At the end of last year the New South Wales Court of Appeal handed down two separate judgments in the James Hardie civil penalty appeals arising from the decision of the New South Wales Supreme Court in Australian Securities and Investments Commission v Macdonald and its subsequent decision on penalties in 2009 (which were discussed in our earlier article Corporate governance: lessons from the James Hardie decision).
The seven non-executive directors were successful in their appeals and the Court of Appeal set aside the declarations of contravention, the pecuniary penalties and the disqualification orders against them. However, the appeals by the company and the former chief financial officer were unsuccessful and the appeal by the former general counsel and company secretary only succeeded in part.
ASIC has since applied for special leave to appeal the NSW Court of Appeal’s decision, in so far as that decision concerns the non-executive directors and the former company secretary and general counsel.
The latest decisions date back to events in 2001 when James Hardie Industries Limited (JHIL) issued a market announcement that claimed that a foundation (which had been set up as a compensation trust for asbestos victims for the James Hardie group) was “fully-funded” to meet all present and future asbestos claims. It transpired that the foundation was substantially underfunded.
In 2007, ASIC, the Australian securities regulator, brought claims against:
- the former directors of JHIL, alleging they had breached their statutory duty of care and diligence by approving a draft of the misleading ASX announcement at a board meeting in February 2001;
- the chief executive officer, chief financial officer and the company secretary/general counsel alleging that they had breached their statutory duty of care and diligence in failing to advise the board in relation to the sufficiency of funding provided to the foundation and other related matters;
- JHIL for contravening the Corporations Act by releasing a misleading announcement to the market, and JHIL and James Hardie Industries NV (JHINV) for misleading statements made regarding the foundation in later roadshow presentations; and
- JHIL and JHINV for breaching their continuous disclosure obligations by not disclosing information in relation to the funding of the foundation.
The New South Wales Supreme Court found that the ASX announcement was misleading, and held that the non-executive directors, the chief executive officer, the chief financial officer and the company secretary/general counsel had breached their statutory duty of care and diligence. The court also found that JHIL had breached the Corporations Act. JHINV was also found to have breached its continuous disclosure obligations. Each of the defendants had pecuniary penalties awarded against them and the directors and officers were disqualified from managing corporations (including acting as directors) for various periods of time.
The non-executive directors, the former chief financial officer and the general counsel appealed the decisions as to liability and penalty. JHINV appealed the findings relating to the roadshow and continuous disclosure contraventions and the pecuniary penalty awarded against it. JHIL and the former chief executive officer did not appeal.
The non-executive directors and officers’ appeals
In (Morley & Ors v ASIC) the Court of Appeal overturned the Supreme Court’s findings that the seven non-executive directors had breached their statutory duties in respect of the ASX announcement and set aside the consequent declarations of contravention, the fines and the banning orders against them.
Contrary to the findings of the trial judge, the Court of Appeal found that the draft ASX announcement had been brought to JHIL’s February 2001 board meeting but concluded that ASIC had failed to satisfactorily prove that the directors had considered and formally approved the announcement at the meeting. Chief Justice Spigelman said one of the grounds for this conclusion was a finding that ASIC had “a duty of fairness to call a witness whose role was such that there was a significant probability that he had relevant knowledge” of what happened at the board meeting. The witness in question had attended the board meeting and was one of JHIL’s main external legal advisers in relation to the establishment of the foundation. ASIC’s failure to call the witness was contrary to the obligation of fairness and it significantly undermined the cogency of ASIC’s case on whether the board approved the draft ASX announcement.
This finding also meant that JHIL’s general counsel had part of the initial judgement made against him overturned, but the appeals by the general counsel and the chief financial officer against decisions relating to their duties to provide appropriate advice to the board on other issues were dismissed.
The Court of Appeal went on to consider whether assuming that the directors had approved the draft announcement, they would have contravened the Corporation Act. The Court of Appeal agreed with the trial judge’s conclusions and stated that the non-executive directors would have been in breach of their statutory duty of care and diligence as the draft announcement was misleading.
James Hardie’s appeal
In a separate decision, James Hardie Industries NV v ASIC, all appeals and cross-appeals were rejected in relation to JHINV’s misleading statements at the roadshows, as well as for the failure of disclosure of certain events by JHINV in 2003.
Lessons for New Zealand directors and listed companies
Although the seven non-executive directors were successful in their appeals, the broader implications for New Zealand directors and executive officers arising from the trial judge’s decision (and discussed in detail in our article Corporate governance: lessons from the James Hardie decision) remain relevant.