Brosnan v Katke [2015] FCA 203 | Case summary

Brosnan v Katke [2015] FCA 203 | Case summary | Zoe

[12]

PART i - BACKGROUND 1 In these proceedings there are nine applicants seeking relief in relation to particular transactions in their capacity as former shareholders in a company called Health World Limited ("HWL") and two of those applicants also bring claims in a trustee capacity in addition to their own individual claims. One of the nine individuals solely brings a claim in a trustee capacity. 2 Put simply for present purposes, the litigation concerns these things. 3 First, the circumstances in which the applicants entered into an agreement dated 27 April 2005 by which they transferred their shares in HWL to the buyer of those shares, a company called Metagenics Australia Pty Ltd ("MAPL") which was, either directly or through shareholdings in other controlled entities, a wholly owned entity of a company called Metagenics Inc ("Metagenics"). 4 Second, whether representations were made by individuals acting on behalf of MAPL and Metagenics which induced the applicants to enter into the agreement of 27 April 2005 and the legal character of any such representations. 5 Third, the circumstances in which the applicants entered into a further agreement of 31 July 2009 with MAPL, Metagenics, Mr Jeffrey James Katke and Dr Jeffrey Bland, which, among other things, had the effect of compromising claims of the applicants in relation to the contended content and legal character of representations said to have been made to the applicants and upon which they say they relied in entering into the agreement of 27 April 2005. 6 Fourth, an examination of the scope, content and legal character of contended representations said to have been made to the applicants by individuals on behalf of MAPL and Metagenics said to have induced them to enter into the agreement of 31 July 2009. 7 Fifth, the events that occurred consequent upon the parties entering into the agreement of 31 July 2009 and the question of whether particular events disentitle the applicants to the relief they claim, should the applicants otherwise make good their contentions on the causes of action in suit and the remedies said to be available to them. 8 Sixth, remedies more broadly and particularly the calculation of damages as an alternative remedy. 9 Seventh, events in question that extend from mid-2003 to the exercise of a Put Option on 14 April 2014. 10 As to the applicants, the nine applicants in the proceeding are Mr Michael Brosnan, Mr Leon Brosnan, Mrs Mary Brosnan, Mr Alan Gee, Mr Alan Grant, Mrs Barbara Grant, Mr Alan David Grant, Mr Michael Curley and Mr Graeme Joiner. All the applicants were shareholders in HWL. That entity conducts the business undertaking of procuring the production and supply of vitamin and dietary supplements. The business of HWL was established in approximately 1985 by Mr Michael Brosnan and his father, Mr Leon Brosnan. Mrs Mary Brosnan is Mr Leon Brosnan's wife and the mother of Mr Michael Brosnan. Mr Leon Brosnan, Mrs Mary Brosnan and Mr Michael Brosnan were the majority shareholders in HWL. 11 Since approximately 1998, Mr Alan Gee, a qualified Chartered Accountant, has been the Managing Director of HWL. He took over that role from Mr Alan Bawden Grant who is also a qualified Accountant. Mrs Barbara Grant is Mr Grant's wife. Mr Alan David Grant is the son of Mr Alan Bawden Grant and Mrs Barbara Grant. 12 Mr Michael Curley was an employee of HWL. Mr Graeme Joiner has been employed by HWL as its Marketing Manager. 13 As to the respondents, the position is this. 14 The first respondent is Mr Jeffrey James Katke. 15 Mr Katke is a Director of Metagenics, the third respondent. 16 In 1983, Mr Katke founded a company called Metagenics Inc incorporated in the State of California in the United States. On or about 11 February 2006, he caused a company, also named Metagenics Inc, to be incorporated in the State of Delaware in the United States. In May 2006, Mr Katke caused the California company to be merged with and into the Delaware company. The merged company is called Metagenics Inc. In the course of the evidence, Mr Katke refers to the California company, the Delaware company and the merged entity as "Metagenics". Mr Katke also observes that to the extent that he refers, in his evidence, to Metagenics at a moment in time when only Metagenics California or Metagenics Delaware was in existence, the relevant reference is to the entity in that period. 17 In the course of these reasons, I refer to the California company, the Delaware company and the merged entity as "Metagenics" and to the extent that it becomes necessary, as a function of the questions in issue in the proceeding, to identify whether a reference to Metagenics is a reference to the California company, the Delaware company or the merged entity at a particular time, I will do so. 18 Mr Katke was the Chief Executive Officer of Metagenics from its establishment in 1983 until 16 August 2010. Metagenics owns all of the issued shares in Metagenics Far East Pty Limited ("Metagenics Far East") which in turn owns all of the issued shares in MAPL, the second respondent. MAPL was incorporated on 22 April 2005. MAPL owns all of the issued shares in HWL. Mr Katke was a Director and Chief Executive Officer of Metagenics Far East between 13 April 2005 and 16 August 2010 and a Director of MAPL between 22 April 2005 and 25 July 2011. He was a Director of HWL between 1 October 1999 and 1 February 2011. 19 Another entity mentioned in the course of the evidence is MetaProteomics, LLC ("MetaProteomics"). Between 12 August 2002 and 16 August 2010, Mr Katke was a Manager of MetaProteomics which is a wholly owned subsidiary of Metagenics and is the research and development entity associated with Metagenics. 20 A further entity mentioned in the course of the evidence is KinDex Therapeutics, LLC ("KinDex"). Mr Katke says that between 11 September 2009 and 1 March 2014 he was a Director of KinDex. KinDex was formed in 2009 and is a party to a Patent and Know-How Licence Agreement with MetaProteomics pursuant to which MetaProteomics licenses to KinDex particular patents, patent applications and related know-how owned or controlled by MetaProteomics. KinDex was reorganised to accommodate new investors on 1 March 2014 and is now called KinDex Pharmaceuticals Inc ("KinDex Pharmaceuticals"). Mr Katke is a Director of KinDex Pharmaceuticals. 21 Mr Jerry Morey is not a party to the proceedings. 22 However, Mr Morey was engaged in an extensive number of exchanges with one or more of the applicants in relation to matters relevant to questions in issue in the proceedings. Between 2 December 1996 and 15 May 1998, Mr Morey was the Corporate Controller of Metagenics. From 15 May 1998 until 31 December 2011, he was the Chief Financial Officer of Metagenics and between 2009 and 2011 he also held the role of Chief Operating Officer. Between 22 April 2005 and 31 December 2011, he held a position as Secretary on the Board of MAPL. He was also a Director of HWL between 1 June 2005 and 22 July 2010. Since the incorporation of Meta Holdings LLC, Mr Morey has held a position, in his personal capacity, as a "Member Manager" for that company. Meta Holdings LLC is a company established in 2009 to hold the minority interest of the applicants (described as the former shareholders in Metagenics) after the acquisition, described later in these reasons, by a special purpose vehicle established by a company called Alticor Inc. Mr Morey is also a minority unitholder in MetaRx Holdings LLC, a company which has a majority interest in a company called KinDex Therapeutics LLC. That company is a joint venture biotechnology company set up at the time of the Alticor acquisition. The elements of these transactions are described later in these reasons. 23 Dr Jeffrey Bland is the fourth respondent. Dr Bland is the Chief Science Officer of Metagenics and aspects of his role will be mentioned later in these reasons. 24 Before examining the precise content of the applicants' contentions as framed by the consolidated third further amended statement of claim (the "pleading"), I will address aspects of three principal agreements central to the litigation. The first is an agreement dated 12 September 2003 which represents the foundation contractual arrangements in place prior to the parties entering into the agreement of 27 April 2005. The second agreement is the Share Purchase Agreement of 27 April 2005 and the third agreement is the Settlement Deed made between the Metagenics Group and the former HWL shareholders dated 31 July 2009.

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30 By cl 6.2, Metagenics initially acquired 10% of the issued shares in HWL. By cl 7.1, Metagenics enjoyed an option to acquire a further 10% of the issued shares in HWL within 90 days of receiving HWL's audited financial statements for the 30 June 2005 financial year, a further 10% (when duly exercised) consequent upon receiving the 30 June 2006 financial year statements and a further 21% (when duly exercised) consequent upon receiving the 30 June 2007 financial year statements. At that point, Metagenics would have acquired, should the options have been exercised, 51% of the issued share capital in HWL. 31 Clause 7.1(e) of the 2003 Agreement provides that where Metagenics has exercised each of the options consequent upon receipt of the financial statements for the financial years ending 30 June 2005, 30 June 2006 and 30 June 2007 and has thus acquired a 51% controlling interest in HWL, Metagenics must (subject to any approval required under the Foreign Acquisitions and Takeovers Act 1975 (Cth)) exercise the option expiring within 90 days of receipt of the audited financial statements for HWL for the financial year ending 30 June 2008 with the result that Metagenics would then own 74.4% of the issued share capital of HWL. 32 Clause 7.1(d), together with Annexure C, to be mentioned further shortly, sets out a mechanism for determining the option purchase price per share. 33 By cl 8, the parties to the agreement put in place particular provisions governing the management and control of HWL which took effect upon completion of the initial 10% share sale in HWL. As to the Board, the maximum number of directors of HWL would be six and initially the Board would be comprised by Mr Leon Brosnan, Mr Michael Brosnan, Mr Alan Gee, Mrs Mary Brosnan and Mr Jeffrey Katke. In the period that Metagenics owned more than 9% of the issued shares but less than 50%, Metagenics would be entitled to appoint at least one director to the Board and in circumstances where it owned more than 50% of the shares it would be entitled to appoint the majority of the directors. Mr Michael Brosnan would be Chairman of the Board whilst Metagenics owned less than 50% of the issued shares. Subject to cl 8.1(i), decisions of the Board would be by simple majority with the Chairman having a casting vote in the event of deadlock. 34 Clause 8.1(i) provides that unanimous resolutions would be required for the following decisions (among other things): a change of strategic direction for HWL; disposal of more than 10% of HWL's assets; new share issues; dissolution or liquidation of HWL or any part of the business; adoption of accounts; variation to HWL's dividend policy "which is to target a distribution of up to 40% of earnings to shareholders each financial year"; making of investments outside of the existing HWL business or determining to carry on a new business; a sale of HWL's entire undertaking; and, raising new debt in circumstances where HWL's total debt would represent greater than five times the then current shareholders' equity less intangible assets. 35 As to business planning, cl 8.1(o) provides that by 31 May each year the Managing Director must prepare and submit to the Board for approval budgets addressing expenditure on capital and revenue accounts and a Business Plan for the forthcoming year. 36 As to any on-market listing of shares, cl 8.1(s) provides that subject to cl 8.1(t), if at any time during the term of cl 8 (which seems to contemplate particularly the period during which Metagenics owns greater than 9% but less than 50% of the issued shares in HWL), Metagenics resolves to sell Metagenics's business, or all the issued shares in Metagenics, or otherwise resolves to float or list all of Metagenics's shares on any stock exchange, Metagenics must use its best endeavours to procure that HWL's business undertaking and, or alternatively, shares in HWL, are also sold as part of the Metagenics's business or the shares in Metagenics. 37 Clause 8.1(t) provides that the parties agree to negotiate in good faith the precise mechanism which might be adopted for achieving those matters contemplated by cl 8.1(s) including valuation multiples and a discount on value. 38 As to commissions, by cl 8.1(y), the parties recognise that Metagenics and HWL are parties to a Licence Agreement dated 28 August 1997 regulating the distribution by HWL in Australia of certain products of Metagenics and having regard to the initial 10% share sale and the arrangements described in cl 8 of the agreement, Metagenics accepts that HWL will accrue, rather than pay, a liability for royalties payable to Metagenics for the sale of licensed products for the months of February, March and April 2003, with those royalties to be paid in April, May and June 2004, respectively. 39 The essential valuation method adopted by Annexure C is to identify, when valuing HWL, the relevant band of revenue growth (of which there are eight) achieved by HWL from the previous financial year and strike a value based on a relevant multiple for that band of EBITDA (as defined in Annexure C) for that previous financial year. If the revenue growth, for example, is 3% or less, the multiple is four times EBITDA. The value so determined is reduced for the option periods ending within 90 days of 30 June 2006, 2007 and 2008 by the accrued value of commissions not paid to Metagenics under the Licence Agreement. The valuation method also offsets any interest-bearing debt and strikes the net value per issued share. 40 Clause 11 contains a supply arrangement by which Metagenics will seek regulatory approval in Australia for the manufacture and supply of vitamin and nutrient tablet products and HWL will provide Metagenics with a description of 20 tablet products which it will require Metagenics to manufacture and supply to it so as to meet HWL's distribution requirements. Each order is to be for a quantity of not less than 300,000 tablets across the tablet range. Clause 11.1(d) deals with the Metagenics supply price which must be competitive. The supply arrangement can be terminated by HWL subject to particular conditions. 41 Clause 9.1 recognises that particular commercial property relevantly connected with HWL is an asset of the HWL Property Trust and the unitholders in the Trust at the relevant date are recited as the eight shareholders in HWL set out in Column 3 of Annexure D. Just as the initial 10% share sale is to be effected by share transfers from Mr Michael Brosnan, Mr Leon Brosnan and Mrs Mary Brosnan, those unitholders would also transfer 10% of their units in the Trust with like unit transfer arrangements in place in parallel with share transfers by the shareholders. 42 Clause 10.1(a)(i) of the 2003 Agreement provides that the units in the HWL Property Trust must at all times be held by a unitholder who is a shareholder in HWL in approximately the same percentage as their shareholding in HWL, and where the interest of Metagenics as a shareholder in HWL increases through the exercise of options, the interest of each unitholder is to be varied so as to ensure that the units are at all times held by a unitholder who is a shareholder in HWL in approximately the same percentage as their HWL shareholding.

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The Share Purchase Agreement dated 27 April 2005 43 By the 2005 Share Purchase Agreement (the "2005 Agreement"), the applicants agreed to sell their remaining 183,701 shares in HWL to MAPL (the "buyer") for $39,600,000 ("$39.6M"). MAPL would be, at the Completion Date (defined to mean 16 May 2005), the beneficial owner of the 20,408 shares in HWL acquired by Metagenics under the 2003 Agreement. 44 Clause 2 of the 2005 Agreement provides that the consideration of $39.6M is made up of three components. 45 First, a combination of cash of $6.5M payable among the applicants as shown in Sch 1 to the 2005 Agreement; the transfer of "Preferred Stock A" in Metagenics to the applicants as shown in Sch 1 to the value of $14,868,000; the transfer of "Common Stock" in Metagenics to the applicants (other than Mr Gee as Trustee and Mr Joiner) in accordance with Sch 1 to the value of $17,291,562; and, procuring Metagenics to issue Common Stock in Metagenics to Mr Gee as trustee, and Mr Joiner, as shown in Sch 1 to the value of $940,438.00, amounting in all to $39.6M: cl 2.1. 46 Second, a component represented by the amount of any compensation HWL might recover from the liquidator of Pan Pharmaceuticals Limited adjusted to take account of any tax payable by HWL (and legal and accounting costs relating to the compensatory payment) the net amount of which would be distributed to all the shareholders of HWL according to their respective shareholding interest in HWL at the day before the Completion Date: cl 2.3. 47 Third, an amount equivalent, in aggregate, to 30% of the "after tax net profits" of HWL distributed in the way set out in Sch 3, in each financial year (or part thereof) during the period commencing on the Completion Date and ending on the earlier of "the date that any stock in Metagenics Inc lists on any recognised stock exchange" and "the date that is 7.5 years after the Completion Date": cl 2.4(a). The amount so determined would be payable quarterly by the buyer within 45 days of the end of the March, June, September and December quarters. 48 From the Completion Date to the end of the cl 2.4(a) period, the buyer agrees to procure HWL to conduct the undertaking of HWL in a normal, proper and efficient manner: cl 2.4(e). 49 By cl 2.4(f), the parties also agree that cl 2.4 will cease to apply during the period contemplated by cl 2.4(a) in the event that the cumulative payments made by the buyer to the applicants under cl 2.4 "aggregate to AU$15 million" and in that event the buyer "will no longer be obliged to pay any further amount to the [applicants] in accordance with this clause 2.4". 50 The reference to Preferred Stock A in cl 2 is defined to mean "Preferred Stock A in Metagenics Inc which are redeemable for cash" at the option of Metagenics at any time, or at the option of the applicants at the earlier of "the date Metagenics Inc lists its Common Stock on any Stock Exchange in the United States of America"; the date of completion of "a transfer or sale of more than 50% of the issued shares or stock of Metagenics Inc in relation to a transaction occurring subsequent to Completion"; "the date 7.5 years from the Completion Date". 51 The reference to Common Stock is defined to mean "common stock issued by Metagenics Inc". 52 The change in position of the applicants by operation of the 2005 Agreement (and corresponding obligations assumed by the counter-parties to the 2005 Agreement) is reflected in Sch 1 to that agreement which, relevantly, is in these terms: Seller Number of Shares Cash Consideration (AU$) Preferred Stock A in Metagenics Inc (shares credited to AU$1.00 per share fully paid) Common Stock in Metagenics Inc (shares credited to AU$7.2864 per share fully paid) Total Consideration Michael Brosnan 70,420 $3,066,000 6,043,000 802,290 $14,954,565 Leon Brosnan 48,822 $1,800,000 5,041,000 496,613 $10,459,371 Mary Brosnan 26,854 $1,440,000 2,323,000 252,236 $5,600,791 Alan Gee 8,083 256,907 $1,871,850 Alan Gee as Trustee 2,020 64,203 $467,789 Alan Bawden Grant 3,429 $43,000 326,000 54,493 $766,041 Alan Bawden Grant as Trustee 6,500 $82,000 619,000 103,297 $1,453,632 Barbara Lee Grant 2,600 $33,000 247,000 41,319 $581,054 Alan David Grant as Trustee 2,829 $36,000 269,000 44,958 $632,568 Michael Curley 10,103 321,110 $2,339,639 Graeme Joiner 2,041 64,870 $472,649 Total 183,701 $6,500,000 $14,868,000 $18,232,000 $39,600,000

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54 The cl 3.1 conditions precedent to Completion were, among other things, the release of guarantees given by Mr Michael Brosnan, Mr Alan Gee and Mr Alan Bawden Grant; MAPL becoming the registered owner of 2,373,223 shares in the Common Stock and 14,868,000 Preferred Stock A; and, lessors of particular premises giving necessary consents under particular property leases. 55 At the Completion Date, the buyer agreed to provide the applicants the cash consideration described in cl 2.1(a) and Sch 1; provide a Shareholders Agreement executed by Metagenics concerning the shareholding of the applicants in Metagenics; and procure Metagenics to issue the Common Stock to Mr Alan Gee and Mr Graeme Joiner as earlier mentioned. 56 By cl 6.2, in the period between the Completion Date and Metagenics listing its Common Stock on any United States Stock Exchange, HWL would have six directors and those directors would be the directors of HWL immediately prior to Completion plus Mr Jerry Morey. By cl 4.2 of the 2005 Agreement, the applicants assumed a series of obligations. As to directors' fees, the applicants agreed to provide the buyer with shareholder resolutions to the effect that on Completion the aggregate amount of directors' fees would be AU$644,950 plus expenses, per annum, divided between the directors in such proportion as they might determine in accordance with HWL's constitution, and upon redemption of the Preferred Stock A in Metagenics, the aggregate amount of directors' fees would be AU$218,000 plus expenses, per annum similarly so distributed. 57 Also, the applicants agreed to provide the buyer with directors' resolutions to the effect that the annual directors' fees upon Completion, of AU$644,950, would be distributed between the directors in the following proportions: Mrs Mary Brosnan: AU$72,700; Mr Leon Brosnan: AU$253,316; and, Mr Michael Brosnan: AU$318,934. Also, the applicants agreed to provide the buyer with directors' resolutions to the effect that the annual directors' fees upon redemption of the Preferred Stock A in Metagenics, of AU$218,000 would be distributed between the directors in the following proportions: Mrs Mary Brosnan: AU$32,700; Mr Leon Brosnan: AU$76,300; and, Mr Michael Brosnan: AU$109,000. 58 As part of the cl 4.2 obligations of the applicants, they agreed to provide the buyer with company officer agreements with HWL executed by Mrs Mary Brosnan, Mr Leon Brosnan and Mr Michael Brosnan in the form set out in annexures to the 2005 Agreement and an executed agreement with Mr Alan Bawden Grant in the form of another annexure. Also, senior executive employment agreements with HWL executed by Mr Michael Curley, Mr Graeme Joiner and Mr Alan Gee in the form of particular annexures to the 2005 Agreement were to be provided. Also, a shareholders agreement between the applicants and Metagenics executed by the applicants in substantially the form of another annexure to the 2005 Agreement was to be provided to the buyer. 59 By cl 10.1(a), the applicants represent and warrant to the buyer that each warranty contained in Pt 1 of Sch 2 to the 2005 Agreement "is correct and not misleading on the date of this agreement and will be correct and not misleading on each day after [that date] up to and including the Completion Date, as if made on and as at each of those dates". By para (f) of Pt 1 of Sch 2, the applicants warrant that the Annual Financial Report for HWL and its controlled entity for the financial year ending 30 June 2004 discloses in all material respects a true and fair view of the state of affairs, financial position and assets and liabilities of HWL and its controlled entity. 60 By cl 10.1(b), the buyer and Metagenics represent and warrant certain matters contained in Pt 2 of Sch 2. Those matters include matters relating to the Preferred Stock A, the Common Stock, relevant approvals, the control by Metagenics of all of the issued capital of MAPL and a warranty at para (e) that the "financial statements of Metagenics Inc provided to the [applicants] fairly present, in all material respects, the financial condition of the operations of Metagenics Inc, in accordance with generally accepted accounting principles applying in the United States of America". 61 By cl 11, the applicants (as shareholders and unitholders in the unit trust) and the buyer (for MAPL and Metagenics), agreed to amend the 2003 Agreement so as to delete the cl 7 options to purchase under the 2003 Agreement. The cl 8 management and control of HWL provisions were also deleted except cl 8.1(a)(a). The cl 11 supply arrangements were deleted and Annexures B and C were also deleted. By cl 11.2, the parties agreed that the buyer and its related entities were not obliged to purchase any units in the HWL Property Trust, and upon purchase of the shares under the 2005 Agreement, cl 10.1(a)(i) of the 2003 Agreement would no longer apply. 62 In substance then (apart from the precise detail of it), the 2005 Agreement brought about the sale by the applicants of their shares to the buyer as contemplated by Sch 1 and as reflected at [52] of these reasons. It provided for additional remuneration in the form of the potential compensatory payment in respect of the Pan Pharmaceuticals Limited matter and continuing remuneration, annually, as reflected in cl 2.4(a), of 30% of the after tax net profits of HWL for the period so described in that clause and distributed quarterly to the recipients as described in Sch 3 and as reflected at [53] of these reasons. 63 It provided a mechanism for determining the quantum of directors' fees payable annually at relevant moments in time to Mr Michael Brosnan, Mr Leon Brosnan and Mrs Mary Brosnan and made provision for warranties as to the state of the financial accounts of HWL for the financial year ending 30 June 2004 and the compliance of the financial statements of Metagenics with the "generally accepted accounting principles" applying in the United States of America. 64 It recognised that particular company officer agreements in a particular form would be put in place by Completion as between HWL and Mr Michael Brosnan, Mr Leon Brosnan, Mrs Mary Brosnan and Mr Alan Bawden Grant, and that senior executive employment agreements in a particular form would be put in place between HWL and Mr Alan Gee, Mr Michael Curley and Mr Graeme Joiner by Completion.

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Settlement Deed - Metagenics Group and former HWL shareholders dated 31 July 2009 65 This agreement (the "Settlement Deed") is made between the applicants, Metagenics Inc (the Delaware corporation), MAPL, Mr Katke and Dr Bland. 66 The Settlement Deed seeks to set the scene for the operative provisions by reciting a range of matters. 67 The parties recite that under the 2005 Agreement, MAPL acquired all of the issued shares in HWL (apart from the 10% interest in HWL held by Metagenics prior to Completion of the 2005 Agreement which would otherwise be transferred to MAPL). The parties recite that each of the applicants received, as consideration for the sale of their shares in HWL, the consideration reflected in Sch 1 to the 2005 Agreement although, of course, additional consideration apart from the Sch 1 factors is provided for by the 2005 Agreement, as earlier described ([46] and [47]). 68 At Recital C, the parties recognise that since completion of the 2005 Agreement, a dispute had arisen between Metagenics, MAPL, directors or officers of those companies on the one hand, and the applicants as former shareholders in HWL, on the other. The parties recite that the dispute related to an allegation by the applicants as former shareholders in HWL that Metagenics, MAPL or directors or officers of those corporations "made misrepresentations which induced [the applicants] to agree to the terms of the [2005 Agreement]". The Recitals recite that the applicants had alleged, among other things, that "the methods used by Metagenics to value Metagenics resulted in the value of Metagenics being overstated in relative comparison to the values of HWL" [emphasis added] and that the applicants had alleged that they had "suffered loss because the overvaluation of Metagenics effectively reduced the amount of consideration provided to each [applicant] under the [2005 Agreement]" [emphasis added]. 69 That dispute is recited as constituting "the Dispute" the subject of the Settlement Deed. 70 Recital D recites that, without admission of liability, the parties to the Settlement Deed, including the respective directors and officers including Mr Katke and Dr Bland of the corporate parties, "have agreed to settle the Dispute on the terms set out in this deed". 71 By cl 1.1(a), subject to the terms of the Settlement Deed, Metagenics agrees to settle the Dispute and issue and allot to the applicants, as "Additional Consideration" for the sale of their shares in HWL under the 2005 Agreement, the following fully paid stock distributed in the manner reflected later in these reasons: 250,538 shares of Preferred Stock B (cl 1.1(a)(i)); 35,000 shares of Preferred Stock B subject to a particular condition (cl 1.1(a)(ii)); 286,328 shares of Preferred Stock B exchanged for the redemption of US$4M of Preferred Stock A owned by the applicants (cl 1.1(a)(iii); and, 178,155 shares of Preferred Stock C (cl 1.1(a)(iv)). The Preferred Stock B and Preferred Stock A have all of the rights and benefits attaching to Common Stock in Metagenics as well as a "Floor Value" applying upon the occurrence of a "Liquidity Event" (as defined). 72 Clause 1.1(a) provides that the Additional Consideration is to be distributed in the following way: Name Number of Preferred Stock B to be issued under cl 1.1(a)(i) Number of Preferred Stock B to be issued under cl 1.1(a)(ii) Number of Preferred Stock B to be issued under cl 1.1(a)(iii) Number of Preferred Stock C to be issued under cl 1.1(a)(iv) Michael Brosnan 96,041 0 116,376 68,294 Leon Brosnan 66,585 0 97,080 47,348 Mary Brosnan 36,624 0 44,736 26,043 Alan Gee 11,024 14,000 0 7,839 Alan Gee as Trustee 2,755 0 0 1,959 Alan Bawden Grant 4,677 0 6,278 3,325 Alan Bawden Grant as Trustee for AB Grant Family Trust 8,865 0 11,921 6,304 Barbara Lee Grant 3,546 0 4,757 2,522 Alan David Grant as Trustee 3,858 0 5,180 2,744 Michael Curley 13,779 10,500 0 9,798 Graeme Joiner 2,784 10,500 0 1,979 TOTALS 250,538 35,000 286,328 178,155

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73 By cl 1.1, the parties agree that on the allocation and issuance of the shares so described, and the redemption of the Preferred Stock A held by the applicants, "the Dispute shall be deemed settled". 74 By cl 1.1(b), Mr Jeffery Katke and Dr Jeffery Bland agree to pay to the applicants "Further Additional Consideration" of US$4,108,959.40 within 15 business days of Completion of a particular "Proposed Transaction" or a "Liquidity Event" (where the particular additional circumstances as defined occur) as contemplated by cl 18.1 to be mentioned further shortly. Clause 1.1(b) describes the Further Additional Consideration as representing the purchase price, in accordance with cl 18, for the purchase of "BioTech Common Units" from the applicants (as held by them according to Sch 11 to the Settlement Deed). The applicants would only receive the Further Additional Consideration if the "Proposed Transaction", including the formation of the "BioTech Joint Venture", occurs (that is, completes). 75 The "Proposed Transaction" in contemplation at 31 July 2009 is defined to mean the proposed acquisition by Alticor Inc ("Alticor"), a corporation incorporated in the United States (or by one of its affiliates) of 60% of the issued and outstanding Common Stock in Metagenics (with the discharge of Senior Subordinated Secured Promissory Notes maturing on 19 May 2013 and 30 April 2012 held by Bison Capital Structured Equity Partners LLC ("Bison Capital")); the discharge of three classes of Bison Capital warrants; the redemption of the "Remaining Preferred Stock A" and, Alticor's acquisition of 28.5% of the "BioTech Joint Venture". 76 The "Remaining Preferred Stock A" is the Preferred Stock A remaining in the hands of the applicants after the redemption of the Preferred Stock A in exchange for the 286,328 shares of Preferred Stock B under cl 1.1(a)(iii). 77 The "BioTech Joint Venture" is defined to mean "Bio Tech JV, LLC", a company to be owned by Alticor as to 28.5% and "Bio Tech Holdco" as to 71.5%, as part of the "Proposed Transaction". 78 "Bio Tech Holdco" is defined to mean a company established by "Holdco" to hold the 71.5% interest in the joint venture and "Holdco" is defined to mean a company established by Metagenics (as part of a reorganisation contemplated by the Settlement Deed) in which the applicants are to hold the same proportionate interest as their holding of stock in Metagenics at the time of conversion of that stock to the new reorganised interests. The reorganisation contemplated by the Settlement Deed was one in which Holdco (and an entity wholly owned by it) would be established by Metagenics and merged with Metagenics whereby Metagenics would become a wholly owned subsidiary of Holdco and each outstanding share of Common Stock, Preferred Stock A, Preferred Stock B and Preferred Stock C in Metagenics would be converted into units in Holdco called the "Holdco Units" comprising Holdco Common Units, Holdco A, Holdco B and Holdco C Units. 79 Each class of Holdco Units would have the same rights as the corresponding class of shares so converted. 80 Once Holdco was established, the Proposed Transaction contemplated that Holdco would form Bio Tech Holdco to hold Holdco's 71.5% interest in the BioTech Joint Venture and Bio Tech Holdco would then issue "BioTech Common Units" to the existing Holdco unitholders made up of former Metagenics shareholders who had converted shares to units in the reorganisation. 81 The BioTech Common Units to be held by the applicants (and purchased from them) as part of the Further Additional Consideration, are the units referred to in cl 1.1(b), to be acquired in the event the Proposed Transaction proceeded to completion. 82 As to the reorganisation, by cl 2.1, each of the applicants agreed and consented to the reorganisation to be effected at a time to be determined by Metagenics, and by cl 1.4 each applicant agreed to the conversation, prior to the reorganisation, of all of the Common Stock issued pursuant to the 2005 Agreement, into Preferred Stock B on a one-for-one basis. Part 1 of Sch 3 sets out the shareholding of the applicants immediately after the Settlement Date (as defined) of the Settlement Deed, having regard to their prior shareholding and the allocation of the additional classes of shares under cl 1 of the Settlement Deed. 83 Part 2 of Sch 3 sets out the holdings of the applicants immediately after the conversion contemplated by the cl 2 re-organisation. 84 The holdings of the applicants, upon conversion, were to be these: Name Holdco Holdco Holdco Holdco Common Units A Units B Units C Units Michael Brosnan 4,055,017 533,333 68,294 123,610 Michael John Brosnan and Leon Michael Brosnan as trustee for the Michael Brosnan Superannuation Fund 0 0 0 20,000 Leon Brosnan 3,382,639 362,310 47,348 82,371 Leon Michael Brosnan and Mary Monica Brosnan as trustee for the Brosnan Super Fund 0 0 0 10,000 Mary Brosnan 1,558,801 182,254 26,043 0 Alan Gee 0 127,787 7,839 0 Alan John Gee 0 0 0 21,000 Alan Gee as trustee 0 28,436 1,959 0 Alan John Gee and Emma Jane Gee as trustee for the Gee Superannuation Fund 0 0 0 17,000 Alan Bawden Grant 218,757 32,752 3,325 0 Alan Bawden Grant as trustee for the AB Grant Family Trust 415,361 62,105 6,304 0 Barbara Lee Grant 165,739 24,831 2,522 0 Alan Bawden Grant as trustee for the Grant Super Fund 0 0 0 30,000 Alan David Grant as trustee for the Ferntree Superannuation Fund 180,513 27,021 2,744 20,000 Michael Curley 0 152,723 9,798 0 Golden Source Holdings Pty Ltd as Trustee for Spectra Property Trust 0 0 0 10,000 Graeme Joiner 0 39,232 1,979 0 Graeme Roberts Joiner and Nadezhda Jane Joiner as trustee for the Joiner Superannuation Fund 0 0 0 21,000 TOTALS 9,976,827 1,572,784 178,155 354,981

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85 The Settlement Deed also provides for the conversion of Holdco B and C Units to Common Units and the conversion of Preferred Stock B and C held by Holdco to Common Stock. 86 Annexure A to the Settlement Deed sets out the anticipated mechanism by which Alticor would acquire 60% of Metagenics for a cash contribution of US$141.64M (with an implied enterprise valuation of US$264.167M) and a 28.5% interest in the BioTech Joint Venture by contributing US$142,500 for Class B Common Units and US$19.875M for Series A Preferred Units in the joint venture. 87 The parties recognise in the deed that the Annexure A mechanisms might well be subject to change. 88 Put simply for present purposes, having regard to the Settlement Deed and the Stock Purchase Agreement between Showcase Holdings Inc ("Showcase"), Meta Holdings LLC ("Meta Holdings") and Metagenics, the Proposed Transaction appears to have been implemented in the following way. 89 Metagenics caused Meta Holdings (the "Holdco" entity contemplated by Annexure A) to be formed. Meta Holdings then caused Meta Holdings Merger Sub Inc ("MHMS"), and the transitory entity contemplated under the reorganisation provisions to be formed. MHMS merged in and with Metagenics. Meta Holdings then became the sole holder of the Common Stock and the Preferred Stock in Metagenics as part of a conversion of those classes of shares into a right, in the shareholders, to receive units in Meta Holdings with the same rights attaching to the relevant class of units as attached to the like class of shares. Showcase then acquired from Meta Holdings, stock it held in Metagenics acquired on the conversion, and Metagenics issued some new Common Stock to Showcase so as to bring about Showcase's 60% interest (and thus, in effect, Alticor's interest), in Metagenics. 90 Meta Holdings caused MetaRx Holdings LLC ("MetaRx") to be formed as a wholly owned subsidiary. A Biotechnology Joint Venture was established as KinDex Therapeutics Inc ("KinDex") between Alticor (contributing cash), MetaRx (also contributing cash) and Meta Proteomics LLC ("Proteomics"). Proteomics was a wholly owned subsidiary of Metagenics and it contributed intellectual property to the joint venture, by licence. 91 Ownership in KinDex was held 28.5% by Alticor and 71.5% by MetaRx. 92 Consistent with the Settlement Deed, units in MetaRx were distributed directly to the unitholders in Meta Holdings on a pro rata basis. Apart from the stock acquired by Showcase to effect a 60% acquisition of Metagenics, a series of put (and call) options also operated such that in 2012 Meta Holdings had the right to require Showcase to purchase up to 25% of the shares in the Common Stock of Metagenics owned by it; in 2013 Meta Holdings could put a further 25% of the shares in the Common Stock in Metagenics to Showcase; and, in 2014 (and each year thereafter), Meta Holdings could put the remaining Common Stock it held in Metagenics to Showcase. 93 The qualification upon the exercise of the put options was that during 2012 and 2013, Meta Holdings could only require Showcase to purchase up to 40%, in aggregate, of the shares in the Common Stock of Metagenics owned by Meta Holdings as a result of the conversion process. 94 The Settlement Deed was entered into by the parties so as to settle the Dispute, framed by Recital C as earlier described, concerning allegations by the applicants of misrepresentations about, among other things, the relative valuations of Metagenics and HWL, made by officers and directors of, Metagenics and MAPL. The applicants contended, in that dispute, that the representations induced them to enter into the 2005 Agreement and caused them to suffer a reliance loss due to a contended over-valuation of Metagenics. 95 Clause 9 of the Settlement Deed contains a number of warranties given by Metagenics and MAPL. Clause 10 contains a release by the applicants. Clause 11 contains warranties, representations and acknowledgements given by the applicants. 96 As to the warranties given by Metagenics and MAPL, cl 9.1(c) is in these terms: 9.1 Metagenics - Warranties Metagenics and [MAPL] represent and warrant to the [applicants] that: … (c) to the best of their knowledge and belief, the Metagenics Accounts (except to the extent they relate to the HWL Operating Segment) are complete and accurate in all material respects and accurately reflect the financial position of Metagenics at the date of those accounts. For the avoidance of doubt, the parties agree that Metagenics, [MAPL] and Holdco are not liable for any breach of this warranty in relation to the Metagenics Accounts caused by a defect in the Metagenics Accounts or the HWL Accounts in relation to the HWL Operating Segment (e.g. if for instance the accounts for the North American & Europe Operating Segment are misstated by reason of a defect existing in the HWL Accounts); … [emphasis added] 97 The "Metagenics Accounts" are defined to mean the "most recent monthly financial statements, a copy of which is contained in Annexure C". Annexure C consists of a Metagenics document under the reference "June 2009 Financial Results" and bears the description: "The following is management's discussion and analysis of financial condition and results of operations of Metagenics, Inc and Subsidiaries for the period ended June 30, 2009". The analysis addresses a period of six months to 30 June, 2009. 98 The "carve-out" from the cl 9.1(c) warranty concerns the "HWL Operating Segment" which is defined to mean the entities HWL, Health World NZ Limited and Innovative Therapies. The "HWL Accounts" are defined to mean the most recent monthly management accounts of the HWL Operating Segment contained in Annexure D to the Settlement Deed. 99 Clause 10.1 contains a release by the applicants in these terms: 10.1 Release by the Former HWL Shareholders Upon Metagenics providing notification under clause 12.2 to the Former HWL Shareholders of satisfaction of the condition in clause 12.1 and receipt of the Additional Consideration and in consideration of the obligations of JJK and JB under clause 18, the Former HWL Shareholders: (a) release the Metagenics Released Parties from all claims, actions and causes of action (including any claim for costs), past, present and future, relating to: (i) the Dispute; (ii) subject to clause 13.2, any matter in connection with the Share Purchase Agreement; or (iii) any matter in connection with this deed (with the exception of a claim, action or cause of action for breach or enforcement of this deed); (b) agree that the Metagenics Released Parties may plead this deed to bar any claim, action or cause of action (including any claim for costs) brought by one or more of the Former HWL Shareholders relating to: (i) the Dispute; (ii) subject to clause 13.2, any matter in connection with the Share Purchase Agreement; or (iii) any matter in connection with this deed (with the exception of a claim, action or cause of action for breach or enforcement of this deed); and (c) agree not to commence or maintain any claim, action or cause of action (including any claim for costs) against one or more of the Metagenics Released Parties relating to: (i) the Dispute; (ii) subject to clause 13.2, any matter in connection with the Share Purchase Agreement; or (iii) any matter in connection with this deed (with the exception of a claim, action or cause of action for breach or enforcement of this deed). [emphasis added] 100 A corresponding release is given by Metagenics and MAPL at cl 10.2. 101 Clauses 11.4 and 11.5 of the Settlement Deed are in these terms: 11.4 Legal advice The Former HWL Shareholders represent and warrant that they have received independent legal and financial advice (either collectively, individually or both) concerning this deed and their rights and obligations under it. The Former HWL Shareholders acknowledge that Metagenics and Metagenics Australia, in executing this deed, are relying on the representation and warranty contained in this clause 11.4 ("Legal advice"). 11.5 Reliance on own information Subject to the terms of this deed, each of the parties acknowledges that they enter into this deed fully and voluntarily upon their own information and investigation. Each of the parties acknowledges that it is aware that it or its advisers, agents or lawyers may discover facts different from or in addition to the facts that they now know or believe to be true with respect to the subject matter of this deed, but that it is their intention to, and they do, fully and finally absolutely and forever settle according to the provisions of this deed any and all liabilities, claims, disputes and differences which now exist, may exist or have ever existed between the parties relating in any way to the matters the subject of this deed, other than proceedings instituted by any of the parties for breach or enforcement of this deed. 102 Clause 23.1 is an entire agreement clause in the usual form. 103 As to the BioTech Joint Venture contemplated by cl 18.1, the applicants release Metagenics, Holdco, BioTech Holdco, Jeffrey Katke and Jeffrey Bland from any claim in relation to the BioTech Common Units, the BioTech Joint Venture and the subject matter of cl 18. 104 By cl 18.4, the applicants acknowledge that, in exercising their rights in cl 18.1, the applicants do not rely on any statement, representation, warranty, condition, forecast or other conduct which may have been made by, or on behalf of those entities or persons, about the BioTech Common Units and the BioTech Joint Venture, including as to value and that they have satisfied themselves in relation to those matters. 105 As to the ongoing officer and service contracts, the Settlement Deed recognises that on and from the completion of the Proposed Transaction the parties agree that the ongoing employment with HWL of Mr Alan Gee, Mr Graeme Joiner, Mr Leon Brosnan and Mr Michael Brosnan will be governed by the agreements at Schs 12, 13, 14 and 15 respectively: cl 15. 106 By cl 15(e), Metagenics agrees that should HWL terminate the relevant agreements with Mr Michael Brosnan or Mr Leon Brosnan after completion of the Proposed Transaction, it will use all reasonable efforts to require Alticor to purchase the shareholding or units in Metagenics in whatever way that holding might be structured at that time. 107 Clause 11.1 provides that each of the applicants (defined as the former HWL shareholders) represent and warrant that he or she is a "sophisticated investor" within the ambit of s 708(8)(c) or (d) of the Corporations Act 2001 (Cth) for the purposes of all transactions contemplated by the Settlement Deed including the contemplated Reorganisation. They also acknowledge that the offer by Metagenics to issue the Additional Consideration to them in accordance with the allocations reflected in the schedule to the agreement falls within the "sophisticated investor" exemption contained in s 708(8) of the Corporations Act. They also acknowledge that the offer by BioTech Holdco to issue the BioTech Common Units falls within the sophisticated investor exemption. Section 708 of the Corporations Act contains a series of subsections which address the topic of offers in an entity's securities by a person, which do not need disclosures otherwise required by Pt 6D of the Corporations Act. 108 Finally, by cl 16, the operation of the "Earn-out payment" is preserved according to the terms of that clause. 109 It is now necessary to address the way in which the applicants have framed the various claims made in the proceeding, by reference to the pleading.

[27]

117 Sixth, Mr Jeffrey Katke and Mr Jerry Morey impliedly represented that any shares in Metagenics taken by the applicants in exchange for their HWL shares would increase in value by reason of each of the matters the subject of the first five representations such that each applicant would be "better off" by selling his or her shares in HWL to Metagenics. 118 These six matters, said to be in part the subject matter of the later dispute commencing in early 2007, are called the "2005 representations". 119 The next pleaded part of the 2007 dispute concerned another six representations called the "Pfizer representations". As to those matters, the applicants plead that between late 2004 and early 2005 either Mr Jeffrey Katke (as to some representations) or Mr Jeffrey Katke and Mr Jerry Morey as to others, represented to Mr Michael Brosnan and/or Mr Alan Gee (for all applicants) the following matters. 120 First, Metagenics "was in discussions with a large pharmaceutical company, Pfizer which had expressed very strong and imminent interest in licensing an anti-inflammatory product produced by [Metagenics] known as Kaprex" [emphasis added]. 121 Second, the "research on Kaprex indicated it was an effective anti-inflammatory product" [emphasis added]. 122 Third, "Kaprex worked just as effectively as anti-inflammatory products already on the market including Vioxx which had been recalled due to cardiovascular side-effects" [emphasis added]. 123 Fourth, "Pfizer's consumer and drug arms were both interested in Kaprex and its mechanism of action was being reviewed by Pfizer's scientific advisory board" [emphasis added]. 124 Fifth, "a licensing deal with a big pharmaceutical company such as Pfizer with respect to Kaprex and other discoveries would provide substantial revenue to [Metagenics] and increase the value of [Metagenics]" [emphasis added]. 125 Sixth, "[Metagenics] had determined to slow the provision of information to Pfizer to give [Metagenics] time to strengthen its patent position before it entered into a licensing deal" [emphasis added]. 126 The applicants say that they relied upon the 2005 representations and the Pfizer representations which induced them to enter into and complete the 2005 Agreement. They say, put simply, that Metagenics was not ready and could not proceed to an IPO on a recognised US stock exchange in 2005 as the inadequate state of its group accounts and regulatory compliance relating to the listing of securities on a US exchange prevented it from doing so. They say that that position prevailed up to and including July 2007. They also say that Metagenics could "not ever" legitimately hold itself out as a speciality pharmaceutical company; "did not ever" have products for sale, nor products in the process of being developed, which would enable it to hold itself out as a pharmaceutical company; "has not entered into" any licensing deals with Pfizer or any other entity concerning Kaprex; and, "did not achieve" the revenue and EBITDA figures pleaded. 127 Some elements of the 2005 representations and the Pfizer representations concern representations as to future matters, and other elements concern representations otherwise. Put simply for present purposes, the applicants say that the making of the 2005 representations and the Pfizer representations (engaging where relevant s 51A of the Trade Practices Act 1974 (Cth) (the "Act")) is conduct in contravention of s 52 of the Act. 128 A further pleaded contention of the applicants is that in late 2004 and early 2005 "discussions with Pfizer with respect to a licensing deal on Kaprex were put on hold because Pfizer had entered into a restructuring which resulted in a change of personnel and focus" [emphasis added]. Thus, the applicants say the Pfizer representations are false. 129 Alternatively, they say that Metagenics and MAPL failed to discharge a contended duty to disclose the cessation of discussions with Pfizer, prior to the applicants electing to enter into the 2005 Agreement. 130 All of the matters described at paras [110] to [129] of these reasons are the matters at paras 4 to 14 of the pleading and, at para 20 of the pleading, the applicants say that a "consequence" of these paras 4 to 14 matters is that the applicants fell into dispute with Metagenics and MAPL about them. That dispute led to negotiations between December 2007 and July 2009 between Mr Jeffrey Katke, Dr Jeffery Bland and Mr Jerry Morey for Metagenics and MAPL on the one hand, and Mr Michael Brosnan and Mr Alan Gee or variously Mr Michael Brosnan, Mr Leon Brosnan, Mr Alan Gee and Mr Alan Bawden Grant, for the applicants on the other hand, and ultimately the resolution of the dispute about all of the paras 4 to 14 matters on the terms of the 31 July 2009 Settlement Deed. 131 The Settlement Deed was completed. 132 The "Proposed Transaction" with Alticor occurred and proceeded to completion. 133 The reorganisation and conversion occurred. 134 However, the applicants contend that Metagenics and MAPL engaged in conduct in contravention of s 52 of the Act again by making misleading or deceptive representations in respect of three further topics which induced the applicants to enter into the Settlement Deed, namely representations called the "2009 representations" and the "Alticor representations", made between July 2008 and July 2009; and, representations made between late 2004 and July 2009, called the "Patent representations". The applicants say they relied upon (and were induced by) these three classes of representations in entering into the Settlement Deed and thus settled and compromised contended rights to relief they then enjoyed under the Act said to be available to them arising out of the pleaded paras 4 to 14 conduct, concerning the 2005 Agreement. 135 The applicants say they would have been entitled to orders as against Metagenics, MAPL and Mr Jeffrey Katke under ss 82 and 87 of the Act, first, to recover, under s 82 of the Act, the reliance loss or damage suffered by them by conduct of those parties in contravention of s 52 of the Act; and, rescission of the 2005 Agreement under s 87 of the Act and recovery of their shares in HWL. 136 They say the loss they have suffered, by conduct of Metagenics and MAPL in contravention of s 52, which induced entry into the Settlement Deed, is the loss of the opportunity to obtain the relief which would have been available to them arising out of the paras 4 to 14 conduct inducing the 2005 Agreement. The relief now sought, arising out of the 2009 representations, the Alticor representations and the Patent representations, also said to be conduct in contravention of s 52, is rescission of the Settlement Deed, recovery of the HWL shares, or alternatively damages representing the proper measure of the lost opportunity (calculated according to the expert evidence relied upon by the applicants). 137 The content of the 2009 representations, the Alticor representations and the Patent representations relied upon by the applicants is this.

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The evidence in the proceedings 148 The principal primary evidence on behalf of the applicants was given by Mr Alan Gee. 149 Having regard to his professional qualifications, his experience and the role he discharged at HWL, Mr Gee accepted that he had the conduct of the detailed negotiations on behalf of all of the applicants with the respondents. Mr Michael Brosnan, on the other hand, engaged with the respondents, particularly Mr Katke, on a more general level. 150 In examining the claims of the applicants, the logical place to begin is with the events which began to emerge in early 2007 until mid-2009 when the parties entered into the 31 July 2009 Settlement Deed. If the claims in relation to entry into the Settlement Deed are not made out, the applicants must fail. If those claims are made good a sequence of other questions arise. 151 However, before examining the detail of those events, it seems to me necessary to identify, in some chronological detail, aspects of the evidence going to the early period as the claims of the applicants in relation to the 2005 Agreement are said to give the later events their proper context. I propose to examine, at the outset, the sequence of events that occurred throughout the period in issue through the evidence given by Mr Gee as the principal participant for the applicants and also refer to aspects of the evidence of Mr Michael Brosnan, Mr Alan Bawden Grant, Mr Katke, Mr Morey and Dr Bland as relevant engagements with those individuals occur. I will then return to other aspects of the evidence of those individuals and the evidence of the experts about particular matters. 152 Before doing so, it is necessary to say some preliminary things about Metagenics and HWL. 153 In 1985, Mr Michael Brosnan's father, Mr Leon Brosnan, asked Mr Michael Brosnan to help sell health related products as an adjunct activity to Mr Leon Brosnan's pharmacy business. By 1985, Mr Leon Brosnan had met Mr Katke and they had begun to have some business dealings together. By 1986 and 1987, Mr Leon Brosnan and Mr Michael Brosnan began importing and selling products of Metagenics under licence. This was, in effect, the beginning of HWL. HWL also commenced manufacturing its own products in Australia under the name Metagenics. Mr Leon Brosnan, Mr Michael Brosnan and Mrs Mary Brosnan were the original directors of HWL. The business of HWL moved from small premises at Windsor to Breakfast Creek, then to Eagle Farm and ultimately to premises at Northgate. 154 Mr Katke and Mr Michael Brosnan became very close friends. Their families had holidays together. Mr Michael Brosnan regarded Mr Katke as "a mentor". Mr Katke was appointed a director of HWL in October 1999. Many of the email exchanges between Mr Michael Brosnan and Mr Katke are written in very familiar terms and often Mr Michael Brosnan's emails to Mr Katke reflect emphatic references to the importance Mr Michael Brosnan placed upon their friendship. 155 In relation to Mr Michael Brosnan's engagement on particular issues arising as between the applicants and the respondents relevant to these proceedings, Mr Michael Brosnan says that he deferred to Mr Gee's opinions, views and advice on financial matters. He put it this way at T, p 286, lns 7-10: "… if I see Alan Gee's name on it [an email], and if it's to do with figures, I often don't read them. I would ask Alan what - what was his - he was … my advisor, and I would ask him what his view … on the figures were". When asked whether he accepted Mr Gee's advice in respect of these matters, he said at T, p 286, lns 12-13: "I've always accepted Alan's advice". When Mr Gee was asked whether he provided counsel in a financial sense to Mr Michael Brosnan in relation to his involvement with Metagenics Inc, he said: "Did I provide input to him on that? Yes, definitely. Yes": T, p 172, lns 44-46. 156 As to Metagenics, it was established by Mr Katke and his family in 1983 or so. HWL's distribution rights for Metagenics nutritional products was the subject of 1997 licence agreement. In the late 1990s, Metagenics took advice from Lehman Brothers (and other investment banks) about undertaking an IPO of its securities. Metagenics was considered to be too small for an IPO. Growth was the focus. In 2000 or so, Metagenics acquired HealthCom International Inc. It was controlled by Dr Bland. It sold medical food products developed by Dr Bland branded Ultra line. HWL acquired the right to sell those products under licence. In 2002, Metagenics established MetaProteomics as a joint venture with Ashni Nutraceuticals LLC ("Ashni"). MetaProteomics engages in research and development activities under the direction of Dr Bland.

[39]

The proposed purchase of shares in HWL by Metagenics 164 On 13 June 2003, Mr Alan Bawden Grant formulated a memorandum to Mr Leon Brosnan, Mr Michael Brosnan, Mr Gee, Mr Katke and Mr Morey on the topic of a proposed purchase by Metagenics of shares in HWL. The memorandum arose out of telephone discussions with Mr Katke and Mr Morey on the preceding day and also discussions within the applicant shareholder group. Mr Grant sought to set out a basis for "an orderly progression of share transfers" in HWL to Metagenics which would meet the desires of the parties leading to a formal agreement which would give "certainty in what is a major issue for us all". Mr Grant set out the elements of the proposal, the price of the initial transfers, the basis for determining the value of subsequent transfers and other matters relating to Metagenics progressively moving from 10% to ownership of 74.41% of the issued shares in HWL. 165 Mr Grant added that, personally, he was content with the proposal. 166 Mr Morey wrote a confidential memo addressed to the Metagenics Board of Advisors summarising the proposed acquisition of HWL. 167 As to the commercial elements, Mr Morey summarised some of the features which became reflected in the 2003 Agreement as earlier described. Metagenics would acquire 10% of the issued shares in HWL based on an AU$12.5M valuation with Metagenics paying AU$1.25M for a 10% interest. The memo recites that Mr Michael Brosnan and Mr Leon Brosnan had agreed in writing that 50% of that price would be loaned to HWL. As to the royalties, the royalties for the period May 2003 to and including June 2004 would not be paid but would be reserved as a credit against the future purchase of HWL shares upon the exercise of the options for a further 10%, 10%, 21% and 23.4%. 168 The 2003 Agreement bears the date 12 September 2003 (Tab 85, at p 2154) although there was some discussion in the course of the hearing that the Agreement was not entered into until October 2003. It bears a stamp duty date of 22 October 2003.

[41]

Mr Katke's 2004 visit to Australia 170 In May 2004, Mr Katke visited Australia and met with Mr Leon Brosnan, Mr Michael Brosnan, Mr Alan Bawden Grant and Mr Gee. Mr Gee says this about it: Mr Katke spoke about the prospect of merging HWL with Metagenics and also with a business that was distributing Metagenics products in Europe called "Biodynamics". Mr Katke explained the likely revenues of the merged group and said that Metagenics was generating revenue of US$68M, Biodynamics "was doing 18 million" and HWL "22 million" giving a combined group revenue of "108 million". Mr Katke said that Metagenics "would need to spend 14.4 million to acquire Biodynamics and that the combined EBITDA of the group was $11 million plus … some technology licensing … and the prospect of … licensing some of the science": T, p 103, lns 8-13; lns 22-23. 171 Mr Katke said, according to Mr Gee, that after combining the groups "they would look at private equity raising … to put some funds into the group comprising about 20% of the company and then working towards an IPO in October 2004, with the company - combined companies valued at between 330 and 550 million": T, p 103, lns 26-27. 172 Mr Katke said, according to Mr Gee, that the IPO would "float off 20 to 25 per cent, so 20 to 25 per cent would be owned by the public": T, p 103, lns 27-28. Mr Katke said that funds raised from the IPO would pay off subordinated debts of the company of approximately $30M. A business called "HVL" would be acquired. Mr Katke said that that business had "revenues of 66 million and an EBIT [Earnings Before Interest and Tax] of 15 million": T, p 103, lns 30-32. Mr Katke said that the price to be paid for HVL would be the equivalent of 4.5 times or four to five times EBIT. 173 Mr Katke said that he and his wife, Mrs Shelley Katke, owned approximately 56% of Metagenics, other family members owned 10% and Dr Bland's family owned 22%. Other nominated individuals owned 12%. Mr Katke spoke about the "plan" to acquire HWL and Biodynamics and said that Biodynamics was an important acquisition because it "gave distribution into Europe to help make [the merged group] a global business": T, p 103, lns 46-47. 174 Mr Katke was to visit Australia in September 2004 to further these discussions.

[43]

The September 2004 events 176 On 7 September 2004, Mr Morey sent an email to Mr Gee attaching spreadsheets on the topic of the valuation of HWL. The first sheet of the spreadsheets expresses the valuation in Australian Dollars at an exchange rate of 73.0353 US cents. The first column takes the actual revenues for the year ending 31 July 2004 of HWL of $28.333M and applies a multiple of 1.05885 to establish a value for HWL of $30M. The second column takes the actual revenues for the same period of Metagenics and Biodynamics (combined) of $110.886M and applies a multiple of 1.167075 to establish a value of $129.412M. The combined revenues of HWL, Metagenics and Biodynamics in the period amount to $139.219M and a combined value, based on the multiples, of $159.412M. 177 Mr Morey's second spreadsheet undertakes the same exercise except that the period is 12 months ending 30 June 2004 and in respect of Metagenics the revenues exclude the revenues of Biodynamics and a different multiple is applied to each entity's revenue. In the case of HWL the revenue is $27.807M, the multiple is 1.07885 and the derived value is $30M. In the case of Metagenics the revenue is $86.275M, the multiple is 1.5 and the derived value is $129.412M. The combined revenues amount of $114.082M and a combined valuation of $159.412M. 178 The body of each spreadsheet (and other spreadsheets forming part of that cluster sent by Mr Morey) then identifies the consideration that each shareholder would receive if the shareholder sold at the particular valuation. 179 Mr Gee accepted that Mr Morey's spreadsheets were designed to demonstrate the price and indeed the value that each shareholder would receive should the shareholder sell at prices suggested by Metagenics and, under certain assumptions, the percentage of cash or stock they might receive, all based upon a multiple being applied "chosen for whatever reason", to the actual revenues each company had received in the year to date: T, p 153, lns 12-20. The proposed value of the package, made up of some money (cash), notes and stock in Metagenics, was $39.621M. 180 On 9 September 2004, Mr AB Grant sent an email to Mr Gee, Mr Leon Brosnan and Mr Michael Brosnan commenting upon the proposal from Metagenics to acquire the HWL shares. Mr Grant observes that the figures provided by Metagenics had been based upon applying a multiple to sales by HWL of 1.05885, and a multiple to "USA" sales of 1.167075. Mr Grant says that he does not understand the multiple of 1.167075 although it "may not be important". That seems to follow for Mr Grant because actual revenues are such that "clearly HWL does not need a multiple now to get to $30m". 181 Mr Grant then sets out some criticism of Mr Morey's criticism of HWL's revenue projections said by Mr Morey to be "unreliable". Mr Grant sets out data on HWL's sales projections for 2005 to 2008 and then sets out these two observations: 4. If the business is to be sold, I feel that in its present condition and immediately projected condition, that buyers from Australian companies may produce a better result for HWL shareholders. Blackmores API & Sigma all could be interested, particularly in view of their recent financial results & comments about expansion. Frankly I would feel safer about a $30m cash plus $15-20m shares deal with any of the above, than an IPO hope for Metagenics. 5. Metagenics Financials. Alan G & I have looked at the P & L and Balance Sheets last provided by Jeff. You are aware of my comments at a board meeting 2-3 months ago. Metagenics sales growth has been 4-8% p a in recent years, profits have been marginal at best with HWL commissions being a substantial contributor. Virtually zero profits have been retained in the business. Shareholders' funds are backed by zero tangible assets. (Note: HWL has $3.3M of shareholders' funds backed by tangible assets). [emphasis added] 182 At para 6, Mr Grant says that the applicants should ask "Jeff" (Mr Katke) to fax copies of the Metagenics latest financials including the consolidation of the Belgium acquisition to allow Mr Grant and Mr Gee to look over them and that this should be done well before "Jeff [Katke] gets to Brisbane to give time to a proper understanding of their position". 183 In the memo, Mr Grant makes some observations about multiples of sales as the basis of the IPO suggested by Metagenics of US$300M which equates to AU$410M. Mr Grant seems to suggest that based on the HWL sales, as compared with the Metagenics and Biodynamics combined sales, the relativity in the values ought to be attributed $88M to HWL and $322M to Metagenics and Biodynamics. He also says that if, by June 2005, HWL sales reach $40M, the HWL value would increase to $99M. Mr Grant observes at point 9 that neither "Alan G [nor] I feel Jeff [Katke] can do his deal without HWL. The split as above is quite unfair" [emphasis added]. 184 The memorandum notes that Mr Grant's comments in the document were to be discussed within the applicant group a few days later. 185 In advance of the meeting between representatives of the applicants and Mr Katke in Australia in September 2004 to further the earlier discussions from May 2004, Mr Gee, consistent with Mr Grant's suggestion in his memorandum, sent an email to Mr Morey on 9 September 2004 in which he said this: To help our assessment would you please forward for both [Metagenics] & the Belgium company, a copy of; your current year budget; your latest monthly management accounts; and 3 yr projections; together with the last 2 years financials for Belgium. Would you also please let us know the level of inter-company sales between [Metagenics] and Belgium. [emphasis added] 186 Mr Morey responded by email on 11 September 2004. 187 He attached a spreadsheet showing the acquisition of the Belgium company (companies) taking place as at 1 July 2004, as a hypothesis. It was one scenario prepared for an investor. The spreadsheet sets out actual revenue for the US and European businesses in the period January 2004 to July 2004 and then shows projections of revenue from August 2004 to December 2004, an annualised 2004 projection and projections for 2005 to 2010 inclusive. The spreadsheet also shows projections of operating expenses, operating income, net income and EBITDA for the periods of the spreadsheet (among other things). 188 The spreadsheet from Mr Morey sets out the following projections for revenue and EBITDA for the United States business and the Biodynamics entities: Future Years Future Revenue United States business only US$ Future EBITDA United States business only US$ Future Revenue Belgium companies Future EBITDA Belgium companies Euros Euros 2004 $67,979,000 $4,992,000 €9,034,000 €1,447,000 2005 $77,982,000 $7,157,000 €20,335,000 €3,314,000 2006 $90,893,000 $9,937,000 €24,402,000 €4,707,000 2007 $106,799,000 $13,755,000 €29,283,000 €5,761,000 2008 $126,023,000 $18,956,000 €35,139,000 €7,694,000 2009 $149,337,000 $25,552,000 €42,167,000 €10,285,000 2010 $177,712,000 $34,078,000 €50,600,000 €13,505,000

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189 Mr Gee sought the information requested in his email to Mr Morey of 9 September 2004 to enable him to make his own assessment of: "were they growing businesses; what size businesses were they; was the profit growing": T, p 131, lns 15-18. 190 Mr Morey's spreadsheet is based on several assumptions: T, p 131, lns 21-22. 191 The first is that three Belgium companies making up Biodynamics have been acquired by Metagenics as at 1 July 2004: T, p 131, lns 24-26. Mr Gee understood, at the time, that that assumption was not the fact (T, p 131, lns 28-31; T, p 132, lns 38-40) and that at September 2004 those companies had not been acquired by Metagenics. It was a particular construct for a particular purpose. 192 Mr Gee believes that Mr Morey's financial information for the Belgium companies must have come from the operators of the Belgium companies. 193 The acquisition of the Belgium companies was to be funded by Bison Capital. 194 Mr Gee understood that Mr Morey's combined projections for Metagenics and the Belgium companies, eliminated, subject to the first half of 2004, "inter-company transactions" (inter-company sales) for the period of the projections so as to avoid "double counting". Mr Morey's spreadsheets postulate a "scenario" in which Metagenics has taken over the Belgium companies as at 1 July 2004 and for the first half of 2004 there is no need to eliminate inter-company sales (as the companies are separate) and for the balance, all inter-company data had been taken out: T, p 132, lns 27-36. 195 The second key assumption about the Belgium companies is that revenue will grow at 20% per year. Mr Morey observes in his email that such growth was "below what we expect and what they have been achieving". Although Mr Gee had asked for the "financials" for the Belgium companies for a two year period in order to enable him to make his own assessment of the business, he said that he did not know or could not recall whether the financials had been given to him: T, p 133, lns 10-14. 196 In Mr Morey's email of 11 September 2004 he also says this: Debt of $12.5 million at 12% cash coupon and 3% pick (accruing) and $2.5 million in warrants for 3% of the combined company of Metagenics & Belgium at a $83.3 million valuation. The plan would be to pay off this debt after an IPO without any penalties. The debt matures in 7 years, but our goal is to be able to pay it off in 2005 if the market is right for an IPO. [emphasis added] 197 Mr Gee understood from Mr Morey's email that the acquisition of the Belgium companies would be financed by a $12.5M loan at 12% with 3% accruing to the balance of the loan; warrants would be issued in the equity of the combined company (valued at $83.3M) equivalent to 3% of the combined company, exercisable for $2.5M, and the intention of Metagenics was to pay off the debt after an IPO without any penalties: T, p 133, lns 21-31. 198 In Mr Morey's email he says "our goal" is to be able to pay off the debt in 2005 if the market is right for an IPO. 199 Mr Gee's understanding was that the "goal" described in Mr Morey's email reflected an "intention" to pay off the debt in 2005 if the market is right for an IPO: T, p 133, lns 40-44. 200 The projections provided by Mr Morey on 11 September 2004 are concerned with a full 12 months projection for 2004 and projections for the years 2005 to 2010 (six additional years). 201 As a matter of general principle, so far as projections are concerned, Mr Gee accepted that the "further out you go, the less weight [you can put on a projection of earnings]": T, p 134, lns 12-14; lns 23-24. By the time Mr Morey made his projections set out in the email of 11 September 2004, he had been the Corporate Controller of Metagenics from 2 December 1996 to 15 May 1998. He had been the Chief Financial Officer of Metagenics from 15 May 1998 until 11 September 2004 and remained the Chief Financial Officer of Metagenics until 31 December 2011, and from 2009, Mr Morey also held the position of Chief Operating Officer. 202 I will return to aspects of Mr Morey's evidence later in these reasons. 203 However, for present purposes, it should be noted that Mr Morey exercised a primary role of Chief Financial Officer in relation to the detail of the financial affairs of Metagenics. 204 In relation to Mr Morey's projections of revenue from the United States business for the years 2004 and following, Mr Gee accepted that (subject to a question about whether inter-company eliminations had been applied to the actual revenue shown in the financial accounts) actual revenues for North America were as follows: for the financial year ending 31 December 2005, $81,160,000 against Mr Morey's projection of $77,982,000; for the financial year ending 31 December 2004, $68,040,000 against Mr Morey's projection of $67,979,000; for the financial year ending 31 December 2006, $91,303,000 against Mr Morey's projection of $90,893,000; for the financial year ending 31 December 2007, $100,379,000 as against Mr Morey's projection of $106,799,000; and for the financial year ending 31 December 2008, $106,665,000 as against Mr Morey's projection of $126,023,000. For the financial year ending 31 December 2009, Mr Morey's projection was $149,337,000 North American business revenues were significantly less. For the financial year ending 31 December 2010 revenues were $114,612,847 as against Mr Morey's projection of $177,712,000. 205 Mr Gee accepted that towards the end of 2008, the Global Financial Crisis emerged in the United States. 206 Mr Gee, in recognising the actual revenues for North America, was uncertain as to whether inter-company sales had been eliminated so as to avoid double counting. For example, in relation to the actual revenue for the financial year ending 31 December 2007, North American actual revenue is shown as $100,379,000. That amount is made up of five components (at p 9553 of Doc Vol 14, Tab 704) amounting to $76,805,550 and 15 other items amounting to $23,573,443 giving total actual revenue of $100,378,993 (or $100,379,000 as the rounded up actual revenue). Within the 15 other items, revenues described as "Australia - Health World" of $2,106,640 is shown; revenues described as "Belgium - Biodynamics" of $893,128.00 is shown; and "Royalty income - Australia" of $2,291,280 is shown. Mr Gee says that these three items represent items of inter-company eliminations which ought to reduce the actual revenues by $5,291,048 which, if taken into account, would reduce actual revenues to $95,087,000. 207 Mr Gee understood, however, that for Mr Morey's projections for 2005, 2006 and 2007, inter-company transactions had been eliminated or removed: T, p 140, lns 24-26. 208 As to these projections provided by Mr Morey, Mr Gee said the figures were important to him (and the applicants generally) because the applicants "were being asked to merge our business with Metagenics, and it was important for us that the Metagenics business and the Biodynamics business were strong, growing companies": T, p 104, lns 25-27. 209 On 11 September 2004, Mr Morey also provided Mr Gee with a "Pro forma Combination" of Metagenics and Distributor A and B for 12 months ending 31 December 2004 as if the acquisitions were transacted on 1 July 2004. The pro forma spreadsheet also contained revenue projections for 2005 to 2010 inclusive. Mr Gee understood this spreadsheet to be an attempt to show, in a pro forma way, the combination of Metagenics and the Belgium companies: T, p 155, lns 45-46. The financial statements are pro forma in the sense that they were prepared in advance of the acquisition of the Belgium companies and the aim is to show the anticipated results as if the acquisitions were transacted (and combined) on 1 July 2004. 210 They represent projections by using judgment to try and determine future results: T, p 156, lns 34-39. 211 Mr Gee accepted that isolating a trend is important because trends, up or down, in a business might continue. Mr Gee said that these historical data had been sought so as to enable him to determine whether, based on the actual historical figures, the projections Mr Morey had provided to him satisfied him in making his own judgment about those projections: T, p 157, lns 26-28. 212 On 18 September 2004, Mr Katke visited Australia and met with Mr Leon Brosnan, Mr Michael Brosnan, Mr Alan Grant and Mr Gee at the Sheraton Hotel. 213 At that meeting, Mr Katke "went over" the scientific discoveries that Metagenics had made and most particularly "the hops - or the Kaprex product": T, p 105, lns 11-13. Mr Gee described the discussion in this way (T, p 105, lns 14-20): [Mr Katke] talked about the licensing that would flow from [Kaprex] … about how those licensing deals would be structured. They would be small payments … in the vicinity of ten to $20 million with milestone payments achieved thereafter. The upfront part of the payment would fund further clinical trials. And he projected on to a screen a model … where he had … I think it was five of those products, each producing revenues in the vicinity of 100 to $150 million, and valuing the company in the billions of dollars. 214 As to merging the companies or an IPO, Mr Gee says that Mr Katke said the "plan was to merge the company and proceed to an IPO in 2005" [emphasis added]. At this point in the exchanges, there does not seem to be any mention, in Mr Gee's recollection of the meeting, of Mr Katke talking about any licensing discussions with Pfizer or, more particularly, discussions that were sufficiently advanced that Metagenics was on the cusp of or imminently close to signing a licensing transaction concerning the Kaprex product with Pfizer. However, that matter is said to arise in October 2004. 215 At this point, it is necessary to say something further about Kaprex.

