Supreme Court New South Wales Medium Neutral Citation: Tredrea v KPMG Financial Advisory Services (Australia) Pty Ltd (No 2) [2019] NSWSC 640 Hearing dates: 27, 28 May 2019 Date of orders: 28 May 2019 Decision date: 28 May 2019 Jurisdiction: Equity Before: Parker J Decision: See [70]. Catchwords: CIVIL PROCEDURE — Representative proceedings — Settlement or discontinuance — Group members – parties who cannot demonstrate that a failure to register to become a group member happened through no fault of their own cannot later complain that they cannot participate in a subsequent settlement – further member may be admitted where no appreciable effect on distributions to registered group members and no opposition to order brought. CIVIL PROCEDURE — Representative proceedings — Settlement or discontinuance — Group members — Sub-groups – where foreign investor purchased shares through foreign bank and confirmed he was a group member but did not receive notification of the proceedings as his shares were held on CHESS system by Australian nominee company – whether order allowing foreign investor to participate in the settlement independently of nominee company should be made – order inappropriate as could lead to double recovery – those administering proceeds of representative proceedings should not be required to deal directly with persons holding shares through nominee companies. CIVIL PROCEDURE — Representative proceedings — Settlement or discontinuance — Group members – Whether group member had realistic ability to assess the reasonableness of the settlement – where settlement terms confidential pursuant to Court order – where group member was refused access to unredacted settlement deed online and did not seek to view unredacted deed at offices of solicitors for the defendant but had benefit of Court's independent review of it – no justification for allowing member access to settlement deed where they have borne no financial responsibility for legal advice on the reasonableness of the settlement terms and sum – importance of the secrecy of the settlement process and importance of the confidentiality of the settlement sum to integrity of the settlement process and to facilitation of future settlements. CIVIL PROCEDURE — Representative proceedings — Settlement or discontinuance — approval of terms of settlement where proper consideration given to merits of the claim and decision to accept amount offered responsible. CIVIL PROCEDURE — Representative proceedings — Settlement or discontinuance — approval of costs of the proceedings and remuneration of the funder adjourned to a later date. Legislation Cited: Civil Procedure Act 2005 (NSW), Part 10, ss 175(4) and 183 Court Suppression and Non-publication Orders Act 2010 (NSW), s 7 Federal Court of Australia Act 1976 (Cth), ss 33X(4) and 33ZF(1) Supreme Court Act 1970 (NSW), s 23 Cases Cited: Melbourne City Estates Investments Pty Limited v Treasury Wine Estates Limited (2017) 252 FCR 1; [2017] FCAFC 98 Texts Cited: None Category: Procedural and other rulings Parties: Edgar George Tredrea (Plaintiff) KPMG Financial Advisory Services (Australia) Pty Ltd (Defendant) Representation: Counsel: J C Giles SC / T E O'Brien/E Ball (Plaintiff) J K Kirk SC / P D Herzfeld (Defendant) N Hutley SC / J Williams (for LCM Operations Pty Ltd) A Hunt (for Blaxland Finance Pty Ltd and Hent Corporation Pty Ltd) Self-represented P Gollakota Solicitors: Piper Alderman (Plaintiff) Corrs Chambers Westgarth File Number(s): 2017/234966 Publication restriction: Nil Judgment – EX TEMPORE Revised and reissued 6 June 2019 1. These are representative proceedings under Part 10 of the Civil Procedure Act 2005 (NSW). They were settled shortly before the hearing which had been fixed to begin on 25 March this year. The plaintiff now seeks orders from the Court approving and giving effect to the terms of the agreement settlement and approving the terms on which the proceeds of the settlement are to be distributed to the represented persons. 2. The proceedings arise out of a takeover bid in October 2012 for Discovery Metals Limited ("DML"), a mining company whose shares were listed on the Australian Stock Exchange. The defendant, KPMG Financial Advisory Services (Australia) Pty Ltd, to which I will refer as "KPMG", provided an independent expert report by way of response to the bid. The report was commissioned and paid for by DML. 3. In the report KPMG gave a value to DML's shares ranging from $1.74 to $2.11. The offer price was $1.70, slightly (2.2%) below the lower end of that range. On the strength of this KPMG expressed the opinion that the offer was not fair and reasonable. 4. DML's directors recommended against the takeover and it eventually lapsed. This happened in mid-February 2013. 5. DML's share price, which had started to fall even while the bid was current, continued to fall after the bid lapsed. Shortly afterwards DML announced its half-yearly results; and the share price fell further. It briefly settled at $0.65 but by mid-April had fallen to $0.34. 