Australian Securities and Investments Commission v Fortescue Metals Group Ltd

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Facts

The facts concerned 3 “Framework Agreements” entered into between FMG and 3 Chinese counterparties for the construction of a mine and a port and a railway in the Pilbara region of Western Australia.  The agreements were signed in August and October 2004.  Between August 2004 and 1 March 2005, FMG made a series of announcements to the market and statements to investors in relation to those Framework Agreements indicating that the agreements legally bound the Chinese counterparts to build and finance the infrastructure for the project.  

The Court, in its appeal decision, found that those announcements were misleading and deceptive and in breach of section 1041H of the Act.  Further, as FMG did nothing to subsequently correct the misleading statements it was in breach of its continuous disclosure obligations under the Act.  Forrest personally was found to have been involved in the breach of section 674 and to have breached his duty of care and diligence as a director under section 180 of the Act.

Decision

The analysis of the Court took a very different approach to that undertaken by the trial judge.  The decision at first instance considered that FMG’s statement relating to the effect of the Framework Agreements were matters of opinion and, as those opinions were reasonably held by FMG and Forrest, they were not in breach of the Act. 

The Court spent some time considering the nature of section 1041H and, in particular, whether the statements relating to the legal effect of the Framework Agreements were statements of opinion or statements of fact.  The Court considered that the statements, in relation to the content of the Framework Agreements and the effect of the Framework Agreements, were statements of fact and that the releases and public statements made by FMG in relation to the Framework Agreements went well beyond the facts and the statements contained in the Framework Agreements.  These were deemed misleading and deceptive as they had no basis in the content of the Framework Agreements. 

There was significant discussion in relation to the meaning of “misleading and deceptive” and “likely to mislead or deceive”.  The Framework Agreements were agreements to agree and much of the detailed subject matter was yet to be agreed between the parties.  However, the FMG statements repeatedly referred to the Framework Agreements as binding contracts to finance and construct the project, despite the fact that key items, such as scope of works and price, had not been agreed.

In particular, the various public statements made by FMG stated that the Framework Agreements bound the third parties to build certain infrastructure.  The Court held at paragraph 128 of its judgement:

“In the present case, the ineluctable reality is that the works the subject matter of the agreements were not agreed.”

Regarding the involvement of Forrest, the issue was his actual knowledge and whether he took reasonable steps to ensure that FMG had reasonable grounds to believe it had complied with its obligations under the continuous disclosure regime.

No evidence was presented to the Court that Forrest had taken any legal advice in relation to the Framework Agreements until January 2005.  There was also evidence, in correspondence created by Forrest in October 2004, confirming that further negotiations were needed between the parties to ascertain particular terms.  This was evidence the Framework Agreements were not binding in the way FMG had publicly stated.  The question of breach of section 180 was made out in that no evidence was provided that he undertook any steps required by section 180.  Further, there was a question as to whether the business judgement rule applied in this case.  As the issue was not a business judgement or a decision in relation to the company, but was a decision about compliance with the continuous disclosure rule, the business judgement rule did not apply.  The Court cited, at paragraph 198, an extract from the explanatory memorandum introducing the business judgement rule which stated as follows:

“The operation of the business judgement rule will be confined to cases involving decision making about the ordinary business operations of the company.  For example, the decision to undertake a particular kind of business activity promoted in a prospectus would be the kind of business judgement to which the proposed rule may apply.  However, compliance (or otherwise) with the prospectus requirements imposed by the Law would not be a decision to which the proposed rule could apply.”

Implications

The Court has not made penalty rulings at this time but has remitted the matter to a judge of the Court to make those decisions.  It has, however, made a declaration that FMG contravened the continuous disclosure provisions of the Act.  This raises, for companies, the importance of correcting misleading information that may be in the market once they become aware that information may in fact be misleading.  This obligation extends to executives knowingly involved.  For projects such as the Pilbara project (the subject of the FMG announcements), the decision shows that where “spin” and enthusiasm for an outcome results in a misleading announcement, both the company and its executives can face significant legal consequences.  Care should be taken when describing any agreement as binding in an announcement, particularly where terms still need to be agreed or certain approvals required are yet to be obtained.  Listed companies, directors and senior executives should obtain appropriate advice about the legal effect of agreements before finalising public statements about them.

Both FMG and Forrest have announced an intention to appeal against the decision. 

Contact Details

Melbourne

Michael Linehan, Partner
T:  +61 (0)3 9321 9807
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Sydney

Darren Pereira, Partner
T:  +61 (0)2 8083 0487
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Lyn Nicholson, Special Counsel
T:  +61 (0)2 8083 0463
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Brisbane

Philip Vickery, Partner
T:  +61 (0)7 3135 0632
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The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity.  Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.