PBL Solutions Limited v AFT Pharmaceuticals Limited
[2024] NZHC 1511
•10 June 2024
ORDER PROHIBITING PUBLICATION OF UNREDACTED VERSION OF THIS JUDGMENT. IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2020-404-801
[2024] NZHC 1511
BETWEEN PBL SOLUTIONS LIMITED
First Plaintiff
AFT ORPHAN PHARMACEUTICALS LIMITED
Second PlaintiffAND
AFT PHARMACEUTICALS LIMITED
First Defendant
HARTLEY CAMPBELL ATKINSON
Second Defendant
Hearing: 17 April 2024 Appearances:
JS Cooper KC, TJ Lindsay and CD Brownlee for the Plaintiffs AS Ross KC and MC Smith for the Defendants
Judgment:
10 June 2024
Reissued:
20 June 2024
JUDGMENT OF FITZGERALD J
[As to form of account]
This judgment was delivered by me on 10 June 2024 at 4.00pm, pursuant to r 11.5 of the High Court Rules 2016. Registrar/Deputy Registrar ………………….……………
Solicitors: Lindsay & Francis, Auckland
Gilbert Walker, Auckland
To:J Cooper KC, Auckland A Ross KC, Auckland
PBL SOLUTIONS LTD v AFT PHARMACEUTICALS LTD [2024] NZHC 1511 [10 June 2024]
Introduction
[1] In my judgment, delivered on 28 August 2023, I ordered that AFT Pharmaceuticals Ltd (AFT) give PBL Solutions Ltd (PBL) an account of profits arising from what is referred to as “the Pascomer opportunity” (in a 65 per cent/35 per cent proportionate share).1 I directed that the parties confer and seek to agree the form of the account.
[2] The parties conferred and, while agreeing many aspects of the form of the account, they were unable to agree on some matters. This judgment accordingly determines the remaining matters in dispute. The lengthy and complex background to this dispute is set out fully in the introductory sections of my substantive judgment, and is not repeated here.
[3] Before turning to the remaining disputes, I make one point by way of introduction. An account is effectively a process by which amounts that one party is required to account to another party for are identified and quantified. There is no doubt that it is a flexible remedy, and that r 16.3 of the High Court Rules 2016 reserves to the Court a broad power to make directions in relation to an account. It is nevertheless important, in my view, to consider the remaining matters in dispute through the lens of the Court making an order for an account, rather than, for example, fashioning other remedies or rights that did not form part of PBL’s original pleaded claims.
Should the account refer simply to “costs” or to “reasonable costs”?
[4] In my substantive judgment, I determined that AFT’s costs of pursuing the Pascomer opportunity were to be an allowance in the account. There is a dispute as to whether the account should refer to this allowance as “the costs incurred by AFT or its Affiliates” (AFT’s position), or “the reasonable expenses incurred by AFT” (PBL’s position).
1 PBL Solutions Ltd v AFT Pharmaceuticals Ltd [2023] NZHC 2351 [substantive judgment]. The Pascomer opportunity is an opportunity to develop and sell an “orphan” drug called Pascomer. Orphan drugs are those which treat rare conditions. The Pascomer opportunity is currently being pursued by AFT. In my substantive judgment, I held that the Pascomer opportunity ought to have been developed within and by a joint venture company in which AFT and PBL are the shareholders, as to 65 per cent and 35 per cent respectively.
[5] PBL is concerned that, if the qualifier “reasonable” is not expressly included in the account,2 there is a risk of AFT “gaming” the costs which are allocated to the Pascomer project; particularly AFT’s internal costs. Ms Cooper KC, for PBL, submits that there can be no proper basis to object to only reasonable costs being the subject of an allowance in the account.
[6] Mr Ross KC, for AFT, does not resile from the broad proposition that costs to be brought into the account ought to be reasonable. But he submits that including an express qualifier to this effect simply heightens the risk of an unnecessary ongoing dispute between the parties. He further submits that PBL’s position is already adequately protected by the fact that:
(a)AFT and PBL’s interests are aligned, in terms of maximising the value of the Pascomer opportunity (given 65 per cent of the net profits are to accrue to AFT); and
(b)PBL will have the right to audit the account, and any disputes in relation to the account can be brought back before the Court in any event.
[7] I accept AFT’s position. In light of the hard fought nature of this proceeding, I am concerned that expressly including the concept of “reasonable” costs will give rise to a temptation to raise what might be unnecessary and/or de minimus issues. In addition, my substantive judgment referred to an allowance for “AFT’s costs and expenses”,3 rather than AFT’s “reasonable costs and expenses”. The terms of the account should, as far as is possible, match the terms of the substantive judgment.
