New Zealand: Conducting board meetings: some useful judicial guidance

Last Updated: 24 September 2013

By Sophie East

In the closing chapter of the long-running litigation involving the James Hardie group and its directors, the New South Wales Court of Appeal provides further discussion on how boards and individual board members should conduct themselves. Although an Australian decision, Gillfillan v ASIC [2012] NSWCA 370 is a helpful reminder of the importance of good corporate governance for New Zealand boards. It is also likely to be relevant to a New Zealand court faced with assessing directors' conduct at a board meeting.

Key learning for boards

Directors attending a board meeting should ensure:

  • They have available to them any material provided to the board prior to voting on a board resolution, and that they are familiar with that material.
  • If they are participating in the meeting remotely (e.g., by teleconference or videoconference), they are able to hear what is being said at the meeting and are in possession of the same information and documentation provided to the other directors at the meeting.
  • Their participation in significant board decisions is properly noted in the minutes. If a director does not wish to vote on a matter, he or she should abstain from the vote rather than simply expressing no opinion either way (and that abstention, and the reasons for it, should be noted in the minutes).
  • The company keeps a complete set of documents provided at or prior to the meeting and a full set of minutes, so there is clear evidence of what has been seen by the board and what was discussed. Directors should also keep copies of documents provided to them.

Background

Gillfillan is the last chapter in a series of cases involving the James Hardie group that have received considerable publicity over the last five years. We have previously written about aspects of that litigation. See "Corporate Governance: Lessons from the James Hardie decision" here and "The James Hardie decision: liability for general counsel and company secretaries" here.

The case against the directors went all the way to the High Court of Australia (ASIC v Hellicar (2012) 86 ALJR 522) which held that the directors breached their duties of care and diligence in assessing announcements made to the Australian securities exchange. One of the criticisms that the High Court made of the directors, was that they failed to recognise the importance of preparing minutes of their meetings. The High Court returned the case to the New South Wales Court of Appeal to consider penalties for the directors (the Gillfillan decision). In this context, Barrett JA makes some brief (but important) observations about the conduct of board meetings. It is those observations that will be of particular interest to directors in New Zealand.

Barrett JA's observations

Barrett JA first addressed the way in which a board should conduct its decision-making. The minutes of the meeting of the James Hardie directors simply recorded that the announcement to the ASX was agreed on. Barrett JA discussed this in the context of the relevant section of the Australian Corporations Act 2001 (s 248G). His Honour observed that value is often attached to collegial conduct leading to consensual decision-making, with a chair saying, after discussion of a particular proposal, "I think we are all agreed on that" (as appeared to be the case with the James Hardie directors). However, such practices are dangerous unless supplemented by appropriate formality. The aim should not be to consult together with a view to reaching a consensus (although as a practical matter that may be what transpires), but rather the aim is that the members of the board consult together so that individual views may be formed and the individual will of each member may be made known in a clearly communicated way. Barrett JA stated:

The culmination of the process must be such that it is possible to see (and to record) that each member, by a process of voting, actively supports the proposition before the meeting or actively opposes that proposition; or that the member refrains both from support and opposition. And it is the responsibility of an individual member to take steps to ensure that his or her will is expressed in one of those ways.

Barrett JA then addressed the issue of participation in board meetings by telephone, audio visual link or other like means of communication. This is specifically provided for in the Australian legislation (s 248D Corporations Act) which states that "[a] directors' meeting may be called or held using any technology consented to by the directors." Barrett JA observed that:

  1. The statutory permission for a meeting of directors to be "held" by means of agreed technology entails, as a bare minimum, "a requirement that each participating director can, for the duration of the meeting, hear and be heard by every other participating director".
  2. If the directors are discussing the content of a particular document in the course of a meeting and that document is not already in the possession of every director entitled to participate, the agreed technology by means of which the meeting is "held" must enable each participating director to see the document's content at the relevant point during the meeting.

This issue was relevant because two of the non-executive directors of James Hardie were in New York and did not have available to them all of the documentation in relation to the critical decision. This was an important reason why the court assessed their penalty/disqualification on less onerous terms than the rest of the non-executive directors.

Relevance to New Zealand directors

Participation in board meetings

In New Zealand, as in Australia, companies are able to set their own procedures for directors' meetings in their constitution (s 160 Companies Act 1993). If they do not do so, the procedure they must follow for meetings is set out in Schedule 3 to the Companies Act 1993. Like the Australian legislation, the Companies Act provides that board resolutions must be passed by a majority of directors present, and further that those directors present must constitute a quorum (or majority) of all directors (Schedule 3, clauses 4 and 5(3)). One unique feature of the New Zealand legislation is the presumption that "a director present at a meeting of the board is presumed to have agreed to, and to have voted in favour of, a resolution of the board unless he or she expressly dissents from or votes against the resolution at the meeting." (Schedule 3, clause 5(4)) This presumption may appear to endorse the "I think we are all agreed on that" or consensual approach. However, notwithstanding the presumption, directors would be well advised (as outlined by Barrett JA) to record their individual agreement to a resolution so as to make clear they have individually considered the matters at issue and formed their own view (which the New Zealand courts have recognised to be a requirement on directors). Similarly, directors should ensure that they record any opposition to resolutions or record that they abstain from voting (in which case, the matter has still at least been ostensibly considered). This is obviously more important where the resolution concerns matters like statements to the market (as in the James Hardie case), than it is for resolutions concerning the company's day-to-day business and that have no conceivable impact on shareholders or the public.

A situation where this is important is where directors are reviewing offer documents. For example, in the Nathans Finance case (R v Moses, CRI-2009-004-1388, HC Auckland, 8 July 2011), Heath J described a "fundamental failure" on the part of the Nathans' directors to review the offer documents and ask themselves whether those documents conveyed an accurate impression of Nathans' business and the associated risks. His Honour noted (at [421]) that this was one of the reasons why a collective approach at a board meeting would likely have resulted in a different outcome because a "discussion among the directors, properly led by the chairman, was likely to tease out a number of issues of concern." Heath J was not saying that the Nathans' directors needed to necessarily reach a consensus at that meeting, but rather that they needed to engage in collective discussion. More generally, His Honour's comments highlight the need for all directors to apply the appropriate degree of consideration, to engage in a robust discussion of important decisions, and to document that discussion in board minutes (in case they later need to prove that it occurred). To achieve this, boards would be well advised to adopt a formal resolution procedure (especially for matters of significance).

Dialling into board meetings remotely

As with the Australian legislation, the New Zealand Companies Act also provides for directors to participate in board meetings from different locations. Schedule 3, clause 3 of the Companies Act provides:

A meeting of the board may be held .... by means of audio, or audio and visual, communication by which all directors participating and constituting a quorum can simultaneously hear each other throughout the meeting.

The Act clearly requires that directors can hear all that is said in a meeting. Barrett JA's observations in Gilfillan are relevant to the related issue of the circulation of documents. As His Honour pointed out, if the board meeting is to be properly "held" through the use of technology (as the words of both the New Zealand and Australian statutes require) that technology should enable each participating director to see the document's content at the relevant point in the meeting. This can be achieved through videoconference and/or through ensuring directors are sent relevant documents in advance of the meeting, and those directors confirming they have the documents to hand or can see the documents when required.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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