The former non-executive directors of James Hardie Industries Limited (“JHIL”) have won their appeal against the Supreme Court of New South Wales’ decision that they had breached their duties of diligence and care by approving a misleading ASX announcement concerning the funding of asbestos liabilities. Their banning orders and pecuniary penalties have been set aside.
The Court of Appeal of New South Wales (Spigelman CJ, Beazley and Giles JJA) today handed down two joint judgments in appeals in civil penalty proceedings commenced by the Australian Securities and Investments Commission (“ASIC”) against James Hardie Industries NV (“JHINV”) and ten then-present or former directors and officers within the James Hardie group. The appeals revolved around statements made by JHIL upon the establishment and funding of the Medical Research and Compensation Foundation (“the Foundation”) JHIL in 2001.
In the first of the judgments (Morley v ASIC  NSWCA 331 “the directors and officers judgment”), the Court of Appeal:
allowed the appeals of the former non-executive directors of JHIL against the findings of contravention that had been made against them, overturning the finding of the trial judge (Gzell J) that the directors had approved a misleading draft ASX announcement;
partially allowed the appeal brought by the former secretary / general counsel of JHIL (Mr Shafron) and partially allowed ASIC’s related cross-appeal, making an additional declaration of contravention; and
dismissed the appeal by Mr Morley and dismissed ASIC’s related cross-appeal.
In the second of the judgments (JHINV v ASIC  NSWCA 332 - “the JHINV judgment”), the Court of Appeal:
On 15 February 2001, the board of JHIL resolved to establish the Foundation. On 16 February 2001, JHIL published an announcement to the ASX, which notified the establishment of the Foundation and which made statements about the sufficiency of the Foundation’s funding to meet asbestos claims against subsidiaries of JHIL. Under a Deed of Covenant and Indemnity (“DOCI”), JHIL agreed to pay annual sums to its subsidiaries as funding to meet the asbestos claims against the subsidiaries. In June 2002, JHINV, made statements at roadshow presentations in Edinburgh and London concerning the sufficiency of the Foundation's funding to meet all asbestos claims and any remaining exposure of the group to asbestos claims. The slides used at those presentations were lodged with the ASX. In March 2003, JHINV took a series of steps which resulted in the transfer of JHIL out of the group and effective protection of JHINV from the financial impact of asbestos claims on JHIL.
Relevant findings at first instance
In ASIC v McDonald (No 11)  NSWSC 287, Gzell J found that:
the non-executive directors had contravened s 180(1) of the Corporations Law, which required that directors and officers use reasonable care and diligence in the exercise of their powers and discharge of their duties, by voting in favour of a misleading draft ASX announcement at a board meeting on 15 February 2001;
Mr Shafron and Mr Morley had contravened s 180(1) in failing to advise the board in relation to the sufficiency of funding provided to the Foundation;
Mr Shafron had further contravened s 180(1) by failing to advise the board of the need to disclose the DOCI to the ASX;
the publication of the slides by JHINV constituted misleading conduct and the making of misleading statements likely to affect market behaviour in contravention of the Corporations Act; and
JHINV had contravened its continuous disclosure obligations by failing to disclose the steps taken in March 2003 to the ASX.
The non-executive directors
The resolution of the appeals by the non-executive directors turned on the factual question of whether the draft ASX announcement was tabled at the board meeting of 15 February 2001 and whether it was approved by the board.
The Court of Appeal found that ASIC was under an obligation of fairness which it breached by failing to call Mr Robb, one of JHIL’s legal advisers with significant involvement in the relevant events. The Court of Appeal noted that, while the proceedings were civil, the role of ASIC is not akin to the position of an ordinary litigant. Instead ASIC acts in the public interest alone and “the public interest can only be served if the case advanced on behalf of the regulatory agency does in fact represent the truth”. The Court of Appeal considered the likely significance of evidence which may have been given by Mr Robb and concluded “the history exposes ASIC’s failure to call Mr Robb as a conscious decision not to call an important material witness who was available to ASIC”. The Court of Appeal concluded that the failure of ASIC to call Mr Robb seriously detracted from the cogency of the case advanced by ASIC and that, on the material before them, they could not conclude that the board approved the draft ASX announcement.
The Court of Appeal noted that, had they not reversed the finding of fact, they would have upheld Gzell J’s finding that the non-executive directors had been in breach of duty by approving the draft ASX announcement. Their Honours accepted that, given both the significance of the announcement and the familiarity of the non-executive directors with the subject matter, the non-executive directors were not entitled simply to rely upon management in this instance. The Court of Appeal’s consideration focussed closely on the particular factual circumstances of the case and expressly disavowed any attempt at “a greater exposition of the position of a non-executive director”. One of the more contentious legal issues arising from the first instance judgment was the proposition that some announcements are so important that they cannot be delegated by a director to other board members. If that is correct, it may have important practical implications as to whether or not decisions can be delegated to board committee's and on the work a director must do in considering important decisions. Besides noting that not every ASX announcement should or will go before a company's board, the Court of Appeal’s judgment provides little further guidance on this important topic.
Mr Shafron and Mr Morley
The Court of Appeal set aside one finding of contravention against Mr Morley, which was dependent upon the premise that board had approved the draft ASX announcement. The Court of Appeal set aside a second finding of contravention, which related to Mr Shafron’s failure to advise the board of the limited nature of certain reviews. The Court of Appeal found that the evidence did not establish that Mr Shafron was aware of the limited nature of the reviews. The Court of Appeal dismissed Mr Shafron’s appeal in relation to his failure to advise the board of the need to disclose the DOCI to the ASX and upheld ASX’s appeal in finding a further contravention in failing to advise the board in relation to the nature of a “best estimate” of exposure to asbestos claims.
The Court of Appeal found no basis for setting aside the finding of contravention against Mr Morley or for making any further declaration of contravention.
The proceedings have been listed on 4 February 2011 for directions in relation to any further consideration of pecuniary penalty or disqualification in the cases of Mr Shafron and Mr Morley in light of the Court of Appeal’s various findings.
Misleading conduct and misleading statements likely to affect market behaviour
The first aspect of JHINV’s appeal was a challenge to Gzell J’s finding that the ASX announcement and the slides were misleading in relation to statements made as to the adequacy of funding of the Foundation. The Court of Appeal upheld the findings at first instance and stated that “we consider that there could be no doubt about the misleading nature of the statements made or that they gave rise to the representations alleged.”
Similarly, the Court of Appeal upheld the finding that the statements made in the ASX Announcement and the slides were likely to affect market behaviour in that they would induce people to acquire JHINV shares and would have the effect of maintaining or stabilising the share price.
The Court of Appeal dismissed ASIC’s cross-appeal in relation to the actual statements made at the roadshows, finding that the audience to whom the representations were made was “a select and sophisticated audience who… would be likely to have some resilience to persuasion solely on the basis of a one hour presentation.”
The Court of Appeal upheld Gzell J’s finding that JHINV had failed to comply with its continuous disclosure obligations by not disclosing the steps taken in March 2003, finding that the steps taken to transfer JHIL out of the James Hardie group was information that a reasonable person would expect to have an effect on the share price of JHINV.
Mallesons Stephen Jaques acted for JHINV at first instance and on appeal.