When is knowing not knowing?

The Inner House of the Court of Session (Scotland’s Civil Appeal Court) recently decided the case of Parks of Hamilton Holdings Limited v Campbell.

It is a timely reminder of what can go wrong between shareholders, supposedly on the same side, in a business/ share sale situation.

In this case, Mr Campbell was one of a number of shareholders selling a business.  He was left by the other shareholders to negotiate the sale of the shares on their behalf.  However, he was in a different situation from the other shareholders in that the Purchasers wanted him to leave employment and become a consultant for an 18 month period to the new Company.

Mr Campbell apparently told the other shareholders that the most tax efficient way for him to be remunerated for the consultancy was to receive a premium on his shares compared to the price they were receiving.  He would then receive no remuneration for the consultancy.  The other shareholders agreed.

Ultimately the other shareholders discovered that in addition to the premium on his shares, Mr Campbell had contracted to receive a consultancy fee of over £80,000 per annum.

The other shareholders sued Mr Campbell for negligent misrepresentation.  In other words, they said, Mr Campbell had induced them to agree to the premium on his shares by misrepresenting the fact he was not to receive a consultancy fee.

At first instance, the other shareholders were successful in claiming damages against Mr Campbell.

Mr Campbell appealed on the basis that the solicitors acting for him knew the accurate position,  particularly knew about the true nature of the consultancy agreement, and were also acting for the other shareholders.  It followed then, he said, that the other shareholders were deemed to know the position, through the imputed knowledge of their solicitors.

The Inner House refused the appeal, holding that given the conflict of interest between Mr Campbell and the other shareholders when he was negotiating an increased premium for him alone, the only way Mr Campbell could avoid a claim would be to show that the others had given informed consent.  Solicitors being aware of the situation was not enough.  In the event, the court also did not accept the solicitors were acting for the other shareholders in relation to the consultancy agreement.

The case is a sobering lesson for anyone negotiating a contract on behalf of others.  The “fiduciary” relationship of agency is one the court will treat strictly.  If the person negotiating is receiving a distinct benefit they will have to ensure they have “informed consent” from those on whose behalf they act.

BBM’s Litigation team specialise in complex corporate disputes. Contact Eric Baijal (emb [AT] bbmsolicitors [DOT] co [DOT] uk)