Australian Securities and Investments Commission (ASIC) appealed because the case raised important issues concerning:
- A listed entity’s obligations to disclose information under the continuous disclosure provisions of the Australian Stock Exchange (ASX) Listing Rules and the Corporations Act, 2001 (Cth) (Act).
- The operation of the misleading and deceptive conduct provisions of the Act, particularly statements concerning the contents, effect or enforceability of commercial agreements
- The role and duties of directors and officers in making statements to the ASX and the investing public, particularly those concerning the contents, effect or enforceability of commercial agreements.
By way of summary, the Full Court found that:
- Fortescue Metals Group Limited (FMGL) engaged in conduct which was, or was likely to be, misleading or deceptive and breached its continuous disclosure obligations
- Mr Forrest was knowingly involved in FMGL’s contravention of its continuous disclosure obligations and also breached his duty of care and diligence to FMGL.
The original proceedings arose out of information disclosed to the market by FMGL concerning certain framework agreements between FMGL and three major state-owned Chinese companies. These agreements related to the development of a mine and associated infrastructure for the mining and export of iron ore in Western Australia’s Pilbara region.
The agreements clearly demonstrated the parties’ intentions to create particular binding obligations but a number of matters were left open for future negotiation between the parties.
In the period 23 August 2004 to 1 March 2005, FMGL disclosed a series of announcements, media releases and investor presentations to the ASX concerning the nature of the framework agreements, in a bid to comply with its continuous disclosure obligations under the relevant legislation. The major focus of the announcements was that FMGL had executed binding agreements with the Chinese companies to complete the proposed developments and to disclose the operation of the agreements.
ASIC claimed the public announcements by FMGL overstated the substance and effect of the agreements (for the proposed developments) with the Chinese companies as they did not contain agreed terms as to price, scope or scheduling. This resulted in the markets and investors being misled as to the true status of the framework agreements (until the true content of the agreements was disclosed six months later).
ASIC also claimed that FMGL failed to act in accordance with the continuous disclosure obligations under the Act by failing to accurately disclose the contents of the agreements and by failing to amend the misleading information provided in the announcements.
ASIC alleged that Mr Forrest knew of the disparity between what was represented to the public and what was actually contained in the framework agreements and that this contributed to the imposition of a pecuniary penalty on FMGL. ASIC asserted that Mr Forrest was knowingly involved in FMGL’s alleged contraventions and breached his duty of care and diligence (as a director of the company) by failing to ensure that FMGL complied with the continuous disclosure provisions.
Was the relevant conduct misleading or deceptive?
ASIC made the following submissions regarding the misleading statements made by FMGL, with which the Court ultimately agreed:
- A statement of the terms of each of the framework agreements, or of their legal effect was likely to influence investors in deciding whether to acquire or dispose of shares in FMGL
- Alternatively, once investors had been told that FMGL had made binding agreements with the Chinese contractors to build, finance and transfer the infrastructure, information that these statements were in error was likely to influence investors in deciding whether to acquire or dispose of shares in FMGL.
The Court focused on what reasonable members of the investing public would have ordinarily understood from the various announcements made by FMGL, in deciding whether the relevant conduct of FMGL was misleading or deceptive, or likely to mislead or deceive.
The Court held that the various statements made by FMGL would not have been perceived as statements of opinion. The Court was of the view that the statements suggested, without doubt, that the Chinese companies had assumed legally enforceable obligations to build the infrastructure. They would have been understood as conveying the historical fact that agreements containing terms accurately summarised in the announcements had been made between the parties.
Continuous Disclosure Obligations
In light of the Court’s finding that the framework agreements were not binding on the parties, the Court held that FMGL’s contravention of the continuous disclosure obligations was a failure to disclose the actual terms or accurately portray the nature of the framework agreements.
Following the disclosure to the market of misleading information, FMGL was under an obligation to provide the information that reflected the true position, which would have amended the misleading statements pursuant to the Act.
The Court considered that the legislation does not, in terms, impose an obligation upon FMGL to correct information already provided to the ASX. The focus of the provision is upon the continuing notification of information. The fact that the later provision of information may, in its effect, correct a misstatement in a notification made earlier, is merely a consequence of compliance (with the legislation).
Mr Forrest’s Duties as a Director
The Court held that Mr Forrest did not take all reasonable steps to ensure compliance with FMGL’s disclosure obligations and therefore breached his duty of care and diligence in his position as a director of the company.
The Court found that Mr Forrest was knowingly involved in the relevant events giving rise to FMGL’s announcements to the public which were, or were likely to be, misleading or deceptive. The Court held that Mr Forrest was aware of the terms of the framework agreements; and it could reasonably be inferred that he knew of the discrepancy between those terms and FMGL’s representations about them.
In Mr Forrest’s defence, it was argued that he took all steps that were reasonable in the circumstances to ensure that FMGL complied with its obligations and, after doing so, he believed on reasonable grounds that FMGL was so complying.
The Court found that the defence was not available to Mr Forrest. Despite seeking legal advice after the misleading statements were disclosed to the public, there was nothing to suggest that he took steps to ensure that the framework agreements were, in law, binding agreements before their content was made public by FMGL. Also, ASIC was able to show that Mr Forrest’s own communications were inconsistent with a belief on his part that FMGL had made a binding agreement for the construction of the infrastructure for the Project.
The matter has been remitted to the Federal Court for the imposition of penalty upon FMGL and Mr Forrest.
In light of this unanimous decision of the Full Federal Court, companies and their directors should ensure they are vigilant in making announcements to the market and the public. The decision reinforces the judicial position regarding the significance of continuous disclosure, which maintains confidence and integrity within the market.