Corum Systems Pty Ltd v Fred It Group Pty Ltd

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL COURT

COMMERCIAL LIST

S ECI 2020 02683

CORUM SYSTEMS PTY LTD (ACN 091 519 603)	Plaintiff
v
FRED IT GROUP PTY LTD (ABN 68 109 546 901)	Defendant

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JUDGE:	M Osborne J
WHERE HELD:	Melbourne
DATE OF HEARING:	24–28 October 2022, 31 October 2022, 2–3 November 2022 and 23 November 2022
DATE OF JUDGMENT:	21 April 2023
CASE MAY BE CITED AS:	Corum Systems Pty Ltd v Fred IT Group Pty Ltd
MEDIUM NEUTRAL CITATION:	[2023] VSC 208

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CONTRACT – Rights and liabilities of a party to a contract – Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 – Whether party breached contract by failure to give notice of change of control – Whether party breached implied duty of cooperation and good faith – Whether party engaged in misleading and deceptive conduct – Whether party held genuine belief at the time that it was not in breach – Whether party breached contract by failure to perform – Whether breach is one which is continuing – Larking v Great Western (Nepean) Gravel Ltd (in liq) (1940) 64 CLR 221 – Whether breach of contract claim statute barred pursuant to s 5(1)(a) of the Limitation of Actions Act 1958 (Vic) – Whether postponement to limitation period available pursuant to s 27(b) of the Limitation of Actions Act 1958 (Vic) – Party also breached contract by late performance.

DAMAGES – Assessing the value of a lost opportunity – Contrasting hypothetical counterfactual scenarios – Defendant claims plaintiff ‘better off’ as a result of the breach of contract – Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 – Malec v JC Hutton Pty Ltd (1990) 169 CLR 638.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	P Wallis KC S Ure	Watson Mangioni Lawyers
For the Defendant	M O’Sullivan KC G S J Berlic	SBA Legal

TABLE OF CONTENTS

Introduction........................................................................................................................................ 1

Corum’s witnesses............................................................................................................................. 7

Fred’s witnesses.................................................................................................................................. 9

The factual narrative in detail....................................................................................................... 11

Commencement of PharmX...................................................................................................... 11
Telstra acquisition....................................................................................................................... 13
Questions regarding change of control.................................................................................... 16
Various restructuring discussions; sale of Simple Retail...................................................... 16
Further board discussions regarding Fred’s potential change of control........................... 21
Potential exit of Simple Retail and Mountaintop................................................................... 25
Impact of Telstra acquisition on PharmX distributions........................................................ 29
Potential wholesaler consortium to acquire PharmX; general divestment discussions... 33
Supreme Court proceedings...................................................................................................... 37

The Overpayment Claim................................................................................................................ 40

Corum’s breach of contract claims................................................................................................ 44

Breach of clause 15.5 of the SSA................................................................................................ 44
Fred’s alleged breach of the implied duty of cooperation and good faith......................... 52

Corum’s misleading and deceptive conduct claim.................................................................... 58

Postponement of the limitation period – s 27(b) of the Limitations Act.............................. 63

Conclusions on liability issues in summary............................................................................... 68

Corum’s damages claim.................................................................................................................. 69

The Corum Counterfactual............................................................................................................ 72

Would Mountaintop and Simple Retail have sought to exercise their pre-emptive rights? 72
Did Mountaintop have the capacity to fund the acquisition of its proportionate share?
.............................................................................................................................................. 79

The value of Corum’s lost opportunity....................................................................................... 81

The Fred Counterfactual................................................................................................................. 83

Mr Naismith’s evidence............................................................................................................. 83
Mr Samuel’s evidence................................................................................................................. 90
Mr Stratigos’s evidence.............................................................................................................. 93
Mr Bond’s evidence.................................................................................................................... 94

The expert evidence of Dr Williams and Dr Hird..................................................................... 95

Mr Vincent’s evidence.................................................................................................................... 98

The MedViewX rollout................................................................................................................... 98

How does the Project Plan compare to the MedViewX rollout?.......................................... 113

The approach to valuing the lost opportunity......................................................................... 121

Assessing the value of Corum’s lost opportunity claim and conclusion............................ 128

HIS HONOUR:

Introduction

In 2006, four vendors of point of sale (‘POS’) software to pharmacies formed a joint venture company known as PharmX Pty Ltd (‘PharmX’). The four POS vendors were the plaintiff, Corum Systems Pty Ltd (‘Corum’), PCA NU Systems Pty Ltd (which later became Fred IT Group Pty Ltd) (‘Fred’), Mountaintop Systems Pty Ltd (‘Mountaintop’) and Simple Retail Pty Ltd (‘Simple Retail’). PharmX operates a gateway which serves as a portal for the electronic ordering of pharmacy products. The gateway operates as an electronic data interchange (‘EDI’), which processes electronic ordering and invoicing communications between retail community pharmacies and their suppliers.[1] The suppliers include Symbion Health Limited (‘Symbion’), Sigma Pharmaceuticals (Australia) Pty Ltd (‘Sigma’) and Australian Pharmaceutical Industries Ltd (‘API’), among others.
[1]In these reasons and at trial, the term ‘wholesaler’ is used interchangeably with ‘supplier’.

Each supplier uses its own ordering, invoicing and inventory management system and as such has its own requirements for the data (and data formatting) needed to process electronic orders and invoices. The benefit of the gateway is that it removes the need for each POS vendor to build custom software for each supplier so as to allow its POS system to communicate with the supplier, with the resultant need to update that software each time the supplier makes a change to its system. The gateway avoids this problem by providing a single portal to connect to POS systems. When an order is sent by a pharmacy through the POS software, the gateway converts the data into the format required by the relevant supplier. PharmX works with the suppliers to update the gateway to interface with the supplier’s systems. In return for this, PharmX charges suppliers a monthly subscription fee for each account a pharmacy holds with that supplier that is connected to the gateway.

To enable a pharmacy to order from suppliers using the PharmX gateway, the pharmacy’s POS vendor needs to build support for the gateway into its POS software. Accordingly, PharmX and the various non-shareholder POS vendors enter into third party access agreements, which provide the POS vendor with access to the gateway. PharmX provides the third party POS vendors with training and technical support, and pays a monthly ‘rebate’ to the POS vendor, which is calculated by a formula reflecting the amount PharmX earns from each supplier according to purchaser order lines transmitted to that supplier from the particular POS vendor’s software. The POS vendor is required to promote the gateway to its customers and convert them to users of the gateway. Corum, Fred, Mountaintop and Simple Retail entered into shareholder access agreements with PharmX on similar terms, save that the vendor rebate mechanism is different.

Each of Corum, Fred, Mountaintop and Simple Retail acquired units in the PharmX Unit Trust (the ‘Trust’) established by a deed of trust (the ‘Deed’) on 27 February 2006. The initial unitholders were Corum and Fred as to 30 units each and Mountaintop and Simple Retail as to 20 units each. Relatedly, each unitholder acquired a corresponding shareholding in the trustee of the Trust, PharmX, and entered into a stapled securities agreement with PharmX (the ‘SSA’) and each of the other holders (together being the ‘Stapled Security Holders’ and individually, the ‘Stapled Security Holder’) on the same date.

The SSA contains a formula for determining the proportions in which the net income of the Trust is to be distributed to unitholders.

An integer in the formula is the number of product lines registered to the PharmX gateway by each supplier. This has the consequence that Stapled Security Holders receive a greater share of the income of the Trust if users of its POS software generate more product order lines. The net income is then distributed, not by reference to the proportion of units in the trust but rather, in broad terms, to the number of products ordered by the pharmacies using the particular holder’s POS software.

The SSA contains a provision which, in substance, requires any Stapled Security Holder who has been subject to a change of control (as defined in the SSA) to give notice to the trustee, PharmX, of the change. In the event of a change of control, the other Stapled Security Holders under the SSA may acquire the holdings held by the party that underwent the change of control, at a cash price determined by a formula under the SSA. For this to occur, however, the remaining Stapled Security Holders, holding 40% or more of the stapled securities not owned by the party the subject of the change of control, must agree. In essence, the cash price formula provides for the units to be acquired at a price calculated as a multiple of four times the proportion of trust distributions paid to the seller as a proportion of the total trust distributions paid to all holders over the last two completed financial years.

It is now common ground that Fred underwent a change of control on 30 September 2013. The change of control arose as a consequence of the acquisition by Telstra Corporation Ltd (‘Telstra’) of a 50% shareholding in Fred. Fred notified the other holders about the Telstra acquisition at that time. No case is advanced to the effect that Fred knew that the effect of the Telstra acquisition was to give rise to a change of control within the meaning of the SSA, until 21 November 2019, when this Court handed down reasons in PharmX Pty Ltd (in its capacity as trustee of the PharmX Unit Trust) v Fred IT Group Pty Ltd (No 3).[2]
[2][2019] VSC 748.

Following that judgment and the related orders, on 13 December 2019, Fred gave notice of the change of control by reason of the Telstra acquisition back in 30 September 2013 (the ‘December 2019 Notice’).

On 2 March 2020, each of Daleflag Pty Ltd (‘Daleflag’),[3] Mountaintop and Corum gave notices of election under the SSA to the effect that Fred was taken to have given an irrevocable transfer notice in respect of its securities in PharmX.
[3]Which, in circumstances referred to in more detail below, had in substance taken over the interest of Simple Retail Pty Ltd.

Fred thereafter transferred its shares and units in PharmX to Corum, Mountaintop and Daleflag in their respective proportions, effective from 2 April 2020, in exchange for payment of $1,831,397.58.

Before this occurred, a dispute arose as to whether the price was to be calculated by reference to the last two financial years which preceded the giving of the December 2019 Notice, as Fred contended, or whether the relevant two year period prefaced the date of the change of control of 30 September 2013, as Corum, Mountaintop and Daleflag contended.

Ultimately, Corum, Mountaintop and Daleflag acquired Fred’s interest for a price referable to the 2 years which preceded the giving of the December 2019 Notice, on the basis that they reserved their rights to argue that the price was wrongly calculated.

It is not in dispute that had the earlier time period been applicable, the price would have been $637,444.

Corum later acquired all of Daleflag’s and Mountaintop’s interests in the Trust, including all rights relevant to this proceeding. Corum now seeks to recover the alleged overpayment of $1,193,953 (the ‘Overpayment Claim’).[4] Corum advances its claim on various bases, alleging:
[4]The amount of the overpayment is in fact $1,193,953.58. The 0.58 is de minimis and was put to one side by Corum for the purposes of its damages claim.

