Michael Dell, Lord Johnson and the ‘gun to the head’ meeting that ended a £15bn AI project
In December, billionaire Michael Dell opened an alarming email. “My trust in Mr Bellamy has been undermined by the way he has operated”, the email read, “and I cannot be certain the information he shared with you is accurate or complete”.
The mysterious missive was sent by Patrick Hughes, the co-founder of a major new British artificial intelligence startup, and became the final nail in the coffin after a fractious relationship with fellow co-founder and investor, Martin Bellamy.
Dell, the world’s seventh-richest person with a net worth of more than $200bn, had been courted to play a big role in the startup, called Pathfinder AI, supporting its plans to build a huge new data centre in Scotland as part of a £15bn investment plan.
But those plans were quickly crumbling: one of its founders was now warning him of alleged misuse of funds by the other.
Pathfinder’s board soon caught wind of the email, setting off a chain of events in which directors tried to wrest control of the business from Hughes. They would all later end up in court, in a case that reached its final conclusion last week.
When ideas were first drawn up for the project, it looked set to be a highly lucrative one, capitalising on the surge in investment in AI and the infrastructure needed to power it and adding itself to a list of dozens of data centre planning applications filed up and down the UK since the start of the year.
Serial entrepreneur Martin Bellamy, chairman of Salamanca Group, teamed up with waste management tycoon Martin Huges in the middle of last year and formed an Isle of Man-based holding company that would become the founding shareholder of Pathfinder.
The pair then had secured an option to acquire a 196 acre site in Ayrshire from the local council to build the huge data centre campus, and the startup recruited a high-profile board of directors, including former investment minister and chairman of the Conservative party, Lord Dominic Johnson.
By November, before spades were in the ground in Ayrshire, Pathfinder had completed its seed funding round, raising £100m at a £500m valuation. The Wykes family, owners of Wykes engineering, were the biggest investors, while some of the directors, including Johnson, also poured cash into the round.
Bitter squabbles
But tensions were already bubbling up between Hughes and Bellamy. The pair held an “acrimonious” meeting weeks earlier, in which they squabbled over how the business was being funded. Hughes had advanced a loan of £12.5m, £7.5m of which had already been spent. He asked Bellamy to stump up his own £12.5m as part of the partnership. But Bellamy said he’d made no such undertaking.
Hughes then questioned the legitimacy of the funding round and the director appointments, alleging that he was unaware of company resolutions that had been passed to give them effect (according to Bellamy, they had already been agreed with Hughes). The board urged the pair to settle their differences in a way that would not “disrupt” the funding round. Their counsel was not heeded.
Hughes fired off the email to Dell, and things quickly escalated. Pathfinder’s board decided they needed to seek legal advice over the legitimacy of the funding round. The board eventually concluded it would be safest to return the seed money back to shareholders.
The move put Pathfinder’s finances on a knife-edge. It was already burning through over £1m a month with little to show for it – and the cash was running out. The firm’s new recruits, however, still felt the business had plenty of potential.
Four days before Christmas, staff got together and submitted a proposal for a management buy-out. The following day they held a “gun to the head” meeting with the whole board and set them an ultimatum: give us the assets, they said, or we’ll all resign before you try and sell them to anyone else.
On Christmas Eve, Hughes tabled a last-minute offer: he would fund the company for at least the next three months on condition that Bellamy was removed. The offer was rebuffed.
By early January, a deal had been signed off by two directors, neither of them the founders and one of them Lord Johnson. The company would be bought out by management for a £17.7m cash consideration.
When Hughes found out about the deal and the “gun to the head” meeting, he called up his lawyers, who said the transaction undervalued the company and was “a dishonest disposal” that was “contrary to the interests of [Pathfinder] and in furtherance of the interests of Mr Bellamy, Lord Johnson” and the other directors.
On Thursday, the High Court rejected Hughes’ bid to unwind the startup’s sale. Mr Justice Trower found that allegations of dishonesty, conflicts of interest and a sale at a substantial undervalue rested largely on “unevidenced suspicion”.
Meanwhile, the Ayrshire site rests undeveloped, one of dozens of speculative data centre proposals across the UK that have yet to leave the drawing board.
Grid connection applications have surged from 41 gigawatts to 125 gigawatts in under a year, according to energy watchdog Ofgem. Such is the strain on the system that Ofgem yesterday laid out plans to “tackle” the problem.
The regulator has proposed a new data centre “commitment fee”, refunded only when the project is ready to be connected up to the grid and forfeited if the project exits the queue early. Developers would be forced to ”demonstrate tangible progress” through evidence such as financial capability, commercial maturity and procurement activity if they wish to retain their place in the queue to get a grid connection.
“Consumers should not bear the risks created by speculative projects taking up space in the system,” Ofgem director Eleanor Warburton said, adding that they “can delay other schemes and create uncertainty about future network needs.”
Dell, Hughes and Lord Johnson were contacted for comment. Bellamy declined to comment but expressed his satisfaction with the outcome of the court proceedings.