Australian Securities and Investments Commission v Fortescue Metals Group Ltd
[2011] FCAFC 19
•18 February 2011
FEDERAL COURT OF AUSTRALIA
Australian Securities and Investments Commission v Fortescue Metals Group Ltd [2011] FCAFC 19
Citation: Australian Securities and Investments Commission v Fortescue Metals Group Ltd [2011] FCAFC 19 Appeal from: Australian Securities and Investment Commission v Fortescue Metals Group Ltd [No 5] [2009] FCA 1586 Parties: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v FORTESCUE METALS GROUP LTD (ACN 002 594 872) and JOHN ANDREW HENRY FORREST File number: WAD 23 of 2010 Judges: KEANE CJ, EMMETT AND FINKELSTEIN JJ Date of judgment: 18 February 2011 Catchwords: CORPORATIONS LAW – continuous disclosure – misleading and deceptive conduct – listed company made announcements that it had entered binding agreements – agreements were merely agreements to negotiate – whether continuous disclosure obligations had been breached – whether obligation not to engage in misleading or deceptive conduct had been breached Legislation: Australian Securities and Investments Commission Act 2001 (Cth) s 19
Corporations Act 2001 (Cth) ss 79, 180, 674, 676, 677, 1041H, 1332
Corporations Regulations 2001 (Cth) r 1.0.02ACases cited: Aaron’s Reefs, Limited v Twiss [1896] AC 273 cited
Australian Communist Party v The Commonwealth (1951) 83 CLR 1 cited
Ansett Transport Industries (Operations) Pty Limited v The Commonwealth of Australia (1977) 139 CLR 54 cited
Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 cited
Australian Goldfields NL (in liq) v North Australian Diamonds NL [2009] WASCA 98 cited
Barrier Wharfs Limited v W Scott Fell & Company Limited (1908) 5 CLR 647
Booker Industries Proprietary Limited v Wilson Parking (Queensland) Proprietary Limited (1982) 149 CLR 600 cited
Briginshaw v Briginshaw (1938) 60 CLR 336 cited
Campomar Sociedad Limitada v Nike International Limited (2000) 202 CLR 45 cited
Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 cited
Council of the Upper Hunter Valley County District v Australian Chilling and Freezing Co Limited (1968) 118 CLR 429 cited
Fletcher Challenge Energy Ltd v Electricity Corporation of New Zealand Ltd [2002] 2 NZLR 433 cited
Franklins Pty Ltd v Metcash Trading Ltd (2009) 264 ALR 15 cited
Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82 cited
Godecke v Kirwan 120 CLR 629 cited
Gould v Vaggelas (1985) 157 CLR 215 cited
GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 cited
Hall v Busst (1960) 104 CLR 206 cited
Hillas & Co Ltd v Arcos Ltd [1932] All ER 494 cited
Hyedon v NRMA Ltd v NRMA Ltd (2000) 51 NSWLR 1 cited
Jubilee Mines NL v Riley (2009) 253 ALR 67 cited
Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service [2010] NSWCA 268 cited
Masters v Cameron (1954) 91 CLR 353 considered
Middleton v Aon Risk Services Australia Ltd [2008] WASCA 239 cited
Moffatt Property Development Group Pty Ltd v Hebron
Park Pty Ltd [2009] QCA 60 cited
Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd’s Rep 601 cited
National Exchange Pty Ltd v Australian Securities and Investments Commission (2004) 49 ACSR 369 cited
Queensland Electricity Generating Board v New Hope Collieries Pty Ltd [1989] 1 Lloyd’s Rep 205 cited
Thorby v Goldberg (1964) 112 CLR 597 cited
Yorke v Lucas (1985) 158 CLR 661 citedSpencer-Bower, Turner and Handley, Actionable Misrepresentation (4th ed, 2000, Butterworths, London)
Dates of hearing: 22, 23, 24, 25, 29, 30 November 2010 Place: Perth Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 235 Counsel for the Appellant: Mr NJ Young QC with Mr JA Thomson, Mr DJ Crennan and Mr DR Luxton Solicitor for the Appellant: Mallesons Stephen Jaques Counsel for the First Respondent: Mr DF Jackson QC and Mr J Karkar QC, with Mr B Dharmananda, Mr RJ Price and Mr JE Hynes Solicitor for the First Respondent: Corrs Chambers Westgarth Counsel for the Second Respondent: Mr AJ Myers QC with Mr M Thangaraj Solicitor for the Second Respondent: Gadens
IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
WAD 23 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
AppellantAND: FORTESCUE METALS GROUP LTD (ACN 002 594 872)
First RespondentJOHN ANDREW HENRY FORREST
Second Respondent
JUDGES:
KEANE CJ, EMMETT AND FINKELSTEIN JJ
DATE OF ORDER:
18 FEBRUARY 2011
WHERE MADE:
PERTH
THE COURT ORDERS THAT:
1.The appeal be allowed.
2.The order made on 23 December 2009 be set aside and in lieu thereof:
2.1The Court declares that the First Respondent has contravened ss 674(2) and 1041H of the Corporations Act 2001 (Cth).
2.2The Court declares that the Second Respondent has contravened ss 180(1) and 674(2A) of the Corporations Act 2001 (Cth).
2.3The respondents pay the applicant’s costs of and incidental to the proceeding.
3.The matter be remitted to a judge of the Federal Court of Australia.
4.The respondents pay the appellant’s costs of the appeal.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.
IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
WAD 23 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
AppellantAND: FORTESCUE METALS GROUP LTD (ACN 002 594 872)
First RespondentJOHN ANDREW HENRY FORREST
Second Respondent
JUDGES:
KEANE CJ, EMMETT AND FINKELSTEIN JJ
DATE:
18 FEBRUARY 2011
PLACE:
PERTH
REASONS FOR JUDGMENT
KEANE CJ:
This appeal arises out of events which occurred in 2004 and 2005 in relation to a mining project in Western Australia known as the Pilbara Infrastructure Project (the Project). The first respondent, Fortescue Metals Group Ltd (FMG), intended that the Project would consist of a mine in the Pilbara region, a port at Port Hedland, and a railway to connect the mine to the port.
FMG is a publicly listed company on the Australian Securities Exchange (ASX). The second respondent, Mr John Andrew Henry Forrest (Forrest), is chairman and chief executive officer of FMG. He is also a substantial shareholder. The appellant, the Australian Securities and Investments Commission (ASIC), alleges that the respondents engaged in conduct contrary to the Corporations Act 2001 (Cth) (the Act) in relation to FMG’s public disclosures relating to the Project.
In early 2004, FMG and Forrest entered into negotiations with three Chinese companies in relation to the construction of the mine, port and railway. The negotiations led to the execution of three agreements with, respectively, China Metallurgical Construction (Group) Corporation (CMCC), China Harbour Engineering Company (Group) (CHEC), and China Railway Engineering Corporation (CREC) (collectively, the “Chinese Contractors”). These agreements are referred to as the “framework agreements”. The CREC agreement was signed on 6 August 2004. The CHEC agreement was signed on 1 October 2004. The CMCC agreement was signed on 20 October 2004.
In August and November 2004 FMG gave information about the Project to the Australian Stock Exchange Limited (as the ASX was then known) in the form of letters and media releases. They were:
·A letter from FMG to the ASX dated 23 August 2004, “the 23 August letter”, and FMG media release dated 23 August 2004, “the 23 August Media Release” (relating to the CREC Agreement)
·A letter from FMG to the ASX dated 5 November 2004, “the 5 November letter”, and FMG media release dated 5 November 2004, “the 5 November media release” (relating to the CHEC Agreement and the CMCC Agreement); and
·A letter from FMG to the ASX dated 8 November 2004, “the 8 November letter”, relating to all three framework agreements.
These letters and media releases stated that FMG had executed binding agreements with each of CREC, CHEC, and CMCC to build, finance and transfer the railway, port and mine for the Project.
This information was repeated in a number of subsequent publications by FMG. These publications are listed in the appendix which is Schedule A to these reasons. The most important of these publications involved an announcement at a press conference held after publication of the 23 August 2004 releases when Forrest said that the price of the railway line was “confidential but we are pleased to say it is competitive”.
FMG requested trading halts before it made the announcements on 23 August and 5 November 2004. FMG’s share price rose over the period covered by the announcements from a price of 59 cents at the close of trading on 23 August 2004 to a price of $1.93 at the close of trading on 9 November 2004, and then to a closing price of $5.05 on 23 March 2005.
In March 2005 an article was published in the Australian Financial Review (the AFR Article) which asserted that the framework agreements did not impose any legally binding obligations on the Chinese Contractors to build, finance and transfer the railway, port and mine. The share price fell after the publication of the AFR Article. Since that time, FMG’s share price has improved on the closing price at 23 March 2005.
A copy of the CMCC agreement was provided by FMG to the ASX on 29 March 2005 and copies of the other two framework agreements were provided to the ASX on 30 March 2005.
In March 2006, ASIC brought proceedings alleging that FMG had engaged in misleading and deceptive conduct under s 1041H of the Act, and under s 52 of the Trade Practices Act 1974 (Cth) (the TPA), by falsely representing to the investing public that the framework agreements were enforceable agreements to build, finance and transfer the railway, port and mine. ASIC alleged that s 1041H of the Act was contravened by each of the publications referred to above, and in the 16 other publications referred to in Schedule A to these reasons. Only declaratory relief was sought against FMG for the alleged contraventions of s 1041H. That is because s 1041H is not a civil penalty provision: see s 1317E. But the contraventions of s 1041H are alleged against FMG as a stepping stone toward the conclusion that FMG contravened s 674(2). The contravention of s 1041H and s 674(2) are, in turn, used as stepping stones toward the conclusion that Forrest contravened s 180 of the Act.
ASIC put its case of contravention of s 674(2) of the Act in a number of ways. First, it contended that FMG had failed to disclose the terms or true meaning of the framework agreements. Secondly, and in the alternative, ASIC asserted that FMG in purporting to comply with s 674(2) breached that provision by making inaccurate disclosure. Thirdly, and in the further alternative, ASIC asserted that FMG breached s 674(2) in failing to correct FMG’s earlier mis-statements as to the terms of the framework agreements. Declarations and pecuniary penalties were sought against FMG in respect of the alleged contraventions of s 674(2) of the Act. ASIC claimed that FMG failed or omitted to disclose the material terms or true legal effect of the framework agreements over the following periods:
·for the CREC agreement, from 23 August 2004 to 30 March 2005;
·for the CHEC agreement, from 5 November 2004 to 30 March 2005; and
·for the CMCC agreement, from 5 November 2004 to 29 March 2005.
