Plaintiff v First defendant

2 The application is made pursuant to r 29.07 of the Supreme Court (General Civil Procedure) Rules 2015 (Rules); alternatively, s 55 of the Civil Procedure Act 2010 (CPA).[2]

Order for discovery

(1) In a proceeding within Rule 29.01, notwithstanding that the pleadings between any parties are not closed, the Court may order that any of those parties make discovery of documents to any other of those parties.

(2) In a proceeding not within Rule 29.01, the Court may at any stage order any party to make discovery of documents.

(3) An order under paragraph (1) or (2) may be limited to such documents or classes of document, or to such questions in the proceeding, as the Court thinks fit.

4 Section 55 of the CPA relevantly provides:

Court orders for discovery

(1) A court may make any order or give any directions in relation to discovery that it considers necessary or appropriate.

(2) Without limiting subsection (1), a court may make any order or give any directions -

(a) requiring a party to make discovery to another party of -

(i) any documents within a class or classes specified in the order;

....

(k) modifying or regulating discovery of documents in any other way the court thinks fit.

...

5 In this proceeding Slea alleges that during the period from 1 January 2012 to 1 November 2013, Connective undertook a restructure and sale of an economic interest in the business carried on by the first and second Connective defendants to Macquarie Bank Limited (Macquarie) for the purpose of circumventing Slea's pre-emptive rights as a shareholder of those defendants, reducing Slea's effective ownership in the Connective business and effecting constitutional amendments relating to the Connective business without the need to pass special resolutions of the shareholders of the first and second Connective defendants. Slea alleges, among other things, that this conduct was oppressive, unfairly prejudicial or unfairly discriminatory to Slea.[3] In substance, although the Connective defendants admit the restructure, sale and constitutional amendments, they deny any allegations of misconduct.[4]

6 On 26 September 2014, the Court ordered the parties to file and serve lists of discoverable documents in accordance with r 29.01(3) of the Rules. Connective filed and served a list of documents dated 27 March 2015 and a supplementary list of documents dated 13 October 2015.[5]

7 Slea submits that there are grounds for belief that four classes of further relevant documents exist which have not been discovered by Connective and which justify the making of the orders sought in its summons.

8 Of the four subject categories set out in the summons, categories 1, 2 and 3 remain in dispute. Connective has agreed to provide further discovery of the documents in category 4.

9 It is convenient to deal with categories 1 and 2 together.

10 Category 1 documents are communications passing between Connective's advisers and third parties and their advisers during the period 1 January 2012 to 1 November 2013 relating to:

(a) any restructure of the business and corporate structure of the first and second defendants (the restructure);

(b) the sale of an interest in the Connective business to Macquarie, including drafts of the share purchase deed and other transaction documents passing between the parties (the sale); and

(c) the Connective Group Pty Ltd constitution, including drafts of the constitution passing between the parties.

11 Category 2 documents are communications passing between Connective and their advisers during the same period relating to the restructure and the sale.

12 Slea submits that documents within categories 1 and 2 will be of central relevance to the questions in issue - specifically, as to the purpose or purposes for which the restructure and the sale to Macquarie (in the terms ultimately agreed) were effected. Slea submits there is reason to believe that such documents are in the possession of Connective and have not been discovered.

(a) no discovery has been made of any drafts of the transaction documents passing between the counterparties to the sale and their advisers in the course of negotiations;[6]

(b) of the 937 documents which have been discovered by Connective, only 212 fall within the transaction period (1 January 2012 to 1 November 2013), in circumstances where evidence filed in the proceeding indicates that Connective, Connective's solicitors and Connective's previous solicitors hold a large number of electronic documents covering the transaction period together with 54 boxes of hard copy documents which are presently being reviewed for enumeration and further discovery purposes;[7]

(c) whilst 58 of the 937 documents discovered comprise emails between Connective and Macquarie personnel, few relate directly to the issues the subject of categories 1 and 2 of the summons;[8] and

(d) there are indications in the discovered documents that further documents in categories 1 and 2 exist but have not been discovered.[9]

(a) there are insufficient grounds for the belief that documents falling within the proposed categories may be or may have been in the possession of Connective and that they have not or will not be discovered;[10]

(b) substantial discovery has already been provided, with ongoing discovery processes and orders already in place;[11]

(c) the discovery sought would involve unwarranted duplication and disproportionate expense, having regard to the substantial resources being directed by Connective on an ongoing basis into compliance with orders for enumeration made by the Court on 28 and 31 March 2017 (Enumeration orders);[12] and

(d) there is a significant overlap between the terms of the Enumeration orders and the proposed discovery categories 1 and 2, and the further orders sought would involve revisiting many documents already reviewed and would lead to confusion.[13]

15 I accept that Connective has already made significant discovery and note that the order for general discovery imposes a continuing obligation on Connective (and the other parties) with respect to discovery. Nevertheless, for the reasons which follow, in my view Connective should be required to make further discovery of documents answering the descriptions in category 1 and category 2 of Slea's summons.

