Yesterday, the High Court released its decision in two appeals, ASIC v Hellicar & Ors1 (ASIC Appeal) and Shafron v ASIC2 (GC Appeal), in relation to an ASX announcement made by James Hardie Industries Limited (JHIL) in February 2001.3
A copy of the ASIC Appeal can be accessed here. A copy of the GC Appeal can be accessed here.
In the ASIC Appeal, ASIC successfully appealed a decision of the Court of Appeal of New South Wales which had set aside the declarations of contravention, pecuniary penalty orders and disqualification orders made at first instance against the seven non-executive directors and the company secretary (and general counsel) of JHIL. The High Court held that the Court of Appeal erred in finding that ASIC had not proved that the ASX announcement was tabled and approved at a pivotal board meeting. We discuss this further in part 2 below.
In the GC Appeal, Peter Shafron (JHIL’s then company secretary and general counsel) also appealed a decision of the Court of Appeal but was not successful, with the High Court finding no reason to disturb the earlier decision that Mr Shafron had contravened s180(1) of the Corporations act by failing to properly provide advice to the board and CEO. We discuss this further in part 3 below.
The decisions are very largely driven by factual matters, however the High Court did make some interesting comments on corporate governance matters, some of which are discussed in this alert. We set out some key practical considerations arising from the decision in part 4.
The parties had appealed the trial judge’s decision not
to relieve the parties from liability under the Corporations Act
(section 1317S) and the penalties imposed (for the non-executive
directors, banning orders of 5 years and pecuniary penalties of $30,000). The
High Court has remitted those issues back to the Court of Appeal for
Broadly, the key issues in the ASIC Appeal were:
The minutes of the pivotal board meeting recorded that the misleading ASX announcement had been approved by the board. Nevertheless, the directors argued that the minutes were incorrect and that ASIC had not proved the board approved the announcement at the meeting.
The directors’ key arguments and the High Court’s response are set out in the table below. The High Court rejected all of the arguments, finding that given the lack of any direct evidence to the contrary, the board minutes were a formal, near-contemporaneous record and evidence of the truth of the matters recorded in them (including that the ASX announcement was tabled and approved).
The minutes were prepared before the meeting, and therefore were inherently unreliable.
The board subsequently adopted the minutes as an accurate record of the meeting. The fact that the minutes were drafted before the meeting did not obscure the later decision of the board to adopt them as a correct record at the next board meeting.
The failure to comply with the statutory obligation to sign the minutes within 1 month of the meeting did not of itself diminish their probative value, given that the minutes were approved at the next board meeting.
The ASX announcement was amended by management after the board meeting, which could not have been done if the board had already approved it.
The amendments made to the announcement subsequent to the meeting were “textual, rather than substantive”, and not material (see "Board approved documents are not set in stone" below).
The directors did not take issue with the contents of the ASX announcement (which was provided to them) once it had been released.
The minutes contained several proven inaccuracies, which further casts doubt over the probative value of the minutes.
The evidence of some inaccuracies in the minutes did not render the entire minutes inaccurate.
In a separate judgment, Justice Heydon noted that it was a particularly heavy burden to establish that the board minutes of an ASX listed company that were subsequently adopted as a correct record were incorrect.
The Court therefore held that the Court of Appeal had erred in finding that ASIC had not proved that the ASX announcement was tabled and approved at the relevant board meeting and in not giving sufficient evidentiary weight to the minutes.
The High Court proceeded on the assumption that ASIC was subject to a duty to conduct litigation “fairly” although the Court expressly reserved judgment as to whether ASIC was actually subject to such a duty. Failing to call one of JHIL’s external legal advisers who was present at the board meeting as a witness did not breach the duty of fairness, particularly as no evidence was led to show that this had denied the respondents “some advantage or subjected them to some disadvantage”. The Court found it was “very unlikely” that the legal advisor would testify to the effect that the record of the minutes were untrue, given that he had been actively involved in the preparation of the minutes before and after the meeting and such evidence would be contrary to his interests.
As an aside, the Court noted that if ASIC was under such a duty and had breached the duty by failing to call a witness, the proper remedy would be:
The appropriate remedy would not be to “discount’ other evidence.
The GC Appeal largely confirmed existing statements of the law relating to the standard of care required of an officer under section 180(1). At the same time the High Court commented on the application of the definition of “officer” and the duty of care and diligence to those holding dual roles, in this case as company secretary and general counsel.
The key questions raised in Mr Shafron’s appeal were:
To what extent was Mr Shafron an officer?
Mr Shafron contended that his conduct at issue in the proceedings (i.e. the failure to give advice to the CEO and board regarding the asbestos fund and ASX announcement) was undertaken in his capacity as “general counsel” and not as “company secretary”. He further asserted that this conduct was not subject to the duties of an “officer”.
