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ANIL HARGOVAN[†]
[Australian Securities and Investments Commission v Macdonald [No 11] required the New South Wales Supreme Court to determine whether company directors and officers of James Hardie Industries Ltd had breached their duties, in particular the statutory duty of care and diligence in s 180(1) of the Corporations Act 2001 (Cth) in the context of the board approving and releasing to the Australian Securities Exchange a defective media statement that commented on the effects of a corporate restructure and the company’s ability to meet future asbestos liabilities. Significantly, in affirming liability in respect of some of the civil penalty charges laid by the Australian Securities and Investments Commission, Gzell J held that 10 former directors and officers of James Hardie Industries Ltd breached their duties of care by approving and releasing a media statement that was false, or misleading and deceptive, and capable of having an adverse effect on the company and the market. In holding that the company also breached its statutory obligations under the continuous disclosure provisions, Macdonald highlights the responsibilities of the board, chief executive officer and general counsel of listed companies to ensure compliance with the law. This case note analyses the reasons underpinning the outcome in Macdonald, with a focus on the modern scope and content of officers’ and directors’ duties. It considers the extent to which reliance can be placed by a non-executive director on other directors, management and external advisers and discusses the potential implications of the case and the lessons that need to be implemented for sound boardroom governance.]
CONTENTS
Corporate governance embraces, inter alia, ‘how risk is monitored and
assessed’ and provides ‘accountability and
control systems
commensurate with the risks
involved.’[1] Corporate
governance measures, in particular directors’ duties, are but one of the
many control devices relied upon to reduce
the agency costs associated with
shareholder monitoring.[2] The
Berle–Means paradigm — which views the separation of ownership and
control as being ownership dispersed among shareholders
and control vested in
directors[3] — has been highly
influential in the development of corporate law norms in Anglo-American
jurisdictions. To bridge the gap
between shareholder and manager interests, a
consequence of an ‘agency problem’ arising from divergent
interests,[4] the board of directors
has a duty to monitor management performance and to align managers’
incentives with the shareholders’
profit-maximising goal.
As a general
rule, a company is to be managed by or under the direction of its board of
directors.[5] The board’s
monitoring functions ‘are the heart of what the agency cost model of the
firm identifies as the central role
for the
board’.[6] The movement to take
boards seriously, according to a leading commentator, has identified monitoring
management decisions as a primary
governance role of the board of
directors.[7]
For the purpose of
accountability and to minimise the risk of self-dealing and shirking by
management, the law imposes both fiduciary
duties and the duty to exercise care,
skill and diligence upon officers and
directors.[8]
As fiduciaries, directors have an obligation to favour corporate interests over
personal
interests.[9]
As monitors of management performance, boards of directors are accountable for
decisions and conduct in office through the duty to
exercise care, skill and
diligence. Directors are expected to discharge their duties in a careful and
competent manner. There is
no place for underperformance or shirking of
directors’ duties, particularly when the board is entrusted with a
specific task,
as illustrated by the decision in Australian
Securities and Investments
Commission v Macdonald [No 11]
(‘Macdonald’), where eight former directors (seven
non-executive and one executive) and two officers of James Hardie Industries Ltd
(‘JHIL’)
were found culpable of dereliction of duty.
The facts
and decision in Macdonald underscore the failure of the JHIL board to
discharge its dual role as adviser and
supervisor.[10] The aim of this case
note is to examine the decision and reasoning of the Supreme Court of New South
Wales in Macdonald and to discuss the potential impact of the case on
Australian corporate governance practices. However, first it is appropriate to
discuss the antecedent and complex events leading to the relevant legal issues
raised in Macdonald, which attracted great, and legitimate, public
interest following the company’s manifest intention at the outset to
create
a limited fund to compensate asbestos claims and thereafter to divest
itself of future liabilities upon depletion of the fund.
Macdonald came before the Supreme Court in the wake of the findings of
a Special Commission of Inquiry established by the NSW government to
examine,
inter alia, the circumstances in which the Medical Research and Compensation
Foundation Ltd (‘Foundation’) was
created and separated from the
James Hardie group and whether this may have impacted on the sufficiency of
assets to meet its future
asbestos-related
liabilities.[11]
Before
identifying the principal conclusions of the Special Commission of Inquiry, it
is necessary to canvass the background to the
events leading to the contentious
corporate reconstruction of James Hardie and the facts leading to the
commencement of civil proceedings
in Macdonald by the corporate regulator
for, inter alia, breach of directors’ and officers’ duties.
Companies in the James Hardie group were major participants in the
manufacture of asbestos products in the 1920s, which were used
extensively in
Australia during the major part of the last century, particularly in building
products and insulation materials. James
Hardie had been responsible for 70 per
cent of Australian asbestos
consumption.[12] Asbestos is
injurious to health and its fibres can give rise to asbestosis, lung cancer and
mesothelioma, which are often fatal.
These diseases may not manifest themselves
immediately, and it is not uncommon for a severe medical condition to arise some
decades
after exposure to the asbestos fibre. Asbestosis was common in the
1920s, but the insidious effect of asbestos and its link to mesothelioma
were
only established in
1960.[13]
JHIL (now ‘ABN 60
Pty Ltd’) manufactured asbestos products until 1937, whereupon this
activity was taken over by its subsidiary,
James Hardie & Coy Pty Ltd (now
‘Amaca Pty Ltd’), which became a substantial producer until it
ceased this business
activity in the
1980s.[14] Another business arm of
the corporate group, Jsekarb Pty Ltd (now ‘Amaba Pty Ltd’),
manufactured brake lining products
until its sale to an independent party in
1987.[15] These three companies in
the James Hardie group were the main participants in the manufacture and
distribution of asbestos products.
These companies, together with Mr Macdonald
as JHIL’s chief executive officer, Mr Shafron as the company secretary and
general
counsel, and Mr Morley as the chief financial officer, were to form the
dramatis personae in the corporate reconstruction of James
Hardie.[16]
A switch in business focus to the United States and the development of new non-asbestos products in the 1980s proved successful for the James Hardie group and provided the impetus to separate the accruing asbestos liabilities in Australia from the group’s core business in the United States.[17]
This impetus to divest itself of its asbestos liabilities also came from the
desire of the group to remove what it perceived as an
obstacle to its
aspirations to access the capital market in the United States. An aborted
attempt to issue 15 per cent of the shares
of a related Dutch company, James
Hardie Industries NV (‘JHINV’), on the New York Stock Exchange added
to the impetus
for a corporate restructure to ‘fully realise the value of
JHIL, and for its growth prospects to be realised’, by adopting
the United
States as the group’s
base.[18] Without separation of the
asbestos-related liabilities on its balance sheet, it was thought that
‘listing in the United States
was “commercially
unrealistic”’.[19]
Three
other influential factors contributed to the momentum towards the group’s
corporate reconstruction and its timing. The
first factor was the desire to
avoid the impact of a proposed new Australian Accounting
Standard,[20] due to come into force
in October 2001, which would have required disclosure of the group’s
estimated total of its asbestos
liabilities.[21]
The second factor was the desire to capitalise on the timing of the
announcement of the group’s third quarter results to the
market on 16
February 2001.[22] It was envisaged
that the simultaneous announcement of the group’s profits together with
the corporate restructure plan would
deflect attention from a controversial
issue which might otherwise attract undesirable publicity. The third factor
related to the
effluxion of time and the new stewardship of the
business.[23] Within this context,
the James Hardie group’s asbestos liabilities were treated as
‘non-core issues’, a source
of ‘management distraction’
and regarded as ‘legacy issues’ which formed ‘part of the
rump’.[24]
Against this
backdrop of corporate aspiration and apparent indifference to the fact that the
James Hardie group remained accountable
for negligence in the manufacture and
distribution of asbestos products over the last century (notwithstanding
cessation of that
business), the group marched forward with a separation plan
that was poorly executed, as illustrated below in Part III.
From the year 2000 until 15 February 2001, the management of JHIL worked on a
plan (known as ‘Project Green’) to divest
the group of its asbestos
liabilities through the use of a trust structure in the following way. Amaca and
Amaba ‘would remain
responsible to claimants in respect of
asbestos-related liabilities, to the extent of their existing assets, but
ownership [of both
these companies] would pass from JHIL to a new company
unrelated to JHIL’ known as the Medical Research and Compensation
Foundation
Ltd, which would operate as a
trust.[25]
The Foundation, a
company limited by guarantee, became the trustee of the Foundation trust. New
directors were appointed to the trust
and to Amaca and Amaba. The structure
adopted sought to exploit the benefits of the separate legal entity rule and
limited liability,[26] benefits
ordinarily conferred on companies by the corporate veil and extended to
corporate groups.[27]
Furthermore, as part of the concerted effort to quarantine JHIL from its
asbestos liabilities, the following arrangements were put
in place. ‘In
return for payments to be made over time by JHIL to each of [Amaca and Amaba],
JHIL was to be indemnified by
[both these companies] against any
asbestos-related liabilities which JHIL might
have’.[28]
Moreover, both these companies agreed to forego any claims against JHIL
arising from any past dealings with it, including in relation
to the payment of
dividends or management fees. Recovery of such intra-group payments was barred
by a deed of covenant and indemnity
(‘DOCI’) entered into by the
contracting parties.[29]
The
Australian Securities and Investments Commission (‘ASIC’) alleged
that JHIL breached its obligation to disclose the
DOCI information to the
Australian Securities Exchange (‘ASX’) as required under ASX
Listing Rules (at 1 July 2000) r 3.1 (‘Listing
Rules’) and the Corporations
Law.[30] ASIC also alleged
that the failure of the chief executive officer (Mr Macdonald) to advise the
chair of the board of the need to
make disclosure was a breach of the duty of
care and diligence under s 180(1) of the Corporations Act
2001 (Cth) (‘Corporations
Act’).[31] Similarly,
ASIC alleged that failure by the company’s general counsel (Mr Shafron) to
provide his own advice on the need for
disclosure was a breach of s
180(1).[32] ASIC further alleged
that the failure of the chief financial officer (Mr Morley) to negotiate
additional funds during the execution
of the DOCI was a breach of s
180(1).[33]
The events surrounding the public announcement of the separation are germane to the litigation in Macdonald. The draft ASX announcement that ASIC alleged was before the board on 15 February 2001,[34] and which was subsequently released to the public on 16 February 2001, was an integral part of the public relations planning in relation to the separation. The theme of certainty of sufficient funding pervaded this, and future, media statements which became the focus of attention in Macdonald. The final ASX announcement included, inter alia, the following statements which ASIC alleged to be false or misleading and the basis of the directors’ breaches of the statutory duty of care and diligence in s 180(1):
The Foundation has sufficient funds to meet all legitimate compensation claims … Mr Peter Macdonald said that the establishment of a fully-funded Foundation provided certainty for both claimants and shareholders. … In establishing the Foundation, James Hardie sought expert advice … ‘James Hardie is satisfied that the Foundation has sufficient funds to meet anticipated future claims’ …[35]
ASIC also alleged that press conference statements and representations made at JHINV’s roadshows in Edinburgh and London in 2001 by Mr Macdonald, in terms similar to the document above, were false and misleading and constituted breaches of s 180(1).[36] Furthermore, ASIC alleged that through Mr Macdonald’s conduct in making such statements JHIL engaged in misleading and deceptive conduct in breach of the Corporations Law and the Corporations Act.[37] ASIC had a substantial degree of success in its claims on these issues for reasons discussed below in Part III.
