it was a response to the conspiracy improperly to oust him from the business, a case the judge rejected and which he had abandoned on the appeal. The other main argument he had advanced by way of a claimed cure of his earlier unfairly prejudicial conduct was that he had offered to buy Oak's QED shares, whilst he had also acknowledged (as reflected in Mr Mallin's opening submissions for the trial, paragraph 109) that it was 'virtually inevitable' that he would be ordered to sell his QED shares if he could not raise the money. It emerged at the trial that he did not have the funds to enable him to meet the purchase offers he had made to Oak; and the judge found that he had lied twice to Oak and to the court in pretending that he did (paragraphs [277], [278], [286], [282]). He had also sought to make good his claim to have the funds by relying on two forged documents, although the court did not find that he was the forger of either. Those twin occurrences led the flow of Mr Crow's oratory to the brink of a familiar Wildean allusion, from which the court stopped him.
105. Leaving aside whether any of the other complaints levelled against Mr Boughtwood amounted to unfairly prejudicial conduct, Mr Crow observed that the judge's assessment of the evidence he had heard from a succession of credible and honest witnesses for Oak was that Mr Boughtwood was a man with whom the PML staff could not work because he created a poisoned atmosphere. Mr Boughtwood himself recognised that: at the staff meeting he called after his coup, he faced them with words to the effect 'I know you all hate me'. Mr Crow disclaimed the suggestion that the judge's discretion as to who was to sell to whom might be exercised by reference to a shop floor referendum. But he said that a company is more than a fictitious legal person, that the court ought to take into account the interests of the individuals behind it and that such considerations properly fall into the discretionary factors that the court has to take into account in petitions such as the present ones. The court's discretion under section 996 is very wide (In re Bird Precision Bellows Ltd [1986] Ch 658, 669D to F, per Oliver LJ). Mr Boughtwood had been admittedly guilty of unfairly prejudicial conduct and the rest of the management did not want to work with him. Yet in all these circumstances he was asking the court to displace Oak from its investment.
106. Mr Crow submitted that it could not be said that the judge's exercise of discretion was plainly wrong; and that it would avail Mr Arden nothing to prove anything less. By the time the judge gave his judgment, the business of PML had been sold so that by then PML was simply holding cash. The real issue by then was not as to who was entitled to buy the business, but who was entitled to obtain the control of QED, the company holding the associated IPR. Much had been made by Mr Arden as to such IPR being formerly Mr Boughtwood's, who thus had a strong moral claim to it. That, said Mr Crow, was a distortion. Any IPR that Mr Boughtwood originally owned became PML's; and PML sold and transferred it to QED for £750,000. It did so as part of the transaction involving Oak, for which Mr Boughtwood was paid some £1.5m for his PML shares. Since then the rights had been developed by a team which had increased to a staff of 70 people. It was not possible to say how much of QED's IPR represented Mr Boughtwood's original IPR. He had done no more than come up with the original concept. There was still no product.
107. All those considerations were, Mr Crow said, enough to dispose of the appeal. Focusing more closely on the issues, Mr Crow disagreed with the judge that there is no authoritative guidance as to the disposition of unfair prejudice petitions in quasi-partnership cases such as this one. Such guidance is to be found in O'Neill and Another v. Phillips and Others [1999] 1 WLR 1092. If the judge meant that no case provides an exhaustive list of the content of the mutual rights and obligations that exist between quasi-partners, that was true; but that is the nature of the quasi-partnership beast. There is no single blueprint as to how a quasi-partnership company will or may be established and operated. It does not follow, as Mr Arden had suggested, that there will always be equal control between the partners. It will always depend on the particular arrangements. In this case, Oak had no director on the PML board; the balance between the quasi-partners was at the QED level.
108. The 'destructive interference' issue raised the questions as to what was Mr Boughtwood's role, did he overstep it and did any overstepping cause unfair prejudice. The judge's findings (paragraph [4]) were that Oak insisted on a structured constitution for companies in which it invested, including the appointment of a CEO independent of the founder member and with no one party being in a position to control the board and the business; in paragraph [57], the judge repeated the point as to Oak's insistence on having an independent CEO, explaining that Oak disagreed with Mr Boughtwood's proposal that Mr Meyer should be the CEO; in paragraphs [78] to [80], the judge explained the employment roles agreed for Mr Knight, Mr Meyer and Mr Boughtwood, saying that 'it was agreed with reasonable clarity that Mr Boughtwood no longer had overall management control of the company as part of his employment responsibilities'; and (in paragraph [125]) he described the essential boundaries of Mr Boughtwood's role as CTO, namely

