FEDERAL COURT OF AUSTRALIA Brosnan v Katke (No 2) [2013] FCA 835 Citation: Brosnan v Katke (No 2) [2013] FCA 835 Parties: MICHAEL BROSNAN, LEON BROSNAN, MARY BROSNAN, ALAN GEE, ALAN BAWDEN GRANT, BARBARA LEE GRANT, ALAN DAVID GRANT, MICHAEL CURLEY and GRAEME JOINER v JEFFREY JAMES KATKE, METAGENICS AUSTRALIA PTY LTD (ACN 113 937 572), METAGENICS INC and JEFFREY BLAND File number: QUD 384 of 2012 Judge: COLLIER J Date of judgment: 16 August 2013 Catchwords: DISCOVERY – application for interlocutory injunction to restrain respondents from entering premises of third-party company – applicants claim they were misled into selling shares in company to respondents – applicants and respondents both claim right to discover documents held by company – where applicant directors manage company on day-to-day basis – where respondents the controlling shareholders in company and need order of board of directors of company to enter premises – where company records contain privileged information of applicants – whether serious question to be tried – whether balance of convenience favours applicants discovering documents – prejudice to parties – no allegation by respondents that applicants would destroy relevant documents or fail to discover them CORPORATIONS – reasonable inference that majority of directors are nominee directors of controlling shareholder Legislation: Corporations Act 2001 (Cth) s 195 Federal Court Rules 2011 (Cth) r 20.14 Cases cited: Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57 applied Levin v Clark [1962] NSWR 686 cited re Broadcasting Station 2GB Pty Ltd [1964-1965] NSWR 1648 cited Date of hearing: 13 August 2013 Date of publication of reasons: 16 August 2013 Place: Brisbane Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 28 Counsel for the First, Second, Third, Fourth, Fifth, Sixth, Seventh, Eighth and Ninth Applicants: Mr M Martin Solicitor for the First, Second, Third, Fourth, Fifth, Sixth, Seventh, Eighth and Ninth Applicants: Mills Oakley Lawyers Counsel for the First, Second, Third and Fourth Respondents: Mr PA Hastie Solicitor for the First, Second, Third and Fourth Respondents: King & Wood Mallesons IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION QUD 384 of 2012 BETWEEN: MICHAEL BROSNAN First Applicant LEON BROSNAN Second Applicant MARY BROSNAN Third Applicant ALAN GEE Fourth Applicant ALAN BAWDEN GRANT Fifth Applicant BARBARA LEE GRANT Sixth Applicant ALAN DAVID GRANT Seventh Applicant MICHAEL CURLEY Eighth Applicant GRAEME JOINER Ninth Applicant AND: JEFFREY JAMES KATKE First Respondent METAGENICS AUSTRALIA PTY LTD (ACN 113 937 572) Second Respondent METAGENICS INC Third Respondent JEFFREY BLAND Fourth Respondent JUDGE: COLLIER J DATE OF ORDER: 13 AUGUST 2013 WHERE MADE: BRISBANE THE COURT ORDERS THAT: Subject to the usual undertaking as to damages by the applicants: 1. the respondents, by themselves, their servants or agents or howsoever otherwise be restrained from taking any step to: (a) attend and/or enter the offices of Health World Limited located at 741 Nudgee Road, Northgate Qld 4013 to retrieve, review and/or copy documents; and (b) access, retrieve and obtain any documents held on any Health World servers, computers or electronic devices; until further order. 2. costs be reserved. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION QUD 384 of 2012 BETWEEN: MICHAEL BROSNAN First Applicant LEON BROSNAN Second Applicant MARY BROSNAN Third Applicant ALAN GEE Fourth Applicant ALAN BAWDEN GRANT Fifth Applicant BARBARA LEE GRANT Sixth Applicant ALAN DAVID GRANT Seventh Applicant MICHAEL CURLEY Eighth Applicant GRAEME JOINER Ninth Applicant AND: JEFFREY JAMES KATKE First Respondent METAGENICS AUSTRALIA PTY LTD (ACN 113 937 572) Second Respondent METAGENICS INC Third Respondent JEFFREY BLAND Fourth Respondent JUDGE: COLLIER J DATE: 16 AUGUST 2013 PLACE: BRISBANE REASONS FOR JUDGMENT 1 On 13 August 2013 the applicants in the substantive proceeding sought urgent interlocutory orders to restrain the respondents from accessing, retrieving and obtaining any documents in the possession of the company Health World Limited ACN 010 636 165 ("Health World"). After hearing the submissions of the parties I made the orders sought by the applicants subject to the usual undertakings as to damages. At the time I informed the parties that I would give reasons for my decision later in the week. I now do so. Background 2 Prior to 2005, the applicants collectively owned 90% of the shares in Health World. Health World is a company which produces nutritional supplements and natural medicines, and supplies them to the Australian market. 