Mr Justice Sales :
- This is the trial of a preliminary issue pursuant to an order dated 22 May 2008. The preliminary issue is whether the First Claimant ("Fanmail") should be granted a declaration that it is the beneficial owner of the four issued shares in the Fifth Defendant ("DPL"). When they were originally issued on 17-18 September 2001, the shares were held one each by the First Defendant ("Mr Bob Cooper"), the Third Defendant ("Mr Zghari"), the Second Claimant ("Mr Burtenshaw") and the Sixth Defendant ("Ms Wayne"). The only change in this position is that in 2002 Mr Zghari transferred his share to Mr Bob Cooper, who therefore now holds two shares. The Second Defendant ("Mr David Cooper") is the son of Mr Bob Cooper.
- Ms Wayne took her share in DPL, as a company formation agent, in the course of setting up DPL as an "off-the-shelf" company. It was left in her hands by an oversight. She has agreed to hold her share either for Fanmail, if Fanmail succeeds in its present claim, or for the other shareholders in DPL in proportion to their shareholdings. She has played no part in the trial.
- The remainder of the action is a derivative claim brought by Mr Burtenshaw on behalf of himself and all the other shareholders in DPL in respect of the assignment from DPL to the Fourth Defendant ("MCashback") of certain intellectual property rights which are discussed below. Mr Bob Cooper, Mr David Cooper and Mr Zghari are shareholders in MCashback and remain closely involved in its business. Put very shortly, the derivative action involves a claim that Mr Bob Cooper, Mr David Cooper and Mr Zghari improperly diverted rights and business opportunities which properly belonged to DPL to MCashback so as to exploit them for their own benefit. The claims made in the derivative action fall outside the matters which I have to determine under the order for trial of the preliminary issue, and I therefore do not explore them further.
- These legal proceedings were commenced in 2006, several years after the events to which they relate. The reason for this is that until 2006 it was not clear to the Claimants and investors in Fanmail that there was sufficient monetary value in the claims they wished to advance to merit the expense of taking legal proceedings. However, in 2006 they learned that the intellectual property rights then held by MCashback and the business opportunity which it was exploiting on the basis of them appeared to be very valuable. They then raised funds to bring these proceedings. In light of the passage of time between the events in issue and the trial, this is a case in which I have given particular weight to the contemporaneous documentation in assessing the evidence of the witnesses.
The factual background
- Mr Burtenshaw was, at the material times, the principal partner in a firm of quantity surveyors which had originally been set up as P K Burtenshaw Associates in 1987. Over time the name of the partnership changed and it also established a group of related limited partnerships. The partnership's main business was undertaken through a corporate vehicle, Burtenshaw Associates Limited. For convenience I will refer to the partnership as "Burtenshaw Associates". Burtenshaw Associates was originally established in Norwich and then expanded, with offices in other cities.
- In 1999, as part of Burtenshaw Associates' expansion, it was decided that it would open an office in London. It was also decided that it would extend the range of services which it offered to include the recovery of capital taxation allowances in connection with property developments. Mr Zghari was a chartered surveyor with experience in the capital taxation allowance field. He was recruited by Mr Burtenshaw to head the new London office and started work for Burtenshaw Associates on 1 November 1999.
- At about this time Mr Burtenshaw had come into contact with Mr Bob Cooper through their mutual interest in Norwich City Football Club ("NCFC"). Mr Bob Cooper was then the Chairman of NCFC. Burtenshaw Associates was engaged to carry out some quantity surveying and project management services for NCFC. Mr Burtenshaw and Mr Bob Cooper got to know each other well.
- Mr Bob Cooper's background is in retailing. He joined J. Sainsbury plc ("Sainsbury's") in about 1975 and remained with that company until 1998. In 1988, at the age of 39, he was appointed to the main board of Sainsbury's. Whilst working for Sainsbury's, he acquired very extensive knowledge of the retailing business. He also developed a close personal and working relationship with Delia Smith, the well-known cookery presenter, who was a consultant to Sainsbury's. In 1996 he joined the board of New Crane Publishing Limited which belonged to Delia Smith and her husband which, amongst other things, published the Sainsbury's magazine. Shortly after leaving Sainsbury's, in November 1998, he became the Chairman of NCFC and remained in that position until May 2002. Throughout his business career Mr Bob Cooper had been involved in developing and supporting new business ideas and products. That was an interest which he retained after leaving Sainsbury's.
- Mr Zghari quickly demonstrated to Burtenshaw Associates that he had a good understanding of computer systems and software. His understanding of these matters was far in advance of Mr Burtenshaw and his partners. Alongside his work on capital allowances he demonstrated an interest in and a flair for applying his knowledge of computers and software to the creation of marketing instruments. In particular, he developed an email brochure for Burtenshaw Associates at a time when this was a distinct and innovative idea. Mr Burtenshaw showed this to Mr Bob Cooper who was impressed by it. Mr Bob Cooper was interested in the communication of brochures in an interactive format via email as a possible marketing tool to promote club events and fundraising using NCFC's fan base as an initial database from which individuals could be targeted via email.
- Mr Burtenshaw and Mr Cooper discussed the possibilities that this form of email contact with football fans might have in relation to marketing football clubs and sport generally. To develop a business of this kind it would be necessary to have access to the details of fans held by football clubs on their own databases. If that could be achieved they thought that this form of marketing tool, combined with access to such databases, could become extremely valuable to outside organisations wishing to sell to this sector of the market as well as to the football clubs themselves. Mr Bob Cooper expressed interest in becoming involved with a new company to be set up to develop this business idea.
- The company which was to be set up to do this was Fanmail. It was eventually incorporated on 29 November 2000. Mr Burtenshaw was appointed as a director and chairman. Mr Zghari was appointed as the other director. In August 2000 Mr Bob Cooper agreed to make a substantial investment of £100,000 in the company in return for 10% of the shares for himself and his wife ("Mrs Cooper"). He did not wish to become a director of it, because he did not have a great deal of time to devote to the business and it might also jeopardise his entitlement to Enterprise Investment Scheme tax relief in relation to his investment.
- With a view to getting help with the promotion of the Fanmail business idea, Mr Bob Cooper introduced Mr Burtenshaw and Mr Zghari to Caroline Townley of Active Rights Management Limited ("ARM"). Ms Townley had experience in digital media and the management of sports rights and data and had contacts within the football league. She also was interested in the Fanmail business idea, for sports clubs to enter into some form of interactive engagement with their fan base through the medium of email. She thought it could have general application to sporting organisations worldwide.
- In September 2000, according to Ms Townley's evidence, which I accept, Mr Bob Cooper offered her a 5% stake in Fanmail. This was on the basis that Ms Townley should subscribe a fairly nominal sum of £500 and would agree not to charge the company for her time or for the access she could provide to her network of contacts in the sporting world. Mr Zghari contacted Ms Townley to suggest that this equity stake would be raised to 10% subject to certain performance targets being met which were to be agreed. In fact it transpired that Ms Townley was issued with 8.79% of the issued shares in Fanmail at the outset. It is unclear why there was a departure from the terms originally proposed. However, the basic idea underlying her involvement is clear. She was to have an equity stake in the company so as to incentivise her to provide the company with the benefit of her experience, knowledge and contacts, so that if Fanmail and its business idea took off and became valuable, she would share in its success, which it was hoped she would help to create. Her shareholding was to be in lieu of payment for her services.
- Mr Burtenshaw also took advice from Norman Wilson, an acquaintance who was a management consultant. On 18 July 2000 Mr Burtenshaw and Mr Zghari introduced Mr Wilson to Mr Bob Cooper. This was the only occasion on which Mr Wilson met Mr Bob Cooper, and he had a good recollection of it. Mr Bob Cooper was introduced to Mr Wilson as someone who was about to make a large investment into the company and its future chairman.
- Mr Burtenshaw sought out other investors for Fanmail. Investors were offered smaller stakes of 1% in the company for £20,000 each. Two people invested at this level: Donald Little and Martin Scott. Mr Little had just been made redundant from Mothercare (where he had worked for a considerable period) and was persuaded to use £20,000 of his redundancy payment to take a 1% stake in Fanmail. He was approached and agreed to invest in about September 2000, and gave his cheque to Fanmail in December 2000. Coincidentally, shortly after that he joined Burtenshaw Associates as a project manager. In this new job he worked from Burtenshaw Associates' office in London, at which he had frequent day-to-day contact with Mr Zghari and Mr David Cooper, who worked from the same office.
- Mr Scott is a solicitor who was a business acquaintance of Mr Burtenshaw. He is a partner in the firm Walker Morris, which acts for the Claimants in these proceedings. Mr Burtenshaw and Mr Zghari met Mr Scott over lunch on 19 April 2001. They discussed a range of ideas which were by that stage being worked on within Fanmail, including use of email to send out electronic promotional coupons and email scratchcards. There was also some general discussion about whether it might be possible to use mobile phones in promotional schemes. In seeking to persuade Mr Scott to invest (according to Mr Burtenshaw's evidence and a note of instructions which Mr Zghari gave to the Defendants' solicitors, Berwin Leighton Paisner, in 2002, and as I find), Mr Burtenshaw and Mr Zghari confirmed to him that if any products developed by Fanmail proved to be marketable, they would be kept within Fanmail's control and would be covered by his investment. On this basis, Mr Scott invested £20,000 in May 2002.
- Mr Zghari was to be incentivised in a similar way to Ms Townley. Mr Burtenshaw and Mr Bob Cooper regarded him as a fund of useful ideas which could potentially be developed by Fanmail. Although he was to remain employed by Burtenshaw Associates, which paid his salary and associated benefits, it was nonetheless thought that he would devote himself to promoting Fanmail with particular enthusiasm if he could see that he had a significant stake in the company if it were to be successful. Accordingly, he was to be issued with 20% of the issued share capital. As it transpired, however, the shares in fact issued to him came to rather less than this, at 17.58%. He paid £500 for this.
- Mr Burtenshaw was to take the main part of the issued capital in Fanmail. Other than a small payment of £455, he did not invest cash in the company, but was to arrange for provision of resources by Burtenshaw Associates. His partners in Burtenshaw Associates (Messrs Howe, Sparrow, Taylor, Pye and Powley) were to take percentage shareholdings in Fanmail reflecting their participation in the equity of the partnership. Like Ms Townley and Mr Zghari, each of them invested a fairly nominal £500 for their respective shareholding.
- The total money invested in Fanmail thus amounted to approximately £144,000, of which Mr Bob Cooper had provided the largest part.
- As a result of these arrangements the ultimate shareholding in Fanmail, as agreed on the pleadings, was as follows:
| Name |
No. of shares |
Percentage |
| Mr Burtenshaw |
45,500 |
39.99 |
| Ms Townley |
10,000 |
8.79 |
| Steve Howe |
7,000 |
6.15 |
| Richard Sparrow |
7,000 |
6.15 |
| Paul Taylor |
7,000 |
6.15 |
| David Pye |
1,750 |
1.54 |
| Colin Powley |
1,750 |
1.54 |
| Bob Cooper |
8,612 |
7.57 |
| Mrs Cooper |
2,874 |
2.52 |
| Mr Zghari |
20,000 |
17.58 |
| Mr Little |
1,149 |
1.01 |
| Mr Scott |
1,149 |
1.01. |
- Fanmail recruited two employees. Tracy Ferneyhough was a graphic designer who began working for Fanmail on a freelance basis in about late 2000. She became a full-time employee of Fanmail in March 2001. She designed a logo for Fanmail, amongst other things. In November 2000 Mr David Cooper, then a young man of 23, returned from travelling overseas and was looking for a job. Mr Bob Cooper suggested that he should seek a job with Fanmail. Mr Zghari interviewed him. Despite Mr Zghari's initial reservations, he was impressed by him at the interview and took him on as an employee originally on a temporary basis. After a short period it was confirmed that his employment should be made permanent.
- Mr Zghari's role in relation to Fanmail was in practice that of chief executive officer. He managed Ms Ferneyhough and Mr David Cooper. Although his salary was paid by Burtenshaw Associates, he spent a good deal of time working on ideas for the company and on drafting business plans and presentations of those ideas for investors and potential trading partners. In about January 2001 Mr Burtenshaw and Mr Zghari agreed that Burtenshaw Associates should charge a management charge to Fanmail of £4,500 plus VAT per month in respect of the support which Burtenshaw Associates provided. This was only actually paid in three months; for the most part these charges were accrued as debt owed to Burtenshaw Associates.
- There was a dispute at trial regarding just how much of Mr Zghari's time was actually spent working on Fanmail business, as opposed to Burtenshaw Associates' business. Mr Zghari and Mr David Cooper sought to suggest that Mr Zghari did not spend a great deal of time working on Fanmail's affairs. However, the time sheets Mr Zghari completed each week in the course of his employment (until he resigned at the end of April 2002) recorded that the great majority of his time was spent on Fanmail business. After DPL was incorporated, the time recorded as spent on Fanmail business clearly also covered the time he spent on DPL's affairs.
- Mr Zghari pointed out, correctly, that the time sheets were completed in a very standardised way by him, and suggested that they did not accurately state the actual time he had spent working for Fanmail each week (although he does seem to have been accurate in setting out times worked for other clients of Burtenshaw Associates). I think it is right that the time sheets were not a fully accurate record week by week of the time he spent on Fanmail; but I also think that, whatever the actual time he worked on Fanmail and DPL affairs from late 2000 onwards, they did occupy most of his working time. The time sheets set out a picture which was basically correct: I can see no reason why Mr Zghari would have wished to present a false account to his employer. Moreover, when relations between Mr Zghari and Burtenshaw Associates were in the course of breaking down in early 2002, Mr Taylor of Burtenshaw Associates sent him a memorandum dated 26 February 2002 in which he stated that the partnership had suffered financially "by allowing [Mr Zghari] to concentrate the bulk of his time in the pursuance of Fanmail/[DPL] matters …". It does not appear that Mr Zghari disputed that at the time, and in my view that memorandum recorded the true position.
- On 29 November 2000 Fanmail engaged Soda Creative Technologies Limited ("Soda") to assist it in developing its business ideas. Soda had expertise in working with computers for marketing purposes. It was principally represented by Mr Fiddian Warman. Mr Zghari gave him an initial brief to work with Fanmail to develop a range of products which included a Fanmail email newsletter aimed at sports fans and a project called "scratchemail", which was to be an innovative on-line scratch card. Discussions related to scratchemail led into ideas for the development of email coupons. The basic idea here was that coupons for money off retail products could be reduced to a barcode coupon which could be sent to consumers via promotional emails, printed out by them and then redeemed either via the tills at retail outlets or through a web site.
- Various features of these promotional tools were worked on by Soda with contributions from Mr Zghari throughout late 2000 and the early part of 2001. It is clear that at this stage Fanmail was looking to develop a number of business ideas, all at a very early stage of development and all loosely grouped together under the general idea of using new technology to develop new and innovative marketing and promotional approaches. Fanmail (in particular, Mr Zghari working with Soda) was seeking to generate a range of new ideas in this broad area. It was not limiting itself just to development of the original Fanmail brochure idea - in fact, by late 2000 Ms Townley's proposals to introduce that idea to the football league had foundered, and it did not appear that it was likely that it would attract the significant investment which would be required to take it further, so Fanmail had begun to concentrate on working up other ideas. It was hoped that one out of a suite of ideas that it developed might prove to be valuable and capable of being worked up to a more advanced stage, at which point additional investment could be sought or the company sold off to other investors.
- In about November 2000 Fanmail produced its first brochure. This dealt with email marketing and ideas as to how to engage in long-term communication dialogue with customers, focusing on the potential for interactive email exchanges with them. These general ideas were promoted under the heading, "customer relationship management".
- Ms Townley used her skills and contacts to try to promote Fanmail's business. On 16 November 2000 ARM hosted a special networking day at their Hereford office for several start-up businesses in which they were involved in a similar way to Fanmail. Mr Zghari attended. Several of the companies which made presentations that day were considering using mobile phones in their business ideas and covered this in the presentations that they gave. Generally, ideas for using mobile phones in the context of marketing campaigns were in the air among technology companies at this stage. ARM also commissioned an email Christmas card from Fanmail as a way of demonstrating the Fanmail product, and these were sent out by ARM to all their contacts.
- From March 2001 Fanmail began to operate its business from the same location in London at 24C Wheler Street, London E1, as Burtenshaw Associates' London office.
- In the early part of 2001 Fanmail's business began to build momentum. Product ideas were being floated and investigated at a great rate. According to Ms Townley, whose evidence I accept, she was in frequent contact with Mr Zghari at this time, either over the telephone or through meetings. According to her, this ferment of ideas and generation of new approaches was normal for new media technology companies at the time, who were all trying to find, under conditions of great uncertainty as to what would be effective and what not, a valuable application for the new technology (in Ms Townley's words, the "killer application") in their sector before someone else did. Such companies were trying to react to problems that had emerged in the course of the "dot com" crash, where business models had been insufficiently targeted on particular customers and insufficiently geared to producing revenue streams which could provide value to a business. They were trying to search for more individualised and targeted methods of promotion and marketing of products.
- Ms Townley and Mr Warman both had the impression that it was Mr Zghari who was leading the development of ideas and their evaluation before reporting back to the investors in Fanmail. I find that Mr Zghari was the main source of the technical ideas that the company was seeking to identify. He was assisted in that regard in particular by Soda and to some degree by Ms Townley. Mr Burtenshaw and his partners had no significant contribution to make to the identification and development of these ideas. I also find that Mr Bob Cooper had little to contribute on the technical side to the identification and development of these ideas. He did, of course, have extensive business experience, and Mr Zghari looked to him for assistance with the assessment of market opportunities and business models.
- The ideas being generated by Fanmail at this time led in various directions, which in turn led to new thinking and new business ideas being developed. From the basic idea of interactive emails to sports fans the company worked on other forms of personalised, direct and trackable marketing via new technology. One idea that was worked on was scratchemail, by which emails could be sent to individuals containing a computerised form of scratch card for use in gambling or lotteries. Technical problems in relation to how to ensure that the scratch card could be opened only once were considered. Fanmail's work on email barcode coupons was related to this. A problem in relation to these was how to ensure that they could only be used once and only by the intended recipient.
- From the work done on these ideas there was a natural progression to discussing the integration of mobile phones into marketing and promotional ideas. In early 2001 one idea which was discussed was the use of mobile phones to send personalised offer information by SMS messages; another was to use them as a method for payment of small amounts when using internet gaming. Charges for small amounts could be directed through mobile phone billing systems. Ms Townley was interested in the commercial attractiveness of ideas being worked on by Fanmail which might offer an immediate personalised approach that could be developed using mobile phones.
- None of these ideas was regarded as being contained in a hermetically-sealed box separate from the others. All were being generated and floated by Fanmail in the hope that one of them might be perceived to have sufficient business merit to be developed more fully and worked up into a business with commercial value. Fanmail was seeking to develop a portfolio of ideas which could be taken to investors so as to attract them to invest in the company or who might provide market opportunities for it to develop those ideas into a viable commercial business. The ideas were closely related to each other, they grew out of the same area of thinking about the development of marketing and promotional techniques using new technology, and they were developed against a background of uncertainty regarding which of them might eventually prove to be both technically viable and of sufficient commercial interest to be carried forward.
