Mitic v OZ Minerals Limited

Solicitor for Oz Minerals Limited: Herbert Smith Freehills

Counsel for the Objector: Mr TG Hauff appeared in person

Counsel for Grant Samuel & Associates Pty Ltd Ms KA Brazenor

Solicitor for Grant Samuel & Associates Pty Ltd Arnold Bloch Leibler

Counsel for KPMG & KPMG TS Pty Limited: Ms EA Bennett

Solicitor for KPMG & KPMG TS Pty Limited: Corrs Chambers Westgarth

Counsel for Allens (a firm): Mr A Muller

Solicitor for Allens (a firm): Colin Biggers & Paisley

Counsel for Mr Anthony Barnes: Mr SB Rosewarne

Solicitor for Mr Anthony Barnes: Maddocks Lawyers

Counsel for OZ Minerals Holdings Pty Ltd: Ms F Shand

Solicitor for OZ Minerals Holdings Pty Ltd: K&L Gates

Counsel for Mr Owen Hegarty & Ors: Ms E Murphy

Solicitor for Mr Owen Hegarty & Ors: Minter Ellison Lawyers

Solicitor for Mr Anthony Larkin, Mr Dean Pritchard and Mr Richard Knight: Ms K Hall of Holding Redlich

AND: OZ MINERALS LIMITED (ACN 005 482 824) Respondent

INTRODUCTION 1 In this representative proceeding, the applicant (Mr Tobias Mitic) represents former shareholders of Zinifex Limited ('Zinifex') who acquired shares in the respondent ('Oxiana' before 23 July 2008; 'OZ Minerals' after that date) as a result of the merger between Oxiana and Zinifex that was first announced to the Australian Securities Exchange on 3 March 2008 and that was implemented by way of court-approved scheme of arrangement on 1 July 2008. 2 Mr Mitic alleged that in the period from 28 February 2008 to 1 July 2008, Oxiana contravened its continuous disclosure obligations and prohibitions on misleading or deceptive conduct and the making of false or misleading statements, causing Mr Mitic and group members to suffer loss. Mr Mitic and the group members engaged a litigation funder, Harbour Fund II, LP (a related entity of Harbour Litigation Funding), for the purpose of bringing these claims. 3 By settlement deed executed on 14 June 2016, Mr Mitic and OZ Minerals agreed to settle this proceeding VID114/2014 and concurrent proceedings VID603/2014, VID604/2014, VID605/2015, VID606/2014 and VID 608/2014 ('the proceedings'). OZ Minerals was to pay AUD$32.5 million (inclusive of interest and costs) in full and final settlement of the proceedings, subject to Court approval pursuant to s 33V of the Federal Court of Australia Act 1976 (Cth) (the 'Act'). 4 Mr Mitic sought approval for the settlement and dismissal of the proceedings by interlocutory application dated 14 June 2016. Mr Mitic relied upon an affidavit and confidential affidavit of Craig Richard Allsopp (Mr Mitic's solicitor on the record) both sworn on 11 July 2016, and an affidavit of Roland Patrick Matters (a costs consultant) sworn on 11 July 2016. Mr Mitic also relied upon a joint confidential opinion of senior and junior counsel dated 14 July 2016. 5 I subsequently made orders approving the settlement in the proceedings and I indicated that I would give reasons at a later date. I now intend to explain why I considered it appropriate to approve the settlement and associated distribution scheme. Since approving settlement, other judges of the Court have made some comments on matters pertaining to issues relevant to the commissions of a litigation funder. Whilst these comments were obviously not in existence at the time of my approval order, I consider it useful to proffer my own brief observations upon them. None of the subsequent decisions I refer to or my observations impact upon the decision I made approving the settlement in the proceedings.

