ASIC's victory in the Full Federal Court in ASIC v Fortescue1 fell short of being resounding. Two of the judges (Keane CJ and Emmett J) queried whether it was worth ASIC's effort given there was no evidence that anyone lost money, albeit the third judge (Finkelstein J) had a stridently different view on this.
More fundamentally though, the decision does not appear to have advanced the jurisprudence on misleading and deceptive conduct or continuous disclosure, at least not in the way ASIC had argued was appropriate.
The facts were essentially that in 2004 Fortescue Metals Group Limited (FMG) announced the entry into framework agreements with 3 different Chinese government owned contractors to build, finance and transfer the rail, port and mine infrastructure for FMG's then embryonic iron ore project in the Pilbara. The announcements described the agreements as "binding" - that is, legally binding, legally enforceable.
The framework agreements were 3 page documents with 7 short clauses, drafted by one of Fortescue's engineers - not exactly the kinds of documents one would expect to be sufficient to underpin obligations to build, finance and transfer the infrastructure for a multi-billion dollar project. Further, in each case the agreements were subject to the approval of a Chinese government authority.
There is more to the facts than that, but these are two matters which would be challenging for any lawyer asked to give an opinion on whether the agreements were legally binding agreements to build, finance and transfer the infrastructure.
At first instance,2 Gilmour J rejected ASIC's contentions that the announcements were misleading and deceptive under section 1041H of the Corporations Act, and that FMG had an obligation under its continuous disclosure obligation under section 674 to disclose that the agreements were not binding. Whilst the word "binding" was used as a statement of fact to describe the agreements, Gilmour J held that a statement of the legal effect of an agreement was necessarily a statement of opinion. A statement of opinion is only misleading (generally speaking) if the opinion is not genuinely held or there is no reasonable basis for it.
Gilmour J held that FMG honestly believed the agreements were binding, and had reasonable grounds for that belief.
The Full Court disagreed. Keane CJ (who delivered the main judgment) carefully examined the terms of the framework agreements and found that, viewed objectively, at best they were just agreements to negotiate and at worst were void for uncertainty. As such they could not be described (as a factual matter) as binding agreements to build and finance the infrastructure.
A statement of fact is misleading and deceptive if it is incorrect, and Keane CJ held that it could not be said that a statement of the legal effect of an agreement was necessarily a statement of opinion. Consistent with a line of authority, the question was how the statement would be understood by the recipient, and the Court found that it would be understood as a statement of fact, rather than "contestable" opinion.
This is not groundbreaking news, although Gilmour J's view at first instance that a statement of the legal effect of an agreement is necessarily a statement of opinion had some merit.
Keane CJ referred to evidence that, at the time the announcements were made by FMG, the Chinese contractors were happy for FMG to represent that they had entered into binding agreements. His Honour held that this was irrelevant to the question of whether the agreements were binding, because that was an objective, rather than subjective, test - that is, it was for the Court (the Judge) to determine the effect of the words used in the signed document, it was not a question of what the parties seemed to have thought was the effect of those words.
However his Honour went on to point out that there was evidence of correspondence (an email) indicating that Andrew Forrest (Forrest), the FMG Chief Executive and major shareholder, did not in fact believe that the agreements had the binding effect which FMG had represented in its announcements.
This is a significant point, not so much for misleading and deceptive conduct - it is trite to observe that the misleading nature of a statement is determined by reference to its objective effect rather than the state of mind of its maker - but for Keane CJ's decision on continuous disclosure to which we will now turn.
At first instance (and on appeal), ASIC's case was that, objectively, the framework agreements were not binding and hence it was misleading for FMG to announce that they were; and section 674 in effect prohibits the disclosure of misleading information. Further, the disclosure by FMG of (objectively) misleading information meant that, immediately upon that misleading information being disclosed, FMG had an obligation (objectively) under section 674 to announce corrective information. In other words (and at the risk of over-simplification), having incorrectly announced that the agreements were binding, FMG was obliged under section 674 to announce that the agreements were not binding. It did not matter what FMG believed to be the effect of the framework agreements, if objectively they were not binding, that was the relevant information.
