FEDERAL COURT OF AUSTRALIA

Brosnan v Katke [2015] FCA 203

THE COURT ORDERS THAT:

1.    The application is dismissed as against all respondents.

2.    The parties are directed to file within 21 days written submissions in relation to the costs of the proceedings.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

PART i - BACKGROUND

1    In these proceedings there are nine applicants seeking relief in relation to particular transactions in their capacity as former shareholders in a company called Health World Limited (“HWL”) and two of those applicants also bring claims in a trustee capacity in addition to their own individual claims. One of the nine individuals solely brings a claim in a trustee capacity.

2    Put simply for present purposes, the litigation concerns these things.

3    First, the circumstances in which the applicants entered into an agreement dated 27 April 2005 by which they transferred their shares in HWL to the buyer of those shares, a company called Metagenics Australia Pty Ltd (“MAPL”) which was, either directly or through shareholdings in other controlled entities, a wholly owned entity of a company called Metagenics Inc (“Metagenics”).

4    Second, whether representations were made by individuals acting on behalf of MAPL and Metagenics which induced the applicants to enter into the agreement of 27 April 2005 and the legal character of any such representations.

5    Third, the circumstances in which the applicants entered into a further agreement of 31 July 2009 with MAPL, Metagenics, Mr Jeffrey James Katke and Dr Jeffrey Bland, which, among other things, had the effect of compromising claims of the applicants in relation to the contended content and legal character of representations said to have been made to the applicants and upon which they say they relied in entering into the agreement of 27 April 2005.

6    Fourth, an examination of the scope, content and legal character of contended representations said to have been made to the applicants by individuals on behalf of MAPL and Metagenics said to have induced them to enter into the agreement of 31 July 2009.

7    Fifth, the events that occurred consequent upon the parties entering into the agreement of 31 July 2009 and the question of whether particular events disentitle the applicants to the relief they claim, should the applicants otherwise make good their contentions on the causes of action in suit and the remedies said to be available to them.

8    Sixth, remedies more broadly and particularly the calculation of damages as an alternative remedy.

9    Seventh, events in question that extend from mid-2003 to the exercise of a Put Option on 14 April 2014.

10    As to the applicants, the nine applicants in the proceeding are Mr Michael Brosnan, Mr Leon Brosnan, Mrs Mary Brosnan, Mr Alan Gee, Mr Alan Grant, Mrs Barbara Grant, Mr Alan David Grant, Mr Michael Curley and Mr Graeme Joiner. All the applicants were shareholders in HWL. That entity conducts the business undertaking of procuring the production and supply of vitamin and dietary supplements. The business of HWL was established in approximately 1985 by Mr Michael Brosnan and his father, Mr Leon Brosnan. Mrs Mary Brosnan is Mr Leon Brosnan’s wife and the mother of Mr Michael Brosnan. Mr Leon Brosnan, Mrs Mary Brosnan and Mr Michael Brosnan were the majority shareholders in HWL.

11    Since approximately 1998, Mr Alan Gee, a qualified Chartered Accountant, has been the Managing Director of HWL. He took over that role from Mr Alan Bawden Grant who is also a qualified Accountant. Mrs Barbara Grant is Mr Grant’s wife. Mr Alan David Grant is the son of Mr Alan Bawden Grant and Mrs Barbara Grant.

12    Mr Michael Curley was an employee of HWL. Mr Graeme Joiner has been employed by HWL as its Marketing Manager.

13    As to the respondents, the position is this.

14    The first respondent is Mr Jeffrey James Katke.

15    Mr Katke is a Director of Metagenics, the third respondent.

16    In 1983, Mr Katke founded a company called Metagenics Inc incorporated in the State of California in the United States. On or about 11 February 2006, he caused a company, also named Metagenics Inc, to be incorporated in the State of Delaware in the United States. In May 2006, Mr Katke caused the California company to be merged with and into the Delaware company. The merged company is called Metagenics Inc. In the course of the evidence, Mr Katke refers to the California company, the Delaware company and the merged entity as “Metagenics”. Mr Katke also observes that to the extent that he refers, in his evidence, to Metagenics at a moment in time when only Metagenics California or Metagenics Delaware was in existence, the relevant reference is to the entity in that period.

17    In the course of these reasons, I refer to the California company, the Delaware company and the merged entity as “Metagenics” and to the extent that it becomes necessary, as a function of the questions in issue in the proceeding, to identify whether a reference to Metagenics is a reference to the California company, the Delaware company or the merged entity at a particular time, I will do so.

18    Mr Katke was the Chief Executive Officer of Metagenics from its establishment in 1983 until 16 August 2010. Metagenics owns all of the issued shares in Metagenics Far East Pty Limited (“Metagenics Far East”) which in turn owns all of the issued shares in MAPL, the second respondent. MAPL was incorporated on 22 April 2005. MAPL owns all of the issued shares in HWL. Mr Katke was a Director and Chief Executive Officer of Metagenics Far East between 13 April 2005 and 16 August 2010 and a Director of MAPL between 22 April 2005 and 25 July 2011. He was a Director of HWL between 1 October 1999 and 1 February 2011.

19    Another entity mentioned in the course of the evidence is MetaProteomics, LLC (“MetaProteomics”). Between 12 August 2002 and 16 August 2010, Mr Katke was a Manager of MetaProteomics which is a wholly owned subsidiary of Metagenics and is the research and development entity associated with Metagenics.

20    A further entity mentioned in the course of the evidence is KinDex Therapeutics, LLC (“KinDex”). Mr Katke says that between 11 September 2009 and 1 March 2014 he was a Director of KinDex. KinDex was formed in 2009 and is a party to a Patent and Know-How Licence Agreement with MetaProteomics pursuant to which MetaProteomics licenses to KinDex particular patents, patent applications and related know-how owned or controlled by MetaProteomics. KinDex was reorganised to accommodate new investors on 1 March 2014 and is now called KinDex Pharmaceuticals Inc (“KinDex Pharmaceuticals”). Mr Katke is a Director of KinDex Pharmaceuticals.

21    Mr Jerry Morey is not a party to the proceedings.

22    However, Mr Morey was engaged in an extensive number of exchanges with one or more of the applicants in relation to matters relevant to questions in issue in the proceedings. Between 2 December 1996 and 15 May 1998, Mr Morey was the Corporate Controller of Metagenics. From 15 May 1998 until 31 December 2011, he was the Chief Financial Officer of Metagenics and between 2009 and 2011 he also held the role of Chief Operating Officer. Between 22 April 2005 and 31 December 2011, he held a position as Secretary on the Board of MAPL. He was also a Director of HWL between 1 June 2005 and 22 July 2010. Since the incorporation of Meta Holdings LLC, Mr Morey has held a position, in his personal capacity, as a “Member Manager” for that company. Meta Holdings LLC is a company established in 2009 to hold the minority interest of the applicants (described as the former shareholders in Metagenics) after the acquisition, described later in these reasons, by a special purpose vehicle established by a company called Alticor Inc. Mr Morey is also a minority unitholder in MetaRx Holdings LLC, a company which has a majority interest in a company called KinDex Therapeutics LLC. That company is a joint venture biotechnology company set up at the time of the Alticor acquisition. The elements of these transactions are described later in these reasons.

23    Dr Jeffrey Bland is the fourth respondent. Dr Bland is the Chief Science Officer of Metagenics and aspects of his role will be mentioned later in these reasons.

24    Before examining the precise content of the applicants’ contentions as framed by the consolidated third further amended statement of claim (the “pleading”), I will address aspects of three principal agreements central to the litigation. The first is an agreement dated 12 September 2003 which represents the foundation contractual arrangements in place prior to the parties entering into the agreement of 27 April 2005. The second agreement is the Share Purchase Agreement of 27 April 2005 and the third agreement is the Settlement Deed made between the Metagenics Group and the former HWL shareholders dated 31 July 2009.

PART ii – THE AGREEMENTS

The 12 September 2003 Agreement

25    The agreement of 12 September 2003 (the “2003 Agreement”) is made between Metagenics, HWL, the nine applicant shareholders and, in addition, two of those shareholders in a trustee capacity (called the “shareholders”) and a company called Ethical Nutrients Pty Ltd as trustee of the HWL Property Trust.

26    By cl 6.1(b) of the 2003 Agreement, HWL and each of the shareholders other than Mr Curley, Mr Joiner, Mr Gee, and Mr Gee in his capacity as trustee, assert that immediately prior to completion of the initial sale of the HWL shares contemplated by the 2003 Agreement, HWL would have total issued ordinary share capital of 204,109 shares held in the following way:

27    By cl 6.2, Metagenics and the shareholders agree that Metagenics will acquire an initial 10% shareholding in HWL effected by Michael Brosnan, Leon Brosnan and Mary Brosnan transferring a number of shares to Metagenics representing 10% of the issued share capital, and Metagenics paying an amount of $1,249,951 for those shares no later than 19 September 2003 as follows:

28    After completion of the initial 10% share sale, the shareholding in HWL would be:

29    By cl 7, Metagenics and the shareholders agree to the grant of the following options in the following manner:

30    By cl 6.2, Metagenics initially acquired 10% of the issued shares in HWL. By cl 7.1, Metagenics enjoyed an option to acquire a further 10% of the issued shares in HWL within 90 days of receiving HWL’s audited financial statements for the 30 June 2005 financial year, a further 10% (when duly exercised) consequent upon receiving the 30 June 2006 financial year statements and a further 21% (when duly exercised) consequent upon receiving the 30 June 2007 financial year statements. At that point, Metagenics would have acquired, should the options have been exercised, 51% of the issued share capital in HWL.

31    Clause 7.1(e) of the 2003 Agreement provides that where Metagenics has exercised each of the options consequent upon receipt of the financial statements for the financial years ending 30 June 2005, 30 June 2006 and 30 June 2007 and has thus acquired a 51% controlling interest in HWL, Metagenics must (subject to any approval required under the Foreign Acquisitions and Takeovers Act 1975 (Cth)) exercise the option expiring within 90 days of receipt of the audited financial statements for HWL for the financial year ending 30 June 2008 with the result that Metagenics would then own 74.4% of the issued share capital of HWL.

32    Clause 7.1(d), together with Annexure C, to be mentioned further shortly, sets out a mechanism for determining the option purchase price per share.

33    By cl 8, the parties to the agreement put in place particular provisions governing the management and control of HWL which took effect upon completion of the initial 10% share sale in HWL. As to the Board, the maximum number of directors of HWL would be six and initially the Board would be comprised by Mr Leon Brosnan, Mr Michael Brosnan, Mr Alan Gee, Mrs Mary Brosnan and Mr Jeffrey Katke. In the period that Metagenics owned more than 9% of the issued shares but less than 50%, Metagenics would be entitled to appoint at least one director to the Board and in circumstances where it owned more than 50% of the shares it would be entitled to appoint the majority of the directors. Mr Michael Brosnan would be Chairman of the Board whilst Metagenics owned less than 50% of the issued shares. Subject to cl 8.1(i), decisions of the Board would be by simple majority with the Chairman having a casting vote in the event of deadlock.

34    Clause 8.1(i) provides that unanimous resolutions would be required for the following decisions (among other things): a change of strategic direction for HWL; disposal of more than 10% of HWL’s assets; new share issues; dissolution or liquidation of HWL or any part of the business; adoption of accounts; variation to HWL’s dividend policy “which is to target a distribution of up to 40% of earnings to shareholders each financial year”; making of investments outside of the existing HWL business or determining to carry on a new business; a sale of HWL’s entire undertaking; and, raising new debt in circumstances where HWL’s total debt would represent greater than five times the then current shareholders’ equity less intangible assets.

35    As to business planning, cl 8.1(o) provides that by 31 May each year the Managing Director must prepare and submit to the Board for approval budgets addressing expenditure on capital and revenue accounts and a Business Plan for the forthcoming year.

36    As to any on-market listing of shares, cl 8.1(s) provides that subject to cl 8.1(t), if at any time during the term of cl 8 (which seems to contemplate particularly the period during which Metagenics owns greater than 9% but less than 50% of the issued shares in HWL), Metagenics resolves to sell Metagenics’s business, or all the issued shares in Metagenics, or otherwise resolves to float or list all of Metagenics’s shares on any stock exchange, Metagenics must use its best endeavours to procure that HWL’s business undertaking and, or alternatively, shares in HWL, are also sold as part of the Metagenics’s business or the shares in Metagenics.

37    Clause 8.1(t) provides that the parties agree to negotiate in good faith the precise mechanism which might be adopted for achieving those matters contemplated by cl 8.1(s) including valuation multiples and a discount on value.

38    As to commissions, by cl 8.1(y), the parties recognise that Metagenics and HWL are parties to a Licence Agreement dated 28 August 1997 regulating the distribution by HWL in Australia of certain products of Metagenics and having regard to the initial 10% share sale and the arrangements described in cl 8 of the agreement, Metagenics accepts that HWL will accrue, rather than pay, a liability for royalties payable to Metagenics for the sale of licensed products for the months of February, March and April 2003, with those royalties to be paid in April, May and June 2004, respectively.

39    The essential valuation method adopted by Annexure C is to identify, when valuing HWL, the relevant band of revenue growth (of which there are eight) achieved by HWL from the previous financial year and strike a value based on a relevant multiple for that band of EBITDA (as defined in Annexure C) for that previous financial year. If the revenue growth, for example, is 3% or less, the multiple is four times EBITDA. The value so determined is reduced for the option periods ending within 90 days of 30 June 2006, 2007 and 2008 by the accrued value of commissions not paid to Metagenics under the Licence Agreement. The valuation method also offsets any interest-bearing debt and strikes the net value per issued share.

40    Clause 11 contains a supply arrangement by which Metagenics will seek regulatory approval in Australia for the manufacture and supply of vitamin and nutrient tablet products and HWL will provide Metagenics with a description of 20 tablet products which it will require Metagenics to manufacture and supply to it so as to meet HWL’s distribution requirements. Each order is to be for a quantity of not less than 300,000 tablets across the tablet range. Clause 11.1(d) deals with the Metagenics supply price which must be competitive. The supply arrangement can be terminated by HWL subject to particular conditions.

41    Clause 9.1 recognises that particular commercial property relevantly connected with HWL is an asset of the HWL Property Trust and the unitholders in the Trust at the relevant date are recited as the eight shareholders in HWL set out in Column 3 of Annexure D. Just as the initial 10% share sale is to be effected by share transfers from Mr Michael Brosnan, Mr Leon Brosnan and Mrs Mary Brosnan, those unitholders would also transfer 10% of their units in the Trust with like unit transfer arrangements in place in parallel with share transfers by the shareholders.

42    Clause 10.1(a)(i) of the 2003 Agreement provides that the units in the HWL Property Trust must at all times be held by a unitholder who is a shareholder in HWL in approximately the same percentage as their shareholding in HWL, and where the interest of Metagenics as a shareholder in HWL increases through the exercise of options, the interest of each unitholder is to be varied so as to ensure that the units are at all times held by a unitholder who is a shareholder in HWL in approximately the same percentage as their HWL shareholding.

The Share Purchase Agreement dated 27 April 2005

43    By the 2005 Share Purchase Agreement (the “2005 Agreement”), the applicants agreed to sell their remaining 183,701 shares in HWL to MAPL (the “buyer”) for $39,600,000 (“$39.6M”). MAPL would be, at the Completion Date (defined to mean 16 May 2005), the beneficial owner of the 20,408 shares in HWL acquired by Metagenics under the 2003 Agreement.

44    Clause 2 of the 2005 Agreement provides that the consideration of $39.6M is made up of three components.

45    First, a combination of cash of $6.5M payable among the applicants as shown in Sch 1 to the 2005 Agreement; the transfer of “Preferred Stock A” in Metagenics to the applicants as shown in Sch 1 to the value of $14,868,000; the transfer of “Common Stock” in Metagenics to the applicants (other than Mr Gee as Trustee and Mr Joiner) in accordance with Sch 1 to the value of $17,291,562; and, procuring Metagenics to issue Common Stock in Metagenics to Mr Gee as trustee, and Mr Joiner, as shown in Sch 1 to the value of $940,438.00, amounting in all to $39.6M: cl 2.1.

