Public statements and continuous disclosure - the Fortescue Metals decision
Commercial Disputes eBulletin - 4 October 2012
The High Court determined that public statements, including some made by Andrew Forrest, claiming Fortescue had entered into "binding contracts" in relation to a project in the Pilbara region were not misleading or deceptive or likely to mislead or deceive. The Court said readers of the statements would take what was said as statements of what the parties understood that they had agreed and intended would happen in the future.
- Public statements to the media or to the ASX must not be misleading or deceptive. If they are then proceedings for breach of the Corporations Act may be brought against the company.
- Public statements to the media or to the ASX must not be misleading or deceptive. If they are then proceedings for breach of the Corporations Act may be brought against the directors for breach of duty.
- What is misleading or deceptive is judged by what the intended audience of the statements takes the statements to mean, not by what the person making the statement intends it to mean.
- The intended audience for listed public companies is not a naïve audience. It is comprised of people with business and commercial understanding.
In 2004 and 2005, Fortescue Metals Group Ltd (Fortescue) made various public announcements about agreements with three state owned companies in China (Statements). The Statements said Fortescue had made "binding contracts" for the construction of infrastructure for a proposed mining project in the Pilbara region.
The agreements provided the parties would agree certain matters including general conditions, scope of works and the value of works. It was agreed fuller and more detailed agreements, not different in intent, would be developed.
ASIC alleged Fortescue had breached section 1041H of the the Corporations Act 2001 (Act) by engaging in misleading or deceptive conduct and failed to comply with the continuous disclosure requirements of section 674 of the Act. Further, ASIC alleged Mr Forrest had breached duties of care and diligence required of directors by section 180(1) of the Act.
ASIC's claims were initially dismissed by the Federal Court of Australia. An appeal by ASIC to the Full Court of the Federal Court was successful. Fortescue and Mr Forrest then appealed to the High Court.
On 2 October 2012, the High Court allowed the appeal.
Misleading and deceptive conduct
The High Court examined what the Statements conveyed when they said the parties had made "binding contracts". ASIC alleged it was misleading or deceptive, or likely to mislead or deceive, to announce there were "binding contracts" unless those agreements would withstand challenge in an Australian court. The Court rejected this argument and examined what the Statements conveyed.
The intended recipients of the Statements were identified as investors (both present and future) and the commercial or business community. The High Court said that, when Fortescue said it had made binding contracts, recipients would take that as a statement of what the parties to the agreements understood that they had done and intended would happen in the future.
The Court was critical of ASIC not having led evidence at trial to show that investors or other members of the business or commercial community (whether in Australia or elsewhere) would have understood the references to "binding contracts" as conveying that a court (whether in Australia or elsewhere) would make orders that the contracts were enforceable. Defendants in class actions have often criticised claims where little evidence has been provided that recipients of alleged misleading publications or statements relied on those representations when making investment decisions. This High Court decision could change the approach of plaintiffs here, adding to the cost and complexity of such claims.
The High Court stated that:
"the statements conveyed to their intended audience what the parties to the framework agreements said they had done — make agreements that they said were binding — and no more. ASIC did not demonstrate that members of the intended audience for the statements would have taken what was said as directed in any way to what the parties to the agreements could do if the parties were later to disagree about performance".
Accordingly, it was held that Fortescue had not engaged in conduct that was misleading and deceptive or likely to mislead and deceive.
Continuous disclosure obligations
The conclusion that Fortescue's statements were not misleading or deceptive, or likely to mislead or deceive, mean Fortescue was also found not liable for alleged contraventions of continuous disclosure requirements. There being no failure to disclose, the High Court did not consider whether the directors of Fortescue, including Mr Forrest, had breached continuous disclosure requirements. Breach of directors' duties
ASIC's allegations that Mr Forrest breached the duties imposed on directors by section 180(1) of the Act depended upon it demonstrating that Fortescue had contravened sections 1041H and 674. This claim therefore failed.
Patrick Joyce | Senior Associate
Varun Bhatia | Graduate
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