Business and Corporate Law Forrest v Asic

Question: Discuss about theBusiness and Corporate Lawfor Forrest v Asic. Answer: Introduction The Australian Securities and Investments Commission (ASIC) commenced legal proceedings in March 2006, against the Fortesque Metals Group Ltd (FMG) and its CEO and Chairman, Mr. John Andrew Henry Forest for the contravention of the sections 674(2) and section 1041 H of the Corporations Act. Mr. Forrest was accused of being personally liable to FMGs alleged misleading conduct and violation of the rules regarding continuous disclosures associated with the agreement between the FMG and the three state-owned Chinese corporations. The FMG entered into a binding contract with the China Railway Engineering Corporation (CREC) to finance and build the railway component of the Pilbara Iron Ore and Infrastructure Project. CREC is fully confident about its capacity to construct the heavy axle railway load and tends to become top construction company in Asia. According to the terms of the binding contract, CREC will undertake full risk under a fixed price agreement on the rail project (Tomasic an d Xiong 2016). During an investor conference, Forrest said that the price of the rolling stock and the railway line cannot be disclosed but it is competitive. On 23rd of August 2004, there was an increase in the FMGs share price from 55% to 70% before closing at 59% (a 7% increase). The Australian Financial Review published an article in March 2005 stating that CREC has no legal obligation imposed on it in the agreement, to build and finance the railway project. After the publication, the share price of FMG fell sharply. Australian Stock Exchange (ASX) requested FMG on 24 March 2005 to clarify the terms of the Agreement. FMG sent a copy of the agreement to ASX, where it was apparent that it did not include any agreed fixed price. Consequently, ASIC commenced legal proceedings against FMG and Forrest (Humphrey and Corones 2014). Infringement of Directors Duties Australian Stock Exchange Ltd (ASX) plays an important role in allocating capital in the Australian economy. The ASX deals with the rules regarding disclosure, which is governed by the provisions under section 674 of the Corporations Act 2001 (Cth) along with Ch 3 of the ASX listing rules. Section 674(2) lays down that it is mandatory for the listed entities to provide relevant information to the Australian Stock Exchange regarding their continuous disclosure rules. The information must be relevant to the extent that any prudent person would expect such information if it was available. The rules regarding disclosure are purported to retain the confidence of the investor by providing them with relevant information, which in turn, would facilitate the investors to take necessary decisions regarding their investments (Corones 2014). The main purpose of Australias incessant disclosure rule is to accelerate the efficacy and integrity of the capital markets in Australia by making them well-informed (Du Plessis 2016). The functioning of the incessant disclosure rules is further emphasized by the operation of section 1041 H of the Corporations Act that deals with deceiving and misleading conduct by any person while dealing in securities. According to the section, a person is prohibited from engaging in any misconduct relating to a monetary service or product that is likely to be deceiving or misleading. The statutory provision under section 52 of the Trade Practices Act 1974 (Cth) restricts a person dealing in commerce and trade from conducting in a way that is deceiving or misleading or is likely to deceive or mislead. This provision has paved the way for the aggrieved to bring legal action for damages. The courts determine whether a conduct of a person is misleading or not under section 1041 H of the Corporations Act 2002 by applying the principles stated under section 52 of the Trade Practices Act 1974 (Cth). The Australian Securities and Investments Commission (ASIC) is the supervisory body that ensures that the investors dealing in securities are not deceived or misled as stated by (Smith 2015). It also examines the announcements made in the market so that they do not mislead or deceive people. The ASIC alleged Mr. John Andrew Henry Forrest has violated the sections 1041 H and 674(2) of the Corporations Act. Mr. Forrest was accused of misleading conduct and infringement of the incessant disclosure regimes regarding the agreements in association with the Chinese corporations. In the investor conference, Forrest did not disclose the amount of the fixed price as he said the amount was confidential. However, under section 674 of the Corporations Act and as per the ASX Listing rule 3.1 any company that is a listed entity shall comply with the obligations regarding the disclosure rules even if the information is confidential by nature as stipulated by the sections (Choi et al. 2016). The company may not reveal any particular information if it satisfies the carve-out from disclosure in ASX Listing Rule 3.1, A which includes the following situations: The concerned information is an incomplete negotiation; The revelation of the information would amount to an infringement of law The information is part of a trade secret The information was created for the purpose of internal management of the entity The information was not sufficiently definite. However, none