Kenquist Nominees Pty Limited v Campbell

The claim 3 The proceeding is a representative proceeding that has been brought pursuant to Pt IVA of the Federal Court of Australia Act 1976 (Cth). The proceeding has been commenced by Kenquist on its own behalf and on behalf of persons who obtained an interest in ordinary shares in QRxPharma Limited (QRx) under certain rights issues, placements and plans or otherwise on the financial market operated by the Australian Securities Exchange Limited (ASX) during the period 6 November 2009 to 25 June 2012. 4 So far as relevant to the present application, the allegations pleaded in the statement of claim may be summarised as follows. 5 At relevant times, QRx's business included the development and commercialisation of therapies for pain management and central nervous system disorders. These therapies included a dual opioid product called MoxDuo, which combined morphine and oxycodone. MoxDuo was intended to provide pain relief with reduced side effects when compared with the individual administration of morphine or oxycodone at equivalently potent doses. QRx held a number of patents and had a commercial agreement to commercialise MoxDuo in the United States of America subject to QRx obtaining New Drug Approval (NDA) from the United States Food and Drug Administration (the FDA). 6 As MoxDuo was a combination of two drugs that, individually, had already obtained NDAs, QRx was able to avail itself of a streamlined regulatory approval process called a Special Protocol Assessment (SPA). This process was one whereby the FDA and the drug sponsor (here, QRx) could come to an agreement about the design and size of a clinical trial that would be sufficient to support an NDA. If the results of the trial were in line with the agreed parameters, then, subject to certain exceptions, the FDA would be required to grant an NDA for the product concerned. Thus, an SPA provided a measure of regulatory certainty in relation to the trial to be conducted. 7 In order to obtain an NDA for MoxDuo, QRx was also required to demonstrate that the combination product was safer or had greater efficacy than comparable doses of its constituent molecules (being, morphine and oxycodone) (the Combination Rule). 8 By at least 2008, QRx had approached the FDA to discuss a proposed Phase 3 clinical trial that was intended to satisfy the Combination Rule in relation to an immediate release formulation of MoxDuo (the MoxDuo study). 9 On 23 December 2008, QRx lodged the MoxDuo study with the FDA and requested an SPA. On 23 January 2009, the FDA declined that request on the basis that QRx's submission, in its then form, did not qualify for an SPA. On successive occasions, QRx submitted revised studies requesting an SPA but, on each occasion, the FDA declined QRx's request. 10 On 3 September 2009, QRx submitted a further revised study and requested an SPA but, on 5 October 2009, the FDA denied that request (the SPA Denial). The letter conveying the SPA Denial (the SPA Denial letter) noted that the FDA's resources did not permit it to provide a third round of review. The FDA said that the revised study would be reviewed as a "regular protocol". The effect of the SPA Denial was that the MoxDuo study would not be afforded the advantage of the SPA process. 11 On 23 November 2009, QRx submitted a regular protocol for the MoxDuo study. It did not make any further application to the FDA for an SPA in respect of that study. 12 On 14 June 2011, QRx completed the MoxDuo study and, on 24 August 2011, submitted an NDA to the FDA for the MoxDuo immediate release formulation. On 27 June 2012, the FDA rejected the NDA on the basis that the Combination Rule was not satisfied. 13 In around October 2009, QRx commenced raising capital to provide funds for the MoxDuo study. It appointed Morgans as the Lead Manager and Underwriter. As part of the capital raising process, a due diligence committee was formed. Staff at Morgans, including Michael Johnston and Kyra Miller, participated on the due diligence committee, apparently in the role of "observers" rather than as "members". 14 The essence of Kenquist's claim is that, in separate capital raisings undertaken in 2009, 2010 and 2011, in which Morgans participated, QRx failed to disclose to the ASX and to potential investors information that would have been material to making an investment in QRx. This information is identified in paragraph 61 of the statement of claim as the SPA Information, which is said to comprise "the matters pleaded in paragraph 48" of the statement of claim. Paragraph 48 refers to the SPA Denial, and is pleaded as follows: On 5 October 2009, the FDA responded to the 3 September 2009 request, which denied that request (the SPA Denial). The SPA Denial: (a) was headed 'Special Protocol Assessment - Request Denied'; (b) noted that the FDA's resources did not permit it to provide a third round of review for the SPA Request; (c) provided that the revised protocol would be reviewed as a 'regular protocol' rather than a Special Protocol; (d) stated that any comments would be conveyed to QRxPharma in a timely manner; and (e) had the effect that the MoxDuo study would not be able to take advantage of the SPA process set out in paragraphs 33 to 38 above. Particulars Letter to Michael Schroeder, Executive Director, Regulatory Affairs at QRxPharma from Bob Rappaport, Director Division of Anaesthesia, Analgesia and Rheumatology Products, FDA dated 27 August 2009. 