On 3 May 2012, the High Court handed down its decisions in ASIC v Hellicar & Ors and ASIC v Shafron holding that seven non-executive directors and the company secretary/general counsel of James Hardie Industries Ltd (Company) breached their duties as directors or officers under the Corporations Act 2001 (the Act).
In this article, we will focus on the general counsel/secretary issues in ASIC v Shafron.
Summary of Facts
The company had two wholly owned subsidiaries which had manufactured products containing asbestos. Both of these entities were subject to litigation as a result of personal injuries caused by the asbestos products.
The company therefore made a decision to separate the two subsidiaries from the group by establishing a Medical Research and Compensation Foundation to manage and pay out asbestos claims and to conduct medical research into asbestos related diseases.
A Deed of Covenant and Indemnity was entered into, which in effect had the two subsidiaries providing an indemnity to the company in respect of all asbestos related claims in consideration for the company to pay to the subsidiaries, amounts of money over a period of time towards the foundation.
At a meeting in February 2001, the board approved to effect the separation of the subsidiaries and establish the foundation.
The company sent the Australian Stock Exchange a media release which stated amongst other things that “the foundation has sufficient funds to meet all legitimate compensation claims anticipated”.
The minutes of the February meeting recorded that this announcement to the ASX was circulated in draft and approved by the directors.
The foundation did not in fact have sufficient funds to meet the compensation claims.
As a result, ASIC commenced proceedings against the directors and Mr Shafron for misleading statements claiming that they had breached their duties to exercise due care and diligence.
Mr Shafron’s duties
It is not disputed that as company secretary, Mr Shafron is an officer within the meaning of the Act. However, the question was whether, as general counsel, Mr Shafron was a person who, at the relevant times participated in making decisions that affected the whole, or a substantial part, of the business and therefore, was an officer within the meaning of the Act.
Traditionally, general counsel have been exempt from being deemed an officer on the basis that giving advice that effects the business is part of the proper performance and functions attaching to their role.
The degree of care and diligence that is required by the Act is an objective standard with reference to the corporation’s circumstances and the responsibilities within the corporation that the officer in question had. It requires analysis of what a “reasonable person” in the same position of officer would do.
Taking into account the extent of Mr Shafron’s involvement and what a reasonable person would have done in the circumstances, the Court found that Mr Shafron was an officer and that he had breached the duties owed to the company to exercise due care and diligence by failing to advise the board that:
certain information about the Deed of Covenant and Indemnity entered into by the company should have been disclosed to the Australian Stock Exchange; and
material provided by the actuarial consultants to separate the subsidiaries did not take into account “superimposed inflation” (being the potential for the cost of claims to increase at a level above the general rate of inflation).
Distinguishing factors to note when considering whether general counsel of a company will be deemed an officer are:
Mr Shafron had a legal background which meant his duties were extended to protecting the company from legal risk;
Mr Shafron was one of three senior executives of the company that had substantial input into the proposal put forward to the board;
Mr Shafron was an employee of the company not an external advisor.
The decision will not result in all general counsel being deemed officers within the meaning of the Act.
To determine whether general counsel may be an officer within the meaning of the Act, the following principles from the case may provide some guidance:
a general counsel who holds additional positions which fall within the definition of officer under the Act (such as Secretary) cannot divide the two roles and will be taken to be an officer;
whether a general counsel is an “officer” within the meaning of the Act will depend on the circumstances including their role and responsibilities within the company;
companies should ensure that sufficient minutes of meetings are retained and formal reporting lines are implemented to ensure general counsel’s advice is provided effectively to the board;
general counsel have a duty to advise the board of significant matters where they are aware of the matter and that it may expose the company to legal risk or liability.