(a) that the proper construction of the SSA requires the price to be calculated by reference to the 2 years preceding the change of control, and not the giving of the notice;

(b) alternatively, that Fred’s failure to give notice in a timely fashion constituted a breach of the SSA;

(c) alternatively, that the giving of the notice late, in December 2019, constitutes a separate breach of the SSA;

(d) further, that Fred’s failure to provide it with relevant documentation with respect to the Telstra acquisition constitutes a breach of implied terms of the SSA obliging Fred to cooperate and act in good faith; and

(e) separately, that Fred’s conduct at various times during the period from the change of control to the giving of the December 2019 Notice constitutes misleading or deceptive conduct within the meaning of s 18 of the Australian Consumer Law, forming sch 2 to the Competition and Consumer Act 2010 (Cth) (‘ACL’).

The resolution of Corum’s claims for breach of contract largely turn on the proper construction of the SSA, the content of the implied terms of cooperation and good faith and the related question of whether any of the contract claims are barred on limitation grounds and, if they are, whether the limitation period should be postponed in the circumstances contemplated by s 27(b) of the Limitation of Actions Act 1958 (Vic) (the ‘Limitations Act’), as the relevant right of action has been concealed by fraud. The latter issue, along with the question of whether Fred’s conduct in the period after 30 September 2013 was misleading or deceptive, requires analysis of the dealings between the Stapled Security Holders in the period from 30 September 2013 to 13 December 2019. That analysis is somewhat fact-intense, but is, for the most part, evidenced by correspondence passing between the parties or reliable contemporaneous documents in the form of board minutes and the like. The fact-finding exercise involved therefore is not complex.

In order for any breach of contract or misleading and deceptive conduct to amount to more than nominal damages, however, Corum must establish that unitholders holding 40% or more of the stapled securities would have elected to acquire Fred’s holding in PharmX. Corum accepts that its preference, all other things being equal, was for Fred to remain part of PharmX, notwithstanding the change of control. Simple Retail and Mountaintop, however, say that had they been aware of the change of control, they would have acquired Fred’s holding. In that event, Corum says that it too would have joined in the acquisition.

Accordingly, for the Overpayment Claim to succeed, Corum must establish that in the hypothetical event that Fred had given notice soon after 30 September 2013, Mountaintop and Simple Retail would have wished to acquire Fred’s holding in PharmX and that each of them had the capacity to fund their proportionate share of the acquisition. The question of whether each would have so chosen is in issue, as is Mountaintop’s capacity to fund its share of the acquisition price (but not that of Simple Retail). Corum’s conduct in that respect is not in issue; it is common ground that if Mountaintop and Simple Retail chose to exercise their rights then Corum would have joined in. Nor is Corum’s capacity to fund its proportionate share of the price in dispute.

Thus, the first hypothetical that needs to be resolved is whether Mountaintop and Simple Retail would promptly have ‘agreed’ that Fred was taken to have given an irrevocable transfer notice after undergoing a change of control on 30 September 2013 and whether as a result Corum, Mountaintop and Simple Retail would have exercised the rights of pre-emption that would thereby have been enlivened and acquired Fred’s interest in PharmX (the ‘Corum Counterfactual’).

Fred in fact remained a unitholder until 2 April 2020. Over that time, it received distributions from the Trust totalling $6,586,999.20. In addition to the Overpayment Claim, Corum also seeks damages in respect of these distributions, which it says were wrongfully paid to Fred, as such distributions would otherwise have been available to the other unitholders.[5] As such, Corum claims damages for Fred’s breach of contract of an amount referable to the distributions wrongly declared and paid to Fred in the period in respect of which Fred remained a unitholder but would not have, if its own breach of contract and/or misleading and deceptive conduct did not occur, as the case may be (the ‘Wrongful Distributions Claim’).
[5]Because Corum has now acquired the interest of Daleflag and Mountaintop, including their respective right to recover their share of distributions wrongfully paid to Fred, the claim is brought by Corum alone.

Fred meets this part of Corum’s case by alleging that had Fred exited the Trust, it would have established a rival gateway to the PharmX gateway, which gateway would have so reduced the profits of PharmX that Corum, Simple Retail and Mountaintop would have received less distributions than they actually received over the period during which Fred remained a unitholder.

Thus, Fred’s case is that Corum, Mountaintop and Simple Retail were better off as a result of Fred remaining a unitholder from 30 September 2013 onwards, as a consequence of which the unitholders suffered no loss. This aspect of the case requires consideration of another hypothesis, namely, if Fred had exited shortly after 30 September 2013, would it have established a rival gateway and what effect would the rival gateway have had on PharmX’s profits, and hence the distributions that would have been received by the remaining Stapled Security Holders (the ‘Fred Counterfactual’). The Fred Counterfactual is both fact-intense and very much in issue.

At the outset, it is convenient to identify the witnesses called in the proceeding and outline, in brief terms, the substance of their evidence.

Corum’s witnesses

Corum called six lay witnesses and two expert witnesses. Corum’s first lay witness was David Clarke, the chief financial officer of Corum Group Limited (‘Corum Group’), the parent company of Corum, from 2013 and its CEO from January 2017 until August 2020. Mr Clarke was the company secretary of Corum from 18 February 2015 until 31 August 2020 and was an alternate director of PharmX from March 2018 and its company secretary from 10 January 2018 until 31 August 2020. Mr Clarke gave largely formal and uncontroversial evidence as to the timing of relevant events.

Corum also called David Wenham. Mr Wenham, along with his wife, was a director and owner of Mountaintop. Mr Wenham gave evidence as to the events between 2013 and 2020 and in particular the interactions between the unitholders over that period. The most contentious part of Mr Wenham’s evidence was whether Mountaintop would have wanted to exercise its pre-emptive rights to take a transfer of Fred’s unitholding in the Trust and its capacity to fund its proportionate share of the acquisition price. Although Fred accepted that Mr Wenham was a generally straightforward witness, it submitted that his evidence should be treated with some caution, as it was impacted by the passage of time and events. More importantly, Fred submitted that on the key point as to whether Mountaintop could afford to fund its acquisition of the Fred unitholding, Mr Wenham’s oral evidence in cross examination directly contradicted his evidence in chief given by witness statement.

Corum’s third witness was Kevin James-New. Mr James-New was the owner and controller of Simple Retail until February 2016. Effective from 23 October 2015, the PharmX stapled securities formerly held by Simple Retail were transferred to Daleflag, another company solely owned and controlled by Mr James-New. Mr James-New’s evidence covered much of the same ground as that given by Mr Wenham, albeit at greater length. Whilst Corum accepted that Mr James-New was a loquacious witness whose memory of the detail of certain names and events was imperfect, it nevertheless submitted that Mr James-New was an honest witness whose evidence should be accepted. Fred submitted that Mr James-New was an obtuse witness prone to giving speeches and submitted that his evidence was confused and evasive, and further, where there is a conflict between the oral testimony of Mr James-New and a document, the document should be preferred.

Philip Nicholas England, Corum Group’s current executive chairman and interim CEO, also gave evidence. Mr England’s evidence largely related to matters relevant to the quantification of Corum’s loss and damages claim and as to the sequence of relevant events not in dispute. Fred rightly characterises Mr England’s evidence as largely unremarkable, but submits that insofar as his evidence related to what would have occurred in the period from 2013 to 2020, it was speculative and should carry no weight.

Corum also called Glenn Bond. Mr Bond is a software development consultant who had performed work for PharmX from late 2007. Mr Bond and his company were also engaged by Fred in 2020 and 2021 as a contractor in connection with Fred’s rival gateway project known as MedViewX, which is described in more detail below. Mr Bond was also chosen by Fred to interrogate PharmX’s database during the discovery phase in the proceeding. Fred does not make any challenge to Mr Bond’s evidence and submits that there are no significant inconsistencies between his evidence and the witnesses called by Fred.

The last of Corum’s lay witnesses was Andrew Stratigos, who has been Corum Group’s enterprise architect since August 2020. Mr Stratigos gave evidence as to the reliability, stability, functionality and security of the PharmX gateway. In addition, he formulated an estimate of the cost and time that it would take to build a rival gateway. Fred submitted that Mr Stratigos’s estimate as to the cost of establishing a rival gateway was grossly inflated and should not be accepted.

Corum also called two expert witnesses; Tom Hird, a competition economist and Owain Stone, a forensic accountant and a partner of KordaMentha.

Dr Hird gave evidence as to the nature of the market in which the PharmX gateway operated and in particular as to matters relevant to the Fred Counterfactual, namely the viability of the establishment of the rival gateway and its effect on the PharmX gateway.

Dr Hird’s evidence was responsive to that of Philip Williams, an economist called as an expert witness by Fred. Fred submitted that Dr Hird was reluctant to answer questions directly put to him and was ultimately shown to be partial to Corum’s case, making uninstructed assumptions that were not identified in his report and engaging in unbecoming speculation.

Mr Stone’s evidence was responsive to the evidence of Tony Samuel, a forensic accountant called as an expert witness by Fred. In the end, Mr Stone and Mr Samuel agreed on all matters of substance, with the utility of their evidence dependent upon acceptance or otherwise of the instructions they were given, which were referable to various aspects of the Fred Counterfactual.

Fred’s witnesses

Fred’s principal lay witnesses were Paul Naismith, Fred’s CEO since its incorporation in June 2004, and Anthony Johnston, Fred’s financial controller or CFO since June 2004. Mr Naismith was Fred’s appointed director of PharmX from the date of its incorporation until 2 April 2020 and Mr Johnston was also PharmX’s company secretary between 13 January 2006 and 19 December 2017. Mr Naismith’s evidence covered the history of the development of the PharmX gateway, as well as the relevant interactions between key participants from 30 September 2013 to April 2020. Importantly, Mr Naismith also gave evidence about the Fred Counterfactual and specifically the establishment of the rival gateway and its viability. Whilst Corum made no submission that Mr Naismith gave deliberately false evidence, it submitted that Mr Naismith’s evidence was infected by a level of overconfidence, hindsight bias and was devoid of any meaningful recollection of relevant events, particularly insofar as it related to the Fred Counterfactual.

Mr Johnston’s evidence was largely uncontroversial and covered both the establishment of the PharmX gateway, its operation from 2006 to 2013, distributions made over that period, the Telstra acquisition, relevant events at PharmX from 2014 to 2020 and distributions made over that later period. Mr Johnston also gave more contestable evidence-in-chief briefly as to the viability of the establishment of a rival gateway and the progress of MedViewX. In relation to Mr Johnston’s evidence which concerned MedViewX and its significance to the Fred Counterfactual, Corum made a similar submission as to the reliability of Mr Johnston’s evidence that it did in relation to Mr Naismith’s evidence, namely, that it was affected by hindsight bias and overconfidence as to the ability to establish a rival gateway.