'… to carry on R & D for PML, in relation to the Hi-Pa drive motors and to ensure that steps were taken to protect PML's intellectual property in relation to the motors by drafting and registering effective patents. In addition, since Mr Boughtwood had been in charge of running the company until late September and work was ongoing within the company to try to meet the requirement for delivery of a viable prototype motor to Volvo, Mr Boughtwood retained responsibility for sorting out that delivery which was then outstanding'.

109. Mr Crow referred us to various parts of the evidence, including that of Mr Boughtwood (his stated preference being that he should step back from a management role), Mr Meyer, Mr Christie, Mr Bycroft, Mr Knight, Mr Carano and Mr Ahmed, and also to Mr Knight's email of 6 January 2008, which Mr Boughtwood never challenged and to which the judge referred in paragraph [124]. This evidence, he said, collectively justified the judge's finding of the agreed assignment to Mr Boughtwood of a role essentially confined to that of CTO. Mr Arden had referred to the judge's comments in paragraph [79] as to there being 'some haziness around the margins of these jobs [CEO, COO and CTO]'. But in the same paragraph the judge had also said that 'it was agreed with reasonable clarity that Mr Boughtwood no longer had overall management control of the company as part of his employment responsibilities'. Those were findings of fact that he was entitled to make and Mr Arden disclaimed a challenge to his primary findings.
110. As to whether Mr Boughtwood overstepped the limits of his role, the judgment contained many examples of his doing so. As for Volvo, whilst he was entitled to be involved in it (although it appears he did not involve himself), he was not entitled to override Mr Meyer's authority in the manner in which the judge found he did in paragraphs [141] and [142]. Other examples of such overstepping were the Mini incident concerning Lotus (paragraph [143]), the matters referred to by the judge in paragraphs [160] to [166], with the judge, in paragraph [161], referring to Mr Boughtwood as having 'sought to exert authority in relation to a range of management decisions well outside his remit as CTO. He sought to act as a sort of shadow CEO, second-guessing and criticising the decisions of other senior managers within their areas of responsibility.' There were the accusations of Mr Knight and Mr Rich in relation to allegedly fraudulent expenses claims. The judgment, said Mr Crow, identified a host of incidents that entitled the judge to conclude that Mr Boughtwood created a poisoned culture at PML. Following the coup, and until the grant of the July 2008 injunction, he also engaged in the covert recording of conversations and the unauthorised access to email accounts.
111. Mr Crow said that, having abandoned his original argument that these overstepping incidents were not acts of the company, Mr Arden said they amounted to no more than acts of mismanagement, whereas acts of such a nature do not amount to unfairly prejudicial conduct under section 994. That, said Mr Crow, missed the gravamen of Oak's point. The complaint of was not that Mr Boughtwood had made mistakes in his bona fide conduct of the company's management. It was that he had destructively thrown his weight around in areas which fell beyond the permitted boundaries of his role and had so acted outside the limits of his function in the company. He had failed to respect the limits of his proper function under the quasi-partnership; and a failure of such nature is capable of being unfairly prejudicial conduct. It may be that it was open to QED to achieve the sacking of Mr Boughtwood but that does not mean that his interference could not and did not amount to unfair prejudice, and Oak's case was that it did: it undermined the management of the PML, frustrated the staff and disrupted the development of the project.
112. As regards the complaint about Oak's alleged failure to share information, it was not suggested that Oak had to share its internal thinking. So far as it was complained that there was a failure to communicate Oak's information as to the management problems that Mr Boughtwood was creating, the judge rightly held that Oak was entitled to look to its own commercial interests in the processing of information such as that (paragraphs [81] to [83]); in any event the judge found that Mr Boughtwood was told about such problems (paragraphs [166] and [186]). As for the Kroll and Chrysler matters, the judge found they should have been disclosed but also that their non-disclosure caused Mr Boughtwood no prejudice; and he took them into account in making his overall judgment (paragraph [328]). Even if the disclosure of this information would have caused Mr Boughtwood to want to dismiss Mr Knight, he was not entitled to do so even though he may wrongly have thought otherwise.