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Kaprex 216 Many chronic conditions or diseases suffered by humans exhibit inflammatory responses by the body's mechanisms. Non-steroidal anti-inflammatory drugs are traditionally administered in treatment. Kaprex is an anti-inflammatory product based on modified hops extracts. It has a different mechanism of action to traditional anti-inflammatory drugs. In the early 2000s, Dr John Babish of Ashni had undertaken research work that seemed promising. MetaProteomics acquired the intellectual property in the work of Dr Babish in 2002 and undertook, in 2003, further work based on a process it had developed (called ExpressSyn) for screening naturally occurring substances to isolate a possible mechanism of action in regulating cellular function in patients suffering chronic disease. 217 The respondents in the written submissions have addressed the steps involved in the development of Kaprex and I accept the submissions as an accurate statement of the evidence on this issue. The respondents put it this way at para 299 of their submissions: 299. … (a) … (b) The work done in 2003 involved screening over 300 botanical extracts of foods, spices and botanical medicines to determine those that had the most significant influence on cellular inflammation compared to, or in combination with, hops. The modified hops extracts were found to have the highest influence on cellular inflammation and the greatest level of safety. (c) Thereafter, based on in vitro streaming data, MetaProteomics developed a proprietary, standardised combination of reduced iso-alpha-acids from hops, rosemary extract and oleanolic acid. (d) The product was evaluated in a number of studies. (e) The studies included: (i) A study entitled "Comparison of the effects of a newly developed botanical anti-inflammatory vs. a commonly prescribed anti-inflammatory medication on fecal calprotectin" which was the subject of a report dated 29 January 2004. The results: "Indicate that [the product] leads to little or no gastrointestinal inflammation, as compared to a standard NSAID, and suggest calprotectin may not carry the risk of ulcer that NSAIDs commonly produce." (ii) A randomised, double-blind placebo-controlled trial over eight weeks starting with 69 patients with knee osteoarthritis, the results of which were reported in a memorandum dated 8 November 2004. The conclusion of the study was: "We have … observed a significant decrease in pain … for the subjects taking the Meta 051 as compared to placebo. Moreover, the data obtained in this trial (Trial B) are consistent with the data obtained with OA subjects in the initial observational trial (Trial A). Therefore, these data indicate that Meta 051 is efficacious for pain relief in OA patients. (iii) A study dated Spring (April) 2004 entitled "Development of Meta 050, a Natural Anti-Inflammatory Targeting Inhibition of Cyclooxygenase Gene Induction Instead of Direct Cyclooxygenase Enzyme Inhibition, Resulting in an Anti-Inflammatory with Low Predicted GI Toxicity. (iv) A presentation dated Fall (October) 2004 entitled "Harnessing the power of nutrigenomics for the development of oral therapeutics to manage chronic diseases. (v) A document published in April 2005 entitled "Clinical trial evaluating the effect of Meta 051 on perimeters of platelet function and blood coagulation. (f) The study suggested that the product was able to treat osteoarthritis pain and that it did not block the cyclooxygenase enzymes associated with inflammation as did traditional NSAIDS, but rather selectively altered the genetic expression of inflammatory mediators thereby providing a much higher safety margin than traditional NSAIDS (such as Vioxx and Celebrex).

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Further aspects of the September 2004 events 218 On 22 September 2004, Mr Gee sent an email to Mr Katke observing that Mr Michael Brosnan had suggested that Mr Mike Curley and Mr Alan Gee should attend a meeting in December with "the Belgium people and the investment bank" with a view to better understanding the science and the proposed IPO. 219 On 28 September 2004, Mr Katke responded and suggested that Mr Mike Curley, Mr Michael Brosnan, Mr Leon Brosnan and Mr Alan Gee attend the Metagenics December sales meeting in Seattle for a "strategic planning session with Belgium, Australia and the US". Mr Katke suggested that the investment bank representative advising Metagenics might be able to meet with the Australian group and "explain the IPO process and timelines". Mr Katke suggested that Metagenics might organise a "complete presentation of the complete science behind Kaprex and our other ExpressSyn discoveries". Mr Katke suggested and preferred a meeting on Sunday, 12 December 2004 or Friday, 17 December 2004. Mr David Schechner's availability would need to be checked. Mr Katke completed his email with this observation: By the way the placebo controlled research on Kaprex was positive. We have a blockbuster on our hands! We are shooting for an IPO in March or April markets permitting. [emphasis added] 220 Mr Gee understood Mr Katke's observation about Kaprex to be a reference to Mr Katke's comments at the 18 September 2004 meeting when he spoke of one or more products which might generate revenues in excess of $100M: T, p 105, lns 43-45. 221 The point of this email seems to be to put in place the arrangements for a face-to-face meeting in the United States to enable Mr Gee, Mr Curley, Mr Michael Brosnan and Mr Leon Brosnan to discuss the timelines and processes involved in an IPO directly with the investment banker advising Metagenics on that matter (and discuss views with Mr Katke and others) and secondly, to provide them with a "complete" briefing on the "complete science" behind Kaprex and the "other ExpressSyn discoveries". 222 The reference to Kaprex being a "blockbuster" is undoubtedly an emphatic and perhaps excited explanation of Mr Katke's perception of it but, in context, Mr Katke is in effect saying: come to the United States and see and hear about it fully and completely for yourself. The reference to "shooting for" an IPO in March or April 2005 coupled with arrangements to meet David Schechner is properly understood as a statement of Mr Katke's intention at that time that Metagenics was intending to go to an IPO in March or April 2005.

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The October 2004 events 223 On 1 October 2004, Mr Gee had a telephone conversation with Mr Katke. 224 Mr Gee says that Mr Katke explained to him that a pain relief pharmaceutical product called "Vioxx" had been withdrawn from the market in the United States due to risks which had emerged concerning heart and kidney function and that a vascular study completed on Kaprex demonstrated that it did not have these risks. Mr Gee's diary note of the conversation describes the risks identified by Mr Katke concerning Vioxx as "endophilial dysfunction/hypertension/kidney heart attack". Mr Katke said that Pfizer had been in contact "a couple of days ago" regarding Kaprex. The diary notes says: "9 days ago re Kaprex". Mr Katke spoke about a trial that Metagenics had completed for Kaprex beginning with 69 subjects and by reason of exclusions and other factors, 27 subjects remained within the trial of which 13 were administered Kaprex and 14 were administered a placebo. Mr Katke said that there was "statistical significance in the outcome of the study", in effect, favourable to Kaprex. Mr Gee gave evidence that he understood the words "statistical significance" to be a "term used in respect of clinical trials" when a relevant person is "required to show levels of statistical significance in order for results to be relevant, clinically relevant". 225 As to this important telephone conversation, Mr Gee does not say in his evidence that Mr Katke told him that Metagenics was in discussions with a large pharmaceutical company, Pfizer, which had expressed "very strong and imminent interest" in licensing an anti-inflammatory product called Kaprex: see [120] of these reasons. The effect of Mr Gee's evidence about Mr Katke's statements concerning a trial involving 27 subjects with 13 administered Kaprex and 14 administered a placebo and the outcome being statistically significant, might have been understood by Mr Gee as meaning "research on Kaprex indicated it was an effective anti-inflammatory product" but Mr Gee does not say that Mr Katke said those words to him: see [121] of these reasons. 226 Nor does Mr Gee say in his oral evidence that Mr Katke said: "Kaprex worked just as effectively as anti-inflammatory products already on the market including Vioxx": see [122] of these reasons. Rather, Mr Katke spoke about the very particular trial of 27 subjects split 13 to Kaprex and 14 to a placebo and observed that there was statistical significance in the outcome. Nor does Mr Gee give oral evidence that Mr Katke said: "A licensing deal with a big pharmaceutical company such as Pfizer with respect to Kaprex and other discoveries would provide substantial revenue and increase the value of Metagenics": see [124] of these reasons. 227 The reason it is important to plead the actual words used in an express representation case (and thus a mis-representation cause of action based upon prohibitions upon misleading conduct) is that the words constituting the express representations actually matter in determining what representations were made and, in context, the meaning to be attributed to the particular words. There is likely to be a real difference of understanding between a contention about something someone actually said and a contention that someone said something to a certain effect, as they understood it. 228 For present purposes, I simply note that Mr Gee in oral evidence did not say that in the course of this telephone conversation, Mr Katke made the pleaded express representations attributed to him by this part of the pleading. 229 On 15 October 2004, Mr Katke sent an email to Mr Gee attaching the draft terms of a proposed agreement for the acquisition of the remaining shares in HWL from the applicants by Metagenics. The terms contemplated consideration of $30M plus the difference between that amount and eight times EBITDA for the financial year ending 30 June 2005 whichever was the greater, capped at $39M. The consideration would be paid 80% in cash and 20% in stock in the proposed IPO. The timing of the payment contemplated that an IPO might take place before completion of final accounts at 30 June 2005 (or before receipt of KPMG's Audit Report for the 30 June 2005 financial year). In that event, a particular payment protocol would apply in relation to the 80% cash and 20% stock. The terms also contemplated that an IPO might take place after receipt of the KPMG Audit Report in which event the consideration of 80% cash and 20% stock would occur "at the IPO date". Metagenics stock would be valued at 1.5 times its 30 June 2005 net revenues. HWL would be valued at 1 times its net revenues. A "definitive agreement" was to be signed by 1 December 2004. The agreement would "expire" 12 months from signing should no IPO have occurred, that is, by 1 December 2005. 230 It seems that at 15 October 2004, Metagenics was at least contemplating the possibility that Metagenics might not list by 1 December 2005. 231 At T, p 284, lns 1-11, Mr Brosnan gave evidence that after the September 2004 meeting he received a telephone call in late October 2004 from Mr Katke in which Mr Katke said this: … "Mate, I'm about to do a licensing deal. If you want to be a part of it you need to get on a plane right now and come to the States. We're doing a licensing deal with Pfizer and we're then going to an IPO". And I said, "Well, just hang on a sec. I've got to talk to the other shareholders". I was actually very excited about - his excitement. And at the same time he said, "If you're not here right now you will miss out on the value that will be created". And so at the same time I was excited, but also, "Well, hang on. I don't want to miss out" - so I think [I] spoke to the other shareholders. [emphasis added] 232 This seems to be the reference in the particulars to Mr Katke saying to Mr Michael Brosnan that Metagenics was about to do an "imminent licensing deal" with Pfizer with respect to Kaprex, although the particulars suggest the conversation occurred in November 2004 (see para 5(a)(ii) of the pleading). 233 Mr Katke rather thinks that it was Mr Brosnan's idea to travel urgently to the United States.

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The November 2004 events 234 On 2 November 2004, Mr Gee responded to Mr Katke's email and memorandum of 15 October 2004. Mr Gee said that he agreed with a multiple of eight times EBITDA. However, the purchase price was to be capped at AU$45M with a floor price of AU$36M. The maximum cash component was to be AU$28M with the balance in stock. Mr Gee said that Metagenics stock was to be valued at 1.3 times the net revenue. Mr Gee made a number of comments about the normalisation of adjustments to determine the 30 June 2005 EBITDA. 235 On 3 November 2004, Mr Katke responded and said this: After reviewing your proposal I would differ with you on [your] statement that we are getting close. I would say that we are getting further apart. Your proposal is too rich for us. I think that you are making a mistake in continuing to increase your price. At these values we are better off to go with the option agreement cash payment formula [set out in the 2003 Agreement]. We are meeting with investors next week and have a new valuation strategy to achieve a pre-IPO valuation of $350 million. We will double that value with a licensing deal with a pharma company, for a total value of $700 million. We meet with Pfizer for licensing discussions on Wednesday. You think that your business is increasing in value day to day, but so is ours. Once we lock in our valuation with another investor the stock now generously valued at 1.5 times sales could go up to 3.5 times sales or greater. If we get strong interest in the licensing deal with Pfizer it goes up to 7 times sales. Jerry [Morey] is in Belgium this week. When he returns we will review your proposal and let you know what we can do. If it is not enough, we understand. We can go back to the option agreement, cash payment formula. We are not eager to give up more of Metagenics shares anyway. [emphasis added] 236 On 11 November 2004, Mr Gee had a telephone conversation with Mr Morey. 237 In that conversation, Mr Morey said that a meeting had been arranged for 16 and 17 November 2004 in the United States at San Clemente for a number of presentations. Mr Morey had been in contact with four investment banks including "Needham" represented by Mr David Schechner and Mr Wayne Fitzpatrick, to select an investment bank to attend the meeting. Dr Bland would attend the meeting. Mr Morey told Mr Gee that there had been "a snag with Belgium" in that there was a qualification to the accounts for the Belgium companies concerning the opening values to be attributed to "inventory" and that if the accounts could not be settled on the basis of determining the opening values by undertaking an "inventory rollback", common in the United States but not common in Europe, Metagenics would have to amend the agreement for the purchase of the Belgium business (shares in the particular entities) "to close" after the June 2005 audit had been completed. Mr Morey also said that there were "some problems with KPMG Belgium in relation to the SEC [Securities Exchange Commission]". Mr Morey said that Metagenics was "still looking at an IPO in April/May 2005": T, p 108, lns 13-28. 238 In this conversation on 11 November 2004, Mr Morey told Mr Gee that Metagenics "required audited accounts" for the Belgium companies. Mr Gee was not sure whether audited accounts were required for the purposes of the IPO at that point but he believed it probably was a requirement of the IPO: T, p 159, lns 30-32. 239 Mr Gee gave evidence that in order to complete audited accounts, the auditor needs to be satisfied as to the opening balance of the inventory because the opening balance affects the determination of the profit. By the time the auditor has examined the transactions to the end of the financial year, the auditor can determine the closing balance. However, the auditor needs to be confident of the opening balance at the beginning of the financial year as the increase or decrease will affect the determination of the profit: T, p 159, lns 35-44. Mr Gee says he was told by Mr Morey that because the auditors had not attended the opening balance stocktake they could not be sure that the procedure had been undertaken correctly and thus they had no confidence in the opening value. Mr Morey told Mr Gee that in the United States it was common practice to take the "closing" inventory value and "roll back" from that determination so as to identify the opening inventory value at the beginning of the financial year. Because a roll back valuation could not be done in Europe (from an accounting standards point of view), the auditors could not establish a robust opening value for the inventory.

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Advisory Board Meeting of Metagenics on 12 November 2004 240 On 12 November 2004, the Advisory Board met in San Clemente. Present were members Mr Hovee, Mr Zaepfel, Mr Krajanowski and Mr Leiner. Mr Katke, Dr Bland, Mr Carl Moore, Mr Morey and Ms Campbell attended the meeting. Mr Morey presented the financial results to 30 September 2004. Ms Campbell presented a legal and regulatory update. Mr Katke and Dr Bland presented information on recent scientific discoveries by Metagenics for review. Mr Katke presented the company's IPO strategy for review. Relevantly for present purposes, Needham made a presentation by conference call. The Board recommended that Metagenics select Needham to represent it in licensing discussions with the pharmaceutical industry and suggested that Metagenics prepare a detailed outline of the various opportunities for obtaining "a licensing deal" and "additional financing". 241 Mr Katke makes a number of points about this meeting which occurred five days before the critical meeting with the Australians on 17 November 2004. Mr Katke says that based on the date of the Minutes, he is aware that it was on or around 12 November 2004 that he and Dr Bland "updated the Metagenics Board on the discussions with Pfizer". He says that based on the minutes and his earlier discussions with investment bankers, he is aware that he also gave presentations to the Advisory Board about growth opportunities for Metagenics. He says Schechner did the same thing. 242 This Advisory Board meeting also has relevance in this sense. Mr Katke says that his document called "Who is Metagenics Today?" was created on 7 October 2004 and it was written by Mr Katke and Dr Bland. Mr Katke says the document was drafted in the lead-up to the 12 November 2004 Advisory Board meeting and for the "upcoming meeting" with the Australians. Mr Katke also says that the document contained a lot of information that Metagenics had "recently presented to Pfizer on 11 November 2004". Mr Katke says that he compiled the document to update the Advisory Board about recent developments concerning Kaprex, growth opportunities and more particularly, with respect to the slides at the end of the document, to show the Australian shareholders at the 17 November 2004 meeting what Metagenics might look like in terms of valuation if Metagenics acquired HWL. Mr Katke says that Dr Bland and Mr Katke spoke about the initial discussions with Pfizer. Dr Bland explained the progress of discovery with respect to Kaprex, the science behind hops and the product pipeline based on hops technology. They advised the meeting that Pfizer's initial response had been positive; placebo-controlled trials were still relatively small; and, further clinical trials would be expensive and Metagenics hoped Pfizer would partner with it and fund the investment for the necessary trial. 243 Mr Katke says that he spoke to his "Opportunities for Growth" document. He emphasised that one of the key matters to be considered was how the company would be "positioned" in the event of an IPO. He said that positioning depended upon the type of company Metagenics might be compared with - a dietary supplement company or, "given its speciality products in medical foods, its marketing to specialty CAM healthcare professionals, its R&D capability through MetaProteomics, and drug licensing and development plans" - "a specialty pharmaceutical company". 244 Mr Katke says that Mr Schechner made a presentation to the Advisory Board about partnership opportunities with a pharmaceutical company or a third party investor, and also the potential for Metagenics to conduct an IPO. Mr Schechner addressed the valuation issues for the company associated with an IPO. Mr Katke says that as best he can recall, the following discussion took place with Mr Schechner. 245 First, Mr Schechner said that Needham was of the view that if the underlying clinical data for Kaprex was robust, large pharmaceutical companies such as Pfizer may well be interested in partnering with Metagenics or MetaProteomics by way of licensing and/or further developing the Kaprex technology. 246 Second, Mr Schechner said that such a partnership would substantially increase the value of Metagenics which he described as a "step-up" in value by such an arrangement. 247 Third, there was a discussion about the robustness of the clinical data underlying Kaprex and how this consideration might affect partnering opportunities. 248 Fourth, Mr Schechner expressed the view that Metagenics could seek investment from a biotechnology or venture capital investor to develop Kaprex and the investment funds could be used to conduct further clinical trials with the result that such an investment would increase the value of Metagenics in an IPO. 249 Fifth, Mr Schechner spoke about how Metagenics might be "positioned" in the event of an IPO. Mr Schechner said it was difficult to identify public companies that had the same characteristics as Metagenics. He expressed this opinion: … although Metagenics sold products in the nature of dietary supplements, it should not be compared to dietary supplement companies because it had a strong R&D capability in MetaProteomics - which was capable of developing science based products like Kaprex - and because Metagenics distributed its products through medical professionals. … These characteristics were more akin to a pharmaceutical company. 250 Mr Katke says that Mr Schechner expressed this further view: Schechner said that given Metagenics' R&D capability - which he said could be specifically "segmented" into MetaProteomics as the R&D or discovery division - and given Metagenics specialty medical food products, and specialty CAM health professional distribution channels, it would be appropriate to position itself as a "specialty" pharmaceutical company for purposes of an IPO - which he said was something of a hybrid between dietary supplement companies and pharmaceutical companies. He also said that in the current market specialty pharmaceutical companies were likely to attract a higher multiple or revenue or operating profit in determining their value in 2005, and recommended that Metagenics therefore position itself as a specialty pharmaceutical company. 251 Mr Schechner conducted his presentation to the Advisory Board by reference to a number of slides some of which are similar to slides presented at the meeting on 17 November 2004. In particular, Mr Schechner presented his triangular "positioning" slide mentioned shortly. This was a "preliminary positioning" of MetaProteomics.

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The 17 November 2004 meeting at San Clemente 254 On 17 November 2004, a meeting took place in the boardroom of Metagenics. 255 The four Australian representatives were present. Mr Katke, Dr Bland and Mr Morey attended the meeting. Mr Wayne Fitzpatrick from Needham was present. Mr Schechner (and two others with him) attended the meeting by telephone. 256 Mr Gee says that a document was handed out at the meeting called "Discussion Materials" bearing Needham's corporate details. Mr Gee says that the discussion at the meeting followed the slides comprising the Needham Discussion Materials document. Mr Katke introduced the Needham people. 257 The document says that "Needham & Company is pleased to meet with Metagenics to discuss an initial public offering". It says that the "Company is an attractive IPO candidate" and that strategies to increase valuation include positioning "Metaproteomics division as an independent operating unit"; continuing to "drive clinical trials"; and, securing "a partnership with large pharma". The document says that an IPO "can dramatically enhance a company's growth prospects". The document sets out the "benefits" of an IPO and the "considerations" to be taken into account in relation to an IPO. The document identifies 10 particular "characteristics" of an "attractive public company" and Metagenics is given a positive tick as exhibiting each of those 10 characteristics. The document then contains a "Preliminary Positioning of Metaproteomics" with Metagenics shown at the apex of a triangle linked with "commercialisation" (the subject of which is "Oral therapeutics for the management of chronic disease") and linked with "Biotechnology" (the subject of which concerns products emerging from the "Metaproteomics Discovery Group"). In the middle of the triangle, as to positioning, are the words "Speciality Pharmaceutical Company'. As to "Metaproteomics Novel Discoveries", the slide observes that "Human clinical trials provide proof of concept". 258 The document sets out "Benchmark Metrics for Metagenics IPO" and as to that it says this: Character of the Revenue Multiple 2005 Revenue - Speciality Pharma 2.0x - 4.0x 2005 Revenue - Nutraceutical/Vitamin 1.0x - 2.0x 2005 Operating Income - Speciality Pharma 7.0x - 9.0x 2005 Operating Income - Nutraceutical/Vitamin NA - NA

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261 Mr Gee says that Mr Schechner led the discussions about the benefits of an IPO and the preliminary positioning of MetaProteomics. Mr Schechner talked about the options for "positioning" the company. The first option concerned characterising Metagenics as a nutraceutical company in which event the value would be determined as a multiple of revenue between 1 and 1.5 to 2 for companies with revenue greater than $100M and between 15 and 20 times the earnings. 262 A second aspect of positioning, if the nutraceutical option was chosen, involved "spinning off" MetaProteomics as a biotechnology company. 263 The third option was to keep both together and position the company as a speciality pharmaceutical company where multiples on revenue were between two and five time's revenue and between 15 and 25 times earnings. Mr Gee says that, at this point of the discussion, Mr Katke said that the speciality pharmaceutical company option was the "probable option and the preference": T, p 110, lns 36-46; T, p 111, lns 1-2. 264 Mr Gee had never heard the term specialty pharmaceutical company before: T, p 255, lns 38-39. Mr Gee accepts that Mr Schechner explained that Metagenics had some characteristics in common with specialty pharmaceutical companies, in his opinion, and outlined those characteristics: T, p 255, lns 41-42. 265 Mr Gee says that the timeline process set out at [260] was discussed as a 12 week process to commence in February or March 2005: T, p 111, lns 13-14. 266 Mr Gee believes that Mr Schechner talked about a multiple being applied to revenue on the one hand, and also a multiple being applied to earnings or EBITDA, on the other. As to the preliminary schedule for the IPO, Mr Gee understood that it would commence in late February or March 2005. Mr Gee says that Mr Schechner spoke about the qualification to the schedule that timing would be "dependent upon a SEC review, accountant's review and legal review". Mr Gee said he understood that the S-1 would be filed in week three and the SEC's comments would be received in week seven. Metagenics might then have to amend its S-1 Registration Statement to take account of the SEC's comments. 267 Mr Gee said that Mr Schechner also spoke about the need to have audited financial statements. 268 Mr Gee could not recall any discussion about the legal review. 269 Mr Gee says that Mr Schechner, however, spoke about the matters that would need to be attended to in order to conduct a successful IPO: T, p 255, lns 44-45. Mr Gee accepted that Mr Schechner was an investment banker with experience in "these matters" and his bank was to be retained to do all of this work in connection with the IPO if it went ahead: T, p 256, lns 1-5. Mr Gee says that Mr Schechner also explained that a regulatory framework in the United States called Sarbanes-Oxley made it more difficult to go public and in order to go public, Metagenics would need three years of audited financial statements before it could do so: T, p 256, lns 7-13. Mr Gee says that Mr Schechner explained that since the Enron scandal, more rigour was being applied by the auditors to public companies: T, p 256, lns 15-17. Mr Gee says that Mr Schechner also spoke about due diligence: T, p 256, ln 24. Mr Gee accepted that the Australian participants in the meeting were "vitally interested" in Mr Schechner's proposal. Mr Gee says that the format for the discussion was that Mr Schechner, Mr Katke and Mr Morey were explaining what was happening and the Australians would seek clarifications: T, p 256, lns 31-33. As to the things involved in connection with an IPO, Mr Gee thinks that Mr Katke said that "it represented hard work": T, p 256, ln 43. Mr Gee says that Mr Schechner made the comment that his bank, Needham, had the expertise to manage an IPO: T, p 257, lns 4-5. 270 Mr Gee could not recall Mr Schechner saying that "there's no guarantee of success of an IPO": T, p 257, ln 7. The proposition was then put to Mr Gee that: You're surely not suggesting that Mr Schechner, an investment banker, evidently an experienced one, was giving you to understand that there would be an IPO and a successful one. [emphasis added] 271 Mr Gee responded to that question by saying at T, p 257, lns 9-12, that: We were led to believe from that meeting (17 November 2004) that an IPO would proceed. [emphasis added] 272 This exchange then followed at T, p 257, lns 14-22: Q You're not suggesting that Mr Schechner, an experienced investment banker, by anything he said, gave you to understand that there would be an IPO and that it would be successful, are you? You're a chartered accountant, many years' experience. You're surely not suggesting that anybody was representing that there would be an IPO as opposed to that there was an intention to have an IPO. A There was an intention to have an IPO. Q Yes. That's what was being put, wasn't it, very strongly, that there was this intention? A Correct, yes. [emphasis added] 273 It will be necessary to examine, later in these reasons, the various steps taken to try and give effect to that intention and the actions Mr Morey took concerning that matter. 274 Mr Schechner also spoke to the "Benchmark Metrics" for an IPO for Metagenics and although the presentation contemplated a multiple of between two and four should the company be characterised as a Specialty Pharmaceutical company, Mr Gee's notes of the conversation suggested a multiple of between two and five. Similarly, Mr Gee understood Mr Schechner to talk about different multiples for a nutraceutical company than the multiples described in the Benchmark Metrics. 275 Nevertheless, Mr Gee believed that he accurately noted Mr Schechner's comments on these topics during the course of the presentation. 276 Mr Gee says that Mr Katke's document dated 14 November 2004 entitled "Metagenics opportunities for growth, access to capital and value creation" was not handed out at the meeting on either 16 or 17 November 2004. 277 A large part of the document is dedicated to a summary of the results of meetings with technology analysts and investment bankers from Needham as well as the results of discussions with private equity investors and biotech investors. The document talks about a "quick to market specialty pharma strategy" in which Metagenics would quickly move to the market after the acquisition of HWL with the Belgium acquisition pending, as a specialty pharmaceutical company. Mr Katke then sets out possible IPO valuations which "might" be achieved as at dates of 15 January 2004, 17 May 2004, 22 September 2004 and 4 November 2004 based on EBITDA statistics at those dates. He also talks about a quick to market strategy as a dietary supplement company and the multiples which would apply at the relevant dates in that case. As to Kaprex, Mr Katke said this: The Kaprex study size of 13 in each arm is too small to justify a "large" pharma deal. Without conducting a successful larger clinical trial we would have to settle for a "small" deal. A "small" deal of $100 million might be made with $5-$20 million up front payment for research and an equity position in Metagenics, milestone payments would be made on completion of formal phase I, II, III and FDA drug approval with royalties of 6% - 9% on future sales. … This size pharma deal, depending on the structure of the deal and size of the partner, could produce a step up in IPO valuation of 1.1-2.2 times the valuation. … If we waited for a deal before going public, the IPO would be delayed until September 05 to March 06. 278 On 17 November 2004, Mr Katke, however, made a presentation to the meeting about going to an IPO. The meeting lasted for a few hours during the course of the afternoon. Mr Gee believes that Mr Katke presented a document to the participants so that they would have something in front of them during his presentation. Mr Gee believes the document was the Needham "Discussion Materials" document. Mr Gee did not accept that Mr Katke gave the meeting participants the document (comprising a series of slides) entitled "Who is Metagenics today?" (at Vol 5, T, p 187 and Vol 5, T, p 189 of the Trial Book). Mr Gee was taken to the final slide headed "Vision To Build Shareholder Value" which contains an activity timeline from November 2004 to January 2007 and possible valuations of Metagenics along the timeline. The slide contains the qualification concerning those processes: "(But No Guarantees)". 279 Mr Katke asserts that both he and Dr Bland spoke to the "Who is Metagenics today?" document during the course of the presentation. Mr Katke says that the manner of making the presentation was that the slides were projected onto the wall and he spoke to each slide. At T, p 285, lns 20-25, Mr Michael Brosnan was asked whether there was some sort of a presentation, "anything put up on a screen". Mr Brosnan said that he was sure that there was a presentation and he believed that the presentation was "shown up on a wall - in which case I think I looked at the wall and didn't refer to the notes as much". 280 Mr Gee did not accept that Mr Katke emphasised at the meeting that there were no guarantees in the process under discussion at the meeting. 281 Nor did Mr Gee accept that Mr Katke commonly used that expression. 282 As earlier mentioned, Mr Gee gave evidence that in the course of the presentation by Mr Schechner, Mr Katke said that the specialty pharmaceutical company option, in terms of positioning, was the "probable option and preference". Mr Gee's evidence about this remark is a little confusing and it also relates to the question of the multiples. 283 The context is this. 284 Mr Gee believes that in November 2004 differential multiples of 2005 revenue were adopted for valuing the North American business of Metagenics (at 1.6) and HWL (at 1.2). Mr Gee believes that in arriving at these differential multiples, for the purpose of the proposed sale of the remaining 90% of the HWL shares by the Australians to Metagenics, no regard was had to Mr Schechner's presentation and no attempt was made to tie the Metagenics multiple of 1.6 "back to" a multiple that Mr Schechner regarded as appropriate to a nutraceutical company rather than a multiple appropriate to a speciality pharmaceutical company. In other words, Mr Gee says that the selection of a multiple in the case of Metagenics which was more consistent with one to be applied to a nutraceutical company for the purposes of an IPO does not suggest that the participants to the Share Sale Agreement were recognising, from November 2004, that Metagenics was more in the nature of a nutraceutical company. Mr Gee says that the multiple of 1.6 was "very very clearly told to us [as] ascribed to the science in Metagenics" (T, p 262, lns 3-4) and the "whole company" was being spoken about as being able to be positioned as a specialty pharmaceutical company because of the science: T, p 262, lns 11-12. 285 Mr Gee says that "because the North American business [was] being represented as a specialty pharmaceutical company" it received "a premium": T, p 262, lns 29-31. 286 In this context, the confusion is that in Mr Gee's outline of responsive evidence of 3 July 2014 (responding to the affidavits of Mr Morey and Mr Katke) he said at paras 19 and 40 that Mr Schechner had said, in his presentation, that positioning Metagenics as a specialty pharmaceutical company was "probable and the preference" for marketing Metagenics. In Mr Gee's outline of evidence of 14 April 2014, at para 13, he said that Mr Katke had said, at the 17 November 2004 meeting, that for the purposes of an IPO the preferred and probable positioning of Metagenics was as a specialty pharmaceutical company because on an IPO it would command a premium on the multiple investors would use to value the company. 287 Mr Gee's earlier recollection of the events certainly attributes the remark about a preference for, and probable positioning of Metagenics, as a specialty pharmaceutical company, to Mr Katke on one occasion, but does so in the context of a discussion about an IPO and how a market premium might be attracted from investors due to a higher multiple applied to a company so positioned. However, in two other parts of Mr Gee's proposed evidence (the outline), he attributes the remark to Mr Schechner who, of course, was talking about multiples in the context of an IPO. Mr Gee, in light of this confusion, did not accept that he could not clearly remember this part of the discussion on 17 November 2004. He believes that Mr Schechner gave an outline of the positioning and Mr Katke said it was the probable positioning and the preference for positioning. 288 The proposition was put to Mr Gee that Mr Schechner was the only person who said that the probable and preferable course of positioning Metagenics as a speciality pharmaceutical company was because of the multiple on an IPO, only. Mr Gee said that he did not specifically recall that. 289 Mr Gee gave evidence that it was his view that the preference would be to position the company as a speciality pharmaceutical company and that was "because of the higher multiple": T, p 265, lns 24-27. 290 In Dr Bland's part of the presentation on 17 November 2004, he spoke about the research and the science. He spoke about the Kaprex product and its relationship with hops, and the utility of the product due to its therapeutic anti-inflammatory properties. He spoke about some discussions conducted with Pfizer with respect to the potential licensing of Kaprex. Dr Bland spoke about the results of a modest trial which had been conducted on Kaprex with positive results. Dr Bland spoke about the potential for licensing the product although in order to properly commercialise Kaprex, larger blind (phase) trials would need to be conducted. Conducting blind trials to establish the therapeutic anti-inflammatory effects of Kaprex (in a satisfactory regulatory way for relevant approvals) among the relevant cohort would cost millions of dollars. Dr Bland observed that Metagenics did not have the financial resources to fund a blind trial of this kind and was seeking investment from a large pharmaceutical company such as Pfizer to assist it in this process. 291 Mr Michael Brosnan gave oral evidence as to the statements he says were made to him that Metagenics would proceed to an IPO. At T, p 285, lns 27-40, Mr Brosnan put it this way in response to the following question from his counsel: Q Subsequent to that meeting in November 2004, what was your next contact with Jeff Katke or anyone from Metagenics about this matter? A I spoke to Jeff all the time. We would speak about a range of issues. We were, as I said, best of friends. We would travel, ski, boat, golf, drink, and so I spoke to him regularly, and it was that, "Mate, we're - we're going to an IPO next year". That was in December [2004]. And most of the discussion about the actual merger and agreement with Health World were done through Alan Gee, but for me the phone calls were - were far less formal, to say the least. They were far more casual, but with an emphasis that, you know, we're - we're going to IPO as fast as we possibly can. Q Can? A Markets - markets permitting. Q Can you recall the sorts of words that Mr Katke used on the phone when he was talking to you about this? A They're going to - "Mate, we're going to an IPO". [emphasis added] 292 At T, p 294, lns 41-42, Mr Brosnan said again, in a different context, that: "We were promised an 05 - promised an IPO in 05".

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19 November 2004 294 On 19 November 2004, Mr Morey sent an email to Mr Gee asking for projections for HWL for 2006 on a monthly basis, if available. If not available, Mr Gee was asked to prepare such projections. Mr Morey also said that Metagenics would need HWL projections at least on a quarterly basis "going out to 2011". He said he had made his own estimates out to 2011 on HWL but would like to see Mr Gee's assessment of projections for HWL for 2011. Mr Morey also observed: "I know as you get that far in the future that it becomes even more of a guess and less reliable". 295 Mr Gee responded and said that he would work on the 2006 (and beyond) projections and respond to Mr Morey the following week. Mr Gee accepted that "it becomes more difficult to project further into the future, but I think it puts more [of] an onus on you, as well, ... for it to be on a reasonable basis": T, p 162, lns 34-36. Mr Gee said that he was not aware of doing seven year forecasts (as Mr Morey had requested) although he had certainly undertaken four or five year forecasts. 296 On 23 November 2004, Mr Morey sent an email to Mr Gee attaching a draft Terms Sheet outlining the elements of a proposed agreement. The terms are contained in a draft document dated 19 November 2004. The draft terms sheet contemplated that Metagenics would purchase all the remaining issued shares in HWL (the 90% held by the applicants) for a price calculated at eight times the "Adjusted EBITDA" of HWL based on audited financial results by KPMG less unpaid royalties (having regard to the earlier 2003 suspension arrangements) of AU$1,350,000 to arrive at a valuation of 100% of HWL. The proposed purchase price would be capped at $48M payable as to $2.5M in cash with the balance in shares. 297 On 26 November 2004, Mr Gee responded to Mr Morey by email copied to Mr AB Grant, Mr Katke, Mr Leon Brosnan and Mr Michael Brosnan. In Mr Gee's email, he observes that the understanding of the applicants at the San Clemente meeting was that the dividend flow to the Australian shareholders would remain until settlement of the shares from the IPO. 298 At point 8 of his email, he says this: 8) Other - as currently drafted there is no horizon for completion of the share purchase. There needs to be some mechanism if for some reason the IPO does not proceed within say 2 years that the Aus shareholders could exercise a call option to purchase the Health World shares back for $2.5m, and agreement that Aus profits would remain in HWL until the IPO. [emphasis added] 299 As to point 8 of his email, Mr Gee gave evidence that he had discussed the matter with either Mr Morey or Mr Katke and the context was this. 300 In September 2004, when Mr Katke had first raised the issue of an acquisition leading to an IPO with the Australian shareholders, they had been concerned to protect their position. One of the risks they perceived was the risk of making a commitment to a transaction effecting a merger of the companies and "between that date and the IPO occurring, … the markets crashed": T, p 113, ln 36. 301 Mr Gee gave evidence that because going to an IPO had always been expressed to the Australian shareholders as conditioned upon "markets permitting", the Australian shareholders wanted "some protection" should the merger occur and a market event intervene. 302 Mr Gee gave evidence that there was a further discussion about this topic with Mr Katke sometime after 1 February 2005 and before 8 February 2005. The initial position of the applicants had been that if a merger transaction was to occur, it should be completed simultaneously with an IPO occurring so as to remove the risk of a merger transaction being completed and a delay to an IPO. Mr Katke initially agreed with that position but then told Mr Gee that the investment advisers had told him that such a transaction would be too complex. That caused Mr Gee to suggest that in the event of a merger occurring the applicants would want a call option in their favour so that, if an IPO had not occurred within, say, two years, the applicants "could just give the money back that we've received, give the shares back and we get the company back". Mr Katke initially thought such a proposal was "a reasonable idea" but then advised Mr Gee that the investment advisers had said that the call option to re-acquire HWL shares "would have to be disclosed in the SEC filing (S-1) and, it would appear that the Australians didn't have confidence in the Business Plan and therefore it would be too difficult to market the concept": T, p 115, lns 22-38. 303 Although Mr Gee accepted that by 26 November 2004 when he formulated point 8 in his email to Mr Morey (copied to others) he had been told by Mr Morey (on 11 November 2004) that a problem had emerged in relation to the acquisition of the Belgium companies and that if an inventory roll back could not be undertaken it would be necessary to amend the Acquisition Agreement so that completion would occur after the 2005 audit (which Mr Gee understood to be a June 2005 audit), Mr Gee did not accept that these circumstances might be a reason why an IPO would not proceed. 304 Mr Gee said that he thought that audited accounts would probably be required for an IPO but he did not actually know that audited accounts of the Belgium entities would be required for an IPO. Mr Gee thought that audited accounts might be required for other purposes, such as, to ensure the accuracy of the financial reports for the benefit of the purchaser. However, in circumstances where the purchaser had a contract governing the rights of the purchaser, Mr Gee could not identify any other reason why audited accounts would be necessary. 305 Moreover, it seems from the evidence of the conversations and exchanges that much of the discussion concerning the need for audited accounts (by Ernst & Young) was in the context of the transaction overall and the proposed IPO. Mr Gee said that the focus of point 8 of his email was to protect the applicants against the risk that the markets might "tank" between merger and an IPO, as it had always been said to the Australian shareholders that the IPO would proceed, "markets permitting". 306 On 30 November 2004, Mr Morey sent Mr Gee by email a revised Terms Sheet which sought to address some of the issues Mr Gee had raised in his email of 26 November 2004.

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The December 2004 and January 2005 events 307 Negotiations on these matters continued between Mr Morey and Mr Gee by email on 1 December 2004, 5 December 2004 and 7 December 2004. On 5 December 2004 Mr Morey sent Mr Gee an email attaching a spreadsheet "on the purchase analysis". 308 On 24 December 2004, Mr Katke sent Mr Gee an email saying that everything was progressing well. Mr Katke also said this: "We had our first meeting with our attorneys to begin the IPO process yesterday. The Pfizer discussions continue to advance". 309 In December 2004, the Charter for a Scientific Advisory Board to Metagenics was brought into existence. Dr Bland, on 15 April 2004, had re-enlivened earlier discussions about establishing such a Board as a leading advisory group. It met for the first time on 18 March 2005. In the period between July 2004 and April 2005 it was comprised of 10 doctoral (PhD) members and one other. This cohort of advisory experts was (apart from Dr Bland and Dr Tripp) in addition to the existing expertise within Metagenics or MetaProteomics. By November 2004, those companies had within their own ranks 11 scientific researchers with PhD qualifications including Dr Bland and Dr Tripp and 10 other researchers with Science degrees. It is not necessary to recite the names of the 23 individuals making up the internal research and development team. 310 On 18 January 2005, Mr Gee had a telephone discussion with Mr Morey. 311 In that conversation, Mr Morey said that Needham had valued the company between $185M and $275M without any licensing revenue. Possible licensing revenue had been foreshadowed in the Needham presentation. Mr Morey said that Metagenics was seeking to confirm the accuracy of that valuation by obtaining advice from another investment bank, Bear Stearns & Company. Mr Morey said that the consumer and drug arms of Pfizer were both interested in the Kaprex product and that Pfizer was "looking at the mechanism of action and it had been referred to their scientific advisory board": T, p 112, lns 45-47. Mr Morey also said that Bison Capital was willing to "fund the Health World deal on 15 February and that in late February or March they hoped to have a Biotech investor in place": T, p 113, lns 1-2. Mr Morey also said that Metagenics would be "looking at filing with the … Securities Exchange Commission [SEC] in March and … the SEC had between 30 and 60 days to respond once [Metagenics] had filed [the prescribed document]": T, p 113, lns 1-5. Mr Morey said that once Metagenics had received a response from the SEC, Metagenics would have the right to change the content of their filed document, if necessary. 312 Mr Morey said that Metagenics was "looking to a May IPO": T, p 113, lns 5-6.

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The February 2005 events 313 On 1 February 2005, Mr Gee had a telephone conversation with Mr Morey. Mr Gee says this about it. 314 Mr Morey told Mr Gee that, in respect of the Belgium companies, Metagenics had signed an agreement in which the acquisition was subject to an unqualified audit report for calendar year 2005. He said that Ernst & Young had been appointed as auditors. He said that Mr Katke's wife, Mrs Shelley Katke, was seeking to sell a proportion of her shares in Metagenics to a biotechnology firm. Mr Gee understood that Mrs Katke held 28.25% of the issued shares in Metagenics and that she was seeking to sell over half of her shareholding in this way. He said that Needham had been talking with biotech firms to determine whether there was any interest in purchasing the shares with a view to setting up a bidding position between possible offerors. He said that he thought a biotech investor could be found within 60 days with the process commencing in mid-February 2005. Mr Morey said that although there had been discussion of a May IPO, the timeframe was too short and that Metagenics was now "looking at September, but, based on the markets, it could be better in November": T, p 115, lns 9-10. 315 Mr Morey said that Mr Katke had met with CK Life Sciences but that company only had "$300 million to spend". Mr Morey also said that a company called "Asahi" was talking about an initial acquisition of 51% of Metagenics with the balance to be acquired over three years based on performance. Finally, Mr Gee said this: "And he [Mr Morey] told me in respect of Pfizer that they were waiting a couple of months before providing information, to provide time to strengthen their patent position": T, p 115, lns 15-16. 316 Mr Gee's telephone discussion with Mr Morey on 1 February 2005 is the subject of Mr Gee's diary note No. 39. Mr Gee understood from Mr Morey that an agreement had been signed in respect of the Belgium transaction and the transaction was now subject to receiving an unqualified audit report for the calendar year 2005 from Ernst & Young. 317 Mr Gee accepted that, at this point, insofar as any Belgium projections were concerned, they were in respect of a transaction that had not taken place as at February 2005 and which was subject to a condition to be satisfied sometime after December 2005 for the receipt of an unqualified audit report, a condition, however, that might never have been satisfied: T, p 163, lns 27-35. 318 Mr Gee said that notwithstanding that a whole year would now pass before the condition might be satisfied, the expectation was that the company would continue to grow under its Business Plan. 319 Nevertheless, Mr Gee accepted that if an IPO had been held in 2005, the value of the shares on the float would not have included the value of the Belgium companies because the Belgium companies had not been acquired and might never be acquired: T, p 164, lns 11-14.

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The Biodynamics group entities or Belgium companies 320 As to Mr Gee's references to the Belgium companies, the position is this. 321 On 14 September 2004, Metagenics by its Belgium controlled entity, Metagenics Belgium BVBA, entered into an agreement to acquire from Mr Francis Maes and Mrs Lucrece Vandorpe (the "sellers") ownership of (the shares in) Special Nutritionals Europe NV, Euro Nutri BV, Biodynamics NV, Bionutrics NV [New Special Nutritionals Europe] BVBA and [New Biodynamics] BVBA. The 14 September 2004 Agreement was to be completed by 30 December 2004 "at the latest". On 10 December 2004 Maes and Vandorpe entered into an "Addendum" to the earlier agreement to address the difficulty confronting Metagenics in obtaining audited financial statements for the relevant entities. The Addendum document recites (among other things) that "in order to facilitate the initial public offering of Metagenics Inc in the US which is expected to happen in the course of 2005", the parties agree to the terms of the Addendum. Mr Gee understood that Francis Maes owned 26% of the shares in Bionutrics NV, rather than 100% of the shares, which was the ownership position (with Mrs Vandorpe) concerning the other entities. 322 Clause 1 of the Addendum is in these terms: The Sellers state that upon the request of the Purchaser an audit will be carried out between 1 January 2005 until 31 December 2005 by Ernst & Young auditors, appointed by both Parties, whereby Ernst & Young during the whole period of 1 January 2005 until 31 December 2005 will follow meticulously the complete accounting and administration, including the production-administration of Biodynamics NV, so that by 31 January 2006, or as soon as practically possible after that date, an unqualified auditor's report can be delivered by Ernst & Young auditors. … 323 Clause 8(5) of the Addendum provides that the agreements dated 14 September 2004: … remain in full force, but … in clause 5.1 (Date of Closing) each reference to "30 December 2004" must be replaced by "30 April 2006". 324 The 14 September 2004 Agreement was also subject to the purchaser obtaining a firm and binding finance commitment to finance the acquisition of the shares in the Belgium companies. 325 In Mr Gee's conversation with Mr Morey on 11 November 2004, Mr Gee understood Mr Morey to say that because an inventory roll back could not be undertaken in Europe, Metagenics would amend the purchase agreement for the acquisition of the Biodynamics entities so that the transaction would complete after the June 2005 audit had been completed. The Addendum, however, contemplates a date of 30 April 2006. Mr Gee said that in the case of HWL it would generally take about three months for audited statements to be produced from the end of the financial year. Clause 1 of the Addendum contemplates an audit for a 12 month period ending 31 December 2005 and an unqualified audit report by 31 January 2006 or as soon as practicably possible thereafter.

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Further February 2005 events 326 On 8 February 2005, Mr A B Grant and Mr Gee had a conversation with Mr Katke by conference call from the boardroom of HWL. 327 Mr Gee says this about it. In that conversation, Mr Katke said, in respect of the patents, that Metagenics needed to "enable the patents" and that could take up to four months and take things to the end of April 2005. Mr Katke said that concluding a "licensing deal" could take anywhere between three months and two years and for present purposes the period should be thought of as nine to 12 months. Mr Katke said that the IPO had been deferred from May 2005 to November 2005. Mr Grant observed that the deferral would give rise to uncertainty from the perspective of the HWL shareholders. Mr Katke responded by saying that the risks were low and that the applicants were better off being combined with Metagenics. Mr Katke said that the best months to publicly list in the United States were May or November. Mr Katke said that having regard to the length of time to conclude a licensing transaction, Metagenics could go public in November 2005 and then announce a licensing transaction in January 2006 which would lift the value of the shares. 328 Mr Katke confirmed that Metagenics had put in place funding for the acquisition of the Biodynamics entities. 329 Mr Grant repeated his observation that the extension of the time for the IPO without protective mechanisms in place left the Australian shareholders "exposed". Mr Katke responded by saying "Guys, we're going to an IPO in 2005": T, p 116, lns 23-37. 330 After this telephone discussion, Mr Gee, Mr AB Grant, Mr Leon Brosnan and Mr Michael Brosnan had a further discussion by conference call from the HWL boardroom with Mr Katke which probably took place on approximately 15 February 2005. 331 Mr Gee says this about it. Mr Katke repeated in substance the observations he had made in the course of the 8 February 2005 conversation and when challenged about the contended exposure or risks to the Australian shareholders, he again observed that "we're going to an IPO in 2005". Mr Gee says that after that conversation the four applicants had a conversation which resulted in Mr Leon Brosnan observing that "well, it comes down, basically, [to] do we trust Jeff. I do". Each of the four applicants said that they trusted Mr Katke and each of them then decided to proceed with the merger transaction although the final terms of the transaction were still a matter of negotiation: T, p 117, lns 1-10. 332 As already mentioned, Mr Alan Bawden Grant was present when the discussion by conference call took place with Mr Katke. Mr Grant had been the General Manager of HWL. He retired in 1997 from that role. He had been the Company Secretary and had attended Board meetings in that capacity. Mr Grant made a diary note of the conversation on 8 February 2005 with Mr Katke. Having regard to that diary note, Mr Grant's recollection of the conversation was this. 333 When Mr Katke said that the IPO had been delayed from May to November 2005, Mr Grant said that this gave rise to uncertainty for the applicants because they had thought in 2004 and early 2005 that the IPO "was going to be in May 2005" but suddenly it had become November 2005. Mr Katke spoke about patents in the United States for products, particularly Kaprex. He spoke about some existing products which were going to emerge out of molecules present in hops. He said that Metagenics would need to enable their patents and be certain about the validity of them. Metagenics was to undertake a "roadshow" in the months of August, September and October and there would be a filing of an S-1. Mr Grant says, from his note, that there was a question of "licensing deals" discussed and the timeframe for putting them "in place" was nine to 12 months. May or November were the months to list in the United States. The proposal was to be announced "and then deals would in January/February 06 drive up the value of the shares which we would then have in the public company". There were comments about the "sort of board structures there would be". Mr Grant's note contains this observation: Pay out balance. Private equity investor to pay out Health World. Company will grow. Will not be a problem. The value would be 1.522 times the sales. Going public this year. 334 "This year" is a reference to 2005. 335 Mr Grant's note records Mr Katke saying "risks are low and we would be better off as a combined company". 336 As to these matters, see T, p 390, lns 36-47; T, p 391, lns 1-38. 337 Mr Grant says that by the time this conversation took place he understood that the directors of Metagenics intended to proceed to an IPO in 2005 and that Needham was the adviser for that purpose: T, p 394, lns 38-40. Mr Grant accepted that the intention of the directors of Metagenics to proceed to an IPO in 2005 was, for him, "old news" in the sense that he had heard the presentation by Mr Schechner in the United States and what was new was the delay to the timeframe: T, p 394, lns 42-46. Mr Grant accepted that because his note made a reference to investment banks including Morgan Stanley, Bear Sterns and Needham, Metagenics was, naturally, seeking advice about the IPO from an investment bank.

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9 February 2005 338 On 9 February 2005, Mr Katke sent an email to Mr Gee attaching an Information Memorandum ("IM") prepared by Bison Capital in relation to Metagenics. In the IM, Bison Capital said that it planned to invest US$15M in Metagenics. It described Metagenics as a leading dietary supplement company. The investment was being made to finance the acquisition of the Biodynamics entities. The IM says that Metagenics is a "leading player in the US practitioner distribution channel" with an estimated market share of 9.5%. The IM then describes aspects of the market position of the European entities. The IM says that Metagenics has an extensive customer base worldwide servicing approximately 30,000 healthcare practitioners. It says from 1991 to 2003 Metagenics revenues grew at a compounding rate of 17.6% and since its merger with HealthCom in 2000, core business revenues had increased at a compounding rate of 10.1%. It talks about the significant manufacturing facility at Gig Harbor, Washington, producing 20 million tablets per month. 339 As to the R&D activities of Metagenics, the IM says this: [Metagenics] hosts the largest and most competent R&D department in the industry. Employees in this group have been responsible for the Company's product safety and efficiency leadership. Metagenics' research and development efforts have resulted in the establishment of a proprietary discovery platform, the ExpressSyn system, for developing natural products that are effective and safe. The company has an extensive product portfolio and pipelines, including numerous products to be produced over the next three years. 340 As to new product developments, the IM says this: In 2003 the Company introduced an anti-inflammatory product called Kaprex. The company's clinical trials have shown Kaprex to be as effective as currently marketed anti-inflammatory drugs such as Ibuprofen, Celebrex and Vioxx, without producing potentially harmful gastro-intestinal bleeding or cardiovascular problems. Metagenics intends to begin seeking a licensing arrangement for the intellectual property associated with Kaprex with either one of the leading pharmaceutical companies or for distribution of Kaprex through an alternative, larger dietary supplement channel such as multi-level marketing. [emphasis added] 341 Adams Harkness, an investment bank, delivered a presentation to Metagenics dated 23 February 2005 under the title "Metagenics, Inc. The IPO Path". Mr Katke gave evidence that Needham was the lead investment bank advising Metagenics. Adam Harkness was, in effect, number two, or the second adviser, and A G Edwards was the third investment bank advising Metagenics. Mr Katke says that these three banks were selected to have a role to play because of their particular focus with particular investment communities. Adams Harkness was the leading investment bank in financing dietary supplement businesses. A G Edwards was a retail investment bank which dealt with individual private investors. Needham dealt with professional investors such as funds, funds managers and large investors. Adams Harkness also dealt with professional investors. 342 Although the IM seems to reflect the outcome of at least some engagements between Metagenics and Bison Capital, Mr Gee does not say in his affidavits or in the course of oral evidence that this particular document had significance for him in his decision-making even though it was sent to him by email. 343 Mr Katke gave evidence that towards the end of February 2005 he became aware that Pfizer was in the process of selling its consumer products division. It followed for Mr Katke that there would be no point in seeking to further discuss with Pfizer personnel any possible commercial relationship with Metagenics and thus Mr Katke ceased any further negotiations. 344 Mr Katke also says that towards the end of February 2005 Adams Harkness in its presentation to Metagenics urged the position that a strong case could be made that a science-based dietary supplement company supported by biotechnology was "as good or better" position to adopt than a specialty pharmaceutical position. Adams Harkness advised Metagenics to adopt that position and after further discussions with Adams Harkness and also Needham, Metagenics agreed to that positioning. Mr Katke says that he advised Mr Gee and Mr Michael Brosnan of this development at about the time that he met with Adams Harkness.

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The 7.5 year horizon 350 As earlier mentioned, Preferred Stock A in Metagenics (being shares taken by the applicant shareholders under the 2005 Agreement) means shares redeemable at the option of the applicants at the earlier of the date Metagenics lists its Common Stock on any Stock Exchange in the United States; the date of completion of a transfer or sale of more than 50% of the issued shares in Metagenics (concerning a transaction occurring after completion of the 2005 Agreement); or a date 7.5 years after completion of the 2005 Agreement. Such stock is also redeemable by Metagenics at any time. 351 The period of 7.5 years also relates to the "earn-out payment" contemplated by cl 2.4(a). That clause provides for the payment of 30% of the after tax net profits of HWL in each financial year ending on the earlier of the date that any stock in Metagenics lists on "any recognised stock exchange" and a date that is 7.5 years after completion as earlier described in these reasons. 352 Mr Gee did not accept that these formulations which contemplate a 7.5 year horizon were inserted into the 2005 Agreement to guard against a "recognised risk" that an IPO might not happen "despite everybody's intentions". Mr Gee's explanation at T, p 170, lns 10-20 was this: The concept of the earn out payment was - for example, we had signed the contract for the sale at the end of April 2005 but it wasn't anticipated that an IPO would occur until November 2005 so we wanted to retain the earnings through that period. And then, in the event that the markets tanked within that period, we wanted to continue to maintain the earnings. They were - initially, it was to be in perpetuity. Gerry Morey [sic] told me that he had received tax advice that it couldn't be in perpetuity and he needed a fixed date. He proposed 5 years. I negotiated that out to seven and a half years on the basis that normal economic cycles run at seven years and I figured that if the markets went down in a serious way, they would recover in seven and a half years. [emphasis added] 353 Mr Gee accepted that the initial notion put by the applicants of an earn-out payment "in perpetuity" gave the applicants more protection in case an IPO never occurred: T, p 170, lns 22-23.

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The events of September 2005 356 On 27 September 2005, Mr Katke sent an email to Mr Gee, Mr Michael Brosnan and others as a "Confidential update" on the private equity transaction and the IPO. Mr Schechner in his presentation had suggested that a large company ought to be attracted as an investor in Metagenics before undertaking a float so as to add value to the IPO when it occurred. In Mr Katke's email he said this as to the private equity transaction: The process of securing a private equity investment is slowly grinding on. We have three interested parties, China Development Industrial Bank (CDIB a large biotech investor), Inventages (a Swiss biotech/healthy living investor with money from Nestle) and Oxford (a marquis biotech investor from Boston). We have received verbal terms from CDIB and Inventages, with CDIB valuing the company at $80-$90 million and Inventages valuing the company at $85 million. We are currently in discussion with Inventages regarding the deal structure and the discussions are progressing. Oxford has just re-engaged in the process and we expect to get a valuation and structure from them early next week. [emphasis added] 357 In Mr Katke's email he said this as to the IPO: We have postponed the IPO until early next year (March/April [2006] market permitting) and plan to file our S1 not later than December 1 2005. If the private equity transaction is not finalised by Thanksgiving we will terminate the private equity process. Needham and Adams believe that we can sell $13 million of Shelley Katke's shares in the IPO if we cannot finalise a private equity transaction by Thanksgiving. A sale of Shelley's shares in the IPO will help reduce her selling pressure after the IPO, secure her cooperation for a lock-up agreement and allow me to address excess compensation issues. [emphasis added] 358 Mr Gee understood this email to be addressing generally the question of a private equity placement in order to add value to an IPO but also serving the purpose of creating a vehicle for Mrs Katke to sell her shares which would also add value to the company on an IPO as it would remove the need for Mrs Katke to "cash out" her shares on a float or immediately after a float: T, p 170, lns 37-43. It seems that by this stage the strategy had very much become one of securing a private equity investment of the kind described in the update and this strategy was being pursued rather than any suggestion of securing a licensing agreement with Pfizer. 359 Mr Gee accepted that by 27 September 2005, the applicants understood that there was clearly not going to be an IPO in 2005. Mr Gee and the applicants accepted that the IPO had been "pushed out" to March or April 2006 "markets permitting". Mr Gee understood that the explanation for the extension in time was that Metagenics did not have the "auditor's sign off": T, p 171, lns 25-27; lns 33-34.

