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In a decision handed down today, the High Court ruled that Fortescue Metals Group did not engage in misleading and deceptive conduct, and by extension, did not breach its continuous disclosure obligations, when it announced three deals with Chinese state-owned companies that did not eventuate.
A negative ruling could have led to Andrew ‘Twiggy’ Forrest, Fortescue’s founder, current chair and former CEO, being banned from being a company director for up to eight years. Forrest’s retirement from the CEO role and move to the board in June last year has been seen as a precautionary move against this possibility.
Today’s decision is a huge loss for ASIC, which was ordered to pay Fortescue’s legal costs, adding to a bill likely to run into the hundreds of thousands of dollars for the case.
Continuous disclosure is a tricky area for directors, and many would have been eagerly watching the Fortescue case. But experts caution the ruling should not be interpreted as giving guidance on directors’ continuous disclosure obligations.
In early 2004, Fortescue issued two announcements to the ASX. The announcements contained details of agreements with several Chinese state-owned companies about building a mine, a port, and a railway in the Pilbara.
The four-page Fortescue releases used the phrase “binding agreement”, but the Chinese companies later told the press the agreements weren’t binding. The deals eventually fell apart, leading ASIC to commence legal action against Fortescue in 2006, alleging the company had misled investors.
A trial judge dismissed ASIC’s claims in 2009, but a full bench of the Federal Court in 2011 ruled in favour of ASIC, finding that because the agreements were not enforceable under Australian law, Fortescue misled investors by describing them as “binding” contracts. On the continuous disclosure point, misleading or deceptive conduct was ruled to automatically mean directors had breached their continuous disclosure obligations.
Fortescue appealed to the High Court, which noted in its ruling today that at the time of making the releases, both the Chinese companies and Fortescue intended the deals to go ahead.
But this was not central to the decision. Crucially, the High Court ruled that the releases would not have been understood to mean the deals were legally binding by their audience. As Fortescue was ruled to not have engaged in deceptive conduct, the High Court did not examine whether such conduct was a breach of continuous disclosure obligations.
For this reason, Anil Hargovan, an associate professor at the Australian School of Business at the University of New South Wales, cautions against reading broadly into the decision.
“This ruling is so specific and narrowly-based on the particular facts of this case. One has to be careful to extract a broad message from it,” he tells LeadingCompany. “This much, however, is clear: whether a claim is misleading or deceptive or not, ultimately, depends on identifying the intended audience and the message conveyed to that audience.”
“In assessing whether or not Fortescue had engaged in misleading or deceptive conduct, the High Court took Fortescue’s target audience, investors and wider sections of the commercial community into account, deeming them to be a sophisticated audience who would not have understood Fortescue’s releases to mean the agreements were binding in a legal sense.”
The High Court also took a dim view of the manner in which ASIC litigated this case, Hargovan adds. “The High Court found it objectionable that ASIC relied on too many alternative allegations, giving rise to confusion and incoherence in the statement of claims against the defendants.”
“The High Court has put ASIC on notice to ensure that claims made are sufficiently clear to allow defendants a proper chance to defend proceedings.”