16 First, there is unchallenged affidavit evidence relied on in support of the application[14] that:

(a) no drafts of the transaction documents have been discovered in the list of documents dated 27 March 2015;[15]

(b) of the 937 documents which have been discovered, only 212 appear to fall within the transaction period and a significant proportion of those appear to relate to other issues;[16]

(c) there are 54 boxes of hard copy documents and more than 5,000 electronic documents held by Connective's current solicitors and the solicitors who acted and advised upon the restructure, sale and Connective Group Pty Ltd constitution that fall within the transaction period, and Connective holds over 11,000 electronic documents that fall within the transaction period;[17]

(d) very few discovered documents comprise communications between Connective personnel and Macquarie personnel, the two main counterparties to the relevant transactions. In this regard, Mr Leibler has deposed that Connective has only discovered 58 emails involving Macquarie personnel during the transaction period, few of which relate directly to the restructure of the Connective business, the terms of the share purchase deed or the terms of the constitution of Connective Group Pty Ltd;[18] and

(e) in the documents that have been discovered, there are indications that other relevant and undiscovered documents exist, notably:

(i) references in email communications between Glenn Lees of Connective and Frank Ganis and James Casey of Macquarie, which foreshadow a meeting to discuss 'the structure of the investment', 'other relevant JV issues', 'the shareholding issue' and 'how the partnership will operate at a business and shareholder level';[19]

(ii) a document prepared by Henry Davis York lawyers entitled 'Connective - Options Paper' dated 7 June 2012 sets out four potential options to restructure the Connective business. A note to option 1 contemplates the potential for challenge by Slea or Haron to the proposed restructure. Mr Leibler has deposed that Henry Davis York acted for Macquarie on previous applications in this proceeding and that no other documents between Henry Davis York and Connective in relation to the options paper have been discovered, nor have any documents that consider or mention the options paper been discovered;[20]

(iii) Connective engaged Mera Corporate Finance (Mera) and appear to have engaged Business Development Company (BDC) during 2012 to advise on the value and possible structuring options for the Connective business at the time that the potential sale to Macquarie was being pursued. An engagement letter from Mera to Connective (amended after discussions) referred to in an email dated 30 July 2012 from Brad Higgs of Mera to Graham Maloney and Glenn Lees of Connective indicates that Mera was engaged to provide strategic and financial advice, including providing valuation advice and identifying any high level potential transaction issues. The engagement letter states that Mr Higgs would be responsible for the engagement and that Mera would work closely with Wellingtons Accountants and Connective Service Pty Ltd's legal advisers;[21] and

(iv) a discovered document prepared by BDC entitled 'Connective: Implementation Plan' states, among other things, 'Glenn and Murray have provided a copy of the Connective business plan to BDC'. Mr Leibler has deposed that notwithstanding Connective's engagement of Mera and the apparent engagement of BDC, Connective has not discovered instructions, briefing papers or company records provided to Mera and BDC, the business plan referred to in the BDC document, or documents setting out the Connective board's consideration or assessment of the Mera valuation or any work carried out by BDC.[22]

17 I accept the broad proposition that when regard is had to the complexity of the transactions in issue, the duration of the transaction period and the small number of documents discovered to date, there are likely to be significantly more documents in existence that relate to the directors' decisions, negotiations and steps taken by Connective to plan and implement the restructure, the sale and formulation of the Connective Group Pty Ltd constitution[23] which would answer the description of category 1 and category 2 documents.

18 Further, one could reasonably expect that discoverable documents would have come into existence in connection with the meeting at Macquarie, the 'Connective - Options Paper' or the work performed by Mera and BDC (including the BDC business plan) and any consideration or assessment of such work by Connective.

19 In the circumstances, I am satisfied that there are grounds for Slea's belief that documents answering the descriptions in category 1 and category 2 may be or may have been in the possession of Connective, and that it is appropriate for the Court to make a specific order in relation to those categories.

20 Whilst I do accept there is an overlap between the terms of the Enumeration orders and the proposed discovery categories 1 and 2, the overlap is only partial and will obviously not capture all documents. Further, I do not attach significant weight to the submission that the discovery sought will involve unwarranted duplication and disproportionate expense having regard to the resources being directed by Connective to comply with the Enumeration orders. The Enumeration orders were only required because of the failure by Connective to adequately enumerate documents over which privilege was asserted. The fact that additional resources are or have been devoted to rectify this shortcoming cannot be convincingly deployed to resist the current application. In my view, a targeted discovery order is justified to focus attention on key areas in issue and will ultimately clarify those issues. In a case of this kind, discovery is likely to be of particular importance as contemporaneous documents will likely provide the best objective evidence of whether or not there has been any oppressive, unfairly prejudicial or unfairly discriminatory conduct directed towards Slea as alleged.

21 I therefore propose to make orders that Connective make discovery of the documents identified in categories 1 and 2 of Slea's summons.

22 Category 3 documents are monthly profit and loss statements and monthly balance sheets for Connective since the financial year ended 30 June 2011.