6. Trading of shares was suspended until May, when trading resumed the share price continued to fall until the company was eventually placed into voluntary administration. In June 2015 it went into liquidation and there was eventually no return to the shareholders. 7. The plaintiff brought these proceedings on behalf of the shareholders in DML who held or acquired shares during or after the period when the bid was current. The proceedings were conducted on the plaintiff's behalf by the law firm Piper Alderman and they were funded by LCM Operations Pty Ltd, a litigation funder. 8. There was a mediation in late 2018 which was unsuccessful. A second mediation occurred just before the hearing and resulted in the agreement to settle the proceedings, to which I have already referred. 9. The settlement sum to be paid by KPMG is confidential and the settlement is conditional upon the approval of the settlement. 10. The issues for the purpose of this judgment fall into three groups. (1) First, there are objections from three parties to the settlement. These objections centre not as much on the substance of the settlement, as on the procedure used to notify the proposed settlement to the represented persons. Two of the objectors seek only to object if, as things are at present, they continue to be excluded from the benefit of participating in the settlement. The third objection is more general. (2) The second issue for determination concerns the commercial substance of the settlement. The Court must consider whether the settlement sum is in the represented persons' interests. (3) The third group of issues concerns deductions which are proposed to be made from the settlement sum if settlement is approved. The major deductions are the costs of the proceedings and the remuneration of the funder. The funder seeks a common fund order which would give it 30% of the gross recovery. 1. I will deal with the three groups of issues in that order. Objections 1. The first objection comes from Allan Peter Hunt on behalf of two companies, Blaxland Finance Pty Ltd and Hent Corporation Pty Ltd. Mr Hunt is the sole director and secretary of the two companies. 2. As matters currently stand, the companies are excluded from the benefit of the settlement because they did not register in response to a notice issued pursuant to orders made by the Court in August last year. That notice required registration to take place by 12 October. 3. Opt out notices for the proceedings were originally sent out in November 2017 pursuant to orders made by the Court at that time. The opt out notice stated: If you are a Group Member then you will be bound by the outcome of the class action unless you "opt out". If the class action is successful, you will be entitled to share in the benefit of any order, judgment or settlement in favour of the Plaintiff and Group Members (in some cases you may have to satisfy certain conditions before your entitlement arises.). If the action is unsuccessful or is not as successful as you might have wished, you will not be able to sue o the same claim in any other proceedings. If you wish to remain a Group Member there is nothing you need to do at the present time. The Plaintiff will continue to bring the proceeding on your behalf up to the point where the Court determines those questions that are common to the claims of the Plaintiff and the Group Members. However, you are invited to contact the Plaintiff's lawyers, Piper Alderman by email (detailed below) and register as a group member so that future notices about the class action can be sent to your preferred address, if you would like to do so. However, you are not obliged to do so if you wish to remain a Group Member. 1. Mr Hunt's companies did not opt out, but they did not register either. 2. The Court made its order in August last year in anticipation of the mediation which ultimately took place at the end of last year, and which turned out to be unsuccessful. The evidence before me shows that Piper Alderman made arrangements with Computershare [a share registry service provider] for copies of the notice to be sent to each of the shareholders of DML (or at least those which had not already registered as claimants) at the addresses for those shareholders shown in the DML share register. 3. On the face of it, there is every reason to suppose that the notices reached Mr Hunt's companies. They had, after all, received the earlier opt out notices which had been sent out using a similar procedure. 4. In Mr Hunt's affidavit in support of his objection, he stated that he discovered that this application was being made when he searched the internet on 15 April 2019 to see if there was any progress with the proceedings. Mr Hunt's affidavit stated that he discovered "for the first time" on that occasion information about a proposed settlement. 