For information purposes only – When will an expert’s report be exempt from compliance with legislative and procedural requirements?
Security Matters Limited, in the Matter of Security Matters Limited (No 3)  FCA 140
In this case, the Federal Court ruled that the question of whether a supplementary expert report did not comply with the Corporations Act 2001 (Cth) (the Act), or the relevant ASIC Regulatory Guides or the Federal Court’s Expert Evidence Practice Notes, was irrelevant as the plaintiff’s directors relied on those for information purposes only.
The plaintiff, Security Matters Limited (SMX) proposed two schemes of arrangement for its shareholders and its option holders (together the security holders). SMX sought orders that the schemes of arrangement be approved under s 411(4)(b) of the Act. ASIC opposed those orders.
In January 2023, the court had ordered that meetings of the security holders be convened and that the plaintiff send the security holders a scheme booklet, which included a report prepared in October 2022 by an independent expert, Mr G. The parties then agreed that SMX procure a supplementary independent expert report authored by Mr G to be given to the security holders.
In both his original and his supplementary report, Mr G concluded that both schemes were fair and reasonable and in the best interests of the security holders on the basis that the redemption rates of the securities.
After a change in redemption rate was announced on 1 February 2023, Mr G prepared a further supplementary independent expert report, in which he concluded that each of the schemes was not fair and not reasonable, and not in the interests of SMX security holders. This section of the further supplementary report was known as the “director’s critique”. The director’s critique was not accepted by the directors of SMX.
ASIC submitted that the director’s critique:
- was not itself an expert report;
- did not comply with the Act, the relevant ASIC Regulatory Guides, or the Federal Court’s Expert Evidence Practice Notes (including the Federal Court’s Harmonised Expert Witness Code of Conduct); and
- may have been misleading or deceptive.
SMX relied upon the affidavits of Mr P (a US-based investment banker) and Dr R (an economist and consultant based in Israel) as providing a sound basis for the statements made by the Directors that the schemes were fair and reasonable, contrary to the ultimate view expressed by Mr G.
ASIC submitted that Mr P’s and Dr R’s reports were also non-compliant and that the only proper independent expert reports provided to the scheme members and to the court were those authored by Mr G. The reports of Mr P and Dr R were not provided to the security holders.
SMX argued that the security holders had received ample information with which to assess the merits of the schemes by way of the reports produced by Mr G and that the directors’ critique was not, and did not purport to be, an expert report prepared in accordance with any particular regime of rules. As such, there was no requirement that it comply with the Act, the relevant ASIC Regulatory Guides or any expert code of conduct.
The Court considered the ruling in Phosphate Co-Operative Co of Australian Pty Ltd  VR 665 at 684, where Brooking J said:
“generally speaking, the outcome of an application for approval of a scheme of arrangement is not to be determined by whether the judge finds the expert’s report persuasive: whether the report is persuasive is a question for the members”.
The Court rejected ASIC’s argument that the scheme members did not have enough information to enable them to assess the merits of the proposal, or that some of that information may have been misleading or deceptive, because the reports prepared by Mr P and Dr R were not compliant with the applicable legislative and procedural requirements.
O’Callaghan J found that the SMX directors did not relevantly rely on those reports other than to inform themselves, thus there was no need for the type of compliance insisted upon by ASIC.
- An expert’s report may be used for a purpose other than as evidence in legal proceedings. It is therefore important for lawyers to ensure that an expert’s report is fit for the purpose for which it will be used.
- Where an expert’s report will be used for a purpose other than as evidence in legal proceedings, it may be more cost effective for the client if the lawyer procures a report from the expert that does not have to meet the strict compliance with the applicable expert code of conduct.
- If an expert’s report is to be used for information purposes only, there is no requirement that the report comply with any legislative or procedural requirements which might otherwise apply if the report is to be used as evidence in legal proceedings.
Read the full decision here.