On 2 October 2012, the High Court of Australia overturned the Full Court of the Federal Court of Australia’s decision against Fortescue Metals Group Ltd and found that Fortescue Metals had not engaged in misleading or deceptive conduct or breached its continuous disclosure obligations, and the company’s chairman Andrew Forrest had not breached his director’s duties, under the Corporations Act 2001 (Cth) (the Act).
- The case concerned agreements entered into between Fortescue Metals and 3 Chinese counterparties for the construction of a mine in the Pilbara region of Western Australia.
- In 2004, Fortescue Metals made a series of announcements to the market and statements to investors indicating that those agreements were “binding” contracts.
- The agreements were later found not to be binding on the Chinese counterparties.
- ASIC prosecuted Fortescue Metals for misleading and deceptive conduct under section 1041H of the Act and breach of its continuous disclosure obligations under section 674 of the Act (which ASIC alleged arose from the company’s failure to correct the announcements after the agreements were later found not to be binding).
- ASIC prosecuted a director of the company (now its chairman), Andrew Forrest, for being involved in the company’s breach of its continuous disclosure obligations and for breach of his director’s duty to exercise due care and diligence under section 180 of the Act.
Decision at first instance
At first instance, the Federal Court found that the statement that the agreements were “binding” was not misleading and deceptive. Fortescue Metals were able to establish a statutory defence by satisfying the Court that it had a reasonable basis for holding the view that the agreements were binding.
The Federal Court held that Mr Forrest also had reasonable grounds for believing that the agreements were binding. Accordingly, Mr Forrest was able to rely on this as a defence to ASIC’s allegation of breach of his director’s duty.
The Federal Court was satisfied that there was a reasonable basis for Fortescue Metals, and Mr Forrest, to have held the view that the agreements were binding and ASIC had not persuaded them otherwise.
Appeal by ASIC
ASIC appealed the decision to the Full Court of the Federal Court, which found that the announcements were misleading and deceptive. Further, as Fortescue Metals did nothing to subsequently correct the misleading statements the Court found that it was in breach of its continuous disclosure obligations.
As to Mr Forrest, the Court found that he was involved in the company’s breach of its continuous disclosure obligations in contravention of section 674 of the Act and that he had breached his duty of care and diligence as a director under section 180 of the Act.
Appeal by Fortescue Metals
Fortescue Metals appealed the decision to the High Court of Australia which overturned it. The High Court found that the Federal Court had oversimplified the position and treated the obligation under section 674 of the Act, in relation to continuous disclosure, as a counterpart of the misleading and deceptive conduct claim.
The High Court found that the announcements were not misleading and deceptive. Accordingly, the Court found that the company had not breached its disclosure obligations and Mr Forrest was not in breach of section 674 of the Act or his duty as director to act with care and diligence.
In reaching these conclusions, the Court made the following findings.
- The Court was satisfied that the provisions of the agreements showed that the parties genuinely intended the agreements to be legally binding. The Court was satisfied that Fortescue reasonably believed that the agreements were binding.
- The announcements simply conveyed a message about what the parties had done. In other words, the parties had made agreements which they intended to be, and believed were, binding contracts.
- The Full Court of the Federal Court had mistakenly treated the announcements as conveying a view about the legal enforceability of the agreements under Australian law. This reasoning was found to be flawed in two respects. Firstly, the intended audience (investors and the business community) would not be expected to interpret the statements as a representation about the legal enforceability of the contracts at law, but rather as a comment regarding what the parties had understood they had done (i.e. made a binding agreement). Secondly, there was a real possibility that the agreements would be subject to the law of China rather than Australian law.
- The announcements were not about what the parties to the agreements could do to enforce the agreement. They were about conveying the fact that the agreements had been made and what the agreements were about.
This particular case contains the following important implications for the boardroom:
- Have reasonable grounds for what you say in an announcement (particularly about the status of the agreement). Fundamentally, the question in these types of cases will be what representations were being conveyed by the statement.
- Does your statement convey the belief that the parties have reached a binding agreement and do you have a reasonable basis for that belief?
- Be careful not to oversimplify your statement - take care to set the statement in the correct factual context for the audience and consider what they may take you to be implying as a state of affairs or underlying facts that may be untrue.
- Be sure to place the statement in the appropriate context. It is the context in which the statement is made which may inform its characterisation.
- In the context in which the statement is made, in the discharge of a duty to keep the market properly informed, does it convey more than that this is just a statement of the company’s untutored opinion on a seriously considered matter?
Announcements by listed corporations in Australia, in the context of a continuous disclosure obligation regime, deserve to give their announcements the highest level of internal scrutiny as part of its corporate governance - if only to avoid this type of drawn out process of public questioning or perhaps even class action by investors who were the intended audience of the company's statement.
This case is an example of the importance of carefully drafted announcements and the need for companies to have a reasonable basis for the views they publish. It also provides helpful guidance in understanding the evidential burdens to be overcome by ASIC in pursuing such cases in the future.