Australia: James Hardie decisions on duties of directors and officers - implications for general counsel and company secretaries

On 3 May 2012, the High Court delivered its judgments in the James Hardie directors' and officers' duties litigation, namely:

• ASIC v Hellicar & Ors [2012] HCA 17 (first judgment), and
• Shafron v ASIC [2012] HCA 18 (second judgment).

This article focuses on the aspects of the judgments which have implications for people employed in the roles of general counsel and/or company secretary.

ASIC v Hellicar & Ors

In the first judgment (see previous case alert), the High Court found that the former non-executive directors and the former general counsel/co-company secretary (Mr Peter Shafron) of James Hardie Industries Limited breached their statutory duties of care and diligence in relation to the approval of a false and misleading draft ASX announcement by the James Hardie board. The draft ASX announcement stated that the Medical Research and Compensation Foundation set up by James Hardie to meet future asbestos-related liabilities would have sufficient funds to meet all claims against James Hardie and its subsidiaries:

In the proceedings ASIC alleged, and the High Court found:

• the James Hardie board approved the draft ASX announcement (a contentious fact), and
• the draft ASX announcement was too emphatically worded as to the sufficiency of funding in the foundation and was therefore false and misleading.

The relevant findings against Mr Shafron in the first judgment were that as general counsel and co-company secretary, Mr Shafron was an "officer" of James Hardie, as defined in Section 9 of the Corporations Act (this finding was dealt with in more detail in the second judgment which is considered below). Accordingly, Mr Shafron owed a statutory duty of care and diligence to James Hardie pursuant to Section 180 (1) of the Act, and by failing to advise the James Hardie board that the draft ASX announcement was false and misleading, Mr Shafron contravened that section of the Act.

Shafron v ASIC

The second judgment dealt with Mr Shafron's appeal to the High Court in relation to the New South Wales Court of Appeal's findings that he contravened Section 180 (1) of the Act in certain respects which related to the creation of the foundation, but did not directly relate to the James Hardie board's approval of the draft ASX announcement. The contraventions of Section 180 (1) alleged by ASIC against Mr Shafron that were considered in the second judgment related to the following conduct:

• Mr Shafron's failure to advise the James Hardie board that a cash flow model used to predict the sufficiency of funding in the foundation did not factor in "superimposed inflation", being the potential for claims to increase at a rate above the general inflation rate, where a prudent actuarial assessment would.
• Mr Shafron's failure to advise the James Hardie board that there were continuous disclosure obligations pursuant to the Act and the ASX Listing Rules to be complied with in relation to the creation of the foundation.

The High Court found Mr Shafron contravened Section 180(1) in both of the above-mentioned respects.

In reaching its conclusions in the second judgment, the High Court made the following observations and findings.

The Court rejected Mr Shafron's submission that because he was an "officer" by definition under the Act in relation to his role as co-company secretary, his responsibilities as general counsel could be separated out in assessing whether he contravened Section 180 (1). It was held that as a practical matter, a division of Mr Shafron's tasks into those undertaken as co-company secretary, and those undertaken as general counsel, could not be made. Rather, the High Court observed the overlapping nature of the tasks Mr Shafron performed in each capacity, and the lack of evidence to suggest that he performed certain tasks as co-company secretary and other tasks as general counsel, prevented such a finding.

In relation to whether Mr Shafron ought to be deemed an "officer" under the more general test relating to his participation in the decision making processes of James Hardie, the Court stressed that participation includes "the role that a person has in the ultimate act of making a decision, even if that final act is undertaken by some other person or persons". The High Court observed that Mr. Shafron was a senior executive employee of James Hardie who was involved in the formulation of proposals put to the board over a long period of time. The court also had regard to the material influence Mr Shafron had on decision making processes within James Hardie generally and not solely in relation to the decisions that were the subject of the litigation.

The High Court also stated that as a matter of statutory interpretation, Section 180 (1) was given content with reference to "whatever responsibilities the officer concerned had within the corporation, regardless of how or why those responsibilities came to be imposed on that officer".

Conclusion

It is common for the roles of general counsel and company secretary to be performed by one person. Given the findings against Mr Shafron in James Hardie litigation, people employed as general counsel and co-company secretary ought to be cognisant of the likelihood that:

• they will be considered an officer of their company,
• their roles as general counsel and company secretary will not be differentiated for the purpose of assessing any liability under Section 180 (1) unless there is clear evidence to the contrary, and
• their duty of care and diligence is likely to extend to providing or obtaining appropriate advice on legal issues.

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.