Richmond Pharmacology Ltd v Chester Overseas Ltd and others [2014] EWHC 2692 (Ch)

The High Court has recently considered whether a minority shareholder was in breach of its duties of confidentiality which it owed pursuant to the terms of a shareholders’ agreement and directors’ duties under section 175 of the Companies Act 2006 to avoid conflicts of interest.

The Facts

The Claimant, Richmond Pharmacology Limited (“Richmond”) was a contract research organisation specialising in the design and conduct of pharmaceutical clinical trials. Dr Ulrike Lorch and Dr Radivoj Arezina formed Richmond in August 2001 and they were later joined by Dr Jorg Taubel (together the “Founders”).

The First Defendant, Chester Overseas Limited (“Chester”) was a British Virgin Islands company which was represented by the Second and Third Defendants, Mr Milton Levine and Mr Larry Levine (the “Levines”).

On 5 March 2002, a shareholders’ agreement was entered into between Richmond, Chester and the Founders (the “Shareholders Agreement”) pursuant to which Chester held 44% of the issued share capital in Richmond. The Founders together held the remaining 56%. The Levines were appointed to Richmond’s board of directors.

Clause 13 of the Shareholders Agreement required each party to treat as strictly confidential all commercially sensitive information relating to Richmond and the Shareholders Agreement. The clause included a carve out which allowed such confidential information to be disclosed to any professional adviser or banker of the relevant party provided that the relevant party at all times procured that any person to whom any such information was disclosed treated that information as confidential.

In July 2009, Chester retained New World Corporate Finance Limited (“NWCF”) to advise and assist Chester in relation to the selling of its shareholding in Richmond to the Founders by way of a management buyout, or, failing this, to a third party. After unsuccessful discussions about the proposed management buyout, NWCF proceeded to market Chester’s shares in Richmond to third parties.

The Claim

It was Richmond’s assertion that in the course of marketing Chester’s shareholding, NWCF, on behalf of the Defendants, disclosed Richmond’s confidential information to third parties. In November 2012, Richmond issued proceedings against the Defendants, alleging that this had caused a substantial loss of business. Richmond sought damages or equitable compensation of £4.3 million.

The Defence

The Defendants sought to argue that clause 13, as drafted, would have precluded any sale of its minority shareholding in Richmond since confidential information about Richmond’s affairs would inevitably need to be disclosed in these circumstances. The Defendants also argued that the obligation to keep information confidential could be complied with by taking care to ensure that the third party to whom such information was disclosed was trustworthy and undertook to keep that information confidential.

The Judgment

The Court was not convinced by the Defendants’ arguments. In its view, the “ordinary and natural meaning of an obligation to treat information as confidential is that it may not be disclosed to anyone else”. Though the Court recognised that there was a need for confidential information to be disclosed to third parties for the purposes of marketing the shares owned by Chester, the Court considered clause 13 to be in line with business common sense, noting that in such circumstances a “shareholder would have to seek Board approval to a sale process, involving providing confidential information to prospective purchasers”. Chester was therefore found to have breached its duty of confidentiality in disclosing confidential information to NWCF and failing to ensure NWCF maintained the confidentiality of this information in accordance with the terms of the Shareholder Agreement.

The Court then considered the statutory duties which the Levines both owed to Richmond in their capacity as directors in accordance with section 175 of the Companies Act 2006.

The Court found the Levines to have breached their section 175 duty to “avoid a situation in which they had a direct or indirect interest that conflicts, or possibly may conflict, with the interests of Richmond”. This finding was reached by the Court in view of the Levines’ role in disclosing confidential information to NWCF and their pre-existing relationship with Chester. An objective test was applied by the Court and of no relevance to its decision was whether or not the Levines knew what they were doing was in breach of their duties or whether or not the Levines were acting in good faith.

Though the Defendants were found to have breached some of their contractual, statutory and equitable duties to Richmond, those breaches were not found to have caused any loss to Richmond. The Court stated that there was “simply no basis for inferring from the fact that the amount of business declined that the decline was caused by the Defendants’ breaches”. Material to the Court’s decision was the number of additional factors which had contributed to the decline of Richmond’s business. Richmond’s claim was therefore dismissed.

Conclusion

The facts of this case highlight the need for careful drafting of confidentiality clauses and both the need to stipulate in such clauses the circumstances in which disclosure of confidential information can be freely made and the circumstances in which prior approval should be sought. The decision of the High Court is also a salutary reminder that the test that shall be applied by the Courts in determining whether directors are in breach of their duty to avoid conflicts is an objective one.