The National Landlords Association/Southern Private Landlords Association merger litigation - the Judgement

Note - the Landlord Law Blog has now moved to www.landlordlawblog.co.uk.

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Regular readers may remember that back in June the National Landlords Association (NLA) published the court order made in respect of the merger litigation.

I have now been provided with a copy of the Judgement in this case by the NLA, who wondered if I could put it into layman's language! Judgements are tricky to read for non lawyers, because the Judge is mainly concerned to explain the legal reasons for his decisions to other lawyers. So ordinary readers are often baffled! This judgement is par for the course but it not too impenetrable, if you know where (and how) to look. The decision was that of HH Judge Pelling QC (sitting as a Judge of the High Court) and was made on 21 May 2009. NB Most quotations (i.e. where I do not say otherwise) in this post are extracts from the Judgement.

There were six claimants. The first was Mr Michael Stimpson, the driving force behind this case. The five others were members of the SPLA who agreed with him.

The defendants were (1) the SPLA itself (i.e. the legal entity), (2) - (5) directors of the SPLA who made the decision (although Mr Richard’s status as director was arguable), and (6) the NLA who, it was claimed, had taken the company's assets in bad faith knowing that the merger was not properly valid.

By way of background, the Southern Private Landlords Association (SPLA) was set up by Mr Stimpson some time ago, and he was the President and a director of the company. The SPLA (as is the NLA) was a company ‘limited by guarantee’. This is a special type of limited company, which is explained on the Companies House web-site as follows:

“A company limited by guarantee is an alternative type of incorporation used primarily for non-profit organisations that require corporate status. A guarantee company does not have a share capital, but has members who are guarantors instead of shareholders. The guarantors give an undertaking to contribute a nominal amount towards the winding up of the company in the event of a shortfall upon cessation of business. It cannot distribute its profits to its members, and is therefore eligible to apply for charitable status if necessary.”

The purpose of the SPLA, as described by the Judge ,was

“to represent the interests of private landlords by lobbying on behalf of its members, providing advice and assistance to its members, and also providing facilities such as insurance and mortgages for the benefit of its members by negotiation with the commercial providers of such services. Members are members for each year for which they pay an annual subscription. If they fail to pay the subscription they cease to be members one month after the subscription has become due.”

This is very similar to most landlords associations, including the NLA.

The history behind this case is that at the SPLA’s AGM on 4 April 2008, 94% of the voting membership voted in favour of a resolution authorising the committee to start negotiations, and if appropriate to merge, with another suitable landlords association.

The committee duly went away to do this, and the organisation the majority of the board decided they wished to merge with was the NLA. This was not surprising as the NLA is probably the largest of all the landlords associations, one of the reasons for this being its mergers with smaller associations.

As pointed out by the Judge, “objectively, the merger was one that benefited the members, not least because it gave them access to a large organisation providing services which were the same as, or more extensive than, those provided by the first defendant and at a lower annual cost.”

However, the merger was opposed by Mr Stimpson, although “no coherent reason for this has been advanced by him”. In the same paragraph (14) the Judge goes on to say:

“The defendants maintain that the inference is that the first claimant was and is motivated by a desire to maintain or regain control of the [SPLA], which he founded and which he had been involved with for many years and to do so without regard to the objective best interests of the members. This point has been highlighted in the evidence and has not been answered.”

Or in other words, Mr Stimpson wanted to hang on to control of the SPLA at all costs. Presumably this is because if the merger went ahead he would lose the position of spokesperson for landlords which he has enjoyed in the past, as the NLA have their own people for this.

The Judge continued:

“No attempt has been made by the claimant [i.e. Mr Stimpson] to explain why substantively the merger of the [SPLA] with the [NLA] is not in the interests of the members. The claimant’s case is advanced exclusively by reference to points of process rather than substance. There is some evidence ... of significant in-fighting at director level which has absorbed funds and distracted attention from the provision of services to members.”

Meaning that being unable to find a good reason to oppose the merger, Mr Stimpson resorted instead to blocking it by other means, and arguing with the rest of the committee. So, how did he block the merger?

The Judge: “there came a point when [Mr Stimpson] decided to stop attending Board meetings in order to prevent such meetings being quorate and so stifle the conduct of the claimant’s business.”

By way of explanation, in companies, for a board meeting to be able to make decisions which will bind the company, there needs to be a minimum number of directors attending - this is called a quorum. Mr Stimpson was able to make the SPLA meetings inquorate because he and one of the other directors, a Mrs Kerslake (‘inferentially’ his ally) stayed away. Putting both of them, as pointed out by the Judge, in breach of their statutory duties as directors.

