15 As to the options, Michael Brosnan, Leon Brosnan and Mary Brosnan granted an option to MI to acquire from them shares amounting to an additional 10% of the issued shares in HWL, exercisable within 90 days after receipt by MI of audited financial statements of HWL for the 30 June 2005 financial year.
16 A further option for 10% of the issued share capital in HWL was exercisable within 90 days of receipt by MI of the audited financial statements for HWL for the 30 June 2006 financial year. The transferring shareholders would be the same three shareholders plus Alan Bawden Grant.
17 A further option for 21% of the issued share capital was exercisable within 90 days of receipt by MI of the audited financial statements for HWL for the 30 June 2007 financial year. The transferring shareholders would be the four transferring shareholders for the 30 June 2006 year plus Mr Alan David Grant as trustee.
18 Finally, a further option for 23.4% of the issued share capital was exercisable within 90 days of receipt by MI of the audited financial statements for HWL for the 30 June 2008 financial year. The transferring shareholders would be the same transferring shareholders for the 30 June 2007 year plus Barbara Grant and Alan Bawden Grant (as trustee).
19 Over the four years, should each option be exercised, MI would have the right to acquire a further 64.4% of the issued share capital in HWL. Taken together with its initial 10% acquisition, it would hold 74.4% of the shares and the applicants would hold 25.6% of the shares in HWL.
20 On 27 April 2005, the applicant shareholders (including in some cases in a trustee capacity) entered into an agreement with MAPL and MI. That agreement provided for a sale by the applicants of all of their shares in HWL to MAPL for $39,600,000.00 made up of cash consideration of $6,500,000.00 payable in the distributed manner to the various shareholders, reflected in Sch 1 to the agreement. The balance of the consideration would be the transfer of "Preferred Stock A" in MI from MAPL to the applicants to the value of $14,868,000.00 in the distributed manner set out in Sch 1; the transfer of "Common Stock" in MI to the applicants (excluding Alan Gee as trustee and Graeme Joiner) to the value of $17,291,562.00 in the distributed manner set out in Sch 1; and the issue of Common Stock in MI to Alan Gee as trustee and Graeme Joiner to the value of $940,438.00 (being $467,789.00 and $472,649.00 respectively).
21 By reason of this transaction, the applicants would hold 14,868,000 shares of Preferred Stock A in MI and 2,502,196 shares of Common Stock (fully paid). Interests other than the applicants would hold 14,868,000 shares of Preferred Stock A in MI and 2,373,223 shares of Common Stock in MI.
22 Subject to particular matters, MAPL agreed to pay the applicants an amount equivalent to, in the aggregate, 30% of the after tax net profits of HWL in the proportions set out in Sch 3 to the agreement for each financial year (or the relevant part of that year) during the period commencing on the Completion Date for the agreement, and ending on the earlier of, the date that any stock in MI became listed on a recognised stock exchange, and a date 7.5 years after the Completion Date.
23 The applicants contend in the principal proceeding that they were induced to enter into that agreement on the basis of representations made by Mr Katke and Mr Morey on behalf of MAPL and MI.
24 Put simply, those representations were these: (a) MI would proceed to an Initial Public Offering ("IPO") on a recognised United States stock exchange during 2005, markets permitting; (b) for the purposes of an IPO, MI could legitimately hold itself out as a specialty pharmaceutical company; (c) the American division of MI would have particular future revenues; (d) the European division of MI would have particular future revenues; (e) the earnings before interest, tax, depreciation and amortisation ("EBITDA") for the American division of MI and for the European division would be the particular earnings pleaded; and (f) impliedly, that any shares taken in MI by the applicants in exchange for their HWL shares would increase in value by reason of the matters at (a) to (e), such that the applicants would be better off as a consequence of selling their HWL shares to MAPL.
25 Apart from those matters, the applicants say that Mr Katke and Mr Morey on behalf of MAPL and MI made these further representations: (a) MI was in discussions with a large pharmaceutical company, Pfizer, which had expressed very strong and imminent interest in the licensing of an anti-inflammatory product produced by MI known as "Kaprex"; (b) research on Kaprex indicated that it was an effective anti-inflammatory product; (c) Kaprex worked just as effectively as anti-inflammatory products already on the market including a product called Vioxx which had been recalled due to cardiovascular side-effects; (d) Pfizer's consumer and drug arms were both interested in Kaprex and its mechanism of action was being reviewed by Pfizer's scientific advisory board; (e) a licensing deal with a big pharmaceutical company such as Pfizer with respect to Kaprex and other discoveries would provide substantial revenue to MI and increase the value of MI; and (f) MI had determined to slow the provision of information to Pfizer to give MI time to strengthen its patent position before entering into a licensing transaction.
26 The applicants say that they entered into the 27 April 2005 agreement in reliance upon these representations.
27 They say that MI was not ready and could not proceed to an IPO on a recognised US stock exchange in 2005 for seven detailed reasons some of which incorporate a range of sub-propositions. They say that MI remained unable to proceed to an IPO up to and including July 2007; MI could not ever legitimately hold itself out as a specialty pharmaceutical company; MI did not have relevant products under development; MI did not achieve the EBITDA statistics suggested; and, MI has not entered into any licensing transactions with Pfizer or any other entity with respect to Kaprex.
28 They say that particular representations were representations as to future matters and they rely upon s 51A of the TPA.
29 They say that the making of the representations constitutes a contravention of s 52. Other related pleaded matters were the subject of the applicants' case at trial.
30 Relief is also asserted against Mr Katke as a person knowingly concerned in the relevant contraventions.
31 They also say that from about early 2007 the applicants fell into a dispute with MAPL and MI concerning the character and content of the representations made to them and between December 2007 and July 2009 negotiations were conducted with a view to resolving that dispute. The negotiations were conducted by Mr Katke, Dr Bland and Mr Morey with Mr Michael Brosnan and Mr Alan Gee and, where relevant in relation to the particular matters, with Mr Leon Brosnan and Mr Alan Bawden Grant as well.
