Danger signs ahead in NRMA decisions

Friday, 01 February 2002


    Can directors in companies with widely dispersed shareholding disclose information to the public without breaching their duties?

    The National Roads and Motorists Association Limited has rarely been out of the news and has been the subject of many interesting case comments in this journal. Now, in another quite interesting decision involving the ability of certain directors to provide information arising out of board meetings to the media has again raised the potential of some new law being created. The case, NRMA Limited v Geeson & Ors has recently been reported in the Butterworths company law cases - (2001) 40 ACSR 1; (see also (2001) NSWSC 343) and on appeal (2001) NSWCA 832). The issue to be dealt with, through an injunction action, made it difficult for the court to give a considered evaluation of all the issues. The NRMA sought an injunction restraining the four defendants (three of whom were directors of the company - Stewart Geeson, Anne Keating, and Jane Singleton - the fourth being John Fairfax Publications) from publishing or otherwise disclosing information in relation to an NRMA board meeting held on 17 September 2001. During this board meeting, NRMA president Nick Whitlam sought an undertaking from the board members not to disclose certain information regarded as confidential.

    At first instance Bryson J in the New South Wales Supreme Court refused the NRMA application. He held that, by declining to give an undertaking, the directors were not threatening to communicate such information. While finding reasonable grounds to believe that Ms Keating would disclose part of the discussions relating to occupation of the chair at the meeting, it appeared to him that the NRMA Directors Code of Conduct (the Code) adopted earlier in the year, allowed Ms Keating to do so. Therefore, in his view, there was no proper ground on which she could be restrained. She would not be in breach of her general law fiduciary duties, nor would she be in breach of sections 182 and 183 of the Corporations Act. Furthermore, Bryson J found there was no proper ground for restraining a third party (John Fairfax Publications) from publishing information disclosed to it by a director in compliance with the Code. In his judgment, Bryson J discussed the general principles in relation to the law on confidential information and considered in particular the requirement of detriment in the disclosure of confidential information, finding that it was necessary in this case to show detriment. He also held that protection given by the law of confidential information is not given on a blanket basis. It was necessary to show more specific areas of change.

    In deciding against the NRMA's application for an injunction against the defendants, his Honour also made several very interesting comments. One set of comments was in relation to the nature of NRMA as a company limited by guarantee, which he suggested made it different from other companies. He also suggested that because of its status it was also possible for directors to take into account "public interest issues" in carrying out their obligations. In particular, in relation to that second set of comments, he noted that the membership of the NRMA was very large and he made what can be regarded by some as an extraordinary statement: "... [NRMA's] activities are so pervasive that it does not seem too much to say that the NRMA is part of the general organisation of society in New South Wales. In my view interests of NRMA as a whole would be positively served by making public, for the information of members and others, events and circumstances at a Board meeting ... The readiness of media to report such things is a reflection of real, well-based and widespread interest and concern in the community." [emphasis added]

    While the public may want to know what goes on at a company such as NRMA (or indeed any of our large companies), it would not be appropriate for the public to be provided with information about activities of companies which are clearly confidential and which are not therefore generally disseminated until it is appropriate for the information to be made available. To apply such an approach to large companies in general would be to create a recipe for chaos at board meetings. One could imagine, for example, directors of state-owned companies who believe that they are there to represent the public interest to divulge information about the activities of those companies through the press when the directors felt that the relevant company itself was not doing enough to publicise its policy, actions or other relevant matters. I believe the judge was incorrect in his evaluation of companies limited by guarantee as being somehow "different". In that context I note that the Court of Appeal embraced the approach taken by Bryson J. The position of companies limited by guarantee has been treated in a series of cases as being no different from other companies. In particular, Wayde's case (Wayde & Anor v New South Wales Rugby League Limited (1985) 61 ALR 225) involving the attempt to exclude the Western Suburbs Football Club from the New South Wales rugby league competition in the early 1990s, saw the court rule that companies limited by guarantee were governed by the same rules as other companies. When the High Court heard the appeal in this case, it did not overrule that aspect of the decision.

    NRMA applied for leave to appeal Bryson J's judgment. Its application was dismissed by the New South Wales Court of Appeal. The judgment was handed down by Ipp AJA (Mason P and Giles JA concurred (2001) 40 ACSR 1)). Ipp AJA also reflected on the nature of the NRMA as a "public institution". In his view, it was in the interests of a very large mutual association for members to be fully informed, and that sometimes the only way of doing this was through the press. He held that there wasn't enough evidence to suggest that the information the subject of possible dissemination, was confidential. In reaching this view, he also relied on the constitutional freedom of communication (at paragraph 48). "... in light of the extent to which the affairs of the applicant are of direct and immediate concern to the members of the public, it is arguable that considerations analogous to those involving freedom of communication in relation to public affairs apply." [emphasis added] In many respects the results in the NRMA cases can be explained by the fact that the case was an application for an injunction. A court has important discretions in an action of this kind and will often refuse to grant injunctions if the decision requires a detailed examination of legal principles which raise difficulties and which require a considerable amount of time to evaluate. The judges no doubt felt that in this particular instance there was sufficient uncertainty as to the question of whether the information that was leaked was in fact confidential to enable them to reject the application for an injunction.