46    Second, a component represented by the amount of any compensation HWL might recover from the liquidator of Pan Pharmaceuticals Limited adjusted to take account of any tax payable by HWL (and legal and accounting costs relating to the compensatory payment) the net amount of which would be distributed to all the shareholders of HWL according to their respective shareholding interest in HWL at the day before the Completion Date: cl 2.3.

47    Third, an amount equivalent, in aggregate, to 30% of the “after tax net profits” of HWL distributed in the way set out in Sch 3, in each financial year (or part thereof) during the period commencing on the Completion Date and ending on the earlier of “the date that any stock in Metagenics Inc lists on any recognised stock exchange” and “the date that is 7.5 years after the Completion Date”: cl 2.4(a). The amount so determined would be payable quarterly by the buyer within 45 days of the end of the March, June, September and December quarters.

48    From the Completion Date to the end of the cl 2.4(a) period, the buyer agrees to procure HWL to conduct the undertaking of HWL in a normal, proper and efficient manner: cl 2.4(e).

49    By cl 2.4(f), the parties also agree that cl 2.4 will cease to apply during the period contemplated by cl 2.4(a) in the event that the cumulative payments made by the buyer to the applicants under cl 2.4 “aggregate to AU$15 million” and in that event the buyer “will no longer be obliged to pay any further amount to the [applicants] in accordance with this clause 2.4”.

50    The reference to Preferred Stock A in cl 2 is defined to mean “Preferred Stock A in Metagenics Inc which are redeemable for cash” at the option of Metagenics at any time, or at the option of the applicants at the earlier of “the date Metagenics Inc lists its Common Stock on any Stock Exchange in the United States of America”; the date of completion of “a transfer or sale of more than 50% of the issued shares or stock of Metagenics Inc in relation to a transaction occurring subsequent to Completion”; “the date 7.5 years from the Completion Date”.

51    The reference to Common Stock is defined to mean “common stock issued by Metagenics Inc”.

52    The change in position of the applicants by operation of the 2005 Agreement (and corresponding obligations assumed by the counter-parties to the 2005 Agreement) is reflected in Sch 1 to that agreement which, relevantly, is in these terms:

53    Schedule 3 which sets out the distribution of the cl 2.4(a) “Earn-out payment[s]” representing 30% of HWL’s after tax net profits each financial year, payable quarterly, is in these terms:

54    The cl 3.1 conditions precedent to Completion were, among other things, the release of guarantees given by Mr Michael Brosnan, Mr Alan Gee and Mr Alan Bawden Grant; MAPL becoming the registered owner of 2,373,223 shares in the Common Stock and 14,868,000 Preferred Stock A; and, lessors of particular premises giving necessary consents under particular property leases.

55    At the Completion Date, the buyer agreed to provide the applicants the cash consideration described in cl 2.1(a) and Sch 1; provide a Shareholders Agreement executed by Metagenics concerning the shareholding of the applicants in Metagenics; and procure Metagenics to issue the Common Stock to Mr Alan Gee and Mr Graeme Joiner as earlier mentioned.

56    By cl 6.2, in the period between the Completion Date and Metagenics listing its Common Stock on any United States Stock Exchange, HWL would have six directors and those directors would be the directors of HWL immediately prior to Completion plus Mr Jerry Morey. By cl 4.2 of the 2005 Agreement, the applicants assumed a series of obligations. As to directors’ fees, the applicants agreed to provide the buyer with shareholder resolutions to the effect that on Completion the aggregate amount of directors’ fees would be AU$644,950 plus expenses, per annum, divided between the directors in such proportion as they might determine in accordance with HWL’s constitution, and upon redemption of the Preferred Stock A in Metagenics, the aggregate amount of directors’ fees would be AU$218,000 plus expenses, per annum similarly so distributed.

57    Also, the applicants agreed to provide the buyer with directors’ resolutions to the effect that the annual directors’ fees upon Completion, of AU$644,950, would be distributed between the directors in the following proportions: Mrs Mary Brosnan: AU$72,700; Mr Leon Brosnan: AU$253,316; and, Mr Michael Brosnan: AU$318,934. Also, the applicants agreed to provide the buyer with directors’ resolutions to the effect that the annual directors’ fees upon redemption of the Preferred Stock A in Metagenics, of AU$218,000 would be distributed between the directors in the following proportions: Mrs Mary Brosnan: AU$32,700; Mr Leon Brosnan: AU$76,300; and, Mr Michael Brosnan: AU$109,000.

58    As part of the cl 4.2 obligations of the applicants, they agreed to provide the buyer with company officer agreements with HWL executed by Mrs Mary Brosnan, Mr Leon Brosnan and Mr Michael Brosnan in the form set out in annexures to the 2005 Agreement and an executed agreement with Mr Alan Bawden Grant in the form of another annexure. Also, senior executive employment agreements with HWL executed by Mr Michael Curley, Mr Graeme Joiner and Mr Alan Gee in the form of particular annexures to the 2005 Agreement were to be provided. Also, a shareholders agreement between the applicants and Metagenics executed by the applicants in substantially the form of another annexure to the 2005 Agreement was to be provided to the buyer.

59    By cl 10.1(a), the applicants represent and warrant to the buyer that each warranty contained in Pt 1 of Sch 2 to the 2005 Agreement “is correct and not misleading on the date of this agreement and will be correct and not misleading on each day after [that date] up to and including the Completion Date, as if made on and as at each of those dates”. By para (f) of Pt 1 of Sch 2, the applicants warrant that the Annual Financial Report for HWL and its controlled entity for the financial year ending 30 June 2004 discloses in all material respects a true and fair view of the state of affairs, financial position and assets and liabilities of HWL and its controlled entity.

60    By cl 10.1(b), the buyer and Metagenics represent and warrant certain matters contained in Pt 2 of Sch 2. Those matters include matters relating to the Preferred Stock A, the Common Stock, relevant approvals, the control by Metagenics of all of the issued capital of MAPL and a warranty at para (e) that the “financial statements of Metagenics Inc provided to the [applicants] fairly present, in all material respects, the financial condition of the operations of Metagenics Inc, in accordance with generally accepted accounting principles applying in the United States of America”.

61    By cl 11, the applicants (as shareholders and unitholders in the unit trust) and the buyer (for MAPL and Metagenics), agreed to amend the 2003 Agreement so as to delete the cl 7 options to purchase under the 2003 Agreement. The cl 8 management and control of HWL provisions were also deleted except cl 8.1(a)(a). The cl 11 supply arrangements were deleted and Annexures B and C were also deleted. By cl 11.2, the parties agreed that the buyer and its related entities were not obliged to purchase any units in the HWL Property Trust, and upon purchase of the shares under the 2005 Agreement, cl 10.1(a)(i) of the 2003 Agreement would no longer apply.

62    In substance then (apart from the precise detail of it), the 2005 Agreement brought about the sale by the applicants of their shares to the buyer as contemplated by Sch 1 and as reflected at [52] of these reasons. It provided for additional remuneration in the form of the potential compensatory payment in respect of the Pan Pharmaceuticals Limited matter and continuing remuneration, annually, as reflected in cl 2.4(a), of 30% of the after tax net profits of HWL for the period so described in that clause and distributed quarterly to the recipients as described in Sch 3 and as reflected at [53] of these reasons.

63    It provided a mechanism for determining the quantum of directors’ fees payable annually at relevant moments in time to Mr Michael Brosnan, Mr Leon Brosnan and Mrs Mary Brosnan and made provision for warranties as to the state of the financial accounts of HWL for the financial year ending 30 June 2004 and the compliance of the financial statements of Metagenics with the “generally accepted accounting principles” applying in the United States of America.

64    It recognised that particular company officer agreements in a particular form would be put in place by Completion as between HWL and Mr Michael Brosnan, Mr Leon Brosnan, Mrs Mary Brosnan and Mr Alan Bawden Grant, and that senior executive employment agreements in a particular form would be put in place between HWL and Mr Alan Gee, Mr Michael Curley and Mr Graeme Joiner by Completion.

Settlement Deed – Metagenics Group and former HWL shareholders dated 31 July 2009

65    This agreement (the “Settlement Deed”) is made between the applicants, Metagenics Inc (the Delaware corporation), MAPL, Mr Katke and Dr Bland.

66    The Settlement Deed seeks to set the scene for the operative provisions by reciting a range of matters.

67    The parties recite that under the 2005 Agreement, MAPL acquired all of the issued shares in HWL (apart from the 10% interest in HWL held by Metagenics prior to Completion of the 2005 Agreement which would otherwise be transferred to MAPL). The parties recite that each of the applicants received, as consideration for the sale of their shares in HWL, the consideration reflected in Sch 1 to the 2005 Agreement although, of course, additional consideration apart from the Sch 1 factors is provided for by the 2005 Agreement, as earlier described ([46] and [47]).

68    At Recital C, the parties recognise that since completion of the 2005 Agreement, a dispute had arisen between Metagenics, MAPL, directors or officers of those companies on the one hand, and the applicants as former shareholders in HWL, on the other. The parties recite that the dispute related to an allegation by the applicants as former shareholders in HWL that Metagenics, MAPL or directors or officers of those corporations “made misrepresentations which induced [the applicants] to agree to the terms of the [2005 Agreement]”. The Recitals recite that the applicants had alleged, among other things, that “the methods used by Metagenics to value Metagenics resulted in the value of Metagenics being overstated in relative comparison to the values of HWL” [emphasis added] and that the applicants had alleged that they had “suffered loss because the overvaluation of Metagenics effectively reduced the amount of consideration provided to each [applicant] under the [2005 Agreement]” [emphasis added].

69    That dispute is recited as constituting “the Dispute” the subject of the Settlement Deed.

70    Recital D recites that, without admission of liability, the parties to the Settlement Deed, including the respective directors and officers including Mr Katke and Dr Bland of the corporate parties, “have agreed to settle the Dispute on the terms set out in this deed”.

71    By cl 1.1(a), subject to the terms of the Settlement Deed, Metagenics agrees to settle the Dispute and issue and allot to the applicants, as “Additional Consideration” for the sale of their shares in HWL under the 2005 Agreement, the following fully paid stock distributed in the manner reflected later in these reasons: 250,538 shares of Preferred Stock B (cl 1.1(a)(i)); 35,000 shares of Preferred Stock B subject to a particular condition (cl 1.1(a)(ii)); 286,328 shares of Preferred Stock B exchanged for the redemption of US$4M of Preferred Stock A owned by the applicants (cl 1.1(a)(iii); and, 178,155 shares of Preferred Stock C (cl 1.1(a)(iv)). The Preferred Stock B and Preferred Stock A have all of the rights and benefits attaching to Common Stock in Metagenics as well as a “Floor Value” applying upon the occurrence of a “Liquidity Event” (as defined).

72    Clause 1.1(a) provides that the Additional Consideration is to be distributed in the following way:

73    By cl 1.1, the parties agree that on the allocation and issuance of the shares so described, and the redemption of the Preferred Stock A held by the applicants, “the Dispute shall be deemed settled”.

74    By cl 1.1(b), Mr Jeffery Katke and Dr Jeffery Bland agree to pay to the applicants “Further Additional Consideration” of US$4,108,959.40 within 15 business days of Completion of a particular “Proposed Transaction” or a “Liquidity Event” (where the particular additional circumstances as defined occur) as contemplated by cl 18.1 to be mentioned further shortly. Clause 1.1(b) describes the Further Additional Consideration as representing the purchase price, in accordance with cl 18, for the purchase of “BioTech Common Units” from the applicants (as held by them according to Sch 11 to the Settlement Deed). The applicants would only receive the Further Additional Consideration if the “Proposed Transaction”, including the formation of the “BioTech Joint Venture”, occurs (that is, completes).

75    The “Proposed Transaction” in contemplation at 31 July 2009 is defined to mean the proposed acquisition by Alticor Inc (“Alticor”), a corporation incorporated in the United States (or by one of its affiliates) of 60% of the issued and outstanding Common Stock in Metagenics (with the discharge of Senior Subordinated Secured Promissory Notes maturing on 19 May 2013 and 30 April 2012 held by Bison Capital Structured Equity Partners LLC (“Bison Capital”)); the discharge of three classes of Bison Capital warrants; the redemption of the “Remaining Preferred Stock A” and, Alticor’s acquisition of 28.5% of the “BioTech Joint Venture”.

76    The “Remaining Preferred Stock A” is the Preferred Stock A remaining in the hands of the applicants after the redemption of the Preferred Stock A in exchange for the 286,328 shares of Preferred Stock B under cl 1.1(a)(iii).

77    The “BioTech Joint Venture” is defined to mean “Bio Tech JV, LLC”, a company to be owned by Alticor as to 28.5% and “Bio Tech Holdco” as to 71.5%, as part of the “Proposed Transaction”.

78    “Bio Tech Holdco” is defined to mean a company established by “Holdco” to hold the 71.5% interest in the joint venture and “Holdco” is defined to mean a company established by Metagenics (as part of a reorganisation contemplated by the Settlement Deed) in which the applicants are to hold the same proportionate interest as their holding of stock in Metagenics at the time of conversion of that stock to the new reorganised interests. The reorganisation contemplated by the Settlement Deed was one in which Holdco (and an entity wholly owned by it) would be established by Metagenics and merged with Metagenics whereby Metagenics would become a wholly owned subsidiary of Holdco and each outstanding share of Common Stock, Preferred Stock A, Preferred Stock B and Preferred Stock C in Metagenics would be converted into units in Holdco called the “Holdco Units” comprising Holdco Common Units, Holdco A, Holdco B and Holdco C Units.

79    Each class of Holdco Units would have the same rights as the corresponding class of shares so converted.

80    Once Holdco was established, the Proposed Transaction contemplated that Holdco would form Bio Tech Holdco to hold Holdco’s 71.5% interest in the BioTech Joint Venture and Bio Tech Holdco would then issue “BioTech Common Units” to the existing Holdco unitholders made up of former Metagenics shareholders who had converted shares to units in the reorganisation.

81    The BioTech Common Units to be held by the applicants (and purchased from them) as part of the Further Additional Consideration, are the units referred to in cl 1.1(b), to be acquired in the event the Proposed Transaction proceeded to completion.

82    As to the reorganisation, by cl 2.1, each of the applicants agreed and consented to the reorganisation to be effected at a time to be determined by Metagenics, and by cl 1.4 each applicant agreed to the conversation, prior to the reorganisation, of all of the Common Stock issued pursuant to the 2005 Agreement, into Preferred Stock B on a one-for-one basis. Part 1 of Sch 3 sets out the shareholding of the applicants immediately after the Settlement Date (as defined) of the Settlement Deed, having regard to their prior shareholding and the allocation of the additional classes of shares under cl 1 of the Settlement Deed.

83    Part 2 of Sch 3 sets out the holdings of the applicants immediately after the conversion contemplated by the cl 2 re-organisation.

84    The holdings of the applicants, upon conversion, were to be these:

85    The Settlement Deed also provides for the conversion of Holdco B and C Units to Common Units and the conversion of Preferred Stock B and C held by Holdco to Common Stock.

86    Annexure A to the Settlement Deed sets out the anticipated mechanism by which Alticor would acquire 60% of Metagenics for a cash contribution of US$141.64M (with an implied enterprise valuation of US$264.167M) and a 28.5% interest in the BioTech Joint Venture by contributing US$142,500 for Class B Common Units and US$19.875M for Series A Preferred Units in the joint venture.

87    The parties recognise in the deed that the Annexure A mechanisms might well be subject to change.

88    Put simply for present purposes, having regard to the Settlement Deed and the Stock Purchase Agreement between Showcase Holdings Inc (“Showcase”), Meta Holdings LLC (“Meta Holdings”) and Metagenics, the Proposed Transaction appears to have been implemented in the following way.

