Professor Bob Baxt provides an overview of recent court decisions affecting the role and responsibility of directors. Many of the matters examined in the Law Reporter are discussed in greater detail in The Baxt Report published by Thomson Publishing.
Liabilities under Fair Trading legislation – the High Court lays down a heavy burden for directors/employees
As directors of companies will be well aware they must ensure that their companies comply with various pieces of legislation including the Trade Practices Act (TPA), Environment Protection Act, and Occupational Health and Safety legislation. It is not only the company that may be at risk in cases where companies breach the relevant legislation. Individual directors (and officers and employees in appropriate cases) may also find themselves potentially liable if they do not carry out the appropriate due diligence and ensure that legislation is complied with by the company and by those who the directors are primarily responsible in overseeing.
Justice Bergin in Maxwell’s case (ASIC v Maxwell & Ors  NSWSC 1052 – noted in last month’s Law Reporter) did not believe that the failure on the part of the relevant director to ensure that the company complied with all of the provisions of the Corporations Act in relation to disclosure led to that director being held to be guilty of a breach of his duty of care. However, the director (officer or employee) may find the reach of the TPA and the Fair Trading Acts may be more significant.
Recently the High Court of Australia in Houghton v Arms  HCA 59, indicated that company employees (which will often include directors) may be personally and directly liable for misleading or deceptive conduct performed in the course of their employment, notwithstanding that they are only ‘accessories’. In such a case it will not be a question of whether the employee aided the company in committing the breach – they will be directly responsible and liable for breaches of the relevant law.
The facts of the case are straightforward. The employees were sued under the Fair Trading Act 1999 (Vic) (which contains provisions which mirror the TPA) on the basis that they engaged in conduct which was misleading.
The judgement of the High Court of Australia is very short with the judges unanimous in their views that the employees were liable. Briefly the facts are these. A Mr Arms conducted a wine selling business which he wished to conduct via an internet site. WSA was a company which provided advice on website design etc. Two employees of WSA, Houghton and Student, advised Arms of a product potentially attractive to small and medium independent wineries such as his which would provide certain savings. They in effect advised that if Arms was to conduct his business using a computer based product known as ‘ANZ Key-Gate’ there was a potentially significant possibility of him reducing his business’ liability in sales tax and other fees. Arms signed up to this product. Apparently the advice provided was not accurate. This led to higher sales tax becoming payable by Arms’ business so that he ran his business at a loss for a period of time. Arms sued WSA, Houghton and Student on the basis that the losses sustained resulted from misleading or deceptive conduct on their part. WSA was in fact insolvent.
The trial judge, Ryan J, held that neither Houghton nor Student were liable under the legislation as neither of them were engaged in trade or commerce on their own account as distinct from the operations of their company. The applications against them for damages resulting from misleading or deceptive conduct were dismissed. The Full Court of the Federal Court ruled that the trial judge had erred in law on his finding and therefore there could be a successful claim brought against Houghton and Student for misleading conduct under the Fair Trading Act of Victoria (which replicates section 52 of the TPA). They appealed to the High Court.
The argument put by Houghton and Student in the High Court was that while their company may have contravened the equivalent of section 52 of the TPA they should not be held to be personally liable. They argued that they were not the persons who should be held liable under the legislation – such an offence should be levelled at the company which carried on the business of selling the particular scheme and that they were really only employees.
The High Court rejected this argument. It made it clear that while their company provided advice and services and the fact that Houghton (and Student) were themselves not business proprietors, and that their activities were an aspect only of the activities of the company, this did not mean that they did not engage in conduct in the course of trade or commerce. Thus they were caught by the provisions of the Victorian Fair Trading Act (they would have had to be corporations to be caught by the TPA).
The High Court also noted in its judgment that the Fair Trading Act was passed to promote and encourage fair trading practices. It was no answer to any arguments about the operation of the TPA (which in effect applied to corporations and only ‘caught’ individuals who were involved with corporations as accessories), that the primary obligation did not apply under the Fair Trading Act to individuals.
Your company’s legal protection is at risk! – the Cole Report’s unexpected consequences
The findings of Commissioner Terence Cole in relation to the affairs of the Australian Wheat Board Limited (AWB) did not lead to any change in the Corporations and Markets Advisory Committee’s reaction to issues concerning corporate social responsibility. However, his remarks on the apparent aggressive use of the doctrine of legal professional privilege by AWB to refuse to supply certain documents has had some potentially unfortunate consequences in the context of future availability of this doctrine.
The term ‘legal professional privilege’ is, of course, a misnomer. The privilege belongs to the individual or to the corporation and operates in the context of advice being sought and obtained by the individual (or the corporation) from lawyers in relation to possible litigation.
