Late last week, the High Court of Australia handed down its decisions in relation to the James Hardie cases1. In the case of the non-executive directors of James Hardie Industries Limited (JHIL), the Court reversed various of the previous findings of the NSW Supreme Court of Appeal, and upheld the trial court’s decision that the directors of JHIL had approved a misleading announcement to the Australian Securities Exchange (ASX), and, in giving that approval, had failed to exercise the requisite degree of care and diligence as directors of JHIL.
In a separate but related decision, the Court rejected the appeal from Mr Peter James Shafron, JHIL’s former company secretary and general counsel, and concluded that Mr Shafron had been an officer of JHIL and, in this capacity, had contravened section 180 of the Corporations Act 2001 (Cth) (Corporations Act).
This note will focus on Mr Shafron’s contravention and the implications it has for general counsel and other senior in-house corporate lawyers.
Duties as an officer of the company
In relation to Mr Shafron, the James Hardie decisions centred on sections 9 and 180 of the Corporations Act. Under these sections:
- the expression ‘officer’ is defined in section 9, with sub-section 9(a) providing that a director or secretary is an officer and section 9(b)(i) further defining an officer as a person who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; and
- section 180(1) of the Corporations Act confers an obligation on the directors and officers of a company to exercise their responsibilities with care and diligence.
The High Court found that Mr Shafron was an officer of JHIL both by virtue of holding the office of company secretary, and because he participated in making significant decisions about JHIL’s business (and in particular, the decision to separate the entities with the asbestos liability from the rest of the James Hardie group). The nature and extent of his participation was more than just providing the board with information and advice, but instead he had a large and active part in coming up with the proposal that he and others put to the JHIL board for approval.
Background to the High Court’s ruling
The James Hardie decisions revolved around an announcement that JHIL had made to the ASX in 2001 that the foundation that it had set up to pay asbestos compensation claims was ‘fully funded’. The trial judge found that Mr Shafron had breached his duties as an officer of JHIL by failing to advise the JHIL board that this announcement was misleading. The court also found further breaches of duties in Mr Shafron’s failures to advise JHIL:
- that it should disclose to ASX information about a Deed of Covenant and Indemnity (DOCI); and
- that actuarial reports that he had obtained and on which cash flow statements were based did not take into account ‘superimposed inflation’ (that is, that the rate of asbestos claims costs were increasing much faster that the general inflation rate, which JHIL had used in determining the foundation’s ability to satisfy asbestos claims).
Whether Mr Shafron had breached section 180 of the Corporations Act turned on whether he was considered an ‘officer’ of JHIL. As noted above, section 9 of the Corporations Act deems a company secretary to be an officer by virtue of his or her position. However, Justice Ian Gzell looked at whether Mr Shafron was also an officer under section 9(b)(i) of the Corporations Act.
In making his decision, Gzell J considered Mr Shafron’s general duties and functions in his role at JHIL (which included attending board meetings and assisting with drafting board papers) and found that Mr Shafron’s involvement with JHIL and the decisions he made “affected the whole or substantial part of the business of JHIL”. Mr Shafron was therefore deemed to be an officer both as a secretary and by virtue of his involvement in making decisions for JHIL.
Appeal to NSW Court of Appeal
On appeal, Mr Shafron, along with the seven non-executive directors of JHIL, was successful in arguing that ASIC had not discharged its burden of proof in relation to the question of whether JHIL’s board had approved the misleading statements to the ASX.
However, the New South Wales Court of Appeal upheld the rest of the trial court’s findings against Mr Shafron and concluded (for the same reasons) that Mr Shafron was an officer of JHIL. The Court found that Mr Shafron’s duties extended to providing JHIL with advice about ASX disclosure of the DOCI and superimposed inflation, and therefore in failing to do so, Mr Shafron had breached section 180 of the Corporations Act.
Mr Shafron’s appeal to the High Court
On appeal to the High Court, Mr Shafron argued in essence that he wore two hats – one as company secretary, and the other as general counsel – and that his conduct pursuant to each role could and should be evaluated separately. While Mr Shafron acknowledged that he was an officer in his role as company secretary, he contended that he was not an officer in respect of his role as general counsel, and that his conduct in the context of the DOCI and the actuarial reports related to his general counsel role.