89    Metagenics caused Meta Holdings (the “Holdco” entity contemplated by Annexure A) to be formed. Meta Holdings then caused Meta Holdings Merger Sub Inc (“MHMS”), and the transitory entity contemplated under the reorganisation provisions to be formed. MHMS merged in and with Metagenics. Meta Holdings then became the sole holder of the Common Stock and the Preferred Stock in Metagenics as part of a conversion of those classes of shares into a right, in the shareholders, to receive units in Meta Holdings with the same rights attaching to the relevant class of units as attached to the like class of shares. Showcase then acquired from Meta Holdings, stock it held in Metagenics acquired on the conversion, and Metagenics issued some new Common Stock to Showcase so as to bring about Showcase’s 60% interest (and thus, in effect, Alticor’s interest), in Metagenics.

90    Meta Holdings caused MetaRx Holdings LLC (“MetaRx”) to be formed as a wholly owned subsidiary. A Biotechnology Joint Venture was established as KinDex Therapeutics Inc (“KinDex”) between Alticor (contributing cash), MetaRx (also contributing cash) and Meta Proteomics LLC (“Proteomics”). Proteomics was a wholly owned subsidiary of Metagenics and it contributed intellectual property to the joint venture, by licence.

91    Ownership in KinDex was held 28.5% by Alticor and 71.5% by MetaRx.

92    Consistent with the Settlement Deed, units in MetaRx were distributed directly to the unitholders in Meta Holdings on a pro rata basis. Apart from the stock acquired by Showcase to effect a 60% acquisition of Metagenics, a series of put (and call) options also operated such that in 2012 Meta Holdings had the right to require Showcase to purchase up to 25% of the shares in the Common Stock of Metagenics owned by it; in 2013 Meta Holdings could put a further 25% of the shares in the Common Stock in Metagenics to Showcase; and, in 2014 (and each year thereafter), Meta Holdings could put the remaining Common Stock it held in Metagenics to Showcase.

93    The qualification upon the exercise of the put options was that during 2012 and 2013, Meta Holdings could only require Showcase to purchase up to 40%, in aggregate, of the shares in the Common Stock of Metagenics owned by Meta Holdings as a result of the conversion process.

94    The Settlement Deed was entered into by the parties so as to settle the Dispute, framed by Recital C as earlier described, concerning allegations by the applicants of misrepresentations about, among other things, the relative valuations of Metagenics and HWL, made by officers and directors of, Metagenics and MAPL. The applicants contended, in that dispute, that the representations induced them to enter into the 2005 Agreement and caused them to suffer a reliance loss due to a contended over-valuation of Metagenics.

95    Clause 9 of the Settlement Deed contains a number of warranties given by Metagenics and MAPL. Clause 10 contains a release by the applicants. Clause 11 contains warranties, representations and acknowledgements given by the applicants.

96    As to the warranties given by Metagenics and MAPL, cl 9.1(c) is in these terms:

9.1    Metagenics - Warranties

Metagenics and [MAPL] represent and warrant to the [applicants] that:

…

(c)    to the best of their knowledge and belief, the Metagenics Accounts (except to the extent they relate to the HWL Operating Segment) are complete and accurate in all material respects and accurately reflect the financial position of Metagenics at the date of those accounts. For the avoidance of doubt, the parties agree that Metagenics, [MAPL] and Holdco are not liable for any breach of this warranty in relation to the Metagenics Accounts caused by a defect in the Metagenics Accounts or the HWL Accounts in relation to the HWL Operating Segment (e.g. if for instance the accounts for the North American & Europe Operating Segment are misstated by reason of a defect existing in the HWL Accounts); …

                                [emphasis added]

97    The “Metagenics Accounts” are defined to mean the “most recent monthly financial statements, a copy of which is contained in Annexure C”. Annexure C consists of a Metagenics document under the reference “June 2009 Financial Results” and bears the description: “The following is management’s discussion and analysis of financial condition and results of operations of Metagenics, Inc and Subsidiaries for the period ended June 30, 2009”. The analysis addresses a period of six months to 30 June, 2009.

98    The “carve-out” from the cl 9.1(c) warranty concerns the “HWL Operating Segment” which is defined to mean the entities HWL, Health World NZ Limited and Innovative Therapies. The “HWL Accounts” are defined to mean the most recent monthly management accounts of the HWL Operating Segment contained in Annexure D to the Settlement Deed.

99    Clause 10.1 contains a release by the applicants in these terms:

10.1    Release by the Former HWL Shareholders

Upon Metagenics providing notification under clause 12.2 to the Former HWL Shareholders of satisfaction of the condition in clause 12.1 and receipt of the Additional Consideration and in consideration of the obligations of JJK and JB under clause 18, the Former HWL Shareholders:

(a)    release the Metagenics Released Parties from all claims, actions and causes of action (including any claim for costs), past, present and future, relating to:

(i)    the Dispute;

(ii)    subject to clause 13.2, any matter in connection with the Share Purchase Agreement; or

(iii)    any matter in connection with this deed (with the exception of a claim, action or cause of action for breach or enforcement of this deed);

(b)    agree that the Metagenics Released Parties may plead this deed to bar any claim, action or cause of action (including any claim for costs) brought by one or more of the Former HWL Shareholders relating to:

(i)    the Dispute;

(ii)    subject to clause 13.2, any matter in connection with the Share Purchase Agreement; or

(iii)    any matter in connection with this deed (with the exception of a claim, action or cause of action for breach or enforcement of this deed); and

(c)    agree not to commence or maintain any claim, action or cause of action (including any claim for costs) against one or more of the Metagenics Released Parties relating to:

(i)    the Dispute;

(ii)    subject to clause 13.2, any matter in connection with the Share Purchase Agreement; or

(iii)    any matter in connection with this deed (with the exception of a claim, action or cause of action for breach or enforcement of this deed).

                                [emphasis added]

100    A corresponding release is given by Metagenics and MAPL at cl 10.2.

101    Clauses 11.4 and 11.5 of the Settlement Deed are in these terms:

11.4    Legal advice

The Former HWL Shareholders represent and warrant that they have received independent legal and financial advice (either collectively, individually or both) concerning this deed and their rights and obligations under it. The Former HWL Shareholders acknowledge that Metagenics and Metagenics Australia, in executing this deed, are relying on the representation and warranty contained in this clause 11.4 (“Legal advice”).

11.5    Reliance on own information

Subject to the terms of this deed, each of the parties acknowledges that they enter into this deed fully and voluntarily upon their own information and investigation. Each of the parties acknowledges that it is aware that it or its advisers, agents or lawyers may discover facts different from or in addition to the facts that they now know or believe to be true with respect to the subject matter of this deed, but that it is their intention to, and they do, fully and finally absolutely and forever settle according to the provisions of this deed any and all liabilities, claims, disputes and differences which now exist, may exist or have ever existed between the parties relating in any way to the matters the subject of this deed, other than proceedings instituted by any of the parties for breach or enforcement of this deed.

102    Clause 23.1 is an entire agreement clause in the usual form.

103    As to the BioTech Joint Venture contemplated by cl 18.1, the applicants release Metagenics, Holdco, BioTech Holdco, Jeffrey Katke and Jeffrey Bland from any claim in relation to the BioTech Common Units, the BioTech Joint Venture and the subject matter of cl 18.

104    By cl 18.4, the applicants acknowledge that, in exercising their rights in cl 18.1, the applicants do not rely on any statement, representation, warranty, condition, forecast or other conduct which may have been made by, or on behalf of those entities or persons, about the BioTech Common Units and the BioTech Joint Venture, including as to value and that they have satisfied themselves in relation to those matters.

105    As to the ongoing officer and service contracts, the Settlement Deed recognises that on and from the completion of the Proposed Transaction the parties agree that the ongoing employment with HWL of Mr Alan Gee, Mr Graeme Joiner, Mr Leon Brosnan and Mr Michael Brosnan will be governed by the agreements at Schs 12, 13, 14 and 15 respectively: cl 15.

106    By cl 15(e), Metagenics agrees that should HWL terminate the relevant agreements with Mr Michael Brosnan or Mr Leon Brosnan after completion of the Proposed Transaction, it will use all reasonable efforts to require Alticor to purchase the shareholding or units in Metagenics in whatever way that holding might be structured at that time.

107    Clause 11.1 provides that each of the applicants (defined as the former HWL shareholders) represent and warrant that he or she is a “sophisticated investor” within the ambit of s 708(8)(c) or (d) of the Corporations Act 2001 (Cth) for the purposes of all transactions contemplated by the Settlement Deed including the contemplated Reorganisation. They also acknowledge that the offer by Metagenics to issue the Additional Consideration to them in accordance with the allocations reflected in the schedule to the agreement falls within the “sophisticated investor” exemption contained in s 708(8) of the Corporations Act. They also acknowledge that the offer by BioTech Holdco to issue the BioTech Common Units falls within the sophisticated investor exemption. Section 708 of the Corporations Act contains a series of subsections which address the topic of offers in an entity’s securities by a person, which do not need disclosures otherwise required by Pt 6D of the Corporations Act.

108    Finally, by cl 16, the operation of the “Earn-out payment” is preserved according to the terms of that clause.

109    It is now necessary to address the way in which the applicants have framed the various claims made in the proceeding, by reference to the pleading.

PART iii – THE PLEADING OF THE CLAIMS

The pleaded claims of the applicants

110    The applicants plead that from about early 2007 they fell into dispute with Metagenics, MAPL, Mr Jeffrey Katke (and Dr Jeffrey Bland) about things alleged to have been said to the applicants by Mr Jeffrey Katke and Mr Jerry Morey in a period from May 2004 up to the date of entry into the 2005 Agreement on 27 April 2005. As pleaded, the dispute about these matters arising in this earlier period had a number of elements.

111    The first element of that dispute is said to concern the following six representations made in this earlier period.

112    First, in the period between May 2004 and 27 April 2005 (particularised to 7 April 2005), Mr Jeffrey Katke and Mr Jerry Morey represented, variously, to Mr Alan Gee, Mr Michael Brosnan, Mr Leon Brosnan and Mr Alan Bawden Grant, that Metagenics “would … proceed to an initial public offering (“IPO”) on a recognised US stock exchange during 2005 markets permitting” [emphasis added].

113    Second, Mr Jeffrey Katke and Mr Jerry Morey represented to Mr Michael Brosnan, Mr Leon Brosnan and Mr Alan Gee, on 17 November 2004 that “for the purposes of an IPO [Metagenics] could legitimately hold itself out as a speciality pharmaceutical company” [emphasis added].

114    Third, in an email from Mr Jerry Morey to Mr Michael Brosnan, Mr Leon Brosnan, Mr Alan Gee and Mr Alan Bawden Grant dated 11 September 2004 attaching a spreadsheet, Mr Morey represented that “the American division of [Metagenics] would have [particular pleaded] future revenue” [emphasis added] for the financial years 2005, 2006, 2007, 2008, 2009 and 2010, as follows:

115    Fourth, in an email dated 11 September 2004, Mr Morey represented that “the European division of [Metagenics] would have [particular pleaded] future revenue for the same financial years” [emphasis added], as follows:

116    Fifth, in an email dated 11 September 2004, Mr Morey represented that “the earnings before interest, tax, depreciation and amortization (“EBITDA”) for the American division of [Metagenics] and the European division of [Metagenics] would be [particular EBITDA amounts]” [emphasis added], as follows.

117    Sixth, Mr Jeffrey Katke and Mr Jerry Morey impliedly represented that any shares in Metagenics taken by the applicants in exchange for their HWL shares would increase in value by reason of each of the matters the subject of the first five representations such that each applicant would be “better off” by selling his or her shares in HWL to Metagenics.

118    These six matters, said to be in part the subject matter of the later dispute commencing in early 2007, are called the “2005 representations”.

119    The next pleaded part of the 2007 dispute concerned another six representations called the “Pfizer representations”. As to those matters, the applicants plead that between late 2004 and early 2005 either Mr Jeffrey Katke (as to some representations) or Mr Jeffrey Katke and Mr Jerry Morey as to others, represented to Mr Michael Brosnan and/or Mr Alan Gee (for all applicants) the following matters.

120    First, Metagenics “was in discussions with a large pharmaceutical company, Pfizer which had expressed very strong and imminent interest in licensing an anti-inflammatory product produced by [Metagenics] known as Kaprex” [emphasis added].

121    Second, the “research on Kaprex indicated it was an effective anti-inflammatory product” [emphasis added].

122    Third, “Kaprex worked just as effectively as anti-inflammatory products already on the market including Vioxx which had been recalled due to cardiovascular side-effects” [emphasis added].

123    Fourth, “Pfizer’s consumer and drug arms were both interested in Kaprex and its mechanism of action was being reviewed by Pfizer’s scientific advisory board” [emphasis added].

124    Fifth, “a licensing deal with a big pharmaceutical company such as Pfizer with respect to Kaprex and other discoveries would provide substantial revenue to [Metagenics] and increase the value of [Metagenics]” [emphasis added].

125    Sixth, “[Metagenics] had determined to slow the provision of information to Pfizer to give [Metagenics] time to strengthen its patent position before it entered into a licensing deal” [emphasis added].

126    The applicants say that they relied upon the 2005 representations and the Pfizer representations which induced them to enter into and complete the 2005 Agreement. They say, put simply, that Metagenics was not ready and could not proceed to an IPO on a recognised US stock exchange in 2005 as the inadequate state of its group accounts and regulatory compliance relating to the listing of securities on a US exchange prevented it from doing so. They say that that position prevailed up to and including July 2007. They also say that Metagenics could “not ever” legitimately hold itself out as a speciality pharmaceutical company; “did not ever” have products for sale, nor products in the process of being developed, which would enable it to hold itself out as a pharmaceutical company; “has not entered into” any licensing deals with Pfizer or any other entity concerning Kaprex; and, “did not achieve” the revenue and EBITDA figures pleaded.

127    Some elements of the 2005 representations and the Pfizer representations concern representations as to future matters, and other elements concern representations otherwise. Put simply for present purposes, the applicants say that the making of the 2005 representations and the Pfizer representations (engaging where relevant s 51A of the Trade Practices Act 1974 (Cth) (the “Act”)) is conduct in contravention of s 52 of the Act.

128    A further pleaded contention of the applicants is that in late 2004 and early 2005 “discussions with Pfizer with respect to a licensing deal on Kaprex were put on hold because Pfizer had entered into a restructuring which resulted in a change of personnel and focus” [emphasis added]. Thus, the applicants say the Pfizer representations are false.

129    Alternatively, they say that Metagenics and MAPL failed to discharge a contended duty to disclose the cessation of discussions with Pfizer, prior to the applicants electing to enter into the 2005 Agreement.

130    All of the matters described at paras [110] to [129] of these reasons are the matters at paras 4 to 14 of the pleading and, at para 20 of the pleading, the applicants say that a “consequence” of these paras 4 to 14 matters is that the applicants fell into dispute with Metagenics and MAPL about them. That dispute led to negotiations between December 2007 and July 2009 between Mr Jeffrey Katke, Dr Jeffery Bland and Mr Jerry Morey for Metagenics and MAPL on the one hand, and Mr Michael Brosnan and Mr Alan Gee or variously Mr Michael Brosnan, Mr Leon Brosnan, Mr Alan Gee and Mr Alan Bawden Grant, for the applicants on the other hand, and ultimately the resolution of the dispute about all of the paras 4 to 14 matters on the terms of the 31 July 2009 Settlement Deed.