113. Turning to the 'duty to accept investment', Mr Crow said that Mr Boughtwood's pre-money valuation of PML at September 2007 was no more than his opinion. That Oak invested at that figure did not mean that that was in fact PML's then value. Because of the anti-dilution terms, PML's value to Oak in the context of further investment was largely irrelevant. Clause 4 of the Shareholders' Agreement contemplated the need for further investment, but after 31 December 2007 the broad terms for which clause 4 provided no longer applied and it was for the quasi-partners to agree the terms of further investment. The key point was that it was part of the Oak investment deal that a further round of investment would be required (paragraphs [5], [49] and [56] of the judgment) and such investment was part of the quasi-partners' mutual expectations. They agreed to a budget in February 2008 which contemplated Oak's money running out by November 2008 (as it did) and the need for further investment by then. In light of that, on 7 May 2008 Mr Boughtwood agreed with Oak that they would accept the best offer by the end of June 2008 (paragraphs [169] and [170]). In refusing to accept the June SCDC offer, Mr Boughtwood was not acting reasonably; he was reneging on his agreement. SCDC turned up on 24 June 2008 to do their due diligence, the very day he staged his coup, the result of which was that SCDC walked out (paragraph [222]). Mr Arden relied on the speculative Coombes offer, but Mr Coombes had not even started his due diligence by then. He did so during Mr Boughtwood's interregnum but made no offer. Mr Boughtwood's torpedoing of the SCDC offer was self-evidently prejudicial because it deprived PML of the money by the deadline that it needed it. The point that Mr Boughtwood was entitled to refuse it because SCDC's valuation was too low was based only on his unproved assertion as to PML's higher value in September 2007. Mr Arden's assertion that Mr Knight 'bad-mouthed' Mr Boughtwood to SCDC is not what the judge found, there was no cross-examination about the nature of Mr Knight's briefing about Mr Boughtwood's behaviour; and anyway there was a duty to disclose the facts about him to another would-be partner. Whatever Mr Knight did say, it did not deter SCDC from its interest in investing. It was clear that the reason Mr Boughtwood refused the offer was not because he did not think that PML needed the money, but because he did not want his shares diluted.
114. As for the coup of 24 June 2008, it was of the utmost gravity and was admittedly unfairly prejudicial. Mr Arden sought to excuse it on the basis that Mr Boughtwood acted on advice. Any advice had not been disclosed – Mr Boughtwood had refused to waive legal professional privilege - and so the point could not be tested. Even if he had been advised that he could remove Mr Knight as a director of QED, that could not have justified a conclusion that it was proper for him, as a quasi-partner, to do so by a plot hatched in secret and sprung on Oak at a board meeting. It was an ambush directed at the unlawful seizure of control. His scheme was to seize control of the QED board and procure the removal of Mr Knight from PML and so achieve control of PML. When, as he foresaw would happen, Oak restored equality on the QED board, the board would be deadlocked and could not unwind the removal of Mr Knight from PML. That was the heart of Mr Boughtwood's scheme, although he could not in fact thereby lawfully remove Mr Knight as a director of PML, as it was precluded by clause 10B of the Shareholders' Agreement. He seized control for a month until a court order (which Mr Boughtwood had opposed) restored the position, during which time he reneged on the February 2008 budget and prevented further SCDC investment.
115. Finally, the bank mandate point manifested another improper attempt by Mr Boughtwood to put a break on expenditure in accordance with a budget that he had agreed and so to regain practical control of expenditure.