Two important meetings then took place on the 23 and 30 June 2008. At the first meeting a Mr Harrison was appointed as director. This, it is claimed, was an invalid appointment as the meeting was inquorate at the time (even though the board tried to telephone Mrs Kerslake). This is important because it was only by the presence and votes of Mr Harrison that another director, Mr Anthony Richards was appointed on 25 June, and it was only with their votes that Mr Barry Markham (one of the other SPLA directors) was authorised to sign the agreement to merge with the NLA.

The argument put forward therefore in this litigation was that the merger was invalid as it was agreed at an inquorate meeting.

The thought in my mind as I read this, was that surely it would be wrong (or inequitable, to use the legal word) for Mr Stimpson to be able to rely on his own breach of directors duties, by deliberately not attending the board meetings, to prevent a merger with which he did not agree? This is a point picked up by the Judge later.

At the hearing on 21 May, the Judge had to decide, whether the litigation should be permitted to continue. Directors of limited companies (which in some cases may not be owned by the persons making the decisions) are obliged by law to act in the best interests of the company. Therefore, when deciding this case, the Judge had to ask himself “would a hypothetical director acting in accordance with the law and in the best interests of the company and its members, allow it to continue” (my words here not the Judge’s).

So what were the points that such a hypothetic director (one of a number of fictitious persons regularly called upon by Judges to help them with their decisions) would consider, in the Judges view?

The first point is that this was not a normal trading company but a not for profit organisation existing as a company limited by guarantee Its members do not own it in the normal way but are “transient affiliates” their membership depending upon whether or not they have paid their membership fee.

Second, the directors had not ‘given away’ the company, but acted in accordance with a resolution properly passed at the company’s AGM.

Third, the terms of the transfer were that members would receive the same or better services without additional charge, and indeed the “services to be provided were equal to or better than those provided by the [SPLA]”.

Thus, the Judge decided “a director properly advised would conclude that this claim was a hopeless one, viewed on its own and aside from the quoracy issue“. So apart from a few financial matters which the Judge felt were not important, the only point which had any chance of success was that the merger decision was “tainted by inquoracy”. However, the existence of a realistically arguable claim is not sufficient to justify litigation, in these circumstances. Other things need to be taken into account as well.

First is the actual sum claimed in compensation. In the Judge’s view the basis of the SPLAs potential income claimed, was flawed, as it depended on members continuing to be members. However there were also the assets which had been transferred to the NLA, which could perhaps be returned. But would this be a good decision for the company?

One telling point is the position of the six former employees of the SPLA. Three of these have been employed by the NLA. However if the litigation succeeded, they would be at risk of losing their jobs. To quote the Judge :

“here a relatively small number of employees are at risk when in reality the members of the first defendant are not, for they were provided with services at least as good as those formerly provided by the first defendant, down to the date their subscriptions expired at no additional cost and can obtain continuing services by paying a subscription to the sixth defendant which in fact is less than that that was charged by the first defendant.”

There is then the question of costs. Mr Stimpson, it seems, is wealthy and can afford it (lucky him!). However the SPLA would be at risk of insolvency if it lost, and its prospect of attracting members would be limited if they become aware that a lot of the energy of the company would be concentrated on fighting this litigation rather than looking after their interests. Overall therefore, concluded the Judge, the hypothetic director would probably decide against continuing the litigation.

However, continued the Judge, even if he were wrong about the hypothetic directors probable decision, he still felt it was wrong to allow the claim to continue. Reasons being:

A questionnaire had been circulated to SPLA members, and although there was a majority in favour of continuing the litigation, this majority was quite small.

Mr Stimpson and his co-claimants had not given any evidence to show that the merger was not in the interests of members, and all the evidence was that the NLA would provide a similar if not better service at a lower price. This indicated bad faith on their part.

Finally, there was the conduct of Mr Stimpson himself in attempting to prevent the merger by causing the meetings to be inquorate, rather than attend them and argue against it. “The reality is” concluded the Judge “that the claimant wishes to bring the contemplated proceedings because he does not want to see the first defendant lose its identity or to lose control of it.”

So the Judge’s decision was to refuse permission to continue the litigation, and the order was made regarding costs as discussed in my previous post. An interesting decision, and one which shows that directors who seek to block decisions they do not agree with by improper means will not ultimately be successful.

If anyone wants to read the decision in full, they can do so here.