The High Court of Australia today overturned a unanimous appeal court ruling that said Forrest’s descriptions of contracts with three Chinese companies in 2004 as binding were misleading.
The appeal based the conclusion on the fact the agreements were not enforceable under Australian law, which the average person reading the statement wouldn’t take into consideration, the High Court said in a summary of its ruling issued in Canberra. “This representation was neither false or misleading,” the judges said.
Forrest faced the possibility of being removed from his post as chairman of Fortescue and Australian companies faced more stringent rules on disclosure to shareholders had the appeal court ruling been upheld, Sally Scott, a partner in Hall & Wilcox Lawyers’ commercial dispute resolution group, said in a phone interview today.
“It’s an odd decision,” Scott said of the High Court ruling. “They’ve drawn quite a technical argument on how the statements were represented” in the reference to enforceability of the agreements.
The ruling doesn’t establish any general proposition that public statements from companies convey a message of what its contracts contain and facts in each case must be scrutinized, the High Court majority said.
“The critical question will be what the statement conveyed to its intended audience, not what the party concerned says that it was intended to convey,” the judges said.
The Australian Securities and Investments Commission, which had pursued the case and was ordered by the High Court to pay the costs of the appeal, said it’s reviewing the ruling to determine what is considered necessary to ensure the market is properly informed by companies’ statements.
“This is something we will be carefully considering” in conjunction with the Australian Securities Exchange, ASIC Deputy Chairman Belinda Gibson said in a statement.
The High Court ruling brought “an end to an eight-year long process that ASIC thought was appropriate but was ultimately determined to be wrong,” Fortescue Deputy Chairman Herb Elliot said in a statement today. “ASIC’s allegations have been an expensive distraction.
Fortescue shares rose more than eightfold in Sydney trading in seven months following the first announcement of a partnership with the three Chinese companies on Aug. 23, 2004. The stock fell 25 percent on March 24, 2005, the most in more than two years, after the Australian Financial Review newspaper reported that China Metallurgical Construction Group Corp. wasn’t prepared to build or finance the project under the arrangements in place at the time.
David Jackson, Fortescue’s lawyer, argued in March that the Perth-based company had legally-binding contracts in place with China Metallurgical, China Harbour Engineering Co. and China Railway Engineering Corp. to build an iron ore mine, a port at Port Hedland in Western Australia and a railway.
Forrest, known as Twiggy, has a net worth of $3.9 billion according to the Bloomberg Billionaires Index. He holds a 33 percent stake in Fortescue, valued at A$3.6 billion ($3.7 billion), according to data compiled by Bloomberg.
Broader Issues Remain
Only Gina Rinehart, chairman of Hancock Prospecting Ltd., with a net worth of $19 billion, Ivan Glasenberg, chief executive of Glencore International Plc (GLEN), an Australian citizen with a primary residence in Switzerland and a net worth of $6.1 billion and James Packer, chairman of Crown Ltd. (CWN) with $5 billion, have more wealth in Australia than Forrest.
According to Australian business law, as long as directors or officers of a corporation make a business judgment in good faith, with no material personal interest and rationally believe the judgment is in the best interest of the corporation, then they’re deemed to have met the requirement that they discharged their duties with the required degree of care and diligence.
The High Court ruling doesn’t deal with the broader issues, such as reliance on business judgment, which lawyers hoped to get clarified, Georgie Farrant, a partner at Baker & McKenzie in Sydney, said in a phone interview today.
‘‘We would’ve liked more,” she said. The decision will be useful for companies making contract announcements, she said
Companies shouldn’t take comfort in Forrest’s victory, Hall & Wilcox’s Scott said.
Directors and companies still “can’t get away with a statement that’s dishonest,” she said. Forrest “was quite lucky.”
The case is: Forrest v. Australian Securities and Investments Commission. P44/2011. High Court of Australia (Canberra).
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