Clime Capital Limited v UGL Pty Limited

Introduction 1 This is an application for approval of a compromise of a representative proceeding pursuant to s 33V of the Federal Court of Australia Act 1976 (Cth). The applicant also seeks approval of a scheme for distribution of the settlement sum. The application came before me initially on 4 December 2019, which coincidentally was the same day the High Court delivered judgment in BMW Australia Ltd v Brewster; Westpac Banking Corporation v Lenthall [2019] HCA 45. In BMW Australia the majority held that s 33ZF of the Act did not empower the court to make a common fund order (CFO), at least not at an early stage in the proceeding absent an application for approval of a compromise. The original scheme for distribution of the settlement sum was predicated upon the implementation of a CFO made by Murphy J on 4 October 2018. 2 Within only a few hours of the High Court handing down its decision in BMW Australia, the applicant proposed a revised scheme for distribution of the settlement sum, relying upon s 33V and what has become known as a funding equalisation order (FEO). The revised scheme for distribution was devised to result in the same outcome in relation to the aggregate sum to be distributed to group members as proposed under the original scheme. This outcome is achieved by in effect spreading the aggregate commission which the funder has agreed to accept under agreements made between certain registered group members and the funder among all group members, whether or not they have entered into a funding agreement with the funder. 3 The aggregate settlement sum is $18 million. From this sum, $5.95 million is to be deducted for legal costs, $82,281.65 for the reimbursement of the applicant's time and effort in the litigation, and $15,054.40 for project costs incurred by IMF Bentham Ltd (IMF). The funding commission payable to IMF is $4.05 million. After deducting these amounts from the settlement sum, approximately $7.9 million or 43.9% is to be distributed to group members pursuant to the revised scheme for distribution. This is the same sum as that which group members were notified of in relation to the original scheme for distribution. 4 When the application came before me on 4 December 2019, there were two preliminary questions. The first was whether the High Court's decision in BMW Australia presented any impediment to approving the settlement, including the revised scheme for distribution of the settlement sum, involving the mechanism of a FEO in substitution for the earlier CFO. The second was whether the applicant had given adequate notice to group members that the proposed scheme for distribution entailed a differential distribution between them based upon certain criteria relating to their putative claims in the proceeding. This characteristic was the same in relation to both the original scheme for distribution predicated on the CFO made by Murphy J and the revised scheme employing instead an FEO. 5 When the application came before me for further hearing on 16 December 2019, I was satisfied that these questions had been resolved in favour of the applicant and that the settlement was fair and reasonable in all relevant respects. Accordingly, on 16 December 2019 I expressed brief reasons for these conclusions and on 17 December 2019 made orders approving the settlement and ancillary orders. However, I extended the time for any appeal from those orders until 14 days after giving reasons and I stayed any distribution to group members until the extended time for any appeal expired. 6 These are my reasons for the orders made on 17 December 2019.

Preliminary Questions 7 I turn now to the first preliminary question referred to above, namely the power to make a FEO pursuant to s 33V of the Act, including as an alternative to a CFO pursuant to s 33ZF.

