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 sensitive information.

Background

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 compensation fund.

The decision

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 factor.

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.

Implications

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.

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