32. The terms of the Draft Agreement are unusual. On its face the Draft Agreement indicated that Alan Thompson was funding or intended to fund the acquisition and holding by Hamish McHardy of 375,000 Kerifresh shares by an interest-free loan from Thompson to McHardy. That loan could be recalled by Thompson at any time, the loan being repaid by the return of 375,000 Kerifresh shares to Thompson. The economic interest in these shares remained with Thompson although there was no provision for Alan Thompson to exercise the voting rights attached to them.
33. Hamish McHardy and Alan Thompson confirmed in evidence and submissions at the first Panel meeting that they had entered into an agreement, ("the 2002 Agreement") albeit unsigned, essentially in the same terms as the document set out in paragraph 31 above. However, the actual numbers which they agreed were 361,000 Kerifresh shares to the value of $245,000. As provided for in clause 4 of the Draft Agreement, they confirmed that under the 2002 Agreement, the "debt" could only be repaid by Alan Thompson recalling the 361,000 Kerifresh shares so held by Hamish McHardy. Accordingly, the 2002 Agreement amounts to a warehousing arrangement, under which Hamish McHardy would hold Kerifresh shares, paid for by Alan Thompson, on behalf of Alan Thompson.
34. While the 2002 Agreement did not confer voting rights in the shares on Alan Thompson the 2002 Agreement gave him an equity interest in 361,000 Kerifresh shares originally held in the name of Hamish McHardy.³
35. The Panel took evidence on how Jonathan McHardy became involved in the Kerifresh investment in May 2002.
36. Jonathan McHardy, in his written statement of evidence for the 7 November 2007 meeting, said that it was his decision, and not Hamish's, to increase the Murrayfield Trust's holding of Kerifresh shares in 2002. He said that:

...also, to the best of my memory, I was not aware of the transactions that led to the alleged association between Hamish and Alan Thompson in May 2002. I was not aware of the details of the so called "warehousing" at all until Hamish unwound the arrangement in 2005, and the details only became fully clear to me due to the recent determination of the Takeovers Panel.

Further, for the whole period the Trust has owned the shares, I, like Hamish, have considered myself completely independent of Mr Thompson and free to act as I wished.

have met and spoken to Mr Thompson only once in my life, which was when he was in New York on 24 August 2007 as part of marketing Kerifresh's crops where we discussed the company and its prospects.

37. During the course of his videolink evidence, Jonathan McHardy said that he had become involved in the purchase of the Hendls' shares because of his father. He said that to the best of his recollection all communications relating to the Murrayfield Trust acquisition of shares in Kerifresh came through the person of his father. To the best of his knowledge all that happened was that Hamish asked him if the Murrayfield Trust would like to buy just under 600,000 shares at 68 cents per share, to which he had said "yes". He remembers that at the beginning he⁴ had more shares than his father held personally.
38. Jonathan McHardy was asked how the division of the Hendl shares between his father and the Murrayfield Trust was determined. Jonathan McHardy was asked if this had just been presented to him as the number available or whether there had been any discussion about how the Hendl holding would be divided between Hamish McHardy and the Trust. He said:

No from memory I believe my father had a certain amount of money he wanted to invest himself and the balance of the shares he was happy for the Murrayfield Trust to buy, if I wanted to buy them.

Asked if he knew how much Hamish had to invest, Jonathan replied:

No, although I remember at the beginning of this I think I had more shares than he did. That's my memory and the reason I remember that is he thought 68 cents was a good price and I was able to buy more shares than he did.

39. The Panel questioned Jonathan McHardy as to how he could know of Hamish's lesser economic interest in Kerifresh from the time of acquisition of the Hendl shares up until 2005 when Hamish McHardy always had more Kerifresh shares in his name (and that of his company Sundry Investments Limited) than did the Murrayfield Trust (the trustees of which were Jonathan and Hamish McHardy). He was asked what caused him to know in 2005 that he, i.e. the Trust, had had a greater economic interest in Kerifresh than his father. He said:

The reason I remember that I did become aware in '05 that was the first time it was clear that he had actually purchased in terms of economic ownership additional shares and the reason that lodges in my mind is obviously at that point once he'd unwound that transaction and bought the extra shares he had 812,000-odd shares - more than I did.

