Background

On 3 May 2012, the High Court delivered judgment in the James Hardie civil penalty appeals.1 This paper highlights the judgment's practical implications for a person acting as general counsel and the scope of their duties and responsibilities.

The penalties related to the 2001 corporate restructure by the James Hardie group which included establishing a foundation set up to "spin off" the asbestos-related liabilities of the group. ASIC's case against James Hardie and its officers revolved around the Board approved ASX announcement which it was alleged contained false and misleading statements concerning the sufficiency of the funding for the foundation.

The relevant findings of the High Court were that:

  • The seven former non-executive directors of James Hardie did, as a matter of fact, approve the release of the misleading ASX announcement and thereby breached their statutory duty of care and diligence.

  • The Court held that the Board minutes indicating the directors' approval had probative value given the contemporaneous nature of the minutes and that they were the formally adopted record of that directors' meeting. This finding reinstated the trial judge's findings over the decision of the NSW Court of Appeal, the latter of which had held that ASIC had not proven its case that the directors meeting had approved the announcement.

  • Mr Shafron, the former company secretary and general counsel of James Hardie, was liable for breach of his duty of care and diligence as an "officer" of the company.

  • The Court held that the assessment to be made in determining his duties and responsibilities as the general counsel and company secretary was to assess his role as an indivisible whole, leading to the conclusion that he had failed to adequately advise the Board regarding its duty of disclosure. Mr Shafron's submission that the application of the duty of care and diligence under section 180 of Corporations Act 2001 (Cth) (Act) should be restricted to his company secretarial function was unsuccessful.

Key Implications

General Counsel Who Also Perform the Role of Company Secretary

Principles

  • A person acting as general counsel and company secretary is an "officer" of the company. The entirety of that person's role will be taken into account when assessing the standard of care and diligence required of that person pursuant to the Act.
  • The scope of responsibilities is to be determined by an examination of all the tasks in fact performed by that person.
  • The duty of a person who acts as general counsel and company secretary extends to protecting the company from legal risk. This may include the obligation to inform the Board of, and proffer advice in relation to:
    • potentially misleading statements (such as ASX announcements);
    • directors' and company obligations with respect to duties of disclosure; and
    • identifying limits or issues with advice provided by external advisers (such as significant assumptions and qualifications and whether these are appropriate).

Illustration in James Hardie

  • The breach of duty related to Mr Shafron's failure to advise the Board that the company should disclose certain information and that the actuarial study he commissioned to predict asbestos liabilities was subject to critical limitations. This evidenced his failure to exercise the degree of care and diligence that a reasonable person in his position as general counsel and company secretary would have exercised.
  • Mr Shafron's responsibilities as general counsel and company secretary were "indivisible" and must be viewed as a composite whole. Mr Shafron failed to provide evidence to support his submission that his role as general counsel and company secretary were divisible and accordingly, that his duties performed as general counsel were not subject to the Act.
  • The scope of Mr Shafron's role as company secretary could not be limited by examining the responsibilities of the other James Hardie company secretary when, in practice, Mr Shafron's responsibilities extended to advising the Board on substantive matters and devising restructure proposals.

General Counsel (and Others) May Also Be An "Officer"

Principles

  • Where a general counsel is not also a director or company secretary, that person may nonetheless be held to the standard expected of "officers". A person who makes, or participates in making, decisions that affect the whole or a substantial part of the business of a corporation, or has the capacity to affect significantly the corporation's financial standing, is considered an "officer" for the purpose of the Act. This may also apply to senior executives such as the CFO or the chief risk officer.
  • The inquiry as to whether someone is an "officer" must be directed to an examination of the significance of that person's role in the decision making (even if the final act is undertaken by someone else), the nature of the decision, and the relationship between the actions of that person and decision by the Board.
  • Accordingly, general counsel should consider whether they have appropriate legal protections and insurance cover in place, and whether they have suitable resources to properly perform their functions to the requisite standard.

Illustration in James Hardie

  • The High Court found that Mr Shafron would be considered an "officer" by virtue of his participation in making decisions.
  • Mr Shafron's "large and active part" in formulating the restructure proposal put to the Board, and his position as one of the three executives who shaped and developed the proposal, founded the Court's conclusion that Mr Shafron had "participated" in the Board's decision to adopt the proposal.

Board Minutes

Principles

General counsel should keep in mind, and advise their Board:

  • To be diligent when reading and approving Board minutes, as they will be treated as a formal and near-contemporaneous record of proceedings. Draft Board minutes provided before a meeting, although often useful to ensure that all relevant matters are dealt with, should be read carefully and challenged where appropriate. Similarly, minutes presented for the adoption by the Board at a subsequent meeting should be carefully checked.
  • The basis for statements and decisions at Board meetings on crucial matters should be understood and noted in minutes. This includes making sure the Board have sufficient time and information to make informed decisions. Given the timing pressures that often apply, implementing processes to keep the Board up to date with the steps management have taken in relation to a matter, external advice that has been sought and any other significant developments can be key to the decision-making.
  • The participants may be held to account on the basis of Board minutes, regardless of what they understood at the time of approving the relevant resolution, document or public announcement. It may be worth considering requiring all directors to positively express their assent to key decisions. The company secretary should ensure that the minute books are adequately maintained, including copies of any documents referred to in the Board minutes.

Illustration in James Hardie

  • The minutes of the February 2001 James Hardie Board meeting recorded that a version of the ASX release had been tabled and approved. Those minutes were formally adopted at the April Board meeting. The directors submitted that the minutes were inaccurate and that ASX release had not been approved by the Board.
  • The High Court held that the fact the minutes contained some inaccuracies and were substantially drafted before the meeting did not render them unreliable or discount their probative value. Explanations from the directors that they did not read the minutes with sufficient care were not afforded great weight.
  • Rather, the Court held that the directors' attempt to argue that the formally adopted minutes were incorrect left them open to the suggestion that they had failed to take care to ensure the ASX release, and the minute books, were not false or misleading – both a breach of duty.

Footnote

1 ASIC v Hellicar & Ors [2012] HCA 17; Shafron v ASIC [2012] HCA 18.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.