Discussion

116. I have covered the facts and submissions fully. I can express my conclusions relatively shortly.
117. This is a case in which the judge gave permission to appeal, which I must say I regard as having been a surprising decision. The case before him was essentially fact-based and, once the facts were found, required of him a discretionary balancing exercise. It was not the type of case in which a trial judge will usually give permission to appeal. The main basis on which the judge did so was his assessment that there was no clear authoritative guidance as to the obligations of parties in a quasi-partnership company of the type in question in the petitions and that it was arguable that a consideration of the principles by this court might require the assessment of the parties' mutual obligations to be viewed differently, so requiring a re-assessment of the judge's disposition of the petitions.
118. With respect to the judge, I would disagree that there is no such guidance. The 30 years of the jurisdiction created by section 994 and its statutory forebears has generated a considerable flow of jurisprudence on the disposal of 'unfair prejudice' petitions in the context of quasi-partnership companies, culminating in the decision of the House of Lords in O'Neill and Another v. Phillips and Others [1999] 1 WLR 1092, in which the leading speech was delivered by Lord Hoffmann, a master in this field as in so many others. His speech, in particular section 5, headed 'Unfairly prejudicial', provides the guidance that is required when approaching the assessment of allegations of unfairly prejudicial conduct in the affairs of a company, including one said to be of a quasi-partnership nature. There is, however, necessarily a limit to the general guidance that can be provided for the purposes of the resolution of any particular case. That is because such resolution must turn on the facts of the particular quasi-partnership relationship and the basis on which the company is established and agreed to be operated. Those facts and bases will vary from case to case.
119. In this case there was no dispute that the Oak/Boughtwood relationship in their corporate arrangements was of a quasi-partnership nature. That did not mean that the constitutional arrangements relating to the structure of the companies in the QED/PML group were irrelevant. On the contrary, they were central to the way that the quasi-partners agreed that their joint venture was to be implemented. The judge was correct to make the findings he did as to the corporate arrangements for the respective operations of QED and PML; this was what the quasi-partners had agreed were to be their way of operation. He was also correct to assess the extent to which the quasi-partnership relationship between Oak and Mr Boughtwood served to impose mutual duties of good faith, trust, disclosure and co-operation on them in the context of the strategic operations of the group. So far as concerned the cross-allegations of 'unfairly prejudicial' conduct by one quasi-partner against the other with which the judge was presented, his task was to make a factual assessment as to whether, and to what extent, they were respectively well-founded. Proof of such conduct by one petitioner would found a jurisdictional basis for an order under section 996, the making of such being ultimately a discretionary exercise. Proof of such conduct by both petitioners would be likely to involve a more complicated balancing exercise as to how to exercise the discretion.
120. In my judgment, the factual assessment and conclusion that the judge ultimately made and arrived at are unassailable. Mr Boughtwood started the trial at a major disadvantage as a result of his disgraceful, and inexcusable, conduct of 24 June 2008 whereby he sought, and for a month achieved (and, had he had his way, it would have been for longer), practical control of the group so that he could run it his way and renege on what he had agreed with his quasi-partner. His conduct was underhanded and unconstitutional, it was damaging to the group and its business and it marked the final destruction of any element of continuing trust and confidence that might still have existed between the quasi-partners. His attempts to explain and justify his conduct added up to nought. The judge rejected his 'conspiracy' defence and he abandoned it before us. He claims to have acted on advice, but has not disclosed it. He claims to have been entitled to act as he did with a view to escaping the imposition on him of the SCDC offer, but I am not persuaded that in objecting to that offer he was doing other than reneging on what he had earlier agreed so as to promote his own personal interests above those of the group. The point had been reached when the group could not afford not to accept the SCDC offer and his deliberate frustration of it was probably the most direct cause of PML's subsequent collapse into administration.
