21 November, 2012

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

In brief

• On 12 November 2012, the NSW Court of Appeal delivered its judgment on penalties in the James Hardie appeals. Overall, the decision represents a better outcome for the non-executive directors than at first instance – particularly in relation to disqualification.

The Court of Appeal’s decision (Gillfillan and Ors v Australian Securities and Investments Commission [2012] NSWCA 370) represents the final chapter of an 11 year saga, and comes 6 months after the High Court upheld ASIC’s appeal, finding that:

• the seven former non-executive directors committed a single contravention of their duty of care and diligence in approving a misleading draft ASX announcement; and
• Mr Shafron, the former general counsel and company secretary, had committed 3 contraventions of his duty of care and diligence for failing to advise the board of certain matters.

The final penalty outcome

The Court of Appeal reduced the disqualification periods and pecuniary penalties for the non-executive directors. The final outcome for the directors and officers concerned is as follows:

Conduct of board meetings

In a separate judgment, Barrett JA made two observations concerning the conduct of board meetings with which Beazley JA concurred:

• The aim of board meetings is not for directors to consult together with a view to reaching some consensus. Rather, the aim is for directors to consult together so that individual views may be formed. Accordingly, the procedures adopted at board meetings must be such that each director may communicate his or her vote and have it taken into account. Practices, such as the chair saying, after discussion of a proposal “I think we are all agreed on that” are dangerous unless supplemented by appropriate formality.
• As set out in section 248D of the Corporations Act 2001 (Cth), participation in board meetings by telephone or video link must be consented to by all the directors (the consent may be a standing one, which is refreshed whenever a new director is appointed). As a bare minimum, each participating director must hear and be heard by every other participating director for the duration of the meeting. Where a document is tabled, or the directors discuss a document’s content, in the course of the meeting, and that document is not already in the possession of every director, the technology by which the meeting is held must enable each participating director to see the document’s content at the relevant point during the meeting.

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; and
• 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 proposal was one of significant importance to James Hardie.
• The directors knew that the separation decision would be disclosed to the ASX and that the contents of the announcement were critical to the strategy being pursued by James Hardie.
• The terms of the draft announcement were calculated to, and did, influence the market.
• 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, while not in the category of the most serious of contraventions that directors can commit, were nevertheless a very serious departure from the standards to be expected.

For further information, please contact:

Angela Pearsall, Partner, Ashurst