Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2011] CSOH 04
CA89/08	OPINION OF LORD GLENNIE in the cause LONEDALE LIMITED AND OTHERS Pursuers; against SCOTTISH MOTOR AUCTIONS (HOLDINGS) LIMITED Defenders: ­­­­­­­­­­­­­­­­­________________

Pursuer: Martin, Q.C., MacColl; Tods Murray LLP

Defender: Clark, Q.C.; Harper Macleod LLP

14^th January 2011

Introduction

[1] Scottish Motor Auctions Limited ("SMAL"), formerly known as Fife and Kinross Investments Limited, is an auction house for motor vehicles based in Scotland and the North East of England. Until 25 April 2007, its entire issued share capital was owned by the pursuers, 50% by the first pursuer, Lonedale Limited ("Lonedale"), and the remaining 50% by the second and third pursuers as the trustees of certain family trusts. Mr Douglas Flynn, one of the trustees of each trust, was also the owner of 50% of the shares in Lonedale.

[2] In terms of a Share Purchase Agreement ("the SPA") dated 25 April 2007, the pursuers (referred to in the SPA as "the Sellers") agreed to sell their shares in SMAL ("the Company") to the defenders, Scottish Motor Auction (Holdings) Limited ("SMAH") (referred to in the SPA as "the Purchaser"), for a consideration of £15 million. Completion took place on that same day.

[3] SMAH was formed specifically for the purpose of acquiring the shares in SMAL. The interests behind the formation of SMAH were Mark Rijkse, Mark Stewart and Nick Richards, who were directors of Aldington Capital Limited ("ACL"), and Robert ("Bob") Anderson, a business acquaintance of theirs who had had a lifelong involvement in the motor vehicle business. Before approaching ACL, Bob Anderson had already had discussions with Douglas Flynn about the possibilities of acquiring SMAL.

[4] The SPA contained a large number of fairly standard warranties. In terms of clause 5.1, the pursuers warranted that each of the warranties was true, accurate and complete in all respects, and not misleading in any respect. The warranties are set out in Part 6 of the Schedule which runs to some 70 pages. The relevant warranties are as follows:

"1. CORPORATE MATTERS

...

1.8 Memorandum and articles of association

1.8.1 The memorandum and articles of association of each Group Company (copies of which are provided in the Disclosure Documents):

(a) completely and accurately set out all the rights and restrictions attaching to each class of share in the capital of each Group Company;

(b) is true, complete and accurate in all other respects; ...

...

2. CAPACITY

...

2.7 Matters unaffected by execution of this agreement

Neither the execution nor the delivery nor the performance of this Agreement (or any document to be executed in accordance with it) will result in:

...

2.7.3 any party to an agreement or arrangement with a Group Company being relieved of any of its obligations or entitled to terminate any such agreement or arrangement; ...

...

3. CAPITAL

...

3.3 No encumbrance

There is no Encumbrance on, over or relating to any of the Shares or any of the unissued shares, debentures, loan capital or other securities of any Group Company and, other than this Agreement, there is no agreement or arrangement to give or create any such Encumbrance and no person has or has claimed the right to an Encumbrance on, over or relating to any of the Shares or any of the unissued shares, debentures, loan capital or other securities of any Group Company or otherwise has or has claimed the right to call for the issue, and allotment or transfer of any shares, debentures, or other securities in the capital of any Group Company whether exercisable now or in the future and whether or not contingent.

...

4. INFORMATION

4.1 Information in this agreement

The information set out or referred to in Section A (Particulars of the Company) and Section B (Particulars of the Subsidiary/Subsidiaries) of Part 2 of the Schedule is true, complete and accurate and not misleading in any respect.

...

10 CONTRACTS AND COMMITMENTS

10.1 Material contracts

No Group Company is nor has been during the three year period ending on the date of this Agreement a party to, or liable in respect of, and none of the assets owned or used by a Group Company are affected by, any contract, arrangement, commitment or obligation which:

...

10.1.13 may be terminated or varied by another party as a result of a change in the control, management or shareholders of any Group Company; ..."

[5] The defenders claim damages for breach of those warranties. They say, and there is no dispute about this, that the Disclosure Documents did not disclose the then current Articles of Association of a Group Company as defined in the SPA, namely Manheim Scottish Auctions Limited ("MSAL"), formerly Lansman Limited (Lansman"). MSAL was a joint venture company, the shareholding of which was at that time owned as to 50% by SMAL and as to the other 50% by Manheim Auctions Limited ("MAL"). It carried on business from an auction site in Siemens Street, Glasgow. The original Memorandum and Articles of Association of Lansman were dated 31 March 2000. New Articles were adopted on 25 July 2000, when the company was still called Lansman. Those were the Articles current at the date of the SPA. Article 11 was concerned with Compulsory Transfers. Article 11.6 provided, so far as material, as follows:

"In the event that any Member which is a body corporate, directly or indirectly, suffers a change of control that Member shall advise the Company of that fact. Following any such notification or following the Company otherwise becoming aware of that fact, the Company shall serve a notice on that Member requiring it to serve a Sale Notice ... in respect of all the Shares registered in its name, the Offer Price to be specified in that Sale Notice to be the fair value of each Share, the right of the other Members to purchase all of some of those Shares not to be conditional upon all of the Shares being purchased and the Acceptance Period ... to commence on the date on which the Company's auditors delivered to the Company and to each Shareholder of their certificate confirming the fair value of a Share. In the event that no such notice has been served within five (5) days of the Company's request for a notice to be served, such a Sale Notice shall be deemed to have been served. For the purposes of this Article 11.6:

11.6.1 A Member shall suffer a change of control if any person, who was not able to control that Member on the date it first became a Member, acquires the ability, directly or indirectly, to control that Member.

11.6.2 ...

11.6.3 Control shall mean the power of a person to secure by means of the holding of shares or the possession of voting power in or in relation to that or any other body corporate or by virtue of any powers conferred by documents regulating that or any other body corporate that the affairs of the first mentioned body corporate are conducted in accordance with the wishes of that person.

11.6.4 ..."

"The Company" in Article 11.6 is Lansman or, as it became, MSAL. SMAL and MAL were the only Members as at April 2007. There had been no such change of control provision in the previous version of the Articles. On 28 July 2000, Lansman changed its name to Manheim Scottish Auctions Limited (MSAL) and the Memorandum of Association was amended to reflect this change. The Articles were not altered.

[6] The change of control provision in Article 11.6 of the MSAL Articles of Association means that upon the defenders purchasing the entire shareholding of SMAL from the pursuers, SMAL suffered a change of control and could thereafter be required to sell its shares in MSAL to the other shareholders. In the event, soon after the share purchase was completed, a notice was served on SMAL in terms of Article 11.6, triggering the procedures which resulted in a compulsory sale by SMAL to MAL of its shares in MSAL.

[7] It is not disputed that the pursuers were in breach of warranty 3.3. That is already the subject of an admission recorded in an interlocutor. But the pursuers have not admitted breaches of the other warranties relied upon by the defenders. No point was ultimately taken that anything of consequence turned on which, if any, other warranties were breached as a result of the admitted facts. Nonetheless, lest it should matter hereafter, I should deal with the point. Having heard brief argument from Mr Clark QC for the defenders, and no contrary argument from Mr Martin QC for the pursuers, I am satisfied that the same facts which establish a breach of warranty 3.3 also establish a breach of warranties 1.8.1, 2.7.3 and 10.1.13, though not 4.2. Warranty 1.8.1 was breached because the Articles of MSAL which were disclosed were not true, complete and accurate in all respects. Warranty 2.7.3 was breached because the execution and performance of the SPA gave MAL, as a party to the Shareholders' Agreement between the shareholders of MSAL, the right to terminate it in terms of clause 14.1.2 thereof. And warranty 10.1.13 was breached because SMAL, being a Group Company, was party to a contract, arrangement, commitment or obligation (namely the Shareholders' Agreement and the Articles of Association of MSAL) which could be terminated by MAL as a result of the change in the control, management or shareholders of SMAL; and its assets, in particular its shares in MSAL and its interest as landlord in the lease of part of the premises used for the auction business of MSAL, were affected by those contracts.

[8] At the end of April 2009, I heard a Debate on a question relating to the contractual provisions concerning payment and retention. Following my Opinion ([2009] CSOH 64) and sundry procedure, I sustained the defenders' second plea-in-law in the Counterclaim, found the pursuers to be in breach of warranty 3.3 and appointed the remaining issues to a proof before answer. Those issues all arose on the defenders' Counterclaim. For that reason, the defenders led at proof.

[9] At the time I pronounced decree holding the pursuers to be in breach of warranty 3.3, the live issue, apart from the question of whether the admitted facts also amounted to breaches of the other warranties, was damages. A time-bar plea was added subsequently. Much later, the pursuers sought leave to introduce a plea, based on clause 5.3 of the SPA, to the effect that the defenders and/or their agents knew of the change of control provision in the MSAL Articles before 25 April 2007, the date of the SPA, and were therefore not entitled to put forward a claim for breach of warranty. Despite the fact that decree had already passed finding the pursuers to have been in breach, the defenders took no objection to this issue being raised, though otherwise they reserved their position. I therefore granted leave to introduce the point. In the event, the defenders chose to answer the new case on its merits rather than argue that it was too late for the pursuers to take the point. I shall deal with the clause 5.3 point and the time-bar plea before turning to deal with damages.

Issue A: the clause 5.3 point

[10] The pursuers' argument is based on the terms of Clause 5.3 of the SPA. This provides as follows:

"The Purchaser warrants to the Sellers that it has not, nor, so far as it is aware, have any of its officers, employees, agents or advisors any actual knowledge of any matter which will or may entitle it to make a claim in terms of this Agreement or under the Warranties and insofar as there are any such matters, the Purchaser shall not make any claim in respect thereof."

The pursuers say that by 13 February 2007, or in any event some time before 25 April 2007 when the SPA was concluded, Dundas & Wilson LLP ("D&W"), who were acting for the defenders in the transaction, had obtained a copy of the up to date Articles of Association of MSAL and were aware of the change of control provision in the Articles which permitted MAL, in the event of a change of control in SMAL, to acquire all of the shares in MSAL held by SMAL. Further, they say that Scott Boyle, a solicitor in the employ of D&W, told Mark Rijkse, a director of the defenders, of the existence of the change of control provision in the then current Articles of MSAL in the course of a telephone conversation on 13 February 2007. The defenders deny that Mr Rijkse was told this. Even if D&W themselves knew of the change of control provision in the Articles, the defenders did not.

Construction of Clause 5.3

[11] For the pursuers, it was submitted that, in terms of clause 5.3, it was sufficient for them to establish that, prior to the conclusion of the SPA, D&W had actual knowledge of the change of control provision in Article 11.6 of the MSAL Articles of Association. If this was established, they submitted, the defenders were not entitled to make any claim for breach of any of the warranties. Referring to the well-known authorities on how to construe a contract, which I need not recite here, it was submitted that the court should adopt a commercially sensible construction of the clause. The intention behind clause 5.3 was to bar claims for breach of warranty where the defenders (as purchasers), or those acting on their behalf in the purchase of the shares, had knowledge of a matter the non-disclosure of which might otherwise have allowed a claim for breach of warranty to be advanced. It was always known that the purchaser would be a limited company. As such, it could only ever have knowledge through its officers, employees or agents. Accordingly, for clause 5.3 to have any effect, knowledge on the part of officers, employees or agents of the defenders must be knowledge of the company. Further, it was submitted that it was "objectively appropriate" for the knowledge of the officers, employees, agents or advisers to be sufficient to preclude a claim in circumstances in which such people were, as a matter of fact, conducting the negotiation of the SPA on behalf of the defenders. If a claim for breach of warranty was precluded only where the defenders themselves had knowledge of the material facts, or had knowledge of what their officers, employees, agents or advisers knew, this would amount to a requirement of actual knowledge of the defenders themselves, and the object of the clause would be defeated.

[12] It was submitted further that, in any event, where the defenders' agents were directly engaged in negotiating all aspects of the transaction, the knowledge of those agents should be regarded as the knowledge of the defenders themselves. The agents could, for that purpose, be regarded as the directing mind of the company. Reference was made to the decision of the Court of Appeal in El Ajou v. Dollar Land Holdings Plc [1994] 2 All ER 685, in which it is made clear that the directing mind and will of a company is not necessarily that of the person or persons having the general management and control of the company. It may include, on a particular aspect, the person most closely involved on behalf of the company in relation to that aspect.

[13] I am unable to accept the submission that it is sufficient for the pursuers to show that D&W or Mr Boyle had actual knowledge of the change of control provision in the MSAL Articles. To my mind clause 5.3 sets out very clearly the circumstances in which the purchaser is prevented from making a claim for breach of warranty. If the purchaser has actual knowledge of a matter which might otherwise entitle it to make a claim for breach of warranty, that knowledge is a bar to it making such a claim. Because of the later reference to the officers, employees, agents or advisers of the company, it is clear that this first part of the clause looks only to the actual knowledge of the purchaser itself. How is a limited company to be fixed with knowledge? I see no reason to depart from the well-established principles. Actual knowledge of the purchaser means actual knowledge of a person or persons who can properly be described as the directing mind and will of the purchaser in respect of the matters of which knowledge is relevant. I accept that this may not always be the person or persons who have the general management and control of the company. In the present case I am satisfied that one such person would be Mr Rijkse. He was handling the negotiations so far as the defenders were concerned, and it was he who was the point of contact with D&W. If he was told by D&W about the change of control provision in the Articles of MSAL, then his knowledge will be regarded as actual knowledge of the defenders. Of course, there might be more than one person within the defenders whose knowledge would be relevant for this purpose, but the attention here has been on Mr Rijkse and I need not explore the position of others.

[14] I see no justification, however, for treating the knowledge of D&W or of Mr Boyle as actual knowledge of the purchaser. It would certainly amount to actual knowledge of the purchaser's agents or advisers. But that is only relevant for the purpose of clause 5.3 if the purchaser (or, for present purposes, Mr Rijkse) was aware that D&W or Mr Boyle had that knowledge. This is not, as the pursuers contend, self-defeating. What is required, if clause 5.3 is to prevent the purchaser from making a claim for breach of warranty, is for it to be shown either: (i) that the purchaser had actual knowledge of the change of control provision; or (ii), that (a) D&W or Mr Boyle had actual knowledge of the change of control provision and (b) the purchaser (in the present circumstances, through Mr Rijkse) was aware that D&W or Mr Boyle had such knowledge. For (ii)(b) to be satisfied, it does not need to be shown that the purchaser actually knew the content of what was known by his agents - it is enough that it was aware that the agent had the knowledge. In other words, the defenders will be barred from making a claim not only where it can be shown that they had actual knowledge of the change of control provision but also where it can be shown that they were aware that D&W or Mr Boyle had such actual knowledge, even if they themselves did not. I should add that Mr Clark referred me to para.82 of the judgment of Chadwick LJ in Infiniteland Ltd. v. Artisan Contracting Ltd. [2005] EWCA Civ 758 for the distinction between actual and imputed knowledge, but, while I recognise the point made in that passage, I derive no great assistance from it in this case since the clause with which I am here concerned clearly makes the same distinction.

[15] I therefore proceed upon the basis that even if it were proved that D&W and/or Mr Boyle had actual knowledge that there was a change of control provision in the Articles of Association of MSAL, that would not be sufficient to bar the defenders from making a claim for breach of warranty unless it were also shown that the defenders were aware that D&W and/or Mr Boyle had such knowledge. On the facts of this case, it seems to me that the two separate questions about (i) the defenders' actual knowledge that there was a change of control provision and (ii) the defenders' awareness that D&W or Mr Boyle had such actual knowledge, merge into one, since the pursuers' case concerning the defenders' (i) knowledge and (ii) awareness depends entirely on a conversation between Mr Boyle and Mr Rijkse on 13 February 2007, in which Mr Boyle is alleged to have told Mr Rijkse about the change of control provision in the Articles of MSAL. If it is established that the conversation took place as the pursuers allege, then it will have been shown that the defenders had both (i) actual knowledge of the change of control provision and (ii) an awareness that their agents also had actual knowledge. If, on the other hand, it is not established that the conversation took place materially as the pursuers allege, then the pursuers will have failed to show that the defenders had either (i) such knowledge or (ii) such awareness.

The evidence

[16] The main focus of the dispute turns on the events leading up to the telephone conversation of 13 February 2007. But events and correspondence thereafter also assists in trying to piece together what happened. I heard evidence from the two main actors, Mr Boyle and Mr Rijkse. The assessment of their credibility and reliability is clearly crucial. I also heard evidence, which was more limited in scope, from Mr Galbraith, Mr Boyle's supervising partner in D&W, and from Robert (Bob) Anderson and Mark Stewart, co-directors of the defenders with Mr Rijkse. It is necessary to consider a number of matters, both before and after the crucial telephone conversation, in some detail. Unless stated, all dates are in 2007.

The involvement of D&W

[17] D&W received their instructions in connection with the transaction from Mr Rijkse and ACL and, once it was formed, from the defenders. The point of contact throughout was Mr Rijkse. The transaction was given the name "Project Bluebird". Within D&W it was handled, on the corporate side, by Eric Galbraith, a partner in the firm. Mr Boyle, a senior associate in the corporate department at D&W, assisted in the due diligence exercise under his supervision. He had worked for D&W for some 7 years. Due to the fact that he was working on another project and was about to go on holiday, Mr Boyle's involvement in Project Bluebird was limited. He went on holiday towards the end of February. But for the time he was engaged on the Project, he was the main point of contact with Mr Rijkse on commercial matters. Orla Murphy, another senior associate, covered for Mr Boyle when he was on holiday. There were a number of others involved in the transaction, in particular on the property side.

[18] Both Mr Galbraith and Mr Boyle described the transaction as unusual. ACL were interested in the properties of the SMAL Group of companies. The pursuers did not wish to sell the properties and be left with a shell company. Accordingly, the transaction was structured as a share purchase agreement, the defenders purchasing the Company with its portfolio of properties. According to Mr Galbraith and Mr Boyle, the negotiations started on the basis that ACL wanted to acquire the properties of the Group and the properties remained the focus of the transaction throughout. Mr Rijkse did not agree. The point is of some importance in relation to forming an understanding of the conversation over the telephone on 13 February. On this point I prefer the evidence of Mr Rijkse. He and others gave clear evidence that in entering into the SPA they were interested in unlocking the business potential of the acquisitions, including the Siemens Street site operated by MSAL. Clearly the properties were important, but I am satisfied that part of the defenders' post-acquisition plan was to realise the business opportunities which would become available to them by the acquisition. Not unnaturally, that formed a part of their presentation to the Alliance and Leicester in December 2006 (7/223). I go into more detail on this aspect in dealing with Issue C, damages.

The due diligence exercise by D&W

[19] According to both Mr Galbraith and Mr Boyle, the due diligence exercise carried out by D&W for ACL (and, later, the defenders) was limited. Mr Galbraith said that the diligence to be carried out by D&W was to be confined to particular matters referred to them. Mr Boyle said that although in an ordinary transaction due diligence would normally cover both the target company and any companies in the Group, in this particular case the due diligence exercise was limited to considering the documents passed to them by the defenders and by the vendors. Most of the negotiations were carried out directly between the defenders and the vendors, without the involvement of D&W. D&W, therefore, had little contact with the vendors or their solicitors. The transaction was also carried out within a very tight timeframe. According to Mr Boyle, Mr Rijkse, who (as I have said) was the main point of contact between the defenders and D&W, was a former corporate lawyer; and he effectively carried out a large part of the due diligence exercise himself, sifting through the documents before providing them to D&W.

[20] The documents bear out to some extent the limited scope of D&W's role in the due diligence exercise in the early stages. On 10 January (7/212) Mr Galbraith wrote to Mr Rijkse inter alia to confirm his understanding of the work they were to undertake in relation to the project. Under the heading "Our Role" he identified the legal work to be undertaken by D&W under several headings. One of these was: "conduct of non property due diligence into SMAL and its subsidiaries (based on a scope agreed with you) and reporting to you". There was, in addition, a requirement to undertake property due diligence in relation to eight heritable properties. On the second page of the letter, Mr Galbraith added this is by way of clarification:

"In particular, our work will not extend to the following ("the Excluded Work") (1) advice in relation to the law of jurisdictions outside the UK, (2) arrangements with Manheim, (3) arrangements with Redrow, (4) any funding arrangements for the Project, other than granting security referred to above or (5) any accountancy advice in relation to the above." (Emphasis added)

"Arrangements with Manheim" is clearly a reference to the MSAL joint venture.

[21] There was clearly further discussion about the scope of D&W's instructions as regards due diligence and about the need to record all material which had been looked at as part of the due diligence exercise. On 26 January (7/268), Mr Galbraith e-mailed Mr Rijkse "to confirm where some matters rest at this stage". Under the heading "Diligence" he wrote this:

"I mentioned during our last conference call that it is key that all diligence material (and, consequently, all disclosures) are tracked and recorded. Thanks for confirming that you are keeping a record of what you receive. I confirm that we are doing likewise. At the appropriate stage, we can check our respective records against disclosure terms.

Coming to the terms of our engagement letter, if I can be a bit pedantic for a moment, we are operating the diligence process on the basis that we are reviewing only the documents which we receive from either you or from Alistair Napier.

Although our engagement letter expressly excludes arrangements with Manheim and Redrow, I confirm that our diligence does include the documentation relative to each of these parties which you have sent to us.

As discussed at the very outset, our diligence will not be on the basis of summarising a document which you can review yourself. Our diligence will be focused on identifying material, commercial terms which ought to be taken into account by a prospective arm's length purchaser for value. In fact, Scott [Boyle] will carry out this exercise himself as his experience will allow him to be more selective than that of one of our junior lawyers on the team.

Our engagement letter's terms should be read in this respect in conjunction with the terms of this e-mail."

That is how matters stood, in terms of the correspondence at any rate, at the time of the telephone conversation on 13 February. The due diligence to be carried out relating to "Manheim" (i.e. MSAL) in terms of the letter of engagement was to be limited to a scrutiny of the documents provided to D&W by the vendors (or their solicitor, Alistair Napier) and by the defenders. But it would be wrong in my judgement to characterise this as being a case where Mr Rijkse was, in effect, carrying out a lot of the due diligence work himself and sifting the documentation before passing some of it on to D&W. Mr Rijkse explained in his evidence that he had not been a corporate lawyer in the general sense. His main involvement in his legal career as a solicitor at Clifford Chance had been in securitisation.

[22] The scope of D&W's due diligence obligations continued to be a matter of discussion. On 23 February (7/493), Mr Galbraith e-mailed Mr Rijkse "to confirm matters which are receiving our attention outwith the initial scope of our services" as set out in the engagement letter of 10 January. He said that the terms of that engagement letter should be varied to the extent of confirming that they had included within the work carried out inter alia "consideration of the arrangements with Manheim". Mr Boyle said in cross-examination that that related to property matters. There is nothing in the wording in that e-mail or in the surrounding circumstances to suggest that it was so limited. Mr Galbraith was at pains in that e-mail, as in his previous correspondence, to set out carefully what was within the scope of D&W's work and what was not; and, had the inclusion within their remit of consideration of arrangements with Manheim been limited to property matters, I would have expected him to say so.

