The decisions of the New South Wales Court of Appeal in Morley & Others v ASIC [2010] NSWCA 331 (Morley) and James Hardie Industries NV v ASIC [2010] NSWCA 332 (JHINV) are perhaps not as significant as Justice Gzell's decision at first instance.
See our update "The decision against the James Hardie directors" for comments on the first instance decision.
The decisions do not appear to create significant new law in relation to directors and officers duties (Morley) or continuous disclosure (JHINV), but there are a number of matters that are worthy of comment.
The case revolved around an ASX release (and related representations) concerning the establishment and funding of a Foundation that would be liable to meet asbestos related claims of certain James Hardie subsidiaries, along with failures by James Hardie to release information regarding further steps relating to the separation of James Hardie from the asbestos related liabilities of its former subsidiaries.
The key issue was whether the directors of James Hardie had breached their statutory duties as directors under section 180 of the Corporations Act by approving the ASX release.
The central finding of Justice Gzell's decision at first instance was that the board of James Hardie approved the ASX release. One key foundation for the finding was the minutes of the February board meeting which stated that a draft ASX release had been tabled and approved.
The non-executive directors had civil penalties imposed of $30,000 and were disqualified from managing corporations (including acting as directors) for 5 years. The managing director had a penalty imposed of $350,000 and was disqualified for 15 years. Penalties and disqualification orders were also made against the General Counsel and Company Secretary and the CFO.
The result in Morley for the individual non-executive directors of James Hardie is significant - they were cleared of contraventions of section 180 of the Corporations Act and relieved of civil penalties and disqualification orders, but this was because the Court of Appeal was not persuaded that the board had approved the critical ASX release concerning the level of funding of the Foundation.
This outcome was in turn partly because ASIC had failed to call a key witness (one of James Hardie's external lawyers) who had been present at the board meeting (and the resulting effect of a rule of evidence), and partly because the Court of Appeal was not willing to follow Justice Gzell's reasoning in relation to the evidence and what inferences should be drawn - particularly in relation to the accuracy of the board minutes.
But these matters probably do not have wide implications for governance of Australian companies, with the exception of once again emphasising the importance of ensuring that board minutes are accurate - but that is stating what should be obvious.
The decision also restates what is well understood in relation to delegation and reliance - that while non-executive directors are entitled to rely on management to a greater extent than executive directors, non-executive directors still need to exercise skill and diligence about information placed before them.
The Court of Appeal did find that, if the board had approved the critical ASX release about funding of the Foundation, they would have been in breach of their duty, given the misleading nature of the ASX release - a matter conceded by the non-executive directors.
The Court of Appeal did, somewhat unsurprisingly, reject a submission that the misleading nature of the critical ASX announcement was overcome by a disclaimer - this is consistent with the well understood body of law on disclaimers - and rejected a submission that the board could rely on ASX releases being corrected after they are approved by the board - but perhaps there was some reliance on the view that it should have been evident to the board that the ASX announcement was flawed.
Mr Shafron, the General Counsel and Company Secretary, on the other hand was not cleared. The Court of Appeal upheld Justice Gzell's finding that he was an "officer" of James Hardie, and that:
The Court of Appeal did say that while non-executive directors might have been entitled to rely on silence from the General Counsel/Company Secretary and external lawyers in relation to a continuous disclosure issue, the General Counsel/Company Secretary could not rely on the silence of the external lawyers, or their failure to advise in relation to matters they were not specifically asked to advise on.
Mr Morley, the CFO (unsurprisingly also found to be an "officer"), was also not cleared in relation to failing to advise the board of limitations in the work done by experts PricewaterhouseCoopers and Access Economics.
So we can draw from the findings that senior executives should ensure that issues and information are properly drawn to the board's attention. Nothing earthshattering in that.
One thing missing - necessarily - from the Morley decision is a consideration of whether the board of James Hardie should approve announcements such as the critical ASX announcement concerning funding of the Foundation. The Court of Appeal considered that the evidence was insufficient to find that the board did approve the ASX release but made no finding that the board should have approved it and failed in their duty by leaving the matter to management.
