Horsky v Mesoblast Limited

Appointment of Fund Administrator 4. Pursuant to ss. 33ZF and 23 of the Act, WRL be appointed as the Fund Administrator and is to act in accordance with the SDS and is to have the powers and immunities conferred by the SDS, subject to any direction of this Court. 5. The Fund Administrator has liberty to apply in relation to any matter arising under the SDS including for the purposes of seeking orders consequential to or in connection with the Deed and/or the SDS.

Approval of amounts to be deducted pursuant to the SDS 6. Pursuant to s 33V of the Act, the following amounts are approved for the purposes of the SDS: (a) the amount of $6,202,989.96 (incl. GST) in respect of Project Costs, being legal costs paid or agreed to be paid by the Funders (excluding the costs referee's fees), to be paid to the Funders in the following proportions: (i) the amount of $2,813,783.94 to be paid to ICP in respect of WRL's professional fees and disbursements; and (ii) the amount of $3,389,206.02 to be paid to OBL in respect of PFM's professional fees and disbursements; (b) the amount of $5,886,132.91 (incl. GST) in respect of funding commission to be shared equally by the Funders as follows: (i) the amount of $2,943,066.45 to be paid to ICP; and (ii) the amount of $2,943,066.46 to be paid to OBL; (c) the amount of $2,000,327.31 (incl. GST) in respect of the Joint Applicants' lawyers' legal costs for work not funded by the Funders (including 25% uplift on deferred fees) to be paid to the lawyers in the following proportions: (i) the amount of $832,120.75 to be paid to WRL; and (ii) the amount of $1,168,206.56 to be paid to PFM; (d) the amount of $11,000 to be paid to the costs referee, Mr Ian Ramsey-Stewart in respect of his fees as costs referee; (e) the amount of $316,718.05 to be paid to the Fund Administrator for its role in administering the SDS; (f) the amount of $35,000 to be paid to each of the Joint Applicants in the following proportions to reimburse them for their time in acting as a representative party in these proceedings: (i) $17,500 to be paid to the First Applicant; and (ii) $17,500 to be paid to the Second Applicant.

Late Registrants & Post-Mediation Objectors 7. The persons referred to at paragraph 70(a), (b) and (c) of the Second Pan Affidavit are to be treated as registered group members for the purposes of the SDS. 8. The persons referred to at paragraph 70(d) and (e) of the Second Pan Affidavit are not to be treated as registered group members for the purposes of the SDS. 9. Any Group Member who is not a registered group member or treated as such by the effect of these orders, will remain a Group Member for all purposes of this proceeding but shall not be permitted to seek any benefit pursuant to the settlement approved by this Court.

Confidentiality 10. Until further order, pursuant to ss. 37AF and 37AG(1)(a) of the Act, and in order to prevent prejudice to the proper administration of justice, the material referred to in Schedule A to these orders is: (a) not to be published or disclosed without the prior express consent of the Joint Applicants and/or prior leave of this Honourable Court to any person or entity other than: (i) this Court; (ii) the Joint Applicants; (iii) the Funders and their respective legal advisors; and (b) not to be disclosed to the Respondent or its legal representatives, other than to the extent that the material identified in Schedule A has previously been disclosed to them during this proceeding. 11. Until 49 days from the date of any order approving the proposed settlement in these proceedings under s 33V of the Act, pursuant to ss. 37AF and 37AG(1)(a) of the Act, and in order to prevent prejudice to the proper administration of justice, the material referred to in Schedule B to these orders is: (a) not to be published or disclosed without the prior express consent of the Joint Applicants and/or prior leave of this Honourable Court to any person or entity other than: (i) this Court; (ii) the Joint Applicants; (iii) the Funders and their respective legal advisors; and (b) not to be disclosed to the Respondent or its legal representatives, other than to the extent that the material identified in Schedule B has previously been disclosed to them during this proceeding.

