Fortescue Metals Group Ltd. (FMG) founder Andrew Forrest is fighting Australian regulators to maintain management control over the company that made him the country’s third-richest person.
Forrest faces removal from his chairman post after the Australian Securities and Investment Commission won an appeals court ruling last year that said he and Fortescue, the country’s third-biggest exporter of iron ore, broke regulatory rules and misled shareholders with a description of contracts with three Chinese companies. He’s appealing to the highest court in the land to reverse that decision.
The High Court’s ruling will have ramifications for corporate directors in Australia beyond Forrest and Fortescue after the appeals court narrowed the extent to which directors and executives can rely on business judgment for decisions, said Georgie Farrant, a partner at Baker & McKenzie in Sydney.
The issue of business judgment is “one of the big things we’re hoping to get guidance on from the High Court,” said Farrant, who isn’t involved in the case. “It’s the first time the High Court has an opportunity to look at this issue.”
The appeals court ruled that business judgment isn’t a defense for making an inaccurate disclosure to shareholders.
A two-day hearing before a panel of High Court judges is scheduled to begin today in Canberra. In 2004, Fortescue said in letters to the stock exchange and in media releases that the Perth-based company had binding agreements with China Metallurgical Construction Group Corp (MLCGCZ)., China Harbour Engineering Co. (GHAICZ) and China Railway Engineering Corp (CRECCZ). to build an iron ore mine, a port at Port Hedland in Western Australia and a railway, according to court records.
Fortescue shares rose more than eightfold in Sydney trading in seven months following the first announcement of a Chinese partnership 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 day that China Metallurgical wasn’t prepared to build or finance the project under the arrangements in place at the time.
Forrest, known as Twiggy, has a net worth of $5.3 billion according to this year’s Forbes list of the 40 richest Australians. He holds a 32 percent stake in Fortescue, valued at A$5.3 billion ($5.7 billion), according to data compiled by Bloomberg.
Only Gina Rinehart, chairman of Hancock Prospecting Ltd., with a net worth of $18 billion, and Ivan Glasenberg, chief executive of Glencore International Plc (GLEN), with $7.2 billion, have more wealth in Australia than Forrest, according to Forbes.
Forrest’s lawyers, in a filing to the High Court, cited e- mails from Oct. 3, 2004, to support his assertion that he believed Fortescue had binding contracts with the Chinese companies.
“It is at this stage non-binding, but is intended to become binding on the 20th of this month at a signing ceremony in Beijing,” Forrest wrote in an e-mail.
Forrest “clearly” believed that the framework agreements were binding contracts, the lawyers said in the filing.
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.
Forrest claimed the benefit of the business judgment rule, saying it was his judgment that allowing Fortescue to make the disclosure was based on good faith and for a proper purpose.
The appeals court rejected the argument, saying the business judgment rule doesn’t extend to inaccurate public statements.
A person must show he or she took “all steps that were reasonable to ensure compliance with the entity’s disclosure obligations,” the three-judge appeals panel wrote in the Feb. 18, 2011, ruling, overturning a lower court’s decision that cleared Forrest and Fortescue of wrongdoing.
“Forrest was unable to point to any steps he took to ensure that the agreements were binding,” the panel wrote.
If upheld by the High Court, that ruling means directors at all companies will have to ensure that anything they sign is 100 percent accurate, Baker & McKenzie’s Farrant said.
“The facts must be there,” she said. “If they’re not, don’t say it.”
The appeal case is: Australian Securities and Investments Commission v. Fortescue Metals Group Ltd. WAD23/2010. Federal Court of Australia - Full Court (Perth)