Jurisdiction - Australia
News
Australia – High Court Upholds Fortescue Appeal: Fortescue And Mr Forrest Successful.

15 October, 2012

 

In brief

 

  • The High Court unanimously overturned the decision of the Full Federal Court which had found that Fortescue Metals Group Limited engaged in misleading and deceptive conduct by announcing that it had entered into “binding contracts” with three Chinese state-owned enterprises and that, as a result of Fortescue misrepresenting the effect of the agreements, it had contravened the continuous disclosure provisions of the Corporations Act 2001 (Cth) (“Corporations Act“). The High Court also dismissed ASIC’s allegation that Mr Andrew Forrest (who was the CEO of Fortescue at the relevant time), had breached his duty of care and diligence by being knowingly involved in Fortescue’s contravention of the Corporations Act.
  • The High Court held that Fortescue’s announcements ought to be interpreted in light of its intended audience, namely investors and perhaps some wider section of the commercial or business community. This audience would have interpreted “binding contract” as a description of what the parties to the agreement understood they had done and intended would happen in the future. They would not ask what could or would happen in a court if the parties to the agreement fell out at some future time, as a lawyer would ask.
  • The Fortescue decision turns on the particular facts of the case and the High Court did not engage in a broader examination of the misleading and deceptive provisions of the Corporations Act, or the relationship between those provisions and the continuous disclosure regime. In fact, the High Court carefully limited the scope of its judgment and emphasised that whether a statement is misleading or deceptive will depend on the message which is conveyed to the intended audience. The decision reaffirms that the content of any market releases, analyst briefings or presentations and speeches by key personnel should be carefully reviewed to ensure that it is not misleading or deceptive.

 

Background

 

In the second half of 2004, Fortescue announced that it had entered into “binding contracts” with three Chinese state-owned enterprises to build, finance and transfer infrastructure for a mining project in Western Australia. The contracts (which were titled “framework agreements”) stated that the parties intended to create certain binding obligations. A number of matters, however, were left to be negotiated between the parties, including the scope of works and the price to be paid by Fortescue.

 

In March 2005, an article was published in the financial press suggesting that the agreements were not binding. Fortescue responded to this suggestion by providing ASX with a copy of two of the framework agreements. ASIC then instituted Federal Court proceedings in 2006 alleging that Fortescue had breached section 1041H of the Corporations Act by publishing notices in relation to a financial product (ie shares in Fortescue) that were misleading or deceptive or likely to mislead or deceive (ie by representing that the framework agreements were legally enforceable in Australia when in fact they were not). ASIC further alleged that Fortescue contravened the continuous disclosure requirements contained in section 674 of the Corporations Act by failing to disclose the true effect of the framework  agreements and that, as a consequence of breaches of sections 1041H and 674 of the Corporations Act, Mr Forrest had not exercised his powers or discharged his duties as a director of Fortescue with the degree of care and diligence required by section 180(1) of the Corporations Act.

 

ASIC’s claims were dismissed at first instance by Gilmour J, who held that the description of the frameworks agreements as “binding” was an expression of opinion, honestly and reasonably held. On appeal, ASIC’s claims were upheld by the Full Federal Court in a decision handed down last year. The Full Federal Court found that because the framework agreements would not be enforceable under Australian law, it was misleading or deceptive to describe them as “binding”. The Court made declarations of contravention and remitted questions about penalty for contravention for consideration by a single judge. Fortescue and Mr Forrest successfully applied for special leave to the High Court.

For a snapshot of the timeline, please click here.

 

High Court decision

 

The High Court unanimously allowed Mr Forrest’s and Fortescue’s appeal.

 

Misleading or deceptive conduct

 

In rejecting the approach taken by Gilmour J at first instance, the High Court confirmed that the correct approach to determining liability for misleading or deceptive conduct under section 1041H is to examine the alleged misleading or deceptive statement by reference to the message conveyed to its intended audience. It was not relevant for the High Court to consider whether Fortescue had a “genuine or reasonable basis” for making the statements.

 

What did the announcements convey to the intended audience?

 

The High Court distilled the complex arguments pleaded by ASIC into two simple questions: first, what did Fortescue’s announcements convey to their intended audience when they said that the parties to each agreement had made a “binding contract”? Second, was what was conveyed misleading or deceptive or likely to mislead or deceive? Of these two questions, the first was determinative.