This was because ASIC's case was that the board had approved the announcement, Justice Gzell's finding was that it was brought to the board for approval (ASIC v MacDonald [2009] NSWSC 287, at [260], [261]) and the Court of Appeal was considering the situation on the assumption (contrary to the Court of Appeal's finding) that it was approved by the board.
So we are left with Justice Gzell's opinion at first instance that the board should have approved the ASX release (although that was predicated on it having been brought to the board for approval) except for the Court of Appeal's somewhat Delphic comment "Not every ASX announcement should or will go before the board". But it is not clear what can be drawn from the fact that Justice Gzell's finding was not overturned on appeal, because the issue was not ventilated.
In JHINV all appeals and cross-appeals were rejected. In essence, the Court of Appeal found that James Hardie had engaged in misleading or deceptive conduct in relation to funding of the Foundation (including the critical ASX announcement), and should have disclosed more details about the separation of JHIL from the James Hardie group pursuant to its continuous disclosure obligations.
The Court of Appeal found that the some undisclosed details of the arrangements for the separation of JHIL would be material to investors, as information on those matters would have removed (or further removed) a negative perception in the market in relation to (broadly speaking) James Hardie's exposure to asbestos liability. The existence of this negative market perception, and the materiality of the relevant details, was challenged by James Hardie but to no avail. The Court of Appeal considered (among other things) that there was enough evidence to establish from James Hardie's internal documentation that it was aware of concerns among its lenders, and the removal of the lenders' concerns would in turn and as a matter of common sense be positive for the market generally. It was "naïve" to assert that James Hardie was not motivated by a desire to eliminate any negative perception as an aspect of the relevant arrangements - an "integral component" of the arrangements was to protect James Hardie from "any perceived connection whatsoever with asbestos" [emphasis added]. In essence, James Hardie was liable for failing to disclose enough of the details of a good news story. There is not much of a lesson in that: in ordinary circumstances companies are not backward in coming forward with positive news about their dealings with major stakeholders and third parties which will have a flow on benefit to the company.
The big question which the decision does not answer is why James Hardie did not disclose the full details of the supposed good news story. One might speculate that James Hardie was concerned about a public backlash. But that would have been negative for the share price. If that was the reason (and there is nothing to suggest that it is) the case would have addressed an interesting question about how to assess the extent to which information which has both positive and negative potential consequences for the share price will have an effect on the share price.
In brief summary, James Hardie was misleading and deceptive in one respect by being too positive; and breached its continuous disclosure obligations in another respect by not being positive enough. One is led to the conclusion that this case should be confined to its peculiar facts and the particularly charged circumstances surrounding it.
It is perhaps noteworthy that the Court of Appeal thought the $80,000 penalty imposed on James Hardie was "light" in view of the "seriousness" of the conduct and James Hardie's attitude to its disclosure obligations. However, since ASIC did not appeal on penalty the Court of Appeal was not asked to consider imposing a more serious penalty.
There has been criticism, in some quarters, of ASIC's role in bring the James Hardie proceedings, and some criticism by the Court of Appeal of ASIC's decision not to call a potentially key witness.
ASIC has defended its decision not to call the witness on the basis that the case law prior to the Court of Appeal's decision did not require it (see "ASIC played by the rules. But the court rewrote them" by Tony D'Aloisio, ASIC Chairman, in The Australian on 21 December 2010).
But it is interesting to note that the Court of Appeal decision on this point is another step in increasing the burden on ASIC when taking "civil penalty" proceedings. This follows on from the High Court's decision in Rich v ASIC [2004] HCA 42 and the Briginshaw principle that serious allegations - or allegations with serious consequences - require cogent evidence to support them.
As Australia debates reforms to non-compete clauses, the implications for venture capital (VC) and private equity (PE) firms are significant, particularly regarding business sales and funding...
While all eyes have been on the recent introduction of the privacy reform Bill to Parliament, there have been a number of other updates that continue to inform the shifting patterns of opportunity,...
Finally, the Australian Government has initiated the long-waited for Tranche 2 reforms to its anti-money laundering regime with considerable fanfare.