Earlier today the High Court handed down its decision in the Fortescue Metals (FMG) and Andrew Forrest appeals against ASIC. The Court allowed the appeals, finding in favour of FMG and Mr Forrest.
The appeals relate to repeated announcements by FMG during August-December 2004 to the effect that it had entered into binding agreements with some Chinese state-owned-enterprises to build, finance and transfer the railway, port and mining construction work for its massive Pilbara iron ore and infrastructure project.
In March 2005 the Australian Financial Review published an article suggesting the contracts were not binding contracts to build, finance and transfer the railway, port and mine.
In 2006 ASIC commenced proceedings in the Federal Court alleging that these market announcements were misleading or deceptive and that FMG contravened the continuous disclosure requirements of the Corporations Act by not correcting the information. It alleged that Mr Forrest was in breach of his duty of care by allowing the company to contravene the law.
The trial judge dismissed ASIC's claims, but an appeal was allowed by the Full Federal Court. Today, the High Court has reversed the Full Federal Court's decision.
The High Court found that the market announcements were not misleading or deceptive, and consequently there was no breach of the continuous disclosure obligation and no breach of duty by Mr Forrest.
Misleading or deceptive?
The central difference between the majority decision of the High Court and the decision of the Full Court is that the Full Court held that when FMG said it had "entered into binding agreement[s] ... to build, transfer and finance" the railway, port and mine, it was saying something about the legally binding effect of the agreements.
However, the majority of the High Court said that when the announcements were properly read in their context, they were not statements about the legal effect of the agreements, under Australian law or any other law. Instead, they were statements about what the parties to the agreements understood that they had done, and intended would happen in the future. They were summaries of what the agreements themselves said: namely that there was an agreement, to carry out a Build and Transfer of the identified Works, which would become "binding" upon approval by the directors of the parties.
It would have been "extreme or fanciful" for the audience of investors to have understood the market announcements as directing attention to the question of enforcement of the agreements by an Australian court if the parties later disagreed .
In addition, if they had been statements that the agreements were legally binding, the question would arise, under whose law? There was a "real and lively possibility" that the validity of the agreements might be governed by Chinese law .
In reaching its decision, the majority of the High Court also:
- rejected ASIC's argument that it was misleading to describe the agreements as "Build and Transfer" contracts, since that is what the agreements themselves said;
- rejected the approach of the trial judge and the Full Federal Court in distinguishing between statements of fact and statements of opinion, and said instead that the Court should examine closely what it is that the statements conveyed to the audience (compare Heydon J's approach, below).
In addition, the majority decision criticised ASIC’s pleadings and argument. In particular the allegations of fraud or negligence were out of place in a misleading conduct case, where there should be only two questions: what was conveyed by the market announcements to the intended audience, and was that misleading or deceptive? 
The High Court said that it was "fundamental, and long established, that if a case of fraud is to be mounted, it should be pleaded specifically and with particularity". The majority of the Court also said that ASIC's allegation that the framework agreements did not state certain matters was without foundation, and ‘embarrassing to the fair trial of the proceedings". 
The conclusion that FMG's market announcements were not misleading was enough to dispose of ASIC's case that FMG contravened the continuous disclosure requirements because it failed to correct the misleading information it had placed in the market.
In addition, the High Court rejected ASIC’s further claim that if the market announcements were merely expressions of FMG's opinion about the effect of the agreements, FMG was bound to disclose the terms of the agreements themselves so that the market could form its own view. In the High Court’s view, the market announcements were not statements of opinion, but simply accurate statements of what the agreements provided.
As ASIC had failed to establish a breach of the misleading conduct or continuous disclosure provisions, its claim that Mr Forrest breached his duty of care by failing to prevent FMG from contravening the law must necessarily fail. The High Court did not therefore make any comment in relation to s180(1) or s180(2).
Does the judgment send the wrong message to the market?
In the majority decision, the High Court defended itself against any criticism that its decision had artificially limited the protection afforded to the investing public. - In particular, it said it had not decided when a company makes a market announcement that it has a contract with another company, this necessarily conveys the message only about what the contract document contains. The message conveyed by market announcements to the intended audience can only be determined by the close and careful analysis of the facts. This suggests that the High Court's decision is very fact specific.
Moreover, according to the High Court the critical question is what the market announcements conveyed to the intended audience of investors, not what the person making the announcement intended to convey. If there is a concern that the person making the announcement knows it is untrue, then they are guilty of deceit. The High Court said it had not artificially limited that protection.
Justice Heydon’s judgment
Justice Heydon produced a separate judgment. He reached the same conclusion, that FMG’s statements were not misleading or deceptive, but for different reasons. In particular, unlike the majority of the Court, his Honour did distinguish between statements of ‘fact’ and statements of ‘opinion.’
In his Honour’s view, FMG’s statements about the contracts being binding were statements of opinion rather than fact, and ASIC failed because it did not establish that Fortescue did not genuinely and reasonably hold that opinion. 
His Honour focused in some detail on the question of whether FMG must fail if it lacked a reasonable basis for its opinion that there was a binding contract to build a railway. For Heydon J the target audience of investors was "tough, shrewd and sceptical" and not naive.
We will be issuing a more detailed analysis of the decision and its implications shortly.