ASIC appeal upheld — Fortescue Metals Group and Andrew Forrest misled investors
In brief — Full Federal Court overturns 2009 ruling
On 18 February 2011 the Full Federal Court unanimously overturned the 2009 Federal Court ruling which cleared Fortescue Metals Group (FMG) and its Chairman and CEO Mr Andrew Forrest of misleading and deceptive conduct.
Framework agreements with three Chinese companies
The appeal related to conduct by both FMG and Mr Forrest in relation to a breach of the continuous disclosure obligations under the Corporations Act 2001 (Act) and of Mr Forrest’s duties as a director under section 180 of the Act.
The matter concerned three framework agreements entered into between FMG and three Chinese companies for the construction of a mine and a port in the Pilbara region of Western Australia. Between August 2004 and March 2005, FMG made a series of announcements and statements to the market in relation to these framework agreements. FMG indicated in these announcements that the agreements created legally binding obligations.
The Australian Securities and Investments Commission (ASIC) brought proceedings against both FMG and Mr Forrest, alleging that the announcements were misleading and deceptive and breached FMG’s continuous disclosure obligations.
The trial judge dismissed ASIC’s case, holding that the announcements that the agreements were binding were an opinion which was reasonably held. ASIC appealed to the Full Federal Court, which upheld the appeal.
Federal Court findings
The full bench found that:
- FMG’s announcement regarding the binding contracts amounted to misleading and deceptive conduct
- FMG breached its continuous disclosure obligations by failing to correct the misleading the deceptive conduct once the announcements were released
- Mr Forrest breached his duties as a director and contravened the Act by his involvement in drafting and releasing the announcements
Consequence of contravention
The judgement is such that Mr Forrest could ultimately be banned from sitting on the board of the company he founded. Additionally, he may be fined up to $10 million dollars. ASIC is likely to push for the imposition of both a fine and a ban during penalty hearings which are expected to be heard at the Federal Court in coming weeks.
FMG intention to appeal
Mr Forrest has already indicated that he and FMG both intend to appeal the decision before the High Court. If an application is made, penalty hearings in the Federal Court would be stayed. Further, it could take up to six months for the High Court even to decide whether to hear an appeal.
Companies need to correct misleading information
ASIC, which commenced proceedings against Mr Forrest and FMG in 2006, proclaimed the judgment as significant for investor confidence. In a statement made shortly after the judgement, ASIC chairman Tony D’Aloisio said that the ruling was important because it reinforced continuous disclosure requirements, which are the “bedrock of confidence in the integrity of our markets”.
For companies, the judgement increases the importance of correcting misleading information in the market once they become aware that their previously released information may be misleading. This obligation extends to directors who are knowingly involved in the contravention.
Statements in ASX announcements must be correct and verifiable. Legal advice on the wording of ASX announcements should be obtained before they are made. Companies should be mindful of agreements in which terms are yet to be agreed or certain approvals need to be obtained before releasing public statements about them.
The judgement confirms that the courts will seek to understand how members of the public would have perceived the information conveyed by an announcement. In essence, the judgment serves to highlight
the responsibilities of companies and their officers with regard to ASX announcements.
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