How far do the obligations of care and diligence under 180(1) of the Corporations Act 2001 (Cth) reach, and how do company officers fulfil them? These were the questions which the High Court had to consider in the appeal by Mr Peter Shafron, the former general counsel and company secretary of James Hardie Industries Limited (“Hardie”), against findings that Mr Shafron had contravened section 180(1) of the Act.
In unanimously rejecting Mr Shafron’s appeal, the High Court provided important guidance concerning:
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the duties of company secretaries with specialist skills extending beyond “pure” company secretarial activities to their use of those specialist skills
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when a person will incur a duty as an officer by “participating” in decisions of significance for a company, even if they are not involved in making the decision, and
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the extent to which the engagement of external specialist advisers may, or may not, eliminate the overlapping responsibilities of company officers.
The facts
Mr Shafron was employed by Hardie as “general counsel and company secretary” in August 1998, although he was not formally appointed company secretary until November 1998. In November 1999, Mr Donald Cameron was appointed as joint company secretary of Hardie with Mr Shafron.
In February 2001, the board of Hardie met to consider a proposal to separate from the James Hardie group two companies with significant asbestos liabilities. Mr Shafron was found to have breached section 180(1) of the Act by:
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failing to advise the chief executive of Hardie, or the board of Hardie, that certain additional information concerning the separation proposal should be disclosed to the ASX (“the ASX issue”), and
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failing to advise the board of Hardie that an actuarial report on which the board relied in considering the separation proposal did not provide for “superimposed inflation” (that is, the cost of claims rising at an annual rate greater than inflation) when a prudent report would have done so (“the actuarial issue”).
The issues
Duties under section 180(1) of the Act attach not only to directors but to “officers” more broadly (directors, company secretaries and certain others). The NSW Court of Appeal found that Mr Shafron was an “officer” on two distinct bases; firstly, because he was the company secretary of Hardie, and secondly, because he was “a person who makes, or participates in making decisions that affect the whole, or a substantial part, of the business of the corporation”.
On appeal, Mr Shafron argued that his duties as company secretary were limited to company secretarial functions, and did not extend to his general counsel functions (such as providing advice to the board about the ASX issue and the actuarial issue). Mr Shafron sought to delimit his company secretarial functions by arguing that they should be equated to the functions of his joint company secretary, Mr Cameron, whose functions were primarily administrative.
Mr Shafron further argued that he was not a person who participated in making the decision in relation to the separation proposal, because that was a decision for the board, of which he was not a member. Finally, Mr Shafron argued that if he was an officer (on either basis), he had, in any event, not breached his duties in relation to either the ASX issue or the actuarial issue.
The findings – does section 180(1) only apply to “company secretarial” duties?
The Court found that it was “greatly to be doubted” (in the words of the majority) that Mr Shafron could exercise some functions in a company secretarial capacity and other functions in a general counsel capacity (as Justice Heydon put it, “it is not possible to sever Mr Shafron's responsibilities into watertight compartments, one marked “Company Secretary” and the other marked “General Counsel”). There was no evidence that Mr Shafron performed some tasks in one capacity and other tasks in another, and because the responsibilities of a particular company secretary in a particular company are matters of fact, evidence of Mr Cameron’s functions did not prove that Mr Shafron’s company secretarial functions were similarly administrative.
The Court then considered whether, if Mr Shafron’s roles could be split, the division would affect the outcome. The Court noted that section 180(1)(b) of the Act fixes the degree of care and diligence by reference to “the office held” and the “responsibilities with the corporation” of the relevant officer. The Court held that the word “responsibilities” in section 180(1)(b) refers to the actual responsibilities of the actual officer (that is, the responsibilities of Mr Shafron within Hardie), not merely the statutory responsibilities of a person holding the office of company secretary.