121. Mr Crow was, in my judgment, therefore right that this serious piece of misconduct by Mr Boughtwood itself justified the judge in making the order he did. But the judge of course rightly looked at all the facts, assessed them all and took them all into account. In particular, he found that Oak had itself been in breach of its disclosure obligations as a quasi-partner in two respects, relating to the Kroll and Chrysler affairs, but he also found that, for reasons he gave, they caused no prejudice to Mr Boughtwood. He also found that Mr Boughtwood had strayed outside the confines of the limits of his assigned task as CTO, trespassed upon management responsibilities that were outside his boundaries, including second-guessing the CEO.
122. It was argued that this was all perfectly all right because the introduction of the post-Oak constitutional structure could not reasonably be regarded as having required Mr Boughtwood to stop operating in the areas in which he had been engaged pre-Oak. I would not accept that argument. I have considered the evidential references made by Mr Crow and I agree that they supported the judge's finding as to the split of duties agreed on 13 November 2007. Mr Arden did not seek to question them and he anyway disclaimed a challenge to the judge's primary findings of fact. In any event, contrary to Mr Arden's submission, the judge's findings appear to me to have been exactly what one would have expected having regard to Oak's favoured modus operandi with regard to companies in which it makes an investment. The judge was, I consider, entitled to find that Mr Boughtwood was wrongly trespassing on others' turf and doing so in a manner seriously destructive of the group's well being. He created a poisoned culture that was damaging to the group's morale. His status as a quasi-partner did not entitle him to override the constitutional arrangements governing the operations of the group: they were what he had agreed to as the way in which the quasi-partnership was to operate. Mr Arden conceded that such destructive interference was capable of amounting to conduct of the affairs of the company for the purposes of section 994. I consider that it was not only capable of amounting to unfairly prejudicial conduct, but that the judge was entitled to find that it did so. I would accept that QED may in theory have been in a position to take steps with a view to controlling Mr Boughtwood's persistent interference, although quite what it could have done is uncertain: and any action it might have taken would probably itself have been regarded by Mr Boughtwood as unfairly prejudicial to him. In the circumstances of this case, I would not regard the availability to QED of this theoretical option as undermining the judge's conclusion that Mr Boughtwood's destructive interference amounted to unfairly prejudicial conduct.
123. Against this background, the judge's conclusion that the fair disposition of the petitions required a buy out of Mr Boughtwood by Oak was, I consider, inevitable; and, before this court, unchallengeable. Having uttered some, perhaps harsh, observations about Mr Boughtwood, I do not forget how devastated he must have been by the judge's decision, as he must have been by our dismissal of his appeal. I consider also - essentially for the reasons that Mr Crow explained and which I have summarised – that it was, by the time the petitions came to be heard by the judge, a distortion to regard QED's IPR as still, in substance, belonging to Mr Boughtwood. By then an enormous volume of water had flowed under the bridge, including in particular a payment by three PML investors of some £1.5m to Mr Boughtwood for the giving up of his shares in PML. I recognise that Mr Boughtwood will not see it like that, and that his perception of the Hi-Pa system is that it was and remains uniquely his own. In my judgment, however, an objective consideration of the story unfolded by the judge, and of the facts as he found them, pointed inevitably to the making of the order that he made.
124. It was for these reasons that I assented to the dismissal of Mr Boughtwood's appeal against Sales J's order of 6 February 2009.