5. Mr Hunt's affidavit did not provide any context for the search which he made in April 2019. He did not, for instance, indicate whether he had made any search since deciding in November 2017 that the companies would not opt out. Nor did Mr Hunt in his evidence say directly that his companies had not received the notices sent out following the Court's orders in August last year. I was left thinking that Mr Hunt's affidavit did not directly exclude the possibility that the notices were received, but that Mr Hunt paid insufficient attention to them at the time. 6. In submissions before me, Mr Hunt referred to s 175(4) of the Civil Procedure Act which provides: Unless the Court is satisfied that it is just to do so, an application for approval of a settlement under section 173 must not be determined unless notice has been given to group members. 1. Mr Hunt submitted that this provision reflected a legislative policy that, before a settlement can be approved, notice must be given of the application to all of the group members. Mr Hunt submitted that the effect of the orders made by the Court was to cut across the approach reflected in s 175(4). He pointed out that no separate notice was given to group members before this application was made and brought on for hearing before the Court. 2. Strictly speaking, this is correct. Notice of the application was given to those who had registered and was also posted on the Court website, but no specific notice would have been sent to Mr Hunt's companies because of their failure to register in response to last year's notice. 3. Mr Hunt's submission in these circumstances was that should his companies continue to be excluded from the settlement, they would in effect have been deprived of the rights which Parliament had intended them to have, and are reflected in s 175(4). 4. The August 2018 orders were made under s 183 which provides: In any proceedings (including an appeal) conducted under this Part, the Court may, of its own motion or on application by a party or a group member, make any order that the Court thinks appropriate or necessary to ensure that justice is done in the proceedings. 1. In Melbourne City Estates Investments Pty Limited v Treasury Wine Estates Limited (2017) 252 FCR 1; [2017] FCAFC 98, a Full Court of the Federal Court considered the relationship between the Federal Court equivalents of ss 175(4) and 183, namely, ss 33X(4) and 33ZF(1) of the Federal Court of Australia Act 1976 (Cth). 2. The Full Court acknowledged that the starting point is that the procedure for representative proceedings in Australia is an opt out procedure. Group members who may benefit from the successful resolution of the proceedings have no obligation to participate in pursuing them. So long as they choose not to opt out, they may watch those proceedings unfold, and come in at the end so as to take the benefit. 3. But s 183 Civil Procedure Act (s 33ZF(1) Federal Court of Australia Act) allows the Court to vary that procedure if it considers it appropriate or necessary to do so to ensure that justice is done in the proceedings. 4. Usually it is defendants who seek orders of the type that are made in this case. Their purpose in doing so is to understand, for the purposes of settlement, how large the claims in question are. 5. But as the Full Court recognised, identifying the claimants and therefore being able to make some sort of assessment of the quantum of their claims is not solely something that only benefits defendants in proceedings of this type. Overall, it has a conducive effect to settlement which is something in the interests of all parties. As the Full Court said (at [75]): A class closure order that precludes class members, who neither opt out nor register, from sharing in a subsequent settlement may facilitate settlement, and therefore be reasonably adapted to the purpose of seeking or obtaining justice in the proceeding. 1. For these reasons, there was ample justification for the orders made by the Court in August last year. True it is that the orders were made in anticipation of a mediation which was unsuccessful. But the second mediation took place not long thereafter, and there was nothing unreasonable about the registration deadline which was imposed. In my opinion, in such circumstances, a party who has not registered and is unable to demonstrate that the failure to register happened through no fault of that party's own, has no right to complain if the proceedings are subsequently settled and that party is not entitled to participate. 2. Settlement of the proceedings has now been achieved. A settlement figure has been agreed, and it would be unrealistic to re-open it. The interests of the defendant KPMG have been satisfied. In these circumstances, I see the question whether Mr Hunt's companies should be permitted to participate as very much a question for the registered group members who are represented by the plaintiff. 3. The claims by Mr Hunt's companies are very small in the scheme of things, and will have no appreciable effect on the distributions to the registered group members. Counsel for the plaintiff candidly drew this to the Court's attention and did not oppose an order admitting Mr Hunt's companies. 4. For this reason, and despite the evidentiary difficulties from which Mr Hunt's application suffers, I will allow it and permit his companies to participate in the settlement. 5. The second objection gives rise to different considerations. 