ASIC alleged that Forrest was involved in FMG’s contravention of s 1041H and s 674(2) because he authorised or approved the letters and media releases. As a result of his involvement in FMG’s contravention of s 674(2), ASIC also alleged that Forrest contravened s 180(1) of the Act because his conduct was in breach of his duty to FMG in that it exposed FMG to pecuniary penalties. ASIC sought pecuniary penalties against Forrest and an order under s 206C or s 206E of the Act disqualifying him from managing a corporation.
The trial judge comprehensively rejected ASIC’s case. His Honour held that FMG had not contravened s 1041H of the Act because its statements about the framework agreements were necessarily statements of opinion as to their legal effect, and FMG’s directors, including Forrest, honestly and reasonably held the opinion they expressed. His Honour also held that FMG did not contravene s 674 of the Act because it honestly and reasonably believed that the framework agreements bound the parties to build, finance and transfer the railway, port and mine. On that basis, it did not have the information which comprises the contrary view for the purposes of s 674 of the Act. Accordingly, it was not obliged to disclose that information.
In consequence of the trial judge’s rejection of ASIC’s case against FMG, its case against Forrest also failed.
ASIC’s principal grounds of challenge to the decision of the trial judge are:
·that his Honour erred in treating FMG’s public statements as statements of matters of opinion;
·that his honour failed to appreciate that FMG’s public statements about the framework agreements were misleading in describing them as binding contracts for the construction of the mine, railway and port when they did not contain agreed terms as to price, subject matter, or scheduling, but provided only for further negotiations with a view to agreement upon such terms;
·that his Honour erred in concluding that the opinion which he ascribed to FMG and Forrest was genuinely and reasonably held by them.
I should note here that, at trial and in this Court, the case was complicated by ASIC’s presentation of a number of arguments. Some of these arguments are strong, while others are not. The presentation of a range of alternative arguments is not apt to aid comprehension or coherence of analysis and exposition; indeed, this approach may distract attention from the central issues in the case. It may be that at trial both sides concentrated upon issues relating to the honesty and reasonableness of FMG and Forrest, whereas, in this Court, the parties’ focus shifted to an objective assessment of the conduct of FMG and Forrest. I propose to begin my analysis with a summary of the principal claims made by ASIC at trial: that will involve reference to the terms of the framework agreements, FMG’s statements to the ASX and to the public, the relevant terms of the Act and those aspects of the factual background necessary to an understanding of the arguments agitated in this Court. I will then state the conclusions of the trial judge in greater detail. I will then summarise the arguments advanced in this Court, before proceeding to a consideration of the arguments necessary to the resolution of the appeal.
ASIC’S CASE
The framework agreements
The CREC framework agreement was in the following terms:
FRAMEWORK AGREEMENT
AN AGREEMENT made the 6th day of August 2004
BETWEEN
Fortescue Metals Group Limited (ABN 50 002 594 872) of Fortescue House, 50 Kings Park Rd, West Perth, in the State of Western Australia, Australia with its successors and assigns (the “FMG”).
AND
China Railway Engineering Corporation, Block B, CREC Mansion, Southern Square, Beijing West Railway Station, Beijing, in the Peoples Republic of China of [sic] with its successors and permitted assigns (the “CREC”).
RECITALS
A.CREC has represented that it has the necessary skills, personnel and equipment to successfully carry out and complete the Build and Transfer of the railway (the “Works”) for the Pilbara Iron Ore and Infrastructure Project (the “Project”) and the FMG is relying on the CREC’s representation.
B.CREC, having closely examined all proposed documents, has submitted an offer to execute the Works and the FMG has accepted the CREC’s offer and the parties now wish to evidence their agreement.
C.CREC will confer with the Chinese government to determine whether CREC will also be authorised to carry out the works associated with the port and mine infrastructure for the Project.
THIS FRAMEWORK AGREEMENT WITNESSES as follows:
1FRAMEWORK
1.1 The parties will jointly develop and agree on the following:
· a General Conditions of Contract suitable for a Build and Transfer type contract in good faith.
· The Scope of the Work to be included in the Contract.
· List of nominated Australian and Chinese joint venture partners and/or subcontractors.
· Definitive engineering design (to Australian Standards).
· Scheduling of the Works.
· Determination of the Value of Works
1.2The Parties agree that the following scope of work will be undertaken by FMG and CREC shall cooperate with FMG to undertake this work:
· Technical peer review.
· Independent review of the schedule and value of the Works.
2SCOPE OF WORK
2.1 The Works include the following:
· Earthworks for the formation including level crossings.
· Civil works associated with the construction of culverts and bridges.
· Above track works including ballast, sleepers, ties and rail.
· Signals and communications.
· All rolling stock with the exception of locomotives.
Detailed Engineering, Procurement and Construction
2.2.1The Parties agree that the following scope of work is to be included in the Agreement:
· Detailed engineering design (to Australian Standards).
· Project management and scheduling of the Works.
· Procurement, construction and commissioning of the Works.
2.2.2The Parties agree that the following scope of work will be undertaken by FMG and CREC shall cooperate with FMG to undertake this work:
· Technical review.
3GENERAL CONDITIONS OF CONTRACT
3.1The Parties agree that the following will be included in the General Conditions of Contract:
· FMG will provide security to CREC in the form of a JORC classified resource to the value of the Works.
· FMG will make a down payment of 10% of the value of the Works in exchange for a bank guarantee of the same value from CREC. The bank guarantee to be returned when the parties agree 10% of the Works have been completed.
· Remaining payment terms are:
· 10% upon issue of Certificate of Practical Completion.
· 15% on the first anniversary of the issue of the Certificate of Practical Completion.
· 15% on the second anniversary of the issue of the Certificate of Practical Completion.
· 50% on the third anniversary of the issue of the Certificate of Practical Completion.
· Standard liquidated damages and performance bonds clauses shall be included.
· CREC will issue a bank guarantee(s) to an agreed value to cover any warranty period that shall be mutually agreed.
4SCHEDULE
CREC has agreed to assist FMG to accelerate the procurement of materials, equipment and their technical understanding of the relevant Australian Standards and work practices inherent in this Project such that the target delivery date for first shipment of ore is last quarter 2006. To expedite the Works CREC have agreed to supply sufficient engineering support from the signing of this Agreement such that it will allow CREC to competently expedite its role in the provision of the Works.
5APPROVAL
This agreement will become binding upon the approval of both the Board of Directors of CREC and the Board of Directors of FMG. Such approval must be given before 31 August 2004.
6RELEVANT LAWS
This agreement will conform with all relevant Australian and Chinese laws and regulations. Any difference that may exist will be negotiated in good faith and will not impact the effectiveness of the other clauses.
7FURTHER AGREEMENTS
This document represents an agreement in itself, and it is recognised a fuller and more detailed agreement not different in intent from this agreement will be developed later.
8IN WITNESS whereof the parties have signed this Agreement.
[Signed for and on behalf of FMG by Chairman Andrew Forrest and signed for and on behalf of CREC by Vice President Bai Zhongren]
On the hearing of the appeal, a question arose as to whether the documents referred to in Recital B included a document entitled the Pilbara Iron Ore Infrastructure Project Prefeasibility Report (the PFS) which described in some detail the work involved in the construction of the Project. The evidence did not address this question directly. That was because it was not suggested at trial that the subject matter of the framework agreements was actually described in the PFS. That such a suggestion was not made at trial is readily understandable: the description of the works referred to in the PFS is not of the works which FMG intended to be the subject of the Project at the time of the making of the framework agreements. That is because the location of FMG’s principal mine site and hence the railway between that site and the port was changed after the production of the PFS.
The CHEC agreement, in broad terms, is similar to the CREC agreement. The “Scope of Work” clause, however, is as follows:
2 SCOPE OF WORK
2.1The Works include the following:
· Dredging and land reclamation (spoil disposal).
· Wharf and approach jetty.
· Stackers, reclaimer and shiploader.
· Primary screen house including storage bins, screens, feeders, etc
· Wagon tippler.
· Conveyors associated with the above.
· General earthworks.
· Additional geotechnical drilling, if required.
2.2Detailed Engineering, Procurement and Construction
2.2.1The Parties agree that the following scope of work is to be included in the Agreement:
· Detailed engineering design (to Australian Standards).
· Project management and scheduling of the Works.
· Procurement, construction and commissioning of the Works.
2.2.2The Parties agree that the following scope of work will be undertaken by FMG and CHEC shall cooperate with FMG to undertake this work:
· Technical review.
The recitals to the CHEC Agreement were slightly different from the CREC Agreement, referring to the port rather than the railway. The recitals to the CHEC agreement were as follows:
A.CHEC has represented that it has the necessary skills, personnel and equipment to successfully carry out and complete the Build and Transfer of the port related work (the “Works”) for the Pilbara Iron Ore and Infrastructure Project (the “Project”) and the FMG is relying on the CHEC’s representation.
B.CHEC, having closely examined all proposed documents, has submitted an offer to excute the Works and the FMG has accepted the CHEC’s offer and the parties now wish to evidence their agreement.
C.CHEC will confer with the Chinese government to determine whether CHEC will also be authorised to carry out the works associated with the port infrastructure for the Project.
The CMCC agreement is also generally similar to the CREC agreement. The “Scope of Work” clause, however, is as follows:
2 SCOPE OF WORK
2.1The Works include the following:
· Crushing plant(s) within the mine workings.
· Overland conveyors from the crushing plant(s) to the process plant(s).
· Process plant(s).
· All earthworks, civil works, structural steel, mechanical, pipework, electrical and control and automation of these facilities.
2.2Detailed Engineering, Procurement and Construction
The parties agree that the following scope of work is to be included in the Agreement:
· Detailed engineering design (to Australian Standards).
· Project management and scheduling of the Works.
· Procurement, construction and commissioning of the Works.
The recitals to the CMCC Agreement were as follows:
A.MCC has represented that it has the necessary skills, personnel and equipment to successfully carry out and complete the Build and Transfer of the mine and the process plant (the “Works”) for the Pilbara Iron Ore and Infrastructure Project (the “Project”) and the FMG is relying on the MCC’s representation.
B.MCC, having closely examined all proposed documents, has submitted an offer to execute the Works and the FMG has accepted the MCC’s offer and the parties now wish to evidence their agreement.
The 23 August Letter
The ASX received the following letter from Mr Catlow, FMG’s Chief Financial Officer, at 9:37am on 23 August 2004:
China Signs to Build Railway
Fortescue Metals Group Ltd (“FMG”) is pleased to announce that it has entered into a binding contract with China Railway Engineering Corporation (CREC) to build and finance the railway component of the Pilbara Iron Ore and Infrastructure Project.