131    The Settlement Deed was completed.

132    The “Proposed Transaction” with Alticor occurred and proceeded to completion.

133    The reorganisation and conversion occurred.

134    However, the applicants contend that Metagenics and MAPL engaged in conduct in contravention of s 52 of the Act again by making misleading or deceptive representations in respect of three further topics which induced the applicants to enter into the Settlement Deed, namely representations called the “2009 representations” and the “Alticor representations”, made between July 2008 and July 2009; and, representations made between late 2004 and July 2009, called the “Patent representations”. The applicants say they relied upon (and were induced by) these three classes of representations in entering into the Settlement Deed and thus settled and compromised contended rights to relief they then enjoyed under the Act said to be available to them arising out of the pleaded paras 4 to 14 conduct, concerning the 2005 Agreement.

135    The applicants say they would have been entitled to orders as against Metagenics, MAPL and Mr Jeffrey Katke under ss 82 and 87 of the Act, first, to recover, under s 82 of the Act, the reliance loss or damage suffered by them by conduct of those parties in contravention of s 52 of the Act; and, rescission of the 2005 Agreement under s 87 of the Act and recovery of their shares in HWL.

136    They say the loss they have suffered, by conduct of Metagenics and MAPL in contravention of s 52, which induced entry into the Settlement Deed, is the loss of the opportunity to obtain the relief which would have been available to them arising out of the paras 4 to 14 conduct inducing the 2005 Agreement. The relief now sought, arising out of the 2009 representations, the Alticor representations and the Patent representations, also said to be conduct in contravention of s 52, is rescission of the Settlement Deed, recovery of the HWL shares, or alternatively damages representing the proper measure of the lost opportunity (calculated according to the expert evidence relied upon by the applicants).

137    The content of the 2009 representations, the Alticor representations and the Patent representations relied upon by the applicants is this.

The 2009 representations

138    The applicants contend that on 26 January 2009 at a Board meeting of Metagenics attended by Mr Michael Brosnan and Mr Alan Gee, those applicants were provided with a “North American Business Plan” (“NABP”) for Metagenics (an earlier copy of it having been given to those applicants by Ms Stockwell on 23 January 2009), and at the meeting Mr Katke said (in the context of other pleaded statements by him), that “the projections in the [NABP] would be achieved” [emphasis added].

139    A final version of the NABP, not materially different from the 26 January 2009 and 23 January 2009 versions, was given to Mr Alan Gee and Mr Graeme Joiner on 10 February 2009. The NABP is said to contain 21 representations collectively called the 2009 representations and they are these:

(a)    Metagenics “would achieve” the following gross revenues and growth rates from its core business:

(b)    For the 2009 calendar year North America would contribute gross sales of US$104.6M.

(c), (d), (e), (f), (g):

From a gross revenue for each of the following years, Metagenics “would achieve” the following EBITDA:

(h), (i), (m), (p) and (s):

For the following calendar years the North American division of Metagenics “would attract” the following number of new Medical Doctor customers which “would produce” the following increase in sales:

(j), (n), (q) and (t):

For the following calendar years the North American division of Metagenics (would deploy) a website called “StopChronicDisease (“SCD”)” to attract the following new patients resulting in the following increase in revenue so attributable to the new website:

(k)    Metagenics “would secure a drug development and co-marketing agreement with a pharmaceutical bio-tech company in 2010”.

(l), (o), (r) and (u):

Metagenics “would identify, complete and integrate accretive acquisition candidates that will grow revenue by [the following percentages] and net income by [the following percentages] in [the following years]”:

The Alticor representations

140    The applicants say that between late July 2008 and July 2009, in the context of Alticor’s proposal to acquire 60% of the issued shares in Metagenics at a particular price, with the balance shares to be acquired pursuant to the proposed put and call options and the purchase price to be determined by reference to the EBITDA of Metagenics at the date of exercise of the option (in accordance with Annexure A to the Settlement Deed), Mr Jeffrey Katke represented to Mr Michael Brosnan and/or Mr Alan Gee the following three things.

141    First, “Alticor was selling US$3-4 billion worth of its products in China annually”.

142    Second, “if the shareholders in [Metagenics] agreed to the proposal by Alticor [Metagenics] would be able to export its products to China by reason of the association with Alticor”.

143    Third, “the exporting of [Metagenics] products into China would substantially increase the profitability of [Metagenics] over and above that set out in the North American Business Plan”.

The Patent representations

144    The applicants say that between late 2004 and July 2009, Mr Jeffrey Katke, Dr Jeffrey Bland and Mr Jerry Morey for Metagenics and MAPL represented to Mr Michael Brosnan and/or Mr Leon Brosnan and/or Mr Alan Gee and/or Mr Alan Bawden Grant the following two things.

145    First, expressly, that Metagenics “had a very strong patent position around its discoveries”.

146    Second, impliedly, that “such patents significantly enhanced the value of shares in [Metagenics]”.

The relief

147    I will return later in these reasons to the precise formulation of the way in which the applicants frame the relief they seek (against the particular parties) and the contended foundations under the Trade Practices Act 1974 (Cth) upon which that relief is claimed.

PART iv – THE FACTUAL CONTROVERSY

The evidence in the proceedings

148    The principal primary evidence on behalf of the applicants was given by Mr Alan Gee.

149    Having regard to his professional qualifications, his experience and the role he discharged at HWL, Mr Gee accepted that he had the conduct of the detailed negotiations on behalf of all of the applicants with the respondents. Mr Michael Brosnan, on the other hand, engaged with the respondents, particularly Mr Katke, on a more general level.

150    In examining the claims of the applicants, the logical place to begin is with the events which began to emerge in early 2007 until mid-2009 when the parties entered into the 31 July 2009 Settlement Deed. If the claims in relation to entry into the Settlement Deed are not made out, the applicants must fail. If those claims are made good a sequence of other questions arise.

151    However, before examining the detail of those events, it seems to me necessary to identify, in some chronological detail, aspects of the evidence going to the early period as the claims of the applicants in relation to the 2005 Agreement are said to give the later events their proper context. I propose to examine, at the outset, the sequence of events that occurred throughout the period in issue through the evidence given by Mr Gee as the principal participant for the applicants and also refer to aspects of the evidence of Mr Michael Brosnan, Mr Alan Bawden Grant, Mr Katke, Mr Morey and Dr Bland as relevant engagements with those individuals occur. I will then return to other aspects of the evidence of those individuals and the evidence of the experts about particular matters.

152    Before doing so, it is necessary to say some preliminary things about Metagenics and HWL.

153    In 1985, Mr Michael Brosnan’s father, Mr Leon Brosnan, asked Mr Michael Brosnan to help sell health related products as an adjunct activity to Mr Leon Brosnan’s pharmacy business. By 1985, Mr Leon Brosnan had met Mr Katke and they had begun to have some business dealings together. By 1986 and 1987, Mr Leon Brosnan and Mr Michael Brosnan began importing and selling products of Metagenics under licence. This was, in effect, the beginning of HWL. HWL also commenced manufacturing its own products in Australia under the name Metagenics. Mr Leon Brosnan, Mr Michael Brosnan and Mrs Mary Brosnan were the original directors of HWL. The business of HWL moved from small premises at Windsor to Breakfast Creek, then to Eagle Farm and ultimately to premises at Northgate.

154    Mr Katke and Mr Michael Brosnan became very close friends. Their families had holidays together. Mr Michael Brosnan regarded Mr Katke as “a mentor”. Mr Katke was appointed a director of HWL in October 1999. Many of the email exchanges between Mr Michael Brosnan and Mr Katke are written in very familiar terms and often Mr Michael Brosnan’s emails to Mr Katke reflect emphatic references to the importance Mr Michael Brosnan placed upon their friendship.

155    In relation to Mr Michael Brosnan’s engagement on particular issues arising as between the applicants and the respondents relevant to these proceedings, Mr Michael Brosnan says that he deferred to Mr Gee’s opinions, views and advice on financial matters. He put it this way at T, p 286, lns 7-10: “… if I see Alan Gee’s name on it [an email], and if it’s to do with figures, I often don’t read them. I would ask Alan what – what was his – he was … my advisor, and I would ask him what his view … on the figures were”. When asked whether he accepted Mr Gee’s advice in respect of these matters, he said at T, p 286, lns 12-13: “I’ve always accepted Alan’s advice”. When Mr Gee was asked whether he provided counsel in a financial sense to Mr Michael Brosnan in relation to his involvement with Metagenics Inc, he said: “Did I provide input to him on that? Yes, definitely. Yes”: T, p 172, lns 44-46.

156    As to Metagenics, it was established by Mr Katke and his family in 1983 or so. HWL’s distribution rights for Metagenics nutritional products was the subject of 1997 licence agreement. In the late 1990s, Metagenics took advice from Lehman Brothers (and other investment banks) about undertaking an IPO of its securities. Metagenics was considered to be too small for an IPO. Growth was the focus. In 2000 or so, Metagenics acquired HealthCom International Inc. It was controlled by Dr Bland. It sold medical food products developed by Dr Bland branded Ultra line. HWL acquired the right to sell those products under licence. In 2002, Metagenics established MetaProteomics as a joint venture with Ashni Nutraceuticals LLC (“Ashni”). MetaProteomics engages in research and development activities under the direction of Dr Bland.

The early experience of Mr Gee

157    Mr Gee has a Bachelor of Commerce degree from the University of Otago and has been a member of the Institute of Chartered Accountants of New Zealand since 1983. He worked for KPMG, or its predecessors in title, for 15 years from 1981 to 1995 and for the first seven years of that period he worked for KPMG in New Zealand in the area of taxation. Mr Gee spent 12 months working in the Los Angeles office of KPMG and seven years in the Brisbane office in that firm’s consulting division.

158    In 1995, he joined HWL as Assistant General Manager and was in that role for two and a half years. He became General Manager in early 1998. That role changed to a position of Managing Director in 1998 which Mr Gee continued to discharge. From 2001 until the agreement with Metagenics in April 2005, Mr Gee owned approximately 5% of the issued shares in HWL.

159    In Los Angeles, Mr Gee worked in the consulting division of KPMG. He primarily worked on real estate matters which involved analysing supply and demand data for new property projects and making some assessments of whether the feasibility for a project on a relevant site would work “economically”. In these projects Mr Gee was expected to apply his “judgement” to those questions. When working for KPMG in Brisbane, Mr Gee worked on at least two major stadium projects, the “Olympic Stadium” in Sydney and the “Gabba Redevelopment” project in Brisbane. In relation to the Olympic Stadium, for example, Mr Gee was asked to examine its likely best use after the Olympics and determine the “optimal” use for the asset.

160    Such a project involved assessing optimization as an “economic criterion” and assessing that criterion involved Mr Gee in “forecasting” exercises: T, p 130, lns 38-46.

Pan Pharmaceuticals Limited and related events

161    In 1998, HWL began to manufacture some of its own products and it contracted out the manufacture of other products. One of those contractors was Pan Pharmaceuticals Limited (“Pan”) which had to close its doors in 2003. At that time, approximately 60% of HWL’s revenue was generated by the sale of products manufactured for it by Pan. Mr Gee says that the closure of Pan was a “shocking event” for HWL and a “terrible thing to have happened” as it, in effect, “dried up the profits for so long as Pan didn’t deliver and until a new supplier could be found” T, p 142, ln 1; lns 29-33.

162    As a result, HWL and Metagenics entered into an arrangement to defer payment of particular commissions ($300,000) and defer the payment of future commissions for a period ($1M). The commission rate was 5.5% of gross sales. Due to the Pan events, HWL’s bank became interested in the financial health of the company. The reductions in cash flow affected HWL’s ability to service debt to the bank: T, p 143, lns 37-38; T, p 144, lns 7-8.

163    On 16 July 2003, Mr Morey wrote a letter to Mr Gee confirming that due to the problems incurred by Pan, Metagenics had agreed with HWL that the payment of royalties (commissions) for the months of February, March and April 2003 would be delayed until June 2004 and that HWL would not be required to pay royalties to Metagenics for the period May 2003 to and including June 2004. Mr Gee sought the letter to show it to the bank so as to demonstrate that HWL’s cash flow would be freed up to enable HWL to service its debts including any obligations to the bank and the ongoing operation of the business: T, p 145, lns 4-12.

The proposed purchase of shares in HWL by Metagenics

164    On 13 June 2003, Mr Alan Bawden Grant formulated a memorandum to Mr Leon Brosnan, Mr Michael Brosnan, Mr Gee, Mr Katke and Mr Morey on the topic of a proposed purchase by Metagenics of shares in HWL. The memorandum arose out of telephone discussions with Mr Katke and Mr Morey on the preceding day and also discussions within the applicant shareholder group. Mr Grant sought to set out a basis for “an orderly progression of share transfers” in HWL to Metagenics which would meet the desires of the parties leading to a formal agreement which would give “certainty in what is a major issue for us all”. Mr Grant set out the elements of the proposal, the price of the initial transfers, the basis for determining the value of subsequent transfers and other matters relating to Metagenics progressively moving from 10% to ownership of 74.41% of the issued shares in HWL.

165    Mr Grant added that, personally, he was content with the proposal.

166    Mr Morey wrote a confidential memo addressed to the Metagenics Board of Advisors summarising the proposed acquisition of HWL.

167    As to the commercial elements, Mr Morey summarised some of the features which became reflected in the 2003 Agreement as earlier described. Metagenics would acquire 10% of the issued shares in HWL based on an AU$12.5M valuation with Metagenics paying AU$1.25M for a 10% interest. The memo recites that Mr Michael Brosnan and Mr Leon Brosnan had agreed in writing that 50% of that price would be loaned to HWL. As to the royalties, the royalties for the period May 2003 to and including June 2004 would not be paid but would be reserved as a credit against the future purchase of HWL shares upon the exercise of the options for a further 10%, 10%, 21% and 23.4%.

168    The 2003 Agreement bears the date 12 September 2003 (Tab 85, at p 2154) although there was some discussion in the course of the hearing that the Agreement was not entered into until October 2003. It bears a stamp duty date of 22 October 2003.

Mr Schechner and Needham & Company (“Needham”)

169    By April 2004, Metagenics was again considering an initial public offering of its securities. On 1 April 2004, it retained Mr Schechner, an investment banker with Needham, to advise it for that purpose. Mr Schechner’s advice to Mr Katke at this time was that the capital markets were improving and there could be a good opportunity for Metagenics to list on United States Stock Exchange.

Mr Katke’s 2004 visit to Australia

170    In May 2004, Mr Katke visited Australia and met with Mr Leon Brosnan, Mr Michael Brosnan, Mr Alan Bawden Grant and Mr Gee. Mr Gee says this about it: Mr Katke spoke about the prospect of merging HWL with Metagenics and also with a business that was distributing Metagenics products in Europe called “Biodynamics”. Mr Katke explained the likely revenues of the merged group and said that Metagenics was generating revenue of US$68M, Biodynamics “was doing 18 million” and HWL “22 million” giving a combined group revenue of “108 million”. Mr Katke said that Metagenics “would need to spend 14.4 million to acquire Biodynamics and that the combined EBITDA of the group was $11 million plus … some technology licensing … and the prospect of … licensing some of the science”:  T, p 103, lns 8-13; lns 22-23.

171    Mr Katke said, according to Mr Gee, that after combining the groups “they would look at private equity raising … to put some funds into the group comprising about 20% of the company and then working towards an IPO in October 2004, with the company – combined companies valued at between 330 and 550 million”: T, p 103, lns 26-27.

172    Mr Katke said, according to Mr Gee, that the IPO would “float off 20 to 25 per cent, so 20 to 25 per cent would be owned by the public”: T, p 103, lns 27-28. Mr Katke said that funds raised from the IPO would pay off subordinated debts of the company of approximately $30M. A business called “HVL” would be acquired. Mr Katke said that that business had “revenues of 66 million and an EBIT [Earnings Before Interest and Tax] of 15 million”: T, p 103, lns 30-32. Mr Katke said that the price to be paid for HVL would be the equivalent of 4.5 times or four to five times EBIT.

173    Mr Katke said that he and his wife, Mrs Shelley Katke, owned approximately 56% of Metagenics, other family members owned 10% and Dr Bland’s family owned 22%. Other nominated individuals owned 12%. Mr Katke spoke about the “plan” to acquire HWL and Biodynamics and said that Biodynamics was an important acquisition because it “gave distribution into Europe to help make [the merged group] a global business”: T, p 103, lns 46-47.