Asked again what it was in 2005 that caused him to know that there had been a different number of shares acquired than he had previously thought, and whether he had been monitoring the share register, he replied:

No, no. I mean initially I think my father - in terms of economic ownership - you know I had more shares than he did in terms of economic ownership. In terms of obviously when he unwound the warehousing and he actually bought more shares at a somewhat higher price, he then moved to have a greater number of shares than I did.

Asked again how Jonathan knew that he had a greater amount of interest than his father, Jonathan said:

Just because I thought I had a bigger stake in the company than he did.

Asked where the information came from that led him to believe that Jonathan said:

It was from Hamish.

40. In summary, Jonathan McHardy:
    1. Denied any knowledge of the total number of shares held by the Hendls at the time of the purchase of part of the Hendl holdings by himself and his father, Hamish, as trustees of the Murrayfield Trust;
    2. Denied any knowledge of the actual number of shares acquired by his father, Hamish, from the Hendls contemporaneously with the purchase by himself and Hamish as trustees of the Murrayfield Trust;
    3. Said that he was aware that he, i.e. the Trust, had had a greater economic interest in Kerifresh than had his father Hamish McHardy (personally and through his investment company Sundry Investments Limited) up until 2005.
41. The Panel noted that Kerifresh's annual reports do not list the shareholdings of the largest shareholders nor those of the directors. However, the financial statements of the Murrayfield Trust, which were provided to the Panel, do show the number of shares held by the Trust. Accordingly, it was not due to publicly available information that Jonathan McHardy could have known of his greater, and then lesser, economic interest in Kerifresh than that of Hamish McHardy.
42. Hamish McHardy, in a written statement for the meeting of 7 November 2007, said that he did not accept the Panel's view that he was an associate of Alan Thompson in 2002 but that, if he was, then he was not an associate from 2005 onwards (once the warehousing arrangements were unwound).
43. In respect of the 2002 arrangements for the purchase of the Hendl Kerifresh shares Hamish McHardy said in his written submission for the 7 November 2007 meeting:

While I have previously acknowledged that I may have been an associate of my son Jonathan, it does not follow that he is an associate of Mr Thompson. I do not think Jonathan even knew of the arrangement I made with Mr Thompson in 2002. In fact, Mr Thompson is practically unknown to Jonathan (he only met him recently) and neither could nor should be treated as associates of the other.

...

Jonathan, from a practical perspective, has total control of Murrayfield Trust in terms of appointing trustees, and over the Trust's investments. Jonathan was not involved with, and I do not think even knew about, the arrangements I made with Mr Thompson in 2002. Jonathan has met Mr Thompson only once which was in August this year in New York. I do not see how Jonathan and the Murrayfield Trust can in any way be associates of him.

In any event, I understand the Murrayfield Trust has, prior to the Turners and Growers Takeovers Notice, unconditionally sold its shares to a corporate trustee of Jonathan's pension plan, which is completely independent of me and cannot be fixed with any association I am supposed to have.

