Courting confusion: The Fortescue fallout
The High Court’s ruling into Fortescue’s ‘binding agreements’ will mean that investors may have to take company statements with a grain of salt in the future.
The ruling puts to an end a seven-year battle between Fortescue and the Australian Securities and Investments Commission over statements made by Fortescue in relation to updates the miner gave to the market in 2004 and 2005.
At the time, Fortescue announced that it had entered into a series of binding agreements with three Chinese state-owned entities concerning infrastructure developments in Western Australia.
It was later found that these were in fact framework agreements rather than binding agreements.
Today, the court decided that Forrest and Fortescue did not mislead shareholders by representing these agreements as binding.
The reasoning given was that each party intended for the agreements to be binding and "there was no evidential basis for assuming that a person hearing or reading these statement would understand that the parties had entered into agreements that would be enforced by an Australian court".
Taking the stance that Fortescue’s representation of the agreements was "neither false nor misleading", could have broad implications for listed companies, and leaves investors in a vulnerable position. Whether or not other companies follow Fortescue’s lead, the actions by the miner have left a sour taste for shareholders.
Speaking to Business Spectator, Sally Scott, a partner at lawyers Hall & Willcox, said that she didn’t believe other companies would copy Fortescue but also warned that directors should not take the case as an excuse to be less careful in market updates.
"I wouldn’t suggest that any directors or companies treat this case as a green light to take less care with their statements or to say that documents are binding when they’re not,” Ms Scott said.
The ruling also brings into question the issue of continuous disclosure and the way in which it is viewed. Still, even the courts can’t seem to agree on this case. An earlier ruling by the Federal Court found that Fortescue had breached continuous disclosure laws by failing to update the market with a statement correcting the error.
In taking the opposite stance and finding that Fortescue’s action was not misleading, the High Court found that Fortescue and Forrest had not failed in their obligations under the Corporations Act (2001), and thus did not contravene the Act.
Forrest had a lot riding on the ruling, including a possible ban from serving as a company director. He can now rest easy knowing that this final decision clears him and his company of any wrongdoing. All it cost was millions of dollars, years of legal proceedings and, until he was cleared, a slightly tarnished business reputation for the mining magnate.
The sting in the tail is that for ASIC this case must have seemed clear cut when proceedings started. Given the huge investment of time, man hours and now the legal costs for both them and Forrest, ASIC is not only left with egg on its face but also has possibly achieved the opposite of what it intended – i.e. increasing clarity for the market.
In a statement issued following the ruling, ASIC justified its reasons for bringing the case to court.
"ASIC brought the case because it raised issues of integrity of the capital markets. Compliance with continuous disclosure goes to the heart of ASIC’s strategic priority of fair and efficient financial markets. Observation of our continuous disclosure laws is essential, not only for investors but for the broader capital markets," ASIC deputy chairman Belinda Gibson said.
"We will now assess what impact the High Court’s decision has on disclosure requirements. The judgement does raise for discussion what the market would regard as a sufficient statement about the nature and content of an agreement, and what is necessary to ensure the market is properly informed for the purposes of making investment decisions."
The ruling also comes as the Australian Securities Exchange is in the process of reviewing its stance on continuous disclosure. A spokesperson for the ASX said the exchange was considering the judgment in light of its revised guidance note on continuous disclosure.
But while both the ASX and ASIC may have to go back to the drawing board on continuous disclosure, the real losers from today’s decision are the public, who have to continue taking the information given by listed companies on face value.
The ruling has also led to calls for a more efficient way of dealing with such issues. Marie McDonald, a partner at law firm Ashurst, believes that there is a need for a better decision-making process in cases such as this.
"If there was an equivalent forum to the Takeovers Panel, you would get not only a faster decision, but also more guidance would be given to the market,” Ms McDonald said.
It must be hoped that directors will not exploit any potential confusion that this case has exposed. Regardless, investors will be analysing market updates much more carefully.