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The events of November 2005 360 On 3 November 2005, Mr Katke's Assistant (Cory Swift) sent an email to Mr Gee, Mr Curley, Mr Michael Brosnan and Mr Joiner attaching a draft Business Plan for Metagenics for the financial year 2006/2007. The addressees were requested to review the draft Business Plan and forward comments or suggestions to Mr Katke. Mr Joiner responded on 9 November 2005 with "a couple of small notes" suggesting tracked changes to the Business Plan. 361 In the "Metagenics Vision" statement the milestones include: 2. Raise capital to fund further growth through an IPO as soon as the market is receptive to our offering in 2006. 3. Secure licensing and research agreements for the development of our ExpressSyn discoveries with large pharmaceutical and/or consumer products companies for products that are safe and effective for the treatment of osteoarthritis, metabolic syndrome, osteoporosis and obesity. 4. Successfully launch Inner Health, Menohop and Kaprex in International pharmacy and Health Food Store markets by 2007. 362 The company strategies are set out in the plan. The financial objectives are to achieve revenues for 2006 of $146.7M and revenues in 2007 of $191.2M. The Business Plan makes reference to financial objectives for EBITDA in each year although the numbers are not inserted in the plan at that point. 363 Point 3 of the objectives is in these terms: 3. Integrate the acquisition of Health World (Australia) and BioDynamics (Belgium) to achieve quantifiable cost and growth synergies in 2006. Responsibility: Mickey Moore, Co-COO or new President?? 364 Point 4 is in these terms: 4. Prepare the company to complete an IPO as soon as the market becomes receptive to our offering in 2006. 365 Under point 4, the plan then recites 10 implementation steps. They include, among other things, the need to ensure the "smooth integration of the acquisitions" with Metagenics; address "accounting, financial reporting [requirements] and compliance with Sarbanes Oxley" regulatory requirements; "select investment bank syndicate, negotiate valuation and prepare for roadshow -"; "Complete the S1". The responsibility for each of those tasks is allocated by the plan to Mr Moore and Mr Gee; Mr Morey; Mr Katke; and Mr Morey, respectively. 366 Under the heading "Long-Term Goals", the plan recites as goal 7: "Complete additional strategic acquisitions in 2007 and 2008. Should a broad acquisition criteria be defined?" 367 Although the plan was sent to Mr Michael Brosnan, Mr Gee could not recall having seen any comments from him: T, p 171, lns 46-47. That may be because Mr Katke's email was also directed to Mr Gee and Mr Brosnan has indicated his general approach to addressing financial questions once he sees that the email is also addressed to Mr Gee. 368 On 8 November 2005, Mr Gee sent his comments on the Business Plan to Mr Cory Swift. 369 Apart from duplication of references to the revenue statistics for 2006 and 2007 and some other matters, Mr Gee responded by observing that Mr Mickey Moore, the Co-Chief Operating Officer, should be responsible for the integration of HWL and Biodynamics with Metagenics rather than the new President to be appointed. Mr Bellin was ultimately appointed to the position of President. Mr Gee observes, as to goal 7, that "more acquisitions in this period is trying to do too much" and: "We need to make sure the first one is done properly, and there is appropriate focus on the science strategy". 370 Mr Gee accepted that the submission of the draft 2006/2007 Business Plan coupled with Mr Gee's examination of it, and response to it, reflected the position that he did not see himself as limited to expressing views about only the HWL operation but rather, he engaged with the Business Plan for the wider operation and he was able to do so in relation to financial matters particularly because Mr Gee received periodic reports from Mr Morey about the financial status of Metagenics: T, p 173, lns 46-47; T, p 174, lns 1-2. 371 On 11 November 2005, Mr Swift responded to Mr Gee's email of 8 November 2005 attaching documents in preparation for an Advisory Board Meeting for Metagenics on 14 November 2005. The documents included an agenda, a further draft of the 2006/2007 Business Plan, financials for the period March up to and including September 2005 and a proposed Organisational Structure. 372 The agenda contemplates a financial review; a review of the legal and regulatory issues; the status of the contemplated private equity transaction; a review of the IPO time line and valuation methodology with an address on that topic by Mr Schechner; and, a discussion of the draft Business Plan and a discussion of the proposed organisational structure for 2006 and beyond. 373 Mr Schechner's presentation on the IPO issues was scheduled for one hour. 374 The further version of the 2006/2007 Business Plan recites the EBITDA financial objectives as, achieving $18.2M for 2006 and $31.1M for 2007. Mr Gee attended the meeting by conference call. The Advisory Board acted in conjunction with the Statutory Board for Metagenics. Mr Gee periodically attended meetings of the Advisory Board. 375 On 14 November 2005, a meeting of the Board of Directors of Metagenics occurred. The following members of the Board attended in person or by conference call: Dr Bland, Mr Michael Brosnan, Mr James Hunt and Mr Katke. The following members of the Advisory Board attended in person or by conference call: Mr Hovee, Mr Krajanowski, Mr Leiner and Mr Zaepfel. The Minutes record that these persons were also present (in person or by conference call): Yee-Ping Chu, Partner, Bison Capital; Mr Gee; Mr Paul Konney, General Counsel, Metagenics; and Mr Morey. On 14 November 2005, a meeting of the Advisory Board also occurred. The Minutes record that those present were Mr Katke, Dr Bland, Mr Hunt, Mr Chu, Mr Hovee, Mr Krajanowski, Mr Morey and Mr Konney. Mr Leiner, Mr Michael Brosnan and Mr Gee attended by conference call. 376 As to the meeting of the Board of Directors of Metagenics, Mr Katke acted as Chairman. 377 As to the IPO, the minutes record this: Initial Public Offering The following representatives of Needham & Company joined the meeting by telephone to discuss the Corporation's potential initial public offering: David S. Schechner, Managing Director, Church Lewis, Managing Director; and Brian Perrault, Financial Analyst. Mr Schechner reviewed the environment for [IPOs] and the stock-market performance of companies comparable to the Corporation that had gone public in the prior year. He discussed the prospects for [IPOs] over the next 12 months and the pricing mechanisms that would apply to the Corporation's stock. Mr Schechner and Mr Lewis reviewed the types of questions that prospective investors would ask about the Corporation and the key factors that would influence the stock market's perception of the Corporation. After discussion, the representatives of Needham & Company left the meeting. [emphasis added] 378 As to the private placement, the minutes record that Mr Katke spoke to the prospects for a private placement of securities in Metagenics. He reviewed the state of the transaction under discussion with Oxford Bioscience Partners. The Board discussed the terms and the impact of the proposed private placement in the event the company proceeded with an IPO, or not. The minutes note that it was the "sense of the Board that the Corporation should continue preparations for a public offering while attempting to negotiate better terms for the potential private placement". 379 As to the 2006 Business Plan, the minutes note that the plan was discussed and the Board requested a "report card on the 2005 Business Plan and a comparison of the 2005 Business Plan with the 2006/2007 Business Plan". 380 Mr Schechner's presentation to the 14 November 2005 Board meeting is the subject of a series of slides at Vol 9, Tab 308 in the Court Book. Mr Gee was on the conference call during the course of this presentation. In Mr Schechner's presentation, he says this: • The current market for equity offerings is challenging. • As a result, the Private Placement process has also been difficult; • We have contacted over 130 accredited investors; • We have had good meetings with high profile venture capitalists; and • There are five remaining parties with whom there is an active process. • We believe that the market will be receptive to a Metagenics IPO in 2006 • The Company should file an S-1 in late 2005 or early 2006 in order to opportunistically issue equity • We continue to believe that the Company's pre-money value before IPO discount is $175M (+/- 10%) • The IPO could potentially include a secondary component • 34 of 82 consumer, technology and healthcare IPOs in 2005 have included secondary shares; • The Company's financing needs must come before any secondary shares are sold. 381 Mr Schechner concludes those observations with this comment on behalf of Needham: We fully support Metagenics' decision to move forward with an IPO. 382 In the presentation, Mr Schechner observes that in the Spring of 2005 the equity market improved from weakness earlier in the year due to a number of identified factors. He says that the market as at 14 November 2005 remained clouded by a number of issues including high energy prices, a heightened risk of inflation, a housing market bubble, forecast slowing economic growth, continuing tightening by the Federal Reserve, a widening budget deficit, slow money supply growth and weakened consumer confidence. 383 The presentation identifies IPO activity in the consumer sector and the biotechnology sector and it also identifies IPOs postponed or withdrawn. 384 The presentation also identifies the investment highlights for Metagenics having regard to eight factors and the investment challenges facing Metagenics having regard to 11 factors including the pre-money valuation at $85M, under-appreciated science, low historical organic revenue growth, nutraceutical industry concerns, concerns regarding the integration of HWL and Biodynamics, and whether the IPO might be potentially premature. Mr Gee could not recall, specifically, Mr Schechner's comments about whether the IPO might be potentially premature. 385 Although Mr Gee rather thought that he first began attending meetings of the Board of Directors of Metagenics as an observer in 2008, the Minutes of the two meetings mentioned earlier make clear that Mr Gee was participating as early as 14 November 2005.

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The events of January, February, March and April 2006 389 On 13 January 2006, a meeting of the Metagenics Board of Directors occurred. The Chairman reviewed the status of the proposed private placement to Oxford Biosciences Partners and Abingworth. The Minutes note that it was the sense of the Board that Mr Katke's proposed purchase of his former spouse's shares was more desirable than proceeding with the private placement. Mr Katke reported on the status of preparations for the company's IPO. Mr Katke outlined the likely timing of the IPO and the planned changes in the membership of the Board of Directors. Neither Mr Michael Brosnan nor Mr Gee were participants in this meeting. 390 On 1 February 2006, Mr Morey sent an email to Mr Gee attaching a list of accounting issues that would need to be resolved before Metagenics could file the S-1. 391 Mr Morey said this: The market in the US is currently very attractive for us. So, it is imperative that we move quickly and accurately with an S1 filing to be in a position to become a publicly traded company. The Company would like to file on the morning of February 9th. In order to keep this timeline we will need to get commitments for completion of the attached outstanding issues understanding that we should allow 5 business days for KPMG US and Australia to review our work afterwards. [emphasis added] 392 The attachment set out 12 accounting issues that would need to be addressed. 393 The audit partner conducting the audit of the financial accounts of Metagenics was Mr Dean Samsvick. 394 On 3 February 2006, a meeting of the Board of Directors of Metagenics occurred. The Directors present were Dr Bland, Mr Michael Brosnan, Mr Hunt, Mr Katke and Mr Moore. From the Advisory Board, Mr Hovee, Mr Krajanowski, Mr Leiner and Mr Zaepfel were present. Mr Konney, Mr Morey and Mr Saggers of Bison Capital were present. Mr Gee was not present. The Board meeting approved the Minutes of the earlier Board meetings held on 14 November 2005, 19 December 2005 and 13 January 2006 although there were some changes to the 13 January 2006 Minutes. Those earlier Minutes addressed (among other things) the discussion in relation to the private equity placement as mentioned. 395 On 28 March 2006, Mr Katke sent an email to Mr Gee advising him that Metagenics planned to file the S-1 during the course of the following week which, he said "should allow us to complete the IPO by June 26". 396 On 20 April 2006, a meeting of the Board of Directors of Metagenics occurred. Mr Katke, as Chairman, reviewed the timetable for the planned IPO. He reported that KPMG had made a commitment to complete the 2005 audit by 28 April 2006 if they received the company's "final numbers" and responses to their questions by 21 April 2006. Mr Katke distributed and reviewed the IPO valuation materials dated 20 April 2005 prepared by Needham and commented on the financial projections used as the basis for Needhams valuation estimates. Mr Lewis, the Managing Director of Needham, joined the meeting by telephone. He commented on the positioning of Metagenics for the IPO and the importance of maintaining growth and profits. Needham made a presentation on the valuation topic under the title "Initial Public Offering Valuation Materials". The document ought to have been dated 20 April 2006. In the document, Needham set out a summary of the effects of an IPO as at January 2006 (representing the previous analysis) with an updated analysis to April 2006. It is not necessary to set out the details of those analyses. The presentation also set out a comparable company analysis and three categories of comparable companies were selected. The first category was MLM/Direct Seller Supplement Comparables with seven companies under that category considered. The second category was Retail Channel Supplement Comparables with seven companies considered. The third category was Biotechnology Comparables with seven companies considered. The analysis sets out the multiples data and the market statistics. It shows income statement data and a margins analysis. It also sets out balance sheet data in each case. 397 On 28 April 2006, Mr Katke sent an email to Mr Gee, Dr Bland and many others including directors of Metagenics and the management team, concerning the status of the IPO filing. He attached an update dated 27 April 2006 to his email setting out the reasons for the delay to the filing. He said that Metagenics was now "shooting for an IPO in October/November" and apologised for the "disappointing news". 398 In the attachment, Mr Katke said this: At a meeting with our investment bankers and auditors this morning, it was decided to delay the S-1 filing for our IPO, in order to satisfy "significance" accounting requirements relating to our Biodynamics acquisition. Two unexpected outcomes have combined to create this situation; 1.) The purchase accounting adjustments related to our acquisition of [HWL] and patent accounting adjustments recommended by KPMG have reduced our 2005 profit from approximately $3 million to just over $1 million. 2.) Biodynamics investment in [particular sponsorships] has produced a $1.5 million loss for them in 2005. These changes were discovered upon receiving the final draft of the Biodynamics audit and final numbers after taxes and adjustments by KPMG. The SEC rules related to the "significance" of an acquisition specify that if an acquisition's profit or loss is more than 50% of our profit, then we must have two years financial statements in our S1. The accounting rules governing the inclusion of financial statements for an acquired business specify the periods for which financial statements must be furnished, depending on various measures of the significance of the acquisition. The significance tests we have conducted in the past [have] consistently shown that we would only be required to include 1 year of audited financials for Biodynamics. However, the changes in our own financial statements resulting from KPMG's audit have reduced our profit for 2005, and combined with the profit shortfall of Biodynamics has changed the calculation of significance for Biodynamics. KPMG now advises that we are required to include two years of audited financials for the Belgium company. [emphasis added] 399 Mr Katke also says in his update that the plan now is to audit the first four months of the operations of Biodynamics at the end of April which will provide Metagenics with 22 months of audited Biodynamics financial statements which the SEC would apparently view as adequate in meeting the SEC's two year requirement. Mr Katke observed that: The impact on our timing has not been finally determined, but we believe the delay in filing will be 6-8 weeks. So at present we are shooting for an October/November IPO. 400 On 28 April 2006, Mr Gee responded by email to Mr Katke's email and update in which he said this: Although disappointing, my view is that everything happens for a reason, and in this case I think it is that the level of preparation work far exceeded anyone's reasonable expectations (read excessively anal auditors). Notwithstanding, I think we will be in a better position as a Group to go at the later date, and subject to the market holding strong, a better result will be achieved. [emphasis added] 401 In order to help plan for a better position, as a group, for the proposed later date, Mr Gee requested Mr Morey and Mr Katke to confirm the timetable that "we are now working to". Mr Gee understood Mr Morey's position to be that the group would rely upon the June results for a filing in August. Mr Gee requested confirmation of the information to be provided and noted that the March quarterly audit review would need to be completed. As a matter of priority, Mr Gee sought information from KPMG US, Australia and New Zealand about the scope of the work required to complete the quarterly audit review. 402 Mr Brosnan gave evidence at T, p 287, lns 41-46 and T, p 288, lns 4-7 and lns 12-14, to this effect in relation to things he started to say to Mr Katke in 2006: In 2006 I would say to Jeff, as a friend, "Look, this is starting to impact on my family and the Australian shareholders, because we're growing at 25 per cent per year". And I had - some stock in the pref A, which is basically cash, and it was getting converted as soon as an IPO converts to cash. And I said, "By the delay, I'm starting to get injured". … Because there was no IPO, the delay in that was - means we couldn't get our cash out. And then the delay also meant that our value in Health World was increasing and we were stuck on a - on an end of 04 valuation. But the whole time it was, you guessed it "Mate, be patient. I'm working my arse off here", just, "It's going to happen. Just be patient". That was the early part of 06. 403 On 11 May 2006, Mr Katke sent an email to Mr Gee and Mr Michael Brosnan (and many others) advising that after many discussions with Ernst & Young in Belgium, Metagenics had determined that it could not meet the timeline earlier proposed and that the new target for filing an IPO was November 2006 (the S-1). Mr Katke said that market, business and KPMG service permitting, Metagenics would price the issue in February 2007. Mr Katke attached an explanation of these developments for review by the addressees. He apologises for another delay and says that Metagenics will make use of this time to grow the business and create more value to improve the success of the IPO and post-IPO performance.

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The events of July and August 2006 404 Metagenics convened an International Strategic Planning Conference in California from Monday, 31 July 2006 to 4 August 2006. 405 The agenda, at least for Monday, 31 July and Tuesday, 1 August was sent to Mr Michael Brosnan, Mr Gee, Mr Joiner and Mr Curley and 16 others on 28 June 2006 including Mr Katke, Mr Morey and Mr Konney. A further version of the draft Business Plan for 2006/2007 was also provided to the proposed participants. 406 On 20 July 2006, Mr Gee had sent an email to Mr Swift setting out the "combined Australian comments" on the 2006/2007 Business Plan. Those comments address the vision; the proposed milestones (including the introduction of the Metagenics FLT ("First Line Therapy") Style programs on a different timetable to the United States; Kaprex and Menohop in the pharmacy and HFS channel); the operating strategies; the 2006 financial year objectives including revenues, EBITDA and net income for the group; the 2007 financial year objectives; the long term goals for the group; and the company structure. Mr Gee's email is supported by particular appendices. 407 Mr Katke says that at the conference on 31 July 2006 there was considerable discussion of the Business Plans for each division especially concerning the initiatives proposed by each management team. Mr Katke says he made specific efforts to encourage each management team to collaborate with other teams on best practice. He says each team brought diverse perspectives about their approach and the views concerning their own local markets. Mr Katke says there was considerable debate about the values, mission, vision, strategy and objectives set out in the Corporate Business Plan circulated before the meeting. Mr Katke says that one matter he recalls is that Mr Michael Brosnan and Mr Gee voiced concern that the rest of the Metagenics group was not keeping up with the HWL growth rate. Mr Katke also says that he made a presentation to the meeting on the current status (to that date) of the unsuccessful attempts by Metagenics to licence its Kaprex technology. Mr Katke said that he was investigating alternative licensees "given that the discussions with Pfizer had concluded". 408 On 4 August 2006, a meeting of the Board of Metagenics took place chaired by Mr Katke. The directors in attendance were Dr Bland, Mr Michael Brosnan, Mr Hunt, Mr Katke and Mr Moore together with Advisory Board members, Mr Hovee, Mr Krajanowski, Mr Leiner and Mr Zaepfel. Also present were Mr Konney, Mr Morey, Mr Gee and Mr Yee-Ping Chu. The Minutes of the meeting contain these observations concerning HWL Preferred Stock: Health World Preferred Stock The Chairman described the Corporation's Series A Preferred Stock, 14,868,000 shares which had been issued to the sellers of [HWL] in connection with the Corporation's acquisition of [HWL] in 2005 the preferred stock is redeemable at its face value of AUD14.8 million (equivalent to US$11.3 million at December 31, 2005). The Corporation had planned to use a portion of the proceeds of the [IPO] to redeem the preferred stock. As part of the acquisition, the former [HWL] shareholders received the right to nominate a member to the Corporation's Board of Directors, and Mr [Michael] Brosnan was elected to the Board pursuant to the exercise of this right. Mr Brosnan and his family members own a major portion of the preferred stock issued to [HWL]. The former shareholders of [HWL] also are entitled to receive an earn-out of 30% of the net income of [HWL] from the date of the acquisition to the date of the [IPO]. Mr Brosnan stated that because of the delay in the [IPO], he and his family would like to convert their preferred stock to common stock and cash, each representing approximately one-half the value of the preferred stock. Mr Morey described the impact of the proposed conversion in terms of dilution and cash flow. After discussion, it was the sense of the Board that conversion of up to US$4.0 million worth of the preferred stock would be appropriate, on terms and conditions to be determined by the proper officers of the Corporation and subject to any required consents from the Corporation's lenders. [emphasis added] 409 On 2 August 2006, Mr Katke had made a presentation to the Strategic Planning Conference about the IPO. The presentation slides talk about third quarter financials being in by November 2006; filing the S-1 in the early part of 2007; a "roadshow" in early February 2007; pricing of the S-1 by the end of February and listing at the end of February. The presentation slides also set out at Slide 16 observations under the heading "What can go wrong?" and at Slide 17, "What did go wrong (in April)?". 410 Under Mr Michael Brosnan's proposal flagged at the 4 August 2006 Board Meeting, he would "cash in" some of his Preferred Stock, receive some money and convert Preferred Stock to Common Stock. The Common Stock would share in the "upside or downside" in the business: T, p 183, lns 26-27. At this Board meeting, Mr Katke also made a presentation on the company's performance against the 2006 objectives and spoke to the reasons for the revenue shortfall. 411 On 17 August 2006, Mr Katke sent an email to Mr Gee and many others comprising the International Performance Management Team attaching a draft Business Plan for the financial years 2007 and 2008. 412 The draft adopted suggestions arising out of the earlier meeting. 413 Mr Katke made reference to targets of revenue, EBITDA, EBIT and net profit for 2007, and revenue only for 2008 which management wanted the team to use as guidelines for the budgeting process. Mr Katke said this in his email: I use the term guidelines rather than required targets because our exercise is top down without detail from the international business units or bottom up data from our sales and marketing people. Therefore our forecasts only provide a conceptual framework of how we see the company growing in 2007. We hope this draft forecast will provide you a context from which to create your country specific business plans, forecasts and budgets. … Our goal eventually is to get our net profit to the 20% range by growing the profit margin each year. [Mr Katke then sets out various targets for expenses control.] [emphasis added] 414 Mr Katke also makes this observation: You will notice that in 2007 we are expecting $20 million in licensing revenue which significantly changes our profit picture for the positive. We are providing general guidelines for growth rate in operating expenses to be not greater than 95% of the revenue growth rate. We have a general philosophy that our profit margin should increase as a result of synergy between acquisitions and economies of scale, therefore, our expenses should not grow as fast as our revenue and gross profit. Our goal eventually, is to get our net profit to the 15% - 20% range by growing the profit margin each year. … 415 On 23 August 2006, Mr Michael Brosnan sent an email to Mr Katke and Mr Morey confirming that he was happy to convert US$1.5M of his Preferred Stock A to Common Stock and Mr Leon Brosnan would convert US$1M with both conversions "at the $8.94 price per share". Mr Michael Brosnan observed that this portion of Common Stock would come from Mr Katke's holdings at the date of the IPO and in the meantime the earn-out payments would continue until the date of the IPO. Mr Brosnan also attached a spreadsheet identifying the buyers "from this end" for Mrs Katke's shares. The buyers would fall into two groups: one comprising HWL shareholders and management staff and the other group comprising a list of friends of Mr Michael Brosnan and Mr Leon Brosnan. Mr Michael Brosnan also said that this confirmatory email followed upon "our several discussions culminating with our last phone call". The nub of the matter for Mr Brosnan was that he believed (and put the proposition to Mr Katke in July 2006 and at the 4 August 2006 Board meeting) that HWL's growth rate had out-performed North America in the period between completion of the 2005 Agreement in May 2005 and July/August 2006. Mr Katke's evidence is that Mr Brosnan told him that the applicants ought to have been "paid more" in 2005. Mr Katke says the proposition Mr Brosnan put to him was this: if Mr Katke agreed to an arrangement by which Common Stock would be granted to Mr Brosnan from Mr Katke's share of Common Stock at the date of listing, Mr Brosnan would not further raise these concerns and his complaint would be regarded "as resolved". 416 Mr Brosnan also added this observation: We are particularly anxious and it is in all our interests that [the HWL shareholders and management staff] group is fully satisfied. As a matter of interest, our original deal had HWL as 20.7% of the valuation basis (meta inc owned 10%). We are slightly over here, but see what you can do. [emphasis added]

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The events of September to November 2006 417 On 17 September 2006, Mr Gee sent an email to Mr Morey providing details of the revenue and expense budgets for HWL for 2007. Mr Gee said that interpretation of the budgets in terms of the draft 2007/2008 Business Plan seemed difficult and further it seemed to him that the EBITDA figures adopted in the draft Business Plan were "very optimistic (and certainly will not be achieved on the revenues we are projecting)". 418 On 18 September 2006, Mr Michael Brosnan sent an email to Mr Katke asking him to confirm that, "based on our last discussion", he would give Mr Leon Brosnan and Mr Michael Brosnan US$2.5M worth of shares from his holdings. Mr Brosnan also said that he had agreed to settle for US$2.5M to "put it to bed and move on". Mr Brosnan asked whether Mr Katke was "still okay with it" and Mr Katke responded simply by saying that Mr Konney was drafting the necessary documents "so you don't need confirmation [from me]". 419 On 26 September 2006, Mr Katke sent Mr Gee a revised version of the 2007/2008 Business Plan for his review and comment. Mr Katke asked Mr Gee to flesh out the applicable sections of the Business Plan now that HWL had "gone through its budget process". Mr Katke requested Mr Gee not to be too specific regarding plans or strategy that may "advantage our competitors". That caused Mr Gee to send an email on 12 October 2006 asking questions about whether the Business Plan would be distributed outside the Metagenics group. In the response, Mr Gee made some comments about HWL milestones and the broader Business Plan including the rate of planned acquisitions by Metagenics. Mr Gee said this in his email: A] Concern about distribution of the Business Plan Who will the business plan be distributed to? Your comment that competitors will have access to it is of grave concern because it will harm our business. To date we have been very successful in managing the channel conflict between practitioner and retail, and this has primarily been achieved by keeping them very distinct and under the radar. If our practitioner channel competitors gain access to information on how much business we do in the retail channel they will use that against us and it will hurt us. B] Health World milestones Subject to the information remaining in-house the information for the business plan … is; a) practitioner market share target in 2011 is 35% b) pharmacy and health food shop market share target in 2011 is 7% c) test a Medical marketing program in 2007 d) establish an effective point of care testing/diagnostic system for practitioners by 2008 e) launch next blockbuster into pharmacy and health food store market in 2008 (current candidates are Kaprex and Menohop) 420 On 10 October 2006, a video-conference was conducted between Mr Michael Brosnan, Mr Gee, Mr Joiner, Mr Katke and Mr Bellin on the topic of "HWL & Meta Inc". The presentation is reflected in a document (at Vol 10, Tab 424) written by Mr Gee. One of the issues was the "differences" between the participants and the notion that there are "always more than one way to look at the same thing" [emphasis added], and that there were cultural and personality differences between the applicants and the United States shareholders. Mr Gee said in his slide on this topic that the issues confronting the parties were: a friend, Mr Katke, under pressure with an obligation to run the company; work on company mergers and the IPO; and his need to deal with "an under-performing company" (including HWL in Quarter 1). 421 On 3 November 2006, Mr Katke sent an email to Mr Brosnan in which he said that Metagenics expected to sign licensing transactions "next month" and the forecast was $10M in sales. 422 On 4 November 2006, Mr Katke responded to Mr Gee's earlier email and took up a discussion of some of the issues Mr Gee had raised in his earlier email. He thanked Mr Gee for his comments and said he was "working on incorporating them with the Belgian comments and the final budget numbers". As to distribution, one complete version of the Business Plan would go to the PM team and middle managers and one sanitized version would go to the employees. 423 On 9 November 2006, Mr Gee responded to Mr Katke's email. Mr Gee thought that the acquisitions of HWL, Biodynamics and HealthCom had "all proved more difficult than expected" [emphasis added] even though they were companies "where the people involved were well known to Metagenics". Mr Gee also said: … and my point is that I would rather see each of the transactions properly bedded down and synergies extracted before being distracted by the next one [acquisition]. 424 As to the role of the Business Plan, Mr Gee accepted that the Business Plan was a "business tool" to be used within the business: T, p 184, lns 26-27. Mr Gee also accepted that his engagement with the business planning process in the complete affairs of Metagenics was a much deeper engagement than anyone else at HWL and, particularly, Mr Michael Brosnan was not as deeply engaged in these issues as Mr Gee: T, p 188, lns 1-4. 425 On 21 November 2006, Mr Gee sent an email to Mr Katke copied to Mr Michael Brosnan, Mr Leon Brosnan and Mr AB Grant attaching a letter setting out a range of concerns on the part of the applicant shareholders. The draft letter is attributed to Mr Michael Brosnan and Mr Leon Brosnan, Mr Alan Gee and Mr Alan Grant. In it, those authors express some concerns about clarity of communication between the Australian group and particularly Mr Katke. Mr Michael Brosnan suggested in the letter that he may have been inflammatory in making some of his "aggressive" comments during the International Planning Meeting in August. The letter recognises that "all of our futures are tied to a successful outcome". The particular issues raised in the letter are these. 426 First, Mr Gee was experiencing difficulty in dealing with a dual reporting responsibility which involved reporting to the Board of HWL and also reporting to Mr Katke. 427 Second, there was a perceived problem with the budget process and timing. The authors say that the budget was prepared and submitted to Metagenics and the HWL Board in mid-September and after an intensive review the HWL Board approved the budget, yet there was no feedback received from Metagenics. 428 Third, there was concern about Mr Bellin's questioning of increases in HWL's sales and marketing costs in the 2007 budget. 429 Fourth, the Business Plan for HWL would need to be "properly resourced" because the HWL budget was projecting 30% revenue growth and greater than 60% profit growth whereas the Metagenics group budget was contemplating 20% organic revenue growth and 20% organic profit growth. 430 Fifth, the authors said this: Our [HWL] budgeted net profit is $A7.1 million, which is some 60% above our projected result for 2006. The net profit being sought under Jean's method [Jean Bellin] is $7.6 million, an increase of 73%, which none of us feel is realistic. 431 The authors make this observation by way of conclusion: In summary we will and have always tried to be as helpful as we can. We value our relationship and friendship. We should mutually strive to have all future communication calm, relaxed and friendly. We will achieve so much more this way and be a far better team. We have a long future together if we are able to help the health of the world, and we need to enjoy the ride. Michael, Leon, Alan and Alan [emphasis added] 432 Mr Gee says that the problem was that Mr Bellin wanted HWL to achieve net profit of $7.6M by cutting out $500,000 of additional costs. 433 Mr Gee's slides also contain an "Outsiders View on North American Operation". 434 Mr Gee accepted that the main issue raised by him on behalf of the applicants seemed to be that Mr Katke was "doing a lot, maybe doing too much". He observed that certainly, a lot of Mr Katke's time was being taken up on mergers and the IPO and lesser time in running the company: T, p 186, lns 22-23. 435 More particularly, the proposition put to Mr Gee was that his presentation on 10 October 2006 (and the topics for discussion reflected in the presentation), taken together with his concerns set out in the letter dated 21 November 2006, did not suggest that the issues being agitated by him and the other applicants were concerned with assertions of having been misled in the way pleaded, in relation to the IPO and the particular 11 September 2005 forecasts the subject of the claim. 436 Mr Gee accepted that these documents putting the concerns of the applicants certainly did not assert those things. However, Mr Gee said that the matters of being misled were matters raised as between Mr Michael Brosnan and Mr Katke: T, p 186, lns 24-30. Mr Gee accepted that by late 2006, he was not personally raising, in these exchanges or otherwise, issues of misrepresentation in relation to an IPO in 2005 or that the projected figures were wrong or that anything had been misrepresented. However, he contended that Mr Michael Brosnan was raising these issues: T, p 186, lns 37-46; T, p 187, lns 1-3. 437 Mr Gee accepted that to the extent that issues were raised on behalf of the applicants other than the ones raised by Mr Gee, it would be necessary to look to Mr Michael Brosnan's communications with Mr Katke: T, p 187, lns 5-8. 438 In November 2006, Mr Leon Brosnan, Mr Michael Brosnan and Mr Katke vacationed together in Hawaii. During their vacation, Mr Michael Brosnan expressed to Mr Katke the concern that HWL was contributing a much greater share of total group EBITDA than had been expected, largely due to HWL's much faster growth as compared with the North American business. Mr Michael Brosnan said his shareholding in Metagenics did not reflect the HWL contribution and the timing was such that the IPO would not now be completed until 2007. Mr Michael Brosnan accepts that he went on "like a broken record" on this topic over time. Mr Katke's evidence suggests two other features of the Hawaii discussions. First, he says that Mr Michael Brosnan said he "felt he had made a bad deal for himself" in 2005. Second, Mr Brosnan said he wanted to see a document comparing the present value of his shareholding in HWL as if he had not sold his shares in 2005, with the value of his present holding in Metagenics. Mr Katke says that in response to these concerns he told Mr Leon Brosnan and Mr Michael Brosnan (among other things) that a generous profit share had been agreed in 2005; Mr Katke was giving them US$2.5M in stock; the egg could not be unscrambled; and the stock transfer was supposed to fully resolve this issue. Mr Katke says that the notion of "gifting" them stock was intended to reflect the circumstance that, according to Mr Katke, a substantial delay would occur in the payment obligation falling in; no interest would be payable; and the agreed price for the shares substantially undervalued those shares. Mr Katke also says that Mr Leon Brosnan and Mr Michael Brosnan rather thought that the additional shares were truly a "gift" with no payment obligations attaching to them although Mr Katke also says that after further discussions at this time, they ultimately agreed with him that the "benefits" of the arrangement involved the elements Mr Katke had spoken about and, inferentially, the shares were a gift in that particular sense. The applicants took a different view of it. 439 The respondents say that Mr Michael Brosnan's point in these discussions was the issue of "relative disadvantage" to the applicants as in the applicants' view HWL's contribution to group EBITDA had grown over time based on its performance metrics as compared with the North American business and thus Mr Brosnan's view of emergent underlying unfairness needed to be adjusted, rearranged or made the subject of an entirely new deal. The second point the respondents make is that, at least so far as Mr Katke's evidence of it is concerned, no mention was made by Mr Leon Brosnan or Mr Michael Brosnan in their agitations about unfairness, of claims as presently made, of being misled into entering into the 2005 Agreement in the way suggested in these proceedings.

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The events of December 2006 440 On 2 December 2006, Mr Morey sent an email to Mr Gee and others attaching a copy of the audited Metagenics financial statements for the 2005 year. 441 On 8 December 2006, Mr Katke sent an email to Mr Brosnan in which Mr Katke said that he had been advised that by the end of the first quarter of 2007, four licensing transactions would be signed. Mr Katke attached a progress report on the licensing discussions which were then underway, in confidential circumstances conducted by a broker called NutraGenetics. Mr Katke observed that, as Mr Brosnan would see from the attachment, there were 13 negotiations that had progressed to serious discussion. Mr Katke expressed the belief that most of these discussions would result in agreements and revenue in 2007 of $10M. Mr Katke also said this: "We are working diligently on the research and IP we will need to begin pharma licensing discussions. We think that we can begin pharmaceutical veterinarian licensing discussions in 2007 and human pharmaceutical licensing discussions in 2008". 442 Mr Katke also said that discussions with Nestlé had progressed and the most recent positive results from clinical research were likely to result in an agreement with Nestlé in 2007 to distribute Metagenics products in at least Asia and possibly Europe. 443 On 20 December 2006, Mr Katke agreed to sell to Mr Michael Brosnan 123,610 shares in Metagenics for US$1.178M. Mr Michael Brosnan ultimately paid Mr Katke US$911,623 but not the balance monies. On 20 December 2006, Mr Katke agreed to sell 82,731 shares in Metagenics to Mr Leon Brosnan for US$785,000. Mr Brosnan paid Mr Katke US$607,484 but not the balance monies. 444 In December 2006, Mr Swift sent emails to the Board members and Advisory Board members of Metagenics including Mr Michael Brosnan and Mr Gee (in the lead-up to the Board meeting of 21 December 2006) to enable them to consider the S-1 Registration Statement. A draft of this document had been formulated on 23 August 2006 and Mr Gee gave evidence that he had seen that draft or other drafts. The S-1 for consideration by the Board on 21 December 2006 was virtually a final version of the document. The intention was to file the document in December 2006. The Board, at this meeting, resolved to price the issue on listing day, at the set out in the S-1. 445 On 27 December 2006 at 8.31pm, Mr Michael Brosnan sent an email to Mr Katke thanking him for the extra shares he had personally made available to him. However, the email set out, against the background of their long friendship, Mr Brosnan's sense of "disillusionment" about his position. Mr Brosnan said this: I am sure our friendship is long enough and strong enough to withstand a little bit of stress. … Yes, I feel I have made a bad deal for myself. At least in the short term. I appreciate the fact that you mentioned this in your email and therefore have some awareness as to how I feel. This was the main thing I wanted to communicate to you, and I now feel you understand. Thank you for acknowledging it. What happens in the future?, no one knows … all we can do are our respective best. I am sure that [is] good enough. My bit of disillusionment probably stems from the fact that I had been in control of my own future and made my own decisions. Usually the correct ones in the commercial environment. I have now largely given this decision-making control to you. I feel I have sacrificed freedom, control, and salary for a net equity positon, at best, the same as if I remained private. This most probably will change in the future. … Jeff, … I know in your heart you are doing the best. I believe that. Your best to be fair and do the right the thing by so many people. I am grateful for the extra shares you personally gave. I believe that when we have floated, and there is some consistency and balance again we may both be effective in growing the business. [bold emphasis added] 446 On 4 January 2007, Mr Katke responded to Mr Brosnan's email. 447 In the meantime, Mr Konney sent an email to Mr Brosnan and others on 29 December 2006 saying that unfortunately, Metagenics had not been able to file the S-1 by the end of that week as it had intended. Mr Konney said this: In reviewing the final version of the document this morning, KPMG found what they consider to be an error in debt classification. The error, if it was one, raised a doubt in KPMG's mind about the accuracy of the other numbers in the document, and led KPMG to conclude that they would be unable to complete their review in time to file by the end of the year. As many of you know, an S -1 filed in 2007 will be subject to the comprehensive new SEC disclosure requirements relating to executive compensation. This work should dovetail with KPMG's completion of the 2006 audit, enabling us to file an S-1 with the audited 2006 financials and the new compensation disclosure in the Spring of 2007. We currently believe that this is a more prudent course of action than trying to file in early 2007 on the basis of the nine-month 2006 numbers. 448 On 30 December 2006, Mr Katke sent an email to Mr Gee advising that these developments would delay an IPO for "another 2-3 months". On 30 December 2006, Mr Konney sent an email to Mr Brosnan and others attaching a confidential memorandum setting out a range of observations in relation to the conduct of the audit by KPMG.

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The events of January and February 2007 449 In Mr Katke's email of 4 January 2007 responding to Mr Brosnan's email expressing his "disillusionment", Mr Katke said this: Sorry you feel that you made a bad deal. Hind sight is 20:20. When you made the deal you felt it was a good deal. Both you and Leon got some short term cash, mid term cash and an upside, plus you maintain your compensation including dividends until the mid term cash is in the bank. Plus you have the security of being part of a bigger more secure company. At that time some short term cash was important to you and Leon. You got cash to clean up the Back Packers mess and Leon got cash for Mary's feeling of security and the house remodel. The deal met your objectives then. Today you feel different. Tomorrow you may change again. … In the meantime, we can't unscramble the eggs … [emphasis added] 450 On 9 January 2007, Mr Brosnan responded to Mr Katke's email of 4 January 2007. Mr Brosnan said this: Believe me, I'm okay with how things are going. I believe, in the long term, things will sort themselves out. You will always have my continued support and friendship. When I said I felt I had made a "bad" decision, a better term perhaps could have been a potentially "compromised" deal (based on the initial values and the go forward). I don't just mean me, I mean Mike, Alan, Alan, Graeme etc. Their/mine equity may not be as valuable in the short term as if we had remained private. (Assuming we all had 100% of shares - no cash). You mentioned my desirable "lifestyle" and I guess THAT is what I'm scared will be compromised. I did have it good. In a private situation I could be pulling out a mil a year while watching the capital value grow. BUT I was prepared to take the punt. I did support you. And I will continue to do so. I do believe in you. I did then and I do now. I will always back you as a friend. I am looking at the bigger picture, and truly believe things will pan out. I think we have always tried to back each other, be fair, and normally I would even lean to your side of thinking in almost all discussions/negotiations etc. We keep saying we can't unscramble egg and we can't. So its put to bed as far as I'm concerned. I appreciate the extra shares. I really do … This has helped very much. I'm okay to finally move on from this discussion. Thanks for understanding. [emphasis added] 451 In his email of 9 January 2007, Mr Brosnan sought to restate or reformulate the notion of having made a bad deal. 452 As to these exchanges, Mr Gee accepted that Mr Michael Brosnan regularly showed him the emails he was sending to Mr Katke: T, p 188, lns 37-39. In the 9 January 2007 email, Mr Brosnan also seeks to speak for at least four of the other applicants including Mr Gee. As to whether Mr Gee was "prepared to take the punt" of entering into the 2005 Agreement (to use the language of Mr Brosnan in his 9 January 2007 email), Mr Gee said that the decision that led him and the applicants into the 2005 Agreement was a positive answer to the question, "Do we trust Jeff?" (T, p 189, lns 5-6) concerning "what he was going to do … the IPO": T, p 189, lns 8-9. 453 Mr Gee accepted that although he was not taking a "gamble" on the outcome of the 2005 Agreement, he was taking an investment "risk": T, p 189, lns 11-17. 454 On 16 and 17 January 2007, email exchanges took place between Mr Katke and Mr Church Lewis concerning a phone meeting to discuss Nestlé's interest in Metagenics. Mr Katke wanted to pursue discussions with Nestlé to try and secure an equity investment according to one of three concepts: an equity investment of $70M in Common Stock in lieu of a planned IPO; an equity investment in the IPO subject to approval of investment bankers; an equity investment of up to $20M pre-IPO. 455 On 29 January 2007, Mr Michael Brosnan sent an email to Mr Katke in which he asked whether there was any chance that Mr Morey could undertake the comparison that they had spoken about in Hawaii "i.e. if I remained private (assume all shares, no cash) or alan gee [sic] as an example, how would it compare to the public situation in terms of $ equity". 456 On 8 February 2007, Mr Michael Brosnan sent a further email to Mr Katke in which he sought to address the extent to which the earlier 2005 "deal" had become "out of whack". He put it this way: I have reviewed [Mr Morey's] valuation spreadsheet with both Alans. As it currently stands, the group of HWL shareholders are down approx. $24 million aus. From the low starting base (our small starting percentage), the disparity in value may never be bridged as if we had stayed private. I.E. we will be in a compromised position for a very long time if not permanently. Even if the consolidated groups value finally becomes substantial, we would probably only at best achieve a "break even" position as to what a private HWL value would be anyway. In this case however the disparity between the other shareholders and the HWL shareholders is exponentially huge. As more time goes by this disparity just becomes larger and larger. I.E. worse and worse for the HWL shareholders. I absolutely know this was never your intention. In fact I know your intention was for all of us to do better, not worse. So I too have been giving the situation some thought as to how to rectify the "out of whackness". My preferred option is to buy my business back. We negotiated the initial deal in good faith. Time has shown that the Needham values are wrong and this caused our problem. As friends there is no reason we can not renegotiate. I can give back all the shares and the 6 million odd dollars in cash, and revert back to our starting positions. Another option (less preferred) would be to have Meta Inc issue more shares to the HWL group. 1.3 million shares at the $14 value would be close enough to the 24 million aus. We have now 13 odd percent and you have control of, I believe, another 50 odd percent so that this new issue would be achieved by majority vote. … You and I can make this right. We should be going forward together for a very long time. Mate, everything can be negotiated. I just hope we can achieve some fairness going forward and I think long term the business will grow faster and as a real team. [emphasis added] 457 The essence of Mr Brosnan's complaint is that a "disparity" of value had emerged in the value of the contribution to the merged company by the US shareholders on the one hand and the Australian former HWL shareholders (who had contributed 90% of HWL to the merger), on the other hand. The contemporary measure of that disparity was said to be AU$24M. 458 Mr Brosnan's point was that if HWL had stayed private (not gone into the merger transaction looking to an IPO) the former shareholders would not be in the presently "compromised position" and even if the value of the consolidated group became substantial, he and the other applicants would probably only achieve (after a "very long time" if at all) a "break even" position equivalent to the value they would have had as shareholders in HWL if HWL had "remained private". Thus, the earlier transaction was now "out of whack". 459 Mr Brosnan's preferred way to rectify the "out of whackness" was for him to buy his business back. The problem as Mr Brosnan saw it was that although the negotiations for the initial deal were conducted in good faith, time had shown the Needham values to have been wrong and this was the cause of "our problem". The solution was to conduct a re-negotiation, between friends, of the initial deal, with Mr Brosnan getting back all the shares and the cash consideration of "6 million odd dollars" and each side reverting to their original starting positions. 460 A less preferred option was one of giving more shares to the former Australian shareholders in HWL so as to bridge the AU$24M gap in value as formulated by Mr Brosnan. 461 Mr Gee was shown this email at about the time Mr Brosnan sent it: T, p 189, lns 45-46. 462 Mr Gee said that the complaint really was that having regard to the valuations of Metagenics and HWL leading up to the 2005 transaction, and taking into account the successful recovery of HWL since the Pan events in terms of HWL's revenues and profits, the applicants believed that their proportionate share in Metagenics was now unfair and ought to be greater: T, p 190, lns 2-12. Mr Gee said that he shared that view: T, p 190, ln 14. 463 On 13 February 2007, Mr Brosnan sent another email to Mr Katke saying that the source of the unfairness was that "Needhams don't value the technology now as they did when we made the deal" [emphasis added]. 464 On 13 February 2007, Mr Gee also sent an email to Mr Katke in which he set out his synopsis of the problem being articulated by the Australian shareholders. There is another version of the email which bears the date 14 February 2007 in the same terms. Mr Gee said this: Hi Jeff Michael has brought the Australian shareholders up to date on his recent discussions with you regarding the company valuations at the time of the merger and has advised that you are requesting Jerry to undertake an analysis to demonstrate the share price at which the Australian shareholders will be better off in the merged company compared with having remained as a private company in Australia. While it is that particular exercise that has brought the matter into focus, the real issue is whether the valuations at the time of the merger (in the order of 2 x sales for Meta Inc and 1 x sales for HWL) were appropriate because if they were not, value has been permanently transferred from the Australian shareholders to the US shareholders irrespective of what happens to the share price in the future. Based on what we now know there is a strong view amongst the Australian shareholders that it was inappropriate for Meta Inc to be positioned and valued along the lines of a speciality pharma company in 2004/05 and it is this issue that we would like to review with you including the valuation documents that were used at the time, to try and get it sorted in the spirit of fairness and integrity. We need to get this sorted sooner rather than later in a manner that won't negatively impact the business and we will plan a trip to the US to sit with you at a convenient time. [emphasis added] 465 On 15 February 2007, Mr Katke responded to Mr Brosnan's emails and Mr Gee's email. In his email, Mr Katke put his understanding of the complaint in this way: Michael as I understand your and Alan's email and our recent discussions, you believe the acquisition of Health World by Metagenics is a deal that is "out of whack", because you think the valuation used by the parties at the time the deal was done was incorrect and because you think the initial perceived unfairness has been amplified over time by the performance of the business units in the combined corporation. [emphasis added] 466 As to the initial valuation, Mr Katke said this: Regarding the initial valuation, both parties understood the factors that led to a higher agreed-upon valuation for Metagenics relative to Health World. Metagenics had greater scale, a valuable international brand name, a pipeline of research discoveries, a portfolio of patent and patent applications and access to capital for acquisitions and business expansion and each of these factors has increased in value today over what they were when the deal was concluded. We are well positioned to access the public capital markets, as we have planned to do. [emphasis added] 467 Mr Katke goes on in his email to elaborate upon those identified factors. 468 Mr Katke also made this observation: Another factor that may be lost in the 20:20 hindsight view was that at the time we made our deal, the regulatory climate resulting from the Pan disaster was still unsure and the ability to recover lost business due to the Pan related recall was still unproven. [emphasis added] 469 Having made further observations about the factors influencing the value of the combined group, Mr Katke said that he did not agree that "our deal is 'out of whack'". Mr Katke also observed that Mr Brosnan's proposals appeared to be "attempts at unscrambling the egg". Mr Katke observed that there might be difficulties due to third party interests in seeking to adopt that course. Mr Katke observed that the Australian shareholders, however, remained free to present a formal proposal to the Board which would require evaluation by outside advisers and a Board vote. 470 Although Mr Katke responded on 15 February 2007 and the final form of his response reflects his final view at the time, Mr Katke also formulated a draft response on 11 February 2007 which he circulated to Mr Konney and Mr Morey for their review and suggestions. In the draft, Mr Katke formulated these observations: … The reason for the greater valuation of Metagenics was due to [it] owning the Metagenics brand and because of the value of the research discoveries, patents and patents pending as well as the value of the IPO for low cost capital for acquisitions. Today the value of the Metagenics brand, R&D discoveries, patents and patents [pending] have increased over what they were in 2004. We have made additional important scientific discoveries, completed additional human clinical trials that have validated our discoveries, filed for more patents, secured more valuable intellectual property and completed an acquisition which has increased our growth rate to 41% which is well above the Health World growth rate. The IPO will provide us access to low cost capital for acquisition which we will [use] to lever up our value. Therefore I do not believe that there is any REAL valuation discrepancy today compared with 2004 but only a perception that the deal is "out of whack". The reason that there is a perception of imbalance with the valuation is that the preliminary estimated valuation provided by Needham does not provide value for our technology. Therefore the Needham value, at $14 per share pre money, is approximately 1.25 times sales. If Metagenics does not achieve at least 2 x sales value it gives the perception that the relative proportionate value of the Health World groups holdings is depressed as compared with a 1 x sales value of the [H]ealth World business today. In other words, if we decide that there is no real value that can be attributed to Metagenics over and above its value as an operating company, then the basis of the valuation of our deal is compromised and the deal seems "out of whack" as you say. … One way to reverse this low value perception is to receive value for our technology by selling licences or products to other companies that have larger distribution. That is what we are doing. We currently are in discussions with 16 large nutrition companies in the US who have expressed serious interest in our technology and we are in discussions with one large multinational company that has expressed serious interest. [emphasis added] 471 In his draft, Mr Katke also formulated these observations about licensing: I will use 1 of the 16 nutrition companies as an example, since we are in late stage discussions with them. They are a large MLM company that wants to launch our Kaprex technology globally. Their estimated purchases from us would be $20-$30 million per year. At the lower $20 million revenue this deal will bring approximately $4.2 million profit and add value of approximately $90 million at the proposed PE multiple 22.9 which Needham is using in their valuation analysis. If we can pull 4 other similar deals from the 16 discussions, we would add an additional $360 million in value. We expect to close 3-4 of these deals in the first quarter of 2007. [In] addition we have discussions with the large multi-national, which if successful would be a much larger deal. We also will be initiating discussion with Veterinarian distribution companies this quarter, which offer similar promise to the nutraceutical companies. We are also beginning to discuss our technology with pharmaceutical companies that have even greater potential. As these deals close and produce revenue and profit over the next couple of years our value will also increase and the perception of the deal will no longer be as you say "out of whack". 472 This draft email, however, was not sent. The views of Mr Katke in the form in which he was content with them is reflected in the email as sent on 15 February 2007. 473 On 16 February 2007 and 17 February 2007, a series of emails were exchanged between Mr Katke and Mr Schechner and also Mr Katke and Mr Church Lewis in relation to the various licensing transactions and the progression of them. In Mr Katke's email to Mr Schechner, Mr Katke urged Mr Schechner to progress discussions with Proctor & Gamble Pharmaceuticals as he would like to conclude a pre-IPO investment with Nestlé, a company called J&J, Proctor & Gamble or another partner. Mr Katke said this: We believe that our Selective Kinase Response Modulator (SKRM) discoveries are a new class of therapeutic molecules that have potential as OTC [over the counter] and prescription drugs. We think we are mining a chronic disease "vein of gold" due to the discovery of natural molecules with a SKRM mechanism of action. We have now made additional pre-clinical discoveries that look promising for the treatment of Alzheimers, Macular degeneration, Asthma and allergies. These discoveries are in addition to our discovery of molecules for [a list of particular inflammatory diseases] that have moved beyond pre-clinical to early clinical validation. I know this sounds too good to be true, but I believe that the reason we are discovering so many targets for our molecules is because we have discovered molecules that modify a primary underlying mechanism of chronic disease. It is kind of like mining a vein of gold. … We need a partner with drug development expertise, capital and an appetite for IPO valuation to help us commercialise our discoveries. I think it is time to test the pharmaceutical market with discussions. [emphasis added] 474 Notwithstanding that these exchanges were occurring, Mr Katke and Mr Morey continued to engage in exchanges with Mr Gee in relation to the financial issues confronting the corporation. On 9 January 2007, Mr Katke sent an email to Mr Gee requesting either Mr Gee or Mr Joiner to make a one hour presentation outlining the results from the 2006 calendar year and the "plan and forecast for 2007". On 10 February 2007, Mr Swift sent an email to Mr Gee and Mr Brosnan among others attaching a final version of the 2007/2008 Metagenics Business Plan which was to be discussed by the Management Team in mid-May. The Business Plan sets out the revenues, EBITDA and EBIT for the North American, European and Australian components of the combined business. The combined projections for 2007 are revenues of $176.8M; licensing revenue of $10M; EBITDA of $27.5M; EBIT of $22M; and, net income of $11.2M. The financial objectives for 2008 are set out in the plan although not broken down in the way reflected in the objectives for 2007. 475 On 15 February 2007, Mr Brosnan sent an email to Mr Katke saying that he and Alan Gee would like to meet with Mr Katke in the following week in the United States to discuss their concerns. Mr Katke suggested that they ought to wait until Mr Morey had completed an analysis he was undertaking relevant to the questions Mr Brosnan and Mr Gee had raised. Mr Brosnan responded on 18 February 2007 and said that he was not sure how relevant or helpful Mr Morey's analysis would be to the "discussion of comparative valuations in 2005, and resulting percentages". However, Mr Brosnan looked forward to seeing the document. 476 On 23 February 2007, Mr Morey sent "an analysis on value" to Mr Brosnan, Mr Gee, Mr Katke and Mr Bellin.

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The meeting in California in February 2007 477 The meeting took place on 27 and 28 February 2007 in California. 478 As to this meeting, the concern articulated by Mr Brosnan and also Mr Gee was the perceived discontinuity in the respective valuations attributed to Metagenics and HWL which formed the foundation for the commercial transaction reflected in the 2005 Agreement, having regard to the revenue and profit performance of HWL over time. 479 Mr Gee identified the purpose of the meeting in this way at T, p 119, lns 1-10: Another IPO deadline had been missed. Right up until very late December [2006] we were being told that the S1 would be filed by the end of December. It was missed again, so I think we were told in the last couple of days of 2006 that it had been deferred yet again. We were very concerned by this stage and wanted - we felt that the values were becoming disproportionate because we hadn't been paid for the company. We had continued to run it in the way that we were meant to. Our business was growing and the value of our business was growing substantially. The Metagenics business, the North American business, wasn't growing to anywhere near the same rate, and we felt that we - it was value that was being transferred from the Australian shareholders to the US shareholders. [emphasis added] 480 Mr Katke, Mr Morey, Mr Michael Brosnan and Mr Gee participated in the meeting. Mr Gee prepared a summary of the discussions and sent it to Mr Katke, Mr Morey and Mr Michael Brosnan (with copies to others). The essential proposition put by Mr Gee and Mr Brosnan was that the relative values of Metagenics and HWL were inappropriate because a higher multiple, appropriate to a specialty pharmaceutical company (based on the science), had been inappropriately applied to the revenues of Metagenics to determine its valuation in 2005: T, p 198, lns 13-28. Mr Gee could not recall whether the multiple was applied to the 2004 revenues or forecast 2005 revenues: T, p 198, lns 32-34. 481 Item 1 of Mr Gee's summary of the meeting is introduced with the comment that a "key aspect fuelling Australian shareholder concerns is the Needham Discussion Materials with low indicative IPO values". This, however, seems to be a reference to the Needham document of 21 December 2006 prepared for the December Board meeting of Metagenics rather than the earlier Needham document identifying possible multiples for determining the merged group's valuation for IPO purposes. Item 3 of the summary records that Metagenics was positioned as a speciality pharmaceutical company in November 2004, on Needham's advice, when the valuations were finalised and subsequently, on Needham's advice, the positioning of the company was changed. These remarks, however, do not address the "relative values" inter se of Metagenics and HWL at the time of the 2005 transaction. 482 Point 5 addresses the "Pharma licensing" issue and the reasons Pfizer put matters "on hold". 483 Mr Gee notes at Point 6 that Mr Katke believed the "relative multiples" of each company at the time of the 2005 transaction were "fair but recognised that the Australian shareholders have been disadvantaged by the passage of time". 484 At Point 7, Mr Gee notes that Mr Brosnan had suggested that if no "Pharma licensing" arrangement was secured by the end of 2008, the Australian shareholders ought to be issued with additional shares as an acknowledgement that Metagenics was not a speciality pharmaceutical company at the time of the 2005 transaction. Mr Gee notes that Mr Katke agreed to consider a proposal to issue further shares. The discussion of the implications for other shareholders and related questions is noted in the summary. Mr Gee notes Mr Morey's remark that with recent share purchases, the Australian shareholders' combined interest had increased from 11.4% to 12.4%. 485 I will return to the various share purchases later in these reasons. 486 Mr Katke responded to Mr Gee's note of the meeting although Mr Gee gave evidence that he did not receive Mr Katke's document. Perhaps Mr Katke's document was not sent. In any event, Mr Katke said in his note (or unsent draft) that he thought Mr Gee's summary "was balanced and for the most part accurate" although he wanted to clarify some matters. Leaving aside many of Mr Katke's comments, Mr Katke said this about shareholder disadvantage suffered by the applicants: 6. Regarding the Australians being "disadvantaged by the passage of time", I agree that the IPO has taken longer than we expected and that it would have been better for all involved if the public capital had already been brought into the company and the cash component of the transaction had already been paid to the Australians. However, everyone understood that there were no guarantees on when the IPO would be completed and all involved have used best efforts to get the IPO completed as soon as possible. [emphasis added] 487 As to Mr Brosnan's proposal, Mr Katke notes this: 7. I did agree to consider Michael's proposal, but I also stated that it most likely would not be possible because of the complications with all of the other shareholders and that the Board would not likely approve the proposal. [emphasis added]

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Mr Gee's submission to the sub-committees review 490 Mr Gee formulated a submission to the sub-committee's review, dated 16 August 2007. 491 Mr Gee wrote this document. 492 He did so with no assistance from anyone else: T, p 200, lns 36-40. 493 At Point 4 of the document, Mr Gee says that based on representations of expected future financial performance, strong interest from pharmaceutical companies in licensing deals and a pending IPO, a valuation methodology had been agreed based on multiples of projected revenues for the year ending 30 June 2005 of 1.6 for Metagenics and 1.2 for HWL. Mr Gee then identifies the two "protective" options put to Mr Katke during negotiations leading up to the 2005 Agreement and the reasons for their rejection. The first was the proposition that the merger transaction ought to occur simultaneously with the IPO (an option said to be "too complex") and the other was the "call option" enabling the applicants to re-purchase the HWL shares if an IPO did not occur within two years. As to the latter, Mr Gee notes that based on Needham's view of adverse market impression, the proposal was rejected and that Mr Katke gave assurances that the company "would be proceeding to an IPO in the near term, markets permitting" [emphasis added]. 494 Mr Gee then notes that upon the rejection of each of these mechanisms, the applicants elected to enter into the 2005 Agreement on the basis of an unanimous view that they trusted Mr Katke about, inferentially at least, proceeding to an IPO "in the near term". 495 As to the IPO representation, Mr Gee says at Point 5.1 of his document, that from the outset the plan was for Metagenics to proceed to an IPO in the first half of 2005 and it was represented that the company was or would be (by then) ready to proceed subject to the "suitability of the markets". 496 The presentation on the topic had taken place in San Clemente on 17 November 2004. The 2005 Agreement was entered into on 27 April 2005. It proceeded to completion in May 2005. The listing on that view was to occur by 30 June 2005. 497 Mr Gee observes that "history has shown" that the company was a "long way from being ready for an IPO" due to accounting, systems and management issues and was not ready in "late 2004" or "2005" to undertake an IPO and remained unable to list in 2006 or 2007. 498 At para 5.2 of the document, Mr Gee says that during the negotiations leading to the 2005 Agreement it was represented that Metagenics was a "Specialty Pharma Company" based on the strength of its scientific research and discoveries. Mr Gee says that it was also further represented that Pfizer was expressing strong interest in licensing the Kaprex technology. Mr Gee also says that after the negotiations on value were concluded, the applicants were told that Metagenics had suspended discussions with Pfizer "while actions were taken to enable their patents, based on a recent court decision on the effectiveness of patents" [emphasis added]. 499 Mr Gee asserts in the document that Metagenics was clearly not a "Speciality Pharma Company in late 2004 when the representation was made, or in 2005, 2006 or 2007". Mr Gee also asserts that there has been no re-engagement of any pharmaceutical licensing discussions and the scientific focus of Metagenics has moved from anti-inflammatory conditions (the focus of action by the Kaprex product) to blood sugar conditions. Mr Gee says that (at the date of his submission), the science remains preliminary and quite some time from attracting any licensing interest from a major pharmaceutical company. 500 At Point 5.3, Mr Gee observes that when introducing the concept of the merger to the applicants coupled with an IPO, it was represented that all parties would "share in the upside". Mr Gee says that any outcome that results in the applicants "being merely returned to their pre-April 2005 position while the US shareholders gain at their expense is not acceptable to the Australian shareholders". 501 At Point 6 of the document, Mr Gee seeks to identify the measure of the disparity and the extent to which there has been a contended "substantial transfer of value" from the applicants to the US shareholders. Mr Gee says that the initial valuation (that is the relative valuation inter se) was finalised approximately six months prior to March/April 2005. The contention put by Mr Gee was that if the same valuation methodology is adopted (as at 16 August 2007) assuming an IPO occurs in the first quarter of 2008, the "value transfer" to the US shareholders is 9.7% of the equity in Metagenics. That result is based on this calculation. In December 2004, a valuation was adopted for the North American business of Metagenics and Health World. The 2005 projected revenues for the North American business were US$77.7M and the multiple was 1.6 resulting in a valuation of US$124.3M. HWL's 2005 projected revenues were US$27.2M and the multiple was 1.2 resulting in a valuation of US$32.M for a total value of US$156.9M. Of that combined value, the North American valuation represented 79.23% of the total value and HWL's valuation represented 20.77% of the combined value. 502 A valuation at August 2007 brings about this result. Based upon 2007 projected revenues for the North American business of US$103M and applying a multiple of 1.5, the valuation is US$155.5M. HWL's 2007 projected revenues were US$59.5M and applying a multiple of 1.2 results in a valuation of US$71.4M, for a total valuation of US$225.9M. Of that combined value, the North American valuation represented 68.39% of the total value and HWL's valuation represented 31.61% of the combined valuation. Thus, in Mr Gee's submission it is said that HWL's contribution to the combined value has increased by 10.84% (being 31.61% less 20.77%) and since the applicants owned 90% of the HWL shares, the "value transfer" to the US shareholders represents 9.75% of the equity in Metagenics. 503 Based on an IPO pre-money valuation in the range of US$250-US$300M this value transfer represents an amount between US$24M and US$29M, on that analysis. 504 In Mr Gee's submission, he observes that the selected multiple applied as at August 2007 is 1.5 rather than a multiple of 1.6 which was applied in December 2004 in valuing the North American component of the Metagenics business and a lower multiple was adopted at August 2007 in order to reflect "the fact that the company is not and should not be valued as a Specialty Pharma Company". 505 Mr Gee's point was that the differential multiple of 1.6 as compared with 1.2 was not fair at the time and, in addition, HWL's revenues had grown considerably faster as at August 2007 with the result that even if the differential had been more or less maintained (at say 1.5 as to 1.2), the applicants believed that their contribution of value to the combined business was more like 32%. 506 The proposition put to Mr Gee in cross-examination was that Mr Gee's contention seemed to be that even though, at the date when the 2005 transaction was accepted by the parties, the revenues of HWL were correctly projected to be $27.2M, events have proved the parties to be wrong and HWL has done much better than anyone expected with the result that "the deal should be re-done to reflect the new reality". 507 Mr Gee put the position this way at T, p 202, lns 2-9: Well, we believed that we had actually only received a deposit, effectively, on the six and a half million dollars in cash. We had believed that the - the group was meant to go to an IPO and we were meant to be able to get - the people who had the pref A shares were meant to cash out those shares in 2005. There was no ability to cash out the pref A shares come 2007, so they were still locked in at a locked in value. We had grown the business substantially during that period, value had grown, and, yes, we believed that that was rightly attributable to us. [emphasis added]

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The Metagenics response 508 On 15 October 2007, Metagenics responded to Mr Gee's submission. 509 In the submission, the authors (predominantly Mr Morey) noted that the applicants believed that they should either receive more Common Stock in Metagenics, or the 2005 Agreement ought to be rescinded, on the footing that because the IPO had taken longer than "they expected", coupled with their belief that they could have been in a better position (then or in the future) to sell their shares in HWL as compared with May 2005, one or other of the proposed remedial steps ought to be taken. At Point 4, the authors set out their view of the basis for the 2005 acquisition transaction. The authors say that it was designed to provide liquidity for the major Australian shareholders of HWL and to provide an ongoing incentive for those shareholders. The authors set out elements of the transaction in support of that view and, as to the multiples, they say this: A greater multiple was applied to Metagenics' revenue because it owned and formulated substantially all of its products and was significantly larger in size than [HWL]. [HWL] was merely a distributor of products and does not own its products and merely distributes them under a licence agreement with Metagenics and therefore received a lower multiple times revenue [resulting] in … final agreed valuation multiples [of approximately 1.6 and approximately 1.2 times projected revenue for each company]. [emphasis added] 510 As to the Point 4 representations in Mr Gee's document, the authors say this. 511 In relation to the IPO, Metagenics has been preparing an IPO and relying upon the advice of professional firms. The authors set out some aspects of the work required to be done before an IPO could take place, the work being done by Needham and the advice and submissions made by Needham. 512 The authors also say this: It was contemplated in the 2005 Share Purchase Agreement that an IPO could take significantly longer than expected and this is precisely the reason why all the parties (including the Australian Shareholders) agreed the conversion of the Preferred Stock A into cash is either at the IPO or in seven and a half years if the IPO has not occurred. The Preferred Stock A represents 37.5% in value of the May 2005 transaction and it was clear to all parties that it could at least take up to seven and a half years before Metagenics could proceed with an IPO or be in a position to convert the Preferred Stock A into cash. It was clearly contemplated by all parties that an IPO may not proceed shortly after close of the 2005 Acquisition Transaction. Thus, the inclusion of the fail-safe mechanism for the Australian Shareholders to convert the Preferred Stock A into cash after November 2012 in the absence of an IPO. [emphasis added] 513 The authors make the further point that Metagenics has been seeking advice on planning for an IPO from investment bankers and that on the question of positioning, Needham provided advice to position Metagenics as a "Specialty Pharma Company based on the market for stocks at that time". The authors note the views expressed by Needham as to the multiples to be applied to projected revenues for such a company for the purposes of an IPO and also the multiples to be applied to projected revenue should the company be characterised as a nutraceutical/vitamin company. The authors also observe that Metagenics had urged a merger with HWL on the basis of an "all stock transaction". However, an agreement to merge could not be reached with the Australian shareholders on that basis and the 2005 Agreement proceeded on the footing that only 46.1% of the transaction was reflected in the form of Common Stock with "upside potential". The Australian shareholders took Preferred Stock A convertible into cash at the date of the IPO or, in seven and a half years, if the IPO had not occurred. 514 The authors assert that the Australian shareholders have not suffered any damage. Without examining the detail of the calculations it is sufficient to note that the authors assert that the 2005 Agreement was based on projected revenue for 12 months ending 30 June 2005 applying multiples of 1.6 and 1.2 with the result that HWL contributed 20.73% of the value of the combined company and the "North America/Europe" valuation represented a contribution of 79.27% of the combined value. Based on these values, the "per share value" at the date of the 2005 transaction was $16.75. The calculations of the authors include 30 June 2005 revenues contributed by "Europe". The authors say that a valuation at 30 June 2007 using the 2005 methodology results in a contribution to combined value by HWL of 23.64% and a contribution by Metagenics of 76.36% with the result that the per share value based on the same methodology is $25.74. The authors assert that HWL's portion of the combined value has risen by 2.91% and having regard to the 90% ownership in 2005 the differential advantage is 2.62%. 515 The applicants, on the other hand, maintain the integrity of their calculations.

