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OUTER HOUSE, COURT OF SESSION
[2024] CSOH 28
CA163/19
OPINION OF LORD TYRE
In the cause
ROBERT GORDON KIDD
Pursuer
against
(FIRST) LIME ROCK MANAGEMENT LLP; (SECOND) LIME ROCK MANAGEMENT LP;
(THIRD) LIME ROCK PARTNERS V, LP; (FOURTH) HAMISH HECTOR LAWRENCE
ROSS; (FIFTH) JASON SMITH; (SIXTH) LEDINGHAM CHALMERS LLP; (SEVENTH)
MALCOLM LAING; and (EIGHTH) RODNEY ALPHONSIOUS MAGILL HUTCHISON
Defenders
Pursuer: Smith KC, Anderson, Reid; Harper Macleod LLP
First to Fifth Defenders: McBrearty KC, McKenzie KC, Roxburgh; Gilson Gray LLP
Sixth to Eighth Defenders: Dean of Faculty (R Dunlop KC), Paterson KC, Boffey; CMS Cameron
McKenna Nabarro Olswang LLP
8 March 2024
Table of contents
Paragraphs
Introduction
The Lime Rock transaction
Origins and development of ITS
Private equity investment
Negotiation and conclusion of deal with Lime Rock
The actings of Ken Gordon
Post-transaction events
The pursuer's contention
3
subscribed $45 million cash and received a 34% shareholding in ITS. A further cash
payment of $10 million was made by Lime Rock to Mr Kidd. The sixth defenders ("LC") are
a firm of solicitors in Aberdeen who acted on behalf of Lime Rock in the transaction.
In this action Mr Kidd claims that the defenders engaged in a fraudulent conspiracy
to induce him to enter into the agreement on the false basis that it was a fairly conducted
arm's length transaction, when in fact the solicitors instructed to act on behalf of Mr Kidd
and ITS were providing advice and information to Lime Rock. Mr Kidd states that as a
consequence of this conspiracy he entered into a transaction, on terms unfavourable to him,
which he would not have entered into at all had he known of the fraud. He seeks an award
of damages of $150 million.
Mr Kidd's assertions are founded upon the actings of Mr Ken Gordon, then a partner
in the firm of Paull & Williamsons LLP ("P&W") who were instructed to act on behalf of ITS
and Mr Kidd in the transaction. At the time when negotiations between ITS and Lime Rock
began, both were existing clients of P&W. Mr Gordon was the partner responsible for Lime
Rock's business and was familiar with their standard demands in relation to vendor due
diligence. On his recommendation, Lime Rock instructed LC to act for them in the ITS
transaction. The individual solicitors at LC responsible for carrying out Lime Rock's
instructions were Mr Malcolm Laing, the seventh defender, and Mr Rodney (Rod)
Hutchison, the eighth defender. However, with a view to saving time and expense, but with
insufficient regard to conflict of interest, Mr Gordon retained an advisory role in explaining
to Messrs Laing and Hutchison and to the Lime Rock personnel how the vendor due
diligence documentation produced by Mr Allan on behalf of ITS differed from Lime Rock's
usual demands. On occasions he gave advice to Lime Rock and also disclosed potentially
sensitive information to them and to LC. None of this came to Mr Kidd's notice until many
5
The Lime Rock transaction
Origins and development of ITS
The business of ITS was created in 1986 by Mr Kidd. At all times until the Lime Rock
transaction the business, which was incorporated in 2003,
was in his sole ownership.
Having begun as an inspection and repair operation in Aberdeen, it expanded during
the 1990s into buying and selling oil field equipment. Mr Kidd exploited a lucrative market
selling used North Sea oil field equipment to operators in the United States and the Middle
East. In about the late 1990s the company moved into pipe and tool rental and longer term
leasing, which became its principal activities.
By the early 2000s Mr Kidd had expanded the business of ITS abroad. Operations
were begun in Dubai, followed by China, Egypt, Venezuela, Pakistan, India and elsewhere.
The business structure varied from country to country: in some locations ITS operated
through a subsidiary company; in others it had a local partner or joint venture. Day to day
management of subsidiaries was carried out by local general managers. A group structure
was created with the various subsidiaries being wholly or partly owned by ITS, which was
itself wholly owned by Mr Kidd. During its period of growth ITS obtained loan funding
from the Bank of Scotland as and when borrowing was required.
In 2007 the ITS group had turnover of $102 million and EBITDA (earnings before
interest, tax, depreciation and amortisation) of $29 million. Mr Kidd, who was resident in
Cyprus, began to think about realising some or all of the value of his interest. He was aware
however that the rapid growth of the business had resulted in a need to improve its
management systems. There was also a desire for better co-ordination among subsidiaries
operating in different countries. By making such improvements, the value of the company
could be further enhanced. Mr Kidd did not regard himself as the right person to make
6
these changes, and turned his attention to bringing in a CEO to address the management
issues and allow him to step back from the day to day running of ITS, possibly with a view
to selling up if an appropriate offer was received.
Mr Kidd had from time to time received business and financial advice from
Mr Jeffery (Jeff) Corray, a partner of KPMG in Aberdeen. Mr Corray was head of KPMG's
M&A oil and gas services business, and was highly regarded in the oil industry. Mr Kidd
persuaded Mr Corray to accept appointment as chief executive officer of ITS with effect from
1 October 2007. The purpose of Mr Corray's appointment was to grow the business and its
value, partly but not exclusively with a view to a sale. Mr Scott Milne, who had been a
director in Mr Corray's corporate finance team at KPMG, joined ITS at the same time, as a
director with responsibility for corporate development.
Private equity investment
Mr Corray shared Mr Kidd's view that the business had scope for further growth,
and had not yet seen a full return on the capital invested. By this time however its bank
debt was high: in early 2008 borrowing amounted to $175 million. The company also had
significant capital expenditure ("capex") commitments in various territories. A further
increase in borrowing was not prudent; in any event the financial crisis was under way and
it was not certain that increased bank finance would be forthcoming. The alternative means
of funding was to bring in an equity investor to contribute capital in exchange for a minority
shareholding. Mr Corray had a friend who worked at the private equity investor 3i, and he
opened preliminary discussions to see whether 3i would be interested in a quick deal.
Discussions were initially positive. 3i proposed to invest $100 million in return for a 31.5%
shareholding in ITS.
7
In February 2008 Mr Corray, on behalf of ITS, contacted Scott Allan, the P&W
partner in charge of the firm's relationship with ITS, to instruct him to provide legal support
for ITS in relation to the prospective private equity investment, and in particular the
indicative offer made by 3i. P&W were engaged to provide legal advice in relation to a sale
of shares by Mr Kidd and an investment into ITS. Working with Mr Milne, Mr Allan began
to prepare the legal due diligence documentation requested by 3i's solicitors. Subsequently,
however, 3i made a revised, less favourable indicative offer which was not acceptable to
Mr Kidd, and discussions with 3i terminated.
P&W sent separate letters of engagement to Mr Kidd and to ITS. In the letter to
Mr Kidd, P&W accepted instructions to act in connection with the proposed sale of part of
his interest in ITS to a third party investor and the rollover of the balance of his shareholding
into a new entity to be owned by him. In the letter to ITS, P&W accepted instructions to
assist the company in relation to all UK legal aspects of its planned corporate restructuring
including assistance in relation to any disclosure exercise being undertaken. Both letters
stated that it was assumed that Mr Corray and Mr Milne had authority to give instructions
to P&W on behalf of Mr Kidd or ITS, as the case may be.
After the 3i deal had fallen through, Mr Corray and Mr Milne, acting on behalf of
ITS, engaged Simmons & Co International Ltd ("Simmons"), a firm of investment bankers
based in Aberdeen and specialising in provision of corporate finance advice in the oil and
gas industry, to assist in identifying and commencing a dialogue with parties who might be
interested in an equity investment in ITS. In September 2008 Simmons prepared a briefing
document for what had become known as Project Indigo which was sent to potential
interested parties. At around the same time KPMG prepared a vendor-initiated financial
due diligence report on ITS and its subsidiaries.
10
report: "Spoke to Bob. He said he is of the view to tell them to take a running jump! He was
not for even entertaining a discussion with [Lime Rock]".
On 7 January 2009, Lime Rock submitted a further revised indicative proposal. The
offers of $10 million cash out to Mr Kidd and $50 million into the company remained the
same, but the investment was now to represent 30% of the company. Lime Rock's shares
would be convertible "A" ordinary shares attracting an annual "yield" of 10%, redeemable
by either party after five years, and with a liquidation preference. The company would have
an option to pay the yield in cash or in shares. After some discussions, Mr Ross reported to
Lime Rock on 12 January 2009 that at last they had "some agreement" with ITS. A further
indicative proposal was sent, addressed to Mr Corray, on 12 January. The offer was now to
represent 27.5% of the equity in ITS, and there was a new "drag right" entitling Lime Rock
as minority shareholder, in specified circumstances, to require the majority shareholder to
join it in a sale of the company. The yield on the "A" shares remained the same but the
option to pay in shares was removed and replaced by an option to roll up the cash payment
at 10% compound interest. The liquidation preference was also maintained but there were
now to be catch-up rights for the ordinary shareholder(s).
The 12 January offer was favourably received by ITS. Mr Milne emailed a copy of
Lime Rock's letter of intent to Mr Kidd, commenting "Any questions please give me a
buzz". P&W were instructed to commence work on a vendor legal due diligence report. It
was at this point that Mr Gordon's participation began, and I return to consider this in detail
below.
On 22 January 2009 Mr Allan sent a letter of engagement, addressed to Mr Kidd and
ITS, setting out the scope of P&W's work as follows:
12
else who may have an interest in the matter is recommended to obtain separate legal
advice.
Our remit will include the following:
- reviewing, advising on and adjusting the terms of an investment agreement,
articles of association, share purchase agreement, disclosure letter, service
contracts and ancillary documents such as minutes, resolutions, stock transfer
forms and Companies House forms.
- attending completion
I understand that Paull & Williamsons have been instructed by you to carry out legal
due diligence and prepare a legal due diligence report. We shall have no
responsibility for any due diligence matters but will read the draft report and liaise
with Paull & Williamsons for the purposes of and to the extent necessary to advise
you properly on warranties and indemnities."
During February 2009 work was carried out by P&W and LC on legal due diligence
and the drafting and revision of the formal documents. Again I return to this in more detail
below. Mr Ross was attempting to obtain approval of the deal by Lime Rock V's investment
committee. This was not easy as some members of the committee had strong reservations
about it. When Mr Ross did come back to Mr Corray on 26 March 2009, it was with a
revised proposal in terms of which Lime Rock would invest $50 million into ITS and pay
$10 million to Mr Kidd for 35% of equity, a warrant to acquire a further 5%, and two board
seats. Mr Corray replied that they did not have a deal, and for the next month matters
stalled.
In early April 2009 there was further contact between Mr Mike Beveridge of
Simmons and Mr Ross, and between Mr Corray and a representative of the Al Shoaibi
Group who had expressed interest in investing alongside Lime Rock, with the consequence
that on 20 April a revised summary returns analysis prepared by Simmons, showing
projected EBITDA of $60 million for 2009, was provided to Lime Rock. Mr Ross presented a
revised plan to the Lime Rock investment committee, in terms of which the sum invested
13
would be $50 million to ITS, with no cash out to Mr Kidd, for 32% of equity. After
discussion, however, the offer made, through Mr Beveridge, at the beginning of May was of
$40 million for 25.6% of equity, with no cash out. Mr Corray expressed his own and
Mr Kidd's disappointment to Mr Beveridge, who reported this to Mr Ross, explaining that
the "no money out" element was unacceptable in principle. Mr Ross expressed concern to
John Reynolds, Lime Rock's co-founder and managing director, that the deal, about which
Mr Ross remained enthusiastic, might have been lost. Mr Reynolds promised to obtain the
investment committee's approval of an offer of $45 million with a further $5 million cash out
to Mr Kidd. Such an offer was duly made by Mr Ross to Mr Corray on 1 June 2009.
Mr Corray emailed it to Mr Kidd the following day. On 8 June, Mr Beveridge emailed a
response to Mr Ross raising a number of points for discussion. At a meeting on 10 June,
most of Mr Beveridge's points were accepted by Lime Rock, although the cash out to
Mr Kidd remained $5 million. A revised indicative proposal was sent by Mr Ross to
Mr Corray on 16 June.
On 18 June 2009, TA Associates reappeared, unsolicited, with a new offer. The
proposed investment was $60 million into ITS with $40 million cash out to Mr Kidd, in
return for a 40% holding in convertible shares. The conditions included an annual coupon
of $12.5 million which would roll up during the period of investment. Mr Corray regarded
the offer as comparable with that of Lime Rock; Mr Kidd would receive more cash but
would relinquish a larger shareholding. After some initial discussions the offer was
amended to be for a 45% holding. The proposal was welcome in that ITS could use it to put
some pressure on Lime Rock to improve their offer. In an email dated 4 July 2009 to
Mr Corray and others, copied to Mr Kidd, Mr Beveridge expressed his view:
14
"If the $40m cash out on offer plus the additional $15m equity injection is very
important and very attractive I would invest more time with TA next week with a
view to running with them and risk losing LR's offer.
