The case of Richards & Anor v Speechly Bircham LLP & Anor [2022] EWHC 935 (Comm) is a cautionary tale for solicitors advising on corporate transactions.
The Defendant Solicitors advised the Claimants on a sale of
their cloud-based communications technology company to a private equity
investor, where they received £2.3M each in cash plus shares in the buyer Newco
and stayed on to manage the company until a planned exit. Just over 8 months later they had been
summarily dismissed from their employment and their shares in the Newco were compulsorily
transferred for £1 each on the basis they were "Bad Leavers".
They brought High Court proceedings claiming wrongful dismissal,
which they won. That made them "Good
Leavers", but they still received nothing for their shares because May J decided
in a subsequent judgment on quantum that the correct interpretation of the
Articles was that the "Redemption Premium Provision" (RPP) in Article
13.3 (which allocated the first £11.5M on an Exit by a Share Sale to the
private equity investors - this being twice their investment) also applied to
the determination of Market Value on a compulsory sale under Article 18.4.1. The RPP was a negotiated compromise on another
commercial point. As Market Value of the
Company at the point they were dismissed was still less than £11.5M, they therefore
received nothing for their shares even though they had now been held to be Good
Leavers.
They appealed against this judgement, but settled for
£87,500 each before the appeal could be heard.
They next sued their solicitors for negligence, including
for failing to advise them that the RPP would apply to the calculation of
Market Value for a Good Leaver. They claimed
a loss of £1.9 to 1.7M each on their shares plus £895,141.63 between them for
the costs of the costs of the previous proceedings re quantum.
These were complex proceedings raising a number of issues,
which resulted in a 515 paragraph carefully-considered judgement by HHJ Russen
QC, sitting as a High Court judge. For
present purposes, one of the solicitors' points of defence was that May J had
construed the Articles incorrectly - so their advice had been correct and the
loss was not caused by their advice. The
Claimants, on the other hand, now argued in favour of May J's interpretation of
the Articles (contrary to their position in the previous proceedings, in which
they had lost on the point but appealed).
HHJ Russen QC agreed with the Defendant solicitors that May
J's interpretation of the Articles was incorrect. The RPP applied on the distribution of the
proceeds of a Share Sale between the shareholders. But what was required under Article 18.4.1
was for the valuer to decide the Market Value of the Company on a hypothetical
sale and then divide it by the number of shares to give a price per share. This was not a Share Sale on an Exit and the
price paid by the hypothetical buyer would not be determined by the provisions in
the Articles about division of proceeds between the different classes of
shares.
But he still held the solicitors liable for negligence,
despite having held that their interpretation of the Articles was correct. He accepted the Claimants’ evidence that they
had repeatedly raised with the solicitors their concern that their equity in the company should be
protected ("Adam, tell
me how we're going to get f**ked?") and "the reasonably competent
solicitor would have questioned the implications of the wording of article
18.4.1 when viewed against the RPP and, having done so and thereby unearthed
the principal points of construction addressed in the Quantum Judgment and by
me above, highlighted the resulting risk and suggested that an attempt be made
to eliminate it." If they had done
so, the Claimants would have instructed them to make that attempt, failing
which there was a good chance they would have walked away and found another buyer
on terms that did not include the RPP.
Damages were ordered in favour of the Claimants in the
combined sum of £1.454m.
Although it seems counter-intuitive from a solicitor's point
of view that your interpretation of a document can be correct but you can still
be negligent, the point is that the solicitors here were instructed to advise
on significant risks and this was an unlikely, but significant risk (as shown
by the previous judge having reached a different conclusion when the point was
fully argued before her). In other
words, the solicitor should have told them how they might get f**ked.