The “Build and Transfer” (BT) contract covers the railway from the Company’s iron ore tenements in the Chichester Ranges to the export hub at Port Hedland. The contract covers all earthworks, culverts, bridges, rail, sleeper and rolling stock requirements, with the exception of locomotives which will continue to be sourced internationally and may form an addition to this agreement.
CREC is China’s largest construction group, having constructed 40,000 kilometres of rail networks throughout the country. FMG is confident in CREC’s ability to build the heavy axle load railway in the Pilbara pursuant to the BT contract. CREC plans to become Asia’s top construction company within 3 to 5 years and this contract provides them with a platform for further international growth. CREC has commenced discussions with Australian based engineering and construction groups with a view to forming local joint ventures to meet its obligations pursuant to the contract.
We refer to the media release on the Company’s website at >
ASIC focuses upon the first two paragraphs of this letter which state that FMG has entered into a binding contract to build and finance the railway component of the infrastructure for the Project. ASIC’s case of contravention of s 1041H of the Act is that the only obligation upon CREC under its framework agreement was to develop and agree upon a final agreement and that it was misleading to suggest that this was an obligation to build and transfer the infrastructure.
The media release referred to at the end of this statement was in the following terms:
CHINA SIGNS TO BUILD FORTESCUE METALS’
MULTI-USER IRON ORE RAILWAY IN THE PILBARAChina’s largest construction group, China Railway Engineering Corporation (CREC), has executed a binding agreement to build and finance the railway component of Fortescue Metals Group Ltd’s (“ASX: FMG”) $1.85 billion Pilbara iron ore project.
Australian-based Fortescue Metals said it had signed the “Build and Transfer” (BT) contract in Beijing with CREC - which is also one of the world’s largest rail construction groups.
Speaking from China today, Fortescue’s Chief Executive Officer, Mr Andrew Forrest said this contract is a major breakthrough for Fortescue Metals in its development of open access and multi-user independent railway and port facilities in the Pilbara.
“This long overdue facility will liberate otherwise stranded major deposits across the Pilbara and ensure that Australia doesn’t continue to lose its share of important growing overseas markets,” he said.
“BT contracts are common in the international engineering and construction industry. Under such contracts, the provider designs to customer specification (AS 9000), builds, commissions and then transfers the facility to the customer once agreed performance specifications have been met, an achievement known as “Practical Completion”,” Mr Forrest said.
The contract underwrites the project’s independent rail line from Fortescue Metals’ mine sites at its massive Chichester Ranges iron ore deposits in the Pilbara to Port Hedland, the export hub for the province’s iron ore shipments. CREC will also source and finance the bulk of the rolling stock for the project, providing the platform for the rapid advancement of the project.
“The further development of the Pilbara has until now been restrained by the lack of an independent railway system. This agreement provides for that vital new infrastructure to be built. Finalising this contract with CREC now paves the way to finance the rest of the project in a plain, vanilla manner should the Company so wish,” said Fortescue’s Chief Financial Officer, Chris Catlow.
The rail link is the largest component in Fortescue Metal’s Pilbara project which also includes a proposed A$410 million iron ore mine and $470 million in new port facilities at Port Hedland.
The President of China Railway Engineering, Mr Qin Jiaming, said from Beijing today that the Fortescue Metals’ contract presented an excellent opportunity for CREC to develop internationally.
“This new Pilbara project dove-tails both CREC’s short and long-term development strategy,” Mr Jiaming said.
“CREC is fully confident about its capacity to build a heavy axle load railway in the Pilbara, a project able to deliver significant economic benefits to both Australia and China,” he said.
The contract covers all earthworks, culverts, bridges, rail, sleeper and rolling stock requirements for the new rail line.
CREC has already commenced discussions in Perth and Beijing with Australian and international engineering and construction groups (operating in Australia) with a view to including minority joint venture interests in the contract.
Locomotives for the Fortescue Metals’ railway will continue to be sourced internationally and may form an addition to this agreement.
“This is the catalyst we have been working on to propel our Pilbara project into real-time construction, project financing and project commencement stages,” Mr Forrest said.
Under the terms of the contract, CREC will take full risk under a fixed price agreement on the rail project which Fortescue Metals proposes be held separate to the parent company, in a new entity called The Pilbara Infrastructure (TPI).
Fortescue Metals has previously announced its intentions of retaining only a maximum 40% interest in TPI which Mr Forrest said may be listed on international stock exchanges.
“We continue to receive interest from parties seeking to invest in and develop a controlling interest in the rail and port facilities being pioneered in the Pilbara by Fortescue Metals”, Mr Forrest said.
Mr Forrest said CREC had clearly indicated an appetite to work with Australian companies on joint venture agreements covering the new rail network.
CREC is a State-owned enterprise in China with work in hand of US$12 billion, prior to signing with Fortescue Metals.
It is set to become a Fortune 500 Company next year and aims to become the top Asian construction company in three to five years.
CREC has constructed 40,000 kilometres of rail networks throughout China, as well as 1,800 kilometres of rail bridges and a similar length of rail tunnels.
Fortescue Metals earlier this month announced the discovery close to surface at its main Christmas Creek project in the Chichesters, of substantial tonnes of high quality microplaty haematite ore over only the initial iron ore deposits explored within that project area.
The ore is in high demand by Chinese and Japanese steel mills as it requires little beneficiation before processing, and offers superior blast furnace performance.
Fortescue Metals has the largest package of tenements (>16,000 sq kms) in the Pilbara province and has appointed the internationally recognised Worley Group Limited as Definitive Feasibility Study Managers for the project.
Mr Forrest said today’s agreement kept the Company’s aspirations for first iron ore deliveries in the 2006 - 2007 financial year “on track”.
The Company has previously announced that its proposed Pilbara rail network would be open to access by other users.
Media Contact:
Andrew Forrest Kevin Skinner
Fortescue Metals Group (FMG) Field Public Relations
(08) 9266 0111 / 0402 097 191 (08) 8234 9555 / 0414 822 631A dial-in conference call is scheduled for 10:00am (WST), 12:00 noon (EST) on Monday 23 August 2004. Details as follows;
Phone No: 1800 063 720
Account No: 75104808
Guest PIN: 7643ASIC draws attention to the statement that the “terms of the contract” include a “fixed price” and require CREC to take the “full risk” of constructing the Project, and points out that the framework agreement contains no such terms.
The 5 November Letter
The announcement of 5 November 2004 was in the following terms:
Design, Construct and Finance Agreements for Port, Rail and Processing Plant
Fortescue Metals Group Ltd (“FMG”) is pleased to announce that it has executed binding contracts with China Harbour Engineering Corporation (“China Harbour”) and China Metallurgical Construction (Group) Corporation (“China Metallurgical”) pursuant to a design, build and finance arrangement for the respective project component parts of FMG’s Port Hedland ship loading and stockyard facility and FMG’s Mine Processing Plant.
The ceremony was officiated by Mr Wang Xiaoqi, the Director General of the Bureau of Planning and Development and of the State-Owned Assets Supervision and Administration Commission of the State Council (SASAC). From Australia, Mr Barry Haase, Federal Member for Kalgoorlie, officiated with the formal support of the Premier of Western Australia, Dr Geoff Gallop, and the Minister for State Development for Western Australia, Mr Clive Brown. The ceremony was also attended by senior representatives from other major corporations already committed to the project including ThyssenKrupp, ABB, Barclay Mowlem, Leighton Contracting and BGC.
These contracts follow a binding agreement signed with China Railway Engineering Corporation (“China Rail”) in August 2004 whereby the largest project component part being the rail line from Port Hedland to the proposed mine site in the Chichester Ranges, is to be delivered under a design construct and finance structure substantially in the same form as those signed today.
FMG has now established a broad platform for the delivery of the three major component parts of its AUD1.85 billion Pilbara Iron Ore and Infrastructure Project on terms and conditions that take full advantage of the expertise and balance sheet strengths of the contracting party. This has the effect of placing the majority project risk with the construction parties. Further, the payment terms for the 90% balance are structured on a staged basis effectively providing a finance facility for this substantial portion of the total project cost. FMG in return for a bank guarantee from the contracting parties will fund the initial 10% of the project value. This balance is being quickly filled by customer pre payments and we are actively pursuing further joint ventures.
The Chinese Government owns the three companies that have committed to design, construct and finance the Fortescue project. They are all the largest and leading participants in their respective areas of operation within China.
All three enterprises have international experience and their preferred operating methodology is to involve local expertise particularly in regard to design and construction. As previously announced, China Rail signed an agreement with Barclay Mowlem pursuant to the rail project which will provide them with significant local knowledge given Barclay Mowlem were a major contractor under the Alice Springs to Darwin rail line. Currently there are a number of Australian companies in China developing working relationships with China Harbour and China Metallurgical to bring similar levels of expertise to their particular areas of interest.
FMG believes that the high level of engagement being actively sought by the various Chinese groups covering both product purchase agreements and project construction relationships is clear evidence of the desire held by many Chinese corporations to see FMG firmly established as an important supplier of iron ore into the future.
For further information we refer to the media release on the Company’s website at >
The corresponding media release stated:
CHINA TO FUND NEW A$1.85 BILLION AUSTRALIAN IRON ORE AND INFRASTRUCTURE PROJECT
Australia’s newest iron ore project is to be financed and built by three of the largest state owned companies in China in a near A$2.0 billion fillip for Australia’s resources sector.
Binding contracts announced and signed this afternoon in Beijing commit Chinese financing and construction support for the A$1.85 billion iron ore and infrastructure project proposed by Fortescue Metals Group Limited in Western Australia’s Pilbara.
The new agreements with China Harbour Engineering Group (China Harbour) & China Metallurgical Construction (Group) Corporation (China Metallurgical) are the latest breakthrough for Fortescue Metals and Australia in opening up a major new iron ore supply source and corridor to burgeoning overseas markets by 2007.
Also in Beijing today as signatory partners to the construction commitments were some of the largest multi-national and Australian engineering, metallurgical, project management and construction firms, and equipment suppliers which will participate widely in the project’s development.
The contracts announced today follow the binding agreement with China Railway Engineering Corporation (China Rail) announced by Fortescue Metals in August this year.
The three agreements now form a total project construction and finance solution as follows:
- Mine: China Metallurgical will provide a financing, design, and construction package for the mine and beneficiation plant at Christmas Creek
- Railway: China Rail has committed to the financing, design, and construction of the heavy haul open-access rail line and associated rolling stock, between the Chichester Ranges and Port Hedland
- Port: China Harbour will provide the financing, design and construction for the large-scale works covering the dredging, train unloading, or [sic] stacking, blending and ship loading facilities at Fortescue Metals’ selected export outlet at Anderson Point in Port Hedland.
