September 22, 2023 COURT OF FIRST INSTANCE - JUDGMENTS
Claim No. CFI 005/2021
THE DUBAI INTERNATIONAL FINANCIAL CENTRE COURTS
IN THE COURT OF FIRST INSTANCE
BETWEEN
(1) ANOOP KUMAR LAL
(2) PAUL PATRICK HENNESSY
Claimants
and
DONNA BENTON
Defendant
JUDGMENT OF JUSTICE LORD ANGUS GLENNIE
Trial : | 15 November 2022 – 18 November 2022 |
---|---|
Counsel : | Ms Justina Stewart instructed by Nimble Legal for the Claimants Ms Sophia Hurst instructed by Curtis, Mallet-Prevost, Colt & Mosle LLP for the Defendant |
Judgment : | 22 September 2023 |
UPON the Part 8 Claim Form dated 14 January 2021 (the “Claim”)
AND UPON the Defence with Counterclaim dated 4 April 2021
AND UPON the Reply to Defence dated 25 April 2021
AND UPON hearing Counsel for the Claimants and Counsel for the Defendant at the Trial held before me on 15 November 2022 to 18 November 2022 (the "Trial”)
AND UPON reviewing all relevant material filed onto the Court file
AND UPON reviewing the Rules of the DIFC Courts (the “RDC”)
IT IS HEREBY ORDERED:
1. The Claimants’ Claims fail and are dismissed.
2. The Defendant’s Counterclaim succeeds in the sum of USD 2,671,542
3. The Claimants shall pay to the Defendant the sum of USD 2,671,542 within 14 days of the date of this Order
4. Judgment debt interest shall run on the said amount at the rate of 9% per annum from the date of this order until payment.
5. Costs shall be reserved.
Issued By:
Delvin Sumo
Assistant Registrar
Date of issue: 22 September 2023
At: 12pm
SCHEDULE OF REASONS
Introduction – relevant parties and other individuals
1. The Entertainer FZ-LLC (“The Entertainer”) is a company incorporated in the Dubai Creative Clusters Authority Freezone (formerly the Dubai Technology, Electronic, Commerce & Media Free Zone). It was established in June 2001.
2. The Defendant (“Ms Benton”) founded The Entertainer in June 2001. Until about September 2020 she was the sole director of The Entertainer and was employed by The Entertainer as its General Manager
3. At the relevant times, Ms Benton was a director of The Entertainer’s parent company, DATE Holdings Ltd (“DATE”), a company incorporated in the Cayman Islands. She and Red Entertainer SPV Limited (“RED”), an entity controlled by the Abraaj Group (“Abraaj”), each owned 50% of the shares in DATE. References hereafter to “the CoShareholders” are references to Ms Benton and RED/Abraaj in their capacities as shareholders in DATE.
4. The First Claimant (“Mr Lal”) was employed by The Entertainer as Chief Financial Officer (CFO) under an Employment Contract dated 4 January 2015. He was later appointed to the role of Chief Operating Officer (COO) from May 2016. He remained in that role until 31 July 2020. His employment was terminated due to redundancy on 30 April 2020. On his departure from The Entertainer, he was deemed a “Good Leaver”.
5. The Second Claimant (“Mr Hennessy”) joined the Entertainer on 1 June 2014 as Chief Operating Officer (COO) and was later appointed to the role of Chief Executive Officer (CEO) in or around May 2016. When he left the Entertainer on 31 December 2020, having resigned in June 2020 but served out his full six month notice period, he too was deemed a “Good Leaver”. He was a director of DATE from April 2017 to July 2018.
6. David Ashford (“Mr Ashford”) was also part of The Entertainer’s senior management team – at the relevant times he was Chief Information Officer – but, although he makes some appearances in the narrative, he does not (for reasons explained later) feature as a party to this dispute.
7. Mr Lal, Mr Hennessy and Mr Ashford are sometimes collectively referred to as “Management”.
8. One other individual should be mentioned at this stage. Stephen Atkinson (“SA”) is an investment banker and Chartered Accountant with, to use his own words, “over 35 years of professional experience spanning a wide range of corporate finance specialisms, including private equity and debt and equity capital markets.” He had no position within The Entertainer’s management team but, as will appear later, was brought in later to assist Management with an attempted Management Buy Out of The Entertainer.
The sale of The Entertainer – outline
9. In 2016, Ms Benton and RED/Abraaj decided to sell some or all of their shares in The Entertainer or, more accurately, in DATE, its parent company. (Some proposals involved selling the shares in DATE while others involved the sale of The Entertainer itself – no difference in principle arises and unless otherwise required to differentiate I shall refer to the sale by whatever term seems appropriate). RED/Abraaj wanted to sell all of its shares in the company. However, there is an issue as to whether Ms Benton at that time wanted to sell her whole shareholding in DATE or only a part of it. Mr Hennessy said that she expressed “an interest in significantly, if not entirely, diluting her stake in the business.” She wanted to “monetise” her stake in the Company. In cross-examination Mr Hennessy was less uncertain. She only wanted to monetise some of her shareholding in DATE. Later he described her position as “absolute” – “she was absolute about retaining a shareholding. Ms Benton’s evidence was that at an early stage, before the trip to the USA discussed below, both she and RED/Abraaj had agreed that they wanted to sell 100% of their respective shareholdings in the Company. I did not find Mr Hennessy’s evidence on this either consistent or compelling. I accept Ms Benton’s evidence on this point. Ms Benton wanted to sell all her shares, but she would have been willing to keep a small percentage of them if the market compelled that outcome or if the terms were sufficient to make it attractive to her.
10. The Co-Shareholders engaged the Raine Group (“Raine”) to advise them on the sale and to organise the appropriate due diligence processes for protecting The Entertainer’s, DATE’s and the Co-Shareholders’ confidential information. As part of this exercise, Raine organised an investor roadshow in the US during 2016, which Ms Benton attended, with Mr Hennessy and Mr James Gosling (her then husband), to pitch The Entertainer to potential investors. Following the roadshow, only EQT Partners showed some interest. In early February 2017 EQT Partners made an indicative nonbinding offer for 80% of the shares in DATE, but this ultimately came to nothing.
