18 November, 2012

 

Legal News & Analysis – Asia Pacific – Australia – Regulatory & Compliance

 

On 12 November 2012, the NSW Court of Appeal delivered its judgment on penalties in the James Hardie appeals. The decision represents the final chapter of an 11 year saga, and comes 6 months after the High Court upheld ASIC’s appeal, finding that the 7 former non-executive directors committed a single contravention of their duty of care and diligence in approving a misleading draft ASX announcement.

 

The Court of Appeal’s decision

 

The Court of Appeal reduced the disqualification periods and pecuniary penalties as follows:

 

  Trial judge Court of Appeal
Australian directors Disqualification: 5 years Fine:$30,000 Disqualification: Approx 2 years, 3 months Fine: $25,000
US directors Disqualification: 5 years Fine:$30,000 Disqualification: Approx 2 years Fine: $20,000

 

Errors made by the trial judge in relation to penalties

 

The Court of Appeal held that the trial judge:

 

  • had incorrectly used the 7 year disqualification imposed on the former CEO, Mr Macdonald, in relation to the draft ASX announcement as the starting point for determining that 5 years was the appropriate period of disqualification for the directors;
  • failed to give due weight to the differences between Mr Macdonald and the directors, including that the declaration against Mr Macdonald recognised that he may have known that the announcement was misleading. In contrast, the declaration made against the directors – that they ought to have known that the announcement was misleading – contained no such acknowledgement;
  • failed to explain the factors that he took into account in deciding that 7 years was the appropriate penalty for Mr Macdonald in relation to the draft ASX announcement, and how this period related to the 15 year disqualification imposed on him for his 11 contraventions.

 

Accordingly the Court of Appeal was required to consider the question of penalties afresh.

 

Reconsideration of penalties by the Court of Appeal

 

The Court of Appeal took account of the following matters:

 

  • Although the information available to the directors was incomplete, the information before them should have made it clear that an announcement to the effect that the Foundation had sufficient funds would be misleading.
  • The separation proposal had been under consideration for over a year and the directors knew not only that the separation decision would be disclosed to the ASX, but that the announcement was critical to the strategy being pursued by James Hardie.
  • The directors did not explain, either adequately or at all, how people of their experience and capability could have approved the draft announcement without appreciating that it contained misleading statements.
  • Although the contraventions by Mr Macdonald, Mr Shafron and Mr Morley (the former CFO) contributed to the circumstances leading to the directors’ contraventions, the directors were not entitled to rely on management when voting to approve the release of a critical document presented to the board for its endorsement and imprimatur.
  • The contraventions were a very serious departure from the standards to be expected of directors (although not in the most serious category of contraventions).

 

The Court of Appeal also considered the following mitigating circumstances:

 

  • The directors did not act dishonestly, nor did they consciously appreciate the falsity of the statements in the draft announcement.
  • The contravention was a single one and did not form part of a pattern of conduct.
  • The directors adduced testimonial evidence demonstrating that they were highly qualified, had impressive careers, had made contributions to the community and had demonstrated skill, care and competence. They were fit to hold office as directors and the need for personal deterrence was low.
  • While the Court of Appeal accepted that publicity and reputational damage are no doubt powerful deterrents, it said that too much weight should not be placed on them and that the prospect of disqualification (with the attendant financial consequences and public obloquy) can have a powerful additional deterrent effect.

 

The Court of Appeal considered that the directors’ contraventions, without allowing for mitigating circumstances, justified a 5 year disqualification. Taking into account mitigating circumstances, the Court of Appeal reduced this period to 3 years. This period was further reduced to approximately 2 years and 3 months for the Australian directors, to reflect the reality that the directors could not have expected to regain board appointments once ASIC lodged its application for special leave in January 2011 (although there was no legal impediment to them doing do).

 

The US directors were not present in person at the board meeting. Their breach arose by failing to obtain a copy of the draft ASX announcement, or asking that it be read out to them, before voting to approve it. The Court of Appeal considered that although this contravention was very serious, it was not quite as grave as the contraventions of the Australian directors, and accordingly imposed a slightly lower disqualification order of approximately 2 years.

 

The Court of Appeal considered that a modest pecuniary penalty, in addition to a disqualification order, was justified for reasons of general deterrence.

 

Penalties imposed on Mr Shafron

 

Mr Shafron, the former general counsel and company secretary, was found by the High Court to have committed 3 contraventions of his duty of care and diligence. ASIC and Mr Shafron agreed to increase his pecuniary penalty to $75,000 and to maintain his 7 year disqualification.

 

Ashurst Australia acted for one of the former non-executive directors.


 

 

For further information, please contact:

 

Angela Pearsall, Partner, Ashurst

lisa.d’oliveyra@ashurst.com

 

Sagar Thakur, Ashurst

sagar.thakur@ashurst.com
 

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