A recent decision of the New South Wales Court of Appeal (Court) overturned an earlier decision against directors of James Hardie. In April 2009 the directors were found to have breached their duty of care by approving a media release relating to claims for asbestos victims.
The media release suggested that an asbestos compensation fund (which was set up by the company) had "sufficient" funds to meet all claims. However, it was later revealed that there was a shortfall of more than A$1 billion in the fund.
Nine of the ten defendants appealed against the April 2009 decision. The Court unanimously upheld the appeal on a factual basis: the Court found that the Australian Securities and Investments Commission (ASIC) failed to prove that the media release was "formally approved" by the non-executive directors at the relevant board meeting.
Importantly, the Court indicated that, if the release had been approved, the directors would have breached their duty of care.
The following key issues were considered in the appeal:
- Was the draft media release taken to, and approved at, the relevant board meeting attended by the directors?
- Did the directors exercise reasonable care and diligence in approving the media release?
Conclusions on Appeal
The Court was satisfied that the draft media release was taken to the relevant board meeting. However, the Court was not satisfied that the draft media release was tabled and approved, for the following reasons:
- the conduct of that part of the meeting was too informal;
- if the draft media release was considered by the board, it was only at a draft stage and was without any level of finality;
- the draft was likely to have only been taken to the board as a "work in progress, or for some kind of approval in principle", with amendment and approval by advisers to follow; and
- the absence of protest to subsequent media releases, which also referred to full funding, was not enough to infer consideration and approval of the draft media release by the directors.
ASIC's case was also undermined by its failure to call one of the company's solicitors as a witness. The solicitor was a key witness, who was likely to have "relevant knowledge" of the approval or non-approval of the release. The Court said that ASIC had breached its "duty of fairness" by failing to call the solicitor as a witness.
The Court also considered whether, if the directors had in fact approved the media release, they had exercised reasonable care and diligence.
The Court indicated that, if the directors approved the media release (as alleged by ASIC), they would have breached their duty of care and diligence. There were three reasons for this view:
- The directors blindly accepted management's assurance of the fund's sufficiency of funding, and they did not apply their minds to whether the media release was misleading.
- The media release was a "key statement in relation to a highly significant restructure of the James Hardie Group" and therefore required particular care.
- The non-executive directors should have known that such an unqualified statement could not be made.
The Court also made the following general comments about directors' duties:
- whether there is a breach of duty is an objective inquiry;
- the Court should consider what "an ordinary person, with the knowledge and experience of the defendant, must be expected to have done in the circumstances";
- the reasonable person is seen to embrace "any special skill or expertise the director or officer possesses, and the non-executive directors were expected to bring their knowledge and experience to the performance of their duties";
- a decision of high importance and significance to a company requires greater care by directors; and
- "blind acceptance" of expert advice where directors ought to know information to the contrary is not acceptable - an application of the director's mind is required before making a decision based on expert advice.
Comments made by the Court may be relevant to future New Zealand decisions on directors' duties, given the similarities between New Zealand and Australian legislation.
In light of this decision, New Zealand directors should:
- carefully scrutinise meeting minutes to ensure they are accurate; and
- satisfy themselves that the company has appropriate processes in place to ensure any disclosures are only made once necessary approvals are in place.