6. The objection comes from Prasad Ventkata Surya Gollakota. Mr Gollakota purchased 200,000 shares in DML in February 2013, shortly before the offer lapsed. He eventually suffered a loss on the relevant parcel of shares of approximately $190,000. At the time of the purchase, Mr Gollakota was living overseas. He purchased the shares through the stockbroking arm of Bank Julius Baer & Co AG, in Singapore. The Bank was not a member of the Australian Stock Exchange and would have needed to make arrangements for the shares purchased for Mr Gollakota to be held on the CHESS system. It appears that this was done by an Australian subsidiary of the HSBC group. The particular HSBC entity was not identified in the evidence. 7. Mr Gollakota says he only became aware of these proceedings on 1 May this year. On 3 May, Mr Gollakota confirmed with a representative of Piper Alderman that he is a group member, insofar as his parcel of 200,000 shares is concerned, but that none of the mail-outs concerning the proceedings were sent to him. This is what one would expect, as the mail-outs would presumably have been confined to those recorded on the share register, and Mr Gollakota's parcel was never so recorded. 8. I accept that Mr Gollakota personally had no idea of the proceedings, and therefore had no opportunity to consider what to do about them. If his entitlement to participate now depended only on that, there could be no objection to him doing so. But his circumstances raise a significant issue of principle. 9. As a general rule, shareholders' rights in Australian company law attach to and depend upon registration in the company's share register. Trust interests are not recorded on that register. And unless the company is specifically on notice that shares are held pursuant to some trust arrangement, the company has no obligation to do other than deal with the registered shareholder as if that shareholder were the owner. 10. In an appropriate case, proceedings may of course be brought to rectify the share register where it does not reflect the true ownership position. But this only reinforces the general principle that it is registration which determines who exercises the rights associated with particular shares of the company. 11. In the present case, HSBC would have been notified of the proceedings by virtue of its status as registered shareholder. In fact, the evidence shows that, HSBC has not opted out, but has registered some of the shares held by it. 12. If Mr Gollakota's shares form part of HSBC's holding, then unless HSBC has failed to pursue a claim with respect to those shares, then the share of the settlement sum attributable to Mr Gollakota's shares will go to HSBC and should in due course flow to him. 13. If I were to make some sort of order allowing Mr Gollakota to participate in addition as an overseas shareholder, I would be taking a step which might potentially lead to double recovery. 14. The amount of money involved is significant from Mr Gollakota's point of view, although not particularly significant given the size of the overall settlement. 15. But in my view, the principle is important. I do not think that those who conduct shareholder representative proceedings or administer the proceeds of such representative proceedings should have imposed upon them the additional difficulty of having to communicate and deal with persons who hold their shares through nominee companies. 16. In saying this, I am not of course criticising the practice of purchasing shares through a nominee. It may be the only practical means for foreign investors to purchase shares. But it is a basic principle of our law that those who choose to purchase through a nominee must look to the nominee to deal on their behalf with the company, and to exercise the corporate rights which attach to the shares, without any direct communication between the company and the beneficiary, and without imposing any direct obligation on the company to the beneficiary. 17. On the evidence before me, I see no reason to suppose that Mr Gollakota will not ultimately receive via HSBC a share of the proceeds of settlement attributable to the shareholding which he purchased in Singapore. But whether that proves to be so or not, I do not think the situation calls for any special order in Mr Gollakota's favour which would give him some sort of direct right to participate in the settlement independently of and in addition to the rights held by HSBC with respect to his shares. His objection therefore fails. 18. The third objector is Mr Rob Brook, a solicitor who practices under the business name Newcastle Legal. Mr Brook acts for Diana Kingsland, who was the registered proprietor of a parcel of 50,000 shares in DML purchased on 7 February 2013. 19. Mrs Kingsland is a registered group member and will therefore participate in the settlement. Mr Brook's objection on her behalf is to the procedure which has been followed. On 5 April I made directions for the conduct of this hearing. One of the issues was what notice should be given to group members to allow them to make any objections they wish to make to the terms of the settlement. The orders provided for group members to be able to obtain on request a copy of the deed of settlement. But this was redacted so as not to include the settlement sum. 20. However, a legal practitioner could be authorised by a group member to obtain a full unredacted copy of the settlement deed, including the settlement sum, on giving appropriate undertakings as to confidentiality. 