ASIC wins appeal in continuous disclosure case with Fortescue Metals

The Full Court of the Federal Court of Australia upheld the appeal by the Australian Securities and Investments Commission (ASIC) against the Fortescue Metals Group (Fortescue) and its Chief Executive Officer, Andrew Forrest in ASIC v Fortescue Metals Group Ltd [2011] FCAFC 19.

Continuous disclosure is — and will continue to be — a key focus of ASIC’s enforcement activities. The judgment emphasises that companies’ announcements to ASX, markets and the media must be carefully drafted to avoid any possibility of being misleading. Further, if information is released inadvertently which is potentially misleading, a company should swiftly correct it.

The court found that Fortescue had misled the market and failed to comply with its continuous disclosure obligations regarding its announcements to ASX and the media in 2004 about ‘binding agreements’ with Chinese companies concerning the financing and construction of infrastructure related to its mining operations. In the months following this announcement, Fortescue’s share price rose substantially.

During 2005, media reports indicated that the agreements were not in fact binding on the Chinese entities. In 2006, ASIC alleged that Fortescue’s announcements to ASX and the media were misleading or likely to mislead and therefore contravene s 1041H of the Corporations Act 2001. Further, the terms of the agreements were not provided to ASX until March 2005 and ASIC therefore alleged that Fortescue had failed to correct its previous erroneous announcements, in contravention of s 674. ASIC also pursued Mr Forrest on the basis of his personal involvement in the announcements.

In December 2009, the trial judge in the Federal Court dismissed ASIC’s claim. ASIC then appealed to the Full Federal Court which held that the investing public would have interpreted the announcements to mean that Chinese companies were immediately bound to finance and build the infrastructure and that what Fortescue and Mr Forrest considered to be the case was not relevant to the claim on whether the announcements were misleading.

Further, the court also found that Fortescue should have acted to correct its original announcements once it had determined that they may have been misleading. The court held that any price rise in the interim was enough to suggest that the announcements had had an influence on investors.

With regard to personal liability, the court ruled that Mr Forrest’s failure to seek legal advice on the true status of the Chinese agreements before making the announcements indicated that he had not taken all reasonable steps to ensure the company had complied with its continuous disclosure obligations.

Mr Forrest has expressed the intention to seek leave to appeal to the High Court.

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