174    Mr Katke was to visit Australia in September 2004 to further these discussions.

The 19 July 2004 Advisory Board Meeting; Ashni

175    On 19 July 2004, the Advisory Board of Metagenics met and, among other things, considered plans for acquisitions and the possibility of an IPO. In August 2004, Metagenics acquired the joint venture interest of Ashni in MetaProteomics. It thus became a wholly owned subsidiary of Metagenics.

The September 2004 events

176    On 7 September 2004, Mr Morey sent an email to Mr Gee attaching spreadsheets on the topic of the valuation of HWL. The first sheet of the spreadsheets expresses the valuation in Australian Dollars at an exchange rate of 73.0353 US cents. The first column takes the actual revenues for the year ending 31 July 2004 of HWL of $28.333M and applies a multiple of 1.05885 to establish a value for HWL of $30M. The second column takes the actual revenues for the same period of Metagenics and Biodynamics (combined) of $110.886M and applies a multiple of 1.167075 to establish a value of $129.412M. The combined revenues of HWL, Metagenics and Biodynamics in the period amount to $139.219M and a combined value, based on the multiples, of $159.412M.

177    Mr Morey’s second spreadsheet undertakes the same exercise except that the period is 12 months ending 30 June 2004 and in respect of Metagenics the revenues exclude the revenues of Biodynamics and a different multiple is applied to each entity’s revenue. In the case of HWL the revenue is $27.807M, the multiple is 1.07885 and the derived value is $30M. In the case of Metagenics the revenue is $86.275M, the multiple is 1.5 and the derived value is $129.412M. The combined revenues amount of $114.082M and a combined valuation of $159.412M.

178    The body of each spreadsheet (and other spreadsheets forming part of that cluster sent by Mr Morey) then identifies the consideration that each shareholder would receive if the shareholder sold at the particular valuation.

179    Mr Gee accepted that Mr Morey’s spreadsheets were designed to demonstrate the price and indeed the value that each shareholder would receive should the shareholder sell at prices suggested by Metagenics and, under certain assumptions, the percentage of cash or stock they might receive, all based upon a multiple being applied “chosen for whatever reason”, to the actual revenues each company had received in the year to date: T, p 153, lns 12-20. The proposed value of the package, made up of some money (cash), notes and stock in Metagenics, was $39.621M.

180    On 9 September 2004, Mr AB Grant sent an email to Mr Gee, Mr Leon Brosnan and Mr Michael Brosnan commenting upon the proposal from Metagenics to acquire the HWL shares. Mr Grant observes that the figures provided by Metagenics had been based upon applying a multiple to sales by HWL of 1.05885, and a multiple to “USA” sales of 1.167075. Mr Grant says that he does not understand the multiple of 1.167075 although it “may not be important”. That seems to follow for Mr Grant because actual revenues are such that “clearly HWL does not need a multiple now to get to $30m”.

181    Mr Grant then sets out some criticism of Mr Morey’s criticism of HWL’s revenue projections said by Mr Morey to be “unreliable”. Mr Grant sets out data on HWL’s sales projections for 2005 to 2008 and then sets out these two observations:

4.    If the business is to be sold, I feel that in its present condition and immediately projected condition, that buyers from Australian companies may produce a better result for HWL shareholders. Blackmores API & Sigma all could be interested, particularly in view of their recent financial results & comments about expansion. Frankly I would feel safer about a $30m cash plus $15-20m shares deal with any of the above, than an IPO hope for Metagenics.

5.    Metagenics Financials. Alan G & I have looked at the P & L and Balance Sheets last provided by Jeff. You are aware of my comments at a board meeting 2-3 months ago. Metagenics sales growth has been 4-8% p a in recent years, profits have been marginal at best with HWL commissions being a substantial contributor. Virtually zero profits have been retained in the business. Shareholders’ funds are backed by zero tangible assets. (Note: HWL has $3.3M of shareholders’ funds backed by tangible assets).

                                [emphasis added]

182    At para 6, Mr Grant says that the applicants should ask “Jeff” (Mr Katke) to fax copies of the Metagenics latest financials including the consolidation of the Belgium acquisition to allow Mr Grant and Mr Gee to look over them and that this should be done well before “Jeff [Katke] gets to Brisbane to give time to a proper understanding of their position”.

183    In the memo, Mr Grant makes some observations about multiples of sales as the basis of the IPO suggested by Metagenics of US$300M which equates to AU$410M. Mr Grant seems to suggest that based on the HWL sales, as compared with the Metagenics and Biodynamics combined sales, the relativity in the values ought to be attributed $88M to HWL and $322M to Metagenics and Biodynamics. He also says that if, by June 2005, HWL sales reach $40M, the HWL value would increase to $99M. Mr Grant observes at point 9 that neither “Alan G [nor] I feel Jeff [Katke] can do his deal without HWL. The split as above is quite unfair” [emphasis added].

184    The memorandum notes that Mr Grant’s comments in the document were to be discussed within the applicant group a few days later.

185    In advance of the meeting between representatives of the applicants and Mr Katke in Australia in September 2004 to further the earlier discussions from May 2004, Mr Gee, consistent with Mr Grant’s suggestion in his memorandum, sent an email to Mr Morey on 9 September 2004 in which he said this:

To help our assessment would you please forward for both [Metagenics] & the Belgium company, a copy of; your current year budget; your latest monthly management accounts; and 3 yr projections; together with the last 2 years financials for Belgium. Would you also please let us know the level of inter-company sales between [Metagenics] and Belgium.

                                [emphasis added]

186    Mr Morey responded by email on 11 September 2004.

187    He attached a spreadsheet showing the acquisition of the Belgium company (companies) taking place as at 1 July 2004, as a hypothesis. It was one scenario prepared for an investor. The spreadsheet sets out actual revenue for the US and European businesses in the period January 2004 to July 2004 and then shows projections of revenue from August 2004 to December 2004, an annualised 2004 projection and projections for 2005 to 2010 inclusive. The spreadsheet also shows projections of operating expenses, operating income, net income and EBITDA for the periods of the spreadsheet (among other things).

188    The spreadsheet from Mr Morey sets out the following projections for revenue and EBITDA for the United States business and the Biodynamics entities:

189    Mr Gee sought the information requested in his email to Mr Morey of 9 September 2004 to enable him to make his own assessment of: “were they growing businesses; what size businesses were they; was the profit growing”: T, p 131, lns 15-18.

190    Mr Morey’s spreadsheet is based on several assumptions: T, p 131, lns 21-22.

191    The first is that three Belgium companies making up Biodynamics have been acquired by Metagenics as at 1 July 2004: T, p 131, lns 24-26. Mr Gee understood, at the time, that that assumption was not the fact (T, p 131, lns 28-31; T, p 132, lns 38-40) and that at September 2004 those companies had not been acquired by Metagenics. It was a particular construct for a particular purpose.

192    Mr Gee believes that Mr Morey’s financial information for the Belgium companies must have come from the operators of the Belgium companies.

193    The acquisition of the Belgium companies was to be funded by Bison Capital.

194    Mr Gee understood that Mr Morey’s combined projections for Metagenics and the Belgium companies, eliminated, subject to the first half of 2004, “inter-company transactions” (inter-company sales) for the period of the projections so as to avoid “double counting”. Mr Morey’s spreadsheets postulate a “scenario” in which Metagenics has taken over the Belgium companies as at 1 July 2004 and for the first half of 2004 there is no need to eliminate inter-company sales (as the companies are separate) and for the balance, all inter-company data had been taken out: T, p 132, lns 27-36.

195    The second key assumption about the Belgium companies is that revenue will grow at 20% per year. Mr Morey observes in his email that such growth was “below what we expect and what they have been achieving”. Although Mr Gee had asked for the “financials” for the Belgium companies for a two year period in order to enable him to make his own assessment of the business, he said that he did not know or could not recall whether the financials had been given to him: T, p 133, lns 10-14.

196    In Mr Morey’s email of 11 September 2004 he also says this:

Debt of $12.5 million at 12% cash coupon and 3% pick (accruing) and $2.5 million in warrants for 3% of the combined company of Metagenics & Belgium at a $83.3 million valuation. The plan would be to pay off this debt after an IPO without any penalties. The debt matures in 7 years, but our goal is to be able to pay it off in 2005 if the market is right for an IPO.

                                [emphasis added]

197    Mr Gee understood from Mr Morey’s email that the acquisition of the Belgium companies would be financed by a $12.5M loan at 12% with 3% accruing to the balance of the loan; warrants would be issued in the equity of the combined company (valued at $83.3M) equivalent to 3% of the combined company, exercisable for $2.5M, and the intention of Metagenics was to pay off the debt after an IPO without any penalties: T, p 133, lns 21-31.

198    In Mr Morey’s email he says “our goal” is to be able to pay off the debt in 2005 if the market is right for an IPO.

199    Mr Gee’s understanding was that the “goal” described in Mr Morey’s email reflected an “intention” to pay off the debt in 2005 if the market is right for an IPO: T, p 133, lns 40-44.

200    The projections provided by Mr Morey on 11 September 2004 are concerned with a full 12 months projection for 2004 and projections for the years 2005 to 2010 (six additional years).

201    As a matter of general principle, so far as projections are concerned, Mr Gee accepted that the “further out you go, the less weight [you can put on a projection of earnings]”: T, p 134, lns 12-14; lns 23-24. By the time Mr Morey made his projections set out in the email of 11 September 2004, he had been the Corporate Controller of Metagenics from 2 December 1996 to 15 May 1998. He had been the Chief Financial Officer of Metagenics from 15 May 1998 until 11 September 2004 and remained the Chief Financial Officer of Metagenics until 31 December 2011, and from 2009, Mr Morey also held the position of Chief Operating Officer.

202    I will return to aspects of Mr Morey’s evidence later in these reasons.

203    However, for present purposes, it should be noted that Mr Morey exercised a primary role of Chief Financial Officer in relation to the detail of the financial affairs of Metagenics.

204    In relation to Mr Morey’s projections of revenue from the United States business for the years 2004 and following, Mr Gee accepted that (subject to a question about whether inter-company eliminations had been applied to the actual revenue shown in the financial accounts) actual revenues for North America were as follows: for the financial year ending 31 December 2005, $81,160,000 against Mr Morey’s projection of $77,982,000; for the financial year ending 31 December 2004, $68,040,000 against Mr Morey’s projection of $67,979,000; for the financial year ending 31 December 2006, $91,303,000 against Mr Morey’s projection of $90,893,000; for the financial year ending 31 December 2007, $100,379,000 as against Mr Morey’s projection of $106,799,000; and for the financial year ending 31 December 2008, $106,665,000 as against Mr Morey’s projection of $126,023,000. For the financial year ending 31 December 2009, Mr Morey’s projection was $149,337,000 North American business revenues were significantly less. For the financial year ending 31 December 2010 revenues were $114,612,847 as against Mr Morey’s projection of $177,712,000.

205    Mr Gee accepted that towards the end of 2008, the Global Financial Crisis emerged in the United States.

206    Mr Gee, in recognising the actual revenues for North America, was uncertain as to whether inter-company sales had been eliminated so as to avoid double counting. For example, in relation to the actual revenue for the financial year ending 31 December 2007, North American actual revenue is shown as $100,379,000. That amount is made up of five components (at p 9553 of Doc Vol 14, Tab 704) amounting to $76,805,550 and 15 other items amounting to $23,573,443 giving total actual revenue of $100,378,993 (or $100,379,000 as the rounded up actual revenue). Within the 15 other items, revenues described as “Australia – Health World” of $2,106,640 is shown; revenues described as “Belgium – Biodynamics” of $893,128.00 is shown; and “Royalty income – Australia” of $2,291,280 is shown. Mr Gee says that these three items represent items of inter-company eliminations which ought to reduce the actual revenues by $5,291,048 which, if taken into account, would reduce actual revenues to $95,087,000.

207    Mr Gee understood, however, that for Mr Morey’s projections for 2005, 2006 and 2007, inter-company transactions had been eliminated or removed: T, p 140, lns 24-26.

208    As to these projections provided by Mr Morey, Mr Gee said the figures were important to him (and the applicants generally) because the applicants “were being asked to merge our business with Metagenics, and it was important for us that the Metagenics business and the Biodynamics business were strong, growing companies”: T, p 104, lns 25-27.

209    On 11 September 2004, Mr Morey also provided Mr Gee with a “Pro forma Combination” of Metagenics and Distributor A and B for 12 months ending 31 December 2004 as if the acquisitions were transacted on 1 July 2004. The pro forma spreadsheet also contained revenue projections for 2005 to 2010 inclusive. Mr Gee understood this spreadsheet to be an attempt to show, in a pro forma way, the combination of Metagenics and the Belgium companies: T, p 155, lns 45-46. The financial statements are pro forma in the sense that they were prepared in advance of the acquisition of the Belgium companies and the aim is to show the anticipated results as if the acquisitions were transacted (and combined) on 1 July 2004.

210    They represent projections by using judgment to try and determine future results: T, p 156, lns 34-39.

211    Mr Gee accepted that isolating a trend is important because trends, up or down, in a business might continue. Mr Gee said that these historical data had been sought so as to enable him to determine whether, based on the actual historical figures, the projections Mr Morey had provided to him satisfied him in making his own judgment about those projections: T, p 157, lns 26-28.

212    On 18 September 2004, Mr Katke visited Australia and met with Mr Leon Brosnan, Mr Michael Brosnan, Mr Alan Grant and Mr Gee at the Sheraton Hotel.

213    At that meeting, Mr Katke “went over” the scientific discoveries that Metagenics had made and most particularly “the hops – or the Kaprex product”: T, p 105, lns 11-13. Mr Gee described the discussion in this way (T, p 105, lns 14-20):

[Mr Katke] talked about the licensing that would flow from [Kaprex] … about how those licensing deals would be structured. They would be small payments … in the vicinity of ten to $20 million with milestone payments achieved thereafter. The upfront part of the payment would fund further clinical trials. And he projected on to a screen a model … where he had … I think it was five of those products, each producing revenues in the vicinity of 100 to $150 million, and valuing the company in the billions of dollars.

214    As to merging the companies or an IPO, Mr Gee says that Mr Katke said the “plan was to merge the company and proceed to an IPO in 2005” [emphasis added]. At this point in the exchanges, there does not seem to be any mention, in Mr Gee’s recollection of the meeting, of Mr Katke talking about any licensing discussions with Pfizer or, more particularly, discussions that were sufficiently advanced that Metagenics was on the cusp of or imminently close to signing a licensing transaction concerning the Kaprex product with Pfizer. However, that matter is said to arise in October 2004.

215    At this point, it is necessary to say something further about Kaprex.

Kaprex

216    Many chronic conditions or diseases suffered by humans exhibit inflammatory responses by the body’s mechanisms. Non-steroidal anti-inflammatory drugs are traditionally administered in treatment. Kaprex is an anti-inflammatory product based on modified hops extracts. It has a different mechanism of action to traditional anti-inflammatory drugs. In the early 2000s, Dr John Babish of Ashni had undertaken research work that seemed promising. MetaProteomics acquired the intellectual property in the work of Dr Babish in 2002 and undertook, in 2003, further work based on a process it had developed (called ExpressSyn) for screening naturally occurring substances to isolate a possible mechanism of action in regulating cellular function in patients suffering chronic disease.

217    The respondents in the written submissions have addressed the steps involved in the development of Kaprex and I accept the submissions as an accurate statement of the evidence on this issue. The respondents put it this way at para 299 of their submissions:

299.    …

(a)    …

(b)    The work done in 2003 involved screening over 300 botanical extracts of foods, spices and botanical medicines to determine those that had the most significant influence on cellular inflammation compared to, or in combination with, hops. The modified hops extracts were found to have the highest influence on cellular inflammation and the greatest level of safety.

