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In October 2012, the High Court of Australia handed down its decision in relation to allegations made by the Australian Securities and Investment Commission (ASIC) against Fortescue Metals Group (Fortescue) and its CEO, Mr Andrew Forrest. The Court found in favour of Fortescue and Mr Forrest, concluding that neither party had breached the Corporations Act and that their conduct in the matter had been “neither false nor misleading”.
The significance of this decision goes beyond the parties involved, as it provides considerable clarification regarding allegations of misleading and deceptive conduct in the ASX announcements of publicly listed companies.
In 2004, Fortescue released three separate ASX announcements (the Announcements) stating that it had entered into “binding contract[s]” with state-owned Chinese companies in relation to building a railway, port and mine for one of Fortescue’s proposed iron ore mining sites in Western Australia. In 2005, it was revealed in the financial media that these agreements were, in fact, not legally binding, resulting in a significant (but short-lived) drop in Fortescue’s share price.
In 2006, ASIC initiated proceedings in the Federal Court of Australia, alleging that, by making the Announcements, Fortescue had engaged in misleading and deceptive conduct, Mr Forrest had breached his duties as a director of the company, and both parties had failed to comply with their continuous disclosure obligations under the Corporations Act 2001 (Cth).
The Federal Court initially found in favour of Fortescue and Mr Forrest, the Trial Judge finding that, while Fortescue had offered a statement of opinion as to the enforceability of the relevant contracts that was incorrect, that opinion had been honestly and reasonably held.
ASIC appealed the Trial Judge’s decision, and the Full Court of the Federal Court overturned the primary judgment, finding that Fortescue (and consequently Mr Forrest) had contravened the Corporations Act by making misleading and deceptive statements to the market. Once those misleading and deceptive statements had been made, Fortescue and Mr Forrest’s failure to correct those statements constituted a breach of their respective obligations of continuous disclosure of material information to the market. The Full Court’s decision provided substantial guidance on when company information is likely to be considered ‘material’ and hence require public disclosure.
Fortescue and Mr Forrest subsequently appealed the Full Court’s decision to the High Court.
The High Court Decision
The High Court allowed the appeal, finding in favour of Fortescue and Mr Forrest.
The majority judgment, delivered by four of the five sitting judges, found that the intended audience of Fortescue’s ASX announcements was professional investors. The Court held that this sophisticated audience would not interpret Fortescue’s statements as assertions of a legal fact that the agreements with Chinese companies would be legally enforceable by Australian courts. Instead, that audience would understand that the companies had “had made an agreement which said that the bargain was, and was intended by the parties to be, legally binding”.
Unlike the lower courts, the majority of the High Court ruled that the intention of the person making the relevant statement is irrelevant to the question of whether the statement is misleading. The only relevant consideration is how the statement would be interpreted by its intended audience. Since, in the opinion of the Court, Fortescue’s spectators would not consider the announcements to be declarations regarding contractual enforceability, the statements did not mislead investors.
The majority judgment stressed that its finding turned on the particular facts of the case, and noted that ASIC had not tendered sufficient evidence as to what Fortescue’s intended audience would have understood the relevant announcements to mean, instead operating on the assumption that Fortescue’s investors would have adopted a lawyerly, forensic approach to the interpretation of company statements. Implicitly, the majority’s findings may have been different if ASIC had put on evidence and sought to prove that the audience for Fortescue’s announcements would have interpreted a reference to “binding contracts” as a reference to enforceability under Australian law.
The minority judgment of Heydon J arrived at the same conclusions as the majority, but using different reasoning. In Heydon J’s opinion, Fortescue’s statements were statements of opinion which were honestly and reasonably held. Accordingly, Heydon J’s reasoning was closer to that of the Trial Judge than it was to that of the majority judgment.
Both the majority and the minority judgments, having found that Fortescue and Mr Forrest did not engage in misleading and deceptive conduct, were not required to consider whether those parties had then breached their obligations of continuous disclosure, or to elaborate on the nature of the test for those obligations. Consequently, the Full Court’s statements in respect of continuous disclosure obligations remain good law. This includes the Full Court’s finding that, if a company makes a misleading statement, then it is likely that the fact that the statement was misleading will itself be material information requiring disclosure.
The High Court’s decision has provided significant clarification regarding the test for claims of misleading and deceptive conduct (and, to a lesser extent, contraventions of continuous disclosure requirements) for publicly listed companies. These developments are relevant to both listed companies and those people who read and interpret ASX announcements.
Of particular note is the approach adopted by the majority to identifying misleading and deceptive conduct. Rather than considering whether the statements in question were intended to be statements of opinion or of fact, the Court instead considered what the intended audience of the announcements would have understood the statements to mean, and hence whether the audience would have been misled by them. Further, both the majority and minority judgments proceeded on the assumption that the people reading these announcements would have a high degree of business nous and commercial scepticism, which they would apply when reading ASX announcements.
Arguably, the High Court’s decision lessens the burden on public companies to be clear and accurate in their statements, and instead shifts responsibility towards market participants, assuming that they will utilise their commercial experience to correctly interpret ambiguous company announcements. However, claims brought by investors for misleading and deceptive conduct will be more likely to succeed if the claimants ensure they provide compelling evidence of what they and other market participants in fact understood the relevant announcements to mean.
It is also important to note that a company’s obligations of continuous disclosure are separate from the requirement not to engage in misleading and deceptive conduct. Even if a company’s statement is found not to be misleading (and hence not require correction), information which would colour, constrain or contextualise that statement may still require disclosure if a reasonable investor would consider that information to be ‘material’. However, as ASIC did not make a separate allegation of contravention of continuous disclosure obligations of this nature, the High Court was not required to consider this issue.