-Other Significant Multinational and Australian involvement: Corporates already committed to the project include ThyssenKrupp, ABB, Barclay Mowlem, Leighton Contracting, and BGC.
The ceremony was officiated by Mr Wang Xiaoqi, the Director General of the Bureau of Planning and Development of the State-owned Assets Supervision and Administration Commission of the State of the Council (SASAC). From Australia, Mr Barry Haase, Federal Member for Kalgoorlie, officiated with the formal support of the Premier of Western Australia, Dr Geoff Gallop, and the Minister for State Development for Western Australia, Mr Clive Brown.
“These commitments by Chinese interests now cover the financing and construction risk for the total project,” Fortescue Metals’ Chief Executive Officer, Mr Andrew Forrest, said today.
“Our approach has been to ensure that construction risk is carried by the contractors and that project payment by Fortescue Metals only follows Practical Completion,” Mr Forrest said.
Since June this year, Fortescue Metals has raised A$14.5 million in new share capital through two separate share placements and signed long term binding sales agreements that contain prepayment commitments of A$66 million payable either at financial close or during the term to first product shipment.
“The three contracts will now limit Fortescue’s initial financing requirement to less than 10% of the estimated $1.85 billion total project cost with the balance covered largely by prepayment commitments. These commitments from customers provide cost effective finance that does not have an equity dilution effect for existing shareholders in Fortescue Metals. Despite this we are not ruling out further joint ventures with Chinese and other multi-national corporations” Mr Forrest said.
“The construction funding significantly enhances the economic value of the project by de-risking the development phase - often an issue with greenfields project financing,” he said.
“The involvement of China in the financial packaging and construction schedules for all three elements of this massive undertaking, is the birth of a new Sino-Australian partnership that will be a major boost for the Australian and Chinese economy.
Significantly it has Fortescue on target for 2007 start up as the new Australian source of long-term quality iron ore supply to mills in the Asian region.
As announced in recent weeks, FMG’s first batch of long term binding sales contracts provides for a total delivery commitment of 8 million tonnes of iron ore per annum of an estimated initial production level of 45 million tonnes per annum.
Mr Forrest said that it was significant that the “contracts were signed soon after Fortescue Metals announced its interim resources exploration results from Christmas Creek. The qualitative analysis of the materials sent a clear signal as to the product type and grade being targeted for production in the 2006/07 financial year - and has been increasingly acknowledged by international steel mills.”
The 8 November Letter
FMG’s letter of 8 November was written in response to a request by Mr Walsh of the ASX that FMG provide the ASX with the material terms of the framework agreements. ASIC relies upon the letter of 8 November as a further mis-statement of the effect of the framework agreements. ASIC also relied on this letter as evidence of an attempt by FMG to avoid providing the ASX with the actual terms of the framework agreements.
The letter released to ASX on 8 November was in the following terms:
Additional Information on China Harbour and China Rail Agreements
Fortescue Metals Group Ltd (“FMG”) is pleased to announce further developments to the agreements signed with China Harbour Engineering Corporation (“China Harbour”) and Metallurgical Group of China (“China Metallurgical”) pursuant to the design, build and finance arrangement for the respective project component parts of FMG’s Port Hedland ship loading and stockyard facility and FMG’s mine processing plant.
As mentioned in Friday’s ASX release, there were a number of Australian companies present at the signing ceremony that were in varying stages of forging closer ties with the Chinese companies.
FMG can now advise that two of those Australian companies have also recently signed separate agreements with China Harbour and China Metallurgical.
ThyssenKrupp Engineering (Australia) Pty Ltd (“ThyssenKrupp Engineering”) has signed a Memorandum of Understanding with China Harbour and China Metallurgical for the development of an ongoing working relationship with each of these companies for the FMG project.
BGC Contracting Pty Ltd (“BGC”) has also signed a similar Memorandum of Understanding (“MOU”) with China Metallurgical.
The MOU’s signed by ThyssenKrupp Engineering and BGC follow similar lines to that entered into between Barclay Mowlem and China Rail in that it creates a strategic relationship with a local operator that has the requisite experience and knowledge of Australian conditions.
BGC is a well known and highly regarded Western Australian private company. Among a range of diverse construction activities, BGC has been involved in a number of large scale resource and mining projects in northern Western Australia and has the requisite skills for a central project role.
ThyssenKrupp Engineering’s direct parent company ThyssenKrupp Foerdertechnik is the world market leader in the fields of mining, materials handling and processing equipment with ten business units operating across all five continents. The ultimate group parent ThyssenKrupp AG is a global operation and recognised as a market leader in steel, capital goods and services.
The involvement of well credentialed Australian operators with each of China Rail, China Harbour and China Metallurgical collectively provides further momentum to FMG’s inexorable progress toward becoming the “new force in iron ore” in Australia. As reported on Friday, FMG now has the three important component parts of its Pilbara Iron Ore Infrastructure Project (ie. rail, port and processing plant) covered within three separate agreements. The aggregate capital cost of the assets covered under the respective agreements is estimated at A$1.7 billion. All three Chinese companies will be working with FMG and the Worley Group within the Definitive Feasibility Study process to establish a firm price which will then be incorporated into a fixed price contract with each party.
As contemplated under the respective agreements entered into to date, the first stage of work covering design and engineering will allow for the confirmation of a mutually agreed set price for embodiment into formal construction contracts. As announced on Friday, the payment structure set within all three agreements requires an initial 10% of the contract price to be paid prior to commencement of work. When paid, the contractor will issue FMG with a corresponding bank guarantee for the same amount which will be released when 10% of the work is completed. The balance of the contract price is payable following practical completion under each agreement. FMG believes this to be one of the most important features of the arrangement as it places the majority risk with the construction entity.
As further advised on Friday the staged payment terms post practical completion then allow FMG up to three years before final payment is due which creates opportunities to refinance these obligations under longer term arrangements. FMG is in discussion with a number of capital market groups regarding such refinance opportunities. The benefit of the abovementioned staged terms and the ability to show financiers an operating history of several years is considered a further important advantage accruing under the China agreements.
Security under the respective agreements has been determined as being a charge or similar style interest pledged by FMG to the contractor over an amount of JORC defined iron ore “in ground” resource for a dollar amount to cover the value of works under contract.
In summary the project achievements of the last few days have been extensive and provide a continuing platform for these component parts of the project to be advanced in parallel to ensure the Detailed Feasibility Study process is finalised within the set timeframe.
Section 1041H of the Act
Section 1041H of the Act provides relevantly:
1041H Misleading or deceptive conduct (civil liability only)
(1)A person must not, in this jurisdiction, engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive.
(2)The reference in subsection (1) to engaging in conduct in relation to a financial product includes (but is not limited to) any of the following:
(a) dealing in a financial product;
(b) without limiting paragraph (a):(i)issuing a financial product;
(ii) publishing a notice in relation to a financial product;
…
(x)carrying on negotiations, or making arrangments, or doing any other act, preparatory to, or in any way related to, an activity covered by any of subparagraphs (i) to (ix).
ASIC’s case under s 1041H rests on the 16 public statements referred to in [6] and [10] above. ASIC alleged that these statements were misleading in relation to the CREC, CHEC, and CMCC framework agreements. It is sufficient for present purposes of this appeal to focus principally on the letters and media releases referred to in [4] above.
ASIC also relied upon s 52 of the TPA to cover the possibility that it might be held that a particular statement was not made “in relation to a financial product or a financial service.”
Section 674 of the Act
Section 674 of the Act provides as follows:
674 Continuous disclosure—listed disclosing entity bound by a disclosure requirement in market listing rules
Obligation to disclose in accordance with listing rules
(1)Subsection (2) applies to a listed disclosing entity if provisions of the listing rules of a listing market in relation to that entity require the entity to notify the market operator of information about specified events or matters as they arise for the purpose of the operator making that information available to participants in the market.
(2) If:
(a) this subsection applies to a listed disclosing entity; and(b)the entity has information that those provisions require the entity to notify to the market operator; and
(c) that information:
(i) is not generally available; and
(ii)is information that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of ED securities of the entity;
the entity must notify the market operator of that information in accordance with those provisions.
(2A)A person who is involved in a listed disclosing entity’s contravention of subsection (2) contravenes this subsection.
(2B)A person does not contravene subsection (2A) if the person proves that they:
(a)took all steps (if any) that were reasonable in the circumstances to ensure that the listed disclosing entity complied with its obligations under subsection (2); and
(b)after doing so, believed on reasonable grounds that the listed disclosing entity was complying with its obligations under that subsection.
Section 676 of the Act provides:
676 Sections 674 and 675—when information is generally available
(1)This section has effect for the purposes of sections 674 and 675.
(2)Information is generally available if:
(a)it consists of readily observable matter; or
(b)without limiting the generality of paragraph (a), both of the following subparagraphs apply:
(i)it has been made known in a manner that would, or would be likely to, bring it to the attention of persons who commonly invest in securities of a kind whose price or value might be affected by the information; and
(ii)since it was so made known, a reasonable period for it to be disseminated among such persons has elapsed.
(3)Information is also generally available if it consists of deductions, conclusions or inferences made or drawn from either or both of the following:
(a)information referred to in paragraph (2)(a);
(b)information made known as mentioned in subparagraph (2)(b)(i).
Section 677 of the Act provides:
677 Sections 674 and 675—material effect on price or value
For the purposes of sections 674 and 675, a reasonable person would be taken to expect information to have a material effect on the price or value of ED securities of a disclosing entity if the information would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of the ED securities.
The ASX is, by virtue of reg 1.0.02A of the Corporations Regulations 2001, a “prescribed financial market”. At all material times, FMG’s shares have been listed for quotation on the ASX. Thus, the ASX is a “listing market” and FMG’s shares are “ED securities”, i.e. enhanced disclosure securities, for the purposes of s 111AE of the Act. By virtue of s 111AM of the Act, enhanced disclosure securities of FMG are “quoted ED securities”, and by virtue of s 111AL(1), FMG is a “listed disclosing entity” for the purposes of s 674 of the Act.
As appears from s 674(1), s 674(2) of the Act operates by reference to the requirements of the Listing Rules of the ASX. In that regard, Listing Rule 3.1 relevantly provides:
Once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity’s securities, the entity must immediately tell ASX that information.
For the purposes of Listing Rule 3.1, Listing Rule 19.12 provides an extended meaning of the word “aware” and relevantly provides as follows:
[A]n entity becomes aware of information if a director or executive officer…has, or ought reasonably to have, come into possession of the information in the course of the performance of their duties as a director or executive officer of that entity.