of the above mentioned situations applied to the revelation of the fixed contract amount of CREC on 24th of August. Therefore, the fixed amount constituted an essential term of the agreement and so it should have been disclosed at the investor conference. The non-disclosure of the price by Mr. Forrest amounted to infringement of his duty as laid down under section 181 and 674 of the Corporations Act (Ramsay 2015). Critical Evaluation of the Courts Decision The High Court dismissed ASICs contention that FMG and Forrest and the Board of the company while making the announcements had acted in a dishonest manner. The court concentrated more on the use of the term binding contract as to whether the term was used to misleading or deceitful manner. The term was analyzed by the court with reference to the proposed audience, which included investors and broader section of the business society (Mills and Woodford 2015). The court opined that the term did not imply that the agreement was enforceable by law. The court stated that a contract must not be assessed to be binding unless a statement regarding the legal binding of the contract has been made to the public. However, the court relied its approach on the following two facts: The contents of the Agreement was summarized precisely by the announcement The announcements made expressed the intention of the parties to constitute a binding contract ASIC further contended that Forrest has made an attempt to modify the agreement as it was not legally binding. The court declined the contention on the ground that post negotiations of the contract is not considered as a repudiation of the previous contract. It is a regular business conduct to make a better contract (Comino 2014). It was further observed that at the time when there was an increase of 7% in the share price of FMG, it was obvious to ASX from the newspaper publication that the market was not adequately informed regarding the terms of the CREC agreement in regard to the fixed amount payable to CREC. ASX should have requested FMG to clarify the terms of the agreement on 24 August itself but it did not write to FMG until March 2005. The member of the High court faced inconveniences with the manner of ASICs pleadings (Price 2014). The allegations made by ASIC during trial were regarded as allegations made on fraudulent conduct of the Fortesque. On an appeal, ASIC advanced the case on a distinguished ground altogether that the default statements made are deceptive or misleading by nature. Thus, the case that was presented during trial was based on the honesty of FMG, Mr. Forrest and the board of the company whereas the case presented on appeal concentrated on the fact that what did the default statements convey to the targeted audience (Langford 2015). It is a well-known principle that the evidence and the facts of a particular case are all relevant and imperative in the adjudication any case. The High Court was of the opinion and criticized that ASIC failed to provide relevant facts and evidences related with the case that would establish the fact that the targeted audience would interpret the term binding contract as contracts that are enforceable by law. It was an established principle that in situations where default statements were made towards the public or any targeted audience, any member within the target audience may adduce evidence that they were deceived and misled as a result of the impugned statement made (Gilbert and Fin 2013). The regulators that is, the ASX and the ASIC failed to comply with the disclosure rule that required them to ensure that the market is adequately informed. The regulators should have immediately requested for clarification of the contract terms relating to the fixed price by asking FMG for a copy of the agreement. The ASIC also failed to succeed in its contention against FMG and Mr. Forrest before the High Court as it did not include the competitive price representation in his contentions when it was apparent that the competitive price representation amounted to deceptive or misleading conduct of the Mr. Forrest (Hedges et al. 2016). In the context of the case, Forrest v. ASIC, the High Court asserted the burden is upon the appellant to prove that a statement addressed to the public include representation and also establishing the message the representation is likely to communicate to the targeted audience. The ASIC failed to adduce relevant evidence of the fact that in deed there were investors who were deceived and misled by the binding contract representation. The appellate court did not have to consider the competitive price representation as ASIC failed to plead the same (Lewis 2015). Conclusion The High Court held that Mr. Forrest and FMG had not conducted in a misleading or deceptive manner in relation to the binding contract and fixed price representation. The purpose of the statutory provisions for deceptive or misleading conduct and the disclosure regime have been incorporated in the Corporations Act to accelerate the efficiency of the Australian capital markets by providing equal opportunity to all the investors to have access to adequate and essential information about the company. Consequently, the availability of the adequate information shall facilitate the investors to take their necessary investment decisions. 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