 

The High Court considered that the announcements could be interpreted in three possible ways:

 

  • they conveyed a message about what the agreements said;
  • they conveyed some message about the legal enforceability of the agreements; or
  • they conveyed a message which was a mixture of the above.

 

Of these three possible interpretations, the first was preferred. According to that interpretation, the announcements conveyed a message about a historical fact, namely what the parties to the agreements had done and said they had done.

 

The first interpretation was preferred in light of the intended audience of the announcements. The High Court identified the intended audience as present and future investors and, perhaps, as some wider section of the commercial or business community. Heydon J went further than the majority in his description of the intended audience, noting that they would not be naïve and would be conscious of both the identity of the counterparties as Chinese state-owned enterprises and the difficulties in creating infrastructure for mining projects in Western Australia.

 

When told that Fortescue had made “binding contracts” with Chinese state-owned enterprises, the High Court found that this audience would take what was said as a statement of what the parties to the agreements understood they had done and intended would happen in the future. The fact that Mr Forrest had sought to use further negotiations to improve Fortescue’s position did not, without more, demonstrate that the parties were not bound by the agreements, nor did it demonstrate that the parties did not intend to be bound by their bargain.

 

The High Court also found that the intended audience would not, as the Full Federal Court had assumed, ask a lawyer’s question, looking not only to what the parties had said and done but also to what could or would happen in a court if the parties to the agreement fell out at some future time. The High Court found that ASIC had not proved that the intended audience would have understood the announcements to have conveyed that the agreements were legally enforceable in Australia.

 

Was what was conveyed misleading or deceptive or likely to mislead or deceive? As ASIC had expressly accepted at trial, the High Court found that the announcements accurately recorded that the parties to each framework agreement had made an agreement which said that the bargain was, and was intended by the parties to be, legally binding. As the High Court had already established that an “ordinary or reasonable member” of the intended audience would understand that the announcements conveyed a historical fact, and not a broader message that the agreements the parties had made would not be open to legal challenge in an Australian court, the announcements were not misleading or deceptive or likely to mislead or deceive.

 

Interestingly, the High Court also noted that, contrary to the assumption of ASIC and the Federal Court, even if it was held that the intended audience of the announcements would have understood them to convey the message that the framework agreements were not open to challenge in a court of law, there was no evidential basis for assuming that Australian law would apply instead of Chinese law.

 

Continuous disclosure

 

As ASIC failed to establish that Fortescue engaged in misleading or deceptive conduct contrary to section 1041H, it followed that Fortescue had not contravened the continuous disclosure requirements contained in section 674 by misrepresenting the effect of the agreements.

 

The High Court also dismissed ASIC’s alternative argument that even if the statements were not misleading or deceptive, Fortescue was nonetheless bound to disclose the terms of the framework agreements themselves, rather than just issuing statements about what it thought to be the effect of those agreements. Heydon J again went further than the majority finding that if Fortescue was required to disclose the totality of the agreements under section 674, then that would compel other companies entering into more bulky agreements to do the same. This, he described, “would not have assisted the cause of ensuring a speedily informed market”.

 

Directors’ duties

 

Having failed to demonstrate that Fortescue had contravened sections 1041H and 674, ASIC’s claim that Mr Forrest did not exercise his duty of care and diligence to the degree required by section 180(1) also failed.

 

Final note

 

Despite the outcome of the High Court’s decision in the Fortescue case (which turned on the specific facts of the case), contraventions of the misleading or deceptive conduct provisions of the Corporations Act still have the potential to give rise to liability under the continuous disclosure regime and directors may be liable for their participation in approving statements which are misleading or deceptive. Care should still be taken to ensure that market releases, analyst briefings or presentations and speeches by key personnel are not misleading or deceptive.

It is expected that the ASX will be releasing its revised Guidance Note 8 on ASX Listing Rule 3.1 on continuous disclosure in a matter of weeks. This revised guidance will prove interesting reading in light of the High Court’s decision in Fortescue.

 

 

 

For further information, please contact:

 

Sarah Dulhunty, Partner, Ashurst
 
David Ryan, Partner, Ashurst
 
Angela Pearsall, Partner, Ashurst
 
Lisa d’Oliveyra, Ashurst
 
Scott Lai, Ashurst

 

Ashurst Corporate/M&A Practice Profile in Australia

 

Homegrown Corporate/M&A Law Firms in Australia

 

 

Leave a Reply

You must be logged in to post a comment.