Brosnan v Katke
[2015] FCA 203
•12 March 2015
FEDERAL COURT OF AUSTRALIA
Brosnan v Katke [2015] FCA 203
Citation: Brosnan v Katke [2015] FCA 203 Parties: MICHAEL BROSNAN, LEON BROSNAN, MARY BROSNAN, ALAN GEE, ALAN BAWDEN GRANT, BARBARA LEE GRANT, ALAN DAVID GRANT, MICHAEL CURLEY and GRAEME JOINER v JEFFREY JAMES KATKE, METAGENICS AUSTRALIA PTY LTD (ACN 113 937 572), METAGENICS INC, JEFFREY BLAND and HEALTH WORLD LIMITED (ACN 010 636 165) File number(s): QUD 384 of 2012 Judge(s): GREENWOOD J Date of judgment: 12 March 2015 Catchwords: CORPORATIONS – consideration of a claim to set aside a Settlement Deed of 31 July 2009 in reliance upon conduct said to be in contravention of s 52 of the Trade Practices Act 1974 (Cth) which had the effect of compromising claims made by the applicants as grounds for setting aside a Share Sale Purchase Agreement of 2005 on grounds including a ground that the applicants were induced to enter into the 2005 Agreement by contended representations that a relevant entity would undertake an initial public offering of securities on a United States Stock Exchange in 2005, market permitting
CONSUMER LAW – consideration of contended representations said to have been made in contravention of s 52 of the Trade Practices Act 1974 (Cth) said to have induced the applicants to enter into a Settlement Deed on 31 July 2009 by which the applicants compromised an opportunity to pursue relief in relation to conduct said to have induced entry into a Share Sale Purchase Agreement of 2005, in contravention of s 52 of the Trade Practices Act 1974 (Cth)
TRADE PRACTICES – consideration of contended representations said to have been made in contravention of s 52 of the Trade Practices Act 1974 (Cth) said to have induced the applicants to enter into a Settlement Deed on 31 July 2009 and conduct said to have induced the applicants to enter into a Share Sale Purchase Agreement of 2005
TRADE PRACTICES – consideration of the extra‑territorial operation of Part V of the Trade Practices Act 1974 (Cth) and in particular the approach to be adopted in relation to ss 5 and 6 of that Act in the context of whether overseas conduct by particular participants falls within the scope of s 52
TRADE AND COMMERCE – consideration of the extra‑territorial operation of Part V of the Trade Practices Act 1974 (Cth) and in particular the approach to be adopted in relation to s 6 of that Act and the constitutional connecting factors contemplated by s 6 of that Act in the context of whether overseas conduct by particular participants falls within the scope of s 52 – consideration of s 5 of that Act
Legislation: Trade Practices Act 1974 (Cth), ss 5, 6, 51A, 52, 75B, 82, 87 Cases cited: Worldplay Services Pty Ltd v Australian Competition and Consumer Commission (2005) 143 FCR 345 – cited and quoted
Bray v F Hoffman‑La Roche Ltd (2002) 118 FCR 1 – cited and quoted
Australian Wool Innovation Ltd v Newkirk [2005] ATPR 42‑053 - cited
R v Australian Industrial Court; ex parte CLM Holdings Pty Ltd (1977) 136 CLR 235 – cited and quoted
Seaman’s Union of Australia v Utah Development Co (1978) 144 CLR 120 – cited
Australian Competition and Consumer Commission v Hughes [2002] ATPR 41‑863 – cited
Trade Practices Commission v Australia Meat Holdings Pty Ltd (1988) 83 ALR 299 – cited and quoted
Australian Competition and Consumer Commission v Chen (2003) 132 FCR 309 – cited and quoted
Tycoon Holdings Pty Ltd v Trencor Jetco Inc (1995) ATPR 41‑413 – cited
Yamaji v Westpac Banking Corp (No 2) (1993) 42 FCR 436 – cited
Cathay Pacific Airways Ltd v Assistant Treasurer and Minister for Competition Policy and Consumer Affairs (2010) 186 FCR 168 – cited
No 1 Raberem Pty Ltd v Monroe Schneider Associates Inc (unreported, Federal Court, von Doussa J, No. G10 of 1989, 8 February 1991) – cited and quoted
Okura and Co Ltd v Forsbacka Jernverks Aktiebolag [1914] 1 KB 715 – cited and quoted
Vogel v R and A Kohnstamm Ltd [1971] 1 QB 133 – cited and quoted
Adams v Cape Industries plc [1990] 1 Ch 433 – cited and quotedDate of hearing: 14 July 2014 to 8 August 2014 Date of last submissions: 8 August 2014 Place: Brisbane Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 1248 Counsel for the Applicants: Mr M Martin QC with Ms A Nicholas Solicitor for the Applicants: Mills Oakley, Mr D Cliff Counsel for the Respondents: Mr W Sofronoff QC with Mr A Pomerenke QC Solicitor for the Respondents: Johnson Winter & Slattery, Mr P Reidy
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
QUD 384 of 2012
BETWEEN: MICHAEL BROSNAN
First ApplicantLEON BROSNAN
Second ApplicantMARY BROSNAN
Third ApplicantALAN GEE
Fourth ApplicantALAN BAWDEN GRANT
Fifth ApplicantBARBARA LEE GRANT
Sixth ApplicantALAN DAVID GRANT
Seventh ApplicantMICHAEL CURLEY
Eighth ApplicantGRAEME JOINER
Ninth ApplicantAND: JEFFREY JAMES KATKE
First RespondentMETAGENICS AUSTRALIA PTY LTD (ACN 113 937 572)
Second RespondentMETAGENICS INC
Third RespondentJEFFREY BLAND
Fourth RespondentHEALTH WORLD LIMITED (ACN 010 636 165)
Fifth Respondent
JUDGE:
GREENWOOD J
DATE OF ORDER:
12 MARCH 2015
WHERE MADE:
BRISBANE
THE COURT ORDERS THAT:
1.The application is dismissed as against all respondents.
2.The parties are directed to file within 21 days written submissions in relation to the costs of the proceedings.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
QUD 384 of 2012
BETWEEN: MICHAEL BROSNAN
First ApplicantLEON BROSNAN
Second ApplicantMARY BROSNAN
Third ApplicantALAN GEE
Fourth ApplicantALAN BAWDEN GRANT
Fifth ApplicantBARBARA LEE GRANT
Sixth ApplicantALAN DAVID GRANT
Seventh ApplicantMICHAEL CURLEY
Eighth ApplicantGRAEME JOINER
Ninth ApplicantAND: JEFFREY JAMES KATKE
First RespondentMETAGENICS AUSTRALIA PTY LTD (ACN 113 937 572)
Second RespondentMETAGENICS INC
Third RespondentJEFFREY BLAND
Fourth RespondentHEALTH WORLD LIMITED (ACN 010 636 165)
Fifth Respondent
JUDGE:
GREENWOOD J
DATE:
12 MARCH 2015
PLACE:
BRISBANE
REASONS FOR JUDGMENT
PART I - BACKGROUND
In these proceedings there are nine applicants seeking relief in relation to particular transactions in their capacity as former shareholders in a company called Health World Limited (“HWL”) and two of those applicants also bring claims in a trustee capacity in addition to their own individual claims. One of the nine individuals solely brings a claim in a trustee capacity.
Put simply for present purposes, the litigation concerns these things.
First, the circumstances in which the applicants entered into an agreement dated 27 April 2005 by which they transferred their shares in HWL to the buyer of those shares, a company called Metagenics Australia Pty Ltd (“MAPL”) which was, either directly or through shareholdings in other controlled entities, a wholly owned entity of a company called Metagenics Inc (“Metagenics”).
Second, whether representations were made by individuals acting on behalf of MAPL and Metagenics which induced the applicants to enter into the agreement of 27 April 2005 and the legal character of any such representations.
Third, the circumstances in which the applicants entered into a further agreement of 31 July 2009 with MAPL, Metagenics, Mr Jeffrey James Katke and Dr Jeffrey Bland, which, among other things, had the effect of compromising claims of the applicants in relation to the contended content and legal character of representations said to have been made to the applicants and upon which they say they relied in entering into the agreement of 27 April 2005.
Fourth, an examination of the scope, content and legal character of contended representations said to have been made to the applicants by individuals on behalf of MAPL and Metagenics said to have induced them to enter into the agreement of 31 July 2009.
Fifth, the events that occurred consequent upon the parties entering into the agreement of 31 July 2009 and the question of whether particular events disentitle the applicants to the relief they claim, should the applicants otherwise make good their contentions on the causes of action in suit and the remedies said to be available to them.
Sixth, remedies more broadly and particularly the calculation of damages as an alternative remedy.
Seventh, events in question that extend from mid‑2003 to the exercise of a Put Option on 14 April 2014.
As to the applicants, the nine applicants in the proceeding are Mr Michael Brosnan, Mr Leon Brosnan, Mrs Mary Brosnan, Mr Alan Gee, Mr Alan Grant, Mrs Barbara Grant, Mr Alan David Grant, Mr Michael Curley and Mr Graeme Joiner. All the applicants were shareholders in HWL. That entity conducts the business undertaking of procuring the production and supply of vitamin and dietary supplements. The business of HWL was established in approximately 1985 by Mr Michael Brosnan and his father, Mr Leon Brosnan. Mrs Mary Brosnan is Mr Leon Brosnan’s wife and the mother of Mr Michael Brosnan. Mr Leon Brosnan, Mrs Mary Brosnan and Mr Michael Brosnan were the majority shareholders in HWL.
Since approximately 1998, Mr Alan Gee, a qualified Chartered Accountant, has been the Managing Director of HWL. He took over that role from Mr Alan Bawden Grant who is also a qualified Accountant. Mrs Barbara Grant is Mr Grant’s wife. Mr Alan David Grant is the son of Mr Alan Bawden Grant and Mrs Barbara Grant.
Mr Michael Curley was an employee of HWL. Mr Graeme Joiner has been employed by HWL as its Marketing Manager.
As to the respondents, the position is this.
The first respondent is Mr Jeffrey James Katke.
Mr Katke is a Director of Metagenics, the third respondent.
In 1983, Mr Katke founded a company called Metagenics Inc incorporated in the State of California in the United States. On or about 11 February 2006, he caused a company, also named Metagenics Inc, to be incorporated in the State of Delaware in the United States. In May 2006, Mr Katke caused the California company to be merged with and into the Delaware company. The merged company is called Metagenics Inc. In the course of the evidence, Mr Katke refers to the California company, the Delaware company and the merged entity as “Metagenics”. Mr Katke also observes that to the extent that he refers, in his evidence, to Metagenics at a moment in time when only Metagenics California or Metagenics Delaware was in existence, the relevant reference is to the entity in that period.
In the course of these reasons, I refer to the California company, the Delaware company and the merged entity as “Metagenics” and to the extent that it becomes necessary, as a function of the questions in issue in the proceeding, to identify whether a reference to Metagenics is a reference to the California company, the Delaware company or the merged entity at a particular time, I will do so.