PRINCIPLES OF SETTLEMENT APPROVAL 6 Section 33V contains the following text: 33V Settlement and discontinuance - representative proceeding (1) A representative proceeding may not be settled or discontinued without the approval of the Court. (2) If the Court gives such an approval, it may make such orders as are just with respect to the distribution of any money paid under a settlement or paid into the Court. 7 As is apparent, there is no explicit reference to applicable criteria or guiding principles that might inform the Court as to when a settlement should be approved. However, a developed body of case law sets out that the central question underpinning this section is whether the proposed settlement is fair and reasonable and in the interests of the group members bound by the settlement, considered as a whole. For a detailed exposition of these principles, see, for example: Newstart 123 Pty Ltd v Billabong International Ltd [2016] FCA 1194 at [9]-[14] ('Newstart'); Camilleri v The Trust Company (Nominees) Ltd [2015] FCA 1468 at [5] ('Camilleri'); Harrison v Sandhurst Trustees Ltd [2011] FCA 541 at [13] ('Harrison'). 8 This question also encapsulates the notion of inter se fairness - the Court must ensure that the interests of the lead plaintiff, or signed-up clients of a given firm of solicitors, are not being preferred over the interests of other group members: Camilleri at [5]. In other words, the Court must ensure that the distribution of settlement proceeds between group members is also fair and reasonable. 9 Importantly, there is no single way in which a settlement should be framed. Reasonableness is a range, and the relevant question is whether the proposed settlement and scheme fall within that range. It is not the Court's function to second-guess the strategic decisions made by a plaintiff's legal representatives: Newstart at [12]; Harrison at [13]. 10 In Williams v FAI Home Security Pty Ltd (No 4) (2000) 180 ALR 459 at 465-6, Goldberg J set out examples of factors a Court may take into account in determining whether a settlement is fair and reasonable. These factors were later augmented and placed in paragraph 11.2 of Practice Note CM 17 of this Court. They are: (a) the complexity and likely duration of the litigation; (b) the reaction of the group to the settlement; (c) the stage of the proceedings; (d) the risks of establishing liability; (e) the risks of establishing loss or damage; (f) the risks of maintaining a representative proceeding; (g) the ability of the respondent to withstand a greater judgment; (h) the range of reasonableness of the settlement in light of the best recovery; (i) the range of reasonableness of the settlement in light of all the attendant risks of litigation; and (j) the terms of any advice received from counsel and/or from any independent expert in relation to the issues which arise in the proceeding. 11 I note that these factors, whilst useful, are neither exhaustive nor prescriptive and they do not supplant a detailed analysis of the peculiar facts in each specific proceeding: see Thomas v Powercor Australia Ltd [2011] VSC 614 at [11]-[13]. For example, if applicable, consideration of the legal costs and any litigation funder's fee ought to be included by the Court in their analysis of whether the settlement is fair and reasonable: see, eg, Earglow Pty Ltd v Newcrest Mining Ltd [2016] FCA 1433 at [91], [99] and [140] ('Earglow'). 12 For completeness, in relation to principles of settlement approval, I note the following text of s 33X of the Act: 33X Notice to be given of certain matters … (4) Unless the Court is satisfied that it is just to do so, an application for approval of a settlement under section 33V must not be determined unless notice has been given to group members. 13 Appropriate notice had been given to group members in the proceedings. Therefore, I turn to my consideration of whether the proposed settlement should be approved. First, I will examine whether the settlement between the parties is fair and reasonable. Secondly, I will examine whether the distribution scheme for allocating the settlement proceeds amongst the group members is fair and reasonable. Thirdly, I will consider in detail the concerns of the single objector to the settlement.

