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EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
[2025] CSIH 11
CA163/19
Lord Malcolm
Lord Doherty
Lady Wise
OPINION OF THE COURT
delivered by LORD MALCOLM
in the reclaiming motion
by
ROBERT GORDON KIDD
Pursuer and Reclaimer
against
LIME ROCK MANAGEMENT LLP AND OTHERS
Defenders and Respondents
Pursuer and reclaimer: Smith KC, Anderson and Reid; Harper Macleod LLP
First to fifth defenders and respondents:
McBrearty KC, McKenzie KC and Roxburgh;
Gilson
Gray LLP
Sixth to eighth defenders and respondents: Dean of Faculty and Paterson KC; CMS Cameron
McKenna, Nabarro and Olswang LLP
24 April 2025
Introduction and background
[1]
This action concerns an alleged unlawful means conspiracy by a private-equity
house and solicitors to conclude an investment and share purchase agreement, which it is
claimed resulted in an immediate loss of $150 million to the other party. The commercial
judge held that there was no such conspiracy, and in any event nothing done by the alleged
2
conspirators caused any loss or damage. This court is now asked to reverse that decision.
Each member of the court has contributed to this opinion.
[2]
The pursuer, Robert Gordon Kidd, owned a company called ITS Tubular Services
(Holdings) Limited. He held 100% of the shares. ITS bought, sold, and leased equipment in
the oil and gas industry. Mr Kidd created the business in 1986 and incorporated ITS in 2003;
by 2009 it was the holding company of a multinational group of enterprises with a combined
annual turnover of over $100 million. The first defender, Lime Rock Management LLP, is a
Scottish limited liability partnership. It provided investment advice to the second defender,
Lime Rock Management LP, a limited partnership registered in Delaware, USA. In turn, the
second defender provided investment advice to the third defender, Lime Rock Partners V
LP, a Cayman-exempted limited partnership. We refer to the first, second and third
defenders collectively as "Lime Rock". It is a private-equity house investing in the energy
sector. Lawrence Ross, the fourth defender, was a partner of the first and second defenders,
and was on the investment committee of the third defender. Jason Smith, the fifth defender,
was employed by the first defender as an investment analyst.
[3]
From 2007, Mr Kidd sought to realise the value of some or all of his shareholding in
ITS. To that end he appointed a chief executive officer, Jeff Corray, with a view to improving
ITS's management systems and finding a buyer or private-equity investor for the company,
and also a director, Scott Milne, to oversee corporate development. In February 2008
Mr Kidd and ITS jointly instructed a firm of solicitors, namely Paull and Williamsons LLP
("P&W"), to represent their interests in any such transaction. By October 2008 discussions
with three potential investors were underway. One was Lime Rock. It sent indicative
proposals for its share purchase and investment in December 2008 - January 2009, which
were, in broad terms, accepted by the ITS deal team.
3
[4]
At this stage Lime Rock sought to instruct solicitors to advise it and to draft the
relevant transaction documents. Its usual solicitors were P&W, but they were already
instructed by Mr Kidd and ITS. They had a conflict of interest and thus could not advise
Lime Rock. Instead Lime Rock instructed the sixth defenders, Ledingham Chalmers LLP
("LC"). The individual solicitors acting were the seventh defender, Malcolm Laing, and
the eighth defender, Rod Hutchison, respectively a partner and employee of LC.
[5]
Mr Kidd, ITS and Lime Rock executed the investment and share purchase agreement
on 26 September 2009. It lies at the heart of this litigation. Mr Kidd's position is that the key
terms of the agreement were never explained to him, whether by Mr Corray, Mr Milne or
P&W, and that they were highly disadvantageous to him. He states that, if accurately
presented to him, he would never have concluded the agreement. It is claimed that as a
consequence his shareholding in ITS became worthless or next to worthless, and that he was
deprived of various opportunities in the following years to dispose of his shareholding on
substantially better terms.
[6]
After the agreement was signed, ITS's performance deteriorated. On 19 April 2013,
administrators were appointed; they immediately sold ITS to a competitor for $125 million,
all of which was used to pay bank debt. Mr Kidd and Lime Rock ended up with nothing.
The events which have triggered this litigation
[7]
When the agreement was negotiated in 2008/9, Kenneth Gordon, a P&W partner,
retained an "advisory" role to LC throughout the transaction, notwithstanding P&W's
duties to ITS and Mr Kidd. Mr Gordon was the partner responsible for P&W's client
relationship with Lime Rock. He was familiar with Lime Rock's document styles and
usual due diligence requirements. He proposed that he play a "facilitative" role in
4
explaining these to LC to save time and expense. As the commercial judge noted, the
moment Mr Gordon did anything more than provide LC with Lime Rock's styles and
an explanation of their standard due diligence requirements, he, and by extension P&W,
were acting in a position of conflict of interest. In the event, Mr Gordon's actions extended
to providing legal advice to Lime Rock and, on occasions, disclosing potentially sensitive
information to LC. Mr Gordon acted contrary to his fiduciary duty to Mr Kidd as P&W's
client. Eventually this led to his resignation from Burness Paull LLP (P&W's successor firm)
and consideration of his conduct by the Scottish Solicitors' Discipline Tribunal.
[8]
Mr Kidd avers that the defenders were aware of the conduct which amounted to
a breach of Mr Gordon's fiduciary duty and professional obligations. It is said that by
continuing to negotiate with Mr Kidd in such circumstances, the defenders conspired
to create a false impression of an arm's-length private-equity transaction between
counterparties with independent legal advice, whilst concealing from him that he was
not being independently advised and that Lime Rock was receiving ITS's confidential
information from Mr Gordon. This deprived Mr Kidd of the opportunity to discover that
he could not trust P&W and that Lime Rock lacked integrity. Mr Kidd states that had he
known of Mr Gordon's conduct, he would have sacked P&W and taken independent legal
advice which would have revealed to him that the agreement diluted his control of ITS to
an unacceptable degree and privileged Lime Rock's investment in the event of liquidation.
Had he known of such terms, he would have made it clear that they were not acceptable.
Had he known that Lime Rock had assented to Mr Gordon's "facilitative" role he would
have pulled out of the deal, he being unwilling to transact with dishonest people. It is
claimed that the object of the conspiracy was to complete the agreement on terms which
were favourable to Lime Rock and prejudicial to Mr Kidd.
5
[9]
Having concluded a deal with Lime Rock, Mr Kidd avers that he was precluded
from seeking alternative means of realising the value of ITS, such as a trade sale or a
private-equity transaction on better terms. He could not sell his shareholding without
Lime Rock's permission. The effect of the agreement was to render his shares worthless
(or at least very significantly less than they had been previously) because he no longer
controlled the destiny of ITS and was now a co-shareholder with a dishonest party, a fact
which would require to be disclosed to potential purchasers.
[10]
For their part, the defenders deny being party to any such conspiracy. They
maintain that they had no intention of deceiving, or knowingly assisting anyone to deceive
Mr Kidd. They highlight that the disputed terms of the transaction were agreed by the
parties' commercial negotiators and that very little, if any, modification of those terms
arose from negotiations between the lawyers. Mr Kidd knew, or at least ought to have
known of the terms of the transaction and of Mr Gordon's dual role. ITS's representatives,
namely Mr Corray and Mr Milne, were so aware. The deal was on normal commercial
terms for a private equity transaction in 2009. In any event ITS's financial position was
such that Mr Kidd would have sought private-equity investment notwithstanding any
misrepresentation by Mr Gordon and the defenders. Furthermore, if there was
wrongdoing, it caused no loss because, even in its absence, the company would still have
foundered in 2013.
[11]
In 2015 Mr Kidd raised proceedings, initially based on alleged negligence, against
P & W and Burness Paull seeking damages of $210 million ("the P & W action").
Investigations in 2016 resulted in Mr Kidd, for the first time, being informed of the extent of
Mr Gordon's role. As a result a claim of breach of fiduciary duty, subsequently admitted,
was added to the proceedings. Those were resolved by agreement between the parties on
6
the eve of the proof with Mr Kidd receiving £19 million and retaining an interim payment
of £1 million. (A separate action against Mr Corray was settled at the same time.) Mr Kidd
raised this action in 2019 against Lime Rock and LC for his remaining alleged losses. A
proof was held over 6 weeks in late 2023. In due course the commercial judge issued an
The investment and share purchase agreement
[12]
The terms of the investment and share purchase agreement are of importance.
Mr Kidd avers that they were materially disadvantageous to him. They crossed his "red
lines", ie they required him to accept conditions which he would never have accepted. It
is said that they differ markedly from how he understood the deal at the time. The disputed
terms are set out below, together with what Mr Kidd says was his contemporaneous
understanding in brackets:
i)
Lime Rock would contribute $55 million, comprising $10 million "cash out"
to Mr Kidd and subscription of $45 million for freshly-issued "A ordinary"
shares comprising 34% of ITS's share capital. (Mr Kidd's evidence was that he
believed that he was receiving $55 million in exchange for one-third of his
existing shares, re-investing $45 million, and keeping $10 million.)
ii)
The holders of "A ordinary" shares (ie Lime Rock) were entitled to a fixed 10%
cumulative preferential dividend every year for the 5 years following the
transaction. ITS had the option not to pay in which case the dividend would be
rolled up and compounded at a rate of 10% per year. (Mr Kidd's evidence was
that this meant that the investment was, effectively, preferential debt owed by
ITS at a steep rate of interest. He was not aware of this at the time; when he
7
found out that he had, in his words, sold one-third of his company for only
$10 million and more expensive debt, he was shocked.)
iii) A liquidation preference which, should ITS be liquidated, gave Lime Rock
a preferential right to amongst other things, return of the $45 million from
surplus assets before any other shareholder would receive anything.
(Mr Kidd's evidence was that he believed that he, not Lime Rock, would be
first to receive the $45 million in the event of liquidation or his exit from ITS.)
iv) A right to appoint two directors and, in certain specified circumstances, to take
control of ITS's board. (Mr Kidd was aware that Lime Rock would appoint
two directors, but he did not appreciate they might be able to control ITS's
decision-making and would never have agreed to this.)
[13]
Mr Kidd's evidence was that each and every one of these terms would never have
been accepted by him.
A summary of the commercial judge's decision
Overview
[14]
The judge held that there was no unlawful means conspiracy against Mr Kidd.