If the additional equity/cash is not very important and/or you need a lot of assurance
that ITS can access new equity very soon I would shut down TA and concentrate on
closing out LR because it removes execution risk and involves a known investor with
strong reputation. As you say Jeff the total dilution with TA is much greater because
of the additional capital involved and today's suppressed valuations. Therefore a
smaller equity round will leave you all with a greater potential upside down the
line."
Messrs Beveridge, Corray and Milne had a meeting in London with TA representatives. In
the end, however, the TA offer came to nothing. Shortly after the meeting, TA's co-chair,
Ajit Nedungadi, informed Mr Corray that TA would not be proceeding with their proposal
as they were uncertain as to what the future held for ITS in light of the ongoing financial
crisis.
In the meantime, Mr Reynolds and Mr Corray had a forthright telephone discussion,
in the course of which Mr Corray emphasised that any deal with Lime Rock had to release
more cash out to Mr Kidd. Mr Corray was subsequently more specific: the cash out had to
be increased to $10 million. In order to get the deal done, Mr Reynolds agreed. In an email
on 22 July 2009, he reported to Mr Ross and Mr Smith: "Jeff just called. Good news back
from him. He and Bob have agreed to move forward with us." A written offer to this effect
was sent by Mr Ross to Mr Corray on 23 July. After some further negotiation of the terms of
the warranties cap, a revised offer was signed as accepted on behalf of ITS by Mr Corray on
31 July 2009. Mr Corray informed Mr Allan that the deal with Lime Rock was on, and that
they were aiming to close late August. The lawyers re-commenced work, which had been
on hold since March, on the formal documentation.
On 17 August 2009, Mr Allan sent a revised draft share purchase agreement to LC,
reflecting the terms of the July agreement. There followed a period of negotiation of the
15
terms of the agreement, notably in relation to warranties and the terms of ITS's disclosure
letter. Those negotiations were conducted partly by the lawyers in P&W (including
Mr Gordon) and LC, and partly by Mr Corray and Mr Milne for ITS and Mr Ross and
Kris Agarwal, Lime Rock's in-house counsel, for Lime Rock. Of particular concern was the
scope of the warranties to be given by ITS in relation to US trade sanction compliance,
especially as regards business carried on by ITS subsidiaries in Iran. The transaction could
not be settled until the warranties had been agreed, and finalisation of the scope of the
warranties was to some extent dependent upon the due diligence process, which was
incomplete because reports from certain overseas subsidiaries were still awaited. There
were also unresolved issues regarding Lime Rock's entitlement to a forced sale of Mr Kidd's
shares. The terms of the transaction reached a final agreed form on 26 September 2009.
Copies of the signing pages (only) were taken to Cyprus for Mr Kidd's signature by
Stuart Ross (an employee of ITS who was Lawrence Ross's son). Mr Kidd signed inter alia
the signing pages of the investment agreement, disclosure letter, share purchase agreement
and articles of association on 26 September, the other relevant individuals signed, and the
deal concluded. Mr Ross and Mr Saad Bargach, a member of Lime Rock V's investment
committee with extensive oil industry experience, were appointed to the ITS board.
The actings of Ken Gordon
By early 2009, Mr Gordon had been carrying out legal work for Lime Rock for about
ten years. He was the "keeper" of the templates of Lime Rock styles for UK company
investments and share purchases. He had acted on behalf of Lime Rock in many legal due
diligence exercises. As already noted, Mr Ross wished to know whether P&W could act on
both sides of the transaction. On 14 January 2009, Mr Ross emailed Mark Jenkins of the
16
Al Shoaibi Group to inform him that "we have instructed Paull & Williamsons
(Ken Gordon) to start the drafting of legal documents and to co-ordinate legal due
diligence". Mr Jenkins replied that he would very much welcome Mr Gordon acting on
Al Shoaibi's behalf. Mr Ross forwarded Mr Jenkins' email to Mr Gordon who replied to
Mr Ross in the following terms:
"I omitted to remind you yesterday that my role here will be `unofficial' counsel to
Lime Rock and that for external consumption and to preserve my practising
certificate I was going to ask Malcolm Laing to front the investment side. Scott
[Allan] will produce the documents which will be in normal LRP style for the
investment and an SPA in a P&W `house' style which we will present to Malcolm.
He will negotiate these on behalf of LRP (and Shoaibi) but I will direct him as to
what is customarily acceptable to LRP and what is not and be responsible for
keeping him on track. I am hoping that we did have that conversation and that I did
not just imagine it. Can you just confirm we did and that is agreed so that I can brief
Malcolm and respond to Mark Jenkins."
The references in this email to Mr Gordon being "unofficial counsel to Lime Rock" and to
Mr Laing "fronting" the investment side are strongly founded on in the pursuer's case.
On 15 January 2009, Mr Gordon emailed Mark Jenkins of the Al Shoaibi Group,
setting out how he envisaged that matters were going to be arranged (references to "Indigo"
are to ITS):
"I don't know if Lawrence has told you that as well as acting as Lime Rock's UK
counsel, we also act for Indigo. Whilst in some ways that is helpful, it does also
present some challenges.
One of my partners, Scott Allan, and his team have already carried out a good deal of
preparatory work in assembling the legal due diligence information on behalf of ITS.
We have been looking at how best to execute the transaction taking best advantage of
resources, existing knowledge of client practices and preferences and work already
carried out in order to attempt to mitigate transaction expenses and meet client
expectation on timetable, but avoid conflicts of interest.
What we have proposed to Indigo and Lime Rock, and which has been accepted by
them, is that legal due diligence is effectively done as a vendor diligence report,
prepared by this firm and addressed to Lime Rock, and assuming you are also
comfortable with this approach, the Shoabi [sic] investor entity. Much of the
diligence work will be carried out by Scott's team, as they are already familiar with
17
the Indigo set-up, but I will take on a supervisory/scrutineer role, reviewing their
work, asking questions and issuing further requisitions etc.
The main transaction documents, i.e. sale and purchase agreement, tax deed,
investment agreement, new articles of association will be prepared by Scott and
`vendor drafts' but the SPA will be based on a precedent form approved by me and
the investment documents will follow the Lime Rock house styles.
The purchaser/investor side negotiation and revision of these drafts will be carried
out by another firm of Aberdeen lawyers so that they are subject to independent
scrutiny and checks. I have arranged for this role to be taken on by Malcolm Laing,
Head of Corporate at Ledingham Chalmers, another Aberdeen firm. Malcolm is an
experienced and well respected lawyer. I would expect to play a supporting role in
advising Malcolm on usual Lime Rock practice on these documents to avoid any
time and expense being wasted on re-invention of the wheel..."
A meeting to discuss vendor due diligence and other matters was held at P&W's
offices on 19 January 2009, attended by Mr Milne and Stuart Ross of ITS, Messrs Gordon and
Allan of P&W, Ms Jenny Simpson of Simmons, Mr Laing of LC and Mr Smith of Lime Rock.
A preamble to the meeting minute stated:
"Due to P&W conflicts, Malcolm Laing is to act for LRP in the negotiation of
investment docs. Scott Allan will compile main vendor due diligence report for
Malcolm's review. Ken Gordon will be involved throughout and standard LRP
documentation will be used where possible to minimise process duration."
On 21 January, following a meeting with Lime Rock, Mr Gordon sent a note to Mr Allan on
how Lime Rock wanted to handle the legal due diligence report on ITS's foreign
subsidiaries. Mr Allan passed it to Mr Milne, who agreed to the proposed scope, and the
work commenced. As regards the sale and investment documentation, Mr Allan emailed
Mr Milne on 26 January, copied to Mr Gordon, stating:
"Regarding sale and investment docs I've agreed with Malcolm/Ken that the starting
point `Lime Rock house styles' should be used as our starting point (albeit with all
customisation to be done by us for the deal and seller revisals introduced as we see
fit). Malcolm/Ken are discussing to ensure the correct starting point. I hope to have
that by mid-week to start properly considering that with you. Again, the intention
here is to streamline the process where we can."
18
On 2 February 2009 Mr Gordon emailed Mr Ross to draw his attention to a possible
means of saving stamp duty (amounting to $50,000) on the share purchase by Lime Rock
from Mr Kidd. Mr Ross replied rejecting the suggestion. In a further email exchange on
3 and 4 February, Mr Gordon queried whether Mr Ross had discussed P&W's fee for the due
diligence exercise with Mr Corray, and also warned Mr Ross to "expect some ear-bashing"
from Mr Corray and Mr Milne regarding the due diligence information being sought from
ITS subsidiaries.
On 17 February 2009, Mr Laing sought an update from Mr Gordon, observing that he
had not heard from anyone for some time. Mr Gordon replied with an update on due
diligence and an indication that Mr Allan was discussing the draft deal documentation with
Messrs Corray and Milne. On 23 February Mr Allan advised Mr Gordon and Mr Laing that
he expected to issue draft investment agreement, articles and share purchase agreement in a
couple of days, and suggested arranging an all parties meeting on the documents. When
Mr Allan duly produced the drafts, Mr Gordon emailed Lime Rock, copying in Mr Laing, to
propose a series of meetings:
"Tuesday, 3 March at 10.00am. Jason, Lynn, Malcolm and Ken.
Thursday 5 March at 9am. Lawrence, Jason, Lynn, Malcolm and Ken - LRP side
pre-meet going into all parties meeting at 10.00am.
As a minimum, Tuesday's meeting should be a page turn to identify and list the
bigger ticket items to create an `agenda' for Thursday's meeting,"
"Lynn" is a reference to Lynn Calder, a member of Lime Rock's deal team in Aberdeen.
Emphasis is placed by the pursuer on Mr Gordon's use of the label "LRP side".
In advance of the all parties meeting, Mr Allan emailed Mr Corray, copied to
Mr Milne, on 25 February noting:
"Gents we will have the meeting here. 10am start.
22
of diligence and disclosure, suggesting on 18 September to Messrs Ross and Smith an
abbreviated procedure for reporting on the terms of ITS's customer and agency contracts.
Finalisation of the terms of the warranties and disclosure letter continued until
shortly before completion, because due diligence reports were still awaited from some of
ITS's overseas subsidiaries. On 22 September 2009, Mr Gordon emailed Mr Hutchison,
copying Mr Laing and Mr Allan:
"I refer to our conversation today and attach some additional warranties that I
consider are required to close the loop on the due diligence, particularly in relation to
the overseas diligence reports. Having said that, the Egyptian report is outstanding,
a note on the ITS operation in Iraq is awaited, the customer contracts review remains
ongoing and whilst the two main LDDR's prepared by P&W have been updated,
these are likely only to reach Lime Rock tomorrow. As a result I suspect Lime Rock
will not want to close the door to further warranties at this stage.
The second document includes as section 3 a list of post-completion actions. I
suggest these be included as a schedule to the Investment Agreement. I would not
propose these as conditions subsequent. They are more of an aide memoire and the
obligation to action these should be of the good faith, reasonable endeavours type
rather than one which failure to achieve renders the Managers and Company in
breach."
These matters were then taken forward by Mr Hutchison and Mr Allan.
On 25 September 2009 Mr Smith emailed Mr Gordon seeking advice in relation to
avoiding payment of stamp duty by Lime Rock on the purchase of Mr Kidd's shares.
Mr Gordon replied, advising that he was unaware of any relevant exemption and noting
that "we have paid stamp duty in the past eg TWMA acquisition". He undertook to ask
someone to look at it, and passed it to a colleague who confirmed that he agreed with
Mr Gordon's view that stamp duty could not be avoided. Later the same day, Mr Gordon
emailed Mr Smith again with detailed comments on ITS's draft disclosure letter. On certain
matters Mr Gordon expressed the opinion that additional specification should be sought
from ITS.
23
No further documentation showing participation of Mr Gordon prior to completion
has been produced.
Two postscripts in relation to Mr Gordon's involvement may be noted here. The first
concerns the circumstances in which many of the emails quoted above came to light. In the
course of the action at Mr Kidd's instance against P&W/BP a number of attempts were made
by the pursuer to recover documents from the defenders by commission and diligence
procedure. Assurances were given on behalf of the defenders that no further documents
were held. However, following an electronic search by the defenders in early October 2016
of inter alia Mr Gordon's email account, the emails quoted were discovered and lodged with
the court in an inventory which, in accordance with usual practice, was labelled "Inventory
Z". In the light of the information thus discovered, the admission of liability for breach of
fiduciary duty was made on behalf of P&W/BP.
The second postscript concerns a complaint lodged with the Scottish Solicitors'
Discipline Tribunal against Mr Gordon by the Council of the Law Society of Scotland,
alleging that he might have been guilty of professional misconduct. After hearing evidence
and submissions, the Tribunal issued a decision dated 26 April 2021 containing the
following finding (paragraph 14.69), in which Mr Gordon is referred to as the Respondent:
"The role the Respondent accepted gave rise to a risk of his having a conflict of
interest. The Respondent did not exercise sufficient caution to prevent that
happening. A conflict of interest did arise. The Respondent provided advice to LRP
when he ought not to have done in the letter of 5 May 2009 [paragraph 38 above],
email of 29 July 2009 [paragraph 39 above] and the emails of 25 September 2009
[paragraph 42 above]."
Having regard to the established facts and the parties' submissions, the Tribunal concluded
that Mr Gordon was not guilty of professional misconduct, but considered that he might be
25
Archer board, resigned from the ITS board to avoid a conflict of interest. He was replaced
by Mr Michael Press as an independent non-executive director. From this time on there was
bad feeling between Mr Kidd and the other ITS board members.