- It was in that context that those running and investing in Fanmail (principally Mr Burtenshaw, Mr Bob Cooper and Mr Zghari) developed a business model that when one of these business ideas was identified as potentially viable a new company would be set up in relation to that idea to act as the vehicle for its development and promotion. It was thought that this model would have two benefits in particular. First, using a distinct company to promote a particular idea would allow that company to be named and branded specifically in relation to that idea which, it was thought, would help in attracting investment for that idea and establishing it in what was a very competitive market place. Secondly, it was appreciated that Fanmail and its investors had limited capital and capacity available to take ideas forward into further stages of development. Using a distinct company would thus create the opportunity for providing incentives for individuals or companies whose services were thought to be particularly valuable in developing the business idea by way of payment for their time and effort in promoting that idea in the form of their taking an equity stake in the company. In this way, they could be given the opportunity to share in any commercial value which was generated through the development of the idea. This was a normal and straightforward conception for providing assistance to start-up companies in the technology field. It followed the model which had been used for Fanmail itself. It was inherent in the use of this model that the shareholdings in the corporate vehicles which might be formed for the development of particular ideas would not correspond exactly with the shareholding in Fanmail itself. But Fanmail could still retain control of such companies. In effect, the shareholders' interests in Fanmail would be capable of being diluted to some degree by the issuing of incentivising shares to important contributors in relation to each new corporate vehicle created to carry forward Fanmail's business ideas.
- Such was the rate of generation of new ideas that there was perceived to be a risk that Fanmail was not sufficiently developing any one of them to a stage where it could be turned to commercial advantage. However, by April 2001 Fanmail had a range of products or applications which were close to being ready to be tested, and emphasis was then given to marketing those ideas. The core of the portfolio of ideas at this time was the original Fanmail sports brochure idea, scratchemail and email barcode coupons.
- In relation to scratchemail, Fanmail proposed to use an off-the-shelf company which had been acquired some time previously (in March 2000) with the issue of one share each to Mr Burtenshaw and Mr Zghari. This company was originally called Kingdom Corporation Limited, but was renamed Rideup Limited ("Rideup") by a resolution passed on 2 May 2000 after an ideas session attended by Mr Burtenshaw, Mr Zghari and various partners in Burtenshaw Associates.
- On 27 April 2001 Mr Zghari wrote to Ms Townley. He emphasised that Fanmail now wished to bring itself and its ideas to market. He said:
"[Fanmail] and [Rideup] (operating company for the gaming and betting industry) have invested a considerable amount of working capital in bringing the business to its current position. It now needs to turn potential into reality.
We structured the incentive shareholding with you so that we could all benefit from the commercial development of these new forms of communication and business development. With your strong client base and your links with sport we are confident that we can really start to make good progress."
- It is significant that Mr Zghari described Rideup as the "operating company" in relation to the gaming and betting industry, that is to say in relation to the scratchemail idea (and related ideas) which Fanmail had developed for that industry. He also produced a business structure chart in which Fanmail and Rideup were grouped together in relation to business concepts and developments. As the chart and email indicate, everyone at this stage was treating Rideup and Fanmail as closely related entities, with Rideup being regarded as the potential operating company according to the business model referred to in paragraph [35] above. It is worth setting out the position in relation to Rideup in some detail, because of the bearing which it has upon the ownership of the shares in DPL, which was formed some time later.
- Ms Townley's evidence, which I accept, was that Mr Zghari discussed with her that a subsidiary company of Fanmail was to be established in relation to scratchemail and that Soda would be given a minority stake in it in return for it reducing its costs in developing the product. She understood from this discussion that she would have an interest in that operating company as a shareholder in Fanmail, as, save for the shares for Soda, the other shares in that company were to be owned by Fanmail. She and Mr Zghari discussed this approach as one that would be appropriate in other situations where there was a third party who would make a significant investment of time and effort or a significant contribution to the development of other specific products or overseas territories, and for targeted incentivisation of key individuals in relation to particular products.
- The documentation sent to Ms Townley by Mr Zghari on 27 April 2001 also referred to the possibility of Fanmail using its email marketing ideas in conjunction with Delia-online, the internet vehicle for Delia Smith. This was a business opportunity which had been introduced by Mr Bob Cooper, using his contacts with Delia Smith, and put by him into the general melting pot of ideas in Fanmail.
- By May 2001 the scratchemail idea had been given the brand name, "Scratch X". Accordingly, in June 2001 Rideup changed its name to Scratch X Limited ("Scratch X"). This was to bring the name of the operating company into line with the name of the particular Fanmail business idea for the development of which it was to be the vehicle.
- In about May 2001 a business plan for Scratch X was written by Mr Zghari. Under the heading, "Management", the document identified Mr Burtenshaw as Chairman and equity shareholder, Mr Zghari as Managing Director and equity shareholder, Mr Bob Cooper as Commercial Director and equity shareholder and a Mr Carl Iyengar as Financial Officer and equity shareholder. These were proposed future arrangements rather than a description of the current state of affairs.
- In relation to finance, the document stated:
"Finance will be obtained by the following:
- £40,000 early stage investment capital from [Fanmail], majority stakeholder, to enable prototype software to be developed for marketing to initial operators. …
- Development capital – to be discussed with third parties"
Hence, Scratch X was here treated by Mr Zghari as a company closely related to Fanmail.
- In May 2001 Mr Zghari became a director of Scratch X. At the end of July 2001 the allotment to him and Mr Burtenshaw of one share each in that company was completed. Mr Zghari's evidence was that he and Mr Burtenshaw agreed that they would jointly own Scratch X, and that it would not be owned by nor treated as a subsidiary of Fanmail. The purpose of this evidence was to suggest that when DPL was formed later on with a similar shareholding arrangement, it was intended that the shares in that company were to be owned beneficially by the three principal registered shareholders. I reject Mr Zghari's evidence about this alleged agreement with Mr Burtenshaw. It is not consistent with what Mr Zghari said to Ms Townley, nor with the business plan for Scratch X which he drafted, nor with a number of other documents referred to below in which he referred to Scratch X as a subsidiary of, or related to, Fanmail. I find that both Mr Burtenshaw and Mr Zghari intended that they should hold the shares in Scratch X registered in their respective names for the benefit of Fanmail.
- In that regard it is relevant to refer to an investment proposal in relation to Scratch X drawn up by Mr Zghari, probably with some assistance from Mr David Cooper, in July 2001. The introduction stated:
"[Fanmail] are delighted to be able to provide a proposal to the NSPCC to operate a new scratch card lottery concept aimed at sports fans and a popular web-site they visit.
[Scratch X] is the subsidiary company of [Fanmail], an email marketing company, which operates Managed Online Lottery services to enable Charities to raise funds through [Scratch X] product offerings."
The document referred to a range of potential gambling and lottery games which Scratch X might provide. It shows that the scratchemail idea was being treated as part of the Fanmail business, albeit it was to be developed through a distinct company, Scratch X. The description of Scratch X as "the subsidiary company of [Fanmail]" indicated that Mr Zghari understood that the intention was that Scratch X would predominantly be owned by Fanmail.
- At around this time, there was evidence from Mr Little, which I accept, that Mr Zghari mentioned to him a new idea that he said he had come up with which he described as "Airtime", which could allow manufacturers to offer mobile phone credits to consumers as an inducement to buy their products. Mr Zghari mentioned that the key to such a system would be finding a way in which the credits for mobile phone air time could be redeemed at the point of sale in retail outlets. Mr Zghari discussed this with Mr Little in the offices at Wheler Street, where they both worked. Mr Zghari was in the habit of enthusiastically mentioning to Mr Little any new ideas which Fanmail was working on, in recognition of the fact that Mr Little was an investor in Fanmail. The conversation about Airtime fell within that pattern. Mr Little was given the impression that it was a new Fanmail idea, which Mr Zghari had devised. The timing of this conversation is significant. Mr Little's evidence that it took place in the early summer, before June, is corroborated by the evidence of Mr Howe that the concept of using mobile phone credits as an incentive for consumers was raised with him before he left the United Kingdom on about 2 May 2001 to work in Egypt.
- In March 2001 Mr Bob Cooper had introduced Mr David Cooper to an important contact of his, Mr Tony Pearce (who at that time was a senior executive at Unilever), and Mr David Cooper had taken the opportunity to discuss Fanmail's email barcode coupons idea with him. In the latter part of May 2001 Mr Bob Cooper and Mr David Cooper again met Mr Pearce. On this occasion, Mr Bob Cooper had approached him because Mr Pearce was approaching retirement, and Mr Bob Cooper thought that he would be someone who could make a valuable contribution to the promotion of Fanmail's business ideas. Mr Zghari wrote to Mr Pearce on 29 May 2001 to make him a formal offer to join Fanmail as a non-executive director. In my view, this was probably done on the instructions of Mr Bob Cooper. The offer to Mr Pearce was to be on the basis of provision of shares in Fanmail in place of cash remuneration. It does not appear that Mr Bob Cooper or Mr Zghari discussed this approach with Mr Burtenshaw or any of the other investors in Fanmail. In the event, Mr Pearce did not take up this offer, as there was still some time to go before he left Unilever.
- On 5 June 2001 there was a meeting between Mr Zghari, Mr David Cooper, Ms Townley and her husband, Stephen Townley, to discuss the strategy for Fanmail and Scratch X in relation to approaching companies for taking forward the lottery and gaming ideas which were being developed via Scratch X. They discussed approaching gaming clients such as Ladbrokes and charities such as the NSPCC. Fanmail and Scratch X were discussed at this meeting as parts of one business. Ms Townley was to set up a meeting with the NSPCC to discuss Scratch X, which she did. It is clear that she understood that she was doing this to promote a business idea in which she had an equity stake (i.e. through her interest in Fanmail). Mr Zghari and Mr David Cooper did not suggest anything different to her. (In fact, although approaches were in due course made to both Ladbrokes and the NSPCC, initial expressions of interest came to nothing and the ideas could not be carried forward with them).
- On 13 June 2001 Mr Bob Cooper took Mr David Cooper to meet Mr Pearce again, this time with Mr Iain Ferguson, who was a senior member of the UK Unilever management team. Mr Ferguson discussed the email barcode coupon idea with them and was interested in it. They discussed using this in relation to a consumer database available to Unilever. Mr Bob Cooper also used this occasion to discuss business opportunities involving Delia-online. Mr Ferguson asked them to put together a business case in relation to the business ideas presented by Mr David Cooper on behalf of Fanmail which could be given to Unilever to consider further. He suggested that Mr David Cooper meet with another Unilever executive, Phil Barden, to discuss the idea of email barcode coupons in conjunction with Unilever's consumer database.
- Mr Ferguson followed up the meeting with an email to Mr David Cooper in which he encouraged him to prepare a business plan. Mr Ferguson observed:
"As you have correctly identified, a critical issue will be the proposition that you make to the major retailers, so that they will incorporate the necessary technology in their systems to provide the input feed to your own system."
For the email barcode coupon idea to work, it would be necessary to persuade retailers to introduce modifications to the software by which their till systems operated.
- Mr David Cooper got in touch with Mr Barden and arranged for a meeting to take place with him on 20 June 2001. The meeting took place at Unilever's offices in Kingston-upon-Thames. It was attended by Mr Barden and two of his colleagues for Unilever and by Mr Bob Cooper, Mr Zghari and Mr David Cooper for Fanmail. They discussed the email barcode coupon idea. By all accounts the meeting went very badly from Fanmail's point of view. The Unilever team raised a series of objections to the idea and Mr Zghari proved, through inexperience, to be unable to deal effectively with these. A particular problem related to the need to recruit retailers to install special software on their till systems to be able to read the barcode coupons.
- The Fanmail team were very downcast on coming out of this meeting. They went to a café nearby to have a debriefing session. Mr Bob Cooper gave Mr Zghari a severe dressing down. He considered that a vital business opportunity had been wasted. During the discussion Mr Bob Cooper indicated that he thought that the email barcode coupon idea was unlikely to succeed and they discussed other ideas. At the meeting, Unilever had raised its interest in seeking to engage with consumers at the younger end of the market. Mr Bob Cooper in that context "put forward the idea of using mobile phones to interact with consumers about offers" (as Mr David Cooper put it in his witness statement). According to Mr Zghari in his witness statement, "Bob Cooper threw up a number of different ideas, among them using mobile phones to interact with consumers about offers in stores". Mr Bob Cooper in his witness statement said, "It was during the discussion … that I first came up with the idea of, in some way, developing a concept relating to mobile phone usage." He went on, "I think it was also at this meeting that I first began to outline the potential for using mobile phone time as a reward for purchases, as distinct from the email coupon idea that Ahmed Zghari had been promoting on behalf of Fanmail."
- This meeting was the subject of extensive consideration in the hearing before me. That is because it is at this meeting that Mr Bob Cooper claims that he invented what he called the "Dialtime concept". The essence of the idea he says was comprised in the concept was that one should get away from marketing campaigns based on emails sent to consumers (what was at various points referred to as "push" marketing campaigns) attaching barcode coupons, and instead use promotional campaigns where the benefit to be received by the customer would take the form of credits in respect of mobile phone bills which could immediately be redeemed by the consumer by their sending an SMS code by phone to Fanmail or the mobile phone company. The special code to claim this financial benefit would be generated by the retail store's till and printed on the receipt given to the customer. It should be observed that this system would not depend upon email marketing campaigns (although obviously it might be used in conjunction with them), but could be operated on the basis of conventional in-store promotional campaigns or ordinary marketing campaigns in the general media. It did not depend upon use of a database of consumers (although it might be integrated with the development of such databases to allow for more targeted marketing campaigns). The essence of the idea was to use mobile phone credits as the form of financial benefit to be redeemed by a consumer reacting to a marketing campaign, in place of using paper coupons to claim price discounts in respect of the payment made at the till.
- I do not accept Mr Bob Cooper's claim that he invented the Dialtime idea at the meeting after the presentation to Unilever on 20 June 2001. There are six principal reasons for taking that view, as follows.
- First, the witness statements from Mr Bob Cooper, Mr Zghari and Mr David Cooper, served on behalf of the Defendants, did not set out the version of events which Mr Bob Cooper sought to elaborate in the witness box and did not support the view that on 20 June 2001 he came up with the fully-formed idea which he now claims. The passages from their witness statements, which I have quoted above, suggested a much more vague and general discussion about mobile phones. Although Mr Zghari and Mr David Cooper both sought in varying degrees to support Mr Bob Cooper's claim when they gave evidence in the witness box, I did not find Mr Bob Cooper's evidence or their evidence on this aspect of the case at all convincing. I was also struck by the way in which Mr Zghari explained things in an important memorandum he sent to Mr Burtenshaw and Mr Bob Cooper on 26 November 2001 (see paragraphs [137] and [138] below), in which he described Mr Bob Cooper as having '"invented"' (i.e. in inverted commas) the Dialtime idea. Mr Zghari could not explain why he did this. In my view, the clear inference is that he did not regard Mr Bob Cooper as the true inventor of the idea.
- Second, up to this point in time Mr Bob Cooper had played little or no part in the development of the technical ideas being worked on by Fanmail. Mr Zghari was in the lead so far as that was concerned, had an inventive flair and had devoted considerable time to thinking the issues through. I do not find it credible that the worked-out idea, which Mr Bob Cooper now claims to have canvassed at the debriefing session on 20 June 2001, simply sprang into his head on that occasion, by-passing all Mr Zghari's work.
- Third, Mr Bob Cooper emailed Mr Pearce and Mr Ferguson on the evening of 20 June 2001. Mr Bob Cooper's evidence was that the object of this email was to try to circumvent the blockage which had appeared at middle management level at the meeting with Mr Barden and the Unilever representatives earlier that day and to convince the more senior managers at Unilever that the business opportunity that Fanmail was able to provide was indeed one that they ought to be pursuing. In my view, this was a desperate last attempt by Mr Bob Cooper to try to repair the damage done at the meeting and to regain Unilever's interest in ideas which Fanmail could promote. As Mr Zghari put it in his evidence, Fanmail had very few choices at this time other than to try to win Unilever round. In the email, Mr Bob Cooper sought to engage Unilever's interest once again by saying:
"If manufacturers don't pursue their own solutions, the power will reside with retailers. We believe that we have two very attractive and leading edge methods of communicating with specific customers. This is a significant step forward. To lose advantage over the difficulties with the retailer may be pragmatic but I wonder if that is right.
We value the meeting and it certainly defined the issues, but I am still left thinking about Dyson and his cleaner. Most could see the problems, but he was determined and eventually got there and he now dominates the market, the shame is it took him 10 years to make it happen.
The attachment sets out the information for you on what we can and cannot do.
Iain [i.e. Mr Ferguson], I am prepared to build a live example for you of how our Email skills can benefit Unilever. I will do so at my cost.
The above does not negate doing the proper business plan as you suggested. This will be done."
- The email contained an attachment headed "coupons in an email". The focus of this was the use of emails as "push media" to contact customers. Mr Bob Cooper did not refer in any way to what he claims was his important new idea reached earlier that day. If he had really had the break-through idea which he claims to have had that day, I think he would have taken this opportunity to press it upon Unilever, whose support he regarded as critically important at this stage.
- Fourth, there was a significant email exchange between Mr Zghari and Mr Warman of Soda on 25 June 2001. Mr Zghari set out for Mr Warman's consideration a scenario which he described as "aimed at 16 to 35 year olds" (i.e. the younger age group in which the Unilever team had expressed a particular interest at the meeting). The scenario which Mr Zghari set out was still based upon Fanmail sending a personalised email coupon to the customer with a unique reference code number shown as a barcode. The scenario continued:
"…
2. Consumer prints coupon as an aid to remember which product to buy.
3. Buy product – checkout issue till receipt with retailer's unique reference code shown against items on special offer. Manufacturer pays an agreed sum to have this info printed to include for database use/extra printing to have this information printed on the till receipt – data would include: retailer, store id, date, time of purchase, item purchased. – No discount is given at till against food purchased.
4. Consumer takes receipt home and accesses www.sorewarding.com or http://www.iphonecredit.com.
5. Consumer types in their unique coupon code, the code on the till receipt and their mobile phone number.
6. [Fanmail] checks unique coupon code, checks retailer codes to verify "a purchase" and credits phone account with 50 pence offer.
7. Manufacturer pays retailer commission (?), phone company commission – added service (?), [Fanmail] soda commission (yes)."
- In his evidence, Mr Zghari sought to suggest that he had misunderstood the idea put forward by Mr Bob Cooper on 20 June and that this explains why he did not set it out in his email of 25 June. I do not think that this is at all likely. All the other evidence indicates that Mr Zghari was a very intelligent man who was technically literate. I do not think that he would have had any difficulty in grasping very quickly the significance of the idea if it had been explained on 20 June as Mr Bob Cooper now suggests. The contents of Mr Zghari's email to Soda of 25 June 2001 indicate, in my view, that Mr Bob Cooper had not come up with the concept as he now claims on 20 June 2001. On the contrary, Mr Zghari's email indicates a process of thinking which involved groping forward from one idea based on email barcode coupons towards another idea which focused more upon using credits in respect of mobile phones as the financial incentive in respect of marketing and promotional campaigns.
- Mr Warman replied on the evening of 25 June 2001. He suggested that Mr Zghari's idea might be a little unwieldy. He put forward an alternative variation on the theme as follows:
"How about this scenario for ipphonecredit using sms: v. popular with your 16-35 demographic
user hears about the bargains obtainable thru "ipphonecredit" and registers lots of lovely personal details with them including their mobile phone number
user gets sms or email telling them of current demon offers relevant to their personal profile
user goes to shop and buys the dishwasher tablets with the cashback offer
the excited user at home rips open tablet box, and SMSes the unique number to FMUK, immediately the user receives an SMS reply confirming that the transaction has gone thru crediting his phone account with 50p, he is also informed about the upcoming special on the dishwasher deodoriser offer he may wish to look out for next week.
