The Australian Securities & Investments Commission (ASIC) commenced civil proceedings in the Supreme Court of NSW against James Hardie Industries Limited (JHIL), James Hardie Industries NV (JHINV), seven former non-executive directors and three former executives of JHIL for breaches of the Corporations Act 2001 (Cth) (the Act) in relation to the preparation and approval of public statements.
The decision highlights the importance placed on the role of directors (both executive and non-executive) and senior executives when considering and implementing important strategic matters of a company. Aside from the corporate governance issues, this decision raises the broadening focus on non-executive directors and senior executives below board level.
JHIL was the holding company of the James Hardie Group and manufactured and sold asbestos products until 1937. From 1937 to 1987, two wholly owned subsidiaries of JHIL, James Hardie & Coy Pty Ltd (Coy) and Jsekarb Pty Ltd (Jsekarb), also manufactured and sold asbestos products.
In early February 2001, the board of directors of JHIL established the Medical Research and Compensation Foundation (the Foundation) to manage and pay out asbestos claims made against the James Hardie Group. In relation to the establishment of the Foundation, the Board approved a draft ASX announcement for public release. Also at this time, JHIL entered into a deed of covenant and indemnity with Coy and Jsekarb, which indemnified it from all liabilities arising from the manufacture and sale of asbestos products (the Deed).
The James Hardie Group then released an ASX announcement which stated that the Foundation had assets of $293 million and would have sufficient funds to meet all legitimate compensation claims anticipated from people injured by asbestos products. A press conference was also held where it was alleged that Mr Macdonald, the CEO of JHIL, made statements conveying that the Foundation had sufficient funds. Similar ASX announcements were made about the Foundation in the following weeks. The Deed was not disclosed in any ASX announcement.
After the establishment of the Foundation, the James Hardie Group was then restructured under a new holding company, JHINV, which was incorporated in the Netherlands.
In 2002, Mr Macdonald gave presentations overseas about the James Hardie Group making representations that the Foundation had sufficient funds.
In February 2007, ASIC commenced civil proceedings against JHIL and JHNIV for misleading and deceptive conduct, false statements in relation to securities and continuous disclosure breaches. ASIC also commenced proceedings against the non-executive directors, the CEO, the General Counsel and the CFO of JHIL.
In summary, His Honour Justice Gzell found that:
- In relation to the draft ASX announcement, all seven former non-executive directors, the CEO, the General Counsel and the CFO of JHIL had breached section 180(1) of the Act by failing to ensure that the draft ASX announcement regarding the Foundation holding sufficient funds to pay compensation was not misleading or deceptive.
- In relation to the Deed, the CEO and the General Counsel had breached section 180(1) of the Act by failing to advise the board appropriately to disclose the Deed.
- In relation to approving the ASX Announcements, the CEO breached section 180(1) of the Act by failing to ensure that the ASX Announcements were not misleading or deceptive. JHIL had also breached sections 995(2) and 999 of the Act by releasing the ASX Announcement which was misleading and deceptive.
- In relation to the presentations made by the CEO, he had breached section 180(1) of the Act by failing to ensure that the presentations were not misleading or deceptive. JHINV had also breached sections 1041E and 1041H of the Act by engaging in misleading and deceptive conduct in relation to those presentations made to the ASX.
His Honour also found that ASIC had failed to establish a number of allegations against the James Hardie Group, its non-executive directors and executives. These allegations included a claim against the CEO for breach of section 181 of the Act in relation to his obligations to act in good faith.
There were a number of factors which were considered by His Honour in finding against the executive and non-executive directors and executives of the James Hardie Group, including the experience, sophistication and intelligence of the directors, the nature of the company and the significance of the restructure, and the fact that the non-executive directors were given considerable professional advice in connection with the restructure.