15 The statement of claim pleads that QRx's failure to disclose the SPA constituted, or resulted in, contraventions by it of various statutory provisions. The statement of claim pleads that Morgans was involved in some of the contraventions and was knowingly concerned in other contraventions. 16 The present application focuses on two issues in relation to the pleading of Morgans' alleged accessorial liability. The first is whether the statement of claim pleads actual knowledge on the part of Morgans in relation to the elements of each contravention - specifically, whether the statement of claim pleads that Morgans had actual knowledge of the effect of the SPA Denial. The second is whether the statement of claim pleads conduct on the part of Morgans amounting to participation in the alleged contraventions. 17 There is no dispute between the parties as to the legal principles involved in establishing accessorial liability. The matter that divides them is whether the statement of claim adequately or sufficiently pleads those elements in order to disclose a reasonable cause of action against Morgans.

Morgans' submissions 18 Paragraph 165 of the statement of claim is of particular relevance in this application. It is pivotal to the pleading of knowledge on the part of Morgans: Knowledge of Morgans At all material times during the Relevant Period, Morgans knew: (a) the SPA Information; Particulars 1. The Applicant refers to and repeats paragraphs 75 to 79 and 81 to 83 of this Amended Statement of Claim. 2. The Applicant relies on: a. The presence of Johnston and Miller on behalf of Morgans at the Due Diligence Committee Meetings on 3 November 2009, 6 November 2009 and 9 November 2009 and the board of directors meeting on 9 November 2009 at which the SPA Denial was disclosed and discussed; and b. The receipt by Johnston and Miller on behalf of Morgans of the 2009 Investor Presentation, 2009 Due Diligence Questionnaire and 2009 Rights Issue Booklet. 3. The knowledge of Morgans is also inferred from the involvement of Johnston and Miller on behalf of Morgans in the due diligence process for the 2009 Shareholder Rights Issue and the 2009 Institutional Placement, and the nature of the SPA Information. (b) the matters pleaded in paragraphs 62 to 67. Particulars 1. The Applicant refers to and repeats sub-paragraph (a) above of this Amended Statement of Claim. 2. The Applicant relies on: a. the response to the 2009 Due Diligence Questionnaire suggesting that the SPA Denial would have been disclosed without the 'incomplete transaction' carve-out in Listing Rule 3.1A; and b. the fact that the SPA Denial clearly indicated that the SPA application process was complete. 3. The knowledge of Morgans is also inferred from the involvement of Johnston and Miller on behalf of Morgans in the due diligence process for the 2009 Shareholder Rights Issue and the 2009 Institutional Placement, and the nature of the SPA Information. 19 As I have noted, paragraph 61 of the statement of claim introduces the term SPA Information by reference to the matters pleaded in paragraph 48. Morgans' submissions focus on paragraph 48 and draw a distinction between, on the one hand, subparagraphs (a) to (d) thereof and, on the other, subparagraph (e): see [14] above. 20 Morgans submits that subparagraphs (a) to (d) describe the content of the SPA Denial and subparagraph (e) describes the effect of the SPA Denial. It says that the statement of claim does not plead that the SPA Denial letter either described or explained the effect of its content. It also says that only a person who had actual knowledge of the SPA process as well as the "regular protocol" referred to in the SPA Denial letter would be able to understand what the letter meant and what its implications were. 21 The particulars to paragraph 165(a) of the statement of claim show that Morgans' knowledge of the SPA Information is alleged to be based on the presence of Mr Johnston and Ms Miller at certain due diligence committee meetings at which the SPA Denial was disclosed and discussed; their receipt of an Investor Presentation, Due Diligence Questionnaire and Rights Issue Booklet; and their involvement in the due diligence process for a Shareholder Rights Issue and an Institutional Placement, both taking place in 2009. The particulars also rely on "the nature of the SPA Information". 22 Relatedly, Morgans submits that, notwithstanding the particularisation of these matters, there is no allegation in the statement of claim that Mr Johnston or Ms Miller had actual knowledge of the effect of the SPA Denial. Morgans submits that, at its highest, the statement of claim pleads that Mr Johnston and Ms Miller had knowledge of the content of the SPA Denial letter (that is, the matters pleaded in subparagraphs 48(a) to (d)). 23 Thus, Morgans submits, the statement of claim fails to plead the necessary allegation that Morgans, through Mr Johnston and Ms Miller, had the requisite knowledge of the effect of the SPA Denial.