FAIRNESS AND REASONABLENESS OF THE SETTLEMENT BETWEEN THE PARTIES 14 In determining whether the settlement is fair and reasonable, I have given significant weight to a confidential joint opinion written by Mr Mitic's counsel (which is supplemented by shorter non-confidential submissions). This is also accompanied by detailed submissions from OZ Minerals which focus specifically on their consideration of the prospects of success. In Camilleri [2015] FCA 1468 at [35], Moshinsky J was similarly disposed to rely on such documents, noting that: There are several factors, in particular, which give me comfort in relying on the opinions expressed in these documents. First, the proceeding is at a very advanced stage, with all the lay and expert evidence already filed. The settlement has occurred virtually on the eve of the trial. This places the parties and their lawyers in a good position to assess the strengths and weaknesses of the case. Secondly, the lawyers who have expressed the opinions have been involved in the proceeding for a long time and therefore are very familiar with the detail of the case. Thirdly, the opinions are well constructed and reasoned, giving me confidence in the opinions they express. 15 I am similarly content to rely on the joint opinion and associated submissions in these proceedings. They are also well-constructed documents prepared by legal representatives who have been involved in the proceedings for a long time. They have also been produced subsequent to the filing of all of the lay and expert evidence, as the settlement was reached on the first day of the trial. I consider that each party was in a very informed position as to the merits of their case and the merits of the settlement, and these documents have thus provided me with an insightful and balanced assessment of the settlement. 16 On the basis of these documents, I make the following observations. 17 First, the quantum of the settlement amount appears to be sufficient having regard to the risk in the claims. Without going into the detail of the confidential joint opinion, I found that the opinion usefully contrasted this settlement amount against: (a) counsels' current estimates as to probable claim value; (b) counsels' earlier estimations of probable claim value; and (c) the known results of similar representative proceedings. 18 I am also assisted by OZ Minerals' (non-confidential) submissions in respect of the prospects of success. Perhaps unsurprisingly, OZ Minerals considered that Mr Mitic's prospects of success were very remote, and that the proposed settlement was thus manifestly both fair and reasonable. These submissions provided a balance to those of Mr Mitic and further assured me that my conclusions regarding the settlement amount were appropriate. 19 Secondly, the settlement, if approved, would have a positive effect regarding the timeliness and costs of the proceedings. I accept that a great many resources were expended in the preparation of these proceedings for trial, and that an earlier settlement would have allowed for significant cost savings. That being said, the settlement will still result in some cost savings as it prevented the need for a lengthy trial hearing. Furthermore, it eliminates the very real prospect of later appeals and further delays to any recovery by the claimants. 20 Thirdly, there are almost no objections to the settlement. Of the two notices of objection filed, only one required my consideration (the other objector was not a registered person, and hence the objection was invalid). The relevant objection was by Mr Trevor Hauff. He held 148,427 OZ Minerals shares as at close of trading on 21 November 2008, and stands to receive a distribution of $9,406.55 if the proposed settlement is approved. I consider the force of his submissions (and those of Mr Mitic in reply) in greater detail below. However at this stage it is relevant for me to briefly note that, having regard to those submissions, I am not satisfied that Mr Hauff's objections carry sufficient weight such that the settlement ought not to be approved. 21 Fourthly, I am satisfied that the distribution allocation between the claimants, their legal representatives and the litigation funder is appropriate. The terms of the settlement specify the distribution to group members will be $11 million. Their legal representatives, ACA Lawyers, will receive a capped amount for their fees and disbursements of not more than $12.6 million, which leaves $8.9 million to be distributed to the litigation funder in satisfaction of their fee. 22 In respect of the legal costs, I note that they are significant. Intuitively, this seems somewhat understandable given that this is a representative proceeding and that settlement was reached very late in the proceedings (on the first day of the trial). Furthermore, whilst I am mindful that the Court should not approve an amount that is disproportionate, I am careful not to overemphasise the mere quantum or proportion of those costs. As stated by Beach J in Blairgowrie Trading Ltd v Allco Finance Group Ltd (Receivers & Managers Appointed) (in liq) (No 3) [2017] FCA 330 at [181] ('Blairgowrie'): [S]uch an assessment cannot be made on the simplistic basis that the costs claimed are high in absolute dollar terms or high as a percentage of the total recovery. … The question is to compare it with the benefit sought to be gained from the litigation. Moreover, one should be careful not to use hindsight bias. The question is the benefit reasonably expected to be achieved, not the benefit actually achieved. Proportionality looks to the expected realistic return at the time the work being charged for was performed, not the known return at a time remote from when the work was performed; at the later time, circumstances may have changed to alter the calculus, but that would not deny that the work performed and its cost was proportionate at the time it was performed. 