Focus: Fortescue 'binding agreements' announcements were not misleading
3 October 2012
In brief: In a decision handed down yesterday, the High Court unanimously held that Fortescue Metals Group Ltd's announcements to the ASX and media in 2004 stating it had reached 'binding agreements' with Chinese State-owned entities to build infrastructure in the Pilbara were not misleading despite the 'agreements' being substantially incomplete and not being legally enforceable in Australia. Partners Richard Harris (view CV) , Jeremy Low (view CV) , Senior Associate Andrew Byrne and Lawyer Alice Dillon comment on the decision and its implications for listed companies and directors.
- The initial appeal
- Misleading or deceptive conduct
- Continuous disclosure and duty of care and diligence
How does it affect you?
- The decision underlines that, in preparing ASX announcements and media releases, listed companies and their directors must pay close and careful attention (as a court ultimately would be required to do) to the context of the subject matter of the statements being made and the likely viewpoint of investors and the wider business and commercial community.
- When attention is paid to that context and audience, terms in ASX announcements or media releases that otherwise carry legal meaning in Australia (here, a 'binding agreement') may be understood to have a broader meaning particularly where the subject matter of the disclosure has international elements.
- Given the High Court's finding that the ASX announcements and media releases were not misleading, it was unnecessary for the court to consider the Full Federal Court's decision as it related to continuous disclosure obligations and the director's duty of care and diligence. Those aspects of the Full Federal Court's decision remain good law. That said, questions arising after the Full Federal Court's decision on the scope of the continuous disclosure obligation and its interaction with directors' duties remain unanswered.
- In its decision, the court was critical of ASIC's conduct of the case. Whether that criticism was wholly justified, it may affect the way ASIC selects future prosecutions and the manner in which it conducts them. It may augur a more conservative approach from the regulator.
Between August and November 2004, Fortescue issued a series of media releases and ASX announcements (pursuant to the ASX Listing Rules and continuous disclosure provisions in the Corporations Act 2001 (Cth)), approved by Chief Executive Officer Andrew Forrest, to the effect that it had entered into 'binding agreements' with three Chinese companies to finance and build mining infrastructure in the Pilbara (the agreements). The agreements contained express provisions indicating that the parties intended them to be binding (although evidence in the proceedings indicated that they were not enforceable in Australia). During that period, Fortescue's share price rose from 59c to $1.93. By March 2005, it had risen to $5.05.
In March 2005, an article in The Australian Financial Review asserted that the agreements were not binding on the Chinese companies and material provisions such as price and the scope of works remained to be agreed. This information appeared to cause a drop in the Fortescue share price and precipitated an investigation by ASIC.
In 2006, ASIC sued Fortescue in the Federal Court, alleging that the ASX announcements and media releases were misleading or likely to mislead (section 1041H) so far as they conveyed that the agreements were legally enforceable in Australia, and that Fortescue's failure to correct its earlier announcements contravened its continuous disclosure obligations (s674). ASIC also sued Mr Forrest on the basis that he was a person knowingly involved in Fortescue's contraventions of ss 1041H and 674 and had therefore breached his director's duty of care and diligence (s180).
The trial judge dismissed ASIC's claims in December 2009 on the basis that the statements were expressions of opinion, honestly and reasonably held by Fortescue and Mr Forrest.
Overturning that decision on appeal, the Full Federal Court found that Fortescue misled the market (on the basis, essentially, that the agreements were not, as a matter of Australian law, binding) and failed to comply with its continuous disclosure obligations by not correcting the erroneous statements. It also held that Mr Forrest was involved in Fortescue's contravention of continuous disclosure provisions and therefore breached his director's duty of care and due diligence (s180).
Fortescue and Mr Forrest were granted special leave to appeal to the High Court.
As to the message conveyed by the ASX announcements and media releases, the High Court considered three possibilities:
- they simply described what the agreements said;
- they conveyed that the agreements were legally enforceable; or
- they conveyed a mixed message as to the content of the agreements and their legal enforceability.
Having regard to the context and content of the ASX announcements and media releases and the intended audience, the court held that the first of those possibilities applied here and further determined that the statements accurately described what the agreements said. On that basis, the court concluded that the statements were not misleading.
In reaching this view, the court had specific regard to the fact that the counterparties to the agreements were Chinese State-owned enterprises against whom enforcement actions in Australia would be difficult and the law governing the agreements was not specified in the documents.
