City firm Charles Russell Speechlys (CRS) has been ordered to pay two former clients nearly £1.5m after a High Court judge found its advice on the sale of their company negligent.
His Honour Judge Russen QC, sitting as a High Court judge, said the firm “fell short of the standard of care required of a reasonably competent solicitor practising in the field of private equity transactions”.
The firm – initially Speechly Bircham and then CRS after the 2014 merger – advised Paul Richard and Keith Purves on the sale of their respective 43% stakes in a communications technology company to private equity business Livingbridge.
As well as £2.3m each in cash, they acquired 30% holdings of C-class shares and became CEO and sales director respectively. But eight months later, they were dismissed and later won High Court claims for wrongful dismissal, but for which they would have been deemed ‘bad leavers’ and their shareholdings worth only £1.
However, Mrs Justice May still found they were only entitled to receive a nominal sum for their shares because of the impact of a redemption premium provision (RPP) in the company’s articles on the market value of their shares.
Appeals in that earlier litigation by both sides settled, with the claimants each paid £87,500.
The claimants argued before HHJ Russen that CRS failed to warn them that the terms of the transaction were such that, even if they were ‘good leavers’ for the purposes of the resulting sale of their shareholdings, they would receive no or only nominal value for them.
They also sued for the legal fees spent on the wrongful dismissal litigation.
Finding for the claimants, the judge said it was “no answer” for CRS to say the RPP was the result of commercial negotiation between the claimants and Livingbridge.
“The firm was responsible for negotiating and reviewing the draft articles to ensure that the legal provisions were fully aligned with the claimants’ understanding that the RPP applied to an ‘exit’ involving Livingbridge and to consider whether the provisions could be read as having a wider impact.”
The judge accepted the claimants’ evidence that they repeatedly raised with CRS their concern that their equity should be protected. This should have prompted “careful consideration” of the language of the articles as it evolved during the retainer.
Concluding the firm fell short of the standard of care required, HHJ Russen said: “It is one thing to say that [CRS] cannot reasonably have been expected to predict a future misalignment of the stars.
“It would be quite another to conclude that it would be imposing an unduly onerous and unwarranted duty of care upon firm to say that it should have undertaken a cross-check upon the meaning and effect of a provision on which it had drafting input.”
Had the firm flagged up to the claimants the risk that the RPP could be considered as impacting upon market value, at the same time expressing its view it should not do so, “I would have said that view was not only tenable but correct”.
“However, the fact is that the risk of the RPP having such impact and, crucially so far as the extent of that risk was concerned, the likely view of Livingbridge on the point, were not brought to the claimants’ attention by the firm. A significant risk went unspotted.”
HHJ Russen found CRS liable to pay £1.45m in damages, including some of the legal fees claim. The firm declined to comment.