The High Court has delivered its decision in the James Hardie actions brought by ASIC against the non-executive directors and the company secretary and general counsel.
The decision emphasises the need for directors to take action if they have concerns about the validity of management recommendations or announcements by the company to the market and the importance of accurate record-keeping at Board level.
The High Court’s findings also confirm that individuals who act in the combined role of company secretary and general counsel have a high degree of responsibility.
Considerations for directors
- Directors must ensure that Board minutes accurately record the business of the meeting. In the James Hardie case, the High Court accepted the minutes as a formal and near contemporaneous record of what occurred at the relevant Board meeting – notwithstanding the fact that the directors challenged the accuracy of the minutes. One of the key difficulties the directors faced was the fact that they had approved and adopted the minutes in the usual course at the subsequent board meeting.
- Clearly, there is a need for directors to carefully review drafts of Board minutes when confirming their approval of them.
- The review and approval of draft minutes should not be seen as merely an administrative exercise but in fact, an important risk minimisation step for each and every director and officer.
- In this case, because the court found that the draft ASX announcement was tabled at the board meeting, there was an obligation on the directors to take steps to ensure that the announcement was not misleading.
- This does not mean that directors are obliged to approve all ASX announcements–some judgment will be required to be exercised in relation to the significance of the issue before the board.
- It is critical that directors take steps to test the reasonableness and accuracy of the material put before them and ensure that there is some documentary record that this has occurred.
- The High Court found it difficult to accept the directors’ evidence that they would not have approved the draft announcement because they did not take steps to challenge management about the final announcement released to the market. The decision suggests that if directors are concerned about the content of a public statement even after it has been released to the market, it is critical that they raise their concerns with relevant company representatives and, where appropriate, the company’s external advisers.
- Companies may want to consider adopting a protocol in relation to the distribution to the board or a sub-committee, of drafts of significant public statements before they are released.
- Boards may also wish to consider the company’s practice in preparing ASX announcements and the extent to which directors should give authority to management to amend the terms of any ASX announcement after it has been approved by the Board.
Considerations for individuals in company secretary/general counsel roles
- This decision confirms that a high degree of responsibility rests on individuals who occupy the role of company secretary and general counsel in respect of a public company’s legal obligations.
- The High Court stated that an individual who holds the combined role of company secretary and general counsel will have a duty to take care and employ diligence ‘to protect the company from legal risk, including the company’s obligations with respect to disclosures to the ASX’. It was found that the scope of this duty extends beyond the statutory responsibilities of a company secretary, and includes any additional responsibilities that the individual carries by virtue of their role within the organisation. On one view, this could be the responsibilities of a general counsel regardless of whether a formal job description applies if, in fact, the individual acts as an in-house legal adviser.
- Individuals who do not hold a role as company secretary may still owe duties of care and diligence to the company as an 'officer’ of the company if they participate in making decisions that affect the whole or a substantial part of the business of the company. Participation does not require that the ultimate act of making the decision be undertaken–whether an individual has participated in decision–making requires examination of the person’s contribution. Importantly, this judgment reinforces the need for individuals involved in decision-making to exercise caution: if an individual’s role in a particular decision is ever under scrutiny, the court may look beyond that event to the conduct of the individual on other occasions and not just what the individual did in relation to that particular decision.
- The court has also confirmed that the duties and responsibilities of a person who is both company secretary and general counsel are indivisible–it is not possible to sever the responsibilities of an individual with a dual role into watertight compartments and must be viewed as a whole.
- Company secretaries and general counsel should also take care to consider whether they agree with any external advice put before the Board because the High Court has essentially confirmed that there may be a positive duty on these individuals to ‘take a stand’ if they believe there are limits, or issues with, the advice given by any third party.
Duty of fairness on ASIC?
- Without actually deciding this issue, the High Court also commented that it should be assumed that ASIC is subject to some form of duty to conduct litigation fairly.
- The court accepted that in some circumstances that duty could be breached if a particular witness was not called by ASIC, however, even if that were the case, the failure could not found any reassessment of the evidence led by ASIC at trial.
- In this case, the court did not accept that ASIC was under a duty to call particular evidence–there was nothing to suggest in this instance, that the directors suffered some disadvantage by a particular witness not being called.
- ASIC of course must fulfil its obligation to act as a ‘model litigant’ but this duty was not the focus of the appeal.