32 Those negotiations led to a resolution of the dispute on the basis of an agreement made between the parties on 31 July 2009. That agreement was made between the former HWL shareholders (the applicants), MI, MAPL, Mr Katke and Dr Bland. The agreement recites that under the share purchase agreement of 27 April 2005, each of the applicants received, as consideration for the transfer of their shares to MAPL, a combination of cash and/or Preferred Stock A and/or Common Stock. It recites that since completion of that agreement, a dispute has arisen between MI, MAPL and the former HWL shareholders in relation to an allegation by them that MI, MAPL or the directors or officers of those companies made misrepresentations inducing the former HWL shareholders to agree to the terms of the 27 April 2005 agreement. The particular matters alleged included contentions that: the methods used by MI to value MI had resulted in the value being overstated "in relative comparison" with the value attributed to HWL; each former HWL shareholder had suffered loss due to the over-valuation of MI; and, the over-valuation had reduced the consideration provided to each former HWL shareholder under the 27 April 2005 agreement.
33 Under the agreement, MI agreed to settle the dispute and allot fully paid stock to the applicants as "Additional Consideration" under the former "Share Purchase Agreement" in the distributed allocations set out in Sch 2. In the aggregate, 250,538 fully paid shares of Preferred Stock B would issue; a further 35,000 shares of such stock would issue subject to cl 1.2 of the agreement; 286,328 shares of Preferred Stock B would issue in exchange for the redemption of Preferred Stock A owned by the former HWL shareholders in the value of US$4 million; and 178,155 shares in Preferred Stock C would issue.
34 The dispute would be treated as settled on the allotment and issuance of the Additional Consideration and redemption as contemplated.
35 Mr Katke and Dr Bland would pay US$4,108,959.40 in addition to the Additional Consideration so as to settle the dispute. The further Additional Consideration was said to represent the purchase price for the purchase of the "BioTech Common Units" from the former HWL shareholders in terms of the distributed allocations set out in Sch 11, subject to particular qualifications. MI would convert all of the Common Stock issued under the 27 April 2005 agreement to Preferred Stock B on a one-for-one basis.
36 The settlement deed of 31 July 2009 also provided for a reorganisation in this way. MI would convert all of the Common Stock held by the former HWL shareholders (not already converted), the Preferred Stock A, the Preferred Stock B and the Preferred Stock C, all held by the former HWL shareholders to Holdco Units. The number and type of Holdco Units would correspond to the percentage holding, number and type of stock in MI held by the former HWL shareholders as at the "effective time" of the reorganisation. Schedule 2 sets out the distribution of the Additional Consideration amongst the applicants. Schedule 3, Pt 1, sets out the post-settlement holdings of the applicants and Sch 3, Pt 2, sets out the holdings of the applicants immediately after the conversion to Holdco Units.
37 Clause 10.1 sets out a release given by the former HWL shareholders and cl 10.2 sets out a release given by MI and MAPL.
38 Entry into the settlement deed of 31 July 2009 was an essential pre-condition to what is called the Alticor Inc transaction.
39 At the start of 2009, HWL was a wholly owned subsidiary of MAPL which, through other entities, was a wholly owned subsidiary of MI. The shares in MI were held by the former HWL shareholders as earlier described and by interests sufficiently described as the Katke interests. An entity called Showcase Holdings Inc ("Showcase") was a wholly owned subsidiary of Alticor Inc. Without descending into all of the particular transactions involving Meta Holdings LLC (otherwise known as "Holdco") and Meta Holdings Merger Sub Inc ("Merger Co"), it is sufficient to identify that once the relevant transactions were put in place, Showcase, Meta Holdings LLC and MI entered into a stock purchase agreement on 9 August 2009 by which Showcase would acquire 60% of the equity ownership in MI for $141,640,000.00. The remaining 40% would be held by Holdco. Showcase would achieve its acquisition by purchasing part of Holdco's holding in MI and by subscribing for some stock directly from MI through the issuing of new Common Stock.
40 To complete the picture, Holdco caused MetaRx Holdings LLC ("MRH") to be formed as a wholly owned subsidiary. A joint venture vehicle was established between MRH, Alticor Inc and Meta Proteomics LLC. Ownership in the joint venture was held 28.5% by Alticor Inc and 71.5% by MRH. Holdco then distributed units in MRH directly to the Holdco unit holders on a pro rata basis. After 2009, Holdco held "put options" conferring the right to require Showcase to purchase interests in MI held by Holdco (2012 - up to 25%; 2013 - up to 25%; 2014 - remaining interests).
41 The applicants say that they were induced to enter into the settlement deed of 31 July 2009 on the basis of a "North American Business Plan" which was first given to them on 23 January 2009 by Ms Stockwell and then provided in final form on 10 February 2009, by Mr Katke, coupled with a representation by Mr Katke to the effect that once he became re-focused upon the business of MI (from which he had been distracted for particular reasons), his commitment would be such that the projections in the North American Business Plan would be achieved. By reason of the provision of that Plan, the applicants say that MI and MAPL represented that MI would achieve gross revenues and growth rates from its core business at particular statistical levels. It is not necessary to set out the content of all of the representations related to the North American Business Plan. It is sufficient to say that there are 20 other representations related to that Plan.
42 These matters are called the "2009 representations".
43 The applicants also say that between July 2008 and July 2009, Mr Katke, on behalf of MAPL and MI, represented to the applicants that Alticor Inc was a company selling US$3-$4 billion worth of its product in China annually; if the shareholders in MI agreed to a proposal by Alticor Inc to acquire a 60% interest in MI, MI would be able to export its products to China; and, the exporting of those products would substantially increase the profitability of MI over and above that set out in the North American Business Plan.
44 These representations are called the "Alticor representations".
45 Finally, the applicants say that between late 2004 and July 2009, Mr Katke, Dr Bland and Mr Morey, on behalf of MI and MAPL, represented to the applicants that MI had a very strong patent position around its discoveries; and, impliedly represented that such patents significantly enhanced the value of shares in MI (the "patent representations").