Ok, ok you don't get all of that lovely data (retailer, store id, date, time of purchase, item purchased) but if the number is a batch number manufacturer should get retailer, and item purchased. This would of course connect to a user and by a system that many people would be happy to use on a regular basis?
We could probably rig a demo version of this to wow potential clients, there is a lot you can do server side with technologies as simple as SMS when hooked to powerful databases. A phone is such a handy way of uniquely identifying folk without them having to go thru login hassles."
- In this exchange and in the discussions which in all probability accompanied it, Mr Zghari and Mr Warman had come very close to identifying the essence of the Dialtime idea. They had identified the attractiveness of integrating marketing promotional campaigns with mobile phones in order to appeal particularly to the 16-35 age range; they had identified the potential for a consumer to send a unique number by SMS leading to an immediate credit on the consumer's phone account; and they had identified the use of mobile phones in this way as a particularly attractive way of uniquely identifying the consumer and providing them with the financial benefit promised without them having to go through a process of logging in on-line. It would be a short step from this to the concept that the unique number for use in the SMS message could be generated through the retailer's till system. When that last step was in place the Dialtime idea would be complete. It is clear that for the last step it would be necessary again to persuade retailers to adapt the software on their till systems in order to be able to scan and register the promotional offers and to generate the unique identifying number which would be provided on the till receipt to the customer for use in his SMS message. In due course, it appears that this did form part of the business plan for use of the Dialtime idea as operated by MCashback, as explained in a witness statement dated 26 March 2007 by Mr Zghari in relation to certain tax proceedings. In that regard also the Dialtime idea could not be regarded as completely distinct from the email barcode coupon idea, and the commercial issues and problems to be overcome to make that system work.
- Fifth, there was a formidable array of witnesses put forward by the Claimants, some of whom worked very closely with Mr Zghari in 2001 (in particular Mr Warman and Ms Ferneyhough), who all gained the strong impression at the time that it was Mr Zghari who was principally responsible for coming up with the Dialtime idea, and to some of whom he said as much at the time (Mr Little, Mr Howe and Mr Stott, who became closely involved in the development of the idea at a later stage). I found all this evidence to be credible and compelling.
- Sixth, when Mr David Cooper was first asked, in the context of giving instructions for a patent to be taken out in relation to the Dialtime idea, who the inventor was, he did not respond to name his father (see paragraph [115] below). I also think that there is an adverse inference to be drawn from the fact that Mr David Cooper later caused a fabricated copy of the patent application in relation to the Dialtime idea to be drawn up naming Mr Bob Cooper of DPL as the applicant, in circumstances which I describe below (paragraphs [141] to [144]). In my view, the production of that document, which was then sent by Mr Zghari to the investors in Fanmail, was part of a deliberate attempt by them to mislead the investors in Fanmail into believing that DPL was the proper holder of the patent. That attempt was embarked upon for tactical reasons, to strengthen the bargaining position of Mr Zghari and Mr Bob Cooper in relation to their negotiations with Mr Burtenshaw in relation to the ultimate proposed allocation of shares in DPL. Had it been true that Mr Bob Cooper was the inventor of the Dialtime idea, that would have been emphasised from the outset for the same tactical reasons.
- On about 21 June 2001, as indicated by manuscript notes made by Mr Zghari on a copy of Mr Bob Cooper's email to Mr Pearce and Mr Ferguson, it was agreed that Mr Zghari and Mr David Cooper would continue to work up a campaign based on the scratchemail idea being used to promote a Unilever brand, "e.g. ice cream". In due course, this work was developed in relation to Unilever's Solero ice cream product. Also, the notes recorded that Mr Bob Cooper, Mr David Cooper and Mr Zghari were to "work on technical/market penetration for business case for phones". This suggests once again that the discussions between them at this time in relation to mobile phones were at a very early stage and did not involve the fully-developed Dialtime idea, which I find only emerged later on through the work of Mr Zghari and Mr Warman.
- It is in the context of the meeting of 20 June 2001 that I have to deal with two further documents. The first is a letter from Mr Zghari addressed to Mr Bob Cooper. It bears the date 15 June 2001, but its contents plainly relate to the meeting on 20 June with Unilever, which Mr Zghari had attended. Mr Bob Cooper did not recall receiving this letter. Mr Zghari had no explanation why the letter should have been dated 15 June 2001. Mr Tomlinson QC, for the Claimants, submitted that this letter was a deliberate fabrication by Mr Zghari brought into existence so as, in some way, to bolster the claim, which I have found to be unsubstantiated, that Mr Bob Cooper was the true inventor of the Dialtime idea. In the context of a case where at least one deliberately fabricated document was brought into existence (the fabricated patent application referred to above), and in which I consider that each of Mr Bob Cooper, Mr David Cooper and Mr Zghari has deliberately sought to exaggerate the extent to which Mr Bob Cooper was involved in the creation of the Dialtime idea, I have given this submission careful consideration. However, I do not think that this letter serves to bolster that particular claim to any material extent and, although it is something of a mystery, on balance I am inclined to accept the view that it is a document which was simply misdated by Mr Zghari at the time that he produced it, by mistake.
- The second document which I have had to consider with care is another letter from Mr Zghari to Mr Bob Cooper, this time dated 19 June 2001 on its face. On Mr Zghari's evidence this document also was misdated by him, and should have borne the date of 20 June 2001. This is more directly relevant to the claim that Mr Bob Cooper was the true inventor of the Dialtime idea, because in the letter Mr Zghari wrote this:
"I have thought a little more on the business case you put forward for the telephone credit scheme you went through with David after our meeting with Unilever and I am happy to use the local business library to research the industry towards the end of next week. I'm not sure that we can tie in our email coupon proposals with your suggestions on the same basis as outlined by [the Unilever executives] due to the security issues of duplication. We are preparing a trial campaign for Solero which [Ms Ferneyhough] and [Mr David Cooper] are working on with Soda and we'll discuss this at the next meeting to see if there is any immediate technical feedback."
- Mr Bob Cooper again did not remember receiving this letter. Mr Tomlinson again submitted that I should conclude that this letter was a deliberate fabrication by Mr Zghari, put on the Fanmail correspondence file by him to bolster the case that Mr Bob Cooper was the true inventor of the Dialtime idea. However, once again, I do not think that this letter has been framed so as to support that particular case. At most, the support it would offer for that case is highly tangential. In fact, in my view, if anything it tends to undermine that case. This is because it refers to a business case for a telephone credit scheme having been suggested by Mr Bob Cooper, rather than a precise technical solution being proposed by him, as he now claims. The letter also suggests that the discussion between Mr Zghari, Mr Bob Cooper and Mr David Cooper after the meeting with Unilever on 20 June had not been distinct from the email coupon proposals which had been presented to Unilever. The impression it conveys, again, is of Fanmail groping its way towards what might be a viable and effective business idea. The quoted part of the letter and the rest of the letter seem to me to fit in with the developing picture derived from the rest of the correspondence, documentation and evidence relating to this time. I find that this is a genuine letter sent by Mr Zghari not on 19 June 2001 but probably on about 21 June 2001 (see the reference to the trial campaign for Solero, which had not been firmed up on 20 June but probably had been by about 21 June 2001).
- Mr Bob Cooper's evidence was that on 22 June 2001 he met Mr David Cooper at Fanmail's offices in London and further explained his Dialtime idea. Mr David Cooper did not recall a meeting on that date, but suggested one might have taken place two weeks or so later. It emerged from an examination of Mr Zghari's diary and timesheets that he was in Fanmail's London offices on 22 June but had not attended such a meeting. It is improbable that Mr Bob Cooper would have confined himself to discussing the matter with Mr David Cooper, if Mr Zghari was available at the time. I find that no such meeting took place on 22 June 2001. It is possible that, as Mr David Cooper recalled, he and his father had a discussion about the business case for using mobile phones on a date some two weeks later. By that stage Mr Zghari and Mr Warman of Soda had had their email exchange of 25 June (see paragraphs [60] to [63] above). It is likely that Mr Zghari had shared that thinking with Mr David Cooper at the time. In my view, it is likely that at any discussion between Mr Bob Cooper and Mr David Cooper thereafter, it was Mr Bob Cooper's interest in the business attractiveness of using mobile phones as the medium for providing a financial incentive via credits to mobile phone bills of consumers which was discussed, rather than any specific technical development of that idea by Mr Bob Cooper.
- From this point work continued on two tracks: first, to develop an email barcode coupon business proposal linked to a hypothetical marketing campaign for Unilever's Solero product; second, to continue examining how use of mobile phones could be integrated into the promotional and marketing approaches which Fanmail was exploring.
- On about 9 July 2001 a draft Fanmail business plan was produced. The computer file which contained this plan bore the name of Mr David Cooper, but his evidence was that he merely set up the template and was not responsible for the detailed drafting. It is likely that Mr Zghari was the principal author of this document. The draft plan described Fanmail as "an email marketing company that operates in four key sectors" identified as "Fast moving consumer goods", "Sport", "Charities" and "Gaming and Lotteries (operated through [Scratch X], subsidiary company)". Fanmail's mission was stated to be, "to deliver lasting value by creating a one-one digital dialogue with consumers". The focus was on messages "pushed via email and SMS messaging" to consumers.
- The document contained a description of the use of mobile phone credits as a financial incentive for consumers. This was linked to a promotion based on a "push" SMS message to a consumer. However, the document contemplated that once a consumer purchased the product advertised, and it was scanned or entered into the cash register, the register would produce "unique offer codes printed on receipts underneath each purchase". That unique code could then be used to redeem the offers, including by sending an SMS message with the offer codes.
- This was the basic Dialtime idea. Clearly, the idea could be adapted for use with any form of marketing or promotion - it did not have to be linked to the original email or SMS message advertising campaign. What this document again shows, in my view, is the growth of the Dialtime idea out of Fanmail's thinking around its email barcode coupon idea and "push" marketing campaigns using new technologies of email and mobile phones. The document included as one option among several for the operation of this system that "the retailer identifies all credits on till receipts and issues a final credit amount at the end of the receipt that is coded by [our] software for redemption". The business plan emphasised the benefit to manufacturers of the positive association they could achieve by helping to reduce their consumers' mobile phone bills. It was pointed out that "monthly bills can be a significant part of a consumer's outgoings, especially in the 16 to 35 year bracket". The attraction of this system to the youth market and the association of the youth market with the penetration of mobile phone ownership were emphasised. It was proposed that the mobile phone credit system should be marketed as "iphonecredits.com". The document stated, "it is a marketing solution using customer relationship management (CRM) techniques". This again indicates the continuity in the development of this idea from Fanmail's original business plan to develop customer relationship management techniques, originally through the use of email. The document emphasised the benefit to retailers from such a system, in that they need only apply for a small software upgrade to enable their point-of-sale systems to print a unique code against product descriptions and offer mobile phone credits in lieu of a price reduction at the till. The retailer would be able to charge manufacturers for provision of such a facility. The document analysed the competitive advantage of this idea:
"No other companies offer financial rewards to your mobile phone from [a fast moving consumer goods] manufacturer linked to a receipt. …
The concept of printing offer codes against receipts is of immediate identifiable value to many sectors and retailers, especially those that have decided not to pursue loyalty cards."
- The draft business plan set out as the heading for the next product, "personalised email coupons". This part of it was not developed by Mr Zghari at this stage. It is significant that both the email coupon idea and the mobile phone credits idea were to be presented in the one document, which was describing the business of Fanmail. What later became called either the "Airtime" or "Dialtime" idea was presented in this document as a product within Fanmail's business.
- The draft business plan had a section headed, "Management Team and Board of Directors". The four key members of the management team were described as Mr Burtenshaw ("Chairman"), Mr Bob Cooper ("Director"), Ms Townley ("Director"), and Mr Zghari ("Managing Director"). The particular significance of the inclusion of Ms Townley is that she was involved in Fanmail's business, but had had no particular role to play in developing the Dialtime idea. This again indicates that Mr Zghari understood the Dialtime idea to be part of Fanmail's business, and not something distinct from it. The draft concluded, "our long term aim and advantage in [fast moving consumer goods] is therefore [to] unify our products for retailer and manufacturer use." The suggestion was that the business ideas set out in this draft document (mobile phone credits and email coupons) might be combined in some way or used individually: they were not presented as being in separate boxes, either in terms of the body which owned the business idea (in both cases it was presented as Fanmail) or in terms of their practical applications. The document was seeking to present a range of ideas which might appeal to investors, manufacturers and retailers in different combinations, depending upon their particular circumstances.
- The potential running together of email contact with consumers and use of mobile phone credits to redeem offers is also demonstrated by an email from Mr Zghari to Mr Warman dated 13 July 2001. In this email Mr Zghari provided Soda with a brief for a business idea using email to promote a Unilever product, Solero, including by a coupon promotion. The email included the instruction:
"4. Show how technically we can change the system to include use [sic] mobile phones to redeem offers i.e. instead of money off a shopping bill a consumer is given a ref number that they can dial into their phone to gain a phone credit."
- Shortly before Mr Bob Cooper went on holiday on 15 July 2001 he had a brief conversation with Mr Burtenshaw, in which they discussed setting up an operating company to develop and promote the mobile phone credits business idea. Mr Bob Cooper's evidence was that Mr Burtenshaw at that stage wished the company to be kept completely separate from Fanmail, and that he did not wish his partners in Burtenshaw Associates to participate in it. Mr Burtenshaw denied this, and I prefer his evidence on this point. The documents which relate to Mr Burtenshaw's position on this question later on in 2001 all show him emphasising that his partners did and should have an interest in the new mobile phone credits idea, and there is nothing to indicate why he should have changed his mind on that point. He understood the idea to be a Fanmail idea, and he appreciated that he could not properly divert it away from Fanmail. In my view, contrary to Mr Bob Cooper's evidence, the strong probability is that Mr Burtenshaw and Mr Bob Cooper discussed setting up an operating company on the model referred to in paragraph [35] above.
- On 16 July 2001 Mr David Cooper, using the address "emailbarcode.com" (i.e. Fanmail) at Fanmail's London office, registered the domain name "iphonecredit.com". This was done on behalf of Fanmail, and again indicates that the mobile phone credit idea was regarded as part of Fanmail's business.
- On 25 July 2001 Mr Zghari sent to Mr Wilson a copy of a draft business proposal for Unilever which he described as "Unilever Business Proposal - Mobile phones.doc", for review and feedback by Mr Wilson before it was sent to Unilever. The document was headed "Business Investment Proposal, e-promotions", with the slogan "communicating and promoting to 16 – 35 year olds". It was a development of the draft business plan referred to in paragraph [72] above. The executive summary included the following statements:
"Fanmail UK is an email marketing company developing new push promotional techniques through mobile phones and email to provide technology solutions that deliver value. …
Our aim is to introduce more targeted email coupons that include an automated clearing process to make coupons disposable once redeemed. We are also developing consumer self-redemption using mobile phones with manual entry of unique codes to credit offers to a phone account."
- The draft proposal described a range of products and services. It stated, "Our initial product focus is to create simple coupon redemption methods that take place outside the retailer's control and at all levels where electronic receipts are issued e.g. supermarkets, local stores or petrol stations." The draft then essentially repeated, under the heading, "Instant money credit to mobile phones", the same ideas in relation to mobile phone credits as had been described in the earlier draft. It went on, under a distinct heading, to describe a system involving "Personalised email coupons". The draft made clear that product development was in the initial stages and that investment or support was being sought for more product development. The management team and board of directors again included Mr Burtenshaw, Mr Bob Cooper, Ms Townley and Mr Zghari. It is again clear from this document that Mr Zghari understood that the Dialtime idea was a development from thinking within Fanmail, that it was a Fanmail idea and that it was an idea in which Ms Townley had an interest and a future role to play in its development.
- By early August Mr Zghari, with some help from Mr David Cooper, had produced a final draft of the Fanmail business proposal to be sent to Unilever. This was a vital document for Fanmail's future and I find that both Mr Zghari and Mr David Cooper had read and assimilated its contents thoroughly. Mr David Cooper sent the document to Mr Bob Cooper to obtain his reaction to it. It is likely, and I find, that Mr Bob Cooper read the document carefully at the time.
- The draft proposal was a development of the previous draft business proposals referred to above. The executive summary contained statements along the same lines as previously. It also now contained as a highlighted item:
"Our aim is to introduce more targeted email coupons that include an automated clearing process to make coupons disposable once scanned at point of sale. We have also developed consumer self-redemption using mobile phones with manual entry of unique codes printed on till receipts against items purchased to credit offers to a mobile phone account."
The draft was presented as a business investment proposal for Fanmail, whose field of business was described as "online and mobile promotions and commerce". In the section headed "Products and Services", it included statements along the same lines as in the previous drafts. The first sub-heading was now, "Mobile phone redemption, instant discount credit to mobile phones". The basic explanation of the process involved remained the same as in the previous drafts. It included the idea that once products were purchased by consumers and were "scanned or entered into the cash register, unique offer codes are printed on receipts underneath each purchase on a separate printout". Those codes could then be used by the consumer to redeem the offer in the form of mobile phone credits, including by sending an SMS text message. The document continued with a separate sub-heading, "Email coupons, personalised email coupons", setting out that business proposal in a detailed and developed form. It was again made clear that the business ideas described were at an early stage of development.
- The draft included the statement:
"We aim to produce online sales promotional business models that can demonstrate intrinsic revenue generation, significant databases and virtually zero reliance on advertising income."
There was no suggestion that the Fanmail ideas presented in the document were necessarily in final form; rather, the suggestion was that they might be developed in new directions as product development work continued on them. This impression was reinforced by the concluding text:
"Our investment to date in technical solutions is a reflection of issues that face all industries, the need to identify new efficient ways to communicate with customers and develop better understanding of how products are perceived thus enabling continual improvement and innovation. …
The model for crediting mobile phones and secure email coupons is immediately attractive to many consumer groups and companies and through small-scale trials we anticipate immense opportunities and exposure."
- The draft set out a funding summary indicating that seed or prototype funding was "private funding" of £144,000. That figure was taken from the amount of the original investment by the investors in Fanmail. There was again a heading, "Management Team and Board of Directors", under which Mr Burtenshaw was described as "Chairman", Mr Bob Cooper was described as "Non-executive", Ms Townley was described as "Non-executive" and Mr Zghari was described as "Managing Director". It is my view, in the context of the document, that the use of the word "Non-executive" (although the title did not also include the word director) bore the clear and unmistakeable meaning that Mr Bob Cooper and Ms Townley were to be non-executive directors of Fanmail. However, although they were introduced as being "currently" part of the management team, the draft was in reality referring to what was intended to be the position if the investment opportunity which it set out was taken up.
- Mr Zghari retained a copy of this final draft on file, bearing his manuscript comment:
"do not complicate FMUK + new co Dialtime to Unilever – treat as 1 for now, otherwise may not close investment opportunity."
The name "Dialtime" was a name for the mobile phone credit idea that originated at the earliest on the 31 August 2001, and does not seem to have been finally agreed upon until about 3 September 2001. So this manuscript comment postdates the sending of the final business investment proposal to Unilever, which occurred on 8 August 2001. What Mr Zghari's manuscript comment does demonstrate, in my view, is that by early September 2001 there had been discussion about setting up a new company as the vehicle to promote the Dialtime idea on the model referred to in paragraph [35] above, as had been adopted in relation to Scratch X. The creation of such a company had been discussed by Mr Burtenshaw, Mr Bob Cooper and Mr Zghari at an important meeting on 28 August 2001. Mr Zghari's manuscript comment indicates that, notwithstanding the intention to create a new Dialtime company, the business idea was still to be promoted to Unilever as a Fanmail business idea in September 2001, so as not to complicate matters with Unilever. This again underlines the way in which the Dialtime idea was treated essentially as a Fanmail idea, notwithstanding the arrangements that were being made to set up a new operating company to carry it forward.
