Yesterday, the High Court delivered the much anticipated final chapter in the litigation between Fortescue Metals Group Ltd (Fortescue) and ASIC. It unanimously held that Fortescue and Fortescue CEO Andrew Forrest did not contravene the Corporations Act (the Act) in connection with public statements that Fortescue had entered into “binding agreements” with several Chinese entities to build, finance and transfer railway, port and mine infrastructure in the Pilbara region.
ASIC’s case, commenced by ASIC in March 2006, alleged that Fortescue and Mr Forrest contravened section 1041H of the Corporations Act by representing that the framework agreements were “binding”. ASIC contended that these representations were misleading or deceptive. ASIC further alleged that they contravened their duty of continuous disclosure to the market under section 674 of the Act by failing to correct the allegedly false or misleading information.
Key themes of the judgment
Two key themes were brought out in the High Court’s decision:
- In deciding whether a statement is misleading or deceptive, the key question is how the relevant audience would interpret the statement. This requires a close and careful analysis of the facts. In the present case, the audience was the business and commercial community who invested in shares of Australian companies, or advised or reported on those companies – and they could be expected to have an understanding of the relevant business realities (for example, the inherent uncertainties of doing business with Chinese state owned enterprises). The audience was not lawyers, and as such the Court considered it incorrect to take a legalistic view of Fortescue’s statements; and
- The Court was highly critical of ASIC’s conduct of the case. In particular, the Court pointed to the complexities in how ASIC had formulated its case (which had multiple permutations and arguments that had been run in the alternative) and to its confused allegations which did not clearly distinguish between fraudulent misrepresentation (which seemed to be ASIC’s primary case at first instance) and negligent misrepresentations (which ASIC seems to have taken as its primary position in the Full Federal Court). This criticism is likely to have an impact on ASIC’s considerations on whether to bring future prosecutions in relation to listed companies’ statements and disclosure requirements. ASIC may well be more cautious, or at least less aggressive, in prosecuting perceived contraventions of these rules in the future.
Background to the case
ASIC was unsuccessful in its case at first instance. At first instance Gilmour J in the Federal Court found that the ASX announcements were understood to be underpinned by an honestly held opinion rather than being statements of fact, and were therefore not misleading under section 1041H of the Act. Consequently, the directors had not become “aware” of any information which was required to be disclosed to the market under section 674 of the Act.
ASIC successfully appealed this decision to the Full Federal Court, which found that Fortescue and Mr Forrest had engaged in misleading and deceptive conduct, and therefore also contravened the continuous disclosure obligations. The finding was based on the relevant agreements not in fact being enforceable under Australian law. The Full Court came to this conclusion on the basis that essential matters such as detailed specifications for the scope of construction work, scheduling and price to be paid by Fortescue remained to be finalised. In reaching this conclusion, the Federal Court assumed that the ASX announcements were statements of fact accepted by the public at face value, and not statements of opinion (which had been the foundation of the analysis at first instance).
The parties’ contentions in the High Court
Several issues were raised by the parties in the appeal to the High Court. A number of these were not ultimately addressed by the High Court’s judgment because the High Court took a particular view on key questions in contention.
ASIC’s arguments amounted to two key contentions:
- first, Fortescue had falsely represented that it had entered into a binding contract with the Chinese entities. The Full Court was correct in holding that this was a statement of fact that was misleading because the framework agreements were not binding and not intended to be immediately binding; and
- secondly and alternatively, even if Fortescue’s statements were opinions, there was no genuine and/or reasonable basis on which Fortescue could have believed the framework agreements were binding given the evidence put forward at trial.
Fortescue appealed to the High Court seeking the reinstatement of the primary judge’s decision on the basis that:
- first, there was evidence that framework agreements were intended to be immediately binding;
- secondly and in the alternative, if the agreements were not in fact binding, the representations conveyed by the ASX announcements were opinions based on Fortescue’s reasonable belief that the agreements were binding; and
- finally, in relation to the continuous disclosure case, Fortescue argued that if a person knows the contents of a legal document but reasonably (though erroneously) believes it has a particular legal effect, they cannot be “aware” of the materiality of the contents and hence the disclosure obligations under section 674 do not arise.
The High Court’s findings
- No misleading and deceptive conduct
The High Court unanimously held that Fortescue did not engage in misleading and deceptive conduct.
French CJ, Gummow, Hayne and Kiefel JJ considered that it was unhelpful to attempt to classify the statements as either fact or opinion. Rather, the critical issue was to identify what the “impugned statements” conveyed to their audience. They found that the statements made by Fortescue conveyed a message about what the parties to the framework agreements had done and said they had done, rather than conveying a message about their absolute legal enforceability. They found the Full Federal Court erred in first, assuming that the message conveyed to the intended audience would be the absolute enforceability of the agreement and secondly, that the enforceability of the agreements would in fact be an issue decided under Australian law. They held that the “ordinary and reasonable” member of the intended audience would not ask a lawyer’s question, but would understand them as statements of what Fortescue and the Chinese entities had done and intended would happen in the future.
Justice Heydon adopted the taxonomy of distinguishing between statements of fact and opinion, holding that the statements about the agreements being binding were statements of opinion. However, Heydon J came to the same conclusion that there had been no misleading and deceptive conduct as, on the facts, ASIC did not make out that Fortescue knew the agreements were not binding, or that Fortescue did not have a reasonable basis for believing so.
- Continuous disclosure obligations were not triggered
The failure of the misleading and deceptive conduct case was sufficient to dispose of ASIC’s case for contravention of the continuous disclosure requirements. ASIC had mounted a cross-appeal that regardless of the effect of the public statements made, Fortescue was obliged to disclose the terms of the agreement under the continuous disclosure obligations of section 674 of the Act. However, this too was unanimously rejected by the High Court.
Next move to the ASX
ASX has held off releasing the new draft of its guidance on continuous disclosure (guidance note 8) until after the High Court’s ruling on this case. One thing is certain, the ASX will be carefully considering the statements made by the High Court. We may well see a guidance that is more focused on the subjective understanding of the audience of any continuous disclosure statements, rather than being as focused the objective accuracy of the statements, as would have been the case if the High Court had followed the views of the full Federal Court.