Porton Capital Technology Funds & Ors v 3M UK Holdings Ltd & Anor

In a contingent earn-out agreement, an obligation to seek regulatory approval diligently requires reasonable application, industry and perseverance. It does not impose a distinct standard of reasonable care, although the court may assume such a requirement for the purpose of considering the claim.

An obligation actively to market requires more than isolated active steps. Marketing must, viewed overall, be characterised by action, while allowing the promisor a reasonable margin of appreciation when acting in good faith for the parties’ common commercial interest. Consent to terminate a business is not unreasonably withheld merely because the consenting party reasonably wishes to preserve its contractual opportunity to earn more.

The claimants were shareholders in Acolyte Biomedica Limited, whose shares were acquired by 3M UK under a share purchase agreement. The consideration included an earn-out based on 2009 net sales of BacLite MRSA, a diagnostic assay.

The claimants alleged breaches of obligations to seek regulatory approval diligently and to market BacLite actively in specified markets. They also challenged 3M’s attempt to obtain consent to cease the business, alleged repudiation of the agreement, claimed lost earn-out profits, and alleged that 3M Company knowingly induced 3M UK’s breaches.

The principal issues were the construction and performance of the marketing and regulatory obligations, the reasonableness of the withheld consent, repudiation, loss, and accessory liability.

1. Regulatory approval. The word “diligently” required reasonable application, industry and perseverance. It did not impose a distinct obligation of reasonable care. Even assuming such an obligation, 3M’s initial United States clinical trials and subsequent investigations were conducted reasonably and with reasonable expedition.
2. From the end of March 2008, however, 3M ceased taking steps to obtain approval for the existing BacLite product. Successful trials remained possible, and the court rejected the argument that further efforts would have been futile. Approval could have been obtained in the United States by February 2009. Canadian approval could and should have been obtained by January 2008, although launch there could not sensibly occur until October 2008.
3. Active marketing. “Actively” required marketing efforts which, viewed overall, were characterised by action. The obligation allowed a reasonable margin of appreciation where 3M acted in good faith to market BacLite successfully. It applied separately to each specified market, subject to the practical limitation that effective sales activity required regulatory approval.
4. There was no breach during the initial European marketing period or during the targeted marketing programme in early 2008. From the end of June 2008, European marketing was effectively being wound down and was no longer characterised by action. Material breaches in the United States, Canada and Australia arose respectively when effective launches could have occurred, namely February 2009, October 2008 and October 2008.
5. Consent and repudiation. The principles derived from landlord and tenant authorities provided assistance in construing the consent provision. The burden was on 3M to show that consent was unreasonably withheld. The vendors’ scepticism about 3M’s low sales estimate, their lack of information, and their reasonable belief that continued performance could produce a larger return made their refusal reasonable.
6. The vendors’ letter of 12 November 2008 rejected 3M’s proposals but did not amount to repudiation. 3M’s cessation of the business on 8 December 2008 was repudiatory and was accepted by the Particulars of Claim.
7. Loss. The court declined to extend the principle in Armory v Delamirie to a lost-profit claim supported by factual, documentary and expert evidence. Damages were assessed on the balance of probabilities, while giving the claimants as fair a wind as the evidence justified. The recoverable loss was 60.4% of estimated net sales of US$2,152,000, namely US$1,299,808.
8. The claim that 3M Company knowingly induced 3M UK’s breaches failed. The requisite intentional causative participation was not proved.

Judgment was therefore given for the claimants in the sum of US$1,299,808.