After the establishment of the Foundation in February 2001, steps were implemented in October 2001 pursuant to a scheme of arrangement[38] to substitute a new Dutch company (JHINV) for JHIL as the holding company of the group — with JHIL becoming a wholly-owned subsidiary of JHINV. The impetus for the move to the Netherlands centred on the prospect of further international growth for the group, as well as being in the best interests of the shareholders as a whole due to the improvement in the after-tax returns to shareholders.[39]
A brief overview of the mechanics of the scheme is relevant for the legal
issues subsequently raised in Macdonald. One of the main features of the
scheme involved JHINV subscribing for partly paid shares in JHIL. Consequently,
JHIL could call
on its holding company to pay any or all of the remainder of the
issue price of those shares at any time in the future. Significantly,
the amount
callable under the partly paid shares would be equal to the market value of the
James Hardie group less the subscription
monies already paid up. This sum was
considerable and was likely to be in the region of $1.9
billion.[40]
The significance of this feature of the scheme was underscored when JHIL
assured Santow J — during the application for approval
of the scheme in
the NSW Supreme Court in October 2001 — that JHIL had the ability to
satisfy any asbestos-related liabilities
by calling upon the partly paid
shares.[41]
The cancellation of
the partly paid shares and the formation of a new foundation in March 2003 to
acquire the shares in JHIL ensured
the complete removal of JHIL from the James
Hardie group. The subsequent failure to inform the public of this development
immediately
also became the focus of attention in Macdonald.
ASIC
alleged that, in approving the information memorandum (‘IM’) sent to
members of JHIL, which failed to include the
plan to cancel the partly paid
shares, five of the non-executive directors present at the board meeting on 23
July 2001 breached
s 180(1).[42]
Similarly, ASIC alleged that, by issuing the IM to its members, JHIL breached s
995 of the Corporations Act due to misleading and deceptive
conduct.[43] For the same reasons,
ASIC alleged that Messrs Macdonald and Shafron, in failing to discharge their
duties in advising the board
that the IM was false or misleading, acted in
breach of s 180(1).[44]
It is
this background of the very large discrepancy between the initial funding of the
Foundation and the actuarial assessments of
its liabilities which gave rise to
controversy and the appointment of the Special Commission of Inquiry. Concerns
about the ability
of the Foundation to meet its liabilities were also
underscored by its application to court to seek relief that would permit
payments
to claimants in full[45]
notwithstanding statutory provisions that prohibit insolvent
trading.[46]
In a wide-ranging inquiry into the financial position of the Foundation, the likelihood that it could meet its future asbestos-related liabilities and the circumstances of the corporate reconstruction of James Hardie, David Jackson QC came to the following conclusions that are relevant for purposes of this case note:
1 As at 30 June 2004, liabilities of the Foundation were estimated at not less than $1.5 billion. Against that, the value of the total assets acquired by the Foundation was $293 million.[47]
2 There was ‘no prospect [of the Foundation] meeting the liabilities of Amaca and Amaba in either the medium or long term’ due to the rapid depletion of the funds used in the payment of current claims,[48] and the life of the Foundation was about three years or a little less.[49]
3 The actuarial report produced by Trowbridge in February 2001 ‘provided no satisfactory basis for an assertion that the Foundation would have sufficient funds to meet all future claims.’[50]
4 ‘The evidence demonstrated that the February 2001 estimates of future liabilities were far too low and that the results of the financial modelling were wildly optimistic.’[51]
5 ‘The public announcements made by JHIL at the time of separation [16 February 2001] emphasised that JHIL had provided for a Foundation which had sufficient funds to satisfy all future legitimate asbestos-related claims.’[52]
6 The media release sent to the ASX, conveying the idea of ‘certainty’ with respect to the Foundation’s funding, was ‘seriously misleading’ and also conveyed the misleading impression that the funding amount JHIL arrived at was checked by independent experts.[53]
7 Contrary to the claims in the media release sent to the ASX, the Foundation was not ‘fully-funded’. ‘It was massively under-funded.’[54]
8 ‘[T]he JHIL board meeting of 15 February 2001 approved the ASX
announcement to be made by
JHIL.’[55] This view, however,
was unsuccessfully challenged by the board in Macdonald despite the
absence of direct evidence of board approval.
The Commissioner’s
report, released in September 2004, had a direct bearing on ASIC’s
decision to launch civil penalty
proceedings in February 2007 against James
Hardie, its directors and its officers. The report was used as a springboard to
launch
further investigations into the activities of the James Hardie
group.
ASIC investigated the conduct of JHIL and that of both executive and
non-executive directors and sought court declarations that a
range of directors
and officers had breached their duties owed to
JHIL.[56] The practical application
of the scope and content of directors’ and officers’ duties,
particularly the statutory duty
of care and diligence, was one of the essential
tasks requiring judicial determination, as addressed below.
Based on the facts discussed above, ASIC alleged in Supreme Court hearings in September 2008 that JHIL, its officers and the board had engaged in multiple breaches of the Corporations Law and the Corporations Act which attracted civil penalties.[57] In particular, ASIC argued that:
1 The draft ASX announcement approved at the board meeting on 15 February 2001 was false or misleading. The approval by the non-executive directors,[58] the chief executive officer (Mr Macdonald), the company secretary and general counsel (Mr Shafron) and the chief financial officer (Mr Morley) was in breach of the duty of care in s 180(1).[59]
2 JHIL’s failure to disclose information to the ASX in relation to the DOCI was in breach of s 1001A(2).[60]
3 Failure by the chief executive officer and the company secretary and general counsel to advise the board that the DOCI information should be disclosed to the ASX was in breach of s 180(1).[61]
4 The chief executive officer had breached s 180(1) for failure to advise that the final ASX announcement on 16 February 2001 should not be released or that it should be amended to cure the defect.[62]
5 Statements made by the chief executive officer at a press conference concerning the adequacy of funding for asbestos claims were false or misleading and involved a breach of s 180(1).[63]
6 A release to the ASX on 23 February 2001 by the chief executive officer, which contained false or misleading statements, was in breach of s 180(1).[64]
7 The approval by the same officer of an announcement released to the ASX on 21 March 2001 containing false or misleading statements was in breach of s 180(1) and the good faith provisions in s 181(1).[65]
8 The publication of the final ASX announcement, the press conference statements and the further ASX announcements, referred to in point 6 above, by JHIL contravened ss 995(2)[66] and 999[67] of the Corporations Law.
9 The representations made by the chief executive officer with respect to
JHINV at roadshows in Edinburgh and London and in slides
for these
presentations, which were lodged with the ASX, were false and misleading and in
breach of ss 180(1) and 181.[68] On
the same facts, it was argued that JHINV was in breach of s
1041E[69] and, in making the ASX
representations, breached s
1041H.[70]
10 JHINV failed to
notify the ASX of JHIL information in accordance with Listing
Rules r 3.1, and thereby contravened disclosure obligations in
s 674(2).[71]
In a judgment delivered by Gzell J, his Honour upheld a number, but not all, of ASIC’s claims identified above. His Honour had no difficulty in finding that the content of the draft ASX announcement satisfied the test used for a breach of s 52 of the Trade Practices Act 1974 (Cth).[72] Noting that in this case the notional representative class member impacted by the announcement was broad, including financial market analysts, investors and other stakeholders, his Honour held:
To the unsophisticated sufferer of an asbestos related disease or other stakeholder the message on a fair reading … was that it was certain that the foundation had sufficient funds to pay all legitimate asbestos claims. That was the plain English meaning … [I]t was [re-]enforced … by the statement attributed to Mr Macdonald that the foundation was fully funded. … People with legitimate asbestos claims could be certain that there were sufficient funds to pay their claims. To read [that statement] as conveying that the establishment of the foundation provided certainty but not certainty that legitimate claims would be paid is a tortuous reading of the document.[73]
Significantly from a corporate governance perspective, his Honour held that
the 10 directors and officers of JHIL breached their statutory
duty of care and
diligence under s 180(1) by approving the false or misleading and deceptive
public announcement.[74] In arriving
at this conclusion, his Honour focused attention onto the legal responsibilities
of the non-executive directors when
requested by management to consider this
strategic public announcement surrounding the separation
plan.[75] The judicial spotlight,
thereafter, was turned on the standard of performance expected of the chief
executive officer, general counsel
and the chief financial officer of
JHIL.[76]
Although all of the
directors and officers denied considering the draft ASX announcement at the
relevant board meeting despite its
mention in the minute book, Gzell J relied on
inferential evidence and did ‘not accept the chorus of denial of
recollection
to be
genuine.’[77] However, his
Honour did not rely on the special evidentiary status of the minutes, conferred
by s 251A(6) of the Corporations Act, due to the company’s
noncompliance with the strict formalities for the entry of minutes within one
month of the meeting.[78]
The directors’ statutory duty of care and diligence, which is akin to that at common law[79] and occupied centre stage in this case, is expressed in the following terms in s 180(1) of the Corporations Act:
A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
(a) were a director or officer of a corporation in the corporation’s circumstances; and
(b) occupied the office held by, and had the same responsibilities within
the corporation as, the director or officer.
In assessing whether the 10
directors and officers breached s 180(1) in approving the draft ASX statement
considered at the 15 February 2001 board meeting, Gzell J
adopted[80] the legal principles
considered by Brereton J in Australian Securities and
Investments Commission v Maxwell
(‘Maxwell’),[81]
which accepted, inter alia, the following propositions of law:
1 ‘In determining whether a director has exercised reasonable care and diligence … the circumstances of the particular corporation concerned are relevant to the content of the duty. These circumstances include [inter alia] the type of company, … the size and nature of the company’s business, the composition of the board, the director’s position and responsibilities within the company, the particular function the director is performing, the experience or skills of the particular director … and the circumstances of the specific case’.[82]
2 The statutory duty of care and diligence can be contravened ‘even if
there was no actual damage, [so long as] it was reasonably
foreseeable that the
relevant conduct might harm the interests of the company’. Furthermore, to
establish breach ‘the
foreseeable risk of harm must be balanced against
the potential benefits which could reasonably be expected to accrue to the
company
from that
conduct’.[83]
Within this
general review of legal principles, Gzell J paid particular attention to the
question whether the law differentiated between
the standard of performance
expected of executive and that expected of non-executive
directors.[84]
His Honour
referred to the divergent judicial views expressed by Rogers CJ Comm D in
AWA Ltd v Daniels, who appeared to show readiness to
accept a lower standard of care for non-executive
directors,[85] and the NSW Court of
Appeal in Daniels v Anderson, wherein Clarke and Sheller
JJA held that the approach of Rogers CJ Comm D on this issue did not represent
modern company law[86] and that all
directors are required to ‘take reasonable steps … to guide and
monitor the management of the
company.’[87]
After
reviewing case law on this
