Publications / Corporate Advisory
On 3 May 2012, the High Court of Australia determined the directors of James Hardie breached their duties to the company by approving a misleading ASX announcement concerning the adequacy of funding in a foundation set up to provide compensation for sufferers of asbestos-related illnesses.
The High Court’s decision dealt with two narrow points:
- the minutes of directors meeting as evidence of what occurred at the meeting, and
- the responsibility of ASIC to be a ‘model litigant’ when conducting litigation and seeking sanctions.
Put simply, the directors of James Hardie (a major manufacturer of asbestos materials in Australia) were restructuring the company, which included moving its base of operations offshore.
The company was facing significant liabilities for asbestos related illnesses and deaths. The extent of the company’s exposure could only be estimated based upon future projections of emerging asbestos related diseases (the onset of which can occur up to 50 years after exposure).
One feature of the restructure was the expulsion of the two companies within the group which faced the asbestos liabilities. In order to prevent the impression that James Hardie was trying to avoid its responsibilities through the restructure, it also created the Medical Research and Compensation Foundation, funded by the James Hardie Group, both to do research on asbestos related illnesses and, more importantly, to meet the emerging asbestos-related liabilities.
James Hardie was required to notify the market (ASX) of the restructure and formation of the foundation, as a reasonable person would expect these developments to have ‘a material effect on the price or value of James Hardie shares.’
An announcement was made by the company to ASX in February 2001. The announcement described the new foundation as ‘fully funded’ with ‘sufficient funds to meet all legitimate compensation claims’. The reality, within a short period thereafter, was that the foundation faced a significant shortfall in funding.
The approval of the announcement
ASIC argued a draft of the misleading ASX announcement was prepared by James Hardie’s lawyers and was considered at the February 2001 meeting of the Board. ASIC relied upon signed minutes of the meeting and the production of a draft announcement prepared prior to the commencement of the meeting. A copy of the draft announcement was modified in a number of respects before finally being released to the ASX.
The directors disputed that the draft was tabled at the meeting and that it was approved by the directors. The directors gave evidence that they had no independent recollection of receiving, considering or approving the announcement.
The trial judge concluded that the evidence supported (on the balance of probabilities) the draft announcement was presented to the meeting, approved by the Board and that the changes between the draft presented at the board meeting and the announcement issued to the ASX were not materially different in regard to the misleading statements.
The High Court agreed that the totality of the evidence supported the conclusion the Board had considered and approved the draft announcement. Section 251A of the Corporations Act 2001 (Cth) requires:
- the company keep minutes of directors’ meetings
- the minutes of each meeting must be signed within one month of the meeting by the chair of that meeting or the chair of the next meeting, and
- a minute signed is evidence of the proceeding to which it relates unless the contrary is proved.
The minutes of the February 2001 Board meeting were not signed within one month of that meeting but were signed at the April 2001 Board meeting. The April 2001 Board minutes showed that the directors at that meeting, by confirming the February 2001 minutes, had accepted the accuracy of the February 2001 minutes, which recorded that the announcement had been considered and approved.
At the trial, the directors proved that the February 2001 Board minutes were inaccurate in a number of respects, however the High Court decided:
- that while the minutes may not have attracted the Corporations Act 2001 (Cth) presumption (in section 251A since they were signed more than 30 days after the meeting), they were nevertheless admissible business records, and
- there was no evidence that the minutes so far as they related to the approval of the announcement were inaccurate.
The High Court also noted there was a complete absence of any protest by the directors concerning:
- the record which indicated the announcement had been considered and approved, and
- the contents of the announcement after it was released and published by ASX.
The model litigant doctrine requires ASIC and other Commonwealth agencies to litigation, to act fairly, with complete propriety and in accordance with the highest professional standards. The High Court considered the failure of ASIC to call a particular witness which ‘may’ have been detrimental to its case was not fatal to its case because:
- the directors were aware of the witness
- the directors had been provided with an extract of his statement, and
- it could not demonstrate the directors suffered any ‘unfairness’ to their case as a result of ASIC’s failure to call the witness.
The critical lessons to be learned from this case are:
- directors must pay vigilant attention to the business of each Board meeting
- directors must interrogate management thoroughly and obtain sufficient information on key issues before making decisions
- every ASX announcement should be thoroughly verified before being released to the market, to ensure its contents are not misleading or deceptive, and
- the minutes of each Board meeting are a critical record of the business of the meeting and should be carefully and critically reviewed by all directors who attended the meeting before they are approved.
Focus covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. Focus is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.