In a landmark judgment today, the High Court found mining billionaire Andrew "Twiggy" Forrest did not mislead investors and breach the Corporations Act eight years ago.
The High Court's unanimous verdict overturns the Federal Court's earlier finding that Fortescue Metals Group's billionaire chairman breached the Corporations Act by misleading investors in relation to agreements signed with three Chinese companies in 2004 and 2005 to build railway, port and mine infrastructure in the Pilbara.
Fortescue also appealed against a finding by the full bench of the Federal Court that it breached the act by describing the contracts with Chinese entities as "binding" when they were merely framework agreements.
The High Court's finding will come as a blow to the Australian Securities and Investment Commission, which has engaged in a long legal battle with Forrest.
ASIC commenced proceedings in 2006 in the Federal Court, claiming the "Framework Agreements" were not enforceable under Australian law and so Fortescue had engaged in misleading or deceptive conduct when Fortescue and Forrest made public statements that Fortescue had entered into a "binding contract" with each of the Chinese entities to build, finance and transfer the relevant construction works.
ASIC also claimed Fortescue and Forrest had contravened the continuous disclosure requirements of the Corporations Act by not correcting the false or misleading information and that Forrest had failed to discharge his duties as a Fortescue director with the degree of care and diligence required.
However, the High Court found the statements made by Fortescue and Forrest that Fortescue and the Chinese state-owned entities had entered into agreements that each intended to be binding were neither false nor misleading representations.
The court held there was no evidential basis for assuming that a person hearing or reading these statements would understand that the parties had entered into agreements that would be enforced by an Australian court according to Australian law should a dispute ever arise between them.
Because the statements were neither misleading nor deceptive, the court also found that Fortescue and Forrest had not failed to meet their obligations under the Corporations Act.
Richard Harris, partner at law firm Allens, told SmartCompany that Forrest and Fortescue's win was unexpected.
"My first reaction is one of surprise because the full court's decision was so emphatic that the representations were made were in fact misleading," Harris says.
Harris says as the High Court found at a threshold level that Forrest and Fortescue's representations were not misleading or deceptive it then did not need to consider whether Forrest and Fortescue had breached continuous disclosure obligations.
"Once the High Court found that then it said it was not necessary to deal with whether the statements were contraventions of the continuous disclosure regime or Forrest's obligations as a director," says Harris.
Harris says as the High Court did not consider the issue of continuous disclosure, much of the Federal Court's reasoning around continuous disclosure is likely to stand until the High Court considers the issue again.
Harris says the law as it now stands on the issue is that if you make a misleading and deceptive statement to the market it is also likely to be a breach of your continuous disclosure obligations. This means you are under an obligation to correct that statement to the extent it becomes clear, and being a person involved in misleading and deceptive conduct automatically constitutes a breach of your director's duty.
He says the High Court judgment "will be a blow to ASIC" and is damning of the regulator.
"The judgment is very critical of ASIC for running too many variations of its case and for running what the High Court characterises as essentially a fraud case, which it says was not made out."
The High Court judgment follows an eventful few weeks for Forrest and Fortescue, which was forced to negotiate a new $US4.5 billion secured debt package last month in response to a sharp drop in the price of iron ore.
SmartCompany contacted ASIC and Fortescue for comment but no reply was available before publication.