The appeal against the order of 26 February 2009

125. The parties were wide apart as to the value of QED. The issue before the judge on 26 February 2009 was as to the instructions to be given to the valuer in relation to one particular matter. The point was whether he should have regard to the 'Liquidation Preference' in article 8 of QED's Articles of Association. I must set out the relevant provisions of the Articles:

'4.3 Save as otherwise provided in these Articles, the Preferred Shares and the Ordinary Shares shall rank pari passu in all respects but shall constitute separate classes of Shares.

8.1 On a return of capital or assets on a Liquidation Event, capital reduction or otherwise the surplus assets of the Company remaining after payment of its liabilities shall be distributed (to the extent the Company is lawfully permitted to do so) in the following order of priority (as adjusted for any Reorganisation) (the "Liquidation Preference").

(A) first, in or towards paying to each holder of any Preferred Share £11,839 on each Preferred Share (subject to Article 12.1(C)) together with any accrued amounts thereon (including declared but unpaid dividends), and so that if there shall be insufficient surplus assets to pay such amounts in full the amount payable to each such Preferred Shareholder shall be abated pro rata to the amounts otherwise due to each of them, and

(B) second, the balance of such surplus assets then remaining (if any) shall be distributed amongst the holders of the Ordinary Shares and the holders of the Preferred Shares on a pro rata basis according to the number of those Ordinary Shares held by such holders and those that would be held by such holders on an as converted basis in respect of Preferred Shares at the then applicable Conversion Rate.

8.2 Other than with the prior written approval of an Investor Majority (i) a Share Sale, or (ii) an Asset Sale (or any similar or analogous transaction) (subject to Article 8.5 below), ("Relevant Event") will be regarded as a Liquidation Event and the entitlement of the Shareholders to consideration in relation to any such Relevant Event shall be determined in accordance with the Liquidation Preference as if the consideration receivable was available for distribution by the Company.'

126. Oak's point in relation to those provisions was that the value of Mr Boughtwood's ordinary shares in QED was inevitably affected by the existence of the Liquidation Preference, which gave the preferred shareholders the preferential rights provided for by article 8.1(A). The Liquidation Preference was therefore necessarily a feature to which the valuer must have regard when valuing the ordinary shares in the open market. What Oak was not arguing, or asking the judge to decide, was that the court-ordered sale to Oak was itself a 'Relevant Event' within the meaning of article 8.2, although it was and is Oak's case that it is. The contrary argument for Mr Boughtwood was that the valuer ought not to take account of the Liquidation Preference, since to do so would be likely to depreciate the value of the ordinary shares, whereas in Oak's hands they will not in practice suffer any article 8.1(A) burden. In the alternative, it was submitted that the court should exercise its discretion to require the valuer to disregard the Liquidation Preference provisions in valuing the ordinary shares, on the ground that to do so would achieve a fair and appropriate remedy in the circumstances of the case.
127. The judge held, contrary to Mr Boughtwood's argument, that the valuer should have regard to the Liquidation Preference, and he refused to exercise any discretion to give a direction that he should not. He said:

'[6] … I do not regard the effect of taking account of the liquidation preference as creating any windfall for Oak. The reason that Oak gets the benefit of the liquidation preference is a function of the rights which it already has by virtue of holding the preferred shares in QED and in no way is a function of the transfer to it of Mr Boughtwood's shares. Oak will receive Mr Boughtwood's shares subject to all the same burdens as would a third party purchaser. It is not as a result of the transfer of shares that Oak will be in a position to have the benefit of the liquidation preference. Therefore it does not seem to me that there is any question of there being a windfall for Oak in being entitled to acquire Mr Boughtwood's shares at a valuation which reflects the liquidation preference in QED's Articles of Association.

[7] So far as Mr Mallin's second point is concerned regarding the discretion which the court has in relation to fashioning remedy, in light of my conclusion that it is Mr Boughtwood who has acted in a manner unfairly prejudicial to Oak in relation to the conduct of the affairs of QED/PML, it again seems clear to me that there is no proper basis on which I could direct the valuer to value Mr Boughtwood's shares on any basis other than the proper basis as I have indicated, in light of Oak's rights under the liquidation preference as set out in Article 8 of the Articles of Association. There is no reason why Oak's rights should be diluted by an exercise of discretion by the court.'

