Optaglio v Tethal

This Court of Appeal allowed the appellant's appeal against summary judgment which had been granted by HHJ Purle QC in the Chancery Division ([2014] EWHC 3351 (Ch)). The appeal raised principally (i) whether the withdrawal of a UK patent application by directors amounted to a breach of directors' duties under section 174 of the Companies Act 2006, and (ii) whether the matter was suitable for disposal at summary judgment.

The court held that the judge below had been wrong to conclude, to the high standard required for summary judgment, that it was unarguable that the directors were acting within their duty in authorising withdrawal of the application. There were disputed factual questions about the strength of Optaglio’s patent position, the commercial pressure from a collaborator (NePL) and whether shareholder consent (in particular from the majority shareholder Mr Zhukov) had been given. The court also found that it was not established to the summary judgment standard that the second defendant, Mr Hudson, was not a party to the decision. The judge had therefore erred in disposing of the case at the summary judgment stage.

The Court of Appeal allowed amendment of the particulars of claim and set aside the order for summary judgment, permitting the claim to proceed to trial.

Background and parties:

• Optaglio Limited (the claimant and appellant) specialised in optical technology. Two former directors, Mr Tomas Tethal and Mr Philip Hudson (the respondents), were defendants to a claim for breach of directors' duties relating to the withdrawal of a UK patent application filed in the name of Mr Tethal on 18 April 2007.
• The patent application was filed as a defensive measure in the context of collaboration discussions with Nano ePrint Limited (NePL) and the University of Manchester under mutual confidentiality agreements. Negotiations concerned a development grant and a collaboration (the DTI agreement) in which ownership and protection of intellectual property were central issues.

Procedural posture:

• At first instance HHJ Purle QC granted summary judgment for the defendants ([2014] EWHC 3351 (Ch)), finding that (a) withdrawal had been justified as part of the price of collaboration, (b) shareholders (in particular the majority shareholder Mr Zhukov) had acquiesced, (c) the second defendant was not a party to the decision, and (d) there was no arguable loss.
• The claimant appealed to the Court of Appeal which heard argument on whether the matter was appropriate for summary disposal and other ancillary points including bona fides, pleading sufficiency and a conditional costs order.

Issues framed:

1. Whether the judge misdirected himself in approach to summary judgment.
2. Whether it was unarguable that withdrawal of the application was not a breach of directors’ duties (section 174 CA 2006 invoked).
3. Whether shareholder consent/acquiescence (Duomatic principle) had been established to the summary judgment standard.
4. Whether the second defendant was plainly not a party to the decision.
5. Whether there was no arguable case of loss.

Court’s reasoning and conclusions:

• The Court of Appeal emphasised the high threshold for summary judgment on contested facts and noted that contemporaneous documents must be sufficiently compelling to show that an opposing factual account had no real prospect of success. While the judge was entitled to rely on contemporary material, he had not explained with sufficient particularity why the appellant's factual case was impossible to accept.
• The appellate court disagreed with the judge's finding that Optaglio necessarily perceived its patent position as weak; there existed contemporaneous material supporting a contrary view and the issues of whether the application contained proprietary confidential information and the legal effect of the confidentiality agreements were complex and fact-sensitive.
• On shareholder consent, the court held that the evidence did not establish informed consent by the majority shareholder to the required standard; inferences from documents and the DTI agreement were insufficient to establish unarguably that consent had been given.
• The court found it was not established that Mr Hudson was not party to the decision; documentary material supported the contention he may have participated and thus the issue should be tried.
• On loss, the Court of Appeal accepted that proving loss may be difficult but that it was arguable Optaglio suffered loss and that the absence of a detailed pleaded case had been partly corrected by draft amendments. The judge’s conclusion that there was no loss was not sustainable at summary judgment.
• The Court refused to strike out the claim for lack of bona fides and declined to make a conditional costs order given the state of the merits and the high threshold for such orders.

Relief and disposition: The Court of Appeal allowed Optaglio leave to amend its particulars of claim, allowed the appeal and set aside the order for summary judgment so the claim may proceed to trial.

Appeal allowed. The Court of Appeal held that the judge below erred in concluding at summary judgment that it was unarguable that the directors’ decision to withdraw the patent application did not breach their duties, that shareholders had unarguably consented, that the second defendant was not a party to the decision, and that there was no arguable loss. Those matters raised factual disputes and legal issues unsuitable for summary disposal. The court permitted amendment of the particulars of claim and set aside the order for summary judgment.

Appeal from HHJ Purle QC, Chancery Division, Birmingham District Registry: [2014] EWHC 3351 (Ch); appeal heard in the Court of Appeal (Civil Division) and allowed ([2015] EWCA Civ 1002).