    Because the facts of this case could be regarded as special (especially as it was an injunction application) the court may not have had the opportunity to consider in greater detail the implications of directors facing the pull from two quarters. In a series of cases (Bennett v Board of Fire Commissioners of New South Wales (1967) 87 WN (Part 1) (NSW) 307; Molomby v Whitehead (1985) 63 ALR 282; Harkness v Commonwealth Bank of Australia Limited (1993) 12 ACSR 165) the New South Wales Supreme Court and the Federal Court had to consider the question of directors disclosing information to persons that had appointed them to a board or whom they "represented". Perhaps the best analysis of this was in the Harkness case which while it is now nearly 10 years old is worthy of review in the context of the NRMA cases. The Harkness case concerned whether Condron, who was a nominee of the Commonwealth Bank of Australia Limited on the board of a company known as Austroclear Pty Ltd, (which acted as a clearing house for payments to banks), had knowledge that could or should be imputed to the Commonwealth Bank because he was its nominee.

    It could be argued that by virtue of his knowledge the Commonwealth Bank also received the information and that the particular payment received by the Commonwealth Bank might have been disallowed under the bankruptcy rules which apply in this area of the law. The liquidator argued that the Commonwealth Bank could not retain the benefit of the payment because Condron would have been obliged to pass on the relevant information to the Commonwealth Bank. Young J dismissed this argument. In his view, the Commonwealth Bank did not receive this information simply because Condron was its nominee. He relied on a number of cases including those referred to above and made these important observations on the obligations of persons on a board not to disclose information to others (including those who appoint them): "While ordinarily there will be a duty to communicate knowledge received, where a director is functioning within another corporate organisation and information comes to the director in the course of that work with the other organisation, his duty of confidentiality to that other organisation will subsume any duty he might otherwise owe to the company which appointed him to that organisation. The use of the word 'representative' does not take the matter any further. Whether a person is elected by a special interest group, considered to be a representative of one group or another group, or a nominee director, does not alter the fact that the person owes the duty of confidence to the board to which he or she has been appointed." (12 ACSR at 177)

    Earlier in his judgment, in dealing with the issue of what might amount to confidential information, Young J made several other very valuable observations which are worth repeating: "There is sometimes difficulty in classifying what is confidential and what is not, and indeed, different board [members] may have different views on borderline items. It is quite clear that a resolution unanimously supporting the public utterance of the Chairman [of the Board] could not be confidential. On the other hand, a resolution authorising the general manager to negotiate for the purchase of another company would obviously be confidential. In between are situations where judgment is called for. Some Board members may consider that selective leaking of information and gaining reaction may be for the benefit of the company but this is always a dangerous attitude to adopt. The safest course to take is to obtain approval from the Board by resolution to the communication of any information outside the Board so that the director knows where he or she stands. Sometimes, however, it does not occur to a director to ask for such approval until well after the meeting has concluded. What is confidential is not to be found merely by looking to see whether someone has marked 'confidential' against an item. The obligation of directors is to keep secret any matter which is discussed, the communication of which might detrimentally affect the company; indeed, even the issuing of information as to who voted in what way on a particular resolution may detrimentally affect the working of a company if it is breezed abroad. The duties of a person whether a director or an executive who serves on a committee of an organisation will be much the same." (12 ACSR at 174)

    You will note his reference to the "safest course of action". Clearly, Young J was concerned that by leaking information the directors would simply generate internal dissension within the company, causing embarrassment to it and damaging the company in the long, if not in the short, term. So what should directors faced with a situation like this do? Clearly in the NRMA case the members of the court felt that the directors were able to utilise the fact that they had been given some discretion by the NRMA Code (adopted by the NRMA earlier that year) in disclosing information. However, one of the early "principles" under the Code was that directors should discuss these matters first with the chairman before they went public. That is clearly the view of Justice Young in the Harkness decision where he suggested board members going off and talking to the press was indeed a dangerous attitude to adopt. A code of conduct such as that adopted by the NRMA does not override or in any way set aside the obligations that are imposed on directors by the Corporations Act. It is possible, in some cases, for companies in general meeting or through a clause in their constitution to actually provide a "safety net" which will allow directors to behave in a particular way which might not fully fit within the common law rules that govern the obligations of directors. So, for example, the company could include a clause in its constitution which would give the directors power to issue shares in a way which might otherwise fall foul of the common law rules. But, even if the company were to include such a clause in its constitution it could not overcome the obligations under the Corporations Act imposed on a director to behave in a particular way.

    In my view such clauses will almost certainly fall foul of any action brought under the Corporations Act which establishes that there is a breach of one of the statutory duties - for example the failure of the directors to act in good faith and in the best interests of the company (see section 181). The daily press makes frequent reference to the affairs of the NRMA organisation and I am sure we have not seen the end of the battles of the boardroom in that company. However, the decisions in these NRMA cases are troubling because they suggest a latitude for directors which frankly can be "dangerous" if taken out of context. In that regard it is useful to remind readers of the fact that when Justice Mason in the High Court suggested that directors who failed to consider the interests of creditors when the company was in financial difficulties they may be in "some danger" of breaching their duty, his statement spawned a series of cases which suggested that directors actually owed a duty to creditors (in law). It was only very recently in the case of Spies v R ((2000) 201 CLR 603) that the High Court made it clear that directors do not owe a common law legal duty to creditors.

    Similarly, statements which permit directors latitude in terms of how they can deal with corporate information (especially if it is confidential) could lead to the High Court having to look at this question more closely where information which is regarded as corporate information is allowed to be shared more widely than the company thought was appropriate.


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