- On 8 August 2001 Mr David Cooper, in his capacity as "marketing manager" for Fanmail, sent Mr Ferguson at Unilever the final version of the business investment proposal. It was sent as a formal business proposal on behalf of Fanmail: the covering letter concluded, "I look forward to your reaction to our proposal".
- On 13 August 2001 Mr Zghari sent Ms Townley a copy of the investment proposal.
- On 14 August 2001 Mr Zghari called a patent agent, David Stanley, to give him instructions to prepare a patent application in relation to the Dialtime (at that stage called "Airtime") idea. Mr Stanley made a note recording the client as Fanmail, based on what Mr Zghari told him. Mr Stanley noted that Mr Zghari told him that Martin Scott, a partner in Walker Morris, was an investor in the idea. This was of significance for Mr Stanley, since he had dealings with Walker Morris. Mr Scott's only interest was through his investment in Fanmail. Mr Zghari described to Mr Stanley the Dialtime idea, and presented it as a Fanmail business idea.
- The same day, Mr Zghari followed up this telephone conversation with an email to Mr Stanley, in which he wrote:
"David Cooper, [of Fanmail] will send you some information.
We will be setting up a new co. called Air Time Limited in the next week to trade through. However, I would hope to retain patents if possible through [Fanmail]."
This email again confirms that the idea was being treated by Mr Zghari as a Fanmail business idea. It indicates that he intended that the new company would be set up for Fanmail "to trade through", rather than as a completely independent company distinct from Fanmail. The instruction to retain patents through Fanmail itself indicated the dominant position which Mr Zghari understood Fanmail to have in relation to the development of the new business idea.
- Later that day, Mr David Cooper sent Mr Stanley some additional information in the form of an extract from the products and services section of the business investment proposal which had been sent to Unilever. He also sent to Mr Stanley a set of power-point slides. These showed the steps in the operation of the Dialtime mobile phone credits redemption scheme.
- On 16 August 2001 Mr Stanley replied to Mr Zghari, indicating that it would be possible to file the patent application in the name of Fanmail and license use of the intellectual property to the new trading company.
- Later that day Mr Stanley spoke to Mr Zghari on the telephone. Mr Zghari told him that there were no competitors in relation to the idea of credits of air time for mobile phones through codes linked to retail products, so this was to be the main focus of the patent application. Mr Zghari told him that the "clever thing is to total up codes or offers and give a total with one encryption [code]", from which the customer's phone could be credited automatically".
- On 20 August 2001 Mr David Cooper wrote on behalf of Fanmail to Mr Ian Merton, a director of Sainsbury's. He referred to "a further exciting development" involving "using mobile phones as a clearing mechanism" in relation to which "we [i.e. Fanmail] are currently filing for a patent". He enclosed a document setting out some information about that. Mr David Cooper was thus presenting the Dialtime idea to a potential investor as a Fanmail idea. The letter continued, "I also thought you might be interested to know that Trefor Hales … has joined us as a non-executive director". This was not correct, but seems to have reflected a degree of assurance that Mr Hales (who was a former Sainsbury's executive and business contact of Mr Bob Cooper) had given Mr Zghari and Mr David Cooper at a meeting on 14 August 2001 that he would be interested in coming on board with Fanmail to develop the idea.
- At the meeting on 28 August 2001 between Mr Burtenshaw, Mr Zghari and Mr Bob Cooper, which was called to discuss how the various business ideas being promoted by Fanmail were progressing, Mr Zghari and Mr Bob Cooper were both enthusiastic about the Dialtime idea. Mr Bob Cooper emphasised that it was his contacts in the retail industry which would open the necessary doors to allow the product to be effectively marketed and tried out. He told Mr Burtenshaw that this would involve a more or less full time commitment from him and that if he was not to be paid consultancy fees, he would require an additional reward in terms of a greater equity stake than he then had in Fanmail. To allow for this, Mr Bob Cooper said that Ms Townley should not be involved in the Dialtime project. His view was that she could not expect to be part of any new operating company set up to develop the Dialtime idea, as she was not a cash investor in Fanmail and had failed to deliver both in respect of the original Fanmail idea regarding development of relations between sports clubs and their fan base, and in relation to Scratch X. Mr Bob Cooper suggested that her real involvement for the future would be with Scratch X and that she should be incentivised through an equity stake in that company, not through the new company which was to be set up to develop the Dialtime idea. Mr Zghari agreed with Mr Bob Cooper and said that Ms Townley could not expect to be involved with the Dialtime idea. They both expressed confidence that Ms Townley would accept this position and could therefore be left out of account in relation to working out the shareholding in the new company to be established to promote and develop the Dialtime idea. Mr Zghari expressed confidence that Ms Townley would be likely to find this acceptable, particularly if she could be compensated through adjustment of the equity shareholding in Scratch X. They both knew Ms Townley much better than Mr Burtenshaw, and he accepted their assurances about her position.
- On the basis that Ms Townley's shares in Fanmail (which Mr Burtenshaw was told were 10% of the company) were available for redistribution, Mr Bob Cooper suggested that he and Mr Zghari should split that 10% holding between them. Mr Burtenshaw's evidence, which I accept, was that it was agreed by everyone at the meeting that the shareholdings in the new company would mirror the shareholdings in Fanmail, subject to such adjustments as were needed to incentivise strategic partners, potential investors or key individuals – in particular Mr Bob Cooper and Mr Zghari. Mr Bob Cooper and Mr Zghari also pressed Mr Burtenshaw to allow them an increased equity participation in the proposed new company, above and beyond the allocation of 5% each of what was understood at the time to be Ms Townley's shareholding, to reflect the time and effort they were going to devote to it and to incentivise them fully. This would involve Mr Burtenshaw having to accept some dilution in the shareholding of himself and his partners in Burtenshaw Associates. Mr Burtenshaw was prepared in principle to agree to this. He set out a calculation on a piece of paper at the meeting reflecting a 48% shareholding for himself and his partners (with him having 31.2% of the company and the other shareholdings reflecting the equity stakes of his partners in Burtenshaw Associates and Fanmail), 25% for Mr Bob Cooper, 25% for Mr Zghari, 1% for Mr Scott, and 1% for Mr Little. Mr Zghari was particularly concerned at the meeting that Mr Scott and Mr Little should be protected: the only sensible basis for that was an implicit recognition by him and the others at the meeting that they, through their equity stake in Fanmail, were properly to be regarded as having an interest in the Dailtime idea. Mr Burtenshaw indicated, however, that he was not happy with Mr Zghari receiving more than 20% as a shareholding, reflecting what he understood to be Mr Zghari's shareholding in Fanmail. He pointed out to Mr Zghari that the partners in Burtenshaw Associates might well not agree to a situation where someone employed and paid a salary by them would also be rewarded with such a large stake. Instead, he suggested that some form of bonus arrangement based on performance might be more acceptable. After some further discussion, Mr Zghari suggested that, in light of the importance of incentivising Mr Bob Cooper, his extra 5% from Ms Townley should be allocated to Mr Bob Cooper. The figures were then adjusted to show 30% for Mr Bob Cooper and 20% for Mr Zghari.
- Mr Burtenshaw in his evidence emphasised that these figures were not finally agreed at the meeting. The position had to await clarification of Ms Townley's position and Mr Burtenshaw checking with his partners that the proposals were acceptable to them. He said that matters were left on the basis that he would discuss these proposals with his partners and get back to Mr Zghari and Mr Bob Cooper with a firm proposal as soon as he was in a position to do so. Mr Bob Cooper in his evidence agreed that the percentages discussed at this meeting were provisional and were not finally agreed. Mr Zghari, in his evidence in cross-examination, sought to suggest that a final agreement was reached at this meeting. I reject his evidence on this point. It is true that he marked the calculation on the piece of paper "agreed allocation 28/08/01" and signed it himself, but I find that he did that after the end of the meeting when Mr Burtenshaw had left. No-one else signed it. Indeed, at a number of points in Mr Zghari's written witness statement, he himself originally described the agreement as an agreement "in principle". I find that the agreement made on 28 August 2001 was no more than provisional and was dependent upon the matters to which Mr Burtenshaw referred in his evidence. It was agreed at the meeting that Mr Zghari would be the managing director of the new company and Mr Bob Cooper would be its chairman. Mr Zghari sought to suggest in his evidence in cross-examination that it was also agreed that DPL would hold the patent for the Dialtime idea, but that was a new suggestion by him not supported by any contemporary documentation and I reject it.
- Also discussed at the meeting was the possibility of allocating shares in the new company to incentivise others. The names discussed were Mr Tony Pearce, Mr Trefor Hales, Mr David Cooper and a marketing company called The Yellow Submarine Marketing (Exploration) Limited ("Yellow Submarine") which Mr Bob Cooper had introduced to Fanmail as a potential strategic partner for promoting the Dialtime idea. Mr Zghari noted these names down at the meeting. The fact that these potential additional shareholders were discussed emphasises the provisional nature of such agreement as was reached at the meeting. It also indicates, in my view, that the model for creation of what became DPL was that to which I have referred at paragraph [35] above. The debate at the meeting proceeded from reference to the existing shareholdings in Fanmail, with adjustments then proposed first to take account of the non-involvement of Ms Townley (at the suggestion of Mr Bob Cooper and Mr Zghari), further incentivisation required for Mr Bob Cooper, and the possibility of additional equity allocation to incentivise potential key personnel or strategic partners for DPL. Mr Bob Cooper and Mr Zghari sought in their evidence to suggest that it was intended that DPL should be set up as a company completely distinct from Fanmail. I reject that evidence. I find that it was agreed between all of them that the shareholding in DPL should directly reflect the shareholding in Fanmail, subject to the equity adjustments to which I have referred to provide incentives to the people that would thereafter be making a particular contribution to the future hoped-for business success of the Dialtime idea.
- On 29 August 2001 Mr Zghari e-mailed Mr Warman at Soda. He indicated that matters were progressing well in relation to the Dialtime idea and that it was to be carried forward by a separate company. The significance of that for Mr Warman was that Mr Zghari had mooted the possibility of Soda engaging in an equity swap arrangement with DPL to provide Soda with an incentive to support the development of the Dialtime idea. This was a matter that Mr Zghari had raised some time previously with Mr Warman. The approach to Mr Warman was fully in line with the model of the relationship between Fanmail and its operating companies in relation to particular ideas, such as had been adopted in relation to Scratch X.
- On 30 August 2001 there was a further email exchange between Mr Zghari and Mr Stanley. Mr Zghari had done some research and had found that there was a domain name and patent in the US which used the name "Airtime", the name which Fanmail had up to this point been using as the label for the Dailtime idea. He indicated that Ms Ferneyhough and Mr David Cooper were therefore formulating a new name for the idea. Mr Stanley in turn asked for some more detailed flow diagrams in relation to the Dialtime idea. Mr Zghari replied that these would be provided. He wrote:
"We are happy to move at your pace. So please do not feel that you have to meet a deadline or get things rushed through."
- 30 August 2001 was Mr Zghari's last day at work. He left on 31 August to go on holiday for two weeks.
- On 31 August 2001 Mr David Cooper sent Mr Stanley some further flow charts in the form of power-point slides. These were contained in a document entitled "Dialtime patent application". This seems to be the first example in the documents of the name "Dialtime" being used in relation to the idea. It is probable that this was a provisional new name for the idea which had been arrived at by Mr David Cooper and Ms Ferneyhough, responding to Mr Zghari's request. The new power-point slides provided to Mr Stanley included slides in relation to the email coupons supply chain, a slide in relation to the "Air Time (mobile phone redemption) supply chain" and slides now headed, "Dialtime (mobile phone redemption) supply chain". These slides indicated the use of mobile phones to claim mobile phone credits. There was also a slide showing a mock-up of a supermarket till receipt with a Dialtime redemption code. These slides provided the main basis for the patent application which Mr Stanley then prepared.
- Mr David Cooper in his evidence sought to suggest that the use of the document title, "Dialtime patent application", indicated that the application was intended to be made on behalf of the new company, DPL, not Fanmail. I reject this evidence. At this point, DPL had not been established. All the documents leading up to this and the discussion on 28 August 2001 indicate that the Dialtime idea was intended and understood to be a business idea of Fanmail. I find that the use of the description "Dialtime" was a reference to the name of the business idea, not to the name of the new company which was to be established. Nothing had happened to change the instructions to Mr Stanley, given by Fanmail, for the patent to be registered in Fanmail's name.
- On 31 August 2001 Mr David Cooper sent two faxes to Mr Bob Cooper. Mr Bob Cooper as addressee was identified as of "FMUK" (i.e. Fanmail). Mr David Cooper sent him diagrams (probably the power-point slides to which I have just referred) for review. He wrote:
"It is important that we are seen as having IP [intellectual property] in the Dialtime encryption software i.e. the encryption software essential to the whole process. Look forward to your responses."
This was written on Fanmail headed paper to Mr Bob Cooper of Fanmail. It is clear that the "we" referred to was Fanmail. There was no suggestion that the business idea or the patent or intellectual property rights should be owned by anyone else. Mr David Cooper also indicated that Fanmail needed a partner such as Yellow Submarine to help sell the Dialtime idea on a large scale and asked for his father's views whether they should go to see Yellow Submarine while Mr Zghari was on holiday.
- On 3 September 2001 Mr David Cooper spoke to Mr Stanley on the telephone and emphasised the importance of the total credits received on the till receipt being in an encrypted form. Later that day, Mr David Cooper sent Mr Stanley some more information about the Dialtime idea by email. It appears that this was in the form of an adapted extract from Fanmail's business investment proposal which had been sent to Unilever. The extract included reference to tracking unique codes by Fanmail. It had been adapted so as to refer to a "Dialtime product" and "Dialtime software".
- On about 4 or 5 September 2001 Mr David Cooper drew up a note for himself to review the Fanmail business and to try to identify steps to be taken in the future. Under the heading, "Review of business", he noted that there were three core components to "the business" (i.e. the business of Fanmail), namely "Dialtime", "Scratch X" and "viral campaigns" (which could incorporate promotional tools such as email coupons etc.). In relation to Dialtime he noted that he should set up a meeting with key team members to debate the question, "We are retailer led at the moment, can this be phone led?" Clearly his understanding was that the Dialtime idea was at an early stage of development and might be developed in a range of different directions. He included a note: "Caroline – end relationship". This was a reference to Ms Townley and to the suggestion that she should be removed from involvement in Fanmail and DPL. He also included a note: "Share ownership – Dialtime (needs sorting out)". This indicates that his understanding was that no final agreement had been reached about the shareholdings in DPL up to that point.
- Early in the morning of 10 September 2001 Mr David Cooper received an email from Stephen Vowles, the customer marketing director for Sainsbury's. By this time Mr David Cooper had made a pitch to Sainsbury's to see if it would be interested in Fanmail's email coupons idea and the mobile phone credit idea. Mr Vowles indicated that Sainsbury's did not wish to proceed. He said that Sainsbury's believed that much of the "capability your proposal described will be provided by our existing technology re-platforming plans". I find that Mr David Cooper was alarmed by this email. He regarded it as ambiguous, but as possibly indicating that Sainsbury's intended to pursue an idea equivalent to the Dialtime idea for itself.
- This galvanised him into taking two immediate steps. First, at 9.35 am that day he called Mr Stanley's office. Mr Stanley returned his call later that morning. Mr David Cooper now instructed Mr Stanley that the patent application had to be filed by Thursday, 13 September 2001 at the latest. He was concerned to ensure that Fanmail would have the earliest possible patent protection for its Dialtime idea.
- Secondly, Mr David Cooper got in touch with the office of T J Darby Accountants. Mr Darby was at the time the company secretary of Fanmail. He had arranged to set up Scratch X for Fanmail. On 10 September Mr Darby was away on holiday, but he had arranged for office cover to be provided by Roger Cavell. Mr David Cooper spoke to Mr Cavell and told him that Fanmail wished to register a new company immediately. The same day, Mr David Cooper followed that instruction up with a fax in these terms:
"Further to our conversation earlier today, here are the details you need to register a new company for us.
Company Name: dialtime plus limited
Director 1: Bob Cooper
Director 2: Paul Burtenshaw
Nature of Business: Promotions involving mobile phones
Database activities
Registered office:
24c Wheler Street, London E1 6NR, United Kingdom
Can you register the company as soon as possible. It will be a trading company. Can you confirm the cost to us of registering the company."
- The fax was sent on Fanmail headed paper. The use of the word "us" was plainly a reference to Fanmail. By this fax, Mr David Cooper was giving instructions for a new trading company to be established for Fanmail, the cost of which was to be borne by Fanmail.
- Mr David Cooper's evidence was that he received instructions from Mr Burtenshaw to establish the new company, DPL. Mr Burtenshaw's evidence was that he did not speak to Mr David Cooper about this and that he was surprised when he learned later on 18 September 2001 from Mr Darby that he had been instructed by Mr David Cooper to establish the new company. I accept the evidence of Mr Burtenshaw on this. It is likely that what impelled Mr David Cooper to take these steps was the email from Sainsbury's, and he sought to do so without losing any time at all. It seems unlikely that he would have wished to delay matters by going to seek instructions from Mr Burtenshaw and there is no trace in the documentary material that he did seek such an instruction. There is a file note made by Mr Cavell of his conversation on 10 September 2001 with Mr David Cooper. He records that Mr David Cooper:
"…informed me they [i.e. Fanmail] needed a new company formed and he didn't feel that he could wait until [Mr Darby's] return. We agreed that he would fax me the details and I would start things moving this week".
This supports the view that Mr David Cooper was seeking to take urgent steps at this stage.
- On 11 September 2001, Mr David Cooper also caused Ms Ferneyhough to register the domain name "www.Dialtimeplus.com". It appears that this was again done on behalf of Fanmail.
- On 13 September 2001 Mr Stanley sent Mr Cooper a draft of the specification for the patent application for his review with a view to filing it the next day.
- On 14 September 2001 Mr David Cooper drew up a draft Dialtime sales document. The document included the following:
"At Dialtime Plus we have developed a break-through consumer self-redemption technology that enables consumers to redeem price promotions directly through their mobile phones.
Dialtime Plus specialises in creating and licensing digital promotional and reward-focussed tools that save retailers time, effort, increase margins and reduce exposure to escalating traditional media costs.
Dialtime Plus enabling software technology enables retailers to offer consumers product discounts that can be redeemed directly to their mobile phone account.
Our digital redemption system was created on the foundation system of modern coupon redemption, which can be seen in use throughout the modern world.
If it ain't broke then don't fix it!!!"
This document again indicates the connection between the development of the Dialtime idea and the earlier email coupon idea which Fanmail had been working on. Mr David Cooper did not regard the two ideas as distinct. The description of the Dialtime products and services was closely based upon the section of Fanmail's business investment proposal sent to Unilever dealing with mobile phone redemptions.