The High Court dismissed this argument, finding that Mr Shafron was clearly an "officer" given he was the company secretary and that his duties and responsibilities as general counsel and company secretary could not be divided or distinguished. The key question in assessing his liability was “what are his responsibilities within JHIL”, not “what are his responsibilities as company secretary exclusively”.
The Court held that all of the tasks Mr Shafron performed were undertaken in fulfilment of his role in both capacities (general counsel and company secretary).
While not necessary to decide as Mr Shafron was an officer by reason of his company secretarial role, the Court also noted that he had been deeply involved in the preparation of the proposal in any event and that the definition of officer in the Corporations Act recognises that a person can be an officer by virtue of participating in decision making without making the actual decision.
Did Mr Shafron fail to meet the relevant standard of care?
The High Court confirmed that the degree of care and skill required by section 180(1) is an objective standard, identified by reference to two relevant elements:
(a) the corporation’s circumstances; and
(b) the office and responsibilities within the corporation that the officer has.
The responsibilities in (b) are not confined to statutory responsibilities, and include whatever responsibilities the officer has in the particular circumstances.
As a qualified lawyer, an important part of Mr Shafron’s duties was to advise the company on compliance and protect the company from legal risk.
The Court held that because of his qualifications, position and knowledge of the relevant subject matter, his responsibilities as company secretary and general counsel extended to proffering advice about meeting duties of disclosure and the defects in the relevant actuary report being considered by the board and CEO.
Since these issues were neither expressly nor impliedly in the retainer of JHIL’s lawyers, Mr Shafron could not rely on the company’s lawyers to raise these issues with the CEO and the board.
Accordingly, even if Mr Shafron’s capacities as company secretary and general counsel could be distinguished, section 180(1) would apply to whatever responsibilities Mr Shafron had in his role at JHIL (regardless of which capacity in which he came to have them).
It was specifically noted that Mr Shafron was not required to have an in depth knowledge of actuarial matters, but was required by s180(1) to draw the relevant potential issues of which he had knowledge to the attention of the board.
Accordingly, Mr Shafron was confirmed to be an officer subject to the duty of care and diligence and that he breached that duty by failing to advise the board and CEO on the relevant matters.
The ASIC Appeal and the GC Appeal are not game changing in assessing the duty of care, skill and diligence of directors and officers. The High Court made no observations that could be construed to expand the nature and scope of that duty. The decisions are confined to an evidentary analysis concerning the conduct of the parties in the highly fact specific circumstances of the case.
In the ASIC Appeal the Court rejected an argument that alterations to the ASX announcement following the board meeting demonstrated that board had not approved the announcement. The Court stated that whether a deed or announcement approved by a board is the same document that is later executed or published:
“…must be determined by more than a literal comparison between texts. Slips and errors can be corrected. In at least some cases better (but different) wording can be adopted…The bare fact that alterations were later made does not demonstrate that the document was not approved by the board.”4
The clear, and in our view correct, implication is that the High Court believes that a document approved by a board can be subsequently amended for “slips and errors” and for “better” (there would be caveats here!) wording, without requiring the document to be re-approved.
While the Court accepted the practice of preparing board minutes in advance of meetings, the ASIC Appeal highlights the need to ensure that these minutes are prepared carefully and, to the extent that the meeting deviates from them, amended after the meeting.
Approval of inaccurate minutes not only provides uncertainly but it also raises issues of directors’ duties and the statutory obligations to keep proper corporate records.5 In this context, the Court noted that if the minutes of a meeting were false, then adoption of those inaccurate minutes as a correct record exposes directors to a risk of breaching sections 1308(2) and (4), which generally criminalise the making of misleading statements in a document required by the Corporations Act.
One of the non-executive directors gave evidence at the first instance hearing regarding how the misleading term ‘fully funded’ came to be used in the ASX announcement. He believed that the term ‘fully funded’ was used in board discussions as a shorthand way of saying ‘sufficient funds according to the actuarial estimate’.
This provides a cogent warning in relation to using shorthand or simplified terms in public documents. This case is a good lesson for all of us not to get too deeply entrenched in the moment.
For the purposes of his obligation to discharge his duties as an officer with care and diligence, the Court did not draw a distinction between Mr Shafron’s duties as a company secretary and his other duties. In complying with their duties under the Corporations Act, officers should be mindful of all of their responsibilities and duties, not just those that may be considered falling under their role as an “officer”.
As noted above, a result of the ASIC Appeal, the matters have been remitted to the Court of Appeal for determinations on relief from liability, penalties and costs.
1.  HCA 17.2.  HCA 18.3. For a recap of the decisions at the Court of Appeal of New South Wales, see our earlier alert here.4.  HCA 17, .5. See, for example, section 251A.
Directors, company secretaries and other company officers (and key executives), and those involved in corporate governance and policies (particularly those involved in the preparation of board materials).
Review your current corporate record keeping practices in light of these decisions and consider who in your organisation is likely to be an “officer” and what their role should be in any given matter. We are happy to discuss the implications of these cases with you in more detail.