Score Draw Ltd v PNH International Ltd

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.

Joanne WicksQC sitting as a Judge of the High Court:

Introduction

This is a claim for breach of a covenant in a shareholders' agreement dated 28 October 2013, by which the Defendant (“ PNHI”) undertook not to solicit or accept custom or business from customers of the Claimant (“ Score Draw”). Score Draw alleges that PNHI broke this obligation by soliciting and accepting orders for retro football shirts from Liverpool Football Club (“ LFC”) and it claims damages and injunctive relief.

Parties and People

Score Draw is a retailer and wholesale supplier of retro football shirts. Retro shirts faithfully replicate historic shirts worn by football teams and are often associated with a particular period of a club or country's past success or with the career of a particular player. The company was established by Michael (“Mickey”) Phillips with another person in 2002 and in 2006 he became its sole director and shareholder.

Score Draw's wholesale business involves the import of retro shirts of various football clubs and associations, and their supply either to retailers or to the clubs themselves, for onward sale through their own retail channels. It has intellectual property licences granted by a number of football clubs and in particular held a licence from LFC dated 15 December 2011 granted for a period of four years from 1 June 2012 to 31 May 2016 (“ the Licence”).

Chun Kwok Wong, also known as Perhson Wong, is a businessman based in Hong Kong. He has extensive business interests and holds a number of directorships.

PNHI is a company registered in Hong Kong, of which Mr Wong is a director. It is part of the PNH group of companies, which may or may not formally constitute a group but are linked in the sense that they are all associated with Mr Wong. The PNH group is in the business of the manufacture and sale of sportswear, including (but not limited to) retro football shirts. For some years prior to the shareholders' agreement, PNHI had been supplying shirts to Score Draw, although the invoicing and payment arrangements between PNHI and Score Draw involved a British Virgin Islands company, Yao Ming Investments Limited.

The majority shareholder in PNHI (holding 9,999 of 10,000 shares) is PNH Holdings Ltd, a company which is 50% owned by Mr Wong and of which he is a director. The other share in PNHI is held by PNH Limited (“ PNH Ltd”) of which again Mr Wong is a director. PNHI and PNH Holdings Ltd each own 50% of the shares in PNH Ltd (or at least did on 16 December 2019, the date of the last company return produced in evidence).

PNH Holdings Europe Limited (“ PNHE”) is a Jersey company with directors in St Helier, incorporated in July 2013, shortly before the shareholders' agreement. When incorporated, Mr Wong held one of the two shares in PNHE, the other being held by Peter Kenyon, a former managing director of Umbro International, and former CEO of Manchester United Football Club and Chelsea Football Club.

Mr Wong is also associated with a brand called “EZ Shopnet”, which is an online sportswear retailer selling in Asia. Mr Wong describes EZ Shopnet in his first witness statement as a “ solely owned business of The PNH group” and the PNH group website treats EZ Shopnet as part of the PNH group. Mr Wong's Hong Kong directorships include EZ Shopnet Limited and EZ Shopnet International Limited. A person who features in the evidence is Ray Evans, whose email footer at the relevant time described him as “ Director, EZ International Ltd, PNH Group Hong Kong”.

Mr Evans and Mr Wong were also involved together in a company originally called Opto Capital Limited but subsequently called Campo Sports Limited (“ Campo Sports”). During 2013 PNHE and Mr Evans became the shareholders in Campo Sports and Mr Wong, Mr Evans and Mr Kenyon were appointed directors. Campo Sports was a customer of Score Draw.

The Licence

The Licence was dated 15 December 2011 and comprises a “Principal Terms Sheet” together with a set of general terms and conditions. By it, Score Draw agreed to use LFC's intellectual property in accordance with the Licence. By clause 4 of the general terms and conditions

“ In consideration of the payment of the Advance, any Additional Advance and any Royalties by the Licensee to the Licensor and the due performance by the Licensee of all the terms and conditions to be performed by it under this Agreement, the Licensor HEREBY GRANTS to the Licensee a non-exclusive licence for the Licence Period to use the Licensed IPR for the purposes of:

i. developing and manufacturing the Licensed Product; and

ii. marketing, distributing, promoting, selling and advertising the Licensed Product in the Territory via the Permitted Distribution Channels in the Language.”