[23] The Legal Due Diligence Report submitted by D&W on 20 April (7/72) stated in the covering letter that ACL had instructed them to carry out "a limited legal due diligence review of certain legal aspects of the affairs of the Company" and its subsidiary undertakings. In the Executive Summary there is a reference to a change of control provision in the Shareholders' Agreement relating to IC Vehicles Deliveries Limited ("ICV"), a 50% owned joint venture company, in terms similar to those of the change of control provision in the MSAL Articles, giving the other shareholder, Ian Carter, the right to have his shares purchased or to purchase the shares held by SMAL in the event of a change in ownership of SMAL. It was noted that the vendors had obtained a waiver from Ian Carter of his rights under that provision in respect of the sale by them to the defenders of the shares in SMAL. The Executive Summary also refers to the fact that part of the Kinross site, owned by the group, might be vested in Fife & Kinross Motor Auctions Limited, which had been dissolved in 1992. It was noted that the vendors had restored that company to the register. Further on in the Legal Due Diligence Report, at para.2.5 there is a section headed "Subsidiaries". Para.2.5.2 deals with ICV, highlighting the change of control provisions at clause 9 of the Shareholders' Agreement. Para.2.5.3 deals with Inchcape Automotive (Scotland) Limited ("Inchcape Scotland"), a company whose shares were held as to 50% by ICV and as to the other 50% by Inchcape Automotive Limited ("Inchcape"). Para.2.5.4 deals with MSAL. It is described, correctly, as a 50:50 joint venture company with MAL which is involved in the motor auction business in Scotland. There is then some discussion as to the terms of the Shareholders' Agreement, including, at clause 9, a restrictive covenant preventing each party, for a period of 12 months after that party ceases to be a shareholder, from being involved in any motor auction facility located in Scotland west of Stirling. There is no mention in this document of the Articles of MSAL or of the change of control provisions in the Articles. Finally, for present purposes, I note that in a section headed "Recommendations and Action Required/Taken" there is a further reference to the waiver from Ian Carter in relation to the ICV Shareholders' Agreement, and to the restoration to the register of Fife & Kinross Motor Auctions Limited.

[24] Mr Boyle was asked in cross-examination about ICV and the fact that a waiver had been obtained from Ian Carter. He remembered that, to some extent. He added that ICV, or Inchcape, appeared to be the company the clients were more concerned with. He could not understand why there needed to be a waiver in respect of ICV but not in respect of the other joint venture company, MSAL.

Communication with defenders about MSAL on 7 February 2007

[25] There was a flurry of e-mails on 6 February between Scott Boyle and Mark McLaughlin, also of D&W but involved in the property side of the transaction. Mr McLaughlin had discovered that part of the title to the Siemens Street site of the Glasgow car auction mart was held in the name of MSAL rather than by SMAL. In an e-mail to Mr Boyle on 6 February (6/283), he asked whether "Manheim", by which I take him to have meant MSAL, was part of "your corporate transaction". He was interested in the lease arrangements over the site and how this fitted in with the valuation which had been obtained. Mr Boyle e-mailed him back that day (6/283) saying that MSAL was "a 50:50 JVCo between SMA and Independent Car Auctions Limited". (It is not clear how this reference to Independent Car Auctions fits with that fact that it was MAL which was the other shareholder in MSAL, but nothing turns on this.) He went on to say that "the 50% of shares in the Company" (presumably meaning MSAL) formed part of the transfer. He had the joint venture agreement, but there was no reference in it to the lease or other property issues. Mr McLaughlin replied asking him to send him the joint venture agreement.

[26] On the evening of 6 February (7/57) Mr Boyle e-mailed his supervising partner, Mr Galbraith, to say that he had been reviewing the structure in all the subsidiaries

"to check through Articles and docs provided to confirm no change of control or other related provisions, I have not come across anything."

This is consistent with his understanding that any due diligence was to be carried out on documents provided to D&W by the vendors' solicitors and by the defenders.

[27] The next day, 7 February, he sent the following e-mail (7/58) to Mark Rijkse, marking its importance as "High":

"Mark

As part of the due diligence process I have undertaken a detailed review of the Shareholders/Joint Venture Agreements in relation to Manheim Scottish Auctions Limited and Inchcape Automotive (Scotland) Limited as well as reviewing the most up to date versions of the Articles of Association of these companies and the Articles of each of Racing Karts Limited and IC Vehicle Deliveries Limited.

My primary area of concern was a change of control provision in relation to any of these companies and any payments which may arise. Whilst both the Manheim and Inchcape JV Agreements and Articles contain detailed share transfer provisions there are no provisions or obligations triggered on a change of control in SMA.

Similarly there are no change of control provisions in the Articles of IC Vehicle Deliveries or Racing Karts. I have not seen any JV or Shareholders' Agreement in relation to either of these companies and wondered if you are aware if they exist and/or in possession of those, if not I will seek copies or confirmation that none exist. ..." (Emphasis added)

Mr Boyle thought it likely, as do I, that he had received a copy of the Articles of MSAL from Alistair Napier, the solicitor acting for the vendors. It is to be assumed that the version he received from this source was the original (out of date) version of the Articles. At the same time, however, it is clear from an invoice from Companies House Services (7/495) that on 6 February, the day before his e-mail to Mr Rijkse, someone at D&W had electronically searched the Companies House website in relation to MSAL. The assumption made in the evidence was that that person had searched for and downloaded a copy of the MSAL Articles. That is an important plank in the pursuers' case.

[28] Evidential support for that assumption comes only from Mr Boyle; and it raises as many questions as it answers. Mr Boyle said in cross-examination that he thought that either he or one of the other members of the team, he was not sure which, had printed off the MSAL Articles at that time. When asked why, if that was the case, he had not looked at the MSAL Articles printed from the Companies House website before e-mailing Mr Rijkse, rather than looking at the copy provided by the vendors' solicitors, he altered his position. It was not him but a trainee who had printed off the Articles from the website. The trainee had printed off the Articles of the target company (SMAL) and its subsidiaries, including MSAL. Mr Boyle thought that he would have asked the trainee to pass him copies of the Articles that he did not have already. Since the trainee would have known that he already had a set of the MSAL Articles, he probably had not passed him the set of MSAL Articles which he had printed off.

[29] There are problems with this explanation. First, since the evidence of Mr Galbraith and Mr Boyle was that their due diligence was restricted to an examination of the documents they were given by the vendors and the defenders, what were they doing getting copies of documents from the Companies House website? Second, there was no evidence (e.g. in the form of Companies House Services Invoices) of any search concerning SMAL or other subsidiaries - the only evidence was of a search concerning MSAL. Third, since whatever was done was done by a trainee and not Mr Boyle, there is no direct evidence that the MSAL Articles were printed off then - Mr Boyle does not say that he saw them then. And fourth, on the assumption that a copy of the Articles of MSAL was printed off then, what happened to that copy. The trainee did not give it to Mr Boyle. No evidence was led as to what he or she did with it. This is of some importance standing Mr Boyle's evidence that some days later, on 12 February, he checked the content of this copy of the Articles. There is a separate question as to what version of the MSAL Articles was downloaded and printed, even assuming that a copy of the Articles was downloaded and printed at all. I revert to this later.

[30] In his e-mail reply (7/59) to Mr Boyle, Mr Rijkse confirmed that there was a Shareholders' Agreement for ICV which he thought he had sent to Mr Boyle a couple of weeks previously. He said he would send it again if Mr Boyle did not have it.

[31] Following this exchange, on 9 February Mr Galbraith e-mailed Mr Rijkse with a round up of progress (7/60). He noted that Mr Boyle had been working up the Diligence Report (excluding property). So far as that report was concerned, nothing material had been unearthed so far. The focus was now on the SPA, which might throw up more material over the next few days, but it was anticipated that the Diligence Report could be issued in the following week, albeit on an interim/draft basis, to be updated as further data became available prior to the Disclosure exercise.

Telephone discussions and e-mails of 13 February 2007

[32] The telephone call relied on by the pursuers took place on 13 February. That is the date on the note made by Mr Boyle in advance of the call. Mr Boyle himself did not recall precisely when the conversation took place, and Mr Rijkse did not recall a specific conversation with Mr Boyle on that day, though he accepted that he spoke to him regularly, possibly daily, and did not dispute that there could have been a telephone conversation then. There is no clear evidence of the time at which the conversation took place. Such evidence might have been of assistance, to see how it fitted into the e-mail exchanges on the same day. Nonetheless, it is possible to piece together the likely sequence of events from the content of the e-mails and the note which Mr Boyle made relative to the conversation on the telephone.

[33] At 18.32 on Tuesday 13 February Mr Boyle e-mailed Mr Rijkse (7/61). The subject line of the e-mail made no reference to MSAL - it referred to "IC Vehicle Deliveries Change of Control Provisions". The body of the e-mail reads as follows:

"Mark

You may recall from my e-mail on Monday (and having raised it with you last week) that I had been pressing Alistair Napier for confirmation as to whether there was a shareholders or joint venture agreement with Ian Carter in respect of IC Vehicle Deliveries Limited. I was initially told there was not one but I have now received a copy and you will note that Clause 9 contains a change of control provision.

The Agreement refers to SMA [by its former name].

Although it refers to a Nominee (the shares of SMA being held by Kippen Campbell Nominees at that time) it clearly states that on the occurrence of a change of control of SMA there is a requirement to notify Ian Carter. Ian Carter then has the option to require a transfer: (i) so that the affected shares are within the same control as the party holding the shares prior to the change of control; or (ii) his shares are bought at the Prescribed Price (as defined); or (iii) he buys SMA's shares at the Prescribed Price.

We can discuss how to take this forward.

Kind regards,

Scott"

Mr Rijkse replied to that e-mail that same evening (7/61), at 19.52 (an hour and twenty minutes later), the subject of his e-mail being "Re: IC Vehicle Deliveries Change of Control Provisions". It seems to me, however, that his reply probably came after the telephone conversation upon which the pursuers rely for this part of their case. This seemed to be Mr Boyle's view as well. I therefore turn next to that conversation.

[34] Mr Rijkse did not keep a note of the conversation. Mr Boyle's handwritten note is at 7/62. It reads as follows:

"Bluebird - Aldington Capital ALD009.0001 13 Feb /

- Property (Redrow) )

)

- E.P.I. )

)

- S.P.A. )

)

- Structure Chart )

- Spke Mark re issues on change of control in SMAL & Inchcape. Understands the points*

* To send through copy of Inchcape Agreement for Mark to consider, check he has copy of most up to date SMA JV and Arts - if not send a copy. Has it *

* Dissolution of Fife & Kinross Motors Autos to be confirmed current position - warranty?

* To ascertain whether they want to use LLP or company for their own vehicle"

I have italicised the words "Has it" and "warranty?" to indicate that they are circled in the note.

[35] Mr Boyle explained in his evidence that this was just a scribbled note to himself of what he was going to speak to Mark Rijkse about. He made some annotations during the conversation, as "comments to myself" or "actions to do". The words "Understands the points*", "Has it*" and "Warranty?" were added during the conversation. I accept that evidence. To my mind it ties in with Mr Rijkse's e-mail of 19.52 (7/61) which, on the view I have formed, was sent by Mr Rijkse after that telephone conversation. Before considering the evidence about the telephone conversation I should refer to that e-mail.

[36] Mr Rijkse's e-mail of 19.52 on 13 February was in the following terms:

"Dear Scott

Many thanks for extracting this from the vendor. Please can you re-scan the attachment as what has come through comprises odd numbered pages only.

Bob, whilst I cannot see all the clauses in the document it is clear that Scott is quite correct and a change in control of SMA triggers certain rights for Ian Carter to either buy up SMA's share, or require SMA to buy up his (at the same price per share in either case) or require the SMA's shares moved to a new holder who has the same control as SMA had (perhaps a new company owned by Lonedale and Smith Trusts?). In any event, it would be interesting to know why the existence of this document has been so hard to ascertain and secondly, what Douglas proposes to deal with the change of control provision.

Best

Mark."

"Bob" is Robert Anderson, the co-shareholder in SMAH. Douglas is Douglas Flynn, who was handling the sale on behalf of all the various vendors. The e-mail was copied to him.

[37] The precise sequence of events is not crucial. But I consider that Mr Boyle was correct in thinking that the telephone conversation took place after the first of those e-mails and before the second. I say this for the following main reasons. First, the first paragraph of the note of the telephone conversation suggests that Mr Boyle's intention is to speak to Mr Rijkse about change of control provisions about which he has just been made aware. That is why Mr Boyle is telephoning him. Mr Rijkse was told about the ICV change of control provisions (in the joint venture agreement) in the first e-mail, timed at 18.32. There is no record of any intimation to him before then of any change of control provisions, relating to ICV or anyone else. So the telephone conversation probably occurred after the first e-mail. Secondly, in the first e-mail, Mr Boyle refers to the ICV joint venture agreement between SMAL and Ian Carter, and makes a comment on it. He invites Mr Rijkse to note something from that document. In the note of the telephone conversation, he notes that Mr Rijkse "has it". Then, in the later e-mail, timed at 19.52, Mr Rijkse asks Mr Boyle to re-scan the attachment to the first e-mail, because only alternate pages have been copied. Mr Boyle must have e-mailed the joint venture agreement to Mr Rijkse as an attachment to his first e-mail. During the telephone conversation, Mr Rijkse was aware that he had received it and confirmed that to Mr Boyle, who noted it down ("Has it"). Only after the call did Mr Rijkse realise that the attachment was incomplete and ask Mr Boyle to re-scan it and send it again. This is consistent with the telephone call having taken place after the first e-mail and before the second; and is more consistent with that scenario than any other.

Mr Boyle's evidence about his note and the telephone conversation

[38] Mr Boyle gave evidence about the note in his witness statement and amplified this orally both in chief and in cross-examination. Since his evidence on this point is central to the pursuers' case, I shall set it out in some detail.

[39] In his witness statement Mr Boyle explained that the note was written in a notebook. It was not a file note as such - indeed it was never put on the client file but remained in the notebook amongst other rough notes on this and other, unrelated, transactions. His recollection was that he had received documents relating to another joint venture, which he thought might have been Inchcape or ICV, and that they were different from those which he had previously seen. These were no doubt the documents referred to in the e-mail sent by him at 18.32 on 13 February. He said that the change of control provision in those new documents had prompted him to go back and look again at the MSAL Articles. The MSAL Articles he saw then were different from those he had looked at previously. The change of control provision was "really obvious". So he called Mr Rijkse. He had to "flag up" the change of control provisions to Mr Rijkse because of the contrary advice he had previous given him.

[40] According to this version of events, therefore, Mr Boyle went back and looked again at the MSAL Articles and saw that they were different from those he had looked at before. This is problematic. Mr Boyle did not say where he found this different set of Articles. It is not suggested that he was sent any further versions of the MSAL Articles by the vendors (or anyone else) between 6 and 13 February. Nor do the Companies House invoices suggest that there had been any further on-line search of the Companies House records between 6 and 13 February - the next search of the Companies House records by D&W in relation to MSAL was on 21 March (see 7/496), too late to be relevant to this stage in the sequence of events (and there was no evidence as to what that search was for or what prompted it). In an e-mail of 17 May 2007 (6/24), written three days after the problem surfaced as an issue, Mr Boyle said that as a result of seeing the ICV change of control provision on about 12 February, he undertook a further review of the MSAL agreement and printed off a set of Articles from the Companies House website. He accepted in cross-examination that that account must be wrong, since there was no record of any relevant D&W search of the Companies House website at that time. If, therefore, Mr Boyle saw a copy of the up to date MSAL Articles for the first time on 12 or 13 February, the copy he saw must have been the one downloaded and printed off by the trainee on 6 February.

[41] This explanation, too, raises questions, not least the question why Mr Boyle should have looked at any copy of the Articles other than the one he already had. I have already noted the absence of any direct evidence showing that a copy of the MSAL Articles was printed off on 6 February. But even if it was, Mr Boyle's evidence was that that copy was not given to him then because he already had a copy of what he (wrongly) assumed were the up to date MSAL Articles. If that is right, why did the copy of the Articles downloaded by the trainee on 6 February come to hand for Mr Boyle to look at on 12 February? There was no evidence led about the system used for collecting and storing relevant documents. Mr Galbraith spoke highly of Mr Boyle's care and efficiency in carrying out his tasks over many years. If, as might be expected of a careful solicitor, Mr Boyle kept a set of the Articles and other corporate documents relating to the target company and subsidiaries all together in one file or cabinet, then, unless he had reason to suspect that the copy of the MSAL Articles which he had was not the correct one (which he did not), the natural thing for him to have done if he had wanted to check something would have been to turn to the copy Articles which he had already gathered together. If so, the copy he checked on 12 February, if he checked the Articles at all on that date, would presumably have been the (out of date) copy which he had had from the beginning - and he would not have been alerted to the change of control provision in the up to date Articles. Further, Mr Boyle's explanation proceeds upon the assumption that the version of the MSAL Articles which the trainee downloaded on 6 February was the up to date version. This may indeed be the case, but it rests entirely upon Mr Boyle's current, and rather tentative, evidence of what he looked at on 12 February (which differs from what he said in May 2007). No other evidence was led to prove it (from the trainee who printed it off, for example) and, to my mind, it is not self-evident that it is the case.

[42] As an aside, I should note that a large number of copies of the Articles in different forms were lodged in process (see e.g. 6/25, 6/29, 6/32 and 7/54 for the original Articles, 6/25, 6/28, 6/30, 6/31, 7/53 and 7/77 for the new Articles). In at least two places (6/32 and 7/54) the original (out of date) Articles are attached to the Memorandum of Association as amended on 28 July 2000, which post-dates the adoption of the new Articles on 25 July 2000. The Company Filing History for MSAL (7/186) shows that a version of the Memorandum and Articles was lodged on 1 August 2000. This ties in with the documents at 7/54, where the new Memorandum front sheet (to which is attached the original, out of date, version of the Articles) has a Companies House bar coded stamp of that date. There is also a record of the Memorandum and Articles of Association having been lodged with Companies House on 21 August 2000. There is no matching date on any of the versions of the Articles lodged in process, though some copies of the new (up to date) Articles bear a Companies House stamp dated 18 August 2000 (see e.g. the copy at 7/30) which presumably points to the new version having been lodged with Companies House at about that date. As I have said, no evidence was led from the trainee involved in the interrogation of the Companies House website on 6 February as to what he/she did and which version of the Articles he/she downloaded. Nor, as I understood it, was it possible to re-construct from any sources what documents D&W had on file at which stages during the period in question.

[43] Turning to the content of the note, Mr Boyle explained that "ALD009.0001" was the client reference. He did not know what "Property (Redrow)" and "EPI" referred to. "SPA" referred to the share purchase agreement. He interpreted the first full paragraph of his note,

"Spke Mark re issues on change of control in SMAL & Inchcape. ..."

as meaning "Speak [to] Mark ...", rather than "Spoke [to] Mark ...", referring to a conversation he was about to have, not one he had just had. That explanation makes sense if, as he said, this was a note made in preparation for a telephone call. More importantly, he said this about it in para.26:

"Where I have written 'SMAL' I am referring to the JV Manheim Scottish Auctions Ltd.[i.e. MSAL] I think I usually referred to it as SMAL. This is a transaction where there were a number of companies with quite similar names abbreviated to quite similar initials/ acronyms. This is definitely a reference to the JV Manheim Scottish Auctions Ltd. It would not make sense for it to be SMA, as there was no change of control in SMA."

He added that he had written "Understands the points*" during the conversation to indicate that Mark Rijkse appeared to understand the points he had made to him. He recalled that when he told Mr Rijkse about the MSAL change of control provisions, Mr Rijkse had said something like: "yes, that's fine". There was nothing further he needed to do about the point. He had brought it to Mr Rijkse's attention and had corrected his previous advice, and Mr Rijkse was not concerned about it.

[44] Turning to the next full paragraph of the note, which reads

"* To send through copy of Inchcape Agreement for Mark to consider, check

he has copy of most up to date SMA JV and Arts - if not send a copy.

Has it *"

Mr Boyle explained that by "SMA JV and Arts" he was referring to the Articles of Association of MSAL. The words "Has it", which he had asterisked and circled, indicated that he understood that Mr Rijkse already had copies of those up to date documents, including the up to date Articles of MSAL.

[45] In his oral evidence in chief, supplementing what he had said in his witness statement, he explained that the telephone call did not focus on MSAL. It focused on the main issues and the change of control provision in other documents. But he said that during the conversation with Mr Rijkse he had also said words to this effect:

"I wrote to you saying that there was no change of control provision [in the MSAL Articles], but I have now received the up to date Articles and there is a change of control provision."

He said that he wrote SMAL in his note, meaning MSAL. The reference to "Inchcape Agreement" in the second paragraph of the note referred to the Inchcape Joint Venture, ICV. He was going to send the Articles because Mr Rijkse did not have them. There were two issues at the time, Inchcape and Manheim. Mr Rijkse's response to the MSAL question was that it was not a huge issue - he had simply said "OK" or "fine". At one point in his evidence Mr Boyle suggested that Mr Rijkse had seemed distracted during the telephone conversation. Nonetheless, as a result of his conversation with Mr Rijkse, Mr Boyle said that he was confident that Mr Rijkse had the up to date Articles of MSAL.

[46] In cross-examination Mr Boyle was asked why he had not extracted his notes from the notebook and put them on the client file. His answer was that the issue was not seen as significant. He had mentioned the change of control provision to Mr Rijkse and there was nothing more to be done. The note was just an aid to the conversation. He did not necessarily put everything on the file. He was about to go on holiday and he left his notes for Orla Murphy. With hindsight, he said, he should have put something on file. Mr Boyle said that he had thought that he had told Mr Galbraith, but that Mr Galbraith had told him that that was not correct. (I should note here that, in his evidence, Mr Galbraith was clear that Mr Boyle had never told him before 14 May 2007 that there was a change of control provision in the MSAL Articles; and he also denied that Mr Boyle had ever said to him that he thought he had told him about it.) Mr Boyle accepted that a change of ownership of SMAL triggered the change of control provision in ICV, but that was not what he was referring to in the note. The note was about things he was going to discuss. So far as concerned the second paragraph, he agreed that he may have thought that he was going to send through copies of the documents.

[47] Mr Boyle insisted throughout that "SMAL" in the first paragraph in his note referred to MSAL. In para.26 of his witness statement he said that he "usually" referred to MSAL as "SMAL". When it was put to him that that beggared belief, he retreated from that position: he should have said that he "may have" referred to MSAL as "SMAL". Asked whether the truth was that he never referred to MSAL as "SMAL", he said that he did in the context of the written note. It was put to him that that was a fabrication and that in none of the documents before the court was there any example of that confusion. He denied that it was a fabrication. He had no reason to make it up. He insisted that in writing "SMAL" in the note he was referring to MSAL. In a proper file note he would have written out the name in full.

[48] During the course of Mr Boyle's evidence, his notebook was recovered, and pages which he identified as being relevant to this transaction were copied and lodged in process (6/33). They show no signs of the acronym "SMAL" having been used to mean MSAL. However, only a few pages in the notebook related to the transaction, and these contained only a few uses of the acronym SMA or SMAL. The point is therefore, perhaps, neutral - the absence of any similar confusion in the pages of the notebook certainly does not prove the negative, i.e. that that Mr Boyle never misused the acronym "SMAL" to mean MSAL (perhaps in other notebooks or on scraps of paper), but neither does it support Mr Boyle's case. It may be noted, however, that "SMA" is written on at least two occasions in 6/33 (at p.25 of the notebook) in a context in which it clearly refers to SMAL and could not have been intended as a reference to MSAL.

