In James Hardie Industries NV v ASIC [1] (Hardie) the NSW Court of Appeal upheld the earlier decision of the trial judge that James Hardie Industries NV (the Company) had breached the Corporations Act 2001 (Cth) (the Act) in two key areas:
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Misrepresentation: the Company had lodged a series of slides with the ASX that contained misleading and deceptive information; and
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Non-disclosure: the Company failed to disclose certain information to the market as is required under ASX Listing Rule 3.1.
In summary, the Court of Appeal dismissed the following appeals:
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the Company’s appeal against the finding that it had engaged in misleading conduct;
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the Company’s appeal against the finding that it had breached its continuous disclosure obligations;
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the Company’s appeal against the penalty; and
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ASIC’s cross-appeals.
Misrepresentation
The misrepresentation case against the Company related to a series of roadshow presentations that the Company’s CEO, Peter McDonald, made to small groups of investors in the UK in 2002. The Company lodged the slides from the roadshow presentations with the ASX for release to the market.
The slides made statements relating to the amount of funding that was available to meet potential asbestos claims against two of the Company’s subsidiaries. The specific statements that ASIC argued were misleading were that potential future asbestos claims were “separated and fully funded” and “no future liability – no provision required”.
ASIC argued that these statements conveyed representations of sufficiency of funding and of the Company having a reasonable basis for that assertion.
The trial judge’s decision that the Company had breached sections 1041E and 1041H of the Act (which relate to false and misleading statements that may lead people to trade, and misleading and deceptive conduct with respect to financial products) was upheld. The Court of Appeal agreed with ASIC’s submission that the statements “fully funded” and “no future liability” would be likely to convey to reasonable members of the intended audience that there was a proper and supportable basis for making the statements.
In reaching its decision, the Court of Appeal rejected the Company’s arguments that:
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readers should have read the individual slide that contained the offending statements in light of other filings made by the Company (which included more conservative language about funding for asbestos liabilities); and
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the statements were qualified by a standard disclaimer at the end of the slideshow.
Non-disclosure
James Hardie Industries Limited (JHIL) was a wholly owned subsidiary of the Company that had significant exposure to potential asbestos liability.
In March 2003 the Company entered into a series of transactions with JHIL which involved the separation of the Company from JHIL including the cancellation of partly paid shares that the Company held in JHIL (the Restructure). JHIL also agreed to indemnify the Company for asbestos-related liabilities.
The Restructure allowed the Company to cancel a contingent liability of $1.96 billion on the partly paid shares for no cost. If not for the Restructure, JHIL could have called upon this unpaid capital as additional funding to meet future asbestos related liabilities.
The Company did not disclose, to the market, the full details of the Restructure until it filed its Annual Report on 30 June 2003.
ASIC claimed that the Company was required by ASX Listing Rule 3.1 to notify the ASX of the separation of JHIL from the Company because it constituted information that a reasonable person would expect to have a material effect on the price or value of the Company’s securities and no exemptions to this obligation were applicable.
The Court of appeal upheld the decision by the trial judge that, in not notifying the market of the Restructure immediately, the Company had breached ASX Listing Rule 3.1 and therefore had contravened section 674 of the Act, which gives legislative force to this Listing Rule. The Restructure meant that there was no ongoing connection with JHIL’s potential asbestos liability or any possibility of a call on the Company to help JHIL meet those ongoing asbestos liabilities. There was evidence of the Company’s awareness that the Company’s connection to potential asbestos liability was perceived negatively by the market, so that the removal of that liability would be expected to be received positively.
The Court of Appeal held that the trial judge was correct in finding that the Restructure was likely to have a positive material effect on the price or value of the Company’s securities and therefore should have been disclosed.
Contrary to being an error of judgment by the Company, the Court of Appeal held that what the Company told the market and when it did so was deliberate and well thought through. The contravening conduct in this case demonstrated a significant disregard for honesty and transparency and a subjective willingness to interpret its statutory obligations to suit its own corporate purposes.
The Court of Appeal emphasised the fact that the test under section 674 of the Act is an objective test that should be determined in light of the expected impact of the information on the market. The fact that a company with an obligation to disclose convinces itself, through a series of self-serving deliberations, that information would not be expected to have a material effect on the price or value of its securities, does not answer the question as to whether the material is in fact disclosable as required by the Act.
What can be taken from this judgement
Although each case turns on its own facts, this case provides practical illustration that disclosing entities must ensure that disclosure is made as and when required, and regardless of whether it is “good news” or “bad news”.
While many continuous disclosure cases revolve around failure to share “bad news” promptly and honestly, this case illustrates that companies must be just as diligent about disclosing “good news” to keep the market properly informed.
When determining whether certain information must be disclosed to the market, directors need to do more than reach a conclusion based on self-serving deliberations (in Hardie the Company had received legal advice to the effect that if the Company did not expect the information to affect the share price disclosure was not required – the Company chose to interpret this as general advice that disclosure was not required).
Assuming that no exemptions apply, genuine objective consideration needs to be given to whether a reasonable person would expect the information in question to have a material effect on the price or value of the company’s securities, regardless of the decision maker’s own preference about disclosure.
The Court of Appeal’s judgement also illustrates the importance of carefully reviewing all material (including individual slides in a presentation) that is to be released to the market to ensure that it is not misleading. If statements are qualified by other information, the qualifications need to be referred to in the presentation instead of assuming that people will undertake their own investigations. When making presentations, a general disclaimer at the beginning or end of a set of slides may be perceived by the audience as a formality (“something the lawyers wanted in there”) rather than a real qualification to statements in the body of the presentation.
For any queries, please contact:
Lis Boyce | Partner
T +61 2 8233 9566
F +61 2 8233 9555
E lis.boyce@dibbsbarker.com
