James Hardie decision puts directors’ responsibilities in the spotlight

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Directors and senior managers of ASX listed entities

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Review board approval procedures for ASX announcements concerning major transactions and corporate actions

Author
Tim Bednall
Partner, Chairman of the Board

Tim Bednall

Partner, Chairman of the Board
T +61 2 9296 2922

Sydney
Tony Bancroft
Tim Blue
Kate Mills

Melbourne
Alison Lansley
Stephen Minns
Diana Nicholson

James Hardie decision puts directors’ responsibilities in the spotlight - 24 April 2009

The Australian Securities and Investments Commission (ASIC) commenced proceedings in the NSW Supreme Court against James Hardie Industries Limited (JHIL), James Hardie Industries NV (JHINV), and seven former directors and three former executives of JHIL.

ASIC alleged that various public statements made by JHIL and JHINV about the establishment and funding of the Medical Research and Compensation Foundation, established to pay asbestos claims against the James Hardie Group, were false and misleading, or misleading and deceptive, and that the directors and executives had breached various provisions of the Corporations Act in the preparation and approval of those statements.

ASIC also made allegations in relation to disclosures concerning the subsequent restructuring of the James Hardie Group.

Justice Ian Gzell, in the NSW Supreme Court, made findings that the companies, the directors, and two of the executives had breached various provisions of the Corporations Act by approving drafts or final versions of certain of the public statements made by JHIL or JHINV.

The judge made the following main findings:

In relation to a draft ASX Announcement prepared by JHIL on 15 February 2001 containing statements to the effect that the Foundation was fully funded and provided certainty for claimants:

that all seven former directors of JHIL had breached s180(1) of the Corporations Act by failing to exercise their powers and discharge their duties with the necessary degree of care and diligence when approving a draft of that announcement

that the CEO and General Counsel had also breached s180(1) by failing to advise the Board appropriately.

In relation to information concerning a deed of covenant and indemnity executed in February 2001:

that JHIL negligently failed to disclose that information, and

that the CEO and General Counsel breached s180(1) by failing to advise the board appropriately in relation to the disclosure of that information.

In relation to the final ASX Announcement released on 16 February 2001, containing statements to the effect that the Foundation was fully funded and provided certainty for claimants, and statements to similar effect made at a press conference on that day, that the Announcement and statements were false and misleading, and

that the CEO breached s180(1) by approving the Announcement and in making similar statements at the press conference

that JHIL breached various provisions of the Corporations Act by releasing the Announcement and making the statements at the press conference.

In relation to ASX announcements made by JHIL on 23 February and 21 March 2001, concerning sufficiency of funding for asbestos claims:

that the CEO breached s180(1) by approving the Announcement and in making similar statements at the press conference

that JHIL breached various provisions of the Corporations Act by releasing the Announcement and making the statements at the press conference.

In relation to investor roadshow presentations and slides lodged with ASX in June 2002, containing statements concerning sufficiency of funding for asbestos claims:

that the CEO breached s180(1) by approving the Announcement and in making similar statements at the press conference

that JHINV breached s1041E and s 1041Hof the Corporations Act by releasing the Announcement.

In relation to various elements of a transaction that led to the transfer of JHIL, including a reduction of capital, that between March and June 2003,, JHINV breached its disclosure obligations concerning JHIL.

The court found that ASIC had failed to establish a basis for all other allegations made against the James Hardie companies, the directors and the executives. The failed allegations included allegations that the CEO breached s181 of the Corporations Act (the good faith obligations), and various allegations with respect to a draft JHIL information memorandum for a scheme of arrangement in July 2001.

It should also be noted that the court has requested and is yet to hear submissions as to whether the various defendants should be exonerated for these contraventions, or whether some form of penalty or other sanction should be imposed.

This case turns on its facts. The court has found that in circumstances where the company is implementing a major transaction or corporate action, and the company is to make public statements concerning the matter, directors are not entitled to abdicate responsibility for approving and releasing public statements by delegating responsibility to other directors, to management or to advisers who may have greater expertise in the substance of the matter, or communications.

Further, senior management have an obligation to bring to the notice of the board relevant material information upon which proposed public statements are based.

This decision will be the subject of intense scrutiny and debate. It will have an effect on governance practices for the preparation and approval of statements made by listed entities concerning significant transactions, not just in ASX releases but also in prospectuses and other disclosure documents. Mallesons will be releasing further commentary on the decision and its consequences shortly.

Mallesons represented JHINV in these proceedings.

This publication is only a general outline. It is not legal advice. You should seek professional advice before taking any action based on its contents.

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