Fred also called Richard Vincent, the former CEO of API who was subpoenaed to give evidence. Mr Vincent was a senior executive of API at the time that it first entered into an agreement with PharmX. Mr Vincent gave evidence of API’s willingness to participate in a rival gateway over the period 2013 to 2020. Corum accepted that Mr Vincent was an honest witness and agreed that his evidence that API would have been open to participating in any rival gateway built by Fred from October 2013 onwards should be accepted. However, it submitted that whether in fact API would have pursued such a course is a matter of considerable doubt and is impacted by the alleged difficulties that Fred has faced in its pursuit of MedViewX.

Fred also tendered, without objection, a witness statement of Brad Lumb, the former managing director of PharmX, who now works for Fred on MedViewX. Mr Lumb’s evidence went solely to the making of distributions from the Trust and was relevant only to the legal action commenced by Fred against PharmX in proceeding number S ECI 2021 01394 for unpaid distributions alleged to be owing by PharmX in its capacity as trustee (the ‘Fred Proceeding’). The Fred Proceeding was heard and decided at the same time as this proceeding.

Fred called expert evidence from Dr Williams and Mr Samuels. Dr Williams’ evidence was relevant to the establishment of a rival gateway and as such, the Fred Counterfactual. Mr Samuels’ evidence sought to quantify the effect of the successful establishment of a rival gateway on the profits of PharmX. As noted above, the mathematical calculations undertaken by Mr Samuels were in the end uncontroversial. What remains controversial is the viability of the assumptions relating to the Fred Counterfactual, which underpinned Mr Samuels’ calculations.

The factual narrative in detail

Commencement of PharmX

PharmX’s revenue is derived from payments made by suppliers based on a fixed fee per pharmacy per month. When PharmX commenced operations in 2007, it entered into ‘use agreements’ with three major pharmaceutical wholesale suppliers, API, Sigma and Symbion. The use agreements provided for the suppliers to use the PharmX gateway on payment of a fixed fee of $12 per month per approved business (pharmacy) using the gateway. The suppliers negotiated different fee structures, including differing upfront payments and differing numbers of pharmacies in respect of which fees were paid. Agreements were entered into with most suppliers and most pharmacies. Over time, the $12 fee increased, either pursuant to consumer price index clauses or renegotiation. The use agreements do not bind the suppliers to use the PharmX gateway exclusively and there are no minimum usage requirements.

PharmX has no direct relationship with the pharmacies; instead, PharmX facilitates access for pharmacies to the gateway via the POS vendor used by that pharmacy. Each pharmacy uses POS software supplied by one of Corum, Fred, Simple Retail or Mountaintop, or by a third party POS vendor.

Third party POS vendors enter into rebate agreements with PharmX, the terms of which provide for the payment to the third party POS vendor of a percentage (25%) of the revenue generated from wholesalers supplying to pharmacies using the third party POS software. The payment is made in exchange for the third party POS vendor adding, maintaining and supporting PharmX connectivity, within its software application, of the pharmacy customer base.

PharmX also entered into access agreements with each of its four holders. Pursuant to the shareholder access agreements, the shareholder is entitled to a proportion of the trust income based on the relative proportions of purchase volume by supplier calculated and paid pursuant to the Deed.

The PharmX profits are distributed to unitholders according to an agreed formula set out in Schedule 2 of the Deed, which is broadly to the following effect:

(a) an analysis is undertaken by the PharmX general manager of the purchase order lines ordered via the systems associated with each unitholder and the relative percentage of the total orders per joint venture partner is determined;

(b) the proposed distribution is put to the PharmX board for approval; and

(c) once the board approves the distribution, money is distributed on that basis.

As a result of the distribution formula, the unitholders are incentivised to increase the usage and therefore grow the exchange to increase their percentage distribution.

In the early period of PharmX’s operation, Corum had the largest market share in providing POS software to pharmacies, followed by Fred, and then by the two smaller companies, Mountaintop and Simple Retail, who received significantly smaller distributions. The early distribution percentages largely reflected the market share of the four holders. In the financial years ending 30 June 2011 to 30 June 2013, the dollar value and approximate percentage of distributions made to each holder was as follows:

Holder/Financial Year FY 2011 FY 2012 FY 2013

Fred $293,232 34% $494,375 35% $586,344 37%

Corum $396,389 46% $657,337 47% $715,250 46%

Simple Retail/Daleflag $98,059 11% $158,348 11% $161,074 10%

Mountaintop $70,582 8% $99,827 7% $103,858 7%

Each holder was entitled to representation on the PharmX board. Throughout, Mr Naismith was Fred’s nominee, Mr Wenham was Mountaintop’s nominee and Mr James-New was Simple Retail’s nominee. Corum’s nominee director changed regularly. Graham Cunningham was appointed by the directors as chair.

Telstra acquisition

In around 2011, Fred approached Telstra to see whether Telstra wanted to acquire part of Fred’s business. Fred’s shareholders at the time comprised the Pharmacy Guild (an association of community pharmacy owners) which owned 50% of the shares, along with Mr Naismith who held a 25% share and another Fred executive, Rod Unmack, who also held 25%. Telstra showed an interest in buying the entirety of the Fred business and as a consequence entered into a confidentiality agreement. Telstra’s investment case analysis prepared in November 2011 described Fred as Australia’s leading pharmacy software developer, deriving annual revenue of $25 million. Telstra regarded acquisition of a majority interest in Fred as a ‘strong strategic fit’ which would create a ‘pharmacy anchor tenant’ for Telstra’s proposed health portal.

According to the Telstra investment case analysis, Fred had a 52% market share in the dispensing software market, a 34% share of the pharmacy broadband market and 16% of the pharmacy POS software market. Its major competitors included Corum, which at the time generated $14 million in revenue from pharmacy and had the number one market share in the POS market. Telstra’s analysis described Corum as the industry leader before Fred entered the market in 1992.

Fred’s then competitors in the POS space also included Minfos, a subsidiary of Symbion, along with Simple Retail and Mountaintop. The latter two were described respectively as ‘a low price low functionality privately held competitor with ageing management’ and ‘a privately held competitor with negligible [market] share’.

In the intervening period and in addition to its other involvement in the dispensing software, POS software and pharmacy broadband markets, Fred also operated an electronic online script exchange known as eRx. Fred’s distributions from PharmX accounted in the 2010 financial year for $240,000 of Fred’s earnings before interest, tax depreciation and amortisation (‘EBITDA') of $5.2 million.

In December 2011, Telstra made a non-binding indicative offer to Fred’s shareholders to acquire a 51% shareholding in Fred, based on a valuation for Fred of $50 million. Ultimately, the acquisition of a 51% shareholding in Fred did not proceed.

In November 2012, PharmX engaged Deloitte Corporate Finance (‘Deloitte’) to prepare an analysis in order to, among other things, assist unitholders to decide whether or not they wished to pursue a divestment of the business (‘Project Accord’). Deloitte assessed an indicative enterprise value in the range of $8.5 to 12 million, based on a variety of pricing methodologies. The valuation reflected an implied EBITDA multiple of between 6.7 and 9.5. At the time, the divestment was supported by Fred, Mountaintop and Simple Retail, but not Corum.

By June 2013, there were approximately 4,570 pharmacies using the PharmX gateway. PharmX’s most significant customer was DHL, which had a little under 4,000 pharmacy accounts connected to the gateway. Additionally, by April 2013, revenue from suppliers, other than DHL and the three major wholesalers, exceeded revenue from those customers for the first time. There were now 26 suppliers connected to the PharmX gateway. Suppliers were increasingly passing through the PharmX fee to their pharmacy customers.

In 2013, Telstra revisited its proposal to acquire an interest in Fred, and on 6 August 2013, Telstra and Fred’s shareholders exchanged an executed term sheet where Telstra was to acquire a 50% shareholding in Fred by acquiring the entirety of Mr Unmack’s shares and a proportion of the shareholding held by Mr Naismith and the Pharmacy Guild. The purchase consideration was $32.5 million, of which $25 million was payable on completion, with the balance of up to $7.5 million conditional upon certain performance hurdles being achieved, relating to the eRx income derived by Fred achieving certain volumes in the financial year ending 30 June 2014. The term sheet contemplated a board of six directors, with Telstra being entitled to appoint three, including the chairman who would have a casting vote.

On 14 August 2013, Simon Jay, a solicitor from Riordans, emailed Mr Cunningham, copying Mr Johnston and Mr Naismith, advising that he had reviewed an unsigned copy of the share sale agreement between Telstra and the Fred vendors and concluded that an agreement to sell Telstra 50% of Fred’s voting shares would not result in a change of control within the meaning of the SSA and that Telstra may acquire 50% (but no more) of Fred’s voting shares without enlivening clause 15.5 of the SSA. Mr Jay subsequently provided a letter of advice to Fred to substantially similar effect on 15 August 2013.

On 23 September 2013, Telstra entered into a share sale agreement (the ‘Telstra Sale Agreement’) with Fred, on broadly the terms set out in the term sheet. The deferred consideration was dependent on the number of prescription dispenses performed using the eRx prescription exchange service.

Clause 14.2 of the Telstra Sale Agreement partly provides:[6]

Each party (recipient) must keep secret and confidential, and must not divulge or disclose any information relating to another party or its business (which is disclosed to the recipient by the other party, its representatives or advisers), this agreement or any Transaction Agreement or the terms of the Sale other than to the extent of the [stated exceptions].

[6]Where terms are capitalised in excerpts of text, they refer to defined terms of that text.

Fred notified the other PharmX unitholders of the Telstra acquisition before it was formally announced to the market. Mr Naismith telephoned Mr Wenham, Mr James-New and Corum’s then-nominee on the PharmX board. Mr Naismith described the reaction of other unitholders as ‘surprised and positive’ when learning of the news.

On 30 September 2013, Telstra, the Pharmacy Guild, Mr Naismith and Fred entered into a shareholders’ agreement (the ‘Fred Shareholders’ Agreement’). Clauses 5 and 6 of the Fred Shareholders’ Agreement relate to Fred’s board. Clause 5.1 provides that, while Telstra retains a minimum of 45% of the shares in Fred, it is entitled to appoint three of Fred’s six directors. Clause 5.3 provides, in summary, that the chairman of the board will:

(1)be a Director appointed by Telstra whilst it retains 45% or more of the shares…; and
(2)If there is an equality of votes at a meeting of the board of Directors, have a casting vote (except in relation to decisions specified in clause 7.1)…

Clause 6.3(a) provides that each shareholder’s appointee on the board is entitled to exercise one vote. However, clause 6.3(b)(i) provides that each Telstra director can exercise the ‘number of votes equal to the number votes that would have been exercisable by the Telstra directors if all of the Telstra directors had been present, divided by the number of Telstra directors actually present’.