11. In December 2016, when it seemed as though little progress was being made by Raine, Management agreed between themselves to pursue the possibility of a Management Buy Out of the business (“MBO”). They engaged SA to assist them in this venture. In pursuance of this proposed MBO, Management and SA entered into negotiations with a number of potential investors. including Havenvest Private Equity Middle East Ltd (“Havenvest”), Commercial Bank of Dubai, Investcorp Bank BSC, Panmure Gordon UK Limited (“Panmure Gordon”), Macquarie Capital Corporate Holdings Pty Ltd (“Macquarie”), Mayfair Equity Partners LLP (“Mayfair”), and GFH Financial Group BSC (“GFH”), who ultimately agreed to buy the company. It is unnecessary for me to describe the negotiations in any detail. The evidence led at trial of this action focused on what, if anything, Ms Benton and the Board of DATE were told of Management’s efforts to pursue an MBO and what, if anything, Management did in their pursuit of an MBO to the detriment of Ms Benton.
12. A sale of 85% of the shareholding in DATE was eventually achieved in early 2018. Although Management complained that they had, as SA described it in evidence, “brought this deal to the table”, the sale was not in fact an MBO. The sale was formalised by a Share Purchase Agreement (the “SPA”) dated 29 April 2018 between Ms Benton and RED as sellers and GFH as buyers. Under the terms of the SPA, RED sold its entire shareholding and Ms Benton sold 70% of her shareholding, leaving Ms Benton with a 15% shareholding in DATE. She sold her remaining shareholding to GFH in 2020.
13. Following the sale to GFH, the Claimants continued until mid to late 2020 to be employed by The Entertainer as COO and CEO respectively (see above). Ms Benton remained at The Entertainer as its General Manager and sole director until around September 2020.
14. In their capacities as COO and CEO respectively, and as members of the senior management team, the Claimants had had certain entitlements in the event of the sale of the Entertainer: see the ESOP and Earnout incentive provisions in connection with their Employment Contracts and the Sale Bonus agreements entered into in September 2017. These entitlements were re-structured in light of the sale to GFH – which was a sale of the shareholdings in DATE rather than a sale of The Entertainer – and replaced by rights and benefits under Settlement Agreements (sometimes referred 1 of 25 to as “Final ESOP Agreements” but which I shall call the “Settlement Agreements”) entered into on 28 June 2018.
15. Before turning to the disputed issues of fact, I should first set out the relevant terms of the Employment Contracts, the Sale Bonus Agreements and the Settlement Agreements.
The Employment Contracts
16. The Employment Contracts for Mr Lal (dated 4 January 2015) and for Mr Hennessy (1 June 2014) are in almost identical terms. The differences do not matter for present purposes. Relevant clauses are clauses 3.2, 5.2, 17.1 and 17.3 (for Mr Lal, 18.1 and 18.3 for Mr Hennessey). I set them out below, from Mr Lal’s Employment Contract:
“3.2 During your employment, you shall comply with (i) all rules, policies and procedures set out in any handbook or employment guidelines published by the Company or any other applicable Group member (as such policies and procedures may be amended or revised from time to time by the Company in its sole discretion or any other Group member); and (ii) to the extent applicable, all policies and requirements by competent authorities and/or any other relevant regulatory authorities.
[“Group” is defined in clause 1.8 as including a holding Company, such as DATE]
5.2 It is expected that you will: (i) act in the best interests of the Company and the Group at all times, (ii) devote your working time, attention and skill to your duties on a full-time basis, and (iii) faithfully and diligently perform such duties and exercise such powers as may be assigned to you by the Company from time to time. You will not engage in any other employment business activities without the Company's prior written consent.
17.1/
18.1 You will devote your best efforts to furthering the best interests of the Company and the Group. During your employment you will not engage in any activity or investment that (a) conflicts with the Company's and/or the Group's business interests, including without limitation, any business activity not specifically listed in this Agreement, (b) occupies your attention so as to interfere with the proper and efficient performance of your duties at the Company and/or any other Group member, or (c) interferes with the independent exercise of your judgment in the Company's and/or the Group's best interests. As used herein, the Company's and the Group's business means the development, marketing and support of products, services, software, data and research for business, professional or financial services use.
17.3/
18.3 You confirm that you have disclosed (or will promptly disclose) to the Company and/or any relevant Group member all circumstances in respect of which there is or there might be, a conflict of interest between the Company and/or any relevant Group member, and you agree to disclose, fully and in writing, to the Company and such Group member any such circumstances which may arise during your employment.”
Sale Bonus Agreements
17. On 4 September 2017, Mr Lal and Mr Hennessy each entered into an agreement with DATE giving them an entitlement to a Sale Bonus in the event that DATE achieved the sale of The Entertainer, or a substantial part thereof, at or in excess of a certain price (the “Sale Bonus Agreements”). It was a term of those Agreements that the relevant individual, Mr Lal or Mr Hennessy, did not breach any of the terms of his employment contract with The Entertainer or any of his obligations of confidentiality with regard to the terms or substance of his employment contract with The Entertainer
ESOPs and EOPs
18. “ESOP” stands for Employee Share Option Plan. (That, at least, is what I understood it to mean and, I think, Ms Benton also understood it to mean when giving evidence – counsel for the Claimants in her Closing Submissions said that it stands for Employee Stock Ownership Plan. The difference, if there is a difference, does not matter for present purposes.) As part of his benefits arising out of his employment by The Entertainer, Mr Lal was party to an Incentive Scheme Agreement (the “Incentive Scheme Agreement”) entered into with DATE on 1 January 2016, in terms of which (a) he was eligible to benefit from an ESOP on the sale of The Entertainer and (b) he would also be entitled to benefit from an earn out plan (the “EOP” or “Earnout”) based on the value of the Company at the date of exit. Mr Hennessy had similar entitlements by virtue of Schedule 1 to his Employment Contract. It was, however, common ground at the trial that the ESOP benefit would result not in the allocation of shares in the business but in their value.
