Professor Bob Baxt examines what the recent James Hardie decision in the High Court of Australia really means for company directors.
The High Court of Australia has in two unanimous decisions (two judgments on each case – one more lengthy than the other) in effect confirmed the decision of Justice Gzell (Company Director, November 2009) that the non-executive directors (NEDs) of James Hardie Industries (JHI) and Peter Shafron, the company secretary and general counsel, had breached their duties.
It found they failed to act with appropriate care and diligence in the context of announcements made to the Australian Securities Exchange (ASX) surrounding the establishment of the Medical Research and Compensation Foundation following the restructure of the James Hardie group of companies.
In doing so, in my view, the High Court of Australia has made it crystal clear that NEDs in particular (but, of course, similar views apply to the position of management and executive directors) must exercise considerable care in ensuring the statements they provide to the ASX concerning the affairs of public companies, in particular, are accurate.
Readers will recall that Justice Gzell at first instance ruled in 2009 that both the executive directors and NEDs of JHI were in breach of their duties of care in relation to JHI’s release of a draft announcement to the ASX that, at a board meeting on 15 February 2001, the board of directors had approved a statement which indicated that the foundation, created to manage and to pay out various asbestos claims relating to asbestos poisoning, was "fully funded" and, in effect, had "sufficient funds to meet all future claims".
Justice Gzell in the New South Wales Supreme Court held relevantly that the NEDs of JHI had contravened their statutory duties of care and diligence contained in section180(1) of the Corporations Act 2001. There were two sets of directors affected by the primary finding.
In December 2010, the New South Wales Court of Appeal overturned the decision of Justice Gzell (Company Director, March 2011). In its view, the Australian Securities and Investments Commission (ASIC) had failed to establish its case properly because, in essence, it did not call the solicitor for JHI to give evidence on the events that occurred at the February meeting.
The New South Wales Court of Appeal argued that ASIC had not conducted the proceedings "fairly".
In its view, the nature of the proceedings brought by ASIC required it to call all important witnesses, especially in a case where penalties might arise.
In its appeal to the High Court, ASIC argued that this raised "the bar" required to be satisfied by a regulator much too high. It also appealed the penalties and orders and disqualification orders made by Justice Gzell in relation to the seven NEDs and Shafron.
Shafron also appealed to the High Court in the decision reached by Justice Gzell that he was liable for breaches of his duties of care and diligence.
It was anticipated that the High Court might not only consider the questions surrounding the arguments concerning ASIC’s "fairness" in conducting the relevant hearing, but might also have some interesting insights on the duties of care and diligence.
Readers will recall that the New South Wales Court of Appeal had indicated that if it were wrong in concluding that ASIC had not acted "fairly", it would have upheld the decisions of Justice Gzell in relation to the failure on the part of the directors to exercise appropriate care and diligence in relation to the review of the ASX announcement and related matters.
The High Court ruled that:
- The Court of Appeal was in error when it concluded that ASIC had not proved that the relevant ASX announcement was tabled and approved by the relevant board meeting;
- That court was also wrong to rule that ASIC had breached a duty of "fairness" by not calling the solicitor to give evidence; and
- That court was further incorrect in concluding that a failure to call a witness in breach of a duty of "fairness" in any way undermined the evidence that was tabled by ASIC and presented to the court.
The lengthier decision of Chief Justice French and Justices Gummow, Hayne, Crennan, Kiefel and Bell concentrated in part on an examination of the relevant board minutes, decisions surrounding the correctness of the minutes and the fact that no protest had been made later by the directors when the minutes were confirmed.
In their appeal, the directors argued that the relevant minutes were false and that the draft ASX announcement had never been tabled and approved in the formal sense. In addition, other inaccuracies were identified in relation to the minutes.
In concluding that the minutes were in fact an appropriate record as approved by the board, the High Court noted that the minutes of the later April board meeting recorded that the minutes of the February board meeting had been approved. They had also been signed as a correct record by the chairman of the company.
The court added: "Both sets of minutes were admissible as business records ... and were evidence of the truth of the matters that they represented. The February board minutes were thus evidence of the facts that a draft ASX announcement was tabled and that it was approved; the April board minutes were evidence of the fact that the board had approved the minutes of the February meeting as an accurate of the proceedings at that earlier meeting" [2012 HCA at .
A critical issue for the majority of judges was that there was no evidence that at any time during that year that any of the directors protested about the terms in which the announcement had been made to the ASX on 16 February. They further noted that this absence of protest "was consistent with the board having approved the draft announcement at the February meeting"  HCA at .
The majority noted that this also may have been "consistent with the directors not having read the final ASX announcement and with their not having been able or sufficiently interested to participate in the proposed telephone conference". "Further, the absence of protest was important to [assess] whether, as the directors asserted, they, if asked would not have approved ... the draft announcement" at .
