Our October 2009 Superannuation Update3 reported on the April 2009 decision in the long series of James Hardie cases, and outlined some general principles regarding the obligations of directors and executives that could be drawn from those cases.
The subsequent decision by the NSW Court of Appeal, handed down on 17 December 2010, overturned the trial judge’s findings against James Hardie’s former non-executive directors based on a different interpretation of the facts. However, the NSW Court of Appeal largely upheld the reasoning of the trial judge, and the general principles outlined in our earlier Superannuation Update remain relevant.
Some additional principles that can be drawn from the appeal decision are as follows:
- A person is an officer of a company if they make, or participate in making, decisions that affect the whole, or a substantial part, of the business of the corporation. A person can ‘participate in making a decision ’ even if they are not the ultimate decision maker. For example, even if the board will make the ultimate decision on a proposal, management can be ‘participants’ in a decision affecting the company by meaningfully participating in the decision to present the proposal to the board. Counselling against a decision may constitute participation.
- An officer’s duty of care and diligence attaches to the scope and range of responsibilities actually carried out by the director or officer whose conduct is in question (which may include fewer or additional responsibilities to those traditionally exercised by persons holding that office).
- The Court of Appeal expressly stated ‘we make no comment on the efficacy’ of having external expert reports provided through the company’s external lawyers ‘with the objective of clothing them with client legal privilege’. However, the mere fact that the court expressly made this comment might be taken to indicate that it found the efficacy of this practice somewhat dubious.
- If an officer knows that information, such as an expert report, provided to company decision makers (eg the board) is misleading or subject to limitations, the officer must raise the issue with the decision makers, even if the officer thinks that the decision makers already know, or should already know, that it is misleading or subject to limitations. In practice, if an officer is responsible for commissioning or preparing a board report, the officer should ensure that all material assumptions and their limitations are included in the document.
- If an officer knows that a certain obligation must be met, the officer must take steps to raise the issue with the ultimate decision makers, even if the officer thinks the decision makers already know, or should already know, that it is necessary.
- An officer cannot remain silent about a significant matter that appears to have been overlooked or ignored – they cannot rely on the fact that it should have been ‘obvious’ to the decision makers or that no-one else, such as an external lawyer, has spoken up.
- A non-executive director may be reliant on management and other officers to a greater extent than an executive director.
ASIC has announced that it is seeking special leave to appeal to the High Court in relation to the aspects of the decision relating to the non-executive directors and the company secretary/general counsel.
Freehills partners Priscilla Bryans and Bob Baxt have prepared a high-level summary of the Court of Appeal decision.4