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January 2008 to July 2008 and aspects of strategic planning 527 Mr Gee says that he has no doubt that he received a copy of an email (although not sent to him) sent by Mr Bellin to particular addressees on 28 January 2008 attaching a final copy of the 2008-2010 Business Plan for Metagenics. The document was given to him so that he could understand and examine the content of the Business Plan: T, p 209, lns 1-5. 528 On 25 April 2008, a special meeting of directors of Metagenics occurred by telephone conference. Mr Gee did not attend the meeting. The meeting discussed a proposed settlement with the applicants and attached a Terms Sheet setting out in considerable detail the proposed Terms of Settlement to be reduced to an agreement in due course. 529 On 26 May 2008, Dr Bland sent an email to Mr Katke setting out his observations on the future of Metagenics. In his email he makes these observations (among other things). If Metagenics is committed to high organic growth greater than 12%, the company must move beyond its traditional market and provide clinically proven solutions to chronic diseases based upon improvement of clinically accepted biomarkers. The diseases to be focused upon are those with the highest prevalence of agreed biomarkers being conditions such as osteoarthritis; insulin resistance conditions; cardiometabolic syndrome and hypertension; obesity; irritable bowel syndrome; early auto-immune diseases; and others. Each of these conditions would need to be supported by the FLT system. The future growth of the Metagenics business in the MD market would be dependent upon getting the company's products on "formulary plans" within various healthcare systems and the insurance reimbursable. The company would need to make sure that its stopchronicdisease website "is successful by putting adequate financial and human resources behind its development and implementation". Dr Bland said "this should be integrated within and supported by all our educational activities globally within the company that brings PR visibility to the program". Dr Bland also observed that Metagenics would need to make "MetaProteomics recognised as a first-in-class discovery Biotech focused on the development of novel SKRM's from natural sources for the management of chronic disease which can be licensed to multiple channels". Dr Bland also observed that Metagenics would need to complete an equity transaction in 2008 to reduce the company's debt and provide liquidity for employees that have been with the company for many years. 530 On 30 June 2008, Mr Katke sent an email to Mr Gee on the topic of strategic planning. Mr Katke said that Metagenics was planning to hold a strategic planning meeting for North America on 14 and 15 July 2008 and an international strategic planning meeting for 29, 30 and 31 July 2008. Day 1 of the meeting on 29 July 2008 was to be a review of progress on the Business Plan and Day 2 was to be a strategic planning session for 2009 to 2011. Day 3, 31 July 2008, was to be a discussion of the previous strategic planning summaries for North America, Europe and Australia for the purpose of developing a "strategic guidance document for use by all for creating the 2009-2011 forecast, budget and business plan". Mr Katke said that he understood that Mr Gee, Mr Michael Brosnan and Mr Graeme Joiner would be attending. He asked whether Mr Curley would be attending and suggested that Mr Curley and Mr Joiner might like to join the discussions by video-conference. 531 He also suggested that the meeting on 31 July 2008 might be confined to a smaller group to include Dr Bland, Mr Katke, Mr Michael Brosnan, Mr Gee and one other. 532 Mr Gee understood that this meeting would be a little different from other strategic planning meetings as it would be confined to a smaller group of people and the idea was to discuss how the strategic plan could be developed for the following year. Similar strategic meetings had occurred in 2005, 2006 and 2007 attended by Mr Gee, for a similar purpose, but the attendees were a larger group (about 12 to 15 or so). Mr Katke, Mr Morey and Dr Bland had attended these sessions in the past and Mr Brosnan had attended in 2005 and 2006. Mr Joiner may also have attended. 533 In short, these meetings were attended by the most senior executives and directors of HWL and Metagenics including the CFO of Metagenics: T, p 209, lns 20-42; T, p 210, lns 1-4. The purpose behind convening a smaller group was to "get more focus from the more senior leaders in the company and concentrate upon the essential things: T, p 210, lns 18-22. 534 On 10 July 2008, Mr Katke sent an email to Mr Gee, Mr Joiner and Mr Brosnan attaching a document prepared by Dr Bland in which he set out his thoughts about strategic planning for the 2009 year (and beyond). In Dr Bland's email, he principally addresses remarks about the science and the challenges confronting medicine and medical practice. In that context, he talks about what he describes as translational medicine, personalised medicine, the role of preventative medicine and the extent to which "medical foods" are "coming into [their] own". Dr Bland also makes the observation that the whole of pharmaceutical and nutritional science has "swung to focusing on modification of intercellular signal transduction". He observes that every journal addressing developments in the life sciences, pharmaceutical sciences or nutritional sciences contains articles focusing on agents that moderate gene expression and epigenome expression. Finally, Dr Bland expresses some observations about where investment might be best directed in these sectors. 535 On 11 July 2008, Mr Katke sent a memorandum to employees of Metagenics (not HWL). Mr Gee saw this memorandum at the time. 536 In the memorandum, Mr Katke sets out comments about the state of the Metagenics business and the impact of the "challenging economic climate we are all currently experiencing". Mr Katke observes that although the Business Plan sets out the specific actions and performance objectives of the company for the year, the performance in 2008 had been mixed. Notwithstanding that sales revenue had increased over the previous year, Metagenics was not meeting the sales and profit goals set out in the Business Plan. Mr Katke observed that the company's performance had been impacted upon by a combination of factors including the current economic conditions. Mr Katke observed that, as a result, Metagenics had identified certain position reductions (involving 14 individuals) which would need to occur both at the San Clemente and the "Gig Harbor" locations. Mr Katke observed that although these steps involved an "unpleasant business decision", it was necessary for Metagenics to take these actions in order to sustain business growth and profitability. Mr Katke also observes that although the company's growth has fallen short of the sales goal, the company was still growing at 8% over the previous year. 537 On 22 July 2008, a memorandum was sent to directors attaching the agenda, proposed resolutions and backup materials for a Board meeting to be held on 28 July 2008. 538 The meeting would consider a report from Mr Katke, a financial review by Mr Morey and a review of operations by Mr Bellin. Mr Gee attended the meeting in person rather than by video-conference as he was to attend the strategic planning meeting. 539 On 16 July 2008, Mr Gee set out his observations about the necessary focus for strategic planning. He also set out a series of remarks in response to Dr Bland's commentary. Mr Gee expressed views about economic uncertainty and the opportunity to focus on core nutritional products. He observed that "translational medicine" did not greatly impact the market in which Metagenics was operating and said that Dr Bland's observations seemed to suggest to Mr Gee that Metagenics did not have "organisation-wide alignment of a clear definition of its markets - existing products and existing channels". Mr Gee also made observations about medical markets and engagement with practitioners, and other matters. 540 Mr Gee summarised his position in this way: The Strategic focus (what products in what markets) should be to maximise our efforts and increase our market share to get more of the 90 to 95% of the sales our competitors get in our markets. It's not sexy and certainly not simple as it requires organisation wide focus and dedication to service, but it works - • Focus on the products that sell • Focus on the conditions that our customers see • Focus on the largest customers 541 In making the remarks just quoted, Mr Gee said that he was speaking about the focus for the United States, Canada, Europe and Australia, not just HWL alone: T, p 212, lns 25-27. 542 As to the strategic planning meeting proposed by Mr Katke for 2008, Mr Brosnan was "positive" that he did not attend the meeting because he was playing beach rugby in a beach rugby tournament in France at the time and thus he relied upon Mr Gee who did attend the meeting: T, p 310, lns 1-19.

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The Board meeting of Metagenics of 28 July 2008 543 On 28 July 2008, a Board meeting took place. 544 Mr Michael Brosnan did attend the Board meeting, as a director, and Mr Gee attended as an observer as did Mr Morey. 545 At the meeting the director who chaired the Board's Audit Committee, Mr Krajanowski, provided a report to the Board about issues being addressed with the company's new independent auditors, Grant Thornton, including differences in opinion between the local office and national office of that firm regarding the tax treatment of previous IPO expenses. The report also dealt with a perceived lack of co-operation from KPMG in Australia and contended lack of co-operation from HWL's management concerning "representation letters". Mr Krajanowski also commented upon the apparent lack of SEC experience and tax expertise within the company's finance and accounting department. Mr Krajanowski addressed the Board on the specific events in relation to the attempted IPO filings. Particular milestones were said to be, discontinuing the printing of the S-1 in April 2006; discontinuing the printing in December 2006; and a decision taken in the fourth quarter of 2007 to pursue other ways of accessing capital markets with a decision to abandon another attempt at filing an IPO. 546 In Mr Katke's report to the Board meeting of 28 July 2008, he addressed the revised free cash flow forecast for Metagenics and reviewed the current economic factors impacting upon the company's business undertaking. He observed that having regard to price pressures affecting consumers generally, patients were reducing and postponing visits to their healthcare practitioners which was affecting the company's revenue. Mr Katke reviewed plans to increase market share in key categories, gain new accounts and combat the efforts of competitors to recruit members of the company's sales force. 547 Mr Katke also said that the uncertain business conditions had caused the company to discuss various alternative equity transactions. He outlined the advantages and disadvantages of the various proposals. As to these matters, the Minutes note this: The Board discussed the status of the business, particularly in terms of cash flow, and considered whether the Corporation should focus on an equity transaction or on improving business results. [Mr Katke] indicated that the Corporation is focused on cash flow and profits, but stated that it was his objective to complete an equity transaction this year. He went on to say that he believes it is in the best interests of the Corporation to do so, because the Corporation is carrying substantial debt it did not plan to have in place for this length of time. [emphasis added] 548 It seems clear that by the date of this Board meeting any attempt to undertake an IPO had been abandoned. Instead, discussions would be pursued with Alticor as an investor. 549 Mr Gee accepted that some of the marketing focus for the various segments of the Metagenics business involved selling products through doctors, chiropractors and a broad range of healthcare practitioners and due to the United States economic conditions, the number of patients visiting healthcare practitioners had been declining. The only way to arrest the decline was to increase market share: T, p 213, lns 15-28. 550 The Minutes also note that Mr Katke said that the performance of the President of the company, Mr Jean Bellin, was being evaluated with a timeline set for determining that evaluation. Dr Bland made a number of comments about Mr Bellin's performance. 551 Mr Katke also observed that the former shareholders of HWL (the applicants) had requested a definitive agreement that would permit them to re-acquire HWL in the event that Metagenics does not complete an equity transaction by November 2009. Mr Katke noted that management was negotiating the terms of an agreement. 552 At the Board meeting, Mr Morey conducted a review of the financial results for the second quarter of 2008. He discussed the existing levels of debt and commented upon the inventory levels and accounts receivable. The Board requested Mr Morey to develop a management cash flow forecast to replace the cash flow forecast prepared on a GAAP basis. 553 Mr Bellin joined the meeting and provided a review of the operations generally. He also reviewed the summary revenue results in North America and Europe. He also outlined the steps being taken to address the revenue shortfall in North America including a renewed focus on key accounts and market segmentation. Mr Bellin addressed the Board on the gross margins for Europe and the steps being taken to improve margins. 554 All of these financial and operational issues and the question of the equity transaction were freely discussed by the Board and although Mr Gee was an observer, not a Board member, he freely participated in the discussions as well: T, p 214, lns 6-7.

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The presentation by Mr Roger Colman of Alticor to the Board 555 The Minutes also note that Mr Roger Colman, the Vice President of Mergers and Acquisitions for Alticor Corporate Enterprises, joined the meeting. Mr Colman made a presentation about Alticor's history and "acquisition strategy". He spoke to Alticor's interest in a transaction with Metagenics. The Minutes note that following Mr Colman's presentation, he left the meeting and the Board then discussed the potential transaction. 556 As to Mr Colman's presentation, Mr Gee says that he almost certainly would have understood that Mr Colman was to make a presentation to the Board and it certainly did not come as a surprise to him: T, p 215, lns 36-47. Mr Colman's presentation was handed out to the participants in the meeting and Mr Colman spoke to the presentation. Mr Gee was apprehensive about any transaction with Alticor because he was wary of the company's connection with "Amway" as a brand and regarded that brand as having a poor public profile and reputation in Australia. 557 Nevertheless, Mr Colman's presentation emphasised these factors. 558 As to the brief short statement or "snapshot" Mr Colman said this: Alticor, through its Amway subsidiary, is the world's second-largest direct-selling company, with 3 million distributors in more than 80 countries. Alticor's Access Business Group is a major supply chain organisation servicing Amway and other leading consumer packaged goods companies. Alticor Corporate Enterprises is Alticor's strategic investment arm, focusing on acquisitions in the beauty and wellness markets. 559 Mr Colman said that sales for 2007 were US$7.1 billion. 560 He said that approximately 85% of Alticor's sales were outside the United States. He observed that the company was founded in 1959. He spoke about the founders and mentioned the three outside directors of the company. He also spoke to a graph which sets out Alticor's "milestones" beginning in 1959 through to 2007. The graph notes the continuous rise in revenues throughout that period and notes that in 1995, by which time Alticor was generating revenues of US$5.3 billion, Alticor entered China to exploit a potential market in China. Other milestones in 2004, 2006 and 2007 are addressed. 561 As to the "global presence" of Alticor, Mr Colman noted that Amway has 55 locally managed affiliates in the 80 countries in which it conducts business. Mr Colman noted the top 10 markets for Alticor, at the top which was China. As to China, Mr Colman said this: Since entering the market in 1995 China is now Amway's single-largest market. Our Amway China affiliate is headquartered in Guangzhou and has two regional offices in Beijing and Shanghai. Amway China operates a 141,000 square-foot production facility in Guangzhou and R&D facilities in both Guangzhou and Shanghai. It has 5,000 employees located in various facilities across the country. Amway is a top health and beauty brand in China. According to market research by AC Nielsen in 2007, Amway's brand awareness and favourability in China are 100% and 80% respectively. In the same survey 86% graded Amway's product quality as very good or good. [emphasis added] 562 Mr Colman observed that three quarters of Alticor's revenues are in the nutrition, beauty and personal care products and of the sales of US$7.1 billion, 45% were derived from nutritional products. As to the investment criteria, Mr Colman said that Alticor was looking for products focused on wellness and beauty markets. Potential target acquisitions would need to have established premium brands, innovative products, unique technology/positioning, distribution in non-direct selling channels, strong management teams in place and sustainable profitable growth. 563 As to the question of Alticor's role as a strategic investor, Mr Colman's slides say this: As a hybrid of a private equity firm and a strategic acquirer, we offer the benefits of each: • A long-term investment perspective • Independence for management • Business resources to leverage: - R&D/product development - Supply chain management - Global reach - Corporate services • Financial resources to grow: - Organic opportunities - Bolt-on acquisitions 564 As to Alticor's post-investment philosophy, Mr Colman said this: We look for strong management teams in our acquisitions because, after our investment, Alticor Corporate Enterprises empowers the management team to chart its own path and guide the day-to-day business. Our role is to provide the resources for growth and serve as a liaison between the platform company and Alticor. 565 Mr Colman spoke to the acquisition of Gurwitch products in July 2006. The presentation contained a testimonial from the CEO of Gurwitch in which she says this: Today we have the backing of a multi-national, multi-billion dollar company that shares our vision and is dedicated to our success. We could not have a better parent … they are supportive and provide great resources yet offer us the latitude needed to successfully run the day-to-day business. And, through our partnership with Alticor, we fully expect in the next five years to increase revenue, expand our global presence, grow market share and improve profitability. 566 Mr Colman also spoke about Interleukin Genetics, a business in which Alticor had invested in 2003 and at the date of the presentation Alticor owned approximately 58% of the company. 567 Mr Gee says that in assessing Alticor's value to the HWL directors and former shareholders in HWL, the fact that Alticor was a very significant corporation, and the circumstance of where it was doing business, were factors he took into account. Mr Gee recalls being told that China was Alticor's largest market: T, p 217, ln 18. That was a matter of interest to Mr Gee (T, p 217, lns 32-33), although no more than the totality of the presentation: T, p 217, ln 39. As to the impression made upon him by the totality of the presentation, Mr Gee said: "For me it meant that Amway would be investing in Metagenics, and I believed that Amway was a damaged brand and that it could harm our business": T, p 217, lns 42-44. 568 However, Mr Gee recognised that the size of Amway's business and the places where it conducted that business were significant in the sense that it was "a very, very large corporation with a lot of resources and operating in many countries" and that "it could help" Metagenics "if it provided resources to Metagenics". As to the resources, Mr Gee understood that it would be a matter for Metagenics to choose which resources it would want by way of support. The resources would include financial, management and scientific resources. Mr Gee says that he understood Mr Colman's reference to Alticor's "global reach" to mean that Alticor was operating in "many, many countries" and that Alticor could assist Metagenics in getting the company's products into "those" countries. Mr Gee accepted that Alticor was offering Metagenics the opportunity to achieve at least some global reach for the company's products: T, p 219, lns 21-28. Thus, one of the "synergies" that Metagenics expected to achieve out of the relationship with Alticor was an expansion in the company's global reach. Mr Gee recalls being told that Alticor had some "discoveries" that were not appropriate for their "channel or distribution" but may be appropriate for "our channel of distribution": T, p 218, lns 1-19. Mr Gee did not see the circumstance that Alticor had three million distributors in more than 80 countries as a resource for Metagenics although Alticor's "major supply chain" was, in Mr Gee's view, a resource: T, p 218, lns 21-27. 569 Mr Gee accepted that Mr Colman was suggesting that if Alticor acquired Metagenics or a part of Metagenics, Alticor saw its role as one of providing the resources for growth described in the presentation as earlier quoted in these reasons. 570 In the same meeting, the directors and observers had already heard a presentation to the effect that the Board was focused on the operations of Metagenics and focused on the goal of increasing revenue generally in all segments of the business including the United States, Canada (North America), Europe and Australia, and otherwise if it could do so. Mr Gee accepted that Mr Colman's presentation included the observation that Alticor's singular goal was to help portfolio companies reach their goals: T, p 220, lns 37-39. As to this question of helping portfolio companies achieve their goals, Mr Katke gave this evidence about the Colman presentation at T, p 555, lns 16-31: Q Did [Mr Colman] say anything about reaching goals? A Yes. He said that their goal was to help companies such as Metagenics reach our goals and that that was their business strategy. Q Now, there had been references on a number of these pages [of the presentation] to global reach and China and the China market being the most significant market. Can you recall what was discussed at that meeting in relation to that? A In relation to China? Q Yes? A Yes. He told us that China did between three and four billion in revenue and that they would do their best to help us access the marketplace, if it was something that we wanted to do. And we had made a presentation to them previous to this about our company and what our company's goals were. And the fact our goal of becoming a global company that offered a better form of healthcare and lifestyle medicine and natural products was well known to them. We covered that point quite clearly and so this was a response to what we said we wanted to do and that they were claiming that they were willing to help us achieve our goal. Q Did you believe Mr Colman when he said that? A Probably not. Q What do you mean by that? A I mean, I thought - I thought it was positive and in good information. I still wanted to learn more about their business and it was my first - kind of our beginning of our relationship and I wasn't convinced yet, but I was - I was favourably disposed to continue discussions with them. 571 Mr Michael Brosnan attended the Board meeting. 572 However, as to Mr Colman's presentation, Mr Brosnan said that he was not listening "as perhaps he should have been". Mr Brosnan gave the presentation a "cursory attendance" and understood the presentation to say "we're brilliant and we're wonderful", but as to the content of the presentation, Mr Brosnan accepted that notwithstanding that he was a Director of Metagenics, he simply was not listening: T, p 311, lns 1-2; lns 16-17 and ln 46. 573 Mr Michael Brosnan gave evidence that after the Board meeting on 28 July 2008 he had a discussion with Mr Katke and in the course of that discussion Mr Katke said that Amway (Alticor) had sales of $3 billion or $4 billion a year into China and that it was a "no-brainer" to get Metagenics products into China or at least components of the company's products into China or licensing into China. This recollection was reinforced for Mr Brosnan because he said that in a telephone discussion with Mr Katke in either March or April 2009, Mr Katke said that the Alticor transaction was the company's "opportunity to create real value"; that Alticor "is a sophisticated company"; and "they can get our products into China": T, p 290, lns 24-26. 574 Mr Gee gave evidence that he had a conversation with Mr Katke after the meeting and much the same thing was said to him. Mr Gee puts it this way at T, p 121, lns 13-36: Q Okay. Now, after that meeting, did you have a discussion with Mr Katke about the Alticor proposal or their presentation? A Yes I did. Q Can you tell his Honour, to the best of your recollection, what was said by Mr Katke in that discussion? A I was concerned about Alticor taking a position in Metagenics. In Australia, at least, its primary brand was Amway, and I felt that the Amway brand was a damaged brand and felt that an association with that brand would not have been good for the company. I expressed that reservation to Mr Katke. He started explaining to me some of the benefits of doing the transaction, and including in those benefits was - he said that Alticor, through their Amway business, was doing - well, in total it was about an $8 billion business at the time - was doing three or four billion dollars of business in China, and by association with - doing the deal that the - Metagenics could have products in China. And it was - the way it was, products into China - it wasn't going to be under the Metagenics brand. It was going to be licensed into the Amway brand. Q Now, did you have other conversations with Mr Katke about that, subsequent to July 2008? A Yes I did. I had a number of conversations, including a similar discussion after the next board meeting and the one after it. So the next board meeting, I think, was October 08 and then January 09. Because I was still concerned about the association with the Amway brand and Mr Katke was trying to tell me - well, was telling me what he saw the benefits of doing the deal were. So - and on a number of telephone conversations we had that conversation, as well. Q When you say "that conversation", just what was that conversation? A That conversation was about the - one of the benefits of doing the deal with Alticor was that the Metagenics products could go into the China business. 575 The following exchange occurred with Mr Katke in evidence-in-chief at T, p 555, lns 40-47; T, p 556, lns 1-30: Q In due course did Alticor take any steps towards assisting Metagenics with the China proposition? A Yes they did. We had a number of meetings with their various levels of their management team, talking about how we might - how we might work together and what benefits might be. They told us that they would do their best to arrange meetings for us with key members of their distributors from various countries including China. The woman that ran China was the - the darling of Alticor because she had been responsible for such a large growth for their business and … Q Did you meet her? A We did. And they arranged a presentation for us at their annual international distributor meeting and then we presented to their distributors what - who Metagenics was, the power of our science, the power of our products and some marketing - a marketing program that we had specifically organised for that presentation, and we got a very positive response from their distributors. Q But in any event, nothing happened in respect of China. At least it hasn't happened yet; is that right? A Well, yes. Their research and development department felt - basically censored us or told us that, you know, nothing goes on in Alticor without going through them, and that we hadn't cleared this with them, and we kind of got embroiled in a little bit of a political struggle within Alticor that we had not foreseen, and that Roger Colman and Jim Weaver had not foreseen. Q Now, did you say to Mr Michael Brosnan or Mr Gee that it was a no-brainer for Metagenics to get its product into China if it did a deal with Alticor? A No. Q Did you say to either of them, if Metagenics did a deal with Alticor, it would enable Metagenics to sell its products into China? A I did not. I - but I was positive about the prospects that we could sell into China and - however, I also had a philosophy, a business philosophy that I had learned from studying Peter Drucker's work, which said that it's not good business to count on synergies that come from the other side of an acquisition, because you can't control that, and if you make a deal depending on those synergies, the chances of a big disappointment are high. So I advised our board and I advised our management team, and I also mentioned this to Michael Brosnan and Alan Gee, that we - even though the prospect of China is very attractive, we can't count on that. We can't even evaluate this deal counting on that or considering that as part of the value of the deal, because we can't control it. We don't know for sure it's going to happen and we need to look at this deal from its face value and what synergies we can bring to the deal, that we can control. And that should be the only criteria that we used in evaluating the deal.

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Strategic guidance for the period 2009 - 2011 579 On 9 September 2008, Mr Katke sent an email to Mr Gee attaching a document described as "2009-2011 strategic guidance". Mr Gee was asked to review the document. Mr Katke also said: "We would appreciate receiving a similar document from you that helps us to understand where you are taking the Australian and New Zealand business in 2009 through 2011". The strategic guidance document emerged out of the strategic planning meeting earlier described: T, p 221, lns 13-14. The corporate objectives set out in the document included these things: 1. Key management and succession planning in place to support the achievement of growth objectives 2. Achieving the annual revenue and EBITDA growth targets in North America and Europe supersedes the achievement of IPO-driven "high growth" financial objectives 3. Operating Expenses growth lower than revenue growth 4. Align investments in R&D, Marketing and Sales 5. Raise $25M asap, … 6. Spin-off MetaProteomics as a biotech, by 2011 580 As to these corporate objectives, Mr Gee said that he had never seen the objectives described in these terms before. However, in so far as the objectives contemplated achieving annual revenue and EBITDA growth targets for North America and Europe that was "a very clear corporate objective": T, p 221, lns 18-22. 581 The strategic guidance document sets out seven points comprising the strategic focus for R&D in the period and six points representing the focus for the global R&D objectives. 582 The document also sets out eight areas of focus of therapeutic activity for the company for North America and the North American marketing objectives followed by the North American sales objectives. 583 The document talks about features of differentiation and how the company might go about growing its market share. The version of the document sent to Mr Gee on 9 September 2008 was a preliminary version, sent in error. 584 On 10 September 2008, Mr Katke sent Mr Gee the "latest version" of the strategic guidance document. That version of the document gives more emphasis to "key business drivers". The slide which earlier represented the corporate objectives is now put in these terms: 1. Staff key positions in each department with high performers in order to achieve our annual revenue and profit growth targets 2. Focus on key business drivers essential to our revenue and profit growth: • Industry-leading customer service and support programs by customer class and size to create long term loyalty and consistent growth • New customer and new market acquisition • New science based proprietary products/product improvements • Industry leading customer education and implementation programs designed for each customer class that increase revenue and profit • Optimize the use of information technology, to improve our communication with employees, customers, end users and vendors 3. Raise capital to finance our strategic growth through a private or public equity transaction 4. Raise $25M to fund MetaProteomics operations … 5. Europe and Australia: develop strategic guidance and plan[s] that are appropriate for their respective markets and customers 585 In many respects, the remaining parts of the document continue to reflect the emphasis and focus of the earlier document. Mr Gee cannot recall whether he responded to Mr Katke or anyone else in relation to this further version of the strategic guidance document: T, p 223, lns 8-9.

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The financial results to 31 August 2008 586 Mr Morey sent an analysis of the financial performance and results of operations of Metagenics for the period ending 31 August 2008 to Mr Gee. Net revenues had increased by $16.5M or 14.5% to $130.0M for the eight months ending 31 August 2008. In US dollars, the results are these - North America $72.4M; Australia $47.6M; Europe $14.6M (with inter-segment eliminations of $4.8M) resulting in actual revenue of $129.9M. These results represented an increase over the prior year for the same period for each segment of the business of 7.8%; 29.4% and 14.5% respectively. As against the internal and external budgets, the performance measure is this: as against the internal budget -8.5%; 13.9%; and -3.1% respectively; as against the external budget -6.8%; 13.9%; and -3.1% respectively. Page 2 of Mr Morey's analysis contains the following observation: The growth rate for Australia revenues of 29.4% for the eight months ending August 31, 2008 over the eight months ending August 31, 2007 consists of 14.7% organic growth and 14.7% due to currency fluctuations. Australia's actual revenues for the eight months ending August 31, 2008 in comparison to the external and internal budget are over by 13.9% consisting of organic revenues under the external and internal budget by 1.5% and 15.4% over the external and internal budget due to currency fluctuation. Actual revenues for eight months ending August 31, 2008 were AUD$51.5 million as compared with AUD$44.9 million for the eight months ending August 31, 2007 for a growth rate of 14.7%. 587 Mr Gee was not able to recall what his view may have been about the overall results for Metagenics at the time he received the August analysis. However, he thinks his view was that the figures told him that North America was behind budget but certainly growing on the previous year. Australia was ahead of budget and growing on the previous year although approximately 15.4% of that growth was attributable to foreign exchange factors. Mr Gee noted the remarks at p 2 of the document about that question, quoted above. Nevertheless, the Australian business was growing in Australian dollars at 14.7%. North America was not meeting its projections but at least it was growing. Mr Gee said that having regard to the financial report to 31 July 2008 and the August report to 31 August 2008, Mr Gee found it more beneficial to examine the second part of the table in each case which identifies the performance of each segment of the business in local currency because that told Mr Gee how each segment of the business was performing in its own local market. Focusing on those figures rather than results converted to US dollars proved to be more relevant for Mr Gee because of the currency fluctuations inherent in the US dollar conversions. 588 Mr Gee said that looking at the financial statistics in local currency as at 31 July 2008, the financial reports told him that each of the market segments had grown over the previous period but each of them had failed to achieve either the internal or external budget. Mr Gee said that his view about that budget performance would have been informed by the financial reports for the previous month and the one before that, and the one before that, providing financial statistics to the end of each relevant period as compared with the corresponding periods in the previous year, but the trend, including the results to 31 August 2008, was clearly one that was disappointing to Mr Gee: T, p 223, lns 2-3.

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Mr Katke's 11 November 2008 email 592 On 11 November 2008, Mr Katke sent an email to Mr Morey and others reporting on a meeting with Alticor on 29 October 2008. 593 Mr Katke reported that he anticipated Alticor would advise him of the Board's position on the transaction. The essence of the advice, however, was that the Alticor Board was concerned about the deterioration in the economic environment and the effect that circumstance might have on the Metagenics business. The Alticor representatives asked for revised forecasts that would reflect Metagenics estimates of the effect the prevailing economic circumstances would have on the Metagenics business. Alticor representatives said that Alticor was still very much interested in the transaction and that it had the financial resources to complete the transaction. 594 Mr Katke said this in his email: The meeting was not what we hoped it would be but rather was the beginning of a negotiation on price. [Alticor] indicated that there would be a change in price, but that they were not ready to discuss what that price change might entail. We advised [Alticor] that if there price was going to decrease substantially that they ought to tell us, because we might as well terminate discussions and save everyone a lot of time and money. Their position was that they did not want to give us their new value until they complete due diligence. They agreed to target November 15 for the completion of due diligence and then meet to provide us their thoughts on value. However, it does not appear that they will complete their due diligence, including a team visit to Australia scheduled for November 17, by November 15, which is the date their exclusivity expires. Nevertheless, [Alticor] has undertaken to meet with us around that time and we will advise you of the outcome of that meeting. [emphasis added] 595 Mr Katke observes in the email that he did not want to provide lower forecasts because the "strategic planning" initiatives would be "going live" in the fourth quarter which would improve 2009 results. One of those new initiatives was said to be the stopchronicdisease website which Metagenics believed would increase growth in 2009 and following years by connecting consumers suffering from chronic illness to customers of Metagenics using the company's products.

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The draft Business Plan formulated by Mr Jean Bellin 604 On 4 January 2009, Mr Bellin sent an email to Dr Bland attaching a draft Business Plan for the financial years 2009 to 2013. Mr Bellin said that he had formulated his draft of the Business Plan on 3 January 2009. Mr Bellin set out the assumptions upon which the draft had been framed. He said that he had checked all the numbers against the projections sent by Mr Morey to Alticor and the revenue, net income, EBIT and EBITDA numbers corresponded with the numbers identified by Mr Morey, not including Metaproteomics. 605 As to the projections for 2013, Mr Bellin made these assumptions: 2013 core growth of +23% similar to core growth in 2012 according to Mr Morey's numbers; 2013 net income of 13% of sales similar to Mr Morey's numbers; and 2013 EBITDA at 22% of sales similar to Mr Morey's numbers. Mr Bellin also said this: I made separate assumptions for the growth of the number of patients on scd [stopchronicdisease] and for the numbers of new MD accounts in 2013, based on the rate of progression year by year of these two strategic initiatives between 2009 and 2012. As we agreed, we looked at the total revenue growth year by year to grow by 35% (see Company Operating Strategy #2). However, I suggest that we consider calculating the 35% growth BEFORE licensing revenue, since we are looking at numbers WITHOUT metapro [MetaProteomics]. This calculation method would of course accelerate our total growth. It would also require acquisition(s) every year of the plan, instead of the current hiatus of [year] 2011. … [emphasis added] 606 Mr Bellin then incorporated in his email the table drawn from p 5 of the Business Plan. 607 Mr Gee had not seen Mr Bellin's email prior to these proceedings. 608 In the draft Business Plan, the following company strategies are described: 1. Achieve consistent annual organic growth of at least 15% in revenue and 20% in net income over the next 5 years by expanding the number of CAM healthcare professionals that effectively use our products, increasing new MD customers that implement FLT and use our products in their practises and by increasing retail sales of our nutraceuticals and natural OTC medicines. 2. Raise capital, through a liquidity event, to fund accretive acquisitions and MetaProteomics' drug development research. Each acquisition must provide organic growth of at least 15% and profit growth of at least 5% and be satisfactorily integrated before an additional acquisition can be executed. The combined growth rate from organic growth and acquisitions is 35% growth in revenue and 20% growth in net income. 3. Build the commercial value of MetaProteomics ExpressSyn technology by conducting controlled human clinical trials that apply our products in TLC programs to treat chronic illness and demonstrate the advantages of safety, efficacy and cost over other therapeutics … 4. Build the commercial value of MetaProteomics SKRM pharmaceutical technology by conducting phase I and phase IIa drug trials and then monetize these discoveries through pharmaceutical licensing and/or spinning off and selling new biotech entities to commercialize our new drug technology. 609 The Business Plan suggests that these four operating strategies will generate annual revenues reflected in the chart contained on p 5 of the Business Plan which is in these terms: Consolidated Revenue 2009 - 2013 $MM 2008 2009 2010 2011 2012 2013 Core Business 191 193 233 284 348 429 Acquisition 1 1 (+15% p.a. 65 75 86 99 114 Acquisition 2 40 46 53 61 Acquisition 3 71 82 Acquisition 4 98 Licensing 55 65 75 TOTAL 191 258 348 471 636 859

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610 The Business Plan then sets out the detailed financial objectives for the 2009 financial year. Three objectives were identified. 611 The first was to achieve revenues of $193.1M with EBITDA of $28.6M, EBIT of $22.6M and net income of $12.5M. Item 1 then sets out eight comments about the individuals who are to be responsible for financial performance for North America, Australia and Europe by reference to the principal financial measures of sales revenue, net income, EBIT and EBITDA. 612 The second financial objective is put this way: 2. Penetrate the MD market and add 196 new MD customers that implement FLT to produce a $2.7 million sales increase in 2009 … 613 Mr Bellin is to be responsible for this objective. Mr Katke was to be responsible for developing a successful "Feeder program" for doctors. He was also to be responsible for hiring, training and deploying five implementation specialists to assist new doctors to implement the new program. 614 The third objective was to complete an equity transaction to provide capital for acquisitions and fund the drug development research of MetaProteomics by the end of 2009. Mr Katke was to assume responsibility for identifying suitable investors and negotiating a valuation for the purposes of the transaction. 615 Notwithstanding that Mr Gee was not sent Mr Bellin's email setting out the assumptions and the adoption of Mr Morey's revenue projections as sent to Alticor (nor the attached particular draft of the Business Plan), the proposition was put to Mr Gee that the revenue figures contained in the Business Plan were drawn from employees throughout the organisation, from the bottom to the top, including sales staff, manufacturing staff and relevant managers at each level, reporting upon the business being done in various parts of the business. The suggestion was put to Mr Gee that this information would pass up the chain to the CFO, Mr Katke and Mr Bellin for their consideration. 616 Mr Gee said that he did not have a detailed understanding of how the projections might have been compiled in the United States but he was familiar with the methodology applied in Australia and New Zealand. 617 As to that method, Mr Gee said this at T, p 224, lns 40-44; T, p 225, lns 1-10: My director of sales and marketing would go to his senior people and they would go to their people, get a feel for what the market was, and we would, based on what our revenue estimates were, and what particular programs we were going to run - we would then put costings and revenue estimates around those … once you knew the sales level, you then had to figure out how much it was going to cost to produce those sales. The person who was in charge of that area, once he knew the sales budget, he would do that. 618 Mr Gee accepted that once the sales figures had been determined and the costs of producing those sales determined, including such things as transport and all other inputs identified, that information would then be provided to senior management including Mr Gee so that a draft budget could be prepared for proper consideration by senior management who would then report to the Board to enable the Board to consider the draft budget and projections. 619 The process was one of obtaining information from those individuals who actually perform the various tasks, provide the information to senior management to enable management to apply their judgement to questions of financial performance and then put that informed judgement to the Board for its consideration and its judgement. Once approved by the Board, the budget with its projections, would become a company document: T, p 225, lns 22-28. 620 Mr Gee also observed that he did not know how the projections formulated by Mr Morey, for despatch to Alticor, and adopted by Mr Bellin into the preliminary budget, had been reached.

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The preliminary consolidated financial statements to 31 October 2008 (12 months) 621 On 6 January 2009, Mr Morey sent Mr Gee a draft of the consolidated revenue statements for December and for all of 2008. He said that the figures were "preliminary" subject to receiving confirmation of some international shipments which may have been received in December. The year to date position reflected in the December accounts, in local currency, show revenue to 31 December 2008 as follows: Australia $79.2M; Canada $13.1M; Europe €14.4M; United States operations $91.7M. These results reflected growth over the prior year period of 13.8%; 10.6%; 2.1%; 5.2%, respectively. As compared with the external budget the results were -4.7%; -9.4%; -20.8%; -7.0%, respectively and as compared with the internal budget the results were -4.7%; -9.4%; -21.2%; -9.0%, respectively. These financial statistics were also sent to Mr Michael Brosnan (T, p 225, ln 40) although, as earlier mentioned, Mr Brosnan relied upon Mr Gee's judgements about financial questions. 622 In Mr Gee's assessment, he again placed emphasis upon the results reflected in local currency because those financial statistics better reflect the performance of each business in its particular market, in his view. The results told Mr Gee that each segment of the business had grown, over the previous year to date comparative period, by the statistical measure quoted above for each region. Reverting to the revenues, Mr Gee observed that revenue for the United States operations was US$91.7M as against an internal budget of US$100.8M and an external budget of US$98.7M and thus the United States operations were falling short by a slight margin. 623 Mr Gee said that by the time he received these statistics, he had already been receiving monthly reports reflecting the position for that month and the year to date position to the end of the relevant month, and the December results were "in line with where I had known, I had expected it to [be]": T, p 226, lns 12-25. 624 Mr Gee observed that, for him, the financial results demonstrated that although Metagenics had not met its budget on revenue, it had exceeded the target for profitability which meant that while Metagenics was not growing as strongly as expected, there were some efficiencies in the business such that the "top line" could be converted into a profit more efficiently. So, although the market was having a negative effect upon revenue, the running of the business seemed to be more than compensating, through efficiency measures, which meant that the "bottom line" was nevertheless in excess of budget: T, p 227, lns 3-20.

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The 26 January 2009 Metagenics Board meeting at San Clemente 627 A Board meeting of Metagenics took place on 26 January 2009 at San Clemente. 628 On 20 January 2009, Mr Konney despatched to the directors a memorandum attaching the agenda for the meeting, proposed resolutions and backup materials for the meeting. Participants not attending in person were to attend by conference call. The agenda contemplated a report by Mr Katke in relation to potential equity transactions; potential biotech investments in MetaProteomics; and, a business opportunity called "ProsperCare". 629 Mr Morey was to provide a review of the fourth quarter financial results and the full year 2008 financial results. 630 Mr Bellin was to provide a report on "operations" and was to speak to the "Approval of 2009-13 Business Plan". 631 Tab 8 of the material for the Board meeting was a draft version of the North American Business Plan (which I have described as the "NABP"), under the sub-heading "Core Business: 2009-2013". 632 This version of the NABP is in different terms in a number of respects to the first version formulated by Mr Bellin as earlier described. The Vision Statement for Metagenics is largely in the same terms and is put this way: Metagenics is a global life sciences company that applies the science of nutrigenomics to discover, develop, manufacture and market proprietary products based on natural molecules with safety and efficacy advantages for use in medical foods, nutraceuticals, and pharmaceuticals to reverse chronic illness and improve health. … We implement new methods to improve health by educating healthcare professionals and consumers regarding the power of functional medicine and nutrigenomics-based products and programs. … 633 The consolidated revenue statistics for the period are set out at p 3 of the NABP. This chart is confined to the core business activities of Metagenics and reflects the same statistics, as to that matter, reflected in the chart contained in Mr Bellin's first version. The core business revenues, in US dollars for 2008, 2009, 2010, 2011, 2012 and 2013 are $191M; $193M; $233M; $284M; $348M; and $429M, respectively. 634 The chart also sets out the growth rate in revenues in percentage terms. The growth rate, over each preceding year, is said to be as follows: Future Years Growth Rate Percentage 2008 No growth percentage shown 2009 1% 2010 20.7% 2011 45.5% 2012 21.8% 2013 22.0%

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635 The company objectives, in terms of revenues, EBITDA, EBIT and net income for the 2009 financial year (Objective 1) are in the same terms as the earlier Business Plan. In the NABP sent to directors, the "2009 financial year objectives" incorporates this further observation: Responsibility for the implementation of the Metagenics social network StopChronicDisease [website] and expansion of the Metagenics Therapeutic Lifestyle Change Centers Of Excellence (COE) Program to pull 1,350 new patients into our COE customers for care and increase revenue by $738,450 in 2009: Doug Gaynor, Vice President Marketing North America. [emphasis added] 636 The second 2009 financial year objective is in the same terms as Mr Bellin's first version of the Business Plan except that there is greater elaboration of aspects of it. The second objective talks about penetrating the MD market (doctors) to add 196 new doctor customers that implement FLT to produce a sales increase in 2009 of $2.7M. Mr Katke is identified as the person responsible for developing the program and hiring, training and deploying five implementation specialists to assist new doctors to implement the program. He is also the person responsible for obtaining relevant accreditation for educational initiatives of Metagenics targeted to doctors. 637 The third objective from the earlier plan is incorporated in the new plan. Mr Konney would be responsible for completing due diligence and purchase documents required to close the equity investment transaction. 638 The fourth objective is concerned with completing Phase I and Phase IIa pharmaceutical drug development research and biotech partnerships in 24 months following the equity transaction with a view to monetizing the discoveries within 36 to 48 months of the equity transaction. Dr Bland was responsible for these topics. 639 The fifth objective is concerned with identifying and evaluating acquisition candidates and completing and integrating accretive acquisitions that would grow revenue by 35% and net income by 20% described as the "combined growth rate goal from organic growth and acquisitions during the 12 months period following the liquidity event". 640 The financial objectives for 2010 are in these terms: Company FY 2010 Objectives 1. Achieve 2010 sales revenue for our core business of at least $233.3 million, Net Income of $20 million and EBITDA of $39.3 million. 2. Add 480 new MD customers that implement FLT to produce, together with the new MDs added in 2009, a $10.2 million sales increase in 2010. 3. Effectively deploy StopChronicDisease [website] to pull 7,000 new patients into our COE customers for care and increase revenue by $3.8 million. 4. Secure a drug development and/or co-marketing agreement with a pharmaceutical/biotech company in 2010. 5. Identify, complete, and integrate accretive acquisition candidates that will grow revenue by 35% and net income by 20% in 2010 (combined growth rate goal from organic growth and acquisitions) 641 The financial objectives for 2011 are in these terms: Company FY 2011 Objectives 1. Achieve 2011 revenue for our core business of $283.8 million, Net Income of $35 million and EBITDA of $61.1 million. 2. Add 719 new MD customers that implement FLT to produce, together with the new MDs added in 2009 and 2010, a $23.1 million sales increase in 2011. 3. Effectively deploy StopChronicDisease [website] to pull 20,000 new patients into our COE customers for care and increase revenue by $10.9 million. 4. Achieve $55 million in revenue from the drug development partnership with a pharmaceutical company in 2011. 5. Identify, complete, and integrate accretive acquisition candidates that will grow revenue by 35% and net income by 20% in 2011 (combined growth rate goal from organic growth and acquisitions) 642 The financial objectives for 2012 are in these terms: Company FY 2012 Objectives 1. Achieve 2012 revenue for our core business of $348.4 million, Net Income of $46.1 million and EBITDA of $77.3 million. 2. Add 941 new MD customers that implement FLT to produce, together with the new MDs added in 2009, 2010 and 2011, a $41.2 million sales increase in 2012. 3. Effectively deploy StopChronicDisease [website] to pull 40,000 new patients into our COE customers for care and increase revenue by $21.9 million. 4. Achieve $65 million in revenue from the drug development partnership with a pharmaceutical company in 2012. 5. Identify, complete, and integrate accretive acquisition candidates that will grow revenue by 35% and net income by 20% in 2012 (combined growth rate goal from organic growth and acquisitions) 643 The financial objectives for 2013 are in these terms: Company FY 2013 Objectives 1. Achieve 2013 revenue for our core business of $428.5 million, Net Income of $55.7 million and EBITDA of $94.3 million. 2. Add 1,223 new MD customers that implement FLT to produce, together with the new MDs added in 2009, 2010, 2011 and 2012 a $57.7 million sales increase in 2013. 3. Effectively deploy StopChronicDisease [website] to pull 60,000 new patients into our COE customers for care and increase revenue by $32.8 million. 4. Achieve $75 million in revenue from the drug development partnership with a pharmaceutical company in 2013. 5. Identify, complete, and integrate accretive acquisition candidates that will grow revenue by 35% and net income by 20% in 2013 (combined growth rate goal from organic growth and acquisitions) 644 The Board papers also included Mr Morey's analysis of the financial results for the 12 months ending 31 December 2008 in the same terms as sent to Mr Gee on 21 January 2009. 645 Mr Gee believes he received a copy of this bundle of documents sent to directors for the 26 January 2009 Board meeting (T, p 227, lns 27 and 31) although he believes that there was another email suggesting the version sent to directors was incorrect and that a further version was given to him. On 22 January 2009, Ms Stockwell sent Mr Michael Brosnan and Mr Gee an email attaching a copy of the materials for the Board meeting including the NABP. On 23 January 2009, Ms Stockwell sent another email to the directors and Mr Gee attaching a corrected version of the NABP in replacement of the version at Tab 8 of the earlier papers. Ms Stockwell said that the earlier version "incorporated numbers from the wrong spreadsheet" and so it should be disregarded. Hard copies of the revised NABP would be available at the meeting for reference. 646 The new version of the plan contains five operating strategies which are in the same terms as the earlier version. The consolidated revenue for 2009-2013, however, is in these terms: Years Core Business Revenues Growth Rate % 2008 $189M - 2009 $193M 2% 2010 $233M 20.7% 2011 $284M 21.9% 2012 $348M 22.5% 2013 $430M 23.3%

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647 The chart in the corrected version of the plan contains no projection of licensing revenue for the years 2011, 2012 and 2013. 648 As to the objectives for the 2009 financial year, Objective 1 is in these terms: Achieve 2009 revenues of $193.1 million with EBITDA of $20.7 million, EBIT of $14.4 million, and net income of $5.4 million. 649 The overall responsibility for achieving this objective is attributed to Mr Bellin. 650 Objective 1 is broken down into nine areas of responsibility with each area allocated to a particular individual. In essence, they were these: 2009 North American sales of $92M, Mr Tim Katke, described as Vice President of Sales 2009 North American distributor sales of $12.6M, Mr Jeff Katke 2009 International Sales (and the remaining portion of European sales) of US$3.9M, Ms Vonheim, Manager, International Sales Implementation of the Metagenics social network StopChronicDisease website and expansion of the COE Program to attract 1,350 new patients into the COE Program and increase 2009 revenue by $738,450, Mr Doug Gaynor, Vice President, Marketing, North America 2009 North American net income of $2.2M, EBIT of $8.5M and EBITDA of $10.6M, Mr Bellin 2009 Australian sales of US$60.2M, Mr Joiner, Australian National Sales and Marketing Manager 2009 Australian net income of US$2.8M, EBIT of US$5.1M and EBITDA of US$7.5M, Mr Gee, Managing Director, HWL 2009 European sales of US$20.3M, Mr Coussement, Vice President, European Operations 2009 European net income of US$388,000, EBIT of US$812,000 and EBITDA of US$2.6M, Mr Coussement 651 Objective 2 is now formulated in these terms: Penetrate the MD market and add 233 new MD customers that implement FLT to produce a $3.1 million sales increase in 2009. 652 The responsibility for this objective is attributed to Mr Bellin. Mr Mike Katke, described as Vice President Medical Marketing, is given responsibility for three aspects of this objective: to develop a successful "MD Feeder program" for implementation specialists; hire, train and deploy six implementation specialists to assist the new doctors in implementing the program; and obtain the relevant accreditation for educational initiatives of the company targeted to doctors. 653 Objective 3 is in these terms: Complete equity transaction to provide capital for acquisitions and fund MetaProteomics' drug development research by end of 2009. 654 Mr Jeff Katke is given responsibility for this objective and as an implementation step he is given responsibility for identifying suitable investors and negotiating a valuation for an equity transaction. Mr Konney, as before, is given responsibility for completing due diligence and the relevant purchase documents. 655 Objective 4 is in these terms: Complete Phase I and Phase IIa pharmaceutical drug development research and biotech partnerships in 24 months following the equity transaction, and monetize the discoveries in 36 to 48 months following the equity transaction. 656 Dr Bland is given responsibility for Objective 4. A part of that objective involves securing partnerships with biotech or pharmaceutical companies to monetize the company's discoveries "through sale or licensing agreements with pharmaceutical partners". Dr Bland also has responsibility for this aspect of Objective 4. 657 Objective 5 is in these terms: Identify and evaluate acquisition candidates and complete and integrate accretive acquisitions that will grow revenue by 35% and net income by 20% (combined growth rate goal from organic growth and acquisitions) during the 12 months period following the liquidity event. 658 Mr Jeff Katke is given responsibility for this objective and responsibility for negotiating an appropriate valuation and the relevant "deal" terms. 659 The financial objectives for 2010 are in these terms: Company FY 2010 Objectives 1. Achieve 2010 sales revenue for our core business of at least $233.3 million, Net Income of $11.9 million and EBITDA of $30.6 million. 2. Add 562 new MD customers that implement FLT to produce, together with the new MDs added in 2009, a $11.9 million sales increase in 2010. 3. Effectively deploy StopChronicDisease [website] to pull 7,000 new patients into our COE customers for care and increase revenue by $3.8 million. 4. Secure a drug development and/or co-marketing agreement with a pharmaceutical/biotech company in 2010. 5. Identify, complete, and integrate accretive acquisition candidates that will grow revenue by 35% and net income by 20% in 2010 (combined growth rate goal from organic growth and acquisitions) 660 The financial objectives for 2011 are in these terms: Company FY 2011 Objectives 1. Achieve 2011 revenue for our core business of $283.8 million, Net Income of $26.9 million and EBITDA of $52.8 million. 2. Add 719 new MD customers that implement FLT to produce, together with the new MDs added in 2009 and 2010, a $27.1 million sales increase in 2011. 3. Effectively deploy StopChronicDisease [website] to pull 20,000 new patients into our COE customers for care and increase revenue by $10.9 million. 4. Identify, complete, and integrate accretive acquisition candidates that will grow revenue by 35% and net income by 20% in 2011 (combined growth rate goal from organic growth and acquisitions) 661 The financial objectives for 2012 are in these terms: Company FY 2012 Objectives 1. Achieve 2012 revenue for our core business of $348.4 million, Net Income of $38.8 million and EBITDA of $68.7 million. 2. Add 941 new MD customers that implement FLT to produce, together with the new MDs added in 2009, 2010 and 2011, a $48.5 million sales increase in 2012. 3. Effectively deploy StopChronicDisease [website] to pull 40,000 new patients into our COE customers for care and increase revenue by $21.9 million. 4. Identify, complete, and integrate accretive acquisition candidates that will grow revenue by 35% and net income by 20% in 2012 (combined growth rate goal from organic growth and acquisitions) 662 The financial objectives for 2013 are in these terms: Company FY 2013 Objectives 1. Achieve 2013 revenue for our core business of $429.7 million, Net Income of $54.5 million and EBITDA of $93.1 million. 2. Add 1,223 new MD customers that implement FLT to produce, together with the new MDs added in 2009, 2010, 2011 and 2012 a $57.7 million sales increase in 2013. 3. Effectively deploy StopChronicDisease [website] to pull 60,000 new patients into our COE customers for care and increase revenue by $32.8 million. 4. Identify, complete, and integrate accretive acquisition candidates that will grow revenue by 35% and net income by 20% in 2013 (combined growth rate goal from organic growth and acquisitions) 663 The directors attending the Board meeting on 26 January 2009 were Dr Bland, Mr Michael Brosnan, Mr Chu, Mr Hovee, Mr Katke, Mr Krajanowski, Mr Leiner and Mr Zaepfel. Also present as observers were Mr Konney, Mr Morey, Mr Gee and a para-legal, Ms Baker. Mr Katke acted as Chairman of the meeting. The Board was comprised of five outside or independent directors and three directors engaged in executive duties within the Metagenics business. The executive members of the Board were Mr Katke, Dr Bland and Mr Michael Brosnan. 664 As to the independent directors, Mr Gee understood the position to be that Mr Hovee was an experienced businessman and appeared to speak with some degree of authority on business questions. Mr Chu, Bison Capital's nominee on the Board, also seemed, to Mr Gee, to speak with the authority of business experience. Mr Gee understood Mr Krajanowski to be the Senior Partner in a "fairly significant regional accounting firm in California" and thus a professional accountant in the same sense that Mr Gee is a professional accountant. Mr Gee understood Mr Leiner to be a very experienced businessman and a successful businessman in the industry in which Metagenics operates. As to Mr Zaepfel, Mr Gee understood him to also be an experienced businessman. Mr Gee expressed the view that he considered himself to be an experienced businessman. He also regarded Mr Michael Brosnan as "having that character": T, p 229, lns 29-44; T, p 230, lns 1-17. 665 In the course of the meeting, Mr Katke delivered the CEO's report. He reported on the status of the project with Alticor and distributed and reviewed a document described as "Marlin Deal Terms" dated 23 January 2009 setting out the financial elements of the proposed transaction subject to further negotiation of terms and the execution of formal agreements. Mr Katke discussed the anticipated timing for the transaction and the acquisition funding that would be provided by Alticor as part of the proposed transaction. He also described the acquisition targets under consideration by management. He also spoke to the funding arrangements for the Metaproteomics subsidiary that was to be provided by Alticor as part of the transaction. An investment bank, Canaccord Adams, was advising on the transaction. 666 Dr Bland also presented a short video describing the commercialisation of "resveratrol" by Sirtis Pharmaceuticals Inc which was apparently founded in 2004 and purchased by GlaxoSmithKline in 2008 for $720M. Dr Bland provided the Board with an update on Management's discussions with potential investors in "MetaProteomics' drug development candidates in the areas of cardiovascular disease, metabolic syndrome and cancer". 667 Mr Katke and Dr Bland both introduced the Board to a new business proposal under the name ProsperCare which would provide consulting services to assist physicians offering the company's FLT program to obtain third-party reimbursement. 668 Mr Morey reviewed the financial statements for the fourth quarter and the period 12 months to 31 December 2008. He also spoke to the negotiation of particular credit facilities. He discussed the company's financial results as compared with budget for each segment of the business in each region. Mr Katke described the business initiatives supporting Management's growth projections. 669 As to the operations of the company, the Minutes contain this observation: Report of Operations Jean Bellin, President of the Corporation, joined the meeting and presented the North American Business Plan for 2009 through 2013. He reviewed the mission and vision statements, company operating strategies and expected revenue by region. In response to directors' questions, the Chairman and Mr Bellin addressed external economic factors, back-up plans, changes in the management team and the competitive outlook. Five new Company FY 2009 Objectives were introduced, with responsibilities assigned for each. The directors asked to have metrics for the 2009 objectives, along with local currency targets for the international results that were included in the first objective. The Board also requested that management present a report card on performance against the objectives in the 2008 Business Plan at a future meeting. [emphasis added] 670 The Minutes note that at this point Mr Bellin left the meeting.

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The "Marlin Deal Terms" document 671 As to the "Marlin Deal Terms", Mr Gee explained the essence of the document in these terms. 672 The total implied value of the Metagenics operating business including Europe and Australia was $250M. The implied value of the research and development arm of Metagenics, namely, MetaProteomics, was $100M giving a total implied value of $350M. Mr Gee understood that the value attributed to MetaProteomics was a function of the anticipated value to be derived from its discoveries. Alticor's proposition was that it would acquire 60% of Metagenics although it would actually acquire a 53% or 54% (approximately) interest from the existing shareholders and then subscribe further capital to take its ownership percentage up to 60%. It would also invest $28.5M in the MetaProteomics business and receive a 28.5% interest in that undertaking. Mr Gee understood that that was the basis for the valuation of MetaProteomics at $100M. The proposal assumed net debt of $28.1M. Mr Gee understood that, therefore, there would be $28.1M of debt remaining in the company with the result that once Alticor acquired a 60% interest in Metagenics, the company would still have obligations to outside parties in that amount. The cash being subscribed by Alticor to raise its ownership level from 53% or 54% to 60% was to be used to discharge some external debt. New shares would be issued to Alticor in respect of the cash subscription. The Australian and American shareholders immediately prior to the Alticor transaction would thus retain a 40% interest in Metagenics representing an interest in a company that in the post-transaction environment would have debt of $28.1M rather than the debt threshold which previously subsisted: T, p 230, lns 27-47; T, p 231, ln 41. 673 The total "Deal Consideration" at the close of the transaction was to be $161,640,000 representing consideration in respect of MetaProteomics of $133,140,000 and $28,500,000 in respect of MetaProteomics. 674 Mr Gee explains that as to the totality of that consideration, $20M of it was going into MetaProteomics. There were also some transaction costs amounting to $3.5M to be paid to the investment bank advising on the transaction. From the capital subscribed by Alticor to Metagenics, $28.1M of company debt in respect of "Preferred, Debt & Warrants" was to be retired. The balance of $110M was to be distributed to the shareholders from whom the 53% (approximately) interest had been acquired by Alticor: T, p 232, lns 4-9. 675 Apart from these arrangements, the transaction also involved the notion that some shares making up the remaining 40% would be held in escrow to the value of $16,164,000. Those shares would be held in escrow throughout 2011 with a release of the shares from the escrow arrangement every six months. Also, an acquisition facility of $50M was to be provided by Alticor to enable Metagenics to finance some acquisitions. The Marlin Deal Terms also suggest that if necessary, amounts in addition to the $50M might be made available through the mechanism of external bank debt of up to three times EBITDA and acquisition financing from Alticor up to five times the acquisition target's EBITDA. 676 Mr Gee gave evidence that notwithstanding these financial arrangements under which the shareholders would receive consideration for their shares; debt would be retired in the company; MetaProteomics would be properly capitalised; and $50M in the form of a debt facility would be available to Metagenics, Mr Gee continued to have reservations about the character of Alticor due to his view of its "damaged brand", Amway. Mr Gee gave evidence that notwithstanding that he had discussed his concerns about that matter with "Alticor people", he still had reservations about proceeding with the transaction. 677 The particular problem, as Mr Gee saw it, was that Alticor had a number of distributors in the United States and Australia who had engaged in "some poor business practices" and the perception was that they had behaved "unethically": T, p 233, lns 7-11. Mr Gee gave evidence that leaving aside the issue of the ethics of some of Alticor's distributors, he thought he was "satisfied with it" which seemed to be a reference to the elements of the transaction and Alticor itself: T, p 233, ln 15. 678 A further element of the transaction with Alticor involved a "Put Structure". The essence of the Put Structure was that it would allow the remaining 40% shareholders to require Alticor to buy their shares. The valuation of the shares would be based upon a multiple of EBITDA. The Marlin Deal Terms talk about adjusted EBITDA. However, leaving aside the mechanism by which EBITDA would be adjusted to determine the relevant quantum of the EBITDA for the purposes of the calculation, the notion was that if adjusted EBITDA fell within particular bands, a particular multiple would apply. For example, the projected EBITDA for 2011 was $55M; 2012 $70.5M; and, 2013 $77.0M. If Metagenics achieved 95% or above of that EBITDA figure, the shares would be valued at 13 times the EBITDA figure (relevantly adjusted). A cascading schedule across five other bands of performance is set out in the Put Structure. In simple terms, the Put Structure contemplated that if EBITDA was above $55M or below $37.499M then the Put Option could be exercised by the shareholders but the multiplier which would determine the price for the shares would change depending upon how well the company had performed. The most advantageous multiple was 13 times (in the example above) and as the company's performance fell away, the multiple to be applied would reduce to 12, 11, 9, 7 and 5 down through the various bands of performance. The EBITDA targets for 2011, 2012 and 2013 were aligned with the Business Plan: T, p 234, lns 1-2. 679 At the meeting, each of the directors had the Marlin Deal Terms document in front of them when Mr Katke spoke to these matters. 680 Having regard to the Minutes of the meeting, which Mr Gee accepts as accurately reflecting the discussions, Mr Gee accepts that the only issues in the transaction that anyone was concerned about, were the amounts payable to the investment bank by way of fees and the issue of clarifying related party contracts and employment issues. Mr Gee gave evidence that for the purposes of the discussion, the "numbers" in the transaction "didn't figure much in the discussion" and nor did the amounts the shareholders were going to receive (and the amounts the shareholders could hope to get by the exercise of the Put Option), figure largely in the discussion: T, p 234, lns 44-47; T, p 235, lns 1-2.

