The corporate regulator’s recent track record in relation to the prosecution of directors continued on 23 December 2009 when Justice Gilmour of the Federal Court handed down judgment in Australian Securities & Investments Commission v Fortescue Metals Group Ltd [No 5] [2009] FCA 1586. The case contains important considerations for D&O insurers in respect of a common D&O policy exclusion – dishonesty.

The case related to events occurring in and after 2004 when Fortescue Metals Group Ltd (FMG) made disclosures to the ASX that it had entered into “binding” framework agreements with Chinese contractors to build mining infrastructure in Western Australia. The popular view in the media following the disclosures in 2004 was that FMG was a new player in the Western Australian mining industry that had previously been duopolised by BHP and Rio Tinto.

The binding nature of the agreements was subsequently thrown into doubt and in 2006 ASIC issued proceedings against FMG and Mr Forrest, FMG’s CEO. According to ASIC, the disclosures had “a positive material effect on the price of FMG’s shares” and had been made dishonestly as they “were false, unqualified and emphatic as to the significance and effect of the framework agreements”. In its case against Mr Forrest, ASIC alleged breaches of the Corporations Act 2001, including failing to exercise care and diligence as a director (section 180(1)) and contravention of the accessorial liability provision of the continuous disclosure regime (section 674(2A)). Mr Forrest maintained that the disclosures were correct.

ASIC’s claim failed. Justice Gilmour found on the evidence that Mr Forrest had obtained “competent professional legal oversight” in relation to the disclosures, had previously been involved in litigation involving similar agreements which were held to be valid and binding, and at least one of the Chinese contractors had engaged in conduct which was consistent with Mr Forrest’s view that the framework agreements were binding.

Costs were awarded against ASIC. Justice Gilmour noted that: “[I]t is important that allegations of dishonesty should be made only where there is a reasonable evidentiary basis for them. It is my opinion that on the totality of the evidence available to ASIC there was no such basis in this case.”

ASIC is in the process of appealing the decision.