The recent decision of Gzell J in ASIC v Macdonald (No 11)  NSWSC 287 provides new guidance on directors' and officers' duties under the Corporations Act 2001 (Cth) (Act).
ASIC succeeded in many (but not all) of its civil claims against the former James Hardie Industries Limited (JHIL), James Hardie Industries NV and certain former nonexecutive directors and officers of JHIL for various alleged breaches of the Act. The majority of ASIC's claims related to public disclosures (including ASX announcements in draft and final form) made in respect of the restructure of the James Hardie Group.
There are a number of matters that directors and other company officers should consider in respect of their own governance practices and arrangements in light of this judgment.
Breaches Of Directors' And Officers' Duties
All of the directors were held to have approved a draft ASX announcement that was misleading and deceptive, thereby breaching their statutory duties of care and diligence under section 180(1) of the Act. This included 2 directors who participated in the relevant Board meeting by telephone, but who failed to ask for a copy of the draft announcement or otherwise explicitly abstain from voting on that item of business.
The former CEO and former in-house counsel/company secretary were also held to have breached their duties under section 180(1) of the Act for failing to advise the Board appropriately. The CEO was held to have committed further breaches of this section by approving various final ASX announcements and making various public disclosures on the same terms.
The court is yet to consider whether to impose penalties in respect of these breaches, or otherwise relieve any of the defendants from civil penalty liability.
Several of the defendants have foreshadowed that an appeal against their convictions will be lodged in due course.
Key Implications Of This Decision
Although ASIC considers this to be 'a landmark decision in Australia on corporate governance', other commentators have suggested that this may be an overstatement, largely because the case turns on its particular facts.
Nonetheless, directors and other officers should consider whether any refinements to existing corporate decision-making processes are required in light of the decision. Among other matters, it may be prudent to consider:
What protocols are in place to ensure the veracity of disclosures made to the market, both at management level and at Board level? Do they require amendment in light of this decision, and what internal training may be required to ensure that all company personnel understand their responsibilities? This applies not only to ASX announcements but also to media releases, investor briefings and 'road shows', and, potentially, to disclosure documents such as prospectuses.
- Do all directors understand the parameters within which the law permits them to delegate their powers to others, and rely on information or advice provided by others? (The James Hardie decision certainly provides directors with greater guidance on these matters).
- How are Board meetings conducted and Board minutes prepared and settled? What changes to existing practices are required in light of this decision? In particular:
- Are all directors provided with the relevant papers (even if attending by electronic means)?
- Are Board minutes accurate and contemporaneous? Do Board minutes accurately record the identity of those present and voting, or abstaining, on each item of business? (The James Hardie decision arguably lends additional weight to the argument that the 'consensus' approach, whereby matters are discussed until unanimous agreement is reached but without a formal vote being taken, may be undesirable from a governance perspective).
Further to the ongoing debate regarding whether client legal privilege attaches to advice provided by in-house counsel, and more broadly the proper role of in-house counsel within a corporation, the James Hardie decision arguably reinforces the view that in-house counsel (and, potentially, company secretaries) must play a 'gatekeeper' role.
In James Hardie, the in-house counsel/secretary was held to have breached his statutory duty of care and diligence largely through a 'failure to advise', understood in light of his duty to protect the company from legal risk. Among other matters, he breached this duty by failing to warn the Board that its approval of the draft ASX announcement 'put JHIL in jeopardy'.
It may be beneficial to review existing reporting structures and relationships in light of this. For example, what capacity does in-house counsel have, in real terms, to challenge management or the Board? What changes may be required, and how might they best be implemented?
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