On the question of the behaviour of ASIC in conducting the case and not calling the solicitor, the High Court noted that ASIC did have an obligation to act "fairly" and behave appropriately, and that it was correct for the courts and litigants to "expect that ASIC will conduct any litigation in which it is engaged fairly. Nothing that is said in these reasons should be taken as denying that ASIC should do so" at .
But the High Court noted that the basis for alleging a higher standard had not been identified. It ruled that the failure of ASIC to call the solicitor did not amount to any unfairness and did not diminish or reduce the impact of the evidence provided by ASIC to the court in dealing with this matter.
In his separate judgment, Justice Heydon made some telling comments concerning the expectation that one would have of directors in a case of this kind.
At paragraph 180 of the judgment, Justice Heydon noted: "Many people made claims against the [relevant companies] for physical injury allegedly caused by their exposure to asbestos. Directors and executives of the [relevant companies] anticipated that many similar claims would be made. They faced an intractable problem.
"At any one moment they knew what claims had been made. They knew approximately what it would cost to meet those claims. They knew or ought to have known that over time that cost had risen faster than the rate of inflation. But they could not know of the group’s asbestos liabilities which had been incurred but not yet reported. Nor could they know of liabilities which had not yet been incurred but in a long time would be.
"The time before they gained accurate knowledge could be very long. That is, because some asbestos-related diseases are contracted only many years after exposure and diagnosed later still.
"The state of asbestos litigation ... was constantly examined at board meetings. Asbestos litigation was seen as affecting the share price. It was seen as jeopardising the long-term future of the subsidiaries. It was seen as jeopardising perhaps even the survival of the group as a whole.’
Justice Heydon described the keen awareness of the board to the success of the separation process and the reaction to the public in relation to these issues. The board and senior management knew that the media was important in ensuring that reaction to the arrangements to be reached and would have to be carefully managed.
His comments concerning timely and accurate disclosure to the ASX are particularly relevant in my view.
He said: "Although [relevant duties] rested on the company, in the last resort the directors were responsible for ensuring compliance with them – particularly since the relevant resolutions to be recorded were those of the directors themselves."
Justice Heydon noted there were certain provisions in the legislation which might lead to fines being imposed for non-compliance.
He then added these telling comments: "The relevance of this consideration goes beyond legal obligation. Provisions of this kind correspond with the strong feeling that accurate minutes should be kept of general meetings and committee meetings in organisations of all kinds. They include businesses; educational and medical institutions ... [and a range of other bodies].
"The members of these organisations, humble as they often are, see it as important that minutes accurately record what took place. How much greater is the importance of accurate minutes in the case of directors running a large wealthy multi-national public company, listed on stock exchanges, in which thousands of people had invested on the faith or the belief that its affairs were efficiently conducted?" .
Justice Heydon then added that the Court of Appeal had confirmed that the relevant minutes of the meeting on 15 February 2001 were false.
He noted: "To find that the minutes of a company listed on the ASX were false in so important a respect was a serious matter legally and commercially. It is fundamental to the running of so large and important an organisation as the James Hardie Group that the records of its central decision-making organ be correct, lest the foundations on which its future affairs rested be left to the vagaries of corporate memory and changing personnel" .
Justice Heydon’s concluding remarks about the February meeting are particularly "chilling" in my view: "That meeting may have been the most significant in the company’s history. The company in question was one of the largest and most important in the country. The directors knew that hostile critics would closely scrutinise the decision and company statements associated with it. They are acting in circumstances of extreme urgency.
"There was no legal capacity to resolve that there should be separation without announcing that fact to the ASX. There was no commercial point in resolving on separation without announcing that fact. And there was no commercial point in any announcement unless an assurance of sufficient funding for asbestos claims was given.
"The resolve that there should be separation without announcing any such assurance would create a damaging controversy from ‘hostile and emotional stakeholders’ and ‘asbestos-related spoilers’. The draft announcement in the hands of management on 14 and 15 February 2001, the last of which was taken into the meeting as the [relevant announcement] spoke of sufficient or full funding for all legitimate claims. Taken together, those circumstances comprised immensely powerful evidentiary support for ASIC’s case" .
As one would expect, ASIC has trumpeted loud and clear signals that this is a major decision in enabling it to continue to pursue cases where directors have breached relevant duties.
Had ASIC failed in this action, it may again have been troubled as to the type of cases it could bring in circumstances where, on its assessment of the relevant facts, a good case could be made for prosecution.
The message from recent court decisions – James Hardie and, of course, ASIC vs Healey – in particular is clear. Disclosure to the securities markets is essential for public companies. Directors must comply with both their statutory and common law obligations in ensuring that such disclosure is accurate and timely. Reliance on management will have to be carefully assessed and directors will need to double check and, if necessary, obtain second opinions if they wish to avoid the possibility of being challenged on the way in which they carry out their obligations.
Professor Bob Baxt AO FAICDLife is an emeritus partner at Freehills and chairman of the Australian Institute of Company Directors’ Law Committee
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