Gilmour J held that section 674 did not prohibit the disclosure of misleading information - that was dealt with by section 1041H - but more fundamentally, the question of whether the agreements were material and hence announceable under section 674 depended on FMG's belief as to their effect. FMG's belief was relevant because section 674 requires the disclosure of information of which a company is "aware", and information for this purpose includes the company's reasonably held opinions and beliefs. Gilmour J found that FMG genuinely believed the agreements were binding, and had reasonable grounds for that belief, so the agreements were material and it was appropriate for FMG to announce them.
In other words (not Gilmour J's), the information to be assessed for materiality is the information in the eye of the beholder, the beholder being the company. The Western Australian Court of Appeal's decision in Jubilee Mines v Riley3 also supports that proposition.
This approach subsumes an element of subjectivity (for want of a better word) into section 674. Whilst the question of whether information is material (that is, broadly speaking, its effect on the share price) is clearly an objective question and hence the company's opinion is not conclusive, the question of what is the information to be assessed for materiality is determined not only by reference to the objective facts, but also by reference to the company's opinions and beliefs in respect of the objective facts. In effect the information is defined by reference to the company's perception of it. That is the "information" of which the company is "aware."
So, for example, in Jubilee Mines, the company (a junior gold explorer) properly did not disclose exploration results showing the presence of nickel on one of its exploration tenements. Whilst there was expert evidence that the results were exciting, the company - probably wrongly, but not unreasonably - did not think they were that significant and hence did not propose to do anything about them.
It was held that the exploration results would only have been material if the company proposed to do something with them, and since it did not and had reasonably formed its view, the information concerning the results was not material and hence not required to be disclosed under section 674.4
In Fortescue in the Full Federal Court ASIC pressed the argument that the question of what is the information to be assessed for materiality should be determined objectively - in this case, the information was the terms of the framework agreements. If they were not binding (objectively) then it was misleading for FMG to have announced them as binding agreements and, having announced them, FMG was obliged under section 674 to disclose that they were not binding - and FMG's beliefs or opinions were irrelevant.
Whilst ASIC was successful in having the Full Federal Court decide that FMG was in breach of section 674 as well as section 1041H, the decision does not appear to have impacted the point that the information to be assessed for materiality is the information as perceived by the company. Keane CJ's decision is not as clear as it could be on this point, although that is probably explicable by the factual inference referred to above: that is, that Keane CJ did not think that FMG in fact genuinely believed that the agreements were binding.
Keane CJ started off by saying that the conclusion that the framework agreements were not enforceable meant that ASIC's continuous disclosure case must also succeed:
It is sufficient to say that once the misleading statements had been made by FMG, s 674 required that they be corrected.
The relevant "corrective" information was that FMG had mis-stated the terms5 of the framework agreements. That information was material because:
"The circumstance that FMG's management had mis-stated the terms of the agreements was a circumstance necessarily apt to affect the confidence of the market in the management of the enterprise - and hence influence them to acquire or dispose of FMG shares over and above the influence which the information actually disclosed by FMG may have had."
In other words, FMG should have disclosed that it had mis-stated the terms (true effect) of the framework agreements so that the market was aware that its management could not be relied on (or something like that). That was what constituted the material information which FMG omitted to disclose.6
Since section 674 only requires the disclosure of information of which a company is "aware", it is unlikely that Keane CJ can be taken to have suggested that FMG was aware that it had mis-stated the terms of the framework agreements unless FMG was aware of its mis-statements. Such an approach would be inconsistent with Western Australian Court of Appeal's decision in Jubilee Mines and Keane CJ did not seek to distinguish that decision.
