The Forrest conundrum: can you ban the owner?
Wednesday February 23, 2011
Even if the founder of Fortescue is replaced, there remains the reality of his 30 per cent shareholding. FOR the past two years there has been talk around the watercooler at Fortescue's Perth office that the company's founder, Andrew Forrest, has been looking to quit as chief executive and take over from non-executive chairman Herb Elliott if he retires this year.Whether this is part of his plan or whether he is happy to stay in his current executive role may not be Forrest's decision to make. What the future holds depends on the Federal Court, which will decide whether to ban him as a director of any company, including Fortescue and the numerous charities he is involved with.At this stage, the Australian Securities and Investments Commission, which won a case last week against the company and Forrest for making false and misleading statements about contracts with the Chinese for construction of port and rail facilities, is pursuing banning orders against Forrest.But ASIC may not get that opportunity. Forrest wants Friday's judgment overturned and is seeking leave to appeal it before the High Court. If allowed, it could take some time to be heard and then for a decision to be made.If an appeal is not allowed, the legal show moves to a Federal Court judge who will hear the matter of penalties, and that could be subject to appeal by either party.In the meantime Fortescue shareholders are in the dark they are, oddly enough, operating in an uninformed market.Lawyers who specialise in the area wonder whether ASIC will be successful in its attempts to ban Forrest, given two of the three appeal judges questioned why ASIC had pursued this case with such vigour.All three judges agreed that there had been a contravention of the law, but two queried ASIC's motives given there was no suggestion investors lost money as a result of being misled. The third appeal judge, Ray Finkelstein, took a different view. He even took the initiative of jumping on to the Commsec website to study the share price movements and volumes around the misleading statements and announcements.Presumably he undertook his own investigation because ASIC did not use this as a plank of its argument. In turn, one can only presume this was because it received no complaints from investors.The regulator will be looking for aggrieved parties now. Already class action lawyers Slater & Gordon have been pouring over Friday's judgment and are assessing whether they can piggyback last week's decision with a civil suit.It's hard to believe that some traders didn't lose some money on Fortescue shares at the time. But the loyal band of shareholders that bought into Forrest's dream of becoming the "third force" in iron ore in Australia have been very handsomely rewarded.For those professional traders that buy in and out of stocks to make quick turns at the margin, there is a better understanding of the risks associated with the market particularly when investing in companies in start-up phase. In a legal sense does this make their losses any less relevant? Probably not.But ASIC seems to want to make an example of Forrest. He certainly makes for big headlines and in theory this should act as a deterrent.The trouble for ASIC is that getting rid of Forrest is potentially harming the shareholders it is meant to be protecting.There will be plenty of politics associated with any attempts to ban Forrest from running Fortescue. The sharemarket response to last Friday's judgment and the prospect of Forrest being banned from running the company were clear enough the shares fell more than 2 per cent. If ASIC is successful, the shares will undoubtedly fall again.The importance of Forrest to the company has arguably declined since the early days; Fortescue is now a $20 billion company with thousands of employees and a growing line-up of very senior management with the ability to take over day to day operations. That said, banning Forrest creates a whole new set of challenges.First, there is no precedent for banning a director currently in office in a major company. In most instances, banning orders are sought because shareholders have sustained significant losses and the perpetrators have left on an early train.More importantly, there is the issue of Forrest's 30 per cent shareholding. Take the instance where Forrest disagrees with the company's strategy. He could call a meeting of shareholders and, using his 30 per cent stake, quite easily sack the board and replace it with like-minded directors. Lawyers say that any new directors would have their own set of legal responsibilities. In theory, they are right, but in practice they are more likely to follow the direction of the shareholder that installed them.Clearly the current shareholders see losing Forrest as a negative, but will their views influence the way a judge rules on a banning order?