(c)    Thereafter, based on in vitro streaming data, MetaProteomics developed a proprietary, standardised combination of reduced iso-alpha-acids from hops, rosemary extract and oleanolic acid.

(d)    The product was evaluated in a number of studies.

(e)    The studies included:

(i)    A study entitled “Comparison of the effects of a newly developed botanical anti-inflammatory vs. a commonly prescribed anti-inflammatory medication on fecal calprotectin” which was the subject of a report dated 29 January 2004. The results:

“Indicate that [the product] leads to little or no gastrointestinal inflammation, as compared to a standard NSAID, and suggest calprotectin may not carry the risk of ulcer that NSAIDs commonly produce.”

(ii)    A randomised, double-blind placebo-controlled trial over eight weeks starting with 69 patients with knee osteoarthritis, the results of which were reported in a memorandum dated 8 November 2004. The conclusion of the study was:

“We have … observed a significant decrease in pain … for the subjects taking the Meta 051 as compared to placebo. Moreover, the data obtained in this trial (Trial B) are consistent with the data obtained with OA subjects in the initial observational trial (Trial A). Therefore, these data indicate that Meta 051 is efficacious for pain relief in OA patients.

(iii)    A study dated Spring (April) 2004 entitled “Development of Meta 050, a Natural Anti-Inflammatory Targeting Inhibition of Cyclooxygenase Gene Induction Instead of Direct Cyclooxygenase Enzyme Inhibition, Resulting in an Anti-Inflammatory with Low Predicted GI Toxicity.

(iv)    A presentation dated Fall (October) 2004 entitled “Harnessing the power of nutrigenomics for the development of oral therapeutics to manage chronic diseases.

(v)    A document published in April 2005 entitled “Clinical trial evaluating the effect of Meta 051 on perimeters of platelet function and blood coagulation.

(f)    The study suggested that the product was able to treat osteoarthritis pain and that it did not block the cyclooxygenase enzymes associated with inflammation as did traditional NSAIDS, but rather selectively altered the genetic expression of inflammatory mediators thereby providing a much higher safety margin than traditional NSAIDS (such as Vioxx and Celebrex).

Further aspects of the September 2004 events

218    On 22 September 2004, Mr Gee sent an email to Mr Katke observing that Mr Michael Brosnan had suggested that Mr Mike Curley and Mr Alan Gee should attend a meeting in December with “the Belgium people and the investment bank” with a view to better understanding the science and the proposed IPO.

219    On 28 September 2004, Mr Katke responded and suggested that Mr Mike Curley, Mr Michael Brosnan, Mr Leon Brosnan and Mr Alan Gee attend the Metagenics December sales meeting in Seattle for a “strategic planning session with Belgium, Australia and the US”. Mr Katke suggested that the investment bank representative advising Metagenics might be able to meet with the Australian group and “explain the IPO process and timelines”. Mr Katke suggested that Metagenics might organise a “complete presentation of the complete science behind Kaprex and our other ExpressSyn discoveries”. Mr Katke suggested and preferred a meeting on Sunday, 12 December 2004 or Friday, 17 December 2004. Mr David Schechner’s availability would need to be checked. Mr Katke completed his email with this observation:

By the way the placebo controlled research on Kaprex was positive. We have a blockbuster on our hands! We are shooting for an IPO in March or April markets permitting.

                                [emphasis added]

220    Mr Gee understood Mr Katke’s observation about Kaprex to be a reference to Mr Katke’s comments at the 18 September 2004 meeting when he spoke of one or more products which might generate revenues in excess of $100M: T, p 105, lns 43-45.

221    The point of this email seems to be to put in place the arrangements for a face-to-face meeting in the United States to enable Mr Gee, Mr Curley, Mr Michael Brosnan and Mr Leon Brosnan to discuss the timelines and processes involved in an IPO directly with the investment banker advising Metagenics on that matter (and discuss views with Mr Katke and others) and secondly, to provide them with a “complete” briefing on the “complete science” behind Kaprex and the “other ExpressSyn discoveries”.

222    The reference to Kaprex being a “blockbuster” is undoubtedly an emphatic and perhaps excited explanation of Mr Katke’s perception of it but, in context, Mr Katke is in effect saying: come to the United States and see and hear about it fully and completely for yourself. The reference to “shooting for” an IPO in March or April 2005 coupled with arrangements to meet David Schechner is properly understood as a statement of Mr Katke’s intention at that time that Metagenics was intending to go to an IPO in March or April 2005.

The October 2004 events

223    On 1 October 2004, Mr Gee had a telephone conversation with Mr Katke.

224    Mr Gee says that Mr Katke explained to him that a pain relief pharmaceutical product called “Vioxx” had been withdrawn from the market in the United States due to risks which had emerged concerning heart and kidney function and that a vascular study completed on Kaprex demonstrated that it did not have these risks. Mr Gee’s diary note of the conversation describes the risks identified by Mr Katke concerning Vioxx as “endophilial dysfunction/hypertension/kidney heart attack”. Mr Katke said that Pfizer had been in contact “a couple of days ago” regarding Kaprex. The diary notes says: “9 days ago re Kaprex”. Mr Katke spoke about a trial that Metagenics had completed for Kaprex beginning with 69 subjects and by reason of exclusions and other factors, 27 subjects remained within the trial of which 13 were administered Kaprex and 14 were administered a placebo. Mr Katke said that there was “statistical significance in the outcome of the study”, in effect, favourable to Kaprex. Mr Gee gave evidence that he understood the words “statistical significance” to be a “term used in respect of clinical trials” when a relevant person is “required to show levels of statistical significance in order for results to be relevant, clinically relevant”.

225    As to this important telephone conversation, Mr Gee does not say in his evidence that Mr Katke told him that Metagenics was in discussions with a large pharmaceutical company, Pfizer, which had expressed “very strong and imminent interest” in licensing an anti-inflammatory product called Kaprex: see [120] of these reasons. The effect of Mr Gee’s evidence about Mr Katke’s statements concerning a trial involving 27 subjects with 13 administered Kaprex and 14 administered a placebo and the outcome being statistically significant, might have been understood by Mr Gee as meaning “research on Kaprex indicated it was an effective anti-inflammatory product” but Mr Gee does not say that Mr Katke said those words to him: see [121] of these reasons.

226    Nor does Mr Gee say in his oral evidence that Mr Katke said: “Kaprex worked just as effectively as anti-inflammatory products already on the market including Vioxx”: see [122] of these reasons. Rather, Mr Katke spoke about the very particular trial of 27 subjects split 13 to Kaprex and 14 to a placebo and observed that there was statistical significance in the outcome. Nor does Mr Gee give oral evidence that Mr Katke said: “A licensing deal with a big pharmaceutical company such as Pfizer with respect to Kaprex and other discoveries would provide substantial revenue and increase the value of Metagenics”: see [124] of these reasons.

227    The reason it is important to plead the actual words used in an express representation case (and thus a mis-representation cause of action based upon prohibitions upon misleading conduct) is that the words constituting the express representations actually matter in determining what representations were made and, in context, the meaning to be attributed to the particular words. There is likely to be a real difference of understanding between a contention about something someone actually said and a contention that someone said something to a certain effect, as they understood it.

228    For present purposes, I simply note that Mr Gee in oral evidence did not say that in the course of this telephone conversation, Mr Katke made the pleaded express representations attributed to him by this part of the pleading.

229    On 15 October 2004, Mr Katke sent an email to Mr Gee attaching the draft terms of a proposed agreement for the acquisition of the remaining shares in HWL from the applicants by Metagenics. The terms contemplated consideration of $30M plus the difference between that amount and eight times EBITDA for the financial year ending 30 June 2005 whichever was the greater, capped at $39M. The consideration would be paid 80% in cash and 20% in stock in the proposed IPO. The timing of the payment contemplated that an IPO might take place before completion of final accounts at 30 June 2005 (or before receipt of KPMG’s Audit Report for the 30 June 2005 financial year). In that event, a particular payment protocol would apply in relation to the 80% cash and 20% stock. The terms also contemplated that an IPO might take place after receipt of the KPMG Audit Report in which event the consideration of 80% cash and 20% stock would occur “at the IPO date”. Metagenics stock would be valued at 1.5 times its 30 June 2005 net revenues. HWL would be valued at 1 times its net revenues. A “definitive agreement” was to be signed by 1 December 2004. The agreement would “expire” 12 months from signing should no IPO have occurred, that is, by 1 December 2005.

230    It seems that at 15 October 2004, Metagenics was at least contemplating the possibility that Metagenics might not list by 1 December 2005.

231    At T, p 284, lns 1-11, Mr Brosnan gave evidence that after the September 2004 meeting he received a telephone call in late October 2004 from Mr Katke in which Mr Katke said this:

… “Mate, I’m about to do a licensing deal. If you want to be a part of it you need to get on a plane right now and come to the States. We’re doing a licensing deal with Pfizer and we’re then going to an IPO”. And I said, “Well, just hang on a sec. I’ve got to talk to the other shareholders”. I was actually very excited about – his excitement. And at the same time he said, “If you’re not here right now you will miss out on the value that will be created”. And so at the same time I was excited, but also, “Well, hang on. I don’t want to miss out” – so I think [I] spoke to the other shareholders.

                                [emphasis added]

232    This seems to be the reference in the particulars to Mr Katke saying to Mr Michael Brosnan that Metagenics was about to do an “imminent licensing deal” with Pfizer with respect to Kaprex, although the particulars suggest the conversation occurred in November 2004 (see para 5(a)(ii) of the pleading).

233    Mr Katke rather thinks that it was Mr Brosnan’s idea to travel urgently to the United States.

The November 2004 events

234    On 2 November 2004, Mr Gee responded to Mr Katke’s email and memorandum of 15 October 2004. Mr Gee said that he agreed with a multiple of eight times EBITDA. However, the purchase price was to be capped at AU$45M with a floor price of AU$36M. The maximum cash component was to be AU$28M with the balance in stock. Mr Gee said that Metagenics stock was to be valued at 1.3 times the net revenue. Mr Gee made a number of comments about the normalisation of adjustments to determine the 30 June 2005 EBITDA.

235    On 3 November 2004, Mr Katke responded and said this:

After reviewing your proposal I would differ with you on [your] statement that we are getting close. I would say that we are getting further apart. Your proposal is too rich for us. I think that you are making a mistake in continuing to increase your price. At these values we are better off to go with the option agreement cash payment formula [set out in the 2003 Agreement].

We are meeting with investors next week and have a new valuation strategy to achieve a pre-IPO valuation of $350 million. We will double that value with a licensing deal with a pharma company, for a total value of $700 million. We meet with Pfizer for licensing discussions on Wednesday. You think that your business is increasing in value day to day, but so is ours. Once we lock in our valuation with another investor the stock now generously valued at 1.5 times sales could go up to 3.5 times sales or greater. If we get strong interest in the licensing deal with Pfizer it goes up to 7 times sales.

Jerry [Morey] is in Belgium this week. When he returns we will review your proposal and let you know what we can do. If it is not enough, we understand. We can go back to the option agreement, cash payment formula. We are not eager to give up more of Metagenics shares anyway.

                                [emphasis added]

236    On 11 November 2004, Mr Gee had a telephone conversation with Mr Morey.

237    In that conversation, Mr Morey said that a meeting had been arranged for 16 and 17 November 2004 in the United States at San Clemente for a number of presentations. Mr Morey had been in contact with four investment banks including “Needham” represented by Mr David Schechner and Mr Wayne Fitzpatrick, to select an investment bank to attend the meeting. Dr Bland would attend the meeting. Mr Morey told Mr Gee that there had been “a snag with Belgium” in that there was a qualification to the accounts for the Belgium companies concerning the opening values to be attributed to “inventory” and that if the accounts could not be settled on the basis of determining the opening values by undertaking an “inventory rollback”, common in the United States but not common in Europe, Metagenics would have to amend the agreement for the purchase of the Belgium business (shares in the particular entities) “to close” after the June 2005 audit had been completed. Mr Morey also said that there were “some problems with KPMG Belgium in relation to the SEC [Securities Exchange Commission]”. Mr Morey said that Metagenics was “still looking at an IPO in April/May 2005”: T, p 108, lns 13-28.

238    In this conversation on 11 November 2004, Mr Morey told Mr Gee that Metagenics “required audited accounts” for the Belgium companies. Mr Gee was not sure whether audited accounts were required for the purposes of the IPO at that point but he believed it probably was a requirement of the IPO: T, p 159, lns 30-32.

239    Mr Gee gave evidence that in order to complete audited accounts, the auditor needs to be satisfied as to the opening balance of the inventory because the opening balance affects the determination of the profit. By the time the auditor has examined the transactions to the end of the financial year, the auditor can determine the closing balance. However, the auditor needs to be confident of the opening balance at the beginning of the financial year as the increase or decrease will affect the determination of the profit: T, p 159, lns 35-44. Mr Gee says he was told by Mr Morey that because the auditors had not attended the opening balance stocktake they could not be sure that the procedure had been undertaken correctly and thus they had no confidence in the opening value. Mr Morey told Mr Gee that in the United States it was common practice to take the “closing” inventory value and “roll back” from that determination so as to identify the opening inventory value at the beginning of the financial year. Because a roll back valuation could not be done in Europe (from an accounting standards point of view), the auditors could not establish a robust opening value for the inventory.

Advisory Board Meeting of Metagenics on 12 November 2004

240    On 12 November 2004, the Advisory Board met in San Clemente. Present were members Mr Hovee, Mr Zaepfel, Mr Krajanowski and Mr Leiner. Mr Katke, Dr Bland, Mr Carl Moore, Mr Morey and Ms Campbell attended the meeting. Mr Morey presented the financial results to 30 September 2004. Ms Campbell presented a legal and regulatory update. Mr Katke and Dr Bland presented information on recent scientific discoveries by Metagenics for review. Mr Katke presented the company’s IPO strategy for review. Relevantly for present purposes, Needham made a presentation by conference call. The Board recommended that Metagenics select Needham to represent it in licensing discussions with the pharmaceutical industry and suggested that Metagenics prepare a detailed outline of the various opportunities for obtaining “a licensing deal” and “additional financing”.

241    Mr Katke makes a number of points about this meeting which occurred five days before the critical meeting with the Australians on 17 November 2004. Mr Katke says that based on the date of the Minutes, he is aware that it was on or around 12 November 2004 that he and Dr Bland “updated the Metagenics Board on the discussions with Pfizer”. He says that based on the minutes and his earlier discussions with investment bankers, he is aware that he also gave presentations to the Advisory Board about growth opportunities for Metagenics. He says Schechner did the same thing.

242    This Advisory Board meeting also has relevance in this sense. Mr Katke says that his document called “Who is Metagenics Today?” was created on 7 October 2004 and it was written by Mr Katke and Dr Bland. Mr Katke says the document was drafted in the lead-up to the 12 November 2004 Advisory Board meeting and for the “upcoming meeting” with the Australians. Mr Katke also says that the document contained a lot of information that Metagenics had “recently presented to Pfizer on 11 November 2004”. Mr Katke says that he compiled the document to update the Advisory Board about recent developments concerning Kaprex, growth opportunities and more particularly, with respect to the slides at the end of the document, to show the Australian shareholders at the 17 November 2004 meeting what Metagenics might look like in terms of valuation if Metagenics acquired HWL. Mr Katke says that Dr Bland and Mr Katke spoke about the initial discussions with Pfizer. Dr Bland explained the progress of discovery with respect to Kaprex, the science behind hops and the product pipeline based on hops technology. They advised the meeting that Pfizer’s initial response had been positive; placebo-controlled trials were still relatively small; and, further clinical trials would be expensive and Metagenics hoped Pfizer would partner with it and fund the investment for the necessary trial.