Mr Rijkse's evidence

[49] I can summarise Mr Rijkse's evidence on this very briefly. He was clear that he had not been told anything about the change of control provisions in the MSAL Articles during that telephone conversation. Indeed he was adamant that he knew nothing about the change of control provisions until after completion. Had he been told, he would have taken steps to resolve the problem, as he had done with ICV, where he obtained a waiver from Ian Carter. MSAL was an important part of the deal. He would have tried to do something about it. He might not have been able to approach MAL as he had approached Ian Carter - the defenders were throughout anxious not to alert MSAL and MAL to the share purchase - but he would have taken the matter up with Mr Flynn. He certainly would not have told Mr Boyle that it was not important. In any case, if Mr Boyle had told him about the change of control provision in the MSAL Articles, he would have expected him to have confirmed the position to him in writing and ensure that something was on the file.

Other evidence relevant to the telephone conversation of 13 February

[50] Mr Galbraith was not a party to the telephone call. But he made four points bearing upon the reliability of the accounts given by Mr Boyle and Mr Rijkse. First, as I have already mentioned, he gave a glowing testament to Mr Boyle's abilities. He was careful and efficient. He never made a mistake. He accepted, however, that because of this, he would have expected Mr Boyle to have made a file note of a conversation such as this. Second, he accepted the crucial importance to a client of a change of control provision. That conflicts with Mr Boyle's view that the matter was not significant enough for him to keep a record. For that reason too, I would have expected Mr Boyle to have kept a note of the conversation on file. Third, he stressed the limited nature of D&W's role in the due diligence process and the perception, from D&W's point of view, that Mr Rijkse was an experienced corporate lawyer who was carrying out his own due diligence. It would be explicable in that context that he should give a low key reaction to being told of the change of control provision in the MSAL Articles. It may well have been something that he already knew and was dealing with. Fourth, he spoke to Mr Boyle's habit of confusing the acronyms in the transaction, in particular confusing MSAL and SMAL. He said it had become a standing joke between them.

The conference call of 19 February 2007

[51] On 19 February a conference call took place between a number of people at D&W, including Mr Galbraith and Mr Boyle, and Messrs Rijkse and Stewart of the defenders. A note of that call is at 7/68. The "Manheim JV" is mentioned twice in that note. The second time is simply noting that the Manheim JV is one of a number of subsidiaries of SMAL. The first mention is at the beginning of the note where the following is written:

"(1) Glasgow keep

Manheim JV

want full market rent

reorg JV post completion"

It was suggested to Mr Boyle that any discussion in these terms about keeping the "Manheim JV" (i.e. MSAL), wanting the full market rent, and reorganising the joint venture after completion, would have been inconceivable if, at that time, the parties (D&W and Mr Rijkse) were aware of the change of control provision in the MSAL Articles, since that provision meant that there was no certainty that the defenders would be able to retain their interest in MSAL if the share purchase went ahead, let alone reorganise it after completion. Why was the change of control provision not even mentioned? Mr Boyle did not specifically remember the call, but he thought it was all to do with the properties being acquired. In any event, he said, this question was outside their (D&W's) remit. The information about the change of control provision had been relayed to the client and, as far as Mr Boyle was concerned, the client was dealing with it.

[52] Soon after this Mr Boyle went on holiday. When he returned he had little first-hand involvement with the matter, though he was involved in preparing the final version of the Legal Due Diligence Report.

Discovery of the change of control provision - events of 14 May 2007

[53] The SPA was concluded on 25 April and the transaction completed on the same day. There were discussions between the defenders and MAL, to which I shall refer in dealing with Damages later in this Opinion. On Friday 11 May, MAL sent a letter (7/75) to MSAL and SMAL invoking the terms of Article 11.6 of the Articles of Association of MSAL on the ground that SMAH, the defenders, had acquired the entire issued ordinary share capital of SMAL. The material part of that letter reads as follows:

"We understand that a company called Scottish Motor Auctions (Holdings) Limited has acquired the entire issued ordinary share capital of Scottish Motor Auctions Limited and that, accordingly, a "change of control" of Scottish Motor Auctions Limited within the meaning of Article 11.6.1 of the Company's Articles of Association has occurred. In accordance with Article 11.6 of the Company's Articles of Association, in the event of such a change of control occurring, Scottish Motor Auctions Limited is obliged to advise the Company of that fact. We hereby give Scottish Motor Auctions Limited notice that it must deliver to the Company in accordance with the requirements of Article 11.6 of the Company's Articles of Association, copied to us, written notice of the change of control it has suffered."

The delivery of written notice that a change of control has been suffered is the first step in the process of implementing the share sale provisions in that Article.

[54] Although that is the date on the letter, the letter in fact appears to have been sent to SMAL's offices in Kinross by fax timed at 10.20 on Monday 14 May. From there, it was faxed at 10.59 on the same morning to Mr Rijkse's office in London. Mr Rijkse confirmed receiving it at his office. Mr Rijkse had also had a telephone call from Bob Anderson, who explained that John Bailey of MAL had telephoned him and told him of his intention to issue a notice requiring SMAL to sell its shareholding in MSAL to MAL.

[55] At 10.35 on 14 May, before himself receiving the faxed copy of MAL's letter, Mr Rijkse e-mailed Mr Galbraith in the following terms (7/76):

"Dear Eric

We have this morning received a fax from Manheim Auctions Limited purporting to require us to issue them with a notice of change of control of SMAL which will purport to be a "Sale Notice" under the terms of the articles of association of Manheim Scottish Auctions Limited.

I do not recall being aware that there was a change of control provision of this nature - did you review the articles of association of the JV company? A copy of the fax is being sent to you now.

Regards

Mark"

Mr Rijkse explained that he had been telephoned by Bob Anderson to tell him about the letter. That was why he could e-mail Mr Galbraith before he received the faxed copy. He was pressed in cross-examination as to how he could have known the term "Sale Notice", which he used in his e-mail to Mr Galbraith, when this term was not used in MAL's letter. It was put to him in terms that he must have had a copy of the up to date Articles of MSAL, and been able to look at Article 11.6 before sending his e-mail to Mr Galbraith. It is not entirely clear on what basis it was contended that Mr Rijkse, as opposed to D&W, had a copy of the up to date Articles of MSAL by this stage. It was no part of the pursuers' case, nor any part of the evidence of Mr Boyle, that Mr Rijkse had actually been sent a copy of the up to date MSAL Articles at the time of the telephone conversation of 13 February. Nor was there any evidence that he had been given or sent a copy subsequently, before the exchanges of 14 May. In any event, Mr Rijkse denied it. He insisted that he had not seen the Articles of MSAL by then. He explained that the letter from MAL was faxed to him from Kinross by Angela Dunn, the personal assistant to Bob Anderson. "Sale Notice" was a term which Bob Anderson used to him on the telephone. Bob Anderson had told him that "Mr Bailey said that he was issuing me with a Sale Notice" or words to that effect. Mr Rijkse said that if he had had the articles he would have made a more accurate reference to the terms of Article 11.6. He would not, for example, have talked about "us" issuing "them" with a Sale Notice - it would have been the other way round.

[56] It was put to Mr Rijkse that Bob Anderson had spoken to Mr Bailey some days before receiving the formal letter from MAL, and must in turn have told Mr Rijkse about the problem some days before the letter was faxed to him on 14 May. His evidence that he had only learned about the change of control provision in the MSAL Articles on the morning of 14 May was therefore untrue. I am not persuaded on the evidence that Mr Rijkse was told before 14 May. There is a separate question as to why, if Bob Anderson was told of the change of control provision some days earlier, he did not pass this on to Mr Rijkse if the point was of such importance, but this does not affect the credibility of Mr Rijkse's evidence on this point.

[57] At 13.31 on the same day (7/76) Mr Galbraith responded by e-mail to say that he was looking at it right now and would call shortly.

[58] Meanwhile, Mr Rijkse e-mailed again at 12.31 on 14 May (7/77) to ask Mr Galbraith for a copy of the Memorandum and Articles of Association. His e-mail was copied to Scott Boyle amongst others. Mr Galbraith replied at 14.45 that day (7/77). That e-mail has no text in it and it may be that it was simply used to send Mr Rijkse a scanned copy of the Articles. Mr Rijkse said that the Articles came to him as an attachment to Mr Galbraith's e-mail. A copy of the up to date Articles appears after that e-mail within 7/77.

[59] On receipt of Mr Rijkse's first e-mail to Mr Galbraith at 10.35 on 14 May, Mr Galbraith took steps to find out what was going on. At 10.40 he forwarded Mr Rijkse's e-mail to Mr Boyle (6/22) and asked him to look at it and let him have his thoughts that morning. Mr Boyle replied (6/22) at 11.05 that day, 25 minutes later, in the following terms:

"Eric

This is correct. I have reviewed the Report but it is not detailed in the Diligence Report although I do recall discussing this with Mark, I will search later to determine if we have anything on file or in my notes.

In terms of the Articles which I did review - although not referred to in the Diligence Report, as this only covers information supplied by the vendors.

In summary, in terms of Article 11.6 if a Member suffers a change of control (directly or indirectly,) that member must serve a transfer notice on the other party at an offer price being the fair value (as determined by the auditors of the Company) IT Aldington is obliged to serve a notice on Mannheim offering its shares.

Scott"

As his e-mail makes clear, and as he confirmed in his evidence in chief, Mr Boyle had not checked his notes by then. He had, however, clearly looked at the up to date Articles of MSAL.

[60] Mr Boyle explained in his witness statement, and in his oral evidence in chief, that he had a set of the Articles next to his desk at the time. He did not recall having looked at them in the intervening period. He remembered having circled the change of control provision in pencil on the copy of the Articles which he had. When the issue was raised on 14 May, he remembered saying to Mr Galbraith, "yes I know about this", and then walking with Mr Galbraith across to his desk, which was only about 5 feet away, where he showed him the circled change of control provision. In cross-examination he was initially less certain as to whether or not he had had that conversation with Mr Galbraith at that time. At one point in cross-examination he said that he probably did not have such a conversation; but moments later, when shown what he had said in his witness statement, he went back on this and insisted that he had both sent the e-mail and also had a conversation with Mr Galbraith and shown him the circled change of control provision in the Articles. But he was unsure as to whether the conversation with Mr Galbraith came before or after he had sent Mr Galbraith the e-mail of 11.05 on 14 May (6/22).

[61] In the course of his evidence, Mr Boyle was uncertain as to what had happened subsequently (i.e. after 14 May) to the copy of the Articles which, according to his evidence, he had marked up by circling the change of control provision. He thought he had seen the relevant page attached to an e-mail only some two weeks before he gave evidence, after he had made and signed his witness statement. At the beginning of Mr Galbraith's evidence, an e-mail exchange in April 2010 between D&W and Mr Boyle was produced (see 6/35). That in turn referred to an e-mail from Mr Galbraith of 22 May 2007 to Bob Anderson attaching a copy of "Clause 11", i.e. Article 11 of the Articles of MSAL (see 6/34). The attached copy of Article 11 was marked up down the left hand side by two large "X"s, one against the second half of the introductory paragraph of Article 11.6 and the other against Article 11.6.1. The number 11.6.1 was circled. Mr Boyle returned briefly to the witness box to confirm that all that marking was his. He said that he had made that marking in February 2007, and it was that marking which he had shown Mr Galbraith on 14 May.

[62] Mr Galbraith confirmed that he had sent this marked up copy of Article 11 as an e-mail attachment to Bob Anderson on 22 May 2007, in response to his request for the documentation relating to the Manheim business. It was the only copy they had. He had obtained that copy from Mr Boyle sometime around 14 May when he and Mr Boyle exchanged e-mails. Mr Galbraith said that he went over to Mr Boyle's desk on 14 May because he (Mr Boyle) had come back with a positive response (in his e-mail of 11.05), and Mr Boyle then showed him the document and pointed out the marking on it. This suggests that the conversation between Mr Galbraith and Mr Boyle occurred after Mr Boyle's e-mail response of 11.05 on 14 May.

[63] The Companies House invoices at 7/497 show two searches carried out from within D&W in respect of MSAL on 14 May. These were the first in relation to MSAL since 21 March. There is no time given on the invoices for either of these searches of 14 May. It was not made clear whether it might have been possible to have found out from Companies House at what time these searches took place. Nor was it clear whether an interrogation of the D&W computers would have provided any useful information. In any event, no evidence was led on these points. The two searches on 14 May bear consecutive Order Numbers, which appear to be Companies House Order Numbers, suggesting that they were made in quick succession to each other. It was put to Mr Boyle in cross-examination that upon receipt of the e-mail from Mr Galbraith at 10.41 on 14 May, and before responding to Mr Galbraith at 11.05, he had downloaded the Articles of MSAL from the Companies House website, printed them off and checked them. Mr Boyle said that he did not recall, but that maybe he had checked with Companies House. This appeared to be a rather different version of events to that given in his earlier evidence, since if he already had the up to date Articles on his desk there would have been no reason to check with Companies House. Mr Galbraith was clear that he himself did not go into the Companies House website and print off a copy of the Articles. He did not believe that Mr Boyle would have done so, since they already had the documents; but he accepted that that belief that they already had the documents was an assumption based on the fact that Mr Boyle had shown him the marked up copy of the Articles on 14 May. That evidence is somewhat circular.

[64] Mr Galbraith's explanation that they would not have gone into the Companies House website and printed off the Articles because they already had the documents makes obvious good sense. It is unlikely, therefore, that he would have instructed anyone else to go onto the Companies House website after he had seen Mr Boyle's copy of the Articles. Nor is it likely that Mr Boyle would have gone to the website and printed off another copy after he had shown Mr Galbraith the copy which he had marked up. Yet it is clear that someone did go into the Companies House website and print off the Articles on 14 May, and it is stretching credulity to imagine that this exercise was unconnected with the e-mail that had come in that morning from Mr Rijkse. It must, therefore, remain a real possibility that Mr Boyle himself went into the website, printed off a copy of the Articles and marked the relevant page with a pencil, before replying to Mr Galbraith's e-mail. He had some 20-25 minutes to do this. This would be consistent with Mr Galbraith having seen the marked up copy of the Articles after Mr Boyle's e-mail reply to him at 11.05 on that day.

[65] I should add here, in fairness to Mr Boyle, that, according to Mr Galbraith, during these exchanges on 14 May Mr Boyle was indignant at the suggestion that he had not informed Mr Rijkse of the change of control provisions in the Articles.

Subsequent correspondence

[66] Mr Galbraith asked Mr Boyle to provide an account in writing of his version of events. His reason for asking for this was, as he put it, that "change of control is a really big issue". He was clearly aware of the potential consequences both for D&W, if a mistake had been made by Mr Boyle, and for the defenders, if they had in fact been told of the change of control provision. Mr Boyle set out his version of events by e-mail of 17 May 2007 (6/24). It reads as follows:

"Diligence Documents were provided for us to review by Mark Rijkse which he had obtained from Alistair Napier and documents provided direct from Alistair Napier.

These included joint venture agreements in relation to Manheim Scottish and Inchcape. There was no agreement in relation to ICV Vehicle Deliveries.

I reviewed the agreements (Manheim and Inchcape) and what I thought to be the most up to date articles (including those in relation to Manheim which subsequently proved to be the incorrect Articles).

On 8 February I confirmed to Mark that there were no change of control provisions in the Agreements or Articles of Inchcape or Manheim.

I continued to ask Alistair Napier for the JV Agreement in relation to ICV - he initially claimed there wasn't one, but it then it was sent to me on or around 12 March. I reviewed this and found there was a change of control provision in favour of Ian Carter. As a result I decided to undertook a further review of the Manheim Agreement and printed off a set of Articles to look over again, I didn't have these to hand so I printed them off from Companies House, at which point I discovered they were different (i.e. a more recent set) than those I had initially reviewed. I discovered the change of control provision).

I called Mark on the 13th to confirm the Iain Carter position and the Manheim position. Mark was not aware of Iain Carter but indicated he was aware of Manheim and the issues arising. As requested I sent through a copy of the ICV Agreement and market came back to confirm he understood the issues involved.

The Diligence Report had been drafted, summarising the documents we had been asked to review and which had been provided by Mark or Alistair Napier. I updated this to include the summarised Ian Carter position in respect of ICV (as it was included in the Agreement provided) and the Manheim JV Agreement (but not the Articles).

Subsequently we were provided by a subsequent Inchcape JV Agreement ..."

This account contains a number of obvious inaccuracies of little importance. For example, it was on 7 February, not 8 February, that Mr Boyle confirmed to Mr Rijkse that there were no change of control provisions in the Articles of Inchcape or Manheim. In the following paragraph, the date should be 12 February not 12 March. Of more importance, however, is the explanation of how Mr Boyle discovered that the Articles of MSAL contained a change of control provision. It was, he says, as a result of being sent the ICV JV Agreement which had its own change of control provision that he decided to undertake a further review of the MSAL Agreement. He then printed off a set of Articles to look over again. He explains that he did not have the Articles to hand, so he printed them off from Companies House and discovered at that point that they were different from those which he had reviewed earlier.

[67] This explanation is inconsistent with the fact, which I do not understand to be disputed, that no Articles of MSAL were printed off from the Companies House website between 6 February and 21 March 2007. Having been asked to provide a full explanation of what had happened, Mr Boyle puts forward an explanation which is clearly incorrect. He may, of course, be mistaken in a number of different ways. One possibility is that he did carry out a further review of the MSAL Articles, but instead of printing off another set from Companies House he simply looked at that which had been printed out by the trainee on 6 February. But this does not fit happily with his explanation that he printed off a set from Companies House on 12 February. Another possibility is that he did not in fact carry out any further review of the MSAL Articles at this time but, realising that he had made a mistake, was seeking to protect his back. A third explanation is that by 17 May he was confused and could not remember accurately what had happened.

[68] Later in 2007 there were proceedings in England between MAL and the defenders. MAL sought an Order compelling the defenders to comply with the sale process. It is not necessary to go into the details. There was some discussion between Martin Thomas, the solicitor handling the litigation at D&W in London, and the board of the defenders, including Mr Rijkse, as to whether, standing the difference between them as to whether or not the change of control provision was brought to the attention of the defenders, there might be a conflict of interest if D&W were to continue to act in the litigation. In a letter of 12 December 2007 (7/146) Mr Thomas summarised the respective positions of the defenders and D&W:

"As I understand the position, your view is that whilst there is no doubt that the vendor did not disclose the correct set of Articles during the acquisition process, nevertheless Dundas & Wilson were aware of them and should have advised you in that respect.

We agree that we were indeed aware of them, through our own investigations rather than within the scope of the diligence instructed or through disclosure, and I understand that we did advise you of the position on the telephone. Whilst the fee earner concerned is no longer with the firm, you will appreciate that we have checked this with him very carefully and his evidence on the subject is clear. To borrow the language used by Judges in these instances, I have no reason to doubt both parties are trying their best honestly to recall what was discussed and that can be difficult against the frenetic atmosphere just before closing a deal. Unlike a Judge I am not in the position of having to decide whose recollection is right, but on our file is a notebook showing the subjects discussed during a telephone conversation and they include reference to the relevant term of the Articles."

Mr Rijkse replied on 29 January 2008 (7/151). So far as is material, his letter is in the following terms:

"When the existence of the change of control provision in the Articles of Manheim Scottish Auctions Limited first came to my attention in May 2007, I e-mailed Eric [Galbraith] and faxed a copy of the letter from Manheim to him. I recall subsequent telephone discussions with Eric during which a number of things were said including Eric describing it as the worst mistake of his 20 years of corporate finance legal practice.

Subsequently, Eric related that Scott Boyle was claiming to have told me about the change of control provision in a telephone discussion but that I had "seemed distracted" at the time. I told Eric that I had absolutely no recollection of a change of control in the Manheim JV arrangements ever being mentioned to me. When I checked the contemporaneous e-mails at that time, it became clear to me that the only change of control provisions that we were discussing were those in the Ian Carter joint venture. I therefore suspected that Scott was either mistaken or trying to deflect blame for that matter.

I found Scott's claim to be even more extraordinary in that, despite his claim that I was "distracted", at no time was the existence of the MSAL change of control provision mentioned in written correspondence, either by email or in the one major document where something like that ought to have been exhaustively discussed, namely your legal due diligence report to us and Alliance & Leicester. It might reasonably be expected that, if Scott's claim was true and he had mentioned it to me but he thought I was not paying attention, he would have followed up the conversation with an e-mail or letter, if for no other reason than to cover his position. Given the grave consequences of the change of control provision, which have subsequently shown themselves, I would have expected that this issue was a major focus of the due diligence report. It is also clear that Scott never mentioned the change of control provisions to Eric, because I recall Eric being genuinely shocked to discover them."

Mr Galbraith accepted in cross-examination that he told Mr Rijkse that it was "not clever" and "a mess", and that this sort of thing "had never occurred in my 20 years of practice", or something along these lines. He tried to run a tight ship. As part of that, he would normally want material matters to be properly documented by a file note, e-mail, or whatever. He accepted that, in an ordinary transaction, if a corporate client had been told that there was no change of control provision, he (Mr Galbraith) would have demanded that any correction subsequently be in writing to the client accompanied by a note on the file.

Discussion

[69] Having considered all the evidence, I have come to the conclusion that I cannot accept the pursuers' case that, in the course of the telephone conversation of 13 February 2007, Mr Boyle told Mr Rijkse of the existence of the change of control provision in MSAL's Articles of Association. Further, though, for reasons set out above, I do not think it matters if the defenders were unaware of the fact, I do not find it established on balance of probabilities that Mr Boyle or anyone else at D&W knew of the change of control provision in MSAL's Articles at any time prior to the conclusion of the SPA on 25 April 2007.

[70] Logically the second point (Mr Boyle/D&W's knowledge) comes before the first (whether Mr Boyle told Mr Rijkse). But the evidence about whether D&W had a copy of the up to date Articles, and knew of the terms of Article 11.6, is so tied in with the evidence of Mr Boyle's telephone call to Mr Rijkse, and the general question of the defenders' knowledge that there was a change of control provision in the Articles, that it would be artificial to consider the evidence on one point separately from the evidence on the other.

[71] In going through the evidence on the various issues, I have inevitably focused on the explanations given by Mr Boyle about the course of events leading up to the telephone conversation of 13 February, the conversation itself, and what was said thereafter. His evidence has to be set against that given by Mr Rijkse, though there are some matters internal to D&W about which, for obvious reasons, Mr Rijkse can say nothing. An assessment of the reliability of these two witnesses is crucial. The evidence must be considered as a whole. It would be wrong to approach the matter by forming a view on reliability on one disputed item, and then following that view through uncritically to other disputed matters. Instead, a picture of the reliability of the witnesses must be formed from the totality of the evidence. In the paragraphs which follow I attempt to summarise the main reasons why I am unable to accept Mr Boyle's evidence on the matters in dispute. Although, inevitably, my explanation follows a sequential line of reasoning, I should emphasise that I have not simply reasoned from one point to the next, forming a view on the first point, treating that as a fixed point in considering the next, and so on. Rather, I have attempted to assess the reliability of the evidence on each matter separately, as well as considering how it fits into picture as a whole, having regard both to the inherent probabilities and to my overall assessment of the reliability of the various witnesses.

[72] There are only a limited number of fixed points against which to test Mr Boyle's evidence. One set of fixed points, however, is provided by the invoices from Companies House Services. These show that the Companies House website was searched from within D&W in relation to MSAL on 6 February, 21 March and (twice) on 14 May, all 2007. Because of the consecutive Order Numbers on the relevant invoice, it is possible that the two entries on 14 May were part of the one search, but nothing turns on this. In his e-mail on 17 May 2007, giving his explanation to Mr Galbraith about what had happened, Mr Boyle explained how, on 12 (or 13) February, he had discovered that the ICV joint venture agreement had a change of control provision in it and how, in consequence, he checked the MSAL position. This in itself would not be surprising, if it had happened, given that less than a week earlier, on 7 June, he had told Mr Rijkse by e-mail that there was no change of control provision in the most up to date Articles of MSAL. But in his e-mail of 17 May to Mr Galbraith, Mr Boyle explained that he did this by printing off a set of the MSAL Articles. This cannot be correct. There is no record of any search of the Companies House website in relation to MSAL around that time. It was not suggested that the records produced of the D&W searches of the Companies House website in relation to MSAL were incomplete.