3 The third respondent, Metagenics Inc ("Metagenics"), is a company based in the United States of America, which (like Health World) conducts a business of manufacturing and supplying nutritional supplements. The second respondent is a company incorporated in Australia and related to Metagenics. The first and fourth respondents were, at material times, directors of the second respondent and Metagenics. 4 On 27 April 2005 the applicants entered into a written share sale agreement to sell all their shares to the second respondent for $39.6 million. The consideration for the sale included a $6.5 million cash payment and the transfer of shares in Metagenics to the applicants. 5 The applicants submit (and it does not appear to be in contention) that Health World remained under the management of the applicants following (and notwithstanding) the sale of the shares to Metagenics, and continues to be under their management. I understand that, at present, Health World has five directors, being the first applicant Mr Michael Brosnan, the fourth applicant Mr Alan Gee, and three directors resident in the United States. Mr Michael Brosnan is also the managing director of Health World, and Mr Gee is the general manager and company secretary. 6 Mr Martin for the applicants submitted at the hearing before me that the three US-based directors are also directors of Metagenics. This submission was not disputed by the respondents. To the extent that they are also directors of Health World I consider it reasonable to draw the inference (despite the submissions of Mr Hastie to the contrary) that they are nominee directors of Metagenics. 7 At some point following the sale in 2005 the applicants claimed they had been misled into entering the share sale agreement, in particular by representations concerning the value of the shares in Metagenics. The applicants commenced legal action to have the share sale agreement set aside. 8 In 2009 the parties settled that dispute by entering into a settlement deed, resulting in an additional cash payment and the transfer of further shares in Metagenics to the applicants. 9 Subsequently, however, the applicants claimed that they had been again misled, this time by reference to the 2009 settlement deed, and in particular by further false representations made by the respondents concerning (inter alia) the future profitability of Metagenics. The applicants claimed that, by entering the settlement deed, they lost the opportunity to litigate their cause of action in 2005, and had suffered damages in the amount of approximately $150 million. 10 On 9 August 2012 the applicants filed an originating application claiming: Against the first, second and third respondents: 1. An order pursuant to s.87 of the Trade Practices Act 1974 (Cth) or s.243 of the Australian Consumer Law setting aside a share sale agreement dated 27 April 2005. 2. An order pursuant to s.87 of the Trade Practices Act 1974 (Cth) setting aside a deed of settlement dated 31 July 2009 3. Such further or other orders to facilitate the transfer of the HWL shares to the applicants 4. Further or alternatively damages pursuant to s.82 of the Trade Practices Act 1974 (Cth) in the sum of $155,899.00 5. Interest 6. Costs Against the fourth respondent: 7. An order pursuant to s.87 of the Trade Practices Act 1974 (Cth) or s.243 of the Australian Consumer Law setting aside a deed of settlement dated 31 July 2009 8. Costs. 11 On 16 July 2013 Greenwood J ordered, inter alia, that the parties were to give standard discovery in accordance with r 20.14 of the Federal Court Rules 2011 (Cth) ("Federal Court Rules") by 16 October 2013. 12 It appears that the question was raised before his Honour whether it would be the responsibility of the applicants or the respondents to discover documents held by Health World Limited. His Honour stated that he would leave the matter to the parties. Correspondence between the parties 13 On 9 August 2013, Mr Paul E Konney of the third respondent sent an email to the directors of Health World, copied to the applicants' solicitors (exhibit GMT1 to affidavit of Gemma Michelle Twemlow sworn 13 August 2013). That email stated materially as follows: To the Directors of Health World Limited ("HWL"): As you are aware, Metagenics, Inc. and Metagenics Australia Pty Limited are respondents in the above referenced Proceeding. The matter is now in the discovery stage, when the parties have a legal obligation to exchange all relevant documents… Metagenics, Inc. and Metagenics Australia Pty Limited are subject to the standard disclosure obligations imposed on parties in litigation. In view of the nature of the claims made in the Proceeding, HWL will hold documents that are relevant to the Proceeding. As the ultimate owner of HWL, Metagenics, Inc.'s disclosure obligations may include disclosure of relevant documents held