In two related decisions, the High Court of Australia (High Court) has reaffirmed the strict approach taken by the courts to misleading market disclosures. The High Court has again made it clear that company officers will be held to account, regardless of what they understood at the time of approving the release, or in what capacity they thought themselves to be acting.
In the first judgement, the High Court found that seven former non-executive directors of James Hardie Industries Limited (James Hardie) breached their statutory duty of care and diligence in approving the release of a misleading announcement to the ASX. This case turned on the significance attributed to board minutes that were approved by the directors of James Hardie, but which were later claimed to contain a fundamental inaccuracy. This highlights again the vital importance of ensuring the accuracy of board minutes.
In a related decision, the High Court also found that the company secretary of James Hardie (being an "officer" of the company), who was also the general counsel (which position did not of itself automatically fall under the definition of "officer" in the Corporations Act 2001), was subject to the same statutory duties in respect of all acts undertaken on behalf of the company. It highlights that there may be no capacity distinction for officers holding multiple positions within a company.
Importance of ensuring that board papers are accurate and complete
The first appeal before the High Court centred on whether the directors of James Hardie did in fact approve the release of an earlier draft of the relevant announcement.
The directors of James Hardie claimed to either have no recollection of having reviewed or approved the relevant announcement prior to it being released to ASX or denied that they saw the announcement. However, a set of board minutes approved by all but one of the directors of James Hardie referred to an announcement as having been tabled and approved at a directors' meeting.
The High Court held that the board minutes were a formal record of a directors' meeting and constituted evidence of the approval of the misleading announcement by the directors of James Hardie. This was the case even though the version of the announcement found to have been tabled and approved at the directors' meeting was not the version released to the ASX.
In handing down its decision, the High Court has made it clear that the courts will continue to take a strict approach to the enforcement of the statutory duty of care and diligence against officers when investors have been misled, regardless of whether the company or its officers intended to do so. This is consistent with the decision in Centro and follows the same line of reasoning as the Court of Appeal in the Fortescue Metals, that is currently also on appeal before the High Court. These cases have also held company officers strictly accountable for disclosures which the investing public would reasonably consider misleading, regardless of how those disclosures came to be made.
Accordingly, this decision highlights the importance of board papers (and, particularly directors' minutes) being accurate and complete and for directors and officers (in discharging their statutory duties) to ensure that they have:
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received and read a true and complete copy of all documents tabled at directors' meetings;
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been given adequate opportunity to review all documents to be tabled and consider all matters to be raised at directors' meetings;
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read and fully understood the contents and effect of all documents to be tabled at directors' meetings;
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raised any questions or concerns which they have (and, to the extent necessary, sought advice) in relation to the documents to be tabled and matters to be considered at the directors' meetings; and
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if asked to approve board minutes, read those minutes and confirmed that they accurately reflect their recollection of the matters considered at the directors' meeting, including in relation to documents referred to in the board minutes as having been tabled. |
This is particularly so as these High Court decisions highlight the probative weight that may be given to board papers where they are not formally recorded in the company's minute books within 1 month (as required by section 251A of the Corporations Act 2001).
Further, if a director or officer becomes aware of an inaccuracy in an announcement following its release to the market, they should take all necessary remedial action to remedy the inaccurate market disclosure.
Importance of continuous disclosure policies
The High Court also considered whether, depending on the significance of the matter being announced, a release must be approved by a company's board of directors and whether subsequent amendments to a release approved by the directors could be made.
The High Court found that even if there are subsequent amendments to an announcement following its approval at a directors' meeting, the board can still be found to have "approved" the final form of the announcement, even if they have not seen that final version.
This case serves as a reminder of the importance of companies having in place a clear continuous disclosure policy with respect to the circumstances in which directors, as opposed to management, must approve announcements to the market and whether any amendments (and, if so, what type of amendments) are capable of being subsequently made to announcements after board approval has been given.
No capacity division for officers holding multiple positions
In related proceedings, the High Court also held that, in omitting to inform directors of inaccurate statements in the misleading announcement released to the ASX, Mr Shafron (the former Company Secretary and General Counsel of James Hardie) was in breach of his duties as an "officer".
The issue before the High Court was the capacity in which Mr Shafron was acting when he omitted to raise the inaccurate statements with the directors of James Hardie. Mr Shafron claimed this was done in his capacity as General Counsel (to which he asserted no statutory duties applied), rather than in his capacity as Company Secretary (which invoked the statutory duties applying to officers).
The High Court held that all tasks performed by Mr Shafron were undertaken in the capacity of both his roles, and that these roles could not be divided. In reaching its decision, the High Court noted that even if Mr Shafron's position as Company Secretary was not sufficient to make his omission subject to the statutory duties applicable to officers, it is likely that he would still fall under the definition of an "officer" (as defined in the Corporations Act 2001) by virtue of his participation in decision making. In this case, the High Court took a wide interpretation of the phrase 'participate', as Mr Shafron did not have a role in the actual making of decisions of James Hardie.
Again, this decision is consistent with the line taken in both Centro and the Court of Appeal in Fortescue Metals and shows the rigorous approach that the courts will take when they reach the conclusion that investors have been misled.
Accordingly, any person who acts as a company officer either formally or informally (by taking part in the decisions of the company) should be mindful that the statutory duties applicable to them in that capacity may be also apply in relation to any additional roles discharged by them. This is particularly relevant in the context of market disclosures.
Conclusion
In addition to demonstrating the importance of board minutes being accurate, these High Court decisions highlight that any person participating in company decisions can be held to the standard expected of "officers"' and should carefully consider the consequences of doing so. It may also be prudent for companies to review their directors and officers insurance policies to ensure appropriate coverage is in place for these persons. For James Hardie and its officers, the dispute has lasted more than a decade (and is continuing) with the relevant events occurring in 2001. This has undoubtedly resulted in the expenditure of significant costs and time by both the company and the individuals concerned.