Neither Mr Gordon nor the individual defenders in this action acted with the intention of
causing injury or loss to Mr Kidd. Even if he had been advised by a properly independent
firm of solicitors, the evidence established that Mr Kidd would have completed the same
deal at the same time. Its terms reflected a typical private equity transaction entered into in
September 2009, a time when ITS's management was actively seeking equity investment to
grow the company, the business had reached the limit of its borrowing ability, and it was in
danger of breaching bank covenants.
8
[15]
Even had Mr Kidd not done the same deal at the same time, nevertheless by the
latter part of the first decade of the new millennium the business was over-extended and
over-leveraged, had below-forecast EBITDA (earnings before interest, tax, depreciation,
and amortisation), a plethora of unprofitable international operations, and was under
commercial pressure caused by American and European sanctions against Iran. The deal
with Lime Rock did not contribute significantly to its failure compared to these factors.
Finally, and even assuming that there was an immediate loss to Mr Kidd on completion of
the agreement, having considered the expert valuation evidence, the judge concluded that
any loss sustained by Mr Kidd was less than the value of the settlement already recovered
from P&W/Burness Paull.
Common intention to injure Mr Kidd
[16]
The judge first considered the requirements for the tort of unlawful means
conspiracy in English law, neither party having submitted that the law of Scotland differed
meaningfully from that of England on this point. Following OBG v Allan [2008] 1 AC 1,
Lord Nicholls at paragraph 166, a common intention to cause harm is an essential element.
As pled, Mr Kidd's case is that the parties to the conspiracy are Mr Gordon, together with
the individual defenders in this action.
[17]
The evidence showed that Mr Gordon did not act with the intention of harming
Mr Kidd, and similarly in respect of the defenders. The judge's reasoning is summarised
later in this opinion, see paragraphs 70-72. In short, it was held that Mr Kidd had failed to
prove an express or tacit agreement involving any of the defenders to cause him injury.
9
Fraudulent concealment
[18]
The judge then considered the unlawful means which Mr Kidd avers were employed
by the defenders in order to injure him, namely the deliberate concealment of the fact that
Mr Gordon was acting in a conflict of interest or, put short, fraud. After adopting the
definition of that term provided by Lord President Carloway in Marine & Offshore (Scotland)
Ltd v Hill 2018 SLT 239, after Erskine's Institutes, as a false pretence combined with a
practical result, he further noted that an essential ingredient of fraud is dishonesty. This
he defined with reference to the formula set out by Lord Hughes in Ivey v Genting Casinos
[19]
As pled, the parties to the alleged unlawful means conspiracy were Mr Gordon
and the individual named defenders in this action. The difficulty for Mr Kidd was that
the evidence did not support a pattern of concealment by any of them. On the contrary,
Mr Gordon was straightforward with those involved in the transaction about his dual role.
This openness extended to those not said to have been parties to the conspiracy against
Mr Kidd, including those, such as Mr Corray and Mr Milne, who were advising him. An
alternative case against the LC defenders, on the basis that they turned a blind eye to a fraud
perpetrated by Mr Gordon and Mr Ross, failed for the same reason.
Causation
[20]
Despite finding that Mr Kidd had failed to establish liability, the judge nevertheless
considered the issues of causation and loss; this on the hypothesis that Mr Kidd was indeed
deceived by a fraudulent conspiracy to conclude the investment and share purchase
agreement with Lime Rock.
10
[21]
Mr Kidd avers that if he had known that Lime Rock was receiving advice from his
solicitors, he would have terminated negotiations with them. The "counterfactual"
advanced by Mr Kidd took as its starting point the disclosure by P&W of Mr Gordon's
improper conduct at some stage prior to the completion of the transaction. The defenders
submitted that this was the wrong analysis, the correct approach being to consider what
would have happened had there been no breach of duty by Mr Gordon. Under reference to
Primeo Fund v Bank of Bermuda (Cayman) Ltd [2024] AC 727, the judge agreed. As submitted
by LC, on the hypothesis of fact in Mr Kidd's pleadings Mr Gordon was a joint wrongdoer
not sued. The correct question was - what would have happened had Mr Gordon refrained
from acting in a conflict of interest? The answer was that ITS and Mr Kidd would still have
sought private equity investment in 2008-2009. Mr Kidd and the company's management
wished to continue a growth strategy, but funding was becoming tighter. In particular
in 2009 ITS's financial controller was warning of the potential of bank covenants being
breached. By this stage Lime Rock was the only remaining interested investor. At the time
Mr Corray and Mr Milne were of the view that the deal was a good one. It had been a hard
negotiation. The conclusion was that had Mr Gordon withdrawn and not participated, the
probability was that the transaction would have proceeded as it did.
Loss
[22]
Considerable expert evidence was led regarding Mr Kidd's claimed losses. Mr Kidd
invited the court to assess his loss as at immediately post-transaction, with no consideration
of subsequent events. The defenders submitted that the court should consider the
subsequent performance and administration of Lime Rock. In any event, even if one did
focus on matters as they stood on or immediately after the date of the transaction, Mr Kidd
11
had failed to demonstrate that he had sustained any loss as a consequence of transacting
with Lime Rock. The parties also disputed whether, and to what extent, the alleged fraud
should be taken into account in valuing Mr Kidd's shares. The defenders submitted that if
any loss did arise, this was "reflective loss" - a loss which damaged the entire share value
of ITS and which was thus not separately recoverable by Mr Kidd. This argument was
rejected, and no cross-appeal has been taken by the defenders.
[23]
Turning first to the question of whether, and to what extent, he should take
post-transaction events into account, the judge applied the "Bwllfa principle" as set out in
Bwllfa and Merthyr Dare Steam Collieries (1891) Ltd v Pontypridd Waterworks Co [1903] AC 426
and approved by the House of Lords in The Golden Victory [2007] 2 AC 353. It states that
when assessing damages, eyes need not be shut to the known facts. As Lord Bingham put it
in The Golden Victory: "you need not gaze into the crystal ball when you can read the book."
This principle was applied by a Scottish court in Haberstich v McCormick & Nicholson 1975
SC 1.
[24]
In these circumstances, the appropriate question was - what would have happened
had no transaction with Lime Rock taken place in September 2009? In the light of evidence
from executive and director-level staff, including contemporaneous board minutes and
financial information pre-dating and post-dating the transaction, it was plain that ITS
would still have faced financial difficulties. Capital expenditure would have required to
be substantially reduced. In the event, Lime Rock's investment was considerably depleted
as a result of financing loss-making overseas operations. The business spread itself too
thinly. Sanctions by the United States and European Union caused serious difficulties for
the Iran operation.
12
[25]
The board of ITS, including the Lime Rock investors, responded by attempting
to boost the group's cash flow and reduce its capital expenditure and indebtedness.
Everything that could have been done to retrieve the company's situation was attempted.
The judge found that the relationship with Lime Rock did not prevent Mr Kidd from trying
to do what he said he would have done had the deal not proceeded. Although Mr Kidd
averred and gave evidence to the effect that he would have achieved a trade sale of ITS
had Lime Rock not been involved, no evidence was led from potential trade buyers, and
sales to American trade buyers were attempted but did not complete. The judge was not
satisfied that such a sale would have been achieved. It followed that, even if there had
been a fraudulent conspiracy to induce Mr Kidd to enter into the transaction, and even
if that conspiracy did indeed so induce Mr Kidd, it caused no loss which he would not
otherwise have sustained.
[26]
Finally the judge turned to the assessment of any loss on the hypotheses that,
contrary to his earlier findings, (a) the pursuer had succeeded on the merits, (b) the
appropriate counterfactual was that he had discovered Mr Gordon's true position before
completion and he had withdrawn from the transaction, and (c) his loss was to be assessed
as at the date of completion of the transaction. The judge rejected the defenders' arguments
that the post-transaction value of Mr Kidd's shareholding should be determined without
taking into account the alleged fraud, again on the basis of Primeo. In order to determine
the effect of the alleged fraud, he had to value the shares absent fraud. In this he was
assisted by valuation experts Michael Thornton (instructed by Mr Kidd) and Richard Indge
(instructed by the LC defenders). Both experts agreed to a considerable extent. In particular
they were at one that simply valuing ITS by a cost approach (ie the aggregate value of ITS's
assets minus its liabilities) was of little assistance except as a floor value. Mr Indge applied
13
a 20% discount to the value of Mr Kidd's pre-transaction shareholding on the basis that
it was in a private company (and thus less readily marketable), as opposed to the public
companies both experts had used as comparators in their valuation exercises. On the
basis of the expert literature cited by Mr Indge, the judge adopted this approach.
[27]
Blending both experts' conclusions, the judge adopted Mr Thornton's market
approach valuation but applied Mr Indge's 20% discount for lack of marketability.
This produced an enterprise value of $270 - 290 million. Subtraction of the company's
$168 million debt returned an equity value of $102 - 122 million. Applying a further
discount to account for the interests of minority shareholders in ITS subsidiaries, the
pre-transaction value of Mr Kidd's shareholding was assessed at $101 million.
[28]
In arriving at a post-transaction value of Mr Kidd's 66% shareholding, it was
necessary to determine the allocation of value between Mr Kidd's ordinary shares and
Lime Rock's A ordinary shares; the discount for Mr Kidd's loss of 100% control; and the
value of Lime Rock's investment. With respect to the allocation of value issue, the judge
split the difference between the experts' figures and arrived at 60.5% of the company's
post-transaction value being held by Mr Kidd. Turning to the discount for loss of control,
Mr Thornton saw Mr Kidd as a de facto "influential minority" post-deal, while Mr Indge
considered he still retained a controlling influence, albeit he could no longer pass a special
resolution. Mr Thornton discounted the value of Mr Kidd's shareholding by 30 - 40%;
Mr Indge by 10%. On his analysis of the terms of the deal, the judge preferred Mr Indge's
approach and discounted the value of Mr Kidd's shareholding by 10% to reflect the
diminution of his influence from his previous 100% shareholding. As to the value of Lime
Rock's investment, both experts admitted in cross-examination that they had made a
mistake, namely that ITS's pre-transaction EBITDA forecasts assumed that the Lime Rock
14
investment would complete; in fact the opposite was the case. The result was that both
experts had either under-valued ITS post-transaction or over-valued it pre-transaction.