[8] I agree that PBL’s position is protected by its right to audit the account, and the right to bring any substantive disputes back before the Court, should the need arise. The fact that AFT may need to justify to the Court, for example, the proportion of internal AFT costs which are allocated to the Pascomer project, will no doubt
2 In relation to costs addressed at [4] of the proposed account (when defining “Pascomer Opportunity Capital Gains”), and as addressed at [8](b) and (d) of the proposed account (when defining “Pascomer Opportunity Costs”).
3 Substantive judgment, above n 1, at [510](j).
encourage AFT to ensure that a transparent and reasonable approach is taken to any such apportionment.
Should PBL have a “veto right” on the sale by AFT of the Pascomer opportunity?
[9] PBL proposes that any sale or transfer of the Pascomer opportunity by AFT to a third party ought to be subject to the prior written consent of PBL, which is not to be unreasonably withheld. AFT objects to PBL having such a “veto” right. This is a key dispute between the parties on the form of account.
[10] PBL submits that its proposal guards against the risk of the Pascomer opportunity being sold or transferred by AFT at an undervalue; for example, at a price where only 50 per cent of the sale price is attributable to Pascomer itself, and 50 per cent is attributable to Crystaderm;4 or where the Pascomer opportunity is sold by AFT as a part of a broader transaction, and the price to be paid for Pascomer might be diluted. In advocating for the veto right, Ms Cooper emphasises the flexible nature of the remedy of an account. She further submits that PBL does not have any interest in interfering or quibbling in relation to these matters, but notes that, but for AFT’s breach of fiduciary duty, PBL would have had a say in any sale of the Pascomer opportunity, albeit as a minority shareholder in AFT Orphan Pharmaceuticals Ltd (AFTO) (although, if the sale had met the threshold of a major transaction, any sale or transfer would have required 75 per cent approval). Ms Cooper further emphasises that AFT and PBL’s interests in securing a profitable sale of the Pascomer opportunity are aligned, further ameliorating any risk of PBL unreasonably interfering in any such sale.
[11] Mr Ross submits that including a veto right is beyond the scope of the account, which simply creates the mechanism for AFT to account to PBL for its 35 per cent share of the net profits generated by the Pascomer opportunity. He suggests that the veto is an invitation for “greenmail”, and would be a “recipe for disaster”. He advances the hypothetical scenario of taking a proposal to PBL, who would be incentivised to respond that yes, it would agree if its position were to be improved, and any dispute in that regard inevitably taking some considerable time to resolve before
4 An AFT proprietary technology which is an “ingredient” in the Pascomer product.
the courts, and inevitably scaring off any purchasers in the interim. Mr Ross submits that it would be irrelevant if AFT “loaded up” any sale price 75 per cent to Crystaderm and 25 per cent to Pascomer, as the account would still be a fair account of that sale price, with the underlying issue then being a point of dispute in relation to the account, which, he submits, is PBL’s proper remedy.
[12] I accept AFT’s position on this aspect of the dispute. In my view, including a substantive veto right goes beyond what might be properly included within the scope of an account, even taking into account the necessarily flexible nature of the process, and that the account is in response to AFT’s breach of fiduciary duty. As the authors of Civil Remedies in New Zealand observe, the objective of an account is to “determine as accurately as possible the true measure of the profit or benefit obtained” by the defendant.5 A veto right itself does not achieve this objective.
[13] In my view, as unpalatable as it may seem to PBL, were there to be fundamental issues in the way AFT dealt with or sold the Pascomer opportunity, PBL’s protection does not lie in a veto right shoehorned into the account of profits. Rather, and as I discussed with counsel at the hearing, PBL might have a separate claim against AFT for dealing with the Pascomer opportunity in a manner inconsistent with any duties owed by AFT to PBL in relation to the opportunity and/or AFT’s obligation to account.6 I say PBL “might” have such a claim as this judgment is not the place for the Court to make substantive comment on PBL’s rights and remedies in the scenario PBL raises.
Should the allowances made in the substantive judgment for historical costs exclude those exclusively attributable to development of Pascomer for Port Wine Stain (PWS)?
[14] The proposed form of accounts sets out various categories of “Pascomer opportunity costs” that are to be the subject of allowances in the account. Two of those categories reflect allowances that, as I held in the substantive judgment, AFT ought to
5 Charles Rickett and Jessica Palmer “Restitutionary Remedies” in Peter Blanchard (ed) Civil Remedies in New Zealand (2nd ed, Thomson Reuters, Wellington, 2011) 383 at 421, citing Warman International Ltd v Dwyer (1995) 182 CLR 544 (HCA) at 558.