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The discussion concerning the North American Business Plan 681 As to the North American Business Plan, Mr Gee recalled that Mr Bellin presented the plan "page by page". Also, Mr Bellin had been involved in "pulling it together in conjunction with other senior executives of Metagenics". Mr Bellin put the plan to the directors, presented it and was asked questions about it as was Mr Katke. Mr Gee was of the view that although Mr Bellin presented the Business Plan to the Board and responded to questions about it together with Mr Katke, ultimately the responsibility for the NABP rested with Mr Katke because the plan was a business plan for the organisation and, in Mr Gee's view, the CEO was responsible for the organisation: T, p 236, lns 12-15. 682 Mr Gee understood that Mr Bellin was responsible for the "operational elements of the business", that is, sales and marketing, the supply chain and administration. He was not responsible for research and development, the attempted IPO or fund raising: T, p 236, lns 17-21. He was also responsible for "worldwide operations" (that is, manufacture, distribution and sales of the products although Australia was a bit of an exception in that regard) and overseeing how those operations were run to ensure that they functioned efficiently and profitably: T, p 236, lns 23-32. 683 The NABP is not recorded in the Minutes as having been approved at the directors' meeting. In his affidavit of 30 June 2014, Mr Gee says that when the NABP was presented to the Board on 26 January 2009, Mr Katke "gave the assurance that the projections would be achieved" [emphasis added]. 684 Four contextual explanations are identified by Mr Gee, leading to that statement. 685 First, for the past four years Mr Katke had been almost exclusively focused on trying to complete an IPO or an equity transaction. 686 Second, Mr Katke had lost focus on the business of Metagenics. 687 Third, when the equity transaction was complete, Mr Katke would re-focus on the business of Metagenics. 688 Fourth, on the basis that Mr Katke would re-focus on the business of Metagenics, the projections in the NABP would be achieved. 689 In oral evidence, Mr Gee said this at T, p 123, lns 6-13, about Mr Katke's remarks on this topic at the meeting: Mr Katke said that … he had lost focus on the business of the company, that this transaction would enable him to - this transaction being the Alticor transaction, would enable him to get back into the operation of the company. They wouldn't be debt burdened any more. And with that, in that scenario, he could focus on achieving those numbers, and he would [achieve] those numbers. [emphasis added] 690 Mr Michael Brosnan says in his affidavit of 30 June 2014 that the first time he saw anything to do with the NABP for 2009-2013 was on 23 January 2009 when he was sent the draft document. Mr Brosnan says that at the directors' meeting he made the following observation coupled with a question: "If North America cannot achieve the proposed figures in the Business Plan in good times, how did they believe they could achieve those figures in a recession?" Mr Brosnan thinks he was in the United States in January when he saw the NABP for the first time: T, p 291, lns 9-12. 691 Mr Brosnan read the NABP during the course of the Board meeting: T, p 291, lns 11-19. 692 As to the projections of future revenues, Mr Brosnan says he asked a few questions of the Board and was supported by Mr Leiner, to the effect that Metagenics had seen "some pretty robust economic years, and they weren't meeting their targets then, how could they expect to achieve this sort of growth and the 20% over the next three or four years": T, p 291, lns 28-31. 693 Mr Brosnan recalls that Mr Katke responded by saying: "Because I've been distracted chasing these liquidity events for five years, and I will be back undistracted and focused on the business": T, p 291, lns 37-38. Mr Brosnan says the NABP was important to him because it formed "the basis for the arrangement with Alticor" (T, p 291, lns 42-43) by which "we would get our value - claw our value back by a backend deal with Alticor": T, p 291, lns 46-47. Mr Brosnan said that, in other words, Alticor would pay cash upfront but the last 40% would get paid over five years, which gave Mr Katke five years to build value, and the important consideration was that the value of the shares would be based on a multiple of EBITDA: T, p 291, lns 46-47; T, p 292, lns 1-4; lns 16-21. 694 As to the contribution of the directors to the Board's deliberations generally and the expertise each director brought to the Board table, Mr Brosnan recalled that Mr Chu was the representative of Bison Capital although he could not recall whether Bison Capital was a lender to Metagenics or an investor in Metagenics. As to Mr Leiner, Mr Brosnan regarded him as a "very sophisticated, good businessman" in the same area as Metagenics. Mr Brosnan did not regard Mr Leiner as simply "a puppet of Mr Katke". Mr Brosnan regarded each of Mr Hovee, Mr Zaepfel and Mr Krajanowski as "certainly having a role to play" and not merely directors (independent) appointed to the Board to do Mr Katke's bidding: T, p 314, lns 1-2. Mr Brosnan accepted that each of them directed attention to the question of the Business Plan as Mr Brosnan agitated his questions: T, p 314, lns 4-10. 695 Mr Brosnan says that once he heard Mr Katke's response that he was going to devote himself to the business, he thought that if Mr Katke did so devote himself, "the figures were achievable": T, p 314, lns 27-31. In his evidence, Mr Brosnan does not say that Mr Katke said he would achieve the numbers in the Business Plan, as Mr Gee recalled things. 696 Mr Brosnan also put it this way at T, p 314, lns 31-34: … if Mr Katke was not distracted, as he said he had been, and was then back in the seat, as he said, and committed to turning the business around - and I thought that if he could do three-quarters of it, it would be - it would be fine. [emphasis added] 697 Mr Brosnan believed that the Business Plan had to be approved by the Board and if it was not approved at the 26 January 2009 meeting it must have been approved by a "phone linkup shortly after". At least, that is what Mr Brosnan thinks occurred: T, p 314, lns 43-44; T, p 315, lns 23-24. 698 As to the approval of the Business Plan, however, Mr Brosnan accepted that he agreed to the Business Plan conditionally on Mr Katke "getting back in the business": T, p 317, lns 7-12. Mr Brosnan also said: "We agreed to it", inferentially, on that condition: T, p 317, ln 12. Mr Brosnan accepted again that what satisfied him that the numbers in the Business Plan were achievable was Mr Katke devoting himself to the business of Metagenics: T, p 317, lns 25-26. 699 As to achieving the projections or "three-quarters of it", Mr Michael Brosnan with the assistance of another, wrote a personal biography of his life story. A "big part" of it, he said, was HWL. The biography was written for the benefit of his son to read. Mr Brosnan accepted that therefore the account would be truthful. As to the Alticor "buy in" Mr Brosnan says in the manuscript that Mr Alan Gee and Mr Michael Brosnan were "sceptical" but nevertheless "confident" that they could "perform, and figured if Mr Katke hit 50 per cent of his projections we would be okay" [emphasis added]. Mr Brosnan gave evidence that the manuscript was only a draft but as to whether that was his view at the time, he said at T, p 318, lns 25-28: I think I mentioned to Alan [Gee] 75 per cent … a probably more realistic number is, I think, Alan and I spoke and we said if it hit 75 per cent of his [Katke's] projections [we would be okay]. [emphasis added] 700 When the proposition was put in cross-examination to Mr Katke that he had said to Mr Brosnan and Mr Gee at the meeting that he would achieve the numbers in the Business Plan once he was no longer burdened with his previous responsibilities, Mr Katke said this at T, p 686, lns 16-24: … while I did feel that the business would improve under my focus when I wasn't as distracted, I also was very concerned about the - the magnitude of the economic downturn and what its impact would be on the business in the coming years. So I wasn't guaranteeing that I was going to be able to hit these numbers. We were behind in numbers already and we were facing a pretty serious economic circumstance, so I was definitely positive about being able to focus more on the business and not be distracted, but I wasn't guaranteeing the achievement of the - of the business plan in the coming years. [emphasis added] 701 The following cross-examination of Mr Katke then occurred at T, p 686, lns 25-41: Q Well, in fact, Mr Brosnan said words to the effect, "Well, you hadn't done these numbers in good times. How do you expect to do them in bad times?" Do you remember him saying that to you? A I - yes, I think - I think Michael Leiner said that, but I believe Michael Brosnan echoed his sentiments, yes. Q Okay. All right. And your response was, I suggest, as you said before, that you were now going to refocus on the business and these figures would be achieved. That's what you said, wasn't it? A I said I would refocus on the business and there would be a good chance that we could achieve these - these figures, yes but I didn't say they would be achieved, because there were too many variables that we were confronted with at the time. Q But these were the very same figures, Mr Katke, that you had provided to Alticor and Nestle, weren't they? A Yes. Q The very same figures. So presumably when you sent them to Nestle and Alticor you expected to achieve them, didn't you? A Yes. [emphasis added] 702 At T, p 677, lns 13-31, this exchange had earlier occurred in cross-examination with Mr Katke: Q Okay. Now, part of your case here is that this North American business plan wasn't a document upon which the applicants should rely, and was prepared for internal planning purposes only; is that right? A It was prepared for internal purposes. Obviously, we use these figures for external purposes, as well. It should not be relied upon. I don't think that that was our representation. I think that what we're saying is that it's not a guarantee and, particularly in light of the global financial crisis, it would be highly unlikely that we would achieve these numbers. Q I'm sorry you said …? A I'm saying … Q Sorry, Mr Katke, I just need to stop you there. Did you say that, having regard to the global financial crisis, which commenced, probably, in the last quarter of 2008, it was highly unlikely that you would achieve these figures in the North American business plan? Is that what you just said? A The north - the North American business plan was … Q No, Mr Katke, just answer. Did you just say that, in light of the global financial crisis, it is highly unlikely that the figures in the North American business plan would not be achieved? Did you just say that? A I did say that. [emphasis added] 703 At T, p 702, lns 31-47; and T, p 703, lns 7-19, this exchange occurred in cross-examination with Mr Katke: Q All right. You also recall giving evidence earlier in the day to this effect: I think that what we're saying is that's not a guarantee and, particularly in light of the global finance crisis, it would be highly unlikely that we would achieve these numbers. Do you recall saying that to this court? A I do. Q All right. So at the time you told the meeting on 26 January 2009 that there was a good chance that we would achieve these figures you didn't actually believe that, did you? A Yes, I did. Q But you told this that "in light of the global financial crisis, it would be highly unlikely that we would achieve these numbers"? A Well, you didn't let me finish. If Q No, is that what you said? [MR SOFRONOFF objects to the witness not being allowed to complete his answer.] MR MARTIN: Well, I [will] allow you to finish your answer. A What I was attempting to say before I was cut off was that, in light of what happened already in January [2009] related to the global financial crisis, we were concerned, and we were concerned in 2008, because we didn't know exactly how long it would - it would last. However, in most of the recessions that the United States had gone through there was a relatively rapid recovery that - that occurred, and so when we made our forecast we expected a rapid recovery. However, what happened in the month of January already was that that recovery wasn't occurring; it was actually getting worse, and therefore, its - even though we - and when we made the forecast and we expected to have the recovery we weren't seeing it occur, and we - we knew and had commented to the board that in the event that the economy gets worse or doesn't improve that that will affect our ability to achieve our - our numbers, and everybody was aware of that. [emphasis added] 704 At T, p 703, lns 23-43, Mr Katke re-asserted his evidence that at the meeting he had said that he would refocus on the business and there would be a good chance that Metagenics could achieve the figures in the Business Plan but said: "I didn't guarantee they would be achieved. I said there was a good chance they would be achieved". 705 Finally, on this topic, Dr Bland gave evidence in his statement to this effect: I recall that Katke discussed the economic downturn as a primary factor underlying the business' underperformance. I specifically recall Michael Leiner voicing his concerns that based on historical performance and in light of the economic conditions at the time, the projections looked ambitious. In discussing the underperformance of the North American business, there was again a discussion about what various Board Members described as Katke's diversion of focus. Key Metagenics personnel - primarily M Brosnan but also to some extent John Zaepfel, Michael Leiner and Bob Hovee - had said at a number of previous Board Meetings that they were concerned about the amount of time Katke had devoted to securing the Alticor deal (among other deals) and the impact this was having on the business generally. … In response to these concerns, I recall that Katke said that he would be able to refocus on the Metagenics business once the Alticor transaction was concluded and therefore hoped to turn the business around. I recall that Brosnan and Gee had also said that they were concerned about Katke and the ability of Metagenics to achieve the objectives set out in the Business Plan. In addition to being categorically unimpressed with Bellin, and generally disillusioned about what Metagenics was doing at the corporate level. [emphasis added]

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The launch of StopChronicDisease website 710 On 25 February 2009, Metagenics launched its (and said to be the first such online facility) "online health information and social networking community to connect people with chronic illness with a diverse network of therapeutic lifestyle change (TLC) specialists". The website is the StopChronicDisease website. The essential idea was to provide an online way of enabling patients suffering chronic illnesses such as Type 2 Diabetes, heart disease and metabolic syndrome, to connect with healthcare professional specialising in lifestyle medicine. The site would establish a community of practitioners trained in nutrition, fitness and lifestyle medicine. 711 Mr Katke gave an extensive body of evidence in cross-examination about the way in which the website would operate and it is convenient to set out that explanation at this point. It is this: Q And how would Metagenics earn money from that; would you sponsor the site? … A We sponsored the site, and the doctors would blog with patients … and the way it would make money is that it would bring patients into the doctors' offices that were doing first line therapy. Q All right. So it was really tied into first line therapy, was it? A It was tied into the doctors' offices that used our products … It was a way to get patients to the doctors - the patients with chronic illnesses that were looking for solutions. If you had a chronic illness and you were looking for solutions, and you went online, what you heard was what the pharmaceutical companies were telling, the stories they were telling - that was all the information there was - and so by offering an alternative approach to these chronic illness[es] - and by demonstrating the successes that were occurring with actual videos of actual people, it was a very compelling site, and the goal was that it would - bring patients to the doctors that were delivering this care. Q All right. Now, who was Doug Gaynor? A He was the vice-president of marketing. Q … was he the person responsible for the web site, stopchronicdisease…? A He was responsible for overall marketing and [stopchronicdisease] was part of our marketing outreach, but we had IT people that were expert in web sites that were working on [stopchronicdisease] along with Mr Gaynor. Q Now, you say about two-thirds of the way down [the paragraph under discussion] "From this past success they prepared a model for projecting the number of new customers that might arise". What was that model? A Well, it's - in this case it's a very difficult - difficult to predict, because the success of social networks had been so dramatically good, and the growth of these sites had been exponential in these businesses which were started, you know, a few years ago where, you know, had millions of people on the site and were worth billions of dollars. So it - it was difficult to do this forecast, but we did our - made our best effort to assess by the numbers of doctors we felt we could get to join, the numbers of patients they would bring onto the site, the numbers of patients that would access the site while they were searching for information about their chronic illness, what we thought was - was reasonable in terms of gaining new visitors to the site and those new visitors getting in touch with the doctors that we were - that were on the sites. Q And did you - do we see the model attached to your statement somewhere, or some document or …? A No. Q What, you couldn't find that either? A No. Didn't - I didn't … Q Okay. A When I started looking I wasn't the CEO anymore and I don't know what happened to those. Doug Gaynor was not there any more. The people that were running the program were not there anymore, so. Q And the last sentence of that paragraph: It was my understanding, from discussions with Doug Gaynor - do you see that - that last paragraph? A Yes. Q "And others". Continuing … in discussion with Doug Gaynor and others. Who are the others? A I spoke with other executives in companies that had engaged in social network initiatives and e-commerce businesses. I spoke with some people that were associated with Google. So there were a group of people that I got … Q So you just spoke to some people and they told you that in their experience they had seen rapid growth when they had used a social network web site. Is that right? A No. The social network web site rapid growth was common knowledge. It wasn't inside knowledge. Everyone knew this. Q If you go to paragraphs 408 and 409 of your statement. 408 they've talked about the launch of the web site, [stopchronicdisease] and what was attached to your statement in the press release dated February 2009; do you recall that? A Yes. Q Okay. And then paragraph 409 you set out, well, what happened to it? A Are you asking me what happened to it? Q No. That's right. In paragraph 409 you set out, in fact, what happened to this social networking site? A Yes. Q All right. So, in fact, you stopped using it after a while did you? A We - no. We didn't stop using it, but we reduced the investment in it, which impaired its ability to achieve the goals that we had set out to achieve, and it was a necessity due to the economic downturn, and then after I left, even though I had introduced Metagenics to people that felt this website had tremendous value and were willing to acquire it, they just pulled the plug on it. 712 As to this evidence, see T, p 792, lns 32-47; T, p 793, lns 1-46; T, p 794, lns 1-29. 713 At the outset of this description of the stopchronicdisease website, Mr Katke made the observation that it was designed to work in association with the whole notion of first line therapy. As to the first line therapy, Mr Katke said this in cross-examination: Q Now, paragraph 321, subparagraph (a). Then we've got (i), MDs? A Yes. Q And then right down the bottom of that page it says: Previous to developing the 2009, 2013 business plan a test had been conducted in Texas to determine the success rate in promoting first line therapy to MDs. What was the test? A In the past, most of our first line therapy development - not all of it, but most of it - was with MDs that - that use nutritional products already, and we conducted a test in Texas to - to contact the market to MDs that didn't use nutrition, that were conventional medical doctors or osteopathic doctors, which, in the US, is [an] equivalent degree, unlike Australia. And - and so it was - it was a test to determine if we could go outside of the complementary alternative medicine group of doctors and access the greater numbers of conventional medical doctors. Q But what exactly was the test; like, what did you actually do? A We - we hired a person that was - was - acted as a - a practice management consultant for the - for the MDs, and - … addressed the implementation of first line therapy from a practice management perspective, and the value that it could add to the practice, and the additional services that it could add in their practice to their patients, and it was - we had a very high success rate in terms of closing the numbers. The percentage of doctors that we contacted, we closed a high rate of them. It was - and then, based on - on the success that we had using - you know, using that approach, we estimated what we could roll it out to accomplish. Q Sorry. Mr Katke, I don't understand. What exactly did you do; did you hire somebody? A Okay. Maybe you want to - okay. Hire someone; yes. Q Well, you said you hired somebody. A We hired someone. Q Who did you hire? A A woman named Christi Richter. Q All right. And what did she do? A She did what I just explained. She - she contacted - she basically was introduced by the sales rep to doctors that were interested in the services that - that she was providing, which included practice management guidance relating to implementing a lifestyle medicine approach in their clinical practice. Q All right. Now, were these MDs who were existing customers of Metagenics? A No. Q Now, were these MDs who were existing customers of Metagenics? A No. Q So, was she cold calling them, effectively? A Yes. Q All right. So she would contact a doctor and say, "I'm from Metagenics, and I would like to speak to you about you selling Metagenics products and getting involved in first line therapy; is that what she did? A No. No. That's not what she did. What happened was - what - the way that it was structured is that in a particular - a particular district in the Texas area, the sales reps would spend a certain percentage - small percentage - of their time calling on MDs - cold calling MDs. Q Yes? A And would look to find a - an MD that was interested in speaking to Christi Richter. When they found one they would introduce Christi to that MD. Q All right. A And then Christi would come in and make a presentation to the MD, and we were having a - and we closed - I believe in that test we closed 60 per cent of the - of the MDs that we met - we presented to. So it was a very high close rate. Q So when you say the area - the area was Texas. A Yes. Q I mean, Texas is a big place. A It is. Q Was it all over Texas? A Yes. Q Or was it just in one city? A It was - well, it was always around the major metropolitan areas of Texas, which includes Houston, Dallas, Fort Worth and Austin. Q All right. A And San Antonio. Q So your sales reps were doing the cold calling. A Correct. Q If we can call it that, just on - on medical doctors and asking them if they were interested in stocking Metagenics products; is that right? A No. Q Are asking if they would be interested in first line therapy? A Asking them if they would be interested in a lifestyle medicine service that could enhance their practice both financially and in terms of the service they provided to their patients. Q All right. And over what period of time did you conduct this test? A It would have been approximately a six-month time period. Q And - and when did you do it? A It was in a - previous to the 2009 business plan. So it was probably - it would be in 2008. Q In 2008? A Yes. Q And then the lady that you employed then followed up on the contact that the salesman made with the - with the doctor; is that right? A Yes. Q Okay. And you say 60 per cent of the doctors she spoke to engaged in the program? A Approximately that number. Q All right. And are you saying that you had never done this before? A We had done it - we had done it in isolated cases, but we hadn't done it as a program to determine whether or not it would be possible for us to roll out a first line therapy program to conventional medical doctors. Q Well, tell us again what is First Line Therapy? A First Line Therapy is a - an - a system that trains doctors to implement therapeutic lifestyle change programs in clinical practice, and helps them understand how to use diet, lifestyle counselling and nutritional products to manage patients with chronic illness, and how to charge for those services so that they can afford to deliver that type of care, and - and afford to hire the people that are needed to implement it, and thrive doing it. Q All right. And for how long had been Metagenics doing this? A Since 2002. Q All right. So you had been doing it for sometime. All right. And it had met with what? Mixed success? A No, it was very successful. Q All right. But there was an issue about it underperforming, though, wasn't there? A The - the issue, as I mentioned to you, you know, that Jeff Bland felt it was underperforming - and I agreed with him in part - was related to some of the management practices that my brother [Tim Katke] was implementing. However, it was difficult to determine whether it was the downturn in the economy or the management practices that were causing the problem. So we didn't - I didn't believe it was the right thing to do to throw the person that invented the program and had good success with the program out with the bathwater, so to speak - you know, using the old term "throw the baby out with the bathwater". And so - and then, in addition to us having success within our complementary alternative medicine group of doctors, the goal was to roll the program out to the - a much larger group of physicians, which were those doctors that did not use nutritional products, and the National Academy of Sciences' National Cholesterol Education Program, which provided guidance to doctors on how to treat patients with hyperlipidaemia and metabolic syndrome, advised that the number one treatment should be lifestyle medicine, and then after the lifestyle medicine was implemented, if that wasn't successful, you would add the cholesterol medication. And, as you probably know, cholesterol - the sale of cholesterol drugs were the largest selling drug in the - in the world, and, therefore, because the new medical guidance on standard of care was to do lifestyle therapy, we believed that there was a window of opportunity for us to introduce this concept to conventional medical doctors and grow our business quite dramatically. Q So you had been doing this since 2002 with the doctors that also bought your products; is that right? A Yes. Q Okay. So what you were trying to do was to expand this First Line Therapy to doctors who didn't buy your products; was that the idea? A That's correct. 714 As to these matters, see T, p 792, lns 5-47; T, p 783, lns 1-45; T, p 784, lns 1-8; lns 23-47; T, p 785; lns 1-14. 715 Mr Katke also gave this evidence: Q Okay. And how did Metagenics make money out of First Line Therapy? A The answer is our medical foods were a part of the treatment protocol. Q So you would encourage the doctors to embrace First Line Therapy, which then involved buying Metagenics products; is that right? A Yes. Q And that's how you make your money. Okay. So what Christi was doing wasn't so much a test, but rather she was just another one of your marketing people to try and get more customers; is that right? A No. Our outreach had been to our customers or to other medical customers that used nutritional supplements in their clinical practices. This was an outreach to what would be considered medical doctors that were not complementary alternative medicine practitioners that had not used these types of therapies before. Q Yes. A So this is conventional MDs which is a large - much larger group in the United States than what would be considered MDs in the CAM space. Q No. Maybe you're misunderstanding what I'm suggesting to you. Christi wasn't conducting a test for you, she was actually trying to get you more doctors on board, wasn't she? A No. It was - it was the belief by Mr Bellin and my brother, Mike Katke, that we could reach conventional medical doctors with First Line Therapy successfully. And I was sceptical and I said, "let's set up a test before we roll this out at great expense to the company and distract our entire sales force on something that might not work. Let's run a smaller test in a small area and then let's see how it works and then if it works we can roll it out nationally. Q And you say …? A So that was a test. Q And you say you conducted this test, what, through the entire State of Texas? A Through the - yes, through the sales people in Texas. And Christi Richter lived in Texas and that's the reason we chose Texas. Q All right. And then ultimately - just a minute. Well, and, as you say in paragraph 412 of your statement - if you could just go to that - what happened was that there was an increase of $15 million in sales to $18 million in sales from 09 to 10, but then not much happened after that; is that right? A No. The - the program continued to grow business, but it didn't grow it at the - to the magnitude that we had expected, and we were, you know, trying to determine whether it was the economic conditions or the program itself, or whether it was Mike Katke's management style that was causing this not to produce the results that we had expected it to produce. We estimated - you know, we took the actual results that we had achieved in Texas, and then discounted those results significantly in our forecast to what we would achieve when we rolled it out nationally, and it didn't - we didn't even achieve those results, even though we had substantially discounted our success rates in the - in our forecasts. Q Okay, didn't work? A It didn't work as good [well] as we planned. Q All right? A However, we were engaged - you know, there was a - there was a significant downturn in terms of patient visits to doctors' offices during this time. Doctors were in financial strife. It was a tough time and so it was hard to tell what the reason was that it didn't work. 716 As to these matters see T, p 790, lns 21-47; T, p 791, lns 1-12; lns 19-38.

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The events of March 2009 717 On 9 March 2009, Mr Katke sent an email to the directors of Metagenics including Mr Michael Brosnan (and to others including Mr Morey) advising that Dr Bland, Mr Katke and senior management met with Alticor representatives in the preceding week to further negotiations concerning the proposed transaction. Mr Katke said that the "bottom line" was that the "deal is proceeding on schedule and on terms that are generally satisfactory so far". The topics under discussion were post-merger integration; communications strategies; deal negotiations; and the risks to completion. 718 On 10 March 2009, Mr Gee sent an email to Mr Morey (by mistake, rather than to Mr Katke as intended) in which he said that Mr Michael Brosnan had mentioned Mr Katke's updated email on the Alticor transaction. Mr Gee had not received it and asked to be included in the distribution list in future. Mr Gee suggested that having regard to the approaching communication dates, Mr Gee and Mr Joiner would need to align the Australia announcements with the United States announcements. Mr Gee asked for the "preliminary communication plan" so he could start the Australian planning. As to Mr Katke's update on the transaction, Mr Katke said in his email dated 8 March 2009 that the negotiations were proceeding on schedule and on terms that were generally satisfactory. Mr Katke said that the two major transaction documents, the Stock Purchase Agreement and the Stockholders' Agreement had been reviewed along with the many other ancillary contracts. Mr Katke, in that context, said this: This email is not the appropriate place to summarise all the deal terms, but a few key points should be mentioned. The price and the payment terms have not changed. We have maintained a good set of supermajority provisions, which will enable us to control the business sufficiently well to be able to achieve our back-end EBITDA targets. As we have discussed with the Board, achievement of those targets will determine the value of the 40% of the business that current stockholders will retain after closing. 719 Mr Gee in his email also said that "as part of this" (Australian planning) he, Mr Joiner and Mr Paul Manyon, HWL's Technical Director, would visit Alticor's facility in Anaheim "to see and hear their story". Mr Gee suggested 2 or 3 April 2009. 720 Mr Gee said that this proposal to visit Alticor's operations (and "look at their facility, meet their people and get to understand them": T, p 239, lns 3-4) had earlier been suggested by Mr Katke due to the reservations expressed by Mr Gee and Mr Brosnan about the Amway reputational issues.

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The financial accounts to the period ending 28 February 2009 725 On 26 March 2009, Mr Morey sent Mr Gee the monthly financial report and review of operations for the period ended 28 February 2009. In local currency, the revenue results were: United States $14.854M; Canada $2.444M; Australia $12.292M; and, Europe €2.609M. In comparison with the prior year, the United States was 5.6% below the prior year result and 10.5% below the external budget. Canada, Australia and Europe were 16.1%, 4.5% and 2.4%, respectively, ahead of the prior year and 1.6%, 4.8% and 3.4%, respectively, ahead of the external budget. 726 In terms of earnings, the year to date (eg. two months) consolidated EBITDA was $3.371M as compared with a budget of $2.999M. The prior year comparator was $3.061M. Thus the company, as to earnings, was 12.4% ahead of budget and 10.1% ahead of the prior year's earnings (EBITDA). As to the North American part of the business comprising the United States, Canada and MetaProteomics, the total consolidated contribution to EBITDA (after eliminations) was $1.903M against a budget of $1.941M and a prior year comparator of $1.349M. As to Australia and New Zealand, the EBITDA contribution for the month of February was $701,241.00 as compared with a budget of $524,379.00 and a prior year comparator of $820,700.00. Year to date to 28 February 2009, the contribution was $1.505M as compared with a budget of $1.206M and a prior year comparator of $1.719M. 727 Again, Mr Gee observed that Metagenics seemed to be converting the top line revenues, although below budget and below the prior year comparator, into efficiency gains at the earnings level. As to the North American performance concerning EBITDA, Mr Gee considered that the "primary performance improvement" was coming from this area. Mr Gee accepted that some of the credit at least for that improved performance definitely belonged to Mr Bellin and Mr Katke: T, p 242, lns 29-31. 728 Consistent with the usual practice, Mr Morey sent a further review to Mr Gee of the financial performance of Metagenics for the period ending 31 March 2009. 729 As to revenues, in local currency, the results were these: United States $22.021M; Canada $3.671M; Australia $19.980M; and, Europe €4.103M. These results were above or below the external budget by these margins respectively: -5.4%; -0.3%; 4.3% (above) and -0.1%. As compared with the prior year the results were all above the prior year comparator and were respectively: 0.8%; 20.1%; 13.1% and 8.9%. 730 Mr Gee believes that he considered this report in the way that he had considered the other financial reports sent to him by Mr Morey in accordance with the usual practice: T, p 244, ln 1. Mr Gee looked at the "key markets" although he did not read in detail every page of the report. Mr Gee looked at these various reports to form a view about whether Metagenics was fundamentally on track: T, p 244, lns 11-12.

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Agitation by Mr Michael Brosnan and Mr Gee concerning contentions of "value transfer" 731 On 2 May 2009, Mr Brosnan sent an email to Mr Katke on the topic of the transfer of value to the US shareholders. That email was based on an analysis undertaken by Mr Gee reflected in an email he had sent to Mr Brosnan. 732 In Mr Gee's email, he said this: I have completed the analysis of the Brosnan Family's value in HWL before and after the 2005 Meta Inc. transaction, based on a 45.1% interest so it can be compared against what you will receive if the new [Alticor] transaction proceeds. A summary is attached. It shows that if you had not sold your shares, 45.1% of the Brosnan Family interest would be worth a A$34.1m (based on a $105.7m value for the company). By entering into the 2005 transaction (plus settlement shares), the A$34.1M value in a thriving business that is growing in value every day has been turned into A$20.0m cash. Of the balance, A$5.2m has been turned into an intangible value for MetaProteomics, and the remaining A$8.9m has been transferred - A$5.2m to the Katke Family, A$1.9m to the Bland Family, A$1.5m to Other US Shareholders, and A$0.3m to other Interest Holders. If you extrapolate the 45.1% interest to a 100% interest, the value transfer from the Brosnan Family is A$19.8m - A$11.6m to the Katke Family, A$4.1m to the Bland Family; A$3.3m to Other US Shareholders, and A$0.7m to Other Interest Holders. [emphasis added] 733 In Mr Brosnan's email of 2 May 2009, he relevantly said this: … I don't want to fight. In many ways, I wish I never had done this deal so that our friendship would be as intact as it was 5 years ago. This deal has hurt our relationship. I do not want to squabble, and fight anymore over this deal. At the end of [this email] you will see an email from Alan Gee to me. I asked him to do it. There is a rather large spreadsheet that I can also forward to you … This spread sheet shows that at the 105.7 value for the [Alticor] deal, Leon and I (the brosnans) get 20 million in cash … and 5.2 goes to blue sky metaproteomics [sic]. If Leon and I did a cash deal to Blackmores say, for our 105.7 we would receive cash of 34.1 million (for the 45.1% [Alticor] type deal). In other words. A strong tangible business has been turned into 20 million cash (aus) for Leon and i. Apart from 5.2 going to blue sky … 5.2 is transferred to the katke family, 1.9 to the bland family and 1.5 to other US shareholders [sic]. If it was a 100% deal with [Alticor], Leon and I would be transferring, 11.6 mil to the katke family, bland family 4.1 and other US shareholders 3.3 million [sic]. This is why it is very difficult for me to keep rolling on points. … HWL is the jewel in the crown. You and the other shareholders are getting the value from this business, we are not. The Brosnans have been let down in this whole process. I believe we need to sign the settlement deal, do the [Alticor] deal if you wish, and just get on with it. Incidentally when i suggested to do the [Alticor] deal for 320 or 330, it was because i thought i had a floor value in place and the underperforming meta inc desperately needed the cash [sic]. [emphasis added] 734 As to Mr Gee's underlying analysis, although he could not recall where the 45.1% figure came from nor the AU$20M cash figure, the essence of his analysis seems to be this. Mr Gee looked at the percentage interest the Brosnan family held in HWL (assumed to be 45.1% for the sake of the exercise notwithstanding that the Brosnan family held a much larger interest in HWL than that) immediately before the 2005 Agreement. That interest, had it not been sold, would have been valued at AU$34.1M in 2009 based on a valuation of HWL of AU$105.7M. Next, Mr Gee sought to determine the value of the Brosnan family interest in Metagenics resulting from the 2005 Agreement (also taking into account the extra shares) with the result that the interest in HWL that would have been worth AU$34.1M was "turned into" a new interest valued in cash at $20M. As to the differential or lost value of $14.1M, Mr Gee says that $5.2M of it is represented by intangible value in MetaProteomics; $8.9M of it has been transferred to the Katke family as to $5.2M, the Bland family as to $1.9M, other US shareholders as to $1.5M and other interest holders as to $0.3M. Mr Gee accepted that, boiled down, his analysis is suggesting that had the Brosnan family not sold their shares in HWL in 2005 their 45.1% interest in HWL would be worth, in May 2009, $34.1M and that value has been replaced with an interest in Metagenics in May 2009 only worth AU$20M. 735 As to Mr Brosnan's email, he seems to be suggesting to Mr Katke, based on Mr Gee's analysis and spreadsheet, that the Brosnan family will receive, if the Alticor transaction proceeds, AU$20M in cash and a AU$5.2M "Blue Sky" interest in MetaProteomics whereas had they not sold their shares in HWL they would have been able to sell their (45.1%) interest for AU$34.1M in cash to, say, Blackmores.

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The financial accounts for the period ending 30 April 2009 736 On 16 May 2009, Mr Gee received Mr Morey's financial statistics and operations report for the period ending 30 April 2009. The report suggested to Mr Gee, at the time, that as to revenues the position in local currency was this: United States $30.528M; Canada $4.898M; Australia $27.794M; Europe €5.524M. As compared with the external budget the results were 3.7% below; 2.0% below; 9.0% above and 3.7% above, respectively. As against the prior year, all results were ahead of that comparator, by, respectively: 0.8%; 17.0%; 13.1% and 9.8%. Mr Gee thinks he would have looked at the EBITDA numbers at the time and in respect of the month of April, consolidated EBITDA was $2.067M against a budget of $1.351M and a prior year comparator of $1.717M. 737 For Mr Gee this told him that the performance was 20.4% above the prior year and 52.9% above budget. The report also contains a pro forma year to date consolidated statement in US dollars. The statement was pro forma as Mr Gee thought some one-off costs had been brought to account. Nevertheless, Mr Gee said it told him that consolidated EBITDA year to date was $7.951M against a budget of $4.733M and a prior year comparator of $6.036M: T, p 246, lns 22-37. These results were 31.7% above the prior year and 68.0% above budget. 738 Mr Gee regarded these as good results: T, p 246, ln 39. 739 Mr Morey's June report for the period ending 31 May 2009 showed revenues for the period in local currency as follows: United States $38.328M; Canada $6.132M; Australia $35.710M; and, Europe €6.877M. As again budget, these results were, respectively, 2.5% below; 3.0% below; 10.5% ahead; and 5.0% ahead. As against the prior year comparator, the results were ahead, respectively, by 2.1%; 15.1%; 14.7% and 11.2%. 740 Mr Gee placed particular emphasis upon the results as to revenues and EBITDA in local currency because although the results were always converted back to US dollars from a holding company perspective, results in local currency better reflected the health of each business in its local market. 741 Mr Brosnan says at para 46 of his statement dated 14 April 2014 that in a meeting in San Clemente in May 2009 with Mr Katke, Mr Morey and Mr Gee, he "raised the issue of the predicted figures in the [NABP] discussed at the Board meeting of Metagenics on 26 January 2009, and Mr Morey said: "We are more worried about what you are going to do [HWL financial performance]. We know what we are going to do". Mr Brosnan put it this way at T, p 320, lns 12-18: … I said to [Mr Katke], "What if you don't do - achieve those numbers?" so this is referring to this - the numbers in this business plan. And Jeff - Jerry Morey said, "We're not worried about what we're doing - what we're going to do. We know … what we're going to do - what we said we were going to do. We're worried about what you're going to do". So in terms of the final sit down discussion, pre-accepting the settlement arrangement, that was the commitment that Jeff gave to us - that those numbers would be achievable. [emphasis added]

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Mr Gee's general perception and opinion about where Metagenics was heading 744 Mr Gee is an experienced Chartered Accountant and an experienced businessman. Mr Gee regularly received these detailed financial reports and commentaries on the operations of the Metagenics business broken down by region and segment. Mr Gee gave evidence that having looked at these reports each time they came to him from Mr Morey and having examined them to form his own views or opinions about the information they conveyed and what they meant concerning the business and its direction or trends, he then discussed his opinion about these matters with at least those members of the applicants who were attendees at Board meetings of HWL. 745 Mr Gee accepted that the applicants looked to him for his opinion and best judgement about where the company was heading and said he gave his opinion about those matters: T, p 248, lns 15-25. 746 As to his opinion in early July 2009, having seen the most recent year to date results together with all of the earlier reports, Mr Gee said his view was that United States sales was still struggling; the US business was not achieving its budget; other elements of the business were in "pretty good shape", Canada was growing at over 17% over the prior year; Australia at 17.5% and Europe at 13.5%: T, p 248, lns 27-36. Mr Gee thought that there was an "opportunity" for the business to "grow better than it was" and there were a number of components to realising that opportunity, in Mr Gee's view. 747 First, as he put it, Mr Katke who had "built the business" had been out of it for the previous four years trying to get the IPO together and secure an investor. He had become "embroiled" in the corporate side of the business and he was not doing well. In Mr Gee's view, "we all knew what he did well" (business building) and so having Mr Katke again "involved in what he did well" was one feature of realising the opportunity. 748 Second, Mr Gee did not believe Mr Bellin was a particularly good operator and there had been some discussion about his performance. A better performer could go into that role. 749 Third, if the Alticor transaction proceeded, that would free up Mr Katke. 750 Fourth, the Alticor transaction would take the pressure off the company and enable it to focus on the important issues for growing the business. 751 As to these matters see T, p 248, lns 40-41; T, p 249, lns 1-9. Mr Gee "certainly thought there was opportunity [but] we had to execute to achieve that opportunity" (T, p 249, lns 14-15) and "we had to do the right things". Mr Gee also said that while "Jean Bellin was there I don't know whether I felt that that could be achieved": T, p 249, lns 21-22.

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Issues in relation to the Settlement Deed of 31 July 2009 752 In the negotiations leading to settlement of the dispute between the applicants and Mr Katke and others and entry into the Settlement Deed, the applicants were advised by Ebsworth Lawyers and the respondents were advised by Mallesons Stephen Jacques. 753 Mr Gee received a copy of the Settlement Deed before signing it, read most of it and took advice about it: T, p 250, lns 27-28. 754 Mr Gee was the principal person for the applicants who dealt with Ebsworth on these issues. Mr Gee gave the instructions: T, p 250, lns 41-46. 755 Mr Gee accepted that, put simply, the central part of the Settlement Deed was the release of all claims against the Metagenics parties and at its heart the purpose of the Settlement Deed was to compromise the dispute. The applicants would give up their claims and receive the consideration reflected in the Settlement Deed. Those historical claims, as now pleaded in the proceeding, concerned the representations as to the IPO, Pfizer and other particular matters. In reaching the compromise, the applicants represented and promised by cl 11.4 that they had received independent legal and accounting advice concerning the elements of the Settlement Deed. Mr Gee said that they had, in fact, done so. Mr Gee gave evidence that he understood that those on the other side of the transaction were relying upon the applicants having taken objective legal and financial advice about the settlement and its terms. Mr Gee also understood that the terms of the Settlement Deed (cl 11.5) contained an acknowledgement that the applicants had conducted their own enquiries and researches and relied upon those steps in entering into the Settlement Deed. Mr Gee said that he also understood that he (the applicants) might discover facts different to or in addition to the facts that he knew or believed to be true at the date of entry into the Settlement Deed. Mr Gee also understood that warranties flowed the other way as well, and one of those warranties was a promise in cl 9.1(c) by the Metagenics side that to the best of their knowledge and belief, the Metagenics accounts contained in Annexure C (being the most recent monthly financial statements) were complete and accurate in all material respects and accurately reflected the financial position of the company at the date of those accounts. 756 As to these matters, see T, p 251, lns 4-46; T, p 252, lns 1-2. 757 As to cl 9.1(c), Mr Gee on 18 March 2009, sent an email to his fellow applicants advising that a lot of headway had been made in the settlement negotiations in a discussion between Mr Gee, Mr Katke and Mr Morey that morning. Mr Gee said that he thought Mr Katke wanted the settlement concluded but that Mr Morey was struggling under the weight of finalising the Settlement Deed and the transaction documents with Alticor. Mr Gee attached to his email of 18 March 2009 the text of an earlier email he had sent to Mr Katke and Mr Morey on 1 March 2009 setting out seven topics for discussion concerning the proposed Settlement Deed. At the foot of each topic, Mr Gee included a comment in the circulated email as to whether the point had been agreed on 18 March 2009; whether it had been abandoned; or simply the current status of the point. 758 As to the warranty concerning the accuracy of information given by the Metagenics side to the applicants, Mr Gee notes that the proposed warranty had been removed from the document. Mr Gee required a warranty to be adopted in these terms: The most recent monthly management financial statements [of Metagenics] are complete and accurate in all material respects and accurately reflect the financial position of the company at the date of those accounts. 759 The resolution of this warranty matter on 18 March 2009 was that the Metagenics side would give the warranty as sought subject to this. The Australian shareholders, however, would give a like warranty as to the HWL accounts and the warranty from the Metagenics side as to the consolidated accounts would be subject to the Australian shareholders warranting the accuracy of the HWL most recent accounts. 760 Thus, the question and scope of the warranty was a matter sought by Mr Gee. The warranty ultimately took the form of cl 9.1(c). 761 Mr Gee at T, p 253, lns 12-17 accepted as correct, and as a fair assessment of the position, the following proposition put to him in cross-examination: And the reason that's important [securing the warranty at cl 9.1(c)] Mr Gee, is that you were entering into a contract to settle a dispute in which your side was alleging you had been misled, and so, on the one hand you wanted a promise that the information you were acting on was accurate, and on the other hand the Metagenics side wanted to ensure that everybody understood what was the information you were acting upon. [emphasis added] 762 At T, p 253, lns 19-22, immediately following that passage, Mr Gee accepted as correct, the following proposition put to him: And that consequently what was agreed upon was that the only warranty they were giving and the only statement they were making concerning the accuracy of the accounts, related to the current accounts as defined in the definition section [of the Settlement Deed - Annexure C]. [emphasis added] 763 Mr Gee said he wanted cl 9.1(c) "to make sure that [the Metagenics side] were warranting the accuracy of their accounts (T, p 266, lns 1-2) because he thought it prudent to do so not because he had any reason to suspect that the accounts were not accurate: T, p 266, lns 5-6. Mr Gee thought it prudent as a Chartered Accountant with business experience to secure the warranty because Mr Gee was intending to rely upon the most recent monthly financial accounts of Metagenics as basing, in part, the decision of the applicants whether or not to enter into the transaction: T, p 266, lns 14-17.

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The commercial elements of the Settlement Deed 766 As to the commercial elements of the Settlement Deed, Mr Gee understood that the Metagenics side was getting a release from the applicants although nothing else, as he understood it: T, p 266, lns 43-45. The Deed was entered into on 31 July 2009. Mr Gee accepted and understood that it provided for a continuation of what is really a "special dividend" in the form of an earn-out payment of 30% of the after tax profits of the Australasian businesses until the nominated expiration dates structured by reference to the circumstances and timing of (or not) a relevant liquidity event. 767 Mr Gee understood that, commercially, apart from the earn-out dividend, the former HWL shareholders were to receive, in substance, Preferred Stock B and Preferred Stock C and that Mr Katke and Dr Bland had agreed to pay additional consideration of approximately US$4M (US$4,108,959.40) by acquiring, from some of the former HWL shareholders, units they owned in Meta Rx. Mr Gee understood that all of the Common Stock issued pursuant to the 2005 Agreement was to be converted to Preferred Stock B and that under the restructure the shares held by the former HWL shareholders in Metagenics were to be converted from Preferred Stock B into units in the Holdco entity. 768 Mr Gee understood that Annexure A to the Settlement Deed concerned the "Proposed Transaction" that all of the participants intended with Alticor. 769 Thus, in substance, prior to settlement, the former HWL shareholders held shares in Metagenics which conducted the United States business and which held the shares in wholly owned subsidiaries operating in Canada, Australia and Europe. Upon settlement, new shares in the form of Preferred Stock B and C would be issued to Mr Gee and the other applicants. Also, the Holdco entity would be established. 770 As to the Alticor arrangements, Mr Gee understood that Alticor would acquire all of the shares in Showcase Holdings and that company would acquire 60% of the shares in Metagenics. The Holdco structure would be implemented with the result that Mr Gee, the remaining applicants, Mr Katke and others would hold units in Holdco which would own 40% of the shares in Metagenics, and Alticor, through Showcase Holdings, would hold a 60% interest in Metagenics. 771 Mr Gee understood that another element of the settlement arrangement involved establishing put and call options in relation to the remaining 40% interest in Metagenics. In substance, those minority shareholders would have the right to require Alticor to buy their shares and Alticor enjoyed the right to call upon the minority shareholders to sell their shares over the course of a three year period, according to the terms of the document, which would result in the transfer, if fully exercised, of the remaining 40% interest to Alticor. 772 Mr Gee understood that a formula applied to the put and call options (if exercised) which, put simply, had these elements. EBITDA is allocated to each year from 2010 to 2014 and a component "Z" is then added to EBITDA as a starting point. Component "Z" refers to any acquisitions that Metagenics might have made and the EBITDA derived from that acquisition. One small acquisition was made. However, for all practical purposes, component "Z" can be disregarded. 773 The table in the formula sets out the relevant EBITDA in US dollars for that year. Mr Gee understood that in each "exercise year", for example, a question is asked as to whether the company has achieved 95% or better of the nominated EBITDA for the relevant "fiscal year" (in 2010, the fiscal 2009 EBITDA was US$24.930M), and if it has so achieved, the put or call option could be exercised at a multiple of 13 times so as to determine the value of the company and thus the exercise price per share for the option. However, the put and call options could be exercised at any level of EBITDA earnings as the table sets out a relevant multiple to be applied to the particular level of EBITDA to determine value and, in consequence, the exercise price per share for the option. Looking at 2010 as the year of exercise, if the EBITDA in fiscal year 2009 was 65% of US$24.930M, the shareholders might be required to sell the relevant nominated proportion of their shares for that exercise year at a price determined by the multiple applicable to that level of earnings (seven times). If below 65%, the multiple would be five times. 774 Mr Gee also accepted that by the time he and his colleagues entered into the Settlement Deed on 31 July 2009, Mr Gee had before him the full year 2008 financial results for Metagenics and the results for the six months to 30 June 2009. Mr Gee also accepted that he took those financial results into account in deciding whether to enter into the Settlement Deed and whether the formula for determining the price of the options was acceptable to him.

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The IPO 797 In his statement in relation to aspects of the IPO arrangements he says this. 798 By about May 2004 Metagenics began to seriously consider proceeding towards an IPO. At this stage, however, Mr Morey and others at Metagenics did not know exactly what was involved in an IPO process and for this reason Metagenics engaged a number of external advisers to assist it on the IPO process. For legal advice concerning the overall process of conducting an IPO (and later in relation to the preparation of the S-1 registration statement and due diligence), Metagenics retained Mr Mihanovic of the law firm McDermott, Will & Emery ("MWE"). For accounting advice, Metagenics engaged its existing auditor, KPMG, in relation to the preparation of financial statements for their inclusion in the S-1. Mr Morey says that Metagenics had been speaking to KPMG about the potential for an IPO for some time before formally engaging that firm. Metagenics did not formally engage KPMG to audit the Metagenics financial statements for the purpose of an IPO until after the HWL acquisition in May 2005 (completion). 799 An engagement letter was ultimately provided by KPMG in respect of the proposed IPO dated 28 July 2005. Mr Morey did not sign that document until 13 October 2005. 800 The Chairman of the Audit Committee was Mr Krajanowski. He was the Managing Partner of an accounting firm called SingerLewak. Mr Morey understood that Mr Krajanowski was familiar with the requirements of "going public". Mr Morey says that he often discussed the advice received from KPMG with Mr Krajanowski and from time to time Mr Krajanowski also involved his firm's public company audit partner in Mr Morey's discussions with Mr Krajanowski. 801 In April 2004, Metagenics retained Needham as financial advisers in relation to a possible transaction which included a possible IPO. The engagement letter is dated 1 April 2004. Mr Morey says that while Metagenics was guided by Needham in relation to the overall steps needed to be undertaken for the purposes of an IPO, Metagenics looked to and relied upon legal advice given by MWE and accounting advice given by KPMG "on the 'specifics' of the steps to be conducted". 802 Mr Morey also says that in 2004 and early 2005, prior to the 2005 Agreement, he considered that the accounting resources and expertise within Metagenics were sufficient to enable it to file the S-1 for the purposes of an IPO. Mr Morey says that nobody from KPMG advised him that Metagenics did not have the resources to do so. Mr Morey says that he considered that in the event the company would need further resources or expertise (including by reason of any advice he might have received from the external advisers), Metagenics could engage those resources as and when needed. 803 Mr Morey says invoices from the advisers began to be rendered in relation to the possible "private placement" and the "IPO process" from early 2005 and he exhibits a summary amounting to $865,000 in 2005. 804 As to the purchase of the Biodynamics entities, Mr Morey says that prior to the acquisition by Metagenics all relevant entities were owned 100% by the founders, Francis Maes and his wife Lucrece Vandorpe (except for Bionutrics NV). Mr Morey says that he conducted discussions relating to the acquisition of the companies. A letter of intent was signed dated 17 June 2004. An agreement was entered into on 14 September 2004 for the acquisition of 100% of Biodynamics BVBA, Euro Nutri BV and New Special Nutritionals Europe. Metagenics acquired 22% of Special Nutritionals Europe NV and 26% of Bionutrics NV. 805 Mr Morey says that at the time of the acquisition he was not aware that audited financial statements of pending acquisitions such as the Biodynamics entities would be required in order to proceed to an IPO. Mr Morey says that, as best as he can recall, he was told by KPMG that audited financial statements would be necessary once Metagenics had become a public company for the purposes of preparing consolidated financial statements. That view accorded with his own expectation. Mr Morey says that it was his belief at the time that Metagenics would be able to retrospectively audit the financial statements for these entities (as necessary) as well as audit the companies on a forward-looking basis. He says that it later became evident that a retrospective audit would be impossible and for this reason the purchase agreements were amended. 806 Mr Morey says that he told Mr Gee and Mr Michael Brosnan about the proposed acquisition of the Biodynamics entities which he regularly referred to as the "Belgian company".

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The KPMG letter of 28 September 2004 807 Metagenics received a Management Letter from KPMG dated 28 September 2004 identifying two "reportable conditions" noted during the 2003 audit. The conditions concerned "Revenue Recognition" and "Accounting for Non-Routine Transactions". The first issue concerned the time at which Metagenics recognised revenue from the sale of its products to its customers. Historically, that had occurred at the time of shipment (being the date the delivery company took possession of the shipment thus assuming responsibility for the product and compensating Metagenics for lost revenue if the products were not delivered). The value of products "lost" in these circumstances amounted to a few thousand dollars each year. 808 KPMG recommended procedures to capture and quantify such shipments, by sampling. The issue was identified in the course of the audit and Metagenics had begun to implement the ultimate recommendation. 809 KPMG observes in the letter that the company has "implemented procedures in 2004". 810 The second issue concerned non-routine transactions which were Metagenics's 2003 investment in HWL; its 2002 investment in MetaProteomics; and the re-evaluation of the long-term classification of borrowings under the company's credit facilities with Comercia Bank. KPMG recommended that the company investigate the appropriate accounting treatment for these transactions and also suggested that the company consider adding resources to accommodate this need in its accounting department. 811 In 2004, the company entered into the acquisition of the Biodynamics entities and was contemplating the possible acquisition of the remaining shares in HWL. Thus, Mr Morey says he considered it prudent to adopt KPMG's recommendation and engage more accounting staff with greater expertise. In this context, Mr Morey was also conscious that Metagenics was proposing to conduct an IPO. Mr Morey sets out the steps he took to implement the decision to engage more staff and reorganise roles in the accounting department. However, it is not necessary to set the detail of those matters in these reasons.

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The inter se valuation of Metagenics and HWL 814 As to the valuation of Metagenics and HWL for the purposes of the 2005 Agreement, Mr Morey says this: The negotiations with the Australian shareholders for the acquisition of HWL continued throughout late 2004 and into 2005. I recall that there were a number of discussions regarding the valuation to be used in the proposed agreement and in particular the multiple of sales to be used in determining the respective valuation of HWL and Metagenics. Eventually, Metagenics was assigned a higher valuation than HWL on the basis that it owned its own brands and the patents to products and so on, while HWL [was] involved in selling products that it had licensed as a distributor. Both Mr Brosnan and Mr Gee said that, on this basis, the valuation of Metagenics should be based upon a higher multiple of revenue compared to that applied to HWL's revenues. [emphasis added] 815 Mr Gee does not agree with the last sentence in Mr Morey's comments on this topic and, of course, Mr Gee says that the higher multiple attributed to Metagenics, was a function of entirely different considerations as described earlier. 816 Mr Morey also says that the matter of the timing of the IPO and factors that may "push it out" over many years was built into the final terms of the 2005 Agreement as reflected in cl 2.4 of that agreement. That clause is the earn-out special dividend payable from completion to the earlier of listing or 7.5 years. 817 Completion occurred on 31 May 2005. 818 After the 2005 Agreement was entered into, Mr Michael Brosnan was appointed a director of Metagenics. Mr Gee attended Metagenics Board meetings as an observer although that step did not occur until May 2008 notwithstanding that Mr Morey thinks it began after entering into the 2005 Agreement. 819 In any event, Mr Morey says that he continued his practice of keeping the Australian investors up to date with the financial matters affecting Metagenics. He cites the sequence of financial reports provided to Mr Gee over time.

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The KPMG letter dated 11 July 2005 824 In July 2005, Mr Morey received KPMG's letter dated 11 July 2005 (addressed to the Board) identifying two reportable conditions noted during the 2004 audit. Those conditions were: "Accounting for Non-Routine Transactions" and "Long Lived Assets - Impairment Analysis". 825 As to the first matter, two issues arose. 826 The first issue concerned the company's acquisition of the remaining minority interest in MetaProteomics where KPMG noted that the company had not performed a "detailed purchase accounting analysis" required under the applicable Financial Accounting Standard (SFAS 141). Mr Morey says that the issue in question involved an amount "in the order of a few hundred thousand dollars". An aspect of the issue involved, put simply, the proper approach to the valuation of the acquired interest. Mr Morey says that while the company had engaged a third party accounting firm to assist in the valuation of the acquisition, the company recognised and acknowledged that a third party valuation services company ought to have been engaged to properly document the analysis required by the Accounting Standard. 827 Mr Morey says that the company did so in relation to the acquisition of the HWL shares in 2005. 828 As to the acquisition of the Biodynamics entities, Metagenics retained Deloitte. 829 As to the second matter, the reportable condition concerned non-compliance with certain debt covenants at year end. Mr Morey says that waivers for violations of covenants in the debt facility agreements had been obtained as at 31 December 2004. He says that as the repayment date for the relevant debt was after 31 December 2005, the company had classified the relevant debt as "long-term" for the purposes of the 2004 audit. KPMG's position was that in order to maintain this classification KPMG would require Metagenics to obtain a waiver that operated until 31 December 2005, and the waiver would need to be obtained in advance of any covenant violation at 31 December 2005. 830 Mr Morey says that this was an unusual request and the bank refused to provide the company with a "prospective waiver". Since such a waiver could not be obtained, KPMG classified the debt as "current" rather than "long-term" necessitating an audit adjustment. Mr Morey says that KPMG representatives told him that this reclassification of the debt was not required under US GAAP "but rather had been required by KPMG for certainty". 831 A further issue arising under this second matter described above was that the company had failed to perform a detailed analysis to support the carrying value of its long-lived assets by conducting an impairment analysis. The point was, so far as KPMG was concerned, that Metagenics did not appear to have prepared a financial impact statement to support its own methodology for attributing value to its "long-lived assets". KPMG recommended that such an impairment analysis be implemented as part of the company's standard policies and procedures. A methodology is reflected in Financial Accounting Standard 144. Mr Morey says that based on KPMG's recommendation, he incorporated the "SFAS 144" methodology into the company's "existing processes". 832 Mr Morey says that he was advised by KPMG that this change was not "required" under US GAAP but was required by KPMG to meet its view of "best practice". Mr Morey says that the company had been "using other permitted methodologies, and following Metagenics' move to using Grant Thornton as auditor these methodologies were changed again". 833 Mr Morey says that for the purposes of preparing for the IPO, the Board's Metagenics Audit Committee decided on 22 December 2005 to convene a meeting between management, the Audit Committee and KPMG to address critical accounting policies; issues and significant accounting estimates; controls in place; end of month closing dates; reporting package; an accounting organisational chart; and, accounting department changes in general. 834 The meeting was held on 11 January 2006. 835 Mr Morey says he was at that meeting and that the KPMG personnel said they agreed that staffing of the accounting department, for this purpose, was "adequate" with the qualification "subject to people performing in their respected [sic] positions". Mr Morey says that this view was consistent with his own view that Metagenics's accounting resources and expertise were adequate for the purposes of an IPO particularly having regard to the steps Mr Morey had taken to engage additional resources. 836 Mr Morey adds that so far as he can recall, no one at KPMG said at this meeting or had said to him at an earlier time that the accounting staff of Metagenics were not performing in their respective positions. 837 Mr Morey says that the topics earlier described were discussed in the meeting. Mr Morey says that, in his view, the company would be able to meet the financial reporting deadlines imposed upon publicly listed companies having regard to the reporting packages described in the Minutes of the Meeting. Again, Mr Morey says that none of the KPMG personnel present at the meeting expressed disagreement with that view. Mr Morey said it was his view, at the time of this meeting, that Metagenics's critical accounting policies and estimates were accurate and effective although further research was needed into an issue relating to the treatment of patent costs. Mr Morey says that no one from KPMG suggested that there was any issue about the significant accounting policies or estimates adopted by Metagenics (apart from the patent cost question). Also, Mr Morey says that the new Control Processes being implemented by Metagenics at that time would be sufficient to enable Metagenics to comply with the Control requirements imposed upon publicly listed companies and again, Mr Morey says that no one from KPMG expressed disagreement with that view. Moreover, the Minutes record express agreement with the processes proposed by Metagenics. 838 The partner at KPMG responsible for the audit of the Metagenics financial accounts was Mr Dean Samsvick. 839 As to the patent costs, Metagenics management and Mr Samsvick disagreed about the appropriate treatment of patent costs in the financial accounts. Mr Morey says that for many years Metagenics had capitalised both the costs of acquisition of intangible assets (with alternative future uses, including patents) and internally derived patents and trademarks. Having capitalised those costs the company then amortised them over a particular period. Mr Morey says that in 2005 Mr Samsvick changed his view and considered that patent costs should be expensed rather than capitalised. Mr Morey says that management put the position to Mr Samsvick that many other companies audited by him capitalised patent costs rather than expensing them in the financial year. Mr Morey says that, nevertheless, Mr Samsvick maintained his view and told management that if Metagenics continued to capitalise these costs after an IPO, he would scrutinise the financial accounts more closely. He expressed the opinion that such costs would "all have to be written off". 840 Mr Morey says that the company adopted Mr Samsvick's suggested policy for the 2005 audit with the result that internally derived intangible expenses were expensed in the current period. Acquired intangible assets with alternative future uses (including patents) were capitalised and amortised over the shorter of their estimated useful life or their legal life (term). Expensing these costs in the financial year rather than capitalising and amortising them over the relevant life of asset, had the effect of decreasing the net income by a margin in the relevant financial year.

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"Significance" for the purposes of SEC Regulation S-X 841 As to the audit requirements concerning the entities making up the Biodynamics group of companies, and the relevant interest Metagenics held in particular entities, Mr Morey says this. On 9 February 2006, he prepared a memorandum on the "significance" of those entities for the purposes of SEC Regulation S-X in determining whether audited financial statements for the entities needed to be included in the Metagenics's S-1 registration statement for an IPO. Mr Morey's analysis concluded that no financial statements for the entities would be required to be filed with the S-1. Mr Morey's memorandum was addressed to Mr Maclean and Mr Brown of KPMG. 842 Mr Morey recalls that at about this time he discussed his calculations and the conclusion set out in the memorandum with Mr Mclean and with other specialists from the KPMG national office. Mr Morey recalls that Mr Mclean was in agreement with the calculations set out in the memorandum and, to the best of Mr Morey's recollection, his calculations were provided to the KPMG national office and the individuals he spoke with also agreed with those calculations. 843 Metagenics had, nevertheless, retained Ernst & Young to audit the financial statements for the Biodynamics group entities and a number of audits had been completed of particular entities for the six months 1 July to 31 December 2004 and for the year ended 31 December 2004. Other audits had been done for the six months to 30 June 2005 and for the year ended 31 December 2005. Mr Morey sets out a description of seven audit reports relating to these periods for particular entities within that group. He also attaches to his statement a set of audited statements for the whole of the Biodynamics group for the year ended 31 December 2005. The financial statements also include a reconciliation of the accounting principles applied in Belgium, with the US GAAP principles. 844 Mr Morey says that the reconciliation of the financial statements prepared according to generally accepted Belgium accounting practices with the US GAAP practices was undertaken to enable the underwriters for the IPO to have available to them appropriate consolidated financial statements for the purpose of marketing the proposed issue of securities to the public. 845 Mr Morey says that as far as he can recall the only issues surrounding the accounting for transactions concerning the Biodynamics group entities was the issue stemming from what is called the "black money transactions", where cash transactions were undertaken by the former owners which were not properly brought to account. Mr Morey says that since those transactions ceased on and from the period the subject of the Ernst & Young audits, they were issues that did not arise for the purposes of the audits. 846 Mr Morey says that in about April 2006 he became aware that the Biodynamics group entities would have a larger loss than anticipated and thus he reassessed the significance of the entities for the purposes of Regulation S-X in the context of the S-1 Statement. In conjunction with KPMG, Metagenics determined that due to this larger than anticipated loss, Metagenics would be required to include 21 months of audit reports in the S-1. Mr Morey notes that KPMG had advised him that they believed Metagenics would not obtain a waiver from the SEC of the requirement for 21 months of audit reports and that KPMG did not want to file an S-1 without including 21 months of audits. The Biodynamics entities only had 12 months of audit reports (for calendar year 2005) and could not obtain audits prior to 2005. Mr Morey says that to the best of his recollection, prior to the conclusion in April 2006 that the acquisition of the Biodynamics group entities was significant for the purposes of the S-1, Metagenics believed that Regulation S-X did not require Metagenics to provide any audited financial statements for these entities. 847 Mr Morey says he makes that observation because Mr Katke in his email dated 28 April 2006 to the Board directors and to Mr Gee (attaching an update on the S-1 filing (or proposed filing)) says that the analysis of the "significance" tests undertaken by Metagenics had consistently shown that the company would be required to include one year of audited financial statements for the Biodynamics entities. Mr Morey says that Mr Katke's observation about that matter is incorrect and it is possible that he was referring to the one year of financial statements which had been prepared by that time, as earlier mentioned. 848 Mr Morey says that he discussed this issue extensively with KPMG and discussed several ideas raised by KPMG addressing the impact of the matter on the filing of the S-1. On 28 April 2006, Mr Samsvick sent an email to Mr Morey advising that KPMG had been investigating the issue of the Belgium companies and they had a few thoughts that might impact upon the logistics and strategy on that issue talked about that morning.

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Mr Morey's assessment of the propositions KPMG was contending for in its letter of 30 November 2006 859 As to the issues raised by KPMG, Mr Morey says this. 860 In their letter, KPMG said that Metagenics did not have the procedures and personnel necessary to identify and properly analysis complex non-routine transactions and that, by reference to some examples, Metagenics had not performed a detailed analysis of purchase accounting issues in connection with the HWL acquisition in accordance with SFAS 141 or an analysis of entities related to HWL to determine whether they qualified as "Variable Interest Entities". KPMG also said that Metagenics did not appropriately identify, research and account for complex instruments including a debt agreement the company had entered into, in conformity with the requirements of US GAAP. 861 Mr Morey says that this issue had been raised previously and steps had been taken to recruit people with relevant skills including Mr Johnson, recommended by KPMG, and who had been appointed to the new position of Internal Audit Manager so as to be in a position to account properly for the acquisitions of HWL and the Biodynamics entities. 862 Mr Morey says that he did not agree with KPMG's analysis of all of the non-routine transactions identified in the letter. In relation to the HWL purchase accounting, Mr Morey says that Metagenics had engaged a third party valuation specialist to perform an analysis of the purchase accounting of HWL and had prepared a memorandum setting out its own analysis of the purchase accounting. Mr Morey also says that while a different treatment was eventually decided upon, the question was a "difficult issue to resolve" and had been elevated to KPMG's national office in order to reach a conclusion on the correct interpretation. 863 Mr Morey says that prior to the 2005 Agreement, he did not expect the purchase accounting of HWL to be as difficult as it turned out to be. 864 Mr Morey also says that as to the other non-routine transaction identified in the letter concerning complex debt instruments, he also did not anticipate, prior to the 2005 Agreement, that the proper accounting treatment would be as difficult and complex as it turned out to be. The particular instruments in question were the Bison Capital notes and warrants. Mr Morey says that when the issue of properly accounting for these particular debt instruments arose, Metagenics implemented procedures to ensure that any unusual accounting issues associated with them were identified early in the process so that they could be dealt with more quickly by internal Metagenics accounting staff. Mr Morey says that as the accounting treatment for non-routine transactions would normally be approved (signed off) by external specialists, these procedures involved having the third party specialists determine and send their draft positions to KPMG early in the audit process in the event there was disagreement over the correct treatment. Mr Morey says it was common for disagreements about treatment to arise between KPMG and the third party specialists concerning non-routine transactions. 865 Mr Morey says that he added several new staff positions including engaging in late 2006 a new person as Chief Accounting Officer. The appointee had been recommended by KPMG.

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Mr Morey's view or belief 866 In the context of this discussion of this issue, Mr Morey says this: … prior to the 2005 Agreement I considered that Metagenics' accounting resources and expertise were sufficient to enable it to file the Form S-1 for purposes of conducting an IPO (no one [at] KPMG told me that they [the accounting resources] were not) and I also considered that in the event further resources or expertise was necessary or desirable (including by reason of the recommendations of Metagenics' external advisers) Metagenics could engage those resources as and when needed. Prior to the 2005 Agreement I believed that the hiring of such additional resources would ensure that any issues arising in relation to Metagenics' accounting would be addressed such that Metagenics would be in a position to file for an IPO in 2005. 867 As to the question of Metagenics's technical accounting expertise, KPMG observed that this issue had been affected by a convergence of factors including increasing demands being placed upon existing senior accounting personnel; increasingly complex transactions into which Metagenics had entered; proliferation of technical accounting literature affecting the consolidated financial statements; and increasing expectations from regulatory authorities regarding the integrity of financial reporting for public companies. 868 Mr Morey says that prior to the 2005 Agreement he was made aware of the introduction of the Sarbanes-Oxley Act. Mr Morey recalls that Mr Schechner in his presentation on 17 November 2004 mentioned that this legislation imposed onerous requirements on public companies and that the regulatory burden and internal accounting demands by reason of it would be significant. 869 Mr Morey says that prior to the 2005 Agreement he was not aware that the demands placed upon Metagenics's accounting staff would be as significant as they turned out to be and he did not anticipate the extent to which this confluence of factors mentioned by KPMG would arise. 870 Mr Morey says that upon learning of these issues and the kinds of problems identified by KPMG in their 30 November 2006 letter, he took them "seriously". He says that from the time that KPMG first raised these concerns with him, he began to address them by seeking to hire more staff to assist in the process of dealing with the issues. Mr Morey says he took steps to engage staff with appropriate expertise to deal with the more complex accounting issues arising out of the transactions Metagenics was entering into; issues arising out of Metagenics's expanded size; and, the more complex reporting requirements that would need to be satisfied in a public reporting environment. 871 On 12 June 2006, Mr Morey drafted a memorandum to the Chairman of the Audit Committee providing an assessment of the accounting department of Metagenics in response to the issues raised by KPMG arising out of the 2005 audit. Mr Morey sets out eight comments about the individuals he had engaged to address these questions. It is not necessary to recite the detail of the individuals, their expertise and the area of responsibility attributed to them. Mr Morey discusses these roles and responsibilities in relation to 10 individuals. Mr Morey notes that Mr Samsvick had recommended that Metagenics engage a Chief Accounting Officer and recommended a person for the role who Mr Morey employed. 872 As to the question of objective documentation of management analyses, KPMG had said in their letter of 30 November 2006 that during the 2005 audit they considered certain estimates and reserves not to be calculated using objectively determined methodologies supported by historical data and, instead, Metagenics had based its estimates and reserves on general formulas and non-current information although recent historically-based data was available. To deal with this issue KPMG made a number of recommendations. 873 Mr Morey says that Metagenics's policies concerning the determination of estimates "had been acceptable for many years". Mr Morey cites the Minutes of the Audit Committee Meeting of 11 January 2006 which record KPMG as having no current dispute with Metagenics "in regard to any of the significant accounting policies or estimates" and that the only area "KPMG is currently reviewing is the company treatment of patent cost". 874 Mr Morey says that it was his view at this time that KPMG was bringing up issues which had never before been considered significant. Mr Morey says that this occurred, in his view, as KPMG was seeking to justify cost overruns and time delays in completing audit work. 875 As to legal documentation, KPMG's letter observed that there was no formal or legal documentation for certain transactions. Mr Morey says that in response to this recommendation Metagenics implemented a series of procedures to ensure that any agreements entered into were authorised, approved and appropriately documented. 876 As to information technology policies, KPMG had identified a number of issues. 877 Mr Morey says that these were not issues that had been raised with management prior to their inclusion in the KPMG letter of 30 November 2006. Mr Morey says that it was his view that the issues raised by KPMG were largely already addressed by existing Metagenics systems. He says that Metagenics employees were provided with specific IT policies and guidelines prior to being given access to the Metagenics IT systems. Mr Morey says that despite this, the company continued to review its IT policies and practices. The specific suggestions made by KPMG were reviewed by IT personnel as part of the process.