[29]
Leaving that matter aside, and without assuming fraud, this left a post-transaction
value of ITS of $78.75 million. This produced a loss to Mr Kidd of $12.25 million (accounting
for his $10 million cash out). The judge could not reconcile that figure with the evidence of
Mr Kidd's advisers that he had received a good deal, nor with contemporaneous financial
modelling by Simmons. Noting the experts' consensus that their methodology undervalued
the cash injection, he arrived "on the balance of probabilities" at a post-transaction value,
not accounting for fraud, of $91 million for Mr Kidd's shareholding, being the value of his
pre-transaction holding less the $10 million cash out.
[30]
Turning then to the assessment taking account of fraud, the judge rejected Mr Kidd's
contention that Lime Rock's alleged fraud rendered his shares worthless as entirely
unsupported by evidence. However, he accepted that some discount required to be made.
Mr Thornton used the equivalent figures for HMRC tax valuations (70 - 80%) of small
minority holdings in private companies on the basis that this was a similar situation;
Mr Kidd held a shareholding in a private company which would be unlikely to sell.
Mr Indge did not supply a figure but commented that there was always a market for
problematic assets at the right price.
[31]
It was held that the impact of fraud on the value of Mr Kidd's shares would have
been speculative. Mr Thornton's approach, based on a distinct and different hypothetical
scenario, was unhelpful. It produced a value for ITS's share capital below Mr Thornton's
own floor value for ITS calculated on a costs approach ($97.9 million). That could not be
right. All that could be said with confidence is that a hypothetical purchaser would have
bought Mr Kidd's shares for something between $91 million (the value of Mr Kidd's
15
shareholding assuming no fraud) and $64.6 million (the pro rata value of Mr Kidd's
shareholding in ITS on Mr Thornton's costs approach). The judge split the difference,
arriving at a figure for Mr Kidd's post-transaction shareholding in ITS, taking into
account Lime Rock's alleged fraud, of $77.8 million, this being $23.2 million less than his
pre-transaction shareholding. Deducting Mr Kidd's $10 million cash out, this left a loss of
$13.2 million. On that basis, Mr Kidd had achieved a full recovery when the P & W action
was settled by agreement for £19 million plus the interim payment of £1 million and thus,
even on the hypotheses mentioned earlier, there was no residual loss due from the
defenders.
Other matters
[32]
Although his decision did not turn upon Mr Kidd's credibility and reliability, the
judge found him to be an unreliable witness. He was apparently unable to recall events
which he would be expected to remember. He was inclined to be dismissive of questioning
rather than, as the judge put it, "engage with a court process in which his perception of
the Lime Rock transaction and the subsequent failure of ITS was subjected to rigorous
challenge". The judge did not accept Mr Kidd's evidence that the disputed terms were
never explained to him by Mr Corray, Mr Milne, or Mr Beveridge (the latter a banker and
director of Simmons & Co International). On the contrary, they were explained to him. The
judge did not understand how a businessman of Mr Kidd's experience could have
misunderstood the transaction in the manner now averred. Whilst it was accepted that
Mr Kidd's (present-day) belief that he did not understand the transaction was genuinely
held, it was not necessary to assess whether that belief was in fact correct.
16
[33]
With regard to Mr Gordon, he still lacked insight into the manner in which his
facilitative role breached his professional obligations, and he was reluctant to accept that he
had crossed the line into wrongdoing. Nevertheless the judge accepted his evidence as
generally credible and reliable. The evidence of the remaining factual witnesses, including
the fourth, fifth, seventh and eighth defenders, was regarded as being both credible and
reliable.
A summary of Mr Kidd's grounds of appeal
[34]
Mr Kidd now reclaims (appeals) the decision to this court on the following grounds:
i)
The judge erred in law in repelling an objection that evidence as to the objective
fairness (or otherwise) of the transaction was irrelevant. This error materially
influenced his consideration of the facts and led to the unfavourable factual
findings set out above.
ii)
He erred in his consideration of the alleged unlawful means conspiracy; he
reached conclusions which were plainly wrong on the evidence led before him.
iii) He was plainly wrong in concluding that Mr Kidd had failed to establish that
there was fraudulent concealment of the wrongdoing.
iv) He erred by misapplying the common law of fraud.
v)
He wrongly held that the fifth to eighth defenders could not incur accessory
liability.
vi) He wrongly held that the appropriate counterfactual in assessing the cause and
extent of Mr Kidd's losses was a transaction which proceeded with Mr Gordon
playing no role. He ought instead to have held that the appropriate
17
counterfactual was one in which Mr Gordon's conflict of interest was disclosed
to Mr Kidd prior to completion of the transaction.
vii) He erred by considering what happened after the date of the transaction with
Lime Rock when assessing the value of ITS. He ought to have valued
Mr Kidd's loss as at the date of the transaction, namely 26 September 2009.
viii) His approach to the valuation of Mr Kidd's shares was incorrect.
A summary of the parties' submissions
Ground of appeal 1
[35]
At a pre-proof hearing on 27 October 2023 counsel for Mr Kidd lodged a note of
objection to a line of evidence developed by the defenders that the transaction with Lime
Rock was a fair one, or at least typical of a private equity transaction entered into in
September 2009. The objection was renewed at the proof. The judge did not rule on the
note of objections, but as he had regard to, and accepted, the expert and lay evidence that
the transaction was a typical one, it is evident that he was not persuaded by it. Counsel
submitted that this was an error of law which led the judge to consider irrelevant and
inadmissible matters. This coloured his findings in fact in a manner which infected his
consideration of the remaining evidence.
[36]
Counsel for Mr Kidd submitted that in a case for breach of fiduciary duty the court
will not entertain evidence in relation to the fairness of the transaction. Reference was made
to Commonwealth Oil & Gas Co Ltd v Baxter 2010 SC 156 where Lord Nimmo-Smith quoted
with approval the authority of Aberdeen Railway v Blaikie Bros (1854) 1 Macq 461 that:
"...It is a rule of universal application, that no one, having (fiduciary) duties to
discharge, shall be allowed to enter into engagements in which he has, or can have,
a personal interest conflicting, or which possibly may conflict, with the interests of
18
those whom he is bound to protect. So strictly is this principle adhered to, that no
question is allowed to be raised as to the fairness or unfairness of a contract so
entered into."
[37]
Lord Nimmo-Smith relied upon this, and other, authorities in rejecting a line of
argument advanced by a director that his fiduciary obligation to his company in relation
to dealings with third parties extended only so far as refraining from using the company's
property or confidential information for his own benefit. It was contended that the same
rule applies in the present context and that similar considerations arise when there is an
allegation of fraud; BP Exploration Operating Company Ltd v Chevron Transport (Scotland) 2002
SC (HL) 19 per Lord Millet at paragraphs 103-105.
[38]
In answer, the defenders highlighted Mr Kidd's averments that the transaction was
highly disadvantageous to Mr Kidd; he was not advised of this by P&W; and if he had
known he would not have entered into to it. Mr Kidd put the fairness of the transaction
at issue. He led evidence as to the effect of its terms; it was only when the expert solicitor
witness instructed by him conceded that the transaction was a typical one that he adopted
his position that objective fairness could not be considered by the court. It would be
perverse if the terms of the transaction were relevant only if they were disadvantageous
to Mr Kidd. Furthermore, the terms of the transaction were relevant to the likelihood of
Mr Kidd's primary contention of unlawful means conspiracy. As the judge noted, it would
be an odd conspiracy where the object of the conspirators was to induce a person to enter
into an agreement on normal commercial terms negotiated by experienced advisers not said
to be part of the conspiracy. Counsel submitted that Mr Kidd's approach was artificial, and
drew a distinction between the principle articulated in the decisions cited and the facts of the
present action.
19
Ground of appeal 2
[39]
Mr Kidd's counsel did not dispute the law in relation to unlawful means conspiracy
as summarised by the judge. He identified three further principles. First, the necessary
combination may be proved by inference where the evidence is that the defender knew
what was going on and failed to stop the unlawful activity; it is not necessary to prove an
agreement, formal or informal, with the principal purpose of injuring the pursuer, Kuwait
and 120-122. Secondly, where a party has a suspicion that certain facts exist and takes a
deliberate decision not to confirm them, this may constitute blind eye knowledge, Group
conduct which if carried out by a single person would incur criminal or civil liability will
constitute an unlawful act founding a claim for conspiracy if multiple parties combine or
agree to such conduct as a means of injuring a pursuer, per Lord Hope of Craighead in
Revenue & Customs Commissioners v Total Network SL [2008] 1 AC 1174 at paragraph 46.
[40]
On the evidence the judge was plainly wrong to conclude that there was no
conspiracy to injure Mr Kidd. Counsel criticised the following conclusions. First, having
noted correctly that an "intention to harm" may be inferred from an intention to profit from
the unlawful means (see Kuwait Oil Tankers at paragraph 121), the judge failed to consider
the evidence of the alleged conspirators' intention to profit. The terms of the deal were
that ITS would pay all of the transaction costs, including the legal fees of both ITS and
Lime Rock. In so far as Mr Gordon felt he was saving everyone money, this was in error
since Lime Rock were never paying. At a meeting on 20 January 2009, which Mr Allan
did not attend but Mr Gordon did, it was noted that Lime Rock would be seeking "toothy
20
warranties". This was reflective of Mr Gordon's actions going beyond a mere explanatory
role.
[41]
Lime Rock intended to profit from the unlawful means, indeed that was the point
of the investment. They used Mr Gordon as their instrument to complete the agreement on
their standard terms. Both LC and P&W charged significant fees: P&W earned £165,000
for drafting and a further £175,000 for due diligence, including a £55,000 success fee. LC
invoiced the sum of £42,737.20. Lime Rock benefitted by all of these fees being paid by ITS.
Mr Gordon's actions were characterised as "reprehensible", which was relevant to the
assessment of intention, see Lord Scott in Total Network SL at paragraph 56. Why, asked
counsel, should Mr Gordon's reprehensible actions not be attributable to Lime Rock when
they were aware of his actions, and why should LC not be liable in circumstances where,
having been instructed because of P&W's admitted conflict, they were well aware of his
blurring (at best) his professional lines from at least 20 January 2009?
