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Focus: Fortescue appeal decision confirms high continuous disclosure standards

25 February 2011

In brief: The Full Federal Court recently handed down its appeal decision overturning the trial judge, and finding that Fortescue Metals Group misled the market and failed to comply with its continuous disclosure obligations in connection with announcements to the ASX and the media in 2004. Partner Richard Harris (view CV), Senior Associate Andrew Byrne and Lawyer Rima Hor comment on the implications for listed companies and their directors and officers.

How does it affect you?

  • Announcements to the Australian Securities Exchange (the ASX) and media in respect of the terms or effect of agreements entered into by a company must be worded carefully to avoid conveying the impression that they are certain where in fact there may be an element of doubt. If an announcement is intended only to set out an opinion of directors or officers, this should be made clear.
  • If an erroneous announcement is inadvertently made to the ASX, a company should be quick to correct it, to minimise the risk of prosecution for contravention of the continuous disclosure rules.
  • Directors or officers involved in the approval of an erroneous announcement cannot rely on the 'business judgment rule' to defend a claim of breach of his or her duty of care and diligence.
  • Directors and officers should ensure they can demonstrate that they have taken reasonable steps in respect of company announcements so as to avoid personal liability for a company's contravention of the continuous disclosure rules.

Relevant facts

Between August and November 2004, Fortescue issued a series of media releases and ASX announcements, approved by Chief Executive Officer Andrew Forrest, to the effect that it had entered into 'binding agreements' with Chinese companies to finance and build mining infrastructure. Over that period, Fortescue's share price rose from 59c to $1.93. By March 2005, it had risen further to $5.05.

In March 2005, an article in the Australian Financial Review asserted that the agreements did not bind the Chinese companies to finance and build the infrastructure but merely obliged them to engage in further negotiations. Fortescue's share price dropped. In late March, Fortescue provided copies of the agreements to the ASX.

In 2006, the Australian Securities and Investments Commission (ASIC) sued Fortescue in the Federal Court, alleging that the ASX announcements and media releases were misleading or likely to mislead (section 1041H, Corporations Act 2001 (Cth)), as they conveyed to members of the investing public that the agreements immediately bound the Chinese companies to finance and build the infrastructure. ASIC also alleged that Fortescue's failure, until March 2005, to provide the terms of the agreements to the ASX or to correct its earlier announcements contravened its continuous disclosure obligations (s674). ASIC also sued Mr Forrest on the basis that he was involved in Fortescue's alleged contraventions of ss 1041H and 674, and had breached his director's duty of care and diligence by allowing Fortescue's conduct.

The original trial judge dismissed ASIC's claim in December 2009. ASIC appealed to the Full Court. Key matters that arise from the appeal decision, handed down in favour of ASIC on 18 February 2011, are summarised below.

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Misleading announcements

Fortescue argued that the ASX announcements and media releases were not misleading or likely to mislead because they were, or would have been, understood by members of the investing public as statements of Fortescue's opinion that the agreements bound the Chinese companies to finance and build the infrastructure, and Fortescue genuinely and reasonably held that belief.

Rejecting this argument, the Full Court held that ordinary and reasonable members of the investing public would have understood the announcements and releases as conveying that the Chinese companies were immediately bound to finance and build the infrastructure. In this respect, the court noted that the subjective understanding of Fortescue and the opinions of its directors in relation to the agreements were irrelevant for the purposes of whether or not the statements were misleading.

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Continuous disclosure

The Full Court also found that, once Fortescue determined that its original announcements may have been misleading, the company's continuous disclosure obligations required Fortescue to correct them. Although the court acknowledged that the need to publish corrective information depends on the circumstances, it rejected Fortescue's argument that corrective disclosure was only required if the announcements in question had had a material positive effect on the price of Fortescue's shares. To this end, the court noted that the 'likely influence' test provided by s677 is not a high threshold and suggested that any movement in share price may assist the court when applying the test.

The court also rejected Mr Forrest's argument that he had taken all reasonable steps to ensure that Fortescue complied with its continuous disclosure obligations and should therefore be relieved of any personal liability by virtue of s674(2B). In this respect, the court had regard to Mr Forrest's apparent failure to obtain legal advice on effect of the Chinese agreements prior to issuing the ASX announcements and media releases.

The court also accepted that Mr Forrest's conduct after the announcements and media releases suggested that he was aware that the agreements did not immediately bind the Chinese companies to finance and build the infrastructure.

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Duty of care and diligence

In addition, the Full Court held that Mr Forrest breached his director's duty of care and due diligence (s180) by allowing Fortescue to breach its continuous disclosure obligations, and rejected Mr Forrest's defence that his conduct in respect of the ASX announcements and media releases was relieved by the 'business judgment rule'. In this respect, the court determined that a decision not to comply with continuous disclosure obligations cannot be described as 'business judgment'; rather, it is a decision related to compliance with requirements of the Corporations Act.

On 21 February 2011, Mr Forrest announced that he and Fortescue intend to apply for special leave to appeal the decision to the High Court.

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