In fact Keane CJ cited Jubilee Mines with approval, on the point that it may be necessary for the analysis of whether information is material to go beyond what can be described as the "core" information if the price effect of that information, if any, is not apparent from its contents. In that case, the "core" information was the exploration results - which, of themselves, would likely have been considered material.7 What went beyond that "core" information was the company's evaluation of the results and its opinion of them - which in effect neutralised their materiality (since the company did not think they were worth pursuing). It was the totality of the information of which the company was "aware" (including its reasonably held opinions) which was to be assessed for materiality, and taken as a whole the information was not material.
In this case, it appears that the information which was the "core" information was that the terms (true effect) of the framework agreements had been mis-stated.
What went beyond that "core" information was that FMG's management could not be relied upon. Keane CJ said:
The confidence of investors in FMG's management was a matter of an entirely different order of importance than information about the achievement of incremental milestones along the way of bringing the Project from a mere speculation to a reality.8
If the relevant material information was that FMG's management could not be relied on, then FMG could only have been "aware" of that if it was aware that it had mis-stated the terms (true effect) of the framework agreements.
That said, one passage in Keane CJ's judgment on the section 674 case might be taken to be suggesting that it was sufficient that FMG was simply aware of the terms (in the sense of the actual words) of the framework agreements, not necessarily that the terms (in the sense of true effect) had been mis-stated in FMG's announcements:
"The trial judge approached the application of s 674(2) and Listing Rule 3.1 as if the only information of which the directors of FMG were aware was the making of each framework agreement and their opinion as to its meaning and effect (at [246]-[247] and [251]). This approach overlooks the terms of the framework agreements. The terms of each of the framework agreements were information in the possession of each of the directors and of which they were aware."
This passage could be taken to suggest that (1) the directors were aware of the actual words of the framework agreements; (2) objectively (as held by Keane CJ), those actual words did not constitute binding agreements in the way represented by FMG in its announcements; hence (3) FMG was aware that the agreements were not binding in the way FMG had represented. However this would stretch the ambit of what constitutes "awareness": the question of whether the agreements were binding was a question of law on which reasonable minds could differ. For example, at first instance, Gilmour J carefully examined the framework agreements by reference to the case law at considerable length, and concluded that there was a reasonable basis to conclude that the agreements were binding - although on the approach Gilmour J took, it was unnecessary for him to decide whether they were. If a judge of the Federal Court could reach that conclusion, FMG could not be taken to be aware that the agreements were not binding simply because the directors were aware of the actual words used in the agreements.
Another possible interpretation is that Keane J considered the approach of Gilmour J to be too narrow because the actual words used in the framework agreements (of which the directors obviously were aware) should have raised questions for the directors as to whether FMG management had accurately represented the effect of the agreements in the announcements - that is, the directors had at least constructive knowledge that the agreements were not binding in the way FMG had represented. It is fair to say (as noted above) that the actual words used were not what one would expect to be sufficient to underpin obligations to build, finance and transfer the infrastructure for a multibillion dollar project.
Another possible interpretation is that Keane J did not think that the actual words used in the agreements could have constituted a reasonable basis for any belief of the directors that the agreements were binding in the way FMG represented - that is, as an incontrovertible matter of fact. That is, whilst the directors' belief in their binding effect may have been relevant - Keane CJ did not appear to suggest that the directors' opinion as to the "meaning and effect" of the framework agreements was not at all relevant, just that it was not the only information of which the directors were aware - the words used in the framework agreements were not enough to constitute a reasonable basis for an opinion, let alone a statement of incontrovertible fact, that the agreements were binding.
In any case, Keane CJ did not think that Forrest and hence FMG genuinely believed that the agreements were binding - we refer here to the factual inference noted earlier. Whilst this inference was not referred to explicitly in this particular part of the judgment, it was referred to in other contexts9 before and after this part of the judgment. It seems fair to conclude Keane CJ's inference of a lack of FMG belief in the binding effect of the agreements underlay his Honour's approach to the section 674 case. Any other reading would fail to give effect to the element in section 674 that a company be "aware" of information.
