Barclay brothers accused of 'illegal strategy' to dominate Mayfair hotel

http://www.guardian.co.uk/media/2013/feb/05/barclay-brothers-paddy-mckillen-appeal

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A flurry of complex deals struck by the Barclay brothers to gain a controlling stake in the £1bn Mayfair hotel group behind Claridge's involved a "quite astonishing, even grotesque," attempt to freeze out major investor Paddy McKillen, three appeal court judges were told on Tuesday.

Lord Goldsmith QC, the former attorney general, accused Sir David and Sir Frederick — best known as the owners of the Ritz and Telegraph newspapers — of deploying a clever, but ultimately illegal, strategy to dominate the hotel business.

The strategy, explained Goldsmith, counsel for McKillen, involved side payments to the family of fallen property tycoon Derek Quinlan, a former business partner of McKillen, who was drowning in debt.

Quinlan, it was suggested, was important to the Barclays because he still owned a one-third stake in Coroin — the company behind Claridge's and sister hotels The Berkeley and The Connaught — even though the value of his shares was less than the borrowings against which they were pledged.

Goldsmith is seeking to overturn a judgment handed down by Mr Justice David Richards last August which found there was nothing improper about a pact entered into by the Barclays and Quinlan. The judge ruled he saw no evidence suggesting advances of £1.86m and €1m from the brothers, between late 2010 and early 2012, were part of a contract struck with the Quinlans.

The Barclay twins declined to appear in court during the 30-day hearing last year, but in a witness statement — released to the Guardian only after the intervention of Justice Richards — Sir Frederick insisted financial assistance had been offered to Quinlan's family purely out of friendship. "Helping the Quinlan family in their time of need was something that I will never regret and I would not hesitate to do it again if necessary, regardless of anything to do with Coroin [the disputed hotel group], which is irrelevant to how I feel on this issue."

He added: "My brother and I deeply resent the suggestion that we have been party to an unlawful conspiracy," noting that they had been family friends with the Quinlans for some years.

At the heart of the dispute is an agreement between Coroin shareholders which had been designed to remove concerns that one of their number might sell to an outside shareholder who might come to dominate the business. Under so-called "pre-emption provisions" in the agreement, any shareholder wishing to sell shares must first offer them to existing investors.

At the start of 2011, however, the Barclays effectively acquired its first stake in Coroin from the wealthy Green family from Manchester. McKillen later launched a failed legal battle claiming that these shares should have first been offered to him and other existing shareholders under the pre-emption rules. That legal action was defeated in the courts because the Barclays had in fact acquired the Green's ownership vehicle, a Cyprus-based company, rather than the Coroin shares themselves.

Shortly after acquiring the Greens' interest, the Barclays struck a series of deals with Quinlan that effectively gave them control — though, crucially, without officially purchasing the shares. This has given them effective control of Coroin, with a two-thirds holding.

Goldsmith on Tuesday suggested Justice Richards' findings were flawed because they did not properly consider the Barclays' actions in their entirety, nor their practical impact. "A deliberate and calculated attempt was made to circumvent the pre-emption provisions and the practical effect of the steps taken was the same as if Mr Quinlan had sold his shares," he said. "It is quite astonishing - I dare even to say grotesque - that he [McKillen] was not given the opportunity to bid for Mr. Quinlan's shares under the pre-emption provisions."

Goldsmith added that the strategy to win control of Coroin ought to be considered in its totality, and not "in a blinkered and unrealistic way". He suggested Justice Richards' compartmentalised approach had been "very reminiscent, the court may think, of the way that tax avoidance schemes used to be considered. What he did not do is to consider the clauses commercially or purposively.".

The brothers' chief lieutenants, led by Sir Frederick's former son-in-law Richard Faber, have made no secret of the fact that, in their efforts to win control of Coroin, they took particular care not to trigger pre-emption provisions.

The appeal hearing continues.