|Focus:||Forrest v Australian Securities and Investments Commission  HCA 39|
The High Court has unanimously held 1 that announcements by Fortescue Metals Group Ltd ("Fortescue") that Fortescue had entered into 'binding contracts' with state-owned Chinese entities were not misleading or deceptive because the statements accurately conveyed the parties' understanding and did not equate to an opinion as to how the courts might treat the agreements. Accordingly, Fortescue did not breach continuous disclosure requirements, nor did the Chairman/CEO breach his duties as a director to act with due care and diligence.
In 2004, Fortescue made various announcements by way of releases to the ASX and media concerning 'binding contracts' it had made with state-owned Chinese entities to build and finance a railway, port and mine project in the Pilbara region of Western Australia. The "Framework Agreements" were expressed to become binding upon board approval, and also contemplated that the parties would later enter into more detailed agreements reflecting the terms of the Framework Agreements.
In 2005, an article in the financial press suggested that the contracts were not binding.
In 2006, ASIC commenced proceedings against Fortescue in the Federal Court of Australia alleging that the agreements announced by Fortescue in 2004 were not 'binding' because they did not contain the essential elements of a contract in accordance with Australian law, nor were they legally enforceable in an Australian court.
Based on this proposition, ASIC pleaded that:
- Fortescue engaged in misleading or deceptive conduct, or conduct likely to mislead or deceive, because it knew the announcements were false and it did not have a genuine and reasonable basis for making the announcements;
- Fortescue contravened the continuous disclosure requirements by failing to correct the misleading announcements; and
- Mr Forrest, Fortescue's Chairman and CEO, had not exercised his powers or discharged his duties as a director with the degree of care and diligence required by the Act.
The Federal Court's decision
The Full Court of the Federal Court found that Fortescue's announcements describing the framework agreements as 'binding contracts' were misleading or deceptive, or likely to mislead or deceive, because they conveyed the view that they were complete contracts that would be enforceable under Australian law. According to the Full Federal Court, Fortescue's announcements accurately reflected the contents of the agreements but they misrepresented their legal effect.
The High Court's decision
The High Court reversed the decision of the Federal Court, finding that the statements were not misleading or deceptive. Therefore Fortescue did not contravene the continuous disclosure requirements of the Act, and Mr Forrest did not fail to exercise his powers or discharge his duties as a director with the degree of care and diligence required by the Act.
The High Court criticised the Federal Court's decision on the basis that it wrongly assumed that the announcements conveyed an intention that the legal effect of the agreements would be determined in accordance with Australian law, ignoring the fact that the other parties to the agreements were foreign state-owned entities.
The High Court found:
- that Fortescue accurately conveyed the contents of the agreements and the parties' genuine intention that those agreements be binding on them;
- that Fortescue's later attempt to negotiate into a better position than that in the Framework Agreement did not in itself show that the original agreement was not intended to be binding;
- that Fortescue did not intend to convey an opinion as to the legal effect of the agreements; and
- that Fortescue did not need to release the full text of the agreements in order to comply with its continuous disclosure obligations.
The High Court also considered the intended audience, observing that the ordinary or reasonable member of the business and commercial community would not "ask a lawyer's question" and consider how the courts might handle the agreements in future, but would take the announcements as statements of the parties' understanding and intentions at the time of the announcements.
Points of comfort from the High Court decision
The decision gives some comfort to listed entities by confirming that investors are a 'savvy' audience but that they do not approach information in the same way a lawyer might.
The decision also confirms what is already well established:
- Companies need not publish entire agreements, but must accurately describe their key features; and
- Agreements 'binding' parties to negotiate further agreements should be disclosed to the ASX at the time the first agreement is concluded.
Challenges illustrated by the High Court decision
- Continuous disclosure is a testing process because disclosures are reviewed "with the benefit of hindsight".
- Defending a challenge to a company's disclosure practices is a lengthy and expensive process. Therefore, listed companies need to:
- ensure that their process for updating the market includes appropriate levels of review to balance the demands of speed and accuracy;
- examine draft announcements "with a fresh pair of eyes", remembering that their audience will not be as deeply involved with the business issues as those who draft the announcements.
The ASX has announced that it will issue a revised version of Guidance Note 8 – Continuous Disclosure: Listing Rule 3.1. The revision has been "in the pipeline" for some months, but was held back pending the release of this decision.
1 Forrest v Australian Securities and Investments Commission  HCA 39.
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