In this edition:
Director takes on the ACCC
Nigel Rooney, director of repair company Seal-a-Fridge, has taken aim at the ACCC claiming it only takes on companies it knows it can bully into submission. Rooney claims the watchdog has been bullying him for four years and spent over $200,000 to force him to plead guilty to a $25 issue he has already fixed. Rooney attempted to explain why the ACCC chose to target Seal-a-Fridge when it has been revealed that the ACCC failed to stop Kleenmaid over four years ago when a group of franchisee’s complained to the watchdog about the dodgy practices of its directors.
ATO Crackdown
The ATO announced last week its intention crackdown on cross border transactions. This is the result of growing concerns that many large businesses are shifting profits offshore to avoid tax liabilities. The initiative will be aimed at large businesses with low profits or losses, particularly those with a history of underperformance relative to industry averages. Those businesses that do not price their arrangements at a commercial arm’s length rate will attract the attention of the ATO.
Recent / Proposed Legislation
Second Reading of the Consumer Law Bill
Minister for Small Business Dr Craig Emerson announced during November the establishment of an expert panel on franchising and unconscionable conduct. The purpose was to review the Franchising Code of Conduct and the provisions of the Trade Practices Act 1974 (TPA) that prohibit unconscionable conduct. An Issues Paper was already released with submissions closing on 18 December.
Dr Emerson also announced on 4 December, that the Australian Government as well as the States and Territories had reached final agreement on the form of the new Consumer Law, the breakthrough came during the Ministerial Council on Consumer Affairs held in Perth.
$3.8 million penalties for abuse of market power
The Federal Court imposed total penalties of $3.8m on two stevedoring corporations (‘Patrick’ and ‘P&O’) in the case of ACCC v PRK Corporation Pty Ltd [2009] FCA 715. after they admitted to using their market power to substantially lessen competition within a market, contrary to s45(2) of the Trade Practices Act 1974 (Cth). This conduct arose in the course of an arrangement between Patrick and P&O to provide access to each other’s automotive terminal services at the ports of Brisbane, Sydney and Melbourne.
Financial services reform, disclosure and misleading or deceptive statements
The recent case of ASIC v Narain [2008] FCAFC 120 has shed light on the interaction of the continuous disclosure rules in the Corporations Act 2001 (Cth) (‘the Act’) and the rules about misleading or deceptive conduct in relation to financial services and products. The court had no doubt the publication on the ASX of a statement that a reasonable person would expect to have a material effect on the value of shares was conduct that ‘relates to’ those shares as needed under s1041H of the Act.
The Lehman Brothers DOCA
The deed of company arrangement in relation to the administration of Lehman Brothers purported to extinguish the creditor councils’ rights to sue other members of the Lehman Group for their financial losses. The Court in City of Swan v Lehman Bros [2009] FCAFC 130 held this cannot be done under Pt 5.3A of the Corporations Act with Rares J stating that Pt 5.3A does not contain express words or unmistakable clarity of language to lead to such a draconian interference that the property of the creditors could be appropriate by a majority of other creditors for the benefit of them or third parties.
1. Takeovers Panel proposal to disregard client legal privilege
The Takeovers Panel (‘The Panel’) is considering comments on its proposed rewrite of the Panel’s Procedural Rules for Proceedings. One of the proposed changes in the rewrite purports to allow the Panel to decline to allow the claim of privilege over communications with legal advisers.
If this proposal goes ahead, this could result in a party being compelled to disclose privileged communications and advice between it and its lawyers to the Panel, the other parties to the dispute and consequently, the public. This will, in stark contrast to the very rationale of client legal privilege, represent a serious impediment to a corporation’s ability to seek and receive legal advice, including from its in-house council, in the lead up to and during a merger or takeover.