Questions regarding change of control

There was a meeting of the PharmX board on 16 October 2013. The minutes record:

KJ raised the question of whether the recent acquisition of a 50% stake in Fred by Telstra would affect the ongoing governance or operations of PharmX. GC noted this would not affect PharmX as the relevant clause in the Stapled Securities Agreement (clause 15) requires a shareholder change in ownership greater than 50%.

PN indicated that the involvement of Telstra in Fred made no difference to Fred’s support for PharmX.

In its annual report for the 2014 financial year dated 14 August 2014, Telstra disclosed its acquisition of the 50% shareholding in Fred, stating: ‘We consolidate the results of [Fred] as we have control through our decision making ability on the board.’

Various restructuring discussions; sale of Simple Retail

In mid-2015, there were discussions between the PharmX directors about potentially selling PharmX. Deloitte once again was retained to undertake an analysis, referring to the project as Project Accord 2. Deloitte assessed PharmX’s indicative enterprise value in the range of $12.5 million to 14.5 million, based on an implied multiple of 6.1-7.1x PharmX’s budgeted EBITDA for the 2016 financial year.

At the same time, discussions took place between the unitholders of PharmX with a view to Corum and Fred buying out the units held by Simple Retail and Mountaintop, with the result that Corum and Fred would become 50/50 owners of PharmX. The minutes of the board meeting held 17 September 2015 record that it was agreed that Corum and Fred would progress their discussions and clarify their position by the end of October 2015.

At the same board meeting, Mr James-New advised of his intention to transfer Simple Retail’s unit holding to Daleflag. The minutes of the meeting record, under the subheading ‘7 Simple Retail Unit Holding’:

GC informed the Board of the intention for Simple Retail to transfer their PharmX unit holding to a related entity Daleflag Pty Ltd (Daleflag) noting that doing so would transfer units to an entity which would not create transactions used to calculate unit holder distributions. KJ confirmed both Simple Retail and Daleflag were Australian domiciled entities wholly owned by KJ.
The Board agreed in principle to the transfer as well as the recognition that distributions subsequently paid to Daleflag will be determined based on the transactions relating to Simple Retail systems. Final agreement to the transfer will be pending a review of the relevant PharmX documentation by lawyers at Norton Gledhill. Simple Retail has agreed to cover all legal expenses related to this review.

At the next meeting of the board of PharmX held 23 October 2015, the board received advice from Norton Gledhill to the effect that a transfer of interests by Mr James-New from one entity owned 100% by him to another entity also owned 100% by him would be regarded as a permitted transfer under the SSA. In light of that advice, the directors resolved that Daleflag execute a deed poll of accession deeming it as the holder of the interest in the Trust and that the share transfer from Simple Retail to Daleflag would be approved along with the unit transfer. Further, the board resolved that for the purposes of determining Daleflag’s entitlement to income distributions under the Trust Deed, Daleflag’s purchase order lines would be taken to be those of Simple Retail.

On 16 November 2015, Mr Cunningham prepared a memorandum addressed to the PharmX board which recommended the price formula in Schedule 6 of the SSA be changed to a multiple of 7.5x, from the current 4x. Mr Cunningham’s memorandum referenced that the formula contained in the SSA was based upon an agreement at the time to set a low value for three reasons. First, it provided a disincentive for interest holders to consider selling in the early stages of establishing PharmX; secondly, should there be a change in control, it provided an opportunity for other shareholders to acquire that shareholder’s interest at a low value and, thirdly, because at the time, they did not know what sort of valuation may be placed on PharmX in the future.

In his memorandum, Mr Cunningham referenced the indicative enterprise valuations assessed by Deloitte in Project Accord 1 and 2, which were in the range of multiples of 6.5 to 7.6x the average EBITDA. Mr Cunningham’s memorandum also noted Deloitte’s reference to a ‘Strategic Value’, which suggested that a higher value might be paid by a buyer who could realise synergistic benefits in acquiring PharmX at a multiple of 6.8 to 8.5x the average of the last 2 years’ EBITDA.

In the result, Mr Cunningham expressed the opinion that a 4x multiple was out of date, potentially punitive and recommended that the company’s lawyers draft a simple deed of amendment to record the change.

On 1 February 2016, Mr James-New sold Simple Retail to MediSecure, a third party and operator of a prescription exchange that was in competition with Fred’s eRx. Mr James-New had not told the other PharmX directors about the proposed sale of Simple Retail to MediSecure before it was finalised in February 2016. The approval by the board of PharmX on 23 October 2015 to the transfer of Simple Retail’s units and shares to Daleflag and the associated resolution for the purposes of Schedule 2 of the SSA, that Simple Retail’s purchase order lines would be taken to be those of Daleflag, occurred without Mr James-New referring to any future sale of Simple Retail.

The fact that the transfer had been approved in October 2015 and was soon followed by the sale of Simple Retail to a competitor of Fred’s eRx caused Fred significant angst. Fred considered that Mr James-New had been less than forthcoming in relation to the circumstances behind his wish to transfer his unit holding from Simple Retail to Daleflag.

On 2 March 2016, Fred’s Mr Johnston wrote to the directors of PharmX and said that Fred had received advice that the transfer of units and shares from Simple Retail to Daleflag in fact was not a permitted transfer under the SSA and that a breach of the SSA would occur if the PharmX board registered the transfer.

On 14 March 2016, K&L Gates, solicitors for Mr James-New and Daleflag, wrote to the PharmX board demanding that it take all steps necessary to finalise the registration of the transfers to Daleflag. On 6 April 2016, K&L Gates wrote a further letter to substantially the same effect to PharmX and its holders.

This dispute took place against the background of two other events of some relevance. First, on 22 March 2016, Mr Johnston sent a paper to one of the Telstra appointed directors of Fred, observing that Fred had the opportunity to exercise (along with at least one other vendor) pre-emptive rights to acquire Simple Retail’s holding in PharmX, and recommended that Fred exercise such pre-emptive rights together with Corum. The board paper was placed before the Fred board at its meeting on 30 March 2016. This opportunity to exercise the pre-emptive rights to acquire Simple Retail’s holding presumably occurred in the context of the belief that the change in the shareholding of Simple Retail constituted a change of control, entitling Fred and Corum to acquire Simple’s holding in PharmX at a multiple of 4x its EBITDA. In his paper, Mr Johnston recommended that Fred exercise its pre-emptive rights so as to acquire an additional 10% of PharmX at the price of $750,000, in the context of a wider strategy which included firstly moving to a 50/50 interest with Corum by later acquiring Mountaintop’s interest and then in the medium term, selling down its interest in PharmX to strategic partners, so as to facilitate Fred’s competition against MediSecure in the context of the eRx business line.

A short time later on 1 April 2016, Mr Johnston wrote to the Telstra appointed directors advising that Fred no longer wished to proceed with that option, having further progressed its analysis of the option to exercise its pre-emptive rights. Mr Johnston concluded that buying more equity would not generate a material change in Fred’s cashflow, noting that any increase in the share of distributions resulting from the redistribution of Simple Retail’s 9% share of distributions would largely be offset by the reduction in the surplus of the Trust, assuming that Simple Retail instead received a rebate as a third party vendor.

The second relevant matter which arose during this period occurred against the backdrop of the agitation resulting from the transfer of the Simple Retail holding to Daleflag.

On 13 April 2016, K&L Gates sent a letter on behalf of Mr James-New and Daleflag to the directors of PharmX referring to the Telstra acquisition and the reference in Telstra’s 2015 annual report to Telstra having control over Fred ‘through our decision making ability on the board’. The solicitors referred to the relevant provisions of the SSA and submitted that it was likely that a shareholders’ agreement or equivalent document existed for Fred that gave Telstra the decision making ability on the board and/or various rights of pre-emption, and that in conjunction with Telstra’s 50% shareholding in Fred, Telstra acquired a relevant interest in Fred for the purposes of the SSA, with the consequence that there was a change of control of Fred on or about 30 September 2013. The solicitors requested that PharmX conduct a proper investigation as to whether a change of control had occurred, including requiring Fred to confirm if a shareholders’ agreement existed and then to notify all parties as to the result of that investigation and advise them if they are able to exercise their rights under clause 15.5 of the SSA.

On 18 April 2016, Mr Johnston responded, on behalf of Fred, to the K&L Gates letter in an email sent to the directors of PharmX (among others). An abridged version of Mr Johnston’s email reads:

… [point 2] of the Gates letter is correct in that Telstra did acquire 50% of Fred on 30 September 2013. Point 5 of the Gates letter is also correct in that clause 15.1 of the SSA is enlivened if ‘… more than 50% of the voting shares …’ etc. ie it is self-evident that clause 15.1 is not enlivened.
I can advise that the statement in the Telstra annual accounts re ‘control over Fred’ is also correct as the control referred to is the ability or requirement to consolidate the financial results of another entity which is determined under Australian GAAP by the definition of ‘control’ in the accounting standard AASB10 ‘Consolidated Financial Statements’. This definition has a completely different approach to change of control in the PharmX stapled securities agreement.
… in summary, Fred’s position is that,
(1) the Telstra transaction doesn’t enliven clause 15 of the stapled securities agreement, for the reasons very clearly set out by K&L Gates, and
(2) Fred was proactive [in bringing] the transaction to the attention of the PharmX shareholders in September 2013, and the matter was considered and put to rest in October 2013.

Mr Wenham said that upon receiving this email, he ‘became convinced’ that Fred had undergone a change of control, notwithstanding Mr Johnston’s response. Mr James-New said he considered that Mr Johnston’s interpretation took an unduly narrow view of the change of control provisions.

In the end, the dispute between Mr James-New and Fred relating to Simple Retail’s transfer of units to Daleflag went away with Daleflag entering into a deed poll of accession to the SSA on 24 May 2016. At around the same time, PharmX entered into a deed of variation of the Deed, which had the effect that as from 23 October 2015, the amounts to be distributed to Daleflag would be based upon the number of purchase order lines registered by PharmX’s gateway from Simple Retail, not Daleflag, and the formula in Schedule 2 to the Deed was amended accordingly. Relatedly, by a deed of instruction, release and indemnity, PharmX undertook to register the transfers from Simple Retail to Daleflag in consideration for certain releases and undertakings given by Mr James-New, Simple Retail and Daleflag.

