(1) Porton Capital Technology Funds (2) Porton Capital Inc. and Another v (1) 3M Uk Holdings Ltd (2) 3m Company
| Jurisdiction | England & Wales |
| Judge | Mr Justice Hamblen |
| Judgment Date | 07 November 2011 |
| Neutral Citation | [2011] EWHC 2895 (Comm) |
| Court | Queen's Bench Division (Commercial Court) |
| Docket Number | Case No: 2008 FOLIO NO.877 |
| Date | 07 November 2011 |
[2011] EWHC 2895 (Comm)
Mr Justice Hamblen
Case No: 2008 FOLIO NO.877
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Stephen Phillips QC and Matthew Parker (instructed by DLA Piper) for the Claimants
Mark Howard QC and Simons Salzedo QC (instructed by Simmons & Simmons LLP & Dorsey & Whitney (Europe) LLP ) for the Defendants
Hearing dates: 15,16,20,21,22,23,27,28,29,30 June 2011. 1,4,5,6,7,11,12,13,14,18 July 2011. 29 September. 3 & 4 October 2011
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Introduction
On 14 February 2007 the First Defendant ("3M UK") agreed to buy the entire shareholding of Acolyte Biomedica Limited ("Acolyte") under a Share Purchase Agreement ("the SPA"). The Claimants were some, but not all, of the shareholder vendors ("the vendors"), representing a total of 60.4% of the shareholding.
The consideration for the shares was £10.4m in cash and an earn out payment based on net sales for the calendar year 2009. Acolyte's only commercial product, and the only one relevant to the present claim, was BacLite MRSA, a diagnostic assay used for the purpose of detecting MRSA. In the event, the Acolyte business was not successful and it was terminated in December 2008. There were therefore no net sales in 2009.
The Claimants allege that the failure and termination of the business involved breaches of contract on the part of 3M UK, that the wrongful termination was knowingly induced by the Second Defendant ("3M US"), and that the Claimants have lost their 60.4% share of the net sales which should have been achieved, which they claim would have been in the region of £32m or US$56.45m.
The case of the Defendants (together, or when unnecessary to distinguish, "3M") is that they have always acted in good faith and in accordance with the SPA. They were entitled to terminate the business in circumstances where they had requested consent and offered compensation and the vendors reacted unreasonably. The reasons that no earn out became payable were the failings of BacLite MRSA itself and the fact that the market moved against that product. On any view, net sales in 2009 could only ever have been at a very low level.
The principal issues for decision are:
Was 3M in breach of its contractual obligation diligently to seek regulatory approval for BacLite?
Was 3M in breach of its contractual obligation actively to market BacLite?
Did the vendors act unreasonably in withholding consent from the Defendants to terminate the Acolyte business in late 2008?
How and when did the SPA come to an end? Did either party accept the other's repudiation and if so which?
How much would the net sales of BacLite in 2009 have been if 3M had performed its obligations under the SPA and the Acolyte business had continued through 2009?
Did 3M US knowingly induce breaches of contract by 3M UK?
General Background
Acolyte
Acolyte was established in around 2000 as a joint venture between the UK government and a venture capital fund. It was formed with the intention of exploiting certain technology first developed by the Defence and Evaluation Research Agency ("DERA"), part of the UK Ministry of Defence, at Porton Down in Wiltshire. The technology in question was based upon the activity of the adenylate kinase enzyme, which is present in all organisms.
In August 2001, Acolyte recruited its first employee, Mr Stephen O'Hara, as its chief scientific officer. Mr O'Hara had been chief scientist in microbiology at Southampton University Hospital from 1987 to 199Subsequently, Dr William Mullen joined Acolyte in November 2002 as Chief Executive Officer.
By July 2003, Acolyte had developed a prototype product for the detection of a range of harmful organisms, but it then began to develop a product which would focus exclusively on the detection of MRSA (albeit with scope to be expanded in due course to detect other organisms). In January 2004, Acolyte raised a further £3.7 million in investment, at which point the Second Claimant became a major shareholder in the company. The Third Claimant was established in April 2005 as an investment arm of the UK Ministry of Defence and it too subsequently became a shareholder in Acolyte.
At the trial the Claimants called Mr O'Hara and Dr Mullen as witnesses of fact. They also called Mr John McKinley, the Chairman and Director of Acolyte from September 2006 until its sale to 3M UK. In addition they called as experts Professor Richard James, Professor of Microbiology at the University of Nottingham, and Dr David Huckle, a consultant in strategic marketing and business development covering all areas of Biotechnology and Life Sciences.