Consideration 24 I do not accept the submission that the statement of claim does not plead actual knowledge on the part of Morgans in relation to the effect of the SPA Denial. Morgans' submission does not give sufficient regard to the definition in paragraph 61 of the SPA Information as "the matters pleaded in paragraph 48". These "matters" comprise aspects of the content of the SPA Denial letter and the effect that "the MoxDuo study would not be able to take advantage of the SPA process". Paragraph 165(a) of the statement of claim specifically pleads that, in the relevant period, Morgans knew the SPA Information. 25 Kenquist advances the argument that, even without the definition of the SPA Information provided by paragraph 61 of the statement of claim, paragraph 48 makes clear that the SPA Denial comprised the content and effect of the SPA Denial letter. Paragraph 76(f) of the statement of claim pleads that the SPA Denial was communicated to the due diligence committee on 6 November 2009 - a meeting attended by Mr Johnston and Ms Miller. Kenquist argues that there are, therefore, two separate paths, each of which is sufficient to defeat Morgans' submission. In making this submission, Kenquist equates the SPA Denial with the SPA Information. 26 I am not persuaded that the statement of claim treats the SPA Denial and the SPA Information as equivalent expressions. Indeed, as Morgans submits, if that were so, there would be no point in having the separate definitions. I think the better reading of paragraph 48 is the one proffered by Morgans. Nevertheless, this construction does not win the day, in light of my conclusion expressed at [24] above. 27 As to the related submission that the statement of claim does not plead that Mr Johnston or Ms Miller had actual knowledge of the effect of the SPA Denial (one of the defined elements of the SPA Information), Kenquist relies on the particulars provided to paragraph 165(a) of the statement of claim and certain other allegations that are pleaded. In submissions, it provided the following narrative. 28 Firstly, Kenquist says that Morgans knew the contents of the SPA Denial itself. As I have noted, paragraph 76(f) of the statement of claim pleads that the SPA Denial was disclosed to the due diligence committee. This meeting took place on 6 November 2009. Paragraph 76(g) pleads that the SPA Denial was tabled. The particulars to paragraph 165(a) of the statement of claim state that Mr Johnston and Ms Miller were present at this meeting. Kenquist says that the SPA Denial letter is explicit: it informs the reader that the request for the SPA had been denied; that the FDA's resources did not provide for a third review; and that QRx's revised protocol for the MoxDuo study would be reviewed as a "regular protocol". Kenquist says that it is apparent that the SPA Denial letter was a significant response from the regulator with whom QRx was negotiating. 29 In this connection, Kenquist also argues that proof of actual knowledge can be by inference. In some cases, actual knowledge can be inferred from the combination of a defendant's knowledge of suspicious circumstances and the defendant's decision not to make inquiries to remove those suspicions: Lifeplan Australia Friendly Society Ltd v Woff [2016] FCA 248 at [356] referring, with approval, to the principles summarised in Austin RP and Ramsay IM, Ford, Austin & Ramsay's Principles of Corporation Law (LexisNexis Butterworths) at [9.284]. Here, Kenquist says that it is arguable that Morgans' knowledge, through Mr Johnston and Ms Miller, can be inferred from a decision not to investigate the "suspicious circumstances" raised by the SPA Denial letter. 30 Secondly, Kenquist submits that the minutes of the due diligence committee meetings on 6 and 9 November 2008, which Mr Johnston and Ms Miller attended (as particularised in paragraph 165(a) of the statement of claim) show that the SPA Denial was raised as a disclosure issue and, hence, Morgans must have known that it was a significant issue from a continuous disclosure perspective: see further below at [33]. 31 Thirdly, paragraph 168(c) of the statement of claim pleads that, in its role as Lead Manager and Underwriter of the Share Rights Issue and Institutional Placement (referred to in the particulars to paragraph 165(a)), Morgans was involved in drafting and reviewing the Rights Issue Booklet. The Rights Issue Booklet contains a statement that refers investors to QRx's interim and annual reports and announcements to be found on QRx's website and on the ASX website. One of those reports (QRx's Preliminary Final Report for the financial year ended 30 June 2009) contains the following statement under the heading Key Achievements: The SPA process provides a mechanism by which the Company can achieve a binding agreement with the FDA regarding the acceptability of the study design and proposed statistical analysis plan prior to implementation of the clinical trial. 32 This statement was made with express reference to the MoxDuo study which had been submitted in June 2009 to the FDA for SPA approval. Kenquist submits that, as part of Morgans' due diligence process and its work in drafting the statement in the Rights Issue Booklet, it must have reviewed the report released to the ASX and must have known the explanation given as to the SPA process. Kenquist submits that, with that knowledge, Morgans must also have known that the SPA Denial meant that QRx had been denied the regulatory advantage of an SPA. Thus, Morgans did know the effect of the SPA Denial. 