The Full Federal Court and the New South Wales Court of Appeal have recently handed down judgements in appeals in the ‘Fortescue Metals’ and ‘James Hardie’ proceedings brought by the ASIC in relation to misleading company announcements to the ASX. Senior Associate, Simone Selkirk and Consultant, Dr Roland M Ryser look at the practical implications of the ‘Fortescue Metals’ and ‘James Hardie’ decisions for directors’ and officers’ duties in a disclosure context.

Continuous disclosure obligations

Under the continuous disclosure regime stipulated by the Corporations Act 2001 (Cth) (Act) and the Australian Securities Exchange (ASX) Listing Rules, listed entities are obliged to immediately notify ASX of any information concerning it of which it is aware and which a reasonable person would expect to have a material effect on the price or value of the entity’s securities. Entities failing to comply with the continuous disclosure requirements may incur criminal liability. Further, a contravention may lead to civil pecuniary penalties up to A$200,000 for involved individuals and A$1 million for the company and/or compensation orders. In contrast, inadequate notifications to ASX may amount to misleading and deceptive conduct and give rise to criminal sanctions and civil actions for loss and damages caused by such announcements. The same applies for inaccurate statements in other public announcements.

Directors’ and officers’ duties

Contravention of an entity’s continuous disclosure obligations may also result in the responsible directors and officers being held liable for breaches of their duties of care and diligence. Under the Act, directors and officers must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they were a director or officer in the same circumstances. A failure to comply with this obligation may lead to civil sanctions including disqualification from managing a corporation for a specific period of time and pecuniary penalties up to A$200,000. A court may also order directors and officers to compensate the corporation for damage suffered.  

Overview of ASIC v Fortescue Metals Group Ltd

Fortescue Metals Group Limited (FMGL) disclosed a series of announcements, media releases and investor presentations to the ASX concerning the nature of certain framework agreements with three major state-owned Chinese companies in relation to the development of a mine and associated infrastructure for the mining and export of iron ore in Western Australia’s Pilbara region. FMGL basically stated that they had executed “binding agreements” with the Chinese companies to complete the proposed developments. The agreements, however, clearly demonstrated the parties’ intentions to create particular binding obligations but a number of matters were left open for future negotiation between the parties such as the scope of the construction work and the price to be paid by FMGL.

Against this background, Australian Securities and Investments Commission (ASIC) commenced proceedings in the Federal Court. While the trial judge dismissed ASIC’s case the Full Federal Court found, upon appeal of ASIC, that (i) FMGL’s announcements were, or were likely to be, misleading or deceptive, that (ii) FMGL breached its continuous disclosure obligations by failing to disclose the actual terms or accurately portray the nature of the framework agreements and that (iii) FMGL’s chairman/chief executive officer, being knowingly involved in FMGL’s contraventions, breached his statutory duty of care and diligence.

Overview of Morley v ASIC and James Hardie Industries NV v ASIC

Primarily in relation to false or misleading public announcements made about the establishment and funding of a foundation that was to manage and pay out asbestos claims made against the companies within the James Hardie Group, ASIC commenced proceedings against James Hardie Industries Ltd (JHIL), James Hardie Industries NV (JHINV), and ten directors and executive officers with JHIL. The public announcements included various statements to the ASX and statements made at a press conference and at certain “roadshow” presentations. Other allegations concerned statements which were made in relation to a group restructure, and disclosure obligations in this regard.  

The NSW Supreme Court found the directors and executive officers to have breached their statutory duty of care and diligence. JHIL and JHINV were held responsible for having failed to disclose relevant information to the ASX and in connection with false or misleading public statements. Consequently, the Court imposed civil pecuniary penalties between A$30,000 and A$350,000 and orders disqualifying the directors and officers from managing a corporation for a period from 5 to 15 years. The NSW Court of Appeal fully dismissed JHINV’s appeal in James Hardie NV v ASIC whereas, in Morely v ASIC, the executive officers’ appeal was upheld in part and dismissed in part. Most importantly, however, the decision upheld the nonexecutive directors’ appeal since ASIC could not prove on the balance of probabilities that they had voted in favour of a draft ASX announcement resolution at the board meeting in question. On 13 May 2011, the High Court granted ASIC and JHIL’s general counsel/company secretary special leave to appeal the NSW Court of Appeal decisions.