[42]
It was submitted that the judge further erred in his consideration of knowledge and
intention. The evidence of the seventh and eighth defenders fell squarely into the category
of knowledge considered in Group Seven. Counsel relied upon the following chapter of
questioning from Mr Laing's evidence:
"Q. And I'm suggesting to you, Mr Laing, that not only is it obvious now there
was a conflict, it was obvious back then. But you say -- well what do you say? `Yes
it would have been but I thought it was consented to.' Is that what you are saying?
A.
I think that probably is my position.
Q.
I'm suggesting to you that, as you certainly know now, it cannot be consented
to. But why is it you didn't check with Scott Allan whether Mr Kidd had consented
to it?
A.
I didn't think it was my problem. The extent to which there was a conflict
of interest, it seemed to me it was a Paull & Williamsons problem. And my clients
weren't -- I didn't think my clients were prejudiced by it, and therefore why rock the
21
boat? The facilitative role I maintain was known by Scott Allan and Scott Milne, I
believe Jeff Corray as well. So -- and plus the fact it was the very early stages of the
deal and frankly the documentation, as we've heard, went backwards and forwards
umpteen times in the next stage of the transaction. So that even if Ken Gordon had
given more advice than he should have given, Scott Allan had ample opportunity
prior to completion to throw things back at us."
[43]
Counsel maintained this was a conscious decision, of the kind deplored in Group
Seven, to refrain from confirming a suspicion that unlawful means were being employed.
To exonerate Mr Laing, or any solicitor, in such circumstances was contrary to public policy.
Likewise, Mr Hutchison's evidence was that "in hindsight" Mr Gordon had breached
boundaries, but he had simply accepted that more senior lawyers saw nothing wrong at
the relevant time.
[44]
The judge was also incorrect to accept the "plausible and credible" explanations
provided by the individual defenders as to why they did not consider Mr Gordon's actions
amounted to wrongdoing. It is not a requirement of the tort of unlawful means conspiracy
that the conspirators appreciate that their conduct is unlawful (Racing Partnership Ltd v
Sports Information Services [2021] Ch 233 (CA)). Subjective understanding that one's actions
are dishonest is not a necessary ingredient of dishonesty (Ivey). It was relevant that Mr Ross,
Mr Smith, Mr Laing and Mr Hutchison were professional people (two accountants, two
solicitors). It was not explained why their conscious involvement in a position of conflict of
interest did not give rise to the necessary inference of dishonesty, awareness of the use of
unlawful means, and intention to harm.
[45]
In answer, counsel for the defenders submitted that this ground of appeal was
founded upon a selective reading of the evidence. It was a classic instance of inviting
an appeal court to decide on the basis of a "telescopic" view of the evidence. It was
emphasised that the judge heard every witness. Rather than reading the documentary
22
evidence relied upon by Mr Kidd as a single, damning testament, he had correctly viewed
it in its temporal context; each participant in the transaction would have seen only those
parts of the inventory copied to them at the time they were sent. The question for the judge
was whether the defenders had evinced a deliberate intention to achieve a common end of
harming Mr Kidd. On the evidence, he was not prepared to so infer. Counsel for the sixth
to eighth defenders highlighted that Mr Laing's use of the words "why rock the boat" was in
the context of his understanding that any conflict on P&W's part had been consented to by
their clients. Counsel prayed in aid the dicta of Lewison LJ in Volpi v Volpi [2022] 4 WLR 48
at paragraph 2(vi) that:
"reasons for judgment will always be capable of having been better expressed.
An appeal court should not subject a judgment to narrow textual analysis. Nor
should it be picked over or construed as though it was a piece of legislation or a
contract."
Grounds of appeal 3 and 4
[46]
No issue was taken with the judge's assessment that fraud requires dishonesty,
or with his identification of the Ivey test as the correct approach to assessing dishonesty.
However dishonesty, and false representations, can be constituted not simply by a
downright lie or half-truth, but by intentional suppression or non-disclosure of information
which a party was under a positive duty to disclose, resulting in a false impression, see
Where an implied representation is a continuing one, as pled by Mr Kidd, there is a
continuing responsibility that the representation is correct.
[47]
Mr Gordon breached his fiduciary duty. The judge considered this "entirely wrong"
and "reprehensible". Nonetheless he held that Mr Gordon did not act dishonestly or
deceptively and that he had "fully disclosed" his activities to Mr Kidd's advisers. These
23
findings were contrary to the evidence. Mr Kidd's unchallenged evidence was that he
was unaware of Mr Gordon's role. Mr Gordon agreed in evidence that his role was not
"explained fully". Mr Corray and Mr Milne both gave evidence that they were not aware
of any wider role for Mr Gordon. Mr Allan's unchallenged evidence was that he would
have withdrawn from acting for ITS had the extent of Mr Gordon's role become known to
him. In any event, a client cannot consent to an actual conflict of interest. The judge had
erroneously conflated ITS executives' knowledge of Mr Gordon's role in carrying out vendor
due diligence for ITS with knowledge of his retained advisory role.
[48]
In answer, counsel for the defenders again highlighted that the judge's conclusions
were based upon his assessment of the credibility and reliability of the witnesses. The
individuals involved had been confused as to the extent of Mr Gordon's role. The confusion
was caused by Mr Gordon's failure to define the scope of his involvement or stick within
that scope (however ill-defined) as the transaction progressed. That was distinct from the
necessary ingredients of dishonesty and intention to harm. The suggestion that the judge
did not distinguish between Mr Gordon's agreed involvement in vendor due diligence and
his wider and inappropriate role was confounded by paragraph 108 of his opinion where
that role was specifically identified. More fundamentally, the findings in this regard were
not "plainly wrong" and thus were immune to interference by an appellate court.
[49]
In so far as the judge was said to have erred in law, this was ill-conceived. The
defenders did not blind themselves to something "unconscionable", as in Frank Houlgate
Investment Co Ltd v Biggart Baillie LLP 2015 SC 187. The judge concluded that any
misrepresentation, if there was one, was not made with the intention that Mr Kidd would
act upon it to his detriment. Mr Kidd had failed to prove that there were clear words or
conduct implying any misrepresentation, Property Alliance Group v RBS plc [2018] 1 WLR 3529.
24
The judge correctly identified the improbability that the defenders would
participate in a fraud to induce Mr Kidd to enter a transaction on normal commercial terms.
Ground of appeal 5
[50]
Mr Kidd relied upon the extensive professional obligations placed upon solicitors.
The judge paid insufficient regard to this point. At first instance in Frank Houlgate the
actions of the solicitor defender were described as "wilful unthinking". The same applied
here. The judge's reasons for rejecting an argument of dishonest assistance to a fraud were
limited and inadequate, being addressed in a single paragraph.
[51]
In answer, the sixth to eighth defenders (this ground not being directed at Lime
Rock) pointed out that the submission Mr Kidd made at proof was that the LC defenders
were liable as accessories to Mr Gordon's fraud on the basis that they had dishonestly
assisted, or at least turned a blind eye to it. Having made the finding in fact that there
was no fraud on Mr Gordon's part and that the LC defenders did not act dishonestly, it
was hardly surprising that the judge's treatment of this issue was in brief terms.
Ground of appeal 6
[52]
The judge was wrong to hold that any breach of duty did not cause Mr Kidd loss on
the basis that the correct counterfactual was that the negotiation and ultimate transaction
proceeded with no wrongdoing. Mr Kidd's evidence, said to be unchallenged, and his pled
case, was that he would not have proceeded with Lime Rock had he known the truth. The
judge's conclusion failed to take into account the rule that where there is a fraud, the pursuer
is not required to reconstruct that which he would have agreed had there been no deception,
Smith New Court Securities v Citibank NA [1997] AC 254. There was a misapplication of the
25
decision in Primeo, the correct counterfactual being that no transaction took place at all.
Counsel acknowledged that if the judge applied the correct counterfactual, Mr Kidd's case
must fail. However, the judge's analysis of causation was wrong in fact and law.
[53]
For the defenders, counsel maintained that Mr Kidd bore the burden not only of
demonstrating that a fraudulent misrepresentation was made, but also of showing that it
influenced (to whatever extent) his decision to enter into the transaction, Zurich Insurance
Co plc v Hayward [2017] AC 142. That was consistent with common sense. If, in the absence
of a misrepresentation, a party would still have entered into a transaction, their claim must
fail, Versloot Dreddging BV v HDI Gerling Industrie Versicherung AG [2017] AC 1; Raiffeisen
wrongdoing, issues of remoteness might have less salience than in claims for mere
negligence or breach of contract, but that is distinct from Mr Kidd's submission. If Mr Kidd
were correct, the wrongdoer would effectively become an insurer and liable for all of his
misfortunes regardless of whether there was a causal connection between his losses and
the wrongdoing. The proposition that where it is proven that a pursuer would have done
nothing differently even in the absence of wrongdoing, he is nevertheless entitled to recover
damages, was unprincipled, unfair, and not vouched by authority.
Ground of appeal 7
[54]
The Bwllfa and The Golden Victory line of authority had no application to the exercise
which the judge required to carry out. They involved circumstances where there was a
known event. The counterfactual that required to be considered by the judge was that there
was no transaction at all and the business of ITS continued under the 100% shareholding of
Mr Kidd rather than encumbered (as he would put it) by Lime Rock's control rights. To
26
inquire as to whether the business would still have collapsed had a different set of facts
prevailed was the kind of crystal ball speculation discouraged by Lord Bingham in The
Golden Victory.
[55]
The judge erred by assuming that ITS would have conducted its business in the same
way had the Lime Rock investment not taken place. There was no dispute that after the
transaction Lime Rock would have a significant influence on ITS's business. Mr Kidd did
not have to prove precisely what form that influence would have taken or its effect on the
business. It was contrary to the authorities, particularly Smith New Court Securities, to force
a victim of fraud to carry the risk of failing in that regard.
[56]
The defenders submitted that Mr Kidd had misapplied Smith New Court Securities.
Read as a whole, that case is a disapproval of a strict and inflexible rule that damages
must be assessed at the date of the alleged wrong. The fundamental task in a claim
for damages is to ascertain loss caused to the pursuer by entering into the transaction
(Downs v Chappell [1997] 1 WLR 426; Haberstich). Where a person is induced to part with a
flawed asset, the value of the asset must be assessed with reference to those flaws. The
judge's conclusions that ITS would have failed in any event and that the deal with Lime
Rock did not prevent Mr Kidd from attempting the measures he said he would have tried
had the deal not been entered into, flowed from his consideration of the evidence and were
not plainly wrong.