issue,[88] Gzell J reiterated the
analysis of Santow J in Australian Securities and
Investments Commission v Adler
(‘Adler’)[89]
(drawn from earlier authorities) and held that a director should become familiar
with the fundamentals of the company’s business
and is under a continuing
obligation to keep informed about the company’s
activities.[90]
Gzell J observed, significantly, that the NSW Court of Appeal in
Adler did not consider Santow J’s analysis of the modern legal
principles applicable to the directors’ duty of care and diligence
‘to be
deficient’.[91]
Satisfied
that the same standards of care are imposed on all directors, Gzell J focused on
the test to determine breach of s 180(1) and relied on Adler to espouse
the following objective test:
In determining whether a director has exercised reasonable care and diligence one must ask what an ordinary person with the knowledge and experience of the defendant might be expected to have done in the circumstances if he or she was acting on their own behalf …[92]
Turning to the facts and applying this objective assessment, his Honour held
that all of the non-executive directors knew or should
have known of the
negative impact of the defective draft ASX announcement on the company upon its
release to the public.[93] According
to his Honour, ‘there was the danger that JHIL would face legal action for
publishing false or misleading …
or deceptive statements, its reputation
would suffer and there would be a market reaction to its listed
securities.’[94]
Based on
the evidence that revealed the shortcomings and unreliability of the cashflow
model used in the actuarial reports, which
was expressly brought to the
board’s attention on many previous occasions, Gzell J concluded that:
The shortcomings of the cashflow model must have been obvious to the non-executive directors, or at least they ought to have been and they should have realised that they were prevented from approving the unequivocal and unqualified statements as to certainty of sufficient funding in the draft ASX announcement.[95]
Gzell J commented on the failure of the non-executive directors to discharge their monitoring role as constituting a breach of the statutory duty of care and diligence:
it was part of the function of the directors in monitoring the management of the company to settle the terms of the draft ASX announcement to ensure that it did not assert that the foundation had sufficient funds to meet all legitimate compensation claims …[96]
Furthermore, his Honour held that the matter before the board, which should have occupied the board’s attention, was not a matter of ‘operational responsibility’.[97] After observing that the non-executive directors had ‘no qualms about a request from management to consider’ the draft ASX announcement (an attitude which found favour with his Honour), Gzell J held that the directors’ conduct thereafter fell short of the standards expected to discharge duty of care obligations under s 180(1) for the following reasons:
The formation of the foundation and the [restructure of the relevant entities described earlier] were potentially explosive steps. Market reaction to the
announcement of them was critical. This was a matter within the purview of the board’s responsibility: what should be stated publicly about the way in which asbestos claims would be handled by the James Hardie group for the future[98]
In such circumstances, Gzell J concluded that it was incumbent on the
non-executive directors to ‘speak against or in modification
of the
announcement’, both of which they failed to
do.[99] Based on this reasoning
and the application of the objective test under s 180(1), his Honour held that a
reasonable person with similar responsibilities would not have voted in favour
of the resolution that the
company approve and release the draft ASX
announcement to the
ASX.[100]
Turning attention to
the two United States non-executive directors (Messrs Gillfillan and Koffel) who
attended the relevant board
meeting by telephone and claimed that the draft ASX
announcement was neither provided nor read to them, Gzell J accepted that
claim
due to the equivocal nature of evidence on this key
issue.[101] His Honour,
nonetheless, held that both directors breached s 180(1) by voting in favour of
the resolution since
neither [non-executive director] raised an objection that [they] did not have a copy of the draft ASX announcement at the 15 February 2001 meeting. Nor did they ask that a copy be provided to them. Nor did they abstain from approving the … announcement.[102]
Applying an objective test under s 180(1), his Honour concluded that the
failure to request a copy of the draft ASX announcement dealing with a most
significant event in the
life of JHIL, ‘to familiarise themselves with its
terms’ or ‘to abstain from voting’ was inconsistent with
the
actions of ‘a reasonable person in their shoes with their
responsibilities’.[103]
The
remaining non-executive directors, Messrs O’Brien and Terry, were
similarly found to have breached s 180(1) despite their decision not to offer
evidence on their role at the relevant board
meeting.[104] Having found that
the board had a duty to consider the draft ASX announcement upon a request by
management, Gzell J focused attention
on the conduct of both these non-executive
directors. His Honour had little difficulty in concluding that the approval of
the announcement
meant that neither director ‘put forward a case that they
abstained from approving the draft ASX
announcement.’[105] The
board’s approval of the announcement with its overstatement meant that,
according to his Honour, both directors ‘failed
in their duty … to
protect [the company] from the harm it potentially faced upon publication of the
draft ASX
announcement.’[106]
In
finding that all seven non-executive directors had breached their duty of care
and diligence under s 180(1), Gzell J was influenced by the direct evidence of
many of the directors who readily conceded that the level of funding described
in the draft ASX announcement was ‘so unequivocal and unqualified’
that none of the directors would have approved it
if they had considered it at
the board meeting on 15 February
2001.[107]
In relation to the
conduct of the five non-executive directors who approved the IM (discussed
earlier in Part II), Gzell J dismissed ASIC’s claim of breach of
s 180(1). His Honour was satisfied that the IM was not false or misleading
as there was no intention at the relevant time on part of the company
to cancel
the partly paid
shares.[108]
His Honour found that ‘ASIC relie[d] on snippets of statements’
which could not be attributed to the ‘collective
view of the board’,
who were unaware of such a plan when approving the
IM.[109]
Furthermore, Gzell J reaffirmed the principle that, even if one director is
aware, ‘[a]n individual director has no implied
authority to act
unilaterally.’[110] His
Honour held that ‘[v]iews in the minds of individual directors not
communicated to other directors nor made the subject
of board decision …
can not be taken as being the plans of the
company’.[111]
Gzell J accepted the legal proposition that, while directors are required to take reasonable steps to place themselves in a position to guide and monitor the management of the company, they are entitled to rely upon others, except where they ‘know, or by the exercise of ordinary care should have known, any facts that would deny reliance on others.’[112] Gzell J held, however, that the wording of the draft ASX announcement was not a matter for reliance upon management or outside experts. In addressing the question of whether the non-executive directors’ reliance on management was reasonable or not, his Honour held that delegation was inappropriate on the facts of this case as
[t]his was not a matter in which a director was entitled to rely upon those of his co-directors more concerned with communications strategy to consider the draft ASX announcement. This was a key statement in relation to a highly significant restructure of the James Hardie group. Management having brought the matter to the board, none of them was entitled to abdicate responsibility by delegating his or her duty to a fellow director.[113]
Similarly, based on the facts which showed management’s referral of the
draft ASX announcement to the board for consideration,
his Honour rejected
defences based on reliance on experts (for example, Trowbridge). Gzell J, in
framing the issue in the following
way, offered this reason for his
Honour’s intolerance of the reliance defence: ‘it is the emphatic
nature of the draft
ASX announcement [with use of the term “fully
funded”] that is at fault. And that is not a matter for reliance upon
management
or outside
experts.’[114]
Furthermore,
a more emphatic reason for Gzell J’s rejection of the reliance defence
arose from the fact that the board’s
‘task of approving the draft
ASX announcement involved no more than an understanding of the English language
used in the
document.’[115]
Gzell J found that Mr Macdonald, as a director and chief executive officer of
JHIL with reporting duties directly to the board, had
‘ultimate
responsibility for planning the separation
proposals.’[116] The
evidence showed that he was the ‘driving force behind Project
Green.’[117] Furthermore, he
was ‘appointed to make public statements on behalf of JHIL concerning
separation proposals’ and, in keeping
with his position, was
‘responsible for dealing with the board on this
issue.’[118]
As a result
of these responsibilities, Gzell J concluded that the chief executive officer
‘bore a high standard of
care’[119] and that in
voting in favour of the resolution to approve the announcement was ‘a
fortiori’ in breach of the duty of
care and diligence in s
180(1).[120] In applying an
objective test, his Honour concluded:
For the reasons [applicable] to the non-executive directors, a reasonable person, if a director of a corporation in JHIL’s circumstances who occupied the office of director and chief executive officer and had the same responsibilities within the corporation, would not have voted in favour of a resolution that JHIL
approve the draft ASX announcement and JHIL authorise … [its execution and release] to the ASX[121]
Gzell J, however, rejected ASIC’s allegation that the chief executive officer breached s 180(1) through failure to enquire of each director as to whether they had formed an opinion on the adequacy of the quantum expressed to meet all present and future asbestos claims brought against Amaca and Amaba. The imposition of such a duty, according to his Honour, is unwarranted as
it was [not] any part of the [chief executive officer’s] duty to monitor the individual bases upon which his co-directors voted on the issue. A director is not obliged to analyse the basis upon which fellow directors intend to vote before determining his or her own course.[122]
Furthermore, his Honour considered it ‘insulting for the chief
executive officer to ask each board member whether he or she
really meant what
they were about to
do.’[123]
Gzell
J found the negligent conduct of the chief executive officer resulted in
multiple breaches of the statutory duty of care and
diligence.[124] The chief
executive officer’s failure to advise the board of the limited nature of
the reviews on the cashflow model undertaken
by external consultants —
PricewaterhouseCoopers and Access Economics — also constituted a breach of
s
180(1).[125]
The review was restricted to issues concerning ‘logical soundness and
technical correctness’.[126]
According to his Honour, a reasonable person with the same responsibilities
would have informed the board that the external consultants
had been
‘specifically instructed not to consider … the key assumptions
adopted by the cashflow model, being fixed investment
earnings rates, litigation
and management costs and future claim
costs.’[127] As the
‘driver of this separation
proposal’,[128]
Mr Macdonald’s failure to draw his co-directors’ attention to the
lack of verification of key data was held to be negligent.
The failure by the
chief executive officer to advise the board that the draft ASX announcement was
expressed in too emphatic terms
in relation to the adequacy of funding was
misleading and deceptive and also constituted a breach of
s 180(1).[129]
Likewise,
in discharging his duties as director and chief executive officer of JHINV, Mr
Macdonald was found to have breached s 180(1) with respect to representations
made during international roadshows in Edinburgh and London to promote the
company. Gzell J found
that, ‘[d]espite his knowledge that the foundation
was seriously under-funded,’ Mr Macdonald was prepared to convey the
opposite impression to an international audience through the use of false or
misleading material during the slide
presentations.[130] His Honour,
however, rejected ASIC’s claim that such conduct was in breach of the duty
of good faith and proper purpose under
s 181, for reasons discussed
below.