by HWL. Assistance from the directors and officers of HWL will be necessary to assist Metagenics, Inc. in complying with its legal obligations in this regard. Under Australian law, destruction of evidence can result in serious penalties. Accordingly, Metagenics, Inc. directs HWL to retain and not destroy any documents that may be relevant to the Proceeding… Metagenics, Inc. has retained forensic experts from KordaMentha and lawyers from King & Wood Mallesons to attend the offices of HWL to retrieve, review, and copy documents relevant to the Proceeding. To facilitate the review of documents, representatives of KordaMentha and King & Wood Mallesons will attend the offices of HWL at 10am on Monday, 12 August 2013, in order to ascertain the scope of the review to be undertaken and to begin the date imaging / collection process… …This initial visit is expected to take the best part of the day, and the relevant HWL employees' diaries should be cleared accordingly… 14 The applicants objected to the course of action proposed by the respondents in respect of accessing documents held by Health World. They requested that the matter be listed before Greenwood J at 3.45 pm on 9 August 2013. Prior to the matter being heard by his Honour, however, the parties entered discussions and the hearing did not proceed. 15 On Saturday 10 August 2013 the executive assistant to Mr Frederick Howard, who I understand to be a director of Health World, sent an email to persons including the fourth applicant Mr Gee attaching a notice of meeting of directors of Health World. Materially the notice of meeting stated as follows: Notice of meeting of Directors A meeting of the Directors of the Company will be held: Date: 15 August 2013 (AEST); 14 August 2013 (PDT) Time: 9 am (AEST); 4pm (PDT) Place: Teleconference: U.S Dial In: International Dial-In: Pass Code: SPECIAL BUSINESS – Decision to allow inspection and copying of all documents in the possession of the Company by King & Wood Mallesons and KordaMentha At the time and date stated above, the directors of the Company will consider and, if thought fit, pass the following as ordinary resolutions: 1. That representatives of King & Wood Mallesons and KordaMentha, acting on behalf of Metagenics, Inc., be granted access to the premises of the Company on Thursday 15 August 2013 from 10am onwards (AEST) and at any time thereafter, to inspect and copy any documents in the possession of the Company. 2. That the Company and its personnel provide all assistance to King & Wood Mallesons and KordaMentha as they may request in order to give effect to Resolution 1. By order of the Board (signed) ……………………………………………………………… Frederick H. Howard Director Date: 9 August 2013 (PDT) Notes: 1. Section 195(1) of the Corporations Act 2001 (Cth) provides that: A director of a public company who has a material personal interest in a matter that is being considered at a directors' meeting must not: (a) be present while the matter is being considered at the meeting; or (b) vote on the matter. 16 The attached agenda for the meeting was as follows: Item Primary Responsibility Documents 1. Electing Chairperson for meeting All N/A 2. Introductory remarks Chairperson N/A 3. Discussion of material personal interest of Michael Brosnan and Alan Gee All N/A 4. Decision to permit King & Wood Mallesons and KordaMentha access to inspect and copy any documents in the Company's possession with any assistance from officers of HWL All N/A 17 The substance of the interlocutory application before me on 13 August 2013 was that the applicants sought to restrain the respondents from giving effect to the steps proposed in the notice of meeting of Directors circulated by Mr Howard on 10 August 2013. Relevant principles 18 In Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57 Gleeson CJ and Crennan J explained at [19] that an applicant seeking interlocutory relief must demonstrate that: there is a serious question to be tried as to the applicant's entitlement to relief; and the applicant is likely to suffer injury for which damages will not be an adequate remedy; and the balance of convenience favours the granting of an interlocutory injunction. 19 Gummow and Hayne JJ observed that "serious question to be tried" means, in summary: It is sufficient that the applicant show a sufficient likelihood of success to justify the preservation of the status quo pending the trial: at [65]. The applicant need not demonstrate more than a 50% chance of ultimate success: at [68]. In that light the issue may be understood as whether the applicant has made out a prima facie case for relief: at [65], [70]. Whether the applicant shows a sufficient likelihood of success depends on the: o nature of the rights asserted; and o practical consequences likely to flow from the interlocutory order sought. Particular considerations arise where the grant or refusal of an interlocutory injunction in effect would dispose of the action finally in favour of whichever party succeeded on that application: at [72]. 