[73] This is not an insignificant error, such as getting a date wrong by a day, which is the sort of error made in other parts of that e-mail. It is significant because it is the central part of an account given by Mr Boyle to his supervising partner of the particular steps which he says he took in relation to the vital matter which he was being asked about. Given the fact that Mr Rijkse had denied having any knowledge of the change of control provision prior to completion, Mr Galbraith wanted a full explanation from Mr Boyle of his side of the story, and there is no doubt that Mr Galbraith regarded the matter as important. Mr Boyle took some time before responding. The matter had blown up on 14 May; and he gave his detailed explanation on 17 May. So it was not a rushed explanation. It has to be assumed that Mr Boyle gave the matter careful consideration before sending that e-mail. If, as Mr Boyle now contends, he did not in fact print off a new copy of the Articles on 12 February but simply looked at the copy of the Articles which had already been printed off by a trainee on 6 February, why would he not say so when trying on 17 May to give Mr Galbraith a full account of what had happened?

[74] Mr Boyle clearly received a copy of the out of date MSAL Articles well before 6 February, probably from the vendors or their solicitors. It was on the basis of that version of the Articles that he was able to e-mail Mr Rijkse on 7 February to say that there was no change of control provision. Why he should use the expression "the most up to date version of the Articles", if he only had the one version and had no reason to believe there was any other version, is unclear. It is possible that he was aware that new Articles had been adopted, and assumed that the copy he had was of the last version. It probably does not matter. His present explanation of the events leading up to the telephone conversation on 13 February is that on 6 February a copy of the MSAL Articles was printed off from the Companies House website by a trainee but that copy was never given to him at the time because he already had a copy of the Articles; and that when he was prompted to look again on 12 February, the copy that he looked at was the copy which had been printed off on 6 February (but not given to him). This explanation does not seem to me to be credible. Earlier in this Opinion, at paras.[29] and [41], I have raised questions about this version of events. In light of questions such as these, I did not find Mr Boyle's evidence on this point compelling. I accept, of course, that he was at something of a disadvantage in giving his evidence. He had left D&W soon after the events in question and had had no involvement with the matter again until about the beginning of 2010, when the question of whether the defenders had been told about the change of control provision was first raised by the pursuers in this action. He was faced at the proof with questions about some documents, such as the Companies House invoices, which he had not seen before. He is not, therefore, to be criticised if his recollection is imprecise or confused. But the fact remains that his was the only evidence led in support of this part of the case, and I am unable to regard it as reliable, particularly since it contradicts the considered version of events which he gave in his e-mail of 17 May 2007. It has already been noted that that explanation was wrong. Why should his new explanation, put forward three years later, be regarded as more reliable?

[75] The explanation about the trainee having printed off a copy of the Articles on 6 February might have received support from the events of 14 May if the evidence about the events of that day had shown that Mr Galbraith had seen a copy of MSAL Articles before the Companies House website had again been searched in relation to MSAL. But there is no evidence as to the timing of that search; and, as I have explained earlier (see para.[62]), the evidence from Mr Galbraith appears to me to point the other way. The more likely explanation, in my view, is that the Companies House website was searched in relation to MSAL before Mr Boyle responded positively to Mr Galbraith at 11.05 that day. Doing the best I can on the evidence before me, I consider that what happened on that day was probably this: that, after receiving the query from Mr Galbraith at 11.40, Mr Boyle printed off a copy of the MSAL Articles, marked the relevant passage as he skimmed through them, responded to Mr Galbraith by e-mail at 11.05 and, a little later, showed Mr Galbraith the terms of Article 11.6. I can see no reason why anyone should have searched the Companies House website on 14 May if Mr Boyle, as he claimed in his evidence, had had a copy of the MSAL Articles by his desk when he received Mr Galbraith's e-mail - certainly neither Mr Galbraith nor Mr Boyle suggested any reason why this should have been done.

[77] The questions which I have raised earlier as to the events of 6 and 12 February and 14 May lead me to doubt whether a copy of the up to date Articles was printed off by a trainee or anyone else at D&W on 6 February. There was no direct evidence that any copy was printed off then, let alone that any copy which was printed was a copy of the up to date Articles. The events of 13 May themselves seem to me to cast doubt upon the idea that any such copy of the Articles, even if they had been printed off then, had been kept by him by his desk. I am not prepared to find, even on balance of probabilities, that a copy was printed off on 6 February or looked at on 12 February. A fortiori, I do not find it established on balance of probabilities that Mr Boyle was aware of the existence of the change of control provision in the Articles when he spoke to Mr Rijkse on 13 February.

[78] Had there been persuasive evidence from Mr Boyle about the telephone conversation of 13 February itself, my assessment of the position might have been different. I have to say, however, that I did not find his evidence at all convincing on this matter. My reasons can be set out quite briefly, though not in any order of importance.

(i) For the reasons already set out above, I was not persuaded by Mr Boyle's evidence about the existence to hand on 12 February of the copy of the Articles allegedly printed off on 6 February but not given to him then. I need say no more about this.

(ii) I do not accept Mr Boyle's evidence about using the acronym "SMAL" to refer to MSAL. In the pursuers' pleadings it was averred that he "was in the habit" of using the acronym SMAL to refer to MSAL. In his witness statement Mr Boyle said that he "usually" did so. Under cross-examination he changed this to "may have". It seemed to me that Mr Clarke was right to say that this beggared belief and that the truth was that Mr Boyle never used the one acronym in place of the other, at least in writing. One can readily understand that in conversations in the office Mr Boyle might inadvertently have used one acronym when he should have used another, and no doubt on each occasion he would have corrected himself. It may well have become a standing joke between him and Mr Galbraith. But that is quite different from using the wrong acronym in written documents, whether in notes to himself or in more formal communications or reports. Even in a casual note I would have expected Mr Boyle to have got this right. If he was in the habit of getting it wrong, then I would have expected other examples of this sort of mistake to have been apparent from other documents.

(iii) If, during the conversation, Mr Boyle had told Mr Rijkse about the change of control provisions in the MSAL Articles, I would have expected him to have made a note on file, or to have confirmed the position to Mr Rijkse by e-mail, or to have included something about it in the Legal Due Diligence Report, or most likely all of the above. This is particularly so if he was about to go on holiday and hand over his file for a time to Orla Murphy. The point was sufficiently important for Mr Boyle to have checked the Articles and e-mailed Mr Rijkse on 7 February saying that there was no change of control provision. He was now correcting the information given to the client in that e-mail. I cannot accept that he would have regarded it as insufficiently important by 13 February to be worth recording in some way. Mr Galbraith recognised the potential importance of a point such as this. He too would have expected Mr Boyle to have made a file note at least, and probably have confirmed the matter to the client in writing. Otherwise the written record would rest with Mr Boyle's incorrect e-mail of 7 May, corrected so far as ICV was concerned but not as far as concerned MSAL.

(iv) The importance of a file note would surely have been all the more obvious to Mr Boyle if, as he suggested, Mr Rijkse had seemed distracted. In this part of his evidence I considered that Mr Boyle was trying to walk a fine line between, on the one hand, saying that he had told Mr Rijkse and that Mr Rijkse clearly understood the position, and, on the other, saying that Mr Rijkse had seemed distracted, and so might not have remembered the conversation later. If there had been any question of Mr Rijkse seeming distracted, Mr Boyle would surely have been very careful to put something in writing.

(v) The conversation has to be set in the context of the e-mails passing between Mr Boyle and Mr Rijkse on the same day. I have explained my reasons for thinking that the likely sequence of events is that the telephone call took place between the two e-mails. However, that sequence is not crucial. Even if that were not the sequence, it is clear that the matter under discussion was the discovery that there was a change of control provision in the joint venture agreement for ICV. If, on 12 February, Mr Boyle had discovered not only that the ICV joint venture agreement had a change of control provision but also that the MSAL Articles had one, I would have thought it obvious that this too would have been mentioned in the first e-mail on 13 February. Why mention the one and not the other? If, as I consider likely, that was the sequence, the position seems even clearer. The first paragraph of the note refers to the issues on "change of control in SMAL & Inchcape". Inchcape was used to mean ICV. What had been discovered, as is clear from the first e-mail of 13 February, was that the ICV joint venture agreement contained a change of control provision triggered by a change of control in SMAL. That is what the first paragraph of Mr Boyle's note refers to. I cannot accept the argument, advanced by Mr Martin, that the reference to "change of control in SMAL" in this context makes no sense, and that it must, therefore, have been intended as a reference to MSAL. In the second paragraph, the reference to the "SMA JV" was, in my view, intended as a reference to ICV, which was a joint venture company 50% owned by SMAL. There is no difficulty with this. The second e-mail on that day seems to me to pick up on the conversation. Mr Rijkse thanks Mr Boyle for extracting the information (about ICV) from the vendor. He has also obviously received a copy of the ICV joint venture agreement from Mr Boyle, and points out that only alternate pages of the document have been scanned. But he has seen enough to comment to Bob Anderson that Mr Boyle appears to be correct in his reading of the agreement. There is not a mention in the e-mails of the similar provision in the MSAL Articles. I am confident that there would have been some mention of it if Mr Boyle's account of the telephone conversation were correct.

(vi) I found Mr Boyle's evidence as to how the point was raised and how Mr Rijkse reacted to it far from convincing. The main point of the conversation, he said, was about ICV; the discussion about MSAL only came up in passing and it was not seen as important. But on Mr Boyle's interpretation of it, the note, prepared as an aide memoire for the conversation, puts the two points on an equal footing - on his evidence, the first and second paragraphs of the note refer to both the ICV problem and the MSAL problem. So the MSAL point was sufficiently important for him to make a note reminding him to raise it. And, in any event, how would he have known before the conversation that Mr Rijkse did not think it important? It seems to me that, on Mr Boyle's evidence, he must have gone into the conversation thinking that there were two pieces of important information to give Mr Rijkse, both of them correcting what he had said earlier. Yet Mr Boyle says that when he raised the question of the MSAL Articles, Mr Rijkse simply said "that's fine" or words to that effect and they then moved on to other matters. I do not find that convincing.

(vii) Last, and this is perhaps only a small point, if Mr Boyle's account of the telephone conversation is correct, I am surprised that only six days later, on 19 February, Mr Boyle sat through a conference call with Mr Galbraith, Mr Rijkse and others, in which the defenders expressed an intention to reorganise the Manheim JV (MSAL) after completion. Surely there would have been some mention of the potential problem caused by the discovery of the change of control provisions in the Articles.

[79] Overall, I did not find Mr Boyle to be an impressive witness on whose evidence I could rely in opposition to that of others. As I have mentioned, his uncertainty on particular points of detail was excusable, given that he had not been involved with the matter again for a considerable time until shortly before the proof. But I cannot on that account treat his evidence as more reliable than I thought it to be. At times in his evidence he appeared to be defensive and concerned about protecting his own position. At other times he appeared confused. Mr Rijkse, by contrast, gave his evidence in a straightforward manner. I formed the view that he was an honest and reliable witness in relation to matters in which he was directly involved, particularly in relation to what he was not told during the telephone conversation and how he would have reacted had he been told of the change of control provision in the MSAL Articles. Even had it not been for the various points mentioned above, I would have preferred his evidence to that of Mr Boyle.

[80] Where does this leave the question of Mr Boyle's credibility? I have given anxious consideration to this question. I have not accepted much of his evidence. Having come to the view that the pursuers have not established this part of their case on balance of probabilities, I do not, of course, need to decide precisely what did happen on each occasion. But in fairness to Mr Boyle, I should say that I did not form the view that he was being dishonest in giving his evidence about what had happened. It seemed to me that he may have convinced himself at a very early stage that he had have told Mr Rijkse about the change of control provision in the Articles. When the problem surfaced on 14 May, he checked the Articles and discovered the true position. He was in the firing line if the clients had not been told. He may have persuaded himself that he had told Mr Rijkse in the telephone call on 13 February, though his initial reaction on 14 May did not pinpoint it so precisely as that. By 17 May he had had time to consider the position and he linked his discussion with Mr Rijkse to the discovery of the ICV change of control provision. When he was asked about this at the beginning of 2010, he adhered to the position he had adopted then. I am prepared to accept that in sticking to that position in his evidence he did so because he had persuaded himself that that was what had happened.

[81] Nonetheless, for the reasons I have given, I am not persuaded that this is what happened. I shall therefore repel to pursuers' pleas in law relative to this point.

Issue B: Time-bar

[82] The pursuers do not contend that the claim for damages for breach of warranty 3.3 is time-barred. They do, however, contend that claims in respect of the other breaches of warranty are time-barred because legal proceedings were not commenced in respect of them within 6 months of 8 August 2007. On that date the defenders wrote to the pursuers in the following terms. First, the letter recited that the contract required the Purchaser

"... on becoming aware of any claim or any matter which may involve the Sellers in any liability pursuant to the terms of the Agreement (i.e. a Claim), to procure that notice thereof is given to the Sellers as soon as reasonably practicable with such particulars as are known to the Purchaser at the time of the Purchaser becoming so aware."

The letter then referred to the proceedings (in England) commenced by MAL against SMAL to enforce the share sale provisions in its favour consequent upon the change of control of SMAL. It then went on to refer to warranty 2.7 of the SPA. The defenders' complaint made in their letter was that:

"The Disclosure Letter did not disclose the current Articles of Association of Manheim Scottish Auctions Limited. ..."

The letter went on to say that SMAL intended to defend the proceedings brought by MAL; and to that end it sought assistance and cooperation from the pursuers in gathering evidence to help defeat MAL's claim.

[83] The pursuers' contention is based on the terms of para.3.2 of Part 10 of the SPA, which provides as follows:

"A claim under the Warranties shall not be enforceable against the Sellers unless legal proceedings in connection with it are commenced within 6 months after written notice of that claim is served on the Sellers."

If the defenders' letter of 8 August 2007 amounted to written notice of the claims under the various warranties, legal proceedings in respect of those claims had to be commenced by 8 February 2008. The pursuers say that it did amount to such written notice. They point to the fact that in para.[9] of my earlier Opinion of 6 May 2009, concerned with the operation of the Retention Account, I described the letter of 8 August as a notice of a claim.

[84] The defenders dispute this. They contend that the letter of 8 August 2007 was not a notice of a claim under the warranties in terms of para.3.2 of Part 10 of the Schedule. They characterise it in this way. They say that, after referring to the obligation on the purchaser to give notice under the relevant provision of the SPA as quoted above, the letter of 8 August 2007 narrates that on 2 August 2007 SMAL and MSAL were served with proceedings to order specific performance of the terms of the Article of Association of MSAL; and further narrates that SMAL intended to defend those proceedings and that to this end the defenders seek the pursuers' assistance in gathering evidence. However, the letter of 8 August 2007 did not give notice of a claim being made by the purchasers against the sellers. It contained no claim for anything, let alone any claim for damages for loss suffered in consequence of a breach of warranty. It gave notice, in terms of para.4.1 of Part 10 of the Schedule, of a "matter which may involve the Seller in liability pursuant to the terms of" the SPA; but did not give notice in terms of para.3.2. Accordingly, they say, the 6 month period referred to in para.3.2 of Part 10 did not commence as a result of that letter. That the purpose of the letter of 8 August 2007 was only to give notice under para.4.1 of Part 10 of the Schedule was confirmed by the terms of the further letter dated 4 October 2007 from the defenders' solicitors to the pursuers' solicitors, which referred to "our letter of 8 August 2007 when we confirmed that by reason of the proceedings served on the Company and Manheim Scottish Auction Limited we had become aware of a matter which might involve the Sellers in a liability pursuant to the terms of the Agreement".

[85] On this point I prefer the arguments for the defenders. The provisions of para.3 of Part 10 of the Schedule to the SPA are concerned with the time limit for bringing claims for breach of any of the warranties. In terms of para.3.1, there is a longstop date (of the seventh anniversary of completion) for claims for breach of any of the tax warranties, but claims for breach of any of the other warranties have to be brought within 18 months of completion. Para.3.2 provides that a claim under the warranties shall not be enforceable unless legal proceedings in connection with it are commenced within 6 months after written notice has been served in respect of that claim. The provisions of para.4, however, are concerned with a different question, namely the involvement of the sellers in the conduct of the defence of any claim by a third party which might involve the sellers in liability to the purchasers. A notice served under para.4.1 is, therefore, in the nature of advance warning of a claim being made, or which may be made, by a third party. A notice served under para.4.1 may amount to a notice of a claim for the purposes of para.3.2, but it will not necessarily do so. The letter of 8 August 2007 seems to me to fall into the category of a notice under para.4.1, i.e. a letter giving notice of a claim made against SMAL and MSAL by MAL. It invited the sellers' co-operation in resisting the claim. It did not give notice of a claim by the purchasers (the defenders) against the sellers (the pursuers) under the SPA so as to trigger the commencement of the 6 month period under para.3.2.

[86] The terms of Part 12 of the Schedule, which was the subject of my earlier Opinion, are entirely separate from those of Part 10. Part 12 is concerned with the right of the purchasers to deduct from the Retention Account. There is a detailed mechanism in terms of which the purchasers give notice of a claim for breach of warranty and the sellers are then required within 30 days thereafter to serve a notice stating whether they accept liability and whether they accept the amount claimed. Failure on the part of the sellers to serve such a notice within that time has certain consequences. In the argument addressed to me at the debate giving rise to my earlier Opinion, it was accepted that the purchasers had served a notice of claim so as to trigger the obligation on the sellers to serve their notice within 30 days, and it was accepted that they had not done so. Therefore I was not required to, and did not, make any decision on the point. The issue was whether the provisions of Part 12 of the Schedule to the SPA allowed deduction of illiquid claims, or applied only to liquid claims. I held that it applied to illiquid as well as liquid claims. Nothing in that decision appears to me to be inconsistent with the argument of the defenders in relation to the time bar provisions in para.3.2 of Part 10.

[87] In those circumstances I do not need to decide the other two points raised by the defenders, namely (i) whether the pursuers are barred by acquiescence or personal bar from relying on para.3.2 of Part 10 so as to deny the present enforceability of the claim and (ii) whether, in any event, it is sufficient for the purposes of para.3.2 that the defenders asserted their right of set-off or retention, and hence their right to damages for breach of warranty, in the defences when lodged on 20 November 2007, well within the 6 month period. Neither point is easy, and neither was fully argued. Since, as I have said, the time-bar point does not apply to the claim for breach of warranty 3.3, and it was not argued that the measure of damages for breach of that warranty was different in any way from the measure of damages for breach of any of the other warranties in question, nothing turns on the question whether the defenders are precluded from seeking to establish breaches of those other warranties. I prefer, therefore, to say nothing about these two points.

Issue C: Damages

[88] I begin by discussing the events both before and shortly after completion, as explained in the evidence. I then turn briefly to consider the parties submissions, the relevant legal principles and the factual and expert evidence before setting out my decision and the reasons for it.

The business interests and experience of the participants in SMAH

[89] I have already mentioned that the defenders (SMAH) were formed specifically for the purchase of SMAL. It is necessary to describe briefly the business interests and activities of the main participants in SMAH, namely Mark Rijkse, Mark Stewart, Nick Richards and Bob Anderson (I shall use his first name throughout to distinguish him from Andrew Anderson, who also gave evidence). Before they incorporated ACL in July 1999, Messrs Rijkse, Stewart and Richards had all been employed at Daiwa Europe Limited ("Daiwa"), Messrs Rijkse and Stewart joining Daiwa in December 1986 at the instigation of Mr Richards. Mr Rijkse was a director and the head of securitisation within Daiwa's principal finance group. The focus of the business carried out by them at Daiwa was, to use Mr Rijkse's words, "investing in asset based businesses generating a strong predictable cash flow with the aim of creating shareholder value". Their focus was on "sectors with multiple/fragmented participants", with a view to consolidation of a number of small businesses into larger and more profitable ones, realising efficiencies in terms of financing options, economies of scale and the provision of a more attractive product to third party purchasers. The strategy was to dispose of purchases within the medium term rather than keeping the acquired businesses for the long haul, thereby realising attractive returns for Daiwa and its investors. Mr Richards in his evidence described this strategy as "leveraged build-up". The investment bank would identify a fragmented sector where there were identifiable operational and financial economies of scale. It would then embark on a process of consolidation, acquiring individual businesses or assets within the sector until a sufficient critical mass had been achieved, whereupon an exit was feasible. Mr Richards said that he had been involved in a number of leveraged build-up strategies during his career.

[90] ACL was set up by Messrs Rijkse, Stewart and Richards in July 1999 to continue a similar business plan to that which they had followed at Daiwa. The intention was to use ACL to raise an investment fund concentrating on making investments in asset based businesses with good cash flow, following that same business model. Their first transactions at ACL involved the purchase of a group of residential investment companies by a foreign investment company in which they had an interest. Subsequently they formed a joint venture with a privately owned finance house, attempting to establish a formal fundraising structure in accordance with their business plan. That was ultimately unsuccessful and the joint venture was terminated by mutual consent, though they did work with the finance house on certain specific transactions, including a large investment in a portfolio of aircraft loans and leases.

[91] During that period, and up until the end of 2004, ACL was successful at building up the residential investment portfolios of the foreign investment companies in which they had an interest, acquiring in all seven portfolios totalling some 1,500 investment properties. According to Mr Rijkse, they worked to rationalise these portfolios, providing asset management advice and administration, assisting with property disposals, re-financings and liability management, and supervising the day-to-day asset managers.

[92] Bob Anderson came from an altogether different background and brought with him different skills and experience. He had no involvement in ACL. He initially worked as an apprentice mechanic. Thereafter, from the early 1970s, he worked in the retail used car market, as a sales manager for various used car dealerships in Sydney, Australia, before moving to the UK in 1994. In 1996 he and his wife started a business in Twickenham, in London, called Direct Car Finance Limited ("DCFL"), which was engaged in the sale of used vehicles and the provision of sub-prime finance for such sales. By 2002, the business had grown to include 20 sites across the UK, 600 staff, annual sales of about 30,000 vehicles and a turnover in the region of £200 million a year. It maintained a stock of vehicles for sale, and also acted as an intermediary providing purchasers of vehicles with access to finance companies. A subsidiary, Cygnet Financial Services Limited, provided sub-prime finance directly to purchasers of vehicles from DCFL. Cygnet financed about 200 car sales per month, while the remainder of DCFL's car sales were financed through other credit providers.

[93] DCFL had a site at Portobello in Edinburgh and another near Kirkintilloch in Glasgow. Through those sites it came to have extensive dealings with SMAL; and Bob Anderson became acquainted with Mr Flynn.

[94] Bob Anderson first met Messrs Rijkse, Stewart and Richards in 2002 when negotiating for the sale of DCFL. Those negotiations fell through, but some weeks later Bob Anderson sold DCFL to another company for £10 million. Thereafter he was semi-retired for a while, though, for a hobby, he dabbled in the import of cars from Japan and their sale to specialist import auctions.

[95] By 2006 Bob Anderson had become interested again in seeking out new business opportunities. He and his former partner in DCFL, Kevin Bann, considered that SMAL was underperforming at its existing sites and decided it was a suitable target for acquisition. Their aim, if they could acquire it, was to improve turnover and profit at the existing sites and expand into greater catchment areas such as Leeds, Manchester and London, to attract an increased volume and quality of cars from fleet vendors, and thereby, in turn, to attract higher quality commercial buyers, and so on in a spiral of expansion. Kevin Bann got in touch with Douglas Flynn. Mr Flynn told him that he had never considered selling SMAL but would think it over. Later, Mr Flynn went back to Mr Bann with an asking price of £15 million.