Other Orders 12. All deeds of indemnity provided to the Respondent by the Funders in accordance with orders 3 and 4 of the orders made by this Court on 5 April 2023 be returned to the Joint Applicants' solicitors or be destroyed within 14 days of the date of these orders. 13. Pursuant to r 2.43(1) of the Federal Court Rules 2011 (Cth), the AU$25,000 paid by ICP into Court on 6 April 2023 as security for the Respondent's costs be returned by transferring it into WRL's trust account. 14. All costs orders made to date in the proceeding be vacated. 15. No order as to costs. 16. The proceeding be dismissed upon notification by the Fund Administrator to this Court of the completion of the implementation of the SDS, on the basis that the dismissal is a defence and absolute bar to any claim (either direct or indirect) or proceeding by the Joint Applicants or any Group Member which is in respect of, or arises out of, the same, similar or related circumstances raised in this proceeding. Note: Schedules A and B have not been reproduced here, but the authenticated order is available on the Commonwealth Courts Portal. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

BEACH J 1 This is a securities class action in which the applicants claim on their own behalf and for group members compensation from Mesoblast Ltd for damage arising from the purchase of securities in Mesoblast, in circumstances where the value of those securities is said to have been inflated by Mesoblast's continuous disclosure obligation contraventions and misleading or deceptive conduct in the period 22 February 2018 to 17 December 2020. 2 The proceedings were originally commenced as an open class representative proceeding against Mesoblast by Mr Horsky on 17 May 2022, but they were later consolidated with another open class representative proceeding initiated by Oil Surveillance Australia Pty Ltd on 3 June 2022. I made the necessary consolidation orders on 19 October 2022. 3 The litigation funding for the consolidated proceeding has been provided by ICP Funding Pty Ltd (ICP) and Omni Bridgeway (Fund 5) Australian Invt. Pty Ltd (OBL). Further, pursuant to the consolidation orders there has been a cooperative litigation protocol entered into. The funders have also agreed to joint funding terms. 4 The applicants now seek my approval pursuant to s 33V(1) of the Federal Court of Australia Act 1976 (Cth) of a settlement which was reached at mediation on 23 July 2024, with a settlement deed being executed on 21 August 2024. 5 The settlement comprises a payment by Mesoblast to the applicants and participating group members of $26.5 million. 6 The settlement amount, together with interest, is proposed to be distributed to group members in accordance with a proposed settlement distribution scheme (SDS) following the deduction of amounts representing the applicants' legal costs and disbursements, funding expenses, a small reimbursement payment to the applicants and administration costs. 7 Group members are to receive 45.46% of the gross settlement sum. 8 Now whilst there were a total of 30 notices of objection lodged by group members, 29 of these were from group members who wished to share in the benefit of the settlement but were not registered group members. There has only been one substantive objection which I have considered but which provides no bar to approval. 9 The applicable principles are not in doubt concerning whether to approve a settlement under s 33V. 10 First, my discretion is broad and its exercise is only limited by the necessity that it be exercised judicially having regard to the particular circumstances of the case. 11 Second, the central question is whether the proposed settlement is a fair and reasonable compromise of the claims made on behalf of the group members who will be bound by the settlement. 12 Third, one approaches the question by asking whether the proposed settlement is fair and reasonable as between the parties having regard to the claims of the group members (inter partes fairness), and then whether the proposed settlement is fair and reasonable as between the group members (inter se fairness). 13 Fourth, there is not usually one single or clear way in which a settlement should be framed. Reasonableness is a range, and the question is whether the proposed settlement falls within that range. 14 Fifth, the parties and their legal representatives are often in a better position to appreciate the risks associated with the proceedings. Moreover, different parties will have different appetites for risk. It is not my present task to second-guess the commercial strategies or other decisions made by an applicant's legal representatives, but rather to satisfy myself that the decisions are within the reasonable range of decisions. 15 Sixth, in determining whether to approve a proposed settlement, the Court assumes a protective role in relation to group members' interests. In this respect the interests of the parties may not wholly coincide with the interests of group members, and relatedly, both parties may have an affection for the deal and consequently may not critique the settlement from the perspective of any group members who may be disadvantaged by the proposed settlement. 16 Seventh, in relation to inter se fairness, a particular concern is to confirm that the interests of the representative applicant, or signed-up clients of a given firm of solicitors, are not being preferred over the interests of other group members. The arrangement should be framed to achieve a broadly fair and cost-effective division of the proceeds, including treating like group members alike. This may involve judgment calls being made where a range of alternative approaches might have been open to be adopted. 17 Eighth, inter se fairness also involves other procedural considerations as to the fairness of a proposed distribution process such as whether appropriate individuals have been nominated to administer the scheme, whether the procedures for lodging and assessing claims are appropriate and to be conducted in a timely manner, and whether any SDS incorporates appropriate checks and balances such as procedures for ensuring consistency between assessments. 18 Now of course the above considerations are not necessarily exhaustive and some are not mandatory. And more generally, the decision required is evaluative and impressionistic. 19 Let me turn first to the question of class closure.