Ground of appeal 8
[57]
Mr Kidd took no issue with the pre-transaction valuation of $101 million for his
shareholding. However, the $77.8 million post-transaction valuation, assuming fraud, was
plainly wrong. The judge should have assessed post-transaction value at nil, or at most
27
$17.5 million. In characterising Mr Kidd's claim that his shareholding was worthless as an
"assertion", the judge ignored his evidence, as well as Mr Thornton's conclusion in his
report that a third-party purchaser would have no interest in Mr Kidd's shares. Even Lime
Rock's principal, John Reynolds, gave evidence that a suggestion of dishonesty would give
him pause before engaging in a transaction. It was not clear that the judge had regard to any
of this evidence.
[58]
If this was wrong and Mr Kidd's shares did have some value, the judge's assessment
of that value was plainly wrong. There was no proper basis for rejecting both experts'
methodology, nor for the judge's own valuation of $91 million which was arrived at by a
method not considered by either expert and not put to them in cross-examination. The use
of $64.6 million as a floor value was to take a figure which assumed no fraud. Fraud could
reduce the value of assets; both experts concurred on that. This undermined the entire basis
of the judge's valuation. As a matter of fairness, any alternative methodology should have
paragraph 70. As Mr Indge did not offer a figure beyond observing that fraud would reduce
the value of assets, the judge was left with, and should have applied, Mr Thornton's
suggestion of an 80% discount.
[59]
The defenders submitted that this ground of appeal proceeded on a
misunderstanding of the expert evidence and the judge's approach thereto. The consensus
of the experts was that account had to be taken of Lime Rock's $45 million subscription in
any valuation of ITS. Both made the same error (as set out above). Their valuations either
over-valued ITS pre-transaction or under-valued it post-transaction. Faced with a gap in the
evidence, the judge was entitled to take a broad axe approach, see Grier v Lord Advocate 2023
SC 116 at paragraph 114. The approach he took was entirely reasonable. He was correct
28
that in the absence of expert evidence about the extent to which the alleged fraud would be
relevant to a hypothetical purchaser, it was a matter for him to resolve. The submission that
the shares post-transaction had a nil value was contrary to the common view of the experts.
Both considered that even tainted assets had a value. The judge was also entitled to
consider both the cash value of ITS's assets and the fact that Lime Rock was a potential
buyer for Mr Kidd's shareholding and would hardly be dissuaded by its own fraud.
General
[60]
The defenders' submissions addressed the caution required of an appellate court
when asked to interfere with the factual findings made by a judge who heard the evidence
and reached decisions based on the credibility and reliability of the witnesses. The
authorities cited included Thomas v Thomas 1947 SC (HL) 45, Lord Thankerton at page 54; the
trilogy of recent decisions of the UK Supreme Court ending with Royal Bank of Scotland plc v
findings as "plainly wrong". In any event they involved inferences from facts, not primary
factual findings, or the application of the law to the facts, and thus were more amenable to
challenge.
[61]
The defenders drew attention to the "massive recovery" sought by Mr Kidd,
namely over $500 million if compound interest at the judicial rate is added to the principal
sum of $150 million. Mr Kidd was the only party to come away from the demise of ITS with
anything, being the $10 million cash payment and the £20 million from the settlement of the
P & W action. In contrast, Lime Rock lost its entire investment. It was suggested that there
would be something wrong with the law if Mr Kidd was to gain a further "windfall" from
these defenders, let alone the "unconscionable" sum sought.
29
Analysis and decisions on the grounds of appeal
The alleged conspiracy - grounds of appeal 2, 3 and 4
[62]
Mr Kidd had to prove that two or more persons combined to take unlawful action
intending to and successfully causing him damage. The alleged unlawful action was
fraudulent concealment of Mr Gordon's breach of fiduciary duty. (It would be enough if
one of the defenders so conspired with Mr Gordon, an alleged joint wrongdoer who is not
convened in this action.) All of the named defenders denied any such wrongdoing.
[63]
The judge's account of the evidence from some of the key witnesses can be
summarised as follows. Mr Ross thought that P&W could act for both parties; it had
happened previously. The lawyers were just putting the commercial agreement into a
legal document. He thought that everyone knew that Mr Gordon was acting for Lime Rock
regarding due diligence. It did not occur to him that Mr Gordon was behaving improperly.
Mr Ross negotiated the deal with Mr Corray who was checking with Mr Kidd at each step.
[64]
Mr Smith said that his role was to support Mr Ross. He was not familiar with
solicitors' conflict rules. He thought that Mr Gordon was acting for P&W and had a liaison
role. The ITS directors negotiating the deal knew about this. It did not occur to him that it
was improper. There was no intention to use Mr Gordon or P&W to gain a tactical
advantage. No lawyer was involved in the agreement as to the commercial terms of the
deal.
[65]
Mr Laing denied that LC were a "front" for Mr Gordon. He was unaware of that
term having been used by Mr Gordon until many years later. He knew there was a potential
conflict, but it was sensible and expedient for Mr Gordon to familiarise LC with Lime Rock's
usual position and "red lines". Mr Laing thought this acceptable since he was told both
30
parties agreed to it. If there was a problem, it was for P&W to resolve. He denied
dishonesty and any concealment of wrongdoing from Mr Kidd.
[66]
Mr Hutchison observed that he took directions from Mr Laing, not Mr Gordon.
He understood that both sides were happy that it would be expedient for Mr Gordon to
be involved in the early stages, for example to provide briefing as to Lime Rock's usual
requirements. He never thought that there was any collusion or attempt to facilitate
wrongdoing.
[67]
Mr Gordon said that he did not appreciate that he was in a position of conflict.
Mr Corray and Mr Milne agreed to his facilitative role. The "unofficial email" was poorly
drafted; it did not imply a covert role. Saying that LC "fronted" the negotiation was sloppy
language. LC performed its role as would be expected. Mr Gordon wanted to find a way
through gaps in the due diligence to get the deal done. He was not representing the
interests of Lime Rock. There was no recruitment of LC so that it could be pretended that
it was an arm's length transaction. There was a "guddle" as to boundaries and who was
doing what.
[68]
Mr Kidd said that he would have been concerned had he known that Mr Gordon
strayed beyond due diligence and gave advice to Lime Rock. His practice was to approve
the key points of a deal, usually the price, and leave implementation to managers and
advisers. No one went over the contract terms with him. At the time of completion he
was presented with only the signing pages. He was shocked when he learned that the
£45 million was preferential debt owed to Lime Rock. He did not discover the actions of
Lime Rock, LC and P&W till receipt of what became known as Inventory Z in October 2016.
If this had been revealed at the time he would have sacked P&W and called off the deal.
31
[69]
In submissions at the proof and before this court, counsel for Mr Kidd focussed
on the documentation recovered in the course of the earlier litigation that has come to be
referred to as Inventory Z and some of the questioning of witnesses pertaining to it. That
material was taken into account by the judge, see paragraphs 28-45, 103-105 and 113-115
of his opinion. He noted that he required to address what Mr Gordon did, not just the
wording of emails. And of course he had to take account of all the evidence led relevant
to the allegation of an unlawful means conspiracy.
[70]
The judge concluded that Mr Gordon's continuing input after providing the initial
information as to Lime Rock's due diligence requirements put him in a position of a conflict
of interest between the two parties. He wrongly gave confidential information to Mr Ross
and he offered to delay contacting Mr Corray so as not to harm Lime Rock's negotiating
position. He assisted with the drafting of warranties to cover due diligence gaps. He gave
Lime Rock advice on US warranty law and again as to stamp duty. However, while this was
a breach of fiduciary duty, the judge was satisfied that it was not done to give Lime Rock an
unfair advantage in the negotiation of the deal nor to harm the interests of ITS and Mr Kidd.
Mr Gordon wanted to keep both ITS and Lime Rock happy. He saw his role as being to the
shared benefit of both parties, notwithstanding the colourful and inappropriate way in
which he expressed himself in emails, and that it brought him into conflict with his
professional obligations. Mr Gordon wanted to be of use to his most important client and
reduce the risk of losing their business, thus he closed his mind to what he wrongly saw as
only a potential conflict of interest. His conduct was reprehensible, but not dishonest. He
did not conceal his role, nor deceive anyone.
[71]
The judge observed that his finding that Mr Gordon did not act with an intention to
cause harm to Mr Kidd made it less likely that the defenders did so. Their denials of such
32
and of involvement in concealing wrongdoing were accepted. It was held that each named
defender gave a credible explanation as to why, from their own perspective, they did not
consider that Mr Gordon's actions were improper. There was confusion as to his facilitative
role caused by a failure to define it and then stay within it, but this raised no inference as to
an unlawful means conspiracy involving any of the defenders.
[72]
The judge found support for this conclusion in that neither P&W nor LC were
involved in the negotiation of the commercial terms of the deal. Lime Rock made an
indicative offer to ITS on 12 January 2009. It included the terms of the deal of which
Mr Kidd now claims he was unaware and would never have accepted. That offer was made
to Mr Corray and Mr Milne who obtained authorisation and approval to proceed from
Mr Kidd at each stage of the process. It predated the instruction of LC. There was no
evidence that anything said or done by Mr Gordon influenced the outcome, nor that the
Lime Rock defenders made improper use of his input to secure a better deal. In addition, as
both the solicitor experts agreed, the terms of the agreement were as would be expected in a
private equity transaction of this nature in September 2009. Nothing was said on behalf of
Mr Kidd as to any term which should have been negotiated away in his interests. Mr Milne,
Mr Corray and Mr Beveridge thought it a fair deal for Mr Kidd and ITS. The judge asked,
why would the defenders conspire to achieve an outcome negotiated by others on terms
satisfactory to both parties?
[73]
The case therefore fell at the first hurdle, namely the need to prove an express or
tacit agreement to cause Mr Kidd injury involving one or more of the named defenders.
Nonetheless the judge separately addressed whether the alleged unlawful means,
namely fraudulent concealment of Mr Gordon's conduct, had been established. The
contemporaneous material suggested that Mr Gordon was open with everyone as to his
33
intentions. There was no evidence that Mr Kidd was being deceived by anyone, either by a
misrepresentation or concealment. The finding that there was no fraudulent conspiracy was
supported by the inherent improbability that the LC and Lime Rock representatives would
participate in such to induce Mr Kidd to enter into the transaction.