33 Fourthly, Listing Rule 3.1 of the ASX Listing Rules requires an entity to disclose information which a reasonable person would expect to have a material effect on the price or value of the entity's securities. Listing Rule 3.1A.1 of the ASX Listing Rules provides an exception where the information concerns an incomplete proposal or negotiation. 34 Paragraph 168(a) of the statement of claim pleads that Morgans, in its role as Lead Manager and Underwriter, prepared the Due Diligence Questionnaire. The particulars to paragraph 165(a) states that Mr Johnston and Ms Miller received QRx's responses to the Questionnaire which showed that QRx's directors considered the progress of the company's application for an SPA for the MoxDuo study to be an "incomplete proposal or negotiation" for the purposes of Listing Rule 3.1A.1. Kenquist argues that, on receipt of this response, Morgans, through Mr Johnston and Ms Miller, must have appreciated that the application for the SPA was price sensitive information; otherwise no point would have been served by QRx's reliance on the exception provided by Listing Rule 3.1A.1. Further, on disclosure of the SPA Denial at the due diligence committee meeting, Morgans, through Mr Johnston and Ms Miller, must have known that QRx's reliance on Listing Rule 3.1A.1 was without foundation because the FDA had stated that the MoxDuo study would be reviewed as a "regular protocol", not an SPA. 35 Kenquist says that the matters discussed at [29]-[34] are the four critical matters on which it relies to support an inference that Morgans had knowledge of the effect of the SPA Denial. I note, however, that this narrative is not expressed in the particulars to paragraph 165(a), although aspects of that narrative are referred to. 36 It seems to me that, if any criticism is to be made of the pleading, it lies in incomplete or inadequate particularisation rather than in a failure to plead that Morgans had knowledge of the effect of the SPA Denial. Rule 16.43(1) of the FCR provides that a party who pleads a condition of mind, such as knowledge, "must state in the pleading particulars of the facts on which the party relies". Kenquist has certainly provided particulars in the statement of claim of facts that are referred to in its narrative. However, the narrative explains the relationship between those facts and provides greater detail of them, as well as additional facts. 37 One aspect of Morgans' criticism of the pleading is that, insofar as Kenquist relies on the drawing of inferences to establish actual knowledge - and, plainly, Kenquist's submissions reveals that it does rely on the drawing of inferences - the particulars do not provide sufficient elaboration. Morgans submits that the events within the due diligence process which are relied on to give rise to "inferential knowledge" are not identified. 38 Further, Morgans criticises the adequacy of the narrative given in the submissions. It submits that if Kenquist "seeks to attribute knowledge on the basis of a conscious decision to turn a blind eye to suspicious circumstances", then that allegation must be pleaded with particularity, including why the circumstances were suspicious; who was aware of those circumstances; and who took the decision not to investigate. 39 I do not understand Kenquist's case, in this regard, to turn, necessarily, on the existence of suspicious circumstances or a conscious decision not to investigate. At one level, Kenquist relies simply on the disclosure, at the due diligence committee meeting on 6 November 2009, of the SPA Denial letter which (it says) makes plain, on its face, the effect pleaded in paragraph 48(e) of the statement of claim. Be that as it may, if Kenquist seeks to rely on suspicious circumstances, as its submissions indicate, it must identify the circumstances which are said to have that character, and identify the person or persons aware of them. If it seeks to rely on the making of a conscious decision not to investigate the circumstances, it must identify the decision and the person or persons who made it. 40 Morgans also criticises other aspects of the narrative in relation to the second, third and fourth matters summarised at [30] to [34] above. Apart from its argument that the current particulars to paragraph 165(a) do not explain the case that is there advanced, it seems to me that Morgans' complaints go more to the substantive merits of the case that is sought to be made, rather than to matters of pleading. 41 Therefore, although I do not accept Morgans' submission that the statement of claim does not plead its actual knowledge in relation to the effect of the SPA Denial, I do accept that the current particulars to paragraph 165(a) do not sufficiently expose the case that Kenquist seeks to make, and which Morgans will be required to meet, in relation to Morgans' knowledge. This can be cured readily by ordering Kenquist to provide further and better particulars of the allegation in paragraph 165(a).