- Also on 14 September 2001 Mr Stanley discussed the patent application with Mr David Cooper. Mr Stanley's note of the conversation again records his client as Fanmail. Mr Stanley noted that Mr David Cooper was to check the name of the applicant company and recorded that they had discussed the inventorship of the Dialtime idea briefly. Mr Stanley told Mr David Cooper that Fanmail would need to declare the inventor at some point in the future, since that is a statutory requirement within sixteen months of filing. Mr David Cooper did not name the inventor in that conversation; later that day he sent Mr Stanley an email in which he instructed that the patent should be registered to Fanmail and that he would "give further details on inventor name etc early next week". The omission by Mr David Cooper to identify Mr Bob Cooper as the inventor of the Dialtime idea to Mr Stanley stands in contrast with his evidence and that of Mr Bob Copper and Mr Zghari that Mr Bob Cooper had invented the Dialtime idea in all its essentials at their meeting after the presentation to Unilever on 20 June 2001.
- Mr Stanley lodged an application for a patent in relation to the Dialtime idea on behalf of Fanmail with the Patent Office the same day. He sent a copy of the application and of the Patent Office's fax of that date, recording date and time of receipt of the application, to Mr David Cooper.
- Four shares were issued in DPL on about 17 September 2001 and in due course these were allocated one each to Mr Burtenshaw, Mr Bob Cooper, Mr Zghari and Ms Wayne of the formation agents. The company was set up by the formation agents following the instructions from Mr Cavell earlier in the month. It is unclear who provided the names of the shareholders to Mr Darby's firm and the formation agents. It is possible that it was done by Mr David Cooper at the outset. However, the principal operative instructions for the allocation of one share each to Mr Burtenshaw, Mr Bob Cooper, and Mr Zghari were those given by Mr Burtenshaw to Mr Darby on 18 September (paragraph [119] below).
- Mr Zghari returned to work on 17 September 2001. Mr David Cooper prepared a memorandum for him, copied to Mr Bob Cooper, reviewing what had happened over the two weeks that he had been away. He reported that the patent application had been submitted by Mr Stanley, and indicated that "issues over ownership/inventor etc need to be resolved within the next sixteen months". He did not indicate a view that Mr Bob Cooper should be identified as the inventor, even though he was writing to Mr Bob Cooper and Mr Zghari, both of whom had attended the meeting on 20 June 2001. The note recorded that Mr David Cooper had instructed Mr Cavell to set up a new business called Dialtime Plus Limited. He reported that the registration should be completed by 18 September 2001 and that Mr Darby would be in touch about it. He recorded that issues over the ownership of the company would need to be resolved before a VAT number could be issued for it (it appears that a VAT number was required for DPL distinct from that for Fanmail, because it was not intended that DPL should ultimately be a wholly-owned subsidiary of Fanmail). He indicated that he had arranged a presentation for Yellow Submarine, who had been identified "as a strategic partner to [Fanmail]" by Mr Bob Cooper and Mr Zghari. He referred to contact he had had with another marketing company called Underwired in relation to the Dialtime project. In his note it appears that this contact had been conducted on behalf of Fanmail. Again, this indicates that Mr David Cooper did not understand there to be any significant difference between Fanmail and DPL so far as the Dialtime project was concerned. He also reported on a meeting which he and Mr Bob Cooper had had with Unilever on 7 September 2001 to discuss further work that had been done in relation to Solero, and indicated that the discussion had moved to cover the Dialtime idea. In relation to that, his note recorded that Mr Bob Cooper had made it clear that Fanmail needed income in the interim period until the patent was through. This indicates that in dealing with Unilever in relation to the Dialtime idea, Mr Bob Cooper and Mr David Cooper had not drawn any clear divide between Fanmail and the Dialtime idea. Under the heading "Dialtime", Mr David Cooper reported that design work was progressing and referred to the proposed brochure. His note stated: "[Mr Bob Cooper] thinks that brochure should feature all that [Fanmail] can do – needs final discussion before go ahead". This indicates that at this stage Mr Bob Cooper considered that the Dialtime idea should continue to be presented as part of a portfolio of ideas being offered by Fanmail (this decision reflects a separate note by Mr David Cooper to himself, recording that the decision whether the email barcode coupon idea was to be included in the brochure was a matter on which Mr Bob Cooper, not Mr Zghari, was to have the final decision). Mr David Cooper indicated that those at Fanmail were upset about the relationship with Burtenshaw Associates, who did not seem to value Fanmail as a company. His note went on to discuss a Fanmail website. He recorded that Ms Ferneyhough "thinks it's now time to have a [Fanmail] website, as the overriding company, a direct link to Scratch X isn't enough, especially when we promote Dialtime." This comment indicates that the understanding within Fanmail at the time was that Fanmail was the primary company offering the various ideas (in particular Scratch X and Dialtime) to the market. Finally, Mr David Cooper included a proposal that regular updates should be sent to investors. He recorded that Ms Ferneyhough had been approached several times by investors at Burtenshaw Associates asking how Fanmail was getting on, and suggested that it would be a good idea to provide them with a monthly update about developments. The developments referred to appear to be all those covered by his note, including Scratch X and Dialtime.
- When Mr Darby returned from holiday he contacted Mr Burtenshaw on 18 September 2001 to confirm the instructions which had been received by Mr Cavell in relation to the formation of DPL. Mr Darby drew up a note of points which he needed to run through with Mr Burtenshaw before he spoke to him and made some brief notes in relation to Mr Burtenshaw's responses. Mr Burtenshaw confirmed that the initial shareholdings in DPL should be one share each for himself, Mr Bob Cooper and Mr Zghari. This instruction was duly carried out by Mr Darby. These are three of the four shares the ownership of which is in dispute in the present case. On the same date Mr Darby arranged for Mr Burtenshaw to sign a form indicating his consent to be a director of DPL.
- On 19 September 2001 Mr Darby wrote to Mr Bob Copper enclosing a form for him to sign in connection with his appointment as a director of DPL. The letter commenced: "Acting upon the instructions of my client, Paul Burtenshaw, I have been engaged in the formation of [DPL]". Mr Chivers QC, for the Defendants, sought to suggest that this letter indicated that Mr Darby understood that Mr Burtenshaw had instructed him in relation to the formation of DPL on a personal basis rather than on behalf of Fanmail. I do not consider that Mr Darby's letter was intended to indicate this. Mr Darby's evidence was that he understood that the instructions for the formation of DPL came from Fanmail. He spoke to Mr Burtenshaw in his capacity as a director of Fanmail. His reference in this letter to Mr Burtenshaw as his client was, in my view, no more than an indication that it was Mr Burtenshaw to whom he had spoken to clarify Fanmail's instructions in relation to establishing DPL.
- Also on 19 September 2001 Mr Zghari, Mr Bob Cooper and Mr David Cooper made a presentation to Yellow Submarine with a view to encouraging them to assist in the development of various business ideas. In relation to the presentation, Yellow Submarine was asked to sign a confidentiality and non-disclosure agreement. This was stated to be with reference to Yellow Submarine's consideration of Fanmail and provided that all the information relating to Fanmail should be regarded as confidential. It was formulated to relate to information disclosed by or on behalf of Fanmail. No reference was made in the agreement to DPL. Since the presentation included the Dialtime idea, it appears that those attending the presentation understood and intended that the Dialtime idea should be regarded as part of the information belonging to Fanmail to be covered by this agreement.
- The presentation was led by Mr Bob Cooper. It proceeded by reference to a series of what seem to have been power-point slides, each of them bearing the Fanmail logo. It is evident from the slides which were used and the non-disclosure agreement which was presented to Yellow Submarine that the presentation was being made by Mr Bob Cooper on behalf of Fanmail. The presentation related to email coupons, scratchemail and the Dialtime idea. Although Mr Bob Cooper, Mr Zghari and Mr David Cooper sought to suggest that these were simply being presented as products which might or might not be Fanmail products, in my view it is clear that all three business ideas were being presented as business ideas of Fanmail.
- By a memorandum dated 21 September 2001 from Mr Burtenshaw to Mr Zghari and Mr Bob Cooper, Mr Burtenshaw reverted to them in relation to the allocation of shares for DPL, which had been discussed on 28 August 2001. He presented joint proposals on behalf of the partners in Burtenshaw Associates. He had by this stage checked the detailed share position in relation to Fanmail, which had not been fully understood at the meeting on 28 August. It had now been established, for example, that Ms Townley only had an 8.79% shareholding in Fanmail rather than 10%. Mr Burtenshaw stated:
"As you are aware I am keen to ensure that the shares held by my fellow partners and me, in terms of proportion, directly reflect our present ownership in Burtenshaws and indeed [Fanmail]. In order to achieve this and meet our own individual aspirations I trust the following is acceptable. "
His proposal was that Mr Bob Cooper (with Mrs Cooper) should have 25%, Mr Zghari should have 20%, he should have 34.45%, Mr Little and Mr Scott should each have 1% and that the remainder should be held by his partners in Burtenshaw Associates. The figures showed that he was assuming that Ms Townley would give up her shares in Fanmail and would hold no shares in DPL. He also proposed that they should meet in the near future to discuss issuing further shares to other possible contributors to the success of DPL and how the issue of such shares should dilute his proposed shareholdings. The memorandum concluded:
"With regard to the 'patent pending' situation, whilst this is held by [Fanmail], we need to seek advice on the tax and other implications of granting licences 'on the cheap' to [DPL] to then sell on. [Mr Zghari] and I are aware of the potential problems we encountered when moving Fanmail out of Burtenshaws. We also must have regard to existing Fanmail shareholders' thoughts on such a move."
This was consistent with adoption of the model referred to in paragraph [35] above in relation to the ownership of DPL.
- It is unclear quite when Mr Zghari received Mr Burtenshaw's memorandum, but on 9 October 2001 he sent Mr Bob Cooper a note to say that he was not happy with Mr Burtenshaw's proposals since they appeared to represent an attempt to maintain a level of voting control. On about that date Mr Zghari drew up his own proposal, which he showed to Mr Bob Cooper but did not send to Mr Burtenshaw. Mr Zghari's proposal was that Mr Bob Cooper and Mrs Cooper should have 30%, with himself having 20%. Mr Burtenshaw's shareholding and those of his partners should be reduced accordingly.
- Also on 9 October 2001 Mr Zghari sent Mr Stanley an email in which he asked whether it would be possible to transfer the patent from Fanmail to DPL and stated that the inventor of the Dialtime idea would "for future reference" be Mr Bob Cooper. I find that this email was part of Mr Zghari's hostile response to Mr Burtenshaw's proposed allocation of shares within DPL. Mr Zghari was suspicious of Mr Burtenshaw's motives and did not want to have him in control of the company. Mr Zghari did not tell Mr Burtenshaw that he was writing to Mr Stanley in these terms. His object was to try to remove what he considered to be the valuable intellectual property rights in the form of the patent away from Fanmail to have them placed with DPL and to claim that Mr Bob Cooper was the inventor rather than himself (an employee of Burtenshaw Associates who was seconded to Fanmail) or Soda (consultants working on behalf of Fanmail). This was the first claim by Mr Zghari that Mr Bob Cooper was the inventor of the Dialtime idea. I find that he made that claim for tactical purposes and did not have any genuine belief that that was the true position. Mr Zghari considered that these steps would strengthen his bargaining position and that of Mr Bob Cooper in relation to the negotiation about the division of the shares in DPL.
- Mr David Cooper was closely involved in the day-to-day affairs of Fanmail and DPL (as Mr Burtenshaw was not), had been directly involved in dealings with Mr Stanley and knew about the need to identify the inventor of the Dialtime idea, and would be bound to find out about these instructions to Mr Stanley; he also knew the true position, that Mr Bob Cooper was not the inventor of the Dialtime idea; and he later caused a fabricated version of the patent application to be drawn up to suggest that Mr Bob Cooper of DPL was the applicant for the patent. In the light of all this, I think it is likely that Mr Zghari agreed these instructions to Mr Stanley with Mr David Cooper before they were given. I find that they agreed that from that point they should take steps to promote the idea that Mr Bob Cooper was the inventor of the Dialtime idea and to secure that the patent applied for would be placed in the hands of DPL rather than Fanmail.
- I have given careful consideration to whether Mr Bob Cooper became party to this scheme at this stage. He was not closely involved in the day-to-day affairs of Fanmail and DPL, as his son was. However, there are other features of the case which have to be taken into account. Mr Bob Cooper had been alerted to the importance of identification of the inventor of the Dialtime idea by Mr David Cooper's memorandum of 17 September 2001 (referred to in paragraph [118] above). Mr David Cooper's evidence was that he was well aware of the importance which his father attached to his business reputation, and I do not think it is credible that Mr David Cooper would have joined in such a scheme with Mr Zghari without first discussing it with his father and getting his approval to put his name forward as the inventor. In order for the scheme to succeed, Mr Bob Cooper's co-operation would inevitably be required at some point, so I think Mr Zghari and Mr David Cooper would have wished to ensure at the outset that he was prepared to back them up. I have also concluded that Mr Bob Cooper deliberately sought to mislead the court in his evidence claiming inventorship of the Dialtime idea. For these reasons, I have concluded that Mr Bob Cooper did become a party to the scheme at this stage.
- Mr Stanley was away on holiday but spoke to Mr Zghari on his return on 29 October 2001. Mr Zghari told Mr Stanley that Mr Bob Cooper was not an employee of Fanmail. Mr Stanley, in the light of that, advised that in order to assign intellectual property rights from Fanmail to DPL it would be necessary to have an initial assignment from the inventor, Mr Bob Cooper, to Fanmail. This would provide a firm trail of title in the patent into the hands of DPL.
- On 26 October 2001 Mr Zghari sent details of DPL and Dialtime promotions addressed to "Dear Investor". This was sent to the investors in Fanmail. It stated:
"…We have been focusing on product research development for the last several months and had planned to launch a number of offerings simultaneously. However, due to recent events we are re-focusing our approach to concentrate on the areas that we feel will provide immediate returns.
I have enclosed an outline of our lead product offering and note that the company operating this mobile phone loyalty product is [DPL]. Shares in this company will be announced in the coming weeks and you will be given the opportunity to apply for Enterprise Investment Scheme tax relief status. …"
Once again, the Dialtime idea was being presented as something which had grown out of a range of ideas which had been developed by Fanmail.
- Also on 26 October 2001 Mr Zghari met Mr Warman to discuss the concept of Soda and DPL swapping share options that could be exercised when DPL's revenues hit a certain threshold. The same day Tim Cornell of Yellow Submarine e-mailed Mr David Cooper to request a copy of the business plan for the Dialtime idea which had been presented to Yellow Submarine on 19 September 2001, with the other elements presented on that occasion stripped out. Yellow Submarine thereby indicated that it was only interested in the Dialtime idea, and not in the Scratch X or email coupon ideas which had been presented to them. This tended to confirm that it was the Dialtime idea which was now beginning to look like the most promising of the ideas which had been developed by Fanmail. That in turn underlined the significance of the distribution of shares in the vehicle for the development of the Dialtime idea, DPL.
- Meanwhile, Fanmail's financial position was deteriorating. It continued to have expenditure but without significant income. On 4 November 2001 Mr David Cooper sent a memorandum to Mr Burtenshaw and Mr Bob Cooper as directors of DPL. It was headed, "Fanmail UK/Burtenshaw Associates commercial relationship". In it he addressed the current financial situation of Fanmail. There was a risk that Ms Ferneyhough might have to be made redundant. He wrote:
"We have very little financial resources left, yet need to spend money on some essential short-term projects in order to get both [Fanmail] and [DPL] off the ground."
He proposed that Burtenshaw Associates should provide cash to assist with items such as market research and that Fanmail should invoice Burtenshaw Associates for design work that Ms Ferneyhough had done for them. He stated:
"I fully understand the economics of business. However, in order to protect the long-term interests of all parties that have a mutual interest in both companies, it is important that Fanmail does not lose a very talented designer over a short-term cash flow problem. Fanmail and especially Dialtime will bring in a large amount of revenue long term for all its investors. It would be a travesty if the company was to suffer such a set back (as losing [Ms Ferneyhough]) at the first hurdle."
It is, in my view, telling that in this memorandum Mr David Cooper again ran together the businesses of Fanmail and DPL, and he did so in a document sent to Mr Bob Cooper.
- On 14 November 2001 Mr Darby sent his invoice for professional charges in connection with the formation of DPL, addressed to the directors of DPL, in the sum of £293.75. It is likely that he had been instructed to address the invoice to DPL by Mr Zghari or Mr David Cooper. This invoice was paid by Fanmail on 3 December 2001. It is likely that the payment was arranged by Mr David Cooper.
- On 19 November 2001 Mr Zghari wrote another "Dear Investor" letter to the investors in Fanmail on DPL headed paper. He referred to the material he had provided to them under cover of his letter of 26 October 2001, informed them of further expressions of interest which DPL had received and asked them to help in the processes of evaluating the Dialtime product from a consumer's perspective by answering, with friends and family, some questions he attached. Mr Zghari wrote that in order to develop the relevant software products, they would need to raise additional capital funding and stated that the investor would be given the opportunity to gain "additional equity in the business" prior to the offer being made available to external sources. He invited the recipients to contact him by 1 December if they wished to apply for that opportunity. This letter again indicates that, in communicating with investors in Fanmail, Mr Zghari was treating them as having an equivalent interest in DPL (see in particular his reference to "additional equity in the business"); and the fact that they were being invited to help with some ad hoc market research also indicated to the reasonable reader that the DPL business was in some sense a business in which they had an interest. Several of the partners in Burtenshaw Associates completed the questionnaires and returned them to Mr Zghari.
- On 21 November 2001 there was a meeting to discuss the DPL business. Mr Bob Cooper took charge of the presentations at that meeting. It was attended by Mr Burtenshaw, Ms Ferneyhough, Mr David Cooper, Mr Zghari, Mr Warman, Mr Hales and another individual with an extensive retailing background, Mr Doyle. There was a good deal of excitement. Mr Burtenshaw was struck that Mr Bob Cooper was described at the meeting as "the caretaker of the patent". He did not know what this meant and made a note to raise it later with Mr Zghari and Mr Bob Cooper.
- On 22 November 2001 Mr Bob Cooper sent Yellow Submarine a revised Dialtime business plan for DPL including a five-year cash flow. Yellow Submarine was an important prospective business partner for DPL. Mr Bob Cooper had led the presentation to it on 19 September. I think it likely that he carefully reviewed the materials for Yellow Submarine which he was now sending off to it. The cash flow showed the "set-up costs/investment" in year one as £144,000. That figure corresponded with the monies which the investors in Fanmail had put into that company. Mr Bob Cooper suggested in his evidence that that figure had been included in the DPL cash flow by mistake. I do not accept that evidence. In my view, the inclusion of this figure represented the common understanding at this stage that the Dialtime idea was one of Fanmail's business ideas and that DPL was being established as an operating company to develop it for the investors in Fanmail. The figure of £144,000 for development costs was included in a number of other cash flow spreadsheets which were produced as part of packages to encourage investment in DPL. In each case I consider that this reflected the same common understanding.
- At the meeting on 21 November, Mr Burtenshaw had noted from the materials that he had been listed only in a non-executive capacity in relation to DPL. He raised his concern about this in a memorandum of 23 November 2001 to Mr Zghari. In that memorandum he referred to himself as the major shareholder and stated that he represented the interests of several minority shareholders who financially continued to support the venture (i.e. DPL). This memorandum was fully in line with Mr Burtenshaw's understanding that the DPL shareholding was intended to reflect the shareholding in Fanmail, subject to equity adjustments to take account of others who needed to be incentivised. Mr Burtenshaw also asked Mr Zghari to clarify the comment that Mr Bob Cooper was the "caretaker of the patent applications". Mr Burtenshaw pointed out that, whilst the minority shareholders were aware of the proposed changes made from the original Fanmail shareholding and concurred with them, they felt exposed to any further evolution in the arrangements for DPL, especially if carried out without Mr Burtenshaw's knowledge.
