In what is likely to be the last decision in the long saga of ASIC’s litigation against the Board and management of James Hardie relating to its ASX Announcement about the compensation fund established to meet claims by sufferers of asbestosrelated illness, the Court of Appeal has provided further guidance to Boards about their decision-making processes.
Some relevant background facts
It will be remembered that ASIC’s proceedings were against the Chief Executive Officer, Mr Macdonald, the Chief Financial Officer, Mr Morley, the General Counsel and Company Secretary, Mr Shafron and seven non-executive directors. Two of those directors, Messrs Gillfillan and Koffel, were based in the United States and were in the US at the time of the Board meeting which approved the draft ASX Announcement.
In this appeal, the US directors sought to be relieved from liability, and otherwise challenged their penalties whereas the other non-executive directors only appealed the penalties delivered by the trial judge, Justice Gzell.
The position of the two US directors was different to that of the other non-executive directors in one important aspect. The US directors participated in the Board meeting by telephone and did not have a copy of the draft ASX Announcement before them when it was discussed and subsequently approved at the meeting. Nor did the US directors seek a copy of the draft or abstain from voting to approve it. The trial judge had found that the Australian directors did have a copy of the draft ASX Announcement.
The US Directors
The US directors sought relief from liability pursuant to section 1317S of the Corporations Act. That section requires a finding that the person seeking relief has acted honestly.
Justice Gzell had found that it was not just mere inadvertence, imprudence or carelessness on their part not to have asked for a copy of the draft. Neither explained why he had failed to ask for a copy or for the document to be read out before signifying approval to the Board approving the draft. Although they may have believed there were acting in the best interests of James Hardie group by separating the asbestos claims from the rest of the group, acting in the best interests of a company does not necessarily mean that a Court will be satisfied that the directors acted honestly.
The Court of Appeal noted the contravention by the US directors consisted of their failure to request a copy of the draft or abstain from voting, in circumstances in which they knew or should have known it was a matter of great importance to the company and its investors. The Court of Appeal found that they abdicated their responsibility and provided no explanation as to why they acquiesced in the vote on such an important matter without discharging their responsibilities as directors.
Justice Sackville disagreed with the trial judge, who found that the gravity of the contraventions by the US directors was no less than the other non-executive directors. Instead, his Honour concluded that the contraventions were not quite as grave as the contraventions by the Australian directors because they did not have before them the text of the draft. Nonetheless, the US directors had failed to demonstrate that Justice Gzell erred in concluding they ought not be relieved from liability, and the US directors failed in their challenge on that point. However, as their contraventions were different to those of the Australian non-executive directors, the Court of Appeal concluded that they should have a somewhat shorter period of disqualification, and a slightly lower pecuniary penalty.
The Australian Non-executive Directors
It was submitted that the trial judge had not properly given effect to the principle of parity between co-offenders when setting the penalties, as he had used the period of disqualification imposed upon Mr Macdonald as the starting point.
The Court of Appeal noted that if the penalty imposed on one contravenor is to be regarded as the yardstick for the penalty on another, the points of similarity and difference between them must be carefully identified. The trial judge had failed to give sufficient recognition to the difference in the finding that Mr Macdonald knew or ought to have known the draft ASX Announcement was misleading, whereas the finding in relation to the non-executive directors was that they ought to have known the draft was misleading.
Further, Justice Gzell had not made clear precisely what factors he considered in deciding a disqualification for seven years was appropriate for Mr Macdonald’s contravention regarding the draft ASX Announcement. Without doing so, it was difficult to make a comparison in relation to the conduct of the non-executive directors.
These errors meant that the Court of Appeal had to review the question of appropriate penalties afresh. In doing so, the Court found that the Australian directors’ actions comprised “a glaring failure to discharge their responsibilities … on a matter of very great significance to the company and to the wider community” and that “all that was required … to follow what was being conveyed to the ASX … was a capacity to read English”.
The Court of Appeal considered that the contraventions were very serious but that there were a number of mitigating factors to consider, including the exemplary records of the directors prior to the contraventions and their contributions to the community, as well as the “severe embarrassment and reputational damage” suffered by them.
Ultimately the Court of Appeal reduced the penalties from five years to three years and from $30,000 to $25,000.
Lessons on Board Procedure
Justice Barratt made a number of comments in his judgment that should be noted by Boards.
His Honour stated that the culmination of the Board resolution process must be such that it is possible to see and record that each member, by voting, actively supports the resolution, actively opposes it or that the member refrains from voting. This means that what his Honour calls “collegiate conduct leading to consensual decision-making” must be supplemented by appropriate formality.
In relation to the use of technology in conducting meetings, his Honour noted that each director must consent to the use of technology (telephone/video link), and for the meeting to be properly “held” using technology, as a bare minimum, each director had to be able to hear and be heard by every other participating director, for the duration of the meeting. Where the content of the particular document is to be discussed, and that document is not already in the possession of each director, the technology used must enable each participating director to see the document at the relevant time.
Although the decision serves as a lesson to all Board members about the importance of not being too casual in the making of Board resolutions, this decision will not mark the end of collegiate decision-making. It will, however, be necessary for all members of the Board to be vigilant in ensuring that the minutes are properly prepared and approved, and contain the requisite formality in noting the participation or otherwise of each director in the decision-making.