The proposed Rule 2.3.2 will require a party wishing to make a claim for client legal privilege to identify the circumstances in which the advice was given, and the subject matter or question in relation to which the advice was directed. The Panel also proposes to insert a ‘note’ to the Rule that states:
“The Panel may decline to allow the claim of privilege. Corporations and Securities Panel v Bristile Investments Pty Limited (1999) 152 FLR 462 decided that the privilege does not apply to the production, inspection and use of documents (or evidence) required under a direction (ASIC Reg 16) or summons (ASIC Act s 192). In Daniels Corporation International Pty Ltd v ACCC (2002) 213 CLR 543 the High Court did not allow a claim of legal professional privilege in respect of s 155 of the Trade Practices Act 1974.”
The effect of the High Court’s decision in Daniels has been incorrectly stated by the Panel as the court in fact allowed a claim for legal professional privilege in relation to documents sought by the ACCC and found that statutory provisions are not to be construed as abrogating that right in the absence of express unambiguous words to that affect.
The law regulating mergers and takeovers is notoriously complex and in those circumstances, it is imperative that corporations be able to communicate with their lawyers without fear that those communications will later be used against them or become public. The probative value of privileged communications in determining disputes is often overstated. Usually, they do not have a bearing on the actual facts and issues in dispute but, rather, are used to add ‘colour’ to a party’s perceived motivations.
2. When is a Global Market a ‘Market in Australia’ for the purposes of the TPA
The recent decision of the Full Court of the Australian Federal Court in the case of Singapore Airlines Ltd v Australian Competition and Consumer Commission [2009] FCAFC 136 is likely to have ramifications for overseas entities conducting business in global markets including Australia.
A number of international airlines are being sued by the ACCC for alleged participation in a cartel in the international air cargo industry; however, preparatory to commencement of proceedings the ACCC used its powers under s 155 of the Trade Practices Act 1974 (‘TPA’) to require the airline to produce documents relating to the matters then under investigation.
Singapore Airlines challenged the validity of these notices on the basis that the use of the phrase ‘including on routes to and/or from Australia’, when used in the notices in the context of the supply of international air cargo services, extended the notices to price-fixing on any route throughout the world without any connection to Australia.
For there to be a breach of the TPA, the conduct must relate to competition in a market in Australia. The primary judge construed these notices as referring to international air cargo services only to the extent that they are outbound or inbound services, supplied in a market in Australia.
On appeal, the Full Federal Court accepted the ACCC’s construction that the use of the phrase “including on routes to and/or from Australia” limited the notices to the provisions of any price-fixing arrangement which had the purpose or effect of fixing prices on routes which included routes to and/or from Australia. As such, the court held that “the market for the services comprised in the matters is capable of amounting to a market in Australia”. In doing so, the court noted that “prices fixed for legs of a journey which take place wholly outside of Australia may ultimately affect competition in a market in Australia”.
Implications
While the individual circumstances of each situation must be considered, this case means that global markets cannot necessarily be regarded as markets which exist wholly outside Australia and that conduct in respect of the same, where it affects an Australian market, is likely to be subject to the TPA. Global enterprises doing business in Australia should be aware that such conduct in one jurisdiction, whether illegal or not in that jurisdiction, could therefore lead to a breach of the TPA in Australia. The need for caution is now vital given the fact that price-fixing is now a criminal offence in Australia.
3. Duty of care and diligence under the Corporations Act s180(1), (2) & (3)
Justice Austin has provided an informative analysis of the duty of care and diligence imposed upon directors and officers of corporations by s180 of the Corporations Act 2001 (‘the Act’) in the case of ASIC v Rich (2009) NSWSC 1229.
s180(1) of the Act provides that ‘a director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
(a) were a director or officer of a corporation in the corporation’s circumstances
(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.
Austin J highlighted whilst damage need not be proved, it must be shown that it was reasonably foreseeable that harm to the interests of the corporation might be caused by the director’s relevant act or omission. Austin J also stressed that hindsight should not be used in place of the commercial context in which the decision was made. This foreseeable risk can however be justified by countervailing potential benefits.
