ASIC and The Star: takeaways for General Counsel who are Company Secretaries

In addition to its lessons for directors (see 'ASIC and the Star: takeaways for directors'), the recent decision of Mr Justice Lee in ASIC v Bekier^[1], (the case brought by ASIC against senior management and directors of Star Entertainment) illustrates the potential exposure of a company’s General Counsel (GC) who is also the Company Secretary (CoSec) under s180 of the Corporations Act – the statutory duty of care and diligence – for failing to advise the board of potential legal risk. 

Statutory liability for a breach of the GC’s duties as a legal practitioner.

Scope of duties

A Director is an officer for the purposes of s180, as is a CoSec (s9AD(1)(a)). 

A GC is not automatically an “officer” for purposes of s180. Whether they are caught by the definition depends on their particular responsibilities and the extent to which they make, or participate in making, decisions that affect the whole, or a substantial part, of the company’s business or have the capacity to affect significantly its financial standing (s9AD(1)(b)). “Merely” giving legal advice is unlikely to make a GC an officer, as distinct from regularly participating in management decisions related to significant risks, including non-financial risks, affecting the business.

The statutory duties of a CoSec are essentially administrative – keeping company records including Board minutes, preparing and filing documents with ASIC. However, usually the CoSec’s duties extend beyond that, particularly a listed company. For example, their duties usually extend to advising the Board on governance matters (see e.g. ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations, 4^th edition February 2019, Recommendation 1.4 at page 8). The CoSec’s duty of care under s180 would be assessed by reference to their competence in attending to all matters for which they are responsible.

But if a GC is also the CoSec, and therefore an “officer” – or otherwise comes within the definition – the s180 standard of care is assessed by reference to the entirety of their responsibilities, not just their responsibilities as CoSec. That will include the GC’s responsibilities as a legal practitioner. The GC/CoSec cannot say that their responsibilities as an “officer” are limited to those of a CoSec. This was made clear by the High Court in Shafron v ASIC^[2]. 

Peter Shafron was the GC and CoSec of James Hardie and was held to be in breach of s180 for failing to give appropriate advice on the extent of the company’s exposure to asbestos claims:

As the title “general counsel and company secretary” given to Mr Shafron indicates, he was qualified as a lawyer … An important element in Mr Shafron’s responsibilities was his giving advice about and, where appropriate, taking steps necessary to ensure compliance with all relevant legal requirements, including those that applied to JHIL as a listed public company. The primary judge and the Court of Appeal described this aspect of Mr Shafron’s responsibilities as a duty to protect the company “from legal risk”. No doubt that included ensuring that purely administrative functions were performed like transmitting necessary material to the ASX and maintaining appropriate records of the board. But Mr Shafron’s responsibilities did not end at that point. His responsibilities were wider than administrative, and extended to the provision of necessary advice.^[3]

The approach of assessing whether an officer has complied with their statutory duty of care by reference to the particular responsibilities of the particular officer is now conventional – the so-called “subjective elements” that inform the objective assessment of what an officer’s duties entail for the purposes of s180 – what a reasonable person with those particular responsibilities should do..

Application to the Star GC and CoSec

The essence of ASIC’s claim against Star’s GC and CoSec Paula Martin under s180 was that she failed to ensure the Board was properly informed of serious legal, regulatory and reputational risks associated with it doing business with certain of Star’s junket customers.

Ms Martin ran essentially the same argument as Mr Shafron. However, Mr Shafron had not given evidence delineating the specific tasks performed uniquely within each of his roles. Presumably in an effort to distinguish the decision in Shafron, Ms Martin did adduce such evidence.

But Justice Lee followed Shafron and rejected that her responsibilities could be divided between the capacities of GC on the one hand and CoSec on the other:

The statutory obligation of an officer to exercise powers and discharge duties with care and diligence applies to “... whatever responsibilities the officer concerned had within the corporation, regardless of how or why those responsibilities came to be imposed on that officer”: see Shafron (at 476 [18]).^[4]

Scope of responsibilities

Ms Martin argued that as GC she reported to the CEO (Mr Bekier) and not to the Board, and that it was a matter for Mr Bekier to make an assessment as to whether he was to take matters to the Board.^[5] She said that she “did not have a direct reporting line to the Board on matters that were unrelated to her role as Company Secretary” because, in that role, she reported to Mr Bekier, who “was the person who would determine what matters were brought to the Board’s attention”.^[6] She also said that she rarely herself provided legal advice, rather she managed the Star legal teams who provided advice.

Justice Lee addressed Ms Martin’s arguments by casting about for various documents (which would have been within “a tsunami of documentary material” produced by ASIC^[7]) which referred to Ms Martin’s responsibilities:^[8]

• First, Star’s 2017 Corporate Governance Statement and Appendix 4G, which said that the CoSec “is accountable directly to the Board, through the Chairman, on all matters relating to the proper functioning of the Board, and all Directors have direct access to the Company Secretary for advice”. 

It seems Justice Lee considered that whilst this document (in express terms) set out her responsibility as CoSec, not as GC, and described quintessential listed company CoSec responsibilities, since she was also GC, it also defined her responsibility as GC.