Class closure 20 Now I have the power under s 33V(1) to approve a settlement that provides for a particular distribution of the settlement proceeds, including a scenario where some group members such as unregistered group members receive no benefit from the settlement. This is clearly permissible provided that I am satisfied that the settlement is fair and reasonable in the circumstances (Wetdal Pty Ltd as Trustee for the BlueCo Two Superannuation Fund v Estia Health Limited [2021] FCA 475; see also Parkin v Boral Ltd (2022) 291 FCR 116). 21 Now in the case before me the SDS proposes a distribution that effectively limits participation to categories of registered group members only, with the consequence that unregistered group members, whose rights will merge upon settlement approval, are excluded from the benefits unless they are granted leave and permitted to register. 22 The SDS defines "registered group member" as follows: Group Members who have registered in accordance with orders 18 and/or 20 of the orders made by the Honourable Justice Beach on 20 December 2023 in respect of the Proceeding, or any other Group Members who, by any further order of the Court, are granted leave and permitted to register to participate in the Settlement 23 Opt out and registration notices were disseminated to some 63,155 potential group members pursuant to orders that I made on 23 December 2023. The notice emphasised the need to register by 4pm on 19 April 2024 or potentially be excluded from the settlement benefits: see for example, Section 5 (Option 1), where the notice informed group members that non-registration "could have significant consequences for your legal rights" because the parties intended to seek an order to the effect that non-registrants may not share in any settlement. 24 Following the in-principle settlement between the parties, I made further orders on 6 September 2024, which approved the form, timing and mode of distributing a notice of proposed settlement to group members and set a deadline of 4pm on 11 October 2024 for group members to object to the proposed settlement by filing a notice of objection. 25 The notification and registration procedures which were implemented resulted in the following subcategories of group members. 26 First, there were 320 group members who filed opt out notices in accordance with the 23 December 2023 orders. 27 Second, there were 16,400 claimants who registered by the registration deadline in accordance with the 23 December 2023 orders (the registered group members). 28 Third, there were 354 group members who attempted to register after the registration deadline but prior to mediation (pre-mediation late registrants). The pre-mediation late registrants can further be split into two subgroups being: (a) 348 group members who provided their share trading data prior to mediation (pre-mediation data late registrants); (b) six group members who have not provided any share trading data to OBL or WRL, despite having been sent the settlement notice and repeated attempts having been made to request this data from them (pre-mediation no data late registrants). 29 Fourth, there were twenty-nine claimants who submitted notices of objection, after mediation and following the issuing of the notice of settlement, on the basis of seeking leave to share in the benefits of the proposed settlement in accordance with the instructions set out in the settlement notice (post mediation objectors). The post mediation objectors included: (a) twenty-one objectors who have provided data and were not otherwise included in other categories (post mediation objectors with data); (b) seven claimants who are also pre-mediation late registrants who need to be excluded to avoid double counting; (c) one claimant who has not provided data to enable any assessment of the value of their claims to be undertaken, despite attempts to contact them (post mediation objector with no data). 30 Fifth, there were 50 claimants who attempted to register to participate in the class action after the mediation and have provided data to allow calculation of loss, but did not file a notice of objection in accordance with the notice of settlement (post mediation late registrants). 31 Sixth, there were 758 group members who have provided some trade data as to their claims at various points in time to OBL's client services team but have neither taken the necessary steps to register following the processes described in the various notices nor taken the step of applying to the Court to be admitted late (unregistered known claimants with data). 32 Seventh, there were 2025 persons who did not attempt to register or object in accordance with any Court order and have not provided any trade data as to their claims (unregistered known claimants with no data). 33 The registered group members and the members who opted out do not require further explanation. In the case of the former, they are clearly covered by the SDS, and in the case of the latter those persons will not be bound by the settlement approval or have their rights merge upon settlement approval. 34 Let me say something about how I have treated the remaining subcategories of group members. 