- Eight years after the ASX announcements in question, Fortescue and Andrew Forrest have succeeded in their High Court appeal challenging the decision that Fortescue’s disclosures to the ASX were misleading and deceptive in describing as ‘binding contracts’ Fortescue’s framework agreements with Chinese SOEs.
- The High Court took into account the audience to these disclosures, which it saw as including investors and possible future investors, and the contextual background that the agreements were with Chinese SOEs executed in China.
- For potential disclosers and litigants, the decision is a reminder that whether or not a statement is technically accurate in legal terms may not be the touchstone of whether an announcement to the ASX is misleading or deceptive. Statements should be tested in terms of whether they may mislead the investor audience.
- The High Court’s decision offers no further guidance on continuous disclosure rules. Given the finding that Fortescue’s disclosures were not misleading or deceptive, the Court did not need to decide whether Fortescue had an obligation under the continuous disclosure rules to correct any misleading or deceptive statement.
Disclosures and proceedings
During August and November 2004 and into 2005, Fortescue Metals Group disclosed to the ASX that it had entered into framework agreements with each of China Railway Engineering Corporation (CREC), China Harbour Engineering Company (Group) (CHEC) and China Metallurgical Structure (Group) Corporation (CMCC) to build, finance and transfer the railway, port and mine for the proposed Pilbara Iron Ore and Infrastructure project in WA. The framework agreements were described as binding contracts. The disclosures referred to the contract counterparties being owned by the Chinese Government.
These disclosures were made by Fortescue and its Chairman/CEO, Andrew Forrest, in respect of the framework agreements. Each of these four-page agreements recorded that it was to become binding upon approval by the parties' respective boards, and that the parties were jointly to agree and develop further general conditions of contract at a later date. The parties' boards approved the agreements.
In March 2005, an article was published in the financial press suggesting that the contracts which Fortescue had made were not binding contracts to build, finance and transfer the railway, port and mine.
In response to the ASX's request for comment, Fortescue provided to the ASX a copy of the framework agreement with CMCC.
In March 2006, ASIC commenced proceedings in the Federal Court of Australia against Fortescue and Mr Forrest alleging the disclosures to the ASX were misleading or deceptive, that failure to correct the statements breached the continuous disclosure provisions and that Mr Forrest had thereby breached the statutory duty of care and diligence required of a director.
At first instance, Gilmour J dismissed ASIC's claims. ASIC's appeal to the Full Court of the Federal Court (Keane CJ, Emmett and Finkelstein JJ) was allowed and declarations of contravention were made.
The High Court’s key decision
The key decision for the High Court was whether, in making its announcements, Fortescue contravened the provisions prohibiting misleading and deceptive conduct. This turned on a close and careful analysis of the facts and evidence that they had available to them.
Fortescue not misleading or deceptive in using the description ‘binding contracts’
The High Court held that the statements made by Fortescue and Mr Forrest represented to their audience that Fortescue and the Chinese state-owned entities had entered into agreements that each intended to be binding. On the evidence, this representation was neither false nor misleading.
The High Court held that there was no evidential basis for assuming that the audience to Fortescue’s description of the agreements as ‘binding contracts’ would understand that the parties had entered into agreements that would be enforced by an Australian court according to Australian law should a dispute ever arise between them. This effectively was the reverse approach to the Full Court. The Full Court had determined that the description of the agreements as binding contracts was misleading by reference to the legal question of whether the agreements would be considered legally binding by an Australian Court.
The audience you should look to in considering your disclosures to ASX is investors and potentially a wider commercial audience
The majority of the High Court said that the intended audience to whom you should look to judge whether disclosures would be misleading and deceptive could be identified as investors (both present and possible future investors) and perhaps a wider section of the commercial or business community.
There was no evidence led at trial to show that this audience would have understood the references in the disclosures to a ‘binding contract’ as conveying that a court (whether in Australia or elsewhere) would grant a remedy to a party seeking to enforce the contract against its counterparty where the counterparty did not comply with the contract.