FEO in place of CFO at conclusion of the proceeding or upon settlement 8 In BMW Australia, the plurality, Kiefel CJ, Bell and Keane JJ held that the Court does not have power under s 33ZF of the Act to make an early CFO unrelated to the approval of a compromise pursuant to s 33V. Their honours (at [46] and [50]) construed the power under s 33ZF as "essentially supplementary" and thus authorised orders apt to determination by the Court of the issues in the proceeding, as distinct from inducing third party support for the proceeding. This reasoning was essentially agreed with by Nettle J (at [125]) and Gordon J (at [145]). 9 The Court was not strictly required to decide whether s 33V(2) conferred a power to make a CFO at the time of the settlement of a proceeding and did not specifically make any finding as to that question. However, the Court clearly distinguished between the making of a CFO at an early stage in a proceeding unconnected to the approval of a compromise and the making of a FEO at the conclusion or settlement of the proceeding. The plurality (at [90]) held that at the stage of judgment while a FEO "falls squarely within the terms of the s 33ZF… the same cannot be said of a CFO." Their honours (at [88]) reasoned: … While it must be accepted that the burden of the amounts that funded group members have agreed to pay to the funder under their agreements with the funder must be distributed fairly, a FEO is apt equitably to distribute those amounts whereas a CFO seeks to impose an additional cost by imposing new obligations on the unfunded group members. 10 The honours (at [89]) further said: A FEO is clearly available where a settlement is reached. A settlement must be approved by the court [citing s 33V], and, in approving a settlement, the court must be satisfied that it is "fair and reasonable to all group members" [Australian Securities and Investments Commission v Richards [2013] FCAFC 89 at [55]]. A settlement that allows some group members to ride for free would not be fair and reasonable to the other group members. 11 Gordon J at [134] to [135] agreed with the plurality and at [168] to [169] said: …the free rider problem was addressed by making funding equalisation orders to redistribute the additional amounts received "in hand" by unfunded class members pro rata across the class as a whole. It was not suggested by any of the parties to these appeals that the legislative scheme did not allow for the making of a funding equalisation order. In short, there is already an accepted solution to the problems which the common fund order supposedly seeks to address. 12 The accepted solution referred to by Gordon J is well established by authorities in this Court since P Dawson Nominees Pty Ltd v Brookfield Multiplex Limited (No 4) [2010] FCA 1029. See also Modtech Engineering Pty Limited v GPT Management Holdings Limited [2013] FCA 626; Earglow Pty Ltd v Newcrest Mining Limited [2016] FCA 1433; HFSP Pty Ltd (Trustee) v Tamaya Resources Ltd (in liq) (No 3) [2017] FCA 650; Liverpool City Council v McGraw-Hill Financial, Inc (now known as S&P Global Inc) [2018] FCA 1289; and Bradgate (Trustee) v Ashley Services Group Limited (No 2) [2019] FCA 1210. 13 The present application for approval of the settlement and of the revised scheme for distribution including the mechanism of a FEO falls within the now orthodox and "accepted solution" for amortising the funding costs equitably between all group members. 14 The second preliminary question was whether group members had been given adequate notice of the proposed differential distribution of the settlement sum between them and the basis for such differential distribution.

Notification of differential payments 15 Sub-section 33X(4) of the Act requires that unless a court is satisfied that it is just to do so, a settlement cannot be approved unless notice of certain matters under Part VIA of the Act has been given to group members. Section 33Y requires the Court to approve the form and content of a notice under s 33X. Justice Murphy approved the Notice of Settlement on 24 October 2019, which was sent to registered group members between 30 October and 1 November 2019. On 12 November 2019 a letter of assessment was sent to registered group members which assessed the quantum of their loss based on the loss assessment formula, and which stated that group members could request a copy of the loss assessment formula upon signing a confidentiality agreement (12 November 2019 Letter). 16 One feature of the scheme for distribution, not uncommon in cases of this type, is that the group members are not to share 'equally' in the settlement sum. The revised scheme for distribution employs a formula for allocating litigation risks differentially correlating to the differential prospects of group members establishing liability on the part of the respondent. As I have said above, this was a feature also of the original scheme. 17 The essential differentiating factor is the date on which the group member acquired shares in the respondent. Group members who acquired shares at the start of the relevant period are to receive a lower distribution than those who acquired shares at the end of the period. The risk discounts applied to the loss assessment formula were derived from the applicant's expert evidence and by reference to a legal assessment of the relative strengths of the claims at different times during the relevant period. 18 Differential distribution between group members requires particular attention in relation to notification of the bases for such distribution and the methodology to be applied in achieving it. The Federal Court of Australia Class Actions Practice Note (GPN-CA) lists a number of matters which it states should usually be included in the notice of settlement. These include "an explanation of who will benefit from the settlement, including an explanation as to how class members or sub-groups will benefit relative to each other" (paragraph 14.2(j)). 19 In P Dawson Nominees Pty Ltd v Brookfield Multiplex Limited (No 4) [2010] FCA 1029 Finkelstein J considered a proposed settlement which treated class members differently based upon a differential assessment of loss (at [25]). His Honour (at [26]) said that "[u]nequal treatment is often a hallmark of unfair terms." This is not to say that unequal treatment equals unfairness, but that courts must pay close attention to this feature. Courts will approve settlements with unequal treatment between group members where there is a 'rational basis' for doing so: see Harrison v Sandhurst Trustees Ltd [2011] FCA 541 at [22] per Gordon J. 20 When the application came before me on 4 December 2019, I queried whether adequate notice and explanation had been given to registered group members concerning the proposed differential distribution of the settlement sum. In the applicant's Supplementary Submissions it was conceded that the information required by paragraph 14.2(j) of the Federal Court of Australia Class Actions Practice Note (GPN-CA) was not in terms included in the applicant's Notice. The applicant (at Supplementary Submissions [37]) said: This information was not included, in such terms, in the Notice. However, in the context of the extensive information provided to RGMs [Registered Group Members] through the course of the proceeding about the differing loss assessments across different groups, and in light of the lack of request for information or objections from RGMs, the Applicant says that the Notice of Settlement was sufficient, and no further notice ought to be required to advise group members of the litigation risk discounts. 21 I am not persuaded that the information provided to registered group members, much less the absence of a request for further information or objections from them, relieved the applicant of the requirement to notify the registered group members "in terms" of the differential distribution. The absence of any request for more information or any objection in these circumstances is particularly unconvincing as, self-evidently, registered group members could not be expected to ask for more information, or raise objections, about a feature of a settlement not explained to them in the first place. 22 Fortunately it became unnecessary to decide whether further notice should be given to group members because shortly following the hearing on 4 December 2019, the applicant wrote to all registered group members on 6 December 2019 explaining "in terms" the fact of and the operation of the litigation risk discounts. Following this correspondence there were no relevant responses or requests for further information from registered group members prior to the further hearing of the application on 16 December 2019. I am therefore satisfied, based upon the information provided to the registered group members during the course of the proceeding, together with the Notice and the 12 November 2019 Letter, that adequate notice has been given to registered group members having regard also to the letter of 6 December 2019.

