ASIC Win Signals Need toTake Caution with Corportate Disclosures
The Australian Securities and Investments Commission secured a victory in a high profile court appeal on 18 February 2011, when the full Federal Court held that Fortescue Metals Group and its chief executive Andrew Forrest contravened the Corporations Act by releasing information that drove up the miner's share price.
The case relates to a series of announcements made to the Australian Securities Exchange in 2004 referring to “binding contracts” FMG had with three state-owned Chinese firms to build its Pilbara iron ore project. ASIC contended that these so-called "binding contracts" were merely "framework agreements" which did not bind either party, and the announcements had the effect of ramping up the company's share price.
A unanimous ruling in the full Federal Court overturned the earlier judgment against ASIC by the Federal Court in December 2009. Even though FMG subsequently entered into the binding contracts referred to in the contested announcements, it was held that:
- FMG contravened s.1041H of the Corporations Act 2001 (the Act) in that FMG's announcements about the framework agreements overstated the substance and effect of the agreements, and were therefore misleading or deceptive.
- FMG contravened s.674(2) of the Act as it failed to correct the misleading statements it had made to the market, thereby failing to comply with its continuous disclosure obligations.
- Mr. Forrest breached his duties of care and diligence to FMG as a director in contravention of s.180(1) of the Act and breached s.674(2A) of the Act for his “knowing participation” in FMG's contraventions of the Act.
In determining whether statements are misleading or deceptive, the real question is what members of the investing public would understand; the intention of the statement maker is not determinative. If a statement is ordinarily and reasonably understood as a statement of opinion, it is not likely to mislead if the opinion is genuinely and reasonably held by the statement maker. However, if a statement is ordinarily and reasonably understood as a matter of historical fact, it is likely to mislead, as those to whom it is published will not treat the statement with the same caution that they may treat a statement of opinion.
Justice Finkelstein noted that it is also irrelevant whether any share traders suffer loss as a result of the misleading statements: “if the market was materially misled, it can hardly be right that a prosecution not commence because, by reason of serendipity, shareholders made a gain”.
The message from the full Federal Court was a simple one: it is fundamental that companies and their directors provide accurate information into the marketplace. If they do not, the penalties could be severe.
FMG was ordered to pay all the legal costs of ASIC which are likely to be substantial. FMG and Mr. Forrest will also have to pay further penalties, up to a maximum of $6 million and $4.4 million respectively, which will be handed down at a later date. ASIC is also seeking a banning order under s.920A of the Act. If this order were granted, Mr. Forrest would be banned from acting as a director of a company, including as a director of the company he started up and the numerous charities he is involved in as a director. A ban would also prevent Mr. Forrest from taking a senior management role. Such a ban could possibly be for five years.
FMG and Mr. Forrest have announced that they intend to seek leave to appeal to the High Court, which must be filed by 28 March 2011.
Tal Williams
Partner
T: +61 2 9390 8331
E: tal.williams@holmanwebb.com.au
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