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HG Alert: ASIC wins appeal against Fortescue Metals Group and Andrew Forrest - 2 Mar 2011

Continuous disclosure and misleading conduct are once again in the spotlight following the Australian Securities and Investment Commission's successful legal action against Fortescue Metals Group and its CEO, Andrew Forrest.

On 18 February 2011, the Full Court of the Federal Court of Australia upheld ASIC's appeal against the earlier decision of the Federal Court in Perth, finding that:

  • Fortescue's ASX announcements, media releases and investor presentations about its framework agreement were misleading and deceptive;
  • Fortescue had breached its continuous disclosure obligations by failing to correct misleading statements it had made to the market; and
  • Mr Forrest had breached his duties as a director and had contravened the Corporations Act 2001 through his involvement in the ASX announcements.

It seems that ASIC is keen to send a message to corporate Australia that it intends to uphold the regulatory requirements of the Act, and that corporate status and success will be of little significance if these requirements have been breached.

Background to this case

ASIC's case related to ASX announcements made between 2004 and 2005 concerning certain framework agreements with three major state-owned Chinese companies. ASIC alleged that Fortescue and Mr Forrest had engaged in misleading and deceptive conduct by overstating the effect of the agreements with the three companies, giving the impression that the agreements were in fact binding, when they were not. ASIC also alleged that Fortescue had failed to comply with continuous disclosure obligations under the Act by failing to disclose the contents of those agreements and failing to correct the misleading announcements made.

Mr Forrest was found to have breached his duty as a director under the Act to exercise care and diligence by failing to ensure that Fortescue complied with its obligations. ASIC also claimed Mr Forrest knew that there was a material difference between what the market had been told and what actually appeared in the agreements, but did nothing to correct the position and instead continued to make misleading statements over a six-month period until the content of the agreements was disclosed in 2005.

While we are waiting to hear what penalties will be handed down against Mr Forrest, ASIC is likely to seek a fine and an order banning Mr Forrest from running a company.

Successful companies not immune

In the wake of the court's ruling in this case, it is clear that no director or company is immune from investigation where there appears to have been a breach of the Act. Even though Fortescue performed well for its shareholders and the commercial arrangements contemplated by the framework agreements came to fruition, ASIC still took action against Fortescue and Mr Forrest for their actions over six years ago. It seems that a company's current circumstances, and whether investors actually suffered any loss, are irrelevant if its past actions amount to a breach of the Act.

Even so, it would appear that not everyone is convinced by ASIC's enforcement priorities. Despite the ruling in favour of ASIC in the appeal, two of the three judges questioned the importance of the case. Chief Justice Pat Keane stated:

There was no evidence that any member of the investing public was mislead by, or suffered loss as a result of, Fortescue's contravention of the Act. Presumably, that is because those who invested in Fortescue had profited handsomely from that investment. This circumstance may be said to raise a question as to whether the prosecution of this case by ASIC was again worth the candle... it is not however for this court to call into question the exercise of ASIC's discretion to determine which cases it should pursue and discharge as regulatory function.

Where to now?

Mr Forrest has already indicated that he intends to fight against the Court of Appeal's decision, and has sought leave of the High Court to appeal.

ASIC will be keen to uphold this test case and reiterate the message that contravention of directors' duties - especially where continuous disclosure issues arise - will not be tolerated, irrespective of the fortune of the company.

ASIC stated that it appealed the initial trial judge's decision because it was concerned and wanted to highlight:

  • the obligation of listed entities to disclose information under the continuous disclosure provisions of the ASX Listing Rules and the Corporations Act;
  • the operation of the misleading and deceptive conduct provisions of the Corporations Act, particularly statements concerning the contents, effect or enforceability of commercial agreements; and
  • the role and duties of directors and officers in making statements to the ASX and the investing public, particularly those concerning the contents, effect or enforceability of commercial agreements.

Irrespective of the outcome of Mr Forrest's appeal, the Court of Appeal's decision is a timely reminder of the importance of adhering to directors' and officers' duties and the continuous disclosure regime, both under the Corporations Act and the ASX Listing Rules.