Mr Katke was the Chief Executive Officer of Metagenics from its establishment in 1983 until 16 August 2010. Metagenics owns all of the issued shares in Metagenics Far East Pty Limited (“Metagenics Far East”) which in turn owns all of the issued shares in MAPL, the second respondent. MAPL was incorporated on 22 April 2005. MAPL owns all of the issued shares in HWL. Mr Katke was a Director and Chief Executive Officer of Metagenics Far East between 13 April 2005 and 16 August 2010 and a Director of MAPL between 22 April 2005 and 25 July 2011. He was a Director of HWL between 1 October 1999 and 1 February 2011.
Another entity mentioned in the course of the evidence is MetaProteomics, LLC (“MetaProteomics”). Between 12 August 2002 and 16 August 2010, Mr Katke was a Manager of MetaProteomics which is a wholly owned subsidiary of Metagenics and is the research and development entity associated with Metagenics.
A further entity mentioned in the course of the evidence is KinDex Therapeutics, LLC (“KinDex”). Mr Katke says that between 11 September 2009 and 1 March 2014 he was a Director of KinDex. KinDex was formed in 2009 and is a party to a Patent and Know‑How Licence Agreement with MetaProteomics pursuant to which MetaProteomics licenses to KinDex particular patents, patent applications and related know‑how owned or controlled by MetaProteomics. KinDex was reorganised to accommodate new investors on 1 March 2014 and is now called KinDex Pharmaceuticals Inc (“KinDex Pharmaceuticals”). Mr Katke is a Director of KinDex Pharmaceuticals.
Mr Jerry Morey is not a party to the proceedings.
However, Mr Morey was engaged in an extensive number of exchanges with one or more of the applicants in relation to matters relevant to questions in issue in the proceedings. Between 2 December 1996 and 15 May 1998, Mr Morey was the Corporate Controller of Metagenics. From 15 May 1998 until 31 December 2011, he was the Chief Financial Officer of Metagenics and between 2009 and 2011 he also held the role of Chief Operating Officer. Between 22 April 2005 and 31 December 2011, he held a position as Secretary on the Board of MAPL. He was also a Director of HWL between 1 June 2005 and 22 July 2010. Since the incorporation of Meta Holdings LLC, Mr Morey has held a position, in his personal capacity, as a “Member Manager” for that company. Meta Holdings LLC is a company established in 2009 to hold the minority interest of the applicants (described as the former shareholders in Metagenics) after the acquisition, described later in these reasons, by a special purpose vehicle established by a company called Alticor Inc. Mr Morey is also a minority unitholder in MetaRx Holdings LLC, a company which has a majority interest in a company called KinDex Therapeutics LLC. That company is a joint venture biotechnology company set up at the time of the Alticor acquisition. The elements of these transactions are described later in these reasons.
Dr Jeffrey Bland is the fourth respondent. Dr Bland is the Chief Science Officer of Metagenics and aspects of his role will be mentioned later in these reasons.
Before examining the precise content of the applicants’ contentions as framed by the consolidated third further amended statement of claim (the “pleading”), I will address aspects of three principal agreements central to the litigation. The first is an agreement dated 12 September 2003 which represents the foundation contractual arrangements in place prior to the parties entering into the agreement of 27 April 2005. The second agreement is the Share Purchase Agreement of 27 April 2005 and the third agreement is the Settlement Deed made between the Metagenics Group and the former HWL shareholders dated 31 July 2009.
PART II – THE AGREEMENTS
The 12 September 2003 Agreement
The agreement of 12 September 2003 (the “2003 Agreement”) is made between Metagenics, HWL, the nine applicant shareholders and, in addition, two of those shareholders in a trustee capacity (called the “shareholders”) and a company called Ethical Nutrients Pty Ltd as trustee of the HWL Property Trust.
By cl 6.1(b) of the 2003 Agreement, HWL and each of the shareholders other than Mr Curley, Mr Joiner, Mr Gee, and Mr Gee in his capacity as trustee, assert that immediately prior to completion of the initial sale of the HWL shares contemplated by the 2003 Agreement, HWL would have total issued ordinary share capital of 204,109 shares held in the following way:
Name
Number of Shares at Date of Agreement
Michael Brosnan
80,624
Leon Brosnan
53,924
Mary Brosnan
31,956
Alan Gee
8,083
Alan Gee as Trustee
2,020
Alan Bawden Grant
3,429
Alan Bawden Grant as Trustee
6,500
Barbara Lee Grant
2,600
Alan David Grant as Trustee
2,829
Michael Curley
10,103
Graeme Joiner
2,041
Total Shares
204,109
By cl 6.2, Metagenics and the shareholders agree that Metagenics will acquire an initial 10% shareholding in HWL effected by Michael Brosnan, Leon Brosnan and Mary Brosnan transferring a number of shares to Metagenics representing 10% of the issued share capital, and Metagenics paying an amount of $1,249,951 for those shares no later than 19 September 2003 as follows:
Shareholder
Number of Shares Transferred
Consideration
Michael Brosnan
10,204
$624,975.50
Leon Brosnan
5,102
$312,487.75
Mary Brosnan
5,102
$312,487.75
Total
20,408
$1,249,951.00
After completion of the initial 10% share sale, the shareholding in HWL would be:
Name
Number of Shares at Date of Agreement
Michael Brosnan
70,420
Leon Brosnan
48,822
Mary Brosnan
26,854
Alan Gee
8,083
Alan Gee as Trustee
2,020
Alan Bawden Grant
3,429
Alan Bawden Grant as Trustee
6,500
Barbara Lee Grant
2,600
Alan David Grant as Trustee
2,829
Michael Curley
10,103
Graeme Joiner
2,041
Metagenics
20,408
Total Shares
204,109
By cl 7, Metagenics and the shareholders agree to the grant of the following options in the following manner:
Option Period (that is, the period during which the option may be exercised
by Metagenics)
Right granted by Option/Ownership following exercise of Option
Transferring Shareholder
Within 90 days after receipt by Metagenics of audited financial statements of HWL for the financial year ending 30 June 2005
10% of total shares in HWL on issue at the date of exercise of the Option
Michael Brosnan (10,204 shares); Leon Brosnan (5,102 shares); and Mary Brosnan (5,102 shares)
Within 90 days after receipt by Metagenics of audited financial statements of HWL for the financial year ending 30 June 2006
10% of total shares in HWL on issue at the date of exercise of the Option
Michael Brosnan (9,704 shares); Leon Brosnan (4,852 shares); Mary Brosnan (4,852 shares); and Alan Bawden Grant (1,000 shares)
Within 90 days after receipt by Metagenics of audited financial statements of HWL for the financial year ending 30 June 2007
21% of total shares in HWL on issue at the date of exercise of the Option
Michael Brosnan (20,425 shares); Leon Brosnan (10,213 shares); Mary Brosnan (10,212 shares); Alan Bawden Grant (1,000 shares); and Alan David Grant as Trustee (1,000 shares)
Within 90 days after receipt by Metagenics of audited financial statements of HWL for the financial year ending 30 June 2008
23.4% of total shares in HWL on issue at the date of exercise of the Option
Michael Brosnan (10,087 shares); Leon Brosnan (18,655 shares); Mary Brosnan (6,688 shares); Alan Bawden Grant (1,429 shares); Alan Bawden Grant as Trustee (6,500 shares); Barbara Lee Grant (2,600 shares) and Alan David Grant as Trustee (1,829 shares)
By cl 6.2, Metagenics initially acquired 10% of the issued shares in HWL. By cl 7.1, Metagenics enjoyed an option to acquire a further 10% of the issued shares in HWL within 90 days of receiving HWL’s audited financial statements for the 30 June 2005 financial year, a further 10% (when duly exercised) consequent upon receiving the 30 June 2006 financial year statements and a further 21% (when duly exercised) consequent upon receiving the 30 June 2007 financial year statements. At that point, Metagenics would have acquired, should the options have been exercised, 51% of the issued share capital in HWL.
Clause 7.1(e) of the 2003 Agreement provides that where Metagenics has exercised each of the options consequent upon receipt of the financial statements for the financial years ending 30 June 2005, 30 June 2006 and 30 June 2007 and has thus acquired a 51% controlling interest in HWL, Metagenics must (subject to any approval required under the Foreign Acquisitions and Takeovers Act 1975 (Cth)) exercise the option expiring within 90 days of receipt of the audited financial statements for HWL for the financial year ending 30 June 2008 with the result that Metagenics would then own 74.4% of the issued share capital of HWL.
Clause 7.1(d), together with Annexure C, to be mentioned further shortly, sets out a mechanism for determining the option purchase price per share.
By cl 8, the parties to the agreement put in place particular provisions governing the management and control of HWL which took effect upon completion of the initial 10% share sale in HWL. As to the Board, the maximum number of directors of HWL would be six and initially the Board would be comprised by Mr Leon Brosnan, Mr Michael Brosnan, Mr Alan Gee, Mrs Mary Brosnan and Mr Jeffrey Katke. In the period that Metagenics owned more than 9% of the issued shares but less than 50%, Metagenics would be entitled to appoint at least one director to the Board and in circumstances where it owned more than 50% of the shares it would be entitled to appoint the majority of the directors. Mr Michael Brosnan would be Chairman of the Board whilst Metagenics owned less than 50% of the issued shares. Subject to cl 8.1(i), decisions of the Board would be by simple majority with the Chairman having a casting vote in the event of deadlock.
Clause 8.1(i) provides that unanimous resolutions would be required for the following decisions (among other things): a change of strategic direction for HWL; disposal of more than 10% of HWL’s assets; new share issues; dissolution or liquidation of HWL or any part of the business; adoption of accounts; variation to HWL’s dividend policy “which is to target a distribution of up to 40% of earnings to shareholders each financial year”; making of investments outside of the existing HWL business or determining to carry on a new business; a sale of HWL’s entire undertaking; and, raising new debt in circumstances where HWL’s total debt would represent greater than five times the then current shareholders’ equity less intangible assets.
As to business planning, cl 8.1(o) provides that by 31 May each year the Managing Director must prepare and submit to the Board for approval budgets addressing expenditure on capital and revenue accounts and a Business Plan for the forthcoming year.
As to any on‑market listing of shares, cl 8.1(s) provides that subject to cl 8.1(t), if at any time during the term of cl 8 (which seems to contemplate particularly the period during which Metagenics owns greater than 9% but less than 50% of the issued shares in HWL), Metagenics resolves to sell Metagenics’s business, or all the issued shares in Metagenics, or otherwise resolves to float or list all of Metagenics’s shares on any stock exchange, Metagenics must use its best endeavours to procure that HWL’s business undertaking and, or alternatively, shares in HWL, are also sold as part of the Metagenics’s business or the shares in Metagenics.
Clause 8.1(t) provides that the parties agree to negotiate in good faith the precise mechanism which might be adopted for achieving those matters contemplated by cl 8.1(s) including valuation multiples and a discount on value.
As to commissions, by cl 8.1(y), the parties recognise that Metagenics and HWL are parties to a Licence Agreement dated 28 August 1997 regulating the distribution by HWL in Australia of certain products of Metagenics and having regard to the initial 10% share sale and the arrangements described in cl 8 of the agreement, Metagenics accepts that HWL will accrue, rather than pay, a liability for royalties payable to Metagenics for the sale of licensed products for the months of February, March and April 2003, with those royalties to be paid in April, May and June 2004, respectively.