The “Licence Period” was 4 years from 1 June 2012 to 31 May 2016 but in clause 20(a) provision was made for a run-off period of 3 months, allowing Score Draw to sell shirts which it had in stock or which were in the course of manufacture at expiry. The “ Licensed IPR” meant LFC's intellectual property and the “ Licensed Product” was retro football t-shirts and tracksuits (not performance/technical/training t-shirts or tracksuits). The “ Territory” was the UK and Eire and the Language was English. The “ Permitted Distribution Channels” were “ All Retail”.

In consideration of the Licence, Score Draw was obliged to pay a series of advances totalling £200,000 in accordance with a payment schedule set out in the Principal Terms Sheet: £44,000 in Year 1; £48,000 in Year 2; £52,000 in Year 3 and £56,000 in Year 4. The advances were, in effect, minimum guaranteed royalty payments. Thereafter, if sales exceeded the level at which the advances had been set, royalties were payable at the rates set out in the Principal Terms Sheet, namely

“ Retail Royalty:	12.5% of the Net Sales Value in respect of each unit of Licensed Products sold to retail stores direct, who in turn distribute direct to the public
Internet Royalty:	12.5% of the Net Sales Value in respect of each unit of Licensed Products sold via the internet
LFC Retail Royalty:	0% royalty on each unit of Licensed Products sold through LFC Retail Channels.”

“ LFC Retail Channels” were defined to mean

“ the retail operation run by the Licensor including Liverpool FC official club stores (both online and offline) and its mail order operation”.

By clause 11(d) of the general terms

“ The Licensee agrees that it will sell the Licensed Product to the Licensor for sales through LFC Retail Channels at a price equal to or lower than the price offered by the Licensee to any other customers. Any Licensed Product sold through LFC Retail Channels will be subject to a 0% Royalty rate.”

Background to the Shareholders' Agreement

In 2012, Mr Wong acquired 20% of the shareholding in Score Draw.

By February 2013, Score Draw had built up a debt to PNHI, in respect of goods supplied, of about US $3.5 million. The shareholders' agreement was entered into as part of a debt-for-equity swap, under which:

i) The shares in Score Draw were reorganised to create 80 A ordinary shares of £1 each held by Mr Phillips and 80 B ordinary shares of £1 each, of which 20 were held by Mr Wong;

ii) On 28 October 2013:

a) PNHE subscribed for 60 of the B shares, the price being a reduction of US $2 million in the trading indebtedness due from Score Draw (via Yao Ming Investments Limited) to PNHI; Mr Wong's shares were also transferred to PNHE. Consequently all of the A shares were (and remain) held by Mr Phillips and all of the B shares were (and remain) held by PNHE;

b) the shareholders' agreement was entered into between Score Draw, Mr Phillips, PNHE and PNHI; and

c) PNHI and Score Draw entered into an agreement under which PNHI agreed to provide rolling credit facilities to Score Draw (“ the Credit Agreement”). This required Score Draw to pay PNHI's invoices up to and including 30 June 2014 within 180 days and invoices thereafter within 120 days. It gave PNHI the right to terminate the Credit Agreement in certain events, including if

“ Score Draw fails to pay any undisputed amount due to [PNHI] on the due date for payment and remains in default not less than 14 days after being notified in writing to make such payment”.

Shareholders' Agreement

In the Shareholders' Agreement, Mr Phillips and PNHE are referred to as “ the Original Shareholders”, with “ A Shareholder” meaning the holder of the A shares from time to time; “ B Shareholder” meaning the holder of the B shares from time to time and together being “ the Shareholders”. “ The Covenantors” means each of the Shareholders and PNHI, whilst “ the Parties” also includes Score Draw.

Clause 3 provides that there are to be two directors and that the A Shareholder has the right to appoint, remove and replace one A director, and the B Shareholder has the right to appoint, remove and replace one B director.Clause 4 makes provision for the holding of board meetings.

Clause 5.1 provides for the way in which Score Draw is to be managed. It...