On 1st May 2020 Judgment was given in Carmela De Sena v Joseph Notaro and others  EWHC 1031 (Ch). You can read the full judgment here.
Dov Ohrenstein of Radcliffe Chambers (instructed by Andrew Perkins at Ashfords) represented Joseph Notaro and S Notaro Group in their successful defence to the Claim that had been brought by Carmela de Sena and her company Meltor Developments.
In addition to setting out the circumstances in which directors may owe fiduciary duties to shareholders, the judgment includes important commentary on the instruction of experts for the purposes of litigation which is relevant to a wide range of practitioners.
Carmela and Joseph are siblings and, along with other family members, were shareholders and directors in the family property business that their father had established. When their father died, Joseph became the managing director. In 2011 Carmela agreed to exchange her shares in the business for a multi-million pound portfolio of properties and £470,000 cash which she acquired through her company (Meltor Developments, the 2nd Claimant). This transaction was structured as a demerger. Most of the properties that she received were low risk residential rental properties while the family business retained its more speculative land in the hope that it could be developed.
Six years after the demerger Carmela brought High Court proceedings in Bristol on the grounds that:
- She had been entitled to assets equivalent to the value of her shares, but the portfolio and cash she had received were worth less than what she had given up;
- The demerger was procured by undue influence of Joseph; and
- Joseph also acted in breach of fiduciary duty towards her resulting in unjust enrichment of the family business by £6.7 million at her expense.
She argued that as a result of this that she should be able to set aside the demerger (so as to return to her previous position as a shareholder in the family business) and/or receive financial compensation. She also claimed damages from the accountants and solicitors who had acted in the demerger.
The Judge’s Conclusions
The judge found that “the assumption that [Carmela] was entitled to a pound for pound equivalence between her share in the company and the assets she received is entirely without foundation”. “In my judgment there is no basis for saying that the first claimant’s shares were disposed of by her in the demerger transaction at an undervalue.”
In relation to Carmela’s argument that “after the demerger the company went ahead with projects on its land, obtaining planning consent and so on, but there was no provision in the deal for her to receive an uplift in her compensation (a form of ‘overage’)”, the judge held: “These complaints are also misconceived. She agreed to a demerger, meaning that for the future she was on her own, and that her and the company’s fortunes now ran on entirely separate paths.” The Judge said: “I do not see why the claimants, having deliberately chosen and followed what seemed to them to be a low-risk path, holding a portfolio of assets for which an open market exists, should now be entitled (with the benefit of hindsight) to claim the benefits of the higher risks which the group has taken, apparently successfully, holding itself together in an illiquid form. Even if the claimants had established their undue influence case, I would not have granted relief in these circumstances. That would not have been fair.”
The judge held that in any event “it is difficult to see what loss [Carmela] has suffered” because her own expert had accepted that she would have been unable to sell her shares for £5.6m but she received properties worth more than that amount. “
In relation to the undue influence claim, the judge held that while there was “a tough negotiation of a commercial transaction” there had been no conduct on the part of Joseph which can properly be regarded as acts of improper or illegitimate pressure or coercion so the claim of undue influence failed.
The judge rejected the allegation that Joseph owed any relevant duties to Carmela. He held that Directors owe duties to their companies and do not ordinarily owe duties to shareholders unless there is some form of special relationship but that there was no such relationship between Carmela and Joseph. He said “She cannot possibly have believed that the person with whom she was negotiating on behalf of the company owed a fiduciary duty to her to put her interests first and the company’s (or his) interests second. That is just fantasy.”
Carmela also claimed against the third defendant (a firm of accountants) and the fourth defendant (a firm of solicitors) that they had breached duties to her but the Judge held that they had not been acting for her on the demerger and could not be liable for any of the claim:
“The first claimant knew how to obtain professional advice, was advised to obtain professional advice, and could easily have done so. She chose not to. That does not entitle her to rely on the professional adviser to the other side in the transaction to look after her interests. As for the incremental test, in the circumstances of this case, where an experienced business woman deliberately chose not to be professionally advised in a commercial transaction, it would not just be an incremental change to hold that the third defendant owed the other side in the transaction a duty of care: it would be revolutionary.”
The Role of the Experts
On all points of difference, the evidence of the Defendants’ property valuation expert was preferred to that of the Claimants’ expert. The Judge held that the fact that the Claimants’ expert had originally been part of the team advising the Claimant may have resulted in unconscious bias and that his evidence may have been affected by the terms of his letter of instruction which was not framed in neutral terms. He had also been instructed to, and did, comment on matters beyond his expertise. The lesson here for practitioners is not to do anything that risks tarnishing the perception of their expert’s neutrality and independence.
The Judge was particularly critical of the approach taken in relation to the Claimants’ instruction of an accountant to give expert evidence on demergers. Not only was he instructed to report on matters of law that were for the court to decide and in respect of which expert evidence is inadmissible but he also did not have expertise in demerger transactions. It was not enough for him to be a “forensic accountant” as it is not the experience of giving evidence in court that makes someone an expert. The judge said:
“Those firms that provide expert witness services really ought to have learned by now that expertise is acquired by doing the thing in question, usually over many years, and that merely being an accountant (or anything else) for a long time does not mean that you thereby become an expert in everything that accountants (or whatever it may be) commonly do.”