6 Ms Cooper raised the notion of AFT effectively holding the Pascomer opportunity as trustee for PBL and AFT as shareholders in AFTO.
be permitted to bring into the account for historic costs, namely [Redacted] (being the costs incurred by AFT and its Affiliates prior to 31 March 2022 in developing and commercialising the Pascomer opportunity),7 and [Redacted] (being the direct labour and overhead costs of AFT and its Affiliates prior to March 2022 associated with developing and commercialising the Pascomer opportunity).8
[15] Elsewhere in my judgment, I made observations to the effect that income and costs associated with the development and use of Pascomer in PWS (PWS not being an orphan condition) ought not to be brought into the account.9 Ms Cooper submits there may be an inconsistency within the judgment, in terms of the [Redacted] and [Redacted] necessarily including some costs which were incurred by AFT exclusively in relation to PWS development. Mr Ross, on the other hand, submits that the judgment speaks for itself, in that the amounts of [Redacted] and [Redacted] were said to be the historic cost allowances that AFT could claim in the account.
[16] I accept AFT’s position. As I explained to the parties at the hearing, it is not appropriate for me to comment on or explain the contents of my judgment, which must speak for itself. Ultimately, and as all parties appeared to accept, this point may need to be a matter taken up in the parties’ existing appeals against some aspects of my substantive judgment.10
Should the Crystaderm royalty of [Redacted] per cent be allowed for in the account of profits?
[17] The experts called by PBL and AFT agreed that, in establishing a net present value of the Pascomer opportunity, an allowance should be made for a “Crystaderm royalty” to compensate AFT for the benefit brought to the Pascomer opportunity by AFT’s proprietary Crystaderm technology. The experts did not agree, however, on the royalty rate to be adopted.11 I held that, had the account to PBL been determined by
7 Substantive judgement, above n 1, at [421].
8 At [423].
9 See, for example, at [408] and [510](i).
10 Since the hearing, I have also dismissed an application by PBL that my substantive judgment be recalled to address this point.
11 PBL’s expert said [Redacted] per cent, AFT’s expert said [Redacted] per cent.
way of its share of a risk adjusted net present value of the Pascomer opportunity, the Crystaderm royalty rate should be [Redacted] per cent.
[18] The expert evidence was not expressly directed to the exercise now being considered, namely the Crystaderm royalty in the context of a forward looking account of profits.
[19] The parties agree that, in relation to any direct sales of Pascomer by AFT, a [Redacted] per cent Crystaderm royalty is to apply. Both parties recognise, however, that there are likely to be relatively limited direct sales of Pascomer by AFT and, as Mr Ross characterised it, the “big prize” is sales into the United States and the European Union, which would be conducted through licensing agreements between AFT and third party licensees. The issue arising for determination is whether the [Redacted] per cent royalty should apply in this scenario also.
[20]PBL proposes that:
(a)a Crystaderm royalty rate of [Redacted] per cent is to apply when Pascomer is sold into territories by licensees; or
(b)the [Redacted] per cent rate applies, but only to royalty income paid to AFT under licence agreements, rather than to the net sales by the licensee.
[21] PBL submits that the [Redacted] per cent Crystaderm royalty rate I determined in the substantive judgment ought not simply carry across to the scenario in which Pascomer is being sold into a territory by a licensee, submitting that this would have the effect of diluting the ultimate profit share between PBL and AFT. PBL says that this arises because AFT would retain the full Crystaderm royalty, as well as 65 per cent of any royalty income paid to AFT under the licensing agreement (the remaining 35 per cent to accrue to PBL). In a worked hypothetical example, in which territory net sales are NZ$100 and the Pascomer royalty rate in the licensing agreement is [Redacted] per cent, Ms Cooper submits that PBL’s share of total profit to AFT/PBL would only be around [Redacted] per cent, rather than the 35 per cent to which it is
entitled.12 By a process of backwards engineering, PBL suggests that a Crystaderm royalty rate of [Redacted] per cent applies to net sales when those net sales are generated by a licensee under a license agreement. On this approach, PBL’s total share of profit is around [Redacted] per cent, which PBL accepts is “close enough” to its intended 35 per cent profit share.
[22] In opposing the approach advocated for by PBL, Mr Ross emphasises that PBL’s 35 per cent profit share is of the net profits of the Pascomer opportunity, not the gross profits, and that the suggested dilution effect only comes about when looking at gross profits. Accordingly, he submits that any Crystaderm royalties accruing to AFT, that would never have been subject to a profit share with PBL, are appropriately deducted from any income earned by AFT under licensing agreements, and it is only the net figure which is then shared between PBL and AFT. Consistent with this, he submits that the Crystaderm royalty rate should apply across the board to all net sales, irrespective of the method of sale into any given territory, suggesting that this was the approach adopted by the experts at trial, albeit in the context of calculating a risk adjusted net present value of the Pascomer opportunity.