The Settlement Agreements
19. I have already referred to the various incentive agreements from which Management individually stood to benefit. In light of the sale agreed with GFH, and the sale being not a sale of the company but a sale of the shares in the holding company, DATE, 1 of 25 these agreements were rolled up into and replaced by the “Settlement Agreements” (or “Final ESOP Agreements” as they were sometimes called). Each was entered into between the relevant Claimant, the Defendant, RED and DATE. Each is dated 28 June 2018. Each recites that the relevant employee benefits from participation in an employee share option scheme pursuant to which he has been allocated points which represent economic rights with respect to a percentage of the share capital of DATE (referred to as the “ESOP Allocation”); and in addition has been awarded a special bonus (the “Sale Bonus”) in the event of a successful sale of The Entertainer (a “Sale”). It then goes on to recite that the Shareholders (i.e. the Co-Shareholders, the Defendant and RED) have entered into an Agreement with GFH for the Sale of 85% of the shares in DATE (the ”SPA”). In light of this, the parties have reached Agreement on certain terms. The relevant terms are as follows:
“3. SETTLEMENT
The Employee agrees that the payment of the Completion Payment and the Earnout Payment (if any) constitutes full and final settlement of all his claims under the ESOP ...
4. COMPLETION PAYMENT
4.1 Subject to this clause 4 and clause 6, the Shareholders and Date agree to pay to the Employee the following:
a. an amount of [$222,222 for Mr Lal, $333,333 for Mr Hennessy]
b. an amount equal to [0.5% for Mr Lal, 0.75% for Mr Hennessy] of the Completion Sale Proceeds which exceed $30,000,000 calculated as [0.5% / 0.75%] x Completion Sale Proceeds minus $30,000,000),
(together, the ‘Completion Payment’).
4.2 95% of the Completion Payment will be paid to the Employee within 10 Business Days of the Shareholders receiving the estimated Completion Sale Proceeds following completion under the SPA.
4.3 Following adjustments under the SPA:
a. ... the remaining 5% oof the Completion Payment ... will be paid to the Employee at the same time as the Earnout Payment is made;
...
5. EARNOUT PAYMENT
5.1 Subject to this clause 5 and clause 6, the Shareholders and Date agree to pay the Employee the following:
...
(together, the “Earnout Payment”).
[The precise method of calculating the Earnout Payment does not matter for present purposes – there is no dispute about the arithmetic behind the Claimants’ claim.]
5.2 The amounts set out in clauses 5.1 ... shall only be payable if the Employee continues to be employed by The Entertainer group as at 30 June 2019.
5.3 The Earnout Payment will be paid to the employee on the later of 10 July 2019 and the date 10 Business Days after the Shareholders have received the Earnout Sale Proceeds following determination of the earnout under the SPA.”
The dispute between the parties
20. The Claimants’ claim is to recover sums alleged to be due under the Settlement Agreements. In essence, they have been paid the Completion Payments but not (or not all) of the Earnout Payments. Mr Ashford had similar entitlements but has been paid – no explanation was given for him being treated differently, but the fact that he has been paid explains why he is not a party to these proceedings. Mr Lal’s claim is for USD 170,224 plus interest and Mr Hennessy’s claim is for USD 255,335, also plus interest. There is no dispute about quantum if liability is established.
21. As already noted, the dispute between the parties relates to the conduct of Management in the negotiations which eventually led to the SPA. It is alleged by Ms Benton, in short, that, in the period from late 2016 and leading up to the sale to GFH, Management decided to pursue an MBO; that they did so without keeping Ms Benton or the Board of DATE sufficiently informed or seeking their approval; that in the pursuit of the MBO they failed to keep Ms Benton informed as to what was going on and indeed shut her out of negotiations; and they placed themselves in a position of conflict with the interests of Ms Benton, acted against her interests, and disclosed confidential information to potential purchasers, causing her loss.
22. Under reference to these allegations against Mr Lal and Mr Hennessy, Ms Benton denies that any sums are due to the Claimants under the Settlement Agreements. She says that, as a matter of the proper construction of the Settlement Agreements and/or of the relevant Employment Contracts, alternatively by virtue of an implied term thereof, the obligation to pay sums under the Settlement Agreements was conditional upon the Claimants not committing a breach of their Employment Contracts and/or of their duties 1 of 25 as members of the senior management team of The Entertainer and, in the case of Mr Hennessy, as a director of DATE. She contends that the Claimants did breach their obligations in pursuing an MBO without informing her of their plans; in disclosing confidential information to potential purchasers; and in seeking to secure better post acquisition deal terms at the expense of the Defendant and/or the Co-Shareholders. In the alternative, she contends that the Settlement Agreements were induced by misrepresentation and are on that ground liable to be rescinded. In the further alternative, as a defence to the Claim, she advances a counterclaim for damages for breach of the Employment Contracts and claims to be entitled to set off sums found to be due under the counterclaim against any liability she might have to the Claimants.
23. The Defendant’s case involves a wholescale attack on the conduct of the Claimants, Mr Lal and Mr Hennessy. It is set out at length in the Re-Amended Defence and Counterclaim. In summary, what the Defendant says is that the Claimants agreed between themselves to try to acquire The Entertainer by way of a Management Buyout (“MBO”); that they kept this secret from the Defendant (hence the reference to a “secret plot”) or at any rate did not make sufficient disclosure; that that gave rise to a conflict of interest, their duty to the Company and the Defendant to achieve the best price coming into conflict with their aim as potential purchasers to reduce the amount which would have to be paid; that as a feature of that conflict they shared confidential information belonging to the Company and the Defendant with potential purchasers (such confidential information including offers made by other potential investors, financial information relating to the Entertainer and/or the Co-Shareholders, details of The Entertainer’s strategy as well as the fact that the Defendant would ultimately be prepared to sell less than 100% of her shares); and that as a result of that conduct the sale of shares in the Entertainer or DATE, the holding company, realised less than it might have done; and, further, the Defendant was only able in that sale to sell a percentage of her shares rather than all of them as she had wanted.
An MBO – what it is and why it matters
24. During the course of the trial there was some uncertainty as to what was meant by an MBO and what were the essential characteristics of any such arrangement.
25. Mr Miocevic gave compelling evidence on this point. He is a solicitor and Managing Partner of the Dubai office of Curtis, Mallet-Prevost, Colt & Mosle LLP (“Curtis”). Curtis was instructed by Ms Benton and RED (the “Co-Shareholders”) to advise on the sale 1 of 25 of the Company, and Mr Miocevic was part of the Curtis team responsible for advising them. He gave a Witness Statement and appeared to give oral evidence at the Trial. In his Witness Statement he gave evidence in relation to a conference call on 20 September 2017 between Ms Benton, Mr Atkinson and Mayfair in relation to their potential acquisition of the Company. He attended the call in his capacity as the CoShareholders’ legal counsel. He said, contrary to the evidence given by Mr Hennessy and Mr Atkinson, that there was no discussion of an MBO during that call. What matters for present purposes, however, is his explanation of an MBO and why it would matter if an MBO was intended. He said this:
“9. ... An MBO refers to a ‘Management Buy Out’. As the name suggests, it is a transaction where a company’s management is acquiring or leading the acquisition of the business – either as a buyer or co-buyer – from the selling shareholders. As part of this, management would either use their own cash, or more usually raise debt finance and often equity finance from a private equity investor house or similar
...
