On 2 October 2012, the High Court of Australia delivered a win for Andrew Forrest and the Fortescue Metals Group over the corporate regulator, ASIC.  The High Court overturned a previous decision of the Full Court of the Federal Court of Australia that found Andrew Forrest and Fortescue had contravened, amongst other things, the false and misleading conduct and continuous disclosure provisions of the Corporations Act 2001 (Cth).

The background

In 2004, Fortescue released statements regarding three agreements between Fortescue and three Chinese state-owned entities.  The agreements related to the development of Fortescue’s proposed Pilbara Iron Ore and Infrastructure Project in Western Australia.  The central issue in the resultant proceedings was whether statements regarding the binding nature of the agreements were misleading or deceptive and whether Fortescue and Forrest knew the statements were misleading and deceptive.

The allegations

In March 2006, the corporate regulator commenced proceedings in the Federal Court of Australia seeking declarations that:

(a) the statements were misleading and deceptive;

(b) Fortescue and Mr Forrest had contravened the continuous disclosure requirements under the Corporations Act by failing to correct the statements when it was discovered that the agreements between Fortescue and the Chinese state-owned entities may not be binding; and

(c) in allowing the release of, and failing to update the statements, Mr Forrest had failed to discharge his statutory duties as a director of Fortescue with the requisite degree of care and diligence.

Whilst dismissed at first instance, the Full Court of the Federal Court allowed ASIC’s appeal and made declarations in respect of each of the matters listed above.  The misleading and deceptive conduct case run by ASIC, at first instance, focused on the honesty of Fortescue and Forrest.  Whereas the case on appeal before the Federal Court focused on what the statements would have conveyed to their intended audience.

For Mr Forrest, the main fear was that ASIC was seeking orders disqualifying him as a company director.

The decision

On 2 October 2012, the High Court of Australia unanimously allowed Fortescue’s and Mr Forrest’s appeal and reinstated the trial judge’s decision at first instance.

In delivering its decision, the High Court was critical of ASIC for leading a case that was not clear and distinct in its allegations against Fortescue and Forrest, and which had altered materially over time as a result. 

Four members of the Court concluded that:

(a) the statements made by Fortescue and Mr Forrest in relation to the agreements were not false or misleading as they conveyed to their intended audience:

      (i) that the parties had made the agreements;

      (ii) what the parties to the framework agreements had said in those
      agreements; and

      (iii) that the parties intended their agreements to be legally binding; and

(b) as a consequence:

      (i) Fortescue did not breach its continuous disclosure obligations; and

      (ii) Mr Forrest had not breached his statutory duties as a director, under the
      Corporations Act.

Justice Heydon stated that, in reviewing the statements, investors (notably sophisticated investors) were smart enough not to accept claims “about the imminent creation of wealth beyond the dreams of avarice” and were conscious of the difficulties of building mining infrastructure in the harsh Western Australian conditions.

To add insult to injury for ASIC, the Court ordered costs in favour of Fortescue and Mr Forrest.

The fallout

The High Court judgment deals very specifically with the facts of this case, and the Court did warn against the broader application of this judgment.  In saying that, this case has provided insight as to the application of the continuous disclosure provisions.  It confirms that companies are not required, in all circumstances, to release the document that is the subject of a public announcement, as it will often be inconvenient and counterproductive.  This being the case, a proper description of the contents of an agreement will generally be sufficient to avoid contraventions of the misleading and deceptive conduct, and continuous disclosure provisions of the Corporations Act, and will not necessarily be held to be a statement as to the legal enforceability of an agreement.  Each case will depend on its particular facts and the circumstances surrounding the entry into a bargain.

Similarly, with regard to misleading and deceptive conduct, the High Court has clarified the matters relevant for consideration in determining a contravention under the Corporations Act, and has provided significant guidance as to the manner in which an intended audience would receive and interpret a release to the market.

Initial (and varied) reactions to the decision indicate that:

(a) the continuous disclosure regime lies at the heart of ASIC’s strategic priority of maintaining fair and efficient financial markets and the integrity of the capital markets;

(b) despite its importance, the continuous disclosure regime is a complicated area of law within which some discern the evolution of systemic trends which may lead to a weakening of the regime and ASIC’s robust determination to enforce it;

(c) directors must ensure that they take great care when releasing statements to the market despite this indication from the Court that it will look to the commerciality of decisions made when assessing disclosure statements; and

(d) sophisticated investors should be “sufficiently tough, shrewd and sceptical” to know that contracts signed in overseas jurisdictions may not automatically be legally enforceable in Australia.