Further board discussions regarding Fred’s potential change of control

On 28 September 2016, Mr Wenham emailed Mr Johnston referring to the Telstra acquisition and the K&L Gates letter dated 13 April 2016, writing:

Irrespective of what you may have stated in [the response email],[7] on behalf of [Mountaintop], I ask that you provide me with complete and accurate copies of the documentation that effected the [sale of Fred]. Clearly, if as suggested in the K&L Gates email,[8] Telstra acquired a Relevant Interest (as defined in the SSA) in more than 50% of the Voting Shares (as defined in the SSA) of Fred IT, then a Change of Control (for the purposes of clause 15 of the SSA) has occurred, without the consequential need for compliance with the mandatory requirements of clause 15.5 of the SSA.
[7]Being Mr Johnston’s email of 18 April 2016.
[8]Being the email dated 13 April 2016.
I want to be clear about what I am seeking to achieve by this request, that being:
1an opportunity for Mountaintop to consider definitive evidence as to whether or not a Change of Control has occurred;
2if Mountaintop can be satisfied that a Change of Control has not occurred as a result of the Fred IT sale, then this particular line of inquiry need not be pursued further by myself;
3if Mountaintop is satisfied that a Change of Control has occurred as a result of the Fred IT sale, then Mountaintop will insist on compliance with the provisions of clause 15.5 of the SSA, which subject to the 40% consent threshold in the first paragraph in clause 15.5(b) being satisfied, will in turn trigger a requirement for:
(a) the cancellation of the Fred IT sale;
(b)the application of the pre-emptive rights provisions under clause 14 of the SSA;
(c)either the retransfer for no consideration of those shares back to Fred IT, or subject to the application of the pre-emptive provisions in clause 14 of the SSA, the transfer on a proportionate basis, of the Fred IT shares held by Telstra to the stapled security holders who have exercised their pre-emptive rights under clause 14 (each a participating stapled security holder); and
(d)the return to each participating stapled security holder, on the appropriate proportionate basis, of all unit distributions that have been made by PharmX, in its capacity as the trustee of the trust, to Telstra or Fred IT during the period commencing on the date on which the application of the pre-emptive provisions of clause 14 should have been completed, as if the provisions of clause 15.5 had been properly complied with in accordance with the timing requirements stated in the SSA, and ending upon completion of the transfer of stapled securities arising as a result of the abovementioned application of the pre-emptive provisions of the SSA.

On 4 October 2016, Mr Johnston responded:

My view is that the Telstra transaction was properly notified to the PharmX vendors in September 2013 in accordance with both the spirit and the technical requirements of the unit holders agreement, and that the window to exercise rights in this matter is well and truly closed.
However, if you want to formally revisit the transaction that is your right and we will respond to your request.
I would suggest we discuss this informally with Paul before we engage the lawyers on this as the costs are prohibitive and the outcomes uncertain.

Mr Wenham responded that he was happy to meet informally. Mr Wenham’s response (and the earlier communications between Mr Wenham and Mr Johnston) were onforwarded by Mr Naismith to Mr Cunningham ‘FYI for discussion’.

On 21 October 2016, Mr Johnston wrote to Mr Wenham, saying:

I’ve reviewed my email of the 18^th of April … I believe that my email … was abundantly clear in setting out the facts which I believe to remain correct and undisputed and clearly show the Fred proactively, accurately, and in good faith brought the transaction to the attention of the PharmX board in 2013.
I have some difficulty with the idea that you should now, after more than three years seek to enquire about a transaction of which you were properly notified of in 2013, and which was minuted in the PharmX Board meeting of 16 October 2013.
If you are addressing this request to me in my capacity as company secretary of PharmX and still wish me to proceed, I believe I would need to redirect your request to the trustee via PharmX board and let the PharmX board take advice and proceed from there.
If you are addressing this request to me as an officer of Fred, then I believe your request is [misdirected]. In any event and by whatever path, if we end up with a demand to release the documents related to the Telstra/Fred transaction you must appreciate that this could not be done without the involvement and instruction of all our shareholders, i.e. Telstra, The Pharmacy Guild and Paul Naismith. I cannot predict how a Telstra lead action would play out, but given the nature of your threatened actions, I would expect that Telstra in house legal and the Pharmacy Guild would jointly engage a tier 1 legal firm and oppose your request. This would likely be the same firm that drafted the deal documentation and structured the transaction in the knowledge that Fred was subject to a change of control clause.
Further, regardless of the legal result, there is substantial risk of damaging PharmX which taken with the certainty of significant legal expenses leaves me wondering if I should not give you the opportunity to reconsider and/or discuss with Paul prior to lighting the fuse.

Also around this time, Mr Johnston had a telephone conversation with Corum’s Mr Clarke about Mr Wenham’s request for the Telstra documentation. Mr Clarke’s evidence was to the effect that Mr Johnston said that Fred would not hand over the Telstra documentation and that ‘we did the best we could to structure the transaction so as not to breach the change of control provisions’. Mr Johnston did not recall the specifics, but did not dispute Mr Clarke’s account.

On 16 November 2016, Mr Wenham wrote to Mr Cunningham referencing the earlier communications following on from the K&L Gates letter of 13 April 2016. Mr Wenham insisted on PharmX providing Mountaintop with a complete and accurate copy of all the documentation that effected the Fred sale and asserted that under the SSA, Mountaintop had clear contractual rights to the information and would ensure that Mountaintop pursued the matter until it received the relevant information. Mr Wenham’s email concluded with him expressing his perception that Mr Johnston and Mr Cunningham’s:

failure to perform [their] respective duties to the stapled security holders of PharmX and the PharmX Trust [made] [Mr Wenham] even more suspicious that [they] [were] hiding the truth regarding the Telstra/Fred IT transaction from all stapled security holders.

On the same day, Mr Cunningham responded, among other things, by saying that the request was more properly regarded as a request from one shareholder to the other and that Mr Cunningham as chairman did not need to do anything on behalf of PharmX.

On 17 November 2016, Mr Johnston wrote to Mr Wenham clarifying that Telstra acquired 12.5 million shares in Fred which amounted to 50% of its share capital and that it held no other options that would enable Telstra to acquire more shares in Fred. Mr Johnston’s email to Mr Wenham concluded as follows:

As I noted earlier, if you want to pursue this to the point of revealing confidential sale share related documents [sic] I can’t do that without engaging all the parties, which effectively means handing over the issue to the Guild, Telstra and their lawyers. This would limit our ability to work on a PharmX deal which requires clear air and cooperation.

On 22 November 2016, Mr Wenham wrote to Mr Cunningham pointing out that Mr Johnston’s reference to the fact that Telstra had no options was not relevant and stated that it was critical to know whether Telstra’s purchase of 50% of the shares in Fred was accompanied by a shareholders agreement with the other remaining shareholders. Mr Wenham’s letter concluded:

… if there is such a shareholders agreement, I want to see a copy of it. I am quite willing to give any sensible undertaking required to maintain the confidentiality of that shareholders agreement, as may be requested.

Mr Wenham’s email was forwarded on by Mr Cunningham to Mr Johnston and Mr Naismith the next day.

Potential exit of Simple Retail and Mountaintop

Mr Johnston’s reference in his 17 November 2016 email to the nexus between a request for confidential documents relating to the Telstra sale complicating the ability of the holders to work on a ‘PharmX deal’ was a reference to a proposal known as ‘Project Mutual’, which contemplated the proposed sale by Simple Retail and Mountaintop of their interests in PharmX.

By 2016, the distributable profit of the Trust had increased substantially but the benefit of the increase had largely accrued to the benefit of Fred, and to a lesser extent, Corum. Mountaintop and Simple Retail’s distributions remained constant or increased slightly, respectively. The reasons for that outcome do not matter much, save that they involved, in part, a growing market share of POS software sales by Fred and declines by the smaller operators, Simple Retail and Mountaintop.

In addition, the differential effect of PharmX’s increased distributable profits was exacerbated by the entering into of an agreement between PharmX and the Commonwealth Department of Health in or around mid-2016 by which diabetic products were distributed by the National Diabetes Services Scheme (‘NDSS’) from Diabetes Australia to pharmacies and then to diabetic patients. In effect, the distribution of such products occurred via the use of the PharmX gateway which was accessible by all pharmacies and utilised by them to facilitate the provision of a new national supply service for diabetic products. PharmX’s distributable income, enhanced by this additional revenue stream, continued to be distributed in accordance with the distribution formula contained in the Deed, which was in turn based on the use of each holder’s POS software for the purposes of generating product lines registered to PharmX by each of its suppliers. The income derived from the new NDSS arrangement, however, whilst distributed in accordance with that mechanism, was not referable to the use of the individual holder’s POS software and related to product lines registered to the PharmX gateway by suppliers, but was nevertheless distributed on the same basis as if it was. The smaller holders, Simple Retail and Mountaintop, regarded this as unfair and not consistent with the contemplation at the time of entering the SSA.

The approximate respective holders’ amount and share of distributable profit in the period which preceded the discussions in relation to Project Mutual is set out below:

Party/Financial Year FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016

Fred
$293,232 (34%)

$494,375 (35%)

$586,344 (37%)

$725,236 (40%)

$843,301 (42%)

$948,755 (44%)

Corum
$396,389 (46%)

$657,337 (47%)

$715,250 (46%)

$799,924 (44%)

$873,323 (44%)

$912,712 (42%)

Simple Retail/Daleflag
$98,059 (11%)

$158,348 (11%)

$161,074 (10%)

$174,687 (10%)

$176,862 (9%)

$202,441 (9%)

Mountaintop
$70,582 (8%)

$99,827 (7%)

$103,858 (7%)

$109,937 (6%)

$102,927 (5%)

$94,314 (4%)

Total Profits
$858,262
$1,409,887 $1,566,526 $1,809,784 $1,996,413 $2,158,222

Project Mutual contemplated various means by which Simple Retail and Mountaintop could exit, the most straightforward of which involved each of Corum and Fred acquiring the 20% stapled security holdings of Mountaintop and Daleflag such that each of Corum and Fred would become 50% shareholders and unitholders in PharmX.

Negotiations proved difficult; there were a range of complicating factors which primarily resulted from the fact that distributions were, in broad terms, based on the amount of business introduced to PharmX by the unitholder, whereas the capital value in a sale of the PharmX business as a whole was to be based on the level of shareholding. Given that Daleflag and Mountaintop received levels of distribution at a level substantially below the percentage level of their unitholding, they favoured a price referable to the value that could be achieved on a sale of the business as a whole. Corum and Fred favoured an acquisition of Mountaintop and Daleflag’s interest, with the value of that interest referable to the distribution levels being received by those entities and not by reference to their proportionate shareholding in the Trust. Daleflag and Mountaintop’s price expectations were derived from the Project Accord estimates based on the enterprise value of the business on divestment, not the price payable by other holders under the SSA. The position was further complicated by the fact that the end result of a buyout of the interests by Corum and Fred would result in each of them holding 50% of the units in the Trust but their resulting holdings would not be reflective of distribution entitlements. Thus, whilst they would be required to pay the same price to acquire the interests of Mountaintop and Simple Retail, the benefit of the increase in unitholding would not necessarily be shared equally. Nevertheless, it is clear that at least from late 2016 onwards, both Simple Retail and Mountaintop were keen to exit PharmX.