The existence of such a privilege dates back many hundred years. It is often regarded as ‘sacred’ by lawyers, and also by the clients of lawyers. From time to time legal professional privilege has been the subject of significant attack by the legislature and there have been some fairly large cases in which the question of whether the privilege operated or not has been raised and rigorously argued in the courts.
Lawyers regard the existence of such a privilege on behalf of their clients as a significant advantage that the profession enjoys, for example, as against accountants. Advice that is provided by accountants in this context is often not protected by privilege – even though the actual request for advice is drawn up in a way so as to gain maximum protection from legal professional privilege. The Commissioner of Taxation has extended to tax accountants the equivalent of legal professional privilege in the context of the advice that they provide in certain circumstances (eg tax audits). But this concession is one that is an administrative concession only.
The Federal Attorney-General, Phillip Ruddock, as a result of the Cole Report has referred to the Australian Law Reform Commission (ALRC) the following questions (amongst others):
- Would further modification or abrogation of legal professional privilege in some areas be desirable in order to achieve more effective performance of Commonwealth investigatory functions?
- Would it be desirable to clarify existing provisions for the modification or abrogation of legal professional privilege, with a view to harmonising them across the Commonwealth statute book?
- Would it be desirable to introduce or clarify other statutory safeguards where legal professional privilege is modified or abrogated, with a view to harmonising them across the Commonwealth statute book?
The nature of the reference to the ALRC is potentially a very wide one. The ALRC has in the past been reluctant to recommend the narrowing of the operation of the doctrine (see ALRC Report No 95 Principled Regulation: Federal Civil and Administrative Penalties in Australia, and Report No 102 Uniform Evidence Law Report). It is hoped that it will, as a result of this new reference, recommend that any future claims for legal professional privilege should be curtailed. Perhaps it will suggest that such a claim will be subject to certain constraints in the way in which the relevant corporation or person argues that they are entitled to the ‘protection’ of that privilege in refusing to supply regulators with documents and advice provided by their legal advisers (see the view of the Administrative Review Council below).
In the past there has been some statutory curtailment of legal professional privilege; some of these curtailments have been the subject of high profile cases, the most recent and important case was the Daniels decision (Daniels Corporation International Pty Ltd v ACCC (2003) 213 CLR 543). The High Court of Australia in a strong decision upheld the concept of legal professional privilege in the context of the operation of the Trade Practices Act. The High Court made it clear in that decision that if legal professional privilege was to be cut back in any way by legislation, the language in the legislation must be specific. The High Court also observed that in its view the ability of the other major regulator, the Australian Securities and Investments Commission (ASIC), to minimise the operation of the doctrine as a result of an earlier High Court decision in Yuill (Corporate Affairs Commission (NSW) v Yuill (1991) 172 CLR 319) was no longer sound. ASIC, however, appears to have ignored the High Court’s comments in the Daniels case in relation to its powers to reject claims for privilege.
The ALRC will report by the end of the year. In the meantime, the Administrative Review Council has issued a discussion paper Government Agency Coercive Information – Gathering Powers. In a chapter on professional legal privilege it has signalled that it believes the doctrine should not be watered down in any significant way. It has signalled that perhaps some measures should be introduced to ensure that challenges by corporations which rely on the application of the doctrine of legal professional privilege to the obtaining of information by regulators might be dealt with in a more efficient and effective fashion, thus reducing costs and delay in allowing these issues to be resolved.
Clearly, all corporations and members of the AICD need to bear in mind the importance of the ALRC inquiry. They should work together to ensure that sound and convincing arguments are made to the ALRC that any reform in this area should not undermine the fundamental principles and the operation of the doctrine. The fact that one or two corporations decide to behave in an aggressive and perhaps unreasonable fashion in claiming legal professional privilege in investigations should not lead to an erosion of that important principle for the vast majority of corporations.
Further clarification of insider trading – the Hannes case in the NSW Court of Criminal Appeal
The Corporations and Markets Advisory Committee’s (CAMAC) Insider Trading Report (which was released in November 2003) is still to be implemented or responded to in an effective way by the Federal Government. This delay is unfortunate as there are growing pressures on the regulator, the Australian Securities and Investments Commission (ASIC), to be more proactive in this area. In addition, there is now a major new decision in this area of law. In late November 2006 the NSW Court of Criminal Appeal delivered an interesting judgment in Hannes v Director of Public Prosecutions  NSWCCA 373.
The judgment is in many respects unsatisfactory. Whilst there are unanimous views of the three judges on various aspects of the quite considerable range of questions facing the New South Wales court; there are also some ‘split’ decisions on interpretations of the various aspects of the law. The decision also contains many interesting observations on questions of pleadings and evidence. Its most important commentary relates to issues surrounding the interpretation of the insider trading offence in the Corporations Act. As noted above, this is particularly relevant at a time when there are a number of insider trading actions being pursued by ASIC. The chances of a further appeal to the High Court of Australia in Hannes may be remote.