Similar to the finding in relation to the five non-executive
directors,[131]
Mr Macdonald was held not to have breached s 180(1) in relation to the
IM connected with the scheme of arrangement on the basis of Gzell J’s
finding that the document was not
false or misleading at the time of its
preparation.[132]
The belated
publication of the DOCI information in JHIL’s annual report in June,
rather than at the time of decision at the
15 February 2001 board meeting,
resulted in JHIL’s breach of its continuous disclosure obligations under
ASX Listing Rules r 3.1 and s 1001A(2) of the Corporations
Law.[133] Based on the same
facts, Gzell J held that both Messrs Macdonald and Shafron (secretary and
general counsel) breached s 180(1) by
failing to provide advice to the chair of
the board about the need for
disclosure.[134] Significantly,
his Honour rejected Mr Macdonald’s statutory defence under the
business judgement rule in s 180(2) due to his
failure to offer any evidence in
support of the defence.[135]
Similarly, Gzell J rejected Mr Macdonald’s defence of reliance on
others under s 189 for the same
reason.[136]
Through the
seminal role played by Mr Macdonald in the cancellation of the partly paid
shares, JHINV was found to have breached its
statutory duty of continuous
disclosure and ASX Listing Rules r 3.1 by failing to disclose such
information that would materially affect the price of its
securities.[137] Gzell J
found that the steps taken by the company to disseminate information were
inadequate.[138]
Gzell J found that the company secretary (Mr Shafron), who was legally
qualified and performed the role of general counsel, participated
in the making
of decisions that affected the whole or a major part of the company’s
business.[139] Mr Shafron’s
expansive role in the affairs of JHIL therefore meant that he was a company
officer within the statutory
definition[140] and,
significantly, attracted the stringent statutory duties applicable to
officers.[141]
‘Guarding
against legal risks to JHIL’ was, according to his Honour, ‘at the
core of Mr Shafron’s responsibilities
as general
counsel.’[142] In that
capacity, Mr Shafron was regarded as having a ‘high degree of
responsibility’ at the board meeting on 15 February
2001 to protect JHIL
from legal risks flowing from the draft ASX
announcement.[143]
His Honour
rejected Mr Shafron’s argument that he had no duty to warn the board of
the emphatic statements in the draft ASX
announcement because, according to the
defendant, a reasonable director would be capable of assessing the statement as
false and
misleading. On the contrary, according to Gzell J, the duty to speak
was enlivened in such circumstances:
Mr Shafron had a duty to protect JHIL from legal risk and if the directors were minded to approve the release of the draft ASX announcement in its false and misleading form, there was the danger that JHIL would be in breach of ss 995(2) and 999. Against that harm it was [the] duty [of Mr Shafron] to warn the directors that [such an] announcement should not be released in its too emphatic form.[144]
Relying upon the objective test in s 180(1), Gzell J held that:
a reasonable person … who occupied the office of secretary and general counsel and had the same responsibilities within the corporation … would have advised the board that the draft ASX announcement was expressed in too
emphatic terms concerning the adequacy of … funding to meet all … asbestos claims and in that respect it was false or misleading[145]
Accordingly, in failing to warn of this jeopardy, Mr Shafron breached the
statutory duty of care and
diligence.[146]
Mr
Shafron’s failure to advise the board of the limited nature of the reviews
on the cashflow model undertaken by external consultants
also constituted a
breach of s 180(1), for the same reasons discussed earlier with respect to
the chief executive officer’s
failure to inform the board that the
cashflow model omitted to consider key
variables.[147]
Gzell J held that Mr Shafron had a ‘duty in protecting JHIL from legal
risk to [advise] the board of the limitations’
associated with the
cashflow model.[148]
Gzell J,
however, rejected a duty on the part of Mr Shafron to enquire into each
director’s opinion on the adequacy of funding
for the same reasons
discussed earlier relating to the chief executive
officer.[149]
His Honour also held that Mr Shafron did not breach s 180(1) with respect to the IM connected to the scheme of arrangement for the same reasons discussed earlier relating to the non-executive directors and the chief executive officer.[150]
For the reasons discussed above, Mr Shafron was held to breach s 180(1) for
failure to advise the board of its continuous disclosure
obligations.[151]
Gzell J found
that Mr Morley, who was appointed chief financial officer of JHIL, was also an
officer due to his ‘participation
… in far-reaching decisions of the
board’.[152] Mr Morley
‘attended all meetings of the board … in 2000 and 2001’ and
‘was responsible for all of the finance,
audit, tax and treasury aspects
of the James Hardie group’s
affairs.’[153] As with
Messrs Shafron and Macdonald, his Honour was satisfied that the chief financial
officer had a high degree of responsibility
with respect to the separation plan
and the draft ASX
announcement.[154]
Gzell J
upheld ASIC’s allegation that the chief financial officer breached
s 180(1) through failure to explain to the board
the limited nature of the
cashflow model reviews by the external consultants. His Honour agreed with
ASIC’s claim that Mr Morley’s
failure ‘to say anything [to the
board] to dispel an erroneous belief … that the reviews … were more
significant
than they were’ was a material omission to do
more.[155]
Engaging in an
analysis on this issue similar to that with respect to the conduct of the chief
executive officer and general counsel
described earlier, his Honour held that s
180(1) was breached by the chief financial officer for identical reasons,
concerning the
failure to address the limitations of the cashflow model and its
key assumptions. In Gzell J’s view, the ‘assumptions
upon which the
cashflow model was based were essential to its
integrity.’[156] According
to his Honour, if the directors were advised of the limitations underpinning the
cashflow model, it might have engendered
a ‘different attitude to the
draft ASX
announcement.’[157] His
Honour found that ‘it must have been obvious to Mr Morley, or at
least it ought to have been, that if nothing more was
said [to the board]
… the directors might act under the misapprehension that the reviews were
more significant than they
were.’[158] In this context,
it was incumbent upon the chief financial officer to have advised the board that
the review conducted was not unlimited
in
scope.[159]
Mr Morley, however,
was found not to have breached s 180(1) in respect of his role in the execution
of the DOCI. Gzell J rejected
ASIC’s claim that Mr Morley should have
secured greater funding for the two subsidiaries due to a lack of evidence that
the
agreed price was less than market value. Based on the evidence, his Honour
was satisfied that Mr Morley’s assessment of the
financial situation was
adequate.[160]
ASIC alleged that the central role played by Mr Macdonald in disseminating
false and misleading information on the sufficiency of
funding in the separation
plan evidenced a failure to act in good faith in the best interests of the
company and for a proper purpose,
as enshrined in s 181 of the
Corporations
Act.[161] Gzell J
rejected ASIC’s allegation that the chief executive officer had breached
s 181 through deliberate and repeated use of the phrase
‘fully-funded’ in press conference statements to justify and
influence
acceptance of the separation
proposal[162]
Gzell J reached this result
by favouring the test of subjective dishonesty in
Marchesi v Barnes[163]
as opposed to objective dishonesty in Australian Growth
Resources Corporation Pty Ltd v Van
Reesema[164] and found that Mr
Macdonald’s conduct may have been misguided and
‘overzealous’[165] but fell short
of the requirements to establish breach of s 181 since
there was no conflict between his personal interest and that of JHIL. He did not take advantage of his position to make a secret profit. … [Nor did he] misappropriate the company’s assets for himself. Like the non-executive directors in approving [the] draft ASX announcement, Mr Macdonald may have believed it was in the best interests of JHIL to be as emphatic as he could in selling the separation proposal.[166]
This conclusion was fortified by the fact that the ‘evidence [did] not establish that Mr Macdonald acted for an improper or collateral purpose.’[167] Based on this reasoning, Gzell J also rejected ASIC’s claim that Mr Macdonald’s role in the release of the false and misleading media announcements to the ASX on 23 February 2001 and 21 March 2001 was in breach of s 181(1).[168] Similarly, his Honour found that Mr Macdonald’s role with respect to the roadshow representations in Edinburgh and London did not constitute bad faith or evidence of acting for an improper purpose. His Honour was satisfied that, in all such instances, there was ‘no conflict between [the] personal interest’ of the chief executive officer and that of the company.[169]
In a separate judgment dealing with the civil penalty consequences of breach
of the law, Gzell J in Australian Securities and
Investments Commis-
sion v Macdonald [No 12] dismissed the
defendants’ applications to be exonerated from their contraventions,
pursuant to ss 1317S and 1318 of the Corporations
Act[170] These provisions confer
judicial discretion to grant relief from liability on the basis that the
defendants had ‘acted honestly’
and, in the circumstances,
‘ought fairly to be excused’ for their
contravention.
Significantly, Gzell J adopted a rigorous approach to the
application of the duty of care and diligence and held that the defendants
could
not be excused from liability despite the existence of the following
circumstances surrounding the decision-making at the key
board meeting on 15
February 2001:
1 ‘[t]he board meeting was attended by JHIL management and a number of external advisers [none of whom] raised any concerns about the content of the [draft ASX announcement]’;[171]
2 JHIL was in receipt of legal advice on issues surrounding the separation plan which addressed directors’ duties (but not the resolution to approve the draft ASX announcement);[172]
3 ‘there was contravention of standard practice’, which ‘required the approval of a draft press release by line management and senior executives before its provision to the board’;[173] and
4 it was a busy board meeting and the approval of the draft ASX announcement
by the non-executive directors, who had lengthy and accomplished
careers of
service on other boards, was an isolated
act.[174]
In denying relief
under such circumstances, Gzell J was influenced by the following key features
of the case:
This was a serious breach of duty and a flagrant one. The non-executive directors were endorsing JHIL’s announcement to the market in emphatic terms that the Foundation had sufficient funds to pay all legitimate present and future asbestos claims, when they had no sufficient support for that statement and they knew, or ought to have known, that the announcement would influence the market.[175]
Furthermore, while this event may have been an isolated one, it was
nonetheless a very significant event in the life of the company
and demanded
attention. His Honour was also influenced by the fact that reliance on advisers
was inappro-priate on the facts of this
case. According to his Honour, the task
before the board involved ‘no more than an understanding of the English
language used
in the
document.’[176]
In light
of these findings, Gzell J made the following disqualification orders under s
206C and imposed the following pecuniary penalties under s 1317G(1) of the
Corporations Act payable to the Commonwealth of
Australia:[177]
1 Mr Macdonald was banned from management for a period of 15 years and liable to pay a pecuniary penalty of $350 000;
2 Mr Shafron was banned from management for a period of 7 years and liable to pay a pecuniary penalty of $75 000;
3 Mr Morley was banned from management for a period of 5 years and liable to pay a pecuniary penalty of $35 000;
4 all of the seven non-executive directors were banned from management for a period of 5 years each and liable to pay a pecuniary penalty of $30 000 each; and
5 JHINV was liable to pay a pecuniary penalty of $80 000.
In a
separate judgment, Tobias JA in O’Brien v Australian
Securities and Investments Commission dismissed an
application brought by three of the defendants for a stay of the
disqualification orders.[178] The
need for general deterrence, which involves an element of public protection, and
the lack of adequate evidence to demonstrate
that the consequences of a refusal
of a stay would constitute an unacceptable burden on the defendants were
influential reasons in
the
decision.[179]
Macdonald is the latest decision to demonstrate corporate law’s
new-found love of s
180(1)[181]
and in many respects is in line with Australian authorities on the stringent
nature of directors’
duties.[182]
Although
Macdonald relied on some of the legal principles espoused by Brereton J
in Maxwell,[183] the
judicial approach adopted by Gzell J towards the enforcement of directors’
statutory duties represents a welcome departure
from the contentious
propositions expressed in
Maxwell.[184]
Brereton J was of the view in Maxwell that ‘it is a mistake to
think that [s 180 is] concerned with any general obligation owed by directors at
large to conduct
the affairs of the company in accordance with law generally or
the Corporations Act in
particular’.[185] According
to his Honour, part 2D.1 of the Act (which contains the directors’ duties)
is not directed to ‘securing compliance with the various requirements
of
the Corporations
Act.’[186] Gzell J in
Macdonald, on the other hand, appropriately linked the conduct of the
directors of JHIL to a breach of
s 180, which is consistent with the concept of community expectations as
fashioned by the courts[187] The judicial
attitude to shareholder acquiescence espoused in Maxwell towards breaches
of directors’ statutory duties, in effect, de-emphasises the public
interest function in setting minimum standards
of corporate managerial behaviour
and the role of public enforcement of statutory
duties[188]
Macdonald, with its concentrated focus on the statutory duty of
care and diligence, can be viewed as another step in the legal journey started
in the late 1980s which shifted the perception of directors from being passive
managers to being active monitors with an obligation
to stay informed about the
affairs of the company. Nearly two decades ago, tapping into community sentiment
following the corporate
greed of the 1980s, the law farewelled the concept of
the ‘sleeping’ or ‘passive’
director.[189]
Indeed, the following judicial observations, made in 1991, ring as true today as they as did then:
the community has of necessity come to expect more than formerly from directors … In response, the parliaments and the courts have found it necessary in legislation and litigation to refer to the demands made on directors in more exacting terms than formerly; and the standard of capability required of them has correspondingly increased.[190]
Any doubts that may have existed with regard to the application of a more
onerous duty of care to directors were dispelled in the
landmark decision of
Daniels v Anderson[191]
The courts have, since then, continued to map the contours of directors’
and officers’ duties of care, skill and diligence
with reference to the
role of the executive director[192] the
non-executive director[193] the
chai[194] and the chief financial
officer[195]
Macdonald, in focusing
the judicial spotlight on the conduct of management during decision-making, has
been hailed by ASIC as ‘a landmark
decision in Australia on corporate
governance.’[196] To the
extent that the decision in Macdonald provides boardrooms with important
guidance and direction on the practical application of directors’ duties
and sheds light
on the role of company secretaries and general counsel, it is a
landmark decision. However, from a jurisprudential point of view,
Macdonald does not add to the existing line of authorities on the duties
of directors. The significance of the case lies in its robust application
of
current legal principles and the manner in which it illuminates their operation
in the context of management of a publicly listed
company.
Attention is now
directed to the manner in which the decision in Macdonald contributes to
the mapping of the contours of directors’ and officers’ duties and
to the light it sheds on the relationship
between management and the board and
on their respective responsibilities.
Macdonald is significant for the legal treatment of non-executive directors for at least two reasons. First, it squarely addresses the expectations and performance standards expected of non-executive directors when entrusted with a specific task by management. Secondly, and of equal importance, it addresses and clarifies the extent to which directors are justified in trusting and relying upon officers of the company. The application of the reliance on management defence and the delegation defence is permitted by both the common law[197] and statute,[198] but its reach and application are uncertain. As noted by Gzell J, ‘[t]he law has not yet established the extent to which the position of a non-executive director shapes the content of the duty of care.’[199]
The decision helps clarify this position, albeit in a case where the facts
are unusual.
