- The High Court confirms that liability for misleading or deceptive conduct is determined by assessing what the particular statements convey to their intended audience, which in this case was the investing public. The High Court took a commercial common sense approach to the investing public’s interpretation of Fortescue's announcements.
- From this perspective, Fortescue’s statements accurately described the agreements reached with the Chinese SOE’s, being statements of what the parties understood they had done and intended would happen in the future. Fortescue’s statements would not have been understood, as ASIC contended, as being statements that an Australian Court would enforce the agreements.
- One member of the Court considered Fortescue's references to having “binding agreements” to be an expression of an opinion that was genuinely and reasonably held by Fortescue and Forrest.
On 2 October 2012 the High Court of Australia upheld appeals by Fortescue Metals Group (Fortescue) and its Chairman and its former Chief Executive Officer, Andrew Forrest, against a decision of the Full Court of the Federal Court of Australia in which they had been found liable for breaching various provisions of the Corporations Act, namely misleading or deceptive conduct in connection with financial services, continuous disclosure and (in respect of Mr Forrest only) directors’ duties.
The proceedings concerned a series of ASX announcements and associated representations made by Fortescue and Andrew Forrest during late 2004 to early 2005 to the effect that Fortescue had entered into “binding agreements” with three significant Chinese state owned entities to build and finance (or build and transfer) the mine, rail and port infrastructure for Fortescue’s project.
The Chinese entities were shown Fortescue’s announcements prior to their release, and approved of (or did not object to) their terms. Further, there was evidence to the effect that the Chinese entities conducted themselves consistently with the behaviour of a party that had agreed to carry out the construction of the infrastructure, rather than one that had entered into a non binding memorandum of understanding.
Following the entry into the agreements, the lead Chinese entity along with a Chinese governmental authority commenced negotiations with Fortescue to acquire a majority equity interest in Fortescue. The agreements did not contain any condition or term relating to the Chinese entities obtaining equity in Fortescue. When the Chinese failed in their bid to obtain a majority equity stake in Fortescue, the lead Chinese construction entity was quoted in the Australian Financial Review as denying that there was any binding agreement between the parties.
In 2006, ASIC commenced civil penalty proceedings against Fortescue and Forrest, alleging that:
- in announcing that the framework agreements were binding, Fortescue had engaged in misleading or deceptive conduct (either pursuant to section 1041H of the Corporations Act 2001 (Cth) (Corporations Act) or, alternatively, section 52 of the Trade Practices Act 1974 (Cth) (TPA));
- Fortescue failed to inform the market of the terms, effect and significance of the agreements, and further by not correcting the announcements that it had made to the market, Fortescue breached its continuous disclosure obligations arising under section 674(2) of the Corporations Act;
- Forrest was also in breach of the continuous disclosure provisions of the Corporations Act due to his involvement in Fortescue’s contraventions; and
- in allowing Fortescue to breach the Corporations Act, which thereby exposed it to pecuniary penalties, Forrest breached the duties of due care and diligence he owed as a director under section 180(1) of the Corporations Act.
Decision at first instance in the Federal Court
The matter was first heard by Justice Gilmour of the Federal Court. Gilmour J dismissed ASIC’s claims in their entirety and held that the announcements were not misleading or deceptive as each had been an expression of opinion (rather than a representation of fact) which was honestly and reasonably held by both Fortescue and Forrest at the time they were made.
Furthermore, his Honour held that, as neither Fortescue nor Forrest were actually in possession of information that the agreements were not binding (nor ought they to have been aware of such information) Fortescue had not breached its continuous disclosure obligations. This finding again turned on the fact that Fortescue and Forrest honestly and reasonably believed the agreements to be binding in the manner announced to the market.
As the case against Fortescue failed, Gilmour J also dismissed the case against Forrest.
Decision on appeal in the Full Federal Court
On 18 February 2011, the Full Court of Federal Court unanimously upheld ASIC’s appeal. The Full Court found that Fortescue had made misleading announcements to the market and that, by not correcting those announcements, Fortescue had also breached its continuous disclosure obligations. Having found that Fortescue was in breach of its continuous disclosure obligation, the Full Court found that Forrest was ‘involved’ in the contraventions and that he had breached his director’s duties by causing or allowing Fortescue to be exposed to penalties for breaching the law.
Keane CJ held that the statements would be understood by ordinary and reasonable members of the investing public to be representations of fact not opinion. The Chief Justice then found that the statements were false because the agreements in question were not enforceable in the manner described by Fortescue and Forrest. This aspect of the judgment turned on the Court’s view that the agreements did not manifest a consensus on the terms essential to the conclusion of an enforceable agreement to build and transfer the infrastructure for the project.