M
The 3M group is a large multinational organisation which carries on business across six business segments: industrial and transportation; health care; display and graphics; consumer and office; safety, security and protection services; and electro and communications. According to its 2007 Annual Report, it employed 76,239 people and achieved a net operating income of US$4.1 billion on sales of US$24.5 billion.
As part of its Health Care Business, 3M supplies medical and surgical supplies, skin health and infection prevention products, drug delivery systems, dental and orthodontic products, health information systems and microbiology products. In 2005, 3M set up a business unit in order to expand its Health Care Business into a new market: Medical Diagnostics. At this time, 3M was developing its own PCR (Polymerase Chain Reaction) platform for the rapid detection of MRSA, known as Fastman. Subsequently, in December 2006, 3M entered into an agreement with Response Biomedical to commercialise its RAMP testing platform, which was subsequently launched as the Rapid Detection Flu A+B Test in October 2008. The acquisition of BacLite was part of 3M's expansion into Medical Diagnostics.
At the trial 3M called the following factual witnesses: Ms Cassie Jacobson, clinical research manager for 3M's Infection Prevention Division's new product development programme; Dr Bob Brennan, senior microbiologist with 3M's Medical Division; Dr Tushar Kshirsagar, Product Development Manager at 3M; Dr David Whitman, Lab Manager for the 3M Biodetection Department; Mr Brian Anderson, 3M's Global Marketing Manager for Medical Diagnostics; Mr Mark Whitworth, 3M's European Business Leader, Infection Prevention; Mr James Ingebrand, 3M's Medical Division Infection Prevention business unit director; Mr Peter Robinson, a consultant engaged by 3M to support the commercialisation of BacLite and later 3M's Technical Services Leader for the European, Middle East and Africa area; Mr James Collier, a sales and marketing consultant engaged by 3M to provide sales training and marketing support in relation to the launch of 3M's Medical Diagnostic business and later 3M's European Business Development Manager for Medical Diagnostics; Dr Jan Kluytmans, a Consultant Microbiologist at Amphia Hospital in Breda in the Netherlands and Professor of Medical Microbiology and Infection Control at VUmc Medical University, Amsterdam; Dr Bart Gordts, who at the material time was the Head of Microbiology at AZ Sint-Jan Hospital, Bruges in Belgium; Ms Maggie Skyrme, who at the material time was Deputy Manager, then acting Manager, then Laboratory Manager of the Department of Microbiology at Salisbury Hospital in the UK. 3M also called as experts, Mr Thomas Tsakeris, a consultant to the medical device industry with respect to US FDA (Food and Drug Administration) regulations and procedures; Mr Kenneth Powell, a consultant providing business development support in the identification, evaluation and commercialisation of new business opportunities in the clinical diagnostic, life sciences and medical device market segments; and Dr Brian Stammers, a healthcare industry consultant.
MRSA
MRSA stands for methicillin-resistant Staphylococcus aureus. It is a form of bacteria which is resistant to antibiotics. Staphylococcus aureus (abbreviated to S.aureus) is a species of bacteria. Methicillin is a form of the penicillin antibiotic (within the class of antibiotics known as beta lactam antibiotics). S.aureus that is not resistant to methicillin, ie that is methicillin-sensitive, is known as MSSA.
S.aureus is carried in the nose or on the skin of around 30% of the population. Mere carriage of the bacteria does not cause any harm to the individual unless it develops into an infection. Because of its resistance to many conventional antibiotics, an infection of MRSA is particularly harmful and can lead to death.
One of the methods by which hospitals seek to control the spread of MRSA is by screening for MRSA colonisation. A common method of such screening is by taking a nasal swab from a patient, which is then tested for MRSA using one or more of a number of different testing methods. As at February 2007, when 3M acquired Acolyte, the most widely used MRSA screening tests were:
i) Traditional Culture: a swab is rubbed onto the surface of an agar plate containing Mannitol Salt Agar (MSA). The salt present in the agar will discourage the growth of most bacteria apart from Staphylococci. Unlike most other forms of Staphylococci, however, S.aureus also has the ability to ferment mannitol, so any S.aureus bacteria will appear as yellow-coloured colonies on the MSA plate and be surrounded by a yellow halo. This method then requires further tests to be carried out in order to distinguish...
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