- Mr Zghari responded by a memorandum dated 26 November 2001 to Mr Burtenshaw. He began by saying, "I note the reason for writing and concur". He thereby indicated that he understood Mr Burtenshaw to have a role in representing the group of minority investors in Fanmail in respect of the interest which they had in DPL. Mr Zghari pointed out that much better progress had been made with DPL compared with Fanmail over the past period and that he wished to move forward "without focusing too greatly on some of the detail, where I believe it is appropriate to do so and will not affect shareholders' interests". Again, this indicated his acceptance of the idea that Mr Burtenshaw and others could be regarded as minority shareholders in respect of DPL as well as Fanmail. Mr Zghari said that the draft business plan for DPL, which had been presented at the meeting, would now be finalised, "at which point I have already promised copies to all shareholders that have indicated they wish to receive one". It is clear that the reference to shareholders here is to shareholders in Fanmail. Mr Zghari's statement assumed that those shareholders were also to be regarded as shareholders in DPL. Mr Zghari gave an explanation for the change in Mr Burtenshaw's title, but emphasised that he would remain a key member of the overall executive board making decisions that "affect shareholder interests". Mr Zghari indicated that the need was to obtain investment to ensure success of the Dialtime idea and that his intention was then to "use the success of Dialtime to promote the benefits of Fanmail/ScratchX as a valuable business model." He clearly did not think that there was any significant difference between Fanmail and ScratchX for these purposes, and the overall tenor of what he wrote indicated that all of Fanmail, ScratchX and DPL were to be regarded as part of one overall association of companies with broadly common ownership. Mr Zghari's suggestion was that the focus should now be upon the Dialtime idea, leaving the other ideas in the Fanmail portfolio to one side for the moment. Mr Zghari said that to fund DPL's immediate shortfall in cash flow he would provide a loan of £15,000 to it.
- The memorandum went on:
"I have asked that the current and future Patents be assigned to Bob Cooper as a Director and officer of Dialtime, effectively removing myself from any personal rights to any approved patents. My rationale for this is that the majority of companies we will be dealing with, certainly in the UK, will know Bob. I believe that these companies will be less inclined to attempt to copy our business model because of any personal association and have greater respect for the product offering having been 'invented' by a retailer that acted at Board level in an internationally respected supermarket company. …
I would have hoped that the decisions made to date would have given confidence that the company shareholders are the singular most important drivers behind our endeavours to explore all opportunities for evolving the original business model including our persistence in our commitment to success. To reach the potential financial rewards there are occasional situations where the release of shares or equity to progress the business is our only option due to cash flow constraints. This course of action is never intended to penalise existing shareholders but expand the potential for long-term financial reward.
To reinforce my commitment to shareholder value and allay any concerns on managerial integrity, I am happy to offer to receive, anonymously or otherwise, a vote of no confidence from all existing shareholders in any managerial involvement in Dialtime or Fanmail."
This passage again assumes a close relationship between the shareholdings in Fanmail and DPL. The memorandum suggested that the existing investors (i.e. the shareholders in Fanmail) could rest assured that he was working to promote their interests by pushing forward the Dialtime idea through the vehicle of DPL. I have already commented at paragraph [56] above on the significance of Mr Zghari's use of the word '"invented"' in this passage in relation to Mr Bob Cooper's claim that he had invented the Dialtime idea. I also observe that the rationale offered by Mr Zghari for asking for the patents to be assigned to Mr Bob Cooper is not easily reconciled with the claim that Mr Bob Cooper was in fact the real inventor of the Dialtime idea.
- I have carefully considered whether these features of the memorandum undermine my conclusions at paragraphs [125] to [127] above regarding the scheme adopted in October by Mr Zghari, Mr David Cooper and Mr Bob Cooper to promote Mr Bob Cooper as the inventor of the Dialtime idea. I do not think they do. They were consistent with that scheme, and indeed assisted it by offering some additional colour of justification to explain why the patent might be registered in Mr Bob Cooper's name. Mr Zghari did not frankly explain in the memorandum that he had already in October arranged for Mr Stanley to change the registered owner of the Dialtime patent without informing Mr Burtenshaw. Further, in his evidence at trial, in giving deliberately misleading evidence that Mr Bob Cooper was the true inventor of the Dialtime idea, he sought to suggest that his comments in this memorandum did not undermine that view.
- On 27 November 2001 Mr Zghari e-mailed Mr Burtenshaw and Mr Bob Cooper regarding the possibility of an equity swap involving Soda and DPL. He pointed out:
"The tie with Soda will also provide us with a working team to continue to produce material and infrastructure for Fanmail / ScratchX, again with a reduced cost implication."
This indicated once again that Mr Zghari did not regard Fanmail and Scratch X as distinct business entities.
- On about 12 December 2001 Mr David Cooper gave instructions to Ms Ferneyhough to produce a set of elaborate fake documents copying the application which Mr Stanley had made to the Patent Office on behalf of Fanmail, but replacing Fanmail's name as applicant with Mr Bob Cooper's and DPL's names, and producing a fake version of the Patent Office fax confirming receipt of the application, again replacing the name of Fanmail with that of DPL. Ms Ferneyhough succeeded in producing what were on the face of it convincing fake documents.
- In view of the facts that Mr David Cooper provided these fake documents to Mr Zghari; Mr Zghari sent them out to investors in December 2001, having looked at and digested them (see paragraphs [153] and [154] below); Mr Zghari and Mr David Cooper had previously agreed in October 2001 to promote Mr Bob Cooper as inventor of the Dialtime idea and DPL as owner of the patent (see paragraphs [125] to [127] above); and Mr Zghari had been the person mainly responsible for the dealings with Mr Stanley (so that any pretence based on the fake documents could not be carried through without Mr Zghari's co-operation), it is likely that Mr David Cooper had obtained Mr Zghari's agreement to produce the fake documents. In view of the later use to which Mr Zghari put them, it is likely that Mr David Cooper caused these documents to be produced with a view to including them in the next version of a pack of materials for the investors to be sent to all the shareholders in Fanmail as part of a request to them for further investment of monies for the development of the Dialtime idea and with a view to strengthening Mr Zghari's and Mr Bob Cooper's hands in the negotiations with Mr Burtenshaw about the future shareholdings in DPL.
- For similar reasons to those set out in paragraph [127] above, I conclude that it is likely that Mr Bob Cooper knew about the decision to produce the fake documents at the time. I do not find it credible to suppose that Mr David Cooper would have taken such a serious step as creating fake documents naming his father to be sent to investors without checking with him first.
- Mr David Cooper gave Ms Ferneyhough a false explanation of why he wanted the presentation of the documents changed in this way. He told her that having Mr Bob Cooper's details on the patent would deter others from copying the idea and potentially encourage more people to invest in it. (Ms Ferneyhough did not spot a flaw in this, that potential competitors would be likely to check the actual register kept by the Patents Office, not the fake documents she was being asked to produce). The work on the false documents was carried out in secrecy. Mr David Cooper and Mr Zghari had told Ms Ferneyhough that all information about developments, particularly in relation to the Dialtime idea, was to be kept confidential because it was commercially very sensitive and no-one, not even the partners in Burtenshaw Associates, was to be told what she was doing. According to Ms Ferneyhough, whose evidence I accept, on occasions when she asked Mr Zghari if Mr Burtenshaw was aware of what was going on, Mr Zghari would say words to the effect, "What Paul does not know doesn't hurt him and there is no need to trouble him with it, he's got enough on his plate". Therefore, she did not mention the creation of these fake documents to Mr Burtenshaw. None of Mr Zghari, Mr David Cooper and Mr Bob Cooper explained to Mr Burtenshaw that these fake documents had been brought into existence.
- At about the same time as he gave his instructions to Ms Ferneyhough, Mr David Cooper contacted Mr Stanley to instruct him to arrange for the assignment of the patent application from Fanmail to DPL. I find that this was done in furtherance of the scheme referred to in paragraphs [125] to [127] above and with the knowledge of Mr Zghari and Mr Bob Cooper. David Cooper confirmed that instruction in an email to Mr Stanley dated 13 December 2001, stating that, "the ownership of the patent should be transferred to DPL with the inventor being recognised as Mr Bob Cooper".
- In due course Mr Stanley provided Mr David Cooper with a draft assignment from Fanmail to DPL dated 11 January 2002 (the date on which he sent it through) and a draft assignment from Mr Bob Cooper to Fanmail backdated to 7 September 2001. This backdating was done on Mr Stanley's own initiative, since he considered it advisable for the draft assignment to bear a date pre-dating Fanmail's application for the patent. Mr David Cooper returned the signed executed documents to Mr Stanley on 23 January 2002. Some time later Mr David Cooper asked Mr Stanley to chase the Patent Office to check that the transfer of the patent application had been registered by them.
- On 18 February 2002 Mr David Cooper e-mailed Mr Stanley and followed that up with a telephone conversation on the 20 February 2002 in which he asked Mr Stanley to prepare a memorandum showing that the patent application had been processed for DPL by Fanmail due to DPL not being registered as a company as at 14 September 2001; that Mr Bob Cooper had been registered as the inventor of the patent; and that a transfer of ownership had taken place for a nominal fee to move ownership from Fanmail to DPL while Mr Bob Cooper remained inventor of the patent throughout. He asked that the paperwork throughout the process should reflect the fact that the only reason the patent was assigned to Fanmail on 14 September 2001 was because DPL was not incorporated as a company until 17 September 2001. He said that the memorandum should indicate that once DPL was incorporated the intention had always been to move registered ownership of the patent back to its rightful owner, DPL, with Mr Bob Cooper throughout being recognised as the inventor. Mr David Cooper explained that it was important for him to have this information in writing from Mr Stanley because there was a potential dispute regarding ownership of the patent. It is likely that Mr Zghari and Mr Bob Cooper knew of this approach to Mr Stanley. Mr Burtenshaw was not informed about it.
- Mr Stanley was concerned at this request since the account which Mr David Cooper had asked him to record in writing did not accord with his recollection of events. Mr Stanley therefore set out a simple chronology recording what he had been asked to do and had done.
- On 27 February 2002, Mr David Cooper spoke to Mr Stanley and asked that his invoice in connection with the transfer of ownership of the patent be raised to DPL, which Mr Stanley duly did. The invoice was paid shortly thereafter by a personal cheque from Mr Bob Cooper under cover of a letter in which Mr Bob Cooper confirmed that he was Chairman of DPL and was paying on behalf of the company.
- I now go back to resume my account of events in December 2001. In his evidence, Mr Zghari claimed that he had a meeting on 13 December 2001 with Mr Burtenshaw at which the transfer of the patent from Fanmail to DPL was agreed. Mr Burtenshaw denied this, and I accept his evidence. Mr Zghari made no note of this alleged agreement, even though his evidence was that he now distrusted Mr Burtenshaw. There is no document which supports this part of Mr Zghari's evidence.
- On 18 December 2001, the first Board Meeting of DPL was held. It was attended by Mr Bob Cooper, Mr Zghari and Mr Burtenshaw. They discussed the ownership of the company. Mr Bob Cooper suggested that the company should remain under the ownership of the three existing shareholders, each with one share each (none of them was aware of the fourth share held by Ms Wayne). He proposed that these should be treated as "golden shares" with special rights. Two days later he provided a memorandum explaining his proposals in detail.
- Mr Bob Cooper's memorandum of 20 December 2001 recorded that Mr Burtenshaw's position at the meeting on 18 December was that he and his partners in Burtenshaw Associates should retain overall control with 50.5% of the company, but that Mr Zghari had objected strongly to that. Essentially the issue turned on a dispute about allocation of 2.5% of the shares in DPL. The memorandum also recorded that they had discussed an equity participation in DPL on the part of Mr Pearce and Mr David Cooper and also a potential equity participation by Yellow Submarine and an employee share incentive scheme. In the memorandum, Mr Bob Cooper proposed that Mr Burtenshaw should accept that the original allocation of 30% in DPL to him and 20% to Mr Zghari should stand. Mr Bob Cooper suggested that the three existing shares in DPL should be made into golden shares such that no change in the structure of DPL or sale of DPL's shares could take place without two of the three golden shareholders agreeing.
- Shortly before Christmas 2001 Mr Zghari sent a further "Dear Investor" letter to the investors in Fanmail in relation to DPL. The letter enclosed a CD-Rom which included a business plan, cash flow, business presentation, extracts from patent applications (these were the fake documents which Mr David Cooper had caused to be brought into existence), trademark confirmation, technical specification in relation to software and a non-disclosure agreement. The business plan included a statement under the heading, "Company Background", in these terms: "[DPL] was formerly [sic] founded in September 2001, after 12 months of background research and development work by its management and technical team". This was clearly a reference to research and development work which had been carried out by Fanmail employees, Mr Zghari (an employee of Burtenshaw Associates), Soda and Mr Bob Cooper. The cash flow enclosed with the plan again showed under the heading "Set-up Costs/Investment" the figure of £144,000 in year 1, reflecting the investment in Fanmail. Mr Bob Cooper again suggested in his evidence that this had been included in the cash flow in error. I do not accept that evidence. In my view, it accurately reflected the understanding on all sides at this time that the Dialtime idea had been developed by Fanmail at Fanmail's cost.
- I consider that Mr Zghari would have studied and compiled this pack of information with great care, before sending it out. By these materials he was seeking investment for DPL at a critical time in its development. I find that Mr Zghari saw and digested the fake patent application documents which had been provided to him by Mr David Cooper, before sending them to investors, and he knew them to be false.
- By mid-December 2001 Fanmail was in a parlous financial position. Its bank account went into overdraft on 17 December 2001. It had no source of income unless further investment could be attracted into the company or it could make use of its patent and intellectual property rights in some way. DPL's position was also difficult.
- The reference to a loan to be made to DPL by Mr Zghari in his memorandum dated 26 November 2001 (paragraph [137] above) related to an agreement he made with Mr Burtenshaw that he would lend £15,000 to DPL to assist it with its cash flow difficulties. Since DPL did not have a bank account of its own at the time, it was agreed that this money would be paid into Fanmail's bank account. The mechanism used was for Mr Zghari to provide Mr Burtenshaw with a personal cheque for £15,000 on the understanding that Mr Burtenshaw would then transfer that sum into Fanmail's account. Mr Burtenshaw paid the £15,000 into his bank account but on 28 December 2001 arranged for only £12,000 to be paid into Fanmail's account. At the hearing, Mr Burtenshaw was asked why he had not paid the full £15,000 over. He said it was a mistake, but did not have any good explanation how this mistake could have occurred. Certainly Mr Zghari regarded with deep suspicion what appeared to him to be a deliberate retention by Mr Burtenshaw of part of the loan monies for his own personal benefit (even though the balance appears to have been paid over at some point in January 2002). By the end of 2001, Mr Zghari was deeply distrustful of Mr Burtenshaw and their relationship was poor.
- On 14 January 2002, Mr Burtenshaw sent Mr Bob Cooper a response, copied to Mr Zghari, to Mr Bob Cooper's memorandum of 20 December 2001. In it he wrote:
"In our discussions concerning share allocation however I am concerned that we have not properly taken into account either the existence of Fanmail or the basis upon which shares were originally issued within that company.
Put in focus the real problem I have is that both myself and [Mr Zghari] did make a number of representations to prospective investors essentially on the lines that Dialtime (and indeed other products being developed at the time and in the future) would all come within the Fanmail stable of products to be controlled either as a simple product line of Fanmail or as a wholly owned subsidiary of that company.
Put shortly if we are now seen to depart from that principle without good reason questions must surely be asked which may prove difficult to answer without us first having sat down and considered in detail the implications of how this venture is to proceed.
What I am particularly concerned about is on the basis of earlier representations made finding ourselves in a position where an aggrieved shareholder of Fanmail or indeed Fanmail itself (were it to come under the control of others) challenges Dialtime itself (i.e. its shareholding) or indeed its ownership of intellectual property has been within the control and ownership of Fanmail [sic].
I am not sure how far fetched the above scenario is but with the sort of money at stake which we are potentially talking about I have to say that I am nervous about proceeding with any arrangement which does not have the full support and consent of all the investors involved.
I appreciate this will widen the discussions somewhat but see no reason why we cannot gain all the interested parties full support based upon say a short presentation and lunch when we discuss how we intend to proceed with a view then to securing everyone's full support to Dialtime operating as a stand alone company rather than a subsidiary of Fanmail as previously discussed. "
- Mr Chivers suggested to Mr Burtenshaw that this memorandum indicated that the previous discussions that he had with Mr Bob Cooper and Mr Zghari had been on the basis that DPL was to be a company completely distinct from Fanmail. In my view it does not bear that interpretation or undermine Mr Burtenshaw's evidence on that issue. I find that Mr Burtenshaw's memorandum was part of a continuous approach by him according to which he maintained that the starting point in relation to ownership of DPL should be the ownership of Fanmail, subject only to adjustment necessary to incentivise those who were going to make a significant additional contribution to the success of DPL (that is to say, in line with the business model referred to in paragraph [35] above).
- In early January 2002 Mr David Cooper asked Ms Ferneyhough to draw up an invoice from Fanmail to DPL using the templates that she used for third party invoicing. Ms Ferneyhough drew up a Fanmail invoice dated 15 January 2002 in the sum of £21,450.24 in respect of "services rendered between September and December 2001". It is common ground that these reflected only expenses paid by Fanmail in relation to DPL and did not include any sum in respect of provision of time by Fanmail employees for the benefit of DPL. As another indication of the way in which the affairs of Fanmail and DPL were in practical terms treated as one business, none of Mr Zghari, Mr David Cooper nor Ms Ferneyhough had kept, or been asked to keep, records of the time they had spent working on DPL affairs, as distinct from Fanmail affairs. Ms Ferneyhough was surprised that Fanmail was raising an invoice to DPL. Moreover, since she was told that both Fanmail and DPL were in financial trouble she could not understand how this would be paid. At this stage she noticed that Mr David Cooper and Mr Zghari were making increasingly adverse comments about Mr Burtenshaw and that Mr Burtenshaw was having to ask her about what was happening at Fanmail and DPL, suggesting that he was being cut off from what was going on.
- The sending of this invoice did not reflect anything agreed with Mr Burtenshaw for Fanmail. It was drawn up on the initiative of Mr David Cooper, probably with the agreement of Mr Zghari, as a way to distance DPL from Fanmail and to try to suggest that Fanmail had been providing services to DPL on some sort of arm's length basis. In that regard, it did not reflect the true underlying position.
- Probably at about this time, in January 2002, Mr Zghari spoke to Ms Townley by telephone. She had had much less contact with Mr Zghari in the latter part of 2001 than previously. Her evidence, which I accept, was that on this occasion he was downcast that Fanmail was having difficulties in relation to obtaining funding for its business ideas. He mentioned that the company was considering whether some restructuring might be required to raise further investment and bring in new partners to move the company forward. Since at this time the main proposals were to try to develop the Dialtime idea, this conversation is further evidence that Mr Zghari regarded that idea as belonging to Fanmail. Ms Townley said that she would look carefully at any restructuring proposal put forward, and would not stand in the way of a reorganisation if it helped Fanmail to realise its goals. The conversation concluded on the basis that he would come back to her with a proposal when the proposed way forward was clearer. It does not appear that he ever did revert to her. Neither he nor Mr Bob Cooper ever approached Ms Townley to see whether she would simply relinquish her shareholding in Fanmail, as they had assured Mr Burtenshaw she would.