Austin J also outlined what a consideration of the corporations ‘circumstances’ will require including consideration of the type of company involved, the size and nature of the business and its board composition. Consideration of the ‘same responsibilities within the corporation’ refers to the tasks delegated by the constitution, by board resolution or otherwise. This will include the factual arrangements, both formal and informal, including ‘arrangements flowing from the experience and skills that he or she may bring to bear to the office.’
This case illustrated minimum standards of diligence directors must be aware of including affirmative duties to:
- keep informed of the company’s activities
- maintain familiarity with the financial status of the company and making further enquiry where appropriate
- have a reasonably informed opinion of the company’s financial capacity.
This legal duty under s180(1) therefore encompasses the followings concepts; a duty of competence, measured objectively; a standard referenced by what a reasonable person of ordinary prudence would do; if the appointment of executive directors is based on a special skill, an objective standard of skill referrable to the circumstance and irrespective of a director’s particular skills and experience, or lack thereof, the director is accountable to a core irreducible requirement of skill, measured objectively.
Generally, non-executive directors are not subject to the same strict standards of care and diligence as executive directors. This duty of skill and competence for non-executive directors may not extend much beyond financial matters unlike executive directors whose standard reflects what is objectively expected of a person appointed to that office in addition to express contractual responsibilities.
Business judgment rule
A ‘business judgment’ means a decision to take or not take action in respect of a matter relevant to the business operations of a corporation. s180(2) of the Act provides that a director who makes a business judgment is taken to meet the requirements of subsection (1) if they:
(a) make the judgment in good faith and for proper purpose
(b) do not have a material personal interest in the subject matter of the judgement
(c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate, and
(d) rationally believe the judgment is in the best interests of the corporation.
A director’s belief that a judgment will be in the best interests of the corporation is rational unless it is one that no reasonable person in their position would hold whilst the director or officer bears the onus of proof of establishing all the elements of the Rule in order to access its relief.
The term ‘a matter relevant to the business operations’ is recognised by Austin J as having great breadth. This term will be satisfied for matters not of itself a business operation matter such as decisions taken with respect to planning, budgeting and forecasting will fall within this context. This being the case, a directors ‘oversight’ duties such as monitoring affairs and policies are not protected by the Rule as they do not involve a business judgment.
With respect to informing themselves of the subject matter to the extent they reasonably believe to be appropriate, this must be assessed by reference to:
- the importance of the judgment
- the time available for, and the costs of obtaining information
- the director’s confidence in those responsible for exploring the matter
- competing demands for attention in the business.
This means that protection may be available as long as the director reasonably believed they had taken appropriate steps to inform themselves about the subject matter. This is therefore a subjective consideration.
Date claimer - end of CPD year half day seminar
Collect all your CPD core requirements in one morning before the March 31 cut-off.
| TOPICS |
SPEAKERS |
| Practical legal ethics: points for consideration |
Kay Lauchland, Director, Alexia Education and Training |
|
Practical management and business skills: maintaining legal professional privilege in house |
Alicia Hill, Partner, DibbsBarker |
|
Professional skills: advocacy and duties to the court and client - ensuring external legal providers can work for you |
Ian Caudwell, Senior Associate, DibbsBarker |
Date: 25 February 2010
Time: 9:00am- 12:00pm
Where: Level 13, 120 Edward Street, Brisbane, QLD 4000
Official invitations will be circulated shortly.
Please contact for more information:
Alicia Hill
Partner, Commercial – Dispute Resolution
T 61 7 3100 5103
Jim Holding
Partner, Commercial
T 61 7 3100 5165
Derek Sutherland
Partner, Commercial
T 61 7 3100 5065
David Richardson
Partner, Commercial
T 61 7 3100 5037
The material contained in this publication is no more than general comment. Readers should not act on the basis of the material without taking professional advice relating to their particular circumstances.
© DibbsBarker 2009