[74]
As to the alternative plea that LC provided dishonest assistance to a fraud
perpetrated by Gordon and Ross, the judge noted that there was no fraud to assist or turn
a blind eye to; no dishonesty on the part of Laing and Hutchison; and no common design
to injure Mr Kidd.
[75]
Notwithstanding the terms of his note of argument, and perhaps appreciating the
difficulties inherent in seeking to persuade this court to interfere with what are findings
of primary fact by the judge who heard the proof, counsel for Mr Kidd informed us that
the main proposition was as follows: It is enough if the defenders knew what it was that
Mr Gordon was doing; they did not need to appreciate that it was a breach of duty or
otherwise wrongful. Counsel indicated that the judge's finding that they did not consider it
improper conduct was not challenged. These grounds of appeal could and should succeed
even standing the acceptance of the defenders' explanations and denials of a cover-up.
[76]
This proposition is foreshadowed in a passage in counsel's note of argument, but
at the hearing it dominated his submissions on this aspect of the case. The judge's
"fundamental error" was to misapply the two-stage test for dishonesty set down in Genting
Casinos v Ivey. All one needed to know was the material contained in Inventory Z, for
example the "unofficial counsel" email of 13 November 2018 which was "pivotal to the
case." Exception was taken to almost nothing in the judge's opinion regarding the law and
the facts; the problem was that he asked himself the wrong question.
34
[77]
Reference was made to the first stage of the test for dishonesty, namely to "ascertain
(subjectively) the actual state of the individual's knowledge or belief as to the facts", Ivey,
Lord Hughes at paragraph 74. As to the second stage:
"When, once his actual state of mind as to knowledge or belief of facts is
established, the question whether his conduct was honest or dishonest is to
be determined by the (objective) standards of ordinary decent people. There
is no requirement that the defendant must appreciate that what he has done is,
by those standards, dishonest."
On this approach Mr Ivey's belief that his conduct was permissible would not render his
conduct honest. Thus the argument ran that the judge erred by taking the defenders'
subjective beliefs as to the propriety of Gordon's conduct into account when acquitting them
of dishonest, or fraudulent, conduct (and likewise regarding Mr Gordon's views as to
his own actions.) They only needed to know of the conduct which, objectively, amounted
to a breach of fiduciary duty on Gordon's part, and which the judge described as
"reprehensible". Any right thinking person would have seen that something was wrong.
Good motives or ignorance of the rules were irrelevant in respect of a conflict of interest.
[78]
In our view there is no merit in these criticisms of the judge's analysis. At
paragraphs 105-106 he considers whether Mr Gordon was dishonest. The finding was
that he did not act with a view to damaging the interests of ITS and Mr Kidd by enabling
Lime Rock to gain an advantage. To avoid upset to an important client he closed his mind
to what he wrongly saw as no more than a potential conflict. While his failure to adhere
to the standards expected of a solicitor was reprehensible, "it would be wrong to draw
the inference that he acted dishonestly." Mr Gordon considered that he was acting for
the shared benefit of both parties. He had no intention of unlawfully causing damage
to Mr Kidd. Counsel for Mr Kidd's approach would exclude from the assessment such
35
subjective beliefs; it would be enough for dishonesty if (a) Mr Gordon knew what it was that
he was doing, and (b) that, on an objective assessment, it was wrong.
[79]
The factual context of Mr Ivey's case and that of the present are different. The former
concerned conduct by a professional gambler which most people would consider dishonest
cheating. However, while there may be circumstances where it is obvious that acting while
under a conflict of interest involves dishonesty, this will not always, or perhaps even usually
be the case. Unlike cheating while gambling, it does not carry, as it was put in Ivey, "its own
stamp of wrongfulness". A position of conflict of interest is a state of fact, not mind. It can
arise in a wide variety of circumstances. If it occurs in a professional context, the code of the
particular profession may render it improper behaviour. As here, it might amount to the
civil wrong of breach of fiduciary duty. However it does not necessarily involve moral
turpitude or an intention to cause harm. For a solicitor, even if it has no impact on events
and causes no harm it will still be improper and unethical behaviour. This is because it
creates a risk of professional embarrassment and/or prejudice to someone whose interests
the solicitor should be protecting. It impinges on the duty of undivided loyalty and
confidence towards a client. There are many examples of circumstances where reasonable
people can and do differ as to whether an improper conflict has been created. Professional
bodies' views can diverge as to whether and when a client's consent makes a difference.
In short, it cannot simply be assumed that, even if carried out as envisaged by counsel for
Mr Kidd, the assessment would lead to a finding of dishonesty on the part of Mr Gordon
and those aware of his role in the matter.
[80]
There is, however, a more fundamental error in the submission. Ivey does not
mandate that the second stage of the test leaves out of account the individual's beliefs and
state of mind. The discussion of the foreigner who does not appreciate that public transport
36
has to be paid for illustrates the point. If they genuinely believe it is free, there is nothing
dishonest in their conduct. "What is objectively judged is the standard of behaviour given
any known actual state of mind of the actor as to the facts" (paragraph 60). Lord Hughes
standards a defendant's mental state would be characterised as dishonest, it is irrelevant
that the defendant judges by different standards." The correct approach was discussed in
detail by Lord Nicholls in Royal Brunei at pages 389-391. He noted that carelessness is not
dishonesty; for the most part dishonesty is equated with conscious impropriety. Reference
can also be made to Lewison and Longmore LJJ in Clydesdale Bank at respectively
paragraphs 51-52 and 57-58.
[81]
The key point in Ivey was the affirmation that someone's honesty or dishonesty does
not depend on their own opinion as to their behaviour. They do not have to appreciate that
they are acting in a dishonest manner. However, when the ordinary right thinking person's
standards are invoked, the exercise includes everything relevant to whether the individual
acted dishonestly, including the reasons for his conduct. It follows that the judge's analysis
on this issue was consistent with the approach discussed in Ivey. He did not err in taking
into account Mr Gordon's motives and lack of intention to cause harm to Mr Kidd or favour
Lime Rock when deciding whether his reprehensible conduct was also dishonest. Likewise,
there was no flaw in his assessment of the defenders.
[82]
Counsel for Mr Kidd prayed in aid the majority view in Racing Partnership that for
an unlawful means conspiracy, proof that it was known that the means were unlawful is
not necessary (though establishing a belief of legality would be a defence). On this issue
we find the dissenting opinion of Lewison LJ wholly convincing, see paragraphs 213ff. At
paragraph 248 he says: "It would, I think, not generally be regarded as dishonest to act in
37
accordance with a mistaken view as to one's own legal rights." He explains that this is not
affected by the reformulation of the test in Ivey. He concludes:
"I would hold...that where the unlawful means consists of a violation of
some private right, knowledge of unlawfulness is an ingredient of the tort of
intention to injure by unlawful means; and of conspiracy to commit that tort"
(paragraph 265).
[83]
As to the need to establish an intention to injure Mr Kidd on the part of the alleged
conspirators, standing the findings of the judge it is not entirely clear how Mr Kidd proposes
that this can be established. It is worth remembering that the pleaded case was that the
harm to Mr Kidd was him being locked into a bad deal on disadvantageous terms. That
proposition having failed at proof, the submission now is that it was intended to be a
profitable bargain for Lime Rock (in the result a disappointed expectation) and that ITS paid
the legal fees.
[84]
It is said that where there is a benefit there is a consequential loss; "the other side
of the coin". No doubt Lime Rock were aiming for a profitable deal for them, but it hardly
follows that Mr Gordon was being used to harm the economic interests of Mr Kidd and ITS.
This was not a zero-sum game. The desire was that everyone would gain, not that Lime
Rock would benefit at the expense of their business partners. A contrast can be drawn with
cases where a competitor captures a rival's business by the use of unlawful means. It can be
noted that the courts have often warned of the danger of expanding the scope of economic
torts in a manner harmful to free trade and legitimate competition.
[85]
Once again the finding that the transactions were in terms to be expected and fair
to both sides militates against the notion that the defenders were engaged in a conspiracy
designed to harm Mr Kidd. The proposition that it is established by the payment of fees
does not bear examination. There is a suggestion that the necessary intention to injure is
38
demonstrated by the concealment of Mr Gordon's conduct, sometimes characterised as
an implied misrepresentation that all was well. Leaving aside the findings that there was
no such concealment, this returns us to the judge's main conclusion that there was no
unlawful means conspiracy. Mention was made of the Outer and Inner House decisions in
Frank Houlgate, but the circumstances of that case are so markedly different from the present,
we gain no assistance from it. (The other necessary element of the delict, namely that the
conspiracy did in fact cause loss, is addressed below.)
[86]
As already mentioned, the submission of a fundamental error sidesteps the difficult
task of persuading us to overturn the judge's findings of fact by reference to the contents of
Inventory Z and selected passages from the transcript of evidence. That said, often there
were more than hints that this was being attempted. However, unless they are undermined
by a material error of approach, in our view none of the judge's key findings in fact and law
can be categorised as plainly wrong in the sense described by Lord Reed in Henderson v
flaw in the judge's reasoning, and we consider that there is no proper basis for a reappraisal
of the evidence relating to an alleged fraudulent conspiracy.
The fifth ground of appeal - dishonest assistance by LC
[87]
We agree with the submissions for the defenders on this ground of appeal. As
already mentioned, the circumstances in Frank Houlgate were materially different from those
in the present case. Given his earlier findings, the judge cannot be criticised for dealing with
the issue of dishonest assistance in the brief terms of paragraph 118 of his opinion. We reject
this ground of appeal.
39
The first ground of appeal - the note of objection to evidence as to the fairness of the
transaction
[88]
This ground of appeal has no merit, largely for the reasons given by the defenders.
Mr Kidd introduced the issue of the alleged unfairness and prejudicial nature of the
transaction; indeed it was a main plank of the case of an unlawful means conspiracy as
pled and initially presented prior to the expert led for Mr Kidd disowning it. Mr Kidd
cannot object to evidence in contradiction, nor to the implications of a finding that the
transaction was in fact a fair one.