243    Mr Katke says that he spoke to his “Opportunities for Growth” document. He emphasised that one of the key matters to be considered was how the company would be “positioned” in the event of an IPO. He said that positioning depended upon the type of company Metagenics might be compared with – a dietary supplement company or, “given its speciality products in medical foods, its marketing to specialty CAM healthcare professionals, its R&D capability through MetaProteomics, and drug licensing and development plans” – “a specialty pharmaceutical company”.

244    Mr Katke says that Mr Schechner made a presentation to the Advisory Board about partnership opportunities with a pharmaceutical company or a third party investor, and also the potential for Metagenics to conduct an IPO. Mr Schechner addressed the valuation issues for the company associated with an IPO. Mr Katke says that as best he can recall, the following discussion took place with Mr Schechner.

245    First, Mr Schechner said that Needham was of the view that if the underlying clinical data for Kaprex was robust, large pharmaceutical companies such as Pfizer may well be interested in partnering with Metagenics or MetaProteomics by way of licensing and/or further developing the Kaprex technology.

246    Second, Mr Schechner said that such a partnership would substantially increase the value of Metagenics which he described as a “step-up” in value by such an arrangement.

247    Third, there was a discussion about the robustness of the clinical data underlying Kaprex and how this consideration might affect partnering opportunities.

248    Fourth, Mr Schechner expressed the view that Metagenics could seek investment from a biotechnology or venture capital investor to develop Kaprex and the investment funds could be used to conduct further clinical trials with the result that such an investment would increase the value of Metagenics in an IPO.

249    Fifth, Mr Schechner spoke about how Metagenics might be “positioned” in the event of an IPO. Mr Schechner said it was difficult to identify public companies that had the same characteristics as Metagenics. He expressed this opinion:

… although Metagenics sold products in the nature of dietary supplements, it should not be compared to dietary supplement companies because it had a strong R&D capability in MetaProteomics – which was capable of developing science based products like Kaprex – and because Metagenics distributed its products through medical professionals. … These characteristics were more akin to a pharmaceutical company.

250    Mr Katke says that Mr Schechner expressed this further view:

Schechner said that given Metagenics’ R&D capability – which he said could be specifically “segmented” into MetaProteomics as the R&D or discovery division – and given Metagenics specialty medical food products, and specialty CAM health professional distribution channels, it would be appropriate to position itself as a “specialty” pharmaceutical company for purposes of an IPO – which he said was something of a hybrid between dietary supplement companies and pharmaceutical companies. He also said that in the current market specialty pharmaceutical companies were likely to attract a higher multiple or revenue or operating profit in determining their value in 2005, and recommended that Metagenics therefore position itself as a specialty pharmaceutical company.

251    Mr Schechner conducted his presentation to the Advisory Board by reference to a number of slides some of which are similar to slides presented at the meeting on 17 November 2004. In particular, Mr Schechner presented his triangular “positioning” slide mentioned shortly. This was a “preliminary positioning” of MetaProteomics.

15 November 2004

252    Mr Leon Brosnan, Mr Michael Brosnan, Mr Alan Bawden Grant and Mr Gee arrived in San Clemente shortly before 15 November 2004 for the meetings on 16 and 17 November 2004. They (other than Mr Michael Brosnan) went to dinner with Mr Katke on 15 November 2004. They told Mr Katke that a company called “CK Life Sciences” had expressed interest in acquiring HWL and “a figure of $50 million” had been discussed. Mr Katke was upset about that news.

16 November 2004

253    On 16 November 2004, the four Australian representatives attended a meeting at the premises of Metagenics at San Clemente with Mr Katke and Dr Bland at the office of Metagenics. Mr Gee recalls that Mr Katke said that he wanted to proceed to an IPO and he would like HWL to be part of it. He asked the applicants to identify the value they would want for the company. Further mention was made of the CK Life Sciences figure, as to value, by the applicants, which caused Mr Katke to become irritated (and leave the room for a time). Dr Bland explained the science, the discoveries and particularly Kaprex. Mr Gee says Dr Bland observed that Kaprex “was a wonderful discovery, that what they were doing to the nutrition industry was equivalent to what Apple had done to the computer industry and that this was a watershed moment in the industry”: T, p 109, lns 42-44.

The 17 November 2004 meeting at San Clemente

254    On 17 November 2004, a meeting took place in the boardroom of Metagenics.

255    The four Australian representatives were present. Mr Katke, Dr Bland and Mr Morey attended the meeting. Mr Wayne Fitzpatrick from Needham was present. Mr Schechner (and two others with him) attended the meeting by telephone.

256    Mr Gee says that a document was handed out at the meeting called “Discussion Materials” bearing Needham’s corporate details. Mr Gee says that the discussion at the meeting followed the slides comprising the Needham Discussion Materials document. Mr Katke introduced the Needham people.

257    The document says that “Needham & Company is pleased to meet with Metagenics to discuss an initial public offering”. It says that the “Company is an attractive IPO candidate” and that strategies to increase valuation include positioning “Metaproteomics division as an independent operating unit”; continuing to “drive clinical trials”; and, securing “a partnership with large pharma”. The document says that an IPO “can dramatically enhance a company’s growth prospects”. The document sets out the “benefits” of an IPO and the “considerations” to be taken into account in relation to an IPO. The document identifies 10 particular “characteristics” of an “attractive public company” and Metagenics is given a positive tick as exhibiting each of those 10 characteristics. The document then contains a “Preliminary Positioning of Metaproteomics” with Metagenics shown at the apex of a triangle linked with “commercialisation” (the subject of which is “Oral therapeutics for the management of chronic disease”) and linked with “Biotechnology” (the subject of which concerns products emerging from the “Metaproteomics Discovery Group”). In the middle of the triangle, as to positioning, are the words “Speciality Pharmaceutical Company’. As to “Metaproteomics Novel Discoveries”, the slide observes that “Human clinical trials provide proof of concept”.

258    The document sets out “Benchmark Metrics for Metagenics IPO” and as to that it says this:

259    The document also contains an IPO checklist of topics that would need to be addressed and dealt with, and as to “Financial statements”, the checklist notes that “audited” financial statements for the “previous three years by quarter” would be required “including results based on contemplated acquisitions”.

260    The document also contains a slide which sets out a preliminary schedule for the IPO “Process” in these terms:

261    Mr Gee says that Mr Schechner led the discussions about the benefits of an IPO and the preliminary positioning of MetaProteomics. Mr Schechner talked about the options for “positioning” the company. The first option concerned characterising Metagenics as a nutraceutical company in which event the value would be determined as a multiple of revenue between 1 and 1.5 to 2 for companies with revenue greater than $100M and between 15 and 20 times the earnings.

262    A second aspect of positioning, if the nutraceutical option was chosen, involved “spinning off” MetaProteomics as a biotechnology company.

263    The third option was to keep both together and position the company as a speciality pharmaceutical company where multiples on revenue were between two and five time’s revenue and between 15 and 25 times earnings. Mr Gee says that, at this point of the discussion, Mr Katke said that the speciality pharmaceutical company option was the “probable option and the preference”: T, p 110, lns 36-46; T, p 111, lns 1-2.

264    Mr Gee had never heard the term specialty pharmaceutical company before: T, p 255, lns 38-39. Mr Gee accepts that Mr Schechner explained that Metagenics had some characteristics in common with specialty pharmaceutical companies, in his opinion, and outlined those characteristics: T, p 255, lns 41-42.

265    Mr Gee says that the timeline process set out at [260] was discussed as a 12 week process to commence in February or March 2005: T, p 111, lns 13-14.

266    Mr Gee believes that Mr Schechner talked about a multiple being applied to revenue on the one hand, and also a multiple being applied to earnings or EBITDA, on the other. As to the preliminary schedule for the IPO, Mr Gee understood that it would commence in late February or March 2005. Mr Gee says that Mr Schechner spoke about the qualification to the schedule that timing would be “dependent upon a SEC review, accountant’s review and legal review”. Mr Gee said he understood that the S-1 would be filed in week three and the SEC’s comments would be received in week seven. Metagenics might then have to amend its S-1 Registration Statement to take account of the SEC’s comments.

267    Mr Gee said that Mr Schechner also spoke about the need to have audited financial statements.

268    Mr Gee could not recall any discussion about the legal review.

269    Mr Gee says that Mr Schechner, however, spoke about the matters that would need to be attended to in order to conduct a successful IPO: T, p 255, lns 44-45. Mr Gee accepted that Mr Schechner was an investment banker with experience in “these matters” and his bank was to be retained to do all of this work in connection with the IPO if it went ahead: T, p 256, lns 1-5. Mr Gee says that Mr Schechner also explained that a regulatory framework in the United States called Sarbanes-Oxley made it more difficult to go public and in order to go public, Metagenics would need three years of audited financial statements before it could do so: T, p 256, lns 7-13. Mr Gee says that Mr Schechner explained that since the Enron scandal, more rigour was being applied by the auditors to public companies: T, p 256, lns 15-17. Mr Gee says that Mr Schechner also spoke about due diligence: T, p 256, ln 24. Mr Gee accepted that the Australian participants in the meeting were “vitally interested” in Mr Schechner’s proposal. Mr Gee says that the format for the discussion was that Mr Schechner, Mr Katke and Mr Morey were explaining what was happening and the Australians would seek clarifications: T, p 256, lns 31-33. As to the things involved in connection with an IPO, Mr Gee thinks that Mr Katke said that “it represented hard work”: T, p 256, ln 43. Mr Gee says that Mr Schechner made the comment that his bank, Needham, had the expertise to manage an IPO: T, p 257, lns 4-5.

270    Mr Gee could not recall Mr Schechner saying that “there’s no guarantee of success of an IPO”: T, p 257, ln 7. The proposition was then put to Mr Gee that:

You’re surely not suggesting that Mr Schechner, an investment banker, evidently an experienced one, was giving you to understand that there would be an IPO and a successful one.

                                [emphasis added]

271    Mr Gee responded to that question by saying at T, p 257, lns 9-12, that:

We were led to believe from that meeting (17 November 2004) that an IPO would proceed.

                                [emphasis added]

272    This exchange then followed at T, p 257, lns 14-22:

Q    You’re not suggesting that Mr Schechner, an experienced investment banker, by anything he said, gave you to understand that there would be an IPO and that it would be successful, are you? You’re a chartered accountant, many years’ experience. You’re surely not suggesting that anybody was representing that there would be an IPO as opposed to that there was an intention to have an IPO.

A    There was an intention to have an IPO.

Q    Yes. That’s what was being put, wasn’t it, very strongly, that there was this intention?

A    Correct, yes.

                                [emphasis added]

273    It will be necessary to examine, later in these reasons, the various steps taken to try and give effect to that intention and the actions Mr Morey took concerning that matter.

274    Mr Schechner also spoke to the “Benchmark Metrics” for an IPO for Metagenics and although the presentation contemplated a multiple of between two and four should the company be characterised as a Specialty Pharmaceutical company, Mr Gee’s notes of the conversation suggested a multiple of between two and five. Similarly, Mr Gee understood Mr Schechner to talk about different multiples for a nutraceutical company than the multiples described in the Benchmark Metrics.

275    Nevertheless, Mr Gee believed that he accurately noted Mr Schechner’s comments on these topics during the course of the presentation.

276    Mr Gee says that Mr Katke’s document dated 14 November 2004 entitled “Metagenics opportunities for growth, access to capital and value creation” was not handed out at the meeting on either 16 or 17 November 2004.

277    A large part of the document is dedicated to a summary of the results of meetings with technology analysts and investment bankers from Needham as well as the results of discussions with private equity investors and biotech investors. The document talks about a “quick to market specialty pharma strategy” in which Metagenics would quickly move to the market after the acquisition of HWL with the Belgium acquisition pending, as a specialty pharmaceutical company. Mr Katke then sets out possible IPO valuations which “might” be achieved as at dates of 15 January 2004, 17 May 2004, 22 September 2004 and 4 November 2004 based on EBITDA statistics at those dates. He also talks about a quick to market strategy as a dietary supplement company and the multiples which would apply at the relevant dates in that case. As to Kaprex, Mr Katke said this:

The Kaprex study size of 13 in each arm is too small to justify a “large” pharma deal. Without conducting a successful larger clinical trial we would have to settle for a “small” deal. A “small” deal of $100 million might be made with $5-$20 million up front payment for research and an equity position in Metagenics, milestone payments would be made on completion of formal phase I, II, III and FDA drug approval with royalties of 6% - 9% on future sales. … This size pharma deal, depending on the structure of the deal and size of the partner, could produce a step up in IPO valuation of 1.1-2.2 times the valuation. … If we waited for a deal before going public, the IPO would be delayed until September 05 to March 06.

278    On 17 November 2004, Mr Katke, however, made a presentation to the meeting about going to an IPO. The meeting lasted for a few hours during the course of the afternoon. Mr Gee believes that Mr Katke presented a document to the participants so that they would have something in front of them during his presentation. Mr Gee believes the document was the Needham “Discussion Materials” document. Mr Gee did not accept that Mr Katke gave the meeting participants the document (comprising a series of slides) entitled “Who is Metagenics today?” (at Vol 5, T, p 187 and Vol 5, T, p 189 of the Trial Book). Mr Gee was taken to the final slide headed “Vision To Build Shareholder Value” which contains an activity timeline from November 2004 to January 2007 and possible valuations of Metagenics along the timeline. The slide contains the qualification concerning those processes: “(But No Guarantees)”.

279    Mr Katke asserts that both he and Dr Bland spoke to the “Who is Metagenics today?” document during the course of the presentation. Mr Katke says that the manner of making the presentation was that the slides were projected onto the wall and he spoke to each slide. At T, p 285, lns 20-25, Mr Michael Brosnan was asked whether there was some sort of a presentation, “anything put up on a screen”. Mr Brosnan said that he was sure that there was a presentation and he believed that the presentation was “shown up on a wall – in which case I think I looked at the wall and didn’t refer to the notes as much”.

280    Mr Gee did not accept that Mr Katke emphasised at the meeting that there were no guarantees in the process under discussion at the meeting.

281    Nor did Mr Gee accept that Mr Katke commonly used that expression.

282    As earlier mentioned, Mr Gee gave evidence that in the course of the presentation by Mr Schechner, Mr Katke said that the specialty pharmaceutical company option, in terms of positioning, was the “probable option and preference”. Mr Gee’s evidence about this remark is a little confusing and it also relates to the question of the multiples.

283    The context is this.

284    Mr Gee believes that in November 2004 differential multiples of 2005 revenue were adopted for valuing the North American business of Metagenics (at 1.6) and HWL (at 1.2). Mr Gee believes that in arriving at these differential multiples, for the purpose of the proposed sale of the remaining 90% of the HWL shares by the Australians to Metagenics, no regard was had to Mr Schechner’s presentation and no attempt was made to tie the Metagenics multiple of 1.6 “back to” a multiple that Mr Schechner regarded as appropriate to a nutraceutical company rather than a multiple appropriate to a speciality pharmaceutical company. In other words, Mr Gee says that the selection of a multiple in the case of Metagenics which was more consistent with one to be applied to a nutraceutical company for the purposes of an IPO does not suggest that the participants to the Share Sale Agreement were recognising, from November 2004, that Metagenics was more in the nature of a nutraceutical company. Mr Gee says that the multiple of 1.6 was “very very clearly told to us [as] ascribed to the science in Metagenics” (T, p 262, lns 3-4) and the “whole company” was being spoken about as being able to be positioned as a specialty pharmaceutical company because of the science: T, p 262, lns 11-12.

285    Mr Gee says that “because the North American business [was] being represented as a specialty pharmaceutical company” it received “a premium”: T, p 262, lns 29-31.

286    In this context, the confusion is that in Mr Gee’s outline of responsive evidence of 3 July 2014 (responding to the affidavits of Mr Morey and Mr Katke) he said at paras 19 and 40 that Mr Schechner had said, in his presentation, that positioning Metagenics as a specialty pharmaceutical company was “probable and the preference” for marketing Metagenics. In Mr Gee’s outline of evidence of 14 April 2014, at para 13, he said that Mr Katke had said, at the 17 November 2004 meeting, that for the purposes of an IPO the preferred and probable positioning of Metagenics was as a specialty pharmaceutical company because on an IPO it would command a premium on the multiple investors would use to value the company.