The essential valuation method adopted by Annexure C is to identify, when valuing HWL, the relevant band of revenue growth (of which there are eight) achieved by HWL from the previous financial year and strike a value based on a relevant multiple for that band of EBITDA (as defined in Annexure C) for that previous financial year. If the revenue growth, for example, is 3% or less, the multiple is four times EBITDA. The value so determined is reduced for the option periods ending within 90 days of 30 June 2006, 2007 and 2008 by the accrued value of commissions not paid to Metagenics under the Licence Agreement. The valuation method also offsets any interest‑bearing debt and strikes the net value per issued share.
Clause 11 contains a supply arrangement by which Metagenics will seek regulatory approval in Australia for the manufacture and supply of vitamin and nutrient tablet products and HWL will provide Metagenics with a description of 20 tablet products which it will require Metagenics to manufacture and supply to it so as to meet HWL’s distribution requirements. Each order is to be for a quantity of not less than 300,000 tablets across the tablet range. Clause 11.1(d) deals with the Metagenics supply price which must be competitive. The supply arrangement can be terminated by HWL subject to particular conditions.
Clause 9.1 recognises that particular commercial property relevantly connected with HWL is an asset of the HWL Property Trust and the unitholders in the Trust at the relevant date are recited as the eight shareholders in HWL set out in Column 3 of Annexure D. Just as the initial 10% share sale is to be effected by share transfers from Mr Michael Brosnan, Mr Leon Brosnan and Mrs Mary Brosnan, those unitholders would also transfer 10% of their units in the Trust with like unit transfer arrangements in place in parallel with share transfers by the shareholders.
Clause 10.1(a)(i) of the 2003 Agreement provides that the units in the HWL Property Trust must at all times be held by a unitholder who is a shareholder in HWL in approximately the same percentage as their shareholding in HWL, and where the interest of Metagenics as a shareholder in HWL increases through the exercise of options, the interest of each unitholder is to be varied so as to ensure that the units are at all times held by a unitholder who is a shareholder in HWL in approximately the same percentage as their HWL shareholding.
The Share Purchase Agreement dated 27 April 2005
By the 2005 Share Purchase Agreement (the “2005 Agreement”), the applicants agreed to sell their remaining 183,701 shares in HWL to MAPL (the “buyer”) for $39,600,000 (“$39.6M”). MAPL would be, at the Completion Date (defined to mean 16 May 2005), the beneficial owner of the 20,408 shares in HWL acquired by Metagenics under the 2003 Agreement.
Clause 2 of the 2005 Agreement provides that the consideration of $39.6M is made up of three components.
First, a combination of cash of $6.5M payable among the applicants as shown in Sch 1 to the 2005 Agreement; the transfer of “Preferred Stock A” in Metagenics to the applicants as shown in Sch 1 to the value of $14,868,000; the transfer of “Common Stock” in Metagenics to the applicants (other than Mr Gee as Trustee and Mr Joiner) in accordance with Sch 1 to the value of $17,291,562; and, procuring Metagenics to issue Common Stock in Metagenics to Mr Gee as trustee, and Mr Joiner, as shown in Sch 1 to the value of $940,438.00, amounting in all to $39.6M: cl 2.1.
Second, a component represented by the amount of any compensation HWL might recover from the liquidator of Pan Pharmaceuticals Limited adjusted to take account of any tax payable by HWL (and legal and accounting costs relating to the compensatory payment) the net amount of which would be distributed to all the shareholders of HWL according to their respective shareholding interest in HWL at the day before the Completion Date: cl 2.3.
Third, an amount equivalent, in aggregate, to 30% of the “after tax net profits” of HWL distributed in the way set out in Sch 3, in each financial year (or part thereof) during the period commencing on the Completion Date and ending on the earlier of “the date that any stock in Metagenics Inc lists on any recognised stock exchange” and “the date that is 7.5 years after the Completion Date”: cl 2.4(a). The amount so determined would be payable quarterly by the buyer within 45 days of the end of the March, June, September and December quarters.
From the Completion Date to the end of the cl 2.4(a) period, the buyer agrees to procure HWL to conduct the undertaking of HWL in a normal, proper and efficient manner: cl 2.4(e).
By cl 2.4(f), the parties also agree that cl 2.4 will cease to apply during the period contemplated by cl 2.4(a) in the event that the cumulative payments made by the buyer to the applicants under cl 2.4 “aggregate to AU$15 million” and in that event the buyer “will no longer be obliged to pay any further amount to the [applicants] in accordance with this clause 2.4”.
The reference to Preferred Stock A in cl 2 is defined to mean “Preferred Stock A in Metagenics Inc which are redeemable for cash” at the option of Metagenics at any time, or at the option of the applicants at the earlier of “the date Metagenics Inc lists its Common Stock on any Stock Exchange in the United States of America”; the date of completion of “a transfer or sale of more than 50% of the issued shares or stock of Metagenics Inc in relation to a transaction occurring subsequent to Completion”; “the date 7.5 years from the Completion Date”.
The reference to Common Stock is defined to mean “common stock issued by Metagenics Inc”.
The change in position of the applicants by operation of the 2005 Agreement (and corresponding obligations assumed by the counter‑parties to the 2005 Agreement) is reflected in Sch 1 to that agreement which, relevantly, is in these terms:
Seller
Number of Shares
Cash Consideration (AU$)
Preferred Stock A in Metagenics Inc (shares credited to AU$1.00 per share fully paid)
Common Stock in Metagenics Inc (shares credited to AU$7.2864 per share fully paid)
Total Consideration
Michael Brosnan
70,420
$3,066,000
6,043,000
802,290
$14,954,565
Leon Brosnan
48,822
$1,800,000
5,041,000
496,613
$10,459,371
Mary Brosnan
26,854
$1,440,000
2,323,000
252,236
$5,600,791
Alan Gee
8,083
256,907
$1,871,850
Alan Gee as Trustee
2,020
64,203
$467,789
Alan Bawden Grant
3,429
$43,000
326,000
54,493
$766,041
Alan Bawden Grant as Trustee
6,500
$82,000
619,000
103,297
$1,453,632
Barbara Lee Grant
2,600
$33,000
247,000
41,319
$581,054
Alan David Grant as Trustee
2,829
$36,000
269,000
44,958
$632,568
Michael Curley
10,103
321,110
$2,339,639
Graeme Joiner
2,041
64,870
$472,649
Total
183,701
$6,500,000
$14,868,000
$18,232,000
$39,600,000
Schedule 3 which sets out the distribution of the cl 2.4(a) “Earn‑out payment[s]” representing 30% of HWL’s after tax net profits each financial year, payable quarterly, is in these terms:
Name
Percentage
Mary Brosnan
13.1385%
Leon Brosnan
26.3578%
Michael Brosnan
36.5990%
Michael Curley
6.5797%
Alan Bawden Grant
2.1033%
Barbara Lee Grant
1.5936%
Alan Bawden Grant as Trustee
3.9855%
Alan Gee as Trustee
1.3155%
Alan Gee
5.2642%
Graeme Joiner
1.3292%
Alan David Grant as Trustee
1.7337%
The cl 3.1 conditions precedent to Completion were, among other things, the release of guarantees given by Mr Michael Brosnan, Mr Alan Gee and Mr Alan Bawden Grant; MAPL becoming the registered owner of 2,373,223 shares in the Common Stock and 14,868,000 Preferred Stock A; and, lessors of particular premises giving necessary consents under particular property leases.
At the Completion Date, the buyer agreed to provide the applicants the cash consideration described in cl 2.1(a) and Sch 1; provide a Shareholders Agreement executed by Metagenics concerning the shareholding of the applicants in Metagenics; and procure Metagenics to issue the Common Stock to Mr Alan Gee and Mr Graeme Joiner as earlier mentioned.
By cl 6.2, in the period between the Completion Date and Metagenics listing its Common Stock on any United States Stock Exchange, HWL would have six directors and those directors would be the directors of HWL immediately prior to Completion plus Mr Jerry Morey. By cl 4.2 of the 2005 Agreement, the applicants assumed a series of obligations. As to directors’ fees, the applicants agreed to provide the buyer with shareholder resolutions to the effect that on Completion the aggregate amount of directors’ fees would be AU$644,950 plus expenses, per annum, divided between the directors in such proportion as they might determine in accordance with HWL’s constitution, and upon redemption of the Preferred Stock A in Metagenics, the aggregate amount of directors’ fees would be AU$218,000 plus expenses, per annum similarly so distributed.
Also, the applicants agreed to provide the buyer with directors’ resolutions to the effect that the annual directors’ fees upon Completion, of AU$644,950, would be distributed between the directors in the following proportions: Mrs Mary Brosnan: AU$72,700; Mr Leon Brosnan: AU$253,316; and, Mr Michael Brosnan: AU$318,934. Also, the applicants agreed to provide the buyer with directors’ resolutions to the effect that the annual directors’ fees upon redemption of the Preferred Stock A in Metagenics, of AU$218,000 would be distributed between the directors in the following proportions: Mrs Mary Brosnan: AU$32,700; Mr Leon Brosnan: AU$76,300; and, Mr Michael Brosnan: AU$109,000.
As part of the cl 4.2 obligations of the applicants, they agreed to provide the buyer with company officer agreements with HWL executed by Mrs Mary Brosnan, Mr Leon Brosnan and Mr Michael Brosnan in the form set out in annexures to the 2005 Agreement and an executed agreement with Mr Alan Bawden Grant in the form of another annexure. Also, senior executive employment agreements with HWL executed by Mr Michael Curley, Mr Graeme Joiner and Mr Alan Gee in the form of particular annexures to the 2005 Agreement were to be provided. Also, a shareholders agreement between the applicants and Metagenics executed by the applicants in substantially the form of another annexure to the 2005 Agreement was to be provided to the buyer.
By cl 10.1(a), the applicants represent and warrant to the buyer that each warranty contained in Pt 1 of Sch 2 to the 2005 Agreement “is correct and not misleading on the date of this agreement and will be correct and not misleading on each day after [that date] up to and including the Completion Date, as if made on and as at each of those dates”. By para (f) of Pt 1 of Sch 2, the applicants warrant that the Annual Financial Report for HWL and its controlled entity for the financial year ending 30 June 2004 discloses in all material respects a true and fair view of the state of affairs, financial position and assets and liabilities of HWL and its controlled entity.
By cl 10.1(b), the buyer and Metagenics represent and warrant certain matters contained in Pt 2 of Sch 2. Those matters include matters relating to the Preferred Stock A, the Common Stock, relevant approvals, the control by Metagenics of all of the issued capital of MAPL and a warranty at para (e) that the “financial statements of Metagenics Inc provided to the [applicants] fairly present, in all material respects, the financial condition of the operations of Metagenics Inc, in accordance with generally accepted accounting principles applying in the United States of America”.
By cl 11, the applicants (as shareholders and unitholders in the unit trust) and the buyer (for MAPL and Metagenics), agreed to amend the 2003 Agreement so as to delete the cl 7 options to purchase under the 2003 Agreement. The cl 8 management and control of HWL provisions were also deleted except cl 8.1(a)(a). The cl 11 supply arrangements were deleted and Annexures B and C were also deleted. By cl 11.2, the parties agreed that the buyer and its related entities were not obliged to purchase any units in the HWL Property Trust, and upon purchase of the shares under the 2005 Agreement, cl 10.1(a)(i) of the 2003 Agreement would no longer apply.
