The Case against FMG and Forrest
The case was initiated when ASIC brought a case against Fortescue Metals Group Ltd (‘FMG’) and Andrew Forrest (‘Forrest’ – Chairman and Executive director).
In 2004-2005, FMG was involved in a project ‘Pilbara Infrastructure Project’ of exporting iron ore and mining. Both FMG and the Forrest enter into negotiations with three Chinese companies amid August – November 2004. After the agreements, there are few announcements that are made by FMG to the Australian Stock Exchange (‘ASX’) and also made several media releases as per the disclosure requirements and the Listing Rules. The agreements establish that the Chinese companies has to finance, build and transfer the infrastructure for the project.
Because of the announcements made to ASX, the share price of FMG is increased from $0.59 to $1.93. in March 2015, there are several negative declarations that are made by the Australian Financial Review regarding the project and specified that there were no binding obligations that were imposed on the Chinese companies because of the presence of the framework agreements.
After some time, ASIC has initiated proceedings against FMG and Forrest for the contraventions that are made.
The several duties that are considered to be violated by FMG are:
- Violation of section 1041H of the Act – It was alleged by ASIC that when the statements are made regarding the framework agreements, that, the agreements are binding with the Chinese companies to finance, transfer and build the infrastructure for the projects, are nothing but the acts of misleading and deceptive conduct.
- Violation of section 674 (2) of the Act (continuous disclosure requirements) – it is submitted by ASIC that FMG has made a contravention of the section when the statements that are made FMG were not corrected by it.
Considering the violation of the duties that are made by FMG, ASIC sought relief:
- Violation of section 1041H and 674 (2) of the Act.
- Pecuniary penalties;
- Compensation order.
Forrest being part of the of FMG when the announcements were made has thus resulted in the violation of section 1041H and section 674 (2A) of the Act. Because of violation of section 1041H and section 674 (2A) of the Act, Forrest is also found to be in violation of his directorial duties under section 180 (1) of the Act. Considering the violation of the duties that are made by FMG, ASIC sought relief:
- Violation of section 1041H and 674 (2A) of the Act.
- Pecuniary penalties;
- Compensation order.
- Order under section 206C and section 206E of the Act resulting in disqualification from the post of company director.
Decision at First Instance
On 23rd December 2009, the decision was made by Justice Gilmour in favor of the FMG and the Forrest and the claim of ASIC was dismissed.
Reasons
- There is no contravention of section 1041H of the Act as the statements that were made by FMG were mere statements of opinions and mere expressions. The same are not the statements of facts. That the statements of opinions that were made by Forrest and FMG are made with good faith and with honest intention.
- Thus, considering the acts of FMG were made with honest intention and have no source to believe that the statements that were made by them are incorrect. So, there is no disclosure obligations that can be imposed upon FMG under section 674 (2) of the Act.
- Since there is no contravention on the part of FMG relating to section 674 (2) of the Act, thus, there is no contravention by Forest under section 674 (2A) of the Act;
- Since no contravention is made by Forest regarding section 1041H and section 674 (2A) of the Act, thus, there is no contravention of section 180 (1) of the Act;
Decision By Full Federal Court
The Full Federal Court, Chief Justice Keane, Emmett and Finkelstein JJ, allowed the appeal of ASIC and dismiss the decision of the Trial Court.
An appeal is made to the Federal Court by ASIC. It was contended by ASIC that:
- The trial judge was in error in finding that the statements that are made by FMG wee mere statement of opinion and expressions, rather, the statements that are made are of facts which has resulted in misleading and deceptive conduct on the part of FMG and thus there is violation of section 1041H of the Act.
- That the framework agreements are not binding agreements as decided by the trial judge as the agreement does not contain agreed terms, rather, there was scope of further negotiations which made the agreements not a binding document.
Reasons
1.The statements made by FMG were not found to be misleading and deceptive under section 1041 H of the Act;
1.The nature of the statements was analyzed and it was found that the statements were not merely the statements of opinion rather the same were the statements of facts. Chief Justice Keane submitted that the in order to consider whether the statements is of the opinion or fact must be construed in the light of what a reasonable person things when the same are announced to ASX.
