On Tuesday this week, the High Court handed down its unanimous decision in Forrest v ASIC; Fortescue Metals Group Ltd v ASIC  HCA 39. It found that announcements that Fortescue had signed 'binding contracts' with Chinese entities to build and finance an iron ore mine, railway and port in the Pilbara were not misleading or deceptive.
Consequently, it held that Fortescue had not contravened its continuous disclosure obligations, and that its chairman, Andrew Forrest, had not contravened his duties as a director. It ordered that the appeal by Fortescue and Mr Forrest be allowed with costs.
In considering whether the announcements were misleading, the High Court determined that it is appropriate to consider how investors would have interpreted the announcement, rather than to ask the lawyer's question of whether the agreements were enforceable in an Australian court. The High Court indicated that an accurate summary of a contract is sufficient disclosure for the purposes of making an investment decision.
The High Court was critical of the Australian Securities and Investment Commission's (ASIC's) case and pleadings. It is likely that the High Court's findings will result in both ASIC and the Australian Securities Exchange (ASX) reconsidering their approach to disclosures made in the market.
Key facts of the case
In 2004 Fortescue entered into framework agreements with three state-owned entities of the People's Republic of China. The agreements related to the construction and financing of a mine, port and railway as part of the proposed Pilbara Iron Ore and Infrastructure Project. One of the agreements was with China Railway Engineering Corporation (CREC).
During 2004 and 2005, Fortescue made various communications to ASX and the media, including an announcement on 23 August 2004 that it had entered into a 'binding contract' with CREC to build and finance the railway component of the project. While the agreements ultimately were abandoned, the CREC agreement outlined the scope of the relevant works to be performed by CREC and Fortescue's payment obligations. It included clauses to the effect that the agreement:
- Will become binding upon the approval of both parties' boards
- Represents an agreement in itself and a more detailed agreement, not different in intent from this agreement, will be developed later.
ASIC argued that various communications by Fortescue overstated the substance and effect of the agreements and the words 'agreement' or 'binding agreement' indicated that the contracts were enforceable under Australian law. On this basis, ASIC alleged that:
- Fortescue engaged in misleading and deceptive conduct, or conduct likely to mislead and deceive, contrary to s1041H of the Corporations Act 2001 (Cth) (the Act), that it and Mr Forrest were fraudulent and knew of the 'gap' between the content of the announcements and the reality of the contracts such that there was no genuine and/or reasonable basis for making the statements, or they ought reasonably to have known there was no such basis
- Fortescue contravened the continuous disclosure provisions of s674 of the Act in failing to correct the false or misleading information
- Mr Forrest breached his directors' duties under s180 to act with care and diligence and breached s674 in respect of each of Fortescue's breaches. ASIC sought orders for his disqualification from acting as a director.
The trial judge dismissed ASIC's claims in 2009. The Full Court of the Federal Court of Australia held in 2011 that Fortescue had engaged in misleading or deceptive contact and had contravened its disclosure obligations, and that Mr Forrest had contravened the Act.
The High Court's findings
On appeal, the High Court found that:
- ASIC did not establish that Fortescue or Mr Forrest were fraudulent in relation to the statements or that they were engaged in misleading or deceptive conduct
- Given this finding, ASIC's other allegations against Fortescue and Mr Forrest fell away
- The announcement correctly represented that there was an agreement and that the parties intended it to be binding upon board approval
- The agreements imposed binding obligations on the parties and it was not necessary to consider whether they were enforceable under Australian law for the purposes of the announcement. Attempts to strike a better bargain in forming the final agreements did not show that the parties were not bound or that they did not intend to be bound.
- Contrary to other of ASIC's arguments, Fortescue was not required to disclose the full terms of the agreements under s674, and an accurate summary is all that is necessary.
In determining that the announcement was not misleading or deceptive, the key consideration for the High Court was whether an ordinary or reasonable member of the audience would understand the announcements as making representations about the enforceability of agreements at Australian law.
It determined that this must be done with a close and careful analysis of the facts. No evidence was provided to indicate that the audience took the announcement in the way that ASIC proposed. Therefore the court made up its own mind as to what the audience understood.
It considered that the audience would not ask the lawyer's questions as to what could or would happen in a court if the parties fell out at a future time, and decided that the audience for announcements is concerned with what the parties understood they had done and intended would happen. It disagreed with ASIC's contention that the words 'contract' and 'agreement' imply a message about legal enforceability in an Australian court.
Disclosure after Fortescue
The lessons for companies include:
- Investors don't think like lawyers - investors will take what is said in announcements as a statement of what the parties understood they had done and intend will happen
- The audience for announcements is not naive - companies should consider what a reasonable investor would understand from their announcements
- Investors don't need the whole agreement - a concise, accurate summary is sufficient
- The rules have not changed - the law on misleading and deceptive conduct, continuous disclosure and directors' duties remains the same following the High Court's decision, however each case will turn on its facts and the nature of the pleadings
- Binding agreements are disclosable - if an agreement states that it is binding and contains details of further bargains intended to be struck, that agreement binds the parties to negotiate the further agreements and is generally disclosable.
While the thrust of ASIC's arguments seem to be that investors should be made aware of the generally difficult to enforce nature of agreements to agree, this case demonstrates the High Court's view that investors are more savvy and a complete technical analysis of agreements is not necessary.
ASIC Deputy Chairman, Belinda Gibson has flagged that it will consider, along with ASX, what the market would regard as a sufficient statement about an agreement and what is necessary for the purpose of making an investment decision. It will be interesting to see whether ASX's revised Guidance Note 8, due to be released for discussion shortly, will reflect the High Court's findings.
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