The corporate regulator's recent track record in
relation to the prosecution of directors continued on 23 December
2009 when Justice Gilmour of the Federal Court handed down judgment
in Australian Securities & Investments Commission v
Fortescue Metals Group Ltd [No 5]  FCA 1586. The case
contains important considerations for D&O insurers in respect
of a common D&O policy exclusion – dishonesty.
The case related to events occurring in and after 2004 when
Fortescue Metals Group Ltd (FMG) made disclosures
to the ASX that it had entered into "binding" framework
agreements with Chinese contractors to build mining infrastructure
in Western Australia. The popular view in the media following the
disclosures in 2004 was that FMG was a new player in the Western
Australian mining industry that had previously been duopolised by
BHP and Rio Tinto.
The binding nature of the agreements was subsequently thrown
into doubt and in 2006 ASIC issued proceedings against FMG and Mr
Forrest, FMG's CEO. According to ASIC, the disclosures had
"a positive material effect on the price of FMG's
shares" and had been made dishonestly as they "were
false, unqualified and emphatic as to the significance and effect
of the framework agreements". In its case against Mr Forrest,
ASIC alleged breaches of the Corporations Act 2001, including
failing to exercise care and diligence as a director (section
180(1)) and contravention of the accessorial liability provision of
the continuous disclosure regime (section 674(2A)). Mr Forrest
maintained that the disclosures were correct.
ASIC's claim failed. Justice Gilmour found on the
evidence that Mr Forrest had obtained "competent professional
legal oversight" in relation to the disclosures, had
previously been involved in litigation involving similar agreements
which were held to be valid and binding, and at least one of the
Chinese contractors had engaged in conduct which was consistent
with Mr Forrest's view that the framework agreements were
Costs were awarded against ASIC. Justice Gilmour noted that:
"[I]t is important that allegations of dishonesty should be
made only where there is a reasonable evidentiary basis for them.
It is my opinion that on the totality of the evidence available to
ASIC there was no such basis in this case."
ASIC is in the process of appealing the decision.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).