20 In light of these principles I now turn to the submissions of the parties. Submissions of the parties 21 At the hearing Mr Martin for the applicants submitted (in summary): There is a serious question to be tried in respect of the ownership of the shares in Health World. Any documents in the possession of Health World which should be disclosed are under the control of the applicants because Mr Brosnan and Mr Gee manage the affairs of Health World. Although the respondents own the shares in Health World it is a separate company. The three US directors are not parties to this proceeding. The applicants are fully aware and understand their obligations with respect to discovery pursuant to the Federal Court Rules. In his affidavit sworn 9 August 2013, Mr Gee deposes that: o any document relevant to this proceeding in the possession or control of Health World will be disclosed by the applicants; o the applicants will not damage or destroy any documents relevant to the proceeding. Importantly, Mr Gee also deposes that the computer systems, books and records of Health World contain information that is: o subject to legal professional privilege in the proceeding, such as correspondence between the applicants and their solicitors, and Counsel's advice; and o confidential to the business of Health World, and not relevant to the issues in this proceeding. The proposal of the applicants is tantamount to executing an Anton Piller order. The respondents have acted in a high-handed manner in this respect. The applicants sought an urgent hearing because the respondents had intended to attend the premises of Health World imminently. Notwithstanding that the notice of meeting referred to s 195 of the Corporations Act 2001 (Cth) ("Corporations Act") and the agenda made reference to the "material interests in voting" of Mr Brosnan and Mr Gee, the three US-based directors are in the same position because they are directors of Metagenics seeking some forensic advantage in litigation by looking through Health World's documents. The balance of convenience favours the preservation of the status quo. 22 In summary, Mr Hastie for the respondents submitted in response: The respondents did not rely on s 195 of the Corporations Act. In relation to any privileged documents in the possession of Health World, the respondents propose a regime which enables the legal rights of the parties, including with respect to legal professional privilege, to be protected. Such a regime anticipates the attendance of a forensic accountant as well as lawyers to ensure documents which are privileged are quarantined. The respondents want to undertake the process of discovery of documents in the possession of Health World. The applicants have not demonstrated any entitlement to relief. It is not appropriate for the Court to render nugatory the decision of a company at a board meeting of its directors, should the majority of the directors decide to allow someone to inspect the books. There is no evidence before the Court that the three US-based directors are nominees of Metagenics. The Court should simply adopt the view that there are five directors of Health World who will vote in the interests of the company one way or the other. This matter should be resolved solely on the basis of the normal principles which apply to interlocutory injunctions. The Corporations Act and the common law entitle directors and shareholders to examine the books and records of a company. The Court should not interfere with those rights. Consideration 23 As I informed the parties at the hearing, the appropriate orders are those sought by the applicants. I have formed this view for the following reasons. 24 First, I am satisfied that there is a serious question to be tried in this proceeding. Substantial pleadings have been filed by the applicants and the respondents in relation to the applicants' claim that they were misled by the respondents in respect of the share sale agreement and deed of settlement. The pleadings have closed, and there is no suggestion by the respondents that those pleadings do not disclose an arguable case by the applicants. Indeed Mr Martin informed the Court at the hearing that the matter was expected to be listed for trial in around March 2014 for one month. The interlocutory orders sought by the applicants relate to proper preparation for that trial and compliance with the orders of Greenwood J on 16 July 2013. 