One of the issues that troubled potential buyers of ITS was the group's trading
activities in Iran. An ITS subsidiary, ITS FZE, which was incorporated in Dubai, in turn
owned ITS Kish, a company incorporated in Iran. In 2011, one or other of ITS FZE or ITS
Kish was a party to 14 contracts relating to the supply of equipment and services in
connection with offshore drilling operations in Iran. EU and US sanctions were by then in
force which prohibited certain business operations including supply of oil and gas drilling
equipment to any Iranian entity for use in Iran. Senior counsel's advice was that the entities
carrying on sanctions country trading should be detached from the group. In early 2012
indicative offers to purchase the whole share capital of ITS were made by two private equity
funds, Blue Water Energy and First Reserve. Both offers were conditional upon Iranian
business being carved out of the group prior to purchase. Part of the consideration for
Mr Kidd's equity interest was to be the sanctions country business, for the sale or disposal of
which he would assume responsibility. Nothing came of either of these offers, but they
served to focus the attention of the ITS board on the need to address sanctions compliance
and to withdraw from Iran. The loss of unrecovered debts on eventual withdrawal from
Iran was a contributing factor to ITS's collapse.
In June 2012 Mr Corray resigned as CEO and left the board. Mr Kidd was appointed
CEO on an interim basis pending recruitment of a replacement for Mr Corray. The
company's performance continued to deteriorate and it once again breached its bank
covenants. Lime Rock did not wish to risk further investment. At the banks' instigation, a
27
committed and/or continued, and the defenders' conspiracy to commit fraud in order to
facilitate completion of the transaction would not have come to fruition.
It is further averred that from around November 2008 until completion of the
transaction, each and all of the defenders conspired to present a knowingly false impression
to Mr Kidd that the proposed transaction was being conducted fairly and at arm's length,
with each party represented independently and according to proper professional standards
incumbent on solicitors. They conspired to induce Mr Kidd to enter into the transaction on a
false basis while concealing from him that he was not being independently advised and that
his transactional counterparty was receiving an unfair advantage by way of confidential
information and guidance from Mr Gordon/P&W. Had Mr Kidd been represented by
solicitors who acted in a professionally appropriate manner, it is likely that he would have
been advised that the transaction was highly disadvantageous to him and that his rights as a
shareholder were seriously compromised. Had he been so advised, he would not have
concluded the contract with Lime Rock.
As presented in submissions at the close of the proof, Mr Kidd's case is that he has
suffered loss and damage as a consequence of the defenders' fraud. Lime Rock, through
individuals for whom they were legally responsible (including Mr Gordon), and LC,
through individuals for whom they were responsible, combined to construct the pretence of
a transaction being negotiated by lawyers acting independently of each other and at arms'
length. They contrived to conceal the reality and to maintain the situation of conflict and
breach of fiduciary duty that the involvement of LC was supposed to have prevented. The
harm which the defenders intended was to secure Lime Rock's advantage and the lawyers'
advantage (in the form of professional fees). The individuals concerned maintained the
pretence that they were acting not only honestly, but in a way which would save expense for
28
ITS and Mr Kidd. An apparently free flow of information and inside knowledge at each
stage of the negotiations gave Lime Rock an edge in relation to the technical way in which
the commercial terms of the deal were implemented and the minority protection terms
written into the deal documentation.
Had Mr Kidd known the truth, he would not have transacted with Lime Rock. It
was irrelevant that the deal might have been an objectively commercially acceptable deal.
Although the Pursuer considered that the deal was not good for him, that was not the issue
for determination. His complaint was that he signed up to a deal where the counterparty
was dishonestly using his lawyers behind his back. Had he known this, he would not have
entered into business with dishonest people. He was entitled to reparation or equitable
compensation.
The amount of Mr Kidd's loss was quantified as $144,510,959, being the difference
between (i) the pre-deal equity value, according to expert evidence, of his shares in ITS
($161.85 million), less a net amount recovered from P&W/BP of $17,339,041, and (ii) a nil
value of his shares post-deal.
In summary, the essence of Mr Kidd's case is that he suffered loss and damage as a
consequence of an unlawful means conspiracy to which all of the defenders were party. The
conspiracy was to bring to conclusion a transaction which all concerned knew was not being
conducted at arm's length. The unlawful means was the fraudulent representation to
Mr Kidd that it was being conducted at arm's length with independent professional advice
on each side, when the defenders all knew that as a consequence of Mr Gordon's breach of
fiduciary duty and resultant breach of contract, it was not being so conducted. Intention to
injure Mr Kidd is to be inferred from a common intention to enrich Lime Rock at Mr Kidd's
29
expense. LC were knowing participants but in any event incurred accessory liability for, or
for dishonest assistance with, the deception of Mr Kidd.
Summary of the relevant law
Unlawful means conspiracy
There is much recent English authority on the requirements for establishing unlawful
means conspiracy as a ground of action, but very little in Scotland. It was not suggested by
any of the parties that the English authorities could not be applied to the circumstances of
the present action. It is appropriate therefore to adopt mutatis mutandis the following
English definition provided by Clerk & Lindsell on Torts (24th ed, 2023) at paragraph 23-108:
"This form of the tort is committed where two or more persons combine and take
action which is unlawful in itself with the intention of causing damage to a claimant
who does incur the intended damage. It is not necessary for the injured party to
prove that causing him damage was the main or predominant purpose of the
combination but that purpose must be part of the combiners' intentions."
The authors then observe:
"The main issues raised by this form of the tort are: first, the degree of intention
required, secondly what forms of behaviour will count as unlawful means, thirdly
whether the unlawful means were `indeed the means' by which damage was caused,
and fourthly whether the defendants must know that their means are unlawful."
In relation to those issues, the following propositions may be derived from the
authorities.
(i)
Intention to cause harm, although not necessarily as a main or predominant purpose,
is an essential ingredient; lesser states of mind do not suffice. Awareness that harm may or
Lord Nicholls at paragraph 166), although intention to cause harm may be inferred from a
finding that a conspirator intended to profit from use of the unlawful means at the expense
30
at paragraph 121; Revenue and Customs Commissioners v Total Network SL [2008] 1 AC 1174,
Lord Neuberger at paragraph 221).
(ii)
The conspiracy or "combination" need not be contained in a formal agreement. It is
sufficient if two or more persons combine with a common intention, ie that they deliberately
combine, albeit tacitly, to achieve a common end (Kuwait Oil Tanker Co, above at
paragraph 111).
(iii)
"Unlawful means" in this context include common law and statutory criminal
offences, and civil wrongs such as breach of contract and breach of fiduciary duty (Total
Network above, Lord Walker at paragraphs 89-91).
(iv)
The unlawful means must have directly caused loss to the person injured, rather than
merely being the occasion of such loss being sustained (Total Network above, Lord Walker at
paragraphs 93-96; Lord Mance at paragraph 119, citing the example of a pizza delivery
business which obtains more custom, to the detriment of its competitors, because it instructs
its drivers to ignore speed limits and jump red lights). As Lord Walker observed at
paragraph 96:
"...What is important, to my mind, is that in the phrase `unlawful means' each word
has an important part to play. It is not enough that there is an element of
unlawfulness somewhere in the story."
(v)
The alleged conspirator must have knowledge of the facts which render the means
unlawful, but need not have knowledge that the means are unlawful (Racing Partnership
Ltd v Done Bros Ltd [2021] Ch 233 (CA) at paragraphs 139 and 171). The requirement of
knowledge is satisfied by "blind eye" knowledge (ibid paragraph 159) but only if there is a
suspicion that the relevant facts exist and a deliberate decision to avoid confirming that they
31
do exist (Manifest Shipping Co Limited v Uni-Polaris Insurance Co Ltd [2003] 1 AC 469,
Lord Scott at paragraph 116).
Fraud
As Lord President Carloway observed in Marine & Offshore (Scotland) Ltd v Hill 2018
SLT 239 at paragraph 16:
"Fraud is a `machination or contrivance to deceive' (Erskine, Institute, III.1.16). There
requires to be a false pretence and, in the civil context, resultant loss (a practical
result)."
Fraud may be perpetrated by false representations, concealment of material circumstances
or other means which induce the victim to act to his disadvantage (Reid, The Law of Delict in
Scotland (2022), paragraph 21.63). Fraud is distinguished from negligence by the ingredient
of dishonesty: the misrepresentation or concealment must be intentional and not merely
careless.
The means of assessing whether a person has acted dishonestly was stated in Ivey v
"When dishonesty is in question the fact-finding tribunal must first ascertain
(subjectively) the actual state of the individual's knowledge or belief as to the facts.
The reasonableness or otherwise of his belief is a matter of evidence (often in practice
determinative) going to whether he held the belief, but it is not an additional
requirement that his belief must be reasonable; the question is whether it is
genuinely held. When once his actual state of mind as to knowledge or belief as to
facts is established, the question whether his conduct was honest or dishonest is to be
determined by the fact-finder by applying 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."
Accessory liability/dishonest assistance
summarised the material principles in relation to dishonest assistance as follows:
32
(i)
There must be a trust or fiduciary obligation owed by the fiduciary to the
claimant.
(ii)
There must be a breach of trust/fiduciary duty by the fiduciary, which need
not be dishonest.
(iii)
The defendant must have assisted in or procured the breach.
(iv)
The defendant must have acted dishonestly in providing the assistance.
(v)
For this purpose, deliberately turning a blind eye counts as knowledge.
In Fish & Fish Ltd v Sea Shepherd UK [2015] AC 1229, it was emphasised (paragraphs 21
and 58) that there must be a common design between the defendant and the primary
tortfeasor that the act be carried out.
Scots law recognises a remedy for dishonest assistance in the commission of a breach
of a fiduciary duty: see eg Ted Jacob Engineering Group Inc v Robert Matthew, Johnson-Marshall
breach of fiduciary duty is not however sufficient to render liable a person who is not
himself subject to a fiduciary duty (cf Watson v Fletcher [2023] CSOH 87 and authorities cited
there). In Frank Houlgate Investment Co Ltd v Biggart Baillie LLP 2015 SC 187, a solicitor whose
client confessed to him that he was a fraudster but who did nothing to alert the other party
to the transaction was held to have incurred accessory liability for loss sustained by the
other party as a consequence of having made a further loan to the fraudster. The court was
not unanimous on the basis of the solicitor's liability. Lords Menzies and McEwan held that
by accepting and acting on the fraudster's instruction not to tell the other party of the fraud,
the solicitor became accessory to the fraud. Lord Malcolm rejected accession to the fraud as
a ground of recovery, holding instead that once he became aware of the truth, the solicitor
required to take reasonable care to prevent further foreseeable losses flowing from the
33
fraudulent transaction which he had unwittingly facilitated, but had failed to do so.
Lord Menzies observed (paragraph 36):
"...(A) solicitor acting for the recipient in a transaction which involves the transfer of
money from one party to another secured by a security over heritable subjects gives a
continuing implied representation to the solicitor for the transferor that he is not
aware of any fundamental dishonesty or fraud which might make the security
transaction worthless."
Assessment of witnesses
Factual evidence
Factual evidence took the form of witness statements largely adopted as evidence in
chief, followed by cross-examination. Some statements were agreed by joint minute to be
the evidence of the witness in question. No witness statement was provided by Mr Gordon
until a few days before the proof began, when he provided a statement to the sixth to eighth
defenders. An affidavit dated 14 December 2016 sworn by Mr Gordon in the course of the
P&W/BP action was also produced. The descriptions below are of the witnesses'
occupations at the material time (2008-2009) and not their current positions.
Evidence was led on behalf of the pursuer from the following witnesses:
Ken Gordon;
Robert Kidd;
Jamie Ritchie, director of corporate banking, Clydesdale Bank plc;
Ian Mackie, ITS group financial controller;
Jack Ogston, head of corporate and structured finance for Scotland, Clydesdale
Bank plc;
Patrick Reilly, head of commercial banking for north of Scotland, Bank of
Scotland plc;
35
Ken Gordon. Mr Gordon was a reluctant witness, called to give evidence about events
that had a highly detrimental effect upon his professional career, having resigned as a
member of BP shortly after the documents produced in Inventory Z came to light. I am not
sure that, despite the litigations and disciplinary procedure that have arisen from it, he yet
considers that there was anything untoward in the "facilitative" role that he undertook. He
denied having being influenced by concern that if he had declined to assist he might have
lost an important client. His position then and now is that he did what he did to save time
and expense for all concerned, recognising his special familiarity with Lime Rock's
documentation and standard corporate practices. Despite his reluctance to accept that there
was wrongdoing when he "breached boundaries", I am satisfied that he did his best to tell
the truth and to assist the court. I am unable to accept all of his evidence as to his
motivation for acting as he did, but in other respects I found his evidence to be generally
credible and reliable.
Robert Kidd. Mr Kidd retains a strong and entirely understandable grievance that a
business which he personally built up from scratch to an international group with a value of
many millions of dollars foundered with no return to him other than the $10 million he
received from Lime Rock (and the damages subsequently recovered from P&W/BP). It was
not at all surprising that his sense of grievance coloured his evidence, and I am mindful of
the need to make allowances for that. I acknowledge also that Mr Kidd's expertise lies in
conducting face to face deals with oil industry personnel, and not in the financial
transactions with which this action is concerned. Nevertheless I did not find him to be an
impressive witness. Throughout his evidence he professed himself unable to remember
matters which I would have expected him to remember, and denied the occurrence of events
which were clearly vouched by contemporaneous documents. I do not go so far as to find
37
"If you have a line into someone at HBOS then make the call just to find out how
their process is going and ask how they view the equity. Don't tell them about our
position unless you are questioned in which case your reply is legitimate."