In substance then (apart from the precise detail of it), the 2005 Agreement brought about the sale by the applicants of their shares to the buyer as contemplated by Sch 1 and as reflected at [52] of these reasons. It provided for additional remuneration in the form of the potential compensatory payment in respect of the Pan Pharmaceuticals Limited matter and continuing remuneration, annually, as reflected in cl 2.4(a), of 30% of the after tax net profits of HWL for the period so described in that clause and distributed quarterly to the recipients as described in Sch 3 and as reflected at [53] of these reasons.
It provided a mechanism for determining the quantum of directors’ fees payable annually at relevant moments in time to Mr Michael Brosnan, Mr Leon Brosnan and Mrs Mary Brosnan and made provision for warranties as to the state of the financial accounts of HWL for the financial year ending 30 June 2004 and the compliance of the financial statements of Metagenics with the “generally accepted accounting principles” applying in the United States of America.
It recognised that particular company officer agreements in a particular form would be put in place by Completion as between HWL and Mr Michael Brosnan, Mr Leon Brosnan, Mrs Mary Brosnan and Mr Alan Bawden Grant, and that senior executive employment agreements in a particular form would be put in place between HWL and Mr Alan Gee, Mr Michael Curley and Mr Graeme Joiner by Completion.
Settlement Deed – Metagenics Group and former HWL shareholders dated 31 July 2009
This agreement (the “Settlement Deed”) is made between the applicants, Metagenics Inc (the Delaware corporation), MAPL, Mr Katke and Dr Bland.
The Settlement Deed seeks to set the scene for the operative provisions by reciting a range of matters.
The parties recite that under the 2005 Agreement, MAPL acquired all of the issued shares in HWL (apart from the 10% interest in HWL held by Metagenics prior to Completion of the 2005 Agreement which would otherwise be transferred to MAPL). The parties recite that each of the applicants received, as consideration for the sale of their shares in HWL, the consideration reflected in Sch 1 to the 2005 Agreement although, of course, additional consideration apart from the Sch 1 factors is provided for by the 2005 Agreement, as earlier described ([46] and [47]).
At Recital C, the parties recognise that since completion of the 2005 Agreement, a dispute had arisen between Metagenics, MAPL, directors or officers of those companies on the one hand, and the applicants as former shareholders in HWL, on the other. The parties recite that the dispute related to an allegation by the applicants as former shareholders in HWL that Metagenics, MAPL or directors or officers of those corporations “made misrepresentations which induced [the applicants] to agree to the terms of the [2005 Agreement]”. The Recitals recite that the applicants had alleged, among other things, that “the methods used by Metagenics to value Metagenics resulted in the value of Metagenics being overstated in relative comparison to the values of HWL” [emphasis added] and that the applicants had alleged that they had “suffered loss because the overvaluation of Metagenics effectively reduced the amount of consideration provided to each [applicant] under the [2005 Agreement]” [emphasis added].
That dispute is recited as constituting “the Dispute” the subject of the Settlement Deed.
Recital D recites that, without admission of liability, the parties to the Settlement Deed, including the respective directors and officers including Mr Katke and Dr Bland of the corporate parties, “have agreed to settle the Dispute on the terms set out in this deed”.
By cl 1.1(a), subject to the terms of the Settlement Deed, Metagenics agrees to settle the Dispute and issue and allot to the applicants, as “Additional Consideration” for the sale of their shares in HWL under the 2005 Agreement, the following fully paid stock distributed in the manner reflected later in these reasons: 250,538 shares of Preferred Stock B (cl 1.1(a)(i)); 35,000 shares of Preferred Stock B subject to a particular condition (cl 1.1(a)(ii)); 286,328 shares of Preferred Stock B exchanged for the redemption of US$4M of Preferred Stock A owned by the applicants (cl 1.1(a)(iii); and, 178,155 shares of Preferred Stock C (cl 1.1(a)(iv)). The Preferred Stock B and Preferred Stock A have all of the rights and benefits attaching to Common Stock in Metagenics as well as a “Floor Value” applying upon the occurrence of a “Liquidity Event” (as defined).
Clause 1.1(a) provides that the Additional Consideration is to be distributed in the following way:
Name
Number of Preferred Stock B to be issued under cl 1.1(a)(i)
Number of Preferred Stock B to be issued under cl 1.1(a)(ii)
Number of Preferred Stock B to be issued under cl 1.1(a)(iii)
Number of Preferred Stock C to be issued under cl 1.1(a)(iv)
Michael Brosnan
96,041
0
116,376
68,294
Leon Brosnan
66,585
0
97,080
47,348
Mary Brosnan
36,624
0
44,736
26,043
Alan Gee
11,024
14,000
0
7,839
Alan Gee as Trustee
2,755
0
0
1,959
Alan Bawden Grant
4,677
0
6,278
3,325
Alan Bawden Grant as Trustee for AB Grant Family Trust
8,865
0
11,921
6,304
Barbara Lee Grant
3,546
0
4,757
2,522
Alan David Grant as Trustee
3,858
0
5,180
2,744
Michael Curley
13,779
10,500
0
9,798
Graeme Joiner
2,784
10,500
0
1,979
TOTALS
250,538
35,000
286,328
178,155
By cl 1.1, the parties agree that on the allocation and issuance of the shares so described, and the redemption of the Preferred Stock A held by the applicants, “the Dispute shall be deemed settled”.
By cl 1.1(b), Mr Jeffery Katke and Dr Jeffery Bland agree to pay to the applicants “Further Additional Consideration” of US$4,108,959.40 within 15 business days of Completion of a particular “Proposed Transaction” or a “Liquidity Event” (where the particular additional circumstances as defined occur) as contemplated by cl 18.1 to be mentioned further shortly. Clause 1.1(b) describes the Further Additional Consideration as representing the purchase price, in accordance with cl 18, for the purchase of “BioTech Common Units” from the applicants (as held by them according to Sch 11 to the Settlement Deed). The applicants would only receive the Further Additional Consideration if the “Proposed Transaction”, including the formation of the “BioTech Joint Venture”, occurs (that is, completes).
The “Proposed Transaction” in contemplation at 31 July 2009 is defined to mean the proposed acquisition by Alticor Inc (“Alticor”), a corporation incorporated in the United States (or by one of its affiliates) of 60% of the issued and outstanding Common Stock in Metagenics (with the discharge of Senior Subordinated Secured Promissory Notes maturing on 19 May 2013 and 30 April 2012 held by Bison Capital Structured Equity Partners LLC (“Bison Capital”)); the discharge of three classes of Bison Capital warrants; the redemption of the “Remaining Preferred Stock A” and, Alticor’s acquisition of 28.5% of the “BioTech Joint Venture”.
The “Remaining Preferred Stock A” is the Preferred Stock A remaining in the hands of the applicants after the redemption of the Preferred Stock A in exchange for the 286,328 shares of Preferred Stock B under cl 1.1(a)(iii).
The “BioTech Joint Venture” is defined to mean “Bio Tech JV, LLC”, a company to be owned by Alticor as to 28.5% and “Bio Tech Holdco” as to 71.5%, as part of the “Proposed Transaction”.
“Bio Tech Holdco” is defined to mean a company established by “Holdco” to hold the 71.5% interest in the joint venture and “Holdco” is defined to mean a company established by Metagenics (as part of a reorganisation contemplated by the Settlement Deed) in which the applicants are to hold the same proportionate interest as their holding of stock in Metagenics at the time of conversion of that stock to the new reorganised interests. The reorganisation contemplated by the Settlement Deed was one in which Holdco (and an entity wholly owned by it) would be established by Metagenics and merged with Metagenics whereby Metagenics would become a wholly owned subsidiary of Holdco and each outstanding share of Common Stock, Preferred Stock A, Preferred Stock B and Preferred Stock C in Metagenics would be converted into units in Holdco called the “Holdco Units” comprising Holdco Common Units, Holdco A, Holdco B and Holdco C Units.
Each class of Holdco Units would have the same rights as the corresponding class of shares so converted.
Once Holdco was established, the Proposed Transaction contemplated that Holdco would form Bio Tech Holdco to hold Holdco’s 71.5% interest in the BioTech Joint Venture and Bio Tech Holdco would then issue “BioTech Common Units” to the existing Holdco unitholders made up of former Metagenics shareholders who had converted shares to units in the reorganisation.
The BioTech Common Units to be held by the applicants (and purchased from them) as part of the Further Additional Consideration, are the units referred to in cl 1.1(b), to be acquired in the event the Proposed Transaction proceeded to completion.
As to the reorganisation, by cl 2.1, each of the applicants agreed and consented to the reorganisation to be effected at a time to be determined by Metagenics, and by cl 1.4 each applicant agreed to the conversation, prior to the reorganisation, of all of the Common Stock issued pursuant to the 2005 Agreement, into Preferred Stock B on a one‑for‑one basis. Part 1 of Sch 3 sets out the shareholding of the applicants immediately after the Settlement Date (as defined) of the Settlement Deed, having regard to their prior shareholding and the allocation of the additional classes of shares under cl 1 of the Settlement Deed.
Part 2 of Sch 3 sets out the holdings of the applicants immediately after the conversion contemplated by the cl 2 re‑organisation.
The holdings of the applicants, upon conversion, were to be these:
Name
Holdco
A Units
Holdco
B Units
Holdco
C Units
Holdco Common Units
Michael Brosnan
4,055,017
533,333
68,294
123,610
Michael John Brosnan and Leon Michael Brosnan as trustee for the Michael Brosnan Superannuation Fund
0
0
0
20,000
Leon Brosnan
3,382,639
362,310
47,348
82,371
Leon Michael Brosnan and Mary Monica Brosnan as trustee for the Brosnan Super Fund
0
0
0
10,000
Mary Brosnan
1,558,801
182,254
26,043
0
Alan Gee
0
127,787
7,839
0
Alan John Gee
0
0
0
21,000
Alan Gee as trustee
0
28,436
1,959
0
Alan John Gee and Emma Jane Gee as trustee for the Gee Superannuation Fund
0
0
0
17,000
Alan Bawden Grant
218,757
32,752
3,325
0
Alan Bawden Grant as trustee for the AB Grant Family Trust
415,361
62,105
6,304
0
Barbara Lee Grant
165,739
24,831
2,522
0
Alan Bawden Grant as trustee for the Grant Super Fund
0
0
0
30,000
Alan David Grant as trustee for the Ferntree Superannuation Fund
180,513
27,021
2,744
20,000
Michael Curley
0
152,723
9,798
0
Golden Source Holdings Pty Ltd as Trustee for Spectra Property Trust
0
0
0
10,000
Graeme Joiner
0
39,232
1,979
0
Graeme Roberts Joiner and Nadezhda Jane Joiner as trustee for the Joiner Superannuation Fund
0
0
0
21,000
TOTALS
9,976,827
1,572,784
178,155
354,981
The Settlement Deed also provides for the conversion of Holdco B and C Units to Common Units and the conversion of Preferred Stock B and C held by Holdco to Common Stock.