11. Typically if an MBO is being considered, to protect the CoShareholders, standard governance would have been put in place to ringfence Mr Hennessy and Mr Lal from sell-side discussions by the Co-Shareholders—including confidential information and negotiations with other potential purchasers—to ensure the integrity of the sale process. This had never been put in place.”
He went on in paragraph 20 to say this in relation to the possible transactions with Mayfair and GFH:
“I had no knowledge of an MBO being contemplated; nor did I consider the transaction proposed by Mayfair Equity or GFH to constitute an MBO in any sense of the word. I note that if I had considered the Mayfair Equity and/or GFI proposals contemplated an MBO, I would have understood Mr Atkinson to be working against the Co-Shareholders and me as a buy-side adviser and not alongside the Co-Shareholders and me as a sell-side aligned adviser.”
In other words, management participating in an MBO (as described by Mr Miocevic in paragraph 9 of his Witness Statement) would have an incentive to drive down the price, working against the interests of the sellers to that extent. Hence the need to take steps to preserve the integrity of the sale process.
26. It is important to distinguish this situation from a typical share option scheme, in terms of which management may be entitled to a small shareholding in the business and, in the event of the business being sold to outside investors, may be able to negotiate a 1 of 25 “roll over” of that entitlement as part of their price for remaining within the company to provide continuity and experience. In such a case, Management are not leading the buyout or investing their own (or borrowed) money into the acquisition of the business and have no incentive to drive down the price.
27. Mr Girard, the expert called by the Claimants, agreed with Mr Miocevic on the potential conflict of interest in the case of an MBO. During the course of cross-examination when he was referred to an example of management seeking to buy The Entertainer and the acquisition being funded by bank debt and/or private equity, he agreed that in that scenario there was potential for management to be incentivised to drive down the price: “if that particular example provides that management will put money from their own pockets, yes.” In answer to a question from the bench along the same lines, suggesting that, where management need to raise private equity to support the buyout, the MBO inevitably involves trying to lower the price enough to get private equity interested, he said: “For sure. I mean, private equity wants to pay a fair value, ... the seller wants to have the highest price, the buyer wants to pay the lowest price.” In response to the suggestion that the interests of the MBO team would be to keep the price low enough to keep the private equity firm interested, he answered: “That's correct, but high enough for the exiting shareholder who wants to sell as well.” The potential for there to be a conflict of interest is inherent in such an arrangement and plain for all to see.
28. The short point is this, that, whenever there is a MBO led by management or funded in whole or in part by management’s own money and/or by loan capital and/or private equity, or when management aim to acquire a stake in the business greater than their existing interest, then the interests of management involved in the buyout will inevitably be to ensure that the sale goes ahead and, to this end, to keep the price as low as possible, while no doubt taking all possible steps to ensure that the price is high enough to keep the sellers interested. It is for this reason that disclosure by management of their intentions is critical so as to ensure that their involvement in negotiations and their use of confidential information in such negotiations is controlled or excluded.
The facts – outline findings
29. Having read the documents filed in process and having heard the evidence, I am left in no real doubt: that management entered into an agreement between themselves and with SA to pursue an MBO; that they failed to make adequate disclosure of that fact to the selling shareholders, i.e. to Ms Benton and to the Board of DATE; that they recognised that pursuing an MBO might, and on occasions probably would, put them 1 of 25 in a position where their interests conflicted with those of the selling shareholders; that on such occasions they pursued their own interests rather than those of the selling shareholders; and that by so doing they prejudiced the interests of the selling shareholders, and specifically Ms Benton.
30. I set out my findings and my reasons in more detail below. First, however, I should set out briefly my assessment of the witnesses.
The Witnesses
31. I heard oral evidence from Mr Hennessy, Mr Lal, Mr Atkinson (“SA”) and Ms Benton. I found Ms Benton to be an honest witness, who believed herself to have been wronged and answered questions firmly but with moderation. By contrast, I found the Claimants’ witnesses, Mr Hennessy, Mr Lal and SA, to be less satisfactory. They were often argumentative and evasive, and in the case of SA somewhat arrogant at times, and they tended to firm up their evidence on a particular point when it was challenged in cross-examination. Where there was a conflict between the Claimants’ evidence and that of Ms Benton, I tended to prefer the latter. But ultimately the case does not turn so much on unsupported oral evidence as on the documents to which the witnesses were referred and their explanation of what those documents showed.
The agreement to pursue an MBO
32. It is not really in dispute that the idea of pursuing an MBO was agreed by Management, with advice from SA, in a meeting in December 2016 (the precise date is unclear – it was probably either 14 or 17 December 2016 – but does not matter). That is not to suggest that it all happened in an instant. SA was brought into assist as the idea of an MBO was forming in the minds of individuals within Management, and ideas developed over time. It may be that not every detail was agreed at that time, but there is no doubt that by mid-December 2016 Management had reached an agreement among themselves to try, with the assistance of SA, to buy The Entertainer from the existing Co-Shareholders.
33. The purpose was a management-led buyout of The Entertainer. As Mr Lal put it in cross-examination (and this was consistent with evidence from others within Management):
“The purpose was to buy The Entertainer. ... And when we say buy-out, I think we better make it clear, we [mean] management-led. There was no 1 of 25 way we could have just paid $100 million for a business. So it was in partnership with an investor.”
This is consistent with SA’s evidence in paragraph 11 of his first witness statement –
“Management informed me that they were contemplating buying the 50% shareholding of Abraaj and whatever portion of the Defendant’s shareholding that she wished to sell”
– a passage confirmed by him, somewhat reluctantly, in cross-examination.