I accept that Mr Ross's initial suggestion was an unethical one. In the end, however, he
decided not to pursue it because he did not consider that it would be proper, and instructed
Mr Smith to approach the matter differently. I do not regard this exchange as casting doubt
upon Mr Ross's credibility as a witness.
Expert evidence
The two principal areas of expert evidence were in relation to (i) the conduct and
usual practice of solicitors and (ii) company and share valuation. The parties' experts in
relation to these matters gave their evidence concurrently, having previously submitted
written reports, held meetings and produced very helpful summaries of areas of agreement
and disagreement. In addition the first to fifth defenders led expert evidence, under
objection, from two witnesses regarding the impact on ITS of sanctions against Iran
introduced between 2009 and 2013 in the United States and the European Union
respectively. Subject to the observations below, I found all of the expert witnesses to be well
qualified to provide reports and give oral evidence on the matters which they addressed.
Evidence was led on behalf of the pursuer from the following witnesses:
Mr Keith Anderson, Solicitor, senior partner, Vialex WS, Edinburgh;
Mr Michael Thornton, partner, Grant Thornton UK LLP.
Mr Anderson's instructions included reviewing the terms of the transaction with a
view to expressing an opinion as to whether they were unusual and/or unusually
disadvantageous to either party. In advance of the proof the first to fifth defenders lodged a
note of objections to the admissibility of Mr Anderson's evidence under reference to the
38
decision of the Supreme Court in Kennedy v Cordia (Services) LLP 2016 SC (UKSC) 59 at
paragraph 44. It was submitted firstly that Mr Anderson offered views on factual matters,
including the dishonesty of the LC solicitors and the knowledge and motives of Lime Rock,
which were not within his expertise, and secondly that his presentation and assessment of
the evidence was not impartial. The objection was renewed in submissions at the close of
the proof.
In cross-examination, the objection was pursued with particular reference to three
passages in Mr Anderson's initial written opinion. The first was a view that the only
reasonable conclusion was that Mr Kidd was not made aware by P&W of the nature of the
terms and the effect of the deal. The second was a conclusion that the common objective on
the part of P&W, LC and Lime Rock was to complete the transaction on the best possible
terms for Lime Rock: a conclusion that imputes dishonesty to all three parties. The third
was an opinion that Lime Rock would have recognised that what the solicitors were doing
was unusual and wrong, and serving a purpose in driving the transaction forward on terms
which were much more favourable to Lime Rock than they were to Mr Kidd. It was
submitted on behalf of the pursuer that where the experts had been asked for their opinion
measured against the standard of an ordinarily competent (and honest) solicitor, it was
appropriate for Mr Anderson to proffer these views.
I accept the first to fifth defenders' submission that Mr Anderson's evidence strayed
beyond the area of his expertise into matters which are for determination by the court. It is a
matter of particular concern that Mr Anderson felt able, on the basis of material supplied to
him, to express the view that there was dishonesty on the part of the P&W, LC and Lime
Rock personnel. It was no part of his function as an expert witness to do so. I have
considered very carefully whether I must hold the whole of his evidence to be inadmissible.
39
In so doing I bear in mind that the Supreme Court in Kennedy v Cordia emphasised (at
paragraph 51) that the requirement of independence and impartiality is one of admissibility
rather than merely the weight of the evidence. Having heard Mr Anderson's explanations of
why he felt it appropriate to include those passages in his report, I have concluded that they
do not indicate a lack of independence or impartiality on his part, but rather an erroneous
assessment by him of how best to assist the court, on the basis of the information provided
to him when he was instructed to prepare an expert report. I do not therefore find it
necessary to exclude the whole of his evidence, which I would have been reluctant to do as
he has many years of expertise in transactions of the kind with which this case is concerned.
I attach no weight, however, to his views on factual inferences to be drawn from the primary
evidence.
Evidence was led on behalf of the first to fifth defenders from the following
witnesses:
Mr Iain Young, Solicitor, Partner, Corporate Division, Morton Fraser LLP;
Ms Michelle Linderman, Solicitor, Head of UK Trade group, Van Bael & Bellis,
London;
Mr David Wolff, Partner, Crowell & Moring LLP, Washington DC, United States.
In advance of the proof the pursuer lodged a note of objection to the evidence of
Ms Linderman and Mr Wolff. It was submitted that Ms Linderman's evidence regarding the
EU sanctions regime was a matter of Scots domestic law and that her evidence usurped the
function of the court and was inadmissible. I repel this objection. In so far as Ms Linderman
narrated EU law in her written opinion she did so to provide context for her opinion
regarding the practical effect of sanctions on the business of ITS and its subsidiaries, which
in my judgment was a matter of professional expertise and not law. It was submitted that
40
Mr Wolff's evidence was irrelevant because, on the hypothesis that Mr Kidd would not have
transacted with Lime Rock, the US sanctions regime would not have been engaged. I repel
this objection too. It was clear from the evidence that the US sanctions regime would have
affected the business of ITS and the realisation of Mr Kidd's interest in that business
regardless of whether the deal with Lime Rock had proceeded or not.
An expert report was also lodged on behalf of the first to fifth defenders by Mr David
Mitchell, Managing Director in the Valuations Team at Interpath Advisory, on company and
share valuation. However, his evidence was not led at the proof. Senior counsel explained
that until 2022 Mr Mitchell had been head of the UK valuations team at BDO UK, another of
whose members, Mr Gervase MacGregor, had produced a report on behalf of Mr Kidd in the
litigation against P&W/BP. The existence of this report had come to the notice of the first to
fifth defenders' advisers when Mr Thornton's supplementary report, referring to it as "the
BDO Report", was lodged on 1 September 2023. (Mr Thornton's first report had in fact
included "Expert report by Gervase MacGregor", without mention of BDO, in a list of
documents relied on). When asked by the first to fifth defenders' advisers about the BDO
report, Mr Mitchell had no recollection of it or of any involvement in its preparation.
However, on the morning when the evidence of the valuation experts, including
Mr Mitchell, was due to be led in the present proof, senior counsel for the pursuer disclosed
that the pursuer's advisers were in possession of documents demonstrating that Mr Mitchell
had reviewed and concurred in Mr MacGregor's report, despite having no recollection of
this. In these circumstances senior counsel for the first to fifth defenders decided that in
view of Mr Mitchell's conflict he was unable to lead his evidence.
Senior counsel for the pursuer informed the court that the pursuer's solicitors had
been aware of Mr Mitchell's conflict for some months (the court was subsequently informed
41
that this had been the case since July 2023) and that he himself had known for about a
month. A decision had been taken not to bring the matter to the defenders' attention until
the morning when Mr Mitchell was due to give evidence in court. Senior counsel for the
pursuer described this as a "tactical decision"; senior counsel for the first to fifth defenders
described it as an ambush. For my part I regard the latter description as appropriate. The
commercial court operates on the basis of full and frank disclosure between parties of their
respective positions, including any fundamental objections to admissibility of evidence. The
relevant rules of court and practice notes provide for issues to be raised and determined at
as early a stage as possible. Provisions for meetings of experts and of parties are intended to
allow opportunities for fundamental issues to be raised and discussed. The court is not
assisted by being deprived of the evidence of one party's expert, in circumstances where
earlier disclosure of the problem might have permitted the instruction of a substitute. This
is especially so when the experts have been put to the trouble and expense of holding a joint
meeting and producing a detailed note of areas of agreement and disagreement. It is highly
regrettable that Mr Mitchell himself did not recall the circumstances giving rise to the
conflict, although this is at least partly explicable by the fact that he did not have access to
the files of his former firm. Nevertheless the decision taken by the pursuer's advisers to say
nothing with a view to excluding the evidence of another party's expert from the court's
consideration was, to say the least, discourteous to the court and to the other parties, and
contrary to the ethos of commercial court practice.
Evidence was led on behalf of the sixth to eighth defenders from the following
witnesses:
Mr David Rennie, Solicitor, Consultant, Stronachs LLP, Aberdeen;
Mr Richard Indge, Senior Managing Director, Ankura Consulting (Europe) Ltd.
42
Objection was taken by the pursuer prior to the proof to the admissibility of parts of
Mr Rennie's reports on the ground that they amounted to submissions in law rather than
expert opinion. As with Ms Linderman, I regard Mr Rennie's references to case law as doing
no more than setting out his understanding of the legal context of his expert opinion on the
actions of the sixth to eighth defenders, and I repel the objection.
Application of legal analysis to the circumstances of the case
Applying the law, as summarised above, to the circumstances of the present case, it
is incumbent upon the pursuer to prove, in relation to each of Lime Rock and LC or persons
for whose actings they are in law respectively responsible, the following:
There was an express or tacit agreement or conspiracy between or among the
defenders one of whose purposes was to cause injury to Mr Kidd;
The unlawful means employed by the defenders to implement the conspiracy was
fraudulent concealment from Mr Kidd of the corruption of the arm's length nature of
the transaction by Mr Gordon's breach of fiduciary duty;
In the case of the LC defenders, they either participated in the conspiracy or
dishonestly assisted with it.
Mr Kidd suffered loss and damage;
The unlawful means, ie the fraudulent concealment, was the direct cause of the loss
and damage suffered by Mr Kidd.
I find it convenient to examine the evidence and reach conclusions on the first three of these
points before moving on to address issues of loss and causation.
I should note that at paragraph 39 of the pursuer's written submissions it appears to
be submitted that the unlawful means consisted of a breach of contract, a breach of
45
a conflict. When he sought Mr Gordon's advice about stamp duty in September 2009, he
saw this as asking Lime Rock's usual go-to lawyer for advice on a neutral point.
John Reynolds. Mr Reynolds was one of the co-founders of Lime Rock, having come
to it from an oil service industry background. He was the most senior of the Lime Rock
personnel who gave evidence. His enthusiasm for the ITS deal waxed and waned in the
course of the protracted negotiations, but he was eventually persuaded by Mr Ross to
support it. Having received Mr Ross's memo of 13 November 2008 drawing attention to the
potential conflict arising out of P&W's existing relationship with both parties, he assumed
that any such conflict would be managed to the satisfaction of the parties. He probably did
not give the matter a second thought.
(b) LC witnesses
Malcolm Laing. Mr Laing denied that he or the firm of LC had acted as a "front" for
Mr Gordon in the transaction between Mr Kidd and Lime Rock. He first became aware that
Mr Gordon had used the word "front" in 2017 in connection with a complaint by Mr Kidd to
the Scottish Legal Complaints Commission. He denied being a member of a conspiracy to
defraud Mr Kidd by concealing from him that P&W were acting in conflict of interest to
defeat Mr Kidd's interests in the deal with Lime Rock. He was aware at the time of a
potential conflict in Mr Gordon's roles, but regarded Mr Gordon's facilitative role at the
outset of the transaction, ie familiarising LC with Lime Rock's usual position and red lines,
as sensible and expedient, to avoid P&W wasting time trying to negotiate something that
Lime Rock would never agree to. His understanding, like that of Mr Ross, was that when
carrying out legal due diligence, Mr Gordon was acting on behalf of Lime Rock, as stated in
LC's letter of engagement which excluded due diligence from the scope of LC's instructions.
49
aborted 3i deal, and had relationships with the foreign lawyers who would have to provide
reports. Mr Gordon informed him that the parties had agreed among themselves that
vendor due diligence would be expeditious; Mr Allan spoke to Mr Milne who confirmed
this to be the case. Mr Gordon obtained a draft scope of the due diligence from Lime Rock
and passed it to Mr Allan who in turn passed it to Mr Milne for approval. As matters
progressed, Mr Gordon played an increasing role because of the extent of overseas diligence
required, while Mr Allan focused on the transaction documentation. As regards
Mr Gordon's "handover" role, the purpose was to use his knowledge to progress the
transaction expeditiously. The process agreed with Messrs Corray and Milne was that after
P&W had produced the first draft of the investment agreement and articles, Mr Gordon
would confirm to LC whether certain revisions had or had not conventionally been accepted
by Lime Rock in past transactions. Mr Gordon would then step out and LC, with this
knowledge in mind, would negotiate to a conclusion on behalf of Lime Rock. The
convention adopted throughout was that Messrs Corray and Milne acted with Mr Kidd's
authority and that they would seek his instructions or report back to him as necessary.
Unfortunately Mr Gordon's actions had gone beyond the envisaged role by giving certain
small pieces of advice, and had created a conflict of interest. Mr Allan did not see the
"unofficial counsel" email of 14 January 2009 at the time; he considered this language to be
inappropriate and not in accordance with what was agreed. He did not however consider
that Mr Gordon's role resulted in terms being agreed that were more favourable to Lime
Rock; negotiations took place in the normal manner. At the all parties meeting on 3 March
2009, it was LC, with contributions from Mr Ross, and not Mr Gordon who went through
the points that were not acceptable to or required further consideration by Lime Rock.