[23] I have found this issue difficult, and suggested that the parties may wish to adduce further expert evidence in relation to it. For example, each party refers to the other party’s approach as “commercially non-sensical”, including by reference to industry standards (PBL suggests, for example, that AFT’s approach is known in the industry as “royalty stacking”). Nevertheless, the parties agreed that I should proceed on the basis of the evidence called at trial and the submissions made to date.
[24] I accept AFT’s approach to this issue. It is not immediately clear to me why a party in AFT’s position ought to receive a materially lower royalty on the Cyrstatderm technology simply on the basis that the sales method into any given territory is through a licensee rather than direct sales by AFT. As a matter of principle, a party in AFT’s position would expect to be compensated for the use of its technology in products sold into market (that is, via net sales), rather than being compensated by reference to royalty income accruing under a license agreement.
12 [Redacted].
[25] Further, while not addressing this issue directly, it does not appear to be in dispute that the expert evidence at trial was that the Crystaderm royalty applied to net sales under both direct sales by AFT and sales by licensees. For example, a key assumption adopted by Dr Walton (the valuation expert called by PBL) was that Pascomer had been licensed to licensees in North America and Europe. In applying a Crystaderm royalty rate of [Redacted] per cent as a cost of goods, Dr Walton did not suggest that this royalty rate applies to anything other than net sales in the ordinary way. Further, Dr Walton was asked to value the Pascomer opportunity at an earlier date than adopted in his primary valuation, and in that alternative valuation (which was also based on licensed sales into North America and Europe), stated that “a royalty of [Redacted]% of net sales for the Crystaderm technology is included in AFT’s share on top of their 65% participation in AFTO” (emphasis added). Mr Seiden, the valuation expert called by AFT, adopted a [Redacted] per cent rate of “end market revenues”. Finally, in its memorandum on the form of account, dated 4 December 2023, PBL stated that “the evidence of Dr Walton and Mr Seiden was consistent in that a royalty to AFT would need to be paid on net sales (although they differed in the amount)” (emphasis added).
[26] PBL has not persuaded me that a materially different approach ought to be adopted in relation to the Crystaderm royalty simply because the exercise is now a forward looking account. While the end product of the expert evidence at trial was a net present value of the Pascomer opportunity, one of the inputs to that value was an appropriate Crystaderm royalty rate forming part of the income stream being valued. As AFT notes, the account of profits now directly relates to that income stream. I accordingly adopt the net sales approach set out in the expert evidence at trial and the Crystaderm royalty rate adopted in the substantive judgment.
Should the account include a written summary of any significant progress in the development or commercialisation of the Pascomer opportunity?
[27] PBL proposes that the account include an obligation on AFT to provide a written summary of any significant progress in the development or commercialisation of the Pascomer opportunity in respect of the time period to which the relevant account report relates. PBL also proposes a schedule of topics which are to be addressed in the summary report.
[28] Mr Ross questions whether the account itself should extend to including such a report. He notes that AFT is not substantively opposed to providing a summary written report, though suggests that this should sit outside the account of profits itself. AFT also disagrees with the extent of information PBL suggests should be included in the summary report.
[29] I consider that a brief written summary of any significant progress in the development or commercialisation of the Pascomer opportunity in the time period to which the account report relates will be a helpful aspect of the account. It is likely to enable PBL to better understand what is contained in the more technical aspects of the account, and thus reduce the prospect of dispute. Further, given AFT already accepts, as a matter of principle, that it could be helpful to provide such a summary, I agree with Ms Cooper that it is likely to give rise to fewer disputes if this is included in the terms of the account itself.
[30] However, I do not think it is helpful to prescribe in granular detail what that summary is to include. It should simply be what it is stated to be, namely a written summary of any significant progress in the development or commercialisation of the Pascomer opportunity. In my view, seeking to now direct, and in a very detailed form, what the written summary should include is likely to lead to disputes as to whether particular information has been included or not, or included to a sufficient degree, or there are other matters that should have also been included.
[31] The essential point is that the written summary should summarise any significant progress in the development or commercialisation of the Pascomer opportunity in a way that is helpful and meaningful, in terms of PBL having the broader context in which to consider the account report that it has received.
[32] Finally on this topic, and as agreed at the hearing, the first account report will be provided by AFT within 75 days after the date of the form of the account being finalised by the Court.
Ancillary matters regarding record keeping by AFT
[33] There is a dispute about the types of records which AFT must be obliged to keep in order to substantiate the account, should the need arise.
[34] I accept AFT’s submission that these should be related to the content of the account itself, and not the much broader categories proposed by PBL. Those categories almost stray into discovery-like categories in the event there was a substantial dispute in relation to the account. Further, some of the categories are framed in relatively broad terms, with the result that there may be uncertainty as to what is and is not captured by them. In addition, broad — and potentially onerous and long-term — record keeping obligations are not appropriately embedded within an account of profits. PBL also has a right of audit under the account which, if exercised, would give the accountant appointed by PBL the right to access “such of the books, records and accounts of AFT and its Affiliates as may be reasonably necessary to verify the accuracy of the calculation of [the] Account of Profits for any financial half year.”