287    Mr Gee’s earlier recollection of the events certainly attributes the remark about a preference for, and probable positioning of Metagenics, as a specialty pharmaceutical company, to Mr Katke on one occasion, but does so in the context of a discussion about an IPO and how a market premium might be attracted from investors due to a higher multiple applied to a company so positioned. However, in two other parts of Mr Gee’s proposed evidence (the outline), he attributes the remark to Mr Schechner who, of course, was talking about multiples in the context of an IPO. Mr Gee, in light of this confusion, did not accept that he could not clearly remember this part of the discussion on 17 November 2004. He believes that Mr Schechner gave an outline of the positioning and Mr Katke said it was the probable positioning and the preference for positioning.

288    The proposition was put to Mr Gee that Mr Schechner was the only person who said that the probable and preferable course of positioning Metagenics as a speciality pharmaceutical company was because of the multiple on an IPO, only. Mr Gee said that he did not specifically recall that.

289    Mr Gee gave evidence that it was his view that the preference would be to position the company as a speciality pharmaceutical company and that was “because of the higher multiple”: T, p 265, lns 24-27.

290    In Dr Bland’s part of the presentation on 17 November 2004, he spoke about the research and the science. He spoke about the Kaprex product and its relationship with hops, and the utility of the product due to its therapeutic anti-inflammatory properties. He spoke about some discussions conducted with Pfizer with respect to the potential licensing of Kaprex. Dr Bland spoke about the results of a modest trial which had been conducted on Kaprex with positive results. Dr Bland spoke about the potential for licensing the product although in order to properly commercialise Kaprex, larger blind (phase) trials would need to be conducted. Conducting blind trials to establish the therapeutic anti-inflammatory effects of Kaprex (in a satisfactory regulatory way for relevant approvals) among the relevant cohort would cost millions of dollars. Dr Bland observed that Metagenics did not have the financial resources to fund a blind trial of this kind and was seeking investment from a large pharmaceutical company such as Pfizer to assist it in this process.

291    Mr Michael Brosnan gave oral evidence as to the statements he says were made to him that Metagenics would proceed to an IPO. At T, p 285, lns 27-40, Mr Brosnan put it this way in response to the following question from his counsel:

Q    Subsequent to that meeting in November 2004, what was your next contact with Jeff Katke or anyone from Metagenics about this matter?

A    I spoke to Jeff all the time. We would speak about a range of issues. We were, as I said, best of friends. We would travel, ski, boat, golf, drink, and so I spoke to him regularly, and it was that, “Mate, we’re – we’re going to an IPO next year”. That was in December [2004]. And most of the discussion about the actual merger and agreement with Health World were done through Alan Gee, but for me the phone calls were – were far less formal, to say the least. They were far more casual, but with an emphasis that, you know, we’re – we’re going to IPO as fast as we possibly can.

Q    Can?

A    Markets – markets permitting.

Q    Can you recall the sorts of words that Mr Katke used on the phone when he was talking to you about this?

A    They’re going to – “Mate, we’re going to an IPO”.

                                [emphasis added]

292    At T, p 294, lns 41-42, Mr Brosnan said again, in a different context, that: “We were promised an 05 – promised an IPO in 05”.

18 November 2004

293    The day after the San Clemente meeting, Mr Gee sent an email to Mr Morey saying that it “was good to arrive at an agreement in principle yesterday”. Mr Gee asked: “Would you please email the spreadsheets we were looking at yesterday so I can review my own position and discuss with Mike Curley & Graeme Joiner the percentages they want”. Mr Morey sent a spreadsheet showing a potential stock valuation with the purchase of Health World dated 31 May 2005 but based upon revenues for each entity at 30 June 2005 with HWL revenues calculated at US dollar conversion at .74c. The spreadsheet demonstrated the value of the shares on such a basis held by each of the applicants. The multiple used for valuation purposes is 1.75 times revenues.

19 November 2004

294    On 19 November 2004, Mr Morey sent an email to Mr Gee asking for projections for HWL for 2006 on a monthly basis, if available. If not available, Mr Gee was asked to prepare such projections. Mr Morey also said that Metagenics would need HWL projections at least on a quarterly basis “going out to 2011”. He said he had made his own estimates out to 2011 on HWL but would like to see Mr Gee’s assessment of projections for HWL for 2011. Mr Morey also observed: “I know as you get that far in the future that it becomes even more of a guess and less reliable”.

295    Mr Gee responded and said that he would work on the 2006 (and beyond) projections and respond to Mr Morey the following week. Mr Gee accepted that “it becomes more difficult to project further into the future, but I think it puts more [of] an onus on you, as well, ... for it to be on a reasonable basis”: T, p 162, lns 34-36. Mr Gee said that he was not aware of doing seven year forecasts (as Mr Morey had requested) although he had certainly undertaken four or five year forecasts.

296    On 23 November 2004, Mr Morey sent an email to Mr Gee attaching a draft Terms Sheet outlining the elements of a proposed agreement. The terms are contained in a draft document dated 19 November 2004. The draft terms sheet contemplated that Metagenics would purchase all the remaining issued shares in HWL (the 90% held by the applicants) for a price calculated at eight times the “Adjusted EBITDA” of HWL based on audited financial results by KPMG less unpaid royalties (having regard to the earlier 2003 suspension arrangements) of AU$1,350,000 to arrive at a valuation of 100% of HWL. The proposed purchase price would be capped at $48M payable as to $2.5M in cash with the balance in shares.

297    On 26 November 2004, Mr Gee responded to Mr Morey by email copied to Mr AB Grant, Mr Katke, Mr Leon Brosnan and Mr Michael Brosnan. In Mr Gee’s email, he observes that the understanding of the applicants at the San Clemente meeting was that the dividend flow to the Australian shareholders would remain until settlement of the shares from the IPO.

298    At point 8 of his email, he says this:

8)    Other – as currently drafted there is no horizon for completion of the share purchase. There needs to be some mechanism if for some reason the IPO does not proceed within say 2 years that the Aus shareholders could exercise a call option to purchase the Health World shares back for $2.5m, and agreement that Aus profits would remain in HWL until the IPO.

                                [emphasis added]

299    As to point 8 of his email, Mr Gee gave evidence that he had discussed the matter with either Mr Morey or Mr Katke and the context was this.

300    In September 2004, when Mr Katke had first raised the issue of an acquisition leading to an IPO with the Australian shareholders, they had been concerned to protect their position. One of the risks they perceived was the risk of making a commitment to a transaction effecting a merger of the companies and “between that date and the IPO occurring, … the markets crashed”: T, p 113, ln 36.

301    Mr Gee gave evidence that because going to an IPO had always been expressed to the Australian shareholders as conditioned upon “markets permitting”, the Australian shareholders wanted “some protection” should the merger occur and a market event intervene.

302    Mr Gee gave evidence that there was a further discussion about this topic with Mr Katke sometime after 1 February 2005 and before 8 February 2005. The initial position of the applicants had been that if a merger transaction was to occur, it should be completed simultaneously with an IPO occurring so as to remove the risk of a merger transaction being completed and a delay to an IPO. Mr Katke initially agreed with that position but then told Mr Gee that the investment advisers had told him that such a transaction would be too complex. That caused Mr Gee to suggest that in the event of a merger occurring the applicants would want a call option in their favour so that, if an IPO had not occurred within, say, two years, the applicants “could just give the money back that we’ve received, give the shares back and we get the company back”. Mr Katke initially thought such a proposal was “a reasonable idea” but then advised Mr Gee that the investment advisers had said that the call option to re-acquire HWL shares “would have to be disclosed in the SEC filing (S-1) and, it would appear that the Australians didn’t have confidence in the Business Plan and therefore it would be too difficult to market the concept”: T, p 115, lns 22-38.

303    Although Mr Gee accepted that by 26 November 2004 when he formulated point 8 in his email to Mr Morey (copied to others) he had been told by Mr Morey (on 11 November 2004) that a problem had emerged in relation to the acquisition of the Belgium companies and that if an inventory roll back could not be undertaken it would be necessary to amend the Acquisition Agreement so that completion would occur after the 2005 audit (which Mr Gee understood to be a June 2005 audit), Mr Gee did not accept that these circumstances might be a reason why an IPO would not proceed.

304    Mr Gee said that he thought that audited accounts would probably be required for an IPO but he did not actually know that audited accounts of the Belgium entities would be required for an IPO. Mr Gee thought that audited accounts might be required for other purposes, such as, to ensure the accuracy of the financial reports for the benefit of the purchaser. However, in circumstances where the purchaser had a contract governing the rights of the purchaser, Mr Gee could not identify any other reason why audited accounts would be necessary.

305    Moreover, it seems from the evidence of the conversations and exchanges that much of the discussion concerning the need for audited accounts (by Ernst & Young) was in the context of the transaction overall and the proposed IPO. Mr Gee said that the focus of point 8 of his email was to protect the applicants against the risk that the markets might “tank” between merger and an IPO, as it had always been said to the Australian shareholders that the IPO would proceed, “markets permitting”.

306    On 30 November 2004, Mr Morey sent Mr Gee by email a revised Terms Sheet which sought to address some of the issues Mr Gee had raised in his email of 26 November 2004.

The December 2004 and January 2005 events

307    Negotiations on these matters continued between Mr Morey and Mr Gee by email on 1 December 2004, 5 December 2004 and 7 December 2004. On 5 December 2004 Mr Morey sent Mr Gee an email attaching a spreadsheet “on the purchase analysis”.

308    On 24 December 2004, Mr Katke sent Mr Gee an email saying that everything was progressing well. Mr Katke also said this: “We had our first meeting with our attorneys to begin the IPO process yesterday. The Pfizer discussions continue to advance”.

309    In December 2004, the Charter for a Scientific Advisory Board to Metagenics was brought into existence. Dr Bland, on 15 April 2004, had re-enlivened earlier discussions about establishing such a Board as a leading advisory group. It met for the first time on 18 March 2005. In the period between July 2004 and April 2005 it was comprised of 10 doctoral (PhD) members and one other. This cohort of advisory experts was (apart from Dr Bland and Dr Tripp) in addition to the existing expertise within Metagenics or MetaProteomics. By November 2004, those companies had within their own ranks 11 scientific researchers with PhD qualifications including Dr Bland and Dr Tripp and 10 other researchers with Science degrees. It is not necessary to recite the names of the 23 individuals making up the internal research and development team.

310    On 18 January 2005, Mr Gee had a telephone discussion with Mr Morey.

311    In that conversation, Mr Morey said that Needham had valued the company between $185M and $275M without any licensing revenue. Possible licensing revenue had been foreshadowed in the Needham presentation. Mr Morey said that Metagenics was seeking to confirm the accuracy of that valuation by obtaining advice from another investment bank, Bear Stearns & Company. Mr Morey said that the consumer and drug arms of Pfizer were both interested in the Kaprex product and that Pfizer was “looking at the mechanism of action and it had been referred to their scientific advisory board”: T, p 112, lns 45-47. Mr Morey also said that Bison Capital was willing to “fund the Health World deal on 15 February and that in late February or March they hoped to have a Biotech investor in place”: T, p 113, lns 1-2. Mr Morey also said that Metagenics would be “looking at filing with the … Securities Exchange Commission [SEC] in March and … the SEC had between 30 and 60 days to respond once [Metagenics] had filed [the prescribed document]”: T, p 113, lns 1-5. Mr Morey said that once Metagenics had received a response from the SEC, Metagenics would have the right to change the content of their filed document, if necessary.

312    Mr Morey said that Metagenics was “looking to a May IPO”: T, p 113, lns 5-6.

The February 2005 events

313    On 1 February 2005, Mr Gee had a telephone conversation with Mr Morey. Mr Gee says this about it.

314    Mr Morey told Mr Gee that, in respect of the Belgium companies, Metagenics had signed an agreement in which the acquisition was subject to an unqualified audit report for calendar year 2005. He said that Ernst & Young had been appointed as auditors. He said that Mr Katke’s wife, Mrs Shelley Katke, was seeking to sell a proportion of her shares in Metagenics to a biotechnology firm. Mr Gee understood that Mrs Katke held 28.25% of the issued shares in Metagenics and that she was seeking to sell over half of her shareholding in this way. He said that Needham had been talking with biotech firms to determine whether there was any interest in purchasing the shares with a view to setting up a bidding position between possible offerors. He said that he thought a biotech investor could be found within 60 days with the process commencing in mid-February 2005. Mr Morey said that although there had been discussion of a May IPO, the timeframe was too short and that Metagenics was now “looking at September, but, based on the markets, it could be better in November”: T, p 115, lns 9-10.

315    Mr Morey said that Mr Katke had met with CK Life Sciences but that company only had “$300 million to spend”. Mr Morey also said that a company called “Asahi” was talking about an initial acquisition of 51% of Metagenics with the balance to be acquired over three years based on performance. Finally, Mr Gee said this: “And he [Mr Morey] told me in respect of Pfizer that they were waiting a couple of months before providing information, to provide time to strengthen their patent position”: T, p 115, lns 15-16.

316    Mr Gee’s telephone discussion with Mr Morey on 1 February 2005 is the subject of Mr Gee’s diary note No. 39. Mr Gee understood from Mr Morey that an agreement had been signed in respect of the Belgium transaction and the transaction was now subject to receiving an unqualified audit report for the calendar year 2005 from Ernst & Young.

317    Mr Gee accepted that, at this point, insofar as any Belgium projections were concerned, they were in respect of a transaction that had not taken place as at February 2005 and which was subject to a condition to be satisfied sometime after December 2005 for the receipt of an unqualified audit report, a condition, however, that might never have been satisfied: T, p 163, lns 27-35.

318    Mr Gee said that notwithstanding that a whole year would now pass before the condition might be satisfied, the expectation was that the company would continue to grow under its Business Plan.

319    Nevertheless, Mr Gee accepted that if an IPO had been held in 2005, the value of the shares on the float would not have included the value of the Belgium companies because the Belgium companies had not been acquired and might never be acquired: T, p 164, lns 11-14.

The Biodynamics group entities or Belgium companies

320    As to Mr Gee’s references to the Belgium companies, the position is this.

321    On 14 September 2004, Metagenics by its Belgium controlled entity, Metagenics Belgium BVBA, entered into an agreement to acquire from Mr Francis Maes and Mrs Lucrece Vandorpe (the “sellers”) ownership of (the shares in) Special Nutritionals Europe NV, Euro Nutri BV, Biodynamics NV, Bionutrics NV [New Special Nutritionals Europe] BVBA and [New Biodynamics] BVBA. The 14 September 2004 Agreement was to be completed by 30 December 2004 “at the latest”. On 10 December 2004 Maes and Vandorpe entered into an “Addendum” to the earlier agreement to address the difficulty confronting Metagenics in obtaining audited financial statements for the relevant entities. The Addendum document recites (among other things) that “in order to facilitate the initial public offering of Metagenics Inc in the US which is expected to happen in the course of 2005”, the parties agree to the terms of the Addendum. Mr Gee understood that Francis Maes owned 26% of the shares in Bionutrics NV, rather than 100% of the shares, which was the ownership position (with Mrs Vandorpe) concerning the other entities.

322    Clause 1 of the Addendum is in these terms:

The Sellers state that upon the request of the Purchaser an audit will be carried out between 1 January 2005 until 31 December 2005 by Ernst & Young auditors, appointed by both Parties, whereby Ernst & Young during the whole period of 1 January 2005 until 31 December 2005 will follow meticulously the complete accounting and administration, including the production-administration of Biodynamics NV, so that by 31 January 2006, or as soon as practically possible after that date, an unqualified auditor’s report can be delivered by Ernst & Young auditors. …