It was submitted that the general law states that the effect of the contractual term cannot be considered as a mere opinion.
It was decided by Keane CJ that the statements that are made by FMG regarding the ‘binding agreement to finance, transfer and build the infrastructure’ are the statements that cannot be considered to be the statements made as opinion and a reasonable person will construe the statements as of facts and not mere expressions;
Violations Made by FMG and Forrest
2.The nature and effect of the framework agreement was analyzed and it was held that the obligation relating to ‘to Build, Finance and Transfer Infrastructure for Project’ was considered to be an enforced obligation and not an agreement to agree. Keane CJ submitted that the intention of the parties to establish a contract or not must be analyzed objectively. It was submitted that under the framework agreement the subject matter, price and the scheduling of the works are the matters that are to be decided by the parties. Thus, there was no agreement which deals with the essential terms of the agreement and the parties are merely keen to reach on a decision on the said matters. Thus, it was concluded that the Chinese companies were not compelled to build the project. There was no formation of the contract thus amid FMG and the Chinese companies as the scope of work was vague.By, applying the law in Masters v Cameron (1954), Keane CJ submitted that agreements which are firmed by the parties in order to fore a further binding agreement have no effect in absence of intention of the parties. Such agreement ate just ‘agreement to agree’. The agreement that was made amid FMG and the Chinese companies are just agreement to agree and not binding as the major matters relating to the contract was not decided.
3.The statements that were made by FMG were thus misleading and deceptive as when the same were made there was no intention on the part of FMG to comply with the same. From the announcements that were made by FMG, any reasonable person or the public who intent to invest based on the announcements would interpret that the achiness companies are in contract with FMG for the project which was not true and thus the announcement was contravention of section 1041H of the Act.
2.The announcement made by FMG was not in compliance with the full disclosure requirement as per section 674 (2) of the Act:
1.That the terms of the framework agreement was not disclosed by FMG nor the legal effect of the same was disclosed. This failure will certainly affect the decision of the investor resulting misleading and deceiving them;
2.That the contents of the statements that were made by FMG were untrue and are not correct. Because of the incorrect statements so made there will be impact on the decision making of the investors who are relying on the said statements;
ASIC’s Sought Relief
3.Even if the statements are submitted by FMG as incorrect but no after attempt is made by FMG to correct the statements and this failure on the part of FMG will defiantly influence the decision making power of the investors.
Keane CJ submitted that section 674 submits that when any incorrect statements are made then it is obligatory that the said statements must be corrected in due time. FMG has made the incorrect statement and the correction of the same is required so that the investors are not misled and by not doing so FMG has not comply with its disclosure requirements under section 674 of the Act.
3.It was found that because of the contravention made by FMG there was no one in public that was misled by the announcement made by FMG and thus does not suffer loss. However, the court submitted that the loss is not the prerequite to consider any person to be in the breach of section 1041H and section 674 (2) of the Act.
4.There are various defenses upon which Forest relied upon in order to establish that he was no in violation of section 674 (2A) of the Act which includes that Forrest relied on section 674 (2B) of the Act, however, the defense was not approved by Keane CJ as nothing was established by Forrest to prove that he has taken all reasonable steps to make sure that FMG has complied with its disclosure obligations. Rather, Forrest was aware of all the incorrect information that is made FMG while making the announcement and nothing done to stop the same on the part of Forrest. Thus, Forrest was also held to be in violation of his duty under section 674 (2A);
5.Forrest was also found to be in violation of section 180 (1) of the Act as he did not acted with care and diligence while catering his duties under law. he was indulged in misleading and deceptive actions (section 1041H) and also violated section 674 (2) of the Act which in turn results in the violation of section 180 (1) of the Act.
The decision laid in ASIC v Fortescue Metals Group Ltd, is very important as it imposes the obligation on the company and its directors to not to act in any deceptive or misleading manner and must comply with the disclosure requirements.
References
ASIC v Fortescue Metals Group Ltd [2011] FCAFC 19
ASIC v Fortescue Metals Group Ltd [2011] FCAFC 19 <https://www.austlii.edu.au/au/journals/UNDAULawRw/2011/8.pdf
Masters v Cameron (1954),
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