[35] I therefore make a direction that AFT’s record retention obligation under the account of profits is in the terms set out in the schedule to the draft form of account attached to AFT’s memorandum handed up for the hearing, dated 16 April 2024.
Ancillary matters regarding audit
[36] The parties agree that the form of account should include an audit right on the part of PBL. There are, however, some residual matters in dispute.
[37] The parties disagree on whether the auditor to be appointed by PBL should be from an independent certified public accounting firm of “internationally” recognised standing.
[38] I do not consider that the auditor needs to come from an “internationally” recognised firm. This would unreasonably limit the choice of entities from which the auditor can be drawn. I note Mr Ross’ point that the reference to the auditor being “internationally” recognised would, in part, be to guard against small and cost-
effective firms being utilised to take up the audit right at every possible opportunity. As discussed further below, however, there are better controls to guard against any such risk.
[39] The parties agree on the limitations as to how often PBL will be entitled to audit, with an (agreed) exception for when there is evidence of fraud or gross negligence, and PBL reasonably believes that such evidence indicates the possibility of fraud or gross negligence in any prior account period. What is in dispute is PBL’s proposed further exception, namely when “PBL has reasonable grounds to believe that the calculation of the account of profits is inaccurate”.
[40] I do not consider this further exception is necessary or appropriate. It is of quite a different nature to that of where there is evidence of fraud or gross negligence. Further, on the basis PBL takes up the audit rights it has, the audit will determine whether the calculation of the account is inaccurate. That is the appropriate remedy for a potentially inaccurate calculation (together with bringing the dispute back before the Court where required), rather than exercising multiple audit rights.
[41] The proposed form of account provides that PBL will bear all costs of the audit unless the audit reveals a discrepancy in PBL’s favour of more than five per cent of the account of profits to which it relates. AFT proposes amending this to PBL bearing the costs of the audit unless the audit reveals a discrepancy in PBL’s favour of more than the greater of five per cent of the account of profits to which it relates and NZ$50,000.
[42] AFT says that this is appropriate given that, if there is a more than five per cent discrepancy, this could nevertheless be on an extremely small amount, making an audit highly inefficient, yet resulting in AFT bearing the costs of that inefficient audit. PBL responds that its approach will incentivise AFT to be accurate and, if it is inaccurate to a magnitude of more than five per cent, it is not unreasonable that it bears the costs of the audit.
[43] I adopt AFT’s position, save that the threshold amount is reduced to NZ$30,000. In my view, this is a sensible balance between the exercise of the audit
rights, and doing so when the account of profits relates to very small amounts, and there is nothing prima facie suggesting anything is wrong. I also have some concern that audit costs could approach or even exceed the threshold of NZ$30,000, yet the audit could be of quite small amounts, at least in the short to medium term.
Result and costs
[44] For the reasons set out in this judgment, the form of the account of profits by AFT to PBL in relation to the Pascomer opportunity is as set out in the attached schedule.
[45] The process to determine the form of account has been an iterative process, in which the parties have agreed many items, and also where each party has altered its approach on some items. In those circumstances, my preliminary view is that the costs associated with setting the form of the account should lie where they fall.
[46] If, despite this indication, any party seeks costs, it may file a costs memorandum within 10 working days of the date of this judgment. Any costs memorandum in replay is to be filed within a further five working days. No memorandum is to be longer than three pages in length (excluding schedules). I will thereafter determine costs on the papers.
[47] Finally, there may be aspects of this judgment which require redaction. Pending hearing from the parties on this, publication of this judgment, other than to the parties/their advisers, is prohibited.
Fitzgerald J
Addendum:
Some parts of this judgment have been redacted to protect confidential/commercially sensitive information. Publication of the unredacted version of this judgment, other than to the parties and their advisers, is prohibited.
SCHEDULE
ORDERS FOR ACCOUNT OF PROFITS IN RELATION TO HIGH COURT JUDGMENT DATED 28 AUGUST 2023
Introduction
1.Parties
AFT Pharmaceuticals Limited (“AFT”)
PBL Solutions Limited (“PBL”)
2.Pascomer Opportunity
The New Zealand High Court (“NZHC”) in PBL Solutions Limited & Anor v AFT Pharmaceuticals Limited & Anor [2023] NZHC 2351 (“Judgment”) has determined that PBL is entitled to an account of profits made or to be made by AFT from commercialising the rights to a topical form of Rapamycin for the treatment of the “orphan” condition Facial Angiofibromas (“FA”) in Tuberous Sclerosis Complex (“TSC”) and any other existing or future orphan and “orphan-like” conditions as described at [510] of the Judgment (“Pascomer Opportunity”).1
These orders for account record the terms of the Account of Profit (as defined below).