34. Later, in March 2017, Mr Lal drafted an investor presentation entitled “Investment Opportunity – Management Buyout – Strictly Private & Confidential”. The Executive Summary states that:
“C-level management [i.e. Mr Hennessy, Mr Lal and Mr Ashcroft] propose to buy the Entertainer in order to facilitate a change of ownership & for management to further grow the business in a strategic & structured manner with a view to an IPO after 5 years.”
Under the heading “MBO Proposal, Summary”, it states that “Senior Management Team wish to acquire the Entertainer”; and, under the heading “Funding”, it states “Equity requirement $25m to c$100m (debt free)”.
35. There is no contemporaneous minute of the meeting in December 2016 between Management and SA. But a letter of 5 September 2017 from SA to Messrs Lal, Hennessy and Ashford (described in the letter as the “Managers”) sets out what was agreed at that meeting, at least so far as concerns the relationship between SA and Management. The relevant parts read as follows:
“Dear Sirs
Acquisition of The Entertainer FZ LLC (the ‘Company’), its subsidiaries and affiliates (the ‘Target Group’)”
Background
A. SA has been assisting the Managers in relation to the proposed management buyout of the Target Group (the ‘Proposed Transaction’) and SA will continue to assist the Managers in this regard after the date of this letter
B. SA and the Managers held discussions relating to the Proposed Transaction on 17 December 2016, during which SA and the Managers agreed certain commercial terms applicable to SA's involvement in the Proposed Transaction.
C. SA and the Managers wish to set out the agreed commercial terms relating to SA's involvement in the Proposed Transaction in this letter”.
Commercial Terms
1. In consideration for SA providing assistance to the Managers in relation to the Proposed Transaction, it is agreed that upon completion of the Proposed Transaction:
(a) SA, or an entity controlled by SA, will be entitled to such number of shares in capital of the special purpose vehicle incorporated for the purpose of acquiring the Target Group (the ‘Bidco’) that are equal to Four (4) per cent of the enterprise value of the Target Group and calculated on a fully diluted basis;
(b) the Managers will procure that the Company pays to SA a cash payment of US$50,000; and
(c) SA will be reimbursed for all expenses incurred in relation to the Proposed Transaction, provided that if the Proposed Transaction does not complete (for whatever reason) the Managers will procure that the Company reimburses SA for all such expenses as soon as reasonably practicable after the presentation to the Managers of invoices for all such expenses.
...”
The letter was signed by each of the Managers confirming their acceptance of its terms. There is some dispute as to whether this letter accurately records terms that had been agreed at the meeting in December 2016, and there is some dispute also as to whether these terms were intended to be binding on the parties, and there is a recognition that things moved on to deal with different situations, but that does not matter. For present purposes what matters is that this letter confirms the proposed MBO of The Entertainer, assisted by SA, and the reward to be given to SA for his assistance, which included a 4% shareholding in the Company, or a holding company (Bidco). That shareholding is important because, as was put to Mr Hennessy and Mr Lal in cross-examination, they were hardly likely to be looking for a smaller shareholding for themselves after the MBO than they were willing to hand over to SA. Mr Hennessy and Mr Lal did not accept this point, but there is to my mind considerable force in it. I am satisfied that Management were looking for a deal that gave them a significant share of the equity.
36. It is also interesting to note, if only from the point of view of potential conflict of interest, that the Managers agreed to ensure that if the Proposed Transaction did not go ahead then SA’s expenses incurred by him in connection with the Proposed Transaction would be paid not by them but by The Entertainer (which on that hypothesis would still be owned by the Co-Shareholders).
Failure to make adequate disclosure
37. In her first witness statement, Ms Benton said that on or around 22 February 2017 at about 9.30 am Mr Hennessy came into her office and mentioned that he, Mr Lal and Mr Ashford were considering an attempted MBO. Mr Hennessy asked whether she would agree to a sale via an MBO, but did not put forward any detailed proposal, and did not set out how he intended to pursue an MBO or how he sought to attract funding for it. The discussion was casual and lasted no more than about 5 minutes. She told Mr Hennessy that she was not against an MBO and that she was comfortable with any acquisition structure said long as it was in the best interests of the Co-Shareholders and the company, in particular with respect to the purchase price which they could achieve. She also told Mr Hennessy that if he wanted to pursue an MBA it would have to be formally approved by the Co-Shareholders, as was the usual course for any MBO process.
38. Her evidence on this matter is supported by an email sent by Mr Ashford on 26 February 2017 reporting what he had been told by Mr Hennessy, namely that “Paul [Hennessy] spoke to Donna [Ms Benton] and she said she wanted him to formally raise it with Abraaj via the next board meeting which is end March. So timing is delayed a bit. We’ll need to prepare a concise presentation for him [Mr Hennessy] to sell the idea of an MBO to existing shareholders.”
39. Mr Hennessy’s version of events is similar in some ways. In his first witness statement, he said that he initially approached Ms Benton about the idea of an MBO at a meeting with her at the offices of the entertainer on 22 February 2017. He suggested that one way to achieve a sale of the company could be by aligning management by way of an MBO and that they could bring on board an advisor (SA) who was known to Mr Ashford. Her response – and this is where his account diverges from that of Ms Benton – was along the lines of “yes, go for it, have a look, keep me updated, we need a sale, do whatever you have to do to get a sale.” Mr Hennessy said that Ms Benton suggested that he present the idea to the Board of DATE at the next Board meeting (falling far short of a formal presentation to the Board). Mr Hennessy said that he mentioned the possibility of an MBO to Mr Al Zarooni, a member of the DATE Board, on a couple of occasions and he seemed “quite excited by the proposal”. Mr Hennessy attended his first DATE Board meeting as a director of DATE on 25 April 2017. The Agenda for the Board meeting mentioned the MBO under AOB. In advance of the meeting Mr Hennessy had instructed Mr Lal to prepare a Powerpoint presentation to present to the Board if requested, but in fact discussion about the MBO at the Board meeting was relatively brief. He explained that he had already spoken to Ms Benton and Mr Al 1 of 25 Zarooni about an MBO and Mr Badreldin, the other Abraaj director, was an experienced financier who did not require an explanation of what an MBO was.