ASIC’s case against FMG under s 674 of the Act is that because the directors of FMG, including Forrest, were in possession of each of the framework agreements, they were in possession of information, being the terms of those agreements, or ought reasonably have come into possession of information being the effect of those agreements. That information, i.e., either the terms of the framework agreements or their effect, was information which a reasonable person would expect to have a material effect on the price or value of FMG’s shares because it would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of shares in FMG.
Shortly put, ASIC’s contentions under this rubric are:
·a statement of the terms of each of the framework agreements, or of their legal effect was likely to influence investors in deciding whether to acquire or dispose of shares in FMG;
·alternatively, once investors had been told that FMG had made binding agreements with the Chinese Contractors to build, finance and transfer the infrastructure, information that these statements were in error was likely to influence investors in deciding whether to acquire or dispose of shares in FMG.
In support of ASIC’s case that the information that FMG had entered into arrangements, whether preliminary or final, in relation to the building and transfer of the infrastructure of the Project would have been likely to influence investors, it relied upon expert evidence from Mr Andrew Sisson, an experienced share portfolio manager, Mr Reginald Keene, an experienced stockbroker and Dr Iain Watson, an expert in business statistics and capital markets research. In response, FMG relied upon the evidence of Mr Houston in support of the argument that, given that the market knew that the prospects for the Project were speculative, and that the viability of the Project depended on a Definitive Feasibility Study (the DFS), announcements by FMG that it had entered into agreements to agree upon build and transfer contracts for the infrastructure would not have been likely to influence investors whether to acquire or dispose of FMG shares.
ASIC also argued that FMG and Forrest were aware, by 5 November 2004 at the latest, that approval from an agency of the Chinese government known as the national Development and Reform Commission (NDRC) would be required if the Chinese Contractors were actually to finance and build the projects, and that a condition of this approval would be that a Chinese investor take an interest in the Project equity. This was said to necessitate disclosure as an aspect of the non-binding nature of the agreements. It was also relied upon as a further particular of the case under s 1041H of the Act. FMG and Forrest argue that ASIC had not pleaded this case, but it was litigated, findings were made in relation to it, and no attack on those findings has been made by FMG and Forrest.
It is relevant to ASIC’s case against Forrest to note that s 79 of the Act provides:
79 Involvement in contraventions
A person is involved in a contravention if, and only if, the person:
(a)has aided, abetted, counselled or procured the contravention; or
(b)has induced, whether by threats or promises or otherwise, the contravention; or
(c)has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention; or
(d)has conspired with others to effect the contravention.
Section 180 of the Act
Section 180 of the Act provides as follows:
180 Care and diligence—civil obligation only
Care and diligence—directors and other officers
(1)A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
(a)were a director or officer of a corporation in the corporation’s circumstances; and
(b)occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.
Business judgment rule
(2)A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they:
(a) make the judgment in good faith for a proper purpose; and
(b)do not have a material personal interest in the subject matter of the judgment; and
(c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and
(d)rationally believe that the judgment is in the best interests of the corporation.
The director’s or officer’s belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold.
(3) In this section:
business judgment means any decision to take or not take action in respect of a matter relevant to the business operations of the corporation.
ASIC contends that Forrest contravened s 180(1) of the Act by allowing FMG to contravene s 674 of the Act thereby exposing it to pecuniary penalties. ASIC relies upon s 674(2) of the Act and argues that Forrest is not entitled to rely upon s 674(2B) of the Act by way of defence because there is no evidence that Forrest sought or obtained or acted upon legal advice before allowing FMG to make the public statements in question. ASIC also argues that Forrest was not entitled to rely on the business judgment rule referred to in s 180(2) of the Act because that rule does not authorise conduct which involves the contravention of a specific provision of the Act, such as s 674(2), especially where the Act provides a specific ground of defence in relation to that provision.
FACTUAL BACKGROUND
Some facts relating to the Project, which were in the public domain prior to the August 2004 announcements, were outlined by the trial judge in Part 5 of his reasons. These publicly known facts included the following:
1.On 5 April 2004, stockbroking firm and market analyst, Paterons Securities Ltd stated that the conditions necessary for financial close of the Project were “the completion of a feasibility study, proof of financially robust project economics, completion of environmental, Aboriginal and heritage permitting and approval issues, and both equity and debt fundraising commitments”. It described FMG shares as a “speculative buy” (at [184]).
2.In July 2004 Worley Pty Ltd (“Worley”) was appointed by FMG as the manager of the preparation of a DFS for the Project. This appointment was accompanied by several media reports, including (at [186]-[190]):
·An AFR report on 9 July 2004 which stated, in part, that the Worley Group had been appointed to “manage a definitive feasibility study. Fortescue hopes to join the global miners…as a supplier of iron ore…pending the results of the study, due by the first quarter of 2005.”
·A report by Macquarie Research Equities dated 9 July 2004, which stated, in part, “The project involves a $450 million mine, $930 million railway and $470 million port and aims to be producing by FY 2007. The feasibility study is the first step in the process towards obtaining finance for the project.”
·A Reuters report dated 23 August 2004, which stated “The railway depends on a feasibility study into the iron ore project, which is scheduled to be completed early next year.”
3.On 9 August 2004, FMG announced that the DFS would cost $34 million. FMG had invested $12 million, and on 13 October it was announced that JF Capital had invested $7 million. This meant that an additional $15 million was required in order to complete the DFS. The trial judge found that “The news that FMG needed to obtain funds to carry the DFS through to completion was widely reported in the media” (at [198]).
4.As of August 2004, FMG had not obtained any of the regulatory or statutory approvals necessary for the construction of the Project infrastructure (at [199]).
The market was aware of the critical importance of the DFS to the prospects of the Project. In this regard, the trial judge summarised Sisson’s evidence as follows (at [185], [191]-[192], and [201]):
[T]he share market did not value FMG on the assumption that its plans to become a producer of iron ore were likely to come to fruition.
…
According to Sisson…the market understood in August that the DFS was expected to define the scope, design, costs and economic viability of the works. Heyting [formerly the Project Manager of Infrastructure at FMG who was called as a witness by ASIC] said that among other things, the DFS was intended to define the scope of the works, define scheduling requirements for the building of the component parts of the project, delineate a resource base to render the project commercially viable, and consider issues such as native title and environmental studies with a view to determining the cost and viability of the Project. He added that the aim of the DFS was to enable finance for the Project to be raised. He conceded that these matters were well-known in the market.Accordingly a successful DFS was of the utmost importance, and would have been so understood by the market. Sisson acknowledged that without a DFS concluding that there was a viable project no bank would lend to the Project, and FMG’s directors would consider that they could not proceed.
…
General market opinion of FMG in August 2004 reflected an air of scepticism.
(Emphasis added).
By early November 2004, the publicly known facts had changed slightly. They then included the following (at [203]):
1.FMG had defined approximately 1.13bt of JORC compliant reserves, compared to FMG’s target of 2bt. The 1.13bt amount was made up of 390.8 mt at Mt Nicholas, announced on 31 March 2004, and 744 mt announced on 30 September 2004. JORC is an acronym derived from the title of the Australasian Joint Ore Reserves Committee.
2.On 24 August 2004, AAP reported that FMG was in the process of finalising a State agreement with the Western Australian government, however it had not yet been approved. This fact was also reported in the Australian Financial Review on 1 October, FMG’s Quarterly Report on 30 September, and by Patersons’ market report of 30 September 2004.
3.FMG had entered three firm sales contracts for a total of 8mt of iron ore per annum. FMG’s target was 45 mt per annum. These agreements were announced on 6, 13, and 21 October 2004, and received wide coverage in the media (at [203]).
The trial judge set out in some detail, (at [134]-[181]), aspects of the factual context in which the three agreements with the Chinese Contractors were signed and relevant conduct on the part of the Chinese Contractors after the framework agreements had been signed. His Honour’s principal findings in this regard were:
5.“According to Heyting, it was clear from the April 2004 meetings that CREC was very anxious to ‘do this project’ with a view to enhancing market perception of the company by building a railway in a first world country such as Australia” (at [138]).
6.The signing ceremony for the CREC agreement was “a high level, serious, and, by Chinese custom, solemn occasion. Kirchlechner [Head of Marketing for FMG] accepted that the parties were entering into a serious agreement and were expecting that each party would fulfil its obligations under the agreement” (at [149]).
7.In relation to the CHEC and CMCC agreements, the “signing of these two framework agreements on 5 November 2004 was publicised widely in China as well as Australia...At no point before 24 March 2005, despite this widespread coverage in Australia and China, was there any correction made to such reporting by any of the Chinese Contractors” (at [179]-[180).
8.CREC realised “the importance of the DFS and its central position in a relationship with FMG” (at [145]).
These publicly known facts bore upon the likelihood that investors would have been influenced to acquire or dispose of FMG’s shares by the disclosures which, on ASIC’s case, ought to have been made.
It should be noted here that the trial judge’s finding that the scope and design of the Project was dependent on the DFS was consistent with FMG’s case at trial. It is, however, inconsistent with an important argument advanced by FMG in this Court, namely that the parties entered into the framework agreements on the agreed basis that the scope and design of the Project was described, not in the DFS, but in an earlier document, the PFS. I will return to this point in due course. For present purposes, it is sufficient to note that the announcements in question were couched in terms which were apt to persuade the market that the making of the framework agreements was a significant step in resolving the uncertainties which had previously attended the Project.
THE CONCLUSIONS OF THE TRIAL JUDGE
Section 1041H
In relation to ASIC’s case under s 1041H of the Act, the trial judge characterised the statements by FMG as “necessarily underpinned by an opinion” as to the legal effect of the framework agreements. This was the first step in his Honour’s process of reasoning. Thus his Honour said (at [684]):
It might be thought that the disclosures, to the effect that FMG had executed binding build and transfer agreements with each of the Chinese Contractors, ought be characterised as statements of fact rather than opinion. Certainly, they were assertive in nature and were not expressly said to be expressions of opinion. However, I consider that they constitute mixed fact and law. As an objective matter, an assertion as to the meaning and legal effect of an agreement is necessarily the product of an opinion formulated to that effect. However the disclosures are characterised, a question as to the reasonableness of the underlying opinion and, in this case, whether or not it was honestly held, arises.
The second step in his Honour’s reasoning was to conclude that this opinion was honestly and reasonably held by FMG and Forrest. His Honour said (at [59]):
I have found that FMG did not contravene s 1041H of the Act. The disclosures complained of by ASIC did not constitute misleading or deceptive conduct. FMG’s disclosures concerning the binding nature of the framework agreements were assertions, necessarily underpinned by an opinion that the agreements were such. In my view, such an opinion was reasonably based and honestly held by FMG and Forrest. The expression, in effect, of that opinion, by its assertions as to the effect of the framework agreements misrepresented nothing. That there was scope for alternative opinions to be held as to the legal effect of the framework agreements does not mean that FMG engaged in misleading or deceptive conduct.
