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.