The High Court has confirmed the first instance decision that in approving an ASX announcement, seven non-executive directors of James Hardie breached their duties as directors. The Court also upheld the finding of liability of the general counsel and company secretary for failing to provide proper advice to the board and the CEO.
Yesterday, the High Court released its decision in two appeals, ASIC v Hellicar & Ors1 (ASIC Appeal) and Shafron v ASIC2 (GC Appeal), in relation to an ASX announcement made by James Hardie Industries Limited (JHIL) in February 2001.3
In the ASIC Appeal, ASIC successfully appealed a decision of the Court of Appeal of New South Wales which had set aside the declarations of contravention, pecuniary penalty orders and disqualification orders made at first instance against the seven non-executive directors and the company secretary (and general counsel) of JHIL. The High Court held that the Court of Appeal erred in finding that ASIC had not proved that the ASX announcement was tabled and approved at a pivotal board meeting. We discuss this further in part 2 below.
In the GC Appeal, Peter Shafron (JHIL’s then company secretary and general counsel) also appealed a decision of the Court of Appeal but was not successful, with the High Court finding no reason to disturb the earlier decision that Mr Shafron had contravened s180(1) of the Corporations act by failing to properly provide advice to the board and CEO. We discuss this further in part 3 below.
The decisions are very largely driven by factual matters, however the High Court did make some interesting comments on corporate governance matters, some of which are discussed in this alert. We set out some key practical considerations arising from the decision in part 4.
The parties had appealed the trial judge’s decision not to relieve the parties from liability under the Corporations Act (section 1317S) and the penalties imposed (for the non-executive directors, banning orders of 5 years and pecuniary penalties of $30,000). The High Court has remitted those issues back to the Court of Appeal for further consideration.
- ASIC Appeal
Broadly, the key issues in the ASIC Appeal were:
- whether the Court of Appeal had properly concluded that ASIC had failed to prove that the JHIL directors had approved the misleading ASX announcement; and
- whether ASIC breached a duty of “fairness” by not calling JHIL’s external legal advisor who had attended the board meeting to give evidence (the Court of Appeal having found such a duty to exist and breached in the circumstances).
Did ASIC prove that the directors approved the misleading ASX announcement?
The minutes of the pivotal board meeting recorded that the misleading ASX announcement had been approved by the board. Nevertheless, the directors argued that the minutes were incorrect and that ASIC had not proved the board approved the announcement at the meeting.
The directors’ key arguments and the High Court’s response are set out in the table below. The High Court rejected all of the arguments, finding that given the lack of any direct evidence to the contrary, the board minutes were a formal, near-contemporaneous record and evidence of the truth of the matters recorded in them (including that the ASX announcement was tabled and approved).
Click here to view table.
In a separate judgment, Justice Heydon noted that it was a particularly heavy burden to establish that the board minutes of an ASX listed company that were subsequently adopted as a correct record were incorrect.
The Court therefore held that the Court of Appeal had erred in finding that ASIC had not proved that the ASX announcement was tabled and approved at the relevant board meeting and in not giving sufficient evidentiary weight to the minutes.
Did ASIC breach a duty of fairness?
The High Court proceeded on the assumption that ASIC was subject to a duty to conduct litigation “fairly” although the Court expressly reserved judgment as to whether ASIC was actually subject to such a duty. Failing to call one of JHIL’s external legal advisers who was present at the board meeting as a witness did not breach the duty of fairness, particularly as no evidence was led to show that this had denied the respondents “some advantage or subjected them to some disadvantage”. The Court found it was “very unlikely” that the legal advisor would testify to the effect that the record of the minutes were untrue, given that he had been actively involved in the preparation of the minutes before and after the meeting and such evidence would be contrary to his interests.
As an aside, the Court noted that if ASIC was under such a duty and had breached the duty by failing to call a witness, the proper remedy would be:
- for the trial judge to direct ASIC to call the witness;
- for the proceedings to be stayed until ASIC agreed to call the witness; or
- if the matter proceeded to judgment, determining whether the breach resulted in a miscarriage of justice, in which case a retrial would be ordered.
The appropriate remedy would not be to “discount’ other evidence.
- GC Appeal
The GC Appeal largely confirmed existing statements of the law relating to the standard of care required of an officer under section 180(1). At the same time the High Court commented on the application of the definition of “officer” and the duty of care and diligence to those holding dual roles, in this case as company secretary and general counsel.
The key questions raised in Mr Shafron’s appeal were:
- to what extent was he an “officer” in the circumstances; and
- having regard to that role, whether he failed to exercise the relevant standard of care in failing to advise the CEO and the board respectively.
Click here to view table.
Accordingly, Mr Shafron was confirmed to be an officer subject to the duty of care and diligence and that he breached that duty by failing to advise the board and CEO on the relevant matters.
- Key Corporate Governance implications and issues to consider
Not game changing decisions
The ASIC Appeal and the GC Appeal are not game changing in assessing the duty of care, skill and diligence of directors and officers. The High Court made no observations that could be construed to expand the nature and scope of that duty. The decisions are confined to an evidentary analysis concerning the conduct of the parties in the highly fact specific circumstances of the case.
Board approved documents are not "set in stone"
In the ASIC Appeal the Court rejected an argument that alterations to the ASX announcement following the board meeting demonstrated that board had not approved the announcement. The Court stated that whether a deed or announcement approved by a board is the same document that is later executed or published:
“…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.”4
The clear, and in our view correct, implication is that the High Court believes that a document approved by a board can be subsequently amended for “slips and errors” and for “better” (there would be caveats here!) wording, without requiring the document to be re-approved.
Care must be taken in preparing and approving minutes of meetings
While the Court accepted the practice of preparing board minutes in advance of meetings, the ASIC Appeal highlights the need to ensure that these minutes are prepared carefully and, to the extent that the meeting deviates from them, amended after the meeting.
Approval of inaccurate minutes not only provides uncertainly but it also raises issues of directors’ duties and the statutory obligations to keep proper corporate records.5 In this context, the Court noted that if the minutes of a meeting were false, then adoption of those inaccurate minutes as a correct record exposes directors to a risk of breaching sections 1308(2) and (4), which generally criminalise the making of misleading statements in a document required by the Corporations Act.
Careful consideration should be given to the drafting of ASX announcements using convenient terms
One of the non-executive directors gave evidence at the first instance hearing regarding how the misleading term ‘fully funded’ came to be used in the ASX announcement. He believed that the term ‘fully funded’ was used in board discussions as a shorthand way of saying ‘sufficient funds according to the actuarial estimate’.
This provides a cogent warning in relation to using shorthand or simplified terms in public documents. This case is a good lesson for all of us not to get too deeply entrenched in the moment.
An officer’s responsibilities can include responsibilities from other roles
For the purposes of his obligation to discharge his duties as an officer with care and diligence, the Court did not draw a distinction between Mr Shafron’s duties as a company secretary and his other duties. In complying with their duties under the Corporations Act, officers should be mindful of all of their responsibilities and duties, not just those that may be considered falling under their role as an “officer”.
As noted above, a result of the ASIC Appeal, the matters have been remitted to the Court of Appeal for determinations on relief from liability, penalties and costs.