Annexure A to the Settlement Deed sets out the anticipated mechanism by which Alticor would acquire 60% of Metagenics for a cash contribution of US$141.64M (with an implied enterprise valuation of US$264.167M) and a 28.5% interest in the BioTech Joint Venture by contributing US$142,500 for Class B Common Units and US$19.875M for Series A Preferred Units in the joint venture.
The parties recognise in the deed that the Annexure A mechanisms might well be subject to change.
Put simply for present purposes, having regard to the Settlement Deed and the Stock Purchase Agreement between Showcase Holdings Inc (“Showcase”), Meta Holdings LLC (“Meta Holdings”) and Metagenics, the Proposed Transaction appears to have been implemented in the following way.
Metagenics caused Meta Holdings (the “Holdco” entity contemplated by Annexure A) to be formed. Meta Holdings then caused Meta Holdings Merger Sub Inc (“MHMS”), and the transitory entity contemplated under the reorganisation provisions to be formed. MHMS merged in and with Metagenics. Meta Holdings then became the sole holder of the Common Stock and the Preferred Stock in Metagenics as part of a conversion of those classes of shares into a right, in the shareholders, to receive units in Meta Holdings with the same rights attaching to the relevant class of units as attached to the like class of shares. Showcase then acquired from Meta Holdings, stock it held in Metagenics acquired on the conversion, and Metagenics issued some new Common Stock to Showcase so as to bring about Showcase’s 60% interest (and thus, in effect, Alticor’s interest), in Metagenics.
Meta Holdings caused MetaRx Holdings LLC (“MetaRx”) to be formed as a wholly owned subsidiary. A Biotechnology Joint Venture was established as KinDex Therapeutics Inc (“KinDex”) between Alticor (contributing cash), MetaRx (also contributing cash) and Meta Proteomics LLC (“Proteomics”). Proteomics was a wholly owned subsidiary of Metagenics and it contributed intellectual property to the joint venture, by licence.
Ownership in KinDex was held 28.5% by Alticor and 71.5% by MetaRx.
Consistent with the Settlement Deed, units in MetaRx were distributed directly to the unitholders in Meta Holdings on a pro rata basis. Apart from the stock acquired by Showcase to effect a 60% acquisition of Metagenics, a series of put (and call) options also operated such that in 2012 Meta Holdings had the right to require Showcase to purchase up to 25% of the shares in the Common Stock of Metagenics owned by it; in 2013 Meta Holdings could put a further 25% of the shares in the Common Stock in Metagenics to Showcase; and, in 2014 (and each year thereafter), Meta Holdings could put the remaining Common Stock it held in Metagenics to Showcase.
The qualification upon the exercise of the put options was that during 2012 and 2013, Meta Holdings could only require Showcase to purchase up to 40%, in aggregate, of the shares in the Common Stock of Metagenics owned by Meta Holdings as a result of the conversion process.
The Settlement Deed was entered into by the parties so as to settle the Dispute, framed by Recital C as earlier described, concerning allegations by the applicants of misrepresentations about, among other things, the relative valuations of Metagenics and HWL, made by officers and directors of, Metagenics and MAPL. The applicants contended, in that dispute, that the representations induced them to enter into the 2005 Agreement and caused them to suffer a reliance loss due to a contended over‑valuation of Metagenics.
Clause 9 of the Settlement Deed contains a number of warranties given by Metagenics and MAPL. Clause 10 contains a release by the applicants. Clause 11 contains warranties, representations and acknowledgements given by the applicants.
As to the warranties given by Metagenics and MAPL, cl 9.1(c) is in these terms:
9.1 Metagenics - Warranties
Metagenics and [MAPL] represent and warrant to the [applicants] that:
…
(c)to the best of their knowledge and belief, the Metagenics Accounts (except to the extent they relate to the HWL Operating Segment) are complete and accurate in all material respects and accurately reflect the financial position of Metagenics at the date of those accounts. For the avoidance of doubt, the parties agree that Metagenics, [MAPL] and Holdco are not liable for any breach of this warranty in relation to the Metagenics Accounts caused by a defect in the Metagenics Accounts or the HWL Accounts in relation to the HWL Operating Segment (e.g. if for instance the accounts for the North American & Europe Operating Segment are misstated by reason of a defect existing in the HWL Accounts); …
[emphasis added]
The “Metagenics Accounts” are defined to mean the “most recent monthly financial statements, a copy of which is contained in Annexure C”. Annexure C consists of a Metagenics document under the reference “June 2009 Financial Results” and bears the description: “The following is management’s discussion and analysis of financial condition and results of operations of Metagenics, Inc and Subsidiaries for the period ended June 30, 2009”. The analysis addresses a period of six months to 30 June, 2009.
The “carve‑out” from the cl 9.1(c) warranty concerns the “HWL Operating Segment” which is defined to mean the entities HWL, Health World NZ Limited and Innovative Therapies. The “HWL Accounts” are defined to mean the most recent monthly management accounts of the HWL Operating Segment contained in Annexure D to the Settlement Deed.
Clause 10.1 contains a release by the applicants in these terms:
10.1 Release by the Former HWL Shareholders
Upon Metagenics providing notification under clause 12.2 to the Former HWL Shareholders of satisfaction of the condition in clause 12.1 and receipt of the Additional Consideration and in consideration of the obligations of JJK and JB under clause 18, the Former HWL Shareholders:
(a)release the Metagenics Released Parties from all claims, actions and causes of action (including any claim for costs), past, present and future, relating to:
(i) the Dispute;
(ii)subject to clause 13.2, any matter in connection with the Share Purchase Agreement; or
(iii)any matter in connection with this deed (with the exception of a claim, action or cause of action for breach or enforcement of this deed);
(b)agree that the Metagenics Released Parties may plead this deed to bar any claim, action or cause of action (including any claim for costs) brought by one or more of the Former HWL Shareholders relating to:
(i) the Dispute;
(ii)subject to clause 13.2, any matter in connection with the Share Purchase Agreement; or
(iii)any matter in connection with this deed (with the exception of a claim, action or cause of action for breach or enforcement of this deed); and
(c)agree not to commence or maintain any claim, action or cause of action (including any claim for costs) against one or more of the Metagenics Released Parties relating to:
(i) the Dispute;
(ii)subject to clause 13.2, any matter in connection with the Share Purchase Agreement; or
(iii)any matter in connection with this deed (with the exception of a claim, action or cause of action for breach or enforcement of this deed).
[emphasis added]
A corresponding release is given by Metagenics and MAPL at cl 10.2.
Clauses 11.4 and 11.5 of the Settlement Deed are in these terms:
11.4 Legal advice
The Former HWL Shareholders represent and warrant that they have received independent legal and financial advice (either collectively, individually or both) concerning this deed and their rights and obligations under it. The Former HWL Shareholders acknowledge that Metagenics and Metagenics Australia, in executing this deed, are relying on the representation and warranty contained in this clause 11.4 (“Legal advice”).
11.5 Reliance on own information
Subject to the terms of this deed, each of the parties acknowledges that they enter into this deed fully and voluntarily upon their own information and investigation. Each of the parties acknowledges that it is aware that it or its advisers, agents or lawyers may discover facts different from or in addition to the facts that they now know or believe to be true with respect to the subject matter of this deed, but that it is their intention to, and they do, fully and finally absolutely and forever settle according to the provisions of this deed any and all liabilities, claims, disputes and differences which now exist, may exist or have ever existed between the parties relating in any way to the matters the subject of this deed, other than proceedings instituted by any of the parties for breach or enforcement of this deed.
Clause 23.1 is an entire agreement clause in the usual form.
As to the BioTech Joint Venture contemplated by cl 18.1, the applicants release Metagenics, Holdco, BioTech Holdco, Jeffrey Katke and Jeffrey Bland from any claim in relation to the BioTech Common Units, the BioTech Joint Venture and the subject matter of cl 18.
By cl 18.4, the applicants acknowledge that, in exercising their rights in cl 18.1, the applicants do not rely on any statement, representation, warranty, condition, forecast or other conduct which may have been made by, or on behalf of those entities or persons, about the BioTech Common Units and the BioTech Joint Venture, including as to value and that they have satisfied themselves in relation to those matters.
As to the ongoing officer and service contracts, the Settlement Deed recognises that on and from the completion of the Proposed Transaction the parties agree that the ongoing employment with HWL of Mr Alan Gee, Mr Graeme Joiner, Mr Leon Brosnan and Mr Michael Brosnan will be governed by the agreements at Schs 12, 13, 14 and 15 respectively: cl 15.
By cl 15(e), Metagenics agrees that should HWL terminate the relevant agreements with Mr Michael Brosnan or Mr Leon Brosnan after completion of the Proposed Transaction, it will use all reasonable efforts to require Alticor to purchase the shareholding or units in Metagenics in whatever way that holding might be structured at that time.
Clause 11.1 provides that each of the applicants (defined as the former HWL shareholders) represent and warrant that he or she is a “sophisticated investor” within the ambit of s 708(8)(c) or (d) of the Corporations Act 2001 (Cth) for the purposes of all transactions contemplated by the Settlement Deed including the contemplated Reorganisation. They also acknowledge that the offer by Metagenics to issue the Additional Consideration to them in accordance with the allocations reflected in the schedule to the agreement falls within the “sophisticated investor” exemption contained in s 708(8) of the Corporations Act. They also acknowledge that the offer by BioTech Holdco to issue the BioTech Common Units falls within the sophisticated investor exemption. Section 708 of the Corporations Act contains a series of subsections which address the topic of offers in an entity’s securities by a person, which do not need disclosures otherwise required by Pt 6D of the Corporations Act.
Finally, by cl 16, the operation of the “Earn‑out payment” is preserved according to the terms of that clause.
It is now necessary to address the way in which the applicants have framed the various claims made in the proceeding, by reference to the pleading.
PART III – THE PLEADING OF THE CLAIMS
The pleaded claims of the applicants
The applicants plead that from about early 2007 they fell into dispute with Metagenics, MAPL, Mr Jeffrey Katke (and Dr Jeffrey Bland) about things alleged to have been said to the applicants by Mr Jeffrey Katke and Mr Jerry Morey in a period from May 2004 up to the date of entry into the 2005 Agreement on 27 April 2005. As pleaded, the dispute about these matters arising in this earlier period had a number of elements.
The first element of that dispute is said to concern the following six representations made in this earlier period.
First, in the period between May 2004 and 27 April 2005 (particularised to 7 April 2005), Mr Jeffrey Katke and Mr Jerry Morey represented, variously, to Mr Alan Gee, Mr Michael Brosnan, Mr Leon Brosnan and Mr Alan Bawden Grant, that Metagenics “would … proceed to an initial public offering (“IPO”) on a recognised US stock exchange during 2005 markets permitting” [emphasis added].
Second, Mr Jeffrey Katke and Mr Jerry Morey represented to Mr Michael Brosnan, Mr Leon Brosnan and Mr Alan Gee, on 17 November 2004 that “for the purposes of an IPO [Metagenics] could legitimately hold itself out as a speciality pharmaceutical company” [emphasis added].