Macdonald, as discussed above in Part III(C), is in
alignment with a string of judicial authority which favours the equal treatment
of both executive and non-executive directors
in determining the standard of
care and diligence required. Consistent with the modern legal principles applied
by the courts in
NSW since Daniels v
Anderson,[200]
Macdonald suggests a swinging of the pendulum away from the lower
standard contemplated by Rogers CJ Comm D in AWA
Ltd v Daniels, where his Honour was of the view that a
board of non-executive directors ‘does not [ordinarily] expect to be
informed of the
details of how the company is managed’ and that such a
board would only expect to be informed of ‘anything untoward’
happening[201] His Honour was of the
following view:
In contrast to the managing director, non-executive directors are not bound to give continuous attention to the affairs of the corporation. Their duties are of an intermittent nature … [T]here is no objective standard of the reasonably competent company director to which they may aspire.[202]
Daniels v Anderson, which marks the stiffening of the
law on the duty of care, emphatically rejected the lower standard for
non-executive directors
and took the broader view that all directors have a
‘continuing obligation to keep informed about the activities of the
corporation’[203] and should
bring an independent judgement to bear on the various matters that come to the
board for decision.[204]
Furthermore, all directors are expected to ‘become familiar with the
fundamentals of the business in which the corporation
is
engaged’[205] and
‘take reasonable steps … to guide and monitor the management of the
company.’[206] These legal
principles were affirmed by the Court of Appeal in Adler v
Australian Securities and Investments
Commission[207] and were
influential in assessing the standard of care expected of the non-executive
directors in
Macdonald,[208]
notwithstanding judicial support for the alternative standard expressed in
AWA Ltd v
Daniels.[209]
In
favouring the line of authority which has expressed heightened expectations of
directors, it was open for Gzell J in Macdonald to find that the
non-executive directors failed to discharge their monitoring function
adequately, which included the task of monitoring
management’s attempts to
settle the terms of the draft ASX announcement. The extent of the board’s
duty to monitor was
enhanced by the facts of this case. The board was aware of
the strategic direction in which the company was headed by following the
separation plan and, moreover, the board was specifically entrusted with the
task of considering the draft ASX announcement prior
to its public release. The
board’s failure to speak against the announcement or take remedial action,
in such circumstances,
was fatal to its prospects of discharging the duty of
care and diligence.
The facts of the case also took the board’s duty to
monitor outside the realm of operational responsibility, for which the duty
to
monitor does not arise. The strategic nature of the separation plan, which was
to take the company in a new direction and divest
it of its asbestos
liabilities, ensured that the draft ASX announcement fell within the purview of
the board’s responsibility.
The salient lesson here is that a board is
expected to focus on matters brought before it and to seriously consider such
matters
and take appropriate action. Failure to engage in any of these tasks,
which demand critical and detailed attention, runs the real
risk of there being
a dereliction of duty and attracting the civil penalty provisions under the
Corporations Act.
Macdonald also sheds light on the operation of directors’ defences against a breach of the duty of care and diligence. In particular, the case affirms the modern approach to the reliance and delegation defences. In common with the approach in Daniels v Anderson, Macdonald rejected the greater latitude conferred on directors in AWA Ltd v Daniels, where Rogers CJ Comm D followed earlier authority on the operation of the reliance defence:
Reliance would only be unreasonable where the director was aware of circumstances of such a character, so plain, so manifest and so simple of appreciation that no person, with any degree of prudence, acting on his behalf, would have relied on the particular judgment information and advice of the officers …[210]
In noting that the reliance test offered in AWA Ltd v Daniels did not represent ‘modern company law’,[211] Macdonald highlights the limitations on the reliance defence by drawing on the judgment of Santow J in Adler, which identified, inter alia, the following factors as relevant in determining reasonableness of the reliance or delegation:
• ‘the function that has been delegated is such that it “may properly be left to” such [directors and] officers’;[212]
• ‘the extent to which the director [or officer] is put on inquiry, or given the facts of a case, should have been put on inquiry’;[213] and
• ‘the risk involved in the transaction’ and its
nature.[214]
Whilst these legal
principles surrounding the limitations on reliance and delegation are clear to
state, they are often difficult
to apply given the diversity of companies and
varieties of businesses, which defy a one-size-fits-all approach.
Unsurprisingly, the
application of this defence is uncertain and generally falls
to be determined on a case-by-case basis. Herein lies the significance
of
Macdonald, which applied these legal principles to the board of a large
publicly listed company that was assisted by management and external
experts
and, within that context, rejected both the delegation and reliance
defences.
The important lesson which emerges from Macdonald is that
directors cannot substitute reliance upon the advice of management in place of
their own attention and examination of a strategic
matter that falls within the
board’s responsibilities. The facts of this case demonstrate that
management had made plain that
they entrusted the board with the specific task
of vetting the draft ASX announcement, which, on the face of it, was misleading.
Consequently, each member of the board was charged with the responsibility of
attending to and focusing on an important strategic
matter and, under these
circumstances, could not delegate or
‘abdicate’[215] that
responsibility to others.
The peculiar facts of this case, however, warrant a
caution against generalisation and the need for all boards to examine each and
every ASX statement issued by the company (such as ‘run of the mill’
announcements). Macdonald is not authority for such an onerous
proposition. On the contrary, Gzell J
endorsed[216] the following
approach advocated by Santow JA in Vines v Australian
Securities and Investments Commission:
What is expected here is a level of scrutiny as befits supervision, not the
detailed direct involvement that is associated with operational responsibility. Where there is no cause for suspicion nor circumstances demanding critical and detailed attention, it is reasonable for an officer to rely on advice, without independently verifying the information or scrutinising the data or circumstances upon which that advice is based …[217]
The reach of the reliance and delegation defences is ultimately dependent on
the facts of each case. Subject to the decision on appeal,
this much is clear:
Macdonald signals the need for board attention and scrutiny when an ASX
statement or other type of key media communication is considered to
be a
strategic issue — as in the case of the unprecedented decision by James
Hardie to shelter its assets through transfer
of its asbestos
liabilities.
Macdonald also illustrates the risks in conducting a
defence by a director or officer who elects not to offer supporting evidence
beyond reliance
on documentation alone. The case illustrates that the reliance
defence in s 189 is of limited value to a defendant in such circumstances.
Without adequate explanation to shed light on ambiguous documents, the
court is
likely to be handicapped in its ability to make a proper assessment of whether
the necessary statutory criteria in the discharge
of the defence have been
satisfied.
It is trite to observe that the statutory defence in s 180(2)
(the business judgement rule) was unavailable to the non-executive directors due
to their chorus of non-recollection of having made
a decision at the key board
meeting. This defence is also of dubious benefit to a director or officer who
elects not to give oral
evidence addressing the extensive statutory
criteria.[218] Macdonald
demonstrates that reliance on documentation alone to determine, for example,
whether the defendant had a rational belief that a business
judgement was in the
best interests of the company can be fatal to the prospects of a successful
defence. Gzell J paid short shrift
to this defence raised by Mr Macdonald in the
absence of direct oral evidence to attach weight to the
document.[219] Directors and
officers need to be aware of the risks of such a strategy, adopted in
Macdonald, when contesting liability for breach of the duty of care and
diligence.
Ominously, for company secretaries, Gzell J in Macdonald rejected a narrow interpretation of s 180(1)(b), advanced by the defendant, which sought to confine the provision’s reach by limiting the assessment of the officer’s responsibilities by reference to the particular office. Gzell J, in reliance upon the interlocutory judgment of Australian Securities and Investments Commission v Rich (‘Rich (Strike-Out Application)’),[220] adopted a wider construction of the relevant words in s 180(1)(b) — ‘and had the same responsibilities within the corporation’ — and considered it necessary to have regard to every responsibility that officer had within the company.[221] The adoption of such a wide construction allowed his Honour to conclude that s 180(1)(b) ensures that all the responsibilities of a person occupying the office of secretary or general counsel are within the scope of the duty of care and diligence. It is submitted, with respect, that this approach is preferable to the narrow construction, because the functions performed by a company secretary or general counsel in one company may differ considerably from those performed in another company, as recognised by his Honour in the following passage:
The corporations legislation envisages certain functions for company secre-taries. One would readily infer that any company secretary had authority commensurate with those functions. Beyond that, however, one cannot make any assumptions about the authority of a particular company secretary in a particular context.[222]
This broader approach to the construction of s 180(1)(b) clears the way for the courts to focus on the range of responsibilities held by a company secretary or general counsel. Austin J, in Rich (Strike-Out Application), reaffirmed that ‘responsibilities’
is a wid[e] concept, referring to the acquisition of responsibilities not only through specific delegation but also through the way in which work is distri-buted within the corporation in fact, and the expectations placed by those
arrangements on the shoulders of the individual director [or officer][223]
It is trite to observe, based on this expansive judicial approach, that a higher level of potential liability will flow commensurate with a higher level of corporate responsibility held by a director or officer. Viewed in this context, and given the pivotal role played by Mr Shafron in the board’s deliberations and wider management, it is unsurprising to see an elevation in performance standards required in the conduct of his office.
The decision in Macdonald illustrates the consequences of the growing
role of general counsel in management of a company and their wider participation
in the
company’s affairs. In such circumstances, general counsel will
attract the label of company officer and the attendant duties
and liabilities
that flow from such a management position. Furthermore, as general counsel, it
appears that the duty to guard the
company against legal risks is expansive in
scope. Gzell J in Macdonald suggested that the ambit of general
counsel’s duty went beyond protecting the company from infringement of
statutory obligations,
such as the continuous disclosure laws. According to his
Honour, the duty to guard against legal risks extended to corporate reputational
risk and the risk of harm arising from market perception of the
company.[224]
Moreover, it is
inadequate for general counsel to dismiss key issues as being self-evident and,
therefore, fail to draw management’s
attention to it. Macdonald
demonstrates the court’s intolerance of such an attitude. Despite the
self-evident nature of the emphatic language in the draft
ASX announcement,
Gzell J was still prepared to impose a duty of care on general counsel to warn
the board of potential harm as part
of the duty owed to the company to avoid
legal risks which may jeopardise its interests.
The fact that the company had
internal mechanisms to deal with questions of continuous disclosure was also of
cold comfort to general
counsel. The imposition of liability underscores the
need for general counsel to have a ‘degree of awareness and sensitivity
to
the need to consider regulatory obligations as a routine incident of corporate
decision-making.’[225]
Continuous disclosure is fundamental to the integrity of the Australian securities market and a key factor in investor protection. In the second reading speech introducing the Corporate Law Reform Bill 1992 (No 2) (Cth), the Minister for Administrative Services offered the following policy considerations as underpinning the continuous disclosure regime:
An effective disclosure system will often be a significant inhibition on questionable corporate conduct. Knowledge that such conduct will be quickly exposed to the glare of publicity, as well as criticism by shareholders and the financial press, makes it less likely to occur in the first place.
In essence, a well informed market leads to greater investor confidence and in turn to a greater willingness to invest in Australian business.[226]
Macdonald emphasises the need for companies to take their continuous
disclosure obligations seriously when dealing with price-sensitive information.
The failure of JHIL to disclose the DOCI information to the ASX in a timely
fashion and to achieve an informed market for its securities
was a flagrant
breach of ASX Listing Rules r 3.1 and s 1001A(2) of the
Corporations Law. Similarly, the failure of JHINV to inform the
market of the cancellation of the partly paid shares, which the investing public
would
have regarded as having a material effect on the share price, was also a
flagrant breach of s 674(2) of the Corporations
Act.
Furthermore, the decision in Macdonald is significant for
the guidance it offers on the operation of the law on continuous disclosure by
rejecting the view that a complex
series of filings with ASIC discharges the
statutory obligation under s 674. It cannot be said, on the basis of such a
convoluted filing practice (and given the requirement to pay a search fee to
access filed
information), that the company is exempt from disclosure because
the information released is generally available to and readily observable
by the
public.[227] Public access to
information, in such circumstances, is either hindered or obscured and fails the
statutory test for exemption. Nor
is the company’s obligation to disclose
discharged if it files documents with ASIC as required by statute for other
purposes.[228] Preclusion in this
manner demonstrates the importance attached in Macdonald to continuous
disclosure obligations.
The consequences of breach of s 674 of the
Corporations Act are not only harmful for the company, due to
reputational loss and sanctions, but extend to individual officers as well.
Macdonald is also instructive, in this context, for the performance
standards expected of the chief executive officer and general counsel in
discharging the statutory obligation of the company. Significantly, breach of
the continuous disclosure requirement under s 674(2) of the Corporations
Act attracts the civil penalty provisions and allows for, inter alia, the
disqualification of individual directors. Equally importantly,
as evidenced in
Macdonald, the failure of the chief executive officer and general counsel
to advise the chair or the board of the need to make disclosure of
information
to the ASX impacted adversely on these company officers.
