02 October 2012
Today, the High Court upheld the appeals by Andrew Forrest and Fortescue Metals Group against the Full Federal Court's decision in favour of the Australian Securities and Investments Commission (ASIC). The case centred around statements by Fortescue to the market in 2004 that it had entered into binding contracts with Chinese state-owned enterprises under which they would build components of Fortescue's Pilbara iron ore project.
ASIC alleged that Fortescue had breached the misleading or deceptive provisions (section 1041H) and continuous disclosure (section 674), and that Mr Forrest had breached his statutory directors' duty of care and diligence (section 180).
The case turned on the question of:
(a) what was communicated to the audience when Fortescue said it had a "binding contract"; and
(b) whether that communication was misleading or deceptive.
At first instance, ASIC's case focused on whether Fortescue had been dishonest in making the statements to the market and whether it had a genuine and/or reasonable basis for making the statements. It was held that all that Fortescue had done was to make statements to the effect that it was of the opinion that it had binding contracts. Since it honestly held that opinion, there had been no breach. Subsequently, the Full Federal Court overturned these findings by focusing on what the statements made would have conveyed to the intended audience. On the basis that Fortescue had announced that it had binding construction contracts, and had not disclosed that the contracts were merely "framework agreements" and not actual construction contracts, the statement was misleading or deceptive.
On appeal to the High Court, Fortescue and Forrest sought reinstatement of the trial judge's decision.
The High Court preferred the narrower interpretation of the statements made and found that the references to a binding contract conveyed to Fortescue's investors a statement of what Fortescue had done and intended would happen in the future. No further message was shown to have been conveyed to an "ordinary or reasonable" investor about whether the contracts were open to legal challenge in Australia, what the effect of the contracts were, should the parties later disagree about performance, or the ultimate enforceability of the contracts.
The High Court accepted that Fortescue and its counterparts had genuinely intended to make a legally binding agreement. Against this background, and given the narrower interpretation of the message the High Court considered was communicated to Fortescue investors, the High Court held that the communication was not misleading or deceptive, nor likely to mislead or deceive.
ASIC also argued that a failure to correct the misleading statements was a breach of the continuous disclosure requirements in the Corporations Act. The High Court considered that, given the original statements were not misleading or deceptive and therefore lawfully made, there was no obligation under the continuous disclosure requirements for Fortescue to tell the market that the agreements were not binding contracts. Accordingly, there was no breach of the continuous disclosure laws.
With ASIC having failed to establish either misleading or deceptive conduct or a breach of the continuous disclosure regime, the High Court also found that there was no breach by Mr Forrest of his directors' duties.
However, the High Court was careful to limit the scope of its judgment. The decision does not stand for the proposition that a statement by a company about entering into a contract will only ever be limited to what the contract is said to contain and not its legal enforceability. The High Court emphasised that the interpretation of what was communicated to the audience in an announcement was necessarily fact specific. The High Court also sought to clarify that for the purposes of the prohibitions on misleading or deceptive conduct, the relevant question is not what the company intended to convey to investors, but what the statement actually conveyed. Concerns about fraud and dishonesty are a separate matter.
The narrower interpretation of the message conveyed by Fortescue will provide some comfort to listed entities issuing announcements in a real time commercial environment. So long as what is contained in the announcement is accurate and consistent with the genuinely held beliefs and commercial intentions of the company, the fact that this turns out not to be the commercial eventuality does not make the original statement misleading.
The practical scope of this decision does not remove the obligation to update previous disclosures to the market should circumstances change. A number of ASIC's recent enforcement actions in relation to continuous disclosure have focused on a failure to update the market as circumstances change.
ASIC has foreshadowed that it intends to consider the implications of the judgment in conjunction with the ASX. This may result in further guidance by ASX and ASIC to the market in relation to compliance with continuous disclosure obligations.