I have been picking at the Court of Appeal decision in PBL Solutions Ltd v AFT Pharmaceuticals Ltd which was delivered in March but which was initially hard to get hold of. The case dealt with a shareholder dispute relating to claims of misuse of corporate opportunity and breach of fiduciary duties.
Central to the decision (rejecting the claimant’s case) was the limited scope of the Shareholders’ Agreement, limited the JV entity’s business to the provision and distribution of market-ready pharmaceutical drugs to treat “orphan” diseases. The claimed misuse was that of the business opportunity for the use of drugs to treat orphan and non-orphan conditions.
In short, the Court of Appeal found no diversion/breach in relation to the opportunity to treat non-orphan conditions, which was outside the scope of the business that was the subject of the Shareholders’ Agreement. Instead, dismissing PBL’s appeal and substantially upholding the High Court’s judgment, the Court found that:
- AFT owed PBL fiduciary obligations in relation to evaluating opportunities that fell within the parties’ joint venture – as described in the Shareholders’ Agreement;
- AFT had breached those fiduciary obligations in respect of certain orphan drug opportunities;
- However, the Port Wine Stain (PWS) opportunity was not within the scope of the joint venture, meaning AFT was not required to account to PBL for profits from that non-orphan indication.
Background
AFT (65%) and PBL (35%) formed a JV vehicle, (AFTO), to develop and commercialise orphan drugs.
The dispute arose after AFT developed Pascomer (a topical rapamycin formulation designed to treat facial angiofibromas – which are benign (non-cancerous) tumours made of blood vessels and fibrous connective tissue) through AFT rather than AFTO. PBL argued that this was a corporate opportunity belonging to the joint venture and that AFT should account for profits from all commercial uses of the product.
Agreeing with the High Court, the Court of Appeal found that:
- the joint venture was confined to orphan (or orphan-like) indications;
- fiduciary obligations existed only within that defined scope;
- the much larger PWS market fell outside the scope of business of the JV; and
- AFT was therefore entitled to pursue that opportunity independently.
However, the Court also confirmed that PBL remains entitled to:
- an account of 35% of the profits earned from Pascomer for orphan or orphan-like indications (subject to appropriate deductions for costs); but
- no share of profits from non-orphan indications such as PWS.
I was interested to learn that an “orphan disease” generally affects relatively few patients and therefore attracts lower commercial incentives.
Pascomer (rapamycin) had potential applications for:
- facial angiofibroma (an orphan indication) and various other orphan(rare) diseases; and
- PWS, a substantially larger, non-orphan market.
PBL argued that, once AFT had become aware of Pascomer, every commercial application of the product belonged to the JV.
On the other hand, AFT argued:
- the JV was confined to orphan opportunities; and
- PWS was not an orphan indication – meaning that it remained free to exploit PWS independently.
The principal issues included:
- The scope of the JV.
- The fiduciary obligations which arose.
- Whether the corporate opportunity doctrine require AFT to bring all Pascomer opportunities into AFTO (the JV).
- Whether PWS was part of the JV
- The appropriate account of profits.
Fiduciary duties hinged on the scope of the venture
The Court emphasised that fiduciary obligations are not abstract duties of loyalty owed in respect of every commercial opportunity. Instead, they arise only within the scope of the relationship the parties actually created.
The Court began by identifying:
- what the parties agreed to do;
- the commercial purpose of the JV vehicle – AFTO; and
- the intended limits of the JV.
This is seen as a reflection of orthodox fiduciary principles, which mean that fiduciary duties cannot be divorced from the contractual and commercial framework that created them.
The JV was narrowly defined
The documentary evidence demonstrated that AFTO was created specifically for orphan pharmaceuticals. And the Court rejected PBL’s submission that the JV gradually expanded to include all therapeutic uses of Pascomer.
Instead, defining the corporate opportunity narrowly, it held:
- the JV remained centred on orphan indications;
- nothing showed the parties intended AFTO to become the vehicle for all dermatological products; and
- commercial opportunities outside that field remained available to AFT.
Corporate opportunity doctrine
The Court analysed what constituted the relevant opportunity. Rejecting PBL’s argument that the opportunity was the commercialisation of Pascomer, the Court preferred a narrower formulation, according to the scope of the JV (as set out I n the Shareholders’ Agreement). That is:
- orphan applications belonged to the JV vehicle; and
- non-orphan applications did not.
Therefore, the doctrine protected opportunities falling within that scope (to which fiduciary obligations attached) – but not every opportunity arising from the same technology.
PWS was outside the scope of the JV
Regarding this as decisive, the Court found that PWS:
- is not an orphan indication;
- involved a much larger patient population;
- represented a different commercial market;
- would require different commercialisation strategies.
Nothing in the Shareholders’ Agreement suggested AFTO was intended to exploit such markets.
Account of profits
The Court upheld the High Court remedy for an account of profits which was confined to profits attributable to orphan indications – and not extend it to PWS profits, which were not generated through exploitation of a corporate opportunity belonging to AFTO (the JV).
Principles confirmed
The judgment confirms several important principles:
- Fiduciary duties are relationship-specific: Commercial parties do not become fiduciaries for every opportunity merely because they collaborate. The scope of loyalty depends upon:
- the venture;
- its purpose;
- the parties’ agreement.
- Corporate opportunities must be defined carefully: Courts should avoid describing an opportunity too broadly.
The proper question is:
Was this particular opportunity one the fiduciary had undertaken to pursue for the venture? – rather than did it arise from the same technology?
- Commercial contracts remain central: Although fiduciary obligations are equitable, they are informed by:
- the contractual documents;
- surrounding circumstances;
- commercial expectations.
This reflects a modern approach of integrating equitable doctrine with contractual analysis.
- JVs create limited, not general, fiduciary duties: The Court rejects the proposition that joint venturers owe one another unrestricted loyalty. Instead, they owe loyalty only in respect of matters committed to the venture.
Takeaways
This should be seen as an important authority on the fiduciary obligations in JVs and one which reflects earlier authorities such as Boardman v Phipps (1967) and Chirnside v Fay (2006), confirming that, in a commercial JV, the existence and scope of fiduciary duties – and the reach of the corporate opportunity doctrine, are determined by the objective scope and purpose of the JV itself. A participant who exploits an opportunity outside that agreed scope does not (absent other breaches), breach their fiduciary obligations just because the opportunity is related to the same technology or product.
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