The conduct of both
officers, in such circumstances, constituted breach of the statutory duty of
care and diligence. Ominously for
general counsel, Gzell J was prepared to find
liability notwithstanding that: (a) the continuous disclosure obligation should
have
been readily apparent to the chief executive officer and the non-executive
directors, and (b) the company had internal mechanisms
to deal with questions of
continuous disclosure. This finding underscores the requirement for ‘a
degree of awareness and sensitivity
to the need to consider regulatory
obligations as a routine incident of corporate decision-making’, as
recommended by French
J in Re Chemeq Ltd; Australian
Securities and Investments
Commission v Chemeq Ltd (‘Re
Chemeq
Ltd’).[229]
Directors
and officers, in discharging the company’s obligations under the
continuous disclosure regime, should be mindful of
the risks involved in
adopting a cavalier attitude to disclosure. The dangers are spelt out clearly in
Re Chemeq Ltd: ‘those who play calculated
risk games of non-disclosure in the shadow of the [continuous disclosure] rules
cannot expect indulgence
from the courts if their assessments are not
accepted.’[230]
Given its complexity, the large cast and the multiple breaches of law, it is
worth distilling the principles and salient lessons for
sound corporate
governance practices flowing from this mammoth case.
Macdonald, as a
baseline matter, is a lesson for passive and compliant boards which approve
resolutions without exercising the degree of care
and diligence required. It
signals that there is no place for a ceremonial board which merely serves to
rubber-stamp management decisions.
The underlying theme is the need for boards
to be more vigilant, diligent and careful in the conduct of their monitoring
role. The
following important points for effective boardroom governance practice
emerge from Macdonald:
• The board should have a formal, comprehensive agenda and make decisions by passing formal resolutions. Abstention of votes should be recorded.
• The board should ensure that minutes are properly recorded and are a full and accurate record of what was discussed and decided; otherwise, it runs the risk of losing the special evidentiary value of the minute book.[231] The value of strict compliance and recording minutes contemporaneously is underscored by Gzell J:
One thing that has emerged clearly in this case is that recollection is fallible. If a minute is to be given evidentiary value, it ought to be a contemporaneous document, for then it is more likely to be an accurate reflection of the proceedings of the meeting rather than a reconstruction of them.[232]
• If management brings a matter before the board for its consideration, the directors are not allowed to abdicate responsibility by delegating their duty to a fellow director. The express referral to the board by management provides all the more reason for a detailed consideration by each director of the matters raised and, consequentially, elevates the standards required to discharge the duty of care and diligence. In such circumstances, where the board accepts the task, the board has a duty to pay attention and make relevant enquiries should the information be deficient.
• Significant decisions, such as those impacting on the company’s reputation or risk of harm, should be considered by the board rather than delegated.
• Directors who are not physically present at a board meeting but participate, for example by telephone, should ensure that they have the same documents as their co-directors or should take steps to satisfy themselves that the absence of the document is not material to the matters before the board. If the director cannot achieve full and effective participation through familiarising themselves with issues before the board, they should formally abstain. The latter point underscores the need for a director’s full attention to matters before the board.
• Communications strategy, particularly in relation to substantial
developments in the company, should be taken seriously and
vetted for accuracy.
Significantly, the board ought to be aware that disclaimers in a document are of
little value where misrepresentation
has been established on the face of the
document.[233]
Macdonald
is also instructive for the guidance it offers on the role of general
counsel:
• The core responsibility of general counsel is to protect the company from legal risk, which extends to reputational harm.
• Where board papers do not address continuous disclosure issues, but
such issues are a relevant matter for consideration, it
is the duty of general
counsel to direct the board’s attention to them regardless of other
mechanisms in place.
Consistent with existing authority, Macdonald
also affirms the following legal principles that are of relevance to directors
and officers:
• The degree of negligence required to establish a breach of s 180(1) is not higher than that which would support a similar finding at common law.[234]
• All directors have a continuing obligation to guide and monitor the management of the company and to keep informed about its activities. This means, in particular, that non-executive directors must be fully informed on any proposal before the board.
• Overzealous and misguided conduct does not necessarily equate to a director’s breach of the requirement in s 181 to act in good faith and for a proper purpose. The courts favour the application of a subjective test to determine dishonesty and breach of s 181 which is directed ‘to prevent[ing] abuses of directors’ powers for their own or collateral purposes.’[235] Directors may take some comfort that, for purposes of s 181, ‘[t]he issue is not whether a management decision was good or bad’.[236]
• The statutory definition of ‘officer’ in s 9 of the
Corporations Act is applicable to a person who has a ‘real
and direct’ participation in management ‘but not necessarily in a
role
in which ultimate control is exercised, although it would have to be more
than the administrative carrying out of
orders’.[237]
The lessons
from the James Hardie experience are not, however, purely legal. Other salient
lessons concern the need for ethical standards
and increased social
responsibility.[238] The strategy
embarked upon by James Hardie to divest itself of its asbestos liabilities has
been described by the Australian Council
of Trade Unions as ‘one of the
most morally and legally repugnant acts in Australian corporate
history.’[239] Although the
actions of the James Hardie group are not
unprecedented,[240] the conscience
of the former directors of JHIL, in relation to strategic behaviour in the
separation plan and the limited funding
set aside to meet the claims of its
asbestos victims, has been found to be sorely
wanting.[241] The extent of the
company’s patent failure to observe corporate social responsibility norms
was crystallised in the following
observation in the Jackson
Report:
The notion that the holding company would make the cheapest provision thought ‘marketable’ in respect of those [asbestos] liabilities so that it could go off to pursue its other more lucrative interests insulated from those liabilities is singularly unattractive. Why should the victims and the public bear the cost not provided for?[242]
It would appear that the directors of James Hardie also failed the basic moral test expected of directors — namely, as articulated by a former judge, to be ‘the guiding hand and conscience of a company’.[243]
The value of Macdonald, for corporate governance, lies in its
contribution to outlining the contours in the cartography of the duty of care
and diligence,
with particular reference to the role of non-executive directors,
company secretaries and general counsel when considering strategic
issues.
The decision in Macdonald underscores the need for boards to
pay attention to key aspects of corporate governance, including risk management,
due diligence
and compliance. The non-executive directors’ substandard
conduct in Macdonald signals the risks associated with an attitude that
shows a readiness to go through the motions and a failure to consider the real
issues. The case also exposes the risks associated with the board’s
failure to be actively engaged and take their monitoring
role seriously and,
together with the civil penalty provisions, has large potential to improve the
deterrence calculus, as shown
in the disqualification orders in
Australian Securities and Investments
Commission v Macdonald [No 12].
In
the United States, according to one commentator, the judicial approach to
‘directors’ liability at the turn of the
twenty-first century seems
to be, if anything, an ideal with no practical
effect.’[244] In contrast,
the Australian experience, particularly in the last two decades, has seen a
robust approach to enforcement of directors’
duties that has changed the
contours of the duty of care and diligence. Notwithstanding the corporate
regulator’s mega-loss
in Australian Securities and
Investments Commission v
Rich,[245] the civil
penalty provisions will continue to propel the majority of litigation given that
directors’ statutory duties are
inextricably intertwined with part 9.4B of
the Corporations
Act.[246] The wave of
investigations[247] and litigation
alleging breach of directors’ statutory duties in a variety of contexts,
ranging from approval of misleading
financial reports in Centro
Properties[248] and ASX
announcements in Fortescue Metals
Group[249] to causing reputational
harm by engaging in corporate conduct contrary to UN resolutions in
AWB,[250] ensure that
Macdonald will not be the last word on, or provide the last lessons for,
Australian corporate governance practices.
[*] [2009] NSWSC 287; (2009) 256 ALR 199.
[†] BA, LLB (Natal), LLM (Monash); Associate Professor, School of Business Law and Taxation, Australian School of Business, The University of New South Wales.
[1] ASX Corporate Governance Council, Corporate Governance Principles and Recommendations (2nd ed, 2007) 3, from which this definition is adapted for purposes of this case note.
[2] See generally Michael C Jensen and William H Meckling, ‘Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure’ (1976) 3 Journal of Financial Economics 305. The agency costs consist of, inter alia, expenses associated with monitoring activities by and on behalf of the shareholders in order to limit the non-wealth-maximising activities of managers: at 308.
[3] Adolf A Berle Jr and Gardiner C Means, The Modern Corporation and Private Property (1932) 3–7.
[4] Ibid 6–7.
[5] Corporations Act 2001 (Cth) s 198A.
[6] Donald C Langevoort, ‘The Human Nature of Corporate Boards: Law, Norms, and the Unintended Consequences of Independence and Accountability’ (2001) 89 Georgetown Law Journal 797, 802.
[7] Jill E Fisch, ‘Taking Boards Seriously’ (1997) 19 Cardozo Law Review 265, 268–70.
[8] For discussion on the rationale and development of directors’ statutory duties in Australia, see Jason Harris, Anil Hargovan and Janet Austin, ‘Shareholder Primacy Revisited: Does the Public Interest Have Any Role in Statutory Duties?’ (2008) 26 Company and Securities Law Journal 355.
[9] See generally R P Austin and I M Ramsay, Ford’s Principles of Corporations Law (14th ed, 2010) 363–4.
[10] For discussion on the balance between the two roles, see Tamar Frankel, ‘Corporate Boards of Directors: Advisors or Supervisors?’ (2008) 77 University of Cincinnati Law Review 501.
[11] Department of Premier and Cabinet (NSW), Report of the Special Commission of Inquiry into the Medical Research and Compensation Foundation (2004) (‘Jackson Report’).
[12] Ibid vol 1, 59 (citations omitted).
[13] Ibid vol 1, 18 fn 4.
[14] Ibid vol 1, 17–18.
[15] Ibid vol 1, 18.
[16] There have been many changes in the identity and names of the James Hardie companies over the years. This case note, however, will refer to the three companies relevant for purposes of this discussion as ‘James Hardie Industries Ltd’ (or ‘JHIL’), ‘Amaca’ and ‘Amaba’.
[17] Jackson Report, above n 11, vol 1, 18–19.
[18] Ibid vol 1, 23–4 (citations omitted).
[19] Ibid vol 1, 340 (citations omitted).
[20] See Australian Accounting Standards Board, Provisions and Contingencies, Exposure Draft No 88, December 1997.
[21] Jackson Report, above n 11, vol 1, 25–6.
[22] Ibid vol 1, 26.
[23] Ibid vol 1, 19.
[24] Ibid (citations omitted).
[25] Ibid vol 1, 25.
[26] See generally Salomon v Salomon & Co Ltd [1897] AC 22.
[27] See Walker v Wimborne [1976] HCA 7; (1976) 137 CLR 1, 6–7 (Mason J); Industrial Equity Ltd v Blackburn [1977] HCA 59; (1977) 137 CLR 567, 575–7 (Mason J). The question whether existing laws concerning the operation of limited liability or the corporate veil within corporate groups require reform falls outside the scope of this case note. There is, however, a wealth of literature that explores this relevant question highlighted by the James Hardie experience: see generally Frank H Easterbrook and Daniel R Fischel, ‘Limited Liability and the Corporation’ (1985) 52 University of Chicago Law Review 89; Phillip I Blumberg, ‘Limited Liability and Corporate Groups’ (1986) 11 Journal of Corporation Law 573; Phillip I Blumberg, ‘The Transformation of Modern Corporation Law: The Law of Corporate Groups’ (2005) 37 Connecticut Law Review 605; Kurt A Strasser, ‘Piercing the Veil in Corporate Groups’ (2005) 37 Connecticut Law Review 637; Anil Hargovan and Jason Harris, ‘Piercing the Corporate Veil in Canada: A Comparative Analysis’ (2007) 28 Company Lawyer 58; Peter Prince, Jerome Davidson and Susan Dudley, ‘In the Shadow of the Corporate Veil: James Hardie and Asbestos Compensation’ (Research Note No 12, Parliamentary Library, Parliament of Australia, 2004). The deficiencies in Australian corporate law concerning the operation of limited liability within corporate groups were noted in the Jackson Report, above n 11, vol 1, 571–3.
[28] Jackson Report, above n 11, vol 1, 28.