[96] Bob Anderson did not have the expertise to judge whether SMAL offered good value for money at that price, nor did he have the necessary finance. Through another mutual friend, he contacted ACL to discuss the proposal. The deal then progressed with the involvement of Messrs Rijkse, Stewart and Richards. A number of different proposals were put forward between them and Bob Anderson as to the formation of the vehicle for purchasing the shares in SMAL but those discussions are not material for present purposes. It is sufficient to note that in due course SMAH was established and proceeded with the acquisition, becoming a party to the SPA with Lonedale.

[97] None of Messrs Rijkse, Stewart and Richards had any background in the car auction industry. It was intended that Bob Anderson and Kevin Bann (who had no equity in SMAH) would bring operational expertise to the business as Executive Directors. They have fulfilled this role since the acquisition of SMAL in 2007. Messrs Rijkse, Stewart and Richards were to be non-Executive Directors, dealing with the financial and legal aspects o the acquisition.

SMAL's business

[98] At the date of the SPA, SMAL operated car auction sites in Scotland, in Aberdeen, Kinross and Livingston, and in the north east of England, in Newcastle. In addition it had a 50% interest in MSAL, which operated an auction site at Siemens Street in Glasgow. I shall go into more detail later about some of the sites and, in particular, the business of MSAL and the Siemens Street site. For the moment it is sufficient to note that the auction site at Aberdeen was very small, selling small numbers of cars and with a very small population base to support it, while the Kinross site was fairly dilapidated and had difficulties of access, access being through the High Street in Kinross. Livingstone and Newcastle were better situated and performed reasonably well: the Livingston site had a good purpose-built structure and a reasonable volume of business from a good catchment area; and the Newcastle site, though small, was a strong performer, albeit with limited prospects for volume growth given the constrictions of the site.

MAL

[99] MAL is part of the Manheim group of car auction companies. At the material time, the managing director for the UK and the EU was John Bailey. According to Mr Flynn, the Manheim group owned and operated about 19 or 20 sites within the UK. The ultimate owner of the group is Cox Enterprises Inc., an American company which, it was said, is the largest car auction company in the world. At the material time, Manheim's biggest competitor in the UK was British Car Auctions ("BCA"), which had a couple of auction sites in Scotland, a similar number in Wales, and about 20 in England.

MSAL - the joint venture between SMAL and MAL

[100] Mr Flynn explained the background to the joint venture between SMAL and MAL in the following way. In order to compete effectively with BCA, Manheim needed to be able to present itself as a UK wide operator. Without an outlet in Scotland, a dealer supplying to Manheim would know that any vehicles supplied by him would be shipped to the North of England for sale, whereas if he supplied BCA there would be sales outlets across the whole of the UK, thereby tapping into a bigger pool of buyers. Manheim already had an entry into the fleet business in Scotland - fleet business being defined in the lease of part of the Siemens Street site as "vehicles which come from Finance Houses, Car Leasing and Rental Companies, Manufacturers and Major Plc's excluding Franchise dealers" - but those vehicles had to be brought to England to be auctioned. For that reason, Manheim wanted a presence in Scotland.

[101] Mr Flynn met Mr Bailey at a Society of Motor Auctions event. Mr Bailey expressed interest in opening in Scotland. SMAL had recently opened a new site in Glasgow, but could not secure any significant fleet business. Mr Flynn could see the benefit of a joint venture with Manheim. Because it could not secure any significant amount of fleet business, SMAL did not have sufficient business to justify the size of the site which it had opened in Glasgow. The majority of its vehicles came from "trade" sources including local trade suppliers, franchised motor dealerships and independent second hand car dealers. The joint venture gave it, in effect, half of MAL's fleet business in Scotland. MAL was keen on the idea too, since it would enable it to establish a presence in Scotland without putting any money into setting up an auction site of its own. It wanted to expand in France and Germany and did not want to tie up money in expanding in Scotland. The downside from its point of view was that it had to accept SMAL as a partner, allowing SMAL to gain information from it on fleets and contacts. It wanted a restriction on SMAL competing in England, which SMAL was prepared to accept as it was not really looking to expand there. For its part, MAL was prepared to accept a restriction preventing it from operating elsewhere in Scotland.

[102] The joint venture took shape in the form of MSAL (then called Lansman Limited), which was owned as to 50 % by SMAL (then Fife & Kinross Investments Limited) and as to the other 50% by MAL. I have already referred to the Articles of Association of MSAL, which contained the change of control provision. In addition, SMAL, MSAL and MAL entered into a Shareholders' Agreement dated 25 July 2000, regulating the terms of the relationship between SMAL and MAL concerning MSAL. In terms of that Shareholders' Agreement, the business of MSAL was described as being "to operate and exploit any motor auction facility at the Property", the Property being the site at Siemens Street, Glasgow. Clause 9 of the Shareholders' Agreement contained restrictions on MAL and SMAL. The precise details are not material. In broad terms, MAL undertook for the duration of the agreement and for a period of 12 months thereafter not to operate or have an interest in any motor auction facility in Scotland, and SMAL undertook for the duration of the agreement that it would not become interested or involved in the operation of any vehicle auctions in the UK in which a number of other companies, including BCA and Premier Auctions, were interested.

[103] The Shareholders' Agreement was expressed to continue in full force and effect until terminated either by mutual consent of the parties or because only one person continued to hold shares in MSAL. In the events which have happened, it has come to an end because SMAL were required to sell their shares in MSAL to MAL.

The Siemens Street site

[104] At the date of the SPA, the Siemens Street site was made up of three distinct parcels of land: (a) the southern part of the site, located at 297 Siemens Street and associated land, which was owned by SMAL, and leased to MSAL for a nominal rent of £1 per annum (hereafter "the main premises"); (b) the northern half of the building in which the main auction hall was located, with some additional land, all owned by SMAL, formerly leased out by them to Racing Karts Limited for use as a Go-Kart site, but at the material time leased by SMAL to MSAL at a rent of £77,000 per annum (hereafter "the former Go-Kart centre"); and (c) a 5 acre plot adjacent thereto, at 199 Siemens Street, to the east of the other two parts of the site, owned by MSAL and used as a car park and car storage facility (hereafter "the car park). I should say a little more about each.

[105] The main premises: The lease of the main premises ran for a period of 20 years from 4 August 2000. At the date of completion of the share purchase on 25 April 2007, it had over 13 years left to run. Under the terms of the lease, the rent was £1 per annum provided that at least 3,000 fleet vehicles were sold through the premises each year; if in any year that figure was not achieved, the rent for that year would be the open market value. The lease of the main premises at a nominal rent was SMAL's main contribution to the joint venture. MAL was to source the fleet vehicles, and the condition attaching to the nominal rent gave MAL an incentive to ensure that at least that many fleet vehicles were sold there every year.

[106] The lease included a provision that if the Shareholders' Agreement was terminated by the landlord (SMAL), then the rent payable would revert to a market rate. During the fair value determination after completion of the share purchase, SMAL argued that the automatic termination of the Shareholders' Agreement, consequent upon its shares in MSAL being transferred to MAL, constituted such a termination, allowing it to charge a market rate for the main premises thereafter. It was decided by a binding expert determination that this was incorrect. The purchase of SMAL's shares by MAL did not give rise to the Shareholders' Agreement being terminated "by the landlord". Accordingly, in terms of the lease, rent continues to be payable at £1 per annum until August 2020.

[107] Part of the defenders' damages claim in this action arises from the fact that it remains bound to lease the main premises to MSAL for that nominal rent but, because of the forced sale of its 50% holding in MSAL to MAL, it no longer receives any benefit in return.

[108] The former Go-Kart centre: The former Go-Kart centre was owned by SMAL and leased to MSAL at a market rent. As at the time in question, that rent was £77,000 a year, though there was evidence that this had subsequently been increased by agreement to £100,000 a year. There were provisions for rent review and for termination which I need not refer to in detail here. Of significance to the parties to this dispute and to any dispute with MAL was the fact that the former Go-Kart centre was integral to the car auction business at the site. It therefore had a potential strategic importance. In the event, that aspect did not loom large in the events which happened.

[109] The car park: The car park was owned by MSAL. It had no great value except in conjunction with the use of the main premises.

[110] The evidence from Mr Rijkse, Bob Anderson and others who were called by the defenders was that the Siemens Street site was the best of the sites operated within the SMA group. It was one of the best auction sites in Scotland in terms of location, being situated just off the M8 motorway and very close to Glasgow city centre. Its catchment area took in about half of the population of Scotland. It was close to a large customer base. It was also close to a large supply of vehicles from across the West of Scotland, thus keeping transport costs from the suppliers to the auction site low. The site was modern and purpose-built and presented an attractive, efficient and high profile image, more attractive to national fleet customers than any of the other sites. But it appeared to be underperforming and there were real prospects of significantly increasing the volume of sales and improving its profitability. Ultimately I did not understand the quality of the site or that fact that it was underperforming to be seriously disputed by the pursuers, but in so far as it was disputed I accept the defenders' evidence on this point. The real question is: by how much could sales and profitability be improved?

MSAL's trading results 2003-2008

[111] The PWC draft factual report dated 19 August 2008, on the basis of which they prepared their one-page valuation of the shares in MSAL, gives details of the trading performance of MSAL for the years from 2003 to 2008. Ms Longworth, the expert witness called by the defenders, added to that some information from the management accounts for the 11 months to 30 September 2008. The following figures appear from the tables in Section 4 of her Report and are not controversial:

	Year ended 31/10/03	Year ended 31/10/04	Year ended 31/10/05	Year ended 31/10/06	Year ended 31/10/07	11 months to 30/09/08
Vehicles offered	31,415	44,068	39,867	35,350	32,661	32,647
Vehicles sold	15,154	19,646	18,001	16,663	14,783	12,163
Conversion ratio	48.2%	44.6%	45.2%	47.1%	45.3%	37.3%
Income per unit	£127	£124	£143	£155	£156	£173

According to Ms Longworth, the increase in income per unit occurred as a result of an increase in indemnity and collection fees and despite a fall in the average price of vehicles sold. She gave the following breakdown of the figures for vehicles sold during the last three years:

	Year ended 31/10/06	Year ended 31/10/07	11 months to 30/09/08
Fleet/ lease	5,659	4,733	4,896
Dealer	6,014	6,124	5,433
Trade/ private	3,855	3,229	1,576
Manufacturer	1,105	697	258
	16,633	14,783	12,163
Number of auctions held	301	259	220
Average gross value per vehicles	£3,000	£3,064	£2,878

The trading results are broken down as follows:

	Year ended 31/10/03	Year ended 31/10/04	Year ended 31/10/05	Year ended 31/10/06	Year ended 31/10/07	11 months to 30/09/08
	£'000	£'000	£'000	£'000	£'000	£'000
Turnover	1,931	2,435	2,567	2,582	2,311	2,134
Cost of Sales	(586)	(809)	(1,047)	(1,139)	(998)	(920)
Gross profit	1,345	1,626	1,520	1,442	1,313	1,214
Gross profit %	69.7%	66.8%	59.2%	55.8%	56.8%	56.9%
Administrative expenses	(1,192)	(1,637)	(1,464)	(1,358)	(1,429)	(1,077)
Other operating income	147	194	25	25	44	5
EBITDA	300	183	81	110	(72)	142
Depreciation	(69)	(77)	(88)	(95)	(53)	(35)
EBIT	231	106	(7)	15	(125)	107
Interest income	8	4	11	10	14	17
Profit before tax	239	110	4	25	(111)	124
Revised profit*	239	410*	304*	325*	189*	124

The figures for EBIT and profit before tax in 2004 to 2007 are after deduction of £300,000 management fees. This was a means by which the two joint venture partners, SMAL and MAL, each took a dividend from the joint venture. The true performance for those years, therefore, required this to be added back in. The last line ("Revised profit*") gives the figures with this management fee added back in for those years. It was agreed that the pre-tax profit for the 12 months to 31 October 2008 would be £164,000.

[112] The administration expenses can be broken down as follows, again using the last three years:

	Year ended 31/10/06	Year ended 31/10/07	11 months to 30/09/08
	£'000	£'000	£'000
Administrative expenses	£1,358	£1,429	£1,077
Auction costs
- employee costs	473	580	526
- other	346	314	277
	819	894	803
Establishment costs
- property rental	69	77	71
- business rates	84	82	76
- other	77	92	66
	230	251	213
Other expenses
- legal and professional	1	6	26
- bank charges	3	5	23
- other	4	7	12
	8	18	61
Management charge	300	300

There are some small discrepancies in the figures, but nothing of any consequence.

Intra-group re-organisation on purchase of the shares in SMAL

[113] On the date that they acquired the shares of SMAL, the defenders carried out an intra-group sale and lease back of all the properties owned by SMAL to a company called Motor Auction (Properties) Limited ("MAPL"), which became a subsidiary of SMAL on 25 April 2007. The sale of the properties to MAPL was undertaken at their then market value (with the benefit of the leases back to SMAL) as advised to them by Drivers Jonas LLP. The leases back to SMAL were all for a term of 15 years on full repairing and insuring terms at the then prevailing market rents, also as advised to them by Drivers Jonas. Mr Rijkse explained the reasons behind this arrangement. They wanted to present the bank with a property-based lending proposition that was easily understood; they wanted to separate the property ownership from the operation of the auction business; they wanted to create a property investment company within the SMA group capable of separate valuation and, potentially, separate disposal, whilst retaining within SMAL a leasehold interest in the auction sites from which to operate the auction business; and they wanted to be able to charge each auction a proper market rent from the property assets used by them, allowing them to benchmark and monitor the true profitability and return on capital of each site.

[114] As part of this exercise, the Siemens Street site (to the extent that it was owned by SMAL) was valued on the basis of a market rent being paid by SMAL to MAPL of £256,000 per annum on a 15 year lease, producing a value of £3.868 million. Mr Rijkse explained that they understood that the rent being received from MSAL for the site was only £77,001 per annum (£77,000 for the former Go-Kart site and £1 for the main premises), but in addition SMAL owned 50% of MSAL (which itself had significant real property assets), SMAL had been receiving management fees from MSAL of £150,000 per annum in recent years in lieu of dividends arising from the operation of the site, and there was potential for improving MSAL's profitability or for restructuring the arrangements, either by acquiring MAL's 50% interest in MSAL or possibly (though this was less desirable) by a negotiated sale of SMAL's 50% interest to MAL.

[115] The loan capital for the acquisition was provided by Alliance & Leicester Commercial Bank plc. In making a case to them for the loan, the defenders made a comprehensive presentation of SMAL's business, emphasising the importance of the Siemens Street site and the MSAL business. From a property perspective, the market rent of the Siemens Street site accounted for nearly 25% of the total rent, and the value of the site for over 20% of the total value. From a business perspective, MSAL was recognised to be the key to maximising coverage of the Glasgow market and as vital to achieving complete coverage in Scotland. The bank accepted the valuation of the Siemens Street site given by Drivers Jonas at £3.868 million.

Relations between SMAL and MAL

[116] During the due diligence process leading up to the acquisition of the shares in SMAL, the defenders were required to enter into a strict confidentiality agreement which prevented them speaking with or meeting MAL in connection with the MSAL business. The reason for this, according to Mr Rijkse, was that Mr Flynn did not want MAL to get to hear of the proposed sale to the defenders. He thought that MAL were very interested in acquiring SMAL but did not want to sell the business to MAL because of the prospect of SMAL employees being made redundant if that happened. Mr Flynn's account of the relationship between SMAL and MAL leading up to this time is set out in the note of the conversation between himself and Bob Anderson of 22 May 2007 referred to in para.[123] below.

[117] As I have already made clear, the defenders had formed the view before acquiring the shares in SMAL that the Siemens Street site was underperforming and had great potential for increased sales and profitability. Their intention was to review every aspect of the auction business there with a view to reducing unnecessary costs and increasing sales. They had in mind also the possibility of entering into an agreement with MAL to buy out their interest in MSAL. They thought that the lease arrangements for the former Go-Kart site at the northern part of the site, including the northern half of the building, entitled them to terminate the lease on notice. They had been advised that only one month's notice was required. They therefore thought that they had a strong bargaining position from which to seek to persuade MAL to accept a reasonable offer for their 50% shareholding in MSAL.

[118] On 26 April 2007 Bob Anderson, Mark Stuart and others, now representing SMAL, visited the Siemens Street site to introduce themselves and to start the process of a full review of operations. Evidence about this visit was given by Bob Anderson (see below). This was the first that anyone at MSAL or MAL knew of the share purchase and their involvement in the business, and they did not take kindly to the news. From the start, it was clear that the relationship between SMAL, under new ownership, and MAL was going to be difficult. They did not see eye to eye in their respective ambitions for the business. Soon after completion, Mr Bailey telephoned Bob Anderson. He was apparently livid with him for being part of the group purchasing SMAL. He was also livid at Mr Flynn for selling SMAL without keeping him informed.

The forced sale of the shares in MSAL

[119] Soon after the completion of the share purchase, Bob Anderson received a telephone call from Mr Bailey asking whether he had read the MSAL Articles of Association. Mr Bailey told him that MAL was now entitled to buy SMAL's shares in MSAL. Bob Anderson's initial reaction was that Mr Bailey was wrong. On 14 May, however, MAL served a notice triggering the process by which they were entitled to buy SMAL's shareholding.

[120] The steps in that process are set out in Article 11.7 of the MSAL Articles (see para.[5] above). In summary, the shares were to be sold at a "fair value" to be determined by the MSAL's auditors acting as experts and not as arbiters. In the event, MSAL's auditors had a conflict of interest and it was agreed that Price Waterhouse ("PWC") should be appointed as the expert valuer in their place. In their valuation letter of 5 September 2008 they explained that, while "fair value" was not defined in the Articles, for the purpose of the valuation MAL and SMAL had agreed that the fair value of a share should represent the pro rata value of MSAL based on the market value of 100% of the equity in MSAL. That seems to me to reflect the ordinary meaning of "fair value". PWC defined the "market value" of 100% of the equity in MSAL to be

"the highest price available in an open and unrestricted market between informed and prudent parties acting at arm's length and under no compulsion to act, expressed in terms of money or money's worth."

In their draft factual report, circulated for discussion in August 2008, they added this explanation:

"The conclusion will therefore implicitly include a control premium because we have been asked to consider the value of 100% of the equity of MSAL, but we have not considered any buyer specific synergies which may lead to a higher price."

They went on to say that they had chosen a valuation date of 25 January 2008. Though it is difficult to follow the logic of such a date, it was not suggested that it made any difference to the outcome of the exercise.

[121] PWC concluded that the fair value of a share in MSAL as at 25 January 2008 was £8, giving a value for SMAL's shareholding in MSAL of £800,008. That is the price which SMAL received for their shares from MAL. The sale to MAL was completed on 16 October 2007.

[122] Four points should be emphasised at this stage. First, the Articles required the shares to be sold at a "fair value". It was not a question of SMAL subsequently agreeing to this as a method of valuation. The only discussion was as to how a fair value was to be assessed. By agreement of SMAL and MAL, fair value was taken to mean the open market value of the equity in MSAL divided by the number of shares, taking account of a control factor. This was the correct approach. It did not innovate on the position laid down in the Articles. Second, it is tolerably clear that the valuation was based upon a historical approach, seeking to identify an appropriate figure for maintainable earnings and apply a multiple to that figure, and then cross-checking the result against the net assets of the company. It is not a criticism of this approach to say, as is the case, that it inevitably excludes any consideration of what might happen once the purchaser acquires overall control of the company. For that reason, it is open to the defenders, in an issue with the pursuers, to seek to argue that although they received a "fair value" for the shares in MSAL, they have lost out by being disabled from unlocking the potential of the company. Third, and this is perhaps merely a different way of saying the same thing, although the valuation took a control factor into account, it did not have regard to any "buyer specific synergies" which might lead to a higher price. For this reason, too, it must be open to the defenders, in claiming damages for breach of warranty, to seek to prove that, had they not been deprived of the opportunity, they would have unlocked the potential in the company and increased its value. Fourth, it is not clear whether, in their valuation, PWC attributed any value to the leasehold of the main premises, which were let by SMAL to MSAL for a rent of £1 a year.

The meeting of 22 May 2007 between Mr Flynn and Bob Anderson

[123] Bob Anderson met Mr Flynn on 22 May 2007, soon after the issue of the change of control had been raised by MAL. At that meeting, Mr Flynn told Bob Anderson about "the history of the SMAG/Manheim JV". Subsequently, a note was produced of what had been said, which note was revised on a number of occasions. As recorded in the note, Mr Flynn explained the origin of the joint venture. He and Mr Bailey of MAL had met and discussed their respective problems. Mr Bailey wanted to get an "in" into Scotland; and Mr Flynn had a Glasgow site but no certainty of getting fleet vehicles. The joint venture was started. Its success became "a double-edged sword" for SMAL: they gained experience of the fleet business, dealing with fleet customers (the fleet business had different demands from other aspects of the used car business); but as the business developed, and SMAL had started to become a serious competitor to MAL, the relationship soured. There were suggestions of another joint venture in Newcastle, but this came to nothing. One version of the note then has this paragraph:

"Because of restrictions in the [Shareholders' Agreement], SMA is not allowed to purchase any of the 6 named auctions (clause 9.3 p14) or to buy any auctions established after the [Shareholders' Agreement] within a thirty mile radius of a Manheim site ..."

Mr Flynn said that the MAL auction site at Durham closed shortly thereafter. Mr Flynn was interested in buying it, but Mr Bailey would not allow it because he "did not want SMA to get any bigger". That was the first major disagreement between SMAL and MAL. The Durham site (Washington) was now on its knees, partly because of competition from SMAL and partly because of poor management. Mr Flynn then mentioned two individuals who might be worth visiting and then returned to the relationship between SMAL and MAL:

"When Manheim claim that SMA are not pulling their weight, DF [i.e. Mr Flynn] feels this is completely untrue. There are two full-time salesmen promoting trade cars. On the contrary, DF feels that Manheim, although initially trying hard, are now always finding reasons to take cars down south. ... Their thought process is 'why get 50% of Glasgow's profit when we could get 100% of Washington's'.

Manheim are poor at giving information - for example league tables on performance. How can you improve a bad performance if you don't know it's bad?

Welcome is another example - MSA initially told it was great news that Manheim were getting Welcome cars but they are shipped out of Scotland to Washington. SMAG have NEVER taken a customer out of Glasgow to another auction whereas Manheim have."

As to SMAL "not pulling their weight" Mr Flynn said that SMAL was never meant to put extra cars into Siemens Street from other sites. The MSAL business was meant to develop of itself, under its own management and on the strength of the fleet business brought in by MAL. Mr Flynn was concerned that Manheim, through its rep in Glasgow, was diverting cars to its other sites. The note continues:

"In 2004, JB offered £400K down payment for 20% of the shares (would have meant Manheim would have held 70%, SMA 30%) then after 5 years (in 2009) they would take the average of the last 2 years pre-tax profits and multiply it by 5 and SMA would get 30% of that plus it would still own the property. (Worth noting that if Manheim bought SMAG shares they would have to pay market rent on whole site.) As they insisted all restrictions would remain in place till 2009, DF declined. Currently they are paying £77K for the area on the left and £1 for the area on the right. JV owns the car park so no rent payable.

Agreement is that Manheim would provide 3000 fleet vehicles every year. Sales are getting worse - have just lost ARVAL. But with Commercials, there will still be in excess of 3K units.