44. The Panel was told by Graham Cowley (who was the subject of a Panel finding) at the first Panel meeting that during the early months of 2002 the Hendls had decided they wanted to sell their Kerifresh shares and that they had approached him, Graham Cowley, up until July 2001 a director of Kerifresh, to arrange the sale of their shares. This evidence has been subsequently disputed by Peter and Linda Hendl in correspondence with the Panel. Peter Hendl advised the Panel that he had no particular wish to sell his shares but was approached by Cowley, who said he had a buyer who wanted to purchase the shares. The Panel has not drawn any adverse inference or conclusion from this disputed testimony.
45. From evidence at the first Panel meeting the Panel was told that Hamish McHardy was identified as a possible purchaser of the Hendls' shares and that Alan Thompson was encouraging Hamish McHardy to acquire those shares. Hamish McHardy was interested in investing but said he wanted Alan Thompson to acquire some of the Hendls' Kerifresh shares himself, thus increasing his (Thompson's) commitment to Kerifresh. In submissions to the first Panel meeting Alan Thompson's additional investment (albeit in the name of Hamish McHardy) was described as being a condition of Hamish McHardy's investment in Kerifresh.
46. Both Hamish McHardy and Alan Thompson explained at the first Panel meeting that the reason why the warehousing agreement was implemented was so that Thompson's name would not appear as the purchaser of any of the Hendl shares. The rationale for this was that, for a number of reasons given in evidence at the meeting, they did not want Hendl to know Thompson was a buyer of Hendl shares. Both Hamish McHardy and Alan Thompson said at the first Panel meeting that they did not appreciate in 2002 that a small unlisted public company like Kerifresh could be caught by the Code. Hamish McHardy said that he became aware of the Code's application some months later while Alan Thompson was less certain.
47. In May 2002 Alan and Helen Thompson held 18.49% of the voting rights in Kerifresh.⁵
48. The provisions of rule 4 of the Code defining "associates" are set out above (see paragraph 26).
49. In the Panel's view, as expressed in the Determination of 18 October 2007 following the first Panel meeting, Hamish McHardy and Alan Thompson, by entering into the 2002 Agreement, formed a business relationship in terms of rule 4(1)(d) of the Code such that, in the circumstances, being the acquisition and holding of Kerifresh shares, they should be regarded as associates for the purposes of the Code.
50. In the Panel's view Hamish McHardy and Alan Thompson also formed an ownership relationship, in respect of the parcel of Kerifresh shares, such that, in the circumstances, they should be regarded as associates for the purposes of the Code. The reasons for this conclusion are set out in paragraph 53 of the Panel's determination of 18 October 2007.
51. In the course of his evidence at the first Panel meeting Hamish McHardy told the Panel that he considered that he and his son were probably associates for Code purposes.
52. It does not follow as a necessary consequence of the associate relationship between Hamish McHardy and Alan Thompson in relation to the acquisition of Hamish McHardy's personal shareholding that there would be an associate relationship between them in relation to any or every shareholding which Hamish McHardy might hold or acquire in another capacity.
53. However in the circumstance of Hamish McHardy's acquisition as trustee for the Murrayfield Trust of the balance of the Hendl parcel at the same time as the acquisition of his personal holding and when, as he explained to the Panel (see paragraph 53(a) of the Reasons dated 18 October 2007), he would not invest in shares in Kerifresh unless Alan Thompson made a similar commitment to acquire Kerifresh shares with his own money, the Panel considers that the respective acquisitions by Hamish McHardy personally and as trustee were so proximate and both dependent on the Thompson commitment that the associate relationship between Hamish McHardy and Alan Thompson also embraced the acquisition of Kerifresh shares in 2002 by Hamish McHardy as trustee of the Murrayfield Trust.
54. Jonathan McHardy, in written evidence received ahead of the Panel's November 7 meeting, confirmed that he and his father undertook a number of investments together as they were co-trustees of the Murrayfield Trust. Jonathan McHardy agreed that he, consequently, was an associate of his father in 2002 for Code purposes, but questioned whether this was still the case in 2007.
55. The Panel confirms its earlier view determined at the first Panel meeting that Hamish McHardy and Jonathan McHardy were associates for Code purposes in 2002. In addition to the personal relationship as father and son, and their common investment interests, they also, as co-trustees of the Murrayfield Trust, had an ownership relationship that made them associates for Code purposes. Nothing the Panel heard at the 7 November meeting has changed the Panel's view of their relationship as associates at 2002. The position in 2007 is considered later.
56. The Panel received no evidence that Jonathan McHardy was directly involved in the negotiations in May 2002 between Hamish McHardy and Alan Thompson over the warehousing arrangements and their entry into the 2002 Agreement.
57. In the absence of evidence of direct participation in the warehousing arrangements by Jonathan McHardy the Panel considers that for Jonathan McHardy to have been an associate of Alan Thompson in 2002 at the time of purchase of the Hendl shares it would have to be shown, at least:
    1. That Jonathan McHardy was aware, at least in broad terms, that Alan Thompson was investing in conjunction with Hamish McHardy when he purchased part of the Hendls' Kerifresh shares in 2002; and
    2. That Alan Thompson's investment in Kerifresh shares, under the terms of the 2002 Agreement, was a material factor in Jonathan McHardy's, and his co-trustee Hamish McHardy's, decision, on behalf of the Murrayfield Trust, to invest in Kerifresh shares in 2002.
58. On the other hand it is not necessary, for the purposes of rule 4(1)(d) and (e) of the Code that Jonathan McHardy should have had any degree of control over Alan Thompson's voting rights, or indeed over Hamish McHardy's voting rights, in order for all three of them to be associates for Code purposes in the context of this transaction.
59. In addressing these issues the Panel noted the following factors:
    1. Kerifresh is an unlisted company with relatively illiquid shares and from all accounts has been performing poorly over many years;
    2. Hamish McHardy proposed making a sizeable investment (around $210,000) personally in Kerifresh. However, as a condition of his investing he required Alan Thompson to make a similar commitment to acquire shares;
    3. Hamish McHardy was a co-trustee of the Murrayfield Trust, a Trust settled for the benefit of his grandchildren. If it was important for Hamish, when investing his own money, to require Alan Thompson to increase his commitment to Kerifresh, then it would have been also important, as a trustee, to obtain the same protection for the beneficiaries of the Murrayfield Trust for their investment being made in Kerifresh;
    4. The evidence obtained by the Panel for the purposes of its inquiries into the Lawrence Fletcher offer (discussed later in this statement of reasons) show that there is a very easy and candid relationship between Hamish and Jonathan McHardy on investment matters. Apart from being father and son they are both experienced and successful business people. In his evidence to the Panel's 7 November 2007 meeting Hamish McHardy said, in response to questions from the Panel's Counsel, Brendan Brown QC:

BB:   Yes, and he's (Jonathan) obviously done very well. You must be very proud of his successes.

HM:   Yes he's a good son to have.

BB:   And would it be fair to say that you think he's got good sort of strategic tactical nous?

HM:   Yeah absolutely. Credit Suisse think so.

BB:   And would you - be fair to say you were happy to have the opportunity to bounce these sort of issues [the position of Kerifresh] off him?

HM:   I think, you know I was an associate of Murrayfields because I'm in the trust deed. And Murrayfield and myself have made - and my company have made these investments. Talking with Jonathan on some of these things where - oh well we pass quite a bit of information together on various things where we've got co-investments and - so I do listen to what he has to say, but I don't follow it always.

Jonathan McHardy confirmed in his evidence that the source of his knowledge about the Kerifresh investment in 2002 came from his father.

5. The Panel believes it is reasonable to draw the inference from their later dealings that Hamish and Jonathan McHardy would also have been candid in their dealings with each other in 2002 concerning the major decision to invest in around 18% of Kerifresh between them. The Panel considers it is reasonable to infer that Hamish and Jonathan would have discussed Hamish's wish to insist that Alan Thompson himself fund around one-quarter of the purchase price of the Hendl parcel.
6. To the extent that the commitment reflected in such an arrangement would also benefit the Murrayfield Trust, the Panel also sees every reason why Hamish would have informed Jonathan about it in the context of communicating to him the merits of the investment which Hamish was inviting the Trust to consider. That would also have been consistent with the dynamics of the relationship between Hamish and Jonathan seen in relation to the Lawrence Fletcher offer;
7. Jonathan McHardy is a very experienced and successful merchant banker. Given his background, the Panel's view is that he would not have made what is a reasonably significant investment in such a company (8.4% of the share capital and around $400,000) without knowing the composition of the shareholding in the company and where the scope for profit from the investment lay;
8. Jonathan McHardy reiterated several times during his video evidence that he thought he had a greater economic interest in Kerifresh shares than did Hamish until 2005, when the warehousing arrangements were unwound. This greater economic interest was despite Hamish McHardy holding more Kerifresh shares in his own name than did Jonathan and Hamish as the trustees of the Murrayfield Trust. Jonathan McHardy was not able to provide any explanation to the Panel for his knowing that he had a greater economic interest in Kerifresh in 2002 than did his father, and that that situation reversed in 2005. The inference the Panel draws from this is that Jonathan McHardy knew of at least the substance, if not the full details, of the arrangements between Hamish McHardy and Alan Thompson;
9. The McHardys divided up the Hendls' discrete parcel of Kerifresh shares between them, down to the last single digit numbers. The Panel's view is that both of the McHardys would have known the number of shares that were to be held by Hamish McHardy in his own name, and by Jonathan and Hamish McHardy as trustees of the Murrayfield Trust;
10. The Panel had considerable reservations about the credibility of the evidence given on a number of matters by both Jonathan McHardy and Hamish McHardy, particularly concerning the nature of the participation of each of them in the acquisition of the shares from the Hendls and concerning Jonathan McHardy's state of knowledge at the time of the warehousing arrangement. In that connection the Panel noted that their written statements were carefully phrased: for example Jonathan McHardy's evidence of his knowledge of the arrangements with Alan Thompson (see paragraph 36) refers to "the best of my memory" which does not preclude that he knew of the arrangements at the time.