21. According to his correspondence, Mr Brook wished to obtain access to the unredacted settlement deed online, but this was objected to by KPMG. I do not propose to go into the rights and wrongs of this. It was still open to Mr Brook to come to Sydney and inspect the settlement deed at Piper Alderman's offices or to retain a Sydney legal practitioner as agent to do so, but he did neither of these things. 22. In correspondence he has now objected essentially on the basis that his client has no realistic ability to assess the reasonableness of the settlement. His allegation can be summed up as being that: Proposed settlement is unfair and unjust because: 1. There has been no advice to shareholders to inform the decision as to whether it appears to be in their best interests for the litigation to continue based on prospects of success; and 2. It is not possible for any member of the class to determine (even within a range) what their own share of the settlement amount approximately is. 1. In evaluating this complaint it is important to appreciate the difference between the position of the plaintiff on one hand and that of Mr Brook's client, Mrs Kingsland, on the other. Piper Alderman act for the plaintiff, not Mrs Kingsland. The advice on prospects which has been prepared has been prepared by counsel retained by Piper Alderman on behalf of the plaintiff, not Mrs Kingsland. 2. Mrs Kingsland has not been required to take any responsibility for the conduct of the proceedings. Mrs Kingsland has not been required to have any involvement in the settlement of the proceedings or at any stage in giving any instructions. 3. KPMG's initial position at the directions hearing was that the settlement deed should be provided only in redacted form. This was a justified submission to make. Release of the settlement amount to a large number of group members, even if confidentiality obligations were formally imposed on them, would present a very substantial risk, indeed in a case such as this one might think almost a certainty, of the settlement sum being disclosed. 4. The secrecy of the settlement process, and in particular the confidentiality of the settlement sum, is a very important part of maintaining the integrity of that process. It therefore plays an important role in facilitating settlements, to the general benefit of all parties in litigation of this type. 5. The provision which was inserted in the orders permitting access to be granted to group members' legal advisers was a modification which I made in the interests of group members. It seemed to me that for practical purposes, if a group member wished to consider the reasonableness of the settlement sum, that group member would need to obtain legal advice. It also seemed to me there might be group members whose interests were sufficiently valuable and who were sufficiently concerned with the outcome of the proceedings that they might wish to retain a legal adviser to advise them on that question. 6. Such circumstances of course will not be usual. For most group members the amount potentially at stake would be unlikely to justify the cost of a detailed investigation of the nature of the underlying claims the terms of the settlement. But I thought that if there were such group members who wished to obtain legal advice, they should be permitted to do so. I also thought that if only legal advisers so retained to act had access to the settlement sum, the concerns about confidentiality which KPMG expressed were of much less weight. 7. I contemplated that this would permit a shareholder to retain a lawyer who would have full access to the settlement deed and would be able, by reference to the pleadings in the case (which are public or at least available to group members), to make some sort of analysis of the issues in the proceedings. But I never contemplated that the shareholder's lawyer would also be provided with the opinion on prospects which has been prepared on the plaintiff's behalf in these proceedings. There would be no justification for the shareholder's lawyer to be allowed a free ride on that work. 8. I could see and can see no justification for allowing a shareholder who has not accepted any responsibility financial or otherwise for that advice, access to it for free to pursue their own commercial interests. 