DF adds that they have a fleet oriented auction system which is very labour intensive - and unnecessary for the volume going through MSA."

It is clear that there were problems in the relationship between SMAL and MAL. The note also confirms the evidence referred to earlier. The joint venture was not performing well and there was scope for improvement in sales and profitability.

Offers by SMA/MAL to buy the other out

[124] Over the years leading up to the compulsory sale of SMAL's shareholding in MSAL to MAL, there were a number of offers made by one or other of the joint venture partners to buy out the other. They are summarised in the expert report of Ms Longworth, though her account is in certain instances based upon what she was told by others. There is some dispute between the parties as to the value to be attributed to some of the offers, but as presented by Ms Longworth in her report the following offers were made:

(i) In 2004, MAL offered £200,000 for 20% of the shares in MSAL, with a deferred consideration after five years for the remaining 30% owned by SMAL. This is the offer mentioned in the note of the conversation between Mr Flynn and Bob Anderson of 22 May 2007 set out in para.[123] above. The deferred consideration was to be five times the average pre-tax profit in 2008 and 2009. It was part of the offer that the rent on the premises would revert to market rent upon completion.

(ii) MAL made a further offer in April 2005, this time to buy SMAL's shareholding for a consideration of £450,000 up front, with a further amount of approximately £1.5 million payable in 2009, the exact amount depending upon the profits made in the intervening period.

(iii) In a written offer by letter dated 3 July 2007, MAL offered to acquire SMAL's shares in MSAL for £700,000, with the rent for the site remaining at £77,001 for the first five years and thereafter reverting to an open market value. In effect, this meant that the rent on the main premises would remain at £1 a year for five years before reverting to market rent. The offer was apparently based upon applying a multiple of 7 to the average operating profit (adjusted to reflect a reduced management charge) in the three years ending 31 October 2007 (using a forecast for the remainder of that year). To this was added an amount of £7,000 to reflect the value of the property portfolio. In her report, Ms Longworth values that offer for SMAL's 50% shareholding in MSAL at £1,461,000, made up of the cash offer of £700,000 plus a value, assessed by her at £761,000, attributable to the ability of SMAL to charge a market rent from 2013.

(iv) On 20 July 2007, SMAL offered MAL a complex deal whereby they would acquire MSAL's interest in the car park for a nominal consideration and MAL would assume SMAL's interest in MSAL for nil consideration. MAL would then enter into a 15 year lease from SMAL over such part of the site as it wished to use, for a market rent plus an additional sum rising as the lease went on. Ms Longworth does not attempt to value this offer.

(v) Also in July 2007, SMAL offered £1.5 million in cash for MAL's shares in MSAL. This offer was repeated by letter of 4 October 2007.

All of these offers were rejected.

[125] In so far as any use is to be made of these offers in seeking to attribute a value to SMAL's shareholding in MSAL, it should be borne in mind that the first two offers were not in writing. There is therefore obviously some uncertainty as to what the final terms would have been had either offer been accepted as a basis for detailed negotiation. Further, and more importantly, the last three offers were made at a time when the dispute had already crystallised, and it was clear that if no agreement was reached a value would have to be placed on the shareholding by PWC. There may, therefore, have been an element of jockeying for position in the making of these later offers.

The parties' cases in outline

[126] The defenders' case on damages is set out in detail in Statement 7 of the Counterclaim. In the opening paragraph, they say this:

"As a result of the breaches of the warranties, the defenders have suffered loss and damage. In particular, they paid the pursuers £15,000,000 for the shares when in fact the shares were worth a substantially lower sum. The shares were worth such a lower sum because the breaches of warranty resulted in (i) [SMAL's] shares in MSAL being able to be purchased by MAL at a lower price than their true value; (ii) [SMAL] being committed to the Lease until 2020 and receiving only a nominal rent of £1 rather than the market rent. The defenders have also suffered consequential legal costs and other expenses."

The sum concluded for in the Counterclaim is £3,481,742.

[127] The defenders go on in Statement 7 to set out more detail of their claim. They say, first, that it was unlikely that MSAL would have continued to operate as it did. One party would have bought the other out, or the joint venture parties would have resolved their differences and made a go of it. The most probable outcome would have been that one party would have bought out the other. In those circumstances, the defenders estimated that MSAL's trading performance would have improved so that the value of its shares would have been £3,155,000. The defenders' 50% interest would therefore have been worth £1,577,500, as against the £800,000 paid by MAL under the forced sale provisions. The difference is £776,992. In addition, following a buy out, SMAL would have been able to charge the full market rent for the main auction site (then leased at £1 per annum), thus realising a capital investment value of £2,023,000. Accordingly the defenders had suffered a loss of £2,799,992; or, to put it another way, the true value of the shares was that much less than the sum paid under the SPA. These figures were based on expert evidence lodged in process by the defenders. On the alternative hypothesis that the joint venture partners would have resolved their differences and worked to improve the profitability of MSAL, they put forward calculations, also based on expert evidence, in support of a calculated loss of £1,224,992. As the case developed, Mr Clark put forward another possibility, namely that damages might be assessed on the basis of evaluating the chance that SMAL might have bought out MAL or the chance that the parties might have worked together to improve MSAL's performance (see below). In addition, they sought to recover the sum of £70,000 for which they were liable to MAL in the proceedings in England, £9,408 paid to Drivers Jonas in respect of their assistance in the valuation by PWC pursuant to the provisions of the change of control provisions in the MSAL Articles, and other legal fees incurred in relation to the PWC Valuation.

[128] The pursuers' case was simple and straightforward. In a case such as this, the proper measure of damages - the object of which was "to place the [defenders] in as good a position pecuniarily as if no breach of contract had been committed (per Lord Gifford in Houldsworth v. Brand's Trustees (1877) 4 R 369, 375, and c.f. Govan Rope and Sail Co. Limited v. Weir & Co (1897) 24 R 370 - was the difference between the market value of the shares in SMAL had the warranty been true and the actual value of the shares: Stilton, Sale of Shares and Businesses (2^nd Ed.) para.10.1.1; McGregor, Damages (18^th Ed.) para.24-007; and Cabrelli, Commercial Agreements in Scotland para.18.33. Having acquired SMAL, the defenders may not have wanted SMAL to sell the shares in MAL, but they were paid the fair value of those shares assessed by PWC according to a formulation agreed to by the defenders. There were three possibilities: either that fair value gave the defenders full compensation for the loss of the shares; or, by agreeing an inappropriate formula, the defenders failed to ensure that they received full compensation; or PWC did not value the shares correctly. None of those circumstances give rise to any liability on the part of the pursuers. It was for the defenders to establish that the PWC valuation did not take account of any synergies which the defenders might have unlocked in MSAL, and to show what those synergies were. Further, the pursuers took issue with the defenders' assertion that MSAL would not have carried on as before. That possibility was much more likely than that SMAL would have bought out MAL, or that MAL would have bought out SMAL, or that the parties (MAL and SMAL) would have worked together to improve MSAL's performance. In addition, on each of the above scenarios the pursuers challenged the values put forward by the defenders and adduced expert evidence to support their case.

[129] In their closing submissions both Mr Clark and Mr Martin developed their arguments with the assistance of detailed written submissions for which I am grateful both to them and to the other members of their respective teams who no doubt made significant contributions. I will not attempt to summarise the points made in those submissions - they are available to be looked at should the case go further - but I shall deal with them as they arise.

The evidence

[130] Evidence on this part of the case was led on behalf of the defenders from Mr Rijkse, Mr Richards, Bob Anderson and Andrew Anderson. The defenders also led expert evidence from Sally Longworth ACA, a partner in Grant Thornton UK LLP in Manchester, and from David Murdoch FRICS, a Chartered Surveyor within Drivers Jonas specialising in commercial property.

[131] The pursuers adduced evidence from Mr Flynn; and expert evidence from Emma Porter of Aver, Chartered Accountants in Edinburgh, and from Brian Ronnie, a chartered surveyor in Ryden LLP in Glasgow

Witnesses of fact

[132] All the witnesses of fact produced witness statements and the experts produced expert reports and supplementary reports. Their evidence was led by reference to those statements and reports and was then subject to cross-examination. I have referred to some parts of the factual evidence. However, I should at this stage summarise parts of the evidence of Bob Anderson, Andrew Anderson and Douglas Flynn, all of which bore on the question of damages.

Bob Anderson

[133] Bob Anderson described the motor auction business as a "chimney pot" business, meaning that ideally an auction site ought to be within or adjacent to a main population centre. Its primary source of stock and customers would tend to come from a 20 mile radius. Business from further afield tends to involve extra cost of transportation. The catchment area for SMAL's site in Aberdeen encompassed about 250,000 people, whereas that for Siemens Street took in about 2.5 million people, about half the population of Scotland. Siemens Street therefore had much greater potential in terms of the number of cars available for sale and the number of potential buyers. He acknowledged that there was intense competition between rival auction companies, there being some 13 in Scotland, but he thought that the Siemens Street site was exceptionally well located and possibly had the best location of any auction site north of the border. In addition to the advantages of its large catchment area, it was situated close to the motorway. This contrasted favourably with SMAL's site at Kinross, beside Loch Leven, were the principal access route from the motorway for car transporters, employees and customers was via the main street of Kinross.

[134] Bob Anderson confirmed that the market in the UK was dominated by BCA, which had some 21 sites and sold nearly 600,000 vehicles a year. MAL was the second largest motor auction company in the UK, with 18 sites and annual sales of about 300,000 to 350,000 vehicles. At the time of acquisition, SMAL was the third largest in the UK by volume of sales. In the year ended 31 October 2006, it sold 56,000 cars through its four wholly owned sites and its 50% interest in MSAL. In the year ended 31 October 2009, it sold 66,000 vehicles, despite losing its interest in MSAL and despite selling the Aberdeen site in mid-2009 when it had accounted for only about 3500 sales. Having an interest in MSAL, gave SMAL a presence in each of the main population centres in Scotland. Without the Glasgow site, it was more difficult for SMAL profitably to service the Glasgow catchment area because of the costs of transporting cars from Glasgow to Livingston and because of the proximity to Glasgow of other sites belonging to SMAL's competitors.

[135] Bob Anderson considered that it was desirable to attract larger fleet companies, such as Motability, Lex Leasing and Lombard. "De-fleeted" vehicles from companies such as these are generally sought after by purchasers. They tend to be three years old or less, well serviced, popular makes and models and have usually had a single user. Because fleet vendors tend to have a need to dispose of cars throughout the UK, they prefer to deal with a few auction groups, each with multiple sites and national coverage. It was his opinion that with more sites serving large population catchment areas, an auction company ought to be able to generate larger profits and a higher income per unit ("IPU"), attract a better quality of customer, and achieve a more efficient use of head office functions such as finance and corporate administration, human resources and accountancy services.

[136] I have made it clear a number of times that, even before entering into the SPA, the defenders thought that MSAL was underperforming. Bob Anderson, Mark Stewart and Kevin Bann attended an MSAL board meeting already scheduled for 26 April 2007 and, in Bob Anderson's words, "let the MSAL board know in no uncertain terms that we were of the opinion that the MSAL business was underperforming." It appeared to them that the news that the defenders had purchased SMAL came as a shock to MAL. Bob Anderson thought that the main reason for the underperformance was that the parties to the joint venture had directly conflicting interests. MAL was not keen to push its feet business into MSAL as it would only get 50p in the £1, whereas it could achieve double that by diverting vehicles to its own wholly-owned sites. He thought that about 40% to 50% of MAL's sales were fleet sales. But for the terms of the lease of the main premises, under which the rental would revert to a market rent if sales dropped below a certain figure, it would have been in MAL's interest to sell all of its fleet stock through its own outlets. Its interest in MSAL was to be able to promote itself as a UK wide organisation with a presence in Scotland, as opposed to making the joint venture succeed in its own right. In contrast, SMAL did have an interest in the success of MSAL, but it was important to SMAL to get a return from that business sufficient to justify the off-market leasing arrangements it was tied into.

[137] After the acquisition of the shares in SMAL, Bob Anderson had a number of meetings with the manager of MSAL, Ian Wilson, and made suggestions as to how they could improve performance. He felt that MSAL was strongly positioned to go after competitors' businesses, particularly targeting Central Car Auctions and BCA Glasgow in the east of the city. With hindsight, however, he felt that there was little impetus to improve the business while it remained a joint venture, since that would require MAL to divert fleet sales from elsewhere to put them into a joint venture with a competitor. There was a tension between the divergent interests of the two companies. Had there been no change of control provision, the most likely outcome would have been for one of the joint venture partners to buy out the other. The difficult relationship between them became clear to him at that first board meeting of MSAL on 26 April 2007 and from Bob Anderson's communications with Mr Bailey, the managing director of MAL, thereafter. MAL refused an offer by SMAL to sell their stake in the joint venture for £1.5 million. Bob Anderson said that the relationship "got progressively more uncomfortable". He said this in his witness statement:

"Had [the relationship] continued in that vein, without the change of control provisions it would have been inevitable that, eventually, MAL would have offered SMAL enough for SMAL to sell. With the relationship as it was, MAL were not going to put any of their feet business into the joint venture and SMAL were not going to put any more of their main dealer or trade sales into the joint venture. It would have to have been sold. The board meetings were becoming increasingly combative and aggressive. Unfortunately we did not get a chance to persuade MAL to make a compelling offer because they felt, correctly as it turns out, that they had the ability to buy us out via the 'forced sale' fair value process via the new Articles of MSAL following the change of control of SMAL."

Andrew Anderson

[138] Andrew Anderson has worked with what is now the SMAL group in various capacities since about 1977. For three years in the middle of the 1980s he acted as motor auctions manager, reporting directly to the then managing director, Douglas Flynn. In about 1987 he was appointed as company accountant. In 1991 he was made a director of Fife and Kinross Investments Ltd, the group holding company, and of all of the subsidiary companies in the group. In about 1986 he stepped out of his role as group accountant and became involved in the plant side of the business. From 1999 he was involved in the operations side of the motor auction business, while Douglas Flynn dealt with other aspects.

[139] Andrew Anderson confirmed in his evidence that BCA was the largest motor auctioneer in the UK, and that MAL and SMAL were these second and third largest respectively. He said that vehicles generally came in to motor auctions from three main sources: trade and main dealerships; fleet companies; and privates. It was preferable to secure business from fleet companies, since the quality and volume of vehicles from them tended to be higher and more attractive to purchasers. Vehicles from fleet companies also tend to give rise to other income streams, for example from service agreements. Fleet companies preferred to deal with auctioneers who had sites throughout the UK and close to major population centres.

[140] Location was fundamental to the performance of any particular site. A site close to a major population centre has an advantage over one that is not. The Siemens Street site is one of the best located sites: it provides access to the most densely populated area in Scotland; it is near the motorway, and therefore easier and cheaper to transport stock to and from; and, being on the east side of Glasgow, it allows good access to customers from both the East and West of Scotland. In addition to that, it has modern purpose-built premises which are attractive both to sellers and buyers.

[141] In his view, the joint venture favoured both parties. SMAL had main dealer, trade and commercial vehicles, but no fleet vehicles. MAL, by contrast, was very strong in fleet vehicles. MAL benefited from the joint venture by being able to present itself themselves as a motor auction business with national coverage. By comparison with MAL, SMAL was a relatively small business focused in Scotland, while MAL was the second-biggest operator in the UK, concentrated mainly in England. However, as SMAL grew to become a more serious competitor, relations between SMAL and MAL became strained.

[142] From about 2004 the performance of MSAL started to decline. He recalled that it was the number of fleet vehicles coming to the auction which declined first, whilst the trade and main dealer sales were maintained at a fairly consistent level. Shortly afterwards, a restructuring of Arnold Clark led to fewer trade and main dealer vehicles being disposed of in the Glasgow area. To attempt to re-divert the cars back to Siemens Street would have involved greater costs for SMAL, which SMAL had no real incentive to incur given the stance taken by MAL in relation to its fleet contributions to the venture.

[143] Andrew Anderson explained that the fleet business was very different from trade business. Fleet customers were more demanding and required both better administration and better service. Prior to the joint venture, SMAL had found it difficult to develop the fleet side of the business, partly due to their lack of experience and partly due to the size of the company. As a result of knowledge acquired during the management of MSAL, SMAL were beginning to attract a number of new fleet customers to other SMAL branches, such as Livingston. Against that background, the relationship between SMAL and MAL in the joint venture began to sour. It seemed as though SMAL was beginning to become an irritant to MAL. The opening of the Livingston site and its success was a further irritation to MAL. At board level, however, the relationship between the joint venture partners remained cordial.

[144] There was an occasion when Douglas Flynn identified the Durham County auction as a target to purchase. It was bigger and better than SMAL's existing site in Newcastle and was therefore perceived to be of benefit both to SMAL and MAL, since the deal would have involved closing the Newcastle site and preventing it being used by another car auction business. However, MAL objected, as they were entitled to do because of the provisions of the Shareholders' Agreement. The relationship between SMAL and MAL went downhill from then onwards.

[145] Andrew Anderson pointed out that MSAL's sales have declined dramatically from the 20,000 or so achieved in the year to 31 October 2004. By 2007 the number of units sold was around 14,500. However, in the twelve months or so prior to the SPA there seemed to be a new willingness at MSAL board level to improve the business. There were some changes in the management structure. He sensed that there was a recognition on both sides that in due course one party would have to buy out the other. MAL remained disinclined to push business into the joint venture. They did enough to secure a national presence, but there was no incentive for them to put more than the minimum required into the joint venture, since they only took 50p in the £1 from sales there.

[146] Before the takeover by the defenders, SMAL made a number of attempts to expand into England. They had an undertaking from Arnold Clark that they would come in with them in a joint venture once a suitable site had been secured. Arnold Clark would supply the volume of trade vehicles required to get the business started. However, no site was found and Arnold Clark began to lose interest. The prospect of expanding into England thereafter presented a greater risk for SMAL, and Andrew Anderson considered that, had SMAL not been taken over by the defenders, Douglas Flynn would probably have sought to consolidate the business in Scotland (and the one site in England) and moved away from the idea of expansion.

[147] Andrew Anderson attended the board meeting of MSAL on 26 April 2007. He confirmed that at the meeting Bob Anderson made it absolutely clear that the MSAL joint venture was underperforming and that this was unacceptable - performance would have to improve or there would be consequences. Andrew Anderson thought that there was a recognition even prior to the takeover that the joint venture was failing and would not continue forever. His view was that SMAL had more to lose from the continuation of the joint venture than MAL, whose only commitment was to provide 3,000 cars per year, a target which was achieved easily, even if at a loss, and which was worthwhile and since it gave them their desired national coverage. From SMAL's point of view, they owned the main premises, and because of the £1 per year lease agreement that part of the site was effectively losing money.

Douglas Flynn

[148] Douglas Flynn was the company secretary of SMAL from 1990 until 1991. Thereafter he was a director until the takeover by the defenders in 1997. He gave evidence for the pursuers. He rejected the idea that the defenders had any damages claim. It was his view that the defenders had not suffered any loss as a consequence of any alleged breach of warranty. They received the fair value for their shares (£800,008) and therefore had suffered no loss.

[149] Mr Flynn explained the background to the joint venture in similar terms to the other explanations to which I have already referred. MAL wanted to have an auction presence in Scotland, "but that was all they wanted". The rationale for SMAL's entry into the joint venture was purely commercial; they did not have sufficient business to justify the size of the site which they had opened in Glasgow. They did not anticipate securing any fleet business without the linkup with MAL in the joint venture. The deal involved certain restrictions on each party. MAL were prevented from operating elsewhere in Scotland, whilst SMAL were prohibited from expanding in England. In the beginning, MSAL was profitable and both parties benefited. The working relationship was very good. In due course, however, MAL began to lose national fleet business, and the trade business also began to fall, mainly due to a change in the disposal policy by the Arnold Clark group. Mr Flynn described the subsequent relations between the parties in para.31 of his Witness Statement:

"MAL were concerned about SMAL creating relationships with fleet customers, which is why there were restrictions in the Shareholders' Agreement. Latterly, SMAL began to build a strong fleet sale business at Livingston. The drop in profitability after the first years was a concern to both sides, and all options were looked at to improve the situation. It is suggested by [the defenders] that the relationship had soured to such an extent that it was likely the JV would not continue. That is not true. I was very happy to continue the JV. MAL wanted to consolidate the profits of the JV into their results, and offered to buy some or all of the shares we owned. I did not want to sell, and MAL accepted that position. I did ask John [Bailey] if he wanted to sell to me, but he replied that MAL would never sell."

[150] Mr Flynn pointed to the fact that the restrictive covenants in the Shareholders' Agreement had flown off since MAL now owned 100% of MSAL. Since then, SMAL has expanded into Leeds, which is a very good auction site. It would have cost them a large amount of money to obtain from MAL a lifting of the restriction to enable them to expand there.

[151] Mr Flynn then considered the various scenarios put forward by SMAL as to what would have happened had there not been a change of control provision in the Articles. He thought it "nonsense" to think that sales could be increased by 242% within two years. By comparison, over the same period, the Kinross site had seen 24% growth and Livingston 38%. The increase in both of those sites had been helped by one particular customer, Motability. Were it not for that, growth would have been substantially less. He then went into more detail as to the difficulties that would have been encountered in expanding the business in Glasgow. Ultimately, he said, the number of cars that can be sold is finite, the number of purchasers is finite and the amount of cash available to spend on cars is finite. He expanded on some of these reasons in his supplementary statement. I need not set out the details here.

Expert evidence

[152] The expert evidence was given under reference to Reports and Supplementary Reports. They can be referred to as necessary. For the present, I shall confine myself to summarising the main points in the expert evidence for both parties.

Ms Longworth

[153] Ms Longworth was asked to investigate and assess the loss suffered by the defenders as a consequence of the breach of warranty. She approached the matter by comparing the value of the shares in SMAL had the warranties been true, i.e. had the Articles of Association not contained the change of control provision, with the value of those shares given that the Articles did contain such a provision. Because of the inclusion of the change of control provision, SMAL was forced to relinquish its shareholding in MSAL for £800,008 and it therefore lost any benefit to itself from the £1 lease of the main premises to which it was committed until 2020. Her Report proceeds upon the assumptions that, had the Articles not contained the change of control provision: (i) there would have been no requirement for SMAL to sell its shares in MSAL at the "fair value" of £800,008 fixed by PWC; (ii) the joint venture would have continued, and both SMAL and MAL would have had the opportunity to improve its performance, negotiate to buy out the other party or even to wind it up; and (iii) although if the joint venture had continued so also would the nominal rent for the main premises, SMAL, as a 50% shareholder in MSAL, would have benefited from it, and, if either SMAL or MAL had negotiated freely to buy out the other, it is likely that the terms of the lease would also have been revised. Ms Longworth's Report concentrates on assessing the value of MSAL, and therefore of SMAL's 50% shareholding in MSAL, on those assumptions. The main parts of her analysis are set out in Sections 4 and 7-10.

[154] In Section 4 of her Report Ms Longworth summarises the trading results of MSAL from year ending 31 October 2003 through to 30 September 2008, the last full month before completion of the sale of SMAL's shareholding to MAL. I have set those out earlier in this Opinion. Her summary of the trends shown by those figures is contained in the following paragraphs:

"4.8 The number of vehicles sold dropped steadily between 2004 and 2008 (from a high of 19,646 in 2004 to an annualised figure of 13,269 in 2008 ...

4.9 Turnover increased slightly in 2005 to just over £2.5m, and remained at a similar level in 2006, but has fallen steadily since. This is due to falling vehicle numbers offset by an increase in revenue per vehicle. Gross profit has levelled out at around 56%, considerably lower than the levels achieved prior to 2006.