35 First, as to the 348 pre-mediation data late registrants who sought to follow the Court's process but did so late but prior to the mediation, these are persons who have all indicated a positive intent to participate in the settlement and have facilitated that participation by providing relevant information. Their claims were taken into account at the mediation, and on that basis their lateness has not caused any prejudice to the group members as a whole or contributed to the applicants underestimating the level of interest of group members. It is fair to include them and I will. 36 Second, as to the 21 post mediation objectors with data, their circumstance is less clearcut than the pre-mediation data late registrants, though their dilutionary impact is negligible at 1.69%. Now whilst their claims were not taken into account for the purposes of the mediation, the minimal incremental value they add to the estimated aggregate claims means that it is difficult to say that the mediation would have been conducted with any real degree of difference. Now given that the applicants' position is that they neither consent to nor oppose these persons being allowed to participate in the settlement, I have determined to allow them to participate given that to include them would have minimal consequences. 37 Third, as to the 50 post mediation late registrants with data who attempted to register to participate in the class action after the mediation but did not file a notice of objection in accordance with the notice of settlement, their circumstance is also less clear-cut, given that they have also not sought to take the steps set out in the settlement approval notice of formally applying to be included, such that their interest in participating is more difficult to assess. 38 Their dilutionary impact is also negligible at 1.35%, and, while their claims were not taken into account for the purposes of the mediation, the very minimal incremental value they add to the estimated aggregate claims means that it is difficult to say that the mediation would have been conducted with any real degree of difference if it had been provided. The applicants' position is that they neither consented to nor opposed these persons being allowed to participate in the settlement. I have also allowed them to participate given that to include them would have minimal consequences. 39 Fourth, as to the next cohort of group members which are the 758 unregistered known claimants with data, those group members did not register or opt out pursuant to my orders. They did not take steps to register for the class action after the deadline or submit an objection on the basis that they wanted to share in benefits from the proposed settlement, being unlike the post mediation objectors, even though OBL provided them with the settlement notice. They have been treated as persons who have manifested a disinterest in participating. Their claims were not considered for the purposes of the mediation. And the dilutive effect on each participating group member of including them would be significant and in the order of 21.6%, which is the flipside of the proposition that if they were to be included, the estimated aggregated claim value would increase by over 20%. 40 Now absent them providing a compelling reason why they ought to be included, as a matter of principle it is not unfair or unreasonable for me to exclude them. 41 Since the 758 unregistered known claimants with data have not registered at any stage, or filed an objection with the Court identifying why they should be entitled to participate, there is a limited basis upon which I could infer that they intended to participate in the settlement and that it would be unfair or unreasonable not to include them. I will not permit them to participate. 42 Fifth, as for the 2025 unregistered known claimants with no data who have not manifested any interest in participating, it is not unfair and not unreasonable for me to approve the settlement and its distribution on the basis that their claims are compromised without them receiving a benefit. I will not permit them to participate. 43 Sixth, there is a small cohort of group members who, though attempting to register or object, have not provided any relevant data, the result of which is that they have not manifested a proper intention for their losses to be assessed in order to participate in the settlement. That cohort includes six pre-mediation with no data registrants and one post mediation objector with no data. Their claims were not considered for the purposes of mediation. Even now, without relevant data, it is not possible to assess loss in respect of those persons. I will not include them. 44 The dictates of pragmatism, fairness and finality require that the claims of group members that I have just identified in the fourth, fifth and sixth points be compromised without them receiving a benefit. One must be firm, but fair. 45 Further, in reaching this conclusion I have put to one side ideas concerning potential conflicts of interest. I am here dealing with the reality of what is before me, not some idealisation or form of conflict of interest that may only interest Neo-Platonists. If you like, I am taking an Aristotelian approach. No unresolved conflict of interest that I need to resolve exists, as Mr William Edwards KC for the applicants pointed out.

