Australia’s highest court has affirmed the importance of maintaining accurate board minutes. Once signed off by directors, minutes will be treated as an accurate record of board decisions unless there is persuasive evidence to the contrary.
This was the central issue in the High Court of Australia’s decision last week to overturn a judgment last year by the New South Wales Court of Appeal relating to the James Hardie Industries Limited (JHIL) asbestos case.
The JHIL board, at a meeting on 15 February 2001, approved the creation of a special foundation which would assume liability for the company’s exposure to asbestos claims.
The company, in its subsequent release to the Australian Stock Exchange (ASX) on 16 February, gave assurances that the foundation would have sufficient money to meet all present and future claims. But barely two years later it was reporting a serious shortfall in funds.
The Australian Securities and Investment Commission (ASIC) successfully pursued the directors for breaching their duty of care (in relation to the misleading release) but this decision was overturned by the NSW Court of Appeal. ASIC then appealed the decision to the High Court of Australia which unanimously granted the appeal. More background on the case is available in Chapman Tripp’s earlier commentaries – here, here and here.
The pivotal factor in all three proceedings was whether the board had approved the misleading ASX release. The minutes of the February board meeting recorded that a version of the release had been approved. Those minutes were formally adopted at the April board meeting, “apparently without demur”. Nonetheless, the directors argued that the minutes were not accurate and the release had not been approved by them.
Two of the key arguments which the directors ran in support of their position were:
- the minutes were unreliable as they had been prepared in advance of the meeting and contained a number of inaccuracies, and
- the statement tabled at the meeting was a draft only and was amended before being released to ASX without those amendments being referred back to the directors for final approval.
This “slackers’ defence” – that the fault lay in the sloppiness of JHIL’s governance arrangements - was comprehensively demolished by the High Court.
Of the difference between the draft presented to the board and the final announcement, the Court said that, although some changes had been made, they were not material. In particular, both the draft approved, and the final version released, were misleading in the same way.
“Whether a deed that is later executed or an announcement that is later published is the document that the board approved must be determined by more than a literal comparison between texts. Slips and errors can be corrected. In at least some cases better (but different) wording can be adopted...The bare fact that alterations were later made does not demonstrate that the document was not approved by the board.”
Of the minutes, the Court made three observations.
One – although they contained some inaccuracies, this did not make them wholly unreliable or discount their evidential value:
“[T]he fact that some parts of the minutes were inaccurate does not necessarily imply that other parts of the minutes...were inaccurate. And similarly, the fact that the minutes were drafted before the meeting does not necessarily imply that they did not accurately record what happened at the meeting.”
In this case, there was no compelling evidence that the minutes were inaccurate in relation to the approval of the announcement. And there was evidence that the pre-prepared minutes had been amended after the meeting to reflect what had actually occurred. Moreover:
- "… the time at which the minutes were drafted must not be permitted to obscure the significance of the decision, in April, to adopt them as a correct record."
Explanations from the directors that they did not read the minutes with sufficient care – or, in one case, not at all – were not accorded great weight. (In this context, it was notable that no director had subsequently raised any concerns about the final release which was made to ASX.)
Two – whatever their imperfections, they were written close to the events in question and were therefore likely to be more reliable than testimony offered seven years later and relying upon memory. (In this context, it should be noted that JHIL had a policy of destroying board papers except for the company’s copy. Chapman Tripp has written a detailed commentary on the pros and cons of these policies.)
Three – the directors could not have it both ways. Either they had approved an ASX statement which was false and misleading, or they had failed to take reasonable steps to ensure that JHIL’s minute books were not false and misleading – or both.
“The directors knew that their approval of the proposal had to be announced to the ASX. Did they, as they now say, leave to the decision of management the way in which the decision would be announced and leave to the decision of management what would be said about a proposal that all directors knew could be very controversial? Or did they, as their minutes recorded, approve what was to be said to the market?”
Take-outs for directors
The take-outs are pretty clear:
- Make sure good minutes are taken.
- Make sure they are circulated in draft to directors while memories of the meeting are still fresh.
- Make sure you review that draft carefully.
- Make sure you do not approve minutes unless and until you have read them and are happy they are accurate.
In short, minutes matter.