9. One of the reasons I thought it unlikely that anyone would actually take up the opportunity to retain a lawyer to look at the settlement deed is that the lawyer would have to do his or her own work in considering the strength of the claims and defences. I accept that for an individual shareholder who is a group member to be provided with a redacted version of the settlement agreement tells that shareholder very little about the reasonableness of the settlement. Of itself, allowing that shareholder's lawyer access to even the unredacted version of the settlement agreement does not take the shareholder much further. A significant amount of work would have to be done and expense incurred before the shareholder could be provided with commercially useful advice, but I see nothing whatever wrong about that. 10. Mrs Kingsland will of course have the benefit, along with all of the other group members, of the Court's independent review of the advice. It was always open to her to opt out of the proceedings and to pursue her own claim in her own way. She chose not to do that. She has also chosen not to invest any further money in legal costs and investigations beyond Mr Brook's correspondence. I do not think that in these circumstances Mr Brook's complaints on her behalf are justified. Approval of Settlement 1. I have already mentioned the advice on prospects provided by counsel. This took the form of a written opinion from counsel for the plaintiff canvassing the merits of the settlement. As one would expect from the counsel involved, the opinion is comprehensive, lucid and candid. 2. The claim was essentially one in negligence. KPMG raised, by way of defence, issues concerning a duty of care, at least so far as some of the investors were concerned, breach and causation. None of these issues were insubstantial. In particular, having regard to the evidence which had been served for the purpose of the hearing, there were real difficulties with demonstrating that the opinion expressed by KPMG was a negligent one, having regard to market circumstances at the time. The claim also faced significant difficulties so far as causation was concerned. 3. An essential element of the claim was that had KPMG reported differently, the takeover would have proceeded. In fact, before the bid was closed, DML made a public announcement which threw some doubt on the profitability of its major asset, which was a mine in South Africa. When the bidder announced that the bid would lapse, this was specifically referred to. 4. The claim faced the obvious difficulty that if KPMG had expressed a different opinion, the bid might still have been withdrawn anyway. 5. There were also questions about the extent to which the fall in DML's share price which took place after 19 February 2013, which is when the half yearly results were announced, could be claimed from KPMG, even if KPMG had been negligent. 6. Part of the proposal for dividing up the settlement moneys is that claimants who purchased shares at a later date will receive a lesser dividend. The opinion from counsel explains the legal basis for this distinction between different classes of claimant. I can see no reason for second-guessing the opinions expressed by counsel in their advice. 7. I am satisfied that proper consideration has been given to the merits of the claim and that the decision to accept the amount offered in settlement by KPMG is a responsible one, conscientiously taken in the interests of the group members as a whole. 8. Accordingly, I will make orders approving the terms of the settlement and giving effect to that settlement by dismissing the proceedings on the agreed basis. [The delivery of judgment was adjourned at this point on 27 May 2019. On resumption the following day, the Court found that further points needed to be addressed on the remaining issues. This meant that the delivery of judgment on those issues had to be deferred. The Court thereupon made orders giving effect to the reasons given on 27 May, to the intent that the remaining issues would be the subject of a separate judgment in due course]. 1. The Orders of the Court are: 1. Pursuant to sections 173 and 183 of the Civil Procedure Act 2005 (NSW) ("the Act"), the Plaintiff is authorised nunc pro tunc on behalf of Group Members to enter into and give effect to the Deed of Variation being pages 1 to 10 of Confidential Exhibit AEF6 to Affidavit of Anne Elizabeth Freeman sworn 24 May 2019 ("Deed of Variation"). 2. Pursuant to sections 173 and 183 of the Act: 2.1 settlement of the proceeding pursuant to the terms contained in the Settlement Deed, being pages 1 to 25 of Confidential Exhibit AEF2, and as amended by the Deed of Variation, ("Settlement Deed") is approved. 3. Pursuant to section 179 of the Act, the persons affected and bound by order 2 are the Plaintiff and Group Members (other than Group Members who have opted out of the proceeding in accordance with the orders made by this Court on 17 November 2017 or 23 August 2018). 8. Pursuant to sections 173 and 183 of the Act, upon Final Settlement Approval (as defined in the Settlement Deed): 8.1 all outstanding costs orders made in this proceeding are vacated; and 8.2 the proceedings are dismissed with no order as to costs of the proceeding. 14. Blaxland Finance Pty Limited, Hent Corporation Pty Limited be taken to be "Settlement Group Members" as defined in clause 1 of the Deed of Settlement for the purpose of the Deed of Settlement and the Settlement Distribution Scheme. ********** Amendments 10 July 2019 - amend case name to include full title of defendant DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 10 July 2019