Analysis
The claimant was the trustee of an employment benefit trust (the EBT). The trustee had an interest in a company that owned and controlled a business (the utility). The beneficiaries of the EBT were the former and current employees of the utility and other group companies and their dependants. The trustee entered into a sale and purchase agreement for the sale of the EBT’s interest in the company, conditional upon certain relief from the court. Following the sale, there would be a distribution of the trust property amongst various beneficiaries.
Held
The following orders were made:
a) The hearing was to take place in private (the privacy order);
b) Representation orders were made (the representation orders);
c) A document executed by the trustee (the deed of grant) was set aside and declared void ab initio (the rescission order);
d) The trustee was granted power, pursuant to s57 Trustee Act 1925 to put into effect transactions set out in the sale and purchase agreement (the SPA) for the disposal of the EBT’s shares in the holding company (the s57 order); and
e) On the basis that this was a ‘momentous decision’, an order was made under the second limb of Public Trustee v Cooper, sanctioning the trustee entering into the SPA and approving the trustee’s decision to complete the transaction (the Public Trustee v Cooper order).
The privacy order
By CPR 39.2 hearings should generally be in public. Exceptions include a hearing involving confidential information where publicity would damage confidentiality and a hearing involving uncontentious matters in relation to the administration of a trust. When deciding whether to order that a hearing should take place in private, the court must undertake a balancing exercise between the interests of the public and the interests of the parties. Factors to be considered include the protection of confidentiality amongst the parties; giving effect to agreements as to the confidentiality of commercial arrangements; any legal professional privilege that might be affected; the nature of the jurisdiction being exercised by the court; and the fact that other parties in the claimant’s position might conduct their affairs in private without resort to court proceedings.
In this case there was agreement between the trustee and purchaser that the transaction should be confidential. Additional factors put forward by the trustee were that it was required under the SPA to apply to the court for approval and in that application, the trustee was under a duty to put before the court advice about the merits of the transaction and its negotiating strategy but needed to keep them confidential from the purchaser; privileged materials were put before the court by the beneficiaries and in the same way needed to kept confidential from the purchaser; and any dissemination of information about the sale would inevitably have caused unrest amongst the employees of the utility.
The court ordered confidentiality to protect the identities of the parties acting as representatives; the terms of the orders and the judgment were to be made available in anonymised form but much of the information considered by the court and the identities of the defendants would be and remain confidential.
The representation order
There were three classes of beneficiary under the EBT: the pot A beneficiaries (of which there were 61 members), the pot B beneficiaries (99 members) and the joint pot beneficiaries (158 members). Membership of each class depended on the present employment status of the beneficiary and the date upon which his employment started. There were good reasons not to join all of the beneficiaries as parties to the claim, including impracticality and the reduction of a risk of the transaction being put in jeopardy by a breach of confidentiality through inadvertent disclosure. The court was satisfied there was no need for potential beneficiaries to be represented but there were good reasons to appoint a representative for each of the three classes of beneficiary.
The rescission order
Under the SPA, the trustee was to grant share options to certain of the beneficiaries over approximately 40% of its holding of shares. The trustee achieved this by entering into a deed of grant, which included a schedule of the beneficiaries being granted share options. The options would be exercised before completion, so that these beneficiaries would participate in the sale as sellers. The evidence before the court, which was undisputed, showed that the schedule to the deed contained a series of mistakes in relation to the options; almost 10,000 fewer options were conferred than was intended, in a manner that favoured the pot B and joint pot beneficiaries over the pot A beneficiaries (who were scheduled to take less than half of what was intended).
The trustee applied for an order setting aside the deed of grant so that it could execute a new, corrected, deed. All the parties supported the application. There were no countervailing considerations that might have affected the jurisdiction to make the order or the exercise of the court’s discretion to do so and the application succeeded (Pitt v Holt; Futter v Futter [2013] UKC 13 applied).
The s57 order
Under the SPA the trustee intended to dispose of its entire holding of the shares and such an action was restricted by clause 7 of the EBT, which contained an express restriction on the powers of the trustee to dispose of shares in such quantity as would lead to a loss of control over the utility. Although the power to dispose of the holding was limited by clause 7, rather than wholly absent, s57 of the Trustee Act 1925 gave the court power to override an express restriction on the powers of trustee, but the power did not permit the court to rewrite the trust itself (dictum of Morgan J in Alexander v Alexander [2011] EWHC 2721 (Ch); [2011] WTLR 187 at para [16] followed).
The court needed to be satisfied of four matters to make an order:
a) The court must have been satisfied that the course of action the trustee wished to take was one that could properly be regarded as ‘management and administration’ of property, rather than a rewriting of the trust. The court was satisfied that this was the case. Dealing with the shares was undoubtedly management or administration (or both). The dealing was part of the intention of the trustee: to exercise the ‘ultimate power of management, namely bringing the trust to an end’.
b) There must have been no power under the provisions governing the trust to carry out the transaction that the trustee wished to carry out. This was clearly the case because of the limitation under clause 7.
c) It must have been expedient that the trustee should be able to enter into the relevant transaction. It was common ground that this consideration was to be applied by reference to the interests of all the beneficiaries, looked at together, weighing the advantages and disadvantages overall and ignoring the particular circumstances of individual beneficiaries. If a transaction was more advantageous to some than others, that would not have prevented it being expedient if it were for their overall advantage or benefit. The court did not need to examine the financial aspects of the transaction in detail; only to consider at a relatively high level the benefits and risks of the transaction for the current and former employees. Based on the evidence, the court determined that the timing of the sale was advantageous. Although there was some risk for current employees from the transaction, they were relatively negligible, and the trustee had taken steps to mitigate them. The trustee had been advised by its financial adviser that the price was a good one. The very significant benefits from the sale weighed far more heavily in the scales than any other considerations. The court was satisfied that it was expedient to grant the Trustee the power it needed in order to effect the transaction both with regard to the requirements of s57.
The Public Trustee v Cooper Order
The trustee had decided to enter into the transaction, which would lead to a sale of its holding of shares in the company, on the basis of the terms of the SPA. This was a momentous decision that would result in the winding up of the EBT. As such, the trustee sought the approval or blessing of the court for that decision under the second limb of the Public Trustee v Cooper test (see Public Trustee v Cooper [2001] WTLR 901, at 923), for which there were two elements to consider: first, was the decision to sell the assets of the EBT a reasonable one and, secondly, was the manner in which the proceeds of sale were to be distributed reasonable?
The trustee’s decision-making process had been structured and logical, ranging much more widely than looking at purely financial considerations. The distribution of the sale proceeds reflected the contributions of the classes of employees to the success of the utility over the years. In reaching a determination under this head, the court reviewed the same considerations as it had in determined the expediency of conferring on the trustee power to enter into the transaction. It looked to see whether the decision fell within a range of reasonable decisions; it being sufficient to reach the view that the trustee’s decision could not be said to have been an unreasonable one.
Although one of the directors of the trustee was also a minority shareholder, the court was satisfied that the potential conflict of interest had been recognised and managed appropriately.
Independent law firms
All of the parties to the application had instructed the same law firm, although separate counsel had been instructed on behalf of the various parties. By way of an afternote, the court expressed reservations about this approach, particularly in the case of the representative parties, but in this case was content with the arrangements that had been made.
JUDGMENT CHIEF MASTER MARSH: [1] This judgment arises from the hearing of this part 8 claim on 16 February 2018. An interim order for anonymisation was made on 8 December 2017, before the claim was issued, and an order anonymising the proceedings, save for the identity of the claimant, was made at the hearing. The …Continue reading "South Downs Trustees Ltd v GH [2018] WTLR 673"