40. Nowhere in this part of his written evidence – his evidence in chief – does Mr Hennessy say that he either asked for or was given formal approval by the Board. Ms Benton says that she told him to raise it formally with the Board, and that version of events is confirmed by the terms of the email of 26 February 2017 from Mr Ashford, which was obviously based on what Mr Hennessy had told him. At times under cross-examination, Mr Hennessy accepted that he was told to take it to the Board. At other times he denied this. Sometimes he said that he had obtained Board approval, but there is no minute of the Board meeting recording any such thing and I reject that idea. It is inconsistent with Mr Lal’s evidence that he was not told that the MBO would need Board approval – he prepared the presentation for the Board, which was ultimately not shown at the Board meeting, and clearly did not think that formal Board approval was under discussion.
41. I did not find Mr Hennessy’s evidence on this point at all persuasive. I prefer the evidence of Ms Benton. I find that Mr Hennessy did raise the issue with Ms Benton and that she was not unwilling in principle. But there was at that time no firm proposal, and I do not accept the idea that she would have given blanket approval to an MBO in all circumstances without reference to any specific investment opportunity and without any requirement that the Co-Shareholders be kept informed of what was happening. For what it is worth, I do not find that Mr Hennessy mentioned the involvement of SA in the proposed MBO. Nor did he disclose that Management were wanting to acquire a significant equity in the Company, and not just roll over their ESOP entitlements. Further, I am satisfied that Ms Benton told him that the proposal would have to be presented at the DATE Board meeting for formal approval. It is possible that at that Board meeting the MBO proposal was discussed, since it was flagged up under AOB, but it was not discussed at any length or in any detail – Mr Hennessy accepted in crossexamination that he did not go into any detail, for example about the equity stake in the company which Management would try to achieve – and it was not the subject of any formal Board approval. Had there been any discussion along these lines it is inconceivable that arrangements would not have been made to ensure that Management were kept at arm’s length in any negotiations, as was done in the case of Mr Al Zarooni, a director of Abraaj and at one time a potential buyer of the company through his own (or a partner) company Al Futtaim.
42. On one view of the matter all of this is beside the point. Full disclosure would involve Management keeping the Board informed of the details of any particular MBO proposal that was current at any particular time. As can be seen from the instances referred to below, Management failed to keep Ms Benton informed of particular MBO negotiations and even went to the extent of deliberately keeping her out of the loop.
43. I should just add this further comment. There were documents shown to Ms Bunton – correspondence, WhatsApp messages and the like – showing that she had been sent offers and term sheets from potential investors such as Mayfair, making it clear that an MBO was involved in the proposed deal. On this basis the Claimants say: she must have known and it is disingenuous on her part to pretend otherwise. As a forensic point there is obviously some force in this. But the point is less forceful in light of the evidence from the Claimants, particularly Mr Hennessy, that Ms Benton never went into any detail in asking for advice on particular issues. She discussed matters at a very high level, dealing with points put to her by Mr Hennessy and not bothering with the detail. Furthermore, I was persuaded by Ms Benton’s evidence on this point when put to her in cross-examination. And in addition, when it came to the GFH deal, there is no doubt that Management went to great pains to exclude her from the negotiations and to cover up the fact that they were pursuing an MBO. I deal with this aspect of the case below.
Conflict of interest
44. I have already explained why there is a risk of there being a conflict of interest whenever an MBO is being pursued. But it is useful to pick out some illustrations from the evidence at the trial.
45. One issue concerned the use of the “data room” compiled by Raine in their efforts to market the company. There is no dispute that Management were accessing that data room as potential purchasers without telling Raine who were supposedly in charge of the use to be made of the data. As I understood their evidence, Management’s view was that all the data in the data room was information which had come from them or to which they had access anyway. So what was the problem? I need not resolve that question. But it is important to note Management’s concern that Raine should not go to Ms Benton and reveal what they were doing. The point is illustrated by an email dated 11 March 2017 from Mr Hennessy to Messrs Ashford and Lal expressing concern that Raine may alert Ms Benton to what was going on:
“I’m concerned about Raine as they have taken down the Data Room and signals they are finished. Ed’s response speaks volumes. I also think they 1 of 25 will warn her about MBO and say we are using their data ... they may have a problem with this and may ask to be involved!”
This was, of course, before the Board meeting of 25 April 2017. It shows Management cutting across Raine’s attempts to achieve a sale and their concern that Ms Benton should not be warned about what they were doing.
46. Take another example, this time relating to the proposed MBO involving Mayfair, known as “project enzyme”. Ms Benton and Mr Badreldin, as Co-Shareholders, had had talks with Mayfair on about 4 September 2017. On 13 September 2017, Mayfair sent Mr Hennessy a term sheet setting out terms relating to the proposed acquisition of the company. On 14 September 2017, Mr Hennessy forwarded those heads of terms to Mr Lal, Mr Ashford and SA, his covering email saying: “This is for us only. We are getting it in advance of everyone. Let’s discuss only between us. Mr Hennessy then went back to Mayfair and negotiated some revisions before Mayfair, on 15 September 2017, sent a revised term sheet to all parties, including Ms Benton. The revisions were significant in terms of the Consideration payable for the company. In terms of her proposed shareholding in the SPV to be used for the purchase (her “institutional strip”), that increased from 10% to 10.7%; but Ms Benton’s share of the Earnout was cut from 46.6% to 43.1%. At the same time, Management’s institutional strip went up from 6.8% to 11.9% and their share of the Earnout increased from 6.8% to 12.3%. On any view those were alterations to the heads of terms which benefitted Management and prejudiced Ms Benton – and the alterations were negotiated by Mr Hennessy without Ms Benton being aware that that negotiation was going on.
47. Some 10 days later, on 25 September 2017, while a possible deal with Mayfair was still on the table, Ms Benton sent out an email saying that:
“... there are too many people involved dealing direct with Mayfair which is causing miscommunication and frustration.
There should be one person coordinating the deal from our companies point of view on behalf of date holdings limited.
That person that has been appointed is Jeremy [Miocevic] – or his colleagues from Curtis.”
There is a reference to Management having representation with Dechert and SA, which Ms Benton understood to be in relation to negotiating the potential roll over of the ESOPs, and the email concludes:
“Anything Abraaj and myself need to negotiate we will do through Tom (Abraaj lawyer), Ahmed, Smiyet and Alok. We will then feed everything to Curtis.