[29] Ibid vol 1, 28, 329–31.
[30] Corporations Act 1989 (Cth) s 82 (‘Corporations Law’). See Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 207–8 (Gzell J).
[31] Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 208 (Gzell J).
[32] Ibid.
[33] Ibid 209.
[34] This point was contested, unsuccessfully, by the 10 former directors and officers who claimed that they had no recollection of this document being tabled at the board meeting: ibid 239; see also at 240–5.
[35] ASX, ‘James Hardie Resolves Its Asbestos Liability Favourably for Claimants and Shareholders’ (Media Release No 228763, 16 February 2001), quoted in ibid 229.
[36] Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 212–13 (Gzell J).
[37] Ibid 213.
[38] Corporations Act s 411.
[39] Jackson Report, above n 11, vol 1, 32–3. James Hardie, ironically, has offered a similar reason for its plan, subject to approval at a meeting of shareholders anticipated in early 2010, to move its corporate domicile from the Netherlands to Ireland following approval by the Commonwealth Treasurer: see ‘James Hardie Cleared for Ireland Move’, The Sydney Morning Herald (online), 22 September 2009.
[40] See Jackson Report, above n 11, vol 1, 34.
[41] Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 211–12 (Gzell J). Management of JHIL did not alert the Court to the Foundation’s concerns over the inadequacy of the initial funding and the Foundation’s fears of being unable to meet the claims of all asbestos victims, which were expressed by the Foundation in a director’s letter dated 24 September 2001: ibid vol 1, 34–5. Santow J approved the scheme under these circumstances: see Re James Hardie Industries Ltd [2001] NSWSC 888; (2001) 39 ACSR 552.
[42] Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 211 (Gzell J). The five non-executive directors present were Mr Brown, Mr Gillfillan, Ms Hellicar, Mr Koffel and Mr Willcox.
[43] Ibid 212.
[44] Ibid.
[45] It was argued that, at the time of the application, the Foundation was insolvent in a ‘practical and commercial sense’ because it was likely to not be able to meet future asbestos-related liabilities: Edwards v A-G (NSW) [2004] NSWCA 272; (2004) 60 NSWLR 667, 682 (Young CJ in Eq).
[46] See, eg, Corporations Act s 588G.
[47] Jackson Report, above n 11, vol 1, 8.
[48] Ibid vol 1, 7.
[49] Ibid vol 1, 63.
[50] Ibid vol 1, 9.
[51] Ibid vol 1, 12.
[52] Ibid vol 1, 8.
[53] Ibid vol 1, 10. The Commissioner remarked incredulously:
I find it difficult to accept that management could really have believed that the funds of the Foundation would have been sufficient … [y]et that was the message that JHIL propounded, … the day after separation, to the [ASX], to government, the media, its shareholders, unions, plaintiffs’ solicitors, asbestos victims and anybody else it felt the need to convince.
[54] Ibid vol 1, 356.
[55] Ibid vol 1, 351.
[56] The investigation ‘spanned three countries (the United States, the United Kingdom and Australia) and … involved about 348 billion documents, 72 examinations and the issuing of 284 notices to obtain evidence’: ASIC, ‘ASIC Commences Proceedings Relating to James Hardie’ (Media Release No 07-35, 15 February 2007).
[57] In relation to non-executive directors, ‘ASIC concluded that the evidence was not of a nature sufficient to refer any matter’ to the Commonwealth Director of Public Prosecutions (‘CDPP’) for criminal prosecution: ASIC, ‘James Hardie Group Civil Action’ (Media Release No 08-201, 5 September 2008). ASIC did, however, refer briefs to the CDPP ‘in respect of certain individuals’ but agreed with the CDPP’s ‘conclusion that there was an insufficient basis to commence any criminal proceedings.’
[58] Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 206 (Gzell J). The non-executive directors were Mr Brown, Ms Hellicar, Mr Gillfillan, Mr Koffel, Mr O’ Brien, Mr Terry, and Mr Willcox.
[59] Ibid 206–7.
[60] Ibid 207. Section 1001A(2) of the Corporations Law, carried over into Corporations Act s 1001A(2) until its repeal in 2002 (by Financial Services Reform Act 2001 (Cth) sch 1 item 1), dealt with breach of continuous disclosure obligation.
[61] Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 208 (Gzell J).
[62] Ibid 209.
[63] Ibid.
[64] Ibid.
[65] Ibid 210. Section 181 of the Corporations Law (now s 181 of the Corporations Act) requires directors and officers of a corporation to exercise their powers and discharge their duties ‘in good faith in the best interests of the corporation’ and ‘for a proper purpose’.
[66] Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 210 (Gzell J). Section 995(2) of the Corporations Law, carried over into Corporations Act s 995(2) until its repeal in 2002 (by Financial Services Reform Act 2001 (Cth) sch 1 item 1), was modelled on s 52 of the Trade Practices Act 1974 (Cth) and prohibited misleading or deceptive conduct in connection with securities. A similar provision to Corporations Law s 995(2) exists in Corporations Act s 1041H(1).
[67] Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 210 (Gzell J). Section 999 of the Corporations Law, carried over into Corporations Act s 999 until its repeal in 2002 (by Financial Services Reform Act 2001 (Cth) sch 1 item 1), prohibited making statements or disseminating information in relation to securities that was false or misleading.
[68] Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 212–13 (Gzell J).
[69] Ibid 213. Section 1041E of the Corporations Act prohibits false or misleading statements which induce persons to, inter alia, apply for or dispose of financial products.
[70] Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 213 (Gzell J). Section 1041H of the Corporations Act prohibits misleading or deceptive conduct in relation to a financial product.
[71] Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 214–15 (Gzell J). Section 674(2) of the Corporations Act deals with a listed disclosing entity’s continuous disclosure obligations.
[72] Macdonald [2009] NSWSC 287; (2009) 256
ALR 199, 258–60 (Gzell J). See also National Exchange
Pty
Ltd v Australian Securities and
Investments Commission (2004) 49 ACSR 369, 373–4
(Dowsett J); Ingot Capital Investments Pty
Ltd v Macquarie Equity Capital Markets
Ltd [2008] NSWCA 206; (2008) 252 ALR 659, 667 (Giles JA).
[73] Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 258–9.
[74] Ibid 260–3.
[75] See ibid 260–2.
[76] See ibid 262–79.
[77] Ibid 377.
[78] Ibid 218.
[79] Ibid 245, quoting Australian Securities and Investments Commission v Maxwell [2006] NSWSC 1052; (2006) 59 ACSR 373, 397–8 (Brereton J). See also Vines v Australian Securities and Investments Commission (2007) 62 ACSR 1, 34–5 (Spigelman CJ) (‘Vines’).
[80] Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 245–7.
[81] [2006] NSWSC 1052; (2006) 59 ACSR 373.
[82] Ibid 397 (citations omitted). See also Daniels v Anderson (1995) 37 NSWLR 438, 602 (Powell JA); Australian Securities and Investments Commission v Adler [2002] NSWSC 171; (2002) 168 FLR 253, 347 (Santow J) (‘Adler’).
[83] Maxwell [2006] NSWSC 1052; (2006) 59 ACSR 373, 397 (Brereton J) (citations omitted). See also Vrisakis v Aust-ralian Securities Commission (1993) 9 WAR 395, 448–50 (Ipp J) (‘Vrisakis’); Australian Securities and Investments Commission v Doyle [2001] WASC 187; (2001) 38 ACSR 606, 641 (Roberts-Smith J); Australian Securities and Investments Commission v Sydney Investment House Equities Pty Ltd [2008] NSWSC 1224; (2008) 69 ACSR 1, 9–12 (Hamilton J).
[84] See Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 249–50.
[85] See (1992) 7 ACSR 759, 866–7.
[86] (1995) 37 NSWLR 438, 502.
[87] Ibid 501.
[88] Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 245–50, citing Statewide Tobacco Services Ltd v Morley (1990) 2 ACSR 405; Group Four Industries Pty Ltd v Brosnan (1992) 59 SASR 22; Vrisakis (1993) 9 WAR 395; Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187; Adler [2002] NSWSC 171; (2002) 168 FLR 253; Maxwell [2006] NSWSC 1052; (2006) 59 ACSR 373; Vines (2007) 62 ACSR 1.
[89] [2002] NSWSC 171; (2002) 168 FLR 253.
[90] Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 250 (Gzell J), quoting ibid 347 (Santow J).
[91] Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 250.
[92] Ibid 247.
[93] Ibid 250–1.
[94] Ibid.
[95] Ibid 259–60.
[96] Ibid 261.
[97] Ibid.
[98] Ibid (emphasis added).
[99] Ibid.
[100] Ibid.
[101] Ibid 245.
[102] Ibid.
[103] Ibid 261.
[104] Ibid 262 (Gzell J).
[105] Ibid.
[106] Ibid.
[107] Ibid 251, quoting Mr Gillfillan’s statements during trial.
[108] Ibid 314–40.
[109] Ibid 339.
[110] Ibid. Gzell J relied upon Northside Developments Pty Ltd v Registrar-General (NSW) [1990] HCA 32; (1990) 170 CLR 146, 205 (Dawson J).
[111] Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 339, quoting Stirling Resources NL v Capital Energy NL (1996) 14 ACLC 1005, 1010 (Hill J).
[112] Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 248, quoting Adler [2002] NSWSC 171; (2002) 168 FLR 253, 347–8 (Santow J), which in turn cited Daniels v Anderson (1995) 37 NSWLR 438, 502–3 (Clarke and Sheller JJA).
[113] Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 251 (emphasis added).
[114] Ibid 259.
[115] Ibid 251.
[116] Ibid 262.
[117] Ibid.
[118] Ibid 262–3.
[119] Ibid 263.
[120] Ibid.
[121] Ibid.
[122] Ibid.
[123] Ibid.
[124] Ibid 264–5.
[125] Ibid 265.
[126] Ibid.
[127] Ibid.
[128] Ibid.
[129] Ibid 264.
[130] Ibid 353.
[131] See above nn 108–9 and accompanying text.
[132] Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 340–2.
[133] Ibid 280–1 (Gzell J).
[134] Ibid 289, 292.
[135] Ibid 288.
[136] Ibid 288–9.
[137] Ibid 370.
[138] Ibid 371–2.
[139] Ibid 269.
[140] Ibid, citing Commissioner for Corporate Affairs v Bracht [1989] VicRp 72; [1989] VR 821, 831 (Ormiston J). See also Corporations Act s 9 (definition of ‘officer’).
[141] Corporations Act ss 180–3, which provide that duties are imposed on officers as well as directors.
[142] Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 269.
[143] Ibid 270 (Gzell J).
[144] Ibid.
[145] Ibid 271.
[146] Ibid.
[147] Ibid 271–2. See above nn 125–7 and accompanying text.
[148] Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 271.
[149] Ibid 267. See above nn 122–3 and accompanying text.
[150] Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 342. See above nn 108–9, 131 and accompanying text.
[151] Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 289–92 (Gzell J).
[152] Ibid 273.
[153] Ibid.
[154] Ibid 273–4.
[155] Ibid 276.
[156] Ibid 275.
[157] Ibid.
[158] Ibid.
[159] Ibid 276–7.
[160] Ibid 292–8.
[161] Ibid 304–6.
[162] Ibid 306.
[163] [1970] VicRp 56; [1970] VR 434, 438 (Gowans J).
[164] (1988) 13 ACLR 261, 270–1 (King CJ).
[165] Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 306 (Gzell J).
[166] Ibid.
[167] Ibid.
[168] Ibid 309, 313.
[169] Ibid 355.
[170] (2009) 259 ALR 116.
[171] Ibid 129.
[172] Ibid 130.
[173] Ibid 129.
[174] See ibid 130.
[175] Ibid 133–4.
[176] Ibid 129.
[177] Ibid 201–2.
[178] [2009] NSWCA 312; (2009) 74 ACSR 324.
[179] See ibid 343–4 (Tobias JA).
[180] Some of the defendants in Macdonald have lodged an appeal: ‘James Hardie Appeals Court Rulings’, ABC News (online), 23 September 2009. The discussion in this part is predicated on the original decision being upheld.