23 The confidential joint opinion has provided me with a comprehensive analysis in respect of the appropriateness of these legal costs, taking into account the nature and complexity of the proceedings, the prospects of success, and other considerations peculiar to the conduct of these proceedings. Based on the content of this opinion, I am satisfied that the legal costs are proportionate in these circumstances. 24 In respect of the allocation to the litigation funder, their proportion appears to be in line with industry outcomes: see the discussion of Murphy J in Earglow [2016] FCA 1433 at [168]-[177]. However, I note his Honour's caution at [178] that 'the objective reasonableness of the rate in a particular case cannot be determined just by reference to market rates'. 25 With this in mind, I rely on the contents of the joint opinion, which takes into account the prospects of success, the complexity of the case both substantially and procedurally, and the conduct of negotiations between the parties. It provides important context and analysis in relation to the allocation to the litigation funder, and based on those contents I am satisfied that it is a proportionate amount. 26 The Court would possess the power to consider and appropriately take into account, the funding commission in certain circumstances (see the comments in Earglow [2016] FCA 1433 at [157], and in Blairgowrie [2017] FCA 330 at [101]). In view of the approach taken by the litigation funder in this proceeding to waive adherence to its contractual bargain, it was not necessary for me to contemplate further the appropriate overall amount provided to the applicant and group members in proportion to the litigation funder's contractual right to a commission. 27 However, I make one observation as to the power of the Court to effectively vary the commission paid to a litigation funder. 28 Sections 33Z and 33ZF(1) of the Act, whilst expressed in broad terms, as is s 23, are not specifically directed to settlement approvals, but relate generally to the power of the Court in representative proceedings and proceedings generally. Once the Court is dealing with a settlement approval application, the focus is upon s 33V. A power to effectively vary the contractual rights of a litigation funder in the course of a settlement approval is to be found in s 33V, specifically subs (2). I would not readily adopt the view that the very general broad powers found in ss 23, 33Z(1)(g) and 33ZF(1), which are not specifically directed to settlement approvals, would provide the power to vary or effectively vary the funding agreement, or otherwise interfere with the contractual rights and obligations of a litigation funder and class members. 29 Nevertheless, by having recourse to the power of the Court under s 33V(2) of the Act, the Court may still take into account the fee or commission of a litigation funder and make orders accordingly. Oversight by the Court of litigation funding fees or commissions so as to protect class members' interests is required. Of course, s 33V(2) refers to orders that are "just" - this includes taking into account the fact that litigation funders assume the substantial costs and risks of a representative proceeding and should be allowed a commercially realistic return. 30 Justice Beach in Blairgowrie, whilst recognising the difficulty with expressly varying a funding agreement, said as obiter at [101]: If it is necessary to say so, I consider that as part of any approval order under s 33V, I have power in effect to modify any contractual bargain dealing with the funding commission payable out of any settlement proceeds. It may not be a power to expressly vary a funding agreement as such. Rather, it is an exercise of power under s 33V(2); for present purposes it is not necessary to invoke s 33ZF. I am empowered to make "such orders as are just with respect to the distribution of any money paid under a settlement". If I make an order that out of monies paid by a respondent, a lesser percentage than that set out in a funding agreement is to be paid to a funder, that is an exercise of statutory power which overrides the otherwise contractual entitlement. That is not an unusual scenario in many and varying contexts. 31 I respectfully agree with the above observation. I would find the source of power in s 33V(2), as was in fact his Honour's main focus, and not s 33ZF. 32 At the time I made the approval order in the proceedings, I was satisfied that the proposed allocation in respect of legal costs and the litigation funder's fee was appropriate, and that the settlement was fair and reasonable as between the parties.