What were Mr Shafron’s role and responsibilities?
The High Court rejected Mr Shafron’s attempt to bifurcate his roles, noting that there was no evidence that he performed any particular tasks in different capacities, and concluding that all the tasks he performed were pursuant to his responsibilities as general counsel and company secretary. The High Court further found that even if the capacities within which Mr Shafron acted could have been distinguished, he was also an officer under the limb of section 9(b)(i) because of the nature and extent of his participation in making significant decisions about JHIL.
In considering the character of his participation in decision making, the High Court focused on the role that he had in the act of making decisions, even though he ultimately did not make the decisions himself. The Court emphasised that Mr Shafron was an employee of JHIL, not an external adviser, and that his role extended well beyond giving advice and information to the board. In particular, the Court found that he was one of a group of three senior executives who were responsible for formulating, and had formulated, the proposal that was put to the JHIL board to separate JHIL from the businesses with the asbestos liability.
While the Court acknowledged that making a ‘real contribution’ to such a decision would not, in itself, be sufficient to show that a person had participated in making the decision, Mr Shafron’s actions, as a senior executive employee of JHIL, rose to the level of ‘participation’ because he played a large and active part in formulating the separation proposal, in deciding the variant of the proposal that would be put to the board and in promoting that proposal to the board.
In considering the nature of Mr Shafron’s responsibilities as company secretary and general counsel, the High Court agreed with the NSW Court of Appeal and the trial judge that, as an officer with a legal background, Mr Shafron’s responsibilities included advising JHIL on its legal liabilities and obligations, including ASX disclosure requirements.
Was Mr Shafron in breach of his section 180 duties?
When determining whether Mr Shafron breached section 180 of the Corporations Act, the Court found the relevant measure to be what a reasonable person with his responsibilities would have done.
The Court dismissed Mr Shafron’s argument that he was not required to provide disclosure advice because JHIL’s external legal advisers were present in the board meeting, as those external advisers had not been engaged to consider disclosure issues. The Court instead held that a reasonable person with Mr Shafron’s responsibilities would have advised JHIL to disclose the DOCI to ASX.
The Court also agreed with the Court of Appeals that, although Mr Shafron did not hold actuarial qualifications, he knew about and understood the potential impact of superimposed inflation on the actuarial estimates and cash flow modelling, and as a result a reasonable person with his responsibilities would have drawn the board’s attention to the issue.
For general counsel
The High Court has upheld Gzell J’s position that general counsel can be considered ‘officers’ by virtue of their participation in making significant decisions about a company, even though they do not themselves make the decisions.
We confirm our advice for general counsel (and other senior in-house lawyers) from our 2009 article (which discussed the original James Hardie decision):
- General counsel should be conscious that they may be considered to be “officers” under the Corporations Act even if they do not also hold the role of company secretary. Determining whether a general counsel is an officer will be a question of fact, and will depend on the nature and extent of the person’s role in the process of making significant decisions about the company.
- Officers, like directors, have specific duties under Part 2D.1 of the Corporations Act. In particular, section 280 conveys upon general counsel the obligation to fulfil his or her duties (such as to advise on legal risk) with due care and diligence.
- General counsel should be reminded that their obligations are ultimately owed to the board, and not merely to the company’s chief executive officer or managing director. Informing the CEO or managing director of a particular risk may not relieve the general counsel of his or her duty also to advise the board appropriately (particularly where the general counsel attends board meetings).
- Formal reporting lines should be implemented to ensure a general counsel’s advice is provided effectively to the board. This will assist general counsel in managing their personal liability and will also ensure that important advice is received at the right level.
- Because most (if not all) general counsel have legal qualifications and expertise, their responsibilities (in the absence of a specific engagement of external counsel) inevitably will include providing advice and guidance to the board in relation to a disclosing entity’s continuous disclosure obligations under the Corporations Act and, if applicable, the listing rules of the relevant financial market. The fact that the disclosure requirements may be regarded as being ‘common knowledge’ is unlikely to absolve general counsel of this duty.
- In addition, a general counsel may have a duty to draw the board’s attention to other significant matters, even though they are outside of the areas of the general counsel’s particular expertise, where the general counsel is aware of the existence of the matter and that it could expose the company to significant risks or liability.