Morgans' submissions 42 On this aspect of its interlocutory application, Morgans challenges the adequacy of the statement of claim insofar as it pleads that Morgans participated in certain decisions of QRx: see paragraphs 169, 172 and 174. In its answering submissions, Kenquist indicated its preparedness to amend these paragraphs so that they simply refer to Morgans' participation in the contraventions identified in those paragraphs. In light of Kenquist's position, it is not necessary to consider this particular objection to the pleading of the statement of claim. 43 Morgans nevertheless persists with other aspects of its challenge to the pleading of its "participation". It argues that the statement of claim fails to contain the allegations that are necessary to sustain the overall allegation that it participated in QRx's alleged contraventions. 44 Morgans' principal complaint is that the description of its conduct in the statement of claim is "extremely vague". This complaint is based, substantially, on the pleading that Morgans was "involved" in certain identified acts, such as drafting and reviewing the Rights Issue Booklet and the Investor Update & Capital Raising, and drafting and reviewing certain Cleansing Notices. Morgans complains that, couched in these terms, the specific allegations are vague and do not adequately identify the case which it has to meet in this regard.

Consideration 45 I do not accept this submission. The specific allegations about which complaint is made must be read with other allegations in the statement of claim, a number of which are provided as particulars. I do not accept that, when the statement of claim is considered as a whole, the level of particularity which Morgans advocates is required to inform it of the case it has to meet. Whether the nature of the participation alleged is sufficient to establish accessorial liability on its part (assuming all other elements of such liability are proved) is another question. However, as Kenquist points out, accessorial liability may be made out on the basis of seemingly modest levels of participation in the contravening conduct: In the matter of HIH Insurance Limited (In Liquidation) [2016] NSWSC 482 at [22]. There must be, at least, some practical involvement by the person in the acts or omissions constituting the contraventions that are alleged: Australian Competition and Consumer Commission v SensaSlim Australia Pty Ltd (in liq) (No 5) (2014) 98 ACSR 347; [2014] FCA 340 at [536]-[543].

Disposition 46 For these reasons, I am not persuaded that the statement of claim fails to disclose a reasonable cause of action. To this extent, Morgans' interlocutory application should be dismissed. However, as I have stated, further and better particulars of paragraph 165(a) should be provided. 47 As I have noted, Kenquist has indicated that it wishes to make amendments to paragraphs 169, 172 and 174 of the statement of claim. I do not think that it is necessary that a further amended statement of claim be filed incorporating these amendments. I will simply order that each of these paragraphs be amended by deleting therefrom the words on which Kenquist no longer relies. 48 As to the question of costs, Morgans has achieved some measure of success on both the particularisation of its knowledge and on the identification of its participation in the alleged contraventions. It is entitled to an order for costs in its favour. The appropriate order is that, as between it and Kenquist, the costs of and incidental to the interlocutory application be its costs in the cause. I certify that the preceding forty-eight (48) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.

SCHEDULE OF PARTIES NSD 1364 of 2015 Respondents Second Respondent: MICHAEL QUINN Third Respondent: JOHN HOLADAY Fourth Respondent: MORGANS CORPORATE LIMITED (ACN 010 539 607) Fifth Respondent: DIBBS BARKER