In a judgment handed down in the Chancery Division on 30 November 2023, Master Pester acceded to an application by the First and Second Defendants, GSquare Capital II LP and P2U Holdings Limited, to strike out or enter reverse summary judgment in respect of aspects of the claims advanced against them by Mr Daniel Lee and the trustee of his private pension (the ‘Claimants’).
The case concerned the validity and enforceability of a transfer notice which compulsorily transferred the Claimants’ shares for £1 on the alleged basis that Mr Lee had breached various restrictive covenants. Such issues frequently arise in the context of a sale of a controlling interest of a business to private equity interests by founder(s) or managing owners of a private company. The founder(s) or managing owners then typically stay on at the business for a period, but are subject to clauses which permit the private equity owner to require the shares held by them to be compulsorily acquired by the private equity owner upon their departure, with the price depending on the circumstances of their leaving.
Mr Lee was the founder and a shareholder in a pharmaceutical business (Pharmacy 2U Limited (‘P2U’)) which was acquired by GSquare and P2U Holdings in March 2018 pursuant to a Share Sale Agreement (the “SSA”). Pursuant to the SSA, shares in P2U Holdings were issued to the Claimants. The new shareholders then entered into a shareholders’ agreement and P2U Holdings subsequently adopted new Articles of Association (the ‘Articles’).
In June 2019, Mr Lee was given notice of redundancy and placed on garden leave, thereby making him a “Leaver”. Pursuant to the Articles, GSquare was entitled within 12 months of a Leaver’s termination date to transfer all or some of his shares to a specified person, with the price payable for the transferred shares varying depending on what type of Leaver Mr Lee was.
In July 2020, GSquare purported to exercise this right by a transfer notice requiring the Claimants to transfer their shares for £1 (the ‘Transfer Notice’), on the basis that Mr Lee was a ‘Very Bad Leaver’ because he had breached various restrictive covenants in Mr Lee’s Service Agreement and/or the Shareholders’ Agreement. Mr Lee disputed this characterisation and contended that he was an ‘Intermediate’ Leaver.
In their claim, the Claimants alleged inter alia that (i) the Transfer Notice was invalid on the basis that it had not correctly identified what type of Leaver Mr Lee was (the ‘Validity Issue’) and (ii) the provisions of Article 16 permitting transfer of the shares for £1 constituted an unenforceable penalty clause (the ‘Penalty Issue’). As a result advanced a claim for damages against the First and Second Defendant for some £8m, said to be the present value of the shares.
The First and Second Defendants applied to strike out or obtain reverse summary judgment in respect of the Validity and Penalty Issues.
On the Validity Issue, Master Pester held that for the Claimants to succeed on their invalidity argument, Article 16 required (i) GSquare to identify what type of Leaver Mr Lee was, but also (ii) that GSquare do so accurately. Master Pester held that these arguments failed as a matter of construction: there was no such express wording and there was no basis for implying a term to accurately identify the type of Leaver in a notice directing the transfer of the shares (Judgment at [43(4)] – [43(5)]).
On the Penalty Issue, the Judgment contains an illuminating discussion on the law on penalty clauses following the Supreme Court’s judgment in Cavendish Square Holdings v Makdessi [2016] AC 1172. Master Pester held that the cases following that judgment had not left the law unsettled. He went onto conclude that Article 16 was properly construed a primary obligation in the form of a price adjustment clause which therefore did not engage the penalty doctrine at all (Judgment at [61]).
As a result, Master Pester granted the First and Second Defendant’s application.
A copy of the judgment is available to view here.
Joe Smouha KC and Bibek Mukherjee appeared for the First and Second Defendants, instructed by Oliver Glynn-Jones and Alasdair McAlpine of Goodwin Procter (UK) LLP.
