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The High Court has unanimously found the former non-executive
directors of James Hardie to be in breach of the Corporations Act
in approving a misleading draft Australian Stock Exchange (ASX)
announcement. The High Court's decision highlights the
importance for boards to:
have a thorough understanding of proposals put before them
carefully review ASX announcements before they are released to
the market
ensure that minutes of board meetings are accurate.
The decision also highlights the need for enhanced corporate
governance processes for board meetings to support the due
diligence expected of directors at those meetings.
Introduction
The High Court unanimously allowed the appeal by the Australian
Securities and Investments Commission (ASIC) against the Court of
Appeal's findings in favour of the seven former non-executive
directors of James Hardie. In essence, the High Court found:
that the Court of Appeal was wrong to conclude that ASIC did
not prove that the draft ASX announcement in question was tabled
and approved at the board meeting
the minutes were evidence of the truth of the matters recorded
– in particular that a draft ASX announcement was tabled
and approved
the Court of Appeal was wrong to hold that ASIC breached a duty
of "fairness" by not calling a former partner of Allens
Arthur Robinson who attended the relevant board meeting
the Court of Appeal further erred in concluding that a failure
to call a witness, if taken to be in breach of a duty of
"fairness", diminished the cogency of the other evidence
adduced.
In doing so, the High Court reinstated the findings of
contravention against the former directors in relation to their
role in approving the misleading draft ASX announcement in 2001,
and the finding of contravention against the former general counsel
and company secretary in relation to his failure to advise the
board of the misleading nature of the draft ASX announcement.
The case has been remitted to the Court of Appeal to deal with
the issue of penalty.
Background to ASIC's appeals to the High Court
On 13 May 2011, the High Court granted special leave for
ASIC's appeals to be heard. These appeals were ultimately heard
in October 2011.
The appeals by ASIC stemmed from the 17 December 2010 decision
of the Court of Appeal (comprising Spigelman CJ, Beazley JA and
Giles JA) which concluded that:
ASIC had failed to discharge its burden of proof in
establishing that the non-executive directors had considered and
approved the draft ASX announcement at the relevant Board
meeting
the failure by ASIC to call material witnesses who were in
attendance at the relevant February 2001 board meeting and made
amendments to the draft ASX announcement, was one of a number of
factors found to have undermined the cogency of ASIC's case
leading the Court to find that ASIC had not discharged its burden
of proof
the Court of Appeal upheld the appeal by the non-executive
directors and quashed the penalty and disqualification orders made
against them.
Implications for directors and boards in Australia
The High Court's decision is significant and will have an
impact on the manner in which board meetings are conducted and how
directors conduct themselves in the corporate environment. Some key
implications arising include the need:
for company directors to exercise due diligence in reading and
checking the accuracy of company statements and media releases
for company directors to carefully review the accuracy of board
minutes, because the minutes have a high probative value as a
contemporaneous record of the events and decisions recorded in the
minutes
for companies to review the procedures supporting board
meetings, including the practice of preparing minutes in advance of
meetings, the review of those minutes following a board meeting and
the Chairman's approval of those minutes as an accurate
record.
Note:
Middletons will be holding a number of sessions to discuss the
implications of this case. A Melbourne briefing has been scheduled
for 6 June 2012 and a Sydney briefing will be held on 21 June 2012.
If you would like to attend one of these sessions, please register
your interest through the link below:
Murray Deakin, Sylvia Ng and Joni Garnham of Middletons acted
for Mr Shafron in connection with ASIC's investigation, the
first instance hearing and appeal hearings before the Court of
Appeal and the High Court of Australia, and continues to act for Mr
Shafron in relation to the hearing on penalty that has been
remitted to the Court of Appeal.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
Middletons has been awarded a 2012 EOWA Employer of Choice for
Women citation acknowledging our commitment to workplace
diversity.
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