46 The applicants say that in reliance upon the 2009 representations, the Alticor representations and the patent representations they entered into the settlement deed of 31 July 2009. They say that the 2009 representations and the Alticor representations were representations as to future matters for the purposes of s 51A of the TPA. They say that MI has not achieved the financial forecasts contained within the North American Business Plan. Nor have they achieved any of the other matters derived from that Plan upon which they rely. Nor has MI exported any of its products into China by reason of an association with Alticor Inc. Nor has MI substantially increased its profitability over and above that set out in the Plan by reason of exporting its products to China or at all.
47 They also say that at the time of the making of the patent representations there were in various jurisdictions prior patents covering most of the key aspects of MI's discoveries.
48 They say that the making of the 2009 representations, the Alticor representations and the patent representations constitutes conduct in contravention of s 52 of the TPA.
49 They also assert that Mr Katke was knowingly concerned in that conduct.
50 They assert that as a consequence of the contraventions of s 52 by MI and MAPL, the applicants have lost the opportunity to obtain the relief they would have been entitled to, pursuant to ss 82 and 87 of the TPA as against Mr Katke, MI and MAPL, for rescission of the agreement of 27 April 2005 and damages in respect of the contraventions of s 52.
51 Thus, the applicants put their case on this basis so far as a contended right to obtain a re-transfer of the HWL shares held by MAPL, is concerned.
52 They say they entered into the 2009 settlement deed in reliance upon conduct in contravention of s 52 of the TPA. Their case, in this respect, is a no transaction case. They say that had they not been induced to enter into the deed by reason of the conduct in contravention of s 52, they simply would not have entered into the settlement deed at all. They seek to set aside the 2009 settlement deed under s 87 of the TPA. They say that in entering into the 2009 settlement deed they gave up the opportunity they then enjoyed (and would have pursued, they say) to set aside the Share Purchase Agreement of 27 April 2005 and "recover back" their 90% shareholding in HWL in exchange for $6.5 million of cash consideration they had received "less any dividends they would have received if the shares had not been transferred". They contend that, had they pursued that relief under s 87, there is no reason why a court would not have ordered a re-transfer of the shares in HWL. Rather, they gave up that opportunity, they say, in favour of the 2009 settlement deed.
53 They say that a court "would have made" such an order as the evidence demonstrates that they were induced to enter into the Share Purchase Agreement of 27 April 2005 by the conduct said to be in contravention of s 52 of the TPA. They also say that there is nothing now preventing the court from exercising its power under s 87 of the TPA in granting relief to set aside the 2009 settlement deed, to also put the applicants, as an incident of that relief, in the position they would have been in had they not entered into the 2009 settlement deed in reliance upon the contravening conduct. That position would have been one, they say, in which they would have exercised the remedial opportunity to once again become the owners of their 90% interest in HWL transferred to MAPL, by demonstrating a right to relief under s 87 which, they say, would have been granted to them on the merits, having regard to all the evidence on that matter.
54 They contend that a court could, and should, now order a re-transfer to them of the HWL shares transferred to MAPL, in exchange for the sum of AU$6.54 million identified in the evidence at the trial by Mr Gee (the calculation as to which, they say, is not the subject of any challenge).
55 Apart from issues in relation to the re-transfer of the shares in HWL, the applicants say that in the alternative they have a claim for damages for their reliance loss of the opportunity and the measure of that loss is said on the contested expert evidence to range between $126 million and $175 million depending upon a range of matters to be the subject of findings. For present purposes, it is not necessary to further examine any aspect of that matter.
56 Thus, it can be seen that the relief sought in the principal proceeding is a statutory remedy under s 87 of the TPA to set aside the settlement deed of 31 July 2009 which, as an incident of that relief, is said to give rise to a remedial order which would have the effect of enabling the Court to order the re-transfer of the HWL shares to the applicants. The cause of action is a contravention of s 52 of the TPA and remedies are sought under s 87 and s 82.
57 No final injunction is sought under s 80 of the TPA.
58 No declaration is sought.
59 By force of the transitional provisions of the Trade Practices Amendment (Australian Consumer Law) Act (No 2) 2010 (Cth), Sch 7, s 6, the TPA as in force immediately before the relevant commencement date (of the particular item), continues to apply after that date, in relation to acts or omissions that occurred before the relevant date. Further, any action taken under Pt VI of the Act as in force prior to the relevant commencement date continues in force in relation to the acts or omissions in question.
60 Thus, in these proceedings, s 87 relevantly provides that without limiting the generality of s 80, where in a proceeding instituted under Pt VI of the TPA, the Court finds that a person who is a party to the proceeding has suffered, or is likely to suffer, loss or damage by conduct of another person that was engaged in, in contravention of a provision of Pt V, the Court may, whether or not it grants an injunction under s 80 or makes an order under s 82, "make such order or orders as it thinks appropriate against the person who engaged in the conduct or a person who was involved in the contravention", if the Court considers that the order or orders concerned will "compensate the first-mentioned person in whole or in part for the loss or damage or will prevent or reduce the loss or damage".
61 Section 87(2) provides that the orders contemplated by s 87(1) include: an order declaring the whole or any part of the relevant contract (between the relevant parties as described) to be void, and if the Court thinks fit, to have been void ab initio or at all times on and after a specified date; an order varying the relevant contract in such manner as is specified in the order and, if the Court thinks fit, declaring the contract or arrangement to have had effect as so varied on and after such date before the date on which the order is made, as is so specified; an order refusing to enforce any or all of the provisions of the relevant contract; an order directing the person who engaged in the conduct or a person who was involved in the contravention to refund money or return property to the person who suffered the loss or damage; an order directing the person who engaged in the conduct or a person who was involved in the contravention constituted by the conduct to pay to the person who suffered the loss or damage, the amount of the loss or damage; and other orders.
62 HWL is not a party to the principal proceeding.
63 No relief is sought against HWL.
64 The subject matter of the principal proceeding concerns relief sought arising out of conduct in contravention of s 52 which, relevantly for present purposes, encompasses a contended claim under s 87 for recovery to the applicants of the shares in HWL and damages under s 82.