There needs to be a process – we all want the same result – so let's work together as a team and finalise the deal together”
Notwithstanding these clear instructions, Management continued to negotiate directly with potential investors to the exclusion of Ms Benton. Within a couple of weeks, there was information sent to Al Futtaim deriving from the Mayfair negotiations. I cannot make any finding as to who was responsible – Mr Hennessy denied any hand in it – and in the overall scheme of things it probably does not matter. More generally, the refrain from Mr Hennessy in evidence was that Ms Benton’s insistence on there being one single channel of communication related to the proposed Mayfair transaction only and not to other transactions being negotiated. I consider Mr Hennessy’s evidence on this point to be self-serving and untenable.
48. Moving on to the negotiations with GFH, which ultimately resulted in the sale of the company on terms of the SPA, the documentary trail begins with a letter dated 15 October 2017 from GFH to SA and Mr Hennessy (but not to the Co-Shareholders) setting out the basis on which GFH would be prepared to purchase a 70% stake in The Entertainer. The letter refers to a meeting with GFH on 9 October 2017, just under a week earlier, at which Management was represented by SA but there was no representation by the Co-Shareholders. It was at SA’s request that the offer letter was not sent to the Co-Shareholders. This was in direct defiance of the instruction received from Ms Benton in her email of 25 September 2017, less than three weeks earlier. SA summarised this offer to Management – though not to Ms Benton – by email on 16 October 2017. He noted that the offer was based on certain assumptions without the benefit of negotiations or discussions with Ms Benton. It was assumed that Donna (Ms Benton) wished to retain half her shareholding, i.e. that she would have 25% of the equity in Newco, the SPV to be set up to purchase the company, albeit that earlier in the email SA states that GFH have assured him that they had the necessary funding to acquire up to 100% using their own cash. The email ends by saying that the most important aspect is that they, GFH, were flexible with regard to Donna’s reinvestment – they were looking for her to reinvest 10% minimum and possibly up to 25%. Yet the offer from GFH was to buy 70% of the company, leaving Ms Benton with 30%.
49. There was a meeting on 19 October followed by emails from Ms Benton to GFH and others. Ms Benton proposed that the offer should be for 90% of the shares, leaving her 1 of 25 with only 10%, though she could potentially look to keep 15%. On 23 October GFH came back insisting that Ms Benton keep 30%.
50. The problem for Ms Benton is that until the offer letter was sent by GFH all the negotiations had been carried out by SA on behalf of Management to the exclusion of Ms Benton. She was not told that 100% was possible. If she had been in from the start, or had she been told that 100% was possible, she might – and on balance of probabilities I find that she would – have been able to negotiate the sale of her entire shareholding.
51. In that email exchange with GFH, Ms Benton was asked whether she had “any concerns” with Management rolling over part of their ESOP entitlement. She replied to the effect that that was all fine; she had no issue with regard to Management investing alongside GFH. But she had not been told that Management were negotiating for sweat equity in addition to rolling over their ESOPs.
52. Throughout the trial reference was made to WhatsApp messages passing between Management and SA. On 19 October 2017, after the meeting on that day referred to above, SA sent the following WhatsApp to Messrs Lal, Hennessy and Ashford. It bears to be set out in full because it neatly illustrates the conflict of loyalties created by an attempted MBO where there has been no full disclosure to the exiting CoShareholders:
“Gents it was a good day today – keep the faith I believe we will get to where you want to be!!!
One crucial point – what we need now is absolutely tight behaviour between the 4 of us as even this am the ‘other side’ tried to get the guys to deal direct with them i.e. without my involvement let alone the management team. I've spoken briefly with David but didn't get a chance with Paul or Anoop before I left the office. We should not use and cannot have back channels to the shareholders their legal counsel or whomever. GFH will not deal with the shareholders direct i.e. they will send everything to me or the very least cc me. The moment the shareholders believe that they can deal direct with GFH is the moment our ability to shape the outcome is gone!!”
Mr Hennessy accepted that the reference to “the other side” was a reference to Ms Benton and Abraaj. “The guys” meant GFH. And Mr Hennessy agreed that SA is calling them the other side because they are the opposite side of the deal SA and Management are trying to do. The question of conflict of interest was explored in evidence. Mr Hennessy accepted that there was a certain conflict in there, but they did not do anything to take anything from the deal, “other than we brought it and we 1 of 25 encouraged it to happen.” He accepted that his negotiating his ESOPs at this point was more important to him then what the shareholders wanted, what the company wanted at that stage. The only way of being able to shape the outcome was to carry on dealing direct with GFH. Accepting that there was a conflict of interest between Management and the Co-Shareholders, he added: “... we have brought a deal to the table. They now push management to one side, didn’t want to pay the ESOPs at the agreed level.”
53. Cross-examined on this WhatsApp, SA justified his attitude by reference to the CoShareholders trying to hijack the deal. He eventually accepted that there was a conflict of interest: every MBO involves conflicts of interest.
54. In the event the deal done with GFH, which culminated with the conclusion of the SPA, was not an MBO. But that is irrelevant for present purposes.
Management’s pursuit of its own interests
55. I deal with this aspect briefly. The incidents mentioned above, and the passages from the documents and oral evidence, make it clear that one of the main concerns of Management throughout this long drawn out process was to protect their ESOPs and, in addition, to negotiate an increased share of the equity for themselves.
Summary of fact findings
56. In her written Closing Submissions, counsel for Ms Benton asked me to make the following findings of fact: (i) that the Claimants’ proposed MBO placed them in a position of conflict; (ii) that the Claimants’ proposed MBO was not disclosed to the Defendant; (iii) that the Claimants disclosed confidential information to SA and potential purchasers; (iv) that the Defendant lost the chance to sell 100% of her shares to GFH; (v) that the Defendant would not have entered into the Settlement Agreements had she known of the Claimants’ misconduct; and (vi) that the Claimants did not reasonably believe that they were entitled to behave as they did.
