Comment: ASIC slammed after Forrest win

By Anil Hargovan, University of New South Wales

Fortescue Metals Chairman Andrew Forrest can breathe a huge sigh of relief after winning his High Court appeal against a Federal Court finding that might have seen him banned as a company director.

The Australian Securities and Investments Commission (ASIC) suffered loss in more ways than one. Apart from the financial sting, where costs were awarded against ASIC, the regulator also suffered from reputation loss arising from the way in which it ran the case.

The unanimous judgement was highly critical of the manner in which ASIC framed its case and has sent a clear and sharp message to the corporate regulator for the need for greater transparency when formulating claims against defendants.

In 2011, the Full Federal Court overturned the decision of the trial judge and held that (then-CEO) Forrest had breached his duty of care and diligence by allowing Fortescue to make misleading statements that it had entered into “binding contracts” with several Chinese companies for the development of critical mining infrastructure.

When news broke in the media that such agreements struck in the framework agreement were not binding, the Full Federal Court also upheld ASIC's claim that the company had breached the continuous disclosure laws by failing to disclose this to the market.

However, before the findings of the Full Court were remitted to the trial judge to assess civil penalties for breach of the Corporations Act (which included the prospect of being banned from being a director, as well as financial penalties), Forrest appealed to the High Court.

In rejecting ASIC's claim that the public statement was misleading, the High Court emphasised the need for ASIC to identify the intended audience and to ask: what would they have understood?

Applying this test, the High Court found that the intended audience of investors and members of the business community would not have understood the agreement to be binding in a legal sense. According to the High Court, “it would be extreme or fanciful” for the target audience to have understood that the contracts were capable of being enforced by an Australian court if the parties later disagreed.

Of all the competing meanings of the phrase “a binding contract”, as used in the context of this case, the High Court took the view that it simply conveyed to the intended audience what the parties to the framework agreement had done and said they had done.

In preferring this narrow meaning, the High Court found that there was no evidence led at trial to show support for a broader meaning, for example, that a court will grant relief should the agreement be breached.

Concerned that the decision might be seen as falling short of protecting the investing public, the High Court was at pains to point out that the result in this type of cases are determined by the particular facts and evidence.

As a result, the High Court cautioned that this case does not establish a broad proposition to the effect that any public statement that Company A has made a contract with Company B necessarily conveys to its audience a message only about what the contractual document contains. The effect of the message conveyed is, ultimately, dependent on a close and careful analysis of the facts.

There are at least two key messages highlighted in today's judgement. First, the value of this judgement as a precedent for corporate management to navigate its way around the investor protection provisions of the Corporation Act is limited, due to its narrow focus.

Based on the High Court's finding on the core issue of misleading or deceptive conduct in favour of the defendants, the court did not focus on other significant issues such as the use of the business judgement defence – that the decision was made in good faith and with the best interests of the company – as a defence for breaching directors' duty of care and diligence.

Nor did the result in this case warrant an examination of the directors' obligations under the continuous disclosure laws.

It is understandable, but regrettable, that the High Court did not offer guidance on such important issues of major concern to the corporate community.

Second is the clear and sharp message sent to ASIC that its litigation strategy was defective for two main reasons.

One, ASIC failed to clearly specify the basis of the alleged misrepresentation (for example, whether it was fraudulent or negligent), resulting in confusion and potential unfairness to the defendant.

Second, in piling one alternative claim on top of another, ASIC was found to have taken this strategy to litigation to new heights which was condemned.

Such an approach was considered by the High Court to be “planting a forest of forensic contingencies” and unacceptable to achieve a fair trial.

In so doing, the High Court upheld the notion and reminded ASIC that no person ought to be put to loss without having a proper opportunity of meeting the case alleged against them.

Such critical remarks offer comfort to potential defendants facing allegations of breach of law by regulatory agencies.

Anil Hargovan does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.