Case: Australian Securities &amp; Investments Commission v Macdonald (No 11) [2009] NSWSC 287 ; (2009) 256 ALR 199
Outcome: distinguished
conclusion, the standard of proof that I must apply is the balance of probabilities as prescribed by s 1332, and I accept that in deciding whether ASIC's allegations are made out on the balance of probabilities I am required to take into account the causes of action and the gravity of the matters alleged and their consequences: s 140(2) Evidence Act ; Briginshaw [1938] HCA 34 ; 60 CLR 336. If inferences are to be drawn, ASIC has to establish that the circumstances appearing from the evidence give rise to a reasonable and definite inference and not merely to conflicting inferences of equal degrees of probability: Australian Securities and Investments Commission v Macdonald (No 11) [2009] NSWSC 287 ; (2009) 256 ALR 199 at [186] ; Communications, Electrical, Electronic, Energy, Information, Postal, Plumbing and Allied Services Union of Australia v Australian Competition and Consumer Commission [2007] FCAFC 132 ; 162 FCR 466 at [38] . The authorities state that two inferences are involved in the rule in Jones v Dunkel . First, a court might infer that the evidence of the absent witness would not have assisted the party that failed to call that witness; secondly, a court might draw, with greater confidence, any inference unfavourable to the party that failed to call that witness, if that witness appears to be in a position to cast light on whether the inference should be drawn: Manly Council v Byrne and Anor [2004] NSWCA 123 at [51] ; ASIC v Macdonald [2009] NSWSC 287 ; 256 ALR 199 per Gzell J at [1137]. ASIC cites the recent decision in ASIC v Macdonald (No 11) [2009] NSWSC 287 ; 256 ALR 199. It submits that the information about the Deed of Covenant and Indemnity which formed the basis of ASIC's claim against James Hardie Industries Limited made under the predecessor section to s 674 was information about the significance and effect of that Deed: at [484], as to which the defendants were too emphatic in understating the effect of this information in market releases. Yet what occurred there was the complete failure by the company to disclose the existence of certain covenants, an indemnity and the obligation to make certain payments. It was not a case, such as the present, involving, in effect, differing opinions as to the meaning and effect of agreements as a whole. I do not find it, in that respect, to be of any assistance. I will then, against this background, consider whether the only reasonable opinion as to the meaning and legal effect of each framework agreement is as expressed in the Informations or whether the opinion of FMG that each was an enforceable agreement to build, transfer and finance the relevant Project infrastructure was reasonably held. It is accepted that, in substance, each framework agreement is mutatis mutandis to the same effect. I will consider then the CREC Framework Agreement. However my conclusions will apply to all three framework agreements. ASIC submits that had such advice been obtained, the misleading statements could not have been made by a responsible company or board of directors and that the failure by FMG to obtain legal advice is a relevant consideration. ASIC did not lead expert opinion evidence as to what such an opinion was likely to have been had it been sought. ASIC referred to ASIC v Macdonald [2009] NSWSC 287 ; 256 ALR 199. There, Gzell J found at [1275] that ASIC had made out its case that the company, James Hardie Industries Limited, negligently failed to disclose information concerning the restructuring of the company in contravention of Listing Rule 3.1 and s 1001A(2) of the Corporations Law as carried over into the Act for reasons including that it did not obtain any legal advice as to whether it should disclose the information. The information did not consist of an opinion as to the meaning and legal effect of an agreement. ASIC pleads at ASC [102] that by 26 January 2005, FMG and Forrest were aware firstly that CREC, CHEC and CMCC did not regard the framework agreements as requiring them to construct and finance the infrastructure necessary for the Project; and secondly that the agreements did not have the effect of obliging those companies to construct and finance the infrastructure. Among the particulars relied on by ASIC to establish FMG's and Forrest's knowledge are the minutes of a meeting of FMG's directors including Forrest on 22 January 2005, and Huston's attendance at the meetings on 16 and 17 January 2005 involving FMG and the representatives of CREC, CHEC and CMCC, together with Huston's status as a qualified, experienced and practicing commercial solicitor. I have discussed in some detail the meetings of 16 and 17 January in Part 9. At those meetings, FMG and the Chinese Contractors discussed their relationship and sought to reach agreement on the size of the equity interest that FMG would grant to a Chinese entity. I have found that the Chinese suggestion at the 17 January meeting that the previous agreements were merely MOUs was a negotiating tactic employed to advance their case for a majority equity interest in the Project. ASIC did not specify in its pleading what aspect of the 22 January minutes it was relying on to establish either or both of these assertions. In fact, ASIC made no reference to this document in oral or written submissions. Further, ASIC did not plead nor explain in submissions just how it was that Huston's attendance at the 16 and 17 January meetings and his status as a qualified, experienced and practicing commercial solicitor advanced ASIC's assertions. The CHEC Framework Agreement was executed on 1 October 2004. The CMCC Framework Agreement was executed on 20 October 2004. In ASIC v Macdonald (No 11) [2009] NSWSC 287 ; 256 ALR 199 at the time of both alleged continuous disclosure contraventions there was a negative perception in the market place in relation to the shares of the holding company due to its asbestos liability. Gzell J noted at [507] that the reasonable person would think on receipt of the information concerning the covenants and indemnities that the company's asbestos claim liability had been controlled and that the blight upon its share price had been removed. In relation to the second set of information, his Honour noted that the severing of the company's connection to its asbestos liability was positive information and likely to reduce negative sentiment in the market regarding the company's shares: [1121]. ASIC refers to the recent decision of Gzell J in ASIC v Macdonald (No 11) [2009] NSWSC 287 ; 256 ALR 199 where Mr Macdonald, the chief executive officer and a director of James Hardie Industries Limited was held to have contravened s 180(1) by: making false or misleading statements at a press