WHAT YOU NEED TO KNOW
Any person having a role in making a decision may be an officer.
Who is an officer will depend on what a reasonable person in the position could be expected to do.
In most Australian public companies any person acting as general counsel and company secretary will be an officer, with the consequences of that role.
Courts are unlikely to support a view that puts the different responsibilities of general counsel and company secretary into watertight compartments, one marked "company secretary" and the other marked "general counsel".
The scope of a general counsel’s obligations may extend beyond strictly legal advice, depending on the matters being considered by the board.
General counsel ought to clarify with their CEO and chair what the expectations are on their role.
The role of general counsel and of company secretaries has expanded in recent times to a point where both roles now are roles of significance. In the modern listed company, those who occupy these roles – especially those who occupy both roles – are deeply involved in the decision making process, and are most likely officers with all the attendant consequences.
Who is an officer?
What is of most relevance from the recent High Court decision involving the James Hardie Industries Ltd (JHIL) company secretary and general counsel (Mr Shafron) is the rejection of the argument that he was not a person who participated in making decisions that affected the whole, or a substantial part, of the business of JHIL.
Mr Shafron submitted that "in order to 'participate in making a decision' a person must have a role in actually making the decision." He accepted that this does not mean that a person must have “ultimate control” however contended that the idea of participating in making a decision was, "quite different from being concerned in or taking part in the management of a company." Mr Shafron had argued that the fact that he "provided information and advice to the board to assist it in its decision making" did not mean that he "participated" in that decision making, even if it could be said that he made a "real contribution" to it. The High Court rejected this, finding instead that the idea of "participation" directs attention to the role that a person has in the ultimate act of making a decision, even if that final act is undertaken by some other person or persons.
The Court found that Mr Shafron was a senior employee of JHIL; relevantly they drew a distinction between his role and that of an external adviser. What Mr Shafron did was not confined to providing advice in response to particular requirements. What he actually did in his role went well “beyond his proffering advice and information to the board of the company. He played a large and active part in formulating the proposal.” While the board made the ultimate decision, Mr Shafron was deemed to have been “participating in the decision to adopt the separation proposal that he had helped to devise.”
The scope of the duty of general counsel
Another interesting element of the decision was the finding that the “role” that a person plays in a corporation is not limited to the particular role that they played in relation to the specific issue in respect of which it is alleged that there was a breach of duty. For this reason, the inquiry was not confined to what Mr Shafron did in connection with the separation proposal. It was also relevant to consider “how a reasonable person occupying the same office and having the same responsibilities would exercise the powers and discharge the duties of that office.”
The scope of a general counsel’s duty was also considered in the context of Mr Shafron’s failure to advise that the actuarial documents did not take into account "superimposed inflation" which was found to have the result that the cost of asbestos claims might increase over time at a rate above the general rate of inflation.
The Court of Appeal had previously found that Mr Shafron was "acquainted" with that concept and "aware of its importance in estimating asbestos liabilities." It also found that he knew that the cash flow projections in the actuarial material did not allow for superimposed inflation. Although Mr Shafron was not a trained actuary, he was familiar enough with the matter to previously have suggested the use of a different figure than one appearing in an earlier report. This and other matters concerning the reports were sufficient for the High Court to agree with the trial judge and the Court of Appeal, that Mr Shafron had a duty to take care and employ diligence to protect JHIL from legal risk in relation to non-disclosure of information to ASX.
So what in a practical sense needs to be done by a general counsel? How much and how far ought they drill down into an issue? The High Court decision tells us that if a general counsel is aware of key matters that go to the validity of material that they are involved in preparing for the board, they cannot keep that material to themselves. This is really no more than an extrapolation of the standard reliance theory emerging from the Federal Court decisions last year in relation to the directors of Centro and Fortescue Metals, that once general counsel are on notice of a serious matter, there are important limits on the reasonableness of their reliance on others. This is an extension of the US concept of “red flags” – matters that make reliance unreasonable. In WorldCom the Delaware Court described them as “[a]ny information that strips a defendant of his confidence in the accuracy of those portions of [the relevant material]”
Are the findings of the courts more than a conformation with the adage that “with great power comes great responsibility”? Probably not – the High Court agreed that responsibilities of company secretaries can vary from company to company, within companies and over time. However, this was a case of an individual whose responsibilities were much more than mere administrative duties. He advised the board on substantive matters, particularly in respect of exposure to asbestos litigation. He was one of its three most senior executives and as an officer that imposed on him “great responsibility”.
General counsel ought to be using the impetus created by the James Hardie decision to clarify the expectations of the board and management about their role and about information flow. In this respect, general counsel has a pivotal role in assisting with the board’s risk management process, including determining whether organisational goals are being met, and whether there has there been full and accurate disclosure by the company.
For a more general discussion of the implications of the decision click here.
We will shortly be producing an updated version of our comprehensive monograph exploring the three decisions and a further paper considering the nature of obligations imposed upon lawyers and the relevance of the so-called “gatekeeper theory”.