On 18 January 2017, Mr Cunningham reported to Fred and Corum that he had been asked to communicate a proposal from Mr Wenham and Mr James-New that their respective companies would sell their interests in PharmX for $4.8 million and Mountaintop would enter into a third party access agreement on standard terms (Simple Retail had earlier entered into such an agreement following Mr James-New’s sale of the Simple Retail business to MediSecure).

By 22 March 2017, discussions regarding the purchase of the Simple Retail and Mountaintop holdings in PharmX had stalled.

On 4 May 2017, Mr Wenham wrote to Mr Naismith observing that the negotiations had stalled and that Mountaintop and Corum in particular appeared to be ‘a long way apart’. Mr Wenham’s email observed that Mr Naismith appeared to suggest at times that Fred was a seller and at other times implied that a sale by Fred would be too hard without Corum also exiting at the same time. Mr Wenham expressed a preference to wind up the Trust with the resultant sale of its assets, the discharge of its liabilities and the distribution of its net proceeds, or alternatively a trade sale. As a further alternative, Mr Wenham proposed that some of the Stapled Security Holders may wish to acquire a larger percentage of the Stapled Security Holder interests and the potential use of a ‘special majority approval’ (which required votes in favour of those holding 70% or more of the units) could facilitate such an exit. Mr Wenham’s email concluded:

For some considerable time – and as previously expressed to you and the other PharmX directors – I have been very uncomfortable in my role as a director of PharmX, carrying on business as usual, knowing that the officers of PharmX have failed to properly investigate or disclose details surrounding the Telstra purchase of Fred IT shares and what I suspect were breaches of the “Change of Control” provisions in the Stapled Securities Agreement. Accordingly, you will understand that Mountaintop would like to find out what [Fred’s] position will be in the shortest possible timeframe. I understand but am not persuaded by any difficulties of working with Telstra – they knew or should have been aware of the legal obligations of acquiring the 50% in [Fred] when they did so and will have to live with the consequences.

On 9 May 2017, Mr Wenham wrote to Mr Naismith expressing his appreciation for Mr Naismith’s efforts in progressing Mountaintop’s exit, albeit expressing his hope that it could have happened more quickly. Mr Wenham then wrote:

I also want you to be aware of a deadline that I believe all the PharmX directors should be mindful of. We will need to sign off on the annual distributions in respect of the 2016/17 year by the end of September 2017. As things stand it is not clear to whom the distributions should be made because of the unresolved issues surrounding the Telstra/Fred IT acquisition. I feel that issue puts all PharmX directors in a difficult situation. Accordingly, just so no-one is blindsided, I want you to know that if I am not satisfied by the time that I am required to vote, that the sale of shares in Fred IT to Telstra was complied with the stapled securities agreement, I for one do not feel we can then resolve to whom any of those distributions should be made, and that that decision should be delayed until the matter has been properly sorted.

Mr Wenham sent a further email in substantially the same terms to all directors of PharmX on 11 July 2017.

On the same day, Mr Johnston sent a final version of the PharmX business plan for FY17/18 to PharmX’s accountants and advisers, PricewaterhouseCoopers. Among other things, the business plan noted a 16% increase in sales compared to the previous year, but noted that margins and profitability remained satisfactory and that the business maintained a near 100% representation within the retail pharmacy market. The near 100% coverage meant that future growth had to come from driving a greater variety of services and connectivity from the current network, and the plan noted that the revenue derived by the company from pharmaceutical suppliers based on a fixed fee per pharmacy per month was increasingly derived indirectly from pharmacies, as suppliers pass through the PharmX fee.

The business plan further noted that research and customer feedback indicated that the margins PharmX was currently experiencing were not typical of other EDI providers and that the market would therefore be viewed as an attractive opportunity for investors. As such, it observed that whilst the risk of a competing gateway entering the space was still low, it was higher than it had been for several years due to an increasing demand for electronically connected suppliers to major pharmacy groups. It further observed that the risk was mitigated by ‘several existing factors including overall high level of customer satisfaction, strong support from our partners and a high network complexity requiring significant investment for any new entrant to replicate’.

Impact of Telstra acquisition on PharmX distributions

The PharmX board met on 15 August 2017. In relation to the concerns raised by Mr Wenham, the minutes record:

In relation to the Telstra/Fred matter, PN explained that Fred had responded to the concerns raised by DW when they were previously raised by DW. They saw no reason to respond again.

The minutes also record that Mr Cunningham was asked to investigate whether the issue between Fred and Mr Wenham would impact the directors’ ability to vote on final annual distributions and the annual financial statements for PharmX.

The PharmX board met again on 27 September 2017. The board was referred to the earlier emails from Mr Wenham regarding the alleged failure of PharmX to properly investigate or disclose details surrounding Telstra’s acquisition of its interest in Fred and Mr Wenham’s earlier requests for access to the Telstra documents back in 2016. Mr James-New and Mr Wenham (as nominees of Daleflag and Mountaintop) voted against a resolution to approve the final distribution for the year ended 30 June 2017 in accordance with the auditor’s report and the PharmX FY16/17 year end distribution summary that had been previously circulated to directors.

On 4 October 2017, Mr Cunningham circulated to each director of PharmX and Mr Johnston a summary of tax advice obtained from Grant Thornton. Grant Thornton’s advice was to the effect that if the Trust failed to distribute 100% of its profits, the undistributed profits would be taxed at the highest marginal personal tax rate and that the financial statements for the Trust had been prepared on the basis that the distributable profits would be 100% distributed to unitholders, although the board had not approved when the final payment of the distributions would be made. The timing of the payment did not have any tax consequences for PharmX (because its accounts were prepared on the basis that the profits had been distributed), but the timing of the payment would impact on each holder, which would have to declare distributions made (but not yet paid).

On 4 October 2017, Mr Johnston sent a memorandum to various internal Telstra recipients headed ‘Fred IT – PharmX Matter’. In the memorandum, Mr Johnston sought Telstra’s mergers and acquisitions involvement in respect of strategy funding for Fred and/or Telstra to acquire the holdings of Mountaintop and Corum. The desire to purchase Corum’s interest apparently arose due to a perception that Corum had blocked previous initiatives to grow PharmX and had blocked a decision to dispose of 100% of PharmX, having previously supported the Deloitte engagement and the Project Accord strategy. As an alternative, Fred proposed engaging Corum in discussions with a view to moving to a 50/50 arrangement with it on the PharmX register, ahead of the subsequent introduction of new shareholders to PharmX to facilitate sales growth.

On 17 October 2017, Mr Cunningham circulated advice provided by Kardos Scanlan to the board, advising that whilst the Deed established a present entitlement for each holder to the income for that trust year calculated under Schedule 2 of the Deed, a special majority approval of directors was required to approve a distribution of the income. The advice raised the possibility that the failure of the trustee to resolve to distribute the income may cause the trustee to be in breach of the Deed and that directors should consider their duties when deciding how to vote on a resolution in relation to paying distributions.

On 23 October 2017, Corum’s nominee on the PharmX board, Matthew Bottrell,[9] emailed other Corum board members about Mountaintop and Simple Retail’s vote against further distributions from PharmX. Mr Bottrell believed they had taken that course because they believed that Fred was controlled by Telstra, with the consequence being that the pre-emption provisions in the SSA applied. His email observed that Mountaintop and Simple Retail would hold this view ‘until Fred/Telstra produces information to the contrary’. Mr Bottrell believed Mountaintop and Simple Retail’s objective was to force a sale of PharmX or the acquisition of their interests by Fred and Corum, at a likely price of $2.2 million each.
[9]Mr Bottrell was Corum’s nominee on the PharmX board from March 2016 to February 2020.

Mr Bottrell’s email then referred to his discussions with Mr Naismith as follows:

I have spoken with Paul Naismith this morning about the former. Paul informed me that Fred/Telstra is a seller – Telstra do not see PharmX as being core to Fred.
One of the outcomes Telstra/Fred are considering is where Fred & Corum each by (sic) out the minorities, on the basis that we (Corum and Fred) agree to exit the PharmX business in the near future to a pre-agreed party (a back-to-back deal). Telstra does not wish for Fred to be in a 50:50 JV with Corum.
I have undertaken to sit with Paul and draw some options/ways forward for us to consider (although Paul agreed to this, he will have already done this with Telstra.)
Paul’s considerations are as follows:
•Agree that confidential information of PharmX can be shared with potential buyers, in order to find a sale for PharmX
•Buy PharmX from the minorities and then exit the business in the near term

• Potentially buyers that Paul wants to contact are the wholesalers
•Perhaps restructure the distribution model in PharmX to make it more saleable.

On 23 October 2017, Mr Cunningham circulated further legal advice from Kardos Scanlan to the board which, in summary, concluded that there was no obligation on the board to take any action if a holder failed to comply with clause 15.5(a) of the SSA or to investigate a possible change of control. Kardos Scanlan also advised that as Fred remained the registered holder of the stapled securities, it was clear that it was entitled to the relevant share of distributable income (subject to the requirement of a resolution).

On 24 October 2017, Mr Wenham requested that PharmX instruct Kardos Scanlan to advise whether the Telstra purchase of Fred constituted a change of control within the meaning of the SSA.

On the same day, the PharmX board met. Mr Wenham requested more time to discuss the Kardos Scanlan advice of 23 October 2017, and as a consequence the meeting was adjourned to 26 October 2017.

At the resumed meeting, Mr Wenham and Mr James-New advised that they still intended to vote against resolutions to distribute income. Thereafter, the two consistently voted against resolutions to distribute the income of the Trust until distributions were made of all outstanding amounts on 1 December 2020.

The minutes of the 26 October 2017 meeting record Mr Bottrell asking Mr Wenham whether Mountaintop was a buyer of the Fred stake. That enquiry was made apparently in the context of Mr Wenham’s statement that the Telstra acquisition of its 50% interest in Fred was the central issue. The minutes record that ‘DW indicated that he could be a buyer’. In Mr Wenham’s typed notes of the meeting, he records himself saying that he ‘would seriously contemplate’ buying Fred’s PharmX stake and that he ‘would sell PharmX soon after’. Mr Wenham’s notes also record Mr Naismith as saying that ’Fred would not be releasing those document[s] so stop wasting our time’.

On 7 November 2017, Mr Cunningham wrote to the PharmX board and proposed that the holders agree to a sale process (involving either the sale of the business or the entirety of the stapled securities) with the sale proceeds to be split at the mid-point between each holder’s holding and its 2017 share of distributions.

On 14 November 2017, Mr Cunningham reported further on the sale proposal and expressed the belief that an independent adviser might value the business at between 8 to 10x the current EBITDA (prior to any rebates payable to the exiting IT vendor shareholders). Further, based on current levels of business, Mr Cunningham estimated that if outgoing IT vendor shareholders were to enter into vendor agreements with PharmX, they would receive approximate annual rebates of $139,000 in the case of Corum, $212,000 in the case of Fred and $15,000 in the case of Mountaintop.