4.10 Management charges have remained constant, but other admin expenses have risen in each of the last three years, despite a fall in the level of business. My understanding of the management charge is that it represents a distribution of profit from MSAL to the joint venture partners, and that all costs incurred by either joint venture partner were separately recharged to MSAL and are not reflected in the management charge."

Tying these figures in with the contentions of the parties in their submissions leading up to the PWC valuation, and with the comment in the notes of the meeting of 22 May 2007 that the relationship between SMAL and MAL had "soured", Ms Longworth attributes the fall in turnover and vehicles sold, in part at least, to the deterioration in the relationship between the joint venture partners. Neither partner was focused on improving performance, SMAL were suspicious that MAL was diverting vehicles to other sites, and, in consequence, SMAL considered that MSAL's performance was poorer than might otherwise have been achieved.

[155] Ms Longworth then goes on to compare the trading figures for MSAL with those for SMAL's auction sites at Livingston, Kinross and Newcastle, as well as the figures for sites in Telford and Queensferry, North Wales, which SMAL attempted to purchase in April 2007. In her opinion, the Livingston site offers the closest comparison to MSAL. It is located on the M8 corridor and is therefore accessible from both Glasgow and Edinburgh, it operates from relatively new premises, and it has had no capital expenditure on it since it was acquired. In a table at para.4.25, Ms Longworth sets out the results for the Livingston site for the three years and 10 months ending on the 31 August 2009. To ensure comparability with MSAL's figures, she adjusted the net profits for the Livingston site as shown in the SMAL group profit and loss accounts to add back, where appropriate, (i) the rent charged by the company holding the property and (ii) head office costs (the management charge) allocated to the sites as referred to in para.4.10 of her Report (see above). In the course of her evidence, Ms Longworth was able to take the figures forward to include the whole of the year ended 31 October 2009. I set out below the table as adjusted to include the whole of this latter year.

	Year ended 31/10/06	Year ended 31/10/07	Year ended 31/10/08	Year ended 31/10/09
Units sold	14,535	15,897	18,035	22,659
Income per unit	£148	£147	£153	£148
Net profit per SMA group p&l	£476,101	£310,388	£13,081	£646,390
Add back rent paid		£92,500	£180,000	£180,000
Add back allocated head office costs		£10,711	£94,615
Net profit before rent and head office costs	£476,101	£413,599	£287,696	£826,390

Ms Longworth makes the point that the number of units sold at Livingston have increased steadily year on year, with the figure for the year ended 31 October 2009 being more than 50% greater than that for the year ended 31 October 2006. Despite this, net profit declined in 2007 and 2008, though it increased considerably in the year ended 31 October 2009. She points out that the year ended 31 October 2008 was the first full year of ownership by the new management team. A number of "legacy policies" and staff remained in place from the previous regime. On the basis of information provided to her by the defenders, she explains the poor performance for the year ended 31 October 2008 by reference to a failure adequately to recover from vendors the costs of transportation to the site, this being exacerbated by high fuel prices and increasing vehicle numbers. The impact of the new management was evidenced by the trading results in the year ended 31 October 2009 as costs were brought under control. She identifies certain policies of the previous regime which were revised after the acquisition of SMAL by the defenders.

[156] Ms Longworth goes on in Section 4 of her Report to consider a forecast for MSAL's future performance in the years 2009 to 2011 had it come under the full ownership of the defenders. It is important to note that this forecast was based on a model provided to her by the defenders. She summarises that forecast in the following table:

	Year ended 31/10/09	Year ended 31/10/10	Year ended 31/10/11
Units sold	16,100	19,448	19,574
Income per unit	£129	£129	£129
	£'000	£'000	£'000
Income	2,080	2,513	2,529
Operating costs	(326)	(329)	(329)
Establishment costs	(385)	(390)	(395)
Advertising/ marketing	(24)	(24)	(24)
Transport	(274)	(331)	(333)
General overheads	(813)	(808)	(808)
Net profit	259	631	640
Net profit %	12%	25%	25%

The model given to her by the defenders suggested that there would be little change in performance after 2011. She notes that the model was prepared by the defenders on certain assumptions, namely: (i) that SMAL would acquire sole ownership of MSAL and the Siemens Street site; (ii) that policies and practices at SMAL's other sites would be adopted; (iii) that the drop in fleet business resulting from MAL's departure would be off-set by additional trade business; and (iv) that MSAL would pay rent to SMAL for the premises at the full market rate, calculated as £256,000.

[157] Comparing that model with actual results for Telford and for the SMAL sites at Newcastle, Livingston and Kinross, she gives her view in para.4.58 that

"the model for the Glasgow site has been prepared on a reasonable basis and provides a reasonable assessment of the profits the Glasgow site would have been able to achieve based on sole ownership by [the defenders]".

This model was the subject of detailed and critical examination during the proof.

[158] In Section 7 of her Report, Ms Longworth explains that in assessing the loss suffered by the defenders as a result of the breach of warranty, she has assumed that had there been no change of control provision in the Articles of MSAL, one of the joint venture partners would have bought out the other; and that the business of MSAL would have continued either as part of the business of the defenders or as part of the business of MAL. Her valuation of MSAL in those (hypothetical) circumstances takes account of the improvement in performance that would have been expected had MSAL been wholly owned by one or other of the joint venture partners. SMAL's shares in MSAL would have been worth one half of that value. The defenders' loss was assessed as being the difference between (i) her valuation of SMAL's 50% shareholding and (ii) the £800,008 actually received by SMAL for that shareholding in accordance with the PWC assessment of fair value.

[159] In assessing the likely future profits of MSAL on that basis, Ms Longworth assumes that any negotiated transfer of shares between the joint venture partners would have included an agreement that the rent for the main premises would revert to market levels; and she includes the obligation to pay rent at such levels in her calculations. Such an assumption inevitably reduces the figures for the profitability of MSAL in that assessment. Had that happened, however, SMAL would itself have received a market rent for the main premises. In those circumstances, Ms Longworth considers that it is necessary in assessing the overall loss suffered by the defenders to include not only the difference between the value of the shareholding in MSAL as described above, but also the loss to SMAL by reason of being tied into the existing lease of the main premises at a nominal £1 rent instead of being able to obtain a market rent.

[160] Although Ms Longworth is clear that an earnings approach is the proper basis for valuing the shareholding in MSAL, in Section 8 she sets out an asset based valuation of MSAL as at 28 February 2008, that day being chosen for consistency with other valuations. She concludes that a fair value for MSAL on this basis would be £2.868 million, and that SMAL's 50% shareholding on that basis would be worth £1.434 million. She compares that with PWC's valuation of £1.6 million for MSAL as a whole, and £800,008 for SMAL's 50% shareholding. She considers that the difference may result from PWC not having taken into consideration the value of the leasehold interest in the main premises.

[161] In Section 9, Ms Longworth undertakes an earnings approach to the valuation of MSAL, having regard to "buyer specific synergies" and improvements in trading once the business was fully owned. In assessing maintainable earnings, she deducts an amount for rent payable at market rate both for the main premises and the former Go-Kart site. The synergies would be achieved by adding the Siemens Street site to a portfolio of other sites. Although she relied heavily upon the model of likely performance provided to her by the defenders, she sought to "flex" or stress test that model by seeing what would happen to the results if, instead of selling 19,440 units in 2010, the business only sold 18,000 units in that year. On that revised figure, the defenders' model would be revised as follows:

	Year ended 31/10/10
	Per model	Flexed
Units sold	19,448	18,000
Income per unit	£129	£129
	£'000	£'000
Income	2,513	2,322
Operating costs	(329)	(329)
Establishment costs	(390)	(390)
Advertising/ marketing	(24)	(24)
Transport	(331)	(331)
General overheads	(808)	(808)
Net profit	631	440
Net profit %	25%	19%

These figures again assume that MSAL would pay rent to SMAL for the premises at the full market rate of £256,000 rather than the artificial £77,001 resulting from the £1 lease. On this basis Ms Longworth felt reassured that she could base her valuation on the model provided by the defenders and use a maintainable earnings figure (EBIT) of £631,000. Her reasoning was that although the sensitivity analysis showed that a drop in units sold would cause a drop of over £190,000 in net profit, that number of units was less than the volume achieved by MSAL in the year ended 31 October 2004, before the relationship between SMAL and MAL broke down, and was also less than the volume being achieved at Livingston. In those circumstances she thought it reasonable to assume that the site at Siemens Street would have been able to achieve the 19,448 units forecast in the model.

[162] To this figure for maintainable earnings of £631,000 a year, Ms Longworth applied a multiplier of 5 to achieve a value for the company of £3,155,000. SMAL's 50% shareholding was therefore valued at £1,577,000.

[163] Ms Longworth notes that the difference between the value of £3,155,000, assessed on an earnings basis, and that of £2,868,000, assessed on an assets basis (see above), represented the premium payable for "buyer specific synergies and improvements".

[164] In Section 10 of her Report, Ms Longworth adds in the loss to the defenders caused by SMAL being tied into the lease of the main premises at a nominal rent of £1 a year. Based on a valuation provided by Drivers Jonas, she estimated that loss at £2,023,000. When this and the additional legal costs of £70,000 were brought into account, her estimate of the total loss suffered by the defenders was as follows (see para.10.3):

Value of 50% shareholding in MSAL £ 1,577,000

less: payment received (800,008)

Shortfall in consideration received for shares in MSAL £ 777,000

Add:

Loss as a result of being tied into the £1 lease £ 2,023,000

Additional costs - legal costs and expenses £ 70,000

Total: £ 2,870,000

The figure for loss as a result of being tied into the £1 lease was revised in the light of further evidence.

[165] Finally, Ms Longworth considered what loss, if any, would have been suffered on the hypothesis that the joint venture parties would have resolved their differences and worked together to increase the profitability of the business (see para.10.7). She calls this Alternative Scenario 1. She proceeded upon the basis that the same synergies would have been achieved and the volume of sales and profits would have increased to the same extent as if one party had bought out the other. The figure for maintainable earnings (EBIT) would still be £631,000. In that situation, however, the rent paid by MSAL would have remained the artificially low figure of £77,001 rather than the market rent of £256,000. The costs would be reduced accordingly, and the figure for maintainable earnings (Revised EBIT) would go up to £810,000. Applying a multiplier of 5, this produces a value for MSAL of £4,050,000, making SMAL's 50% shareholding worth £2,025,000. After giving credit for the £800,001 received from MAL for that shareholding and adding in the legal costs and expenses (£70,000) as before, the loss was calculated at £1,295,000.

[166] Given that the calculation on the basis of one party buying out the other assumes payment of a market rent and then adds back in the loss from presently being tied into the artificially low rent, whereas the calculation on the basis of both parties working together calculates maintainable earnings on the basis of the artificially low rent (but has no other adjustment for rent), one would have expected the two calculations to show the same overall loss. That they do not suggests that there is an error in the capitalisation of the £1 lease, i.e. in Ms Longworth's calculation of the figure of £2,023,000 for the "loss as a result of being tied into the £1 lease". This is a point made by Ms Porter in her Report at para.10.8. Further evidence was given about the valuation of the loss caused by being tied into the £1 lease by Mr Murdoch and Mr Rennie, and some measure of agreement was reached. In the event, for reasons explained below, I do not need to decide this issue.

Ms Porter

[167] The Expert Reports on this part of the case were prepared and exchanged sequentially. Ms Porter's first Report was, therefore, prepared in response to that of Ms Longworth. In summarising Ms Porter's evidence, I shall not repeat areas on which there was little, if any, disagreement. I shall simply try to identify the differences both in their approach and in specific details.

[168] Ms Porter's starting point was that since the forced sale of SMAL's shareholding in MSAL was at a "fair value" or, as she put it, "an open market value", that value fully compensated the defenders for the loss of that shareholding. In addition, it provided SMAL with funds to invest and with which to expand the business, whether by capital investment in existing sites or through the acquisition of new sites. Further, it freed SMAL from the restrictions placed upon it by the Shareholders' Agreement with MAL, which agreement came to an end with the compulsory sale and purchase of the shares. Taking all these matters into account, her view was that the defenders had suffered no loss.

[169] Ms Porter makes a number of comments about Ms Longworth's general approach. First, she points out (in para.2.17) that Ms Longworth has not considered the value attributed by the defenders to the joint venture when they purchase the shares in SMAL in April 2007. That is obviously correct, but it does not seem to me to be central to the exercise, which is to identify the difference, if any, between the value of what the defenders acquired and the value of what they would have acquired, regardless of what value, if any, they had attributed to it in entering into the SPA. Second, in para.2.20 she points out, correctly, that Ms Longworth's valuation proceeds upon forecast results supplied by the defenders as part of the model given to her. Ms Longworth acknowledges as much in her Report. The point is made that Ms Longworth offers no view of her own on the likelihood of any of the scenarios put forward in that model actually occurring. That too is correct, though in fairness to Ms Longworth I should say that it is no part of the function of an expert witness to attempt to judge the strength of the factual evidence provided by others in an area outwith his or her expertise. The role of the accountancy experts is to provide expert opinion as to the methodology of valuation and to apply that methodology to the range of different factors and hypotheses put forward in the evidence. Third, Ms Porter appears to agree that the fortunes of the joint venture were unlikely to improve without renewed cooperation between SMAL and MAL, and even then the joint venture has inbuilt expenses and inefficiencies which would not be present were MSAL be in single ownership (see para.2.21). I take from this, though it appears to be at odds with certain other parts of her evidence, that she accepts that the joint venture was underperforming and that there was potential, the extent of which is the real issue between the experts, for improving its sales and profitability. Fourth, she agrees with Ms Longworth in rejecting the winding up approach as a measure of valuing MSAL in the present circumstances. That makes obvious sense. Finally, and this is a point which she develops at greater length in her Report, she characterises the approach taken by Ms Longworth as containing "aspirational elements" which she considers to represent "hope" value, when in her view the possibility of attaining such additional value "was remote in many instances and overstated in others". The impact of that point is ultimately to show that the PWC valuation was "reasonable and in many instances in excess of the value of the business". Insofar as it was shown that the PWC valuation had failed to take relevant items into consideration, this was for the defenders to take up with PWC rather than the pursuers.

[170] There is little disagreement between the experts about the historical trading figures for MSAL, though Ms Porter gives a different range of figures for the year ended October 2008. Further, she takes the 2008 figures through to the end of the calendar year. They show a further deterioration. Her assessment of the trend is that it shows falling sales, making the possibility of future profitability more remote. She does not speculate about the deteriorating relationship between SMAL and MAL and its impact upon the profitability of MSAL.

[171] So far as concerns a comparison with the Livingston site, Ms Porter tentatively suggests that part of the increase in unit sales at Livingston in 2009 may be due to the transfer of trade from Aberdeen which had by then ceased trading, though she accepts that she does not have sufficient information to make a full assessment of that. Subject to that point, she accepts that Livingston may be used as a comparable site, though she points out, correctly, that at Livingston profits deteriorated during the first 18 months under new management and only returned to previous levels in 2009.

[172] Ms Porter then turns to consider the projections for MSAL based upon the model provided to Ms Longworth by the defenders. Those projections had suggested sales of 16,100 vehicles in 2009, 19,448 in 2010 and 19,574 in 2011. She did not think these figures were very likely to be achieved. She noted that the projected sales in 2009 suggested an increase of over 20% on the annualised unit sales for the previous year. Further, the figures for the years up to 2008 included both trade and fleet sales. If by 2009 SMAL had purchased MAL's shares in the joint venture, it was likely that most of the fleet sales would be lost or at least significantly reduced. The non-fleet sales in 2008 amounted to under 8,000 units. Yet the defenders' model projected sales of twice that number in 2009 and even more in 2010 and 2011. Where were these extra sales to come from? If the Livingston results were to be used as a comparison, the increase in sales over the comparable period was only some 13.4%. She produced a table at para.4.40 showing a projection of sales continuing to decline in 2009, 2010 and 2011 by 9.31% each year, that being the average of the reductions over the four years to 2008. She concluded that there was "no possibility" that the profits forecast in Ms Longworth's Report could have been achieved. Ms Porter also noted that the drop in sales at the Glasgow site in 2006, 2007 and 2008 appeared to coincide with increases in sales at Livingston, and speculated that that might reflect a diversion of vehicles from one site to the other rather than an independent increase in sales at Livingston. It was also possible that the Livingston figures were affected by vehicles being transferred from Aberdeen in anticipation of the site being sold. If so, it would reduce the usefulness of any comparison with Livingston. Ms Porter then makes the following observations in paragraphs 4.47-4.50:

"4.47 What the Longworth Report completely fails to take into account is that there is a finite market for units sold at auction in Scotland and the increases suggested for Glasgow from 2009 to 2011 appear to be unrealistic. Nor does it attempt to quantify the exact loss as a consequence of Manheim's fleet trade no longer being available or how this will be replaced in addition to the suggested growth.

4.48 If Glasgow trade was to increase at all then the increase would have had to come from:

(i) The collapse of a competitor;

(ii) The purchase of another auction house; and/or

(iii) A transfer of unit sales from the Livingston site or other SMA sites.

4.49 I do not consider it likely that the Glasgow sales would have been allowed to slump to the level brought out in the table at paragraph 4.14 above [i.e. the table showing a 9.31% reduction year on year in 2009, 2010 and 2011]. However, unless one of the above was to take place, given the trend apparent in the recorded unit sales for Glasgow, I do not consider that organic growth alone would have allowed the unit sales to increase to the extent suggested by the Longworth Report.

4.50 It is noted, however, that having two sites in such close proximity as Livingston and Glasgow makes it difficult to achieve year on year growth at both sites. It is unclear from the information available whether Livingston was operating at capacity. If it were not, then the possibility must be that one of these sites would become redundant and sold to release property values."

[173] Ms Porter recognised that there could be a cost saving in administration and other overhead expenses if the whole operation was managed by SMAL. However, she pointed out that Ms Longworth's Report provided no detailed assessment of what the savings might be. Detailed information, she said, was crucial on this aspect if any cost saving forecast was to be supported.

[174] Ms Porter pointed out that Ms Longworth's assessment of the likely future net profit suggested an increase in net profit as a percentage of sales from 6% in 2008 to 12% in 2009 and then 25% in the following years. The increase from 2008 to 2009 seemed unlikely given the probable disruption on any transfer from MAL to SMAL, as shown by the temporary drop in sales at other sites in the immediate aftermath of the share purchase. The example of Livingston did not suggest that net profit would return to its previous levels until 2009; and it was, therefore, not apparent on what basis Ms Longworth could forecast such an increase for the Glasgow site. In short, the Ms Longworth's Report was not so much an independent evaluation of the business and any resultant loss, but rather a representation of the defenders' forecasts without any independent review or assessment. The net profit of £631,000 for the year ended 31 October 2010, upon which Ms Longworth based her assessment of the value of MSAL on a maintainable earnings basis, was "grossly overstated" and would have to be significantly reduced if an earnings calculation was to be undertaken.

[175] Although Ms Porter agreed that an earnings-based valuation is appropriate in this case, she too considered briefly an assets-based valuation. On an assets basis, she came to the view that the payment made for the SMAL shareholding pursuant to the PWC valuation in fact overvalued SMAL's shareholding.

[176] In Section 9 of her Report, Ms Porter deals with the valuation of the shares in MSAL upon the hypothesis that the joint venture would come to an end with a negotiated sale by one party to the other of its 50% shareholding. She makes the point that the Glasgow site was important to MAL for a number of reasons: it gave them access to the Scottish market; it gave them exposure in Scotland with the site branded with their name; and it gave them the benefit, via their share in the joint venture company, of the £1 a year rental for the main premises until 2020. MAL had already rejected an offer of £1.5 million and, in Ms Porter's view, the premium that SMAL would be required to pay MAL to compensate them for the loss of those advantages would be "prohibitive". Ms Porter said in her oral evidence that the synergies would not apply equally to each party. They were "buyer specific". Similarly, it could not be assumed that there would be a single price at which one party would be prepared to sell to the other. Each would have a different assessment of the value to them of acquiring sole control of MSAL. Thus, if MAL were to purchase SMAL's shares, and SMAL were seeking to negotiate a new lease of the main premises at market rent, as opposed to the nominal rent of £1 a year, MAL would look for a significant reduction in the price of the shares to compensate for that. Conversely, were SMAL to purchase MAL's shares, MAL would be aware of the benefit to SMAL in terms of its ability to charge a market rent for the main premises, and would look for a premium in the amount paid to them for their shares. It was necessary, therefore, to identify what scenario was in play for the purpose of any valuation.

[177] Ms Porter made a number of points about the assumptions upon which the Ms Longworth's Report proceeded. She questioned the reliability of the Livingston example as a guide to what might have happened in Glasgow. Quite apart from the question already raised as to whether it had benefited from the closure of the Aberdeen site, Ms Porter questioned whether some vehicles had already been diverted to Livingston from Glasgow. Second, she questioned whether the relatively poor performance of MSAL was down to the relationship between the joint venture parties - her understanding was that they had a good overall relationship. Third, she questioned the evidence that SMAL, under the new management, had improved the performance of the other sites. She again raised the possibility that some of the apparent improvement in performance resulted from a transfer of vehicles from Aberdeen. Fourth, she was dubious as to the assertion by Ms Longworth that synergies would be achieved by adding Glasgow to the other SMAL sites. She said that she was unsure what synergies were being referred to:

"While adding an additional site would add capacity to the business there is insufficient evidence to support the assertion that the capacity would be utilised with new business and not result in the transfer of business from one site to another. Also, there is no evidence to suggest that the other sites are operating at capacity; therefore growth in the business could be obtained by using existing sites. The proximity of Livingston to Glasgow would suggest that further growth could not be achieved organically; rather it would need to be done by acquisition of other existing businesses with different customer bases."

In support of this last point, Ms Porter referred again to the fact that in 2008 only about 7,600 units sold were trade sales. The remainder were fleet sales, most of which would have come from MAL. To achieve sales of 16,100 units in 2009, which was the figure in the model provided by the defenders upon which Ms Longworth relied, from a base of 7,600 units the previous year was, in her view, unrealistic. It would involve winning a significant amount of business from a rival or transferring business from other SMAL sites. She said that the most that she would allow for in terms of an increase would be a maximum of 12,000 units in 2009 and 16,000 units in 2010. She added in her oral evidence that she thought 16,000 units in 2010 was "quite an enthusiastic target" which might not have been achieved. On the basis that the costs were not significantly reduced from the model put forward by the defenders, that figure of 16,000 units would result in a net profit for 2009 of about £190,000. Applying the multiplier used by Ms Longworth, which appeared reasonable, that would give a value for the company of £950,000, which would mean that SMAL's 50% shareholding would be worth about £475,000, significantly less than the price achieved through the forced sale process. She emphasised that this valuation would apply if SMAL bought out MAL. It would not necessarily apply the other way round, though she had no information on which to assess the value of MSAL on that hypothesis.

[178] Ms Porter gave her views on Alternative Scenario 1 (the parties working together to improve the sales and profitability of MSAL) in para.10.12. She approached the matter on the same basis as Ms Longworth, namely on the assumption that the same growth would be achieved on this scenario as would have been achieved had one party bought out the other. Her difference from Ms Longworth was as to what that growth was likely to be. Taking "more realistic levels of sales achievable" as set out above (i.e. 12,000 units in 2009 and 16,000 units in 2010), she calculated the likely net profit at £190,000 (as above), producing a Revised EBIT, once the adjustment was made for rent in the same manner as in Ms Longworth's Report, of £369,000. Using a multiplier of 5, this gave a total value for MSAL of £1,845,000 and a value for SMAL's 50% shareholding of £922,500. Such a figure would mean a loss, compared with the £800,001 actually received for the shares, of £122,500, plus whatever was to be added for legal and other expenses (i.e. the £70,000 referred to by Ms Longworth, which Ms Porter regarded, correctly in my view, as outwith her remit). She regarded this as the very maximum figure for any loss suffered by SMAL. She thought the estimate of 16,000 units sold in 2010, on which the calculation was based, as enthusiastic.

