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The facts surrounding the James Hardie litigation are well known and centered around the issue of an ASX release concerning the establishment of a foundation to take over the asbestos liability carrying subsidiaries of the James Hardie group. The release stated, among other things, that the foundation was 'fully funded' to meet the claims of asbestos affected claimants. It wasn't. The lower courts found release to be misleading and that the directors should have known that it was. Unlike the judge at first instance, the Court of Appeal was not satisfied that ASIC had discharged its onus of proof because it failed to call a witness, one of the partners from James Hardie's lawyers. The Court of Appeal said this was in breach of a duty of fairness on the part of ASIC, which detracted from the cogency of ASIC's case.
The High Court rejected the Court of Appeal's novel duty of fairness on the part of ASIC, but contrary to some media reports the decision did not say much about the duties of non-executive directors;the key point of the High Court's decision in James Hardie for non-executive directors (and those who advise them) is about the evidentiary importance of board minutes. The High Court was not prepared to overlook the evidentiary value of the fairly contemporaneous minutes that stated unequivocally that the ASX release had been approved. There was evidence that the minutes had been prepared by the company secretary and general counsel who was present at the board meeting, and settled by the external lawyer who was also present. The minutes were approved at the next board meeting, some six weeks later. In these circumstances, the High Court's approach was that to overturn the evidentiary value of the approved minutes - admissible as business records - there was a heavy onus on the non-executive directors. ASIC had more or less established its case by simply tendering the minutes, and the non-executive directors had to overcome the apparent weight of the minutes - that is establish that the minutes were false, despite having being approved.
The absence of subsequent protest by the directors at the misleading ASX announcement was not helpful, but the approval of the minutes at the subsequent board meeting was really the 'killer point'.
The High Court apparently could not accept that the minutes could have been approved without the directors having read them carefully. Having approved the minutes, the non-executive directors were faced with the task of establishing the minutes were actually false - a difficult task, particularly given the surrounding circumstances. And this was despite the fact that the minutes were admittedly incorrect in other ways, and had been pre-prepared, before that crucial board meeting. Interestingly, from an evidentiary point of view, it did not really matter that the minutes were not entered into the company's books within the one month period required by the Corporations Act, and so did not have the usual statutory evidentiary presumption attached to them (that is, the minute is evidence of what is recorded unless the contrary is proved: section 251A of the Corporations Act).
The High Court's decision in James Hardie is really all about evidence and procedure rather than continuous disclosure and the duties of directors (except in relation to minutes). But the bottom line for directors is that they must consider the minutes carefully before approving them, because they will be stuck with the consequences. This principle can be extended to other documents approved by the directors, and is consistent with the theme at least of the Centro decision, where the directors approved accounts, at least in some cases without having read and understood them.
The Shafron decision concerned the position of Mr Shafron, who was company secretary and general counsel of James Hardie, and whether he had discharged his duties as an officer under section 180 of the Corporations Act in relation to the matters coming before the board, the need to give or obtain advice about a disclosure matter (the so-called 'DOCI information') and that he should have advised the board that a cash flow model did not take account of 'superimposed inflation' but a prudent estimate would have done so.
Leaving aside some of the fairly fact specific aspects about Mr Shafron's discharge of his duties as an officer - which would have required him to give or procure advice - the High Court's decision has some important implications for company officers.
First, because Mr Shafron was appointed as company secretary - a position that makes the holder an 'officer' under the Corporations Act definition - the officer duties under section 180 applied to everything Mt Shafron did. The High Court would not accept that the officer duties did not apply to things done by Mr Shafron in his capacity as general counsel. The duties were indivisible.
Second, regardless of whether Mr Shafron had been company secretary, the High Court also applied the limb of the "officer" definition that deals with those who participate in decisions that affect the whole or a substantial part of the business of the corporation. The High Court said that for a person to 'participate' in a decision does not require that the person be a part of the making of the decision - that is the notion of 'participation' does not require 'joint' decision making. It was enough that Mr Shafron "played a large and active part" in formulating the "separation proposal" for approval by the board; that what he did went beyond "proffering advice and information". The clear implication of the High Court's decision is this - those who formulate, promote and present proposals to the board of directors for approval could be taken to participate in the decision to approve the proposal. The officer duties may attach to those persons, even if they are not 'joint' decision makers. How far this will spread officer liability downwards through companies to persons who might not appreciate that they are officers remains something of an open question. But anyone who is presenting a proposal to a person who will make a decision that "affect the whole, or a substantial part, of the business" of a company could - if the logic of the High Court's decision is followed - be regarded as an officer. So a person putting a proposal to the CFO or a divisional manager (who makes decisions affecting a 'substantial part' of the business) could be an officer, affixed with statutory duties and subject to civil penalties. One could question whether Parliament intended such an outcome.
Third, the High Court appears to have accepted the lower Courts' formulation of the duty of a general counsel as a duty to protect the company from legal risk. The exact content of the duty implied by that formulation is yet to be fully explored, but it is possible to observe that to fully "protect" the company from legal risk is impossible - perhaps it is, as in the specific case of Mr Shafron, a positive duty to advise or cause advice to be obtained. Some level of legal risk needs to be voluntarily assumed by a real world corporation. Perhaps a distinction will be drawn between 'regulatory risk' - where taking calculated risks might be seen by the Courts as unacceptable - and other legal risks that might expose a company to merely financial or reputational consequences. The calculus of risk and return should still have a place in corporate decision making, even if legal risks are involved.
It may be that the reach of the officer definition has been expanded by the James Hardie litigation; perhaps an example of the old saw that hard cases make bad law. Potential officers should consider whether they have adequate indemnification (having regard of course to the limitations under section 199A of the Corporations Act) and whether they are covered by D&O insurance - not all policy wordings are necessarily co-extensive with the Corporations Act definition.
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