Fortescue – v – ASIC
High court clears fortescue metals and andrew forrest, asic slammed
The High Court recently handed down its decision in Forrest v Australian Securities and Investments Commission  HCA 39 where it allowed appeals by both Fortescue Metals Group Ltd (Fortescue) and its prominent director Andrew ‘Twiggy’ Forrest (Forrest) against the previous decision of the Full Federal Court which had found in favour of the Australian Securities and Investments Commission (ASIC).
The case centred on Fortescue’s announcements to the market in 2004 that it had entered into ‘binding’ framework agreements with Chinese state owned enterprises to build, transfer and finance the railway, port and mining work for a proposed mining project in Western Australia called the Pilbara Iron Ore and Infrastructure Project (Pilbara Project).
In March 2005, the Financial Review published an article questioning the binding nature of the agreements, and Fortescue’s share price subsequently fell.
ASIC commenced proceedings in March 2006 alleging that Fortescue had breached the misleading and deceptive conduct and continuous disclosure provisions under the Corporations Act 2001 (Cth) (Act), and that Forrest had breached his directors’ duty of care and diligence under the Act.
1. The High Court accepted Fortescue and its counterparties had genuinely intended to make a legally binding contract. As a result, the statements contained in the market announcements that Fortescue had entered binding agreements with the Chinese state owned enterprise did not constitute misleading or deceptive conduct.
2. The assumed audience to whom the market announcements were directed, being the investor community, was an important factor in the High Court’s reasoning. Such persons were concerned with what the contracting parties understood and intended by entering the agreements, not whether they were enforceable agreements in a court of law. ASIC’s contention that the intended audience would expect ‘binding’ to mean enforceable in an Australian court was rejected.
3. Furthermore, the fact that the agreements were with Chinese state owned enterprises was an important factor as the investor public would appreciate the difficulty of Fortescue enforcing a contract against such an entity.
4. Because the announcements were not misleading or deceptive, the continuous disclosure issue was not relevant to determine. As Fortescue’s original announcement was not misleading or deceptive, there was no requirement for Fortescue to correct the announcement and thus no breach of continuous disclosure rules.
Misleading or deceptive?
The determinative issue in the appeal was: what did the statements in the market announcements convey to their intended audience when they stated that the parties to the framework agreements had entered a binding contract?
In a joint judgement made by French CJ, Gummow, Hayne and Kiefel JJ, the majority of the High Court considered three possible alternatives for what the words ‘binding contract’ conveyed to investors in the announcements made by Fortescue:
(a) firstly, that the statements conveyed a message about what the agreements said (which is what the High Court ultimately concluded);
(b) secondly, that they conveyed some message about ‘legal enforceability’; and
(c) thirdly, that they conveyed a message which was a mixture of the two elements above.
In overturning the Full Court’s earlier decision, the High Court said that the announcements, when read properly in context, should be construed as a statement about what the parties to the agreements understood they had done and what they would do in the future, rather than what would happen in a court if the parties had a disagreement at some later point. The parties had understood themselves to be entering into binding legal relations by entering the agreements and intended that the agreements would be performed. ASIC’s argument that a binding contract meant enforceable in an Australian court was rejected.
In a separate judgment, Heydon J added that the statements were directed at a particular audience (i.e. not the public as a whole but a sophisticated section of the public), and that such audience would not consider the words ‘Western Australian’, ‘mining’ and ‘Chinese’ to be some certain statement ‘about the imminent creation of wealth beyond the dreams of avarice.’ Rather, that section of the public (i.e. superannuation funds, large investors, stock brokers and financial advisors) would be aware of the difficulties of creating infrastructure for mining projects like the Pilbara Project, and would not consider it simple or even possible to ‘force’ state-owned Chinese enterprises to do anything in Australian courts, because even the tightest of contractual terms would not do that.
Ultimately, in light of the above, the High Court concluded that the statements made by Fortescue were not, in fact, misleading or deceptive at all.
In addition, the High Court considered the following in respect of ASIC’s scattergun approach to its pleadings:
(a) that the allegations of fraud made, which were described by ASIC’s submissions as a ‘fallback’ claim, were not appropriate; and
(b) that ASIC’s claim that the contracts did not state certain matters, which was on the facts incorrect, was ‘embarrassing to the fair trial of the proceedings.’
The verdict reached by the High Court with respect to the misleading and deceptive conduct allegations was enough of itself to dispose of ASIC’s claim that Fortescue breached its continuous disclosure obligations.
This is because, as Fortescue has not made any incorrect statements to the market, it was not obliged to correct such statements.
Likewise, having failed to establish that Fortescue breached either sections 1041H or 674 of the Act, ASIC’s allegations that Forrest breached his directors duties also failed.
Implications for the market
In protecting itself against criticism, particularly that a decision along the lines above would artificially limit the protection afforded to the investing public, as had been observed by Keane CJ in the previous hearing in the Full Court, the majority of the High Court noted:
(a) that the decision did not establish any general proposition to the effect that a company need only disclose a message about what a particular contract contained moving forward, therefore absolving itself from any potential misleading or deceptive conduct claim;
(b) rather, what message is conveyed to the ordinary member of the intended audience is to be determined on a case by case basis by a close analysis of the particulars facts (i.e. more information may be required depending on the particular circumstances).
The High Court’s reasoning suggests that the case turned on construing the particular announcements made by Fortescue, and thus was a fact specific decision. In particular, this case related to agreements with Chinese state owned enterprises, upon whom enforcing such agreements in an Australian or Chinese court of law would inevitably be challenging for Fortescue.
Therefore, companies should continue to give careful consideration to what information they are required to provide to the markets regarding each transaction on a case by case basis.
Pointon Partners has a wide breadth of experience advising listed corporations of their various obligations under the Act, and in particular their obligations relating to continuous disclosure and market announcements.