Account of Profit
3.Account of Profit
AFT will pay to PBL an account of profit equal to 35% of the Pascomer Opportunity Profits (any such payment, an “Account of Profit”), where:
“Pascomer Opportunity Profits” means Pascomer Opportunity Capital Gains plus Pascomer Opportunity Revenue less Pascomer Opportunity Costs;
"Pascomer Opportunity Capital Gains” has the meaning in 4 below; “Pascomer Opportunity Revenue” has the meaning in 5 below; and
1 The NZHC has determined that the use of Rapamycin to treat Port Wine Stains (“PWS”) does not fall within the Pascomer Opportunity. PBL has appealed this aspect of the judgment.
“Pascomer Opportunity Costs” has the meaning in 8 below.
The provisions of these orders for account will be interpreted to avoid double counting of any items to be included in the calculation of Pascomer Opportunity Profits.
All calculations of Account of Profit amounts due by AFT to PBL under these orders for account will be made in accordance with NZ GAAP as consistently applied by AFT.
4. Pascomer Opportunity Capital Gains
“Pascomer Opportunity Capital Gains” means the net cash or cash equivalent (where the consideration is or includes non-cash items) consideration received by AFT and its Affiliates from the sale or transfer of all or any part of their rights and interests in and to the Pascomer Opportunity to a Third Party less costs incurred by AFT and its Affiliates in connection with the Pascomer Opportunity or its sale or transfer, to the extent not previously recovered by AFT from any Account of Profit paid or credited to PBL. The Pascomer Opportunity Capital Gains do not include any consideration received by AFT and its Affiliates from the sale or transfer of all or any part of their rights and interests in the Crystaderm technology used in Pascomer Products.
A “Third Party” is any person that is not AFT or an Affiliate of AFT.
An “Affiliate” of AFT is any person controlled by, controlling or under common control with AFT, where “control” (and “controlling”, “controlled by” and “under common control”) means, in the case of a person: (a) the power to direct the management and policies of that person (whether through ownership, by contract or otherwise); or (b) ownership of more than 50% of the securities of that person.
5. Pascomer Opportunity Revenue
“Pascomer Opportunity Revenue” means Net Sales plus Royalty Income plus Licensing Income, where:
“Net Sales” has the meaning in 6 below;
“Royalty Income” means any income received by AFT and its Affiliates under a License Agreement (defined in 9 below) that is calculated as a percentage of net sales of Pascomer Products; and
“Licensing Income” means any other income received by AFT and its Affiliates under a License Agreement in respect of the Pascomer Opportunity other than Royalty Income (for clarity, Licensing Income excludes payments for Pascomer products under manufacturing or supply agreements).
6. Net Sales
“Net Sales” means the total amounts invoiced or otherwise charged by AFT and its Affiliates with respect to the sale or other commercial disposition of Pascomer Products (defined in 7 below) to Third Parties or any other revenue howsoever generated by AFT from the sale or other commercial disposition of Pascomer Products to Third Parties, in each case after subtracting the following items:
(a) credits or allowances granted on account of rejections, returns and invoicing errors;
(b) actual retroactive discounts, charge-backs, levies or rebates granted to legally recognised healthcare organisations, healthcare insurance carriers or to regulatory authorities;
(c) mandatory rebates;
(d) actual and estimated bad debt write-off attributable to such Net Sales and to obsolete and slow-moving items of Pascomer Products; and
(e) customs, GST, VAT and other taxes based on the supply price of the Pascomer Product and separately set forth in the invoice, but solely to the extent not otherwise reimbursed or credited to the Third Party.
For the avoidance of doubt, Net Sales do not include amounts that AFT or its Affiliates invoice for Royalty Income or Licensing Income.
7. Pascomer Products
“Pascomer Products” means pharmaceutical products containing a topical form of Rapamycin (singularly or in combination) for the treatment of FA in TSC and any other orphan and “orphan-like” conditions as described at [510] of the Judgment.
8. Pascomer Opportunity Costs
“Pascomer Opportunity Costs” means:
(a) [Redacted], being the amount determined by the High Court of New Zealand as the costs incurred by AFT and its Affiliates prior to 31 March 2022 in developing and commercialising the Pascomer Opportunity (including the development, registration, licensing, manufacture, distribution, sale and other commercial disposition of the Pascomer Opportunity and Pascomer Products);
(b) all costs incurred by AFT and its Affiliates on or after 31 March 2022 in relation to developing and commercialising the Pascomer Opportunity (including the development, registration, licensing, manufacture, distribution, sale and other commercial disposition of the Pascomer Opportunity and Pascomer Products);
(c) [Redacted], being the amount determined by the High Court of New Zealand as the direct labour and overhead costs of AFT and its Affiliates prior to 31 March 2022 associated with developing and commercialising the Pascomer Opportunity (including the development, registration, licensing, manufacture, distribution, sale and other commercial disposition of the Pascomer Opportunity and Pascomer Products);
(d) direct labour and overhead costs of AFT and its Affiliates on or after 31 March2022 associated with developing and commercialising the
Pascomer Opportunity (including the development, registration, licensing, manufacture, distribution, sale and other commercial disposition of the Pascomer Opportunity and Pascomer Products); and
(e) an amount equal to Crystaderm Royalty (defined in 9 below).