The law

[179] There was general agreement about the basic approach to the assessment of damages in a case such as this. The general principle is that, to the extent that this can be achieved by an award of damages, the innocent party should be put in as near as possible the same position as he would have been in had the contract been performed. I have already referred to the authorities cited by Mr Martin. To these Mr Clark added the following: Walker, Civil Remedies at pp.394-402; McBryde, The Law of Contract in Scotland (3rd Ed.) at paras.22-91 to 22-92; Haberstitch v. McCormick and Nicholson 1975 SC 1; Senate Electrical Wholesalers Ltd. v. Alcatel Submarine Networks Ltd. [1999] 2 Lloyds Rep 423 at paras.30-32. Subject to that overriding principle, there are no fixed rules. Often the question is simply one of fact. The burden of proof is on the claimant. The aim is to do justice between the parties.

[180] It may be that there was a slight difference between the parties on one point. Mr Martin sought to emphasise the fact that in a case of sale of shares (or, indeed, a sale of goods) damages are normally taken to be the difference between the market value of the shares as warranted and the value shares as they in fact are. But even in the case of sale of goods, that is the normal measure only where there is an available market; and, where there is an available market, that is only the normal measure. Mr Clark emphasised that in many cases it will be appropriate to look to the particular position and circumstances of the particular claimant: Radford v. De Froberville [1977] WLR 1262 and Senate Electrical at para.32. Similarly, while damages based on the value of a company (and the shares in it) can usually be assessed by using accountancy tools such as net maintainable earnings and a multiplier, or a variant thereof, that approach may not always be appropriate, for example where the original purchase price was not determined on any such basis: Senate Electrical.

[181] There was no disagreement with the proposition that, in the present case, the value of the shares in SMAL was directly affected, pound for pound, by the value of its then 50% shareholding on MSAL. In other words if, as a result of the breach of warranty, the value to SMAL of that shareholding in the joint venture company was less than it would have been had the warranties been correct, the defenders' loss, which is measured by the difference, on the two hypotheses, in the value of its shareholding in SMAL, could properly be assessed by reference to that difference in the value of SMAL's shareholding in MSAL. As Lord Millet said in Johnson v. Gore Wood & Co [2002] 2 AC 1 at 61G-62G, the correspondence between the value of the subsidiary and the parent is, in such a case, "exact": see also McLeod v. Rooney 2010 SLT 499 at para.[24].

[182] Two further points of law were raised. The first concerned the date for assessment of damages. The second concerned the law on damages based upon loss of a chance. There was, in fact, no great difference between the parties on the law in either of these areas, but I should briefly refer to the relevant arguments and the cases on each point.

[183] As to the date for assessment of damages, Mr Clark submitted that there were two alternative dates upon which it could be said that loss was suffered. The first was the date of completion, 25 April 2007. In a case of breach of warranty, loss is normally suffered on the date of completion: BSA International SA v. Irvine [2010] CSOH 12 at para.[30]; and see also AXA Insurance Ltd. v. Akther Darby Solicitors [2009] PNLR 25 (a case concerned with when the loss was suffered for purposes of limitation) at paras.24-30, 42 and 43. On that date, instead of getting shares in a company which, through its certain shareholding in a joint venture, would be able to influence and benefit from its future, the defenders acquired shares in a company whose shares in the joint venture were at risk of being compulsorily acquired by the other joint venture partner at a "fair value" price fixed by a third party, rather than a value reached on the basis of the true worth of the shares to the defenders. Although that loss was suffered on the date of purchase, its full effect was not worked out until completion of the MAL buy-out. The loss is suffered on the date of purchase albeit quantified afterwards, with the benefit of knowing what actually happened. The alternative view is that any loss occurred only on 16 October 2008, when MAL completed the purchase under the forced sale procedure. Mr Clark submitted that assessment at the date of breach should not be used where assessment at another date more accurately reflected the overriding compensatory rule: County Personnel (Employment Agency) Ltd. v. Alan R Pulver & Co. [1987] 1 WLR 916.

[184] I did not understand Mr Martin to challenge this approach. However, I am not sure that the question of the date on which the loss is suffered is of critical importance in this case.

[185] The question of assessment of damages on the basis of the loss of a chance is perhaps of more importance. It has been the subject of some discussion in both England and Scotland: see, in England, Allied Maples Group Ltd v Simmons & Simmons [1995] WLR 1602; Gregg v Scott [2005] 2 AC 176; Dayman v. Lawrence Graham [2008] EWHC 2036 (Ch); 4Eng Ltd v Harper and another [2009] Ch 91; and Parabola Investments Ltd v Browallia CAL Ltd [2010] EWHC Civ 486; and, in Scotland, Paul v. Ogilvy 2001 SLT 171. Mr Clark submitted that where the assessment of loss is dependent to some extent on future events and also upon what a third party would have done in circumstances which might have occurred (but, ex hypothesi, did not), then it may be appropriate to make the assessment on the basis of the percentage prospects of a particular set of events occurring. I did not understand Mr Martin to dispute the availability of this approach in principle. But he sought to emphasise a number of points. First, he submitted that the claimant must show that he had had a "real and substantial chance" of obtaining the benefit which he claims to have lost, as opposed to a merely "speculative" one: per Stuart Smith LJ in Allied Maples at pp. 1609-1612. Second, under reference to the Opinion of Lord Hamilton in Paul v. Ogilvy, he submitted that the issue is relevant to two different stages of the enquiry, namely that of causation (whether any loss has been caused) and quantification (measuring such loss). Third, under reference to paras.81 and 82 of the judgment of the Deputy Judge in Dayman v. Lawrence Graham, he contrasted the position of the claimant himself with that of the third party. Where the actions of the third party were concerned, the court must assess whether there was a real and substantial chance of the third party acting in a particular way; but where the actions of the claimant are concerned, the question is what, on balance of probabilities, he would have done. I accept these submissions, with the caveat (if it is one) that it may not always be possible to apply the "disciplined, and principled, approach" described by the Deputy Judge in Dayman, by which the court in effect reconstructs the bargaining process by working through the different positions which the third party might have adopted (using the test of a real and substantial chance) before reaching a position at which the claimant would (on balance of probabilities) have struck a deal; and, in any event, a formulaic application of that approach must not be allowed to get in the way of a robust assessment of the evidence as a whole.

[186] In light of the above, Mr Martin submitted that it was for the defenders to prove what they and MAL would have done in respect of the future of MSAL. The test to be applied in the case of the defenders was that of a balance of probabilities. The test in the case of MAL, a third party in this analysis, was that of a real and substantial chance. I accept that submission.

Discussion

[187] The defenders' case is straightforward. They purchased the whole shareholding in SMAL for £15m. For that price they acquired the whole of SMAL's interest in its subsidiaries and certain 50% owned joint venture companies, including MSAL. They viewed MSAL as under-performing and capable of improvement both in terms of sales and profitability. The purchase price of £15 million included an amount (on the evidence of Mr Richards, perhaps £2.75 - £3million) reflecting their assessment of the value of the opportunity of realising the untapped potential of MSAL. That improvement might have been achieved in a number of ways: by SMAL buying out the other joint venture partner, MAL; or by continuing with the joint venture and improving its performance; or, at worst, by negotiating a sale of their 50% shareholding to MAL. The realisation of this benefit to the defenders depended upon that part of the assets of SMAL being as warranted, i.e. upon them having (indirectly) acquired the 50% shareholding in MSAL with no compulsion to sell it. In fact the opportunity of realising that potential was taken away from them at the time of the share purchase (or soon thereafter), because the Articles of Association of MSAL contained a provision allowing MAL to buy SMAL out of the MSAL joint venture if there was a change of control of SMAL. In effect, the assets of SMAL, which the defenders purchased, were not as warranted. One of its assets, its 50% shareholding in MSAL, had built into its acquisition a time-bomb primed to explode at the moment of completion of the SPA, with the result that it was unlikely that they could ever be in a position to unlock MSAL's potential. Put simply, the defenders did not get what they paid for.

[188] In this case, it is possible to limit the focus of enquiry to an assessment of the difference between the value to SMAL of its 50% shareholding in MSAL (a) on the assumption that the Articles had not contained the change of control provision, and (b) with the Articles as they were, with a change of control provision. There is no difficulty in assessing the value of its shareholding in the latter case. The existence of the change of control provision in the Articles led directly to SMAL being forced to sell its shareholding to MAL for a consideration of £800,008. That amount was determined by PWC to be the "fair value" for SMAL's 50% interest. A sale at a "fair value" assessed by a third party was what was required by the Articles. The agreement reached by SMAL and MAL as to the precise definition of that "fair value" did not innovate on that test. The argument that it did in some way innovate on that test, so that any failure of the forced sale process adequately to compensate the defenders for the loss of their shareholding could be said to stem from their own voluntary act in entering into that agreement with MAL, was never fully developed, but I am satisfied, in any event, that it is without merit. Nor do I consider that there is anything in the suggestion, raised rather tentatively by Ms Porter in her evidence, that PWC may have undervalued SMAL's shareholding in MSAL, so that the defenders' complaint, if any, should be directed at them. There was no evidence to support such a case. I therefore proceed upon the basis that SMAL's 50% shareholding in MSAL was properly valued at £800,008. That figure, therefore, represents the value of SMAL's 50% shareholding in MSAL with the change of control provision in the Articles. The critical question, therefore, is: what would have been the value to SMAL of that 50% shareholding had there been no change of control provision in the Articles of MSAL?

[189] The answer to that depends principally on an assessment of the factual evidence.

[190] Before turning to look at the matter in any detail, I should record that I accept the evidence of Mr Rijkse and Mr Richards that, when contemplating and going through with the process of acquiring the shares in SMAL, they intended to enhance the value of the companies within the SMA Group and, as part of that, the value of MSAL, which was 50% owned by SMAL. Put very simply, that was their business and that was why they were acquiring the shares. They were in the business of improving the profitability of any business acquired by them and realising a profit by selling in the medium term. They thought that SMAL was underperforming and saw an opportunity of improving its profitability. Post acquisition they would have directed their efforts to achieving this. Bob Anderson approached the matter from a different background, but he shared with Messrs Rijkse and Richards the perception that SMAL was underperforming and the intention of improving the profitability of the business.

[191] I also accept that MSAL itself, as a business, was underperforming. This was clear not only from the evidence of Mr Rijkse, Mr Richards and Bob Anderson, but also from that of Mr Flynn. The reasons for this are not hard to discern. They broadly reflect those set out in the note of the meeting between Mr Flynn and Bob Anderson of 22 May 2007 which I have quoted at length. MAL had no incentive to increase the sales through the joint venture at Siemens Street. Neither did SMAL. There was beginning to be a rivalry between them, and a measure of distrust. None of this was conducive to the expansion of the business. And even without those factors, there were inefficiencies in the running of the Siemens Street site as a joint venture separate from the core businesses of the two joint venture partners. For what it is worth - and it may not be much, since the assessment is ultimately a factual one outwith their accountancy expertise - the underperformance of MSAL was an assumption underpinning the expert evidence of Ms Longworth and, in some places, Ms Porter, who both, in their calculations, gave figures for the value of MSAL on the basis that there would have been an improvement in its performance, though they differed as to the extent of that improvement.

[192] It is tolerably clear on the evidence, and I did not understand this to be disputed by the experts, that the PWC valuation was arrived at by a method involving the assessment of maintainable earnings and applying a multiplier to the figure thus obtained. That is a perfectly proper basis of valuation and, in the circumstances of valuing a company as a profitable going concern, is likely to be the appropriate method. Such an assessment involves a historic analysis of earnings in the years leading up to the valuation. It does not take account of the fact, if it be a fact, that earnings over the previous years may have declined because of the friction between the joint venture partners, nor of the possibilities of improvement inherent in the company coming under single ownership. I therefore do not accept the argument advanced by the pursuers that the "fair value" fixed by PWC fully compensated the defenders for the loss of their shareholding in MSAL.

[193] It follows from the above that the defenders are likely to have suffered some loss by reason of the breach of warranty. They bought a company (SMAL), one at least of the subsidiaries of which (MSAL) had potential for improvement in its sales and profitability. They had the ambition to release that potential. Their ability to unleash that potential and reap the benefit of any such improvement, was removed by reason of the fact that the Articles of MSAL included a change of control provision, the exercise of which by MAL required them to sell their shares and deprived them of the opportunity any longer to be involved in the affairs of MSAL. In return for the shares which they had to sell to MAL, they received a "fair value" which, being historically based, gave no value to the potential for improvement in MSAL if it reverted to single ownership and cast off the factors which where inhibiting its development. The valuation of that loss is a matter for detailed discussion, but the starting point must be that the defenders are likely to have suffered a loss. The only question is quantification.

[194] In assessing what loss, if any, the defenders have suffered, the starting point is to try to assess what would probably have happened had the MSAL Articles not contained a change of control provision - and when I say "probably", I include within the range of matters to be considered the rather more complex exercise which I have described in paras.[]-[] above. As to this, Mr Clark submitted that there were, in reality, only two alternatives that needed to be considered: either one party would have bought out the other; or the parties would have made an effort to improve the performance of the joint venture (on the assumption that their initial antagonism would have been overcome and they would have said, in effect, "let's make the best of it"). For the reasons set out below, I think that is correct. I am persuaded that the parties would not simply have allowed the joint venture to continue running along inefficiently. That the defenders would not have wanted this follows from what I have already said. I am not prepared to assume that MAL would have acted against its own interest in this respect (of course there might have been "posturing", but this has to be disregarded: c.f. Dayman at para.82). Nor is it at all likely, to my mind, that either party would have allowed (or caused) MSAL to be wound up. Andrew Anderson, who had worked with Mr Flynn in SMAL up to the time of the defenders' acquisition of the shares, spoke in his evidence of an unspoken recognition in the years before the share purchase that "the likely or necessary fate of the joint venture would be that one party would have to buy out the other". There is, of course, the possibility that MAL would have tried to buy out SMAL. According to Mr Flynn's account of the relationship between the parties given to Bob Anderson on 22 May 2002, Mr Bailey had made an offer in 2004. And he had made offers more recently than that, albeit that one of them was made in the changed circumstances of the forced sale provisions having been triggered. I did not hear evidence from Mr Bailey.

[195] The defenders' primary case was that SMAL would have bought out MAL. Applying the approach in Dayman, Mr Martin submitted that for this primary case to succeed the court would have to be satisfied of the following: (i) that on balance of probabilities SMAL would have tried to buy out MAL; (ii) that there was a real and substantial chance that MAL would have been willing to negotiate with SMAL with a view to selling them their shares in MSAL; and (iii) that there was a price for MAL's shareholding in MSAL which SMAL would, on balance of probabilities, have been willing to pay and which there was a real and substantial chance that MAL would have been willing to accept. I am compressing into three steps what Mr Martin set out in four, but I do not consider that there is any material difference between the two formulations. Point (iii) can, of course, be expressed the other way round, by asking whether there was a real and substantial chance that MAL would put forward a price which SMAL would, on balance of probabilities, have agreed to pay, but I do not think that it makes any difference to the enquiry. The approach starts by focusing attention on MAL's bottom line, i.e. the lowest price at which there was a real and substantial chance they might be willing to offer their shares to SMAL and asking whether, on balance of probabilities, SMAL would have agreed to pay this price. If the answer is No, then the defenders' case based on this scenario must fail. If, however, the answer is Yes, then it is necessary to work upwards from MAL's assumed bottom line and see if there is a price which they might have asked for above their bottom line which SMAL would, on balance of probabilities, have accepted. I consider that this accurately reflects the approach outlined in Dayman. It is a useful tool is providing the answer to the broader question in which the court is interested, namely: could SMAL have bought MAL's shareholding and what price would it have had to pay?

[196] Mr Martin submitted that since no evidence had been led from MAL as to the price at which they would have been willing to sell their shares, the defenders' primary case must fail. All but two of the offers put forward by the parties, to which I have referred earlier were made after the change of control issue had arisen and were therefore not a reliable guide to what would (on the respective tests) have happened if there had been no change of control provision in the Articles.

[197] I do not accept such a cut and dried approach. I am satisfied on the evidence that, on balance of probabilities, SMAL would have tried to buy out MAL. This conclusion is supported by the evidence of Messrs Rijkse and Richards and by that of Bob Anderson, and I see no reason to doubt it. Nor do I have any reason to doubt that there was a "real and substantial chance" that MAL would have been willing to negotiate with SMAL with a view to selling them their shares in MSAL. As I have said, I did not hear evidence from Mr Bailey. I accept that relations between MAL and SMAL in connection with the MSAL joint venture had deteriorated well before the share purchase. Nor, when they first approached the matter after completion of the SPA, were the actions of SMAL calculated to improve matters. But Mr Bailey was a businessman and I have little doubt that he would, at the right price, have been willing to sell. By the same token, however, I am also satisfied that MAL would have tried to buy out SMAL. And at the right price SMAL would have been prepared to sell. The difficult questions are: (a) would either have been willing to offer a price which the other would have accepted; if so, (b) which party would have made that offer; and (c) what would have been the price? These questions are not easy to answer. And they over-simplify the matter, because they ignore the question of timing. Might the parties have worked together for a while, and, if so, for how long, before one offered enough to tempt the other? Whatever the answers to these questions, one thing does appear to be clear; if either SMAL or MAL had prevailed, in the sense of persuading the other to sell, it would have had to offer a price significantly in excess of an objectively ascertained market value. Both sides had an interest in retaining an involvement with the site. The reasons why they entered into the joint venture in the first place still held good. They would not lightly have given that up.

[198] On the evidence I think it more likely than not that at some stage one party to the joint venture would have bought out the other at a negotiated price. But I cannot on the evidence say which party would have bought out which, when and at what price. Nor, ultimately, does it matter. For, as Mr Clark submitted, there is no reason to believe that one party would have been prepared to sell to the other at a price which gave them less than they could reasonably have anticipated receiving had the joint venture continued with a new willingness to improve its performance - and, for different reasons, I have already said that I consider that whichever party bought out the other would have had to pay over the odds. Accordingly, any calculation of the loss suffered by the defenders for breach of warranty which proceeds on the hypothesis that MAL would have bought out SMAL, or vice versa, is unlikely to produce a figure for loss which is lower than that which results from the "working together" scenario. Mr Clark was content that I should approach the question of damages on this restricted basis; and it is an approach which cannot, in my opinion, work to the disadvantage of the pursuers.

[199] I therefore turn to consider how the joint venture would have performed if the parties had put aside their differences and decided to make a go of it. Both Ms Longworth and Ms Porter base their calculations on the forecast results for the year ended 31 October 2010. Ms Longworth takes the defenders' own forecast of 19,448 units sold for that year giving a net profit of £631,000. Having "stress tested" those figures, she is prepared to regard them as realistic. Ms Porter, on the other hand, suggests a maximum of 16,000 units sold in that year (para.9.8) leading to a net profit of about £190,000 on the assumption that the costs shown in Ms Longworth's calculations would not be significantly reduced (para.9.9). Ms Porter's main reasons for preferring a lower figure for sales are set out in para.9.5 and 9.6 of her Report. The principal reason, set out at para.9.6, is that a very large part of the sales in previous years had been fleet sales. If the joint venture with MAL came to an end, so would MAL's contribution of fleet vehicles: see para.[177] above. This is a powerful argument if one is predicting unit sales for 2009 and 2010 on the basis of SMAL buying out the shares of MAL, though it cannot be assumed that all of the fleet sales previously brought in by MAL would have been lost to the business. But this particular argument disappears if the prediction of unit sales for those years is on the basis that the joint venture is to continue, at least for the short to medium term. Another reason for Ms Porter opting for a low figure for unit sales in 2010 is that she does not accept that the relationship between SMAL and MAL was poor and had an adverse effect on the performance of MSAL. I have already made it clear that I consider that the strains in the relationship did have a negative impact on MSAL's performance. Although I accept some of Ms Porter's other concerns, in particular a very pertinent general question as to where any new business would come from, I consider that these two factors have unduly reduced the figure for units likely to have been sold in 2010 had the joint venture continued. In addition, it should be noted that Ms Porter's figure of 16,000 units leads to a net profit percentage of only 9%. While I accept Ms Porter's concern about the profit percentage on Ms Longworth's analysis rising from 12% in 2009 to 25% in 2010 and 2011 (see her para.4.55), I do not accept that it was likely to be as low as 9% in 2010 in the context of the joint venture continuing. However, I agree with her that the figures put forward in the model provided to Ms Longworth by the defenders are on the optimistic side. Units sold fell to 14,783 in the year ending 31 October 2007 and 12,163 in 2008, from a high of 19,646 in 2004 and 18,001 in 2005. It may be that the figures for 2007 and 2008 are unduly low due to the change in control occurring at that time, but I think it unlikely that they could rise as high as 19,448 by 2010. On the other hand, I see no reason not to assume that there would be a trend back up to the 2004 and 2005 levels, even if those levels were not achieved by 2010. Doing the best I can on the evidence, I consider that the valuation of the shares should be based on a figure for units sold in 2010 of 17,500. This is slightly lower than the figure used by Ms Longworth in her stress testing at para.9.9 of her Report.

[200] The figure of 17,500 units sold in 2010 leads to a net profit for that year of £375,500, assuming that all costs remained the same: the calculation can easily be done using as a base Ms Longworth's table at para.9.9, set out at para.[161] above. That shows a net profit percentage of something under 17%, which seems to me to be reasonable. The rent saving of £179,000 (£256,000 - £77,001) has to be added to this, on the basis that the joint venture would continue to benefit from the artificially low rent for the main premises. That produces a revised EBIT of £554,500. To that I would apply a multiplier of 5. Both experts agreed that such a multiplier was reasonable, though Ms Longworth suggested that a higher one might be used if the net profit were reduced, the principle being that a higher multiplier can be justified if the profit figures are more robust. I do not disagree with that approach in principle, but I do not consider that the figure for sales of 17,500 units is so robust as to justify the use of a higher multiplier. Multiplying £554,500 by 5 gives a total value for MSAL of £2,772,500 and a value of £1,386,250 for SMAL's 50% shareholding in it. After giving credit for the £800,001, that results in a loss to SMAL of £586,250.

[202] There remains to be considered the claim for £70,000 for the legal expenses incurred in resisting MAL's claim in the English litigation, and the claim for £9,408 paid to Drivers Jonas for their work in respect of the valuation by PWC. No evidence was led to support the Drivers Jonas fee and I therefore reject that claim. Nor can I accept that the £70,000 spent in defending the English proceedings is recoverable. Faced with the existence of the change of control provision, the defenders had a choice whether to accept the consequences vis à vis MAL or to challenge MAL's insistence on its rights under that provision. Whether it was reasonable or unreasonable to oppose MAL on this issue is not the point. It was a voluntary act on the part of the defenders which was not caused by the breach.

Disposal

[203] In light of my conclusions on the matters covered by this Opinion, I shall repel the pursuers' pleas-in-law in the counterclaim to the extent of granting decree for payment by the pursuers to the defenders of £586,250 in terms of the First Conclusion therein. As regards the Second Conclusion in the Counterclaim, and the Conclusions in the principal action, I was invited by the pursuers to put the case out By Order for disposal of those aspects, and I shall do so.