65 The respondents contest these claims on the merits.
66 There is a substantial factual controversy on every aspect of the contended contraventions.
67 Apart from the contest on the merits, the respondents say that the applicants are not entitled to an order for rescission of the settlement deed of 31 July 2009 and, in any event, if an order were to be made under s 87 to that effect, the Court would not, as an incident of that relief, set aside the Share Purchase Agreement of 27 April 2005. They say that quite apart from any question of the merits, the Court would not make an order under s 87 setting aside the 2009 settlement deed because the rights of innocent parties under that deed are affected and any order would have the effect of depriving them of their rights.
68 They say that the Court's exercise of the power conferred under s 87 is, at least, to be informed by, notions of rescission in equity although the statutory remedy is not dictated by the equitable principles. They say that the innocent parties affected by any order setting aside the 2009 settlement deed would be MAPL and Dr Bland especially having regard to Dr Bland's acquisition of the BioTech Common Units. They also say that the events in relation to the reorganisation which gave rise to units in Holdco, the exchange of shares for units and the subsequent acquisition by Alticor Inc of 60% interest in MI would suggest that an order setting aside the 2009 settlement deed would not be made by the Court in the proper exercise of the power under s 87 of the TPA.
69 However, these are the very matters which go to the heart of the principal proceedings.
70 I now turn to the immediacy of the events which have given rise to the present interlocutory application.
71 The application is supported by an affidavit by Mr Gee in which he says these things.
72 Mr Gee has held the position of Managing Director of HWL since 25 July 1998. He oversees and manages the business undertaking of HWL on a day-to-day basis as well as performing duties as a Director of HWL.
73 The Directors of HWL are Mr Fred Howard (a US based Metagenics nominee), Mr Joe Lanstra (also a US based Metagenics nominee), Mr Alan Gee, Mr Michael Brosnan and Mr Roger Colman (also a US based Metagenics nominee).
74 Since the parties entered into the 2009 settlement deed there has only been one Board meeting where the members of the Board met face-to-face. Mr Weaver (who was a Metagenics nominee Director until April 2014), Mr Lanstra (who replaced Mr Weaver) and Mr Colman rarely travelled to Australia to meet with Mr Gee and other members of the HWL management team.
75 Mr Colman has not been to HWL's offices in Australia since 2010.
76 Mr Gee says that the members of the "operating board" are Mr Michael Brosnan, Mr Leon Brosnan, Mr Alan Grant and Mr Gee. He says that HWL has operated under substantially the same management team led by Mr Gee that was in place before the 2009 settlement deed and that team includes Mr Graeme Joiner as Director of Sales and Marketing (since 1998), Mr David Wallace in various positions including that of Chief Information Officer since 2002, Finance and Administration Manager until May 2006 and Director of Operations since 1 January 2014; Heidi Roscher as Financial Controller since May 2006 and Mr Paul Mannion as Technical Director since 2007. The only significant change in the management team during the past five years has been the recent retirement of Mr David Craig as Operations Manager and his responsibilities were assumed by Mr Wallace from July 2013. Mr Alan Bawden Grant is the Company Secretary of HWL having been appointed on 19 July 1991. This agreement is due to expire on 30 September 2014.
77 Mr Gee and Mr Joiner are employed by HWL under a Senior Executive Employment Agreement. Each agreement is dated 11 September 2009. Each agreement will expire according to its terms tomorrow, 11 September 2014. Clause 2.2 of the agreement provides that Mr Gee is responsible to the Board which is defined to mean the Board of Directors of HWL (and includes a Committee of the Board). Mr Gee is responsible for providing the Board with information and reports as to the affairs of HWL as the Board may request from time to time, and information and reports so as to keep the Board fully informed of all material developments in or relevant to HWL's affairs within the scope of Mr Gee's "Duties" and also all material developments in or relevant to the Group's affairs within the scope of Mr Gee's "Duties". "Group" is defined to mean HWL and each of its "Related Bodies Corporate (including, without limitation, [MI] and Metagenics NZ Ltd (a company incorporated in New Zealand) and [MAPL]". A "Group Company" means a company that is part of the Group, as defined. Mr Gee's Duties are that he "must faithfully and diligently perform the Duties and exercise the powers consistent with the position as set out in Schedule 1 ('Duties of the Executive') and as may be varied in writing from time to time by mutual agreement between the Board and Executive".
78 The "Primary Objectives" set out in Sch 1 are to provide leadership and direction in the pursuit of HWL's mission, philosophy, strategy and its annual goals and budgets, and to oversee the management and growth of HWL.
79 The "Primary Responsibilities" include: the overall performance and operation of HWL; meeting sales budgets; meeting customer service standards; keeping the Board fully informed of important matters and developing a good working relationship with Board members; building, developing and coordinating an effective management team and company structure with clearly defined lines of authority and responsibility; fostering an ethos of positive commitment; ensuring the required resources are available to permit staff to conduct their duties in an effective and efficient manner; understanding the nature and direction of the natural healthcare industry in Australia, NZ and the world, and understanding competitor issues; facilitating a regular strategic planning process and establishing short and long range goals; fostering innovative thinking; and overseeing the preparation of annual budgets for approval by the Board with regularly updated projections.
80 The key performance indicators include meeting sales and profit targets, levels of customer satisfaction, levels of staff satisfaction, levels of shareholder satisfaction, levels of supplier satisfaction and levels of business partner satisfaction.
81 The agreement provides for a substantial remuneration.
82 The fifth anniversary of the agreement is 11 September 2014. Mr Gee may elect in writing to extend the duration of the agreement until the seventh anniversary of 11 September 2009 if, and only if, a 7% or more compounded average annual growth in HWL's "Operating Segment's total annual revenue" is achieved in the period from the third anniversary of 11 September 2009 to the fifth anniversary of that date. If the contemplated growth rate is not achieved and agreement is not otherwise reached between the parties for the employment to continue, the employment will terminate on the fifth anniversary. Alternatively, if agreement is reached between the parties for the employment to continue, the employment will continue until at least the seventh anniversary of 11 September 2009 unless terminated earlier in accordance with the agreement: see cl 1.5.