Third, in an email from Mr Jerry Morey to Mr Michael Brosnan, Mr Leon Brosnan, Mr Alan Gee and Mr Alan Bawden Grant dated 11 September 2004 attaching a spreadsheet, Mr Morey represented that “the American division of [Metagenics] would have [particular pleaded] future revenue” [emphasis added] for the financial years 2005, 2006, 2007, 2008, 2009 and 2010, as follows:
Future Year
Future Revenue
2005
$77,982,000
2006
$90,893,000
2007
$106,799,000
2008
$126,023,000
2009
$149,337,000
2010
$177,712,000
Fourth, in an email dated 11 September 2004, Mr Morey represented that “the European division of [Metagenics] would have [particular pleaded] future revenue for the same financial years” [emphasis added], as follows:
Future Year
Future Revenue in Euros
2005
€20,335,000
2006
€24,402,000
2007
€29,283,000
2008
€35,139,000
2009
€42,167,000
2010
€50,600,000
Fifth, in an email dated 11 September 2004, Mr Morey represented that “the earnings before interest, tax, depreciation and amortization (“EBITDA”) for the American division of [Metagenics] and the European division of [Metagenics] would be [particular EBITDA amounts]” [emphasis added], as follows.
Future Years
Future EBITDA
in US$
Future European EBITDA in Euros
2005
$7,157,000
€3,314,000
2006
$9,937,000
€4,707,000
2007
$13,755,000
€5,761,000
2008
$18,956,000
€7,694,000
2009
$25,552,000
€10,285,000
2010
$34,078,000
€13,505,000
Sixth, Mr Jeffrey Katke and Mr Jerry Morey impliedly represented that any shares in Metagenics taken by the applicants in exchange for their HWL shares would increase in value by reason of each of the matters the subject of the first five representations such that each applicant would be “better off” by selling his or her shares in HWL to Metagenics.
These six matters, said to be in part the subject matter of the later dispute commencing in early 2007, are called the “2005 representations”.
The next pleaded part of the 2007 dispute concerned another six representations called the “Pfizer representations”. As to those matters, the applicants plead that between late 2004 and early 2005 either Mr Jeffrey Katke (as to some representations) or Mr Jeffrey Katke and Mr Jerry Morey as to others, represented to Mr Michael Brosnan and/or Mr Alan Gee (for all applicants) the following matters.
First, Metagenics “was in discussions with a large pharmaceutical company, Pfizer which had expressed very strong and imminent interest in licensing an anti‑inflammatory product produced by [Metagenics] known as Kaprex” [emphasis added].
Second, the “research on Kaprex indicated it was an effective anti‑inflammatory product” [emphasis added].
Third, “Kaprex worked just as effectively as anti‑inflammatory products already on the market including Vioxx which had been recalled due to cardiovascular side‑effects” [emphasis added].
Fourth, “Pfizer’s consumer and drug arms were both interested in Kaprex and its mechanism of action was being reviewed by Pfizer’s scientific advisory board” [emphasis added].
Fifth, “a licensing deal with a big pharmaceutical company such as Pfizer with respect to Kaprex and other discoveries would provide substantial revenue to [Metagenics] and increase the value of [Metagenics]” [emphasis added].
Sixth, “[Metagenics] had determined to slow the provision of information to Pfizer to give [Metagenics] time to strengthen its patent position before it entered into a licensing deal” [emphasis added].
The applicants say that they relied upon the 2005 representations and the Pfizer representations which induced them to enter into and complete the 2005 Agreement. They say, put simply, that Metagenics was not ready and could not proceed to an IPO on a recognised US stock exchange in 2005 as the inadequate state of its group accounts and regulatory compliance relating to the listing of securities on a US exchange prevented it from doing so. They say that that position prevailed up to and including July 2007. They also say that Metagenics could “not ever” legitimately hold itself out as a speciality pharmaceutical company; “did not ever” have products for sale, nor products in the process of being developed, which would enable it to hold itself out as a pharmaceutical company; “has not entered into” any licensing deals with Pfizer or any other entity concerning Kaprex; and, “did not achieve” the revenue and EBITDA figures pleaded.
Some elements of the 2005 representations and the Pfizer representations concern representations as to future matters, and other elements concern representations otherwise. Put simply for present purposes, the applicants say that the making of the 2005 representations and the Pfizer representations (engaging where relevant s 51A of the Trade Practices Act 1974 (Cth) (the “Act”)) is conduct in contravention of s 52 of the Act.
A further pleaded contention of the applicants is that in late 2004 and early 2005 “discussions with Pfizer with respect to a licensing deal on Kaprex were put on hold because Pfizer had entered into a restructuring which resulted in a change of personnel and focus” [emphasis added]. Thus, the applicants say the Pfizer representations are false.
Alternatively, they say that Metagenics and MAPL failed to discharge a contended duty to disclose the cessation of discussions with Pfizer, prior to the applicants electing to enter into the 2005 Agreement.
All of the matters described at paras [110] to [129] of these reasons are the matters at paras 4 to 14 of the pleading and, at para 20 of the pleading, the applicants say that a “consequence” of these paras 4 to 14 matters is that the applicants fell into dispute with Metagenics and MAPL about them. That dispute led to negotiations between December 2007 and July 2009 between Mr Jeffrey Katke, Dr Jeffery Bland and Mr Jerry Morey for Metagenics and MAPL on the one hand, and Mr Michael Brosnan and Mr Alan Gee or variously Mr Michael Brosnan, Mr Leon Brosnan, Mr Alan Gee and Mr Alan Bawden Grant, for the applicants on the other hand, and ultimately the resolution of the dispute about all of the paras 4 to 14 matters on the terms of the 31 July 2009 Settlement Deed.
The Settlement Deed was completed.
The “Proposed Transaction” with Alticor occurred and proceeded to completion.
The reorganisation and conversion occurred.
However, the applicants contend that Metagenics and MAPL engaged in conduct in contravention of s 52 of the Act again by making misleading or deceptive representations in respect of three further topics which induced the applicants to enter into the Settlement Deed, namely representations called the “2009 representations” and the “Alticor representations”, made between July 2008 and July 2009; and, representations made between late 2004 and July 2009, called the “Patent representations”. The applicants say they relied upon (and were induced by) these three classes of representations in entering into the Settlement Deed and thus settled and compromised contended rights to relief they then enjoyed under the Act said to be available to them arising out of the pleaded paras 4 to 14 conduct, concerning the 2005 Agreement.
The applicants say they would have been entitled to orders as against Metagenics, MAPL and Mr Jeffrey Katke under ss 82 and 87 of the Act, first, to recover, under s 82 of the Act, the reliance loss or damage suffered by them by conduct of those parties in contravention of s 52 of the Act; and, rescission of the 2005 Agreement under s 87 of the Act and recovery of their shares in HWL.
They say the loss they have suffered, by conduct of Metagenics and MAPL in contravention of s 52, which induced entry into the Settlement Deed, is the loss of the opportunity to obtain the relief which would have been available to them arising out of the paras 4 to 14 conduct inducing the 2005 Agreement. The relief now sought, arising out of the 2009 representations, the Alticor representations and the Patent representations, also said to be conduct in contravention of s 52, is rescission of the Settlement Deed, recovery of the HWL shares, or alternatively damages representing the proper measure of the lost opportunity (calculated according to the expert evidence relied upon by the applicants).
The content of the 2009 representations, the Alticor representations and the Patent representations relied upon by the applicants is this.
The 2009 representations
The applicants contend that on 26 January 2009 at a Board meeting of Metagenics attended by Mr Michael Brosnan and Mr Alan Gee, those applicants were provided with a “North American Business Plan” (“NABP”) for Metagenics (an earlier copy of it having been given to those applicants by Ms Stockwell on 23 January 2009), and at the meeting Mr Katke said (in the context of other pleaded statements by him), that “the projections in the [NABP] would be achieved” [emphasis added].
A final version of the NABP, not materially different from the 26 January 2009 and 23 January 2009 versions, was given to Mr Alan Gee and Mr Graeme Joiner on 10 February 2009. The NABP is said to contain 21 representations collectively called the 2009 representations and they are these:
(a)Metagenics “would achieve” the following gross revenues and growth rates from its core business:
Revenue Year
Gross Revenue
US$
Growth Rate
2008
$189M
-
2009
$193M
2%
2010
$233M
20.7%
2011
$284M
21.9%
2012
$348M
22.5%
2013
$430M
23.3%
(b)For the 2009 calendar year North America would contribute gross sales of US$104.6M.
(c), (d), (e), (f), (g):
From a gross revenue for each of the following years, Metagenics “would achieve” the following EBITDA:
Paragraph
Financial Year
Gross Revenue US$
EBITDA US$
(c)
2009
$193M
$20.7M
(d)
2010
$233.3M
$30.6M
(e)
2011
$283.8M
$52.8M
(f)
2012
$348.4M
$68.7M
(g)
2013
$429.7M
$93.1M
(h), (i), (m), (p) and (s):
For the following calendar years the North American division of Metagenics “would attract” the following number of new Medical Doctor customers which “would produce” the following increase in sales:
Paragraph
Calendar Year
New Customers
Increase in Sales in US$
(h)
2009
233
$3.1M
(i)
2010
562
$11.9M
(including 2010 growth from the new 2009 customers)
(m)
2011
719
$27.1M (including 2011 growth from the new 2009 and 2010 customers)
(p)
2012
941
$48.5M (including 2012 growth from the new 2009, 2010 and 2011 customers)
(s)
2013
1,223
$57.7M (including 2013 growth from the new 2009, 2010, 2011 and 2012 customers)
(j), (n), (q) and (t):
For the following calendar years the North American division of Metagenics (would deploy) a website called “StopChronicDisease (“SCD”)” to attract the following new patients resulting in the following increase in revenue so attributable to the new website:
Paragraph
Calendar Year
New Customers through SCD website
Revenue Increase in US$
(j)
2010
7,000
$3.8M
(n)
2011
20,000
$10.9M
(q)
2012
40,000
$21.9M
(t)
2013
60,000
$32.8M
(k)Metagenics “would secure a drug development and co‑marketing agreement with a pharmaceutical bio‑tech company in 2010”.
(l), (o), (r) and (u):
Metagenics “would identify, complete and integrate accretive acquisition candidates that will grow revenue by [the following percentages] and net income by [the following percentages] in [the following years]”:
Paragraph
Year
Revenue Growth
Net Income Growth
(l)
2010
35%
20%
(o)
2011
35%
20%
(r)
2012
35%
20%
(u)
2013
35%
20%
The Alticor representations
The applicants say that between late July 2008 and July 2009, in the context of Alticor’s proposal to acquire 60% of the issued shares in Metagenics at a particular price, with the balance shares to be acquired pursuant to the proposed put and call options and the purchase price to be determined by reference to the EBITDA of Metagenics at the date of exercise of the option (in accordance with Annexure A to the Settlement Deed), Mr Jeffrey Katke represented to Mr Michael Brosnan and/or Mr Alan Gee the following three things.
First, “Alticor was selling US$3‑4 billion worth of its products in China annually”.
Second, “if the shareholders in [Metagenics] agreed to the proposal by Alticor [Metagenics] would be able to export its products to China by reason of the association with Alticor”.
Third, “the exporting of [Metagenics] products into China would substantially increase the profitability of [Metagenics] over and above that set out in the North American Business Plan”.
