Australia: In-house counsel may be exposed to risk of prosecution, disqualification, penalty or payment of legal costs

In brief - Shafron v ASIC creates new challenges for in-house lawyers

In Shafron v Australian Securities and Investments Commission [2012] HCA 18, the High Court upheld a decision made by the NSW Court of Appeal, finding that Mr Peter Shafron, the former general counsel and company secretary of James Hardie, failed to discharge his duties as an officer of James Hardie, contrary to section 180(1) of the Corporations Act 2001 (Cth) .

Decision has three significant implications for in-house counsel

  • In-house counsel may be exposed to risk of prosecution, disqualification, penalty or payment of legal costs under the Corporations Act for any failure to exercise due care and skill as a corporate legal adviser, assuming their liability to the company is incurred as an officer ( section 199A of the Corporations Act prohibits a company from indemnifying (save for legal costs) a person against liability incurred as a director, officer or auditor of the company which is: (a) owed to the company or a related body corporate, (b) for a pecuniary penalty order or compensation order for a breach of certain provisions (including the insolvent trading provisions), (c) owed to another party and did not arise out of good faith).
  • In-house counsel can be considered an "officer" of a corporation under section 9 of the Corporations Act by participating in making decisions that affect a substantial part of the business of the corporation, even though they themselves may not make the ultimate decision.
  • Courts will interpret the duties and responsibilities of a person engaged by a company as a composite whole, rather than seeking to compartmentalise or differentiate the responsibilities of in-house counsel and company secretary.

Numerous hats worn by in-house counsel

Commercial reality and the complexity of legal regulations often requires in-house legal counsel to adopt a number of functions, or wear "different hats":

  • the "legal adviser hat" is worn when providing legal advice to the company
  • the "employee hat" is worn to demonstrate their status as an employee of the company
  • the "gatekeeper hat" is worn to indicate their ethical and moral role to prevent corporate wrongdoing or misconduct
  • the "executive hat" is worn when providing commercial and management advice to the company, particularly as a number of in-house counsel now sit on the board of directors or routinely assist the board with corporate governance, compliance and risk

Shafron v ASIC adds "officer hat" to the collection. Whether in-house counsel dons this hat will be a question of fact and will depend on the nature and extent of their role in the process of making decisions that affect the company.

ASIC prosecution of general counsel of James Hardie

In 2007, ASIC commenced proceedings against Mr Shafron, general counsel and joint company secretary of James Hardie, alleging that Mr Shafron had failed to exercise due care and diligence in breach of section 180(1) of the Corporations Act.

The allegations centred around an announcement made in 2001 to the Australian Securities Exchange (ASX) by the James Hardie board that the Foundation James Hardie had set up to pay asbestos compensation claims was "fully funded". ASIC alleged that Mr Shafron failed to advise the board:

  • that its announcement to the ASX was misleading
  • that it should have disclosed to the ASX information about a Deed of Covenant and Indemnity
  • that actuarial reports he had obtained and on which cash flow statements were based were misleading in that they did not take into account "superimposed inflation", i.e. the fact that the rate of asbestos claims costs was increasing much faster than the general inflation rate (a factor which affected the foundation's ability to satisfy asbestos claims)

High Court rejects argument that Mr Shafron performed certain tasks in differing capacities

On appeal, Mr Shafron argued that he wore two distinct hats: one as company secretary (for which he acknowledged he was an officer) and the other as general counsel. Mr Shafron argued that the conduct in issue was not carried out in his capacity as company secretary, but rather in his capacity as general counsel, which did not fall within the section 9 definition of "officer" and as a consequence did not activate the duties required of an officer under the Corporations Act.

The High Court rejected Mr Shafron's submissions, holding that his role as company secretary and general counsel extended his responsibilities to giving advice about, and where appropriate, taking steps necessary to ensure compliance with legal requirements that applied to James Hardie, to protect it from "legal risk". The court found insufficient evidence to demonstrate that Mr Shafron had performed certain tasks in differing capacities.

Was Mr Shafron an officer of the corporation?

The court found that in determining whether Mr Shafron was an officer of the corporation, it was necessary to consider:

  • the role he played individually within the corporation, not simply the role he played in relation to a particular issue.
  • the character of his participation in decision making (section 9(b)(i) makes a distinction between making decisions and participating in them): Mr Shafron was an employee of James Hardie and one of three senior executives (the others were the CEO and CFO) responsible for formulating proposals for the separation of asbestos subsidiaries from the James Hardie group and presenting those proposals to the board. On that basis, the court held that Mr Shafron had a significant role in the decision made by the board, notwithstanding he did not make the decision himself.

What are the practical implications for general counsel?

Be conscious of your role

As general counsel, your role is to protect the company you work for from legal risk. Whether you will be considered an officer of the company will be a question of fact and will depend on whether you participate in making decisions of importance to the company. The information a company officer needs to bring to the board's attention is contingent upon that person's role within the company. It is likely, given your legal qualifications and expertise, that you may be expected to provide advice and guidance to the company's board on continuing disclosure obligations under the Corporations Act.

Take care when proofing documents and advising company boards

If you are asked to review and approve a document which will be distributed publicly, such as an ASX release, take care in dealing with disclosure issues and bringing those to the attention of the board or company CEO.

Protect yourself

Implement formal procedures and lines of reporting to ensure your advice is communicated effectively to the board of directors. Clarify with the company CEO or board of directors what is expected of you as general counsel. Ensure you are covered under the company's D&O insurance, so that if you are found to be an officer of the corporation, (in which case you will not be entitled to indemnity from the company pursuant to section 199A) you can at least have the benefit of insurance protection.

In larger companies, consider splitting the functions of company secretary and general counsel

Consider having different people occupy each role and attempt to define clearly the roles of each, so for example, the responsibilities of company secretary are confined to administrative functions, while the responsibilities of general counsel are confined to in-house legal advice that is akin to the type of legal advice you would expect from an external lawyer. However, at a practical level and given the varied role, functions and expectations of in-house counsel, that may not be a viable solution.

Kyrren Konstantinidis Antony Riordan
Commercial litigation
Colin Biggers & Paisley

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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