When it later appeared that there were due diligence gaps that could not be resolved,
53
reinvest the remaining $45 million in ITS to increase growth. He would retain control of ITS,
and after three to five years of strong growth and reinvested profit, ITS would be sold and
he would have a full exit with inter alia a return of the $45 million. He was willing to accept
those terms and authorised Mr Corray to proceed with the deal. No-one went over the
contract details with him. Mr Corray did not explain the deal as it ended up to him. When
it came to signing the agreements, he was in Cyprus and was presented only with the
signing pages. It had since been explained to him that the $45 million was preferential debt
owed to Lime Rock, entitling them to 10% interest per annum which would be compounded
if not paid out, and with a preference on liquidation entitling them to $45 million before any
sum fell due to be paid to him. He was shocked when he discovered the true position. Had
it been explained to him he would not have done the deal. He denied having had a meeting
with Messrs Corray, Milne and Beveridge at which he agreed to the 10% yield. He denied
having previously seen an email to him from Mr Corray on 16 July 2009 forwarding a chain
of email correspondence with Mr Reynolds in which reference was made to $45 million
going directly from Lime Rock into ITS. He did not remember seeing a term sheet for the
deal; in any event he would not have had enough time to look at it. He did not find out
about the actions of Lime Rock, LC and P&W until after P&W provided Inventory Z in
October 2016. If he had found out before the Lime Rock deal had been concluded he would
have called it off and sacked P&W.
(b) Lime Rock witnesses
Lawrence Ross. Initially Mr Ross had no direct contact with Mr Kidd, although they
met on one occasion along with Mr Corray to confirm that their respective exit objectives
were in alignment. Negotiations on the terms of the deal were conducted between himself
57
The role that he initially undertook, with the consent and encouragement of, at least,
Mr Milne, and the awareness of Lime Rock, LC and P&W, created a conflict of
interest as soon as he did anything more than initial provision to Mr Allan of Lime
Rock documentation and information regarding Lime Rock's standard requirements
in relation to due diligence. From that point forward, responsibility for considering
and responding to Mr Allan's draft documentation rested upon LC, on the basis of
instructions and information provided by Lime Rock personnel such as Mr Ross and
Mr Agarwal. Mr Gordon's continuing input created an actual conflict between the
interests of the two negotiating parties. (Whether that conflict resulted in injury to
ITS or Mr Kidd is a different matter to which I return below.) His assumption of
responsibility for legal due diligence created a further source of confusion: as I have
noted, some of those involved (Mr Smith and Mr Allan) thought he was carrying out
vendor due diligence on behalf of ITS, whereas others (Mr Ross and Mr Laing)
understood him to be acting on behalf of Lime Rock.
From time to time Mr Gordon communicated with Mr Ross in terms which were
inappropriate for a solicitor whose firm was engaged by the other party to a
transaction. In particular, his email of 9 April 2009 quoted at paragraph 37
above
could be read as providing Lime Rock with confidential information that ITS had not
ruled out a deal with them and that there was no competing potential purchaser. On
29 July 2009 he offered to delay contacting Mr Corray about resurrecting due
diligence, seemingly to avoid prejudicing Mr Ross's negotiating stance as the parties
approached agreement. Those remarks ought not to have been made.
As the deal whose commercial terms had been agreed on 29 July 2009 neared
completion, Mr Gordon re-emerged to assist with the drafting of warranties by ITS to
58
cover gaps in due diligence in order to bring the transaction to completion. No
matter how well-intentioned this may have been, it was clearly a conflict of interest
for Mr Gordon to have any input at this late stage into any position to be taken by
Lime Rock in relation to the nature or adequacy of warranties offered by ITS.
On two specific occasions, Mr Gordon provided advice to Lime Rock: once on
5 May 2009 when he provided advice about the need for certain warranties and
covenants in relation to US law, and once on 25 September 2009 when he provided
advice regarding the (non)availability of stamp duty exemption.
Although I am satisfied that the concession made by P&W/BP in the previous action
and by the defenders in this action that Mr Gordon acted in breach of his fiduciary duty to
ITS and to Mr Kidd was correctly made, I am equally satisfied that he did not do so with a
view to damaging the interests of either of them by enabling Lime Rock to gain an unfair
commercial advantage in the negotiation of the deal. By 2009 he was accustomed to
receiving instructions from Lime Rock in share purchase/investment transactions. He held
their style documents and knew more about their commercial practices than any other
Scottish solicitor. When confronted with an unwelcome situation in which his firm had
accepted instructions to act for the other party to a transaction with Lime Rock, his reaction
was to attempt to find a way to be useful to his most important client, as a means of
sugaring the pill and (despite his denial that this was a concern) reducing the risk that they
would take future business elsewhere. As he acknowledged in cross-examination, he
expected to get a hard time from Lime Rock, and in attempting to find a solution that would
keep them happy, he closed his mind to what he saw as merely a potential issue of conflict.
He was of course entirely wrong so to view it, and his failure to adhere to the standards
reasonably to be expected of a solicitor was reprehensible. But it would be wrong to draw
59
an inference that he acted dishonestly. Having regard to the contemporaneous
documentation and to his oral evidence, I find that he saw his role as acting for the shared
benefit of both parties, by using his familiarity with Lime Rock's documents and preferences
to save them both time and money, without any conscious thought of favouring Lime Rock
over ITS in that process. As a partner in the firm instructed by one of the parties, it was not
open to him to take on such a role, but it is important to observe that he did so without any
concealment or deception. His intentions were set out in his email of 15 January 2009 to
Mark Jenkins of the Al Shoaibi Group, reiterated in the 19 January meeting note, and
reflected, at least in relation to due diligence, in the letters of engagement of P&W and LC
respectively.
Mr Gordon is not a defender in this action, but his intentions are relevant because he
is one of the alleged co-conspirators. If as I have found Mr Gordon did not act with the
intention of unlawfully causing damage to Mr Kidd, it becomes much less likely that any of
the other alleged conspirators did so. Each in his evidence to the court denied that they did
so, and I am entirely satisfied that I should accept the evidence of each of them that they did
not. I find the following support for this conclusion.
Firstly, neither P&W (including Mr Gordon) nor LC were directly participant in the
negotiation of the principal terms of the deal between Lime Rock and Mr Kidd. The first
indicative offer that found favour with ITS and (I infer from the fact that it was emailed to
and discussed with him) Mr Kidd, dated 12 January 2009, pre-dated the instruction of P&W
or LC in connection with Lime Rock. Thereafter, the negotiation was conducted by Mr Ross,
with the assistance of Mr Smith, and Mr Reynolds on behalf of Lime Rock and by
Messrs Corray, Milne and Beveridge on behalf of Mr Kidd and ITS. It is worth emphasising
that the terms so negotiated included the features of the deal which Mr Kidd, in his evidence
60
to the court in this case and in his pleadings in the P&W/BP action claimed not to have
knowingly agreed to: the fact that the $45 million was an investment by Lime Rock with
preferential rights and not a loan by himself, the annual 10% compoundable interest on the
Lime Rock investment, the liquidation preference, and the entitlement of Lime Rock to
appoint two board members. On each side the individuals responsible for negotiation
required to and did obtain authorisation to conclude the deal: on the Lime Rock side
Mr Ross required the approval of the investment committee of the Lime Rock V fund, and
on the ITS side Messrs Corray, Milne and Beveridge required the approval of Mr Kidd.
There is ample evidence in the contemporaneous documentation and in these witnesses' oral
testimony of such approvals having been sought and obtained at every stage of the
protracted negotiation process, including the deal finally agreed in July 2009. As is apparent
from the chronology narrated above, those discussions were carried out without substantive
involvement of any of the solicitors, who were simply kept informed of progress from time
to time. So far as Mr Ross and Mr Smith are concerned, there was no evidence that at any
stage of the process either of them made improper use of any input provided by Mr Gordon
in order to secure a better deal for Lime Rock than could otherwise have been obtained.
There is in particular no evidence that any of the inappropriate remarks made by
Mr Gordon to Mr Ross, or any advice provided by Mr Gordon to Lime Rock in relation to
warranties or stamp duty, had any effect or influence on the terms agreed between the
parties.
Secondly, each of the named individual defenders gave a plausible and, in my view
credible, explanation from his own perspective of why he had not considered that
Mr Gordon's actings amounted to wrongdoing. With the benefit of hindsight it can be seen
that each of them was wrong about that, but for differing reasons. Mr Ross understood that
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suggesting that Mr Kidd would, if properly represented, have achieved a re-negotiated
version of all of these. Some of them, such as the liquidation preference and Mr Kidd's
inability to influence whether the preference dividend was paid, were features of the heads
of terms negotiated by the principals, and I find no reason to conclude that any solicitor
would have been likely to succeed in re-opening these hard-fought conditions. One
particular provision of the articles (10.1.3), concerning the requirement for Mr Kidd to
subscribe for a proportionate share of any new issue if he wished to take up that offer, was
discussed in detail in cross-examination. My conclusion from that discussion was that
reading the articles as a whole, Mr Kidd retained control of any decision to allot new shares,
albeit that his hand could be forced if the company's financial need was urgent, and that
there was nothing untoward in the provision itself. In his second supplementary report,
Mr Anderson conceded that the documentation entered into reflected a typical private
equity investment structure. That was the view of Mr Young, with whom Mr Rennie
concurred. I see no reason to reject that view. In the end Mr Anderson's concern appeared
to relate less to the terms of the documentation than to whether they were explained to and
understood by Mr Kidd.
In his submissions at the close of the proof, senior counsel for Mr Kidd did not found
on any particular provision of the investment agreement, sale and purchase agreement or
articles negotiated between P&W and LC which was said to have been prejudicial to
Mr Kidd's or to ITS's interests and which would have been successfully negotiated away by
a solicitor acting properly to protect those interests. Senior counsel's position, as I
understood it, was rather that it did not matter whether or not the deal was on standard
commercial terms; what mattered was the tainted manner in which it was arrived at. It
would be a somewhat unusual unlawful means conspiracy where the common intention of
64
the court Mr Gordon went so far as to suggest that his role had been proposed by
Messrs Corray and Milne. That suggestion was not put to either Mr Corray or Mr Milne and
I make no finding to that effect, but I am satisfied that Mr Milne at least knew and approved
of what Mr Gordon was doing, both in relation to due diligence and in relation to the
"handover" of Lime Rock style documentation for use by Mr Allan in negotiations with LC.
I have already mentioned, inter alia:
The preamble to the note of the meeting on 19 January 2009 attended by, among
others, Mr Milne, Mr Allan and Ms Simpson, referring to Mr Gordon being
"involved throughout";
Mr Gordon's email of 21 January to Mr Allan, attaching a note of a meeting with
Lime Rock on how they wished to handle foreign legal due diligence, which was
forwarded by Mr Allan to Mr Milne for agreement;
Mr Allan's email of 26 January to Mr Milne referring to having "agreed with
Malcolm/Ken" about use of Lime Rock house styles as a starting point for the sale
and investment documents, in order to "streamline the process";
Mr Allan's email of 23 February to Mr Gordon and Mr Laing, advising them that he
expected to issue draft documents in a couple of days and suggesting an all parties
meeting;
It is readily apparent from these documents that far from being concealed from
Mr Kidd, Mr Gordon's activities were fully disclosed to Mr Kidd's advisers Mr Milne and
Mr Allan and, indeed, met with their approval. As regards Mr Corray, although he has no
recollection now of the role adopted by Mr Gordon, he too was a recipient of emails, such as
Mr Allan's email of 25 February, which made reference to it and which he accepts would
have caused him no concern. Mr Kidd himself had very little direct contact with Mr Ross
65
and none with either Mr Smith or LC. His meeting with Mr Ross was a high level one which
had nothing to do with the role being undertaken by Mr Gordon. Having regard to
Mr Ross's subjective understanding of Mr Gordon's role, I find that there is no evidence of
deception of Mr Kidd by him, whether by representation or concealment. Nor is there any
evidence of deception by Mr Smith, a junior member of Mr Ross's team whose
communications with Mr Milne were at a technical level. The due diligence exercise and the
drafting of the transaction documentation were matters with which Mr Kidd did not
concern himself, relying instead on his executives and lawyers to get on with them unless
something arose that required his instructions. The Lime Rock and LC personnel were
entitled to proceed on the basis that whatever was known by Mr Milne, Mr Corray and/or
Mr Allan would, so far as they saw fit, be brought to the attention of Mr Kidd.
Having regard to all of these circumstances I find that there was no intentional that
is, fraudulent concealment from Mr Kidd by any of the defenders of those actings of
Mr Gordon which constituted breach of fiduciary duty. Put shortly, there was no fraud and
therefore no use of unlawful means. For that reason too the pursuer's case fails.
I reach these conclusions without having to make any finding as to Mr Kidd's
contemporaneous understanding of the deal with Lime Rock. His case, as ultimately
presented, did not depend upon him having been misinformed about the terms which he
subsequently claimed not to have understood; his case depended solely upon fraudulent
concealment of Mr Gordon's activities. For the sake of completeness, however, I am
satisfied that the core terms of the deal, including the fact that the $45 million was a capital
investment by Lime Rock and not a loan by Mr Kidd, the 10% compoundable interest on the
"A" shares, the minority participation of Lime Rock nominees on the ITS board, and the
"waterfall" entitlements of Lime Rock and Mr Kidd in the event of a liquidation, were
66
explained to Mr Kidd on more than one occasion by Messrs Corray, Milne and Beveridge. I
share the evident perplexity of those witnesses that Mr Kidd, a very experienced
businessman, could have misunderstood the deal in the ways that he now says he did. I
accept that Mr Kidd genuinely believes that he did not understand the deal at the time, but it
is unnecessary to my decision for me to make any finding as to whether or not that belief is
correct.
