On Friday 17 December 2010, the NSW Court of Appeal handed down two judgements in the James Hardie appeals
[1] arising from proceedings brought against James Hardie, and its directors and officers by ASIC.
The first appeal was brought by James Hardie Industries NV against the finding that that the Company had made false and misleading statements concerning the funding of the Company’s asbestos liabilities. That appeal failed, for reasons which will be considered in a separate article.
The second appeal arose from findings made against a number of directors and executives of the Company for breaches of their duties as directors (or officers) of the Company under the Corporations Act 2001 (Cth) (the Act).
Each of the directors and officers (with the exception of Mr McDonald, the Chief Executive Officer of the Company) appealed against those findings. Each of the directors was successful in their appeal. Of the officers, Mr Shafron, the general counsel and company secretary, was partially successful, and the appeal of Mr Morley, the CFO, failed.
There can be no doubt that each of the successful directors will regard the result as “a win”. However, whether the decisions of the Court of Appeal are “a win” for directors generally is much less clear. This is because the Court of Appeal found that ASIC had not proved, as a matter of fact, that the directors actually engaged in the conduct which ASIC claimed to be in breach of their duties under the Act. On the legal question of whether or not the conduct involved a breach of the Act, the Court of Appeal agreed that, if the conduct ASIC relied upon had been proved, the directors would have breached the Act.
The appeals of Mr Shafron and Mr Morley also raise important issues in relation to the liability of executives who are officers of corporations. In this article, we look at the result of the second appeal, and then go beyond the specifics of this case to draw out some key principles for all directors and officers.
A Quick Re-cap
The James Hardie Group manufactured and sold asbestos products over an extended period to 1987. The Medical Research Compensation Foundation (Foundation) was established in 2001 to deal with asbestos related claims as part of a broader restructure of the James Hardie Group.
The board of directors of James Hardie Industries Limited (the Company) met on 15 February 2001 to consider matters associated with the Foundation, including a draft public announcement (draft ASX announcement) to the Australian Stock Exchange (ASX).
The draft ASX announcement contained statements to the effect that the Foundation would commence operations with assets of $284 million, would have sufficient funds to meet all anticipated legitimate asbestos claims, was fully funded and provided certainty for people with legitimate asbestos claims.
DibbsBarker previously issued an article in relation to this decision which can be located
here.
Non-executive Directors
The trial judge’s findings against the non-executive directors related to their approval of a resolution approving a draft of an ASX announcement which was found to be misleading.
The Court of Appeal reversed the trial judge’s decision and found that ASIC had not proved that the directors approved the draft ASX announcement. There were several reasons for this finding of fact, but the main reasons were:
(a) The draft press release allegedly tabled at the Board meeting was inconsistent with slides presented by management to board of directors and which were considered by the directors.
(b) ASIC had breached its duty of fairness by not calling a witness, Mr David Robb, a solicitor who was present at the board meeting and who could have presented valuable evidence.
The Court of Appeal did, however find that if the conduct had been proved, the directors would have breached their duties under the Act in approving the draft ASX announcement. In particular, the Court of Appeal rejected the contentions of the non-executive directors that relying upon the management of the Company was enough to discharge the duties of due care and diligence.
The Court of Appeal also rejected the arguments of two directors who were present by telephone from the United States that their duties were reduced by the fact that they were not physically present in the meeting. According to the Court of Appeal, the directors did not have sufficient familiarity with the subject matters of the resolution, their obligation was to abstain from voting, rather to merely follow the views of those physically present.
Lessons for Non-executive Directors
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It is not safe for non-executive directors to assume that their duties of due care and diligence will always be discharged by relying upon management.
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The Court of Appeal has expressly declined to lay down rules which set out when reliance on management is sufficient. However, the more important the transaction is for the company, the more likely it is that mere reliance on management will not be sufficient.
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The extent to which directors will be able to rely upon management also depends upon the skills and experience of the director concerned. Directors who appointed because of their particular skills or experience are expected to use those, and that experience, in the performance of their functions as directors.
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If directors do not have sufficient material to enable them to them to exercise their independent judgement on a matter, they should obtain that material or abstain from voting.
The Executives
Mr Shafron (general counsel and company secretary) was partly successful in his appeal in that he was found not to have breached his duty of care and diligence by failing to advise the directors that the draft ASX announcement was expressed too emphatically.
However, Mr Shafron failed in his appeal against the decision of the Supreme Court that he breached his duty of care and diligence in failing to advise the board of JHIL’s continuous disclosure obligations, specifically in relation to considering the need to disclose the execution of a deed of covenant and indemnity and in failing to inform the Board of the possible effect of inflation on asbestos liabilities.
In particular, the Court of Appeal rejected Mr Shafron’s argument that he was a mere provider of information, rather than being involved in the relevant decision-making processes, so as to make him an officer (and therefore subject to the relevant Corporations Act duties). In support of this view, the Court of Appeal cited Mr Shafron’s participation over a long period in the project team promoting the restructure proposal to the Board, his status as an approver of ASX announcements and examples of his being given authority by the Board to negotiate key agreements.
In finding that Mr Shafron was an “officer”, the Court of Appeal expressly rejected Mr Shafron’s submission that to find that he was an officer would “open the floodgates” and widen the meaning of officer to include all of a company’s management or advisers.
Mr Shafron also argued that, although he held the position of joint company secretary, in practical terms his functions were those of a general counsel so that he did not become an officer by virtue of holding the position of company secretary. The Court of Appeal agreed that it is necessary to look carefully at the role, rather than the title, but observed that Mr Shafron’s role included tasks which could properly be described as being secretarial.
In addition, the Court of Appeal made a new declaration that Mr Shafron had breached his duty of care in failing to advise the board of the limitations of the best estimates presented in the expert’s reports.
Mr Morley (chief financial officer) was unsuccessful in his appeal and the Court of Appeal reinforced the trial judge’s decision that he had breached his duty by failing to explain to the board the limited nature of the expert reviews conducted on the cash flow model used to assess the likely funding needs of the Foundation.
Key Lessons for Executives
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The question of who is an officer is a question of fact to be determined on a case by case basis.
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Where an employee is performing some tasks which may be those of an officer and some which may not, it is important to ensure that the scope of the employee’s role is correctly documented.
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The scope of the duties of an officer is determined by reference to the skills and experience of the officer concerned rather than by reference to the title of the office held.
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A senior executive with experience in relation to finance will not discharge their obligations merely because there is another executive who has carriage of a particular issue
Next Steps
ASIC is currently assessing the judgments to determine whether it will seek special leave go appeal to the High Court.
This article has been prepared through collaboration between Lis Boyce, Wendy Jacobs, Angus Macinnis, Sarah Matthews, Tom Morgan and Masi Zaki.
Any queries should be directed to:
Lis Boyce | Partner
T +61 2 8233 9566