On 6 May 2011, the NSW Court of Appeal had already reduced, in Morley v ASIC (No 2), the disqualification period of JHIL’s chief financial officer from 5 to 2 years as well as the pecuniary penalties imposed on both the chief financial officer and the general counsel/company secretary.

Arising from the ‘Fortescue Metals’ and the ‘James Hardie’ decisions: what are the key lessons for directors’ and officers’ duties in a disclosure context?

The ‘Fortescue Metals’ and the ‘James Hardie’ decisions serve as a reminder of the high standards expected of directors and officers in the corporate governance of their companies. In particular, they demonstrate that companies, directors and officers engaging in misleading and deceptive conduct in connection with company announcements to the market may face serious exposure to civil penalty proceedings in which they may incur liability for pecuniary penalties, disqualification orders and damages. In light of these recent decisions, companies and their directors and officers should ensure that they are vigilant in drafting and approving public announcements. The ‘James Hardie’ and ‘Fortescue Metals’ proceedings can also be taken as a demonstration of ASIC’s willingness to vigorously pursue breaches of the Corporations legislation even if no member of the investing public was misled by or suffered loss as a consequence of such breaches, a conclusion that may open the floodgates for ASIC to commence proceedings in connection with public announcements.  

We set out below in more detail some of the key learnings arising from the ‘James Hardie’ and the ‘Fortescue Metals’ proceedings and show which practical measures deriving therefrom may be implemented in order to reduce the risk of company announcements to be in breach with the Corporations legislation ultimately leading to directors’ and officers’ liability.

New learnings and practical suggestions

Ruling that “[n]ot every ASX announcement should or will go before the board” the NSW Court of Appeal has left the question unanswered whether public announcements of a certain importance require board approval. However, when an announcement is brought to the board by senior management each individual executive and non-executive director should carefully and diligently consider the terms of the announcement. It is suggested that the need for board involvement should be carefully considered when developing clear sign-off procedures for market disclosure. Generally, the more significant or material the matter, the more important it is to obtain the approval of the board. It should be noted, however, that compliance with standard practice does not relieve directors from “applying their own minds” on the terms of the announcement.  

In order to avoid company announcements to be misleading or deceptive, attention should be paid on a careful wording. Public announcements must be accurate and verifiable; subject to their justification emphatic statements in public announcements should be avoided. Further, statements of opinion should clearly be designated as such since a statement which is ordinarily and reasonably understood as a statement of opinion is not apt to mislead if the opinion is genuinely and reasonably held by its maker.  

Board meetings should not be conducted by implied consensus. The courts interpreted the silence of two non-executive directors participating in a board meeting by telephone as being a vote approving the resolution in question. If a director wishes to abstain from voting or vote against a proposal it must be ensured that his or her position is acknowledged and explicitly recorded in the board minutes. It must further be ensured that board members are provided with a complete set of board papers. In the ‘James Hardie’ proceedings, the courts referred, inter alia, to the failure of certain directors to ask for a copy of the draft announcement at issue in order to establish a breach of duty.  

Directors may be limited in relying on others such as fellow directors, management or external advisers. Non-executive directors, however, may be reliant on others to a greater extent than executive directors. In any event, it is important for directors (and officers) to ensure that facts and assumptions upon which they base their decisions are thoroughly tested.

At least in ambiguous cases, legal advice should be sought in relation to continuous disclosure obligations. Although relying on legal advice does not relieve decision-makers from applying their own minds on the questions at issue seeking legal advice does offer protection to a certain extent. In the ‘James Hardie’ matter, the NSW Supreme Court referred, inter alia, to the failure of the companies and their directors and officers to obtain legal advice in order to establish the contraventions in question.  

Incorrect public announcements should be corrected. Although the provisions on continuous disclosure do not impose ‘in terms’ an obligation to correct information already provided to ASX corrective disclosure may be necessary because the circumstance that misstatements had been made may be apt to affect the confidence of investors in the management and influence them to acquire or dispose of the disclosing entity’s shares.  

As previously foreshadowed, executive and non-executive directors and officers participating in company decisions amounting to contraventions of the continuous disclosure regime may face legal consequences for breaches of the duty of care and diligence. Especially, general counsel should be mindful of their position as an ‘officer’ of the company and their special responsibility in advising the board in relation to company announcements. In connection with compliance issues, it should finally be noted that the business judgment rule cannot successfully be invoked as a defence since compliance with statutory requirements is not considered a matter of business judgment.