Keane CJ held that once the statements had been made, section 674(2) required they be corrected as the market needed to be provided with the correct information and further, information that Fortescue’s management had mis-stated the terms of the agreements was a circumstance that would influence Fortescue’s investors.
Forrest had relied on statutory defences in the Corporations Act that he:
- had taken reasonable steps to ensure compliance by Fortescue with its continuous disclosure obligation; and
- was entitled to the protection of the business judgment rule.
Neither defence was upheld on appeal. Keane CJ found that Forrest couldn’t show any steps taken to confirm the binding nature of the framework agreements. Further, Forrest’s communications on the matter were inconsistent with a belief that the agreements were binding.
Keane CJ considered that a decision not to (accurately) disclose the effect of the Agreements was not ‘business judgment’ or within ‘business operations’. Given the decision in question was a question of compliance with the Corporations Act, the defence of business judgment was not available.
Decision of the High Court
Fortescue and Forrest appealed the Full Court’s decision to the High Court, and were granted special leave to appeal on 29 September 2011. On 2 October 2012, the High Court delivered a unanimous judgment upholding the appeals.
There is no dispute as to the applicable test for whether a company has engaged in misleading conduct, namely whether from the perspective of an ordinary and reasonable member of the investing public, the statement was misleading, or likely to mislead that audience.
However, in the main judgment, the High Court disagreed the Full Court’s approach of treating Fortescue’s announcements about the parties having made a “binding contract” as conveying more than the message that the parties had made an agreement which they described as a “binding contract”. That is the Full Court wrongly assumed that the audience would have asked a “lawyer’s question” and looked beyond what was said and done to what could or would happen in a court if the parties to the agreement fell out at some future time.
The High Court held that it was “too broad a proposition” to assume that the words “contract” and “agreement” necessarily conveyed a message about legal enforceability in an Australian Court. Further, given the international features of the agreements, there was even a question as to whether the agreements would come before an Australian or Chinese Court for legal determination. It was therefore “extreme or fanciful for the audience to understand the impugned statements as directing their attention to any question of enforcement by an Australian Court if the parties later disagreed”.
The High Court also disagreed with an approach of rigidly characterising each statement in question as a “fact” or “opinion”, and that the appropriate focus remained on how “investors or other members of the business or commercial community” would have understood the references in question. The High Court also suggested that this audience would have considered the public statements by the Chinese SOE’s of “binding” obligations was “a much more powerful spur to performance” than any possible legal action instituted by Fortescue.
For these reasons, the High Court did not have to answer the question of whether the agreements in question were actually binding in Australian Courts in the manner described by Fortescue.
As no breach of the misleading or deceptive conduct provisions was established, it followed that there was no breach of the continuous disclosure provisions, nor did Andrew Forrest breach his director’s duties.
Justice Heydon, who delivered his own judgment also provided some useful explanations of the position.
His Honour clarified that companies are not required to disclose the entire wording of an agreement, as had been suggested by ASIC. His Honour noted that to do so would not assist the cause of ensuring a speedily informed market, as with bulky agreements it could require the investor audience to procure expert assistance to understand the agreements.
His Honour concluded that Fortescue’s releases “correctly represented that there was an agreement, and that it was the view of the parties binding from the time of board approval”. In relation to Fortescue’s comment about the contract being “binding” that was a matter of opinion being “an inherently controversial matter of professional judgment”, and ASIC failed to establish that Fortescue did not genuinely and reasonably hold the opinion it expressed.
Justice Heydon also commented that if the agreements had the legal status that ASIC attributed to them, namely unenforceable agreements to agree, then Fortescue was never obliged to make a disclosure about them pursuant to the continuous disclosure regime.
- The case is best viewed as a case study of circumstances in which disclosures were found to be compliant with the law owing to a variety of factual circumstances. In this case, announcements about agreements reached with Chinese SOE’s were found to be accurate, and not conveying a representation to the investor public that the agreements would be found to be legally enforceable in an Australian Court.
- The High Court was clear in saying it was not laying down any general proposition, and as the Court said “if a person seeks to characterise a public statement as a representation about the content of a document, the critical question will be what the statement conveyed to its intended audience, not what the party concerned says that it was intended to convey”.
- The Court helpfully identified the investor public as a section of the public comprising large commercial entities and smaller investors reliant on advice. They were “not a naive audience”. The Court took a view of the announcements as would a “commercial audience” and found that from that perspective there was nothing misleading about the content of the announcements.
- Justice Heydon’s judgment has also clarified that it is not necessary for a Company to disclose the entirety of the terms of an agreement, but that an accurate summary of the terms is sufficient.
- While the legality of public statements must be considered on a case by case basis, it remains the case that a company will have greater latitude to defend statements that are identifiable as opinions (where there is a genuine and reasonable basis for them), as opposed to statements of fact (which are either accurate or not).