I also reach my conclusions without needing to have regard to the inherent
improbability, for differing reasons, that either Lime Rock and their representatives or the
partners of LC would participate in a fraud to induce Mr Kidd to enter into a deal, but my
conclusions are thereby reinforced. The consequence of the deal for Lime Rock was to enter
into a close business relationship with Mr Kidd and the executives of ITS with a view to
maximisation of future profit. Such a relationship required a high degree of mutual trust
and co-operation, and it is extremely unlikely that an experienced private equity executive
such as Mr Ross would regard it as appropriate to lead his fund into a deal founded upon
fraudulent concealment. It is equally unlikely that respected solicitors in a reputable firm
would put their careers and their firm's reputation at risk for the purpose of earning a
professional fee. As Ungoed-Thomas J observed in In re Dellow's Will Trusts
[1964] 1 WLR 451 at 455 (quoted by Lord Nicholls of Birkenhead in In re H and Others
evidence required to overcome the unlikelihood of what is alleged and thus to prove it."
The allegation in the present case is a very serious one. The evidence does not, in my
opinion, come close to raising the inferences necessary to overcome the unlikelihood of what
has been alleged.
68
business was dishonest. For that reason his shareholding had been rendered worthless or at
least fell to be valued at a very substantial discount.
The defenders take issue with this analysis on a number of grounds, which may be
summarised as follows:
The pursuer's approach to causation is flawed because it assumes the wrong
counterfactual: the correct approach is to assume not discovery of wrongdoing but
absence of wrongdoing. On that basis, no loss has occurred.
Esto the pursuer's approach to causation is correct, his approach to quantification of
loss is incorrect because the loss should be assessed with the benefit of hindsight and
not at the date of the breach. On that basis, there is no causal link between any loss
ultimately sustained by the pursuer and the defenders' alleged wrongdoing.
Esto the loss falls to be assessed at the date of the breach, the pursuer has failed, on
the basis of the facts and the expert evidence, to demonstrate that he sustained any
loss as a consequence of entering into the transaction with Lime Rock;
Esto the loss falls to be assessed at the date of the breach, and the defenders'
fraudulent concealment falls to be taken into account in assessing the
post-transaction value of the pursuer's shares, any loss is speculative and would, in
any event, be reflective loss which would be recoverable only by ITS and not by
Mr Kidd qua shareholder;
I address each of these arguments in turn.
Causation: the counterfactual
In his action against P&W/BP, Mr Kidd stated his case on causation in a similar way
to the present case, averring that if P&W had disclosed to him its improper actings on behalf
69
of Lime Rock, he would not have proceeded with the transaction and would have
terminated negotiations because he would have considered Lime Rock to be persons with
whom he did not wish to be in business. I held (2018 SC 193 at paragraph 47-48), under
reference to various authorities including Target Holdings v Redferns [1996] AC 421, that the
analysis was flawed and that the relevant question for determination was what would have
occurred if P&W had avoided committing a breach of fiduciary duty by timeous disclosure
of the conflict.
In the present case it was submitted on behalf of the pursuer that the recent decision
of the Judicial Committee of the Privy Council in Primeo Fund v Bank of Bermuda (Cayman)
been wrong. In Primeo, the claimant sued for losses sustained in a multi-billion dollar Ponzi
scheme operated by a company ("BLMIS") controlled by the fraudulent financier
Bernie Madoff. One of the issues for determination by the Board was whether Primeo had
suffered any recoverable loss. The defendants contended in one branch of their argument
that even if BLMIS had fulfilled its duty and had held Primeo's cash in safe keeping, BLMIS
would still have run up the same losses operating its fraudulent Ponzi scheme using other
customers' cash; Primeo would still only have had an unsecured right to its cash; and so
would have suffered the same loss on the collapse of the Ponzi scheme as it did in fact
suffer. Therefore, it was maintained, the breach of duty caused Primeo no loss. The Board
rejected that argument, stating (paragraph 63):
"In the Board's view, this submission cannot be sustained. For the reasons given
above, the relevant counterfactual `but for' analysis involves asking what would have been
the position if BLMIS did not carry on the Ponzi scheme at all... BLMIS's duty of
safekeeping of Primeo's cash included not misappropriating it for the Ponzi scheme
and not exposing it to loss through including it in the assets at risk from the conduct
of the Ponzi scheme. Therefore, to comply with its duty of safekeeping, BLMIS
70
should itself immediately upon receiving cash from Primeo have returned it to
Primeo (or, what comes to the same thing, put it in trust for Primeo)...."
(Emphasis added.)
It was submitted on behalf of the defenders that my decision in the P&W/BP case
was consistent with the Board's analysis, although their analyses of its application to the
present case were slightly different. On behalf of Lime Rock, senior counsel submitted that
the counterfactual assumed that Mr Gordon had made the proposal that he did make, but
that Lime Rock had declined to accede to it or to the instruction of LC on the basis proposed.
Even if this had caused Mr Kidd to distrust P&W and seek alternative representation, it
would have given him no cause to distrust Lime Rock, and the transaction would have
proceeded with or without the instruction of P&W and/or LC. On behalf of LC, the Dean of
Faculty submitted that the position of Mr Gordon could be equated with that of BLMIS in
Primeo: a joint wrongdoer not sued. The counterfactual assumed that the transaction
proceeded with no wrongdoing: ie Mr Gordon played no role at all, and the transaction
proceeded with Mr Allan representing Mr Kidd and ITS, and LC or someone else
representing Lime Rock.
It appears to me that my reasoning in the P&W/BP case accords with the Judicial
Committee's analysis, which affirmed that the correct counterfactual "but for" analysis
requires one to ask what would have happened if the wrongdoing had not taken place. Of
the two analyses proffered for application to the present case, I consider that the Dean of
Faculty's analysis adheres more closely to what was said in Primeo. The difference is,
however, of no importance, because both analyses lead to the same submission: that no
recoverable loss was sustained by Mr Kidd because on the relevant "but for" analysis the
transaction would have proceeded exactly as it did. If so, the alleged wrongdoing cannot be
71
said to have been a material cause of any loss ultimately sustained by Mr Kidd (cf Zurich
Insurance Co plc v Hayward [2017] AC 142). The question is whether that conclusion is
justified by the evidence.
In my opinion there is ample reason to conclude that in the absence of any
wrongdoing by any of the defenders, the outcome as regards the parties concluding a deal,
the terms of the deal, and all subsequent events would have been the same in all material
respects as in fact occurred. The context of the Lime Rock transaction was that in 2008-2009
the individuals in charge of ITS, Mr Kidd and Mr Corray, were keen to attract equity
investment in order to grow earnings and to enhance the value of the company with a view
to Mr Kidd's eventual exit. They wished to continue to expand the company's international
operations but were reaching the limit for funding by bank borrowing. Private equity
finance was seen as the most practicable source of growth funding. By the end of 2008, Lime
Rock were the only interested investor, and that remained the case until the deal was
concluded, except for a short-lived revival of interest by TA Associates, whose new
indicative offer was not more favourable than that of Lime Rock. During the first half
of 2009 Mr Corray, under instructions throughout from Mr Kidd, negotiated hard for a deal
that gave Mr Kidd the cash out that he wanted while retaining control of ITS. As already
noted, the lawyers played no part on either side in those negotiations. By the summer
of 2009, ITS was beginning to fail to meet its EBITDA forecasts. In an email dated 25 August
2009 (entitled "Indebtedness musings from Dr Doom") to Mr Corray, copied to Mr Kidd,
Mr Milne warned that unless ITS received either funding from Lime Rock or payment of the
Reliance debt by September, bank covenants were likely to be breached. According to
Mr Corray, there was an urgent need for cash. It was not suggested that without the Lime
Rock investment the banks would not have continued to support ITS (and it was the view of
73
"...In many cases, even in deceit, it will be appropriate to value the asset acquired as
at the transaction date if that truly reflects the value of what the plaintiff has
obtained. Thus, if the asset acquired is a readily marketable asset and there is no
special feature (such as a continuing misrepresentation or the purchaser being locked
into a business that he has acquired) the transaction date rule may well produce a
fair result. The plaintiff has acquired the asset and what he does with it thereafter is
entirely up to him, freed from any continuing adverse impact of the defendant's
wrongful act..."
Lord Browne-Wilkinson noted that one advantage of the "transaction date" rule is that it
avoids difficult questions of causation which arise if the asset is valued at a later date.
However, he continued:
"...But in cases where property has been acquired in reliance on a fraudulent
misrepresentation there are likely to be many cases where the general rule has to be
departed from in order to give adequate compensation for the wrong done to the
plaintiff, in particular where the fraud continues to influence the conduct of the
plaintiff after the transaction is complete or where the result of the transaction
induced by fraud is to lock the plaintiff into continuing to hold the asset acquired."
In that case it was held that the correct measure of damages was the difference between the
fraudulently induced purchase price and the actual price obtained on re-sale, even though
the latter was adversely affected by the effect of a second and separate fraud which,
unknown to any of the parties, had been perpetrated prior to the purchase. Read as a whole,
it seems to me that the decision amounts to disapproval of what was said to be a "strict and
inflexible rule" that damages fall to be assessed as at the date when the wrong was
committed.
On behalf of the defenders it was emphasised that the purpose of an award of
damages is to put the pursuer in the position he would have been in if the wrong had not
New Court Securities Ltd v Citibank NA above, Lord Steyn at 282): in the present case, to
compensate Mr Kidd for loss suffered as a result of entering into the transaction with Lime
Rock. I was invited to adopt the same approach as in Crimond Estates Ltd v Mile End
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Developments Ltd [2021] CSOH 26, and apply what is sometimes referred to as the Bwllfa
principle derived from the case of Bwllfa and Merthyr Dare Steam Collieries (1891) Ltd v
Pontypridd Waterworks Co [1903] AC 426, and enunciated by Lord Bingham (dissenting) in
Golden Strait Corpn v Nippon Yusen Kubishika Kaisha (The Golden Victory) [2007] 2 AC 353 as
being that:
"...(W)here the court making an assessment of damages has knowledge of what
actually happened it need not speculate about what might have happened but
should base itself on the known facts. In non-judicial discourse the point has been
made that you need not gaze into the crystal ball when you can read the book."
Delivering one of the majority judgments in The Golden Victory, Lord Brown of Eaton-under-
Heywood observed at paragraph 78:
"Must the judge really shut his eyes to the known facts and speculate how matters
might have looked at some earlier date? Again, not without compelling reason and
none appears to me. Lord Bingham, at para 12, and Lord Carswell, at para 65, have
already explained the `Bwllfa principle'... There is no need to repeat it. Suffice it to
say that I see no good reason to depart from it here."
None of these cases concerned a claim for damages for loss caused by fraudulent
conduct. Bwlffa was concerned with statutory compensation for not working a coal mine;
The Golden Victory and Crimond Estates were concerned with damages for breach of contract.
That does not, in my view, distinguish them from the present case. All are concerned with
application of the compensation principle which applies with equal force to damages for
fraudulent concealment, the only difference being that the latter is not restricted by
foreseeability. The principle is of general application. Another example is provided by
Haberstich v McCormick & Nicholson 1975 SC 1, which concerned loss on the resale of a house
with a defective title. Although the defect could have been cured at less expense during the
period of the pursuers' ownership, the court held that the actual loss sustained on resale was
the correct measure of damages. Lord Cameron observed (page 13):
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"...If ...a claim of damages for breach of contract by solicitors, the breach being
found as a failure to secure a valid and marketable title as contracted for, has to be
assessed, it appears to me that the best proof of actual loss--if any--may well be
found in evidence of what occurred when the subjects so acquired were in fact sold.
Let the matter be put the other way: if it could be shown that in point of fact the
particular subjects were sold for a full price, the defect in title being acknowledged
but ignored, could it be said that in such circumstances the original purchaser could
complain of actual loss when in fact he had sustained none? This would be in such
an event a clear case of injuria sine damno..."
The same point was made in a more general way by Nourse LJ in Kennedy v Van
Emden [1996] PNLR 409, where the Bwlffa principle was applied in an action for damages for
professional negligence, at page 414:
"...(D)amages are to be assessed in the real world. Compensation is a reward for
real, not hypothetical, loss. It is not to be made an occasion for recovery in respect of
a loss which might have been, but has not been, suffered."
These observations have obvious resonance in the present case where the alleged
wrongdoing did not come to light until after the company had gone into administration and
had been sold without any awareness of or reference to it.
It follows, in my opinion, that in carrying out the exercise of assessing the loss
sustained by Mr Kidd as a consequence of having entered into the transaction with Lime
Rock, it is necessary to consider what actually happened during the period after the
transaction took place, and not to attempt to quantify an unrealised and notional loss on the
date of the transaction. The counterfactual on this set of hypotheses is not that Mr Kidd
disposed of his shares in ITS immediately after the transaction with Lime Rock; it is rather
that no deal with Lime Rock took place, no funds were invested by Lime Rock, Mr Kidd
remained the sole ITS shareholder, no Lime Rock nominees were appointed to the ITS
board, and ITS continued to trade.