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The share transactions in the latter part of 2006 878 Mr Morey says that in the latter part of 2006 he recalls that two share transactions were being discussed. Some Australian shareholders wished to purchase more shares in Metagenics and, in particular, a proposal had been put forward by Mr Michael Brosnan and Mr Leon Brosnan to convert their Preferred Stock acquired under the 2005 Agreement to Common Stock. Mr Morey recalls that at a Board meeting, Mr Michael Brosnan commented upon the value of his shareholding as compared with Mr Katke's shareholding in the event of an IPO or other liquidity event. Mr Michael Brosnan said that HWL was contributing more EBITDA to the Metagenics group than Metagenics and as a result he and the other former HWL shareholders should have more shares in Metagenics. 879 Mr Morey recalls that Mr Katke transferred some of his own stock to Mr Michael Brosnan and Mr Leon Brosnan in order to address Mr Brosnan's complaints. 880 The first of these late 2006 transactions concerned the purchase of shares by a number of the Australian shareholders from Shelley Katke, Mr Katke's former wife. On 23 August 2006, Mr Michael Brosnan sent Mr Katke a spreadsheet listing the former HWL shareholders who were the buyers of Shelley Katke's shares. Mr Michael Brosnan converted US$1.5M of his Preferred Stock A to Common Stock and Mr Leon Brosnan converted US$1M of Preferred Stock to Common Stock. 881 On 1 November 2006, Mr Gee sent Mr Morey an email attaching an executed Subscription Agreement by which Mr Michael Brosnan and Mr Leon Brosnan as trustees for the Michael Brosnan Superannuation Fund subscribed for 20,000 shares of Common Stock in Metagenics for $178,000. 882 On 1 November 2006, Mr Gee sent Mr Morey an email attaching an executed Subscription Agreement by which Mr Leon Brosnan and Mrs Mary Brosnan as trustees for the Brosnan Super Fund subscribed for 10,000 shares of Common Stock in Metagenics for $89,400. 883 On 1 November 2006, Mr Gee sent Mr Morey an email attaching an executed Subscription Agreement by which Mr Alan Bawden Grant as trustee for the Grant Super Fund subscribed for 30,000 shares of Common Stock in Metagenics for $268,200. 884 On 1 November 2006, Mr Gee sent Mr Morey an email attaching an executed Subscription Agreement by which Mr Gee subscribed for 21,000 shares of Common Stock in Metagenics for $187,740. 885 On 1 November 2006, Mr Gee sent Mr Morey an email attaching an executed Subscription Agreement by which Mr Gee and Ms Emma Chapman as trustees for the Gee Superannuation Fund subscribed for 17,000 shares of Common Stock in Metagenics for $151,980. 886 Following the sale of Shelley Katke's shares, discussions continued in relation to what Mr Morey calls the second late 2006 transaction. This transaction concerned the sale of shares by Mr Katke to Mr Michael Brosnan and Mr Leon Brosnan which Mr Morey understands arose by reason of the friendship between these individuals, in order to address Mr Michael Brosnan's complaints at the Board meeting. As to these matters, a Stock Purchase Agreement, secured promissory note and pledge agreement were entered into between Mr Katke and Mr Michael Brosnan dated 20 December 2006 and similar documents were entered into between Mr Katke and Mr Leon Brosnan on that date.

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The November 2006 delay due to an event in relation to the financial accounts for the Biodynamics group of entities 889 Notwithstanding that view, Mr Morey notes that in November 2006 another delay to the filing occurred as a result of the Biodynamics group accounts. As at November 2006, Ernst & Young had prepared an Audit Report for the nine month period to 30 September 2006, as earlier mentioned. This report was to be included in the S-1 together with the Audit Report for the 12 months ending 31 December 2005 in order to make up a 21 month period of audited financial statements required under Regulation S-X, as earlier mentioned. Mr Morey says that a copy of the statements for this period including a draft Audit Report dated 15 November 2006 was submitted to Metagenics. Ernst & Young sent these documents to that firm's capital markets group for review as the documents were to be included in an S-1 filing. 890 Mr Morey says that by the time of the audits for the nine months to 30 September 2006, the acquisition of the Biodynamics group had completed as at 4 May 2006. That completion date meant that Ernst & Young's Audit Report for the nine month period to 30 September 2006 included a period of five months in which the Biodynamics group entities were "acquired entities" of Metagenics and a period of four months and 26 days as owned entities of Metagenics. 891 In early November 2006, Mr Morey became aware that Ernst & Young believed that five months of the period could not be included in the 21 months of audited financials required under Regulation S-X. 892 Mr Morey says that on 7 November 2006 he sent an email to Mr Samsvick setting out issues about this matter. 893 Mr Samsvick advised Mr Morey that he would seek to confirm positions concerning these issues with KPMG's own experts. Mr Morey recalls that Mr Samsvick and KPMG initially told him that Ernst & Young was incorrect in their interpretation of Regulation S-X. Mr Samsvick later told Mr Morey that KPMG had changed its view about the matter and now agreed with the construction adopted by Ernst & Young. Mr Morey says that as a result of these developments he again discussed with KPMG the possibility of applying for a waiver of the Regulation S-X rule concerning the financial accounts for the Biodynamics group entities. 894 On 8 November 2006, Mr Samsvick sent an example of a waiver letter, along with suggestions as to the content of a Metagenics waiver letter, to the Chief Accounting Officer of Metagenics and Mr Morey.

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Mr Morey pursues an alternative approach to providing 21 months of audited financial accounts 895 However, Mr Morey says that at about this time he obtained regulatory guidance that suggested it was possible to file an S-1 with less than the 21 months of audited financial accounts provided the filing was later amended to include a 21 month period prior to the IPO going "effective". Mr Morey set this observation out in an email to Mr Payne of Ernst & Young on 9 November 2006. Thus, rather than draft a waiver letter, Metagenics drafted an email to the SEC requesting permission to file an S-1 with less than the otherwise required audited 21 month financial statements, with the intention of later amending the filing. 896 Mr Morey sent a draft of the proposed letter to the SEC to Mr Samsvick on 10 November 2006. He replied with comments on 11 November 2006. A further draft emerged on 13 November 2006 and in this letter Mr Morey set out the reasons why the financial accounts for the Biodynamics group entities could not be audited. In the letter, Mr Morey sets out the issue in relation to audited financial accounts for those entities to 31 December 2004 concerning determination of the opening inventory values. Mr Morey also observes that the Biodynamics books of account and records for 2004 did not enable an alternative basis for using, other procedures, to produce audited financial statements to 31 December 2004. 897 Mr Morey says that on the basis of a letter to the SEC (based on the 13 November 2006 draft), Metagenics continued to work towards filing the S-1 in December 2006 "intending to provide financial statements from the start of the 2005 year until the date of acquisition for the Biodynamics Group entities". Mr Morey says this involved Ernst & Young preparing a full audit on the financial statements to 30 April 2006 for the relevant entities as well as preparing an audit report on the financial statements for another entity for the period 1 January to 19 December 2005.

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Metagenics continues working towards a December 2006 filing of the S-1; Mr Samsvick's reservations of 20 December 2006 898 Mr Morey says that despite these delays, Metagenics continued working towards a December 2006 filing. The Form S-1 was prepared. Mr Morey sent an email to Mr Gee, Mr Wallace and Ms Roscher, HWL's Financial Controller, on or about 19 December 2006 advising that Metagenics was conducting an all day meeting with KPMG "at the printer" on Wednesday, 20 December 2006 and was hoping to file the S-1 on Friday, 22 December 2006. This meeting at the printer was intended to involve final review and amendment of the S-1 by all relevant parties. Mr Morey understands that Mr Katke, Mr Konney and three others from Metagenics were present. Mr Samsvick and all relevant KPMG personnel were present. The relevant personnel from the lawyers, MWE, were present and so too were the relevant personnel from the underwriters, Needham. Mr Morey says that during the course of Wednesday, 20 December 2006, Mr Samsvick told him that he wanted to have "a little bit of extra time to look over this" and said "I really feel like I'm being rushed and so I'd like to file it in January not December". 899 Mr Morey says that there was a great deal of argument about this request particularly since Mr Samsvick was, in Mr Morey's view, unable to provide any "concrete reasons" not to file other than saying that he felt rushed about it. Mr Morey thinks that Mr Samsvick might have been sensitive in this respect as partners from KPMG had been sanctioned by the SEC for improper accounting practices in audits and IPO filing disclosures of a company called Gemstar-TV Guide International Inc. 900 Mr Morey also recalls at this time that there was a discussion about the new SEC executive compensation disclosure rules which were to take effect on 1 January 2007 with the result that should the filing be delayed, the new rules would further delay an IPO filing. Mr Morey says that personnel from Needham, and the lawyers, MWE, brought up this issue when Mr Samsvick said that he wanted to postpone the filing of the S-1. Mr Morey says that Mr Samsvick did not accept that these new rules would cause a further substantial delay and said that he would simply need an extra week to consider the document and said: "We can file in the first week of January".

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The delay of the filing of the S-1 into 2007 and the consequences of that step 901 Mr Morey says that the delay into 2007 meant that further work had to be done to prepare the S-1 to address the new rules as to executive compensation disclosure. Mr Morey says that due to the time required to prepare this disclosure, Metagenics decided to wait until the audit was completed for the year ended December 2006 to file the S-1. 902 Mr Morey says that at this point Metagenics was considering changing its audit firm. Mr Morey says that on a number of occasions in December 2006 and January 2007 Mr Samsvick told him that since the nine months ending 30 September 2006 had been reviewed, the 2006 calendar year audit should be a "very quick and very easy audit". Mr Morey says that Mr Samsvick told him that it could be completed in a relatively short period which would enable Metagenics to file in March 2007. 903 On 8 February 2007, KPMG provided an engagement letter to Metagenics. Mr Morey signed it on 9 February 2007. KPMG was engaged to provide a written report concerning the audit of the company's consolidated financial statements and any schedules supporting those statements, all of which were to be included in the proposed filing of the S-1. The engagement letter was amended on 29 May 2007. 904 By 11 April 2007, the 2006 audit was still incomplete. Two main issues were outstanding. The first was the company's sales tax exposure and the question of an account receivable from Nu Life International, one of the company's distributors. The sales tax issue related to a continuing standing audit of sales tax compliance. The Nu Life issue concerned a question relating to contributions to the running costs of particular manufacturing plant jointly owned by Nu Life and HealthCom. The Audit Committee met again on 13 April 2007. Mr Morey notes that the Minutes record the Chairman, Mr Krajanowski, reporting that "Mr Samsvick could not point to any specific concerns with the audit, although he referred to an undefined sense of discomfort".

[153]

Meetings of the Metagenics Audit Committee 907 As to the question of KPMG possibly withholding its consent to the filing of the S-1 for one or more quarters of financial reporting, Mr Katke sent an email to Board members on 20 July 2007 which refers to discussions with KPMG concerning the audit and observes that Mr Krajanowski and Mr Hovee, Audit Committee members, planned to seek a second opinion on the S-1 consent issue from the management of KPMG. On 21 July 2007, an Audit Committee meeting was held. Mr London attended for part of the meeting. The Minutes record that the Committee reviewed the organisational changes made by the company in preparation for the proposed IPO including changes made at the suggestion of KPMG. The Minutes note that the Committee discussed the company's readiness to go public and expressed the position that the company was so ready. The Minutes note that Mr London "concurred, while pointing out that it normally takes three to four months for a newly public company to get all the accounting processes right". Mr Morey says that when he joined the meeting (which was after Mr London had left the meeting) the Committee summarised their discussions with Mr London, with Mr Morey. Mr Morey expressed his view to the Committee that the company was "ready to be a public company" and that the company "had been ready for some time". 908 On 3 August 2007, a further meeting of the Audit Committee was held. Mr Morey reported on the estimates for the completion date. 909 On 30 August 2007, a meeting of the Audit Committee was held. A number of representatives of Ernst & Young joined the meeting to be interviewed as potential new independent auditors for the company. Metagenics management was considering a change of auditor for the "key reason" that the relationship with KPMG staff had deteriorated since the delay in filing the IPO in December 2006 and, in particular, after the moment in time when the company requested a transfer of the audit responsibility to the Los Angeles office of KPMG. The fees were also a problem as they were substantially over budget. Mr Morey says that reversals of earlier decisions concerning accounting treatment were also an issue. KPMG's unwillingness to sign off on the use of their audit report for the S-1 until one or more quarters of financial reporting had been produced was also a problem. Grant Thornton was also being considered as a replacement for KPMG. 910 On 10 September 2007, a meeting of the Audit Committee was held. The Committee discussed the potential costs and delays should KPMG be removed as the company's auditors. This issue was discussed again on 13 September 2007.

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KPMG's letter and report and attachments of 25 September 2007 911 On 25 September 2007, KPMG provided the Audit Committee with a report together with a number of attachments including KPMG's management letter in relation to the 2006 audit, also dated 25 September 2007. It raised a number of issues. Three of them KPMG classified as "material weaknesses" and two of them as "significant deficiencies". As to the material weaknesses the first concerned contended failures to document and fully support journal entries as well as a failure to fully analyse the transactions underlying such journal entries: "Objective Documentation of Management's Analyses and Journal Entry Support". The second concerned a contended failure to maintain adequate legal documentation to support transactions: "Legal Documentation". The third concerned a contended failure to fully communicate all transactions on a timely basis to those responsible for accounting and financial statement preparation: "Management Review and Communication". The two significant deficiencies were these: "Accounting for Non-Routine Transactions"; and, "Information Technology (IT) General Controls". As to the first, the particular matter was the Belgium acquisition of "New BD" and "SNE" and 20% of Bionutrics. KPMG in its report observes that although the company was able to identify and properly account for significant issues associated with the acquisition, there were, however, "several errors in the initial recording of the acquisition in accordance with [SFAS No. 141, Business Combinations]". KPMG said that the inability to accurately account for these errors represented a significant deficiency in "internal controls". As to the second, KPMG identified a number of contended deficiencies in Metagenics's processes. 912 As to the comments concerning material weaknesses, the questions in issue seemed to concern the earlier question of the Nu Life "receivable" and the company's sales tax exposure. Other criticisms, says Mr Morey, related to problems that had occurred in the earlier part of 2006 prior to the November 2006 management letter and prior to the adoption of a number of policies and strategies to address the problems then raised by KPMG. Mr Morey says that the major question raised by KPMG concerned the Nu Life receivable which had been recorded in the Metagenics financial accounts since the HealthCom merger in 2000. Mr Morey says that he does not recall why KPMG determined that the treatment of this receivable had to change. As to the sales tax audit in California, it was necessary to estimate the exposure stemming from the audit. Metagenics had estimated its exposure and had recorded a potential liability in that regard in its accounts. KPMG, according to Mr Morey, required the estimate to be made "in a different way". The liability needed to be estimated by a "third party" so as to give "greater assurance" to the estimate of a potential sales tax exposure.

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The North American Business Plan 917 As to the North American Business Plan, more particularly, Mr Morey says this. 918 Mr Morey was a member of the Performance Management Team ("PM Team") which discussed and prepared the 2009-2013 NABP, together with Mr Katke, Mr Bellin (President), Mr Tim Katke (Vice-President of Sales), Mr Douglas Gaynor (Vice-President of Marketing). Mr Morey says that Mr Coussement (Vice-President, European Operations), Mr Gee and Mr Joiner were part of an International Performance Management Team ("IPM Team") who also made contributions to the formulation of the 2009-2013 NABP by way of commentary and other observations. Mr Morey says that in the period August and September 2008 to January 2009, Mr Gee and Mr Joiner developed the details of the business plan for the Australian and New Zealand components of the business. They also provided commentary by way of critique and perspective on aspects of the business plan for the North American and European divisions. 919 Mr Morey described his role in this way at paras 268 and 269 of his statement which was entirely consistent with his oral evidence: 268. My involvement in the preparation of business plans generally, including the 2009-2013 [NABP], was primarily the "verification" and "compilation" of the numbers developed by the various business units throughout the Metagenics business. As CFO, my role was to consolidate and verify (in an "arithmetical" sense) the numbers [in] the final business plan and I did not have responsibility for challenging the numbers being put forward. 269. In this regard, each of the management teams would come up with their approach to formulating their objectives. I would review and discuss the approach and objectives (i.e. their arithmetical basis") with the management teams, and Katke would then get involved and discuss with the management teams the underlying foundation for the objectives and the assumptions they were based upon. The objectives would, following discussion about their underlying foundation, be settled upon and included in the business plan and ultimately put to the Metagenics Board for approval. 920 Mr Morey says that he recalls the discussion of the NABP at the Board meeting on 26 January 2009. Exchanges took place between Mr Brosnan, Mr Bellin and Mr Katke about whether the targets in the NABP could be achieved. Mr Morey says that prior to the finalisation of the 2009-2013 NABP, and after its finalisation, Mr Morey provided Mr Brosnan and Mr Gee with many financial reports concerning the operations of Metagenics. Mr Morey identifies 15 examples of material provided to Mr Gee and Mr Brosnan in this way including spreadsheets and the reporting packs containing the consolidated financial reports for all of the relevant periods, monthly and year to date, to August 2008; September 2008; 26 October 2008 projections; October 2008; November 2008; December 2008; January 2009; February 2009; March 2009; April 2009; May 2009; June 2009.

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Aspects of the evidence of Mr David John Wallace 926 It is now necessary to consider some aspects of the evidence of Mr David Wallace. Mr Wallace is the Director of Operations at HWL. He commenced work with HWL in 1996 as a Company Accountant and left in 1998 to join an accounting firm consulting in business services with a specialisation in business processes, technology systems and management support. Mr Wallace gave evidence about "enterprise resource planning" ("ERP") processes which are understood as company-wide integrated software/hardware and design that marries financial reporting with physical inventory, manufacturing and supply transactions including integration with invoicing, the production of receipts, payroll functions and cashflow controls. Mr Wallace re-joined HWL in October 2002 for the purpose of putting ERP processes on a sound footing within HWL. He was employed in the role of Finance Manager from this period until May 2007. From June 2007, he was the Global Chief Information Officer ("GCIO") of Metagenics. In May 2007, he relocated to the United States and worked in the Head Office of Metagenics in San Clemente. He relocated to Australia in July 2008 and continued in the role of GCIO until the end of 2008. From January 2009 to December 2013, he was the Chief Information Officer for HWL and in January 2014 he took up the role of Director of Operations for HWL. 927 For present purposes, it is important to note that he was in the United States working for Metagenics in San Clemente for 14 months from May 2007 until July 2008. 928 Mr Wallace says that Metagenics, like HWL, is an inventory-based business which produces product to carry as stock rather than a business that produces products to order. He says that it is fundamental to businesses of this kind that inventory can be assessed and quantified on a "real time" basis. He says that both Metagenics and HWL operate with a combination of manufactured and acquired inventory. In a manufacturing business it is necessary, he says, to ensure that ingredients are on hand to ensure the products are manufactured and sold with a minimum of delay and interruption and an ERP system needs to be deployed to manage both inventory of ingredients (used to make products) and products. Such a system would also facilitate the transition of that information to the financial systems. 929 Mr Wallace gave evidence about collating particular financial information and sending it to Mr Morey and Mr Mark Johnson and others at Metagenics in the finance team between Christmas and New Year in 2006. These communications were relevant to the efforts by Metagenics to try and file an S-1 in December 2006 as earlier discussed. The point of Mr Wallace's evidence is that he says Metagenics seemed to be making repetitive requests for information. The team at Metagenics seemed to be disorganised and they seemed to be seeking financial information while they were at the Printers. He says that he was put under pressure by Mr Morey to locate Partners of KPMG in this period to secure signatures on financial documents. 930 I have reviewed and considered Mr Morey's evidence on this entire question and I accept Mr Morey's evidence about the events in question. Although Mr Wallace has impressions about these things, Mr Morey is in a position to give the most useful and informed evidence about the events in question. 931 Mr Wallace also says that once he arrived at San Clemente and carried out a due diligence on the business systems, he began to understand why Metagenics could not produce timely financial information. He says this was so because the systems deployed by Metagenics which were a combination of IT systems and human operated physical systems which were inefficient and poorly implemented. He says he had discussions with Mr Katke and Mr Morey in November 2006 about upgrading those systems. He says that in February 2007 he visited San Clemente and Gig Harbor. He says he observed that at Gig Harbor Metagenics had a production facility, an R&D department and a quality control department. He says that the warehouse at Gig Harbor stored raw materials for the production of product. He says that during his visits he observed deficiencies in the business systems concerning the IT infrastructure, telecommunications systems, data networks and data security. He says that these deficiencies concerned business platforms and the software program, "Finesse", running the ERP for Metagenics. He says that although the Finesse program was "adequate" it was not "ideal" having regard to its implementation or its technology backbone. Also, he says that Metagenics operated two separate and disconnected Finesse software packages which were not electronically integrated. One was at Gig Harbor and the other in San Clemente. He says that the integration of data from the two systems was performed by manually extracting underlying data, importing that data into Microsoft Access databases and Excel spreadsheets and then processing the results. The integration process utilised mapping tables within the Microsoft Access systems. 932 Mr Wallace says that he had a discussion in early 2007 with Mr Wagner, a Management Accountant in Mr Morey's team. Mr Wallace says that Mr Wagner told him that the month end close of inventory took not less than nine days and sometimes longer to occur. He says that securing month end closure on the inventory became a priority improvement task for him to undertake so as to reduce the month end close and reconciliation. In his evidence, Mr Wallace goes into some detail about those systems and particularly the system of inventory recording of materials and product which was based on a card system filled out manually by staff. The card system provided a record of stock used in production, particularly. Mr Wallace's criticism is that based on his observations the card reporting was not being maintained in a timely fashion with the result that the physical inventory did not, at any point in time, correlate with the data recorded in the business system, he says. 933 Although I accept that Mr Wallace observed practices in relation to these matters which, in his view, failed to reflect best practice in terms of ERP (and particularly in terms of the management of inventory and its relationship with month end closures), I accept the evidence of Mr Morey, as Chief Financial Officer, that Metagenics was able to operate its business undertaking in a way which enabled it to obtain accurate and reliable month end closure statistics as to materials used in production, from month to month. This enabled the company to produce reliable end of month financial accounts, year to date financial reports. It may well have taken longer than best practice to secure month end closure and manual systems may well not have been as efficient as they might be, but the evidence demonstrates that detailed financial reports were able to be produced and Metagenics was able to conduct its business undertaking. Moreover, from year to year, in the main, Metagenics was able to produce revenues that had a substantial correlation each year with its projections framed by the Business Plan for each year. 934 To the extent that the criticisms Mr Wallace has of the ERP processes within Metagenics as he observed them in the period from his first inspections in February 2007 to the end of his period in the United States at San Clemente in July 2008 (17 months in all) might be said to suggest that Metagenics had no reasonable basis for projecting statistics about its production, sales and revenue over time, I do not accept that these observed criticisms provide any basis for that conclusion. Mr Morey gave oral evidence about the inventory system and the evidence makes it clear that Metagenics was in a position to conduct its business undertaking in a way which enabled it to produce product, identify the demands for raw materials, record (even manually) utilisation of resources and levels of stock produced, and sales of stock - all leading to financial outcomes in terms of revenues, costs and expenses and all of the financial measures ultimately leading to the determination month to month and year to date of earnings. On these questions, I prefer and accept the evidence of Mr Morey.

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PART V - THE LEGAL PRINCIPLES 935 Although the resolution of the issues in controversy in this case turns very largely upon an analysis of factual questions, there are a number of matters of legal principle that need to be addressed. Some aspects of these legal principles are not contentious. However, other aspects of the matter are particularly contentious. The relevant provisions are these. 936 Section 52 of the Act is, relevantly, in these terms: 52 Misleading or deceptive conduct (1) A corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive. 937 Section 51A is in these terms: 51A Interpretation (1) For the purposes of this Division, where a corporation makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act) and the corporation does not have reasonable grounds for making the representation, the representation shall be taken to be misleading. (2) For the purposes of the application of subsection (1) in relation to a proceeding concerning a representation made by a corporation with respect to any future matter, the corporation shall, unless it adduces evidence to the contrary, be deemed not to have had reasonable grounds for making the representation. (3) Subsection (1) shall be deemed not to limit by implication the meaning of a reference in this Division to a misleading representation, a representation that is misleading in a material particular or conduct that is misleading or is likely or liable to mislead. 938 Sections 52 and 51A, of course, fall within Pt V of the Act. 939 Section 75B is, relevantly, in these terms: 75B Interpretation (1) A reference in this Part to a person involved in a contravention of a provision of Part ... V ... shall be read as a reference to a person who: (a) has aided, abetted, counselled or procured the contravention; (b) has induced, whether by threats or promises or otherwise, the contravention; (c) has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention; or (d) has conspired with others to effect the contravention. 940 Section 82 is, relevantly, in these terms: 82 Actions for damages Subject to subsection (1AAA), a person who suffers loss or damage by conduct of another person that was done in contravention of a provision of Part … V … may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention. 941 Section 87 is, relevantly, in these terms: 87 Other orders (1) Subject to subsection (1AA), but without limiting the generality of section 80, where in a proceeding instituted under this Part …, 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 (whether before or after the commencement of this subsection) in contravention of a provision of Part … V …, the Court may, whether or not it grants an injunction under section 80 or makes an order under section 82, … makes 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 (including all or any of the orders mentioned in subsection (2) of this section) 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. (1A) Subject to subsection (1AA) but without limiting the generality of section 80, … the Court may: (a) on the application of a person who has suffered, or is likely to suffer, loss or damage by conduct of another person that was engaged in in contravention of Part … V …; or … make such order or orders as the Court thinks appropriate against the person who engaged in the conduct or a person who was involved in the contravention (including all or any of the orders mentioned in subsection (2)) if the Court considers that the order or orders concerned will: (c) compensate the person who made the application, … in whole or in part for the loss or damage; or (d) prevent or reduce the loss or damage suffered, or likely to be suffered, by such a person. 942 Sections 75B, 82 and 87 fall within Pt VI of the Act. 943 The orders contemplated by s 87 are set out at s 87(2)(a) to (g). It is not necessary to recite the scope of the orders in these reasons. 944 The particularly contentious matter is this. The respondents raise, what amounts to a threshold question, in relation to the operation of these provisions in the context of the pleading by the applicants of representations said to have been made by the respondents on 17 November 2004, 28 July 2008 and 26 January 2009 in the United States and thus, obviously enough, outside Australia. They say that s 52 simply does not apply to the pleaded conduct because the Act does not have unlimited extra-territorial operation. The point is developed in the following way. 945 Prior to the commencement on 24 July 2009 of amendments made to the Act by the Trade Practices Amendment (Cartel Conduct and Other Measures) Act 2009 (Cth) (the "2009 Amending Act"), s 5 of the principal Act was, relevantly, in these terms: 5 Extended application of Parts IV, IVA, V, VB and VC (1) Parts IV, IVA, Part V (other than Division 1AA), Part VB and Part VC extend to the engaging in conduct outside Australia by bodies corporate incorporated or carrying on business within Australia or by Australian citizens or persons ordinarily resident within Australia. (1A) … (2) … (3) Where a claim under section 82 is made in a proceeding, a person is not entitled to rely at a hearing in respect of that proceeding on conduct to which a provision of this Act extends by virtue of subsection (1) … of this section except with the consent in writing of the Minister. (4) A person other than the Minister or the Commission is not entitled to make an application to the Court for an order under subsection 87(1) or (1A) in a proceeding in respect of conduct to which a provision of this Act extends by virtue of subsection (1) … of this section except with the consent in writing of the Minister. (5) The Minister shall give a consent under subsection (3) or (4) in respect of a proceeding unless, in the opinion of the Minister - (a) the law of the country in which the conduct concerned was engaged in required or specifically authorised the engaging in of the conduct; and (b) it is not in the national interest that the consent be given. [emphasis added] 946 The first proposition is that since the Act in this form expressly provides for an extended operation of Pt V in the way described, the conduct proscribed by Pt V will be taken to be conduct in Australia unless s 5(1) applies. That proposition is said to be supported by Worldplay Services Pty Ltd v Australian Competition and Consumer Commission (2005) 143 FCR 345 at [18], Ryan and Kiefel JJ; Tamberlin J agreeing at [28]; Bray v F Hoffman-La Roche Ltd (2002) 118 FCR 1 at [50], Merkel J. 947 The second proposition is that prior to the 2009 Amending Act, s 5(1) of the Act did not give any extra-territorial operation to s 75B of the Act. Section 75B falls within Pt VI of the Act which addresses the topic of enforcement and remedies. Section 5(1) does not give any extra-territorial operation to that Part and thus s 75B was to be construed as only being applicable to conduct in Australia. That proposition is said to be supported by Bray v F Hoffman-La Roche Ltd at [55], Merkel J, and Australian Wool Innovation Ltd v Newkirk [2005] ATPR 42-053 at [54], Hely J. 948 The third proposition is that the 2009 Amending Act expanded the operation of s 5 of the Act by providing that the Act would apply not only to the identified Parts of the Act but also to the remaining provisions of the Act to the extent to which they "relate to any of the provisions" of the specified Parts. Thus, from 24 July 2009, s 5 of the Act not only made provision for the extension of the provisions of Pt V to the engaging in conduct outside Australia (by nominated classes of persons) but also extended "the remaining provisions of this Act (to the extent to which they relate to any of the provisions covered by, relevantly, [Pt V])" to engaging in conduct outside Australia by the nominated class of persons. The nominated class of persons are bodies corporate incorporated or carrying on business within Australia; or Australian citizens; or persons ordinarily resident within Australia. 949 The respondents say that the consequence of these provisions is that s 52 of the Act can only apply to the overseas conduct of Metagenics if Metagenics falls within the class of bodies corporate identified in s 5(1) which means that the company must be characterised as a body corporate incorporated within Australia or a body corporate carrying on business within Australia in order for s 52 to apply to its conduct occurring outside Australia. The respondents also say that s 75B of the Act will not apply to the conduct of Mr Katke in the United States because he is neither an Australian citizen nor a person ordinarily resident within Australia. 950 The respondents also say that since Metagenics was not incorporated within Australia, s 52 will only apply to conduct on its part in the United States if Metagenics was, at the date of the alleged contraventions, carrying on business within Australia. The authority for that proposition is Bray v F Hoffman La Roche Ltd at [57], Merkel J, who said this about s 5(1) in the context of conduct within s 45 of the Act (Pt IV conduct also within the scope of s 5(1)): Accordingly, insofar as the claims against the foreign respondents in reliance on s 45 of the TPA are based on conduct outside of Australia, those claims are only maintainable if those respondents were "carrying on business within Australia". There is a question as to whether that requirement is to be satisfied at the date of the alleged contravention or when the proceeding is commenced. In the context of s 5(1) of the TPA, which is not directly or indirectly concerned with the time of service but is, rather, concerned with extending the range of conduct that contravenes the TPA, the relevant date appears to be the date of the alleged contravention. 951 It will be recalled that the 2005 Agreement proceeded to completion on 31 May 2005. After that date, HWL was a wholly owned subsidiary of Metagenics through controlled entities of Metagenics in the form of Metagenics Far East Pty Ltd and MAPL. Apart from this ownership relationship, HWL was a party to a licence agreement with Metagenics which pre-existed the acquisition and remained on foot. The respondents say that notwithstanding the ownership relationship and the licence agreement, Metagenics had "very little control over the operation of HWL". The respondents rely upon Mr Katke's evidence at T, p 563, lns 33-40 to the effect that HWL runs its own business at Northgate and there is no American working at the HWL premises. Mr Katke gave evidence that an Australian employed by Metagenics North America had attempted to work at the Northgate premises but had not been allowed to enter the premises. 952 The proposition said to flow from that evidence is that Metagenics cannot be characterised, properly, as "carrying on business in Australia" after 31 May 2005, and the respondents contend that prior to 31 May 2005, Metagenics simply held a 10% interest in HWL and was a licensor of products. As to the principle to be applied in determining whether Metagenics was carrying on a business after 31 May 2005, the respondents rely upon the observations of Merkel J in Bray v Hoffman La Roche Ltd at [80] in these terms: In my view something more than the indirect legal and commercial capacity of the parent companies to control and direct the subsidiaries, plus the parent's involvement in implementing the cartel arrangement, is required to lift the corporate veil between the subsidiaries and their parents or to find that each of the subsidiaries is carrying on its business as agent for the parent. That is particularly so where it is contended (as it is in the present case) that the parent, rather than the subsidiary, is carrying on business in Australia or, put another way, the subsidiary is engaging in all of its commercial activities on behalf of, and therefore as agent for, the parent. 953 At para 116 of their submissions, the applicants say two things. 954 First, the integers of s 52 do not, according to their terms, limit the scope of that section to conduct occurring within Australia only. That follows, they say, because "corporation" is defined in s 4 of the Act to include a "foreign corporation" and "trade or commerce" is defined in s 4 to mean "trade or commerce in Australia or between Australia and places outside Australia". 955 Second, s 5 of the Act does not limit, they say, the operation of s 52. The applicants say at para 119 that there is no judicial support for a construction of s 5 of the Act as narrowing the operation of s 52 of the Act in the way contended for by the respondents. The applicants say that the weight of authority is to the effect that s 52 and s 6 of the Act are not constrained by the operation of s 5 of the Act. The authorities they rely upon for these propositions are: R v Australian Industrial Court; ex parte CLM Holdings Pty Ltd (1977) 136 CLR 235 at 243-5, Mason J; Barwick CJ, Stephen J, Jacobs J and Murphy J agreeing; Seaman's Union of Australia v Utah Development Co (1978) 144 CLR 120 at 136-7, Gibbs J; Barwick CJ and Stephen J agreeing; Australian Competition and Consumer Commission v Hughes [2002] ATPR 41-863 at 44,792, Allsop J, at [79] as to the conclusion, deriving from the discussion of the facts by his Honour. 956 The position, however, seems to me to be this. 957 There are a number of reasonably clear statements in the authorities to the effect that but for the extension provided by s 5, the conduct which might constitute a contravention of the Act is conduct within Australia. In Bray v F Hoffman La Roche Ltd at [50], Merkel J said this: Whether a statutory provision has extra-territorial operation is a question of construction of the Act as a whole, with the TPA, as in Meyer Heine [which is a reference to Meyer Heine Pty Ltd v The China Navigation Co Ltd (1966) 115 CLR 10], it is not necessary to rely on any canon of construction in respect of s 5 as s 5(1) has provided for extra-territorial operation of the provisions of Pts IV, IVA, V (other than Div 1AA), VB subject to certain conditions. As with s 9(b) of the Australian Industries Preservation Act, s 5 of the TPA is to be accounted for only on the basis that the Act as a whole, including s 5 itself, has been framed on the assumption that when conduct is made a contravention of the Act it is only conduct in Australia that is meant unless the conditions set out in s 5 apply. 958 In Bray v F Hoffman La Roche Ltd (2003) 130 FCR 317, the Full Court took the same view: see Branson J at [162] - [164], Carr J agreeing at [29] and Finkelstein J at [233] - [234]. 959 The observations of Merkel J at [50] in Bray v F Hoffman La Roche Ltd was cited with approval in Worldplay Services Pty Ltd v Australian Competition and Consumer Commission by Ryan and Kiefel JJ at [18], Tamberlin J agreeing at [28]. At [18], Ryan and Kiefel JJ having analysed a number of the authorities noted the "assumption" upon which s 5(1) may be taken to have been framed and said this: The result here is that the conduct proscribed by Pt V will be taken to be conduct within Australia unless s 5(1) applies. [emphasis added] 960 This conclusion reached by the Full Court in Worldplay is consistent with references to s 5 of the Act giving other provisions of the Act an extended operation: Australian Wool Innovation Ltd v Newkirk at [54] relying on the observations of Merkel J in Bray v F Hoffman La Roche Ltd. It is also consistent with the observations of Wilcox J in Trade Practices Commission v Australia Meat Holdings Pty Ltd (1988) 83 ALR 299 at 353-355. In the Full Court decision in Bray v F Hoffman La Roche Ltd, Branson J also noted at [162] that the construction adopted by the Full Court was supported by the terms of s 21(1)(b) of the Acts Interpretation Act 1901 (Cth) which provides that in any Act, unless the contrary intention appears, references to localities, jurisdictions and other matters and things shall be construed as references to such localities, jurisdictions and other matters and things in and of the Commonwealth. 961 In relation to the authorities relied upon by the applicants, the position seems to be this. R v Australian Industrial Court; ex parte CLM Holdings Pty Ltd and Seaman's Union of Australia v Utah Development Co are both cases which discuss the effect which s 6 of the Act has upon the scope of the operation of the Act. However, s 6 is concerned with the scope of operation of the Act in terms of making clear the precise limits upon which the sections of the Act operate having regard to the constitutional connecting factors. Section 5, on the other hand, is concerned with the scope of the application of the Act to conduct which the Act seeks to regulate and in that sense s 5 is properly regarded as determining the question of the extra-territorial application of the Act. 962 Section 6 of the Act relevantly provided, at the material time: 6 Extended application of Parts IV, IVA, IVB, V, VA and VC (1) Without prejudice to its effect apart from this section, the Act also has effect as provided by this section. (2) This Act … has, by force of this subsection, the effect it would have if: (a) any references in this Act … to trade or commerce were, by expression provision, confined to trade or commerce: (i) between Australia and places outside Australia; (ii) among the States; (iii) within a Territory, between a State and a Territory or between two Territories; or (iv) by way of the supply of goods or services to the Commonwealth or an authority or instrumentality of the Commonwealth; and … (h) a reference in this Act to a corporation [relevantly s 52] included a reference to a person not being a corporation. (3) In addition to the effect that this Act … has as provided by subsection (2), the provisions of … Division 1 … of Part V … have, by force of this subsection, the effect they would have if: (a) those provisions … were, by express provision, confined in their operation to engaging in conduct to the extent to which the conduct involves the use of postal, telegraphic or telephonic services or takes place in a radio or television broadcast; and (b) a reference in those provisions to a corporation included a reference to a person not being a corporation. 963 Section 4 of the Act defines a corporation in these terms: corporation means a body corporate that: (a) is a foreign corporation; (b) is a trading corporation formed within the limits of Australia or is a financial corporation so formed; (c) is incorporated in a Territory; or (d) is the holding company of a body corporation of a kind referred to in paragraph (a), (b) or (c). 964 Each of the terms "foreign corporation", "trading corporation" and "financial corporation" are then defined by reference to the meaning given to those terms in s 51(xx) of the Constitution, that is, the so-called "Constitutional corporations". 965 The role of s 6 of the Act then is to establish a scope of operation which reflects the constitutional heads of power which would support the operation of the provisions of the Act. In R v Australian Industrial Court; ex parte CLM Holdings Pty Ltd at 243-244, Mason J puts it this way: I now turn to s.6, which gives the Act an extended operation. To understand what the section seeks to achieve one must bear in mind that for the most part the operative sections of the Act which, according to their terms, regulate the conduct of corporations, are based upon the corporation's power and the territories' power. … Section 6(1) recognises that the Act will in the first instance have a direct operation according to its terms and at the same time provides that in addition to this operation the Act shall have a further operation in accordance with the provisions of s.6(2) and (3). [Section 6(2)] extends the application of the principal provisions of the Act to persons not being corporations as well as to corporations, whilst they are engaged in interstate or overseas trade or commerce, trade or commerce between territories or with a territory or in the supply of goods or services to the Commonwealth or an authority or instrumentality of the Commonwealth. The sub-section achieves this operation in the main by providing that the Act shall have the effect it would if references to "trade or commerce" were confined to trade or commerce in the aspects already mentioned (s.6(2)(a)), if certain sections (s.46, Pt V (other than s.55) and Pt VIII) were confined in their operation to engaging in conduct to the extent to which such conduct takes place in the course of, or in relation to, those limited aspects of trade or commerce so mentioned (s.6(2)(b)) and, subject to certain qualifications, if the word "corporation" included a reference to a person not being a corporation (s.6(2)(h)). There are other alterations for which sub-s.(2) makes provision but they need not be mentioned. Thus, it appears that sub-s.(2) is designed to give the provisions of the Act an operation which can be supported not merely by reference to the corporations power but by reference also to the powers contained in ss.51(i.) and 122 together with the limited power to regulate the supply of goods or services to the Commonwealth, its authorities and instrumentalities. Sub-section (3) then provides for Div. 1 of Pt V having a further additional operation [in the way described by Mason J]. Thus it appears that sub-s.(3) is designed to give the Act a further operation which can be supported by reference to the power contained in s. 51(v.) of the Constitution. 966 The High Court, in Seaman's Union of Australia v Utah Development Co, adopts the same position as that reflected in R v Australian Industrial Court; ex parte CLM Holdings Pty Ltd. 967 In respect of Metagenics Inc, it seems to me that s 6 of the Act has no role to play. Metagenics is a "foreign corporation" and therefore falls squarely within the unextended terms of s 52. That position seems to be consistent with the applicants' statement of claim at para 35 which only seeks to rely upon s 6 in respect of the conduct of Mr Katke personally and not in respect of MAPL or Metagenics. The question to be determined is whether the conduct in which Metagenics is said to have engaged in conduct to which s 52 applies. The determination of that question falls to be determined by reference to s 5 and the principles reflected in the decision of Merkel J in Bray v F Hoffman La Roche Ltd and the Full Court's decision in that case on appeal. 968 Section 6 may, however, be relevant to the conduct of Mr Katke. He is "a person not being a corporation". Section 52 may apply to the relevant conduct of Mr Katke where he is either engaged in trade or commerce in one of the ways identified in s 6(2) or engaged, relevantly, in conduct which involves the use of postal, telegraphic or telephonic services. Nevertheless, it seems to me that the relevant conduct for the purposes of s 52 of the Act can only be conduct on the part of Mr Katke in which he was engaged, within Australia. That follows because Mr Katke does not fall within any integer of the extended application of the Act provided for by s 5, and s 6(3) does not draw within the field of operation of s 52 of the Act, a natural person who is neither an Australian citizen nor an Australian resident and who engages in conduct wholly outside Australia. 969 This construction of the Act is consistent with the reasoning of Merkel J in Bray v F Hoffman La Roche and the Full Court's acceptance of that reasoning. It is also consistent with the observations of Wilcox J in Trade Practices Commission v Australia Meat Holdings Pty Ltd at 355-356 in these terms: In the face of the express provisions for extra-territorial application of the Act made by s 5, it is difficult to ascribe to Parliament an intention that [a particular section then under discussion] should apply to persons who have no connection with Australia except [and his Honour then set out particular factual considerations then under discussion]. As Lord Russell of Killowen said in R v Jameson [1896] 2 QB 425 at 430, the presumption against the extra-territorial application of a statute, "is a rule based on international law by which one sovereign power is bound to respect the subjects and the rights of all other sovereign powers outside its own territory". … It is not difficult to see the disruption to international comity which might result from an Australian court declaring void a transaction entered into by a vendor who not only lacked a continuing association with Australia, such as residence, incorporation, or the carrying on of business in this country but who had not even the casual relationship of having engaged in Australia in conduct relating to the relevant transaction. [emphasis added] 970 The other authority relied upon by the applicants in support of their submission that s 5 does not limit the operation of s 52 is Australian Competition and Consumer Commission v Hughes. In that case, Mr Hughes placed misleading or deceptive material on a website in the United States with the intention that consumers in Australia and the United States and elsewhere would use telephonic services to access the information and rely upon it. Allsop J held that relief was available under the Act in reliance upon ss 5 and 6 notwithstanding the lack of a presence of a corporation. Although it is not entirely clear on the face of the reasons for judgment, there seems to be no suggestion that Mr Hughes was not an Australian citizen or an Australian resident. His Honour's reference to s 5 of the Act should be understood as a reference to that part of s 5 which had the effect of applying the Act to conduct outside Australia by an Australian citizen (or a person ordinarily resident within Australia). Reliance upon s 5 was probably necessary because, in addition to orders concerning the conduct of selling to Australian consumers, his Honour ordered that the respondent be restrained from offering for sale and/or selling and/or supplying the relevant goods to persons in the United States of America. His Honour made reference to s 6 because the respondent, being a natural person, would not have fallen within the terms of s 52 but for the extended operation of s 52 to a "person not being a corporation" provided for by ss 6(2) and (3). 971 Having regard to the questions in issue in Hughes, it seems to me that this authority does not assist the applicants in the present proceeding. 972 The applicants also rely upon Australian Competition and Consumer Commission v Chen (2003) 132 FCR 309. In that case, the respondent was a natural person resident in the United States. He engaged in misleading or deceptive conduct by purporting to sell tickets online to performances at the Sydney Opera House. On the question of the scope of the Act, Sackville J said this at [32]: The ACCC identified the "services" for the purposes of the application of ss 53(c) and 55A of the TP Act as the offer made by the respondent on the WBO Site to provide booking facilities for events at the Sydney Opera House. Although the respondent is not a corporation, the TP Act applies to his activities at least insofar as they affect consumers in Australia. This is so because he has engaged in conduct over the Internet which has involved the use of telephonic services (s 6(3)) or, alternatively, which has taken place in trade or commerce between Australia and the United States (s 6(2)): see Australian Competition and Consumer Commission v Hughes [2002] ATPR 41-863 at 44,792 per Allsop J. 973 The relationship between the power to make remedial orders and the extended operation of the Act, once applying, is addressed by Sackville J at [41] and [42] in these terms: 41 … The language of s 80(1) is broad: once the court is satisfied that one of the preconditions has been met, it "may grant an injunction in such terms as the Court determines to be appropriate". There is nothing in this language that imposes an implied territorial limitation on the power of the court. On the contrary, not only is the language of s 80(1) broad enough to permit the court to prohibit or mandate acts abroad, but there is good reason to interpret in this way. 42 Section 6(2) of the TP Act extends the application of Pt V (and other provisions) to conduct in trade or commerce between Australia and places outside Australia. In enacting this provision, Parliament has relied on the trade and commerce power conferred by s 51(i) of the Constitution of the Commonwealth. The extended application of the TP Act has the effect that a person outside Australia (but subject to the jurisdiction of the court under provisions such as the Rules, O 8, r 2) might well contravene provisions of the [TP Act] and thereby enliven the power conferred on the court by s 80(1). In these circumstances, in my opinion, s 80 should be read as contemplating that an injunction may be granted prohibiting or requiring the performance of acts outside Australia. [emphasis added] 974 The role of s 6(2) is to extend the application of Pt V to persons other than corporations but only where those persons are engaged in certain limited activities which draw them within the scope of the Commonwealth's constitutional legislative powers. 975 It follows from all of this that the respondents are correct in their contention that the conduct to which s 52 applies can only be conduct that is either engaged in within Australia; engaged in outside Australia by a body corporate which is either incorporated in Australia or is carrying on business within Australia; engaged in by an Australian citizen; or engaged in by a person ordinarily resident within Australia. 976 The question to be determined then, as a matter of fact and law, is whether the evidence demonstrates that the conduct relied upon by the applicants in relation to the Settlement Deed of 31 July 2009 was conduct engaged in within Australia or whether Metagenics was carrying on business within Australia at the time of the conduct relied upon. Nevertheless, the following difficulty seems to remain. Even if Metagenics is shown to be carrying on business within Australia at the time of the conduct relied upon, the applicants would require Ministerial consent before they could obtain any relief under s 82 for damages or under s 87 concerning the claim for re-conveyance of the HWL shares, based upon conduct engaged in outside Australia: see ss 5(3) and (4), respectively. There is no suggestion that Ministerial consent has been obtained. It may be possible to satisfy s 5(3) and/or s 5(4) by obtaining Ministerial consent simply before relief is granted: see Tycoon Holdings Pty Ltd v Trencor Jetco Inc [1995] ATPR 41-413 (but cf, Yamaji v Westpac Banking Corp (No 2) (1993) 42 FCR 436); Cathay Pacific Airways Ltd v Assistant Treasurer and Minister for Competition Policy and Consumer Affairs (2010) 186 FCR 168.

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Was the 2009 conduct engaged in within Australia? 977 As already mentioned, the applicants plead and rely upon conduct described as the 2009 representations, the Alticor representations and the patent representations as conduct which induced them to enter into the Settlement Deed. The applicants at para 117 rely upon Trade Practices Commission v Australia Meat Holdings ("TPC v AMH") in support of their submission that in assessing the conduct of the respondents, the Court is required to take into account the whole of the available evidence and that it is artificial to quarantine one particular piece of evidence and ignore other representations forming part of the total factual matrix, so as to suggest that there has been no contravention of the Act. 978 TPC v AMH was a case in which the owners of a UK company sold the company's Australian business to an Australian competitor company (the respondent). Wilcox J found that as a result of the acquisition by the respondent, it had contravened s 50 of the Act. In order to obtain relief under s 81(1A) in respect of that contravention, the applicant was required to show that the vendors had been knowingly concerned in the contravention of s 50. The relevant respondents contended that because the meeting and the agreement had occurred in London, the vendors could not be said to have been knowingly concerned in conduct taking place within Australia. At 356, Wilcox J said this: On the other hand it seems to me that the submission of counsel for the Borthwick respondents, that all conduct outside Australia must be ignored, also goes too far. In a case where there is relevant conduct in Australia, it is a misuse of language to speak of the statute being given extra-territorial effect. The statute applies because of that conduct. It attaches to conduct within Australia. But in assessing that conduct, in relation to both its nature [in this case whether the vendors were concerned] and to its quality [that is whether the vendors had the requisite knowledge], the Court is required to take into account the whole of the available evidence. Evidence of events outside Australia may, for example, establish or negative the necessary knowledge. There is nothing unusual about that course. Australian courts commonly receive evidence of overseas events which bear upon conduct affected by Australian law. 979 On the facts, Wilcox J found at 356 that there was "plainly relevant conduct in Australia" including the circumstance that a representative of the vendors, at the direction of the Chief Executive of the UK company, attended at and attempted to negotiate with the Commission in respect of its opposition to the proposed takeover of AMH. Wilcox J found that that circumstance was sufficient for the vendors to have been knowingly concerned (in Australia) in the contravention when they voted in favour of the takeover at the meeting in London. 980 In Bray v F Hoffman La Roche Ltd, Merkel J expressed these observations at [144] to [147] in relation to the forensic examination of the conduct in issue before his Honour: 144 I infer that, for the most part, the directions, instructions and advice implementing the cartel arrangement in Australia were communicated at meetings both inside and outside of Australia and by facsimile, e-mail, letter, telephonic, telex or other communications by officers of the European or regional parent (as the case may be) to officers in Australia of the Australian subsidiary. I accept that in some instances meetings and communications occurred at the overseas headquarters of the European or regional parent. However, the nature, extent and detail of the implementation of the cartel arrangement in Australia was such that it is likely that, substantially, implementation on a regular basis required detailed communications on an ongoing basis by officers of the relevant overseas parent to officers in Australia regarding the matters agreed to or budgeted for at regional meetings held outside of Australia. 145 In a different context, Mason CJ, Deane, Dawson and Gaudron JJ in Voth v Manildra Flour Mills Pty Ltd (1990) 171 CLR 538 observed at 567-568: "In some cases an act passes across space or time before it is completed. Communicating by letter, telephone, telex and the like provide examples". 146 However, after also observing that generally the tort of negligence misstatement is committed where the statement is received and acted upon their Honours pointed out that the statement may be received in one place and acted upon in another. They stated: "If a statement is directed from one place to another place where it is known or even anticipated that it will be received by the plaintiff, there is no difficulty in saying that the statement was, in substance, made at the place to which it was directed, whether or not it is there acted upon". See also Sydbank Soenderjylland A/S v Bannerton Holdings Pty Ltd (1996) 68 FCR 539 at 547-548 and Diamond v Bank of London and Montreal Ltd [1979] 1 QB 333 at 345-346. This principle has been applied to conduct found to contravene Pt V of the TPA: see No 1 Raberem Pty Ltd v Monroe Schneider Associates Inc (unreported, Federal Court, von Doussa J, No. G10 of 1989, 8 February 1991). 147 In the present case the facsimile, e-mail, letter, telephonic, telex, or other communications from overseas parents to officers of the Australian subsidiaries, although they were likely, for the most part, to have been initiated outside of Australia, were directed to and were expected to be, and were, received in Australia. In my view such conduct can, for the purposes of s 45 of the TPA, be regarded as taking place in Australia. [emphasis added] 981 In No 1 Raberem Pty Ltd v Monroe Schneider Associates Inc (unreported, Federal Court, von Doussa J, No. G10 of 1989, 8 February 1991) ("Raberem"), von Doussa J expressed these observations at 95-96: The representations, other than the second and third representations [which were made in person in New Zealand] although originating from [the respondent's representative] in the USA, were made by letter or telephone to [the applicants] in Australia intending that [the applicants] act on them in Australia. The conduct constituted by the making of the representations occurred in Australia. The specific representations alleged by the applicants form part of a course of conduct by the respondents which led ultimately to the losses suffered by the applicants. The first representation made [by a particular exhibit] in Australia, did not cease to influence [the representative of the applicants] when he travelled to New Zealand. The events which caused loss and damage to [the applicants] were the acceptance of purchase orders from [the respondent] and the issuing of corresponding purchase orders to Feltex US at higher prices … The receipt of the purchase orders from [the respondent] dated 18 March 1986 and posted to [the applicants] under cover of the letter of 20 March 1986 … constituted part of the overall course of conduct. The false statements made by [the respondent's representative] in New Zealand were either expressly repeated in the letter of 20 March 1986, or were allowed to go uncorrected in circumstances where [the respondent's representative] intended [that the applicants] act to their detriment in the erroneous belief that the prices stated by [the respondent] in the purchase order were the basis of contracts to his clients which committed him to supply at prices set at a very low profit margin. The delivery of the [relevant] purchase orders in Australia to [the applicants] without correcting that misunderstanding was an integral part of the course of conduct on which the applicants rely. [emphasis added] 982 As to the 2009 representations, the applicants plead that this conduct was constituted by Ms Stockwell on 23 January 2009 emailing a copy of the NABP to Mr Michael Brosnan and Mr Gee; the provision to Mr Michael Brosnan and Mr Gee at a Board meeting of Metagenics in San Clemente, California, on 26 January 2009 of a copy of the NABP; statements made by Mr Katke at the meeting of Directors in California on 26 January 2009 concerning Mr Katke's intention to "re-focus" on the business of Metagenics and that on that footing the figures in the NABP "would be achieved"; and the emailing of a copy of the NABP to Mr Gee and Mr Joiner by Mr Katke on 10 February 2009. 983 It seems to follow on the basis of the propositions set out in the cases I have quoted that, in principle, the two emailed copies of the NABP sent to and received by the Australian former HWL shareholders in Australia would constitute conduct within Australia. The statements made at the meeting of Directors in California would seem to logically form part of a course of conduct in the sense contemplated in Raberem or might alternatively be viewed as evidence of overseas events which bear upon conduct affected by Australian law in the sense contemplated in TPC v AMH. It seems to follow that the discussion at the meeting of Directors in San Clemente is properly understood as having been informed by the understanding which the applicants had of the NABP which had been sent to them for consideration for the purposes of discussion at the meeting on 26 January 2009. The applicants' pleading is consistent with a case being maintained on that footing in that the pleading does not assert that the statements made by Mr Katke in California as, in and of themselves, were representations upon which the applicants acted. Rather, each of the matters as pleaded are pleaded as matters by reason of which MAPL and Metagenics Inc made various representations including representations as to future revenue and EBITDA. The contention is that Mr Katke's statements relevantly gave the figures in the NABP the character of representations. 984 These matters are addressed later in these reasons. The question presently under consideration is simply the way in which the case has been framed. 985 In relation to the Alticor representations, the applicants plead that between about July 2008 and July 2009, Mr Katke on behalf of MAPL and Metagenics, represented to Mr Michael Brosnan and/or Mr Gee on behalf of all of the applicants that Alticor was selling US$3 to $4 billion worth of its product in China annually; if the shareholders in Metagenics agreed to the proposal by Alticor then Metagenics would be able to export its products to China by reason of the association with Alticor; and the exporting of Metagenics products into China would substantially increase the profitability of Metagenics over and above that set out in the NABP. The applicants say that these representations were said to have been made by the following conduct: statements made in person by Mr Katke to Mr Michael Brosnan and Mr Gee at a meeting in San Clemente on or about 28 July 2008; statements made by Mr Katke to Mr Michael Brosnan in a telephone call in July 2009; statements made by Mr Katke to Mr Michael Brosnan and/or Mr Gee in numerous unparticularised telephone calls from late July 2008 to October 2008; statements made by Mr Katke to Mr Michael Brosnan and Mr Gee in person at the premises of Metagenics in San Clemente on 28 October 2008; statements made by Mr Katke to Mr Michael Brosnan and Mr Gee at further unparticularised meetings in San Clemente during 2009; and statements made by Mr Katke to Mr Michael Brosnan and Mr Gee during further unparticularised telephone conversations during 2009. 986 It seems to me that the same analysis applies to these contentions as that applying to the 2009 representations. The telephone conversations made to Mr Michael Brosnan and Mr Gee in Australia can properly be regarded as conduct within Australia. The pleaded statements also appear to suggest a course of conduct some of which was within Australia and the remainder of which informed the applicants' understanding of the statements which were made within Australia. 987 As to the patent representations, the applicants plead that between about late 2004 and July 2009, Mr Katke, Dr Bland and Mr Morey on behalf of MAPL and Metagenics, represented to Mr Michael Brosnan and/or Mr Leon Brosnan and/or Mr Gee and/or Mr A B Grant on behalf of all of the applicants, expressly, that Metagenics had a very strong patent position around its discoveries and, impliedly, that such patents significantly enhanced the value of shares in Metagenics. These representations were said to have been made by the following conduct: statements made by Mr Katke to Mr Michael Brosnan, Mr Leon Brosnan, Mr Gee and Mr A B Grant at a meeting in Brisbane on or about 7 May 2004; statements made by Mr Katke, Dr Bland and/or Mr Morey to Mr Michael Brosnan, Mr Leon Brosnan, Mr Gee and Mr A B Grant at a meeting in San Clemente on or about 16 November 2004; the emailing of a document to Mr Gee by Mr Katke on 9 February 2005; statements made by Mr Katke to Mr Michael Brosnan and/or Mr Gee "regularly" in unparticularised telephone calls throughout 2007, 2008 and 2009; and statements made by Mr Katke to Mr Michael Brosnan and/or Mr Gee "regularly" in unparticularised meetings in San Clemente throughout 2007, 2008 and 2009. 988 Again, it seems to me that the conduct in relation to the meeting in Brisbane along with the email and telephone calls might all be considered as conduct within Australia with the remainder of the conduct being contextually relevant. 989 It follows that the conduct, as a whole, which is said to have induced the applicants to enter into the Settlement Deed on 31 July 2009 can properly be considered, in principle at least, as pleaded, to be conduct within Australia. A question, later addressed in these reasons, remains as to whether the relevant conduct constitutes representations. If, upon this analysis, the conduct is properly understood as conduct occurring within Australia that is the end of the matter as far as the respondents' lack of jurisdiction point goes.

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The alternative position assuming the conduct, viewed as a whole, is not regarded as conduct within Australia 990 If, however, the conduct is not regarded as conduct within Australia or, on the facts, the conduct is found not to have occurred in the way pleaded, then it may be necessary to consider whether any of the respondents otherwise satisfy any limb of s 5 of the Act. 991 As to that question, the position seems to be this. Clearly enough, MAPL is a body corporate incorporated in Australia. It therefore satisfies s 5 of the Act. Any conduct of MAPL outside Australia can fall within the scope of s 52 by operation of s 5(1). As to Metagenics, the only limb of s 5 by which the conduct of Metagenics outside Australia might fall within s 52 is if it is shown that Metagenics was, at the material time, carrying on a business within Australia, that is to say, at the moment in time when the relevant conduct occurred. I will return to that question shortly. As to Mr Katke, the applicants contend that he has contravened the Act in two alternative ways. First, he is said to be personally liable by virtue of s 6(3) of the Act for contraventions of s 52 and, second, he is said to have been knowingly concerned in MAPL's and Metagenics's contraventions of s 52 within the meaning of s 75B. 992 In either case, Mr Katke does not fall within any limb of s 5. He is neither an Australian citizen nor an Australian resident. His conduct, if it was engaged in outside Australia, is therefore not regulated by the Act, on this alternative hypothesis. 993 As to the question of whether Metagenics was carrying on a business within Australia at the moment in time when the pleaded conduct is said to have occurred, the test for determining that question is addressed by Merkel J in Bray F Hoffman La Roche Ltd at [60] to [81]. However, at [62] and [63], Merkel J said this: 62 Whether a corporation is carrying on a business within Australia is very much a question of fact: see Luckins at 186 per Stephen J and Saccharin Corporation Ltd v Chemische Fabrick von Heyden Aktiengesellschaft [1911] 2 KB 516 at 521, 524 and 526. Carrying on business will usually involve "a series or repetition of facts": see Thiel v Commissioner of Taxation (Cth) (1990) 171 CLR 338 at 350 per Dawson J. The Full Court of the Supreme Court of Victoria in Pioneer Concrete Services Ltd v Galli [1985] VR 675 at 705 stated: "The word 'business' frequently poses difficulties for the courts. As Lord Diplock said in Town Investments Ltd v Department of the Environment [1978] AC 359, at p 383: 'The word "business" is an etymological chameleon; it suits its meaning to the context in which it is found. It is not a term of legal art and its dictionary meanings, as Lindley LJ pointed out in Rolls v Miller (1884) 27 Ch D 71, at p 88 embrace 'almost anything which is an occupation, as distinguished from a pleasure - anything which is an occupation or duty which requires attention is a business'. Recently Mason J attempted to define the word 'business' in its ordinary or popular meaning for the purpose of certain rating sections in the Local Government Act 1919 (NSW). In Hope v Bathurst City Council (1980) 144 CLR 1, at pp 8-9, … in a judgment which was concurred in by Gibbs, Stephen and Aickin JJ, Mason J accepted meaning No 19 from the Shorter Oxford Dictionary 'A commercial enterprise as a going concern', as the definition which came closest to the popular meaning, although he considered that: 'it is the words 'carrying on' which imply the repetition of acts (Smith v Anderson (1880) 15 Ch D 247, at pp 277-8) and activities which possess something of a permanent character'. Referring to the particular activities in question he said that the word 'business' denoted 'activities undertaken as a commercial enterprise in the nature of a going concern, that is, activities engaged in for the purpose of profit on a continuous and repetitive basis'." 63 While the purpose of profit is unnecessary in the present context (by reason of the definition of business in s 4(1)), the definition set out above can otherwise be adopted as sufficient for present purposes without adopting it as a definition which is necessarily applicable in all cases. In the context of s 5(1) I see no reason, however, for importing the additional requirement that to carry on business in the jurisdiction the foreign company must also have a place of business in the jurisdiction. A place of business is not a requirement of comity. Further, importing such a requirement will impermissibly supplement the corporate requirement of carrying on business with the additional requirement of corporate presence or residence. In any event it is clear that the requirement of a place of business in the jurisdiction relied upon by the foreign respondents does not apply where the contention is that the foreign corporation carried on business by an agent acting on its behalf. In such cases it is of no significance that the foreign company has no fixed place of business in the jurisdiction provided the agent acting on its behalf carried on its business from some fixed place in the jurisdiction: see Adams v Cape Industries plc [1990] 1 Ch 433 at 525 and 529-531. 994 The reference to a requirement (which Merkel J did not regard as a requirement) for a place of business in the jurisdiction, derives from older authorities such as Okura and Co Ltd v Forsbacka Jernverks Aktiebolag [1914] 1 KB 715. In that case, Buckley LJ held at pp 718-719 as follows: The question really is whether this corporation can be said to be "here" by a person who represents it in a sense relevant to the question we have to decide. The point to be considered is, do the facts shew that this corporation is carrying on its business in this country? In determining that question, three matters have to be considered. First, the acts relied on as showing that the corporation is carrying on business in this country must have continued for a sufficiently substantial period of time … Next, it is essential that these acts should have been done at some fixed place of business … The third essential, and one which it is always more difficult to satisfy, is that the corporation must be "here" by a person who carries on business for the corporation in this country. It is not enough to shew that the corporation has an agent here; he must be an agent who does the corporation's business for the corporation in this country. 995 In Vogel v R and A Kohnstamm Ltd [1973] QB 133 at 143, Ashworth J quoted the above passage with approval and added this: At the end of the day there is a test which the courts have used as part of the material on which to reach a conclusion, namely, is the person in question doing his business or doing the absent corporation's business? Conversely, are they doing business through him or by him? 996 However, where a foreign corporation, the subject of the enquiry (as in the present case), has one or more subsidiaries in the jurisdiction, that circumstance is not by itself sufficient to establish that the parent entity "carries on business" in the jurisdiction. In Adams v Cape Industries plc [1990] 1 Ch 433 at 536-7, Slade LJ, for the Court of Appeal, said this: As Sir Godfray submitted, save in cases which turn on the wording of particular statutes or contracts, the court is not free to disregard the principle of Salomon v A. Salomon & Co Ltd [1897] A.C. 22 merely because it considers that justice so requires. Our law, for better or worse, recognises the creation of subsidiary companies, which though in one sense the creatures of their parent companies, will nevertheless under the general law fall to be treated as separate legal entities with all the rights and liabilities which would normally attach to separate legal entities. In deciding whether a company is present in a foreign country by a subsidiary, which is itself present in that country, the court is entitled, indeed bound, to investigate the relationship between the parent and the subsidiary. In particular, that relationship may be relevant in determining whether the subsidiary was acting as the parents' agent and, if so, on which terms … There is no presumption that the subsidiary is the parent company's alter ego … If a company chooses to arrange the affairs of its group in such a way that the business carried on in a particular foreign country is the business of its subsidiary and not its own, it is, in our judgment, entitled to do so. 997 The Court of Appeal in Adams v Cape Industries plc at 530-531, identified a number of questions which are "likely to be relevant" to an investigation of whether "a representative of the overseas corporation has for more than a minimal period of time been carrying on the overseas corporation's business in the other country" [original emphasis]. Those questions are: whether or not the fixed place of business from which the representative operates was originally acquired for the purpose of enabling the representative to act on behalf of the overseas corporation; whether the overseas corporation has directly reimbursed the representative for the cost of accommodation at the fixed place of business and the costs of staff; what other contributions, if any, has the overseas corporation made to the financing of the business carried on by the representative; whether the representative is remunerated by reference to transactions, e.g. by commission or by fixed regular payments or in some other way; what degree of control the overseas corporation exercises over the running of the business conducted by the representative; whether the representative reserves part of its accommodation and/or part of its staff for conducting business related to the overseas corporation; whether the representative displays the overseas corporation's name at its premises or on its stationery and if so whether the representative does so in such a way as to indicate that it is a representative of the overseas corporation; what business, if any, the representative transacts as principal exclusively on its own behalf; whether the representative makes contracts with customers or third parties in the name of the overseas corporation or otherwise in such manner as to bind it; and if so, whether the representative requires specific authority in advance before binding the overseas corporation to contractual obligations. 998 Many of these questions might well apply to a case where the "representative" is in fact a subsidiary company. These questions were adapted in that way by Merkel J in Bray v F Hoffman-La Roche Ltd at [71]. At [80], Merkel J said this: In my view something more than the indirect legal and commercial capacity of the parent companies to control and direct the subsidiaries, plus the parent's involvement in implementing the cartel arrangement, is required to lift the corporate veil between the subsidiaries and their parents or to find that each of the subsidiaries is carrying on its business as agent for the parent. That is particularly so where it is contended (as in the present case) that the parent rather than the subsidiary, is carrying on business in Australia or, put another way, the subsidiary is engaging in all of its commercial activities on behalf of and therefore as agent for, the parent. [emphasis added]

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Is the test satisfied in the case of Metagenics? 999 In the present case, there is no evidence of any business which Metagenics may have conducted on its own account within Australia. If Metagenics is said to have satisfied the test of "carrying on business in Australia", that result must only arise through the presence of one of its subsidiaries within Australia, engaged in a particular way, having regard to the relationship between the parent and the subsidiary. From 31 May 2005 onwards, Metagenics had two subsidiaries relevantly connecting it with Australia: MAPL and HWL. As to MAPL, that entity is a holding company only and there is no evidence that it carries on any business, or, for example, has any staff of its own conducting any activities or at all. The only business which MAPL appears to have ever conducted was the purchase of a shareholding in HWL. Although Metagenics seems to have the requisite degree of control of MAPL such that MAPL's business can be said to be the business of Metagenics, the position on the evidence nevertheless remains that MAPL was not at any material time carrying on any business in the relevant sense, that is to say, engaged in activities reflecting a repetition of acts. 1000 As to HWL, there can be no doubt whatsoever that it carried on (and carries on) business within Australia. The question on the authorities is whether at the relevant times it was in fact carrying on the business of Metagenics in some relevant way or at all. Despite being a wholly owned subsidiary, the evidence seems to show that HWL was permitted by Metagenics to operate within Australia in a substantially autonomous way. That circumstance no doubt arose out of the history of the relationship between Metagenics and HWL prior to the acquisition reflected in the 2005 Agreement with the result that after the acquisition Metagenics continued to adopt a position in which HWL would continue to conduct its own undertaking. That was, in substance, the evidence given by Mr Katke. Having regard to the level of independence of operation, or autonomy, HWL was carrying on its own business, in my view, and not that of Metagenics. The question posed in Vogel of whether HWL was conducting its business or undertaking or the absent corporation's business, must be answered, on the evidence in this case, by finding that HWL was undertaking HWL's business. It follows that there is simply an insufficient basis on the evidence to, in effect, "lift the corporate veil". It follows, and I find, that Metagenics was not "carrying on a business in Australia" in the sense required by s 5 of the Act at the time of the conduct which the applicants plead as the conduct said to be misleading or deceptive. Thus, the conduct of Metagenics outside Australia would not fall within the scope of s 52 of the Act, if the question falls to be determined by reference to s 5 of the Act on the alternative basis presently under consideration: see [989] of these reasons. 1001 I do not propose to address any remarks concerning the legal principles governing ss 51A, 52, 75B and 82. I regard the principles governing these sections as well settled and not substantially in controversy as between the parties in any real degree. At Pt IX of these reasons, I address further observations concerning the exercise of the discretion under s 87 of the Act.

