Introduction
Facts
Allegations
Misleading or deceptive?
Continuous disclosure obligations
Director's duties
Comment
In a recent decision the Full Federal Court upheld an appeal by the Australian Securities and Investments Commission (ASIC) against the Federal Court's decision to dismiss the ASIC's application against Fortescue Metals Group Limited and its chairman and chief executive officer, Andrew Forrest.
The ASIC appealed because the case raised important issues concerning:
- a listed entity's obligations to disclose information under the continuous disclosure provisions of the Australian Stock Exchange (ASX) Listing Rules and the Corporations Act 2001 (Cth);
- the operation of the provisions on misleading and deceptive conduct of the act, particularly on statements concerning the content, effect or enforceability of commercial agreements; and
- the role and duties of directors and officers in making statements to the ASX and the investing public, particularly those concerning the contents, effect or enforceability of commercial agreements.
The original proceedings arose out of information disclosed to the market by Fortescue concerning certain framework agreements between it and three major state-owned Chinese companies. These agreements related to the development of a mine and associated infrastructure for the mining and export of iron ore in Western Australia's Pilbara region.
The agreements clearly demonstrated the parties' intentions to create particular binding obligations, but a number of matters were left open for future negotiation between the parties.
In the period from August 23 2004 to March 1 2005, Fortescue disclosed a series of announcements, media releases and investor presentations to the ASX concerning the nature of the framework agreements. The major focus of the announcements was that Fortescue had executed binding agreements with the Chinese companies to complete the proposed developments and to disclose the operation of the agreements.
The ASIC claimed that the public announcements by Fortescue overstated the substance and effect of the agreements with the Chinese companies, as they did not contain agreed terms as to price, scope or scheduling. This resulted in the markets and investors being misled as to the true status of the framework agreements (until the true content of the agreements was disclosed six months later).
The ASIC also claimed that Fortescue had failed to act in accordance with the continuous disclosure obligations under the act by failing to disclose accurately the contents of the agreements and by failing to amend the misleading information provided in the announcements.
The ASIC alleged that Forrest had known of the disparity between what was represented to the public and what was actually contained in the framework agreements. The ASIC asserted that Forrest was knowingly involved in Fortescue's alleged contraventions and had breached his duty of care and diligence as a director by failing to ensure that Fortescue complied with the continuous disclosure provisions.
The ASIC made the following submissions regarding the misleading statements made by Fortescue:
- A statement of the terms of each of the framework agreements or of their legal effect was likely to influence investors in deciding whether to acquire or dispose of shares in Fortescue.
- Alternatively, once investors had been told that Fortescue had made binding agreements with the Chinese contractors to build, finance and transfer the infrastructure, information that these statements were in error was likely to influence investors in deciding whether to acquire or dispose of shares in Fortescue.
The court ultimately agreed with the submissions. It focused on what reasonable members of the investing public would have ordinarily understood from the various announcements in deciding whether the relevant conduct of Fortescue was misleading or deceptive, or was likely to mislead or deceive.
The court held that the various statements made by Fortescue would not have been perceived as statements of opinion. The court considered that the statements suggested, without doubt, that the Chinese companies had assumed legally enforceable obligations to build the infrastructure. They would have been understood as conveying the historical fact that agreements containing terms accurately summarised in the announcements had been made between the parties.
Continuous disclosure obligations
In light of the court's finding that the framework agreements were not binding on the parties, the court held that Fortescue's contravention of the continuous disclosure obligations was a failure to disclose the actual terms or to portray accurately the nature of the framework agreements.
Following the disclosure to the market of misleading information, Fortescue was under an obligation to provide the information that reflected the true position.
The court considered that the legislation imposed no obligation on Fortescue to correct information already provided to the ASX. The focus of the provision is on the continuing notification of information. The fact that the later provision of information may correct a misstatement in a notification made earlier is merely a consequence of compliance.
The court held that Forrest did not take all reasonable steps to ensure compliance with Fortescue's disclosure obligations, and therefore breached his duty of care and diligence in his position as a director.
The court found that Forrest was knowingly involved in the relevant events giving rise to Fortescue's announcements to the public which were, or were likely to be, misleading or deceptive. The court held that Forrest was aware of the terms of the framework agreements, and it could reasonably be inferred that he knew of the discrepancy between those terms and Fortescue's representations about them.
In Forrest's defence, it was argued that he took all steps that were reasonable in the circumstances to ensure that Fortescue complied with its obligations and, after doing so, he believed on reasonable grounds that Fortescue was so complying.
The court found that the defence was unavailable to Forrest. Despite seeking legal advice after the misleading statements were disclosed to the public, there was nothing to suggest that he had taken steps to ensure that the framework agreements were binding agreements in law before their content was made public by Fortescue. In addition, the ASIC was able to show that Forrest's own communications were inconsistent with a belief on his part that Fortescue had made a binding agreement for the construction of the infrastructure for the project.
The matter has been remitted to the Federal Court for the imposition of penalties on Fortescue and Forrest.
Companies and their directors should ensure that they are vigilant in making announcements to the market and the public. The decision reinforces the judicial position regarding the significance of continuous disclosure, which maintains confidence and integrity within the market.
For further information on this topic please contact Anne Freeman or James Parkin at Piper Alderman by telephone (+61 2 9253 9999), fax (+61 2 9253 9900) or email ([email protected] or [email protected]).