I have already set out (at paragraphs 46-50 above)
a brief summary of the events
which in fact took place after the transaction, culminating in the sale of ITS at a price which
76
produced no return for shareholders. The question is whether, viewed with hindsight,
Mr Kidd sustained a loss, as a consequence of having been induced to enter into the
transaction with Lime Rock, that he would not have sustained if there had been no such
transaction.
Mr Kidd's evidence was that if the Lime Rock deal had been called off due to
discovery of fraudulent concealment, he would first have taken whatever steps were
necessary to ensure that ITS's financial position was sound. Without the additional
investment, the level of capex would have been reduced by cancellation or postponement of
commitments. He would have focused on cost-cutting, cash management and sale of
surplus assets to realise cash. If ITS had breached its banking covenants he would have
worked something out with Mr Mackie that would have satisfied the banks, with whom he
had always had a good relationship. He would probably have considered a trade sale of ITS
rather than private equity investment. The market was picking up during 2010 and 2011.
There were a number of potential buyers in the industry. The business could have been sold
in parts without any discount to a sale of the whole.
Mr Mackie considered that if the Lime Rock deal had not proceeded, it would have
been business as usual managing the group's income and expenditure, but the level of capex
would have had to be substantially reduced, and surplus equipment sold. Payments would
have been deferred and orders cancelled. A new three year credit facility had been
negotiated with HBOS and Clydesdale Bank in August 2009, and if covenants were
breached this would have been managed by renegotiation of the covenants. Mr Milne
expressed a similar view. Mr Corray's view was that if ITS had not obtained equity
investment it would have run into financial difficulty.
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There was a consensus among the witnesses that the demise of ITS was not
attributable to one single factor. In a witness statement provided for the P&W/BP action,
Mr Mackie identified a number of bad decisions made "throughout the years". These
included remedial action not being taken quickly enough; a poor investment in Colombia;
poor execution of a merger in the Far East which made losses every month; investment in
research and development of whipstocks (an item of equipment which allowed drilling out
of an existing well in a non-vertical direction) which did not produce revenue; low asset
utilisation; and failure to move assets around freely. In the course of cross-examination
Mr Mackie accepted that these difficulties all had their origins before the Lime Rock
transaction completed. Mr Mackie also identified as major contributing factors the impact of
Iranian sanctions, which led to the writing off of $18 million of trapped debtors and assets,
and a build-up of trade debtors, including Reliance, in the Middle East. Mr Milne's view
was that there were changes within the industry and ITS's performance declined. This put
pressure on cash flow and the business was unable to deliver adequate returns for its level
of debt. With hindsight, the company was attempting to operate in too many places. By
late 2011, the business unit in the Middle East and India had contracted, new business
ventures were proving slow, and existing businesses were producing 50% less revenue than
in previous years. Sanctions became more and more of an issue, especially after EU
sanctions were imposed. The Iranian supply chain stopped paying on time and then
stopped paying at all (SWIFT banking codes were removed by the EU sanctions). Various
ideas were discussed but eventually there was no alternative but to withdraw.
As to whether the Lime Rock transaction contributed to ITS's demise, Mr Mackie
noted that much of the Lime Rock investment was spent on new ventures many of which
underperformed and took the business backwards. Mr Milne acknowledged that the
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not require to address these submissions in detail because my assessment does not depend
upon accepting the experts' analysis of the actual or potential effect of sanctions on the
business of the ITS group. It is entirely clear from the evidence of, among others, Mr Milne,
Mr Corray and Mr Press that the sanctions, especially those imposed by the EU including,
of course, the UK, were seriously damaging to the group's business, as well as to the
shareholders' efforts to achieve an exit. I find no evidence to support the submission that
those problems were created or significantly exacerbated by Lime Rock's US connections;
that was not the view of those who were managing the financial affairs of the group at the
time.
Drawing all of the above together, I find 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. The minutes of ITS board meetings amply demonstrate that all
concerned were alive to the need to control capex, improve operational cash flow and
reduce indebtedness. Pricing issues and pursuit of debtors were constant themes. There is,
in short, nothing that Mr Kidd says he would have done if the Lime Rock deal had been
terminated that was not in fact attempted. Despite this, EBITDA continued to fall below
forecasts. I accept the analysis of those witnesses who described the business as having
become too widely spread, with too many unprofitable operations and insufficient co-
ordination in utilisation of assets. The effect of sanctions on the group's Iranian business
was especially damaging.
Nor am I persuaded that the difficulties would have been likely to be avoided by a
trade sale of ITS prior to their occurrence. No evidence was led from any potential trade
buyer. On the contrary, there was evidence that trade sales to Allis-Chalmers and
Seawell/Archer were attempted but did not reach fruition. Although the failure of the latter
82
Applying that approach to the present case, it is necessary to value Mr Kidd's shares
post-transaction on what (on this set of hypotheses) is the true state of affairs, ie that Lime
Rock was a fraudster, regardless of the fact that this was not known to Mr Kidd at the time
because of concealment by Lime Rock and LC. As the Board put it in Primeo,
"...This is in line with Lord Nicholls' discussion of the simple case of a purchase
where a valuer has given negligent advice, in relation to which he made it clear that
the existence of loss is to be assessed according to the true state of affairs at the time
of the completion of the purchase although the purchaser does not appreciate this
and the fact of the loss only comes to light later..."
On behalf of the defenders it was submitted that no account should be taken of the
alleged fraud when valuing Mr Kidd's shares post-transaction. Firstly, it was said that the
loss was speculative and that Mr Thornton's approach to discounting had no sound basis. I
deal in part (3) of this chapter below with these arguments, including my concerns
regarding Mr Thornton's methodology. They do not, however, constitute a reason in
principle for leaving fraud out of account. In Primeo at paragraph 90, again under reference
to Lord Nicholls' approach in Nykredit, the Board observed that "relevant loss may be
identified even though it cannot be precisely quantified on the evidence which is available",
and quoted Lord Nicholls' observation that "such difficulties as there may be are evidential
and practical difficulties, not difficulties in principle". Secondly, it was said that the
pursuer's approach required the court to close its eyes to the fact that ITS entered
administration for unconnected reasons before the fraud was discovered, and that no loss in
fact crystallised before then. I have already addressed this argument, which seems to me to
relate rather to the question whether the loss should be assessed at the transaction date.
Finally it was submitted by the sixth to eighth defenders that if it was correct to take fraud
into account, the pursuer's claim was precluded because it was reflective loss. I address that
argument separately in part (4) below.
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For these reasons, I am satisfied that it is appropriate in principle when valuing
Mr Kidd's shares post-transaction to take account of the fraud which, on the hypothesis
under consideration, was perpetrated by the defenders. Before that can be done I must, in
order to fix a starting point, make findings as to the pre-and post-transaction value of
Mr Kidd's shares without taking any account of the effect, if any, of fraud on the
post-transaction value. That exercise requires an assessment of the evidence of the share
valuation experts.
(2) Share values without fraud
Pre-transaction value
There was much agreement between Mr Thornton and Mr Indge as to the
approaches that ought to be considered in arriving at a pre-transaction value for
Mr Kidd's 100% shareholding in ITS. Both concluded that in the circumstances of the
present case the primary indicator was the market approach, using figures from recent sales
of shares in the most closely comparable listed public companies. Both had regard also to
the terms of the most recent offer by TA Associates. Both used the income approach, based
on discounted cash flow, as a cross-check. It was agreed that use of a cost approach, based
on the value of the assets of the business, was not appropriate other than to provide a floor
value. Mr Indge had regard to the price paid by Lime Rock; Mr Thornton was instructed to
disregard this.
As regards the application of the market approach, there was also agreement
between Mr Thornton and Mr Indge that the two most appropriate guideline public
companies (GPCs) to use were Total Energy Services Inc and Natural Gas Services Inc.
Mr Thornton considered that ITS was likely to have a value closer to Natural Gas Services'
85
lack of marketability, the discount would probably not be as high as that for a minority
interest, as there were fewer restrictions to a sale for a controlling shareholder. The discount
effectively related to the additional time required to sell a private controlling shareholding
versus the same in a public company, and the inequality between private and public
companies in respect of regulatory requirements and sources of financing. Published data
suggested that the discount from listed companies applicable to sales of minority holdings
of private company shares was of the order of 20-30%; acknowledging that the present case
was concerned with a 100% holding, Mr Indge applied a discount at the bottom of the range,
ie 20%.
Mr Thornton did not consider it appropriate to apply a discount. In his
supplementary report, the reason he gave was that the basis of value assumed that there
already existed a willing buyer and willing seller for the subject company as a result of a
proper marketing process having been completed. That would not differ as between a
public and a private company. In the course of giving evidence, Mr Thornton also made the
point that there was no readily available market for a 100% shareholding in a public
company, and again therefore no difference in marketability between the two. In the case of
a 100% holding of private company shares it was not appropriate to apply a "rule of
thumb"; each case had to be considered individually.
On this issue I find Mr Indge's arguments persuasive, and supported by the
literature to which he referred. The point, as I understand it, is that it is unnecessary and
inappropriate to attempt to compare a sale of a 100% holding in ITS with a hypothetical sale
of a 100% holding in a public company. The comparison that has been done to produce
enterprise and equity values for the listed companies is based on sales of readily marketable
small parcels of shares; it is that comparison which requires a discount in valuing a less
86
marketable shareholding of whatever size. I have difficulty with Mr Thornton's reasoning
based on the marketing process having been completed, because the discount reflects the
hypothetical purchaser's awareness that that process will have to be gone through when he
comes to sell on, as well as recognising the greater uncertainties regarding marketability of
shares in a private company.
The published material to which Mr Indge referred recognised that different
considerations applied to discounting controlling interests for lack of marketability.
According to one source (Shannon P Pratt, The Market Approach to Valuing Businesses (2005),
page 163) there are no directly observable market data to quantify such discounts. However
the author observes that preparing the company for sale and accomplishing the sale involves
substantial time and costs, and there is a risk that once these costs are incurred, the company
might not be able to realise the amount indicated by historically observed transactions. In
determining a discount one should attempt to quantify these costs and risks. The approach
taken by Mr Indge accorded with this guidance and did not merely apply a rule of thumb.
To the same effect, a study by Micah S. Officer, "The price of corporate liquidity: Acquisition
discounts for unlisted targets" (2007) 83 Journal of Financial Economics 571 concluded, in a
passage with obvious relevance to controlling as well as minority interests:
"Selling a part, or the whole, of a firm is an important source of liquidity for the
trapped owners of equity in nontraded assets -- but a source that comes with a price
that appears to at least equal that of alternate sources of liquidity (public and private
debt and equity markets). However, the results in this paper imply that selling part
of an unlisted firm is a last-resort source of liquidity for owners that need sources of
cash when borrowing additional funds is unappealing. As such, the price paid to
access liquidity by selling unlisted assets is reflected in the discounted sale price..."
I am therefore satisfied that Mr Indge's approach is soundly based in experience and
published guidance. I find no evidential basis to warrant departing from his choice of a
discount of 20%.
88
Having regard to what would have been known in 2009 about ITS's actual performance
against forecast, that appears to me to be an appropriate methodology to adopt. The
enterprise value range thus produced is comparable with, albeit slightly higher than,
Mr Indge's range of $270 - 290 million using the market approach.
In order to make a finding on pre-transaction value, I have carried out a
re-calculation of Mr Thornton's market approach valuation, using the methodology at
paragraphs 8.20 to 8.24 of his report but with the inclusion of a private company discount
of 20%. According to my calculation this would produce implied multiples for the two
GPCs of 4.4 and 6.9 respectively, giving an enterprise value range for ITS of $203.7 to
$319.5 million. The midpoint is $261.6 million. Continuing with Mr Thornton's approach by
identifying a narrower range within the lower bound of the range between the midpoint and
the upper (Natural Gas Services) figure, one arrives at a range of value between
$270 - 290 million: the same as Mr Indge's market approach valuation. I regard this as a
sound footing upon which to make a finding that the enterprise value of ITS immediately
before the transaction was in the range of $270 - 290 million. I do not find that the results
produced by either the income approach or reference to the most recent offer by TA
Associates (which was of course based on earlier and more favourable EBITDA forecasts)
cast doubt on this conclusion. I note that Mr Indge calculated the pre-money enterprise
value of ITS based on the price paid by Lime Rock to be $287.5 million.
In order to arrive at the equity value of Mr Kidd's 100% holding, ITS's net debt
($168 million) requires to be deducted from the enterprise value. This produces a range for
the equity value of $102-122 million.
There is, however, one further adjustment to make. Some of ITS's subsidiaries had
minority shareholders, and the experts were agreed that account ought to be taken of these
89
when valuing Mr Kidd's shareholding in ITS. Unfortunately there was very little material
upon which to carry out this exercise. In the absence of anything else, Mr Thornton adopted
a figure of $3 million used for minority interests in the ITS balance sheets for the 2008
and 2009 financial years. Mr Indge's view was that there was insufficient information to be
able to value the minority shareholdings. He considered that the figure shown in the
balance sheet, based on book values which would be consistent with a cost approach to
valuation, was not appropriate and would probably understate their value. He noted that
according to the KPMG vendor due diligence report, the minority shareholders' share of
EBITDA in financial year 2008 was just over 8%, but did not consider that there was
sufficient information to confirm whether this was truly reflective of their economic interest.
In his written report, Mr Mitchell also used the KPMG figures but considered that the most
appropriate way of accounting for the minority shareholders' interest was to attribute a
proportion of EBITDA on a forward-looking basis, which gave a figure of 11%.
