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Company Law News October 2012

A long and hard won battle for ‘Twiggy Forrest’ against ASIC

Forrest v Australian Securities and Investments Commission [2012] HCA 39 (2 October 2012)

This decision of the High Court concerned a prosecution brought by ASIC against high-profile miner Fortescue Metals Group Ltd, and its Chairman and Chief Executive, John [Twiggy] Forrest.

ASIC prosecuted the company and Forrest for alleged contraventions of the Corporations Act 2001 in connection with information provided to the ASX regarding a proposed mining project known as the “Pilbara Iron Ore and Infrastructure Project.” It was ASIC’s case that, in contravention of s1041H of the Act, the company engaged in misleading and deceptive conduct in publishing information that might deceive or mislead purchasers of a financial product (in this case, shares in Fortescue Metals). ASIC also claimed that Fortescue had contravened the continuous disclosure requirements of s 674 of the Act, and that each breach of the Act by the company also involved a breach by Mr. Forrest of his directors’ duty of care and diligence under s180(1) of the Act.

Specifically, ASIC claimed that announcements made by Fortescue by letter and media release regarding agreements made by the company with China Railway Engineering Corporation ("CREC"), China Harbour Engineering Company (Group) ("CHEC") and China Metallurgical Construction (Group) Corporation ("CMCC"), were misleading and deceptive or likely to mislead and deceive investors in the company.

Fortescue had, in its letters to the ASX and media releases, stated that it had made “binding contracts” or “binding agreements” with CREC, CHEC and CMCC to “build, finance and transfer the railway, port and mine for the [Pilbara] project.” A report in the media subsequently questioned Fortescue’s representations, claiming that the agreements made with the Chinese companies were not in fact binding as represented. At ASIC’s request, Fortescue sent a copy of the framework agreement with CMCC to ASIC, which prompted ASIC to commence proceedings against Fortescue in March 2006. The Full Court of the Federal Court ultimately overturned the decision of the Judge at first instance, and ruled in favour of ASIC.

On appeal to the High Court, however, Fortescue and Forrest’s appeal was upheld. The High Court considered the framework agreements entered into between Fortescue and the Chinese companies. ASIC alleged Fortescue’s representations regarding the agreements were misleading and deceptive in that the company represented that the contracts between the companies were “binding” agreements for the building and financing of railway infrastructure and so on for the Pilbara project.

The Court noted that ASIC’s case was that Fortescue had made the following false statements or misrepresentations to the ASX and investors:

  1. That Fortescue "had entered a binding contract" with CREC, CHEC or CMCC "obliging" that company to build and finance the relevant elements of infrastructure, and
  2. That Fortescue "had a genuine and reasonable basis for making" the relevant statement.

Essentially, ASIC argued that the framework agreement between Fortescue and the Chinese companies was not binding and did not give rise to “binding obligations” on the part of the parties. Key to this argument was the assertion that some of the terms of the agreements that were necessary to give them practical effect had not been formally finalised. Problematically, the Court noted that ASIC’s case, as framed, simultaneously accused Fortescue of both deliberately misleading and deceiving investors, and “negligent misrepresentation”. There was a level of contradiction here that the Court found highly objectionable.

The Court stated:

And since at least 1889 and the well-known decision of the House of Lords in Derry v Peek, it has been firmly established that a false statement, made through carelessness and without reasonable grounds for believing it to be true, may be evidence of fraud but does not necessarily amount to fraud. 

It was noted that for fraud or deliberate misrepresentation to be made out, it had to be shown that the person making the representation had “no honest belief in the truth of the representation” in the sense that they intended it to be understood. The Court found that Fortescue and Forrest could not be said to have made any fraudulent misrepresentations here.

Ultimately, the Court noted that for misleading and deceptive conduct to be made out, a statement must have been made that is, in and of itself, misleading or deceptive or is likely to mislead or deceive. Crucial to this enquiry is consideration of what it is that the representation conveys to the persons it is directed at, and whether or not those persons have or are likely to be misled or deceived by the representation. The intention of the person making the representation – that is, whether they know or care whether the representation is true or not – is not directly relevant.

The Court rejected ASIC’s claim that the agreements between Fortescue and the Chinese companies were not binding, noting that the terms of the framework agreements themselves expressly and clearly stated that the parties had reached agreement, and set out the obligations of the parties in broad terms. Crucially, the Court found that the agreements between the parties were described in their terms as binding agreements importing reciprocal obligations, and that it was therefore not misleading or deceptive for Fortescue to describe the agreements in these terms. The Full Federal Court, it was said, had fallen into error in focussing on whether or not the “binding agreement” represented to investors by Fortescue was in fact binding in a strictly legal, contractual and forensic sense.

The Court summarised ASIC’s case as follows: 

“…despite the parties' stated intention to make a legally binding contract, [ASIC argued that] it was misleading or deceptive or likely to mislead or deceive to announce to investors, or some wider business or commercial audience, that the parties had made a contract (or binding contract) unless the agreement they had made would withstand legal challenge in an Australian court.”

The Court ultimately found that Fortescue and the Chinese companies intended that their agreements be binding in a real and commercial sense, and had therefore not misled or deceived investors.

In answer to ASIC’s argument that the agreements were not binding because certain key terms were yet to be settled, the Court went on to say that:

“[w]hen commercial enterprises make an agreement which records that it is intended to be a binding contract, those parties can be assumed, unless fraud is proved, to expect and to intend that the agreement will be performed. But it by no means follows that the parties will thereafter refrain from any attempt to strike a better bargain. And the fact that one or both of the parties tries to strike a better bargain does not, without more, show that the parties are not bound to the bargain that has been made. Nor does it show that the parties did not intend to be bound to that bargain.”

As a result of the foregoing, it could not be said that Fortescue had breached the ongoing disclosure requirements of s674 of the Act. Given that no breach of the Corporations Act could be established against Fortescue, Forrest was also found not to have breached his directors duties under s180(1) of the Act.

This decision provides some limited insight into what is required before a representation made by a company will amount to misleading and deceptive conduct. If you would like to discuss your responsibilities with respect to offering inducements or making other representations to customers or the public, please contact Forum Law for a consultation today.

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