Forrest was held to be personally liable for FMG's breaches of section 1041H (misleading and deceptive conduct) and section 674 (continuous disclosure) on the basis that he was "involved" in FMG's breaches.
Involvement in a contravention requires participation with knowledge of the facts that constitute the contravention.
Here again there is a lack of clarity in Keane CJ's judgment. Keane CJ said, simply:
Forrest knew of the terms of the framework agreements; and it can reasonably be inferred that he knew of the disparity between these terms and FMG's representations about them.
This again suggests that it was sufficient that Forrest was aware of the terms (the words) of the framework agreements on the one hand, and the terms of the announcements on the other.
In some cases (e.g. McPherson AJA in Heydon v NRMA10) some judges have appeared to suggest that the knowledge required for involvement in a company's contravention of the misleading and deceptive conduct provisions is, simply, knowledge of the contents of the relevant statement. In our view, these suggestions are contrary to the High Court's decision in Yorke v Lucas11 - it is necessary for the defendant to be aware of the misleading nature of the statement.12
It is unlikely, however, that Keane CJ considered that mere knowledge by Forrest of the terms (the words) of the framework agreements on the one hand, and the terms of the announcements on the other, was sufficient to constitute involvement in a contravention of section 674 under section 674(2A). Section 674(2A) requires that the person be aware that the company had information which was required to be disclosed to the ASX. As noted above, the relevant information (as far as Keane CJ was concerned) was that FMG had mis-stated the terms (true effect) of the framework agreements, and hence FMG management (i.e. essentially, Forrest) could not be relied upon. Forrest could only have been aware of that if he did not genuinely believe (or knew that FMG did not genuinely believe) that the framework agreements were binding. This seems to be what Keane CJ meant by his reference to Forrest's knowledge of the "disparity" between the terms of the agreements and the representations made about them in the announcements.
This inference of fact was confirmed (albeit in a different context) by Keane CJ a few paragraphs later. Keane CJ referred to an email sent by Forrest after the entry into the framework agreements and said:
"At the time when this email was written, Forrest plainly did not entertain, and it may be inferred had never entertained, reasonably or at all, the opinion that the terms of the framework agreements were effective as binding agreements to build, finance and transfer the infrastructure involved."
This is an emphatic statement and, it is submitted, was - or at least should have been - fundamental to Keane CJ's approach to the question of knowledge sufficient to found liability for involvement in a company's contravention of section 1041H and section 674.
Keane CJ also found that Forrest could not make out a defence to liability for participation in FMG's breach of section 674 based on section 674(2B), since the defence requires that the defendant takes all reasonable steps to ensure the company's compliance with section 674. But Forrest had not given any evidence, and there was no evidence that Forrest consulted a lawyer at the relevant time. (Keane CJ disagreed with Gilmour J's inference that FMG had a lawyer who provided some oversight.)
Keane CJ also held that Forrest was in breach of his duty of care and diligence in section 180 of the Corporations Act by exposing FMG to the risk of a civil penalty though a breach of section 674.13 Keane CJ rejected Forrest's reliance on the business judgment rule in section 180(2) of the Corporations Act. His Honour characterised Forrest's claimed business judgment as "the decision not to disclose the true effect of the agreements" - which again underscores his Honour's apparent finding of fact that Forrest did not in fact believe that the agreements were binding.
One may argue with Keane CJ's approach to the business judgment rule if it suggests that directors cannot rely on it to take business risks which may risk liability under legislation.14 However, it is difficult to dispute the proposition that the business judgment rule will not excuse a conscious decision to breach legislation. Keane CJ seems to have taken the view that Forrest deliberately chose to breach the Corporations Act and hence should not have the safe harbour of the business judgment rule. It does not follow from this that a director with a good faith and reasonably based view that an act is not a breach of law should not have the benefit of the business judgment rule.