[89]
As to the authorities relied on by Mr Kidd, it is true that it is well settled that if there
is an action to set aside a contract made by a fiduciary on behalf of the principal, and from
which the fiduciary benefits, it is no defence to show that it was a fair or reasonable bargain
for both parties; but this principle of law has no relevance in the circumstances of the
present case. Where the action is for damages based on an allegation that the defenders
and Mr Gordon conspired to harm Mr Kidd by fraudulently causing him to sign up to a
disadvantageous agreement with a third party, the relevance of the fairness of the
transaction to the merits, to causation, and to loss, is obvious.
The sixth ground of appeal - factual causation
[90]
Mr Kidd contends that, if it is accepted that there was an unlawful means conspiracy,
it resulted in significant loss to him. Determination of whether there is a causal link between
wrongdoing and claimed loss or damage can be resolved by the application of a
"counterfactual" or "but for" test. Normally this will involve consideration of what would
have happened had the alleged wrongdoing not occurred. The purpose of an award of
damages is to put the individual in the position he would have been in if there had been
40
no wrongdoing, at least so far as monetary compensation can do so. If the answer is that
the conduct complained of made no difference and any harm would have happened
anyway, the general rule is that the wrongdoer is not responsible for the ultimate outcome
and no damages are payable.
[91]
A particular feature of the present case is that, if there was a conspiracy of the kind
claimed, at the time Mr Kidd was unaware of it, and it did not influence his conduct; and
furthermore, it has not been established that it had any impact on the nature and terms
of the transaction entered into by Mr Kidd and ITS with Lime Rock. Thus the normal or
traditional approach will not avail him. Therefore the dispute between the parties on this
issue relates to the question which should be asked. For Mr Kidd it was contended that it
should be - what would he have done had there been wrongdoing of the kind claimed but
he discovered it or it was disclosed to him before the agreement was signed? In evidence
he stated that in that event he would have pulled out of the proposed transaction with Lime
Rock and so would have retained a company which he maintained was extremely valuable
at that time.
[92]
While it was suggested that this evidence was unchallenged, our attention was
drawn to a passage in which it was put to Mr Kidd that he would have been unconcerned
if he had discovered that Mr Gordon had given advice to Lime Rock on issues such as
stamp duty. In any event, the contrary position was that the correct counterfactual is
that the transaction proceeded but with no wrongdoing. Before the judge, two slightly
different scenarios were advanced in relation to that. Lime Rock contended that the
correct assumption was that Mr Gordon had made the proposal for his role and that of
LC, but that Mr Kidd objected and so the transaction proceeded without either P&W or LC.
LC contended that the correct approach was that the transaction proceeded without the
41
involvement of Mr Gordon, with either LC or another firm representing Lime Rock. In
agreement with the judge, we do not consider that anything turns on which of these
alternatives is adopted.
[93]
In submissions to the judge all parties referred to the decision of the Judicial
Committee of the Privy Council in Primeo Fund. Before this court counsel for Mr Kidd
submitted that the decision was of little assistance. To the extent that it might be relevant,
he suggested that the reference in that case (at paragraph 63) to what would have happened
had the wrongdoer "given a true account of the actual position" supported the contention
that the correct counterfactual question in this case was - what would have happened had
the wrongdoing been disclosed? The evidence illustrated that the existence of the conflict
was toxic and was itself a wrong. As the true situation had been misrepresented, it was that
failure to disclose which provides the foundation for the counterfactual. Proceeding on the
basis that there had been no such failure would favour the fraudster. In cases of fraud the
court should not reconstruct what parties would have agreed had there been no deception
(Smith New Court Securities).
[94]
The defenders relied on a passage in paragraph 63 of Primeo Fund. The "but for"
analysis requires asking what the position would have been if the relevant wrongdoing (the
Ponzi scheme under scrutiny) had not been carried on at all. Here the complaint is that the
defenders combined with Gordon in a scheme to damage Mr Kidd; the alternative is that
there had been no such conspiracy.
[95]
The judge relied on the same passage in Primeo Fund. We agree with his analysis
on this matter. Mr Kidd's argument proceeds on the basis that there would have been
wrongdoing and the conjecture that at some point prior to completion of the transaction it
would have been disclosed to or discovered by Mr Kidd. That is not the correct approach.
42
The proper counterfactual is one that examines what would have happened if there had
been no wrongdoing. In the present case that requires consideration of what would have
occurred if Mr Gordon, who is an alleged, arguably the primary, conspirator, had absented
himself from the transaction at the outset to avoid any situation of conflict. That seems to us
to fit best with the decision in Primeo Fund. The judge held that on that analysis the
transaction would have proceeded with Mr Allan of P&W representing Mr Kidd and ITS,
and either LC or another firm representing Lime Rock.
[96]
At paragraph 125 of his opinion the judge set out the basis for his conclusion that
the deal between ITS and Lime Rock would have gone ahead in the absence of wrongdoing
by the alleged conspirators. The relevant factors included:
(i)
the clear desire by those running ITS for an equity investment in the company
to enhance its value against a backdrop of the company, absent a deal, being at
risk of breaching its covenants to the bank,
(ii)
the lack of any other interested investor at a more favourable level of offer
than Lime Rock,
(iii)
the deal fulfilled Mr Kidd's aims, including retention of overall control of ITS,
(iv)
the terms of the deal were consistent with reasonable expectations for a private
equity investment, and
(v)
the absence of any reservations about the deal expressed by Mr Kidd at the
time it was completed.
[97]
These factors support a conclusion that the transaction would have been entered
into absent any wrongdoing. As Lord Sumption put it in Versloot Dredging at paragraph 54:
"If [the claiming party] would have done the same thing even in the absence of the
misrepresentation, a claim based on it will fail". The judge found that Mr Kidd would have
43
entered into the transaction absent any unlawful means conspiracy. On that basis the
straightforward outcome is that he has failed to establish that the alleged wrongdoing
caused the claimed loss. This is hardly surprising given that it cannot be said that anything
done by any of the alleged wrongdoers influenced Mr Kidd's conduct or changed the terms
of the transaction.
[98]
For completeness it can be noted that counsel for Mr Kidd's reliance in this context
on the decision in Smith New Court Securities is misplaced. That case addressed the separate
question of the correct measure of damages after it was established that a bargain was
fraudulently induced, and in particular that it need not be constrained by a date of
transaction rule, nor the foreseeability of the claimed losses. It did not extend recovery to
loss not caused by the wrongdoing. The sixth ground of appeal is rejected.
Ground of appeal 7
[99]
At paragraphs 126 to 139 of his opinion the judge proceeded on the hypotheses
that, contrary to his earlier findings, Mr Kidd had succeeded on the merits, and that the
appropriate counterfactual was that he had discovered Mr Gordon's true position before
the transaction was concluded and had not gone ahead with it. The judge found that, even
making those assumptions, the pursuer had not suffered any loss that he would not have
suffered in any case.
[100]
In our opinion, in assessing whether Mr Kidd had suffered a loss the judge was not
bound to confine himself to an examination of whether immediately after the transaction
he was worse off financially than he was immediately before it. We agree with the judge
(paragraph 126) that, properly read, Smith New Court Securities Ltd is not authority for the
existence of a strict and inflexible rule that damages must be assessed as at the date of
44
commission of the wrong. We also agree with him (paragraph 128) that the compensation
principle is one of general application. In terms of that principle, the fundamental question
is whether Mr Kidd suffered a loss by entering into the transaction (Livingstone v Rawyards
Collieries, Lord Macnaghten at page 431; Smith New Court Securities, Lord Steyn at page 382;
Downs v Chappell, Hobhouse LJ at page 434; The Golden Victory Lord Bingham at
paragraph 12, Lord Scott at paragraphs 32 and 38, Lord Carswell at paragraph 63,
Lord Brown at paragraphs 78 and 80; Crimond Estates Ltd v Mile End Developments Ltd
[2021] CSOH 26, Lord Tyre at paragraphs 53 - 56). Damages are intended to compensate real losses
which have actually been sustained, not notional or hypothetical losses (Haberstitch,
Lord Cameron at page 13; Kennedy v Van Emden [1996] PNLR 409, Nourse LJ at page 414).
[101]
Given ITS's trading and financial position at the time of the sale and soon after it,
culminating in its entry into administration three and a half years later with its shares
becoming worthless, the judge was right (paragraphs 128 to 129) to be astute not to examine
only a snapshot of the position as at the date of the sale. He was correct to be wary of
compensating Mr Kidd for losses which he would have incurred even if there had been no
wrongdoing. At the very least, it cannot be said that the judge was plainly wrong in taking
the approach that he did.
[102]
The judge carefully assessed the evidence about ITS's financial position from the
time of the transaction until its entry into administration. He reviewed the evidence relating
to ITS's difficulties at paragraphs 131 to 138. He found that many of the difficulties had their
origins before completion of the transaction. He held that the circumstances which resulted
in the decline of ITS's business were not caused or materially contributed to by its entering
into the transaction with Lime Rock; and that it was unlikely that the difficulties would have
45
been avoided by a trade sale prior to their occurrence. He found (paragraph 139)
that Mr Kidd sustained no loss which he would not have sustained if there had been no
transaction. In our view the judge was entitled to make all of the findings which he made.
He provided clear and adequate reasons for making them. It cannot be said that he was
plainly wrong to make those findings.
[103]
It follows that ground of appeal 7 has no merit.
Ground of appeal 8
Introduction
[104]
At paragraphs 140 to 178 of his opinion the judge proceeded on the hypotheses
that, contrary to his earlier findings, (a) Mr Kidd had succeeded on the merits; (b) that the
appropriate counterfactual was that he had discovered Mr Gordon's true position before
the transaction was concluded and had not proceeded with it; and (c) that his loss was to
be assessed as at the date of completion of the transaction. The judge held that on that
scenario (i) the fraudulent concealment ought to be taken into account when valuing the
shares immediately after the transaction; (ii) Mr Kidd was not precluded by the doctrine of
reflective loss from claiming any loss in the value of his shares which had occurred because
of the fraud; (iii) the value of Mr Kidd's shares before the transaction was $101 million;
(iv) the value of his residual shareholding immediately after the transaction was (a) at least
$91 million if no account was taken of the fraud, and (b) $77.8 million if account was taken
of the fraud; (v) as $23.2 million (the difference between $101 million and $77.8 million) was
less than the aggregate of the $10 million cash payment made to Mr Kidd and the settlement
sum of $24.5 million he received from the P & W action, he had suffered no loss. There was
46
no challenge to the judge's conclusions concerning (i), (ii) and (iii). The thrust of the attack
was that he had erred when determining values (iv)(a) and (b).