57. I have already said sufficient in my discussion of the facts set out above to confirm my acceptance of fact findings (i) and (ii). Finding (vi) follows from that and is supported by the evidence of Mr Hennessy and SA referred to above. In short, the Claimants and SA deliberately tried to conceal their attempts to conclude an MBO from Ms Benton and took steps to prevent her becoming involved in any negotiations. They cannot reasonably have believed that they were entitled to act in this way. As to finding (iii), the disclosure of confidential information, the Claimants clearly disclosed to SA 1 of 25 sufficient information to enable him to pursue possible investors and nearly reach agreement with them. Whether the information came from the data room, as some of it must have done, or from the Claimants’ own knowledge, the information was confidential to The Entertainer. They also knew Ms Benton’s negotiating position, and all about previous deals that had not crossed the line, all critical factors enabling them to come close to concluding a deal with possible investors. I find this finding (iii) to be established. I also find finding (iv) to be established, for the reasons set out above – had the Claimants and SA not kept Ms Benton out of the loop until the deal with GFH was nearly done there would have been every chance of her negotiating the sale of 100% of her shareholding. I am also satisfied, though I have not summarised the evidence on this point, that Ms Benton would not have entered into the Settlement Agreements with the Claimants had she known about the misconduct. I find finding (v) to be established.
Legal Consequences
58. I was treated to a wide ranging legal argument on both sides, covering ground such as UAE Employment Law, Cayman Islands Company Law and, under reference to English law principles, topics such as fiduciary duties, waiver, estoppel and the like. In the end, however, I am persuaded that there is a simpler way of dealing with this case and these other issues can await another day.
59. The Claimants’ case is straightforward. They claim the balance of the sums they say is due to them under the Settlement Agreements. These are the Earnout Payments. Mr Lal’s claim is for USD 170,224 plus interest. Mr Hennessy’s claim is for USD 255,335 plus interest.
60. In answering these claims, counsel for Ms Benton maintained that on the true construction of the Settlement Agreements, alternatively by an implied term thereof, the Claimants were only to be entitled to recover sums ostensibly due under the Settlement Agreements if they had fully complied with their duties under their Employment Contracts. I am persuaded that that submission is correct. It must be borne in mind that the Employment Contracts remained in force after the Settlement Agreements were entered into and indeed remained in force until well after completion of the purchase by GFH under the terms of the SPA. The Settlement Agreements consolidated and replaced the various employee incentive schemes previously in existence and re-fashioned those incentives to take account of the fact that the sale, as it eventually came about, was not a sale of The Entertainer but a sale of the shares 1 of 25 in the parent company, DATE. But no alteration of the fundamental principles was intended: the incentives were a reward for good performance. Under the Sale Bonus Agreements concluded in September 2017 it was expressed to be a term of the employee’s entitlement to receive the bonus payment thereunder that the employee did not breach any of the terms of his Employment Contract with The Entertainer or any obligations of confidentiality with regard to the terms or substance of his Employment Contract. I see no reason to think that parties to the Settlement Agreements would have intended to approach the matter in any other way. Notwithstanding the Entire Agreement clause – which, as is now firmly established, does not have the effect of excluding the possibility of implying terms into the contract – I consider that the parties or, if different, the well-informed bystander, would have regarded such a term as both obvious and necessary to give the Settlement Agreements business efficacy: c.f. Marks & Spencer Plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2016] AC 742 and Impact Funding Solutions Ltd v Barrington Support Services Ltd [2017] AC 73.
61. That leads on to the question: were the Claimants in breach of their duties under the Employment Contracts? The Claimants say: No. I am persuaded, however, by the analysis put forward on behalf of Ms Benton. The duties owed under the Employment Contracts were owed both to the company (The Entertainer) and the Group (which includes DATE). The Group was managed at DATE level. In terms of clause 17.1 (Lal) and 18.1 (Hennessy) of the Employment Contracts, the Claimants agreed not to engage in any activity or investment that conflicts with the business interests of the company or of the Group. At the times with which this action is concerned, the business of the company and of the Group included the proposed sale of the company by DATE or of the shares in the company or in the holding company (DATE) – the precise structure of any deal ultimately agreed was a matter which could not be resolved until further down the line. The activities of the Claimants summarised above clearly conflicted with the business interests of DATE, in so far as efforts were being made to obtain the best price for The Entertainer, even if not of The Entertainer itself; and their duties owed to DATE must include duties owed to the shareholders in DATE who were acting on behalf of the DATE in trying to achieve a sale of the business.
62. It follows, in my opinion, that the Claimants were in breach of obligations owed to The Entertainer under their Employment Contracts at all material times and are not entitled to recover the balance of the Earnout Payments otherwise due to them under the Settlement Agreements. The Claimants’ claims fail.
63. That does not, of course, mean that the Claimants have to repay sums already paid to them by way of the Completion Payment under the Settlement Agreement. Quite apart from anything else, Ms Benton would have no title on her own to sue for the recovery of these sums.
64. Ms Benton also claims damages for the loss of the chance to sell 100% of her shares in DATE at the time of the negotiations with GFH. The relevant facts are set out above. I was referred to a number of cases explaining the correct approach to the calculation of damages for loss of a chance: see e.g. Palliser Ltd v Fate Ltd [2019] EWHC 43 (QB) and PCP Capital Partners LLP v Barclays Bank [2021] EWHC 307 (Comm). I have found that she wanted to sell her entire shareholding if that were possible. There was a good prospect of her being able to sell her entire shareholding had she been allowed to negotiate from an earlier stage. There was no reason why GFH, if they had the cash (as Mr Hennessy understood they did), would not have been willing to buy her out. In so far as GFH wanted to keep her in the business, there were other ways of achieving this without insisting that she retained a significant shareholding. But I should allow a discount (say 25%) for there being some uncertainty as to the willingness of GFH.
65. I was presented with indicative figures by counsel for Ms Benton. There were no detailed arguments on this aspect put forward by the Claimants, except for the suggestion that credit should be given for Ms Benton’s salary and benefits earned or otherwise accruing during er continued employment after the sale completed – I reject this argument since there is no reason why she would not have stayed on at The Entertainer after the sale whether or not she had sold all her shares. Evidence on this point was put forward by the Claimants’ expert, Mr Girard. Ms Benton’s calculation arrives at a figure of USD 3,562,056 (calculated by taking the sum she was later paid for her remaining shareholding from the figure her shareholding would have been worth had it been sold under the SPA as part of her 100% shareholding at the same pro-rata price). There are a number of uncertainties identified by Mr Girard. Some push the figure up, others potentially push it down. My view is that the sum claimed, USD 3,562,056 represents a fair assessment. Deduct 25% from this figure to represent the risk that GFH would not have purchased her entire shareholding and one is left with a loss of USD 2,671,542.
66. Ms Benton’s Counterclaim succeeds to that extent. There will be an award in her favour of USD 2,671,542.
67. I shall reserve all questions of costs.