High Court dismisses continuous disclosure action against FMG and Andrew Forrest

Forrest v ASIC; Fortescue Metals Group Limited v ASIC [2012] HCA 39

The High Court today handed down its decision in these appeals – the final round in ASIC’s civil penalty action against Fortescue Metals Group Limited (FMG) and Mr Andrew Forrest.

ASIC’s action was based on FMG’s continuous disclosure announcements to ASX in 2004 and 2005.  The relevant announcements said that FMG had entered into binding contracts with Chinese state-owned engineering companies for construction of the mine, port and rail components of its iron ore project in the Pilbara.  ASIC alleged that the contracts were not “binding”, so the announcements were misleading and FMG was in breach of its continuous disclosure obligations.  ASIC also alleged that Mr Forrest was personally liable for the continuous disclosure breaches, and also for breach of his duty as a director to use proper care and diligence.

The High Court unanimously found that the statements were not misleading.  As a result, the rest of ASIC’s claims against FMG and Mr Forrest collapsed.  All five judges supported this view.  French CJ and Gummow, Hayne and Kiefel JJ wrote a joint judgment; Heydon J delivered a separate concurring judgment.

In the end, the High Court’s decision turned on the particular facts of the case.  It does not really support any broad proposition about continuous disclosure.  Nevertheless, we think some key messages can be derived from the FMG case:

Continuous disclosure – legal points

1. To prove that a statement is misleading, you have to bring evidence showing it conveyed to the intended audience a message that was misleading.  ASIC did not prove this.

2. When announcing a contract to ASX, it’s sufficient to provide a summary which says what the parties have done (and said they have done) in the contract.

3. The intended audience for ASX announcements is relatively sophisticated – according to the High Court, “the business and commercial community”.  In the FMG case, this meant the intended audience could be expected to have a relatively sophisticated understanding of what “binding” meant in the context of an international contract with a foreign state-owned enterprise.  It did not mean the same thing as “completely enforceable under Australian law”.

Continuous disclosure – practical point

1. Notwithstanding the legal points above, it’s wise not to push your luck.  FMG (and Mr Forrest) could have saved themselves a great deal of effort and trouble by adopting slightly more conservative wording in their announcements.

Regulatory point

1. The High Court admonished ASIC for pleading its case badly, with multiple and confusing grounds of claim.  With a fine eye for a pun, the joint judgment referred to “planting a forest of forensic contingencies”.  This was incompatible with the “fundamental requirements for the fair trial of allegations of contravention of law”.

This should lead ASIC to review its approach to pleading civil penalty cases – indeed, to running civil penalty cases.  If the pleader can’t state the claim clearly, the case should not proceed.