Oak Investment Partners v Boughtwood [2009] EWHC 2394 (Ch)

[2009] EWHC 2394 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate Tuesday, 14 July 2009
Before
THE HONOURABLE MR JUSTICE SALES
Between
OAK INVESTMENT PARTNERSApplicantMR BOUGHTWOODRespondent
Digital Transcript of Wordwave International, a Merrill Communications Company101 Finsbury Pavement London E C2A 1ERTel No: 020 7422 6131 Fax No: 020 7421 6134Web: www.merrill.com/mls Email: mlstape@merrillcorp.com(Official Shorthand Writers to the Court)
MR CHRISTOPHER HARRISON (instructed by Messrs Simmons & Simmons) appeared for ApplicantMR MAX MALLIN (instructed by Messrs Needleman Treon) appeared for Respondent
JudgmentTuesday, 14 July 2009JUDGMENT
[1]There is an application before me by Mr Martin Boughtwood in this continuing matter. It relates to directions that he says the court give to the valuer who is engaged upon the valuation exercise in respect of the value to be ascribed to Mr Boughtwood's shares in QED. The background to this matter has been dealt with in previous judgments and it is not necessary to set it out in great detail.[2]The particular issue which arises on the current application relates to the value to be ascribed to shares in QED by virtue of certain intellectual property rights ("IPR") in relation to the development of the “Hi-pa drive” motor. Originally the IPR and the motor were developed by PML Flightlink Limited ("PML") but, as described in my previous judgment, in about November 2007 the petitioner, Oak Investment Partners (“Oak”), invested money on the basis of a joint venture with Mr Boughtwood to develop the Hi-pa drive motor. The corporate structure that was selected as the vehicle for such investment involved the creation of a holding company, QED Group Limited ("QED"). The original idea was that QED would have a number of subsidiaries and that QED would be the group repository of IPR in respect of the Hi-pa drive motor.[3]To that end, a Deed of Assignment was made between PML and QED on 13 November 2007 (“the Assignment”). In the introductory recital to the Assignment, it was stated:
"The Assignor [PML] has developed and owns the Intellectual Property Rights and Know-How. The Assignor and Assignee [QED] have agreed that all of the Intellectual Property Rights and Know-How existing as at the date of this Agreement and developed in the future by the Assignor are to be transferred to and owned by the Assignee on the terms of this Deed."
[4]Clause 2.1 of the Assignment was in these terms:
"Subject to clause 2.2 and in consideration of the payment by the Assignee of £750,000 plus any applicable VAT (receipt of which the Assignor hereby acknowledges), the Assignor hereby assigns and transfers to the Assignee (where relevant by way of present assignment of future rights) all its right, title and interest in the Intellectual Property Rights and Know-How with full title guarantee and free from encumbrances."
[5]Clause 2.3 of the Deed provided that any improvements as developed by the Assignor [ie PML] should belong to QED, and would as at the date of their creation become IPR owned by QED. Clause 2.5 provided:
"Following the assignment, the Assignor shall not use the Intellectual Property Rights or Know-How without the permission of the Assignee, shall not disclose any Confidential Information without the permission of the Assignee, and shall keep all Intellectual Property Rights and Confidential Information confidential."
[6]According to the Deed of Assignment, therefore, QED became the owner of all the IPR owned by PML at the time it was entered into and QED was in future to become the owner of all other IPR developed by PML.[7]The basis on which PML carried on its business developing the Hi-pa drive motor thereafter was that it was given permission by QED to use the IPR to do so. PML did not pay a fee in respect of such permission.[8]On 28 November 2008, PML went into administration and it appears that development work in relation to the Hi-pa drive motor and development of any additional IPR by PML ceased at that point. On 26 January 2009, PML sold its business to another company, Electric Motor Works ("EMW"). Thereafter, EMW - using its own assets and employees, but also using the IPR which up to that point in time had been used by PML under permission from QED - continued to develop the Hi-pa drive motor and intellectual property rights in respect of it for its own benefit. There was no assignment by EMW of any IPR rights that it might develop after 26 January 2009 into the ownership of QED.[9]For the purposes of explaining the issue that has arisen, I will refer to the IPR owned by QED by virtue of the Assignment of November 2007 down to 26 January 2009 as "the PML IPR". I will refer to any additional IPR developed after that date by EMW as "the EMW IPR".[10]In my main judgment in these proceedings I concluded that an order should be made for Oak to buy the shares in QED owned by Mr Boughtwood. Those shares were to be valued by an expert valuer. Mr Eels was appointed by the parties as an expert valuer. He was chosen in particular for his expertise in the valuation of IPR rights in relation to technology companies. The valuation process directed to be carried out by the court was intended to be an expeditious way of resolving the outstanding issue between the parties as to the price at which Oak should purchase Mr Boughtwood's shares in QED.[11]Both parties (Mr Boughtwood and Oak) put in a first round of submissions on valuation to the valuer on 17 April 2009. The submissions for Oak were prepared by KPMG. KPMG's submissions referred to the PML IPR and set out various methodologies for valuing the PML IPR which were owned by QED for the purpose of valuing shares in QED. The method which KPMG submitted should be used to value those shares was by way of identifying an earning stream, defined by reference to the reasonable royalties payable in respect of use of the PML IPR. KPMG did not refer to the EMW IPR and did not suggest that the EMW IPR would be relevant to valuation of QED.[12]Also on 17 April 2009 Mr Boughtwood put in some very short submissions to the valuer. It is fair to say that he had taken a decision to keep his powder dry to a large extent in respect of the full statement of his case until a second round of submissions which had been directed by the court. In his submissions on 17 April 2009 he claimed: "all [IPR] generated, past, present and future has been assigned to QED Group Limited. EMW has been sold under this understanding and so its [IPR] is also owned by QED Group Limited … Suffice it to say the [IPR] generated both in filed applications and in applications pending are substantial in value, and from the description offered by the EMW team, it seems there will continue to be a good stream of ensuing [IPR] that will follow. All of this future [IPR] will of course form part of the future value …".