60. The Panel concludes, on the basis of the evidence received at the first Panel meeting and the meeting of 7 November 2007, and of the views it has formed, that:
    1. Jonathan McHardy was aware of:
       1. relevant details of the purchase of shares from the Hendls by both his father in his own right and himself and his father as trustees of the Murrayfield Trust;
       2. the particular financing arrangements (see paragraph 32 above) between Hamish McHardy and Alan Thompson, at least in general terms, at the time that the Murrayfield Trust acquired 597,316 Kerifresh shares on 29 May 2002;
    2. The financial involvement of Alan Thompson in funding part of the purchase of Kerifresh shares acquired by Hamish McHardy was a material factor in Jonathan and Hamish McHardy's decision, on behalf of the Murrayfield Trust, to purchase 597,316 Kerifresh shares on 29 May 2002.
61. The Panel consequently finds that, in addition to Jonathan McHardy being an associate for Code purposes of Hamish McHardy in 2002, and Hamish McHardy being an associate for Code purposes of Alan Thompson, the nature of the relationship between these three parties is such that, in the circumstances (being the purchase of the Hendls' Kerifresh shares in 2002) Alan Thompson should be considered to be an associate of Jonathan McHardy for Code purposes at 2002 and at least until the warehousing arrangements were unwound in 2005. The Panel makes no finding as to whether that association continued beyond 2005.
62. The Panel determined at its first meeting that at the time that Hamish McHardy purchased 669,200 Kerifresh shares, or 9.43% of the company's voting rights, that holding, when aggregated with those of his associates Alan and Helen Thompson (18.49%) and Jonathan McHardy and Hamish McHardy jointly (8.69%) was well in excess of 20% of Kerifresh's voting rights. None of the exceptions in rule 7 of the Code were used to undertake this acquisition.
63. The 597,316 Kerifresh shares purchased on 29 May 2002 by Jonathan McHardy with his co-trustee Hamish McHardy, when added to the Trust's existing holding of 20,000 shares, equated to 8.69% of total Kerifresh voting rights. When this amount is aggregated with the holdings of Jonathan McHardy's associates, Hamish McHardy in his own right (9.43%) and Alan and Helen Thompson (18.49%), Jonathan McHardy had in aggregate well in excess of 20% of the voting rights in Kerifresh. None of the exceptions in rule 7 of the Code were used to undertake this acquisition and it was accordingly made otherwise than in compliance with rule 6 of the Code.
64. The Panel's conclusion in paragraph 63 above, that the acquisition of 597,316 Kerifresh shares in May 2002 by Hamish McHardy and Jonathan McHardy as trustees of the Murrayfield Trust was not in compliance with rule 6 of the Code, followed from the finding that Jonathan McHardy, Hamish McHardy and Alan Thompson were all associates of each other for the purpose of the acquisition of the Hendl's parcel of Kerifresh shares. That finding of association was made on the basis that Jonathan McHardy had the state of knowledge referred to in paragraph 60 above.
65. However, even if Jonathan McHardy had not had the degree of awareness as found by the Panel in paragraph 60, the Panel considers that, to the extent of any parcel of Kerifresh shares acquired by Jonathan McHardy jointly as co-trustee with Hamish McHardy for the benefit of the Murrayfield Trust during the duration of the 2002 Agreement to which Hamish McHardy was a party, the trustee relationship between Hamish McHardy and Jonathan McHardy nevertheless produced the same outcome whereby there was a failure of compliance with rule 6 of the Code.
66. As noted in paragraphs 49 to 55 above, Hamish McHardy and Alan Thompson were associates for the purposes of the Code by reason of the 2002 Agreement and that associate relationship extended to Hamish McHardy's shareholding in his trustee capacity resulting from the contemporaneous acquisition by the Trust of the balance of the Hendl parcel in 2002.
67. Hamish McHardy and Jonathan McHardy recognised that they were associates at least in 2002 (see paragraphs 51 - 54 above). But in relation to shareholdings which they acquired as trustees their relationship was also governed by trust law. In the context of the Murrayfield Trust's shareholding their capacity to act independently of each other was constrained by their obligations as co-trustees. Trustees are required to act unanimously unless the trust instrument provides otherwise. The copy of the unsigned Deed of Settlement constituting the Murrayfield Trust provided to the Panel provided in clause 30 as follows:

TRUSTEES' MAJORITY DECISIONS

If any dispute or difference shall arise between the Trustees respecting any matter relating to the sale leasing mortgaging investment control management or distribution of the Trust Fund the decision of the majority of the Trustees if there be more than two shall be binding on other Trustees.

68. It was not until September 2003 that a third trustee was appointed in addition to Hamish and Jonathan McHardy who were the original trustees. Consequently during 2002 clause 30 had no application and it would have been necessary for Hamish and Jonathan McHardy to be in agreement in relation to any relevant actions to be taken on the Trust's behalf.
69. In this context the Panel records that a submission was made on behalf of Jonathan McHardy and the Murrayfield Trust to the following effect:

Jonathan was the first-named joint shareholder on the Kerifresh share register for the Murrayfield Trust shares, and, according to clause 11 of the First Schedule of the Companies Act 1993, had control over the Murrayfield Trust's votes while Murrayfield Trust was a shareholder.

71. Clause 11 is a procedural provision relating to the manner of exercise of votes by joint holders at shareholders' meetings. It states:

Where 2 or more persons are registered as the holder of a share, the vote of the person named first in the share register and voting on a matter must be accepted to the exclusion of the votes of the other joint holders.

71. The Panel does not consider that the fact of clause 11 has any implications for co-trustees' obligations of unanimity. Subject to the terms of the trust deed, trustees must act unanimously or not at all and, were a trustee with voting powers to exercise them without the consent of a co-trustee, such conduct might warrant the intervention of the court: Dawson v Dawson [1945] VLR 99; Ford's Principles of the Law of Trusts paragraph [9380].
72. In the particular circumstances, where Hamish McHardy and Alan Thompson were associates, where the Trust's acquisition was promoted by Hamish McHardy whose participation as a Kerifresh shareholder was dependent on the Alan Thompson commitment and where Jonathan McHardy was not at liberty to act independently of Hamish McHardy in relation to the Murrayfield Trust's affairs, the Panel considers that in terms of rule4(1)(e) Alan Thompson should be considered to be an associate of both the co-trustees, Hamish and Jonathan McHardy, in relation to the Trust's acquisition of shares in Kerifresh in 2002. This finding is not reliant on the finding in paragraph 60 as to the extent of Jonathan McHardy's knowledge or understanding about the 2002 Agreement between Alan Thompson and Hamish Thompson.
73. The acquisition of 597,316 Kerifresh shares in 2002 by Jonathan McHardy jointly with his co-trustee Hamish McHardy when aggregated with Hamish McHardy's personal holding and the voting rights held by Alan and Helen Thompson was considerably in excess of 20% of the voting rights of Kerifresh. That acquisition was therefore made otherwise than in compliance with rule 6 of the Code.

Footnotes

3. The Kerifresh shares held by Hamish McHardy were subsequently transferred to Sundry Investments Limited, whose shareholders and directors are Hamish and Audrey McHardy
4. In various parts of his evidence Jonathan McHardy referred to himself when strictly speaking he was intending to refer to the Murrayfield Trust.
5. For the purposes of the Code the Panel aggregates the shareholdings of Alan and Helen Thompson with those of the Thompson Family Trust, of which Alan and Helen were originally the sole trustees. See the Panel's determination of 18 October 2007 for its reasoning.

Index | Previous | Next