83 The position is that the growth rate was not achieved and agreement has not otherwise been reached between the parties for the employment to continue beyond 11 September 2014.
84 Plainly enough, it would be open to the respondents and Mr Gee to reach agreement as contemplated by cl 1.5(c)(ii) for the employment to continue. The respondents may be concerned that any agreement for the employment to continue would necessarily continue under cl 1.5(c)(ii) until 11 September 2016, subject to the termination provision.
85 Mr Joiner's agreement is in the same terms as Mr Gee's agreement except of course with variations in Schs 1 and 2 in terms of the description of the "Duties of the Executive" and Mr Joiner's "Remuneration".
86 Mr Gee says that HWL has no borrowings of any consequence and that HWL is financially independent of MI and does not receive any funds or advances from MI. For the financial year ended December 2013, HWL recorded revenue of $127.3 million and produced EBITDA contribution of $27.1 million including royalty payments and EBITDA of $22.2 million. For the seven months ending July 2014, HWL has recorded revenue of $76.1 million, an EBITDA contribution of $14.9 million including royalty payments and EBITDA of $12.2 million.
87 Mr Gee also says this.
88 It is not clear to him what will occur upon the termination of Mr Gee's employment and Mr Joiner's employment. It is unclear whether a MI employee, Ms Hogan, who has been appointed to the position of Senior Vice President Asia Pacific, reporting to Mr Howard will take over the management of HWL. HWL has been run as a family oriented business since 1985 and Mr Joiner and Mr Gee have established significant personal relationships with HWL employees. Of approximately 400 employees all but two have been employed during Mr Gee's tenure. Mr Gee says that he and Mr Joiner have developed close personal relationships with many of HWL's significant customers and the important top customer groups comprise 25% of HWL's total revenues. Mr Gee says that he is "gravely concerned that, having regard to my significant involvement in the operation of [HWL] since 1995 and also that of Mr Joiner since 1998, there is a real risk of financial loss occurring to HWL if our employment was brought to an end on 11 September 2014". The succession plan of HWL is for Mr Joiner to ultimately replace Mr Gee as Managing Director.
89 Mr Gee also says this:
Because of the personal relationships that have been established since 1995 with staff and importantly with the customers of HWL I am concerned that a sudden change in management at HWL may cause the loss of customers and the loss of employees, resulting in a downturn in revenue. This in turn would have a detrimental effect on the value of HWL and in the event that the HWL shares are transferred back to the applicants, damage may be suffered to its business which may be irreversible.
[emphasis added]
90 Mr Gee also says this:
Assuming the applicants are successful, even if the Court does not order a transfer of the HWL shares to the applicants but awards damages, the only asset of the respondents in the jurisdiction to satisfy any judgment is the shares in HWL. From the evidence adduced at trial it would appear that the HWL shares are the only significant valuable asset of [MI]. I am concerned to ensure that the business of HWL is maintained and not diminished in any way until judgment is delivered. The most efficient way of that occurring is to continue the employment arrangements of Mr Joiner and me, and the company officer arrangements with Michael and Leon Brosnan and Alan Grant, and to continue the agreement with Alan Grant with respect to Innovative Therapies.
[emphasis added]
91 The reference to Innovative Therapies ("IT") is this.
92 IT is a sole trader business created and operated by Mr Alan Bawden Grant. IT has developed a range of products which are available for sale in Queensland and HWL has been providing services to and manufacturing and packaging products on behalf of IT since its establishment in 1999. HWL and IT have a supply agreement under which HWL is appointed to provide these services. The agreement will expire on 30 September 2014. IT has contributed revenue of $1.7 million to HWL in 2013 and EBITDA of $1.2 million. Mr Gee says that this revenue and EBITDA contribution will be lost to HWL if the agreement comes to an end.
93 As to Mr Michael Brosnan's contribution, Mr Gee says that the flagship product distributed and sold by HWL is the "Inner Health" line. Those products account for $40 million of HWL revenue. This product line was "invented" by Mr Michael Brosnan as a product. Of the suite of such products, nine are based upon MI formulae and those products represent less than 1% of Australian sales. Mr Gee says that during the year ended 31 December 2013, HWL invested approximately $3.2 million on its own research and development. He says that there have been no new products from MI's R&D activities provided to HWL since March 2006.
94 As to the remaining matters, Mr Gee says that Michael and Leon Brosnan have been involved with the HWL business from the outset and they have a deep understanding of the business and enjoy strong personal relationships with many key customers and staff. Mr Gee says he has a very good working relationship with Michael and Leon Brosnan and Alan Grant and that he has very little or no contact with the American based Directors of HWL. Mr Gee says that for the year following the 2009 settlement deed, Michael Brosnan, Alan Gee, Leon Brosnan and Mary Brosnan remained on the HWL Board. In July 2010, the Board structure was changed with three MI nominees appointed to the Board, together with Michael Brosnan and Mr Gee.
95 Mr Gee says that the MI Board made a conscious decision to "depower the HWL statutory board" early in 2010. Mr Gee says at a meeting on 26 January 2010, the HWL Board members discussed the role of the HWL Board and "indicated" that it should diminish in importance over time, determining that Mr Gee "could report to the [MI] board on the Australian business". He says that a new Board, termed the "operating board" was established at the suggestion of the MI nominees on the HWL Board to continue to oversee the operation of the HWL business on a monthly basis in the same manner that had been in effect since July 1998. Mr Gee says that this Operating Board consists of Michael Brosnan, Leon Brosnan, Alan Grant and Mr Gee. This Operating Board has continued to oversee the operation of the HWL business on a monthly basis since July 2010.
96 The respondents rely upon an affidavit, principally, of Ms Mary Chowning, sworn 3 September 2014 filed on behalf of MI.