23 Slea submits that documents relating to the financial performance of Connective are relevant to issues in the proceeding - in particular, the value at which the shares were sold to Macquarie, in circumstances where it is likely that a higher price for the relevant shares would have been obtained had the shares been offered to other potential purchasers and a competitive bidding process been engaged in.[24]

24 Slea submits that monthly reports for the three years prior to the date of sale are necessary because a reasonable purchaser would need to review the performance of the Connective business by reference to the detailed financial documents over a three year period, and not only by reference to the annual financial reports. Further, Slea submits that in the circumstances of this case there is reason to believe that the end of year financial documents might not been a complete or adequate record of Connective's performance.

25 In particular, Slea notes that the Connective Services Pty Ltd (Connective Services) financial reports record different retained earnings figures for each of the 2011, 2012 and 2013 financial years.[25] Slea alleges that the directors of Connective Services purported to retrospectively record an 'accrued director's liability' owed to the directors in the amount of $990,000 and reduce the retained earnings figures in Connective Services financial accounts, and caused Connective Services to record 'the accrued director's liability' as being paid.[26]

26 Finally, Slea submits that in 2014, Connective switched from financial year (30 June) to calendar year (31 December) financial reporting, which has left a gap in the annual reports.

27 Connective submits that the information contained in the annual financial reports is sufficient for the purposes required in the proceeding, and that if monthly reporting was required for the purpose of ascertaining the actual or fair market value of the business at a particular time that would ordinarily be supported by expert evidence to that effect. Connective says that there is no evidence of any forensic work justifying the late request for materials. Connective concedes that there is in existence an interim financial report dealing with the switch from financial to calendar year reporting, and has agreed to provide the relevant interim report.

28 In my view, monthly reports may well illuminate the timing of, and reasons for, the reduction of the retained earnings figures and any retrospective changes made to the accounts. This may turn out to be material. Sometimes such applications are supported by evidence from an expert, but this is not a necessary precondition. In this case, sufficient foundation for the orders emerges from the matters in issue on the pleadings, and the evidence about different retained earnings figures and retrospective changes made to the accounts.

29 Discovery of the monthly reports should not cause any particular difficulty or expense for Connective. These documents will doubtless be archived in electronic form. In the circumstances, I propose to make orders that Connective make discovery of the monthly reports referred to in category 3 but provide inspection (at least in the first instance) only in electronic form.

30 I will hear from the parties as to the appropriate form of order and, in particular, the timeframe for compliance.

[1] The summons was also addressed to the tenth defendant (Haron), but no discovery was sought as against Haron and Slea did not seek any orders with respect to Haron.

[2] Slea also relied on rr 1.14 and 29.08 of the Rules and s 26 of the CPA.

[3] Amended Statement of Claim dated 1 July 2014, [27]-[50].

[4] Defence to the Amended Statement of Claim dated 4 September 2014, [27]-[50].

[5] The first and second defendants had previously been ordered to make limited discovery and complied with that order by filing an affidavit of documents sworn by Glenn Andrew Lees on 4 April 2014.

[6] Affidavit of Raphael Yehuda Leibler affirmed 13 April 2017 [21(a)] (Leibler affidavit).

[10] Connective submissions as to Slea's summons dated 13 April 2017, [4(a)].

[11] Connective submissions as to Slea's summons dated 13 April 2017, [4(b)].

[12] Connective submissions as to Slea's summons dated 13 April 2017, [4(c)].

[13] Connective submissions as to Slea's summons dated 13 April 2017, [7].

[14] As set out in the Leibler affidavit.

[15] For present purposes this is the only relevant list. The affidavit of documents of Glenn Lees dated 4 April 2014 contains documents limited to the formal transaction agreements and electronic data room documents relating to the Macquarie sale discovered pursuant to orders made by Efthim AsJ on 14 March 2014, and the supplementary list of documents dated 13 October 2015 is limited to financial documents: Leibler affidavit, [16]. The list of documents dated 27 March 2015 was filed pursuant to a general order for discovery made on 26 September 2014 (Elliott J) and extended by order of 12 December 2014 (Almond J).

[17] Leibler affidavit, [17] referring to the affidavit of Elan David Sasson affirmed 24 March 2017.

[18] Leibler affidavit, [19]; Exhibit RYL-5.

[19] Email from Glenn Lees of Connective to James Casey of Macquarie dated 14 March 2012; Exhibit RYL-6 to the Leibler affidavit.

[20] Leibler affidavit, [21(b)]; Exhibit RYL-7.

[21] Leibler affidavit, [21(c)]; Exhibit RYL-8; Mera Corporate Finance draft letter of engagement dated 16 July 2012, s 4, p 2; email dated 30 July 2012 from Brad Higgs to Graham Maloney and Glenn Lees.

[23] Leibler affidavit, [16]-[17] referring to the affidavit of Elan David Sasson affirmed 24 March 2017.

[25] Amended Statement of Claim dated 1 July 2014, [5A], [5B] and [5C].

[26] Amended Statement of Claim dated 1 July 2014, [9A] and [9B].