It is not necessary in this note to delve into the facts of the case. Suffice to say that Hannes was unsuccessful in challenging various aspects of the charges that had been successfully brought by the Crown against him. What is also interesting (and indeed this is becoming a pattern in a number of cases involving our regulators) is that Hannes appeared on his own behalf without representation.
The judgment, which is over 140 pages, does provide a helpful guide on how pleadings in these matters are to be structured, and the way evidence should be led in dealing with claims in this particular area of the law. It also contains some interesting and useful observations on various aspects of the offence of insider trading and its interpretation.
Insider trading must relate to information
One important aspect of the charge of insider trading is that it must relate to information. Does the insider have knowledge of information which, if made available to the market, would influence the way the market operates? The judges in the Hannes case made some interesting observations about the preciseness or otherwise of the information that is relevant in the context of any claim alleging insider trading. Affirming the views expressed in earlier decisions the majority noted that:
“The kind of information which may affect the securities market may be quite imprecise. However the source of the rumour may be of very considerable importance, despite the vagueness of the known details. If the information in question is so imprecise that it is not likely to affect the market, the charge will not be made out. But if it is sufficient to satisfy that element of the offence, there is no reason to import into the statutory definition an additional requirement of specificity or precision.” (at para 415)
To determine whether the information is of the type that was used by the insider, the prosecution will also need to establish just how the information ‘came’ to the accused. So, for example, if the accused is a director of a company which eventually is going to pursue a course of action, but the director is not necessarily a critical participant in the relevant decision, (eg whether a takeover is to be made), the fact that that the relevant director possessed the information may be sufficient. One looks at the question of the way in which the information is likely to be used. This depends on the intention of the person who has received or obtained the information.
Information must be generally available
Another element in the insider trading offence that has to be established is whether the relevant information is generally available. Again, the question here was whether all of the information in question was generally available or whether only some of it was available. The majority (at para 382) made these comments in relation to this question:
“Even if it can be said that aspects of the particularised information were generally available, that [does not lead] to the conclusion that the particularised information as a whole was generally available. In that respect, there is a difference, for example, between speculation as to a ‘takeover valuation’, on the one hand, and information as to the likelihood of a particular takeover, on the other. It was the combination of information particularised which was significant in relation to the offence [in this case].”
They added these observations later:
“If [the information] is passed on to others, it is information in the hands of the [relevant person]. However, the intention may be inferred by others from the conduct of the directors. The inference may be drawn with varying degrees of certainty as to its accuracy. Nevertheless, such an inference remains information. Indeed, there is no clear distinction between information conveyed orally and by conduct. In the case where the director [of the company] tells a third party of his or her intentions, the information is in fact inferred nor merely from receiving the communication, but from forming a belief as to its veracity.” (at para 411)
Hannes failed to show that the Crown had not established its case on this aspect of the particular claim.
Materiality is another important aspect of the claim. The court noted at para 384, this aspect involves:
“investor conduct and, more particularly, [and a concern] with the question as to whether the particularised information would or would be likely to influence persons who commonly invest in securities in deciding whether or not to subscribe for, buy or sell specified securities … This might generally be said to be concerned with the capacity of information to influence investor behaviour which, in turn, has a material effect on price or value of securities. Accordingly, materiality is concerned with information which might be said to be price sensitive.”
The court felt that it was important to distinguish between evidence that the Crown may have been able to lead about the possession of information on the part of the alleged offender, and the separate question of the information that is generally available to investors in the marketplace, as well as information that could affect investor behaviour. Unless these matters are closely linked in the pleadings and pursued with precision, in the case of a criminal offence, the charge may not be made out. This is one aspect of the case which troubled the court but on balance, the majority of the court felt that the Crown had discharged its onus.
Another critical issue is whether the relevant information is likely to be used in the context of the particular activity. Is the information of the proposed takeover likely to be relevant? The argument by Hannes was that the trial judge had not properly directed the jury as to what meaning should be given to the word ‘likely’. Detailed consideration of this question was made by the members of the court with a different view being adopted by the majority judges to that of Justice Basten. In the view of the majority the word ‘likely’ was to be interpreted in this case as a ‘predictive term’. The word is to be determined by ordinary English usage unless there are real reasons for departing from the ordinary meaning. While Justices Barr and Hall felt that the matter was not critical, Basten J felt that this was an issue in which there had been an error made. However, this conclusion did not change the result. The appeal was lost.
The difficulty thrown up by this decision – ie the concept of insider trading and how it is to be handled in our courts – is a critical one for our regulators. Important questions as to how the offence should be defined and interpreted remain critical issues and it is vital that reports of specialist bodies such as CAMAC are not ignored. These reports should be either further examined or dismissed so that some certainty as to how the law will continue to be developed can be clearly established for the benefit of all concerned.
Already a member?
Login to view this content