His Honour approached the interpretation of s 1041H by reference to authorities relevant to the interpretation of s 52 of the TPA (at [660]). After an exhaustive examination of the evidence, his Honour concluded that “FMG did not contravene s 1041H by making any of the 16 disclosures concerning the CREC, CHEC and CMCC Framework Agreements and the Project generally” (at [882]).
ASIC presented an alternative case under s 1041H of the Act to the effect that FMG knew, or ought reasonably to have known, that the NDRC would be unlikely to approve CREC, CHEC and CMCC entering into binding agreements to build the infrastructure unless a Chinese entity obtained an equity stake in the project. His Honour summarised this case as follows (at [60]):
The gravamen of ASIC’S additional or alternative case under s 1041H is that FMG’s disclosures as to the meaning and legal effect of the framework agreements were misleading or deceptive or likely to be so in circumstances where FMG did not have a genuine and/or reasonable basis for making the statements and ought reasonably to have known that the Chinese Contractors would not or probably would not carry out the works necessary for the Project without the approval of NDRC. ASIC then says that the NDRC would, or probably would, withhold its approval for CREC, CHEC or CMCC to enter contracts binding them to build, finance and transfer the infrastructure necessary for the Project unless a Chinese entity obtained an equity interest in the Project.
As to this alternative case, the trial judge found that FMG honestly and reasonably believed that the NDRC had approved the making of the framework agreements and that, to the extent that Chinese equity in the Project was likely to be a condition of performance by the Chinese Contractors, agreement upon the equity issue was a mere formality. The trial judge’s summary of the evidence and findings of fact in relation to this aspect of the case is at [61]-[67]. His Honour said:
I find that FMG and Forrest knew that financial investment by the Chinese Contractors in building the infrastructure required NDRC approval and that Mr He of the NDRC in turn tied that approval to the requirement that a Chinese entity, likely ultimately to have been CMCC, obtain a minority equity in, it seems, an FMG mine(s). However, I find that the NDRC…had approved the Chinese Contractors entering into the framework agreements.
I have concluded that FMG’s disclosures were not misleading or deceptive. The additional allegations, concerning NDRC approval and equity do not alter my conclusion. In any event, although I have found that Chinese commercial reality dictated NDRC approval as a prerequisite to the provision of finance, this does not mean that the need for approval operated at a contractual level. Neither NDRC approval nor the provision of equity was a condition of the framework agreements, nor was it contained in the drafts of later documents known as Advanced Framework Agreement although they could have been. ASIC’s primary claim is that the disclosures made as to the meaning and legal effect of the framework agreements were misleading or deceptive. The need for approval tied to equity does not, in my opinion, at least in the way ASIC pleaded its case, impact upon that question.
I find that, in respect of the CREC Framework Agreement, the trigger for NDRC approval for financial investment, being the provision of a minority equity interest to a Chinese entity, whether by shareholding or joint venture, was almost a formality. FMG had, for a long time prior to execution of the CREC Framework Agreement, been pursuing such Chinese investment, and more, and the Chinese side was anxious to obtain it.
The NDRC had given every indication that it fully supported the Project and was keen for Chinese involvement. FMG had over a long period made it clear it was prepared to give a Chinese contractor or steel mill a minority equity stake. Mr He, of the NDRC, in August 2004 also made it clear that this was all that was being sought. It was, as at 5 November 2004, when the last two framework agreements had been executed and when disclosures were made on 9 November 2004, then only a matter of negotiating the actual amount of the equity interest and its price. There was not even the hint of a suggestion that this could not or would not be achieved. Indeed the position, as at 9 November was to the contrary.
In other words, FMG and Forrest, quite reasonably, considered that the matter of NDRC approval for financial investment and the allied question of the provision of equity was no barrier to the performance of the executed framework agreements. ASIC’s case concerned statements about the legal effect of the framework agreements, not that there was a practical barrier to their performance. The market was already aware that significant aspects of the framework agreements still had to be agreed upon through the DFS process and that, in any event, each of the framework agreements was ultimately dependent on a bankable DFS at the earliest in March 2005. Approval by the NDRC, linked as it was to the provision of equity, was merely another contingency. This does not go to the issue of their legal effect.
The grant, in due course, of NDRC approval was regarded, reasonably, by FMG, as a formality. That, from November 2004, this was complicated by the marked and unwarranted change of position taken by Mr He of the NDRC merely gave rise to negotiations as, indeed, Mr He intended.
FMG and Forrest were entitled, in my view, to negotiate with the Chinese Contractors through CMCC and the NDRC to resolve the impasse created by Mr He, contrary as it was to the consensus reached in August 2004 for minority equity, without having to inform the ASX. Indeed, by September 2005, FMG had succeeded in reducing the demands for majority equity down to a 50/50 joint venture although that process took many months However the DFS completion date had been extended beyond March 2005 and was only partially completed in September 2005 and not fully completed till April the following year. There was no question, as the market well knew, that any of the framework agreements would proceed until there was a completed bankable DFS.
For reasons which will become apparent, it is not necessary to decide whether the trial judge was correct in rejecting ASIC’s alternative case under s 1041H of the Act.
Section 674
In rejecting ASIC’s case under s 674 of the Act, the trial judge elaborated upon his view that FMG reasonably regarded the framework agreements as legally binding agreements for the construction of the infrastructure for the Project (at [50]-[51]):
Significantly too, CREC approved the terms of the 23 August Media Release before FMG made the notifications to the ASX on 23 August 2004. The release described the CREC Framework Agreement as a “binding agreement to build and finance the railway component of Fortescue Metals Group Ltd’s $1.85 billion Pilbara iron ore project”. In the release Mr Qin Jiaming (Qin), the President of CREC, is quoted as saying that the contract presented an excellent opportunity for CREC to develop internationally and that CREC was fully confident about its capacity to build the rail project. It was described by him as a ‘marriage’ immediately following the high level ceremony when the parties signed the Joint Statement which rendered the agreement binding.
I find that the terms of the 5 November Media Release provided to CHEC and CMCC was likewise approved, at least not disavowed, by them before disclosure to the ASX by FMG.
His Honour found that the AFR Article was the product of self-interested manipulation by the Chinese parties. In this regard, his Honour said (at [52]-[53]):
The AFR Article, which reported that, according to the Chinese parties, the framework agreements did not impose on them legally binding obligations, was engineered by Mr He of the NDRC as a blunt commercial tactic in an attempt to wrest majority control of the Project from FMG. This was quite contrary to the clear understanding which existed prior to the execution of the framework agreements that FMG would never agree to this but that a minority equity position would be given to a Chinese entity. I find FMG was entitled to regard Mr He’s unwarranted actions, which resulted in publication of the AFR Article, as a plank in his attempt to renegotiate the equity question. FMG was ultimately successful in reducing the demands from a majority to a minority equity position.
The AFR Article did not reflect the actual views of the Chinese Contractors who, on the evidence, prior to and after its publication, regarded themselves bound by the framework agreements to build the infrastructure.
The trial judge summarised his conclusions in relation to FMG’s alleged breaches of s 674 of the Act at [41]-[56] of his reasons. The first step in his Honour’s reasoning under this heading was once again to characterise FMG’s statements to the ASX as conveying only statements of opinion. The second step was to conclude that FMG’s directors did not have the “Information” which ASIC argued should have been disclosed to the ASX because they did not hold the same opinion as ASIC as to the effect of the framework agreements. In terms of the Listing Rules, his Honour did not accept that framework agreements were known by, or ought reasonably to have been known by, FMG’s directors, to be unenforceable as contracts to build and transfer the infrastructure for the Project. His Honour said (at [41):
There is no evidence that FMG by any of its directors or officers, including Forrest, ever held the opinions postulated by ASIC and which underpin its case as to what FMG ought to have disclosed as to the meaning and legal effect of the framework agreements. I find that the opinions contended for by ASIC do not self-evidently or obviously emerge upon merely reading the terms of the framework agreements.
His Honour elaborated on these findings at [465]-[468]:
ASIC has failed to establish that FMG or Forrest, as a director and executive officer of FMG, held or ought reasonably to have held, the opinions which underpin the assertions as to the meaning and legal effect of the framework agreements reflected in the Informations.
It follows that I am satisfied, applying the Listing Rule 19.12 definition of ‘aware’, that FMG did not become aware of the Informations. ASIC’s case under s 674(2) fails for this reason alone.
FMG was not aware of the Informations, and accordingly was under no obligation to disclose it to the ASX. Applying s 674(2)(b), FMG did not have information at the relevant times that the Listing Rules required it to notify to the market operator, and FMG did not contravene s 674(2) by failing to notify the asserted information to the ASX. Its obligations under s 674(2) were satisfied by making the notifications in August 2004 and November 2004 which accorded with its opinion, reasonably and honestly held, as to the meaning and legal effect of the framework agreements.
As a consequence of my finding that FMG did not contravene s 674(2), then Forrest could not have been a person who was involved in a contravention of that subsection pursuant to sub-s (2A). It is therefore unnecessary for me to deal with his submission that he did not contravene sub-s (2A) because, for the purposes of sub-s (2B), at all material times, he believed, on reasonable grounds, and took all necessary steps to ensure, that FMG was complying with its obligations under s 674(2) of the Act.
It may be noted here that the trial judge focused exclusively on the disclosure of the effect of the framework agreements rather than their actual terms. ASIC’s case of breach of s 674 included FMG’s failure to disclose the terms of the framework agreements as well as their effect.
ASIC had also contended that FMG and Forrest did not have an honest and reasonable basis for the opinion or judgment reflected in the information notified to the ASX. Insofar as this aspect of ASIC’s case involved an assertion of deliberate dishonesty by FMG’s directors, the trial judge’s attention was inevitably focussed upon the mental state of Forrest and his fellow directors, rather than the objective effect of their conduct. Not surprisingly, FMG and Forrest were content to fight the case on this ground. In rejecting ASIC’s contention, the trial judge said (at [42]-[43]):
ASIC contends that FMG through Forrest had no genuine and or reasonable basis for making its claims that the framework agreements were binding build and transfer agreements. It has accused FMG, its board and in particular Forrest, of deliberate dishonesty in making those claims knowing that they were false, unqualified and emphatic. It says that there is no evidence that FMG obtained any legal advice concerning the agreements, and that if it had obtained competent legal advice, it would have been aware of the legal effect of the framework agreements asserted by ASIC and forming part of the Informations. It says that, in those circumstances, the misleading disclosures could not have been made by a responsible company or board of directors.
