The highly anticipated judgment in ASIC's joint action against Fortescue Metals and Andrew Forrest was handed down by the High Court of Australia yesterday.
ASIC initiated actions against Fortescue Metals and Mr Forrest in 2006, alleging that agreements entered into with Chinese entities that Fortescue had disclosed as binding were in fact not enforceable under Australian law, constituting misleading and deceptive conduct under the Corporations Act.
In a unanimous decision, the High Court determined that the disclosure was not misleading or deceptive, because the wording used was not misleading in these particular circumstances.
Partner Michael Hansel and associate Richard Hanel outline the proceedings and what company directors can learn from this decision.
Key lessons from this decision
While ASIC was unsuccessful in this instance, the action taken against Fortescue Metals and Mr Forrest, and the High Court's decision, provide some important lessons for company directors.
- ASIC is serious in its pursuit of what it believes are breaches of the continuous disclosure obligations by listed entities, even though it may need to reconsider the manner in which it prepares its pleadings in future proceedings. This decision was fact based and is unlikely to deter ASIC from monitoring and enforcing continuous disclosure obligations.
- In order to avoid investigation or further action by ASIC, directors should pay careful attention to the wording used in announcements, whether in relation to agreements entered into or more generally. Directors need to take into account:
- the potential target audience of the announcement (in this instance the Court determined that the target audience was reasonably sophisticated); and
- whether the message being conveyed is capable of being construed as misleading or deceptive by that identified target audience.
Background to this case
In 2004, Fortescue Metals disclosed that it had entered into binding agreements with three state-owned Chinese entities to develop infrastructure for its Pilbra project. ASIC initiated actions against Fortescue and Mr Forrest in 2006, alleging that the agreements were not binding because they were not enforceable under Australian law, and that the disclosure therefore constituted 'misleading and deceptive conduct' under the Corporations Act. It was alleged that Fortescue was in breach of its continuous disclosure obligations, and that Mr Forrest was in breach of his duties as a director under the Corporations Act.
ASIC argued that the agreements were not enforceable under Australian law because provisions setting out or providing for the determination of key commercial matters were missing, rendering the agreements incomplete.
ASIC was unsuccessful on its initial application to the Federal Court, but was successful on appeal to the Full Court of the Federal Court. Fortescue Metals and Mr Forrest applied for, and were granted, special leave to appeal to the High Court.
The High Court's decision
At the core of this decision is the Court's detailed consideration of the meaning that the statement 'binding contract' conveyed to the intended audience. The Court outlined three possible constructions of this statement:
- The statement conveyed a message about what the agreements said.
- The statement conveyed a message about the legal enforceability of the agreements.
- The statement conveyed a combination of the first two possible constructions.
The agreements Fortescue entered into contained several clauses that stated that while a more detailed agreement would be developed and entered into in the future which would reflect the same intent as the initial agreement, the initial agreement was an agreement in itself, and would become binding on acceptance by the board of each party.
The High Court determined that, in these particular circumstances, the first approach to construction as outlined above was to apply, as the agreements clearly stated that they were legally binding and the disclosure by Fortescue conveyed that message. Beyond that, it was going too far to suggest that the disclosure conveyed any message about the legal quality of the agreements. The High Court noted that ASIC did not present any evidence to suggest that a member of the intended target audience (identified by the majority of the Court as investors, comprising both present and possible future investors, and perhaps some wider section of the business or commercial community) would have understood the disclosure to be conveying a message that the agreements could, and would, be enforced by an Australian Court under Australian law if a dispute was to arise from them.
The High Court observed that:
- all agreements were silent as to the jurisdiction that applied to them;
- the other parties to the agreements were Chinese state-owned entities, and an elaborate and formal signing ceremony had been conducted in China; and
- even though the infrastructure covered by the agreements was based in Australia, it was not justified in these circumstances to assume that the legal character of the documents was to be determined by an Australian court.
The Court also examined exchanges of draft agreements and emails between Fortescue Metals and the Chinese entities, looking at the terms that should be contained in the detailed agreements. The Court held that while each party had sought to negotiate better terms for itself during development of the detailed agreements, this did not demonstrate that the parties were not bound by, or intended to be bound by, the initial agreement that had been entered into.
In handing down its decision, the High Court also made the point that:
- the decision was based on a close and careful analysis of the facts and does not establish any general proposition in relation to contracts between parties; and
- the critical question when assessing a claim for misleading and deceptive conduct is not the message that the parties intended to convey to the target audience, but the message that is conveyed to that audience.
As the disclosure was not misleading or deceptive, the High Court also found that it could not be established that Fortescue Metals had breached its continuous disclosure obligations or, in turn, that Mr Forrest had breach his duties as director of Fortescue.
The High Court was highly critical that ASIC had made multiple, fall back and radically different arguments to justify its case against Fortescue Metals and Mr Forrest, which failed to present the claim in a clear and distinct manner fundamental to the conduct of a fair trial. Accordingly, ASIC will need to be more careful in the manner in which it frames its pleadings and approaches enforcement of contraventions of the Corporations Act in the future.
ASIC has indicated that it will review the decision and the impact it will have on the application of continuous disclosure requirements. We will keep you informed of further developments in this area.
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