For avoidance of doubt, in calculating the costs defined in paragraphs (b) and (d):
(i)costs associated exclusively with PWS development (development, packaging, regulatory, intellectual property, preclinical and clinical) are to be excluded; and
(ii)costs associated with developing and commercialising the Pascomer Opportunity and with other activities of AFT and its Affiliates (eg PWS development) are to be apportioned between those activities on an appropriate basis consistent with generally accepted accounting practice.
9. Crystaderm Royalty
“Crystaderm Royalty” means an amount equal to the aggregate of:
(a) where AFT and its Affiliates have not entered into any license or distribution agreement with a Third Party in respect of a territory, [Redacted]% of Net Sales in that territory, being a royalty payable to AFT for use of AFT’s Crystaderm technology in Pascomer Products where AFT and its Affiliates are selling Pascomer Products directly in a territory;
(b) where AFT or any of its Affiliates have entered into a license or distribution agreement with a Third Party for that Third Party to sell Pascomer Products in a territory (such agreement, the “License Agreement” and such Third Party, the “Licensee”) [Redacted]% of the net sales of Pascomer Products (as net sales are defined under the License Agreement) by the Licensee and entities controlled by the Licensee in that territory (“Licensee Net Sales”), being a royalty payable to AFT for the
use of AFT’s Crystaderm technology in Pascomer Products in the relevant territory.
Payment, Reporting of Account of Profit, Audit
10.Payment
Within 90 days after the date of these orders for account, AFT will pay to PBL any Account of Profit arising from consideration or revenue earned in the period up to (and including) 31 March 2024, calculated as Pascomer Opportunity Capital Gains and Pascomer Opportunity Revenue received during that time period less any Pascomer Opportunity Costs incurred during that time period.
Within 90 days after the end of each financial half year of AFT (31 March and 30 September respectively) after 1 April 2024, AFT will pay to PBL any Account of Profit arising from consideration or revenue earned in that time period, calculated as Pascomer Opportunity Capital Gains and Pascomer Opportunity Revenue received during that time period less any Pascomer Opportunity Costs incurred during that time period (or carried over from a previous time period and not yet accounted for as attributed to Pascomer Opportunity Capital Gains or Pascomer Opportunity Revenue).
All payments of amounts owed to PBL will be paid to PBL in NZD to the following bank account:
[Redacted]
However, if AFT has not received payment within 90 days after the end of a financial half year for any amount of Pascomer Opportunity Capital Gains or Pascomer Opportunity Revenue earned in that financial half year (an “Outstanding Amount”), AFT will not be required to pay PBL that portion of the Account of Profit that relates to the Outstanding Amount until 15 days after AFT receives payment of the Outstanding Amount. In the event that there is any Outstanding Amount AFT shall notify PBL of that fact in the Account Report.
If any amount due under these orders for account is not paid when due then default interest shall be payable by the party in default on a daily basis from the
date of default until the default is remedied at the rate applicable under the Interest on Money Claims Act 2016. Default interest will not be payable on any amount that is the subject of a notice of objection under section 14.
11. Reporting of Account of Profit
Within 75 days after the date of these orders for account for the period up to and including 31 March 2024, and within 75 days after the end of each financial half year (31 March and 30 September respectively) thereafter, AFT will provide to PBL a written report of the Account of Profit (if any) for such time period (each an “Account Report”), broken down by: (i) the amount of Pascomer Opportunity Capital Gains, Pascomer Opportunity Revenue, Net Sales, Licensing Income, Royalty Income and Pascomer Opportunity Costs received or incurred during that time period; (ii) the amount of Pascomer Opportunity Costs carried over from any previous time period and not yet offset against Pascomer Opportunity Capital Gains or Pascomer Opportunity Revenue; and
(iii) the deductions taken to the definition of Net Sales, to determine the Account of Profit (if any) arising from that financial half year.
Each Account Report will include a written summary of any significant progress in the development or commercialisation of the Pascomer Opportunity in the time period to which that Account Report relates.
The first Account Report provided under these orders for account will be for the period up to and including 31 March 2024, with the written summary of any significant progress in the development or commercialisation of the Pascomer Opportunity to be in respect of the period from 1 November 2022 to 31 March 2024 (recognising that the period prior to 1 November 2022 was covered via discovery and evidence in the trial to which the Judgment relates).