The applicant's claim in the proceeding 23 Before turning to the now well established principles to be applied in an application for approval of a settlement of a Group Proceeding under Part IVA of the Act, it is necessary to briefly describe the nature of the applicant's claim. The applicant brings the proceeding against the respondent on its own behalf and on behalf of all persons who acquired shares in the capital of the respondent on the Australian Stock Exchange between 16 April 2014 and 5 November 2014, who are alleged to have suffered loss or damage by reason of the pleaded conduct of the respondent, and who have not opted out of the proceeding. 24 The applicant's claim falls within the genre of Group Proceedings commonly referred to as securities class actions. The applicant alleges that the respondent breached its continuous disclosure obligations under s 674(2) of the Corporations Act 2001 (Cth) and Australian Stock Exchange Listing Rule 3.1. The applicant further alleges that by that conduct the respondent engaged in misleading and deceptive conduct. 25 The subject matter of the alleged non-disclosure concerned problems the respondent encountered with a major project it had undertaken called the Ichthys Project. This was a $900 million project for the construction and commissioning of a combined cycle power plant in the Northern Territory.

Evidence and materials relied upon by the applicant 26 The applicant relies upon the following evidence and materials: (1) Submissions in support of the proposed settlement by the applicant dated 27 November 2019 and 12 December 2019; (2) Submission in support of the proposed settlement by the respondent dated 2 and 13 December 2019; (3) Affidavits of Mr Timothy Michael Luke Finney dated 27 November 2019, and 4 and 12 December 2019, the solicitor on record for the applicant; (4) A confidential counsel opinion of Ms Rachel Doyle SC and Ms Alexandra Folie dated 27 November 2019, concerning the merits of the proposed settlement; and (5) A report of Mr Ian Ramsey-Stewart and appendices dated 18 November 2019, concerning the costs incurred by the solicitors for the applicant.

Applicable principles 27 As I have said, the relevant principles are well-established. Accordingly, it is unnecessary to again adumbrate them. Rather, I respectfully adopt the recent economical statement of the principles by Middleton J in Bradgate (Trustee) v Ashley Services Group Limited (No 2) [2019] FCA 1210 (at [9] to [10]): The principles applicable to court approval of settlements of representative proceedings are well-established. The fundamental task of the Court is to determine whether the settlement is fair and reasonable having regard to the interests of the group members who will be bound by it. Justice Lee recently summarised the applicable principles in McKenzie v Cash Converters International Ltd (No 3) [2019] FCA 10 at [24] as follows: First, the Court assumes an onerous and protective role in relation to group members' interests, in some ways similar to Court approval of settlements on behalf of persons with a legal disability; secondly, the Court must be astute to recognise that the interests of the parties before it and those of the group as a whole (or as between some members of the group and other members) may not wholly coincide; thirdly, and connected to the second point, the Court should be alive to the possibility that a settlement may reflect conflicts of interest or conflicts of duty and interest between participants in the common enterprise which has conducted the representative proceeding; fourthly, the Court should understand that at that point of settlement approval, the interests of the parties have merged in the settlement and both sides may not critique the settlement from the perspectives of the group members who may suffer a detriment or obtain lesser benefits through the settlement; fifthly, the Court must decide whether the proposed settlement is within the range of reasonable outcomes, not whether it is the best outcome which might have been won by better bargaining (in this way, the Court's task is not to second-guess the applicant's lawyers, and it should recognise that different applicants and different lawyers will have different appetites for risk). (Citations omitted) Further, when the Court performs its supervisory and protective role, and in particular when assessing whether the proposed settlement falls within the range of reasonable outcomes, the Court relies heavily on the applicant's counsel who, as guided by [14.4] of the Class Actions Practice Note (GPN-CA), should address the following factors: (1) the complexity and likely duration of the litigation; (2) the reaction of the class to the settlement; (3) the stage of the proceedings; (4) the risks of establishing liability; (5) the risks of establishing loss or damage; (6) the risks of maintaining a class action; (7) the ability of the respondent to withstand a greater judgment; (8) the range of reasonableness of the settlement in light of the best recovery; (9) the range of reasonableness of the settlement in light of all the attendant risks of litigation; and (10) the terms of any advice received from counsel and/or from any independent expert in relation to the issues which arise in the proceeding.