In essence, the High Court found that it was incorrect for the Full Federal Court to conclude that the general body of investors to whom the statements were made would assume that Fortescue intended, by the use of the words 'binding agreements', to convey that the agreements were enforceable in Australia. The High Court referred to the fact that ASIC had not led any evidence to suggest that investors or members of the business or commercial community would have understood the statements to convey that the agreements were legally enforceable in Australia. The court also suggested that many investors could have concluded that the reference to 'binding' may have been a reference to the position under Chinese law (although nothing was put forward to suggest that the agreements would be binding in China either).
In light of its finding that the Fortescue announcements were not misleading, the High Court found that it automatically followed that Fortescue had not breached the continuous disclosure obligation and Mr Forrest was not a person involved in a contravention of the legislation and had not breached his director's duty of care and diligence. Accordingly, the Full Federal Court's reasoning in relation to those issues has not been interfered with by the High Court's decision.
As such, listed companies and directors should assume that a contravention of s1041H by the issuing of misleading ASX announcements or media releases is likely to trigger contraventions of the continuous disclosure regime and, if a director is a person involved in any relevant misleading conduct, breaches of that director's duties to the company.
Among the issues which remain the subject of some uncertainty given the way the High Court dealt with the appeal is the potential difficulty for listed companies and their directors in reconciling , on the one hand, the requirement in ASX Listing Rule 3.1 for 'immediate' disclosure to the ASX of a matter likely to have a 'material' effect on the entity's price or value and, on the other hand, a director's duty to exercise care and diligence to make sure that any announcement is completely accurate. A further issue which arose on the Full Federal Court's judgment is whether, as the Full Federal Court appeared to find, being a director involved in a contravention of the misleading and deceptive conduct prohibitions would automatically also put that director in breach of their duty of care and diligence.
The High Court's discussion of the intended audience for the announcement also raises some interesting questions as to the level of sophistication and the degree of understanding of cross cultural business practices courts will assume. Justice Heydon's formulation of that assumption is particularly broad1. Exactly what degree of understanding can and cannot be assumed on the part of the relevant investing audience however remains unclear. Much of the reasoning in the decision around 'audience' may be distinguished to the particular facts of the case. We suggest that, despite the High Court's judgment, it would remain courageous for a company to disclose that it had reached 'binding agreements' in circumstances where those agreements were known not to be enforceable.
It is understood that the ASX has been holding off issuing an updated version of Guidance Note 8 on ASX Listing Rule 3.1 pending this decision of the High Court. It is unlikely that the decision will have any material effect on the note, or any further impact on the timing of it being issued.
- 'Fortescue's remarks were not directed to the public as a whole. They were directed to a section of the public. It comprised superannuation funds, other large institutions, other wealthy investors, stock brokers and other financial advisers, specialised financial journalists, as well as smaller investors reliant on advice. This was not a naive audience. It was not an audience in whom the adjectives "Western Australian", "mining" and "Chinese" would excite a sudden certainty about the imminent creation of wealth beyond the dreams of avarice. It was an audience conscious of the difficulties of creating infrastructure for mining projects in the harsh conditions of Western Australia. It was an audience conscious of their vast expense. It was an audience conscious of the problems of doing so in cooperation with a Chinese group described in the ASX announcement as China's largest construction group. And it would have learned not from the announcement itself but from the simultaneous media release that CREC was "a State-owned enterprise in China", the state in question being the People's Republic of China. The audience was sufficiently tough, shrewd and sceptical to know something of the difficulties of "forcing" a builder to build and finance anything. Whether an agreement can "force" one party to it to do something depends on whether another party can get the state to employ any "force" against that first party to do that thing.'
- Jeremy LowPartner,
Ph: +61 2 9230 4041
- Richard HarrisPartner,
Ph: +61 2 9230 4919
- Guy AlexanderPartner,
Ph: +61 2 9230 4874
- Jon WebsterPartner,
Ph: +61 3 9613 8832
- Belinda ThompsonPartner,
Ph: +61 3 9613 8667
- Geoff RankinPartner,
Ph: +61 7 3334 3235
- Philip BlaxillPartner,
Ph: +61 8 9488 3739
- Andrew PascoePartner,
Ph: +61 8 9488 3741