On 23 April 2009, Gzell J handed down his decision in civil
penalty proceedings brought by ASIC against a number of directors
and executive officers of James Hardie Industries Limited
("James Hardie"). The case, which has been described by
ASIC as a "landmark decision" in corporate governance,
provides important guidelines on the scope and content of the
duties of executive officers and directors of publicly listed
companies when considering strategic company decisions and market
ASIC alleged that the board of directors of James Hardie had
contravened their duties under s.180 of the Corporations Act
2001 (Cth) ("Act") by approving, at a meeting held
in February 2001, an announcement to the Australian Stock Exchange
("ASX announcement") to the effect that an asbestos
compensation fund set up by James Hardie was "fully
funded" to compensate asbestos victims. This statement was
repeated in a series of press releases issued by James Hardie in
2001. The compensation fund was subsequently discovered to be
significantly under funded.
ASIC also alleged that James Hardie's chief executive, and
other executive officers, had contravened their duties by failing
to advise the board of directors of matters relevant to the
veracity of the statements regarding the adequacy of the
Gzell J found the ASX announcement and subsequent press releases
to be misleading, and held that each of the directors had breached
their duties by giving approval. This was despite the fact that the
directors gave evidence that the ASX announcement was not tabled at
the February 2001 meeting. In finding the directors to be
"mistaken" in this regard, Gzell J took into account
evidence of the usual practice of the directors at meetings of the
James Hardie board.
Gzell J rejected arguments that the directors were entitled to
rely on recommendations made to them by James Hardie executives,
and the expert reports provided to them. In doing so, His Honour
emphasised that the ASX announcement was a key statement in
relation to a highly significant restructure of the James Hardie
Group. His Honour found that each director, knew, or ought to have
known, that the statements regarding the adequacy of funding were
misleading, and likely to lead to a market reaction regarding James
Hardie's listed securities. The fact that the directors had
previously received information regarding the difficulty in
predicting the level of asbestos claims was a significant
The chief executive and other executives were found to have
committed additional breaches by failing to advise the directors
that the ASX announcement was too broadly stated and of the
limitations in the financial modelling that had been undertaken to
assess the level of funding.
The penalties to be imposed on the James Hardie directors and
executives will be considered at a later hearing, at which time
they will also be able to argue whether they should be excused
under the exoneration provisions in the Act. ASIC is seeking fines
against the directors and executives of up to $200,000 each, and
disqualification from managing publicly listed companies.
The case provides important guidelines on the scope and content
of the duties of company executives and directors. Whilst directors
are permitted to delegate to others the day to day management of
the company, they are expected to take a diligent and intelligent
interest in information presented to them relating to strategic
company decisions and the disclosure of market sensitive
information. Directors are expected to exercise independent
judgment in considering those matters, and are not entitled to rely
solely on the recommendations made by company executives or other
officers of the company. The decision also provides guidelines on
the information to be provided by company executives when taking
important matters to the board of directors for approval.
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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