The client was involved in establishing a UK company with three other business partners based in Italy. The company specialised in the manufacture and supply of industrial machinery, including winders and rewinders used within production lines for packaging businesses.
The business model was structured around the UK company managing sales, marketing and administration, whilst manufacturing operations were intended to take place in Italy through a manufacturing establishment. The parties agreed that they would operate the business jointly, with each partner holding an equal shareholding.
The client invested significant time and financial resources into developing the company. The UK company funded various business expenses, including design and manufacturing drawings, machine operating software, IT equipment and support, website development, marketing, and materials required for machine production. The total investment made into the business was approximately £20,000.
A shareholder agreement was prepared which recorded the intention that the four partners would operate the business together and contained provisions including obligations to act in good faith and a non-compete clause.
The client’s position is that, without his agreement or consultation, three of the other partners established separate companies in Italy using the same company name and business model. The client alleges that these Italian entities were created to divert existing customers and business opportunities away from the UK company.
The client became aware that customers who had previously been engaged through the UK company were redirected to the Italian operation. The client identified several orders which he believes should have generated revenue for the UK company, including:
Recticel – approximately £10,500;
GPS – approximately €330,000;
Postumia – approximately €50,000.
The total value of these orders was approximately €390,500.
The client believes that the actions of the other shareholders caused significant financial loss and damage to the UK company. He seeks compensation of approximately €200,000 based on the revenue and business opportunities allegedly diverted away from the UK operation.
The client also wishes to understand his options regarding potential legal action against the former business partners and the Italian company.
The principal issue is whether the other shareholders breached their obligations to the client and the UK company by establishing a competing Italian business and diverting customers and business opportunities.
Counsel considered whether the actions of the other shareholders amounted to a breach of the shareholder agreement, particularly the obligations to act in good faith and the restrictions contained within the non-compete provisions.
A further issue concerns the legal relationship between the UK company and the Italian company. Counsel considered whether the Italian company was intended to operate as part of the wider business structure of the UK company or whether it was established independently in a manner detrimental to the client.
Counsel considered the importance of the shareholder agreement, despite it referring to a proposed foreign company structure rather than specifically the UK company. Counsel advised that an argument may be advanced that the parties’ intention was always to create and operate the UK company together and that the agreement should be interpreted accordingly.
A further issue concerns the evidence required to demonstrate the alleged diversion of business opportunities, including customer communications, invoices, bank records, emails and evidence showing that orders originally belonged to the UK company.
Counsel also considered jurisdictional issues, as the other shareholders are based abroad and any proceedings would potentially involve service of documents outside England and Wales.
Counsel advised that there appeared to be potential grounds for bringing a claim against the former business partners based on the alleged diversion of company business and breach of their obligations as shareholders and directors.
Counsel advised that the first step would be to gather further evidence, including:
The email notifying the client of the creation of the Italian company;
Communications with the other shareholders regarding the decision to establish the Italian operation;
Evidence of customer diversion;
Copies of invoices and payments relating to diverted orders;
Any correspondence relating to access to company accounts and financial information.
Counsel advised that the shareholder agreement would be central to the claim. Although the agreement referred to a foreign company structure, Counsel considered that arguments could be made that the agreement reflected the parties’ intention to establish and operate the UK company together and that the obligations contained within it should apply.
Counsel advised that proceedings could potentially be issued in England and Wales against the shareholders, with applications required to serve proceedings on parties located in Italy and Switzerland.
Counsel advised that a letter before action should be prepared setting out the allegations, including:
The establishment of competing businesses;
The diversion of customers and revenue;
Breaches of shareholder obligations;
The financial losses suffered by the UK company.
If the parties failed to engage, the client could consider issuing a Part 7 claim seeking damages and other appropriate remedies.
Counsel advised that the client should not liquidate or strike off the UK company whilst considering legal proceedings, as maintaining the company’s existence would be important in pursuing claims. The client could cease trading if necessary but should retain the company structure and relevant records.
Overall, Counsel advised that the client appears to have an arguable claim that the other shareholders acted in breach of their obligations by diverting business opportunities away from the UK company. Further evidence would be required to assess the strength and value of the claim before commencing proceedings.
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