In late July 2000, the Court heard submissions from all parties as to whether the various defendants should be exonerated under sections 13175S or 1318 of the Act for these contraventions, or whether some form of penalty or other sanction should be imposed. ASIC submitted to the Court that:
- the CEO should be disqualified from managing a company for 12 to 16 years and receive a fine of between $1.47 and $1.81 million
- the General Counsel should be disqualified from managing a company for a minimum of 8 years and receive a fine of between $350,000 and $450,000
- the CFO should be disqualified from managing a company for a minimum of 6 years and receive a fine of between $150,000 to $250,000
- each of the non-executive directors should be banned from managing a company for 5 years and receive a fine of between $120,000 and $130,000, and
- the defendants jointly and severally pay 90 per cent of ASIC's costs.
ASIC also submitted that when the Court is considering penalties to be imposed on the defendants, it should take into consideration the issue of indemnity. While the Act prohibits an Australian company from indemnifying against this type of civil penalty, ASIC submitted that some of the defendants may be indemnified by foreign companies within the James Hardie Group.
With the exception of the CEO, who had admitted that the breaches were serious, but that the fine and banning orders sought by ASIC were excessive, the defendants sought to be fully exonerated.
On 20 August 2009, Justice Gzell refused to exonerate any of the former board members and handed down the following penalties:
- the CEO is disqualified for 15 years from managing a company and is to pay a fine of $350,000
- the General Counsel is disqualified for 7 years from managing a company and is to pay a fine of $75,000
- the CFO is disqualified for 5 years from managing a company and is to pay a fine of $35,000
- each of the non-executive directors are disqualified for 5 years from managing a company and are to pay a fine of $30,000 each, and
- JHINV is to pay a fine of $80,000.
On 23 September 2009, JHINV filed an appeal against the declaration and orders made against it and the appeal was heard by the NSW Court of Appeal in May 2010. The appeal by nine of JHIL former directors and executives was heard by the NSW Court of Appeal in April 2010. Judgement in both these appeals is expected to be handed down later in the year.
What ASIC has said
ASIC considers this case to be a landmark decision in Australian corporate governance because it provides boardrooms with important guidance and direction on:
- the practical application of the scope and content of the duties of executives (chief executives, company secretaries and chief financial officers) when taking important matters to the board and disclosing those matters to the market, and
- the responsibilities of non-executive directors of public companies when asked by management to consider strategic matters and to approve disclosure to the market of the board's decisions.
In addition, ASIC states that the findings illustrate that in making statements to the market, companies should carefully assess and check the veracity of those statements.
Observations as to conduct of boards and executive staff
- Directors should be more inclined to ensure that the bases of their decisions at board meetings on crucial matters are understood and noted in the minutes
- Management should be clear as to whether it is seeking the directors' approval or providing documents for information where no immediate action is required
- Until it is clarified (on appeal), where the board is asked to approve a draft announcement which is placed before it which concerns a matter of particular significance, caution should be exercised in delegating the approval to a sub-committee or the chief executive
- General counsel should be aware of the true position of a matter and as such will be subject to the Corporations Act duties. Failure to warn of a foreseeable legal risk on significant matters can be held against general counsel, and
- If general counsel has an enhanced duty to warn the board of foreseeable legal risks associated with particular transactions, the same might apply to senior executives warning of risks in their particular areas of responsibility, such as the CFO, the treasurer or the chief risk officer.
Effect on D&O insurance
Section 199A of the Act prohibits, among other things, an insurer from indemnifying directors and officers for pecuniary penalties ordered under section 1317G and compensation orders under sections 1317H and 1317HA of the Act. This includes legal costs in defending proceedings where the person is found to be liable for such pecuniary penalties.
The ASIC prosecution has broadened beyond the traditional executive directors. This decision affirms that non-executive directors are in the firing line as much as executive directors. The focus of this decision was also on management below board level, including the CEO and General Counsel, affirming the decision in ASIC v Vines1 and the positive duties of management.
The broadening focus on non-executive directors and senior executives below board level gives rise to the possible exposures of a larger group of people covered under a D&O insurance policy than traditionally experienced. While this broadening of regulator interest has been happening for some time, this decision reaffirms this and sets the bar even higher for non-executive directors.
Australian Securities & Investments Commission v Macdonald (No. 11)  NSWSC 287 and (No 12)  NSWSC 714.
1ASIC v Vines
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