When should directors seek legal advice?

Hindsight is a beautiful thing. The corporate world is likely littered with directors who regret not seeking independent legal advice. But when is the right time to do so?

There are a growing number of areas where directors may be personally liable and need to seek their own legal advice, according to Ian Robertson AO FAICD, partner and chair of Holding Redlich.

“There are some obvious situations. One is when there are suggestions of a conflict of interest. Other examples are if there are doubts about the solvency of the company, when directors are involved in complex transactions such as takeovers or where there are personal liability concerns.”

Other scenarios where directors may be personally liable include occupational health and safety, employee entitlements, environmental issues, privacy, cybersecurity risks, modern slavery, money laundering, anti-bribery and corruption laws.

“Directors who feel they may be at risk may want to obtain their own legal advice, in addition to the advice the company will presumably be taking,” he says. “They may also do so if they believe there’s a reputational risk or aren’t comfortable with what’s being done in the company. Plus, the entire board may decide to get separate advice if it has concerns about the quality of the company’s lawyers’ advice or independence.”

When to ask questions

Lyn Nicholson FAICD, general counsel corporate and commercial at Holding Redlich, says that ordinarily, directors rely on management to inform them and obtain advice about the activities of the company. 

“However, there are issues where directors may have questions and may wish to ask questions on their own. Under Section 189 of the Corporations Act 2001 (Cth), directors can rely on experts, but case law has confirmed that directors still need to make an independent assessment of the information from the experts on whom they rely. 

“For example, in the case of a major project or transaction, they may seek independent advice from a lawyer who is not routinely involved in providing advice to the company and can bring a fresh perspective. They can also ask questions and frame questions in the way they would like, rather than the way management has approached  the questions in seeking its advice.”

Nicholson says getting independent advice may also involve obtaining a suite of briefing materials, which may then lead to different advice or to further questions being asked regarding the original legal opinion obtained by management.

Reducing the risks

She notes that in the actions it has taken recently, the Australian Securities and Investments Commission (ASIC) has focused on directors being involved in and understanding the business and how it works at a granular level. Seeking independent advice can help directors to do this and reduce their risks.

Major projects involving personal data and technology are particular areas where independent advice may be beneficial.

For example, she says when taking Federal Court action against Medibank for its 2022 data breach, the Office of the Australian Information Commissioner (OAIC) listed in its concise statement 45 policies and standards to which Medibank’s cyber and data security adhered. However, it also noted 11 missing steps to secure personal information that were cross-referenced to several published frameworks and standards. 

"While an independent legal opinion would not necessarily have resolved all issues raised by the OAIC in the Medibank case, the process of obtaining an independent opinion would potentially have unearthed some of the issues the OAIC considers should have been implemented, giving Medibank room for improvement,” she says. 

“Similar lists of missing cybersecurity and risk management measures were listed in a concise statement in ASIC’s case against FIIG Securities for its breach of its obligations as an Australian Financial Services (AFS) licence holder.”

Nicholson says keeping up to date with changes in legislation and having presentations by third parties and specialist advisers from time to time may prevent the need for independent advice. That’s provided the board can work with management to ensure it is comfortable the broadest possible risk management strategy has been deployed.

Ethical breaches and misbehaviour

Dr Matthew Turnour FAICD, chairman of Neumann & Turnour Lawyers, says directors should seek legal advice when they are concerned there is a significant departure from the expected behaviour of the company or a director, or if they are concerned about ethical breaches. 

“Earl Warren, when Chief Justice of the Supreme Court of the United States, pointed out: ‘In civilised life, law floats in a sea of ethics’. If a director sees law as floating in a sea of ethics, then triggers for legal concern arise as ethical concerns rise. To oversimplify ethics, to be ethical is often summarised as to be other-regarding. This is often framed as to treat others the way you would want to be treated. 

“It follows that directors should be concerned about possible breaches of the law whenever they have a concern that the basic moral code is being violated and proper regard is not being had to the relevant stakeholders — be they others in the company, the company itself or third parties such as creditors dealing with the company.”

Be alert

Robertson says while there may be occasions when directors should seek independent legal advice, those situations are rare. “I suspect most company directors will probably go through their careers not having to do that.”

He believes an important question is who pays for the independent legal advice. “Directors acting in good faith may form the view that they need advice, but whether the company is going to pay for it is a different issue.”

He says payment may be dealt with via the directors’ letters of appointment, the board’s charter or a deed of access and indemnity with the company. “In the absence of any of these, the director would probably have to approach the chair and say, I’m getting advice and I want the company to pay for it, but the chair or board don’t necessarily have to agree.”

However, he adds that the overall duty of the director is to be alert to what’s happening in a company. “Directors are entitled to rely on the advice of others, including the company’s management, accountants, lawyers and others. But at the end of the day, directors have to make their own decisions.”