- Allowing a company to be exposed to harm can be a breach of the duty to exercise care and diligence.
By allowing a company to be exposed to harm (including damage to market reputation and legal exposure), by making a misleading or deceptive announcement, and not taking steps to prevent the company from doing so, directors and senior management are at risk of breaching their duties to the company. It does not matter whether any such damage actually occurred.
Being misguided, or overzealous, in promoting the company's interest may constitute a breach of the duty of care and diligence but, alone, will not be a breach of the duty to act honestly and for a proper purpose.
- The business judgment rule requires evidence that a judgment has actually been made
The CEO submitted that he had made a business judgment in good faith and for a proper purpose that the DOCI did not require disclosure. He rationally believed was acting in the best interests of JHIL and as such should not be found to be in breach of his duties. As the court had no evidence that he made such a judgment, or that it was in the best interests of JHIL, he was not able to rely on the business judgment rule to avoid liability. Similarly, there was no evidence that the CEO had relied on advice from internal or external lawyers, to assist him in avoiding liability.
Where a decision has been made in reliance on the business judgment rule or advice from others, it should be clearly documented.
- Company announcements must be balanced and objective
The "over emphatic" language used in the ASX announcement about the Foundation being fully funded was the basis for most of ASIC's successful allegations.
Management involved in drafting announcements and those involved in approving them (whether it is the board or senior management) need to be vigilant to ensure announcements are balanced and objective. Conveying the desired message to the market (eg that JHIL had no further asbestos liabilities) cannot be allowed to take priority over ensuring that the language used in announcements is supported by the facts surrounding making the announcement.
Each individual involved in preparing and approving an announcement must take responsibility for this – it may not be sufficient to rely on others. Where a transaction is sufficiently significant for the company, it may be appropriate for the board to be asked to carefully review and approve the proposed ASX announcement. This is particularly so, where an announcement refers to the directors having a specific belief about an issue.
- Seek advice on ASX Listing Rule 3.1
In any transaction, careful consideration needs to be given to whether disclosure is required under ASX Listing Rule 3.1 and to what aspects of the transaction require disclosure, to ensure all material price sensitive information is provided to the market. The company and its officers must consider whether the investing public would regard a piece of information as material to the company's share price – not simply whether a transaction is material to the company.
The board should seek advice from management and, if required, management should seek external advice if there is any concern about what information should be disclosed.
- Provide decision makers with all necessary information
Board members, or other decision makers, must be provided with all information needed to assess an issue and make a decision. In this case, the non-executive directors were not told about the limited nature of the external advisers' review of the cash flow modelling relating to the Foundation. This may have contributed to the misleading nature of the announcement made by the company.
- Read the minutes before they're approved
The minutes of a meeting must be recorded in a minute book within 1 month of the relevant meeting and they must be signed within a reasonable time by the chair of the meeting or the next meeting. There is then a rebuttable presumption that the minute is evidence of the resolutions to which it relates (section 251A). It is imperative that all directors carefully review proposed minutes of meetings, and raise any objection to the contents of those minutes, before they are approved to ensure they reflect what actually occurred at the meeting.
While ASIC could not get the benefit of that presumption (as the minutes had not been recorded in a timely fashion), the JHIL board minutes still provided persuasive evidence that the directors had in fact considered and approved the initial false and misleading ASX announcement, although they all subsequently denied they had done so. None of the directors had sought to change the minutes which recorded that resolution, before the minutes were approved.
- Keep a complete set of documents tabled at the board meeting
Directors should keep a complete set of all documents which are provided in board packs or tabled at a board meeting, so there is clear evidence of what the directors have, and have not, seen. If directors' papers are typically collected by the company after the meeting, the company secretary should retain a complete set of these papers.
The directors who gave evidence all denied seeing and approving the draft ASX announcement and there was no set of tabled documents retained by the company. There was sufficient other evidence available to indicate that it had been tabled at the meeting (including in the approved board minutes), so the Court did not accept that an announcement on such a significant matter had not been provided to the directors and approved at the meeting.