At the meeting of the Fred board on 25 October 2017, Mr Naismith’s report referenced the fact that the blocking of trust distributions was causing associated cashflow risks to Fred. The report stated:

Meetings separately held with Telstra M&A and Grant Thornton (20^th October) re Fred facilitating a transaction to resolve the PharmX impasse. Preferred outcomes being to remain/enhance ties to the major wholesalers with retention of equity in PharmX and full exit acceptable outcomes … [if] unsuccessful in negotiations with the 3 wholesalers then Fred would sell its stake in PharmX.

On 15 November 2017, Mr Johnston and a Telstra Health finance employee wrote to Telstra Treasury seeking shareholder approval for additional funding as an interim measure, to meet a projected cashflow shortfall for December and March 2018, arising from the withholding of distributions.

In November 2017, Corum first became aware, so it said, that Mr Cunningham had provided advice to Fred in connection with the Telstra acquisition. Accordingly, on 27 November 2017, Mr Bottrell wrote to Mr Cunningham and asked whether he had disclosed this role in connection with the Telstra acquisition and asked for advice as to other activities he had performed for any shareholders in PharmX including Fred, Telstra and/or Telstra Health. Mr Cunningham’s alleged lack of independence was raised at a meeting of the PharmX board the following day. At that meeting, each of Mr Bottrell (as Corum’s nominee), Mr Wenham and Mr James-New indicated they had concerns about Mr Cunningham’s independence and they would vote in favour of a resolution removing him as chairman. At a later meeting, Messrs Bottrell, Wenham and James-New agreed that a resolution should be drafted providing for Mr Cunningham’s removal.

In my view, Mr Naismith’s evidence concerning the effectiveness of the rollout of an alternative platform lacks weight when measured against the evidence of Mr Stratigos, Mr Bond, both Dr Hird and Dr Williams (as to the ‘stickiness’ of customers and the ‘first mover advantage’, respectively) and as to the real world experience showed in documentation discovered by Fred, which occurred with the rollout of MedViewX, which showed a rigour of analysis and a significantly more complicated technological rollout and a far less easily penetrated market than shown in the project plan and reflected in Mr Naismith’s evidence more generally.

Assessing the value of Corum’s lost opportunity claim and conclusion

Against the background of those observations, it is necessary to assess the value of Corum’s loss of opportunity claim.

First, had Fred given notice as it was required to do immediately after 30 September 2013, it is extremely probable that Mountaintop and Simple Retail would have sought to exercise their pre-emptive rights and, in such event, Corum would have joined with them. If Mountaintop and Simple Retail did not do so, then Corum has suffered no loss at all. Corum submitted that it was near certain that Mountaintop and Simple Retail would have acted. I accept that that is extremely probable for the reasons adverted to above. Given this, only the smallest of discounts should be applied to reflect the risk of that not occurring. In those circumstances, Fred would have exited PharmX in about October 2013. The circumstances of its exit would not have been attended by the angst and distrust which preceded its exit in April 2020. The disputes which arose in relation to Mr James-New’s desire to transfer the stapled securities held by Simple Retail to Daleflag, its coincidence in timing with the sale by Simple Retail of its business to MediSecure, the issues concerning the alleged control at Fred arising from the Telstra acquisition and its non-disclosure to the other Stapled Security Holders and the resultant disharmony caused by Mr James-New and Mr Wenham refusing to vote in favour of distributions to the unitholders of PharmX as distributable profit would not have been present, in that event.

Moreover, Fred’s exit from PharmX would have occurred in the deserving but happy circumstance of the successful completion of its transaction with Telstra, self-evidently resulting in significant capital return to Fred’s shareholders reflective of Fred’s success and innovation along with the payment of an acquisition price by the Stapled Security Holders for Fred’s interest in PharmX, albeit at the discounted multiple of 4x. Whilst Fred may have preferred to remain a Stapled Security Holder in PharmX, I consider it most unlikely that Fred’s exit would have been accompanied by any substantial disharmony. Moreover and in any event, the exit would not have been accompanied by satellite legal proceedings, such as the claims for unpaid distributions and the claims by the parties that the purchase payable on the buyout of Fred’s interest had been wrongly calculated. These matters would have enhanced the prospect of a harmonious consensus.

Secondly, the likelihood of Fred establishing a rival exchange in late 2013 would have been significantly less than Fred submitted, and more particularly I consider that its adverse effect on PharmX would have borne little relation to that contained in the project plan and reflected in Mr Samuel’s calculations.

The challenges which faced a new entrant such as Fred in establishing a rival exchange in 2013 would not have been significantly different than those faced in 2020. PharmX had been operating for about seven years and was well entrenched. I am not satisfied that the difficulties from a technical perspective would have been materially different in 2013 than they were in fact in 2020, when the MedViewX rollout occurred. The only evidence that they would have been is from Mr Naismith. Mr Stratigos and Mr Bond’s evidence is to the contrary. More specifically, I do not accept that it would have been possible in 2013 to set up and establish a fully operational rival exchange on the timelines and with the weakening effect on PharmX as set out in the project plan. Nor do I accept that Fred would have regarded that to be the case. Certainly, I do not accept that it would have committed to the establishment of a rival platform on the basis of anything as high level and limited as the one page project plan.

The more likely course is that Fred would have entered into a third party access agreement. Had it done so in 2013 on the standard terms, it would have derived an annual rebate of somewhere in the order of $154,000 in its first 12 months after exit. This sum compares with its distributions of $293,232 in the 2011 financial year and $494,375 in 2012. Thus, at no cost, Fred could have derived an income from PharmX of about 30% of the largest amount that it had received as a unitholder. This would have been derived without the cost, inconvenience and uncertainty of setting up a rival exchange. Although by foregoing a rival exchange, Fred forewent the prospect of deriving a capital return from a divestment (in respect of which, had it occurred, was estimated to a sale of somewhere in the order of $11 million),[112] the desirability of establishing a rival platform would have had to have been measured against the certainty of the receipt of rebates in the magnitude set out above, the costs likely to be incurred in establishing the rival platform and the likelihood of successfully establishing a rival platform.
[112]See above [52].

Fred did not adduce evidence as to the likely costs of establishing a rival gateway in 2013, notwithstanding that it undertook those calculations in 2020 for MedViewX. This diminishes the weight of the evidence that it did adduce to the effect that it would have established a rival exchange, and permits the conclusion to be more readily drawn that Fred would not have established such a rival platform.

The terms upon which a third party access agreement would have been negotiated are less certain. The calculations relied upon by Corum proceed on the basis that Fred would have entered into a standard third party access agreement in respect of which it would receive a 25% rebate. Mountaintop did this when it exited upon Corum’s recent buyout. So too did Simple Retail in 2016. I have some doubts as to whether Fred would have been prepared to enter into an agreement on the standard terms. Mr Naismith’s disclosed reluctance in 2020 to enter into a third party access agreement was based, in part, on his wish to resolve the question of third party access, only as part of a resolution of all matters in dispute. The complicating factor of the need to resolve other disputes would not have been present in 2013. The remaining matter cited by Mr Naismith in 2020 as an impediment to the conclusion of a third party access agreement was his distaste for doing so on the basis of a standard 25% rebate. Although the complication arising from the need to resolve wider disputes would not have been present in 2013, I could well understand that Mr Naismith would have been unimpressed with an offer of a standard 25% rebate, even allowing for an exit in 2013 on a consensual basis. As someone who not unreasonably considered that he had been at the forefront of the establishment of PharmX, there is every chance that Mr Naismith would have pressed for Fred to have received a higher rebate than that being paid to standard POS vendors, who had played no role whatsoever in the establishment of PharmX.

Notwithstanding the likely harmony that would have attended any negotiation, there is every chance that Fred would have sought to obtain a rebate on a special basis calculated at a higher level which reflected both its contribution to PharmX’s successful establishment, as well as a latent capacity to compete or at least advert to the possibility of it doing so at least as a negotiating tool to facilitate the payment of higher rebates.

As such, I consider that there is every chance that a third party access agreement would have been entered into by Fred with PharmX, but on a basis which provided for a fee some way in excess of the standard 25% payable to standard third party vendors. Mr Lumb’s email to Mr Naismith of 30 June 2020 foreshadowed a willingness to negotiate on terms. There is no reason why a similar willingness to negotiate on terms would not have been present back in 2013. In contrast, the absence of the later disharmony would have enhanced the prospect of a successful negotiation.

Whilst the possibility of Fred establishing a rival exchange cannot be discounted entirely, I consider that such a course would have been far less likely than Fred entering into a third party access agreement. Had a rival exchange been undertaken in 2013, it would have required the support of a robust business case presented to the Fred board, which would have been required to justify the costs associated with the establishment of such a rival exchange in light of the anticipated revenues balanced against the comparative benefit that could have been derived by entering into a third party access agreement providing for rebates on a variety of bases.

In the event that such a rival exchange was established, real difficulties arise in assessing the effect of the rival exchange on PharmX, and derivatively, Corum’s claim. To be sure, however, I do not accept that there is any realistic prospect that it could have been established on the timelines and with the ease implicit in the project plan. The evidence of Mr Stratigos and Mr Bond, along with the lived experienced of the MedViewX rollout, even discounting for some complications arising from the presence in 2022 of the NDSS issue which would not have been present in 2013, point in a very different direction.

Any establishment of the rival exchange would have been far more technologically fraught, more time consuming in terms of the resources demanded at PharmX, taken longer and been far less effective in transitioning business away from PharmX than that set out in the project plan. Further, whilst the question of the establishment of the rival platform and its effect on PharmX are distinct, the more costly, time consuming and less effective the competitive business was anticipated to be, the less likely that Fred would have established such a rival endeavour. The rollout of MedViewX required the preparation of a business case with supporting information incorporating a net present value calculation and generally required the preparation of materials at a sufficient level of rigour as would ordinarily be expected of a subsidiary of a public company. Had a like-level of rigour and comparable assumptions been applied to the 2013 project plan as those that attached to the 2020 MedViewX, it may well be the case that the resultant financial analysis that would have been undertaken at that time would have resulted in a decision not to proceed, all the more so in circumstances where there was an alternative on the table in relation to the receipt of third party access fees of the magnitude set out above.