Consideration 28 Having regard to the principles referred to above, I am satisfied that the proposed settlement in this proceeding is fair and reasonable having regard to the interests of the group members. 29 I shall address below each of the key features of the proposed settlement which bear upon that conclusion.

The settlement sum 30 The settlement sum of $18 million is a substantial sum in the context of the claims made in the proceeding. I have had the benefit of considering a thorough and carefully reasoned opinion provided by counsel for the applicant briefed in the proceeding, Ms Rachel Doyle SC and Ms Alexandra Folie. As Lee J observed in McKenzie v Cash Converters International (No 3) [2019] FCA 10 at [24] referred to above: …the Court must decide whether the proposed settlement is within the range of reasonable outcomes, not whether it is the best outcome which might have been won by better bargaining (in this way, the Court's task is not to second-guess the applicant's lawyers, and it should recognise that different applicants and different lawyers will have different appetites for risk). 31 In my view, the settlement sum, having regard to the risks of the proceeding which have been carefully considered in counsel's opinion, is within a reasonable range that may be expected for such claims. I am fortified in reaching that conclusion by the fact that a settlement was reached at an advanced stage in the preparation of the proceeding for trial. By the time of the proposed compromise, the applicant was in a good position to make an assessment of the evidence likely to be adduced at trial, the strength of the claims, the likely range of damages which may be awarded if the applicant were successful, the likely course of the trial and the further costs which were likely to be incurred. The settlement was reached after the parties conducted two mediations in April and August 2019. In connection with those mediations the parties had exchanged detailed position papers which addressed the respective strengths and weaknesses of the claims and defences. 32 I note that the reaction of group members to the settlement has been essentially one of silence. I do not infer that such silence necessarily implies assent on the part of all group members, but the absence of any substantive objections by group members, or any sub-group of them, provides some reassurance that the settlement is reasonable.

Differential distribution among group members 33 I am satisfied that the differential distribution of the settlement sum among group members, differentiated essentially according to the time at which the group member acquired shares in the capital of the respondent, is reasonable. I am also satisfied that the methodology to be employed in calculating the distribution of the settlement sum among group members is rational and reasonable and that it is supported, insofar as it requires the exercise of a judgment, by the legal opinion of counsel relating to the relative strengths of the group members' claims having regard to the time period in which they acquired their shares. I also note that the model to be applied in distributing the settlement sum is to be applied uniformly to all group members, including the applicant, and it will be administered by an experienced administrator who in turn will be supported by experienced solicitors.

