Fortescue Metals Group and Andrew Forrest vindicated – implications of judgment in ASIC's litigation

On 23 December 2009 Justice Gilmour in the Federal Court delivered his judgment in ASIC’s proceedings against Fortescue Metals Group Ltd (FMG) and its CEO Andrew Forrest. The company and its founder were cleared of liability for all civil claims against them concerning FMG’s 2004 ASX announcements regarding certain 'framework agreements' with Chinese state-owned companies in relation to the development of FMG’s mines and infrastructure.

ASIC alleged that FMG engaged in misleading and deceptive conduct and breached its continuous disclosure obligations by overstating in market announcements the substance and effect of the agreements, failing to correct misleading announcements and failing to disclose the agreements’ contents. The commission also claimed Mr Forrest breached the continuous disclosure provisions and his director’s duty of care and diligence to FMG. Please refer to our August 2009 Risky Business publication for further background on the proceedings, which concluded on 7 May 2009.

FMG and Mr Forrest claimed they acted honestly and reasonably in making the announcements.

In recent years ASIC have on a number of occasions used their powers under the Corporations Act to issue ‘infringement notices’ in relation to continuous disclosure breaches which provide the relevant company the opportunity to pay, in effect, a fine on a no-admission basis. The FMG case and the James Hardie case (which was also decided last year) are relatively rare examples of situations where ASIC have instead resorted to litigation under the civil penalty provisions in relation to alleged continuous disclosure breaches.

A central question at the trial was whether the defendants honestly believed the framework agreements were legally enforceable and whether that belief was reasonable. On the facts of this case, Justice Gilmour found that at the least it was reasonable for FMG and Mr Forrest to reach that conclusion. Although the framework agreements contemplated further negotiations in relation to some matters, particularly pricing, His Honour found the essential terms of the agreements were sufficiently clear for it to have been reasonable for the defendants to view them as binding.

With respect to ASIC’s allegations of misleading and deceptive conduct, Justice Gilmour considered that the announcements on the framework agreements were assertions underpinned by the opinion that the agreements were binding, which was reasonably based and honestly held by Mr Forrest and FMG.

An important factor in reaching this conclusion was the fact that FMG and Mr Forrest had obtained the opinion of a senior and experienced corporate lawyer in relation to both the legally enforceable nature of the agreements and the relevant ASX announcements. The act of seeking and relying on legal advice was viewed by Justice Gilmour as a reasonable basis for FMG to make the announcements and furthermore as evidence that FMG and Mr Forrest acted honestly and reasonably.

While both the FMG case and the James Hardie case were decided ultimately on the basis of very different factual scenarios, there are some key messages from both cases for listed company directors and executives. First, as an integral part of a company’s corporate governance regime it is important both to have in place rigorous disclosure policies and to ensure that those policies are followed at the executive and board levels. Secondly, it is prudent for a responsible board to take properly considered legal or other relevant professional advice in relation to proposed public disclosures that have the possibility of being material in the context of the value of the company or its securities, no matter how urgent the matter.

ASIC has appealed the decision in the FMG case, so the appeal decision of the full Federal Court is likely to provide further guidance in respect of these important areas of the Corporations Act.