25 Second, and importantly in this case, the question to be tried involves the events which go to the ongoing validity of the sale of shares in Health World from the applicants to the respondents. Health World is the entity in possession of documents the subject of the present interlocutory dispute between the applicants and the respondents. I am not persuaded by Mr Hastie's contention that the case before me merely comes down to a request by directors and the controlling shareholder of Health World to inspect its books and records, as they are entitled to do by the Corporations Act (transcript p 18 ll 17-20). These rights are not in dispute. However this characterisation simplifies issues for determination in this interlocutory proceeding in such a way as to effectively misstate the dispute currently before the Court. In reality, the dispute before the Court is complicated by the facts that: the substantive dispute involves ownership of the shares in Health World. It is insufficient in my view, in the very limited circumstances of the case before me, for the respondents to simply claim that they are entitled to assert their rights of ownership and control to insist on accessing documents of Health World for discovery purposes. because of earlier contractual arrangements between the parties the directors of Health World are both two of the applicants, as well as directors of one of the respondents. The two applicant-directors continue to manage the affairs of Health World. As I consider it likely on the facts before me that the three US-based directors are nominees of Metagenics, those directors (currently the majority of the board) are entitled to act in the interests of the respondents as well as the interests of Health World and may do so: re Broadcasting Station 2GB Pty Ltd [1964-1965] NSWR 1648, Levin v Clark [1962] NSWR 686. it is not disputed that Health World has documents over which the applicants will assert privilege. 26 I do not accept the submission of the respondents that the orders sought by the applicants anticipate the Court improperly interfering in the internal affairs of Health World or obstructing proper board decisions. Such a submission must be considered in light of the fact that, if the applicants are ultimately successful in their substantive claims, the respondents may cease to have any rights in relation to shares in, or the board of directors of, Health World. 27 Third, it is clear that the balance of convenience lies in the restraining orders being made, and the applicants disclosing documents in the possession of Health World rather than the respondents doing so. This is because: The respondents have not claimed that there is any risk that documents in the possession of Health World will not be disclosed to them by the applicants in accordance with the applicants' discovery obligations. Similarly, the respondents make no claim that any documents will be damaged or destroyed. There is certainly no material before the Court which supports a finding that either the applicants will not fulfil their discovery obligations, or that records of Health World are in jeopardy. The respondents have not, in my view, given any compelling reason why the applicants, who manage Health World, should not discover documents held by Health World in the ordinary course of discovery. So far as I can ascertain from the arguments of the respondents, the respondents want to discover documents held by Health World, because they want to. In my view this reason is not particularly compelling. The respondents have not demonstrated that they would suffer any prejudice from the Court making the interlocutory orders sought. On the other hand, the applicants have provided evidence that Health World has documents over which the applicants assert privilege. There is a risk that such documents would be exposed to the respondents if they had access to Health World records. I note that the respondents chose not to pursue any contentions concerning s 195 of the Corporations Act and any material interests in voting at the board meeting by Mr Brosnan or Mr Gee. I am unable to see how the balance of convenience would favour the respondents being required to engage a forensic accountant and independent lawyers to implement a regime to ensure that any privilege which might be claimed by the applicants would not be compromised. The costs and complexities associated with such an approach can be contrasted with the simple expedient of requiring the applicants to disclose material held by Health World which is not privileged. 28 In the circumstances the appropriate orders are those sought by the applicants, with costs reserved. I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Collier. Associate: Dated: 16 August 2013