In circumstances where the experts agreed that some adjustment ought to be made,
but that there was insufficient information to do this accurately, I consider that I must make
an adjustment doing the best I can with such material as is available. In my view the use of
the balance sheet figure, based on cost, is unlikely to allocate sufficient value to the minority
shareholdings. On the other hand a valuation based on contribution to future EBITDA has
significant uncertainties. I propose to make a very conservative allowance for the value of
the minority shareholdings, beginning with the KPMG current EBITDA figure of 8% and
reducing it by half to recognise the uncertainty of their future contribution. A deduction
of 4% of the midpoint of the enterprise value range ($11.2 million) from the midpoint equity
value of £112 million produces a figure of $100.8, or say $101.0 million. I find that this was
the value of Mr Kidd's shareholding in ITS immediately before the transaction.
91
of 30% to 40% to the value of Mr Kidd's shareholding. Mr Thornton based his view on the
following features of the investment agreement:
Clause 12.1.3 stated that if the lead investor (ie Lime Rock) voted in favour of any
resolution or signed a written resolution, each other investor (if any) must also vote
in favour of or sign the resolution. On Mr Thornton's interpretation this deprived
Mr Kidd of the right to vote against the Lime Rock directors on resolutions.
Mr Kidd was not permitted without Lime Rock's consent to effect any material
change to the nature of the business, appoint directors or alter managers' service
agreements, incur capex in excess of 10% of budget, dispose of the share capital of
any subsidiary, make loans to other entities, raise additional funding, materially
depart from the strategic plan, or liquidate the company.
Mr Kidd could not sell his shares without Lime Rock consent to anyone other than a
family member or Mr Corray.
Lime Rock had certain rights on the occurrence of a "Trigger Event" including
default and breach of covenant.
Mr Indge noted that with only a 66% shareholding and no casting vote, Mr Kidd
could not pass a special resolution. In practical terms this meant that he could no longer sell
ITS and liquidate his shareholding without Lime Rock voting support, and could only sell
his own shares if he could find a buyer. In terms of the investment agreement, he could not
make changes to the business plan or appoint additional directors without Lime Rock
consent. Mr Indge considered that a control premium was still appropriate but that a
10% discount should be applied to reflect the reduction in influence.
In the course of cross-examination Mr Thornton's position in relation to voting on
resolutions appeared to change. It was pointed out to him that for the purposes of
92
clause 12.1.3, Mr Kidd was not an "investor", and not therefore subject to the restriction in
the clause. In response he explained that the clause was still relevant because it would
apply to any acquirer of Mr Kidd's shares. He accepted that the provisions referred to were
not major restrictions on Mr Kidd's ability to operate ITS's business, and that the guaranteed
exit could not occur for seven years, which was quite a long time. He assented to the
proposition that rather than an influential minority, Mr Kidd had moved to being a
co-investor, to whom the minority discount would not apply, but observed that someone
purchasing Mr Kidd's shares would have to see the matter differently. For his part,
Mr Indge agreed with the description of the relationship as a joint venture, where the terms
of the investment agreement reflected the parties' agreed business plan.
The approaches of the two experts to this matter differ significantly, and I must
choose one or other. On balance I am satisfied that Mr Indge's 10% discount is to be
preferred. Despite Mr Thornton's explanation, it appears to me that his choice of discount
was influenced by an erroneous interpretation of clause 12.1.3 regarding Mr Kidd's power to
pass resolutions. I am not persuaded that the other factors mentioned by Mr Thornton
justify characterising Mr Kidd's 66% holding as no more than an influential minority. They
were concerned more with the parties' respective rights on exit, or in the event of the
company falling into financial difficulty, than with the operation of the company's business.
The descriptions of co-investors and joint venture seem to me to be much more apposite,
and in my view those descriptions support the application of a 10% discount only.
The final issue is more difficult to address because it arose at a very late stage of the
proceedings. It concerns the appropriate treatment, in the post-transaction valuation of
Mr Kidd's shares, of the cash injection by Lime Rock. In their written reports, Mr Thornton
and Mr Indge adopted the same approach of simply adding $43.6 (Mr Thornton) or
94
Mr Indge's approval of Mr Mitchell's methodology, that I should adopt a conservative
figure of $120 million as the post-transaction value. I am unable to accept that submission.
Firstly, it is not supported by the terms of Mr Mitchell's report in which he stated
(paragraph 9.6.4):
"For the avoidance of doubt, I do not consider that the value of Mr Kidd's
shareholding post-LRP Transaction was $123.0 million but is instead at least the
same as it was post-LRP Transaction [sic I assume this is an error and should be
`pre-LRP Transaction'], or potentially higher."
At paragraph 9.6.8 of his report Mr Mitchell offered an alternative post-transaction value of
$86.2 million (which was still $15 million higher than Mr Mitchell's pre-transaction value of
$73.1 million) if a higher discount rate was applied to reflect the higher risk to Mr Kidd's
shares resulting from the waterfall distribution. Mr Mitchell did not of course give
evidence, and the significance of these observations remains unexplained. Secondly,
Mr Indge, although agreeing with the methodology, did not adopt the value of $123 million.
I am satisfied on the ground of what appears to be a consensus among the experts that a
method which simply adds $43.6 million without taking account of expected returns
undervalues the shares post-transaction, but I am left with no clear evidential basis for
assessing by how much.
Disregarding for the moment such undervaluation, the arithmetic is as follows:
$ million
Pre-transaction value of 100% holding (as calculated above)
Add net cash input
Whereof 60.5%
Less 10% discount
Post-transaction value of 66% holding
95
To this falls to be added the $10 million received by Mr Kidd, giving a total of $88.75. When
compared with the pre-transaction valuation, that would produce a loss on the transaction
of $12.25 million.
On the face of it, I would find this surprising. This part of the calculation does not
assume fraud, and it will be recalled that Mr Kidd's financial advisers who are not
implicated in the alleged fraud were of the view that he had got a good deal. In the course
of the negotiations, Simmons had carried out numerous modelling exercises on behalf of
Mr Kidd and ITS in order to assess the value of the company. Taking this into account, and
having regard to the consensus of the experts that this methodology produces a
post-transaction undervaluation, I find that, on balance of probabilities, it is likely that, still
disregarding fraud, 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
received. On this basis he sustained no loss in the transaction.
Even if the undervaluation is left out of account, Mr Kidd would have to
demonstrate a loss which exceeds the sum recovered in the P&W/BP action. I have noted
that that sum was £19 million. In their submissions the sixth to eighth defenders adopted a
conversion rate (as at January 2019) of $1.29 to £1; - as no other rate was proposed I shall do
likewise. £19 million equates to $24.5 million. Allowing for interest on $12.25 million at,
say, 4% per annum from September 2009 until January 2019, the sum recovered by Mr Kidd
in the P&W/BP action comfortably exceeds the loss calculated without taking account of the
undervaluation. On this basis he would have sustained no residual loss recoverable from
the present defenders.
97
there were allegations of fraud but people were willing to buy at the right price. In this case
there would have been a market for the right deal.
I am not persuaded that Mr Thornton's comparison is of assistance. It is based on
experience of the familiar situation of a sale of a minority private company shareholding and
assumes what, in the very different circumstances of the present case, has to be
demonstrated: namely, that dishonesty on the part of Lime Rock would have had a very
significant impact on the marketability of Mr Kidd's residual shareholding. Secondly, as
Mr Thornton accepted, the rationale of this argument was that the wrongdoing would
impact on the value of all ITS shares and not just Mr Kidd's shares. On that basis
Mr Thornton's comparison would value ITS's shares post-transaction at a range well below
the figure of $97.9 million (including the Lime Rock cash injection) produced by his cost
approach, which he regarded as a floor value. It seems to me that that cannot be right.
The hypothetical purchaser of the shares must be presumed to have full and accurate
information about the wrongdoing of Lime Rock. The purchaser must therefore be
presumed not only to be aware that Lime Rock fraudulently concealed Mr Gordon's conduct
from Mr Kidd but also what the conduct was that was concealed. In paragraph 104
above I
listed the actings of Mr Gordon that were subjected to criticism. At paragraph 125,
I
concluded that the transaction would have proceeded as it did without Mr Gordon's
participation. What the hypothetical purchaser would have made of this is, in my judgment,
a matter of speculation and not one where expert valuation evidence can offer much
assistance. It seems to me that all that one can say is that the hypothetical purchaser would
have been willing to offer a price somewhere between (a) the post-transaction value with no
allowance for fraud ($91 million), and (b) a pro rata share of the value of the company on the
98
cost approach ($64.6 million). In the absence of any reason to do otherwise, I adopt the
figure half way between. The calculation is then as follows:
$ million
Pre-transaction value
Less:
Share of value on cost approach (66% of 97.9)
64.6
Add 50% of (91.0 64.6 = 26.4)
13.2
77.8
Add cash sum received
10.0
87.8
Loss on transaction
13.2
Again on this basis there has been full recovery, inclusive of interest, in the P&W/BP action,
and there is no residual loss recoverable from the defenders in the present action.
Finally, for the sake of completeness, if contrary to my decision the undervaluation
of the shares post-transaction with no account taken for fraud were to be left out of account,
the figure of 91.0 in the above calculation would become 78.75, and the figure of 77.8 would
therefore become 71.7. After addition of the $10 million cash sum received, the loss
produced would be $19.3 million. Interest thereon at, say, 4% per annum from
September 2009 until January 2019 would amount to about $7.2 million, and Mr Kidd would
have a recoverable residual loss of $2 million.
(4) Reflective loss
On behalf of the sixth to eighth defenders it was submitted that on the hypothesis
that the valuation post-transaction had to take into account the effect of fraud, the claim
failed because it amounted to reflective loss. As already noted, Mr Thornton agreed that the
impact of fraud would have affected the value of shares in ITS as a whole and not merely
Mr Kidd's holding. On this hypothesis the wrongdoing would be actionable by ITS because
the entire shareholding was devalued. Reference was made to Sevilleja v Marex Financial
99
Ltd [2021] AC 39, decided since I rejected a similar argument in the P&W/BP action. It was
submitted that where the wrongdoing diminishes the value of the entire shareholding, a
claim by a shareholder fails as reflective loss.
Had it been necessary to address this argument, I would have rejected it. Far from
supporting it, the Sevilleja decision emphasises that the circumstances of the present case do
not fall within the restricted scope of the doctrine of reflective loss (in so far as it survives at
all in the light of the Supreme Court's decision). The issue in Sevilleja was the proper scope
of the decision of the Court of Appeal in Prudential Assurance Co Ltd v Newman Industries Ltd
(No 2) [1982] Ch 204, as subsequently interpreted by the House of Lords in Johnson v Gore
observed (paragraph 39):
"In summary, therefore, Prudential decided that a diminution in the value of a
shareholding or in distributions to shareholders, which is merely the result of a loss
suffered by the company in consequence of a wrong done to it by the defendant, is
not in the eyes of the law damage which is separate and distinct from the damage
suffered by the company, and is therefore not recoverable... The decision had no
application to losses suffered by a shareholder which were distinct from the
company's loss or to situations where the company had no cause of action."
At paragraph 41, Lord Reed quoted Lord Bingham's speech in Johnson at page 35, where he
observed that the authorities including Prudential supported the following statement of
principle:
"Where a company suffers loss caused by a breach of duty owed to it, only the
company may sue in respect of that loss. No action lies at the suit of a shareholder
suing in that capacity and no other to make good a diminution in the value of the
shareholder's shareholding where that merely reflects the loss suffered by the
company..."
Lord Reed noted (paragraph 42) that the first sentence quoted is a statement of the rule in
Foss v Harbottle (1843) 2 Hare 461, and that the second sentence encapsulates the reasoning
in Prudential, and explains why, in the circumstances described, a shareholder who is "suing
100
in that capacity and no other" cannot bring a claim consistently with the rule in Foss v
Harbottle.
In the present case Mr Kidd is not suing in the capacity of shareholder and no other
for a loss sustained because of an injury to ITS which has caused a diminution in value of his
shareholding. His claim is to have suffered loss directly because of an unlawful means
conspiracy perpetrated to cause harm to him, not to ITS. Had his case on the merits
succeeded, the alleged diminution in his share value would not have been the consequence
of a wrong against the company but rather of a wrong against himself by inducing him by
fraudulent concealment to enter into a joint venture relationship with a fraudster. That is
not a situation in which the law refuses to recognise the claim of a shareholder as separate
and distinct from any claim that the company might have.
Expenses of action against P&W/BP
In his quantification of loss, the pursuer seeks to reduce the £19 million recovered in
the action against P&W/BP by the sum of £5,215,419, said to represent the expenses of that
action beyond an interim award of £1 million. On this argument the US dollar equivalent, as
at December 2023, of the sum recovered in the previous action is around $17.3, rather than
the figure of $24.5 million that I have used in the above calculations. In my opinion this
element of the pursuer's claim is irrelevant. The action against P&W/BP was a claim against
different defenders based on different grounds, including breach of fiduciary duty on the
part of P&W. That claim was settled on payment of a lump sum of £19 million. So far as
expenses are concerned, the settlement agreement provided (clause 2.4):
"No other sum of money, whether referable to damages, interest, expenses or
otherwise, is payable as between the Parties. In particular, to the extent that they
have not already been paid, any awards of expenses in favour of any party hereto are
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