Any chief executive or board director could find themself in the uncomfortable position facing Andrew “Twiggy” Forrest, corporate governance experts say.
Forrest, the founder, major shareholder and chairman of mining company Fortescue Metals Group, is embroiled in a long-running legal battle with the corporate regulator, the Australian Securities and Investments Commission (ASIC). Today marked the last day of hearings into the matter.
The fight is over the interpretation of the ASX’s Continuous Disclosure: Listing Rule 3.1, but Fortescue and Forrest are also facing other accusations.
It was in early 2004 that Fortescue, then only a few months old, released two announcements to the ASX. They contained details of agreements made with Chinese companies about building a mine, port and railway. In the announcements, Fortescue said the deals were finalised, but the Chinese companies later told the press they were not. Those releases landed Forrest in court.
Forrest is before the High Court fighting ASIC’s accusation that Fortescue Metals breached the ASX’s continuous disclosure rules, as well as sections of the Corporations Act (2001), and the Trade Practices Act (1974).
If Fortescue loses the case, the company could face heavy fines, and Forrest could be banned from being a company director for up to seven years.
The legal case has been decided in favour of both parties in the years since it began. In the first trial, in 2006, the chief justice of the Federal Court found that Fortescue’s then chairman, Herb Elliott, and Forrest, who was then the chief executive of Fortescue, believed their disclosures were accurate, and therefore no breach of the act had occurred.
ASIC appealed to the full Federal Court, which ruled in ASIC’s favour in early 2011. The full bench of the Federal Court unanimously decided the company’s leaders knowingly breached their continuous disclosure obligations. Fortescue appealed to the High Court, taking the case into its seventh year.
The court’s final verdict is likely to be several months away. Legal experts cannot predict the outcome. “Having just read the High Court transcript, there is more to this case than meets the eye… the matter is very contestable,” says Anil Hargovan, associate professor at the Australian School of Business.
The whole thing has been a costly exercise for both parties, but Forrest has acted to limit the damage to the operations of Fortescue.
Forrest resigned as CEO last June, shortly after losing the case to ASIC – a decision Hargovan says is smart, given the uncertain outcome of the next appeal. “Should the decision go against him, it reduces the shock to the market,” Hargovan says. “It softens the blow.”
A month after resigning, Forrest returned as chairman of the board. Hargovan says: “In some companies the chair is treated as a figurehead. In this case, Forrest is a major shareholder and founder, so his role is more meaningful, based on the particular structure of this company. But the fact that he has relinquished some responsibilities showed that there will still be continuity regardless of the outcome.”
Hargovan says the case underlines the duty of directors to ensure their message is accurate and relied on. “There’s a real risk that directors will be answerable for breach of care and diligence. They shouldn’t be rushing to make favourable announcements.”
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However, others say the continuous disclosure rules are part of the difficulty. Tim Sheehy, chief executive of Chartered Secretaries Australia, says: “It’s one of the most difficult issues for boards to manage… it requires a great deal of judgement.”
Sheehy says listed companies are required to release to the market any significant price-sensitive information almost immediately. The uncertainties surrounding what this means in practice has led the ASX to announce a review of its guidance notes in response to the concerns of many company directors.
“The debate revolves around what is ‘immediate’,” he says.
“Some say immediate is within an hour, but to get a company to draft a market release, have it signed off by legal, and approved by the board or committee, you’re going to need more than an hour.
“One of the other areas is how much you disclose, particularly around the area of confidential information.”
Hargovan says the law is clear; what is unclear is how it is being used by ASIC. “In this case, ASIC was alleging that because continuous disclosure was breached, it automatically meant that Mr Forrest was in breach of his duties. That may not always be the case – it doesn’t automatically follow. That’s a matter for concern for directors.”
The clash between ASIC and Fortescue is a test case, Sheehy says. Although several companies have been fined by ASIC for breaching the continuous disclosure provisions, most have chosen to pay the fine, without admitting guilt.
To avoid being in Fortescue’s shoes, it’s vital for companies to have a disclosures committee, Sheehy says. Such a committee could involve the company secretary, the chief financial officer, one or two board members and the in-house council.
“If something needs to be disclosed, that’s not the time to start developing internal tests.”