Roadchef
It was reported last month that after a 17 year legal battle, 600 former staff of the Roadchef business had won a legal claim for breach of trust. The case has important lessons for anyone operating or thinking of setting up an employee benefit trust (“EBT”).
The founder of Roadchef, Patrick Gee, wanted to set up a John Lewis-style structure of employee share ownership. In 1986, a few months after setting up the EBT with a substantial shareholding, he died.
Gee’s successor, Tim Ingram-Hill, had other ideas. He acquired the shares personally from the EBT and sold them in 1998 in a deal worth £22m. Had the scheme operated as Gee intended, the company might never had been sold but on a sale the 600 employees would each have received a five figure payment.
Legal proceedings were issued and in January 2014 the High Court ruled that Ingram-Hill had breached his fiduciary duty. The share purchase by Ingram-Hill was declared void. In summer last year there were settlement negotiations and the High Court approved settlement terms.
The story does not end there. Having secured the settlement, the trustees of the EBT must now undertake negotiations with HM Revenue & Customs over how much money will be available for distribution to the employees.
The terms of the settlement remain confidential but the case has already involved years of complex and hard fought litigation. Patrick Gee must be turning in his grave at the sad end to his John Lewis dream of employee share ownership.
What lessons can be drawn from this unhappy affair where the principal winners will have been the legal advisers to the EBT and to Ingram-Hill?
The first point is that EBTs are complex and great care must be taken before setting them up: ask yourself as an owner-manager what is motivating me to set up the trust? Whilst the John Lewis story is one of great success, collective ownership and control of a private company can be disastrous. The stewardship of an organisation depends on a careful balance of leadership and management skills. Entrepreneurial flair may also be critical.
In changing markets a company controlled by trustees, however well-meaning and motivated, may just not have the ability to respond to changing market forces.
Some of you reading this article (particularly the accountants amongst you) will be old enough to remember a Birmingham-based world leader in accounting ledgers. Its name was Kalamazoo and its public spirited Quaker founders established an EBT with the colourful (Marxist sounding) name, the Kalamazoo Workers Alliance. The trust came to control over 51% of shares in what became a listed company. There was an elaborate system for the election of a Board of Trustees from all sections of the management and the workforce.
Insulated as it was from the scrutiny of informed shareholder oversight, Kalamazoo found itself losing market share and unable to compete as the markets for personal computers grew in the 1980s and 1990s. The company’s former playing fields in Northfield, Birmingham are now a housing estate. What would the Quaker founders have made of this?
It may be of course that this outcome would have befallen the company in any event. The cultural shift needed to reinvent a successful company as markets change is seldom made.
Ingram-Hill clearly embraced personal share ownership (his own 🙂 ) above that of the collective good. Irrespective of one’s personal philosophy (capitalist, socialist or the new theory of conscious capitalism) one thing is clear: Patrick Gee had picked the wrong man to make his John Lewis dream come true.
Having analysed that big picture failing, what else do we learn from this sad case?
The key lesson is the great risk of conflicts of interest between the Director/shareholders (and their personal interests) and their fiduciary duties as trustees of the EBT. With fast growing or early stage companies those conflicts may be very difficult if not impossible to manage.
At what price can shares properly be acquired by a Director where he is acting as both buyer and fiduciary? Beware advisers who believe that this conflict can easily be managed by the simple expedient of instructing a helpful accountant experienced in valuing the shares of private companies.
The person privy to the critical market and financial data that would influence a valuation is likely to be the conflicted Director. Even the most ethical may struggle with the impossible task of making full disclosure to the adviser.
In any event the true value of a significant shareholding in a private company can only be determined in an arms’ length sale. A hypothetical valuation exercise is always going to come under intense scrutiny if in the event (as with Roadchef) the conflicted Director makes a significant profit on his purchase.
For Directors of private companies tempted to suppress information when buying shares, whether from an EBT or other shareholder, the risk of misrepresentation by silence must be borne in mind. The New Zealand case of Coleman -v- Myers, cited with approval in English cases, is salutary. A Director when buying shares in a private company may owe a duty of disclosure where he is privy to information that another non-director shareholder is not. The remedy for misrepresentation is rescission. As with Ingram-Hill, the High Court can set aside the transfer.
A final thought. Very capable tax advisers (accountants and solicitors) will frequently set up structures involving EBTs. Those advisers are generally not around later on when decisions may be made by poorly advised Directors unaware of the law or turning a blind eye to words of caution.
The key for any Directors is to take advice from an adviser or a team of advisers who can see the big picture and have an eye for what may be uncomfortable detail.
