Australian High Court ruling reviews how statements to the market should be assessed

On 2 October 2012, the High Court of Australia handed down its much anticipated judgment in  Fortescue Metals Group v Australian Securities & Investments Commission (ASIC) [2012] HCA 39.  The Court stressed the importance of having regard to the audience for whom a statement is prepared, taking into account the commercial understanding of that audience.

Background

In 2004 and 2005, FMG made various public statements, including to the Australian Stock Exchange (ASX), that it had entered into framework agreements with various Chinese state owned entities to build, finance and transfer the railway, port and mine required for its then fledgling iron ore project in WA. The framework agreements were described as ‘binding contracts’.

The framework agreements were each 4 pages long and recorded that they were to become binding upon approval by the parties' respective boards, and that the parties were jointly to agree and develop further general conditions of contract at a later date. The parties' boards approved the agreements.

In March 2005, an article in the financial press suggested that the contracts which FMG had made were not binding contracts.  In response to the ASX's request for comment, FMG provided to the ASX a copy of one of the framework agreements.

In March 2006, ASIC commenced proceedings in the Federal Court of Australia against FMG and its Chairman and CEO, Mr Forrest, alleging the public statements were misleading or deceptive, that failure to correct the statements breached the continuous disclosure provisions and that Mr Forrest had thereby breached the statutory duty of care and diligence required of a director.

At first instance, Gilmour J dismissed ASIC's claims.  ASIC's appeal to the Full Court of the Federal Court (Keane CJ, Emmett and Finkelstein JJ) was allowed and declarations of contravention were made.

High Court’s decision

The High Court has unanimously allowed appeals by FMG and Mr Forrest. 

The High Court found that the audience for the statements was investors (both present and future) and perhaps a wider section of the business and commercial community.  They would have taken what was said as a statement of what the parties to the agreements understood that they had done and ‘intended’ would happen in the future. They would not ‘ask a lawyer’s question’ whether the agreements would be legally enforceable if there was a dispute between the parties.  The Full Court had wrongly addressed this question.  One of the five High Court judges noted that the audience was not naïve. They would be conscious of the difficulties of creating infrastructure for mining projects in the harsh conditions of Western Australia, the vast expense of such projects and not expect the Chinese government to be ‘forced’ to adhere to a contract.  As he went on to observe: ‘It was not an audience in whom the adjectives “Western Australia”, “mining” and “Chinese” would excite a sudden certainty about the imminent creation of wealth beyond the dreams of avarice.’

The earlier decisions had focussed on whether the statements were representations of fact or opinion.  The majority did not consider this dichotomy to be useful. One of the five High Court judges considered the representation was one of opinion, but nevertheless not misleading or deceptive.

The judgment was particularly scathing of ASIC’s case and the way it was pleaded.  For example, the Court observed the task of the pleader ‘does not extend to planting a forest of forensic contingencies and waiting until final address or perhaps even an appeal hearing to map a path through it.  In this case there were hundreds, if not thousands, of alternative and cumulative combinations of allegations.’  ASIC had also confused allegations of fraud with allegations of negligent misrepresentation.

Implications

The High Court’s decision provides some guidance:

• Companies should not view market disclosure from a lawyer’s perspective alone. They should have regard to the audience for whom the statement is prepared, and may take into account the commercial understanding of that audience.
• Each case will be decided on its own facts.  What message is conveyed to the ordinary or reasonable member of the intended audience cannot be determined without a close and careful analysis of the facts.
• Plaintiffs should be careful in framing their cases, so as not to create a complex labyrinth of pleading about which the defendant is uncertain.  As one of the High Court judge’s put it during argument, they should ‘nail their colours to the mast’.

Next steps

The ASX has been holding off releasing a revised guidance note (Guidance Note 8) concerning continuous disclosure obligations pending the High Court decision in FMG.  This is expected to be released shortly for public consultation. The Guidance Note will provide more detailed guidance on how to manage disclosure obligations on a day-to-day basis and the types of behaviour that are likely to result in regulatory investigations.