This transpired to be a surprising submission for ASIC to make.
As to this last comment, the trial judge explained (at [44]):
In fact FMG did have the benefit of competent professional legal oversight and advice in relation to its agreements, including the framework agreements. Mr Peter Huston and his assistant Hsin-Luen Tan of Troika Legal Ltd had, prior to October 2004, been available to advise FMG. Huston was described by ASIC in its pleading as a qualified, experienced and practising commercial solicitor. From early October 2004, Huston and Tan joined FMG as employees. It is apparent that one of Huston’s principal roles, at least from that time, was to oversee and ensure the legal enforceability, or as Forrest sometimes said, the “bankability” of FMG’s agreements. This is evident from an email dated 3 October 2004 sent by Forrest to FMG’s senior executives and Graeme Rowley, another of FMG’s directors.
The trial judge summarised the evidence on which his findings were based (at [46]-[48]):
Huston helped prepare the draft as well as the final 8 November Letter concerning the three framework agreements provided by FMG to the ASX that day. He attended a meeting with Mr Tony Walsh, Assistant Manager Issuers of the ASX, on 8 November 2004 relevantly to discuss this draft for the purpose of providing further information to the ASX as to the terms of the framework agreements. I have concluded that, for this purpose, Huston would have considered the terms of the related 5 November Letter and the three framework agreements referred to in that letter. He did not advise the FMG Board or Forrest that these agreements were not legally binding or that the 5 November Letter was to that extent incorrect or not reasonably based. Given his role in FMG, had he formed that view, I find that he should have and would have informed the board. That he did not, entitled the board and Forrest to continue to regard the disclosures concerning the legal effect of the framework agreements as correct, or at least that they were reasonably based.
That this was so is fortified by evidence of actual advice given by Huston to the FMG board that the framework agreements were legally binding as disclosed.
The FMG board minutes of its 22 January 2005 meeting, attended by Huston, record his advice to the board that the CMCC Framework Agreement was binding. So too did an email sent by him on 30 March 2005 to Forrest, Christopher Catlow, David Liu, Rowley, Alan Watling and other FMG executives concerning the AFR Article in which he repeated this advice, relying in particular upon the Anaconda decision. The 30 March 2005 email was not disclosed in ASIC’s pleading. While the minutes of the 22 January board meeting were set out as a particular of two allegations concerning FMG’s and Forrest’s knowledge of the Chinese Contractors’ attitude towards the framework agreements and of the legal effect of the agreements, ASIC did not particularise the material passage in the minutes where Huston’s legal advice to the board was set out, nor did it refer to this passage in its opening or closing submissions. This is so, despite the fact that, in relation to ASIC’s s 674 case, it asserted, amongst other things, that FMG ought to have been aware of the legal effect of the framework agreements asserted by ASIC by first obtaining competent legal advice. Huston was a very experienced and competent commercial solicitor.
The appellant, the Australian Securities and Investments Commission (the Commission), contends that to describe the agreements in those terms was misleading or deceptive or likely to mislead or deceive, because none of the agreements imposed upon the relevant contractor an enforceable obligation to build and transfer any component of the Project. Rather, the agreements were no more than agreements to undertake discussions and negotiations with a view to entering into build and transfer agreements of the kind described in the announcements. The Commission says that, as a consequence, Fortescue contravened s 1041H and s 674 of the Corporations Act 2001 (Cth) (the Corporations Act). The Commission also contends that the second respondent, Mr Andrew Forrest, the chief executive officer of Fortescue, was involved in Fortescue’s contraventions.
The first agreement was signed on 6 August 2004 with China Railway Engineering Corporation (Railway Engineering), and related to the construction of the railway. The second agreement was signed on 1 October 2004 with China Harbour Engineering Company (Group) (Harbour Engineering) and related to the construction of the port. The third agreement was signed on 20 October 2004 with China Metallurgical Construction (Group) Corporation (Metallurgical Construction) and related to the construction of the mine. Each of the agreements was expressed to be a framework agreement.
Apart from the description of the parties and the description of the work that might be carried out, the operative provisions of the three agreements were materially identical. The proceeding at first instance and the appeal were conducted on the basis that the effect of each of the second and third agreements was relevantly the same as the first agreement, such that conclusions in relation to the first agreement would be applicable to each of the other two. Accordingly, it is convenient to deal with the terms of the first agreements alone.
The Commission’s contentions require a detailed examination of the language of the agreement. The Railway Engineering framework agreement recited that:
·Railway Engineering had represented that it has the necessary skills, personnel and equipment to successfully carry out and complete the build and transfer of the railway (the works involved) for the Project and that Fortescue was relying on that representation.
·Railway Engineering, having closely examined all proposed documents, had submitted an offer to execute the Works, Fortescue had accepted Railway Engineering’s offer and the parties wished to evidence their agreement.
·Railway Engineering would confer with the Chinese government to determine whether Railway Engineering would also be authorised to carry out works associated with the port and mine infrastructure for the Project.
The pivotal provision of the Railway Engineering framework agreement was clause 1.1, which provided that the parties would jointly develop and agree on the following:
·General conditions of contract suitable for a build and transfer type contract in good faith.
· The scope of the work to be included in the contract.
·List of nominated Australian and Chinese joint venture partners and/or subcontractors.
· Definitive engineering design to Australian standards.
· Scheduling of the Works.
· Determination of the Value of Works.
Clause 5 of the Railway Engineering framework agreement provided that the agreement was to become binding upon the approval of both the board of directors of Railway Engineering and the board of directors of Fortescue, which had to be given before 31 August 2004. Clause 7 provided that the agreement represented an agreement in itself and that a fuller and more detailed agreement not different in intent, would be developed later.
It may be that the Railway Engineering framework agreement imposed legally binding obligations on both Railway Engineering and Fortescue to engage, in good faith, in discussions and negotiations that might ultimately have led to a binding agreement whereby Railway Engineering would be obliged to construct a railway and transfer it to Fortescue for a price that would ultimately be arrived at following those discussions and negotiations. However, the question is whether, even if the Railway Engineering framework agreement imposed such legally binding obligations on both Railway Engineering and Fortescue, it created a binding obligation on Railway Engineering to build and finance the railway as asserted in Fortescue’s announcements.
While the Railway Engineering framework agreement made clear that the parties intended a binding obligation to be created, albeit that a more detailed agreement was to be entered into, the obligations created by it were to develop and agree on the terms of a build and transfer type of contract. That was the extent of the obligation created. The absence of a clear mechanism for the determination of the detailed specifications for the construction of the railway and the price to be paid by Fortescue for the transfer of the railway demonstrates that the framework agreement was no more than a framework for discussion and negotiation, with a view, ultimately, of reaching a binding agreement for the construction of a railway. There was nothing in the Railway Engineering framework agreement to enable the scope of the work that would be undertaken by Railway Engineering to be determined without further discussion and negotiation; there was nothing that enabled the price to be paid by Fortescue to obtain the transfer of a railway, once constructed, to be determined. It was misleading to describe the Railway Engineering framework agreement as a binding contract to build and finance the railway component of the Project.
In the proceeding at first instance, a judge of the Court found that the statements in question were properly to be understood as statements of the opinion of Fortescue or its directors and that the opinions were genuinely held. Accordingly, his Honour concluded that the statements were not misleading or deceptive or likely to mislead or deceive. His Honour therefore dismissed the proceeding brought by the Commission. In the appeal, the Commission contends that the primary judge erred in the conclusions that he reached.
The statements in the announcements are not expressed to be statements of the opinion of Fortescue or its directors as to the effect of the Railway Engineering framework agreement. Their effect is to state, unequivocally, that Fortescue has entered into a binding contract with Railway Engineering to build the railway and to transfer it to Fortescue when built. In the absence of some indication that a statement as to the legal effect of an agreement is no more than a subjective opinion of the maker of the statement, such a statement must, as a matter of ordinary English, be construed as a statement as to the agreement’s actual legal effect. Unless there is something in the statement to indicate to the reader that the statement represents only the opinion of the maker, there is no reason to read such a qualification into it.
I agree with the detailed analysis of the Railway Engineering framework agreement in the reasons of the Chief Justice. An ordinary and reasonable member of the investing public would not understand the announcements as stating the subjective opinion of Fortescue or its directors. An ordinary and reasonable reader of the announcements would understand them to say that a binding agreement has been entered into between Fortescue and Railway Engineering and that that agreement imposed upon Railway Engineering a binding obligation, enforceable by Fortescue, to construct and transfer to Fortescue a railway adequate to serve Fortescue’s Pilbara iron ore project. The Railway Engineering framework agreement did not have that effect. Accordingly, the announcements were, at least, likely to mislead or deceive an ordinary and reasonable member of the investing public who read the announcements. I agree that there was a contravention of s 1041H of the Corporations Act. I also agree that there were contraventions of s 674 of the Corporations Act.
Clearly enough, Mr Forrest was, for the reasons given by the Chief Justice, knowingly involved in Fortescue’s contravention of s 1041H of the Corporations Act and Fortescue’s contravention of s 674(2)(c). I agree, for the reasons given by the Chief Justice, that s 674(2B) does not afford Mr Forrest a defence in the circumstances. I also agree with the Chief Justice’s conclusion, for the reasons given by him, that the Commission’s allegation of contravention of s 180 of the Corporations Act by Mr Forrest is made out.
Accordingly, I consider that the Court should make the orders proposed by the Chief Justice. I also agree with the observations of the Chief Justice that the vigour with which the Commission has prosecuted the proceeding against Fortescue is curious. However, I agree that it is not for the Court to call into question the Commission’s exercise of its discretion to commence and prosecute the proceeding. The consequences that flow from the conclusion that there has been a contravention will be a matter for determination by a judge of the Court upon remitter.
I certify that the preceding fifteen (15) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate:
Dated: 18 February 2011
IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
WAD 23 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
AppellantAND: FORTESCUE METALS GROUP LTD (ACN 002 594 872)
First RespondentJOHN ANDREW HENRY FORREST
Second Respondent
JUDGES:
KEANE CJ, EMMETT AND FINKELSTEIN JJ
DATE:
18 FEBRUARY 2011
PLACE:
PERTH
FINKELSTEIN J:
I agree in the reasons of the Chief Justice and in the orders he proposes. I do, however, wish to make some short observations on two points: agreements to agree and the appropriateness of the Australian Securities and Investments Commission (ASIC) having brought this proceeding.