- On 28 January 2002, Fanmail's financial position was so parlous that Mr Zghari emailed Ms Townley to enquire whether she would be interested in purchasing Scratch X. His email indicates again that Mr Zghari regarded Scratch X as in substance a subsidiary of Fanmail, contrary to his protestations in his evidence. In the email Mr Zghari said, "I am seeking to offer for sale parts of the business to ensure to provide funding options for the business". The business referred to was Fanmail's. The thrust of the email was that part of Fanmail's business (i.e. Scratch X) should be sold in order to provide funding for another part of its business - it is clear that what Mr Zghari had in mind at this time was DPL. Ms Townley did not respond to this approach.
- Also on 28 January 2002, the second Board Meeting of DPL took place attended by Mr Zghari, Mr Burtenshaw and Mr Bob Cooper. Mr Bob Cooper drew up the minutes for that meeting. Under the heading, "Shareholding", he recorded:
"As Chairman of [Fanmail], [Mr Burtenshaw] has agreed to complete the following in the next week,
i) Write to Caroline Townley requesting that [Fanmail] buy back her shares as she has failed to honour the terms on which she was given the share allocation.
ii) Will investigate the legal issues with regard to liquidating [Fanmail].
iii) Produce a document for [DPL] board as to a proposed agreement to shareholdings for [DPL]. This will be structured in a similar way to [Fanmail] but will include suggested allocations that enable the board to incentivise key members of the team.
Once the above is completed it was suggested by [Mr Bob Cooper] that an independent analyst could propose a fair and reasonable structure for the share allocation. [Mr Zghari] and [Mr Burtenshaw] agreed to this.
[Mr Burtenshaw] suggested that [Fanmail] be renamed Dialtime Holdings, which then had two subsidiary companies [Fanmail] and [DPL]. No decision was taken on this."
The minutes also recorded that they had discussed the financial position of Fanmail and DPL and suggestions for trying to raise investment funding for DPL.
- The particular significance of the discussion at this meeting is that it was agreed on all sides that it would be necessary to sort out the shareholding position in relation to Fanmail (in particular, in relation to Ms Townley's shares) before the shareholding in DPL could be sorted out, and they all contemplated that the shareholding in DPL should reflect that in Fanmail, but with adjustments as necessary to incentivise people with a particular contribution to make. There was no suggestion that the proper starting point should be that each of Mr Burtenshaw, Mr Zghari and Mr Bob Cooper owned one third of DPL.
- On 4 February 2002, Mr Zghari wrote another "Dear Investor" letter on behalf of DPL to investors in Fanmail, referring to the CD-Rom which had previously been supplied. The letter sought to raise further funding for the DPL business. Mr Zghari wrote:
"We are seeking loan capital from the shareholders of the company in order to continue trading effectively while pursue [sic] higher levels of funding and commercial agreements for use of our technology solutions. Several members of the Board have already committed financially to the anticipated shortfall and we are seeking your funding assistance to be repaid on contractual terms agreed by you."
The tenor of this letter was again that shareholders in Fanmail could be regarded as shareholders in a joint Fanmail/DPL business.
- Mr Zghari provided a draft of the letter and the accompanying information to Mr David Cooper to review, asking him also to seek Mr Bob Cooper's comments. Mr David Cooper responded by email dated 4 February 2002:
"I have passed the document over to [Mr Bob Cooper], he has responded that he would like to discuss the contents with you tomorrow before it is sent to any of the existing shareholders."
- Again, it appears from this that Mr David Cooper's understanding was that the existing shareholders in Fanmail were to be regarded as the shareholders in DPL. It is likely that Mr Bob Cooper did review the document and approved it before it was sent out.
- On 6 February 2002 Mr David Cooper agreed to become a director of DPL.
- In early February 2002 Mr Zghari contacted lawyers at Berwin Leighton Paisner to seek advice in relation to the share structure of DPL.
- At about the same time it appears that Mr Burtenshaw was chased to draft the letter to Ms Townley which had been discussed at the DPL Board Meeting on 28 January 2002. Mr Burtenshaw drafted such a letter bearing the date 11 February 2002, in which he stated that he understood from Mr Zghari that she was happy for Fanmail to buy back her shares for a nominal sum. Mr Burtenshaw sent a copy of this draft to Mr David Cooper, copied to Mr Zghari and Mr Bob Cooper, on 12 February 2002. In the event this letter was not sent. It is unclear why not. Mr Zghari did not disabuse Mr Burtenshaw about what had been discussed with Ms Townley.
- Also at about this time, Mr Burtenshaw learned from a discussion with Mr Howe (who had been looking at the materials on the CD-Rom, including the fake patent application documents) that the patent appeared to have been registered in the names of Mr Bob Cooper and DPL. Again reflecting his uncertainty why Mr Bob Cooper should be treated as "caretaker" of the patent (paragraph [134] above), Mr Burtenshaw did not understand why the patent should be in Mr Bob Cooper's name.
- On 18 February 2002 Mr Zghari wrote to Mr Burtenshaw and Mr Bob Cooper to propose that since none of the shareholding proposals to date had been agreed, they should revert to what he described as "the original agreement" (although there had not in fact been such an agreement), whereby the shares in the company were simply the three shares held one each by Mr Burtenshaw, Mr Bob Cooper and himself. He supported Mr Bob Cooper's golden shares proposal and proposed that all matters relating the shareholding should be agreed in twenty-eight days. He discussed the financial structure of DPL and referred to "£42,000 development costs to [Fanmail] as promoter of Dialtime prior and during incorporation." This reflected invoices that Mr Zghari had caused to be sent by Fanmail to DPL, as part of an exercise by him to try to demonstrate the separateness of DPL from Fanmail.
- On 21 February 2002 Mr Burtenshaw wrote a memorandum to his partners in Burtenshaw Associates and Mr Zghari, Mr Bob Cooper, Mr Scott and Mr Little (i.e. to all the shareholders in Fanmail other than Mrs Cooper -presumably on the basis that her interests would be represented by Mr Bob Cooper - and Ms Townley). Mr Burtenshaw set out his understanding that Ms Townley had informed Mr Zghari that she was willing to release her shareholding in Fanmail. Mr Burtenshaw referred to his letter to Ms Townley even though it had not yet been sent (and in the event was not sent). He now suggested that Ms Townley's shares should be reallocated proportionately between the remaining shareholders in accordance with their stake in Fanmail. This would give him 43.83% of DPL, Mr Zghari 19.28% and Mr Bob Cooper and Mrs Cooper 11.07%. He referred to "the potential of subsidiary companies, Scratch X and [DPL]" and proposed further investment from the existing shareholders at the rate of £1,000 per 1% held. He was reluctant to sell Scratch X as Mr Zghari had proposed. He proposed changing Fanmail's name to Dialtime Plus Limited, in order to preserve the benefits that the shareholders enjoyed under the Enterprise Investment Scheme. He recorded the fact that no agreement had been reached as to the shareholding in DPL. He again put forward his proposals in his memorandum of 21 September 2001 and suggested that there might be a mediation, with Mr Scott acting as facilitator.
- Mr Burtenshaw's memorandum led to the other directors in DPL (Mr Bob Cooper, Mr Zghari and Mr David Cooper) seeking legal advice on DPL's position which was not shared with Mr Burtenshaw. In an email from Mr David Cooper to Berwin Leighton Paisner of 22 February 2002 he asked:
"Can you confirm the legal status of [DPL] and [Fanmail] – are they totally separate companies? Can you also confirm that the shareholding of the legal entity [DPL] is 3 shares and if this is so there is therefore no legal link between the two companies and therefore no ownership rights that [Fanmail] can claim to."
- Mr Burtenshaw was by this stage taking his own legal advice on the position from Walker Morris.
- At the suggestion of Berwin Leighton Paisner, Mr Bob Cooper produced a memo to Mr David Cooper in relation to DPL to confirm that he was the sole inventor of the patent filed on behalf of DPL on 14 September 2001. He stated that Fanmail agreed to act as nominee to hold the patent until DPL was incorporated. Neither of these points was true. He continued:
"It was always my intention, which [Fanmail] recognised when they agreed to act as nominee, that at some point in the future I would request the transfer of ownership of the patent return to [DPL]."
This was not true either. He then stated that this transfer of ownership had now taken place. This memo was intended to be copied to all the shareholders in Fanmail.
- Mr Zghari's proposal that the ownership of DPL be divided in three equal shares held by each of Mr Burtenshaw, Mr Zghari and Mr Bob Cooper brought protests from the partners in Burtenshaw Associates. This reflected their understanding, which had been fostered by Mr Zghari, that they had an interest of their own in DPL.
- At the end of February 2002 Mr Zghari wrote to Mr Burtenshaw rejecting his proposals.
- Also at the end of February 2002 Berwin Leighton Paisner checked the position in relation to the shareholding in DPL and it came to light that Ms Wayne still held one share in the company.
- On 28 February 2002 Mr Burtenshaw met Mr Darby to discuss the documents evidencing the assignment of patent rights between Fanmail and DPL, which Mr Darby had signed as company secretary of Fanmail and which Mr Burtenshaw had now seen. Mr Darby explained that before signing he had spoken with Mr Zghari to confirm that the assignment had been formally approved by the board of directors which he confirmed. This was untrue: it had not been confirmed by the board of directors. By this stage Mr Burtenshaw had become very suspicious of Mr Zghari. The prospects for reaching agreement in relation to the shareholding in DPL were receding on all sides.
- At a further board meeting of DPL on 4 March 2002, Mr Burtenshaw protested at the proposal that the shares in DPL should be treated as allocated one third each to him, Mr Bob Cooper and Mr Zghari. Again mediation was proposed.
- By a memo dated 7 March 2002 Mr Burtenshaw requested Mr Zghari to explain how it was that Mr Zghari had told Mr Darby that the assignment of the patent by Fanmail to DPL had the full support of the board of Fanmail.
- Mr Zghari took legal advice and then responded in a memo dated 11 March 2002 to Mr Burtenshaw, copied to Mr Bob Cooper. He referred to his memo to Mr Burtenshaw of 26 November 2001 (see paragraphs [137] and [138] above). Mr Zghari stated:
"You have always been aware that the common intention of the directors of both Fanmail and [DPL] was to transfer the patent application to Fanmail, pending incorporation of [DPL]. On this incorporation, the transfer from Fanmail to [DPL] was to be effected."
This was not true. There had been no such common intention.
- In the event, a claim was at one stage made by Fanmail that the assignment of the patent to DPL was invalid. However, for reasons of litigation strategy, since the relevant intellectual property rights had been assigned by DPL to MCashback and it was hoped that Fanmail could claim ownership of DPL and then make a claim through DPL against MCashback, Fanmail ratified the assignment of its intellectual property rights to DPL.
- Discussions continued with a view to trying to resolve the question of the shareholding in DPL, but they came to nothing.
- On 20 March 2002 Mr Zghari resigned as a director of Scratch X.
- Meanwhile, it appeared there was considerable investor interest in DPL. Mr Bob Cooper was at this stage paying DPL's business expenses from his own pocket.
- By about the end of March 2002 relations between the principal parties had to all intents and purposes broken down. Mr Bob Cooper, Mr David Cooper and Mr Zghari proceeded to market the Dialtime idea through DPL. Mr Burtenshaw had no effective control over what they were doing.
- There was a meeting on 24 April 2002 between Mr Burtenshaw and Mr Zghari. Mr Burtenshaw's evidence was that at this meeting they had an angry row about what Mr Burtenshaw now believed to be the forged patent application in respect of the Dialtime idea, which had been sent by Mr Zghari to the Fanmail investors; Mr Burtenshaw accused him of being dishonest and disloyal; he told him that everyone knew he had invented the idea and, in maintaining the fiction that Mr Bob Cooper had invented it, he was making himself look foolish. Mr Burtenshaw said that Mr Zghari became tearful and admitted that his understanding who had invented the idea was in fact correct. Mr Zghari denied this in his evidence. There is no reference in the documents to this confrontation, but I think it is likely that something along these lines did occur. Mr Zghari's reaction reflected the truth as I have found it to be. It also reflected his awareness that he had told or given the impression to others at an earlier stage that he was indeed the inventor of the Dialtime idea. I accept Mr Burtenshaw's evidence on this point.
- At the end of April 2002, Mr Zghari resigned from his employment with Burtenshaw Associates.
- Fanmail became insolvent. Some time later, in 2003, Mr Burtenshaw omitted to file accounts for it, with the result that its name was removed from the register at Companies House. Thereafter, Mr Burtenshaw and the other shareholders in Fanmail made an application for the restoration of Fanmail to the register for the purposes of pursuing litigation in relation to these matters. Steps were taken to raise the finance necessary to bring the present proceedings. In particular, Fanmail issued new shares in return for provision of funds which could be spent in pursuing these legal proceedings. Mr Chivers suggested to Mr Burtenshaw that the only reason that Fanmail had been restored to the register was to use it as a vehicle for raising funds for litigation, and that he had no genuine belief that Fanmail is the beneficial owner of the shares in DPL. Mr Burtenshaw denied this. I accept his evidence.
- On 6 September 2002 the board of DPL decided, in the absence of Mr Burtenshaw, to transfer DPL's intellectual property rights to MCashback. MCashback was formed by Mr Bob Cooper, Mr David Cooper and Mr Zghari in July 2002 with the object of receiving the assignment of the DPL's intellectual property rights from DPL and exploiting them. The validity of the assignment from DPL to MCashback is one of the matters covered in the derivative action which has been brought on behalf of DPL. That is not a matter which is before me and I say no more about it.
- On 18 September 2002 Walker Morris wrote to Berwin Leighton Paisner to protest at this step. Mr Burtenshaw by this letter objected that he had not received notice of the DPL board meeting until the day before and had been unable to attend. The letter went on:
"Furthermore, we put you on notice that it is our client's position that the issued shares in [DPL] are held on trust for the benefit of the shareholders of Fanmail. In these circumstances, any purported assignment of Dialtime [intellectual property rights] to a third party without the consent of the Fanmail shareholders constitutes a clear breach of the fiduciary duties of Bob Cooper and Ahmed Zghari as directors of [DPL].
For the avoidance of doubt, the proposed assignment of Dialtime [intellectual property rights] to MCashback is vigorously opposed by Mr Burtenshaw and the other Fanmail shareholders for whom we act.
In addition, our client takes issue with the validity of the purported assignment of the Dialtime [intellectual property rights] from Fanmail to [DPL]."
- Mr Chivers put to Mr Burtenshaw in cross-examination and made the submission that this letter indicates that the true claim sought to be advanced (and Mr Burtenshaw's true understanding) was not that Fanmail the company owned DPL, but that the Fanmail shareholders owned DPL. Whilst the letter is, I think, rather loosely drafted, I do not think it bears the weight which Mr Chivers sought to put upon it. It is in my view consistent with the case which Fanmail now seeks to advance, and does not lead me to the conclusion that Mr Burtenshaw did not believe that Fanmail was to have the beneficial ownership of the three shares in DPL in the hands of Mr Zghari, Mr Bob Cooper and himself while they were held on what he regarded as a temporary holding basis before the final shareholding arrangements could be agreed.
Legal analysis
- The claim by Fanmail in relation to the shares in DPL is that there was a resulting trust in relation to each of the four shares in DPL which was registered in the names of Mr Burtenshaw, Mr Zghari, Mr Bob Cooper and Ms Wayne respectively. I address this issue under three headings: the direct consideration given for the shares, the wider context for the formation of DPL and the objective intentions of the parties as to the ownership of the shares in DPL. In relation to the last heading, the parties invited me to consider as sub-issues the questions of who invented the Dialtime idea and whether Mr Bob Cooper was a de facto director of Fanmail.
(i) The direct consideration given for the shares in DPL
- Mr David Cooper, acting on behalf of Fanmail, gave instructions on 10 September 2001 (see paragraph [109] above) to Mr Darby's accountancy firm for DPL to be established. When Mr Darby checked the position with Mr Burtenshaw on 18 September 2001, Mr Burtenshaw confirmed that Fanmail wished to set up the new company (see paragraph [119] above). I find that the instructions for the formation of DPL were given on behalf of Fanmail, and that Fanmail thereby assumed liability to pay Mr Darby's fees in respect of the formation of DPL.
- Subsequently, probably on the direction of Mr Zghari or Mr David Cooper in November 2001, Mr Darby sent an invoice addressed to the Directors of DPL for his firm's fees of £250 plus VAT in relation to the formation of DPL, including setting up the statutory register and filing documents with Companies House. In the event, that invoice was paid by Fanmail by sending a cheque on 3 December 2001.
- It was Mr Darby's unchallenged evidence that the four shares in DPL were issued on 17-18 September 2001 in a form in which they were not paid up. At that time, DPL had no bank account into which it could have received payment for the shares. His view, as an accountant, was that the issued shares at that time represented debt obligations owed to DPL by the shareholders. The invoice which he rendered in respect of the formation of DPL did not include reimbursement in respect of subscription monies paid for the shares.
- In DPL's annual accounts for the year ended 30 September 2007, drawn up by Mr Zghari, the four shares are described as "Allotted, called up and fully paid". There was no similar statement in DPL's accounts in previous years. No evidence was given regarding whether and when the shares may in fact have been paid up, and it is possible that Mr Zghari may, at the time he prepared the 2007 accounts, simply have assumed that they had been paid for. However that may be, both sides submitted that the ownership of the shares in DPL falls to be determined as at the time they were originally allotted, on 17-18 September 2001, and so that is the date upon which I focus in this judgment.
- In support of its resulting trust claim, Fanmail relied on Shephard v Cartwright [1955] AC 431. That case concerned a resulting trust which was said to have arisen in respect of the allotment of shares in six private companies formed for the purpose of engaging in speculative property development. The shares had been subscribed for in cash by one of the promoters, who caused certain of them to be issued to his children. The result of the case was that the House of Lords held that, since the case concerned the provision of shares to the promoter's children, the presumption of advancement applied, with the result that the children were taken to be the full beneficial owners of the shares which were allotted to them. In the course of his speech, Lord Simonds said this at p. 445:
"… I do not distinguish between the purchase of shares and the acquisition of shares upon allotment, and I think that the law is clear that on the one hand where a man purchases shares and they are registered in the name of a stranger there is a resulting trust in favour of the purchaser; on the other hand, if they are registered in the name of a child or one to whom the purchaser then stood in loco parentis, there is no such resulting trust but a presumption of advancement."
In the present case, of course, there is no question of any presumption of advancement applying.
- Mr Chivers did not dispute this statement of principle, but emphasised that it was made in the context of a case in which, on the facts, the promoter had actually paid for the shares which were issued, by subscribing for them in cash (see p. 444). He submitted that it was this feature of the case which was the basis for Lord Simonds equiparating the case of a purchase of shares paid for by one person but registered in the name of another (where a resulting trust is presumed to arise) and that of an allotment of shares paid for by one person but registered in the name of another. By contrast, in the present case, Fanmail did not pay any subscription monies in respect of the four shares issued. When the four shares were allotted to Mr Burtenshaw, Mr Zghari, Mr Bob Cooper and Ms Wayne respectively, and registered in their names, they each became personally liable to meet any call by DPL for payment of the £1 due in respect of their share.
- In my judgment, Mr Chivers' submission that Shephard v Cartwright does not cover the present case is correct. The consideration for the shares allotted in that case was cash paid by the promoter of the company, and Lord Simonds' statement of principle was directed to that situation. In this case, the consideration for the shares allotted to each of the shareholders was the personal liability of that shareholder to meet any call by DPL for payment in respect of the share registered in his or her name. Each shareholder "paid" for his or her own share by assuming a personal obligation to DPL in respect of it.