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PART VI - CONSIDERATIONS 1002 Later in these reasons I will address aspects of the patent representations as a separate question together with observations about aspects of the expert evidence and other issues in the case. 1003 For present purposes, however, I will address the claims of the applicants having regard to the evidence of the principal participants to the central events in question as described. 1004 As to the facts, I find as facts the elements of the narrative I have set out in these reasons subject to the remarks or qualifications addressed in this Pt VI and Pts VII, VIII and IX of these reasons. 1005 As to the principal witnesses, I make these observations. 1006 I found Mr Gee to be an honest witness who answered directly the questions put to him free of any obfuscation or dissembling. I generally accept his evidence. 1007 I found Mr Morey to be an honest witness. He behaved in the same way and I generally accept his evidence. 1008 So too was Dr Bland although, oddly enough, he seemed to feel compelled for some reason to give his evidence in what seemed to be an unnecessarily forceful fashion as though the authority of his views depended upon his demeanour rather than the authority of his discipline or the simple truths of the content of his engagement on the facts. Nevertheless, I accept his evidence and do not mean to suggest any lack of reliability or confidence in the evidence he gave. 1009 Mr Michael Brosnan is also an honest man. However, he seems to see things in emphatic and black and white terms or in absolutes. The question for the Court is generally one of determining the best or most reliable evidence on the relevant topic and those witnesses who exhibit greater precision as to the facts and engagement in events are likely to be more reliable than those witnesses who do not. Mr Michael Brosnan did not engage on financial questions and chose to leave these matters to Mr Gee. He conceded that he paid no real attention at all to Mr Colman's presentation. He was, however, clear and consistently emphatic about one matter: the extent to which emergent disparity, after the event, over time, in HWL's EBITDA contribution to group earnings had rendered the 2005 Agreement "unfair" or "out of whack" thus necessitating, by reason of his friendship with Mr Katke, a need for redress and preferably an opportunity to "start over" or, less desirably, adopt some other adjustment mechanism to redress the balance. In making these observations, I do not mean to be critical of Mr Michael Brosnan. Plainly enough, his real strengths lie in the area of sales, business building and engaging with people and, naturally enough, that is where his focus is and where he directs his energy. He leaves the details of other matters, particularly financial and structural corporate matters, to others. 1010 Mr Alan Bawden Grant was an honest and impressive man. 1011 As to Mr Katke, I am urged by the applicants to make adverse credit findings against him on the footing that he "gave his evidence in a most unconvincing manner and was prone to exaggeration, evasion, embellishment, contradiction and generally [adopted] unbelievable propositions". 1012 I am not willing to do so because I am not persuaded that the contentions in support of that proposition are made good. Mr Katke was subjected to a very lengthy, pressing and difficult cross-examination on almost every aspect of all of the events I have just described. It was, of course, properly open to the applicants to test Mr Katke's evidence in this way. However, I do not accept that Mr Katke was not telling the truth, in any conscious sense, about particular matters. Obviously enough, views can differ about particular topics. Recollections of events can vary. People, as Mr Gee said in one of his emails, can see the same things differently. Beliefs can be held about events which on the basis of all the evidence are shown not to be correct or, on balance, not likely to be correct. That forensic conclusion reached having regard to all of the evidence does not then carry with it an adverse credit finding against a witness who believes in the truth of particular recollections about matters in issue, although ultimately shown to be wrong (if it be the fact) about those recollections. 1013 I will shortly address each of the examples of Mr Katke's evidence that are said to be necessarily emblematic of a lack of credit-worthiness on his part as to his evidence generally since I am pressed to reject his evidence on credit grounds. 1014 Before doing so, three general observations about the circumstances of the case should be made. 1015 First, this is not a case where one side (the Australian side) was a stranger, or for all practical purposes a stranger, to the other side (Mr Katke, Dr Bland and Mr Morey) or the business undertaking, and then came together with the other side in a commercial transaction on 31 July 2009 (or for that matter on 27 April 2005) where one side had said something about the subject matter of an entirely unfamiliar enterprise which, by later events, was shown to be wrong after the other side had entered, for example, into possession and had then become familiar with the undertaking, finding things said by one side to have no basis. In this case, the commercial relationship over a long time, was deep, enduring, characterised by constant exchanges of very detailed information and, after the 2005 Agreement, both sides had become equity owners in Metagenics and shared a common interest in securing an initial public offering of securities on a United States Stock Exchange in that entity (or in a listed entity controlling that entity). 1016 The second general observation is that the applicants say in relation to the Settlement Deed that they were misled by the pleaded representations, relied upon them and were induced by them to enter into the Settlement Deed thus compromising and giving up their opportunity to litigate claims concerning the 2005 Agreement and secure remedial relief under s 87 of the Trade Practices Act 1974 (Cth) extending to a rescissionary and restitutionary re-transfer of the HWL shares to them based upon contraventions of s 52 of the Act. The 2009 representations are representations as to future matters. So too are the Alticor representations but for the representation that Alticor was selling US$3-$4 billion worth of its products in China annually. The case in relation to the Settlement Deed is a "no transaction" case in the sense that the applicants contend that had they properly understood the contended true position as to the future matters, they would not have entered into the Settlement Deed and would not have given up, by the release clause, the earlier claims. 1017 Neither Mr Gee nor Mr Michael Brosnan gave evidence to that effect or that had they known that there was no contended reasonable basis for the predictions, they would not have entered into the Settlement Deed with the result that there would have been no transaction foreclosing the claims in relation to the 2005 Agreement. That conclusion seems to be left as a matter of inference to be drawn from the evidence that the projections mattered to Mr Gee and Mr Brosnan because the downstream EBITDA earnings would ultimately determine the share price on the put options concerning the residual share interests. 1018 Third, I also find that at all times relevant to these proceedings, Mr Katke, Mr Morey and Dr Bland knew and understood that when they were engaging either severally or collectively with any of Mr Gee, Mr Michael Brosnan, Mr Leon Brosnan, Mr A B Grant or Mr Curley, that those members of the applicants were acting for and on behalf of all of the applicants in relation to the questions in issue between the applicants and, put simply, the Metagenics side.

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The criticism of Mr Katke's evidence 1019 The first example is that when Mr Katke was confronted with the proposition that the total EBITDA of Metagenics for 2013 was $31.2M of which the Australian business contributed $27M, Mr Katke gave evidence that in his view that figure representing the Australian contribution was exaggerated because it did not incorporate the distributed costs of conducting a global organisation or, put another way, an adjustment for "corporate expenses". The applicants say that there simply is no evidence of such costs or expenses. The applicants say that the staff cohort operating HWL and its expenses base essentially remained the same reflecting no true distortions in a realistic assessment of contribution to earnings. The applicants say that Mr Katke's explanation that it had become more difficult to manage HWL operations because of a lack of cooperation from the Australian management team is simply not made out and thus the proffered explanations have no substance and were thus exaggerated, embellished or essentially unbelievable. 1020 The exchanges in the transcript do not make clear the extent to which Mr Katke took the view that the figure representing the Australian contribution to group EBITDA failed to fairly reflect the share the Australian business should bear of group global costs which were not otherwise distributed. It may be that the amount of undistributed group global operating costs is quite small with the result that the figure for the Australian contribution to group EBITDA fairly and accurately reflects a proper measure of its integrated contribution. 1021 Nevertheless, I would not regard Mr Katke's evidence on this topic as a basis for concluding that Mr Katke gave his evidence in the way suggested. 1022 The second example is that Mr Katke denied providing Bison Capital with the information which appears in its presentation regarding clinical trials showing that Kaprex was just as effective as Vioxx or Celebrex. In its IM (see [338] to [340] of these reasons) Bison Capital made the observation that Metagenics had introduced an anti-inflammatory product called Kaprex and that the company's clinical trials had shown Kaprex to be "as effective as" currently marketed anti-inflammatory drugs such as Vioxx, Celebrex and Ibuprofen (with other language explaining that observation). Mr Katke is criticised on the footing that he had described Kaprex as "slightly better" than Vioxx or Celebrex and ultimately agreed that the words "as effective" and "slightly better" reflect the same concept and thus the likely source of the information to Bison Capital was Mr Katke. The applicants say that Mr Katke's denial of providing Bison Capital with the information is made more difficult by Mr Katke's agreement in evidence that the clinical trial conducted by Metagenics at that particular time was not large enough to justify the statement that Kaprex was just as effective as Vioxx. In other words, Mr Katke was being evasive, it is said, about the source of the information to Bison Capital and was trying to explain away the source of that information in circumstances where Mr Katke understood that there was no real basis for the statement as the clinical trial, was in truth, not large enough to justify such a conclusion. 1023 I am not in a position to reach any finding about the source of the information to Bison Capital on this topic. It is correct to say that Mr Katke recognised that the clinical trial was not a large, blind, randomised clinical trial of the kind or scale which would support clinical conclusions that Kaprex was just as effective as Vioxx. Nevertheless, the evidence shows that by this time the research literature within Metagenics suggested great promise that modified hops extracts which had been found to have the highest influence on cellular inflammation and the greatest level of safety in use was exhibiting a mechanism of action which suggested that Kaprex (being the product exhibiting those features) had efficacy and a commercial future as compared with other anti-inflammatory products and particularly non-steroidal anti-inflammatory products. Perhaps the information to Bison Capital came from the science side of Metagenics. 1024 I would not regard the criticism of Mr Katke's evidence on this topic as supporting the contentions about his credit-worthiness, generally. 1025 Another aspect of this criticism is that the Bison Capital Information Memorandum was sent to Mr Gee on 9 February 2005 as being "very comprehensive" and that on 28 September 2004, Mr Katke had sent his email to Mr Gee saying that the placebo controlled research on Kaprex was "positive" and that Metagenics had a "blockbuster" on its hands. No doubt, Mr Katke regarded the Bison Capital memorandum as very comprehensive and there is no doubt that he had described Kaprex as a "blockbuster". However, as mentioned earlier, the 28 September 2004 email needs to be seen in the context that Mr Katke was undoubtedly extolling the virtue and potential of Kaprex but on the footing that the representatives of the Australians, Mr Gee, Mr Leon Brosnan, Mr Michael Brosnan and Mr Curley ought to come to the United States to hear directly presentations on the science and, for that matter, the IPO process from David Schechner. In context, I do not regard these other features of this issue as emblematic of or inferentially giving rise to a conclusion that Mr Katke was being evasive or dishonest in giving his evidence. 1026 The third example is that in Mr Katke's document called "Who is Metagenics today?" Mr Katke says that Metagenics had reached agreement to acquire Biodynamics pending completion of a certified audit and agreement to acquire HWL in May 2005, yet as at 17 November 2004, there was no agreement even in draft to acquire HWL, nor a Completion Date of May 2005 (which was not known until April 2005). The applicants say that, in a similar way, although the agreement to acquire the Belgium entities was entered into in September 2004, the amendment to make completion of that transaction subject to a certified audit was not entered into until December 2004. For the applicants, it follows that Mr Katke's document could not have been presented to the 17 November 2004 meeting in this form and that Mr Katke's explanation in his evidence that the document was presented to the meeting is simply "unbelievable". 1027 An aspect of this confusion is that Mr Katke said his usual practice was to have his assistant email a copy of such a presentation to those who would be in the presentation, or give them a printed copy. The applicants say that there was no email of the presentation to Mr Gee, Mr Michael Brosnan, Mr Leon Brosnan or Mr Grant and the metadata for the presentation shows that no copy of the document was ever printed. The metadata extract shows that the trial bundle version of the document is made up of 71 slides although Mr Katke says his document is 72 slides. The applicants say that the document was "clearly subject to revision". 1028 There is real controversy about this document and whether it was presented by Mr Katke at the meeting on 17 November 2004; whether it was handed out; whether Mr Katke spoke to it directly as handed out; whether he spoke to it by projecting the slides onto the wall and addressing each slide as projected; or whether he did one or all of these things. Mr Katke's evidence on this issue has already been described. It may be that the document was subject to revision for other presentations and that the version which has entered into evidence is not necessarily the version of the document which was presented on 17 November 2004. That may account for descriptions of later events in the document which seem to go beyond a description of anticipated future events because there are precise references to such things as the May 2005 Completion Date for the agreement with the Australians. 1029 It seems to me that there are areas of legitimate confusion about this document and the question of whether it was projected onto the wall or precisely what occurred in relation to it on 17 November 2004. I would not regard an area of confusion about this question to be emblematic of evasion, embellishment or dishonesty on the part of Mr Katke. He has a recollection to be assessed in the context of all the evidence on the topic. As to this question, I am satisfied that it is more likely than not that the document was projected onto the wall and that Mr Katke spoke to it. It was his presentation on the day and he would be likely to be in the best position to recall how he went about it. Also, Mr Brosnan says he thinks something was projected onto the wall that day. No one suggests that any other presentation was projected onto the wall. In all probability, the copies of the slides annexed to Mr Katke's affidavit are the bulk of the slides presented that day. Some slides may have been a little different. It is not possible to say. 1030 The fourth example is Mr Katke's response to Mr Grant's evidence and diary note of the February 2005 conversation with Mr Katke: see [332] - [337] of these reasons. Mr Grant records that Mr Katke said: "Going public this year [2005]". Mr Katke agreed with Mr Grant's diary note of the discussion but denied making the above statement. Mr Grant's note, in the context of the language of the note, is a record of either his understanding of what Mr Katke actually said or the effect of what he said. Mr Grant's note reflects in substance the evidence Mr Gee gave about the conference call conversation. I am satisfied that Mr Katke said in this meeting that Metagenics would be going to an IPO in 2005. I am also satisfied that in the context of all of the events I have described up to February 2005 that this remark was a statement of an intention he then held and was nothing in the nature of a promise or guarantee or irreducible unequivocal commitment to a particular future outcome in 2005. By then, the Australians had heard the Schechner presentation on the IPO process in detail and by February 2005, Mr Gee knew there was "a snag with Belgium" concerning the opening inventory value (and no possibility of a roll-back from the closing value - see [236] - [239] of these reasons). Mr Katke's statement falls into the same frame of reference conceded by Mr Gee at [270] to [272] of these reasons, generally. Mr Katke believes that he did not say in this conversation that Metagenics was going to an IPO "this year". He is wrong about that. I do not accept, however, that he was being untruthful in giving his evidence on this topic. 1031 The fifth example is Mr Katke's reference to mining "a chronic disease vein of gold": see [473] of these reasons. The applicants say that this is clear "exaggeration" and "completely unbelievable" and so too was Mr Katke's explanation of the expression, given in oral evidence. I accept that Mr Katke has used a colourful and perhaps extravagant phrase to describe his perception of the commercial opportunities represented by the new class of therapeutic molecules Metagenics was seeking to deploy in the treatment of chronic disease as part of its selective kinase response modulator ("SKRM") mechanism of action. However, if it fairly reflected Mr Katke's view (excited and optimistic as it may have been) at that time, it may not be an exaggeration, although perhaps not necessarily a correct view of it. I do not regard these matters as a basis for concluding that Mr Katke's evidence at large is generally exaggerated or "completely unbelievable". 1032 The sixth example concerns Mr Katke's evidence of licensing negotiations conducted for Metagenics by a broker called NutraGenetics: see [441] of these reasons. As to this matter, NutraGenetics was engaging with 13 entities in licensing discussions to take up Metagenics products. Mr Katke said in an email to Mr Michael Brosnan that these activities had progressed to "serious discussions" and would result in agreements and estimates of revenue in 2007. The applicants say that the licensing discussions were no more than attempts to place Metagenics products in large retail chains such as Wal-Mart, Walgreens and Costco. The applicants say that there was no rational basis upon which Mr Katke could have predicted "licensing deals" at $10M or $20M. Mr Katke gave oral evidence about these arrangements and his view of the standing and importance of some of the entities on the list. Many of them had very significant distribution chains and the evidence shows that Metagenics was a company that supplied over the counter ("OTC") nutritional products, apart from other products based on SKRM action. Moreover, the broker was conducting the discussions and reporting on them. I do not regard this matter as a basis for, in effect, adverse credit findings concerning Mr Katke's evidence in the proceeding. 1033 The seventh example concerns Mr Katke's evidence about the "numbers" in the NABP. The particular evidence on this topic of contended inconsistency is set out at [700] - [705] of these reasons. Mr Katke gave evidence in cross-examination that the NABP was a document developed for "internal purposes" and was not in the nature of a "guarantee" or a "representation". He added that "particularly in light of the global financial crisis, it would be highly unlikely that we would achieve these numbers". Mr Katke was pressed about this observation and reasonably strong disagreement emerged between Mr Katke and counsel for the applicants about the notion that Mr Katke had been "cut off" or stopped from completing his explanation about that matter. Mr Katke was asked what aspect of the answer was ambiguous or unclear and this exchange followed: A As I said, it doesn't - it's not a clear - it's not my best effort at articulating what I meant, and I needed to give you additional explanation to clarify what I meant and you stopped me. Q Well, what did you - what were you meaning to say when you made that statement; did you mean to say something else? A I meant to say that the business plan wasn't a guarantee, that the global condition of the - of the economy was a variable that was a concern to all of us. I meant to clarify that we did think that we could achieve our goals, but if the economy continued to get worse it would affect our efforts to achieve our goals. That's what I meant to say. Q Well, why didn't you just say it? A I wished I would have, but I - I - I may - I didn't say it as - as well as I would like to have said it, but you wouldn't let me complete or explain it. 1034 The following further exchange then occurred at T, p 709, lns 24-46; T, p 710, lns 1-2: Q So at the time of the January 26 meeting you were aware of the global financial crisis weren't you? A Yes Q And you were aware that those - that the global financial crisis could affect your ability to achieve the figures? A I was. Q And, in fact, in your mind you thought it was highly unlikely that you would achieve those figures? A I did not think it was highly unlikely that we would achieve those figures when I created the business plan, or when I presented it to the board of directors. I - I believed that we had programs in place that gave us a good chance to achieve it, however, I - I did not know what - what the economy was going to do. We - we - our forecast was based on the economy improving, but if the economy didn't improve that [then] it would affect - negatively affect our ability to achieve our targets. Q Well, just one last time. Why then did you use the words "highly unlikely" when you gave that evidence to the court? A Because in the - I just didn't use the best words. I - I - and I wasn't allowed a chance to explain what I meant. Q Well, your explanation is that there was this global financial crisis, and you were really waiting for the economy to get better, and if the economy got better, well, you could achieve the numbers; is that right; is that really what you were trying to say? A No. My - what I said was, is that our forecast was based on a - on the economy recovering in a time period that was consistent with past recession that had occurred in the United States. Yes. And that if the economy didn't recover, that it would affect our ability to achieve our goals. 1035 See also [699], [701] and [702] of these reasons. 1036 I initially had the impression that Mr Katke was suggesting by his answer at T, p 677, lns 17-19, that looking back to those events now, it seemed to him highly unlikely in light of the global financial crisis that the numbers in the Business Plan would be achieved. However, Mr Katke said that he was speaking about his views at the time. He went on to explain those things that he meant to convey had he been able to complete his contextual answer to the question put to him. He said that in formulating and presenting the NABP to the Board on 21 January 2009 that he believed the programs "in place" gave the company a good chance of achieving the numbers although the global financial crisis was a concern ("to all of us") and the forecast in the plan assumed that the economy would improve. Mr Katke said that should it not do so, the ability of the company to achieve the numbers would be "negatively affected". Mr Katke also said that he wasn't guaranteeing that Metagenics was going to be able to "hit these numbers". He said the company was facing serious economic circumstances and that he was definitely positive about being able to focus more on the business without distraction, but said that he was not guaranteeing the achievement of the Business Plan in the coming years. The NABP was a business plan for the period 2009 to 2013. 1037 This question of Metagenics achieving the numbers in the NABP (or not) and the view Mr Katke had about those things, is, of course, related to the following matter. Mr Gee says that he was told by Mr Katke at or immediately after the Board meeting of 26 January 2009 that the projections in the Business Plan "would be achieved": see [683] to [689] of these reasons. Mr Michael Brosnan does not say in his evidence that Mr Katke said to him at this time that the projections would be achieved: see [690] to [696]. Mr Michael Brosnan also gave evidence that he formed the view, at this time, having heard Mr Katke's presentation, that "…if he could do three-quarters of it, it would be fine". Mr Michael Brosnan also says that he and Mr Gee both felt that way about it: see [699] of these reasons. 1038 Ultimately, the question is whether the discussions about the Business Plan at the 26 January 2009 Meeting of Directors of Metagenics (and observers including Mr Gee), or immediately thereafter, are properly characterised as intra-company discussions within the Director group (Executive and non-Executive Directors) and management for the purpose of trying to set the direction, expectations and targets for the years 2009 to 2013, or whether the proper understanding of these particular events is that the content of the Business Plan as put to Mr Gee and Mr Brosnan, and through them to the Australians, amounts to representations by Metagenics as to future matters made to them in their capacity as shareholders. If so, further questions arise about whether the applicants relied upon the representations in entering into the Settlement Deed on 31 July 2009 and whether there was a reasonable basis for the making of the representations as to the Business Plan projections. In this context, Mr Gee says he was told by Mr Katke at the 26 January 2009 meeting that the projections "would be achieved", presumably, across the life of the Business Plan to 2013. 1039 Mr Katke was pressed at the Board meeting of 26 January 2009 by at least Mr Michael Brosnan and Mr Leiner about the basis for any expectations of achieving "this sort of growth" over the next three or four years having regard to the recent "pretty robust economic years". That line of enquiry led to Mr Katke's response that he would now be back in the business, focused and undistracted by chasing a liquidity event (a major "step-up" investor and an IPO). There is no suggestion in Mr Michael Brosnan's evidence about Mr Katke's response at the meeting to this line of enquiry to the effect that Mr Katke said that the projections in the Business Plan "would be achieved". Rather, the discussion seemed to focus on how things might be different. Mr Katke seemed to stop well short of promising, representing or guaranteeing that the projections in the Business Plan would be achieved. Mr Katke says in his oral evidence that the economic conditions were a concern but he felt there was a good chance of achieving the plan subject to the qualifications he mentioned. 1040 Having regard to these exchanges it seems to me that Mr Katke was of a state of mind on and around 26 January 2009 that Metagenics would be confronting difficult economic circumstances and that achieving the projections in the Business Plan would undoubtedly be challenging and difficult. I accept that Mr Katke believed that the company had a good chance of achieving the projections in the Business Plan although doing so was dependent upon a calculus of factors the two most important of which were whether the programs the company then had in place would be successful and whether the economic cycle would be such that conditions in the United States, and for that matter globally, would improve in a way which would make achieving the projections over the life of the five year plan from 2009 to 2013 possible. 1041 In addition, it should be remembered that the Business Plan for 2009 to 2013 was just that. It was a business plan with well-defined financial objectives for 2009 coupled with an allocation of responsibilities to particular individuals for particular performance targets for that year. Other targets were set out for the years 2010 to 2013: see [659] to [662]. However, annual budgets would need to be developed in detail in the usual way as described by Mr Gee and Mr Morey taking into account the set of factors each year which would determine the annual budget. Each annual budget would need to take account of the objectives set out in the Business Plan. 1042 I am not satisfied that Mr Katke made a representation to Mr Gee on or about 26 January 2009 that Metagenics would achieve the projections in the Business Plan. The Business Plan contemplated a reasonably long range horizon extending through 2009, 2010, 2011, 2012 and 2013. It was, after all, a business plan which contained objectives and a vision for the company extending to an end of a financial year horizon for 2013. Moreover, Mr Katke was conscious of the challenging economic and market conditions and seemed to focus his answers at the Board meeting not on guarantees of achieving the projections but personally re-engaging with the business. In addition, Mr Brosnan and Mr Gee seemed to actually proceed on the footing that if Mr Katke was able to achieve, for Metagenics, 75% of the projections reflected in the plan, Metagenics, and relevantly the Australians, would be okay: see [695] to [699]. 1043 I am sure that Mr Gee genuinely believes that Mr Katke gave him to understand that the projections in the Business Plan would be achieved. However, having regard to all of the evidence, I do not accept that such an emphatic position was put to Mr Gee by Mr Katke. It seems to me inherently unlikely that a person in the position of Mr Katke on or about 26 January 2009 would readily or without any qualification or reservation assert that the company would achieve throughout 2009 to 2013 the projections set out in a business plan. Mr Gee is simply incorrect in his recollections on this topic. 1044 The eighth example concerns Mr Katke's evidence that Metagenics did not comply with the requirements of the United States Sarbanes-Oxley legislation and then altered his evidence after discussing this part of his cross-examination with Mr Morey overnight. The exchange was in these terms (T, p 590, lns 22-47; T, p 591, lns 1-18): Q All right. So what I'm suggesting to you, that if Metagenics was not Sarbanes-Oxley compliant for the purposes of going to an IPO, which is what you were intending to do in 2007, wasn't it; that's right? A It was. Yes. Q Yes. Okay. And that's what you were working towards, to become compliant so you could do that? A We were. Q Okay but what I'm suggesting to you is that if you weren't Sarbanes-Oxley compliant in 2007, and you were working towards that, similarly, you were not Sarbanes-Oxley compliant in 2006 were you? A No. Q All right. And - because it was the same system that you were running in 06 as the way - the way you ran your company in 06? A No. We … Q … as you ran in 07? A No. We had made, you know, considerable progress. Q Okay. A Yes. Q So 06 is probably worse, if I could call it that, if we're talking about compliance with Sarbanes-Oxley? A Yes. I think that would be accurate. Q Okay. A Yes. Q So 06 you've got issues. You work on them. You get to 07, you're still not there, and you've got to do a bit more work, is that right? A The answer is it's correct, but we were within the compliance period. Q I'm not saying you weren't? A So in … one sense - I know what you're attempting to portray. In one sense we were compliant because we were operating within the allowable time period to become compliant, and we had a plan to get - get there, and it was within the time lines that were permitted by the [SEC]. Q Okay. A So to say that we - and, I mean, on the one hand it's true that we weren't compliant; on the other hand it's also true that we were in compliance with the - with the time periods that were allowed to - to permit companies to do - make the changes that were needed to adapt to this new law. So, in one sense, we were compliant, and in another sense we weren't. Q Yes but you had to make changes to become compliant, didn't you? A Yes. We did. Q Okay, and - so, similarly, if you weren't Sarbanes compliant in 2006, you weren't Sarbanes complaint in 2005? A Correct. 1045 These passages properly explain the evidence Mr Katke gave about this topic. Then at T, p 651, lns 43-48; T, p 652, lns 1-10, this exchange occurred: Q Yes. Well, you said earlier before the break that you wanted to correct the evidence that you gave yesterday when you said that Metagenics was not [Sarbanes-Oxley] compliant in 2005 and 2006 after you gave that evidence yesterday. What caused you to change your mind Mr Katke? A I thought about it overnight and, as I thought about it, I realised that what I said wasn't accurate. Q Did you talk to anyone about it? A I spoke with my CFO this morning to verify that my thinking was correct, that we were Sarbanes-Oxley compliant, and that I had made a mistake, and he agreed with me that we were Sarbanes-Oxley compliant. Q Did anyone say to you that it probably wasn't a good idea to talk to anyone about the case whilst you were being cross-examined? A Yes. Q Well, why did you talk to your CFO when you had received that advice, good advice, no doubt, from your lawyers? A Because he was the CFO of the company at this time, and I needed a resource to confirm my belief regarding the facts. 1046 Disagreement then emerged between counsel about the nature of the prohibition upon a witness discussing the case with someone during the course of cross-examination. Mr Sofronoff observed that Mr Katke made an enquiry as to a question of fact of someone and there is no rule of law or practice that would prohibit a witness under cross-examination making an enquiry as to a fact while the witness is under cross-examination. Mr Sofronoff contended that the prohibition operates to prevent a witness under cross-examination entering into discussions that might pervert the cross-examination, and, that is not what Mr Katke did. Mr Morey was the CFO during the relevant period. Mr Martin took a different view about that proposition. 1047 In the context of these exchanges, I am not satisfied that these events give rise to the result that Mr Katke's evidence is generally unreliable and ought not to be believed. 1048 The ninth example concerns evidence Mr Katke gave in which he denied ever having seen a document described as "Marlin Comments on 'The Marlin/Lion Deal Doctrine' Received Feb. 10, 2009" (Vol 16, Tab 853 of the trial record). Mr Katke gave evidence that he thought the document had been drafted by a lawyer. Mr Katke's attention was drawn to the fact that the document is also an annexure to his statement and thus Mr Katke must have seen the statement before. Mr Katke responded at T, p 710, ln 47: "Apparently I did, but I didn't remember it". Mr Katke gave evidence that he was not the author of the document although he may have had "input" into the document. Mr Katke thought it may have been authored by the "legal department" and that Mr Konney might have drafted the document. The document at para 16 contains this observation: Jean Bellin. We understand Lion's desire to retain Jean during a transitional period, even though we agree that he is not the successor to Jeff Katke. In our estimation Jean is a journeyman operations executive, but he is not the game-breaker we need to lead the operations or integrate the operations of acquisitions for a company that will reach a billion in revenue in five years. 1049 Mr Katke gave evidence that although these remarks reflect operational comments and remarks about an individual, the legal author of the document (Mr Konney) would be likely to use words of that kind if he was attempting to summarise the Metagenics view about Jean Bellin's capability and he had been told those things by, for example, Mr Katke. 1050 I do not regard this example as illustrative of Mr Katke giving exaggerated and unbelievable evidence reflecting generally on his credit. 1051 The tenth example concerns Mr Katke's evidence that KPMG had previously made errors in undertaking their audit tasks and therefore when issuing their management letters they were adopting particular remarks for "ulterior motives": T, p 722, lns 16-17. In respect of KPMG's letter of 30 November 2006, Mr Katke gave evidence that he believed that "KPMG was being more expansive in their management letters because they had made errors and it was a method for them to prevent further - future liability that they had in the way that they handled the transaction": T, p 722, lns 26-29. Mr Katke gave evidence that he thought KPMG was producing management letters which were expansive in identifying deficiencies and that KPMG was trying to protect its position in respect of any liability claims: T, p 724, lns 11-14. At T, p 724, lns 11-14, Mr Katke said this of KPMG: "I think their team was under - under qualified to do what they were doing and that they had liability, and I think they were covering their butts by trying to - as I said before, trying to be - produce a more expansive listing of deficiencies". 1052 The applicants say that Mr Katke ultimately acknowledged that there was nothing inaccurate in the actual material weaknesses or deficiencies identified by KPMG. The applicants also say that Mr Katke gave evidence that he settled with KPMG for a six figure sum because he believed that KPMG felt, in effect, that it had fallen under liability obligations to Metagenics. The applicants say that in fact Metagenics settled with KPMG with respect to outstanding fees only, and the settlement agreement expressly denied liability on the part of each side to the other. Mr Katke gave evidence that he "looked these people in the eyes and negotiated with them and [believed] that they felt that they had liability". Exhibit 39 is the Settlement Deed and it is true to say that it contains a mutual denial of liability and settles up questions concerning outstanding fees. However, it is not clear to me whether the ultimate resolution of the fees issue concerning the KPMG work and the discount applied to those fees for settlement reflects any inherent reservation or apprehension on the part of KPMG of any particular or contended liability to Metagenics notwithstanding that the formality of the position in the deed is that liability either way is denied. 1053 The eleventh example concerns evidence given by Mr Katke that somebody at KPMG in late 2004 or early 2005 advised him that Metagenics could proceed to an IPO that year. The evidence was this: Q You say your auditors told you that you could do an IPO in 2005? A Our auditors were - were part of the organisational meeting that we held, and they did tell us that we - they thought we could be prepared to do an IPO. Q Now when was this organisational meeting? A I think the first one that we had was in late 2004 or early 2005. Q And who attended on behalf of KPMG who were your then auditors? A It would have been the audit partner at the time. I'm not sure whether that was Gordon McLean or Dean Samsvick. Q And are you saying that he told you that you could do an IPO in 2005? A All of our advisers agreed that we - we could. That's why we were working toward that - that end, and why they were charging the fees they were charging to get us prepared. Q Are you saying that an audit partner of KPMG told you in early 2005 you could do an IPO that year? A It's the best of my memory. Yes. Or - or it could have been late 2004. Q We don't see any reference to any such advice in their management letters of 2004 and 2005, do we? A No. 1054 The applicants say that the cross-examination of Mr Katke following the statements quoted above go on to reveal in a very general way that Mr Katke had meetings with investment bankers, lawyers and unidentified people from KPMG about the prospect of going to an IPO and that no one told him that an IPO could not occur. Mr Katke put it this way at T, p 748, lns 28-42: Q [KPMG were not] retained to get you ready for an IPO, were they? A No. But they knew that that was the plan, and they were performing the audits with the intention that we would go public, and we - and - and we had plans to - to go public at certain dates and times that were delayed because of challenges related to the acquisition of the Belgium entities. So we were working toward an audit - toward an IPO. We were not informed by KPMG [that] they didn't believe we would be able to go to an - for an IPO, and they, in fact, were working with us with the understanding that we would go public. Q But what I'm - what I'm focusing on is your assertion that you were given some advice by KPMG in the early part of 2005 that you could do an audit that year. What I am suggesting to you is that you, in fact, received no such advice. A Well … Q … from KPMG at the early part of 2005 or at any time that you could do an IPO that year? A Well, I disagree with you. 1055 The applicants say that KPMG was not retained in connection with the preparation of an S-1 until October 2005. However, it is plain that Metagenics was engaging with KPMG throughout this early period and the retainer letter, although not signed by Mr Morey until October 2005, was submitted to Metagenics on 28 July 2005. Although events emerged throughout the course of 2005 which caused the proposed filing of the S-1 to be deferred, it is not clear to me on the evidence that Mr Katke's evidence about advice he received from KPMG in the early part of 2005 ought to be rejected notwithstanding that such an observation by someone (unidentified) from KPMG must have been at a reasonably high level of abstraction and presumably qualified by the nature of the tasks that remained to be completed as part of any such process. It may be that opinions were expressed about the likelihood or possibility of an IPO in 2005 which reflected then held views based upon any number of assumptions as to certain matters or things. Plainly enough, there is no formal advice to the effect that Metagenics could proceed to an IPO in 2005. I am not persuaded, however, that some remark to this effect was not made to Mr Katke conditioned by qualifications or otherwise. Plainly, it cannot be the case that KPMG in early 2005 were suggesting by such a remark that all of the processes necessary for an IPO were sufficiently well developed to be enabling of an IPO in early 2005. 1056 The twelfth example concerns the criticism of Mr Katke in the "Strawman Analysis" prepared by Mr Leiner on 10 August 2008. In his memorandum circulated again by Mr Leiner on 8 May 2009 he expressed criticism of Mr Katke's failure to conclude the Alticor transaction and his failure to settle up with the Australians. Dr Bland largely agreed with the criticism of Mr Katke. Criticism is made of Mr Katke's "wishful thinking" on six important topics and the consequent unrealistic expectations created in the minds of the shareholders. Many failures are levelled at Mr Katke by Mr Leiner in the 10 August 2008 document. Even if an assumption is made that Mr Leiner's criticism is well-placed (and some of the contentions are disputed in the evidence generally), Mr Leiner's views at that time do not form a basis for an adverse finding against Mr Katke about his evidence generally, given in the proceeding. No reliance is placed upon something Mr Katke said about the document in evidence or the criticism in it, as a ground of obfuscation or dissembling about the document on Mr Katke's part. The underlying content of many of the points in the memorandum are in issue in the proceeding itself. 1057 The thirteenth example concerns Mr Katke's observation in August 2010 in an interview that Alticor had been a "brilliant" investment partner for Metagenics in enabling Metagenics to expand its global reach. The applicants say that the true position is that by January 2010, Mr Colman had told Mr Katke that the research and development arm of Alticor was not interested in the Metagenics products and by then things were not "looking too promising" about getting Metagenics products into China. One reason given by Mr Katke on 12 January 2011 for Alticor's reluctance was a desire to avoid contributing to annual earnings (EBITDA) by Metagenics upon which a multiple (of 14) would apply for the purpose of further share acquisitions. The applicants say that Mr Katke's statement in the interview about expanded global reach and Alticor's brilliant role in facilitating global expansion was, when said, false and was known by Mr Katke to be false. 1058 Again, in evidence in the proceeding, Mr Katke accepted that by January 2010 placing product in China was not looking too positive. Mr Katke did not give a different answer so as to accommodate in some way the observation made in August 2010. That statement, although inconsistent with the true position, was made by Mr Katke in an interview having won an award for negotiating the Alticor/Metagenics transaction. It is not really surprising that Mr Katke would engage in some degree of market puffery about that matter on the occasion of an award about the very investment itself. 1059 I do not regard this matter as a basis for treating Mr Katke's evidence generally as unreliable. 1060 The fourteenth example concerns Mr Katke's response to Mr Michael Brosnan's email of 17 November 2011. Mr Michael Brosnan said in his email that no international acquisitions had occurred; no markets had been accessed with Alticor; the StopChronicDisease project had failed; and EBITDA was worse than 2009. Mr Katke described these criticisms as "exaggerations" on Mr Brosnan's part. The applicants say that Mr Brosnan's criticisms were accurate, as put, and that Mr Katke accepted as much in cross-examination. However, I do not regard an assertion made in November 2011 by one side that draws a defensive response at the same time from the other side (that the criticism is "exaggerated") and is later accepted as an inaccurate description of the state of affairs at that earlier time, as a matter that gives rise to a proper basis for treating Mr Katke's evidence on oath as generally exaggerated or generally characterised by assertions of unbelievable propositions. 1061 The fifteenth example concerns Mr Katke's evidence about the Metagenics First Line Therapy system and its deployment and utility in assisting doctors in the United States in 2009. The applicants say that the notion that doctors who undertake medical training at institutions in the United States are not properly trained to effectively treat patients with lifestyle diseases such as obesity and high blood pressure is fanciful. Mr Katke certainly took the view that there were real market opportunities to support medical practitioners in the United States with a method of engagement with a cohort of experienced healthcare practitioners who were dedicated to, and experienced in, dealing with conditions contributed to by lifestyle behavioural practices. Mr Katke also took the view that doctors without that specific focus would probably bring a narrower or less well, educated and experienced frame of reference to bear on the field of treatments or practices that might address the causes of these lifestyle conditions. I do not regard these matters as fanciful or a basis for finding that Mr Katke's evidence should generally be treated as unbelievable. 1062 The sixteenth example concerns Mr Katke's acceptance that he resiled from an oral agreement he made with Mr Michael Brosnan to pay $1.6M to acquire a 10% interest in HWL following the Pan crisis. Mr Katke accepted that notwithstanding the oral agreement he had made, he later said that he would only pay $1.2M. It seems odd that Mr Michael Brosnan seems entirely unconstrained in asserting that the nature of the friendship with Mr Katke was such that "deals" done earlier in time could and should be redone later in time for particular reasons that seemed meritorious to Mr Brosnan, yet should Mr Katke change his mind about price (especially in the context of the uncertain future due to the Pan crisis), Mr Katke's change in position is to be treated as emblematic of a lack of credit-worthiness and unreliability as, inferentially, he changes position when it suits him to do so. I do not regard that event in 2003 as a basis on which I should regard Mr Katke's evidence in the proceeding as unbelievable or generally unreliable. 1063 The seventeenth example is the very matter in issue in the proceeding itself in any event. Put simply, the applicants say that they were misled into transferring their shares in HWL by Mr Katke's misrepresentations so as to give Metagenics critical mass in an IPO and when the IPO failed, they were misled again so as to secure the settlement as a necessary pre-condition to the Alticor transaction. That is the very matter in issue. 1064 Finally, the applicants say that a great deal of evidence was put on by the respondents about many matters yet a number of important evidential gaps exist which reflect on the credibility of the versions of events given by Mr Katke and Dr Bland. As to the Pfizer discussions, the applicants say that neither Dr Bland nor Mr Katke can recall the name of any person they say they met with at Pfizer and the only document they produced concerning licensing discussions with Pfizer is a calendar reference for 11 October 2004 in these terms: "Meet Ray in the lobby 8.30 - 8.45 at Pfizer". 1065 I accept that it is an odd thing, perhaps a very odd thing, that Dr Bland who speaks with such great authority and assertiveness on many topics cannot recall the name of anyone at Pfizer that he or Mr Katke met with for the purpose of discussing a relationship with Metagenics and to present the science-based work of Metagenics on new products and particularly the Kaprex product and its cellular modification method of action. Nor can Mr Katke remember the name of anyone at Pfizer. Nevertheless, I have no doubt that a meeting occurred at Pfizer and plainly the evidence of Dr Bland and Mr Katke about the meeting, its topics, focus and purpose must be accepted, uncontradicted as it is: see [240] - [242] of these reasons. The applicants also say that the respondents were not able to produce the financial model which was said to underpin the StopChronicDisease - growth initiative projections, and nor were they able to produce any document recording the survey of the FLT initiative, notwithstanding Mr Katke's evidence that such a document exists. 1066 I also accept the force of the proposition that documents which are said to exist that assist in determining whether a reasonable basis for particular conduct (projections) subsisted at a particular time ought to be available. The failure to produce such documents is to be taken into account in determining questions relating to those two initiatives. It should be remembered, however, that oral evidence was given about these programs and especially the Texas-wide activity: see [710] - [716] of these reasons. 1067 For all of these reasons, I do not accept that the applicants have made good the proposition that Mr Katke's evidence should be regarded in the way they assert. I accept that Mr Katke was doing his best to give his evidence in a genuine and honest way notwithstanding the differences in recollections as to particular matters as between Mr Katke and some other witnesses.

[168]

The North American Business Plan 2009-2013 1068 The NABP began life as a document authored by Jean Bellin on 3 January 2009. He set out the assumptions in his email of 4 January 2009 to Dr Bland and checked all the numbers against Mr Morey's projections assembled in the way Mr Morey described in his evidence. He also set out the assumptions for core growth for 2013 and separate assumptions for the number of patients operating on StopChronicDisease and the number of new doctors in 2013 based on the progression rate he described. 1069 The plan set out the strategies and the projection of revenues arising out of deploying those strategies. It contained reasonably detailed financial objectives for 2009. This document was the beginning of the discussion about a 2009 to 2013 Business Plan. 1070 Mr Bellin's email to Dr Bland was not sent to Mr Gee. 1071 The next version of the NABP was included at Tab 8 of the Board pack bearing the heading "Core Business 2009-13" sent to Directors on 20 January 2009 by Mr Konney. It contained a vision statement; consolidated revenue statistics for 2008 to 2013; projected growth rates; five detailed financial objectives for the first year of the plan - 2009; and financial year projections for 2010 to 2013. Mr Gee saw this version of the plan. Another version was sent to him and Mr Michael Brosnan on 22 January 2009. On 23 January 2009, another corrected version was sent to Directors and Mr Gee by Ms Stockwell. The document was discussed at the Board meeting on 26 January 2009 and I have described those matters in detail. Mr Bellin presented it page by page. Mr Katke was pressed and questioned about it in the way I have earlier described, by Mr Michael Brosnan, Mr Leiner and Mr Zaepfal. The Board members testing the plan were experienced businessmen comprising Executive Directors but also independent Directors. Much discussion centred around the question of Mr Katke refocusing his efforts on the business undertaking in an undistracted way. A further version of the plan was sent by Mr Katke to Mr Gee and Mr Joiner for review on 10 February 2009. It is not clear when and whether the Business Plan was formally adopted by the Board. All the relevant events as to this early matter are set out at [600] to [706] of these reasons. 1072 I am satisfied and find that the discussions concerning the NABP for 2009 to 2013 were discussions within the group of decision-makers responsible for setting the direction of the company for the period of the plan so as to form their best estimate of, or judgement about, the vision, strategies and objectives including financial objectives, for the company in a forward-looking way. That group comprised the Executive Managers of the company including Mr Katke, Dr Bland, Mr Morey and Mr Gee. It included experienced independent Directors and Executive Directors. It also included Mr Michael Brosnan as a Director. It is true that the Business Plan was sent to Alticor and Nestlé and in that sense it was also used outside the business. Nevertheless, it remained a business plan over a horizon to 2013. The plan was the emanation of the group's best assessment of a business plan for the future, taking into account the economic environment, the range of challenges confronting the business and the programs and new initiatives the company had adopted. Plainly, the dominant influences on the formulation of the plan were Mr Bellin, Mr Katke and Dr Bland and as to the numbers, Mr Morey. Nevertheless, Mr Gee and Mr Michael Brosnan were participants in the discussion of the plan and they formed their own views about it. They were engaged in the discussion about Mr Katke's role. Mr Katke did not say, promise or guarantee, that the projections in the plan "would be achieved". Rather, the question to be addressed in the discussion about the plan, and expectations for it, was what factors would be different in the conduct of the business. That led to the debate about Mr Katke's role. 1073 These discussions within the Executive Management Group and Directors about the content of the plan are not "representations" by Metagenics or Mr Katke or Dr Bland made to the Australian shareholders about the subject matter of the plan. They are discussions within the participant group about the content of the company's Business Plan for the period of the plan looking into an uncertain future taking into account the core business activities and those programs the company had introduced and intended to place reliance upon in trying to build the business. 1074 The Business Plan is said by the Australians to have an important relationship with the Alticor transaction for the shareholders in Metagenics in the sense that the Alticor transaction would provide cash consideration for the sale of some shares (53% or 54% with a capital subscription to reach Alticor's 60% first tranche) and provide a mechanism, by the put and call option process, for the sale of the remaining shares at a price based on multiples of EBITDA. The Australians therefore needed to form a view about the likelihood of the company achieving EBITDA numbers in years 2012 and 2013 that, when applied to the relevant multiple, would produce a price per share that they would find acceptable. I find that they formed their own view about the likelihood of Metagenics achieving acceptable levels of EBITDA earnings. They did so having regard to the discussions of the Business Plan and Mr Katke's role. 1075 The Settlement Deed of 31 July 2009 was a document that had to be brought into existence to enable the Alticor transaction to go ahead and in that sense there is a relationship between the two transactions. Mr Gee was influenced in reaching his judgement about whether to enter into the Settlement Deed and enable the Alticor transaction to occur by a number of things. They were the financial statistics he had regularly seen; his knowledge of the business; his involvement in discussions with the Board members of Metagenics as an observer at Board meetings; all the detailed information he had received from Mr Morey regularly; the resources Alticor would be likely to bring to bear especially supply chain resources; the reduction, by reason of Alticor's investment, in the debt burden under which the company was labouring; and, Mr Katke concentrating on the business in an undistracted way. 1076 On the basis of this calculus of factors, Mr Gee recommended the Alticor transaction and the Settlement Deed to the applicants. 1077 I am therefore satisfied that the presentation of the 2009-2013 Business Plan to Mr Gee and Mr Michael Brosnan and their engagement with it in their respective roles was not a representation to the applicant group that the projections within it would be achieved in each year of the plan or at all. As I have already found, Mr Katke did not expressly represent that the projections would be achieved. In any event, the composition of the plan was influenced by Mr Bellin's assumptions and ultimately the numbers were derived from Mr Morey's assessments of the core business revenues and assessments about the FLT and StopChronicDisease programs. Mr Katke gave evidence of the background to the adoption of these programs and the assessments of them. I accept his evidence about these matters. At the time of the formulation of the Business Plan there was a reasonable basis for the projections notwithstanding that the new programs proved, in the result, to be, in effect, failures. 1078 There is, however, a more fundamental matter concerning financial projections which is directly relevant to the question of whether the Katke side made representations that the financial projections contained in the Business Plan would be achieved (that is, each year to 2013). Each side in 2008 had gone through a dispute resolution process by making written submissions to a Board sub-committee. I have described the contentions of each side earlier in these reasons and I will not repeat the detail of it here again. However, the applicants strongly agitated the proposition that the differential values had proved to be unfair. Mr Gee had made references in his submissions to the applicants having been misled about the particular matters. By 31 July 2009, the applicants intended to settle up these matters. The Katke side also wanted to end the dispute once and for all. One question that emerged in the negotiations was the issue of warranties and to what extent had one side relied upon the other in respect of any particular matter. The only financial warranty given by the Katke side was a warranty as to the accuracy of the Annexure C accounts. The Katke side relied upon the assurances of the applicants that they had taken independent legal and accounting advice about all of these matters. Mr Gee understood that this was an important matter for the Katke side. 1079 If the projections in the Business Plan had loomed large in the thinking of the applicants as a seminal factor in forming their willingness to enter into the Settlement Deed, it would have been a simple matter for them to have raised that issue (important to them if it was so) in the negotiations and to have pressed for a warranty about it as part of the Settlement Deed. Plainly enough, it would not have been given because the Katke side had removed any financial warranty from the document and the cl 9.1(c) warranty was adopted at the insistence of Mr Gee. Mr Gee also framed the terms of the warranty in the course of the negotiations. It seems to me therefore that if the applicants had been treating the projections in the Business Plan as financial representations as to future performance for the years 2009 to 2013, it would be more likely than not that they would have sought to secure a warranty about them in the document or at least have addressed comments in the negotiations about them. 1080 They did not do so. 1081 I am satisfied that the projections in the Business Plan do not constitute representations to the applicants. The applicants look back at the company's performance and say that the projections were not achieved for 2012 and 2013. They contend that the matters the subject of the Business Plan were presentations made to them upon which they relied and which induced them to enter into the Settlement Deed. Let it be assumed that the matters the subject of the Business Plan constitute representations as to future matters. The applicants say two things. First, as a matter of objective realised fact, the projections did not come to pass. Second, the representations, by operation of s 51A of the Act, render the making of the representations misleading and deceptive because ultimately the weight of the evidence demonstrates that there were no reasonable grounds for the statements included in the Business Plan. As to that matter, the evidence given by Mr Morey and for that matter Mr Katke, as to the manner in which the Business Plan projections were assembled and adopted demonstrates that there was a reasonable basis for the financial projections as to the core business. Further, the evidence in relation to First Line Therapy and StopChronicDisease as described earlier in these reasons provided a reasonable basis for the projections derived from the deployment of those programs. It is not necessary to repeat the essential content of the evidence about those matters that I have already recited earlier in these reasons. 1082 There are, however, other matters that need to be mentioned. The applicants say that they were induced to enter into the Settlement Deed in reliance upon the pleaded representations. One aspect of that matter is that the NABP was presented page by page by Mr Bellin at the 26 January 2009 Board meeting. Discussions took place about it at the meeting as already described. There were then discussions with Mr Brosnan and Mr Gee as already described. Much later, in July 2009, the applicants entered into the Settlement Deed. Nevertheless, the applicants may well have had the Business Plan in mind as they continued to think about the terms of the proposed settlement and the terms upon which they would enter into the Settlement Deed. The particular financial projections do not appear to have loomed large in aspects of those negotiations. Moreover, in the period between 26 January 2009 and 31 July 2009, Mr Morey had continued to provide Mr Gee with detailed monthly financial accounts and financial accounts representing the year to date position for six months to 31 July 2009. Mr Gee was in a position to see the monthly evolution of the company's financial performance and was in a position to assess that information in the context of the prior year's financial results. Mr Gee had before him a great deal of financial information about the performance of the company. 1083 There is no suggestion in the evidence that Mr Gee sought to incorporate a warranty or statement of accuracy about the content of the Business Plan 2009 to 2013 of the kind he sought to incorporate in relation to the Annexure C accounts confined as they were to the six months accounts to 31 July 2009. 1084 On the question of reliance, the applicants give emphasis to the following consideration. The 2009 Settlement Deed reflected the terms and conditions of a settlement which needed to be reached in order to enable the Alticor transaction to, in effect, fall in. The Alticor transaction was important to the applicants because not only would they obtain cash consideration for the sale of their shares but they secured a mechanism for the ongoing disposal of their shares under the put and call options pursuant to which a price per share would be determined as a function of a relevant multiple to be applied to a particular threshold of EBITDA earnings. They say that thus they had a particular interest in the financial performance of the company in these later years of the Business Plan. In effect, they say that this particular interest was material and induced them to enter into the Settlement Deed in reliance upon the materiality of the future performance of the company as laid out in the Business Plan for 2009 through to the end of the 2013 financial year. I have already found that the applicants made their own judgement about this very matter. They formed their own investment view and took a calculated decision to regulate their future affairs by reference to the Alticor transaction and as a pre-condition to the investment, entered into the Settlement Deed on the basis that the only matter as to financial projections upon which they relied was the warranty as to the Annexure C accounts. However, more fundamentally, although Mr Brosnan and Mr Gee say that the future EBITDA earnings were important to them and thus material, their evidence does not go so far as to say that they would not have entered into the Settlement Deed if either, they had known that the future projections would not come to pass, or had they known that, as they contend, there was no reasonable basis for the projections adopted in the five year Business Plan. 1085 I am not satisfied that the claims of the applicants have been made good as against the respondents in relation to the 2009 representations relating to the NABP. I am satisfied that there was a reasonable basis for the formulation of the Business Plan, as explained in the evidence of Mr Katke and Dr Bland.

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The Alticor representations 1086 The critical meeting concerning Alticor's proposed role and the state of its engagement with China is the presentation by Mr Colman at the Board meeting of Metagenics held on 28 July 2008. This presentation was the comprehensive presentation to the Board about Alticor, its global presence and its corporate policy and objectives in making investments in particular entities, by one of its senior executive managers. It was the source of Mr Katke's understanding of Alticor's position. 1087 The pleaded representations in relation to this matter are set out at [140] to [143] of these reasons. For the sake of convenient reference, I will set out the pleaded representations again. They are these: "Alticor was selling US$3-4 billion worth of its products in China annually"; "if the shareholders in [Metagenics] agreed to the proposal by Alticor [Metagenics] would be able to export its products to China by reason of the association with Alticor"; "the exporting of the products [of Metagenics] into China would substantially increase the profitability of [Metagenics] over and above that set out in the North American Business Plan". 1088 Having regard to the events described at [555] to [575] of these reasons, I am satisfied and find that at the Board meeting on 28 July 2008, Mr Colman represented to the Board members that Alticor was a corporation that had generated $7.1 billion in sales in 2007; 85% of its sales were outside the United States; the global presence of Alticor extended to 80 countries with 55 locally managed affiliates; China had become the company's single largest market; its establishment, locations, scale of operations, brand awareness and favourability ratings in China were those described in the presentation; revenues in China were between $3 and $4 billion; and, Alticor was willing to assist Metagenics as a portfolio Alticor company gain access to global markets where it had a global presence including China. 1089 Having regard to all of the matters I have mentioned in reviewing the evidence, I accept that Mr Katke told Mr Michael Brosnan that Amway had sales of $3 to $4 billion a year into China. I find that Mr Katke obtained that information from Mr Colman. I also accept that Mr Katke said, in effect and substance, the same thing to Mr Gee. Mr Michael Brosnan gave evidence that Mr Katke described the notion of Metagenics getting its products into China as a "no-brainer" by which I assume Mr Brosnan understood Mr Katke to be saying that the prospect of getting Metagenics products into China, through or with Alticor, was so self-evidently true that one did not even need to think about it. 1090 Having heard and read Mr Brosnan's evidence and emails, the phrase "no-brainer" sounds very much like a phrase Mr Brosnan would use to describe emphatically a particular position or the likelihood of events occurring. Mr Gee does not say that Mr Katke used that phrase when speaking to him. In any event, it seems to me not to matter very much ultimately for two reasons. 1091 First, I accept that Mr Katke said to Mr Michael Brosnan that this opportunity with Alticor was an opportunity to create "real value" in the company; that Alticor was a "sophisticated company" and that Alticor "can get our products into China". If Mr Katke described Metagenics getting its products into China as a "no-brainer" that phrase probably summed up the three propositions that Mr Katke had put to Mr Brosnan. I suspect that if Mr Katke was apt to describe these matters as a "no-brainer" he would probably have used that phrase to describe the matter when speaking to Mr Gee. I also accept that Mr Katke said to Mr Gee that one of the benefits of doing the Alticor transaction was that "Metagenics could have products into China". I would not regard the use of the phrase a "no-brainer" as a representation as to a future matter that Metagenics would be able to get its products into China through Alticor. In any event, I think it unlikely that Mr Katke used that phrase. 1092 Second, having regard to Mr Colman's remarks about sales into China of between $3 and $4 billion and China's importance to Alticor as its largest single market for a company that had generated $7.1 billion in sales in 2007 overall, Mr Katke was simply repeating the substance and effect of Mr Colman's observations. 1093 The discussions in relation to Alticor, its role and the attractive force of an investment relationship with Alticor, for Metagenics, are much like the discussions about the NABP. The truth of the matter is that the Executive Management Group and ultimately the Directors were debating, and in discussion about, the merits of the Alticor transaction so as to decide whether the best interests of the company were served by the opportunities the Alticor investment presented. The decision-making group was asking itself what the advantages and benefits of such an investment relationship would be likely to be having regard to Alticor's financial standing, global presence, existing supply and distribution chain arrangements, financial and managerial resources and all of the other things Mr Colman had spoken about? None of these matters as taken up with Mr Michael Brosnan and Mr Gee in discussions were representations by Metagenics or Mr Katke or Dr Bland to the applicants about what would happen. The elements of the discussions concerning sales of $3 to $4 billion into China and Alticor's market presence in China were features of the opportunity Alticor presented. Certainly, one benefit of a transaction with Alticor was that it presented an opportunity to engage with a financially strong corporation which enjoyed, as its largest single market, a presence in China. I have no doubt that Mr Katke believed that Alticor was a company that could get the products of Metagenics into China given its penetration and scale of engagement in that country. Mr Katke was simply recognising the opportunity Alticor presented as part of a discussion about whether Alticor was a suitable or desirable scale investor. 1094 It is true to say that looking at the events as they transpired, Metagenics has not exported any of its products into China either through or by reason of its investment relationship with Alticor and nor has Metagenics substantially increased its profitability over and above that set out in the North American Business Plan by reason of exporting its products into China. As to these future events, from the perspective of 2008 and 2009, they have simply not come to pass. 1095 As to the pleaded representation that Alticor was selling $3 to $4 billion worth of product into China annually, I accept, as already mentioned, that Mr Katke made a remark substantially in these terms to both Mr Michael Brosnan and Mr Gee. He did so in the course of discussions about whether the Management Group and ultimately the Directors would regard seizing the investment and relationship opportunity as a step to be taken in the best interests of the company. It was not a representation made by one side to the other. In any event, there was a foundation for the remark as Mr Colman had provided the information and Mr Katke was simply making reference to that information in his discussions with Mr Brosnan and Mr Gee. 1096 As to the pleaded representation that if the shareholders in Metagenics agreed to the proposal by Alticor, then Metagenics would be able to export its products into China by reason of that association, I am not satisfied that Mr Katke made this representation. In the course of the evidence, Mr Katke expressed some reservation about whether Metagenics could seriously rely upon Alticor placing its products into China. Mr Katke said that he (and others) had made a presentation to Alticor concerning the company's goal of becoming a global company that offered a better form of healthcare and lifestyle medicine and natural products. Mr Katke also observed that Alticor's people had said that they were willing to help Metagenics achieve that goal. However, Mr Katke expressed some reservation about whether he believed that Mr Colman would help Metagenics in that regard. Mr Katke said that he thought Mr Colman's comments were certainly "positive" and "good information". However, he still wanted to learn more about the Alticor business. I am not satisfied that Mr Katke made the affirmative representation that Metagenics would be able to export its products into China by reason of the association with Alticor. I am satisfied that Mr Katke told Mr Brosnan and Mr Gee that there were opportunities in this regard. However, Mr Brosnan's reference to the remark "no-brainer", if made, overstates the position inferentially. Mr Gee does not assert such an affirmative position. 1097 More fundamentally, having regard to the nature of the exchanges on this issue that I have described in reviewing the evidence, I am not satisfied that the remarks by Mr Katke about these matters are properly characterised as "representations" at all. 1098 As to the third pleaded representation that exporting Metagenics products into China would substantially increase the profitability of the company over and above that set out in the North American Business Plan, I can find no references in the evidence to Mr Katke having made such a statement. Mr Katke told Mr Brosnan about the level of Alticor's sales into China and he said that Alticor was a sophisticated company and one that "can get our products into China". It might be suggested that the combination of Alticor's scale, its sophistication, its level of sales of products into China, its global presence and its supply and distribution chain arrangements within China leads to a conclusion that should Metagenics products be sold into China by reason of the association with Alticor, sales revenue would increase (and perhaps increase significantly) and scale efficiencies might mean that the sale of products into China would "substantially increase" the "profitability" of Metagenics. However, these are conclusionary matters which at one level might be said arise out of the other facts. There is no suggestion in the evidence, however, that Mr Katke said to Mr Brosnan or Mr Gee or anyone else that exporting Metagenics's products into China would "substantially increase" the "profitability" of Metagenics "over and above" that set out in the "North American Business Plan". Such a matter cannot arise simply as a question of inference. 1099 As to the Alticor pleaded representations, I have found that Mr Katke did remark to Mr Gee and Mr Brosnan that Alticor was selling $3 to $4 billion of its product in China annually in the circumstances earlier described. As to the two other Alticor pleaded representations, the applicants say that the events have not come to pass and that there was no reasonable basis for the making of the representations. I have already made findings in relation to the question of whether these statements were made and whether they amount to representations. Let it be assumed, however, that a representation was made by Mr Katke to the applicants that Metagenics would be able to export its products into China by reason of the association with Alticor. These things should be noted. There is no suggestion in the evidence that Mr Gee or anyone else in the negotiation of the terms and conditions of the Settlement Deed sought to secure a warranty as to this matter on the footing that it was important and material to the applicants because they were purporting to enter into the Settlement Deed in reliance upon Metagenics, through Alticor, achieving a position of exporting its products into China. I accept that the applicants took the matter of the opportunity or potential for the supply of products into China into consideration but they did so with a view to forming their own judgement about the opportunity created by Alticor's investment and assumed the risk that the opportunity might or might not come to pass. The terms of the Settlement Deed expressly sought to address the notion that there might be something outside the Deed which would be called upon as a fact, matter or circumstance relevant to entry into the Deed. The applicants understood that the protocol adopted by the parties was that the applicants had taken independent advice about all relevant matters in relation to the Settlement Deed, no doubt with a view to securing in the terms of the Deed, provisions dealing with matters of importance to them upon which the entry into the Deed was based, as they understood it. However, the Settlement Deed expressly seeks to make plain that there is no other such matter. It also makes plain that the Katke side were relying upon the applicants having taken independent advice and having raised any matter they wanted to raise. 1100 I am not satisfied that the claims of the applicants have been made good as against the respondents in relation to the Alticor representations.

