High Court win fails to clarify rules for boards

Wednesday, 3 October 2012  Media Alerts

Associate Professor Anil Hargovan in the School of Taxation and Business Law said "given that this is a High Court decision, it will be instrumental in shaping new continuous disclosure guidelines contemplated by ASIC and the ASX. The judgement was also highly critical of the manner in which ASIC framed its case. This will make it clear to the corporate regulator that there is a need for greater transparency when formulating claims against defendants."

However he adds "the Fortescue decision has 'limited utility' - it can't be used indiscriminately as a precedent for other cases."

The High Court of Australia has unanimously ruled that Fortescue Metals Group chairman Andrew Forrest did not mislead investors regarding the infrastructure on a proposed Pilbara project in Western Australia.

Associate Professor Hargovan says the decision is likely to have ramifications for company disclosure laws, but because of the narrow focus it doesn't clarify those laws for the rest of corporate Australia.

He says "in terms of corporate governance, the case was disappointing. The court did not focus on significant issues such as the 'business judgement' defence - that the decision was made in good faith and with the best interests of the company. The court didn't address continuous disclosure laws, directors' duties, or even the specific 'operation of business judgment' rule. In one sense it's a real shame and a missed opportunity that they didn't take the opportunity to shine some light on this area of law because it is currently riddled with uncertainty."

However he adds ASIC must now rethink its litigation strategy. "It was defective for two main reasons. ASIC failed to clearly specify the basis of the alleged misrepresentation resulting in confusion. For example did ASIC believe it was fraudulent or negligent? This was unclear. Second, in just piling alternative claims on top of another, ASIC must be condemned. This strategy of litigation was quite rightly considered by the High Court, as they said, 'to be planting a forest of forensic contingencies' and it is totally unacceptable with a fair trial."

He says "it is vital in any future trials that every person ought to have a proper opportunity of meeting the alleged case against them. ASIC is now on notice - the courts chastisement should offer comfort to potential defendants facing allegations of breach of law by regulatory agencies. They can certainly anticipate greater clarity in the claims made against them."

Anil Hargovan
02 9385 3577
Australian School of Business
University of New South Wales