The Court agreed with the findings of the Court of Appeal that providing advice in relation to the ASX issue was within Mr Shafron’s area of responsibility (because it was a matter which a company secretary with a legal background would be expected to raise), and that providing advice in relation to the actuarial issue was also within Mr Shafron’s area of responsibility (because Mr Shafron had close involvement with the cash flow modelling which underpinned the actuarial report and was therefore responsible for raising with the board the limitations of that cash flow modelling). Accordingly, Mr Shafron’s responsibilities as a company secretary of Hardie were wide enough to support a finding that he owed the duties of an officer in carrying out all of those responsibilities.
The findings – what is “participation in decision making”?
The Court’s broad view of Mr Shafron’s role as company secretary meant that it was strictly unnecessary to consider whether Mr Shafron was also an officer on the basis that he was “a person who makes, or participates in making decisions that affect the whole, or a substantial part, of the business of the corporation”. However, the Court found that Mr Shafron was also an officer on that basis.
The Court rejected Mr Shafron’s argument that a person must be a decision maker in order to “participate” in that decision. The Court noted that Mr Shafron was a very senior executive of Hardie (ranking 2nd or 3rd in seniority). Although the board made the decision on the separation proposal, Mr Shafron “played a large and active part in formulating the proposal” as one of three senior executives who worked on the proposal with external consultants, was “part of the promotion of the separation proposal to the board” and “went well beyond proffering advice and information to the board”. These matters (and in particular, the connection between Mr Shafron’s actions and the decision of the board to accept the separation proposal) meant that Mr Shafron participated in the decision and owed duties as an officer of Hardie on that basis.
The Court did emphasise that it is not participation in any decision of a corporation that makes a person an officer, because the statutory provision is limited to decisions which “affect the whole, or a substantial part, of the business of the company”. The Court agreed with the finding of the Court of Appeal that the relevant decisions in which Mr Shafron participated did meet this test.
The findings – Mr Shafron’s alleged breaches of duty
Finally, the Court rejected Mr Shafron’s arguments that he had not breached his duties under section 180(1) of the Act.
In relation to the ASX issue; Mr Shafron argued that he was entitled to rely upon Hardie’s external lawyers to raise the need for additional disclosure to ASX. This argument failed because the Court found that the retainer of those solicitors neither expressly nor impliedly extended to considering that issue.
In relation to the actuarial issue, Mr Shafron argued that he did not have expert actuarial knowledge and could not know what provision for “superimposed inflation” ought to have been made. This argument failed because the Court found that Mr Shafron did know that the cost of claims was increasing faster than the rate of inflation, and also knew that the failure to take this fact into account was likely to have a significant impact upon the validity of the actuarial report. His duty was not to suggest an appropriate provision but to draw to the Board’s attention that the provision had not been made.
The lessons
The first key lesson from the case comes from the point which the Court did not strictly have to decide – namely, when a person who is not a director or secretary is still an officer because of “participation” in company decisions. If you thought that because you were not a decision-maker, you were not an officer, this case requires you to think again.
Senior executives will not be excused from liability as officers under section 180(1)(b) simply because they are not the ultimate decision-makers – being a decision influencer, a decision promoter, or a decision urger may be sufficient. Whether a duty will arise will depend upon all of the facts leading up to the decision (including the relationship between the actions of the executives and the decision making process, and whether or not the decision affects the whole, or a substantial part, of the business of the corporation).
The second key lesson is that a company secretary who has specialised skills or training (whether in law, or in some other discipline) will be expected to apply those skills (and comply with obligations under section 180(1) in respect of those skills) in relation to the performance of their company secretarial functions, even if the company secretary has a dual title.
The third key lesson is that obtaining the advice of external professional advisers is not, by itself, enough to discharge the duty of care and diligence. If an officer wishes to argue that an external adviser was responsible for a particular issue, it is necessary to ensure that the adviser’s brief extended to the particular question (which was not the case in relation to the ASX issue). If an officer is responsible for presenting externally-sourced advice to the Board, they must still ensure that any factual assumptions in the professional advice are consistent with the factual position known to the officer (which was not the case in relation to the actuarial issue).
Next steps
The High Court has remitted the case to the Court of Appeal to determine issues of penalty.
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