The Patent representations
The applicants say that between late 2004 and July 2009, Mr Jeffrey Katke, Dr Jeffrey Bland and Mr Jerry Morey for Metagenics and MAPL represented to Mr Michael Brosnan and/or Mr Leon Brosnan and/or Mr Alan Gee and/or Mr Alan Bawden Grant the following two things.
First, expressly, that Metagenics “had a very strong patent position around its discoveries”.
Second, impliedly, that “such patents significantly enhanced the value of shares in [Metagenics]”.
The relief
I will return later in these reasons to the precise formulation of the way in which the applicants frame the relief they seek (against the particular parties) and the contended foundations under the Trade Practices Act 1974 (Cth) upon which that relief is claimed.
PART IV – THE FACTUAL CONTROVERSY
The evidence in the proceedings
The principal primary evidence on behalf of the applicants was given by Mr Alan Gee.
Having regard to his professional qualifications, his experience and the role he discharged at HWL, Mr Gee accepted that he had the conduct of the detailed negotiations on behalf of all of the applicants with the respondents. Mr Michael Brosnan, on the other hand, engaged with the respondents, particularly Mr Katke, on a more general level.
In examining the claims of the applicants, the logical place to begin is with the events which began to emerge in early 2007 until mid‑2009 when the parties entered into the 31 July 2009 Settlement Deed. If the claims in relation to entry into the Settlement Deed are not made out, the applicants must fail. If those claims are made good a sequence of other questions arise.
However, before examining the detail of those events, it seems to me necessary to identify, in some chronological detail, aspects of the evidence going to the early period as the claims of the applicants in relation to the 2005 Agreement are said to give the later events their proper context. I propose to examine, at the outset, the sequence of events that occurred throughout the period in issue through the evidence given by Mr Gee as the principal participant for the applicants and also refer to aspects of the evidence of Mr Michael Brosnan, Mr Alan Bawden Grant, Mr Katke, Mr Morey and Dr Bland as relevant engagements with those individuals occur. I will then return to other aspects of the evidence of those individuals and the evidence of the experts about particular matters.
Before doing so, it is necessary to say some preliminary things about Metagenics and HWL.
In 1985, Mr Michael Brosnan’s father, Mr Leon Brosnan, asked Mr Michael Brosnan to help sell health related products as an adjunct activity to Mr Leon Brosnan’s pharmacy business. By 1985, Mr Leon Brosnan had met Mr Katke and they had begun to have some business dealings together. By 1986 and 1987, Mr Leon Brosnan and Mr Michael Brosnan began importing and selling products of Metagenics under licence. This was, in effect, the beginning of HWL. HWL also commenced manufacturing its own products in Australia under the name Metagenics. Mr Leon Brosnan, Mr Michael Brosnan and Mrs Mary Brosnan were the original directors of HWL. The business of HWL moved from small premises at Windsor to Breakfast Creek, then to Eagle Farm and ultimately to premises at Northgate.
Mr Katke and Mr Michael Brosnan became very close friends. Their families had holidays together. Mr Michael Brosnan regarded Mr Katke as “a mentor”. Mr Katke was appointed a director of HWL in October 1999. Many of the email exchanges between Mr Michael Brosnan and Mr Katke are written in very familiar terms and often Mr Michael Brosnan’s emails to Mr Katke reflect emphatic references to the importance Mr Michael Brosnan placed upon their friendship.
In relation to Mr Michael Brosnan’s engagement on particular issues arising as between the applicants and the respondents relevant to these proceedings, Mr Michael Brosnan says that he deferred to Mr Gee’s opinions, views and advice on financial matters. He put it this way at T, p 286, lns 7‑10: “… if I see Alan Gee’s name on it [an email], and if it’s to do with figures, I often don’t read them. I would ask Alan what – what was his – he was … my advisor, and I would ask him what his view … on the figures were”. When asked whether he accepted Mr Gee’s advice in respect of these matters, he said at T, p 286, lns 12‑13: “I’ve always accepted Alan’s advice”. When Mr Gee was asked whether he provided counsel in a financial sense to Mr Michael Brosnan in relation to his involvement with Metagenics Inc, he said: “Did I provide input to him on that? Yes, definitely. Yes”: T, p 172, lns 44‑46.
As to Metagenics, it was established by Mr Katke and his family in 1983 or so. HWL’s distribution rights for Metagenics nutritional products was the subject of 1997 licence agreement. In the late 1990s, Metagenics took advice from Lehman Brothers (and other investment banks) about undertaking an IPO of its securities. Metagenics was considered to be too small for an IPO. Growth was the focus. In 2000 or so, Metagenics acquired HealthCom International Inc. It was controlled by Dr Bland. It sold medical food products developed by Dr Bland branded Ultra line. HWL acquired the right to sell those products under licence. In 2002, Metagenics established MetaProteomics as a joint venture with Ashni Nutraceuticals LLC (“Ashni”). MetaProteomics engages in research and development activities under the direction of Dr Bland.
The early experience of Mr Gee
Mr Gee has a Bachelor of Commerce degree from the University of Otago and has been a member of the Institute of Chartered Accountants of New Zealand since 1983. He worked for KPMG, or its predecessors in title, for 15 years from 1981 to 1995 and for the first seven years of that period he worked for KPMG in New Zealand in the area of taxation. Mr Gee spent 12 months working in the Los Angeles office of KPMG and seven years in the Brisbane office in that firm’s consulting division.
In 1995, he joined HWL as Assistant General Manager and was in that role for two and a half years. He became General Manager in early 1998. That role changed to a position of Managing Director in 1998 which Mr Gee continued to discharge. From 2001 until the agreement with Metagenics in April 2005, Mr Gee owned approximately 5% of the issued shares in HWL.
In Los Angeles, Mr Gee worked in the consulting division of KPMG. He primarily worked on real estate matters which involved analysing supply and demand data for new property projects and making some assessments of whether the feasibility for a project on a relevant site would work “economically”. In these projects Mr Gee was expected to apply his “judgement” to those questions. When working for KPMG in Brisbane, Mr Gee worked on at least two major stadium projects, the “Olympic Stadium” in Sydney and the “Gabba Redevelopment” project in Brisbane. In relation to the Olympic Stadium, for example, Mr Gee was asked to examine its likely best use after the Olympics and determine the “optimal” use for the asset.
I am satisfied that the claims based on the contended IPO inducement would, in my view, have failed if litigated at the time rather than settled by the Settlement Deed.
The applicants also contend that they were induced to enter into the 2005 Agreement by reason of the expressly represented projections set out at [114] to [116] and by the implied representation set out at [117]. There are three difficulties with this contention.
First, Mr Gee understood that the projections were a postulate or hypothesis and formulated based on assumptions for a particular purpose that was not the fact. The submission of the spreadsheet to Mr Gee in these circumstances did not amount to a representation that the projections would be realised.
Second, in the exchanges I have considered in detail, these projections given by Mr Morey to Mr Gee in the context I have described are not the subject of any assertions by the Australians that they were induced to enter into the 2005 Agreement based upon them or a belief in them. These projections seem to largely disappear from any exchanges or discussion about contentions concerning the 2005 Agreement.
Third, although turning to later events in respect of which earlier expectations for those future events have proved to be unrealised is no probative basis for concluding that the projections when made, had no reasonable basis, the enquiry becomes a little different when it is contended that projections which have actually been realised (over a four year period prior to the global financial crisis making an impact), or very largely realised, remain misleading because, when made, there was said to be no reasonable basis for making them. The future revenue projections, in this case, for the period 2005 to 2008 proved in fact to be very accurate indeed. It follows that, on the face of it, it is very likely that the Chief Financial Officer had a sound basis for the projections.
I am satisfied that the claims based on the contended representations based upon the financial projections the subject of Mr Morey’s spreadsheet would, in my view, have failed if litigated at the time rather than settled by the Settlement Deed.
The applicants also rely upon six representations said to have been made between late 2004 and early 2005 called the Pfizer representations as conduct in contravention of s 52 of the Act inducing entry into the 2005 Agreement: see [119] to [125] of these reasons. The first pleaded representation is that Metagenics was “in discussions with a large pharmaceutical company, Pfizer which had expressed very strong and imminent interest in licensing an anti‑inflammatory product produced by Metagenics known as Kaprex”. The second is that “research on Kaprex indicated it was an effective anti‑inflammatory product”. The third is that Kaprex worked just as effectively as anti‑inflammatory products already on the market including Vioxx which had been recalled due to cardiovascular side‑effects. The fourth is that Pfizer’s consumer drugs arms were both interested in Kaprex, and its mechanism of action was being reviewed by Pfizer’s Scientific Advisory Board. The fifth is that a licensing deal with a big pharmaceutical company such as Pfizer with respect to Kaprex and other discoveries would provide substantial revenue to Metagenics and increase the value of Metagenics. The sixth is that Metagenics had determined to slow the provision of information to Pfizer to give Metagenics time to strengthen its patent position before it entered into a licensing deal.
As to the first, second, third and fifth pleaded representations, reliance is placed upon the conversation between Mr Gee and Mr Katke on 1 October 2004. As already noted, Mr Gee’s evidence about that conversation does not extend to making good these pleaded representations.
As to the first representation, reliance is placed upon a telephone conversation between Mr Michael Brosnan and Mr Katke in November 2004 (as to which see [231] of these reasons). This evidence is in stark contrast to the evidence of Mr Gee at about this time on the same topic. I am not willing to rely upon Mr Brosnan’s evidence in the way in which it is framed. I find Mr Gee’s evidence more proportionate and balanced and more likely to be a fair reflection of what was put by Mr Katke. That is not to say that I disbelieve Mr Michael Brosnan. Far from it. Rather, I am of the view that Mr Michael Brosnan tends to see things in absolute terms and is likely to present an exaggerated assessment of what was said although I accept that Mr Brosnan had the impression he spoke of. The remaining particulars of representation one do not go that far.
As to the second representation, Mr Gee’s evidence did not take the matter that far. The applicants rely upon aspects of the Bison Capital document already discussed in these reasons. I am satisfied that Mr Katke was extolling the virtue of the potential for the Kaprex product particularly in its utility of use in addressing the effects of anti‑inflammatory conditions. These views reflected his opinion about the potential for the product and I am satisfied that there was some basis for it. Mr Katke made it plain that developing full scale blind trials would be necessary to prove up any potential Kaprex might have.
As to the third representation, aspects of this matter have been discussed at [1022] of these reasons. Again, the Bison Capital document is relied upon. The authorship of those remarks is not clear. I regard the pleaded representation as a statement of opinion and I am satisfied that there was at least a basis for that view which would need to be proved up by full scale clinical trials.
As to the fourth representation, the applicants rely upon the conversation between Mr Morey and Mr Gee on 18 January 2005 (as to which see [311] of these reasons). I accept Mr Gee’s evidence about this topic.
As to the fifth representation, reliance is placed by the applicants on the conversation with Mr Gee on 1 October 2004. Reliance is also placed upon things said between 7 May 2004 and 11 May 2004 and on or about 18 September 2004. As to the discussion on 18 September 2004 (at [213] of these reasons) Mr Katke, at the meeting in Brisbane, spoke expansively about licensing opportunities and the potential revenues that might be generated. However, it is clear from the evidence Mr Gee gave that Mr Katke’s observations were about possibilities and how, if realised, those transactions might be structured with milestone payments etc. It is difficult to accept that the applicants understood these statements to be representations as to future matters that would occur as compared with statements of commercial expectation in relation to particular classes of transactions.