As noted above, I do, however, consider that Fred would likely have sought to negotiate a significantly higher rate by way of rebate than the standard third party rebate paid to other POS vendors. Mr Naismith was justifiably conscious of the critical role which he had played in PharmX’s development and it is clear enough that Mr Naismith was a person who was astute at all times to seek to advance Fred’s interest. Therefore, there was a real prospect of Fred negotiating a third party rebate arrangement with PharmX on terms some way in excess of the 25% rebate payable to third party POS vendors. The precise level at which agreement could have been reached requires a considerable degree of estimation; doing the best I can, I consider it likely to be between 30-40%. Fred’s 40% unitholding in the Trust is not directly relevant to the question of the quantum of its rebate, but does at least represent some benchmark against which negotiations could have been carried out. The reference to unitholding as a reference point is also consistent with the approach taken by Mr James-New and Mr Wenham to the separate question as to how proceeds of a trade sale should be split up and shows that it was an integer that the parties took account of from time to time when it suited. In my view, it is likely that the third party access agreement would have been entered into, involving payment to Fred of a third party rebate of somewhere between 30% and 40%.

Whilst there are an overwhelming number of factors which are in favour of the entering into of a third party access agreement, I cannot exclude entirely the prospect that Fred may have, for whatever reason, chosen to establish a rival gateway. Given the evidence of Dr Hird who referred to the ‘stickiness’ of customers and Dr Williams who noted the significant ‘first mover advantage’ in markets of the kind operated by PharmX, the lived experience of the MedViewX rollout and with the evidence of Mr Stratigos and Mr Bond, I have very real doubt as to how successful the rival gateway would have been and, relatedly, its effect on PharmX’s profits in the unlikely event of it being established.

Had I concluded that there was, say, an 80% possibility of Fred entering into a third party access agreement with PharmX involving the payment to Fred of a rebate of somewhere between 30 and 40%, any assessment of Corum’s loss and damage would involve a calculation derived by multiplying 0.80 by the distributions that Fred received that would otherwise have been received by the Corum and the remaining unitholders whose rights it has acquired, on the basis that they otherwise would have been available to the other unitholders, less the extra expenses incurred by PharmX in the form of the third party access rebate paid to Fred calculated at a rate between 30 and 40% from the time the third party access agreement would have been entered into.

It would also be necessary to take into account the effect on Corum (and the other unitholders) of the operation of the rival gateway, even if there was only say a 20% chance that such a gateway would have been established. If its effect could have been to denude PharmX of the business transacted through Fred POS systems but otherwise leave the PharmX business intact, a broad brush assessment could be undertaken which simply assumed that in that event, no additional distributions would have been received by Corum and other Stapled Security Holders. If that occurred, the application of the 80% integer would adequately compensate Corum for the Wrongful Distributions Claim. If however, the effect of the rival gateway would have been productive of loss to Corum of the magnitude set out in Mr Samuel’s calculations, it would be necessary to then subtract from the damages, calculated by reference to the 80% possibility of PharmX entering into a third party access agreement with Fred, the reduction in distributions that would have been suffered by Corum compared to those it actually received whilst Fred remained a unitholder by reference to the 20% possibility of such losses arising.

The difficulty with doing so here is that Mr Samuel’s calculations are of little assistance, even if I were to accept that Fred may have established a rival gateway in 2013. Mr Samuel’s calculations establish the effect on PharmX of the establishment of a rival gateway at the timing and effectiveness of the project plan. Moreover, Mr Samuel’s calculations proceed on the assumption that Fred’s rival gateway would have sought to entice POS vendors across by paying them rebates as high as 50% and by charging wholesalers about half of that which PharmX at the time was charging wholesalers. Neither of those two instructed assumptions are of any real evidentiary value. Among other things, such a course was completely disconnected to the approach taken in the MedViewX rollout and as such, was unlikely to have been followed. Moreover, the speed of the rollout itself in the project plan also is so unlikely that it needs to be put to one side.

Overall, there is an absence of evidence establishing the effect of a rival gateway on PharmX had it been established but on a more credible timeline and with a more credible impact on PharmX.

The speed of the rollout and the enthusiasm of wholesalers to sign up to MedViewX at all, even on a non-exclusive basis, much less to transition business away from PharmX is markedly at odds with the speed implicit in the project plan and which underlie Mr Samuel’s calculations. His calculations assume a 29.4% reduction in the profits of PharmX in the 2015 financial year (which is within 21 months of Fred’s hypothetical exit), a 60.9% reduction in PharmX’s profits in the 2016 financial year (33 months after Fred’s hypothetical exit) and a 79.7% reduction in the 2017 financial year (45 months after the hypothetical exit). The reduction in profits results largely on PharmX’s declining revenues due to the loss of wholesalers who are assumed to have moved to the rival Fred exchange. The loss of revenue embodied in Mr Samuel’s calculations is $774,678 in the 2015 financial year (equivalent to 26.8% of PharmX revenue); $1,545,818 in the 2016 financial year (equivalent to 47.33% of PharmX revenue) and $2,695,260 in the 2017 financial year (equivalent to 82.53% of PharmX revenue).

The asserted impact on PharmX profits is intrinsically tied to the speed of the rollout and the extent of any transition of business and associated loss of revenue from PharmX to its rival. If the loss of business was only, say half as effective as the project plan assumed, the reduction in PharmX profits over the loss period from the 2014 financial year to the 2019 financial year would reduce to $4,978,172 (which is 50% of the PharmX reduction in profits in Counterfactual Scenario 1).

But if the whole transition of business took, say 1.5 times as long, nine years instead of six, as well as being only half as effective, then the reduction of profits has to be apportioned over a longer period of time than the loss period. Nor is the reduction of the PharmX profits linear; Mr Samuel’s calculations show a graduated approach with the reduction of profits occurring over time and increasing exponentially. This longer and less effective competitive option is far more consistent with the lived experience of the MedViewX rollout, the evidence of Mr Bond and Mr Stratigos and the ‘stickiness’ of customers and related ‘first mover advantage’ referred to by Dr Hird and Dr Williams.

If a lesser reduction in PharmX profits results and it occurs over a longer time period, the adverse effect on PharmX and hence the amount of the distributions that would otherwise have been received by the remaining unitholders in the event of competition from the Fred rival exchange does not differ markedly from the reduction in PharmX profits resulting from a maintenance of revenues at an increased cost in the form of payments of third party access fees to Fred, particularly if Fred has been able to negotiate a rate higher than the 25% standard. As noted above, the amount of the rebate payable to Fred over the loss period calculated at the rate of 25% and the associated reduction in PharmX profits is $1,320,975.78. The corresponding figures at rebates of 35% and 40% are $1,849,366.09 and $2,113,561.25 respectively.

If the majority of the business transition and loss of profits at PharmX occurred in the second half of a nine year period (instead of the second half of a six year period which is the predicate of Mr Samuel’s calculations), then the PharmX profits will not be materially affected for the first 4.5 years of the six year loss period. If for the sake of analysis, it is assumed that 40% of the PharmX profit reduction of $4,978,172 takes place in the first six years, then the PharmX profits reduce by $1,991,269 in the six year loss period, which is equivalent to the reduction that arises where Fred does not compete but instead enters into a third party access agreement struck at between 35% and 40%.

One approach to assessing the loss is to ascribe percentages to the various alternatives and calculate the loss under each scenario. Such an approach however injects too much complexity into an analysis which is necessarily imprecise. The complexity extends not just to the various rebate possibilities, but the timing of any rebate agreement being concluded, as well as various hypotheses as to the detriment on the PharmX business, both as to amount and timing.

The better approach is to take account of the possibility of a detriment to PharmX’s business, in the unlikely event of a rival gateway being established and the more unlikely event of it being established in a way which had much impact on PharmX from the 2014 financial year to the 2019 financial year, by assuming in Fred’s favour that the terms of the third party access agreement would have been negotiated on a basis which gave it a third party rebate calculated promptly and at the higher end, say at 40%.

Further, whilst I accept that it is extremely probable that Mountaintop and Simple Retail would have sought to exercise their pre-emptive rights, a slight discount is appropriate to reflect the slim chance that Mountaintop and Simple Retail would not have sought to exercise their pre-emptive rights. The chance of them not doing so would have been as little as 1% but no more than 5%. In the same way I have taken account of the risk of Fred setting up a rival gateway, damages will be assessed on the basis there is a 5% chance that Mountaintop and Simple Retail would not have so acted.

Overall, I discount that part of Corum’s claim for loss and damage which represents the Overpayment Claim by 5%, so as to reflect the slim possibility that Mountaintop and Simple Retail would not have sought to exercise their pre-emptive rights. Had they not exercised their pre-emptive rights, Corum would have suffered no loss and damage. A discount of 5% applied against the Overpayment Claim results in damages in respect of the Overpayment Claim component of $1,134,255 (0.95 x $1,193,953).

Under the Wrongful Distributions Claim, the dividends paid to Fred from PharmX which otherwise would have been received by Corum, net of those paid to Simple Retail total $6,323,503.75.[113] Had Fred entered into a third party access agreement with PharmX providing for the payment of a rebate of 40%, PharmX’s distributable profits would have been reduced by $2,113,561.25.[114] The $2,113,561 (rounded) will be deducted from the wrongful distributions paid to Fred that Corum seeks to recover of $6,323,504 (rounded), which gives a total of $4,209,943. This figure too needs to be discounted by 5%, reflecting the slight possibility that Mountaintop and Simple Retail would not have sought to exercise their rights at all, which results in a figure of $3,999,446 (rounded).
[113]See above [322].
[114]Fred provided a calculation at a rate of 25% which came to $1,320,975. The 40% is based on that calculation.

Corum’s loss of opportunity therefore, being the sum of the Overpayment Claim and Wrongful Distributions Claim, is assessed as the sum of $1,134,255 and $3,999,446.

In the result, there will be judgment for Corum in the sum of $5,133,701. I will hear the parties as to interest and costs.

Holder/Financial Year	FY 2011		FY 2012		FY 2013
Fred	$293,232	34%	$494,375	35%	$586,344	37%
Corum	$396,389	46%	$657,337	47%	$715,250	46%
Simple Retail/Daleflag	$98,059	11%	$158,348	11%	$161,074	10%
Mountaintop	$70,582	8%	$99,827	7%	$103,858	7%

Party/Financial Year	FY 2011	FY 2012	FY 2013	FY 2014	FY 2015	FY 2016
Fred	$293,232 (34%)	$494,375 (35%)	$586,344 (37%)	$725,236 (40%)	$843,301 (42%)	$948,755 (44%)
Corum	$396,389 (46%)	$657,337 (47%)	$715,250 (46%)	$799,924 (44%)	$873,323 (44%)	$912,712 (42%)
Simple Retail/Daleflag	$98,059 (11%)	$158,348 (11%)	$161,074 (10%)	$174,687 (10%)	$176,862 (9%)	$202,441 (9%)
Mountaintop	$70,582 (8%)	$99,827 (7%)	$103,858 (7%)	$109,937 (6%)	$102,927 (5%)	$94,314 (4%)
Total Profits	$858,262	$1,409,887	$1,566,526	$1,809,784	$1,996,413	$2,158,222

[2023] VSC 208

21 April 2023