[181] See Anil Hargovan, ‘Corporate Law’s New Love: Section 232(4) and the Director’s Duty of Care’ (1994) 3 Asia Pacific Law Review 20. Prior to the insolvent trading cases in the late 1980s, which articulated higher standards of care, there was a dearth of reported cases on directors’ statutory duties of care and diligence: at 21–8.
[182] For a useful collection of legal principles on the modern standards required for diligence and skill, see Australian Securities and Investments Commission v Rich [2009] NSWSC 1229; (2009) 236 FLR 1, 127–34 (Austin J) (‘Rich’). Note, however, the different approaches to the statutory standard of skill required by directors and officers in Rich (an objective standard) compared to the lesser (corporation-specific) standard expressed in Maxwell [2006] NSWSC 1052; (2006) 59 ACSR 373, 397–8 (Brereton J), and adopted in Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 245–7 (Gzell J).
[183] See above Part III(C).
[184] For a more detailed discussion of these propositions, see Harris, Hargovan and Austin, above n 8, 357–9, 362–72.
[185] [2006] NSWSC 1052; (2006) 59 ACSR 373, 399. Compare the approach in Australian Securities and Investments Commission v Narain [2008] FCAFC 120; (2008) 169 FCR 211, 217, where Finkelstein J held it was open for ASIC to prove a director’s breach of s 180(1) for ‘having caused [his company] to contravene s 1041H’ in instructing the release of a misleading ASX announcement.
[186] Maxwell [2006] NSWSC 1052; (2006) 59 ACSR 373, 400.
[187] See Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115, 126 (Tadgell J), and Australian Securities and Investments Commission v Rich [2003] NSWSC 85; (2003) 174 FLR 128, 147 (Austin J) (‘Rich (Strike-Out Application)’), where the courts have emphasised the role of ‘contemporary community expectations’ in elevating the standard of care and diligence expected of directors.
[188] A similar charge, it would appear, can be made to the approach in Rich [2009] NSWSC 1229; (2009) 236 FLR 1, 134 (Austin J), where it is arguable that tacit support has been offered to the propositions in Maxwell. See Harris, Hargovan and Austin, above n 8, 356, for a more detailed discussion on the ‘fundamental purpose and rationale of directors’ statutory duties’.
[189] See generally Statewide Tobacco Services Ltd v Morley (1990) 2 ACSR 405; Morley v Statewide Tobacco Services Ltd [1993] VicRp 32; [1993] 1 VR 423. For discussion on the changing attitudes to and expectations of the modern director, see Hargovan, above n 181; A S Sievers, ‘Farewell to the Sleeping Director — The Modern Judicial and Legislative Approach to Directors’ Duties of Care, Skill and Diligence’ (1993) 21 Australian Business Law Review 111; A S Sievers, ‘Directors’ Duty of Care: What Is the New Standard?’ (1997) 15 Company and Securities Law Journal 392; Julie Cassidy, ‘An Evaluation of Section 232(4) of the Corporations Law and the Directors’ Duty of Due Care, Skill and Diligence’ (1995) 23 Australian Business Law Review 184.
[190] Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115, 126 (Tadgell J).
[192] See Adler [2002] NSWSC 171; (2002) 168 FLR 253.
[193] See Elliott v Australian Securities and Investments Commission [2004] VSCA 54; (2004) 10 VR 369.
[194] See Rich (Strike-Out Application) [2003] NSWSC 85; (2003) 174 FLR 128.
[195] See Vines (2007) 62 ACSR 1.
[196] ASIC, ‘James Hardie Proceedings’ (Media Release No 09-69, 23 April 2009).
[197] For a useful collection of the principles surrounding the reasonableness of reliance or delegation, see Adler [2002] NSWSC 171; (2002) 168 FLR 253, 347–8 (Santow J).
[198] Corporations Act s 189 allows for reliance by directors on information or advice provided by others. Section 198D permits delegation to, inter alia, a committee of directors, a company employee or any other person.
[199] Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 249. His Honour quoted with approval an explanation for this result proffered by the learned authors in Austin and Ramsay, above n 9, 444: ‘Part of the reason is the absence of any shared body of detailed expert knowledge of what is involved in the directing of companies. The diversity of companies and varieties of business endeavour are such as to allow uniformity of standards only on very general matters.’
[201] (1992) 7 ACSR 759, 867.
[202] Ibid. Rogers CJ Comm D (at 866) relied upon Re City Equitable Fire Insurance Co Ltd [1925] Ch 407, 426 (Romer J).
[203] (1995) 37 NSWLR 438, 503 (Clarke and Sheller JJA).
[204] Ibid 500–4.
[205] Adler (2002) 158 FLR 253, 347 (Santow J).
[206] Daniels v Anderson (1995) 37 NSWLR 438, 501 (Clarke and Sheller JJA).
[207] [2003] NSWCA 131; (2003) 179 FLR 1, 116–17 (Giles JA); see also at 5 (Mason P and Beazley JA).
[208] See [2009] NSWSC 287; (2007) 256 ALR 199, 250 (Gzell J).
[209] Ipp J in Vrisakis (1993) 9 WAR 395, 452, however, added the caveat that the judicial remarks in AWA Ltd v Daniels were ‘statements of broad principle alone and act merely as signposts’ in determining the particular standard of care. These remarks were repeated in Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187, 240 (Ipp J).
[210] (1992) 7 ACSR 759, 868 (citations omitted). The origin of this extract can be traced back to The Overend & Gurney Co v Gibb [1872] UKLawRpHL 3; (1872) LR 5 HL 480, 486–7 (Lord Hatherley LC).
[211] [2009] NSWSC 287; (2009) 256 ALR 199, 248 (Gzell J), quoting Daniels v Anderson (1995) 37 NSWLR 438, 502 (Clarke and Sheller JJA).
[212] Adler [2002] NSWSC 171; (2002) 168 FLR 253, 348, quoting Re City Equitable Fire Insurance Co Ltd [1925] Ch 407, 429 (Romer J).
[213] Adler [2002] NSWSC 171; (2002) 168 FLR 253, 348, citing Re Property Force Consultancy Pty Ltd (in liq) [1997] 1 Qd R 300.
[214] Adler [2002] NSWSC 171; (2002) 168 FLR 253, 348, citing Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187. Santow JA restated these propositions in Vines (2007) 62 ACSR 1, 149, upon which Gzell J then relied in Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 248–9.
[215] Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 251 (Gzell J).
[216] Ibid 248–9.
[217] (2007) 62 ACSR 1, 149 (citations omitted).
[218] The business judgement must be made ‘in good faith for a proper purpose’ with the director ‘inform[ing] themselves about the subject matter’ with rational belief ‘that the judgment is in the best interests’ of the company and the director must ‘not have a material personal interest’ in that decision: Corporations Act s 180(2). For judicial consideration on the operation and utility of this defence, see Rich [2009] NSWSC 1229; (2009) 236 FLR 1, 144–55 (Austin J).
[219] For judicial caution on sole reliance of documentary evidence, see Rich [2009] NSWSC 1229; (2009) 236 FLR 1, 74–7 (Austin J); see also at 160–1.
[220] See [2003] NSWSC 85; (2003) 174 FLR 128, 140 (Austin J).
[221] Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 247, 269.
[222] Ibid 269, quoting Tim Barr Pty Ltd v Narui Gold Coast Pty Ltd [2008] NSWSC 657 (Unreported, Barrett J, 27 June 2008) [10].
[223] [2003] NSWSC 85; (2003) 174 FLR 128, 140.
[224] Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 269–70.
[225] Re Chemeq Ltd; Australian Securities and Investments Commission v Chemeq Ltd [2006] FCA 936; (2006) 234 ALR 511, 531 (French J).
[226] Commonwealth, Parliamentary Debates, Senate, 26 November 1992, 3581 (Nick Bolkus).
[227] Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 372 (Gzell J).
[228] Ibid.
[229] [2006] FCA 936; (2006) 234 ALR 511, 531.
[230] Ibid (French J).
[231] See also Claremont Petroleum NL v Cummings [1992] FCA 446; (1992) 110 ALR 239, 258 (Wilcox J).
[232] Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 218.
[233] Lezam Pty Ltd v Seabridge Australia Pty Ltd [1992] FCA 206; (1992) 35 FCR 535, 556–7 (Burchett J).
[234] Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 276 (Gzell J), citing Vines (2007) 62 ACSR 1, 34–5 (Spigelman CJ). Austin J, in Rich [2009] NSWSC 1229; (2009) 236 FLR 1, 130, rejected the contention that the legislative scheme only applies to gross negligence and regarded that view as being ‘untenable’.
[235] Maxwell [2006] NSWSC 1052; (2006) 59 ACSR 373, 400 (Brereton J).
[236] Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187, 218 (Ipp J).
[237] Commissioner for Corporate Affairs v Bracht [1989] VicRp 72; [1989] VR 821, 831 (Ormiston J), quoted in Macdonald [2009] NSWSC 287; (2009) 256 ALR 199, 269 (Gzell J).
[238] For the views of the
leading advocate on corporate goals and social responsibilities, see
E Merrick Dodd Jr, ‘For Whom Are Corporate Managers Trustees?’
(1932) 45 Harvard Law Review 1145.
[239] ABC Television,
‘James Hardie Executives Accused of Fraud’, The 7:30
Report, 28 July 2004 (Greg Combet, Secretary of the Australian Council of
Trade Unions) <http://www.abc.net.au/
7.30/content/2004/s1164158.htm>.
[240] For a critical and valuable examination of the use of the limited fund strategy by the largest manufacturer and supplier of asbestos products in the United States, see Peta Spender, ‘Blue Asbestos and Golden Eggs: Evaluating Bankruptcy and Class Actions as Just Responses to Mass Tort Liability’ [2003] SydLawRw 11; (2003) 25 Sydney Law Review 223, 226–9.
[241] See Peta Spender, ‘Weapons of Mass Dispassion: James Hardie and Corporate Law’ [2005] GriffLawRw 20; (2005) 14 Griffith Law Review 280.
[242] Jackson Report, above n 11, vol 1, 13.
[243] Neil Young, ‘Has Directors’ Liability Gone Too Far or Not Far Enough? A Review of the Standard of Conduct Required of Directors under Sections 180–184 of the Corporations Act’ (2008) 26 Company and Securities Law Journal 216, 218.
[244] Dalia Tsuk Mitchell, ‘Status Bound: The Twentieth Century Evolution of Directors’ Liability’ (2009) 5 New York University Journal of Law and Business 63, 69.
[245] [2009] NSWSC 1229; (2009) 236 FLR 1.
[246] For criticism of ‘ASIC’s perceived failure to use criminal sanctions in cases of serious corporate misconduct’, see Vicky Comino, ‘The Challenge of Corporate Law Enforcement in Australia’ (2009) 23 Australian Journal of Corporate Law 233.
[247] ASIC is currently investigating the conduct of certain officers following the collapse of Opes Prime, Westpoint, Chartwell Enterprises, Fincorp and Storm Financial: ASIC, ASIC Annual Report 08–09: A Year of Consolidation (2009) 16–17.
[248] ASIC, ‘ASIC Commences Proceedings against Current and Former Officers of Centro’ (Advisory No 09-202AD, 21 October 2009).
[249] ASIC brought civil penalty proceedings against the company and its officers alleging failure to comply with continuous disclosure obligations and breach of the misleading or deceptive provisions concerning ASX announcements. However, ASIC’s claims were dismissed in late 2009: ASIC, ‘ASIC’s Proceedings against Fortescue Metals Group Ltd and Andrew Forrest Dismissed’ (Advisory No 09-268AD, 23 December 2009). For criticism of ASIC’s approach to recent litigation, see Peter Ryan, ‘Fortescue Loss: “ASIC Must Learn Lessons”’, ABC News (online), 24 December 2009 <http://www.abc.net.au/news/stories/2009/12/24/2780119.htm> .
[250] An example is the preliminary hearing on statement of claim alleging breach of directors’ statutory duties in Re AWB Ltd; Australian Securities and Investments Commission v Lindberg [No 5] [2009] VSC 258 (Unreported, Robson J, 17 July 2009).
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