Investment manager who left company for competitor entitled to share of profits with former colleagues, appeal judges rule

Richard Bishop was described as a “competing leaver” after leaving the investment company 3i plc to join the Business Growth Fund (BGF) and was told he was no longer entitled to benefit from his investments in seven profit sharing funds.

However, he successfully challenged that decision and judges in the Inner House of the Court of Session upheld a decision of the Lord Ordinary that he should receive the profits of his investments.

Lady Paton, Lady Dorrian and Lord Drummond Young heard that Mr Bishop was employed by 3i for 22 years and had been promoted to head of the global growth capital portfolio before tendering his resignation to join BGF as head of investments in May 2011.

During the course of his employment with 3i, he invested about £350,000 of his own money in seven profit sharing funds.

Investment companies commonly provide an incentive for their employees in the form of “carried interest”.

To receive carried interest, members of the fund’s management team must become a member of the carried interest partnership and sign a limited partnership agreement (LPA).

In order to retain investment teams, LPAs specify that an employee’s right to receive carried interest will depend upon the circumstances in which he leaves his employment.

On his departure, 3i informed Mr Bishop that he was a “competing leaver” in terms of the investment agreements and would therefore lose his right to share in future profits from his seven LPAs.

Instead 3i proposed to return to him a sum of about £90,000, being the value of his share in those funds at the time he left.

However, Mr Bishop brought an action against 3i challenging that decision, arguing that he was wrongly classified as a competing leaver when he joined BGF.

The court heard that BGF was launched in May 2011 to provide growth capital funding of between £2 million to £10 million to UK SMEs, while 3i had moved away from investing in SMEs and had only made one £27 million growth capital investment in the UK in the last five years, instead focussing on providing finance to potentially high growth unquoted global companies.

It was contended on behalf of the pursuer that since BGF operated in a different banding from 3i, the two companies were in different investment product sectors.

For the defender, it was submitted that the parties had clearly intended to apply a wide ranging meaning to the term “competing leaver” and that the relevant clause in the agreement had been framed to act as a deterrent to any employee seeking to find employment elsewhere in the growth capital market.

The Lord Ordinary concluded that the pursuer was not a competing leaver for the purposes of the limited partnership agreements, but the defenders contended that the judge erred in law in a number of respects.

It was submitted that it was appropriate to give a “wide meaning to “competition” in the circumstances of the case, as the purpose of the limited partnership agreements was to provide incentives for 3i’s management by sharing profit with them and managers who left limited partnerships early left the remaining partners to manage the investments and undertake the work required to bring the investments to a successful conclusion.

It was also argued that the Lord Ordinary had given “insufficient weight” to the definition of competing leaver.

It was further submitted that the notion of “actual competition” should be construed “broadly”, as all enterprises engaged in private equity business were capable of competing with each other, for deals, for funds and for staff, and the differences in banding did not preclude competition between 3i and BGF for individual deals.

The Lord Ordinary was also said to have “misconstrued” the provisions relating to “deemed competitors”. It was submitted that the contractual provision should be construed by reference to the circumstances that existed at the date when each of the contracts was concluded.

Further, it was argued that the expression “investment product sector/business line (taken together)” could not be given a meaning if its wording was taken literally, but sense could and should be made of it by construing it as a reference to the totality of all of the different parts of 3i’s business at the date of the contract.

However, the judges ruled that the Lord Ordinary’s findings in fact “clearly justify” the conclusion that BGF and 3i operate in different markets.

Delivering the opinion of the court, Lord Drummond Young said: “Thus it cannot be said that there is competition, in any significant sense, between 3i and BGF. The foregoing applies both to the existence of competition at a general level and to the concepts of ‘investment product sector’ and ‘business line’ as used in…the definition of competing leaver.

“We are equally of opinion that it cannot be said that there was any deemed competition between 3i and BGF. For the reasons already stated we consider that the different banding within which 3i and BGF operate means that it cannot be said that the latter company ‘operates or is intended to operate or is likely to operate… in any… investment product sector(s)/business line(s) (taken together) in which the Manager or any of its Associates operates on… is proposing to operate within the next 12 months’.”