97 Ms Chowning commenced employment with MI as its Chief Financial Officer ("CFO") in January 2012 and was promoted in January 2013 to the position of Chief Operating Officer ("COO"). As CFO and COO, Ms Chowning is responsible for managing the financial and general operations of MI and its wholly-owned subsidiaries globally including HWL in Australia. This role typically involves regular contact with the relevant financial and operational executives within MI and various domestic and internationally wholly-owned subsidiaries. This role involves Ms Chowning conducting monthly financial and operational reviews of subsidiaries and their businesses; creating and monitoring appropriate financial and operational procedures "and metrics" for those subsidiaries; reviewing operating and market trends with local managements of those subsidiaries; and, periodic visits with each of those subsidiaries to obtain direct information about and an understanding of the relevant business. Ms Chowning says that MI seeks to manage and monitor HWL in the same manner as its other wholly-owned subsidiaries.
98 Ms Chowning's affidavit is an extensive one.
99 It is not necessary to set out the content of Ms Chowning's affidavit in these reasons. It is sufficient to say that Ms Chowning expresses significant reservations about a number of matters and they include the extent to which Ms Chowning has been able to secure the cooperation and support of Mr Gee in the discharge of what Ms Chowning regards as her responsibilities. The concerns include difficulties in relation to the management and monitoring of HWL by reason of the conduct of HWL Executives failing to cooperate and respond to requests from HWL's "parent company". There are, according to Ms Chowning, six main areas of conduct which are problematic in her view. They concern the conduct of:
a) the diversion of product supply arrangements with HWL away from [MI] to third party suppliers, with no explanation;
b) HWL entering into unauthorised foreign currency hedging contracts;
c) the non-attendance by HWL executives/employees at important meetings with [MI] representatives, such as the monthly Financial Review Meetings;
d) the failure to provide financial and other business information as requested;
e) HWL revenue targets not being achieved both for the total business as well as certain key products;
f) the failure to engage in meaningful discussions on business operations and best practices.
100 Ms Chowning then sets out the content of those concerns supported by a range of email exchanges and other documents.
101 One specific matter ought to be mentioned.
102 In relation to the diversion of business, Ms Chowning says that she is concerned that HWL has not been sourcing tablet volume from MI and that the "impact of moving production from [MI] to a third party contract manufacturer is considerable and reduced the HWL tablet volume from the prior year by more than 50% or approximately 14 million tablets". Ms Chowning says that this equated to a loss in value for MI of around $1.1 million at cost, and the impact on the application of overheads was approximately $500,000.00, as well as close to an $85,000.00 write-off of raw materials that had been purchased for the expected orders. Those raw materials cannot be used for any other production. Mr Gee contends that HWL was able to source third party supply at a reduced cost to that incurred by HWL in sourcing product from MI.
103 As to the interlocutory application, Ms Chowning says that she is concerned that any "forced extension" of the HWL executive employment contracts will make it "increasingly difficult, if not impossible, for [MI] to ensure the proper oversight and management of HWL as a wholly-owned subsidiary of [MI]"
104 Ms Chowning also says this at para 55:
In particular, I am very concerned at the ability of [MI] to:
a) obtain the requisite financial and business information it requires from HWL executives;
b) maintain appropriate supply arrangements between HWL and [MI];
c) manage and monitor HWL business risks and compliance with [MI] corporate policies and procedures.
105 Ms Chowning also says this at para 56:
[MI] has no intention or desire to see the growth and profitability of HWL decline. The direct opposite is true. [MI] also has no intention of disposing of its shares or interest in HWL. I am confident that [MI] will be able to manage the HWL business in an appropriate manner, with a view to increasing HWL's growth and profitability upon the expiry of the contracts [the] subject of the interlocutory application, including the employment contracts of Gee and Joiner.
106 Apart from these matters, Ms Chowning responds to various contentions of Mr Gee in his affidavit. Ms Chowning says at para 66 that she is concerned that in the event that Mr Gee continues with his employment with HWL beyond 11 September 2014, and therefore Ms Hogan's position is not expanded to include the role of Managing Director, Ms Hogan may leave HWL to find employment elsewhere. Ms Chowning had initially formulated her affidavit on an optional basis by saying that "Ms Hogan will [consider using 'may' rather than 'will'] leave HWL to find employment elsewhere". Ms Chowning explained that there was confusion about this matter and that her view was that Ms Hogan may leave HWL should Mr Gee continue in employment with HWL.
107 Ms Chowning explains that she has not actually spoken to Ms Hogan about that impression that she holds.
108 Ms Chowning also says that as far as she is aware, the "operating board" Mr Gee speaks about does not have "any authority from the actual Board of HWL and is in effect simply a management advisory group".
109 Ms Chowning also observes that in effect, Mr Gee is said to be unreliable, because, notwithstanding that he was a former shareholder and a party in the recent lengthy litigation, he attended in Court for the entire trial, and Mr Joiner attended for at least 60% of the trial period. Moreover, she says that Mr Gee played a significant and active role in assisting the applicants in the preparation of expert reports of Elia Lytras in support of the applicants' damages case.
110 Perhaps the criticism is that Mr Gee is unreliable because he ought to have taken four weeks leave in order to attend the Court proceedings in which, of course, he actually gave evidence and, it is fair to say, was the principal witness for the applicants as to events and financial calculations. Perhaps the criticism is not that Mr Gee failed to use leave or holidays to attend the Court proceedings but that he attended at all. It must surely be entirely unsurprising to MI and MAPL and Ms Chowning that Mr Gee would be an active participant in what proved to be contentious proceedings between the parties (of which he was one) before a superior court of this country.