Each Account Report is to be reviewed by AFT’s Chief Financial Officer (or in their absence a director of AFT) prior to being provided to PBL.
If AFT permanently ceases all development and commercialisation activities relating to the Pascomer Opportunity, AFT will notify PBL in the Account Report for the period in which that permanent cessation takes effect and
thereafter will not be required to provide PBL with an Account Report in respect of any subsequent period unless AFT resumes such development and commercialisation activities.
12. Records
The books of account of AFT (and to the extent they are relevant, those of Licensees) are prima facie evidence of the truth of the matters contained in them for the purposes of the Account of Profit.
AFT will keep (all in accordance with NZ GAAP) complete and accurate records in sufficient detail to properly reflect the Account of Profits (including its elements as described in these orders for account) and to enable any payment of Account of Profits payable under these orders for account to be determined, including the information listed in the Schedule herein.
AFT will retain such records relating to each financial year for at least five years after the conclusion of that financial year.
13. Audits
PBL will have the right to appoint an independent certified public accounting firm of recognised standing, to obtain access during normal business hours, and after giving at least 20 business days prior written notice, to such of the books, records and accounts of AFT and its Affiliates as may be reasonably necessary to verify the accuracy of the calculation of Account of Profits for any financial half year. PBL will not have the right to:
(a) conduct more than one such audit in any twelve month period;
(b) audit records relating to Pascomer Opportunity Capital Gains or Pascomer Opportunity Revenue received, or Pascomer Opportunity Costs incurred, more than two years prior to the audit; or
(c) audit the same period of time more than once,
unless evidence of fraud or gross negligence arises and PBL reasonably believes that such evidence indicates the possibility of fraud or gross negligence in any such prior period.
The accounting firm will not have any advocacy mandate but an independent review mandate. It will deliver a draft copy of its report to AFT and PBL for review and comment no less than 15 business days prior to its finalisation, and will consider any response received from AFT and PBL to that draft report before delivering its final report.
PBL will bear all costs of such audit, unless the audit reveals a discrepancy in PBL’s favour of more than the greater of (i) 5% of the Account of Profit to which it relates and (ii) NZ$30,000, in which case AFT will bear the cost of the audit.
14. Additional amounts and rights of objection
If, based on the results of any audit, additional payments are owed to or from PBL, then AFT or PBL will make such additional payments within 15 business days after the accounting firm’s final report is delivered to the parties, unless within that time either party provides a notice of objection to the other party, specifying the nature and details of the findings of the accounting firm’s final report that they object to.
If a notice of objection is given, the matters objected to will be determined by the High Court of New Zealand.
15. Taxes
If any taxes on payments to PBL are required to be withheld by AFT and paid to the applicable taxation authority, AFT will:
(a) pay such taxes required to be withheld to the taxation authority on behalf of PBL;
(b) send proof of such payment to PBL; and
use commercially reasonable efforts to assist PBL in its efforts to claim and obtain a credit for such tax payment from its local authorities and/or obtain any benefit of any applicable tax treaty.
General
16.Confidentiality
Each of AFT and PBL will keep all confidential information received from the other party or any of the other party’s affiliates (“Confidential Information”) confidential and will use the Confidential Information only for the performance of or exercise of its rights under these orders for account.
Each party will not disclose Confidential Information other than to such of its and its affiliates’ directors, employees, litigation funder, contractors, agents or consultants (“Representatives”) who have a need to know such Confidential Information to perform the terms of these orders for account or enforce its rights under these orders.
Each party will advise any of its Representatives that receives Confidential Information of the confidential nature thereof and the obligations contained in these orders for account relating thereto and will ensure that all such Representatives comply with such obligations as if they had been a party to these orders for account.
Each party may disclose Confidential Information to the extent such disclosure is reasonably necessary to: (a) comply with or enforce any of the provisions in these orders for account; (b) comply with applicable laws or a court order; or (c) comply with the rules of any stock exchange on which its securities are listed.
Schedule – Information relating to the Pascomer Opportunity to be retained by AFT
AFT will retain the following in accordance with section 12 of these orders for account:
(i) all contracts entered into by AFT and its Affiliates in relation to the Pascomer Opportunity;
(ii) all invoices issued, all payments receipts received, by AFT and its Affiliates, that support Pascomer Opportunity Capital Gains and Pascomer Opportunity Revenue;
(iii) all invoices received by AFT and its Affiliates that support Pascomer Opportunity Costs;
(iv) where any Pascomer Opportunity Costs are associated with developing and commercialising the Pascomer Opportunity and other activities of AFT and its Affiliates, all calculations and materials that support the apportionment of those costs between those activities.
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