[13]It appeared from this that Mr Boughtwood was claiming that the IPR relevant to valuation of QED comprised both the PML IPR and also the EMW IPR, apparently on the basis that he maintains that by virtue of the circumstances of the sale of PML's business to EMW, EMW had somehow assumed an obligation to transfer any of the EML IPR to QED.[14]The next round of submissions from the parties to the valuer took place on 1 May 2009. The submissions put in for Oak by KPMG on that occasion objected to the proposal by Mr Boughtwood that the EMW IPR should be brought into account in the calculation of the share value of QED. On 1 May 2009, Mr Boughtwood lodged an expert report from LECG, to stand as submissions on his behalf. In that report, LECG referred to the same choice of methodologies as had been set out by KPMG in its report of 17 April and, like KPMG, indicated that the appropriate method of valuation of shares in QED would be by reference to an earning stream based on reasonable royalties payable for relevant IPR. The relevant IPR, according to LECG, were the PML IPR. LECG did not suggest that the EMW IPR should be brought into account in assessing the value of the QED shares. Accordingly, at that point, it appeared that Mr Boughtwood's own experts, LECG, did not support his earlier suggestion that the EMW IPR should be brought into account in the valuation of QED. There was no reservation by Mr Boughtwood on 1 May of any case by reference to the EMW IPR as had previously been put forward by him.[15]So far as the submissions to the valuer made by the experts on both sides were concerned, therefore, it was common ground that the proper basis for valuation of QED in the light of its relevant IPR was to assess the reasonable royalty earning stream in respect of the PML IPR at its current value at the relevant valuation date.[16]On 10 June 2009, a considerable period of time after these rounds of submissions had taken place, Mr Boughtwood sought to raise again the question of the basis for valuation of QED. He reverted to the position that the EMW IPR should be brought into account in that calculation. On 7 July 2009, he issued a further application to the court seeking directions to be given to the valuer to that effect. It seems that that application was only notified and served on Oak after hours on Friday, 10 July. Nonetheless, since Oak had their own application on foot in relation to a distinct matter scheduled to come before the court today, the parties proceeded, essentially by consent, on the basis that Mr Boughtwood's application should be heard by me today.[17]Oak object to the application by Mr Boughtwood. They contend that there is no sound basis on which the directions sought by Mr Boughtwood should be issued and they say that the issuing of further directions to the valuer would be likely to result in further delay and cost in relation to the proceedings. As to the significance of further delay, Oak say that their interests will be prejudiced, since there is an outstanding costs order against Mr Boughtwood requiring him to pay some £575,000 in costs to Oak when the expert valuation process is completed.[18]So far as additional cost is concerned, Mr Boughtwood has already put in evidence in these proceedings as to his difficult financial position and there is a serious question whether any additional costs would be recovered from him if a further costs order was made against him.[19]Mr Harrison for Oak submits that, if the present point based on the EMW IPR was to have been raised in the valuation, it should have been raised in the rounds of submissions directed by the court which took place in April and May. He submits that there is no sound basis in law or on the facts for the court to issue further directions to the valuer now to consider valuing QED by reference to the EMW IPR. He submits that when EMW acquired the business of PML, it entered into no agreement with QED according to which the EMW IPR would be assigned to QED or otherwise treated as QED's property. He says that the appropriate basis for valuation of shares in QED is by reference to the IPR owned by QED as defined by the Assignment, which comprise only the PML IPR and not the EMW IPR.[20]In my judgment, the position adopted by Oak in the submissions made by Mr Harrison is correct. Mr Boughtwood has not put forward any reasonably arguable case that EMW has entered into any obligation vis-à-vis QED to treat the EMW IPR as assignable to QED or otherwise as QED's property. The experts on both sides in the valuation have addressed their minds and their submissions to the relevant basis for assessing the value of the shares in QED and both have put forward, as their analysis, the approach that a reasonable royalty stream should be worked out in respect of the PML IPR (i.e. on the footing that it is the PML IPR which are owned by QED). Neither expert has suggested that any additional element of consideration should be assumed in relation to the EMW IPR. Their proposed approach seems to me to be obviously correct in commercial and legal terms, in that the development of the EMW IPR has taken place by EMW using its own resources for its own benefit. The terms of the Assignment do not cover the EMW IPR; moreover, EMW is not a party to the Assignment. To the extent that EMW has, in developing the EMW IPR, made use of the PML IPR owned by QED, the value of such use will be reflected in the reasonable royalty stream in respect of the PML IPR on which both KPMG and LECG make submissions to the valuer. The valuer is an expert in this area and will be able to assess those submissions. If in fact the valuer considers that any additional weight should be given to the EMW IPR when assessing the value of QED - by way of assessing what would qualify as a reasonable payment in respect of use of the PML IPR - that would be open to him to take into account in his valuation.[21]For these reasons, I conclude that Mr Boughtwood has not shown on this application that there are any good grounds on which it would be right to issue further directions to the valuer in respect of this matter. The arguments by Oak as to the additional delay and cost which would follow from any directions are cogent ones, and since Mr Boughtwood cannot point to any good arguable case that the EMW IPR should be distinctly included in the valuation which would merit further legal argument on the issue, in all the circumstances it seems to me to be right that no directions should be given as sought by Mr Boughtwood and that the valuer should now proceed to finalise his valuation on the basis of the existing directions.