(ii) The wider context for the formation of DPL
- In my view, however, that is not the end of the analysis in relation to the question whether the shares were held on resulting trust for Fanmail. The subscription money of £1 potentially payable in respect of each share (if called in by DPL) was tiny in comparison with the real economic cost of setting up DPL (Mr Darby's firm's charge of £250 plus VAT). That cost was borne by Fanmail. In that wider sense, Fanmail did pay for the allotment of the four shares to the four individuals referred to. In my view, in the context of the whole transaction to set up DPL, the potential individual liability of £1 in respect of each share was de minimis and cannot be regarded as governing the beneficial ownership of the shares. Indeed, in 2001 no-one even referred to the question whether the £1 for each share should be paid or not, or showed any awareness that it had not in fact been paid for as part of the costs of formation of DPL which were borne by Fanmail. The instructions given by Mr Zghari to Mr David Cooper and by Mr David Cooper and Mr Burtenshaw to Mr Darby's firm to set up DPL did not spell out whether the shares in DPL should be paid up or not. The whole tenor of the transaction was that it was assumed that Fanmail was giving the instructions for DPL to be set up and would bear all the costs of doing that.
- This point is powerfully underlined by what happened in relation to the fourth share, held by Ms Wayne of the formation agents. No-one for Fanmail or amongst the Defendants was aware of the existence of this share until detailed research was carried out into the share register of DPL in 2002, after the parties had fallen out with each other and had called in lawyers. No-one has suggested that Ms Wayne has or had the beneficial ownership of her share in DPL, even though as a matter of formal analysis she had assumed a personal liability in respect of it in the same way as Mr Burtenshaw, Mr Zghari and Mr Bob Cooper in relation to their respective shares. No doubt, if DPL had called for payment of £1 in respect of her share the day after it was issued, the £1 she would have been obliged to pay for it would have been charged back to the person giving the instructions for the formation of the company (i.e. Mr Darby's firm and, through it, Fanmail). The same would have been true if the formation agents had chosen to arrange for shares in DPL to be issued in fully paid up form: the additional cost of £4 would have been charged to Fanmail. There is no indication from the evidence I have heard that any of the persons involved in the transaction would have regarded that as having any significance at all.
- Is it legitimate, then, for the purposes of working out where the beneficial ownership of the four shares in DPL lies and whether a resulting trust arose, to assess the position in the light of this wider context? In my judgment, it is. Whether a resulting trust arises or not is based on the court's assessment of the true, or most likely, objective intention to be ascribed to the parties to a transaction involving the acquisition of property as to the ownership of that property, based on a factual presumption taken to arise from the identity of the person who pays for the property. The presumption is rebuttable, and its force and whether it is rebutted or not have to be assessed in the light of the particular circumstances of the specific case. That being the nature of the presumption, it is appropriate in my view for the court to consider its application in the light of indications from the evidence about how the parties regarded the true economic substance of the relevant transaction. On 17-18 September 2001 all parties regarded DPL as a company set up by Fanmail and at its cost. For all practical purposes, Fanmail was regarded as the person who had paid for DPL to be established.
- Therefore, I conclude that a rebuttable presumption arose upon the formation of DPL that the shares in it were to be held beneficially upon a resulting trust for Fanmail. I consider below whether that presumption was rebutted on the facts of this case, and conclude that it was not. But it should be noted here that I also regard the analysis below, which focuses on the objective intentions of the relevant parties, as supporting the conclusion that a resulting trust arose. I do not think that there is a sharp divide in this case between the operation of resulting trust principles and an analysis of the objective intentions of the parties.
(iii) The objective intentions of the parties as to the ownership of the shares in DPL
- It was common ground that the approach to examination of the intentions of the relevant parties as to the beneficial ownership of the shares which were issued in DPL should be an objective one: see Gissing v Gissing [1971] AC 886 at 906 per Lord Diplock:
"As in so many other branches of English law in which legal rights and obligations depend upon the intentions of the parties to a transaction, the relevant intention of each party is the intention which was reasonably understood by the other party to be manifested by that party's words or conduct notwithstanding that he did not consciously formulate that intention in his own mind or even acted with some different intention which he did not communicate to the other party. On the other hand, he is not bound by any inference which the other party draws as to his intention unless that inference is one which can reasonably be drawn from his words or conduct. It is in this sense that in the branch of English law relating to constructive, implied or resulting trusts effect is given to the inferences as to the intentions of the parties to a transaction which a reasonable man would draw from their words or conduct and not to any subjective intention or absence of intention which was not made manifest at the time of the transaction itself. It is for the court to determine what those inferences are."
- The approach to be adopted is somewhat complicated when, as here (and in contrast to the position in Gissing v Gissing), the words and conduct of more than two people may be relevant. Fanmail is a corporate person, which acted by a range of individuals in relation to the formation of DPL: each of Mr Zghari, Mr David Cooper and Mr Burtenshaw played a part. Mr Bob Cooper's evidence was that he discussed the formation of a new company with Mr Burtenshaw, but left Mr Burtenshaw to get on with setting it up. The position is further complicated by the considerable informality with which the affairs of Fanmail were carried on, reflecting in that regard the informality with which the affairs of Burtenshaw Associates were conducted.
- In arriving at the relevant composite objective intention as to the ownership of the shares in DPL, the position is that:
i) Mr David Cooper on behalf of Fanmail (his employer) carried out instructions he had received from Mr Zghari, and made no substantive contribution to the formation of the relevant intention by his own thinking in mid-September 2001;
ii) Mr Burtenshaw, Mr Zghari and Mr Bob Cooper conducted a joint negotiation regarding the formation of DPL, and the actions and expressed views of each of them as known to the others are relevant;
iii) In the course of the negotiation, Mr Burtenshaw was at pains to refer to and protect the interests of the investors in Fanmail in relation to the exploitation of the new Dialtime idea (which had been developed as part of the portfolio of ideas which had been generated by Fanmail). This was known to Mr Zghari and Mr Bob Cooper. The only reason Mr Burtenshaw did not press the interests of Ms Townley was that he had been told by Mr Bob Cooper and Mr Zghari that she was prepared to relinquish her shares in Fanmail (even though they had not broached that with her).
- It is in the context of examination of the objective intention of the parties that the two sub-issues referred to in paragraph [195] above (whether Mr Bob Cooper invented the Dialtime idea and whether he acted as a de facto director of Fanmail) are relevant. I turn to deal with them in turn.
- Mr Zghari, Mr Bob Cooper and Mr David Cooper all sought to emphasise in their evidence that Mr Bob Cooper had invented the Dialtime idea, in particular in their debriefing session after the presentation to Unilever on 20 June 2001. One reason for this was to provide support for their contention that the agreement to form DPL as a new company to develop and exploit the Dialtime idea was that it should be established as a company completely distinct from Fanmail. If the idea was Mr Bob Cooper's idea, the suggestion went, then there was no good reason to think that Fanmail had a strong interest in it which could lead to the inference that the common intention was for Fanmail to own the beneficial interest in the shares in DPL.
- As appears above, I reject this contention. Mr Bob Cooper was not the inventor of the Dialtime idea. On the contrary, the idea derived from ongoing work by Fanmail (acting by Mr Zghari, its director, together with a contribution from Soda, the consultants whom Fanmail had engaged and paid) in relation to the range of ideas it was developing. The Dialtime idea grew out of work which had been done on the email barcode coupons idea, which everyone knew to be a Fanmail idea. I find that as they became disenchanted with Mr Burtenshaw from the later part of September 2001, Mr Zghari, Mr Bob Cooper and Mr David Cooper deliberately sought to foster the impression (which they each knew was not true) that Mr Bob Cooper was the inventor of the Dialtime idea so as to try to strengthen the hands of Mr Zghari and Mr Bob Cooper in their negotiations with Mr Burtenshaw. I find that in their evidence to the court they again deliberately and untruthfully sought to claim that Mr Bob Cooper had been the inventor of the Dialtime idea.
- Mr Bob Cooper undoubtedly had an important contribution to make, particularly in relation to the development of the commercial case in favour of introducing the Dialtime idea to retailers, in putting the force of his reputation amongst retailers behind the idea in introducing it to potential investors and in using his extensive business contacts to open doors with supermarket chains and manufacturers so that the idea would be taken seriously at the highest levels within those organisations. His substantial potential contribution was recognised in the negotiations between him, Mr Burtenshaw and Mr Zghari from 28 August 2001 onwards by the proposed allocation of 30% of the shares to be issued in DPL to him. The proposed allocation of those shares did not indicate that he was the inventor of the Dialtime idea.
- The facts that the Dialtime idea was known to be a Fanmail idea, which had been developed using Fanmail's resources in terms of money and personnel, are themselves strong indicators that each of Mr Burtenshaw, Mr Bob Cooper and Mr Zghari understood themselves to be negotiating in August and September 2001 in respect of the formation of a new company to develop what was in substance Fanmail's property in terms of the idea and the business opportunity which it represented. This is borne out by the way in which the negotiation on 28 August 2001 proceeded, from consideration of the shareholding position in relation to Fanmail to debate about how the shares in DPL should be allocated as a departure from that position to reflect the special contribution expected from, and incentivisation for, key individuals including in particular Mr Bob Cooper (see paragraph [98] above). The fact that Mr Zghari, Mr Bob Cooper and Mr David Cooper all sought to create the false impression that Mr Bob Cooper was the inventor of the Dialtime idea also gives rise to the inference that they appreciated very well that, absent that circumstance, it would appear that the basic position was intended to be that Fanmail owned DPL, subject to any variation in shareholdings in DPL as compared with those in Fanmail which might be agreed thereafter.
- In respect of the intended relationship between the shareholders in Fanmail, Fanmail itself and the shares in DPL, Mr Chivers sought to suggest – on the basis of the letter from Walker Morris dated 18 September 2002 written on the instructions of Mr Burtenshaw (paragraph [193] above) – that Mr Burtenshaw's understanding was that it was the shareholders in Fanmail who were intended ultimately to benefit from the shares in DPL, and not Fanmail itself. He submitted that on the basis of this understanding, the inference should be that Mr Burtenshaw, Mr Zghari and Mr Bob Cooper did not intend that the four shares in DPL should be beneficially owned by Fanmail. Therefore, the declaratory relief sought by Fanmail should be refused.
- In my view, in the light of the evidence in the case regarding events at the time of the relevant transaction in September 2001, the Walker Morris letter of 18 September 2002 does not bear the weight which Mr Chivers sought to place upon it. It was loosely drafted, in a way which does not make it appear that a sharp distinction was intended to be drawn by the writer between a case of a claim to be made by Fanmail and one to be made by the shareholders in Fanmail as a distinct group of individuals. When he was taxed with this letter in cross-examination, it was clear that Mr Burtenshaw did not understand the letter as drawing any such distinction, and he regarded it as consistent with his evidence and case that it was intended that the beneficial ownership of the shares in DPL should be held by Fanmail.
- The question does arise, however, why in that case Mr Burtenshaw should have arranged for the three shares in DPL (leaving aside the fourth share held by Ms Wayne) to be held one each by himself, Mr Zghari and Mr Bob Cooper, rather than simply having them registered in the name of Fanmail. On any view, this arrangement was rather odd. The registered shareholding did not marry up with the shareholders in Fanmail, as individuals, who were discussed at the meeting on 28 August 2001, when agreement in principle as to the shareholding in DPL was arrived at. Nor did it marry up with the proposed interests which it was suggested that Mr Zghari and Mr Bob Cooper should have: it was never suggested that Mr Bob Cooper should have more than a 30% share in DPL, and Mr Zghari a 20% (or, taking Mr Burtenshaw's opening suggestion at the meeting on 28 August 2001, a 25%) share. So it is difficult to regard the registered shareholdings as reflecting any actual intention of the parties as to the beneficial ownership of DPL.
- In my view, the explanation for the original allocation of shares is that it broadly followed the arrangement which had already been used in relation to the formation of Scratch X. This was set up for the development and exploitation of another Fanmail idea, had two issued shares in the names of Mr Burtenshaw and Mr Zghari respectively, and was regarded by everyone as a subsidiary of Fanmail (subject to potential adjustments to the shareholding as it developed as a business, to reward and incentivise persons with a special contribution to make). This was an arrangement with which both Mr Burtenshaw and Mr Zghari were familiar and were comfortable. It was also the model which Mr Darby understood, who was to be instructed to set up DPL. It was explicable in the context of the very informal way in which the affairs of Burtenshaw Associates, Fanmail, Scratch X and then DPL were conducted and allowed to blend into each other. The addition of Mr Bob Cooper probably reflected the fact that it was proposed by Mr Zghari and Mr Burtenshaw that in due course he should be a major shareholder in DPL, to reflect the special contribution he could make to that company, as compared with Scratch X.
- Mr Bob Cooper, in his evidence, made it clear that he left the mechanics of setting up DPL to others. He did not propose that an initial share be issued to him or make any suggestion about how the shares should be held prior to agreement to be reached in future along the lines of what was discussed on 28 August 2001. I find that he had no clear and distinct view of his own as to how the initial allocation of shares in the company should be made. At the time, he gave every impression of being comfortable with the idea of treating the Dialtime idea (which was to be developed and exploited by DPL) as part of the group of business opportunities owned by Fanmail. In particular, he had read and approved the business investment proposal sent to Unilever on 8 August 2001 (paragraph [82] above) which presented the Dialtime idea as a business opportunity of Fanmail; and shortly after DPL was set up, he led the presentation to Yellow Submarine on 19 September 2001 to seek their investment in Fanmail and its business ideas, at which the Dialtime idea was presented by him alongside scratchemails (Scratch X) and email barcode coupons as a Fanmail product (paragraphs [121] and [122] above).
- In that context, I find that the common intention was that the shares in DPL held by the individuals should be held in such a way as to allow DPL to be treated as part of the Fanmail association of companies, and in such a way as to allow for the Dialtime business opportunity which DPL was to develop and exploit to be presented as one of the business opportunities which Fanmail could put before investors. This intention both reinforces and is reinforced by the presumption that a resulting trust arose by virtue of the use of Fanmail's assets to set up DPL.
- Little consideration was given to the precise way in which the initial shares in DPL should be held. On 17-18 September 2001 the parties all expected that a final, detailed agreement about the distribution of new shares to be issued by DPL would be arrived at shortly, along the lines discussed on 28 August 2001. The initial allocation of shares was regarded on all sides as a temporary holding measure, and was not thought to have major significance. It is because, contrary to the parties' expectations, it transpired that no such final agreement was made that it is necessary for the court to infer or construe their objective intention as to the beneficial ownership of the shares as initially allocated.
- Against that background, another matter which further reinforces my conclusion as to the common intention of the parties as to the beneficial ownership of the shares in DPL is consideration of the commercial significance and propriety of Fanmail retaining within its beneficial ownership any assets which had been acquired or developed using its resources, for the benefit of its Fanmail's shareholders and for its creditors should it become insolvent. It would not have been properly open to Mr Burtenshaw and Mr Zghari, as directors of Fanmail, to divert a business opportunity which Fanmail had developed at its expense to their own beneficial ownership, and since DPL was established to hold and promote such an opportunity they could not in good conscience assert their own beneficial ownership of it. Mr Bob Cooper left the setting up of DPL to them.
- Further, in September 2001 Fanmail had used up most of the money invested in it, so there was a distinct possibility that it would become insolvent. Mr Zghari's evidence was that already at the meeting on 28 August 2001 he had the insolvency of Fanmail in mind. Although the temporary shareholding arrangement in respect of DPL was established with little thought being given to it, I think it is relevant to bear this context in mind when seeking to determine the common intention of the parties. Had Mr Burtenshaw, Mr Zghari and Mr Bob Cooper given more detailed consideration to the initial holding arrangement, and assuming they would have wished conscientiously to act properly in making the temporary arrangements in relation to the shares in DPL, they would have concluded that the beneficial ownership of the shares should remain in Fanmail pending final agreement as to the allocation of new shares to be issued.
- The second sub-issue which the parties invited me to consider was whether Mr Bob Cooper should be regarded as a de facto director of Fanmail. The relevance of this, submitted by Mr Tomlinson, was that it would be a factor tending to reinforce the conclusion that the common intention of the parties was that Fanmail should have the beneficial interest in the shares in DPL. If Mr Bob Cooper owed Fanmail fiduciary duties as a de facto director he could not lawfully have intended to divert assets which should properly have been Fanmail's to himself and others.
- I have not found consideration of this sub-issue to be helpful in working out the objective common intention of Mr Burtenshaw, Mr Zghari and Mr Bob Cooper. As set out in paragraphs [222] and [223] above, I think it is relevant to consider in a general sense what they would have found to be the proper course of action, had they given the matter more thought. The conclusion that I have drawn in that regard does not depend upon a finding that Mr Bob Cooper was a de facto director. Mr Burtenshaw and Mr Zghari were directors, and, acting properly, Mr Bob Cooper would not have sought to deter them from acting in accordance with their fiduciary duties to Fanmail, for the benefit of its shareholders and creditors. Moreover, there has never been any suggestion that the objective intention in relation to ownership of the shares in DPL was different in relation to Mr Bob Cooper's original share as compared with those of Mr Burtenshaw and Mr Zghari.
- However, since this sub-issue was the subject of evidence and submissions, I should briefly indicate my conclusions on it. I do not consider that it is possible to conclude that Mr Bob Cooper was a de facto director of Fanmail in the simple, bald terms in which the parties formulated this sub-issue. Although he was, with his approval, held out by Fanmail to be a non-executive director (in particular, in the business investment proposal sent to Unilever on 8 August 2001), the thrust of the relevant section in that document was to indicate who would be included in the management team should an investment be made. Ms Townley was included on the same basis. In the event, Unilever did not invest. This and other similar statements (such as his introduction to Mr Wilson as Fanmail's future chairman) did not, in my view, amount to a declaration by Mr Bob Cooper or anyone that he was for all purposes to be treated as a de facto director of Fanmail. He is not in any sense generally estopped, as between himself and Fanmail, from denying that he was a de facto director of that company.
- On the other hand, there were occasions on which I find that Mr Bob Cooper did become so directly involved in making important decisions for Fanmail that he assumed a de facto director's role in relation to those particular decisions, and would have owed Fanmail fiduciary duties as such in relation to those decisions on application of the principle illustrated by the statement by A.L. Smith LJ in Mara v Browne [1896] 1 Ch 199, 209. One example is the offer which I think it likely he made in May 2001 on his own authority to Mr Pearce to join Fanmail as a non-executive director (see paragraph [48] above). Another is the decision which was taken in about September 2001 to include the email barcode coupons idea in a Fanmail brochure and materials for the presentation to Yellow Submarine on 19 September (paragraph [118] above). It is difficult to state in general terms where the line fell, since a lot of the time Mr Bob Cooper was doing no more than offering support, assistance and advice to Mr Burtenshaw, Mr Zghari and Mr David Cooper, drawing on his business experience and going no further than one would expect an interested investor in the company to do. It would require detailed consideration of each incident to decide whether he had overstepped that mark and had taken responsibility for a particular decision. It would not be appropriate or helpful in this judgment to embark upon such an exercise.
- So far as concerns his negotiations with Mr Burtenshaw regarding the ultimate shareholding he should have in DPL, Mr Bob Cooper was legitimately acting in his own self-interest and was not in the position of a de facto director of DPL. So far as concerns the limited role he played in relation to the formation of DPL, he had not assumed any decision-making role in relation to the allocation of shares and so again was not acting as a de facto director in that regard.
Conclusion
- For the reasons given above, I conclude that Fanmail is the beneficial owner of all four shares in DPL.