111 There is some degree of tension in the relationship between members of the applicants and some management of MI.
112 As to Ms Chowning's criticism of HWL's failure to achieve growth targets, Mr Gee puts on an affidavit dated 4 September 2014 in which the EBITDA growth for the North American MI business in US dollars (million) is compared with the EBITDA growth achieved by HWL in Australian dollars. The applicants make the point that North American EBITDA for MI in 2010 was US$11.8 million. It declined to US$5 million in 2011. It was US$5.2 million in 2012 and declined to US$1.9 million in 2013. HWL's comparative position is that it's EBITDA in 2010 was $18.2 million. It grew to $24.6 million in 2011. It was $25.4 million in 2012 and $26.9 million in 2013. The applicants say that on an objective comparative basis of business performance in terms of achieving EBITDA, the HWL management team seems to have been strikingly more successful than MI's management team especially in the years 2012 and 2013.
113 HWL's formal position in the proceeding as the party against which an order is sought to be made is this: HWL will not play an active role in the application; HWL will abide by the orders of the Court; the solicitors and counsel for the respondents in the principal proceeding are authorised to convey this position to the Court including by tendering a resolution of the Board made on 28 August 2014.
114 That Minute was tendered in the course of the application.
115 The interlocutory application made by the applicants is undoubtedly a novel application.
116 By that application, they urge the Court to make an order that contracts of employment which are due to expire according to their terms ought to be extended until 14 days after the delivery of judgment in the principal proceeding. There is no suggestion that there is any conduct on the part of HWL (recognising that the application is contested by HWL's shareholder) in respect of the contracts of employment which would give rise to a cause of action in the applicants. It is not suggested that HWL has taken steps to terminate the contracts in a way which would constitute a breach such that an injunction might go so as to restrain the breach pending a trial of the question of whether the termination constituted a breach of contract. There is no cause of action relied upon by the applicants which is sought to be vindicated at trial in respect of which an interlocutory order might be made in aid of that relief.
117 In respect of the contracts of employment there is no legal right or equity sought to be vindicated by the grant of an interlocutory injunction in mandatory terms or otherwise.
118 As Chief Justice Gleeson has observed in Australian Broadcasting Corporation v Lenah Game Meats Pty Limited (2001) 208 CLR 199 at [15], if a party cannot show "a sufficient colour of right of the kind sought to be vindicated by final relief, the foundation of the claim for interlocutory relief disappears". The Chief Justice also observed at [16] that the notion of a "free-standing" right to an interlocutory injunction is a contradiction in terms. The Chief Justice further observed that there is no justice in maintaining the status quo in circumstances where that step depends upon restraining a party from doing something which, by hypothesis, the applicant for the interlocutory injunction has no ultimate right to prevent. See also Construction, Forestry, Mining and Energy Union v Abigroup Contractors Pty Ltd (2012) 227 IR 201 at [66] - [76].
119 That is precisely the position here.
120 The applicants seek interlocutory relief in respect of matters which are not the subject of any cause of action sought to be vindicated in a final sense.
121 However, that is not the end of the matter.
122 The second basis upon which the applicants seek an order of the Court is in aid of the relief they seek in the principal proceeding. Put simply, they say that a central part of the principal proceeding engages the notion that remedial orders are sought for the re-transfer of the HWL shares to the applicant shareholders who transferred those shares to MAPL, for all of the reasons earlier mentioned. The interlocutory orders in relation to the contracts are sought in order to preserve the status quo pending judgment in the principal proceedings and thus the orders are sought in aid of the relief under s 87 of the TPA in the principal proceeding.
123 They say that, should they be successful, the HWL shares will be re-transferred to them. They seek to preserve the value of the business undertaking of HWL, ultimately reflected in the value of the shares, by preserving the integrity and cohesion of the management group presently conducting (and who have been conducting for some time) the business undertaking of HWL.
124 They say they are concerned that representatives of MI will cause long term contracts to be entered into with Ms Hogan and possibly others which would need to be undone should they be successful in the principal proceeding. They also say that should the present management group not continue to be engaged in the conduct of the undertaking, the undertaking will be irreparably damaged.
125 Thus, they seek to maintain the status quo pending the publication of judgment (and for a period of 14 days thereafter).
126 One of the immediate difficulties, of course, with that proposition is that the status quo comprehends a set of contractual arrangements which, without any unlawful conduct on the part of HWL or anyone else, will simply take their course according to the terms of the contracts with the result that the relevant individuals will no longer have a contractual relationship with the entity.
127 It seems to me that there is simply no principled basis upon which the Court can "extend the duration" of the contracts at least in the terms sought by the applicants. It may, of course, be possible, in a principled sense, for the Court to make an order in aid of the relief sought in the principal proceeding which would have the effect of preserving the conduct of the operation of the HWL undertaking in the hands of those management individuals who have the greatest degree of experience in the conduct of that undertaking. In order to grant an interlocutory injunction in aid of a legal right (whether statutory or otherwise) or in aid of a demonstrated equity, the applicant must show a prima facie case in the sense required by the organising principles described by their Honours Gummow and Hayne JJ at [65] - [72] and Gleeson CJ and Crennan J at [19] in Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57.
128 In one sense, the notion that the applicants might need to demonstrate a serious question to be tried (as that term is understood having regard to the observations of their Honours noted above) is a little odd as the parties have just conducted a contested (at every level) trial of the claims to relief. Of course, the respondents say that having ventilated all of those questions, the applicants do not enjoy a prima facie case to the relief to a re-transfer of the shares based upon the methodology they contend for described above.
129 There may or may not be some force in that proposition.
130 However, I do not propose to descend into a detailed evaluation of that matter as it does not serve the interests of justice to do so in circumstances where the deliberative process on the issues at trial is now engaged.
131 It is very unfortunate indeed that the parties have not been able to reach some interim arrangement, commencing upon the expiration of the contracts of employment, which would enable the relevant individuals to continue to be employed by HWL and discharge relevantly supervised duties and obligations pending the completion of the Court's analysis of the contested claims.
132 It is sufficient to say for present purposes that I am satisfied that there is at least an argument to be addressed about the right to the relief.
133 I do not wish to say any more about the strengths or weaknesses of that question as doing so necessarily, in my view, prejudices the proper discharge of the judicial deliberative function in a litigated controversy before the Court, which is presently reserved for judgment.