Legal Costs 34 The solicitors for the applicant, Phi Finney McDonald, agreed with the funder, IMF, that in seeking court approval the applicant's legal costs and administration costs would be capped at $5.95 million. The Court appointed independent costs consultant, Mr Ramsey-Stewart, assessed the fair and reasonable costs of the applicant's solicitors in this proceeding to be in the range of $6,039,270 to $6,071,670. Accordingly, the agreed capped sum for legal costs of $5.95 million is below the range assessed by Mr Ramsey-Stewart. 35 It is also necessary to consider the proportionality of the costs to the settlement sum. In this case, the costs represent approximately 33% of the gross settlement sum. This is a significant proportion, but assessing proportionality it is not a simple matter of comparing the gross settlement sum with the sum incurred for costs in dollar terms, or as a percentage of the gross settlement sum. It is necessary also to consider the complexities of the litigation and the efficiency with which it was conducted on behalf of the applicant. Counsel's opinion provided a detailed analysis of the complexities of the proceeding, including the evidentiary issues which arose and their impact upon the costs incurred. Having regard to these matters, in my opinion the legal costs to be capped at the agreed sum of $5.95 million is reasonable. 36 In addition to the sum of $5.95 million, approval is sought for a reimbursement payment to the applicant for the time, trouble and expense incurred by it in representing the group members in the proceeding. The applicant seeks the amount of $82,281.64. This amount includes reimbursement for categories of work typically performed by a lead applicant for the benefit of the group members as a whole, as well as additional work undertaken by Mr John Abernethy on behalf of the applicant in its capacity as an experienced investor. That work included providing advice to the legal team in relation to aspects of materiality. Mr Abernethy filed an extensive witness statement which included detail of the applicant's fund manager's general approach to investments, its consideration of and decisions regarding investments in the respondent and his opinion on the materiality of the pleaded information. The applicant prepared a spreadsheet indicating that it had devoted approximately 280 hours to work in connection with the proceeding. The claim for reimbursement is calculated at two rates: (1) for work performed by Mr Abernethy on traditional tasks in relation to the applicant's capacity as the lead applicant, it seeks reimbursement at the rate of $300 per hour; and (2) for work undertaken by Mr Abernethy in his capacity, on behalf of the applicant, as an experienced investor and for instructions in connection with the materiality following a perusal of discovered documents, it seeks reimbursement at the rate of $500 per hour. 37 In my view, the applicant's claim for reimbursement on the bases referred to above is reasonable. I note also that by a side agreement between the applicant and the funder, the funder has agreed to waive the applicant's obligation to pay his proportionate fair of the funding commission. The indicative value of this waiver is $48,552.69. This waiver does not impact on the distribution of the settlement sum is not material in my opinion to the question of the reasonableness of the settlement as a whole, or the reasonableness of the costs to be recovered by the solicitors for the applicant.

Funding commission and project costs payable to IMF 38 As discussed above, the funding commission is to be equalised between all group members irrespective of whether they are parties to a funding agreement with IMF. This mechanism has been consistently endorsed by the authorities as a means to achieve equality of treatment between group members. In Bradgate, Middleton J at [15] said succinctly as to FEOs: They achieve equality of treatment between group members because unfunded group members (that is, group members who have not entered into a funding agreement with a litigation funder) would not receive any more 'in hand' than funded group members. As has been espoused by the courts, there is no good reason why unfunded group members should be permitted to take the benefit of the proposed settlement without paying a proportionate share of the funding costs. (citations omitted) 39 The applicant seeks approval of a payment from the settlement sum of a funding commission of $4.05 million plus the payment of $15,054.40 for project costs. The funding commission of $4.05 million represents 22.5% of the $18 million gross settlement sum, prior to deduction of legal costs. The funding commission is plainly a significant sum and a significant proportion of the gross settlement sum. It is nevertheless at the lower end of the scale of funding commissions approved in recent cases: see, Morabito, V, An Evidence-Based Approach to Class Action Reform in Australia: Common Fund Orders, Funding Fees and Reimbursement Payments, 31 January 2019. It is also significantly less than the proportion of 30% of any settlement or award allowed in the CFO made by Murphy J on 4 October 2018. 40 Self-evidently the funder's business of funding litigation involves taking significant risks. The funder's commission is the return, or reward, for taking such risks. It may be said that all litigation involves significant risks, but not all litigation carries with it the same level of risk. The level of the risk is plainly influenced by the strength of the claims, properly understood. However, the relative strengths of one proceeding compared with another is not by any means the only factor which has a bearing on the risk undertaken by the funder. Some proceedings involve "breaking new ground", while others, though subject to the risks inherent in proving the causes of action concerned, are brought in the context of earlier successful claims of a similar kind and in some instances with the benefit of an earlier successful prosecution by a regulator: see, Kuterba v Sistex Medical Limited (No 3) [2019] FCA 1374 at [12]. 41 The present claim as I have said falls within the genre of securities class actions and is not novel or ground breaking in relation to the essential underlying thesis of the claim. On the other hand, it is not a claim preceded by a successful prosecution by a regulator resulting in competition among funders and law firms to run the proceeding. The evidence reveals that the funder took the risk of funding the proceeding where others had decided against it and where there had already been abortive proceedings in relation to the same subject matter in the Supreme Court of Victoria (see, Melbourne City Investments Pty Ltd v UGL Limited [2015] VSC 540). There were also evidentiary developments which arose in preparing the case for trial. These concerned important factual matters about relevant knowledge of the respondent which were revealed only after obtaining answers to interrogatories from the respondent. 42 Having regard to the nature of the proceeding as a whole, to the context in which the proceeding was brought referred to above, the forensic and evidentiary challenges that emerged in preparation for trial and the aggregate settlement sum, I am satisfied that the funding commission is reasonable. The additional sum for project costs of $15,054.40 is immaterial in the context and reasonably incurred. I certify that the preceding forty-two (42) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Anastassiou.