As to the sixth representation, the applicants rely upon the conversation between Mr Morey and Mr Gee on 1 February 2005: see [313] to [319] of these reasons.
It follows from Mr Gee’s evidence about the conversation on 1 February 2005 and Mr Grant’s note of 8 February 2005 that the applicants had been told that the discussions with Pfizer had been put on hold so as to enable Metagenics to strengthen its patent position. By the end of February 2005, the issues in relation to Pfizer had reached that fault line. Later exchanges occurred which addressed engagement between Metagenics and Pfizer but ultimately the discussions came to an end.
Although I am satisfied that some of these statements were made, they were not made as pleaded, in the main. In any event, the force and effect of them came to an end by the end of February 2005.
Having regard to all of the evidence in relation to the financial projections in Mr Morey’s spreadsheet otherwise described as the 2005 representations (including the representation in relation to the description “specialty pharmaceutical company”) and the evidence in relation to the Pfizer representations, I am not satisfied that the applicants would have succeeded in their contentions in relation to the 2005 Agreement.
PART IX – THE TRANSACTIONS
Let it be assumed that the applicants had made good the causes of action advanced concerning entry into the Settlement Deed of 31 July 2009. There would be nevertheless fundamental problems in granting the relief sought under s 87 of the Act to set aside the Settlement Deed.
The difficulties are these.
The Settlement Deed made provision for the payment of “Additional Consideration” (see [71] and [72] of these reasons) and the payment by Mr Katke and Dr Bland of “Further Additional Consideration” of US$4,108,959.40: see [74] of these reasons. The Settlement Deed also contemplated the entry into the “Proposed Transaction”: see [75]; [88] to [94] and [775] to [778] of these reasons.
On 9 August 2009, Showcase Holdings entered into the Stock Purchase Agreement as described at [775]. Put simply, Alticor in reliance upon the resolution reached with the former HWL shareholders under the Settlement Deed entered into the transaction contemplated by that agreement as the Proposed Transaction (as varied) and took the benefit of the release contained in cl 10.1 of the Settlement Deed (see [99] of these reasons) as one of the “Metagenics Released Parties” (as defined) for the purposes of cl 10.1. All of the steps contemplated by the suite of agreements representing the Alticor transaction proceeded to completion and Alticor made the substantial investments effected by those steps as earlier described: see [775] of these reasons.
Alticor is not a respondent to the proceedings and no contravening conduct is asserted against it or any of its controlled entities. Moreover, Dr Bland made a commitment with Mr Katke to provide the Further Additional Consideration of US$4.108M in purchase of the Bio Tech Common Units held by the appellants according to Sch 11 of the Settlement Deed in the event of the Proposed Transaction occurring: see [74] to [81] of these reasons in the context of the discussion at [74] to [94].
Dr Bland gave evidence which I accept that he became a party to the Settlement Deed to give effect to this requirement concerning the Further Additional Consideration of the former HWL shareholders which was a condition of the Settlement Deed required by them. Dr Bland gave evidence that the Australians required an obligation that both Mr Katke and Dr Bland purchase “a significant portion of their [the former HWL shareholders] shares in the biotech venture”.
The Settlement Deed proceeded to completion. The applicants received the Additional Consideration in the form of the Preferred Stock: see [71] and [72] of these reasons. The stock was then converted into Holdco Units A, B and C and Holdco Common Stock having the equivalent rights and interests attaching to the units as attached to the shares, except that after the reorganisation the shareholders were no longer shareholders in Metagenics but had become unitholders in Meta Holdings LLC.
The Alticor transaction contemplated (as reflected in the “Marlin Deal Terms” document), and the transaction documents established, a put and call protocol (see [775] to [778] of these reasons) and pursuant to those options the steps described at [779] to [786] of these reasons, occurred.
Making an order to set aside the Settlement Deed in the exercise of the statutory remedial power contained in s 87 of the Act ought to take into account, by reference to analogues of equitable principles (although those principles will not be determinative of the basis upon which the statutory power will be exercised), of the extent to which the interests of innocent third parties would be affected or prejudiced by such an order and thus the extent to which restoring the parties to their former positions would at all be possible having regard to the effect upon those innocent third parties.
I can see no basis upon which such an order could properly be made in a principled way which would have the effect of setting aside the Settlement Deed and depriving Alticor and, for that matter Dr Bland, of the rights and interests each of them have acquired derived from, or relevantly related to, the Settlement Deed and the transactions which were entered into by reason of the Settlement Deed having come into existence.
The discretionary power contained in s 87 to make orders of the kind contemplated by that section is not “at large” and must be exercised according to settled principle having regard to the language of the section and the scope of the statutory power properly construed. The factors informing the exercise of the discretion tell entirely against making an order to set aside (which in this statutory context might be conveniently called rescission) the Settlement Deed.
It is not clear to me how Alticor or Dr Bland can properly be deprived of the interests they have acquired. They have adopted a significantly changed position in acting upon the Settlement Deed.
For these reasons, acting upon the assumption that the applicants had established the causes of action they assert in relation to the Settlement Deed, I would nevertheless make no order which would have the effect of setting aside the Settlement Deed.
Let it be assumed as a further hypothesis that the applicants had established the causes of action in relation to the Settlement Deed that they advance and an order is made under s 87 of the Act setting aside the Settlement Deed. Let it also be assumed that the applicants had made good one or more of the claims in relation to the 2005 Agreement and (apart from any other question that might be agitated against a remedy at all), the matter for remedial determination had then become a question of whether the 2005 Agreement ought to be set aside in the exercise of the power conferred under s 87 of the Act.
In those circumstances, at least some of the same considerations that apply to the making of an order to set aside the 2009 Settlement Deed would apply to a possible order setting aside the 2005 Agreement. Under the 2005 Agreement, the former HWL shareholders exchanged their shares for some cash, Pan compensation payments (when and if they came), an earn‑out payment (see [47] and [53] of these reasons) and shares in Metagenics as to which see [52] of these reasons.
The shares in Metagenics, of course, were then the subject of the arrangements under the 2009 reorganisation and the exchange of stock for Holdco units as earlier mentioned. The refusal of an order setting aside the 2009 Settlement Deed would be the end of the matter in terms of any order setting aside the 2005 Agreement. However, for the purposes of this discussion, the assumption is made that the 2009 Agreement can properly be the subject of such an order. In those circumstances, it is relevant to have regard to the benefits obtained by the former HWL shareholders under the working operation of the 2005 Agreement in considering whether the 2005 Agreement might properly be set aside.
The earn‑out payments and the Pan compensation payments have been substantial and they are these:
Year
Profit Earn‑Out Payment
Pan Compensation Payment
2007
$1.470M
$17,530.00
2008
$1.764M
$486,503.00
2009
$2.283M
-
2010
-
$454,069.00
2011
-
$491,100.00
2012
-
$626,820.00
In each of the years 2007, 2008 and 2009, the applicants were entirely astute to the content and detail of their contended claims of conduct on the part of the respondents said to be in contravention of s 52 of the Act inducing entry of the applicants into the 2005 Agreement yet the applicants continued to take the benefit of the agreement and affirmed its operation. It seems to me that there are significant difficulties, although perhaps not insurmountable difficulties, in making an order under s 87 of the Act to set aside the 2005 Agreement in these circumstances. The answer might be that notwithstanding that the applicants took the benefit of the payments under the agreement rather than commencing proceedings to set aside the 2005 Agreement, all payments would be ordered to be repaid as an element of an order setting aside the 2005 Agreement.
However, the real issue is that the 2009 Settlement Deed cannot be properly set aside having regard to the effect of doing so upon Alticor and Dr Bland. Thus, the question of setting aside the 2005 Agreement does not arise.
Having regard to the considerations I have just mentioned, the real question in relation to remedies is this.
Let it be assumed that the applicants had made good the causes of action advanced concerning entry into the Settlement Deed of 31 July 2009. The question then would be: what is the true measure of the reliance loss suffered by the applicants by conduct of the respondents done in contravention of s 52 of the Act?
That question involves attributing a value to the loss of the opportunity to pursue the causes of action in respect of the 2005 Agreement foreclosed by entry into the Settlement Deed in circumstances where the contravening conduct is said to be conduct which induced the applicants to enter into the Settlement Deed. An examination of that question involves forming views about the opportunity so lost. In these proceedings, expert reports have been put on which see to deal with the quantification of the lost opportunity.
Having regard to the findings I have reached, I can see little point in analysing in these reasons the various contentions in relation to claim for damages and the expert evidence addressing that topic. I have considered whether it would be useful to make findings in these reasons about damages on a number of alternative hypotheses as to the outcome. However, it seems to me that having reached the primary findings arising out of the review of the evidence concerning the engagement by the relevant participants on the principal factual matters in issue, little is to be gained by undertaking an analysis in these reasons of the competing expert opinions on the quantification of damages and the various considerations which would go into that topic.
There is a second question which I do not propose to address in these reasons and it concerns aspects of the 2003 Agreement (as to which see [25] to [42] and in particular options contained in cl 7 of that agreement as described at [29] of these reasons).
The respondents say that had the parties not entered into the 2005 Agreement, Metagenics would have exercised the options contained in the 2003 Agreement and would ultimately, according to the terms of that agreement, have reached the position where they had become the owner of 74.4% of the shares in HWL in any event. The applicants say that Metagenics was in no position to exercise the options at the relevant moments in time when those options fell due for exercise because Metagenics was so significantly debt burdened that it could not have financed the acquisition of further shares in HWL under the terms of the options.
Metagenics has put on evidence that upon a proper analysis of the financial instruments under which it was operating at the material time, it would nevertheless have been able to raise sufficient funds by particular classes of instruments which would have enabled it to take up the options. Moreover, Metagenics has not left that proposition merely as a hypothesis based upon any residual capacity to raise funds as a matter of construction of its financial instruments but has put on evidence from one financier that funds would have been lent at the material time.
I can see little utility in determining the questions in controversy as to that matter having regard to the primary findings I have reached.
In the course of the proceeding, a number of objections were made to aspects of the evidence contained in the statements of a number of the principal witnesses. I have dealt with some aspects of those objections. However, in the main, the remaining objections were to be addressed in these reasons. I do not propose to set out each objection taken by the applicants and the respondents to the various statements. I propose to simply deal with the objections on the basis that I regard each aspect of the evidence under challenge as admissible.
I admit the statements in their entirety.
I have had regard to the statements and the oral evidence in determining the findings. I regard the material the subject of objections which has been admitted into evidence as going to weight rather than admissibility.
As to the evidence generally, I have taken into account all of the evidence on the primary facts in issue adduced in the proceeding whether documents or oral evidence. To the extent that I have not referred to particular evidence in these reasons given by a witness or contained in a document in evidence, it should not be assumed that I have not considered that material in formulating these reasons.
Accordingly, having regard to the findings I have reached, the orders of the Court must be that the application is dismissed.
The parties will be directed to put on submissions as to costs within 21 days.
I certify that the preceding one thousand two hundred and forty eight (1248) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Greenwood. Associate:
Dated: 12 March 2015
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