Keane CJ also expressed the view that the existence of specific "exculpatory provisions" in section 674 referable to officers - the due diligence defence mentioned above - meant that the business judgment rule was not available in relation to a breach of section 180. His Honour's reasoning is less than compelling, and does not draw on support from any statement of principle or any express language in the Corporations Act. The existence of a defence to personal liability under section 674 has, as matter logic, no connection with whether a breach of section 180 may have occurred. In fact, in appropriate circumstances, an officer should be able to make out both the section 674 due diligence defence and take the benefit of the business judgment rule.
ASIC appealed the first instance decision against it on the basis that an appeal would assist in clarifying the ambit of the continuous disclosure, misleading and deceptive conduct and officer duties provisions in relation to ASX announcements.15 Whilst ASIC won the appeal, it is doubtful that ASIC entirely fulfilled its aim. The decision exemplifies that companies should be careful not to make misleading announcements, and that they should not describe agreements as "binding" unless it is demonstrably clear that they are (or they make clear it is their opinion), but these propositions are fairly obvious.
It was suggested by ASIC that FMG should have disclosed the full terms of the framework agreements. However it is rarely appropriate for companies to disclose the full terms of their agreements given the commercial sensitivities (which would often fall within the ambit of the "trade secret" criterion in the exception to Listing Rule 3.1A in any event).
FMG and Forrest have sought special leave to appeal to the High Court. It would be very helpful to have the High Court's views on the issues, particularly given that the High Court has yet to consider the continuous disclosure provisions of the corporations legislation despite them being first introduced in 1994.
1 Australian Securities and Investments Commission v Fortescue Metals Group Ltd [2011] FCAFC 19. 2 Australian Securities and Investments Commission v Fortescue Metals Group Ltd (no.5) [2009] FCA 1586. 3 Jubilee Mines NL v Riley [2009] WASCA 62. 4 The above discussion is a distillation of the analysis by Damian Reichel in the paper "Continuous Disclosure in Volatile Times" in (2010) 28 C&SLJ 84. 5 Keane CJ appears to have used the word "terms" in this context as encompassing much the same as "true effect". His Honour referred to FMG as having "mis-stated" the terms of the framework agreements in the relevant announcements, but the announcements did not state the "terms" at all, but rather their effect; and it was the statement of their effect (that is, that the agreements were binding) which was said to be misleading. His Honour referred at one point to the section 674 breach as being constituted by "the failure to disclose the terms or the true effect of each of the framework agreements". 6 Keane CJ was careful to point out that section 674 does not "in terms" require that incorrect information announced to the ASX must be corrected, and expressly said that it was unnecessary to address ASIC's contention that a information disclosed in breach of section 1014H (because it is misleading) necessarily involves a breach of section 674 (that is, because the misleading information should be corrected). The issue is the materiality of the omitted information. 7 There was evidence from an exploration geologist, aptly named Dr Trench, that "most small exploration companies of the likes of Jubilee at the time would kill for results like this". 8 It is not clear but it seems the "incremental milestones" were the framework agreements. His Honour appears to suggest here that the agreements may not of themselves have been material, even if they were binding. Earlier in the judgment his Honour referred to the fact that FMG's project was generally known to be at an early stage, in particular its overall feasibility was yet to be determined. 9 Specifically, in the context of whether the framework agreements were, objectively speaking, binding and the question of whether Forrest had a defence under section 674(2B) of having taken all reasonable steps to ensure FMG's compliance with its continuous disclosure obligations. 10 Heydon v NRMA Ltd (2000) 51 NSWLR 1. 11 (1985) 158 CLR 661 12 In this regard see "Continuous Disclosure in Volatile Times" in (2010) 28 C&SLJ 84. 13 That there could be liability under section 180 for the failure by a director to prevent the company being in breach of its continuous disclosure obligations was established in the recent decisions against the former James Hardie directors. See our article "Insights from the James Hardie Appeals" 14 See our article "ASIC v Rich - observations on the duty of care and diligence and the business judgment rule" at http://www.jws.com.au/news_details.php?id=123 15 See ASIC Media Release 10/13AD.
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