On 18 February 2010, the Full Court of the Federal Court overturned the earlier decision of Justice Gilmour in unanimously ruling that Fortescue Metals Group Ltd (FMG) and its CEO Andrew Forrest had acted in a misleading and deceptive manner by giving the impression that broad framework agreements with Chinese state-owned companies dating back to 2004 in relation to the development of FMG’s mines and infrastructure were binding contracts.
The framework agreements were not binding
A central question at the trial was whether the defendants, FMG and Mr Forrest, honestly believed the framework agreements were legally enforceable and whether that belief was reasonable. Justice Gilmour found that at the least it was reasonable for FMG and Mr Forrest to reach that conclusion. Although the framework agreements contemplated further negotiations in relation to some matters, particularly pricing, His Honour found the essential terms of the agreements were sufficiently clear for it to have been reasonable for the defendants to view them as binding.
On appeal, the Full Court held that the framework agreements were not binding and were either non-binding ‘agreements to agree’ or void for uncertainty. Whatever may have been the subjective intentions of the parties on either side of the framework agreements, the crucial question for the Court was whether they made a contract to build the infrastructure and this question must be answered by taking an objective view of the agreements. The Court was unable to accept that, objectively speaking, the framework agreements expressed a common intention that the Chinese companies were bound to build the infrastructure without an agreed description of the works that formed the subject matter of the contract.
Misleading or deceptive conduct
With respect to ASIC’s allegations of misleading and deceptive conduct, Justice Gilmour considered that the announcements on the framework agreements were assertions underpinned by the opinion that the agreements were binding, which was reasonably based and honestly held by Mr Forrest and FMG. However, the Full Court held that the opinion of the ‘actors’ was irrelevant to the question as to whether certain facts gave rise to a binding contract. Rather, it is the effect of a statement upon the persons to whom it is published, rather than the mental state of the publisher, which determines whether the statement is misleading or deceptive, or likely to mislead or deceive. The Full Court held that FMG’s public statements conveyed ‘unequivocally’ that the Chinese companies had assumed legally enforceable obligations to build the infrastructure and would have been understood as statements of fact by ordinary and reasonable members of the investing public.
The conclusion that the framework agreements were not enforceable agreements meant that ASIC’s claim that FMG had breached its continuous disclosure obligations must also succeed. The Full Court held that FMG, having made misleading statements to the ASX, was obliged by section 674(2) of the Corporations Act to correct the position. The important point made by the Court was that the publication of corrective information was necessary because, in the circumstances, that information was information which would, or would be likely to, influence investors in deciding whether to acquire or dispose of shares in FMG. The Court noted that the ‘likely to influence’ test is not a high threshold.
Breach of Mr Forrest’s duty of care and diligence to FMG
ASIC contended that Mr Forrest breached his duty of care and diligence to FMG by allowing FMG to contravene the continuous disclosure provisions of the Corporations Act there by exposing it to pecuniary penalties. The Full Court upheld ASIC’s claim and held Mr Forrest was not entitled to the benefit of the business judgment rule defence. The Court considered that the business judgment rule is confined to cases involving decision making about the ordinary business operations of the company. A decision not to make accurate disclosure of the terms of a major contract is not a decision related to the ‘business operations’ of the company. Rather, it is a decision related to compliance with the requirements of the Corporations Act. Further, the Court held that the business judgment rule cannot be construed as affording a defence where the director’s want of diligence results in a contravention of another provision of the Corporations Act and where that other provision contains specific exculpatory provisions enacted for the benefit of the director.
The Full Court also found that Mr Forrest knowingly participated in the relevant events leading to FMG making the public announcements which were, or were likely to be, misleading or deceptive. Mr Forrest was involved in FMG’s contraventions because it could reasonably be inferred that he knew of the disparity between the terms of the framework agreements and FMG’s representations about them. He was also a person involved in FMG’s contravention of the continuous disclosure provisions. A defence to Mr Forrest’s involvement in FMG’s contravention of the continuous disclosure provisions was available if he could establish that he took ‘all steps that were reasonable’ to ensure compliance with the entity’s disclosure obligations. Mr Forrest was unable to point to any steps he took to ensure that the framework agreements were, in law, binding agreements to the effect represented by FMG. Further, ASIC was able to show that Mr Forrest’s own communications were inconsistent with a belief on his part that FMG had made a binding agreement for the construction of the infrastructure. Hence, no defence was made out.
Implications of the decision
Two of the judges questioned the importance of the ASIC-driven case against FMG and Mr Forrest because they said it was not clear whether investors had suffered any serious losses. The third judge (Justice Finkelstein) stressed the importance of a fully informed and, therefore, efficient market for listed securities. Justice Finkelstein believed that it was more likely than not that many share traders in FMG lost money and substantial sums of money at that. His Honour said that, assuming for the moment that no shareholder lost money, if the market was materially misled, it cannot be right that a prosecution not commence because, by reason of serendipity, shareholders made a gain. If that were the approach, the continuance disclosure obligations could be sidestepped by any successful corporation whose share price continued to climb after investors discovered that the corporation misled the market and that is not what Parliament had in mind. ASIC chairman Tony D’Aloisio said in a statement after the judgment that the ruling reinforced continuous disclosure requirements, which were the ‘bedrock of confidence in the integrity of our markets’.
FMG seeking leave to appeal to the High Court
The matter has been remitted to a judge of the Federal Court to determine penalties. In addition to the potential for multi-million dollar fines, it is open to ASIC to seek the imposition of a ban on Mr Forrest on managing corporations.
FMG and Mr Forrest have announced they intend to seek leave to appeal to the High Court of Australia against the decision of the Full Court of the Federal Court.
For more information please contact Graham Nagle, Corporate Counsel on (08) 9288 6855 / firstname.lastname@example.org or Tony Chong, Partner on (08) 9288 6843 / email@example.com. Graham will present a seminar on the implications of this decision on Tuesday 12 April 2011 at the offices of Lavan Legal. If you would like to attend the seminar, please RSVP by emailing Jasmin Novak on firstname.lastname@example.org or call her on (08) 9288 6862.