• Second, Ms Martin’s regular attendances as CoSec at Board and Committee meetings, and meetings with the Chairman, and her role in finalising of Board papers for Mr Bekier. 

Again, it seems Justice Lee considered that she did these things as GC as well.

• Third, an “internal Star document” dating back to 2014 that described the “position purpose” of Ms Martin as GC and CoSec, which set out “key responsibilities and accountabilities“ as including “Manages a full legal and commercial advisory role to the Chief Executive, Senior Executives and the Board to ensure [Star] complies with all aspects of the law, and that its interests are protected”. 

It is not clear who created this document or for what purpose, or whether it was still current, and Ms Martin disputed aspects of it. Justice Lee did not accept her objections.

• Fourthly, when Ms Martin was promoted to Chief Legal and Risk Officer (CLRO) in 2019, there was a “position description” document that set out “key responsibilities and accountabilities“ as including “ensure compliance” with statutory and regulatory requirements. 
   
• Fifthly, as CLRO she reported on a number of occasions to the Board and Committees on particular matters.

Albeit the only example that Justice Lee gave was a presentation on media coverage of allegations made against Crown Casino.

Justice Lee held that Ms Martin did not discharge her s180 duty by failing to advise the Board of a legal risk when she knew that Mr Bekier had not done so adequately (or at all):

Notwithstanding Ms Martin gave evidence that it was Mr Bekier who decided which matters were to be brought to the Board’s attention, the scope of her roles during the Relevant Period is clear from the key responsibilities identified in the contemporaneous documents. The findings made as to the nature of responsibilities is sufficient to require her to ensure that Mr Bekier and the other members of Star’s Board were apprised of matters which she was aware that gave rise to a foreseeable risk …^[9]

Justice Lee said^[10] that the fact that an “officer” of a company is also acting as in-house counsel will have ramifications for the way in which they perform and discharge their obligations to the company and under s180(1). His Honour went on to say:

Such an officer may reasonably be expected to apply their legal knowledge, training and skills to identify risks that other officers of the company may not necessarily have appreciated, particularly those who lack legal experience or expertise, and to recognise that other officers within the company may be relying on them to be aware of legal risks, and to guard against the realisation of those risks. At the risk of stating the obvious, an officer in the position of Ms Martin would know the officer has a client, and that client is the company that employs the officer, and not the CEO of the client.^[11]

Ms Martin should have “spoken up” when she was aware of a matter that gave rise to a relevant foreseeable risk, and she knew the matter had not been raised with the Board.^[12]

Some takeaways

Most GCs are employed under contracts which require them to report to the CEO or CFO. A GC will hope to have a sufficient relationship with the senior executive that if the GC raises a matter of risk with them, it will be appropriately reported to the Board, because to go over the head of the CEO or CFO is likely to be a career limiting move. But in light of the Bekier decision, that possibility needs to be accepted when the GC is also the CoSec (or otherwise comes within the definition of “officer”).

Any case, since a CoSec by dint of their position reports to the Board – and as per Justice Lee that carries with it a direct line of communication in the CoSec’s capacity as GC which means the GC is required to advise the Board on all matters, not limited to governance – it would seem logical for the GC’s reporting line to correspond. But views on this may differ, having regard to the circumstances of the particular company. 

Another takeaway from the Bekier decision is that aspirational position descriptions and responsibility lists can come back to bite. They should accurately reflect what the GC/CoSec actually does, within the parameters of their expertise and authority. It would probably have not made a difference to the finding against Ms Martin in the circumstances of this particular case if the position descriptions had not been expressed in absolute terms – to “ensure compliance” etc. – Courts generally take this to mean taking reasonable steps. But it remains to be seen whether a GC/CoSec sitting at the Board or Committee table will be considered to have a s180 duty to speak up if there is a discussion of any activity that could involve risk under some law or other. Hopefully there will be no expectation that a GC must be taken to be expert in any law that could impact, but it will not help if an aspirational position description states otherwise.

Also to note, Justice Lee acknowledged^[13] that an officer is not necessarily in breach of the s180 duty by causing the company to take an action that is likely to breach, will breach, or does in fact breach, a law. The relevant analysis concerns whether, and the extent to which, the company’s interests were jeopardised, and if so, whether the risks obviously outweighed any potential countervailing benefits, along with whether there were reasonable steps that could have been taken to avoid them. 

Sounds reasonable in theory but the spectre of hindsight looms. 

Justice Lee drew a distinction between advising and decision‑making. Ms Martin had no duty to cause Star to terminate or suspend business with the junket customers, or a duty to recommend that to be done. There is no general duty on a GC to "go around making recommendations."^[14] The duty was to provide "clear and timely advice to assist [the] client to understand relevant legal issues and to make informed choices”.^[15]

Still, if the risk of a course of action decided on by the Board is realised, the resulting impacts are more serious than anticipated, and the GC/CoSec is a participant (as GC) in the Board’s deliberations (as the Bekier case suggests is required), the GC’s advice will be picked over. Lawyers being conservative by nature will not be comfortable with such a discussion so may tend to overstate the risk and underplay the benefits. The Board might not always welcome that, but it comes with the territory.