conference; and approving, or failing to advise not to release, or failing to remove matters that were false or misleading from, an ASX announcement which contained over-emphatic statements and which were false or misleading. Mr Macdonald and number of other directors were also held to have contravened s 180(1) by approving a draft ASX announcement which contained false or misleading or deceptive statements about the funding of a medical research and compensation fund that the company was establishing. His Honour stated that the directors ought to have been and they should have realised that they were prevented from approving the unequivocal and unqualified statements as to certainty of sufficient funding in the draft announcement. In the present case, ASIC pleads (ASC [166(b)(1)]) that the information in each of FMG's disclosures was published to "persons who commonly invest in securities in the ASX's financial market". Further, ASIC pleads that FMG's conduct in publishing the information, making the statements and representations, or creating the impressions associated with the disclosures was conduct "designed to encourage reasonable investors in the ASX's financial market to invest, or to continue investments, in the First Defendant". This formulation I regard as no different, in substance, to the language of s 677 of the Act, namely the question of the influence or likely influence of information upon common investors. I do not think it is intended by ASIC to describe an actual causal consequence but merely an encouraging or influencing factor. ASIC, borrowing from the language of Gzell J, submits that FMG's and Forrest's disclosures to the market between 23 August 2004 and 24 March 2005 were likewise emphatic, unequivocal and unqualified. Thus while ASIC is not required to prove that FMG intended to engage in misleading or deceptive conduct to establish contraventions of s 1041H, evidence of intent will allow the Court to readily infer that the intention has been effective. ASIC submits that the evidence supports a finding that FMG and Forrest in particular intended to mislead and deceive investors and potential investors in FMG shares. The Representees The various persons to whom ASIC claims FMG made the disclosures were: reasonable investors in the ASX's financial market; media publishers; the audience of the media publishers; persons obtaining access to media releases, FMG's letters to the ASX and other company reports on FMG's website; media representatives who attended a telephone press conference conducted by Mr Forrest on 23 August 2004; the audience of the Business Sunday television program broadcast on or about 17 October 2004; and attendees at conferences between August 2004 and March 2005 where Forrest gave presentations on behalf of FMG. Relevance of media commentary ASIC's claim that the disclosures were false and misleading is pleaded against a factual background summarised by ASIC at ASC [18], subparas (a) to (v). That background is derived from 265 documents listed in Schedule 10 to the ASC. The documents included in the Schedule are from the following sources: Letters, media releases, conference and meeting presentations, progress reports and statutory reports provided to the ASX by FMG; and Media reports published by newswire services such as Australian Associated Press Financial News Wire; and by national and capital city newspapers including the Australian Financial Review, The Australian, The Sydney Morning Herald, The Age, and The West Australian. ASIC submits that the elements found in ASIC v Macdonald (No 11) [2009] NSWSC 287 ; 256 ALR 199 that led Gzell J to find that Macdonald had breached his duties as a director are present in this case in that Forrest: (a) was Chairman and Chief Executive Officer; (b) had control and responsibility for the making of ASX announcements; (c) was intimately involved in the preparation and approval of the various announcements and the later company presentations; (d) knew full well that the statements were false, misleading and deceptive and that unqualified and emphatic statements could not be made concerning the execution of binding, build and transfer contracts by the three Chinese contractors; (e) knew that the ASX announcements and the company presentations had been crafted to induce a positive effect on the price or value of FMG shares by positively influencing investors; (f) knew that this conduct exposed FMG to serious risks to its reputation and placed it in likely contravention of important provisions of the Act; (g) knew that the false announcements withheld from the market the true information concerning the terms, legal effect and significance of the actual framework agreements, which steps placed FMG at risk of likely contravention of s 674. It is not in issue that Forrest was, at all material times prior to about 17 May 2005, the chairman of directors and chief executive officer of the first defendant; and that he has, since on or about 17 May 2005, been FMG's chief executive officer. In his closing written submissions, Forrest points out that ASIC did not tender any direct evidence regarding his, or any other FMG directors' duties or call expert evidence regarding the role of a director or a chief executive officer in a company like FMG at the material times. Forrest also points out that ASIC had sought to tender parts of his s 19 ASIC Act examination transcript but withdrew the tender after he sought to include parts of the explanatory and contextual portions of his examination transcript. ASIC emphasized the recent judgment in ASIC v Macdonald (No 11) [2009] NSWSC 287 ; 256 ALR 199 , where Gzell J held that the Chief Executive Officer, Macdonald, and a number of other directors, had breached their duties under s 180. Gzell J held that Macdonald failed to advise the board of the company that the draft ASX announcement was expressed in too emphatic terms concerning the sufficiency of funds held by the foundation to meet all legitimate asbestos claims and that as a result the ASX announcement was misleading and deceptive. He also found that Macdonald failed to properly advise the board as to the fact that the cash flow model supporting the statements concerning funding had not verified the key assumptions contained in the model. I have already considered this case, which turns on its own facts. It is of no particular assistance in the resolution of this issue concerning Forrest. Forrest does not dispute that he knew of FMG's duties regarding Listing Rule 3.1 but says FMG did not breach s 674(2) of the Act. Alternatively, Forrest says, if FMG breached s 674(2) of the Act (which is denied), for the reasons regarding Forrest's honest and reasonable beliefs, a reasonable person in Forrest's position and FMG's circumstances would have acted the same way that Forrest did.