Last week Justice Gzell of the NSW Supreme Court found that James Hardie directors and executives had breached their obligations to the company by allowing misleading statements to be issued to the market.
While the James Hardie case was decided on its specific facts, it provides some important lessons for directors of public companies and general counsel.
Significance of ASX announcements
The James Hardie case is an important reminder to public company directors of the significance of media statements and, in particular, ASX announcements. Public company board members (executive and non-executive) have an obligation to exercise care and diligence in considering and approving significant public statements made by the company, especially where requested to do so by management. Depending on the significance of the announcement, this may require a line by line verification being undertaken by boards.
Reliance by directors on information and advice provided by others
Directors are not able to rely upon the advice of management under section 189 of the Corporations Act in place of their own examination of a matter where the matter falls within the board's responsibilities (which include considering strategic matters and approving significant disclosures to the market).
With regard to company announcements, the wording will affect the extent to which a director may rely upon external advice. The more "emphatic" an announcement's wording, the less room a director has to say that it was approved in reliance upon the opinion of someone else.
Responsibilities of non-executive directors
The James Hardie case serves as a reminder to non-executive directors that, despite not being involved in the day to day running of the business, they are officers of the company and will be liable as such where they fail to meet the standard of care and diligence expected of a person in their position.
Significance of board minutes
Board minutes are a record of board meetings and should be critically reviewed by directors before being approved.
However, the fact of an event being recorded in a board minute will be of no evidentiary value where, on the whole of the evidence, the opposite is found to be true.
In order to be given evidentiary weight, board minutes should be prepared at or close to the meeting they purport to document and must be recorded in the books of the company within one month of the relevant meeting. Only then will the minutes obtain the benefit of the statutory presumption in the Corporations Act.
Director liability for misleading or deceptive conduct
Where a company makes a statement to the market which is misleading or deceptive, liability can attach personally to each of the company's directors for breach of their duty to exercise care and diligence under section 180(1) of the Corporations Act, regardless of their actual involvement in the process of issuing the statement.
Responsibilities and liability of general counsel
The James Hardie case reminds us that general counsel have a positive obligation to guard the company against legal risks. What is required of general counsel in order to discharge their duty to the company will vary depending on the circumstances.
For example, where a draft company announcement is worded so as to create an impression of absolute certainty about a particular outcome and the general counsel knows or ought to know that such an impression is false, the general counsel will be under an obligation to warn the board that the announcement should not be worded too emphatically.
Also, where the opinion of external expert advisers is relied upon by the board in approving a statement, and general counsel is aware of some deficiency in the suitability of that opinion to support the statement, general counsel has an obligation to advise the board as to the limitation of the opinion.
The case serves as a reminder that general counsel participating in company decision making are also acting as officers of the company and are subject to the standards of care and diligence set out in section 180(1) of the Corporations Act.
The James Hardie case demonstrates the importance of directors and officers having insurance to cover the gap left by section 199A of the Corporations Act, which prohibits, among other things, a company from indemnifying an officer in respect of pecuniary penalties under s1317G of the Corporations Act (including legal costs in defending proceedings where the person is found to be liable for such a pecuniary penalty).
The best D&O insurance policies will cover pecuniary penalties 'to the extent permitted by law' as well as legal costs, although the James Hardie case may ultimately result in the public policy implications of such provisions being tested before the courts.
Practical tips for directors
- take care to closely read and critically consider strategic proposals, ASX announcements and board minutes
- if they are attending meetings by phone, ensure that they have all the relevant board papers including, for example, any slides that will be presented
- recognise the importance of media communications, particularly ASX announcements, as being significant investor communications requiring their supervision
- review company disclosure and communications policies and procedures to ensure that the board considers significant ASX announcements
- re-assess their indemnities and D&O cover.
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