FAIRNESS AND REASONABLENESS OF THE DISTRIBUTION SCHEME AS BETWEEN GROUP MEMBERS 33 Under the proposed settlement distribution scheme, the settlement sum is to be distributed between group members on a pro-rata basis based on the number of OZ Minerals shares each group member held on 21 November 2008, the first day on which part of the alleged material information was released. 34 I consider that this pro-rata distribution replicates the likely distribution that would occur after trial, regardless of the damages methodology eventually adopted. This is because I accept that all losses crystallised after the release of the relevant material information on 21 November 2008. 35 Therefore, I was satisfied that the settlement was fair and reasonable as between the group members.

CONSIDERATION OF THE OBJECTOR'S POSITION 36 Mr Hauff says that he has suffered a loss of $489,012, calculated as the value of his Zinifex shares as at 1 July 2008 ($623,200) less the value received through sales of OZ Minerals shares after 1 July 2008 ($134,188). In respect of the proposed settlement, Mr Hauff made the following submissions: 37 First, Mr Hauff contended that the sum received by group members ($11 million) is inadequate because it is only approximately 4% of the purported value of the claim of around $250 million. Mr Hauff argued that the case against OZ Minerals was a good one, and that the settlement outcome did not reflect this - nor was it appropriate compensation for the wrongs allegedly committed. He suggested that either the settlement was too low or the risks associated with this litigation were not properly assessed by Mr Mitic's legal representatives. 38 I do not accept that the claim value can be reliably placed at $250 million, a number which appears to have been attributed to Mr Mitic's legal representatives in a newspaper article. Nor do I accept the contention that the settlement proceeds to be recovered by the group members is inadequate in respect of the prospects of success. Rather, based on the contents of the confidential joint opinion and Mr Mitic and OZ Minerals' submissions, I am satisfied that the quantum of settlement proceeds is adequate having regard to Mr Mitic's prospects of success. 39 Secondly, Mr Hauff contended that the sum received by group members is also inadequate as it is only approximately 33% of the actual settlement amount (with the remainder being distributed to the legal representatives and litigation funder). In support of this contention, he argued that the case was not particularly complex and was thus undeserving of such high legal costs. 40 I accept that significant legal costs were incurred in preparing this representative proceeding for trial. I reiterate what I have said above about the legal costs and the litigation funder's fee in these proceedings. I am satisfied that the proportion of proceeds being received by the legal representatives and the litigation funder is appropriate. 41 Thirdly, Mr Hauff contended that the settlement on the first day of trial meant that the misleading and deceptive conduct of OZ Minerals was concealed from the public, and that the settlement was reached without any of the rigour of cross-examination. 42 I understand the frustration that a settlement might cause to a group member in Mr Hauff's position, especially if the group member was seeking vindication of their position at trial. Nevertheless, the reaching of settlements is not at all contrary to public policy; in fact, settlements are generally encouraged as a process for achieving efficient, mutually acceptable resolutions between parties. Although Mr Hauff may wish for the opportunity to "clear the air" in relation to this matter, his desire for a final judgment does not render the terms of this settlement either unreasonable or unfair. 43 Fourthly, Mr Hauff contended that OZ Minerals was quite capable of paying a much higher amount, such as the $250 million which was purportedly the original estimate of the value of the claim by Mr Mitic's legal representatives. 44 Be this as it may, I have already indicated my position in respect of Mr Hauff's claims as to the purported $250 million value of the claim. 45 Therefore, I did not consider Mr Hauff's objections affected my assessment that the settlement was both fair and reasonable.

CONCLUSION 46 For the above reasons, I was prepared to approve the settlement and make the associated orders sought by Mr Mitic. I certify that the preceding forty-six (46) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Middleton.