128. Mr Arden re-opened both arguments before us but did not articulate any reasons that even began to satisfy me that the judge was wrong in either of the two bases for his decision. The skeleton argument focused an argument on the point that the share sale in favour of Oak is not itself a 'Liquidation Event', but the judge has not decided that point either way and Mr Arden did not advance that submission to us.
129. As for the first point, the judge was, in my judgment, right that the valuer should not be directed to ignore the liquidation preference. The valuation instructions include provisions that the share valuation shall be 'of the Ordinary Shares as if sold by a willing seller to a willing buyer' (clause 3) and that the valuer is to 'not [to] have regard to the putative willing buyer already holding shares in QED' (clause 4(E)), neither of which provisions was challenged before us. The Liquidation Preference is a feature of QED's constitution that is integral to the respective rights of the ordinary and preferred shares in QED and is a feature that is in principle likely to have an impact on the valuation of its ordinary shares in accordance with such directions. I do not understand upon what basis it is considered that the court might have a jurisdiction notionally to write that provision out of QED's articles so as to require the valuer to ignore it when valuing the ordinary shares. To adopt a popular analogy, the Liquidation Preference can be regarded as giving the ordinary shares the features of apples, whereas any required disregard of it would give them the features of oranges. The valuer's task is to value apples, not oranges.
130. I would accept, however, that the court might have a discretion to direct the valuer to disregard the Liquidation Preference, one that could perhaps be regarded as akin in nature to the discretion whereby, in a case in which a wrongdoing majority is ordered to buy out an unfairly prejudiced minority, the court may consider it appropriate to direct that the valuation of the latter's shares should not be discounted to reflect that they constitute a minority holding. That, however, is not this case, in which it is Mr Boughtwood who was the wrongdoer and in which the judge has specifically exercised his discretion against any direction requiring the disregard of the Liquidation Preference. Mr Arden identified no basis upon which the judge's exercise of discretion might be challenged.
131. There is in my view, therefore, no sound basis for a challenge to paragraph 4 of the valuation instructions annexed to the order of 26 February 2009.
132. A further paragraph of those instructions was also the subject of challenge by Mr Boughtwood, namely paragraph 14 reading:

'For the avoidance of doubt, and without limitation, the Valuer shall necessarily value the Ordinary Shares at nil if s/he concludes that the value of QED as a whole, as at the Valuation Point, was less than £10,299,930.'

133. The rationale for that provision appears to be an assumption that if QED is worth less than £10.3m, no willing buyer would be prepared to pay anything for the ordinary shares, because the entire value of QED would lie with the preferred shares as a result of the Liquidation Preference. Mr Crow sought to justify the inclusion of paragraph 14 on that basis. Any valuation of QED, he said, must necessarily reflect QED's future prospects of prosperity; and if such valuation is less than £10.3m, it necessarily follows that the ordinary shares can have no value since upon a Liquidation Event the whole value will be swallowed by up the preferred shareholders. Mr Arden submitted that whilst it may be the case that a valuation of QED at less than £10.3m would result in a nil value for the ordinary shares, it does not necessarily follow that it will do so. In particular, the closer QED's valuation is to £10.3m, the greater the chance of the ordinary shares having a real value in the future. Whether they do in fact have any, and if so what, value is a matter for the expertise of the valuer, and the court ought not by clause 14 to have tied his hands in that respect by its mandatory direction.
134. On this issue, whilst I follow the logic of Mr Crow's submission, I was not convinced by it and I prefer and accept Mr Arden's submission. Paragraph 14 purported to circumscribe the valuer's exercise of his expertise and I consider that it ought not to have done so.
135. The court's order on this point, made on 31 July 2009, was in following terms:

'The valuation appeal be allowed to the extent that paragraph 14 of the valuation instructions be settled on the basis that it is entirely a matter for the valuer to determine what value, if any, to ascribe to the ordinary shares even if he concludes that the value of QED as a whole, as at the valuation point, was less than £10,299,930.'

136. To that extent, therefore, the court allowed Mr Boughtwood's appeal against the valuation instructions annexed to the order of 26 February 2009. Otherwise it dismissed his appeal against them. These are my reasons for agreeing to that order.

Lord Justice Moses :

137. I agree.

Lord Justice Rix :

138. I also agree.