AGREEMENTS TO AGREE
In the presentation of its case ASIC was prepared to assume that each of the so-called “framework agreements” imposed upon the parties an obligation to engage in good faith negotiations to conclude agreements for the construction in the Pilbara of, respectively, a port, a railway line and mines. If that assumption is false (ie if the agreements are not enforceable), then the public statements made by Fortescue (FMG) about the nature of the agreements were even more misleading than would otherwise be the case. The point is that it is one thing to misdescribe the effect of an agreement, but it is quite another to assert that an agreement exists when it does not.
It is not strictly necessary to rule on whether the framework agreements created binding obligations for the purposes of resolving whether FMG and Forest breached the Corporations Act2001 (Cth). It is, however, helpful to consider this issue because the case will go back to a judge to deal with the consequences of the contraventions which the Chief Justice in his reasons has identified.
The question whether a binding contract has been made is usually determined by the intent of the parties. In analysing that intent many matters may be taken into account, including the circumstances surrounding the negotiations and the language and terms of what purports to be the agreement between them. In cases where the parties have entered into some arrangement which contemplates the execution of a formal agreement, the analysis is that mandated by the High Court in Masters v Cameron (1954) 91 CLR 353.
This case does not raise a Masters v Cameron problem. Here the parties, in clear and unambiguous language, have indicated that each framework agreement was intended to be binding. For example, in the CREC framework agreement, cl 5 states: “This agreement will become binding upon the approval of both the Board of Directors of CREC and the Board of Directors of FMG”. Clause 7 states: “This document represents an agreement in itself”. Identical clauses are found in the CHEC and MCC framework agreements. But simply because parties intend what they have agreed to be binding does not always produce that result. Although the principle of freedom of contract rests on the premise that individuals are free to make agreements as they wish, the public interest in freedom of contract can be outweighed by other public policy considerations. So, for example, courts will not enforce an agreement to do an illegal act. Nor will they enforce an agreement which is in restraint of trade. Other examples can be brought to mind.
In this case the problem is of a different order: If an arrangement is incomplete it may be impossible to find that a contract has come into existence notwithstanding the intention of the parties. For a contract to be valid the agreement must be sufficiently definite and explicit so that the parties’ intention can be ascertained with a reasonable degree of certainty. Put another way, a court cannot enforce a contract unless it can determine what the contract is, applying all applicable rules of formation and interpretation. Otherwise the court would be imposing its own perception of what the bargain is rather than implementing what has been agreed by the parties.
Often the problem of incompleteness arises when the parties have left an aspect of their bargain for later agreement. In recent years some court have, by a process of implication by law, supplied a term requiring parties to a commercial contract to exercise “good faith” in the performance of their contractual rights and obligations. And there are cases which hold that when parties to a commercial contract have reached a preliminary agreement but have left a term of their contract open for future negotiation the parties are under an obligation to negotiate the open issues in good faith in an attempt to reach agreement on the open terms. This obligation does not mean that a final agreement will be reached. Good faith negotiations will not necessarily bridge all gaps that stand in the way of a concluded agreement. The obligation does, however, bar a party from walking away from the preliminary agreement without a legitimate attempt at negotiation.
Imposing an obligation (whether expressly or by implication) to negotiate open terms will not overcome all cases of incompleteness. It will not, for example, deal with the problem created where parties have not agreed on the important (some might say the essential) terms of their bargain. A good faith obligation to negotiate cannot make a fatally incomplete contract valid and enforceable.
This case is a good example. The projects contemplated by the agreements were, on any view, complex multi-million dollar projects. The construction of port facilities would likely cost in excess of $1 billion. The construction of a railway line would cost around $1 billion. The construction of mines would cost several hundreds of millions of dollars. Yet almost nothing was agreed about the nature and extent of those projects. One would expect that it would require significant time, effort and expertise to resolve these matters and arrive at the appropriate terms.
One missing element of each agreement is the price to be paid for the works. In construction contracts the price is of fundamental importance. If it is not agreed, or there is no agreed method of ascertaining it, there can be no bargain.
The reason no price was agreed is the inevitable consequence of another major omission: the scope of the works were barely described, let alone defined. One agreement contemplates the construction of a railway line which would likely be several hundred kilometres in length. But the parties had not turned their mind to its type, design, or even the route over which the line would run. Each difference would carry a different cost structure. Another agreement contemplates the construction of a port. Yet there is no specification of the precise location, size or configuration of the port. Once again the cost differences for the various possibilities would be significant. Then there is the agreement for the construction of the mines. How many mines, of what type and where were they to be located? None of these issues had been worked out.
In a complex case such as this it would, in any event, be necessary to impose additional terms to make effective a duty to negotiate in good faith the scope of the works. For good faith negotiations on any of the open issues to take place the other obligations that would need to be imposed would include, by way of example, (1) a duty on each party to disclose information material to the other party’s ability to formulate terms; (2) the establishment of a framework for the negotiations; and (3) a duty to continue negotiations for a sufficient time. No doubt other terms would be necessary. So many terms would need to be implied that the result would be an agreement imposed by the court, not one reached by the consensus of the parties.
THE PROSECUTION OF THE CLAIMS
The Chief Justice and Emmett J have made some observations about the appropriateness of ASIC running this case. I have a very different view from them.
The facts and figures (using data from the Commsec website to supplement that which was in the appeal papers) upon which my views are based are as follows:
1.On 1 July 2004 the share price opened at $0.50.
2.During the month prior to the first announcement (19 July 2004 to 18 August 2004) FMG shares traded between $0.44 and $0.60 with an average price of approximately $0.52.
3.In that period the volume of trade in FMG shares was between 10,234 and 1,644,698 shares per day, averaging approximately 284,000 shares per day.
4.The day of the trading halt for the first announcement (19 August 2004) FMG shares closed at $0.55.
5.The day trading resumed (23 August 2004) FMG shares opened at $0.65, reached a high of $0.70 and a low of $0.57 before closing at $0.59. 2,569,182 shares were traded.
6.During the month following the resumption of trading (24 August 2004 to 23 September 2004) the share price fluctuated between $0.54 and $0.65 with an average of approximately $0.59.
7.In that period the volume of trade in FMG shares was between 10,905 and 2,161,515 per day, averaging approximately 342,000 shares per day.
8.During the month prior to the second announcement (5 October 2004 to 4 November 2004), the share price fluctuated between $0.57 and $1.65 with a significant upward trend throughout the month.
9.In that period the volume of shares traded was between 304,815 and 3,677,233 per day, averaging approximately 1,422,000 shares per day.
10.The day of the trading halt for the second announcement (5 November 2004) FMG shares closed at $1.66.
11.The day trading resumed (9 November 2004) the share price opened at $2.01, reached a high of $2.32 and a low of $1.93 and closed at $2.25. 8,329,775 shares were traded.
12.During the month following the resumption of trading (10 November 2004 to 9 December 2004) the share price fluctuated between $2.27 and $3.33, averaging approximately $2.90.
13.In that period the volume of shares traded fluctuated between 307,794 and 10,219,968 per day with an average of approximately 2,250,000 shares per day.
14.Over the following two months (10 December 2004 to 9 February 2005) the share price continued to rise, reaching a high of $3.95.
15.During the month prior to the publication of the AFR article (22 February 2005 to 23 March 2005), the share price fluctuated between $4.29 and $5.55 with a significant upward trend throughout the month.
16.In that period the volume of shares traded per day was between 111,790 and 1,889,346, averaging approximately 553,000 shares per day.
17.The day prior to the publication of the AFR article (23 March 2005) the shares closed at $5.05.
18.The day of the article (24 March 2005) the share price opened at a high of $4.25, reached a low of $3.30 and closed at $3.77. 1,165,806 shares were traded.
19.Over the next three trading days (29 to 31 March 2005) the share price hit a low of $2.83. 8,257,166 shares were traded over those three days.
20.During the following month (1 April 2005 to 29 April 2005) the share price fluctuated between $2.29 and $3.93, averaging approximately $3.12.
21.In that period the volume of shares traded fluctuated between 257,894 and 1,900,463 per day, averaging approximately 815,329 per day.
22.During the following two months (2 May 2005 to 1 July 2005) the share price fluctuated between $2.25 and $3.25, with an average of approximately $2.75.
23.In that period the volume of shares traded fluctuated between 14,112 and 1,128,478, averaging approximately 308,000 per day.
24.On 30 June 2005 the share price closed at $2.90.
25.FMG’s share price only reached its pre-AFR article high on 22 December 2005, almost nine months after the article was published.
The first point to make is that one of the important objectives of Chapter 6CA (where s 674 is to be found) is to ensure that there is a fully informed and therefore efficient market for listed securities. The second point is that during the period 23 August 2004 to end March 2005, those trading in FMG securities had been seriously misinformed about the affairs of the company. The third point is that, while there is no evidence of complaint having been made that a share trader had suffered loss, the only open inference is that traders did lose money and possibly significant sums of money. The only circumstance in which it could be said that no loss was suffered by anyone is where every single trader who purchased FMG shares after the second announcement held onto them in spite of the falling price until the price recovered to their purchase price. For many investors would have been as late as 22 December 2005. This is a highly unrealistic assumption: more likely than not, many traders lost money and substantial sums of money at that.
In any event, while I think that many shareholders suffered significant losses, I regard that as not being determinative of whether the action should have been commenced. But assuming for a moment that no shareholder lost money, if the market was materially misled, it can hardly be right that a prosecution not commence because, by reason of serendipity, shareholders made a gain. If that were the approach, the continuance disclosure obligations could be sidestepped by any successful corporation whose share price continued to climb after investors discovered that the corporation mislead the market. That is not what Parliament had in mind.
Looking specifically at Mr Forrest’s position, the relevant facts are these. Mr Forrest has (through various entities) always been a substantial shareholder in FMG. As at 1 July 2004 he held over 40 million shares. As at 30 June 2005 his shareholding had increased to over 100 million shares. During the relevant financial year he sold over 5 million shares. If the sales were of any of his original holding and were made after the announcements, Mr Forrest would have made a significant profit. (The maximum he could have made was over $25 million, representing over a 1100% increase in the value of his shares, although it is likely he made less) Further, the value of his original 40 million shares increased by up to 1300%, (ie over $200 million) after the November announcement. At the same time, the increase in FMG’s share price would have significantly increased its ability to raise finance, find significant equity investors and negotiate contracts for iron ore.
No doubt the judge who imposes penalties will investigate these matters in more detail and on proper evidence. Nonetheless I mention them to indicate why I believe that not only was it was proper for ASIC to have commenced this action but it would have been subject to just criticism had it failed to do so.
I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein. Associate:
Dated: 18 February 2011
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