Yesterday the High Court of Australia delivered its decision on an appeal brought by the Australian Securities and Investment Commission (ASIC) against 7 former non-executive directors (Directors) and the company secretary and general counsel (Mr Shafron) of James Hardie Industries Ltd (JHIL). The High Court allowed the appeal and held that the primary judge was correct in finding that the Directors and Mr Shafron breached their duties to JHIL in approving a misleading ASX announcement.
In February 2001, JHIL released an ASX announcement which relevantly stated that JHIL had established a foundation to compensate sufferers of asbestos-related diseases with claims against two of JHIL’s former subsidiaries and that the “Foundation has sufficient funds to meet all legitimate compensation claims anticipated” (ASX Announcement).
ASIC commenced proceedings in 2007 against the Directors and Mr Shafron alleging that the Directors approved the ASX Announcement at a board meeting in February 2001 (Board Meeting) when they knew or ought to have known that the Foundation did not have sufficient funds. ASIC also alleged that Mr Shafron who attended the Board Meeting should have advised the board of certain matters including that the draft ASX Announcement “was expressed in too emphatic terms” in respect of the adequacy of funding.
ASIC relied upon board minutes approved by the Directors to establish that they had approved the misleading ASX Announcement. ASIC also argued that Mr Shafron was an “officer” for the purposes of section 180(1) of the Corporations Act.
The Directors argued that the board minutes were incorrect and that they never approved the ASX Announcement, it being drafted and released by management. The Supreme Court of NSW was not convinced by this argument and found that the Directors had approved the ASX Announcement and that it was false or materially misleading. In doing so, the Court held that the Directors, and Mr Shafron as an officer of JHIL, failed to discharge their duties to JHIL with the degree of care and diligence that a reasonable person would exercise in their circumstances and accordingly contravened the civil penalty provisions of the Corporations Act.
This decision was overturned by the NSW Court of Appeal, largely on grounds that ASIC had failed to prove that the ASX Announcement had been approved at the Board Meeting.
The High Court overturned the NSW Court of Appeal’s decision and determined that in the absence any evidence to the contrary, the board minutes were sufficient proof that the ASX announcement was approved at the Board Meeting. The High Court’s decision means that the original finding that the Directors and Mr Shafron acted in contravention of civil penalty provisions of the Corporations Act stands.
The High Court’s decision is significant for a number of reasons:
- directors need to ensure that they do not merely “rubber stamp” board minutes, but actually read and carefully examine them to see if they accord with their memory of what transpired at the board meeting and, if they do not, to raise an objection at the next board meeting;
- a person merely participating in a decision that affects the whole or a substantial part of a business (including general counsel) may be liable as an “officer” for the ultimate the decision made;
- senior executives and officers of a company must ensure that they properly inform and advise the board of material matters;
- directors and officers of a company may not be able to rely on and delegate the task of important announcements to management.
This decision follows the those of the Federal Court last year in relation to the directors of Centro and Fortescue Metals, and further evidences that there has been a judicial tightening of expectations of directors and senior executives in the way that they operate the affairs of their companies.