In a recent decision, the Scottish Court of Session Outer House held that a Chief Executive Officer’s knowledge of and involvement in a bribery arrangement made him a “Bad Leaver” under the company’s articles. As a result, the CEO could recover only par value for his shareholding in the company despite establishing that some of the company’s affairs were conducted in a manner that was unfairly prejudicial to his interests. The decision illustrates one of the many commercial costs that can flow to an individual implicated in a bribery arrangement and reflects some of the challenges that companies encounter when investigating the conduct of a director and shareholder.

The directors of Braid Group Holdings Limited (“BGHL”), the holding company of a group of logistics and freight businesses, had had a series of internal disputes concerning the management of the company and its various subsidiaries. Nigel Gray, a director and majority shareholder of BGHL and the CEO of BGHL’s UK subsidiary (“BGUK”), then filed proceedings alleging that the company’s affairs had been conducted in an unfairly prejudicial manner.

Mr. Gray filed his claim after an internal investigation into BGUK concluded that he was aware of a bribery arrangement between BGUK and the director of a U.S. customer. The investigation revealed that a Mr. Park, the director of the customer company, had access to various BGUKcredit cards and had charged over £100,000 to them. Other arrangements had also been reached between BGUK and Mr. Park, including that BGUK would charge the company inflated prices (including increased rental on warehouse space) and the inflated amounts were then credited to a BGUK ledger account that Mr. Park could access. In return Mr. Park would ensure that his company continued to direct business to BGUK. The amounts invoiced to BGUK by Mr. Park’s company increased significantly between 2008 and 2012.

The Court found that Mr. Gray was aware at all material times that the purpose of the ledger account was to provide personal expenditure to Mr. Park on the understanding that he would seek to ensure his company increased the business it directed to BGUK. Mr. Gray’s submission that he was not aware of the account and did not authorise it was held to be inconsistent with the evidence.

One basis of Mr. Gray’s claim that the company’s affairs were conducted in an unfairly prejudicial manner focused on the conduct of the internal investigation and subsequent disciplinary proceedings against him. Mr. Gray’s submission that the other directors had an obvious interest in the outcome of the investigation procedure was rejected. The Court acknowledged that when details of the bribery arrangement came to light, the other directors would have identified a silver lining. Mr. Gray was however given ample opportunity to state his position and the investigation was found to have been conducted in a fair and unbiased manner. The Court acknowledged that the solicitors and forensic accountants engaged to conduct the investigation were in a difficult position and it was appropriate for them to have taken their instructions from an investigation committee within the Board. It was accepted that Mr. Gray’s dismissal for gross misconduct would cause him prejudice as a shareholder. However, because the Court reached the same factual conclusion as the directors had done, and in light of the finding that the investigation was carried out impartially, Mr. Gray could not show that the prejudice was unfair.

The Court further rejected Mr. Gray’s claim that he was unfairly prejudiced by being excluded from discussions at Board meetings relating to disciplinary proceedings against him. It was held to be within the Board’s management powers to decide by majority vote that a member of the Board should not be permitted to attend meetings. The Court observed that Mr. Gray appeared to have lost sight of the fact that the Board’s discussions about the company’s response to the results of the investigation, including decisions about self-reporting, were concerned with safeguarding the company’s interests as opposed to any director’s personal interests.

The Court held that Mr. Gray’s knowledge of and involvement in the bribery arrangements made him a Bad Leaver under the company’s articles. It rejected the submission that it was for the Board, not the Court, to reach such a finding. Although Mr. Gray had established that other conduct involving disclosure of financial information and removal of auditors of a BGHLsubsidiary was unfairly prejudicial, he was therefore only entitled to receive par value for his shareholding, which was approximately £18 million less than the value of his shareholding.

The case is helpful to companies investigating wrongdoing by a director. It demonstrates that concern about any “silver lining” resulting from the outcome of the investigation is unlikely to undermine a fair and unbiased investigation. The case also highlights the discretionary approach taken by the Court to claims for unfair prejudice, including the Court’s willingness to find that a director is a Bad Leaver when the Board has not reached that decision first.