134 Apart from any question of whether an interlocutory order might be made in aid of relief sought in the principal proceeding, there is a further matter which needs to be taken into account.
135 It seems to me that the Court needs to ensure that its own processes of deliberation and adjudication of the principal proceeding and the relief that might or might not be granted in that proceeding is not diminished by intervening events or actions taken by parties to the proceeding (in this case to appoint particular individuals to particular roles) which might be prejudicial to that process. Put another way, the Court has to ensure, and has power to protect, the integrity of its processes once set in motion. The integrity of those processes extends to preserving the efficacy of the relief which might be granted in the principal proceeding.
136 HWL is wholly-owned by MI and, as a shareholder, MI is entitled to assert all of the rights of a shareholder as against its wholly-owned subsidiary which extends to (subject to any agreements to the contrary with relevant parties), the right to appoint the Board, and to the extent that the Board, in conjunction with the decision-making processes of the parent entities determines, management of the undertaking will be conducted in a particular way. That view ought to prevail as a matter of orthodoxy, subject to other pending interests to be protected.
137 In the principal proceedings, relief is sought against MI and MAPL. The ultimate ownership (by way of remedy) of the shares in HWL is in issue and the value of those shares is reflected in the value of the conduct of HWL's undertaking. Mr Gee and the applicants say that once the relevant individuals are no longer engaged in the conduct of the undertaking, the undertaking will be irreparably damaged. That contention is disputed and MI contends that it seeks to preserve and improve the value of the undertaking in terms of its revenues, EBITDA and capacity to achieve business targets and other KPIs.
138 Section 23 of the Federal Court of Australia Act 1977 (Cth) provides a sufficient statutory foundation upon which the Court, being seized of jurisdiction under the TPA, might make an order (described as an injunction order or otherwise) in aid of final relief in a proceeding before the Court or in aid of protecting the integrity of its processes once set in motion.
139 Nor is it necessary that an injunction be sought in the principal proceeding. An order in the nature of an injunction directing a party to take particular steps (rather than enforcing negative stipulations), made in aid of relief sought in the principal proceeding, is also supported by s 80 of the TPA. If the jurisdiction acquired by the Court under the TPA is regarded as an exhaustive code of the available statutory remedies in the relevant circumstances confronting the Court, an order in aid of relief sought in the principal proceeding is supported by s 80 of the TPA. If the jurisdiction under that Act is not an exhaustive code, the power to make an order in each of the two circumstances described above is supported by s 23 of the Federal Court of Australia Act. Such an order may be made against a non-party to the principal proceeding such as HWL (as presently constituted).
140 It is uncontroversial to suggest that a power to prevent the frustration of a Court's process should be accepted as an established part of the armoury of a court of law and equity and that the power to grant relief in relation to a matter in which the Federal Court has jurisdiction is comprehended by the express grant to the Court by s 23 of the Federal Court of Australia Act. Any order framed in the exercise of that power must fall squarely within the limits set by the purpose which the order is properly intended to serve. The moulding of the order will depend entirely upon the circumstances of each particular case. The judicial power to make a protective order of this kind may be exercised according to the exigencies of the case: Jackson v Sterling Industries Limited (1987) 162 CLR 612 at 623. Normally, of course, orders of this kind are framed in the context of a debtor seeking to deal with assets in a way which would render any judgment nugatory.
141 The general principle which informs the exercise of the power to grant an interlocutory order is that the Court may make such orders, at least against the parties to the proceeding against whom final relief might be granted, as are needed to ensure an effective exercise of the jurisdiction invoked. Once the relief is sought, however, against non-parties, the focus of the order must be one which serves the "administration of justice": Cardile v LED Builders Pty Limited (1999) 198 CLR 380 at [42].
142 The question then in this case is whether on the evidence, there is a risk or threat to the conduct of the HWL undertaking (in which the shares the subject matter of the principal proceeding relate) during the period up to judgment (and 14 days thereafter) and whether the Court ought to intervene so as to protect the integrity of its own adjudicative and deliberative processes once set in motion.
143 The contest seems to be this.
144 On one view, the respondents say that the steps MI proposes to take as shareholder will operate to preserve the conduct of the undertaking and should the Court make an order for re-transfer of the shares, that order can be given effect and will take its course according to law. On the other hand, the applicants say that the close and historical association with the development and conduct of the business undertaking by particular individuals and their relationship with customers is central to the preservation of the value of the undertaking. It is not necessary to resolve that question. It is clear, however, that in order to preserve the integrity of the undertaking on the assumption that the propositions advanced by Mr Gee have some force, the Court does not have power to "extend" contracts which will expire according to their terms. The question is whether it is appropriate to fashion an order which would address the concerns of the applicants and at the same time balance the interests of the respondents as parties to the proceeding, during the period between now and the pronouncement of judgment in the principal proceeding.
145 One such order would be an order directing HWL, upon the expiration of the employment agreements between that company and Mr Gee and Mr Joiner, to retain those individuals in their present roles until the pronouncement of judgment in the principal proceedings (and 14 days thereafter), on the terms and conditions, from week to week, upon which those individuals were employed as at 10 September 2014. Such an order would be subject to an undertaking being given by Mr Gee that he would, in good faith, discharge the responsibilities described in cls 2.2 and 2.3 of the former contract of employment and that he would, in good faith, discharge the primary objectives and primary responsibilities described in Sch 1 of the agreement. Clause 2.2, of course, casts an obligation on Mr Gee to comply with all reasonable and lawful directions of the Board of HWL.
146 Such an order would be subject to an undertaking being given by Mr Joiner in similar terms.
147 Such an order serves the purposes earlier described. Since such an order adequately serves those purposes, there is no necessity to make an order in relation to Mr Alan Bawden Grant, Mr Leon Brosnan or Mr Michael Brosnan.
148 I propose to make orders as contemplated by [145] and [146] of these reasons.
149 Such orders are made on the footing that the applicants give the usual undertaking as to damages.
I certify that the preceding one hundred and forty-nine (149) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Greenwood.