Fairness and reasonableness of the proposed settlement 46 Counsel's confidential opinion sets out the considerations taken into account in concluding that the proposed settlement is fair and reasonable and in the interests of group members. It is neither necessary nor appropriate to repeat here what is there set out as to the appropriateness of the all-inclusive settlement sum of $26.5 million. 47 I am satisfied that the overall amount is fair and reasonable on an inter partes basis.

Fairness of the proposed distribution 48 As I have already said, another matter relevant to an assessment of the fairness and reasonableness of the proposed settlement is the consideration of fairness between group members inter se. 49 In my view, the SDS adopts a distribution formula which takes into account the losses suffered by group members in a way that attempts to be as fair and reasonable as possible in all the circumstances. Further, the SDS includes a mechanism by which information is gathered, verified and followed up if need be. This is coupled with a mechanism by which proposed distributions are provided and group members have the opportunity to have those statements reviewed.

Proposed deductions from the settlement sum 50 Now proposed deductions from the settlement sum include the following. 51 First, project costs being legal costs paid by the funders in an amount of $6,202,989.96. 52 Second, funding commission in an amount of $5,886,132.91 paid to the funders, representing 22% of the gross settlement sum and 29% of the net settlement sum. 53 Third, legal costs for work not funded by the funders up to and including the settlement approval hearing, which total $2,000,327.31 including a 25% uplift fee on deferred fees. 54 Fourth, court appointed costs referee's fees in an amount of $11,000. 55 Fifth, costs of administering the SDS in an amount of $316,718.05. 56 Sixth, $17,500 to be paid to each of the joint applicants totalling $35,000 to reimburse them in recognition of their time in acting as a representative party in this class action. 57 In summary, the deductions proposed amount to 54.54% of the gross settlement sum, leaving 45.46% to be shared between group members.

Legal costs 58 Mr Ian Ramsey-Stewart was appointed by me as the costs referee on 6 September 2024 for the purpose of conducting a reference into the reasonableness of incurred and anticipated legal costs and administration costs and providing a report with respect to that reference. 59 Now the referee identified the reasonable incurred costs and disbursements of $7,295,303.93 inclusive of GST, following a reduction of $505,085.50. That reduction was taken into account for the purposes of calculating uplift amounts. The applicants accepted the reductions identified by the referee, with the exception of several matters. 60 I have accepted the applicants' position and rejected some of the reductions.

The applicants' reimbursement payment 61 The SDS contemplates a payment to each applicant of $17,500 per applicant. Such a payment is designed to recognise the fact that each of the applicants has expended time and effort in bringing the action on behalf of others. 62 Such payments are commonly made and the figures sought fit well within Professor Morabito's empirical analysis on the topic.

Litigation funding charges 63 Now the Court possesses a broad discretionary power under s 33V(2) to make such orders as are just with respect to the distribution of any money paid under a settlement. This power extends to the making of common fund orders in the context of settlement approval applications, which facilitate the equitable distribution of the costs of necessary litigation funding among all group members who benefitted from the funding. 64 The question of whether I should make a common fund order and in what amount is to be guided by the following non-exhaustive factors which were set out by Murphy, Gleeson and Beach JJ in Money Max Int Pty Ltd v QBE Insurance Group Ltd (2016) 245 FCR 191 at [80]: … (a) the funding commission rate agreed by sophisticated class members and the number of such class members who agreed. That can be said to show acceptance of a particular rate by astute class members; (b) the information provided to class members as to the funding commission. That may be important to understand the extent to which class members were informed when agreeing to the funding commission rate; (c) a comparison of the funding commission with funding commissions in other Pt IVA proceedings and/or what is available or common in the market. It will be relevant to know the broad parameters of the funding commission rates available in the market; (d) the litigation risks of providing funding in the proceeding. This is a critical factor and the assessment must avoid the risk of hindsight bias and recognise that the funder took on those risks at the commencement of the proceeding; (e) the quantum of adverse costs exposure that the funder assumed. This is another important factor and the assessment must recognise that the funder assumed that risk at the commencement of the proceeding; (f) the legal costs expended and to be expended, and the security for costs provided, by the funder; (g) the amount of any settlement or judgment. This could be of particular significance when a very large or very small settlement or judgment is obtained. The aggregate commission received will be a product of the commission rate and the amount of settlement or judgment. It will be important to ensure that the aggregate commission received is proportionate to the amount sought and recovered in the proceeding and the risks assumed by the funder; (h) any substantial objections made by class members in relation to any litigation funding charges. This may reveal concerns not otherwise apparent to the Court; and (i) class members' likely recovery "in hand" under any pre-existing funding arrangements. 65 In my view the rate sought is not out of step with the market either at the time the funders contractually committed to provide funding or now. 66 The funders' contractual entitlement to a commission was stipulated to be calculated by the application of a percentage to the net resolution sum rather than the settlement sum as a whole. 67 Now 29% of the net resolution sum is equivalent to 22% of the gross settlement sum. CFO rates of 22% or above for actions of this kind are common. I have no difficulty in approving the CFO sought.

Conclusion 68 In summary and for the foregoing reasons, I have approved the settlement under s 33V(1) and made the necessary distribution orders under s 33V(2). I certify that the preceding sixty-eight (68) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Beach.