As far as the High Court was concerned, the disclosures that the parties had entered into binding contracts conveyed to their intended audience that the framework agreement between Fortescue and CREC was what those parties had described (and a commercial audience would describe) as a ‘binding contract’. There was no further message conveyed as to enforceability of the agreements in an Australian Court.
Indeed, from the High Court’s standpoint, the location of the signing ceremonies and the Chinese SOE status of Fortescue's counterparties pointed to the possibility that validity of the agreements might be governed by the law of the People's Republic of China, not Australia.
Continuous disclosure obligations not relevant
ASIC alleged that if the disclosures made by Fortescue misrepresented the effect of the framework agreements, it was obliged under the continuous disclosure obligations to correct the position.
The High Court disposed of that claim shortly. Once it was decided that Fortescue's statements were not misleading or deceptive or likely to mislead or deceive, ASIC had failed to establish the premise to its allegation.
ASIC also failed in its alternative case, which was premised on Fortescue’s disclosures expressing its opinion as to the effect of the framework agreements. The Court disagreed that the disclosures were statements of opinion, rather it considered them an accurate description. Again, on failure of ASIC’s premise that the disclosures were statements of opinion, Fortescue had no obligation to publish the full texts of the agreements.
What did this mean for Mr Forrest as director?
The High Court did not need to consider Forrest’s liability for breach of continuous disclosure.
Following their conclusion that Fortescue was not in breach of the continuous disclosure provisions, the High Court considered it unnecessary to examine Mr Forrest’s liability, or potential for excuse from liability, for breach of those provisions.
ASIC also failed in its claim against Mr Forrest for breach of statutory duty of care and diligence. The success of this claim depended upon ASIC demonstrating that there had been misleading or deceptive conduct or breach of the continuous disclosure provisions, which it had failed to do.
What does this mean for disclosure and directors?
First, it means that ASX disclosure should be considered by reference to an investor’s standpoint. Even though technical accuracy to a lawyer may assist, the High Court defers to the investor audience to test whether what is conveyed is misleading or deceptive.
Secondly, it shows that ASIC can fail to establish breach of the misleading and deceptive provisions, which are the same provisions it used to successfully attack the James Hardie directors.
This may perhaps offer comfort to directors who are concerned about the risk to announcement accuracy which may arise from meeting the immediacy requirement of the continuous disclosure rules.
ASIC’s failure in these proceedings may also encourage listed entities which have striven to comply with continuous disclosure obligations to consider more seriously the course of not complying with infringement notices. Listed entities do have a choice whether or not to comply with an infringement notice. Putting aside class action risks, when a listed entity decides to comply with an infringement notice, they ‘cop’ both the infringement notice penalty and ASIC’s media release about the infringement notice. If the listed entity decides not to comply, it risks ASIC determining to take proceedings including against the directors. ASIC will need to consider carefully whether taking proceedings is an appropriate action for it to take. Only if ASIC decides to take proceedings does the listed entity need to suffer disclosure by ASIC of the entity’s alleged breach of the continuous disclosure rules. ASIC’s proceedings in this scenario could extend to breach of the misleading and deceptive conduct provisions as well as breach of continuous disclosure rules and directors’ duties. ASIC may well think more carefully about its actions and combinations of claims in light of this apparent rebuff by the High Court.
In an M&A context, if a shareholder or unitholder class action is threatened against a potential bidder’s proposed takeover target, the potential bidder may be disinclined to move to acquire shares in the target and may consider whether a direct asset purchase from the target is a better course. The High Court’s decision does not affect the potential bidder’s position. Its primary assistance is to disclosers and litigants – by highlighting the importance of testing the quality of disclosure by reference to the present and possible investor audience. It does not sit uncomfortably alongside the Master’s decision in the Jubilee case that the test of material price sensitivity, determining whether and when to disclose under the continuous disclosure rules, is by reference to the standpoint of common investors of that class of investment.