Post-transaction value, no account of fraud
[105]
At paragraphs 158 - 167 the judge discussed the post-transaction value of Mr Kidd's
residual shareholding if no account was taken of fraud. There were only three areas of
contention. The first issue was the allocation of value between his ordinary shares and Lime
Rock's A ordinary shares. The judge attributed 60.5% of the value of the whole ITS
shareholding to Mr Kidd's shares (paragraph 159). The second issue was the appropriate
discount for the reduction in Mr Kidd's total control (as sole shareholder) to control as a
majority (66%) shareholder. Mr Thornton had proposed a 30 - 40% discount, whereas
Mr Indge considered that a 10% discount was appropriate. The judge was satisfied that
Mr Indge's evidence on this issue should be accepted, for the reasons he set out at
paragraph 163. Mr Kidd does not challenge the judge's decision on either of those issues.
The third issue concerned the appropriate treatment of Lime Rock's cash injection. The
judge discussed this at paragraphs 164 - 165. In their reports, both Mr Thornton and
Mr Indge had simply added the cash injection to the equity value of the shares (in
Mr Thornton's case he used a figure of $43.6 million rather than $45 million to take account
of deal expenses). However, during their evidence both Mr Thornton and Mr Indge
acknowledged that consideration ought also to have been given to the additional value
attributable to the shares because of the business opportunities created by the finance
injection. While they were not in a position at the proof to quantify the extent of the
additional value, the judge was satisfied that a method which simply added the cash
injection without taking account of expected returns undervalued the shares. If the
47
undervaluation was ignored, the post-transaction value of Mr Kidd's 66% holding was
$78.75 million (paragraph 166). On that basis, once account was taken of the $10 million
cash receipt, Mr Kidd would have suffered a loss of $12.5 million on the transaction. That
suggested to the judge that the $78.75 million figure was too low. Mr Kidd's advisers had
been of the view that he had got a good deal. In the course of negotiations they had carried
out numerous modelling exercises for him and ITS in order to assess the value of the
company. Having regard to that and to the consensus of the experts that there had been
an undervaluation of the value of the cash injection, the judge found (paragraph 167) that
the post-transaction value of Mr Kidd's 66% holding would have been at least $91 million,
ie the pre-transaction value of his 100% holding less the $10 million cash he had received.
[106]
Counsel for Mr Kidd submitted that the judge ought to have found that the
post-transaction value of Mr Kidd's shares was $78.75 million. He maintains that it was
plainly wrong for the judge to take the course which he did in paragraph 167. There was
no proper evidential basis to support it.
[107]
We reject those submissions. In this part of his opinion the judge required to assess
the value of Mr Kidd's shares after the transaction leaving fault out of account. He had
evidence indicating that they were worth at least $78.75 million, but that that figure was
likely to be an undervaluation because the effect of the cash injection had been undervalued.
In those circumstances, there was a good reason to cross-check the figure in light of the
other evidence which he had heard. Mr Kidd was a shrewd businessman, and he was ably
advised by professionals who had modelled what was proposed and who believed that he
was getting a good deal. It was open to the judge to consider whether it was likely that
Mr Kidd would have entered into the transaction if he expected to make a loss. In our
view, in the whole circumstances the judge was entitled to conclude that the value of
48
Mr Kidd's shares immediately after the transaction was at least $91 million - the value of
his whole shareholding immediately prior to the transaction ($101 million) minus the
$10 million cash he received. It cannot be said that he was plainly wrong to reach that
conclusion.
Post-transaction value, account taken of fraud
[108]
At paragraphs 169 - 173 the judge discussed the post-transaction value of Mr Kidd's
residual shareholding if account was taken of fraud.
[109]
Mr Kidd's primary position was that the shares were worth nothing, the suggestion
being that no-one would be prepared to pay anything for them once wrongdoing was
disclosed. The judge rejected that contention. In his view it was not supported by the
evidence, and indeed conflicted with the common view of the experts that even tainted
assets have a value. It also ignored the very substantial cash value of the company's
assets, and the existence of Lime Rock as a potential purchaser whose valuation would
not be affected by their own wrongdoing. Our attention was directed to a passage at
paragraph 6.26 of Mr Thornton's supplementary report where he had stated: "I do not
consider that it is reasonable to conclude that a third-party purchaser would have any
interest in acquiring Mr Kidd's shares". That was said to be supported by Mr Kidd's
evidence that if he had known of the fraud he would have called off the deal, and by the
evidence of Mr Reynolds that any suggestion of dishonesty would give him "pause" before
engaging in a transaction.
[110]
This selective highlighting of parts of the evidence does not persuade us that the
judge was plainly wrong to reject the proposition that Mr Kidd's shares had a nil value.
During their evidence Mr Thornton and Mr Indge both accepted that even tainted assets
49
have a value. The extent to which fraud might affect value was likely to depend upon
the nature and consequences of the wrongdoing and how those matters would be viewed
by a potential purchaser. Here, part of the relevant factual matrix would be that the
hypothesised wrongdoing had no material effect on the terms of the transaction, which were
entirely standard for private equity investments such as this one. Moreover, the value of the
company's assets was very substantial. In addition, Lime Rock was a potential purchaser of
Mr Kidd's shareholding and was unlikely to be deterred by a fraud in which it was said to
have been a participant.
[111]
Having rejected the nil value contention, the judge examined the evidence as to
value (paragraphs 170 - 173). Mr Thornton suggested that an appropriate comparison was
with the higher level discounts (70 - 80%) applied in HMRC tax valuations for the challenge
of realising the value of a small minority shareholding in a private company. For his part,
Mr Indge opined that there would have been a market for a deal at the right price
notwithstanding the allegations of fraud. The judge did not find Mr Thornton's comparison
of any assistance. It assumed that the wrongdoing here would have a very significant
impact on the marketability of the pursuer's shares. The suggested reduction would value
ITS's shares at a range well below their cost (floor) valuation. However, the hypothetical
purchaser would be aware that the wrongdoing had no material effect upon the terms of
the deal, and that the terms were fairly standard for a private equity transaction of this type.
Doing the best he could on the material before him, the judge concluded that the price
offered by the purchaser would be somewhere between the post-transaction value with
no allowance for fraud ($91 million) and a pro rata share of the value of the company on
the cost approach ($64.6 million). He adopted the mid-point of those figures, $77.8 million.
When the cash receipt of $10 million was added, Mr Kidd's loss was $13.2 million
50
($101 million - $87.8 million), which was less than the sum already recovered in the P & W
action.
[112]
Before this court counsel for Mr Kidd submitted that the judge's approach was
plainly wrong. It was not an approach which was available because it had not been put
to Mr Thornton or Mr Indge. If it had been open to the judge to use upper and lower
parameters, the upper parameter ought to have been $78.75 million, not $91 million. He had
also erred in treating the $64.6 million cost basis value as a floor value because disclosure of
the fraud might have reduced that value. He ought to have accepted Mr Thornton's
evidence that an appropriate discount was 70 - 80%. If 80% had been applied, the value of
Mr Kidd's shares would have been $17.5 million.
[113]
We are not persuaded by these submissions. The judge required to estimate as best
he could on the material before him the effect of the wrongdoing on the value of Mr Kidd's
residual shareholding. Ultimately, it was very much a question for his determination. It
was for him to decide which evidence to accept and which to reject, and the inferences
which could reasonably be drawn from the evidence which he accepted. It was common
ground that the effect on value which wrongdoing would have in any particular case would
depend upon the nature and consequences of the wrongdoing. It was also common ground
that the hypothetical purchaser would have full knowledge of the facts. He would be aware
of the precise nature of the wrongdoing and its consequences. He would be aware that the
wrongdoing had no material impact upon the terms of the deal, and that the terms were
fairly standard for a private equity transaction of this type. It is clear that Mr Thornton
treated the nature and gravity of the wrongdoing and its consequences as having a very
dramatic effect on value - justifying a reduction of 70 - 80%. It is also clear that the judge
did not accept that a reduction of anything like that order was appropriate. That was a
51
conclusion he was entitled to reach. It is a conclusion which we find wholly unsurprising
given that any wrongdoing had no material influence on the terms of the deal, the terms of
which were fairly standard for a private equity transaction of this type. The judge rejected
Mr Thornton's analogy with a sale of a minority shareholding in a private company, which
was the basis for his 70 - 80% reduction. He gave intelligible and persuasive reasons for
doing so. Having rejected a reduction of that order as being excessive, he endeavoured to
assess a more appropriate reduction. Two clear parameters of value were apparent to him.
The upper one was the post-transaction value of Mr Kidd's shares leaving fraud out of
account ($91 million). The lower one was the floor value of that shareholding on the cost
approach ($64.6 million). He considered that a reasonable approach was to take the
mid-point value, $77.8 million. Counsel for Mr Kidd contended once again that the upper
parameter ought to have been $78.75 million rather than $91 million. We have already
explained why we have rejected that contention. He further submitted that the judge erred
in treating the cost basis as a floor value, because fraud could have reduced that too. The
difficulty with that submission is that both experts spoke to the cost basis providing a floor
value, and neither deponed that the floor value would be lowered by the wrongdoing said
to have occurred here. It is far from clear to us that the value of the company's underlying
assets would be affected by wrongdoing of that nature. While it may be inferred from
Mr Thornton's suggested reduction of 70 - 80% that he considered that it would be, the
judge rejected that evidence, for good reasons. There was no other evidence supporting a
reduction below the floor value. In our opinion it was open to the judge to employ the
floor value as his lower parameter, and to adopt the mid-point figure between it and the
post-transaction value without fraud as the post-transaction value of the Mr Kidd's shares
52
taking account of the fraud. We are not convinced that these conclusions were plainly
wrong.
[114]
It follows that the judge was correct to determine (paragraph 173) that Mr Kidd's
hypothesised loss on the transaction of $13.2 million has already been fully recovered by
him in the P & W action. Ground of appeal 8 is not well founded and we reject it.
Disposal
[115]
For these reasons the reclaiming motion is refused. We adhere to the judge's
interlocutor of 8 March 2024.
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