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PART viI - The patent representations 1101 The pleaded patent representations are set out at [144] to [146] of these reasons. However, the detail of the matter, taken together with the particulars, is this. The applicants say that between about late 2004 and July 2009, Dr Katke, Dr Bland and Mr Morey on behalf of MAPL and Metagenics made the following representations to one or more of the applicants (put this way in the pleading - Mr Michael Brosnan and/or Mr Leon Brosnan and/or Mr Alan Gee and/or Mr Alan Bawden Grant on behalf of all of the applicants): (a) expressly that Metagenics had a very strong patent position around its discoveries; (b) impliedly that such patents significantly enhanced the value of the shares in Metagenics. 1102 The second representation arising as a matter of implication must be taken to be a representation impliedly arising out of the first representation. In other words, by the respondents representing that Metagenics had a very strong patent position around its discoveries, the respondents were representing that those patents significantly enhanced the value of the shares in Metagenics. The first thing to observe about the pleaded representation is that it seems to be very much the expression of an opinion about the strength, validity and enforceability of the "patent position" adopted by Metagenics "around its discoveries". It is not clear what the term "patent position around its discoveries" means. Nor is it clear in which jurisdictions Metagenics is said to enjoy a very strong patent position around its discoveries. As to the second representation, the applicant pleads that such patents had the effect of significantly enhancing the value of the shares. 1103 The particulars of the making of these representations are these. 1104 First, the representations were made orally in a meeting in Brisbane on or about 7 May 2004 in the presence of Mr Michael Brosnan, Mr Leon Brosnan, Mr Gee and Mr A B Grant. 1105 Second, the representations were made orally in a meeting in San Clemente on or about 16 November 2004 at which Mr Michael Brosnan, Mr Leon Brosnan, Mr Gee and Mr A B Grant were present. 1106 Third, the representations were made in an attachment to an email from Mr Katke to Mr Gee dated 9 February 2005 under the reference "Bison Memo". In the email, Mr Katke said this: "Attached is the write up Bison did for the Belgium acquisition. It is very comprehensive and includes the risks and benefits. Great bedtime reading. I thought you would like to see what they thought of Belgium also. Call me if you have any questions". The particular parts of the Bison Memo relied upon by the applicants are these. 1107 Example 1: In the fourth bullet point on p 13 the following statement is made by Bison Capital: "These efforts have produced some promising results and the company has begun to build a relatively sizeable patent portfolio". 1108 Example 2: In para 13 on p 14 of the memo, the following statements are relied upon: In addition to the stand-alone commercial prospects for Kaprex, the Company believes that certain ingredients of Kaprex can potentially be combined with existing anti-inflammatory drugs to reduce or eliminate the GI side effects of those products. Metagenics intends to begin seeking a licensing arrangement of its intellectual property associated with Kaprex with either one of the leading pharmaceutical companies or for distribution of Kaprex through an alternative, larger dietary supplement channel, such as multi-level marketing. [emphasis added] 1109 Example 3: In the sixth bullet point on p 22 of the memo, the following statement is made: The Company considers its key competitive strengths to be the following: ... • Significant intellectual property including 103 issued and pending patents. 1110 Example 4: In the first bullet point on p 23 of the memo, the following statements are made: The Company estimates that it takes eight to twelve months to take R&D products from conception to commercial launch. R&D Products are typically protected by patents surrounding manufacturing processes and unexpected synergies from combinations of ingredients. [emphasis added] 1111 Example 5: At p 47 of the document, under the heading "Patents", the following statement is made and relied upon: "The Company owns a total of 29 patents and 62 pending patents in the United States and foreign jurisdictions". 1112 Example 6: The applicants also rely upon the third paragraph in the memo under the heading "Patents" which is in these terms: The Company is pursuing and will continue to pursue patent protection for proprietary scientific formulations, methods and processes. The Company's intellectual property strategy is to file patent applications to protect inventions and improvements that are commercially viable to the business. The Company currently has issued patents and/or pending patent applications in the United States and foreign jurisdictions on the following Metagenics products: • Kaprex [and then a list of 19 other products] [emphasis added] 1113 Fourth, the representations were made "regularly throughout 2007, 2008 and 2009" by Mr Katke in telephone conversations with Mr Michael Brosnan and Mr Gee and in meetings in San Clemente with Mr Michael Brosnan and Mr Gee. 1114 Fifth, the representations are also said to be contained in a document under the heading "MetaProteomics 2009-2013 Roadmap Confidential". In that document, the following observation is made: MetaProteomics has made a significant discovery in the role that specific molecules derived from Humulus lupulus (hops) have on inflammation and insulin signalling/obesity. These discoveries have been captured in over 150 patent applications. Of these patent applications, those related to the role of one of the most potent molecules in the family of modified hops extract-related molecules for the modulation of inflammation, termed TH5, has been approved by the United States Patent and Trademark office for composition and use. Presently MetaProteomics has an approved Investigation New Drug application for phase 1 study on a mixture of modified hops extract molecules. It is the intention of MetaProteomics to licence or sell specific intellectual property rights related to the inflammation and insulin modulating/obesity effects of certain molecules once the phase 1a and phase 1b work is completed. [emphasis added] 1115 Each of these particulars are said to be a particular of the circumstances of the making of the primary representation carrying with it its implied representation. Although the six examples mentioned previously are drawn from the Bison Capital document and the authorship of the document is not at all clear, the memorandum was sent by Mr Katke to Mr Gee on 9 February 2005 on the footing that it was comprehensive and set out the risks and benefits. As to the Bison Capital document, I do not regard the statement in the fourth bullet point on p 13 as conveying the meaning, in that language, of the first or second representation. The statement in the document is that the company has "begun to build a relatively sizeable patent portfolio". It is not clear to me what is intended to be conveyed by the pleaded representation. Presumably, it is intended to mean that the company has a significant or serious patent portfolio and those patents are efficacious in the sense that so far as they relate to the products of Metagenics, they properly cover the relevant art, provide a properly drawn monopoly, are valid, not susceptible of revocation and are enforceable in the relevant jurisdictions. Alternatively, the pleaded representation might simply mean that the company has pursued a strategy of established a sizeable and serious portfolio of patents and patent applications which says nothing about the ultimate validity and enforceability of those patents. 1116 The statement in para 13 on p 14 of the Bison Capital document does not have anything to say about a very strong patent position around the Metagenics discoveries. 1117 The statement on p 22 is an expression of opinion that the company considers one of its key competitive strengths to be its significant intellectual property portfolio. The statement contains an assertion that its "significant" intellectual property includes 103 issued and pending patents. 1118 The statement on p 23 simply observes that the products of research and development are "typically protected" by patents "surrounding" manufacturing processes and unexpected synergies arising out of particular combinations of ingredients or elements. 1119 The remark at p 47 of the document is a statement of fact that Metagenics owns 29 patents and 62 pending patents in the United States and foreign jurisdictions. 1120 The further paragraph under the heading "Patents" on that page is a statement of fact that Metagenics has adopted a particular intellectual property strategy of filing patent applications to protect inventions and improvements that are "commercially viable to the business", once that judgement has been made. The paragraph contains a further statement of fact that the company has current issued patents and/or pending patent applications in the United States and foreign jurisdictions in relation to 19 products including Kaprex. 1121 As to the oral statement made on 7 May 2004 by Mr Katke to Mr Michael Brosnan, Mr Leon Brosnan, Mr Gee and Mr A B Grant, Mr Gee gave evidence that at a meeting in Brisbane in May 2004, Mr Katke "spoke about the prospect of some - licensing some of the science". Mr Gee does not give evidence that Mr Katke made the pleaded statement at that meeting. As to the meeting on 16 November 2004, it will be recalled from the review of the evidence that at this meeting the applicants again mentioned that they had been in discussion with CK Life Sciences about a sale of the HWL undertaking for $50M which irritated Mr Katke. He left the meeting. He then returned after a few minutes. After that, Dr Bland "talked through the science, the - and the discoveries and brought us up to speed on the - to Kaprex particularly, but the science that they had used" (T, p 109, lns 38-40) and Dr Bland said that Kaprex was "a wonderful discovery" and that what Metagenics was doing in the nutrition industry (presumably having regard to Kaprex and other things) "was equivalent to what Apple had done to the computer industry and that this was a watershed moment in the industry" (T, p 109, lns 42-44). Mr Gee does not give evidence that the pleaded express statement was made at this meeting, in turn, giving rise to the pleaded implied statement. 1122 In his affidavit (Exhibit 2), Mr Gee explains, as already mentioned, that KinDex Therapeutics LLC is an entity owned and controlled ultimately by the shareholders in Metagenics and that KinDex was formed for the specific purpose of developing and exploiting pharmaceutical applications of intellectual property rights licensed by it to MetaProteomics. Mr Gee had a discussion with Mr Konney on 3 May 2012 in San Clemente. It seems from the evidence that the discussion arose as a result of a recommendation to Mr Gee by the Metagenics Chairman that he talk to Mr Konney about this topic. The notion was that Kirin Breweries ("KB") may have "got the jump" on Metagenics. Mr Gee says that Mr Konney told him the following things. 1123 First, KB had been granted a patent in Europe, Australia and Japan and a patent was pending in the United States which covered most of the key products and claims by Metagenics. 1124 Second, Metagenics could oppose the KB patent in Europe. The time for doing so would expire on 30 May 2012. Metagenics was unlikely to oppose the KB patent because the company was only doing "$100k of business in Europe" and it would cost $450,000 to oppose the patent and it would signal to KB the interest of Metagenics in the process. 1125 Third, Metagenics could try to obtain licensing in the United States and throughout the rest of the world. This was the likely choice but KinDex was likely to oppose the European patent because its whole business depended upon doing so. 1126 Fourth, KinDex was likely to run out of funds and the business would fold. 1127 Fifth, Dr Bland was trying to find further funds but had experienced difficulty with safety trials. 1128 Sixth, KinDex believed there were reasons for the animal deaths in the course of the safety trials but nevertheless KinDex would need to undertake the trials again at a net cost of $400,000. 1129 Seventh, the gross cost of the trial was $750,000 with a $350,000 contribution from Covance which was the organisation that undertook the trial that failed. 1130 Although the respondents have taken objection to Mr Gee's evidence of this conversation, I admit that matter into evidence into the proceeding. 1131 The applicants say that the particulars they have given of the oral conversations and the documents make good the making of the representations as pleaded. They say that the representations were not true having regard to the issues concerning the KB patent and the subsequent licensing transaction which was entered into between KB and KinDex. In other words, KinDex found it necessary to enter into licence agreements to resolve its position. The applicants say that Dr Bland asserted that the licence agreement was entered into for commercial reasons but admitted that any exploitation of discoveries of Metagenics in so far as they related to the subject matter of the licence agreement, would mean that any profits derived from commercialisation of a product (falling within the scope of the licence) would have to be shared to some degree with KB. 1132 At para 33 of the pleading, the applicants say that at the time of making the patent representations, KB had prior dated patents in Europe, Australia and Japan and pending patents in the United States covering most of the key aspects of the discoveries of Metagenics. The KB patent was entitled "Compositions and Foods for Improving Lipid Metabolism". The applicants plead the publication numbers for filings in Europe, Australia, China, Japan, two filings in the United States and an international filing. 1133 Although the applicants assert that there is "no dispute that the respondents represented orally and in writing that they had a strong patent position around their hops discoveries", the respondents put in issue the question of whether the pleaded statement was made in those terms and secondly whether the statement can properly be characterised as a representation at all. 1134 There is no evidence that a statement was made by any of the respondents in the terms pleaded. 1135 Plainly enough, there are references to the patent filings of Metagenics, patents obtained, the strategy of filing patent applications and references to "103 issued and pending patents" and on another occasion a reference to "a total of 29 patents and 62 pending patents" in the United States and foreign jurisdictions and a further reference to patents and patents pending in relation to 19 Metagenics products including Kaprex. All of these references are contained in the Bison Capital document which was dispatched to Mr Gee in January 2005 with the support of Mr Katke. There is a further reference to the company's significant discovery in the role that specific hops molecules have on inflammation and insulin signalling and obesity and related patents in the "Roadmap" document. 1136 As explained above, the fourth particular of the making of the representations is an assertion that the representations were made regularly throughout 2007, 2008 and 2009 by Mr Katke in telephone conversations. There is simply no precision or content to this contention. There is no identification of when these statements were made nor is there evidence of what words were used. This particular is simply a rolled up reassertion of the contention over time in the most general sense. Moreover, the pleading asserts that the representations were made between late 2004 and July 2009. The particular content of it must be taken to be 7 May 2004, 16 November 2004, the Bison Capital document sent on 9 February 2005 and the "Roadmap". 1137 There are two difficulties with the pleaded contentions. The first is that it is difficult to attribute meaning to the pleaded statement and it seems to me that the statement is in any event the expression of an opinion. The second difficulty is that as I mentioned at [227], in an express representation case which is pleaded as the foundation for a misrepresentation case on the footing of a contravention of the prohibition upon engaging in misleading and deceptive conduct by making misleading representations, words matter. As to this aspect of the case, the pleading is that Mr Katke, Dr Bland and Mr Morey on behalf of MAPL and Metagenics made, by words, an express representation that Metagenics "had a very strong patent position around its discoveries". That statement is not contained in the Bison Capital document and nor is it contained in the Roadmap document. Nor did any one of the applicants give evidence that any of the nominated respondents said those words to any one of them or all of them. 1138 Let it be assumed, however, that the pleaded statement is not the expression of an opinion. Let it also be assumed that the pleaded statement is properly understood as a representation of the effect conveyed to the applicants by reference to or as a result of aggregating together the things said on 7 May 2004 and 16 November 2004 taken together with the statements contained in the Bison Capital document sent to Mr Gee on 9 February 2005 and the Roadmap document. 1139 The question then is whether the applicants have shown that the representation so understood is incorrect. The respondents have put on two statements on this topic. The first is a statement of Mr Rodney Cruise who is a Partner in the intellectual property services firm Phillips Ormonde Fitzpatrick. Mr Cruise is also the Manager of IP Organisers Pty Ltd which is owned by the Partners of the firm. That company is an intellectual property research company which specialises in conducting research in relation to intellectual property and, in particular, patent, trade mark and design registration searching. Mr Cruise sets out in considerable length the steps he took to conduct a search to identify the registered patents of Metagenics ("M"), MetaProteomics ("MP") and Metagenics Belgium BVBA ("MB") and also patent applications filed by those companies throughout many jurisdictions including the United States, Australia, Europe-wide filings, Canada, New Zealand, China and Japan. Having conducted these searches, Mr Cruise developed a schedule setting out all of the relevant information which he attaches to his statement. 1140 Having conducted this review, he says this. M, MP and MB have at least 80 issued patents worldwide; M, MP and MB have at least 47 issued patents in the United States; M, MP and MB have at least 53 pending applications worldwide; M, MP and MB have at least a further 78 patents/applications where the legal status would require further verification; M, MP and MB have at least 133 patents/applications worldwide; and, M, MP and MB have at least 41 United States patents/applications in the United States that are entitled to a priority date before 21 August 2003 (being the earliest filing date in respect of the Kirin patents). 1141 Apart from the statement of Mr Cruise, the respondents also rely upon a statement of Mr Paul Devinsky who has been employed by McDermott Will & Emery LLP since 1996. He says that the firm was engaged by Metagenics. Mr Devinsky says he has extensive experience in intellectual property law and he sets out the background matters relevant to that issue in his statement. Since approximately October 2003, the firm has conducted all patent prosecution work in the United States on behalf of Metagenics and MetaProteomics. Mr Devinsky confines his remarks to the United States position with which he is familiar. He sets out information in relation to the filing and searching processes adopted by the United States Patent and Trademark Office ("USPTO"). Mr Devinsky also sets out observations about approaches to the prior art and responses applicants can make to the USPTO about issues of that kind. 1142 Mr Devinsky then devotes remarks to a group of patent applications and patents issued from those applications that originated from two Japanese priority patent applications filed in the Japan Patent Office on 14 February 2002 and 15 May 2002, respectively, by Kirin Beer Kabushiki Kaisha which he calls "Kirin". Mr Devinsky refers to this group of patents as the "Kirin Patent Family" of patents. Mr Devinsky says that a claim of any application or patent in the Kirin Patent Family that is fully supported by the disclosure of the 14 February 2002 priority application is entitled to 14 February 2002 as its earliest priority date. If the subject matter of a given claim was not disclosed on that date but disclosed in the second priority application then the claim would only be entitled to a priority date of 15 May 2002. Mr Devinsky says that Kirin filed two applications on 14 February 2013 both claiming priority derived from the two Japanese priority applications. The international application claiming that priority served as the basis for subsequent national applications filed in Europe, Australia, China, South Korea and the United States. 1143 Mr Devinsky says that so far as the United States is concerned, there are two publications that relate to essentially the same discoveries as those underlying the claims made in the Kirin Patent Family. He identifies them. It is not necessary to recite the published papers in these reasons. Mr Devinsky has considered Mr Cruise's table and he has looked at the prior art position in the United States. 1144 As to the national filings in the United States, Mr Devinsky says that the relevant Kirin patents and published applications for patents were published on various dates the earliest being 21 August 2003 being the publication date bearing the reference W02003/068205. That document is an attachment to his statement. In the patent table, there is a column that sets out the priority date specifying the earliest priority date for each listed patent or patent application. Mr Devinsky says this at paras 42, 43 and 44 of immediate relevance: 42. … In respect of the US position, Kirin's family of patents and applications (which are not US patent or patent applications) are not prior art to, and so cannot be cited against, any Metagenics or Metaproteomics US patents or applications that are entitled to a priority date before Kirin's earliest publication date of 21 August 2003. 43. In other words, the Kirin Patent Family and related publications have no effect whatsoever on the patentability of any of the claims of any US Metagenics or Metaproteomics patents and applications entitled to a pre-21 August 2003 priority date. By way of example, on review of the Patent Table, Metagenics and Metaproteomics' has at least 41 US patents and pending applications (most of which are issued patents) and have a priority date pre-21 August 2003. These patents and applications are completed unaffected by the Kirin Patent Family. 44. In fact, in circumstances where a Metagenics or Metaproteomics publication may be relevant to the invention covered by a claim in a Kirin patent or patent application and is prior-dated, it is the Metagenics or Metaproteomics publication that can be cited as "prior art" against the claim(s) of that Kirin patent or patent application. 1145 The applicants rely on Mr Gee's evidence of his conversation with Mr Konney about the KB patent and KinDex's licensing arrangements as a basis for saying that Metagenics did not have a very strong patent position around its discoveries. The Court is invited to draw that inference from the circumstance of the KB patent in the relevant jurisdictions and KinDex's election to enter into a licence, with a sub-licence to Metagenics. However, the question in issue is whether on an analysis of the patent portfolio of Metagenics including its patent applications, is it incorrect to say at the material time that Metagenics had a very strong patent position around its discoveries? Difficult questions of patent strategy as to filing in the field of the art; the proper construction of the scope of the relevant monopoly in the case of each patent (and patent applications as framed); the validity of each patent in terms of novelty, obviousness and inventive step, opposition and revocation; and infringement, all arise in making an informed assessment of whether the "patent position" reflected in the patent portfolio of the company (and MetaProteomics) "around its discoveries" is correctly or incorrectly described as "very strong". The circumstance that Metagenics chose to deal with a commercial problem concerning the KB patent in the way it did does not give rise to an inference that the KB patent in the jurisdictions of its filing was valid, or that particular Metagenics products would necessarily infringe the scope of the monopoly defined by the patent claims, or that the patent position of Metagenics around its discoveries was not "very strong". 1146 One answer may be upon proper analysis that the KB patent is (or was) a very major problem for Metagenics around a number or perhaps a significant number of "its discoveries" even if there were some serious questions concerning the scope of the monopoly, validity and whether Metagenics might be infringing the claims of the patent. The difficulty, however, is that evidence of some real precision and analysis of the Metagenics patent position and the threat the KB patent represented would be necessary to make good the proposition that the representation (so understood) was incorrect and misleading of the applicants. 1147 Dr Bland gave evidence that even if a patent in the pharmaceutical industry was thought to be "watertight" there could well be challenges and extensive patent infringement proceedings with the result that "certainty" is never guaranteed and the commercial aim is to "avoid any kind of ambiguity". As to the Kirin patent, Dr Bland said that that was the company's "objective" in entering into the licence agreement - "we weren't required obviously, to do anything with Kirin, but it just seemed like prudent business practice": T, p 497, lns 21-22. Dr Bland gave evidence that in the result should KinDex licence discoveries of products that fall relevantly within the scope of the Metagenics licence with KB, a royalty would be payable to KB. Dr Bland confidently gave evidence that "we" (which I assume is a reference to Dr Bland) have managed to negotiate the "most favourable royalty arrangements ever negotiated for a pharmaceutical rights of patent" [emphasis added]: T, p 497, lns 27-28. 1148 The other difficulty is this. Mr Gee was sent the Bison Capital document by Mr Katke by email and in that email Mr Katke said strongly supportive things about the document in encouraging Mr Gee to read it. When Mr Gee gave oral evidence of the events and especially the things he took into account in electing to enter into the Settlement Deed, Mr Gee did not say that this document was influential on him or, for that matter, anything about it at all on this issue, notwithstanding that six textual extracts are expressly relied upon in the pleading, as I have earlier described. Mr Michael Brosnan does not say that he read the document. Neither Mr Gee nor Mr Brosnan gave evidence that they understood the particular oral remarks of 7 May 2004 and 16 November 2004 together with the textual references to amount to a representation as pleaded. Nor do they say that they accepted the representation to be true and acted upon the truth of it in entering into the Settlement Deed. Nor do they say that had they known the true position they would not have entered into the Settlement Deed; there would have been "no transaction"; and they would not have discharged and released the relevant parties against whom they believed they had rights arising out of conduct inducing entry into the 2005 Agreement. 1149 For all of these reasons, the case based on the patent representations must fail. 1150 The result then is that the applicants have failed to make good their case based on the 2009 representations, the Alticor representations and the patent representations. Thus, the proceeding must be dismissed as against all respondents.

[171]

part viii - The 2005 Agreement 1151 However, let it be assumed that the applicants had made good the proposition that they had been induced to enter into the Settlement Deed in reliance upon one or more of the pleaded representations shown to be made in contravention of s 52 of the Act. Let it also be assumed that the Court would, in those circumstances, exercise the power conferred by s 87 of the Act to set aside the Settlement Deed (putting to one side all discretionary bars and the impact upon innocent third parties such as Showcase and Alticor), so as to notionally put the parties in the position they would have been in immediately prior to entry into the Settlement Deed (which, upon entry, foreclose the opportunity to seek a remedy in respect of contended contraventions of s 52 of the Act concerning the 2005 Agreement) so as to consider whether as a function of remedying the reliance loss an order ought also be made for the transfer of the HWL shares to the applicants. 1152 Making those assumptions, one question then is where the strengths or otherwise of the lost opportunity lie and the answer to that question turns upon the merits of the contentions asserted in respect of the contended contravening conduct inducing entry into the 2005 Agreement. 1153 I have examined the evidence extensively in relation to these contentions and I simply now propose to set out the findings on those matters. 1154 As to the proposition that the applicants entered into the 2005 Agreement in reliance upon the pleaded representations that Metagenics would proceed to an IPO on a recognised United States Stock Exchange during 2005, markets permitting, I find that the respondents did not make a representation that such a listing would occur. Mr Gee well understood and accepted, as an experienced professional man and an experienced businessman, that the true content of these various statements to such an effect was that Mr Katke, in particular, but also Mr Morey, were very strongly conveying to the applicants the notion that they (and through them, Metagenics), when making those statements, had an intention to bring about that outcome. Mr Gee, Mr Michael Brosnan, Mr Leon Brosnan and Mr A B Grant, understood that Metagenics had engaged a number of merchant banks to assist in various aspects of the process of getting ready to list and assist in undertaking all of the particular process and regulatory steps necessary to be in a position to file the S-1 and then actually list the relevant securities at a particular offer price. Mr Schechner at Needham had the primary responsibility for the issues surrounding the IPO process itself, valuation issues and the issues I have discussed. It was a reasonably complex process. Other merchant banks were engaged especially for the purpose of securing access to particular classes of investors from different sectors of the United States investment market. 1155 Throughout the period of the chronology earlier addressed, the proposed dates for filing the S-1 (and ultimately a proposed listing of the entity) were extended from time to time. I have already examined the detail of that matter. Many factors contributed to those extensions in the timetable not the least of which were the issues concerning the Biodynamics entities in Belgium; dealing with the inventory problem; determining the proper arrangements to be adopted for obtaining audited accounts; and securing an audited set of financial accounts for the relevant period from Ernst & Young, all for the purposes of the IPO. 1156 I accept that the applicants ultimately decided after the conference calls to Mr Katke made with Mr Gee, Mr Michael Brosnan, Mr Leon Brosnan and Mr A B Grant, to go ahead with the sale of their HWL shares on the strength of their belief in Mr Katke and a collective view formed after the second conference call that they could trust Mr Katke to make good his intentions about going to an IPO in 2005, markets permitting. However, Mr Katke's statements about which Mr Gee and Mr A B Grant have given particular evidence do not rise above a statement by Mr Katke that he then held an intention that Metagenics would proceed to an IPO in 2005. I accept that he genuinely held that intention and I also accept that Mr Morey genuinely held that intention. 1157 However, there was simply nothing in the nature of a promise or guarantee or anchored absolutism that the event itself would occur in 2005 no matter what, markets permitting. Of course there was a hope and expectation on all sides that the processes could be managed to a listing outcome in 2005 and that was because Mr Katke and Mr Morey had that intention, and Mr Gee knew and understood (and through him the other applicants) that Mr Katke and Mr Morey were very strongly of that intention. Moreover, the Australians wanted it to occur as well. However, Mr Gee, Mr Michael Brosnan, Mr Leon Brosnan and Mr A B Grant knew and understood that professional help had been retained to try and bring that intention to fruition in 2005. An experienced merchant banker, Mr Schechner, had been retained to guide Metagenics through all of the issues that Needham had identified as matters to be addressed in undertaking an IPO. An experienced law firm was retained to assist Metagenics. Mr Gee gave evidence about Mr Schechner's remarks concerning the compliance reviews that would need to be undertaken as part of the process. Accountants were providing advice to Mr Morey about the state of the Metagenics accounts and would ultimately be retained to provide audited financial statements although the letter would be signed quite sometime later. 1158 Circumstances then emerged that made it necessary to extend the time for progressing the IPO process and particularly the filing of the S-1. There can be no doubt that Metagenics was genuinely working towards an IPO and seeking to confront and address things thought to be necessary or alternatively desirable in progressing the attractiveness of an IPO together with particular proposals such as trying to secure a "step-up" investor to make the float more attractive. That possibility had been discussed in the period prior to 27 April 2005. 1159 The case was presented by the pleading, and Mr Gee sought to advance the proposition in oral evidence, that arising out of the 17 November 2004 meeting in San Clemente, adopting a forward-looking approach, the applicants were led to believe that there would be an IPO (markets permitting) in 2005 as though the applicants understood and believed that Metagenics would deliver that outcome as an absolute or irreducible minimum outcome no matter what circumstances might arise in the management and progression of the IPO process and regardless of what issues that might arise that might need to be addressed to accommodate regulatory and market requirements for an IPO. 1160 Mr Gee resiled in cross-examination from that position and accepted what must surely have been the position from the very outset, that is, it was always understood by the Australians that no promise or guarantee was being given about a listing in 2005, but rather, on the Metagenics side, the principal actors were conveying to the Australians, very strongly, that they had a present intention to bring about that result which, however, would need to be realised through the IPO process and which had been the subject of the presentations at the 17 November 2004 meeting indicating the range of considerations which would need to be dealt with. As to the email of 28 September 2004 upon which particular reliance has been placed by the applicants, I simply do not accept that Mr Gee or any of the other applicants entered into the 2005 Agreement in reliance upon that email or were induced by it to enter into the 2005 Agreement. The email was no doubt a step along the way to broader engagements between the applicants and the respondents but I find it very difficult to accept that Mr Gee, bringing an inquiring professional mind to the question of whether he and the applicants would enter into the 2005 Agreement, were induced to enter into that Agreement on the footing that they regarded the email of 28 September 2004 as a promise or guarantee that an IPO would occur in March or April of 2005, markets permitting. 1161 I have no doubt that on the Metagenics side Mr Katke and Mr Morey had that intention and were seeking to give effect to it. 1162 As they sought to do so, circumstances emerged which made it necessary to extend the time for achieving the intended outcome. As I mentioned, one of those circumstances concerned the need to obtain audited accounts in respect of the Belgium entities. The relationship between the need for audited accounts and the IPO and particularly the requirements of the S-1 is set out earlier in these reasons. Mr Gee recognised that had Metagenics attempted to undertake a listing in 2005 without the audited accounts relating to the Belgium entities, the valuation of Metagenics for the purposes of the listing would not have included any value related to the holding of the shares in the Belgium entities. 1163 The applicants place particular reliance upon the email dated 28 September 2004 which talks about shooting for an IPO in March or April, markets permitting. However, it must also have been apparent to the Australians that this email was a communication in a sequence of steps which involved Mr Michael Brosnan, Mr Leon Brosnan, Mr Gee and Mr Curley (and later Mr Alan Bawden Grant) attending the United States to obtain relevant briefings about the IPO and the science. For the reasons I have already mentioned, it seems to me that the reliance placed upon this email overstates its particular role and significance having regard to the highly engaged set of events which occurred later in time (and not much later). 1164 It should also be remembered that as early as 11 September 2004 Mr Morey was using terms like our "plan" and our "goal" in connection with steps which would occur consequent upon an IPO "if the market is right for an IPO". There was nothing absolutely affirmative about that language in terms of a contemplated promise of an outcome in 2005. Mr Gee gave evidence that at the meeting with Mr Katke in Australia on 18 September 2004, Mr Katke said that the "plan" was to merge the entities and proceed to an IPO in 2005. There were also other references to "goals" and "plans" in the evidence earlier described. 1165 Also, the applicants knew from the Needham presentation that a particular timeframe was being recommended by the merchant bank. There was also a revision to that timeframe. Nevertheless, the likely timeframe remained, as a block period, roughly the same although the process might start a little later in time than originally foreshadowed. Nevertheless, there can be no doubt that Metagenics had before it a recommended timeframe from a merchant banker experienced in undertaking IPO processes. 1166 It follows that although I am satisfied that remarks were made by Mr Katke and by Mr Morey about going to an IPO in 2005 and, generally, at particular nominated times, beginning with 2005 and then later periods according to the emerging events, I am not satisfied that the statements rise higher than a statement of present intention genuinely held. 1167 I am also satisfied that on the Metagenics side, Mr Katke and Mr Morey genuinely held that intention in 2004 and continued to hold that intention, relevantly for present purposes, up to and including 27 April 2005. 1168 The applicants say that Metagenics could never have proceeded to an IPO in 2005 for two principal reasons. First, the state of its financial accounts for the 2004 financial year and the financial accounts for the first two quarters of 2005 were such that KPMG was not willing to issue an approval letter for the purposes of an S-1 filing having regard to a range of concerns expressed by the firm - material weaknesses. Second, Metagenics was not compliant with the United States Sarbanes-Oxley Act. In support of these propositions, the applicants rely upon the expert report of Mr Huber. 1169 Mr John J Huber provided an expert report dated 3 April 2014. Mr Huber is a United States Attorney who was initially educated at the University of Wisconsin Law School. He obtained an LLM from Georgetown University Law Centre. He acted as counsel to companies and investment banking firms on securities offerings and private placements and public offerings, tender offers and mergers in the United States, when Senior Partner and Counsel at Latham & Watkins LLP. 1170 Between 2011 and the date of the trial in 2014, he had been providing consulting services in the areas of securities offerings, strategic transactions, corporate disclosure, restatements, internal control over financial reporting and corporate governance issues. In Mr Huber's report he says that he had been asked by the applicants to provide "an opinion as to whether Metagenics Inc could have proceeded to an initial public offering and list on a United States stock exchange in 2005". In Mr Huber's executive summary, upon which the applicants rely, Mr Huber says this: It is my opinion that Metagenics Inc was not in a position to file a Form S-1 at the U.S. Securities and Exchange Commission ("U.S. SEC" or "SEC") for an initial public offering ("IPO") in the U.S. in 2005 and therefore could not have proceeded to an IPO or listed on a United States stock exchange in 2005. The bases for my opinion are: 1. Metagenics did not have audited financial statements for [the Biodynamics entities] and [HWL] for the requisite periods of 2004 and 2003 as required by the Securities Act of 1933 (the "1933 Act") and SEC Regulation S-X thereunder; 2. Metagenics could not file its audited financial statements for 2004 and quarterly financial statements for 2005, in a timely fashion as required by the 1933 Act, because of the material weaknesses in internal control over financial reporting ("ICFR") that prevented Metagenics from recording, processing, summarising, and reporting its financial statements, within the time periods required for the review of a Form S-1 at the SEC. 3. KPMG LLP would not have consented to the inclusion of its audit report on Metagenics' annual financial statements in the form S-1. 1171 At Pt 3 of his report, Mr Huber addresses the applicants' case that Metagenics was not ready and therefore could not proceed to an IPO on a recognised US Stock Exchange in 2005. 1172 The pleaded propositions about that matter are that such an IPO required the filing of a Form S-1 under the 1933 Act; the S-1 had to be accompanied by audited financial statements for Metagenics, the Biodynamics entities and HWL, for and as of, the end of the most recent completed financial year (and if the filing is more than 45 days after the end of the fiscal year, it must be accompanied by interim review financial statements no more than 135 days old as required by Item 11 of Form S-1 and Reg S-X); and audited financial statements accompanying the Form S-1 had to also include audit reports and consents of the auditors who undertook the audit. 1173 The applicants plead that Metagenics was not able to meet any of these requirements and thus it could not have proceeded to an IPO on a US Stock Exchange in 2005. 1174 Mr Huber says that under the relevant policies administered by the SEC (which he identifies), the SEC would view both Biodynamics and HWL as "probable acquisitions" from the date of signing of the purchase agreements for the respective acquisition of the shares. He says that, as such, the financial statements of Metagenics standing alone would not provide sufficient financial information upon which investors could make an investment decision in an IPO. He says that it therefore follows that the annual financial statements that would have been required to be set forth in the Form S-1 would have consisted of statements for Metagenics, HWL and the Biodynamics entities. Mr Huber says that based upon his review of the documents provided to him, annual audited financial statements for the Biodynamics entities for the 21 months required under r 3.5 were not available at any time from 2004 through 2005. 1175 Mr Huber observes that the audit was not completed until late 2006. 1176 He also says that the financial statements of HWL were not prepared in accordance with the U.S. GAA Principles ("GAAP") and were not reconciled to GAAP. Mr Huber also says that the Metagenics annual financial statements were restated after KPMG's appointment was terminated. He says that "it appears" that errors were identified by Grant Thornton LLP which raised questions concerning the reliability, accuracy and compliance with SEC Regulations, of the annual financial statements for Metagenics for 2005 and 2006. 1177 Mr Huber goes on to say this at para 3.20: These errors were severe enough to require a restatement of Metagenics' financial statements for 2005 and 2006 which Grant Thornton audited and issued an audit report dated October 6, 2008. The lack of adequate financial statements for Biodynamics and errors in at least two of Metagenics' three fiscal years that would have been included in the Form S-1, depending on the timing of the filing, raised substantial questions concerning the availability of Biodynamics' financial statements and the reliability, accuracy and compliance with SEC regulations of the financial statements that Metagenics' would have been required to include in a Form S-1. [emphasis added] 1178 Apart from these matters, Mr Huber says this at para 3.21: In addition to the requirements to file annual, audited financial statements, the Company must comply with requirements to include interim financial statements under the 135 day rule. Assuming the Form S-1 had been filed, it would have needed to include interim financial statements from the end of the preceding fiscal year through a date within 135 days of the filing date for Metagenics and any acquisition or probable acquisition the financial statements of which were required to be included in the Form S-1 [by the relevant rule]. In addition, during the time the Form S-1 is being reviewed by the Staff [of the SEC] up until the date the Form S-1 is declared effective by the Staff, the financial statements have to be updated with subsequent interim financial statements to avoid "going stale". Due to the financial close and reporting challenges and what appears to be management's inattentiveness to correcting the material weaknesses in ICFR identified by the auditors, it appears unlikely that Metagenics would have been able to prepare interim financial statements for itself or to cause Biodynamics and/or HWL to prepare such statements in compliance with U.S. GAAP and Regulation S-X so that the Form S-1 would have been current when filed. It is also unlikely that updated interim financial statements could have been prepared and filed on a timely basis in accordance with U.S. GAAP and Regulation S-X after filing, while the Form S-1 was being reviewed by the Staff. [emphasis added] 1179 At Pt 3.3 of his report, Mr Huber conducts an analysis of the provisions of the 1933 Act regulating the provision of consent by the accountants and experts. 1180 At para 3.31 of the report on the topic of an accountant's consent, Mr Huber describes the particular legislative provisions regulating this topic and notes that s 7(a) of the 1933 Act provides that if any accountant is named as having prepared or certified any part of the registration statement, the written consent of such person shall be filed with the registration statement. Similarly, if an opinion by an expert is quoted in the registration statement or in a prospectus, the written consent of the expert is required to be filed as an exhibit to the registration statement. Moreover, the written consent "shall expressly state that the expert or lawyer consents to such quotation or summarisation". All such written consents must be dated, signed by the expert and filed as part of the registration statement contained within the Form S-1. 1181 At para 3.36 of his report, Mr Huber concludes that "it appears that KPMG LLP had adequate reason to withhold its consent to having its audit report included in the Form S-1, if it had been filed for an IPO by Metagenics during 2004 or 2005" [emphasis added]. Mr Huber at para 3.37 of the report observes that even though the KPMG management letters for 2005, 2006 and 2007 contemplated the inclusion of KPMG's audit report in a Form S-1, KPMG was aware of and expressed concerns about issues that affected its audit report, the nature of its participation in a Form S-1 and the timing of such a filing. Mr Huber also observes that KPMG "was aware that revenue recognition errors had resulted in a restatement of Metagenics's financial statements for the year ended December 31, 2002". 1182 The applicants say that Mr Huber's report shows that the consent of the auditor is a fundamental plank in any S-1 filing and without that consent, the S-1 could never have been effective for the purposes of an SEC filing. They also say that Mr Samsvick's position was that KPMG would not have given its consent to the inclusion of their audit report in an S-1 filing in 2006. They say that, in many respects, that is the end of the matter, as without the consent the S-1 could not have been filed and there is nothing optional about it. The applicants say that it is reasonable to assume that Grant Thornton would not have given their consent either because their review revealed the same problems, material weaknesses and deficiencies identified by KPMG. 1183 The applicants submit that this is critical and damning evidence which dispels the notion that if Metagenics had done things differently in September 2004 it could have proceeded to an IPO. They say that even with Mr Katke focused entirely on the IPO, Metagenics was not able to rectify the failings in its financial reporting in the period between December 2004 and, ultimately, January 2008. 1184 The reference to dispelling the notion that if Metagenics had done something differently in September 2004 it could have proceeded to an IPO in 2005 is responsive to the propositions advanced by the respondents. Apart from placing emphasis on the proposition that the statements do not amount to a representation as pleaded because there was no promise or guarantee of an IPO in 2005 but simply a plan, goal or intention to proceed to an IPO in 2005, the respondents say this. If a representation was made, there were reasonable grounds for making it because it was based upon advice given or statements made to Metagenics about timelines by its investment bankers including Needham and at an earlier point in time, Lehman Brothers, experienced in the conduct of IPO processes, and as Mr Huber said in evidence, it was not uncommon for investment bankers to promote timelines of this order to their clients, although Mr Huber described such timelines as an "ideal circumstance": T, p 346, lns 15-16. 1185 The respondents say that Mr Huber's report does not establish that there were no reasonable grounds for the making of the statement because Mr Huber's report addresses a "different question". As to this proposition, the respondents say the following things. 1186 First, Mr Huber looked at what actually occurred in the unsuccessful attempts by Metagenics to proceed to an IPO in the period from about September 2004 and drew conclusions based on those events. 1187 Second, Mr Huber, however, did not examine the position that Metagenics would have been in, so far as an IPO is concerned, had it done things differently from September 2004. 1188 Third, Mr Huber gave evidence that he was not asked to address the position Metagenics would have been in had it done things differently from September 2004 and said that "if I were to address that question in this report, it would have been twice as long … because there were a lot of things that could have been done differently": T, p 351, lns 37-41. 1189 Fourth, in order to show that the representation that Metagenics would proceed to an IPO in 2005 was baseless at the time when it was made, the applicants would need to show that, at the material time, namely late 2004 and early 2005, Metagenics did not have the substantial capacity to proceed in 2005 or had definitely resolved against so proceeding in 2005. The inability of Metagenics in late 2004 and early 2005 to proceed to an IPO in 2005 is not demonstrated, it is said, by adducing evidence that as things later transpired in 2005, 2006 and 2007, its plans for an IPO were not executed as well, or as successfully, as they might have been. 1190 Fifth, rather, the capacity of Metagenics in late 2004 and early 2005 to proceed to an IPO in 2005 is to be determined by what it could have done including those things that could have been done differently assuming it had received different professional advice. The respondents say that this is the crucial question rather than an examination of what actually occurred as the sole determinant of whether Metagenics could reasonably, acting properly, have proceeded to an IPO in 2005. 1191 The respondents say that Mr Huber has not examined this question. 1192 It seems to me that there are a number of factors which determine whether there were reasonable grounds for the Metagenics side making the representations (assuming for the moment that the statements relied upon amount to representations in the sense claimed by the applicants) that the company would proceed to an IPO in 2005, markets permitting. The first is that the assessment must be made, it seems to me, at the moment in time when the representations were made having regard to what was known and understood at that time. I accept that an examination of things that occurred later in 2005, 2006 and 2007 may not be helpful in terms of determining whether circumstances subsisted in late 2004 and early 2005 which rendered the making of the statements reasonable. Although it may be useful to look back with hindsight from the perspective of an expert, the real assessment is to be made in the moment when the relevant participants, experienced businessmen, are engaging with the issues and the IPO proposal and taking professional advice from investment bankers, lawyers and accountants, about it. The question of whether reasonable grounds existed at the time when the statements were made ought to be examined in a forward-looking way having regard to the evidence of the various engagements occurring at the time. 1193 It is true that Mr Morey was inexperienced in the processes associated with an IPO. He was, however, experienced in the processes associated with addressing management letters from the accountants/auditors and assessing contended material weaknesses in the accounts. To the extent that Mr Katke and Mr Morey were in unfamiliar territory in relation to an IPO, they were obtaining and acting upon professional experienced advisers guiding the process. Particular timelines had been suggested on 17 November 2004 by Mr Schechner and, in his presentation, he had generally supported the notion that Metagenics was a good candidate for an IPO and exhibited many of the features that would characterise a public company. A working group was established to deal with the IPO issues including due diligence and regulatory issues and those other issues described in the earlier assessment of the evidence. As things transpired it became apparent that issues had arisen concerning the financial accounts for the Biodynamics entities and questions were being raised about the Metagenics accounts. However, there is nothing in the evidence which suggests, at the relevant moments in time, that the professional advisers retained by Mr Katke and Mr Morey (whether the merchant bankers or the lawyers retained on the float or the accountants) were telling Mr Katke, Mr Morey or Dr Bland that Metagenics was a company that could not proceed to an IPO in 2005 due to particular considerations or at all, notwithstanding the intention of these executives to take the company to an IPO in 2005. The merchant bankers and lawyers had been retained for this very purpose. 1194 I accept the evidence of the hindsight view of Mr Huber expressed in answer to the question which he was addressing. However, the references in Mr Huber's report to events in 2006 and later are not relevant to the question of whether there were reasonable grounds for the making of the statements at the moment in time when they were made. Nevertheless, I accept Mr Huber's evidence that upon a full analysis of the documents presented to him, Metagenics was not in a position to list its securities on a stock exchange in the United States in 2005. However, I do not accept that that objective assessment was known to or in the mind of Mr Katke or Mr Morey at the relevant time when the statements were made because they were acting upon the information they had before them at that time supported by the professional advisers advising them at that time. 1195 I am not satisfied that the case has been made good that there were no reasonable grounds for the making of the statements when made. 1196 There is also a more fundamental matter. Mr Gee accepted in evidence that in entering into the 2005 Agreement he was accepting an investment risk. The applicants made their own judgment about whether to enter into the 2005 Agreement influenced by whether they were willing to accept the risk that the company might not list in 2005. They accepted that investment risk because they said they trusted Mr Katke to make good on his intention to list Metagenics in 2005. Mr Michael Brosnan also chose to enter into the transaction because he believed that Mr Katke could make good on his intention. The simple truth about the 2005 transaction, at least as far as the IPO issue is concerned, is that Mr Michael Brosnan particularly, but also Mr Gee and the other applicants, made a calculated and deliberate judgement as a business decision to enter into the transaction and sell their shares on the terms of the agreement having satisfied themselves that based on their knowledge and experience of Mr Katke and their relationship with him that they were satisfied, for themselves, that Mr Katke would make good on his intention to list. Ultimately, it was their own business decision to go forward with the transaction. They did not do so because of a promise that the matter would list but rather because the history of their relationship with Mr Katke suggested to them that he would make every effort to make good his intention to list. As mentioned earlier, there can simply be no doubt that the applicants were proceeding on the basis that Mr Katke had an intention to do these things rather than making absolute promises about the outcome. Ultimately, Mr Michael Brosnan regretted the decision he made and later described it as a bad decision. He regretted taking the punt on the listing occurring. In the exchanges between Mr Katke and Mr Brosnan about the disappointment of the applicants no claim of being misled, as claimed in the proceeding, is made. Rather, the problem identified by Mr Brosnan was that the delay in moving towards an IPO had brought about, in his view, a transfer of wealth to the US shareholders and that the valuation methodology was wrong at the outset. 1197 Another aspect of the contended IPO representations is the matter at [113] of these reasons that Mr Katke and Mr Morey represented on 17 November 2004 to Mr Gee (and the others present) that "for the purposes of an IPO Metagenics could legitimately hold itself out as a specialty pharmaceutical company". The meeting on 17 November 2004 is extensively discussed earlier in these reasons. The point of the discussion of the attributes of Metagenics which might lead to one characterisation of the company rather than another was to consider the very question of how the company might be "positioned" for the purposes of an IPO. The question was, put simply, how might the classes of investors, funds, fund managers, high net worth individuals etc, respond to the offering when attributing market value to pricing the issue and valuing the company having regard to the characterisation adopted by the company. In the context of the meeting and the presentation by Mr Schechner, the debate on this topic was how might the company be positioned on a float so as to attract the most favourable multiple and maximise the value of the shares on offer? In the review of the evidence concerning the meeting, I noted the evidence of Mr Gee on this issue. Mr Schechner seemed to be leading the presentation and discussion of the topics generally. Mr Katke seemed to embrace Mr Schechner's triangulated slide (and other aspects of the presentation) that the company might be positioned as a specialty pharmaceutical company. Mr Gee believes that Mr Katke expressed a preference for that positioning. He may or may not be confused about that issue as I have earlier described. In any event, Mr Katke was probably embracing a preference for Mr Schechner's postulated positioning, on the footing that adopting that characterisation would attract a higher multiple, a higher value and a higher share price. 1198 I do not accept the pleaded contention that Mr Katke at the 17 November 2004 meeting in San Clement represented that Metagenics could legitimately hold itself out as a specialty pharmaceutical company. I accept that this entire question of whether Metagenics might be positioned as a "specialty pharma" company attracting a market multiple on revenues of between two and four (according to the Schechner slide although Mr Gee has a different note of the oral multiples put by Mr Schechner) or whether the company was better positioned as a nutraceutical company attracting a multiple of between one and two, was discussed. Mr Schechner had put his triangular diagram forward. The evidence of the discussion at the meeting seems to suggest that the selection of this description was one of "preference" and "positioning" expressly for the purpose of presenting the company in an IPO to the relevant market addressees who would ultimately determine the value to be attributed to a company bearing the relevant characterisation. This matter seemed to be very much a matter of opinion with options available about how to best present the company. Mr Katke's expression of a "preference" for "specialty pharmaceutical company" (if expressed in the way Mr Gee believes occurred) seems to me to be the very expression of an opinion arising out of a debate about possibilities with a view to reaching an informed decision about the best positioning. I am satisfied that if Mr Katke embraced this description he did so clearly enough in reliance upon his own assessments and informed greatly by Mr Schechner's view of how the market would view a company seeking to list which was positioned in one way as opposed to another. In effect, to the extent that Mr Katke made this remark, it seems to be an evaluative judgement along the lines, we think this is the best desirable way to position the company for a float so as to maximise value. Whatever else may have emerged about this topic later in time, the pleading on this issue was confined to a representation at the 17 November 2004 meeting. I find that at that time there was simply a discussion about positioning and the expression of an opinion about a preference for positioning the company in one way rather than another for the purposes of a listing. 1199 I am satisfied that the claims based on the contended IPO inducement would, in my view, have failed if litigated at the time rather than settled by the Settlement Deed. 1200 The applicants also contend that they were induced to enter into the 2005 Agreement by reason of the expressly represented projections set out at [114] to [116] and by the implied representation set out at [117]. There are three difficulties with this contention. 1201 First, Mr Gee understood that the projections were a postulate or hypothesis and formulated based on assumptions for a particular purpose that was not the fact. The submission of the spreadsheet to Mr Gee in these circumstances did not amount to a representation that the projections would be realised. 1202 Second, in the exchanges I have considered in detail, these projections given by Mr Morey to Mr Gee in the context I have described are not the subject of any assertions by the Australians that they were induced to enter into the 2005 Agreement based upon them or a belief in them. These projections seem to largely disappear from any exchanges or discussion about contentions concerning the 2005 Agreement. 1203 Third, although turning to later events in respect of which earlier expectations for those future events have proved to be unrealised is no probative basis for concluding that the projections when made, had no reasonable basis, the enquiry becomes a little different when it is contended that projections which have actually been realised (over a four year period prior to the global financial crisis making an impact), or very largely realised, remain misleading because, when made, there was said to be no reasonable basis for making them. The future revenue projections, in this case, for the period 2005 to 2008 proved in fact to be very accurate indeed. It follows that, on the face of it, it is very likely that the Chief Financial Officer had a sound basis for the projections. 1204 I am satisfied that the claims based on the contended representations based upon the financial projections the subject of Mr Morey's spreadsheet would, in my view, have failed if litigated at the time rather than settled by the Settlement Deed. 1205 The applicants also rely upon six representations said to have been made between late 2004 and early 2005 called the Pfizer representations as conduct in contravention of s 52 of the Act inducing entry into the 2005 Agreement: see [119] to [125] of these reasons. The first pleaded representation is that Metagenics was "in discussions with a large pharmaceutical company, Pfizer which had expressed very strong and imminent interest in licensing an anti-inflammatory product produced by Metagenics known as Kaprex". The second is that "research on Kaprex indicated it was an effective anti-inflammatory product". The third is that Kaprex worked just as effectively as anti-inflammatory products already on the market including Vioxx which had been recalled due to cardiovascular side-effects. The fourth is that Pfizer's consumer drugs arms were both interested in Kaprex, and its mechanism of action was being reviewed by Pfizer's Scientific Advisory Board. The fifth is that a licensing deal with a big pharmaceutical company such as Pfizer with respect to Kaprex and other discoveries would provide substantial revenue to Metagenics and increase the value of Metagenics. The sixth is that Metagenics had determined to slow the provision of information to Pfizer to give Metagenics time to strengthen its patent position before it entered into a licensing deal. 1206 As to the first, second, third and fifth pleaded representations, reliance is placed upon the conversation between Mr Gee and Mr Katke on 1 October 2004. As already noted, Mr Gee's evidence about that conversation does not extend to making good these pleaded representations. 1207 As to the first representation, reliance is placed upon a telephone conversation between Mr Michael Brosnan and Mr Katke in November 2004 (as to which see [231] of these reasons). This evidence is in stark contrast to the evidence of Mr Gee at about this time on the same topic. I am not willing to rely upon Mr Brosnan's evidence in the way in which it is framed. I find Mr Gee's evidence more proportionate and balanced and more likely to be a fair reflection of what was put by Mr Katke. That is not to say that I disbelieve Mr Michael Brosnan. Far from it. Rather, I am of the view that Mr Michael Brosnan tends to see things in absolute terms and is likely to present an exaggerated assessment of what was said although I accept that Mr Brosnan had the impression he spoke of. The remaining particulars of representation one do not go that far. 1208 As to the second representation, Mr Gee's evidence did not take the matter that far. The applicants rely upon aspects of the Bison Capital document already discussed in these reasons. I am satisfied that Mr Katke was extolling the virtue of the potential for the Kaprex product particularly in its utility of use in addressing the effects of anti-inflammatory conditions. These views reflected his opinion about the potential for the product and I am satisfied that there was some basis for it. Mr Katke made it plain that developing full scale blind trials would be necessary to prove up any potential Kaprex might have. 1209 As to the third representation, aspects of this matter have been discussed at [1022] of these reasons. Again, the Bison Capital document is relied upon. The authorship of those remarks is not clear. I regard the pleaded representation as a statement of opinion and I am satisfied that there was at least a basis for that view which would need to be proved up by full scale clinical trials. 1210 As to the fourth representation, the applicants rely upon the conversation between Mr Morey and Mr Gee on 18 January 2005 (as to which see [311] of these reasons). I accept Mr Gee's evidence about this topic. 1211 As to the fifth representation, reliance is placed by the applicants on the conversation with Mr Gee on 1 October 2004. Reliance is also placed upon things said between 7 May 2004 and 11 May 2004 and on or about 18 September 2004. As to the discussion on 18 September 2004 (at [213] of these reasons) Mr Katke, at the meeting in Brisbane, spoke expansively about licensing opportunities and the potential revenues that might be generated. However, it is clear from the evidence Mr Gee gave that Mr Katke's observations were about possibilities and how, if realised, those transactions might be structured with milestone payments etc. It is difficult to accept that the applicants understood these statements to be representations as to future matters that would occur as compared with statements of commercial expectation in relation to particular classes of transactions. 1212 As to the sixth representation, the applicants rely upon the conversation between Mr Morey and Mr Gee on 1 February 2005: see [313] to [319] of these reasons. 1213 It follows from Mr Gee's evidence about the conversation on 1 February 2005 and Mr Grant's note of 8 February 2005 that the applicants had been told that the discussions with Pfizer had been put on hold so as to enable Metagenics to strengthen its patent position. By the end of February 2005, the issues in relation to Pfizer had reached that fault line. Later exchanges occurred which addressed engagement between Metagenics and Pfizer but ultimately the discussions came to an end. 1214 Although I am satisfied that some of these statements were made, they were not made as pleaded, in the main. In any event, the force and effect of them came to an end by the end of February 2005. 1215 Having regard to all of the evidence in relation to the financial projections in Mr Morey's spreadsheet otherwise described as the 2005 representations (including the representation in relation to the description "specialty pharmaceutical company") and the evidence in relation to the Pfizer representations, I am not satisfied that the applicants would have succeeded in their contentions in relation to the 2005 Agreement.

[172]

PART IX - THE TRANSACTIONS 1216 Let it be assumed that the applicants had made good the causes of action advanced concerning entry into the Settlement Deed of 31 July 2009. There would be nevertheless fundamental problems in granting the relief sought under s 87 of the Act to set aside the Settlement Deed. 1217 The difficulties are these. 1218 The Settlement Deed made provision for the payment of "Additional Consideration" (see [71] and [72] of these reasons) and the payment by Mr Katke and Dr Bland of "Further Additional Consideration" of US$4,108,959.40: see [74] of these reasons. The Settlement Deed also contemplated the entry into the "Proposed Transaction": see [75]; [88] to [94] and [775] to [778] of these reasons. 1219 On 9 August 2009, Showcase Holdings entered into the Stock Purchase Agreement as described at [775]. Put simply, Alticor in reliance upon the resolution reached with the former HWL shareholders under the Settlement Deed entered into the transaction contemplated by that agreement as the Proposed Transaction (as varied) and took the benefit of the release contained in cl 10.1 of the Settlement Deed (see [99] of these reasons) as one of the "Metagenics Released Parties" (as defined) for the purposes of cl 10.1. All of the steps contemplated by the suite of agreements representing the Alticor transaction proceeded to completion and Alticor made the substantial investments effected by those steps as earlier described: see [775] of these reasons. 1220 Alticor is not a respondent to the proceedings and no contravening conduct is asserted against it or any of its controlled entities. Moreover, Dr Bland made a commitment with Mr Katke to provide the Further Additional Consideration of US$4.108M in purchase of the Bio Tech Common Units held by the appellants according to Sch 11 of the Settlement Deed in the event of the Proposed Transaction occurring: see [74] to [81] of these reasons in the context of the discussion at [74] to [94]. 1221 Dr Bland gave evidence which I accept that he became a party to the Settlement Deed to give effect to this requirement concerning the Further Additional Consideration of the former HWL shareholders which was a condition of the Settlement Deed required by them. Dr Bland gave evidence that the Australians required an obligation that both Mr Katke and Dr Bland purchase "a significant portion of their [the former HWL shareholders] shares in the biotech venture". 1222 The Settlement Deed proceeded to completion. The applicants received the Additional Consideration in the form of the Preferred Stock: see [71] and [72] of these reasons. The stock was then converted into Holdco Units A, B and C and Holdco Common Stock having the equivalent rights and interests attaching to the units as attached to the shares, except that after the reorganisation the shareholders were no longer shareholders in Metagenics but had become unitholders in Meta Holdings LLC. 1223 The Alticor transaction contemplated (as reflected in the "Marlin Deal Terms" document), and the transaction documents established, a put and call protocol (see [775] to [778] of these reasons) and pursuant to those options the steps described at [779] to [786] of these reasons, occurred. 1224 Making an order to set aside the Settlement Deed in the exercise of the statutory remedial power contained in s 87 of the Act ought to take into account, by reference to analogues of equitable principles (although those principles will not be determinative of the basis upon which the statutory power will be exercised), of the extent to which the interests of innocent third parties would be affected or prejudiced by such an order and thus the extent to which restoring the parties to their former positions would at all be possible having regard to the effect upon those innocent third parties. 1225 I can see no basis upon which such an order could properly be made in a principled way which would have the effect of setting aside the Settlement Deed and depriving Alticor and, for that matter Dr Bland, of the rights and interests each of them have acquired derived from, or relevantly related to, the Settlement Deed and the transactions which were entered into by reason of the Settlement Deed having come into existence. 1226 The discretionary power contained in s 87 to make orders of the kind contemplated by that section is not "at large" and must be exercised according to settled principle having regard to the language of the section and the scope of the statutory power properly construed. The factors informing the exercise of the discretion tell entirely against making an order to set aside (which in this statutory context might be conveniently called rescission) the Settlement Deed. 1227 It is not clear to me how Alticor or Dr Bland can properly be deprived of the interests they have acquired. They have adopted a significantly changed position in acting upon the Settlement Deed. 1228 For these reasons, acting upon the assumption that the applicants had established the causes of action they assert in relation to the Settlement Deed, I would nevertheless make no order which would have the effect of setting aside the Settlement Deed. 1229 Let it be assumed as a further hypothesis that the applicants had established the causes of action in relation to the Settlement Deed that they advance and an order is made under s 87 of the Act setting aside the Settlement Deed. Let it also be assumed that the applicants had made good one or more of the claims in relation to the 2005 Agreement and (apart from any other question that might be agitated against a remedy at all), the matter for remedial determination had then become a question of whether the 2005 Agreement ought to be set aside in the exercise of the power conferred under s 87 of the Act. 1230 In those circumstances, at least some of the same considerations that apply to the making of an order to set aside the 2009 Settlement Deed would apply to a possible order setting aside the 2005 Agreement. Under the 2005 Agreement, the former HWL shareholders exchanged their shares for some cash, Pan compensation payments (when and if they came), an earn-out payment (see [47] and [53] of these reasons) and shares in Metagenics as to which see [52] of these reasons. 1231 The shares in Metagenics, of course, were then the subject of the arrangements under the 2009 reorganisation and the exchange of stock for Holdco units as earlier mentioned. The refusal of an order setting aside the 2009 Settlement Deed would be the end of the matter in terms of any order setting aside the 2005 Agreement. However, for the purposes of this discussion, the assumption is made that the 2009 Agreement can properly be the subject of such an order. In those circumstances, it is relevant to have regard to the benefits obtained by the former HWL shareholders under the working operation of the 2005 Agreement in considering whether the 2005 Agreement might properly be set aside. 1232 The earn-out payments and the Pan compensation payments have been substantial and they are these: Year Profit Earn-Out Payment Pan Compensation Payment 2007 $1.470M $17,530.00 2008 $1.764M $486,503.00 2009 $2.283M - 2010 - $454,069.00 2011 - $491,100.00 2012 - $626,820.00

[173]

1233 In each of the years 2007, 2008 and 2009, the applicants were entirely astute to the content and detail of their contended claims of conduct on the part of the respondents said to be in contravention of s 52 of the Act inducing entry of the applicants into the 2005 Agreement yet the applicants continued to take the benefit of the agreement and affirmed its operation. It seems to me that there are significant difficulties, although perhaps not insurmountable difficulties, in making an order under s 87 of the Act to set aside the 2005 Agreement in these circumstances. The answer might be that notwithstanding that the applicants took the benefit of the payments under the agreement rather than commencing proceedings to set aside the 2005 Agreement, all payments would be ordered to be repaid as an element of an order setting aside the 2005 Agreement. 1234 However, the real issue is that the 2009 Settlement Deed cannot be properly set aside having regard to the effect of doing so upon Alticor and Dr Bland. Thus, the question of setting aside the 2005 Agreement does not arise. 1235 Having regard to the considerations I have just mentioned, the real question in relation to remedies is this. 1236 Let it be assumed that the applicants had made good the causes of action advanced concerning entry into the Settlement Deed of 31 July 2009. The question then would be: what is the true measure of the reliance loss suffered by the applicants by conduct of the respondents done in contravention of s 52 of the Act? 1237 That question involves attributing a value to the loss of the opportunity to pursue the causes of action in respect of the 2005 Agreement foreclosed by entry into the Settlement Deed in circumstances where the contravening conduct is said to be conduct which induced the applicants to enter into the Settlement Deed. An examination of that question involves forming views about the opportunity so lost. In these proceedings, expert reports have been put on which see to deal with the quantification of the lost opportunity. 1238 Having regard to the findings I have reached, I can see little point in analysing in these reasons the various contentions in relation to claim for damages and the expert evidence addressing that topic. I have considered whether it would be useful to make findings in these reasons about damages on a number of alternative hypotheses as to the outcome. However, it seems to me that having reached the primary findings arising out of the review of the evidence concerning the engagement by the relevant participants on the principal factual matters in issue, little is to be gained by undertaking an analysis in these reasons of the competing expert opinions on the quantification of damages and the various considerations which would go into that topic. 1239 There is a second question which I do not propose to address in these reasons and it concerns aspects of the 2003 Agreement (as to which see [25] to [42] and in particular options contained in cl 7 of that agreement as described at [29] of these reasons). 1240 The respondents say that had the parties not entered into the 2005 Agreement, Metagenics would have exercised the options contained in the 2003 Agreement and would ultimately, according to the terms of that agreement, have reached the position where they had become the owner of 74.4% of the shares in HWL in any event. The applicants say that Metagenics was in no position to exercise the options at the relevant moments in time when those options fell due for exercise because Metagenics was so significantly debt burdened that it could not have financed the acquisition of further shares in HWL under the terms of the options. 1241 Metagenics has put on evidence that upon a proper analysis of the financial instruments under which it was operating at the material time, it would nevertheless have been able to raise sufficient funds by particular classes of instruments which would have enabled it to take up the options. Moreover, Metagenics has not left that proposition merely as a hypothesis based upon any residual capacity to raise funds as a matter of construction of its financial instruments but has put on evidence from one financier that funds would have been lent at the material time. 1242 I can see little utility in determining the questions in controversy as to that matter having regard to the primary findings I have reached. 1243 In the course of the proceeding, a number of objections were made to aspects of the evidence contained in the statements of a number of the principal witnesses. I have dealt with some aspects of those objections. However, in the main, the remaining objections were to be addressed in these reasons. I do not propose to set out each objection taken by the applicants and the respondents to the various statements. I propose to simply deal with the objections on the basis that I regard each aspect of the evidence under challenge as admissible. 1244 I admit the statements in their entirety. 1245 I have had regard to the statements and the oral evidence in determining the findings. I regard the material the subject of objections which has been admitted into evidence as going to weight rather than admissibility. 1246 As to the evidence generally, I have taken into account all of the evidence on the primary facts in issue adduced in the proceeding whether documents or oral evidence. To the extent that I have not referred to particular evidence in these reasons given by a witness or contained in a document in evidence, it should not be assumed that I have not considered that material in formulating these reasons. 1247 Accordingly, having regard to the findings I have reached, the orders of the Court must be that the application is dismissed. 1248 The parties will be directed to put on submissions as to costs within 21 days. I certify that the preceding one thousand two hundred and forty eight (1248) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Greenwood.

Brosnan v Katke

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