A Cautionary Tale for Company Secretaries & General Counsel

Australian High Court

The Australian High Court Building, Canberra

On 3rd May 2012 the highest Appeal Court in Australia delivered a judgment focusing on the importance the Court attaches to the accuracy of board minutes and press releases, confirming the need for general counsel and company secretaries to have a clear understanding of their responsibilities (especially where those responsibilities are merged and carried out by one individual).

For good measure, the Court reversed the decision of the New South Wales Court of Appeal and reinstated the original trial court finding to the effect that seven non-executive directors of the former asbestos manufacturer James Hardie had breached their duty of care and diligence in approving a misleading announcement to the Australian Stock Exchange (ASX) concerning a corporate restructure.

The case is the latest milestone in a vigorous campaign pursued by the Australian Securities and Investments Commission (ASIC) to raise the standards of care and diligence expected of directors of Australian companies, something I highlighted in another blog on ASIC’s case against Centro Group.

The facts of the James Hardie case go right back to 2001 reinforcing the notion that D&O liability insurance should be regarded as “long tail” business.  In 2001, James Hardie made an announcement to the ASX concerning the adequacy of funding for a Foundation it had set up to deal with the asbestos-related liabilities of certain of its subsidiaries. However, the company was short AUD1.5bn and soon faced bankruptcy.  The case against the Non Executive Directors (NEDs) was that they had, in effect, approved the announcement or at least failed to protest against it.

The Case Against the Non Executives

Previously, the New South Wales Court of Appeal had overturned findings against the seven James Hardie NEDs on the basis that there was no direct evidence to the effect that they had passed an express resolution approving the inaccurate press release.  The Court had stated that if the directors had voted in favour of the announcement they would have been in breach of their duty of care and diligence on the basis that the announcement was misleading.

The High Court of Australia went one step further.  The NED’s defence was that the minutes of the critical board meeting in February 2001 were unclear and inaccurate on the crucial question as to whether the relevant announcement had been formally tabled for discussion.  The High Court, whilst accepting there was some doubt on that issue, neatly side-stepped the question by focusing on the subsequent April 2001 board minutes and accepting those minutes (in which the earlier board minutes were formally approved) were an accurate record of the proceedings at that earlier meeting.

Justice Hayden explained the importance of minutes to corporate governance in general thus:

“It is fundamental to the running of a large and important… organisation… that the records of its central decision-making organ be correct, lest the foundations on which its future affairs rested be left to the vagaries of corporate memory and changing personnel.”

The High Court also warned against the danger of directors later seeking to challenge the accuracy of a company’s minute books on the basis that the directors were, in any event, under a statutory duty to ensure that the relevant records were neither false nor misleading.

The Position of the General Counsel/ Company Secretary

The appeal by the company secretary/General Counsel was on the basis that the conduct on which the trial judge had found him to have been in breach of his duties of care and diligence was not done in his capacity as an officer of the company (the company secretary) but instead in his capacity as general counsel.  The conduct in question was his failure to provide the necessary and proper advice to the CEO and to the board as a whole.

The High Court rejected this argument and unanimously reached the view that the responsibilities of company secretary and general counsel, where held by an individual, were indivisible and must be viewed as a whole.

The Court concluded that the scope of the responsibilities of any given officer have to be determined by an examination of all the tasks in fact performed for that company by that officer.  Given this fairly broad brush but nevertheless common sense approach to this question, it may be that company secretaries and general counsel will wish to pay even closer attention in their letters of engagement and/or job specifications to the proper delineation of their responsibilities and functions.  They may also wish to ensure that there is adequate cover (especially in relation to their advisory role) under any D&O liability or similar management liability insurance.

About Francis Kean

Francis is an Executive Director in Willis Towers Watson's FINEX Global, where he specializes in insurance for Dir…
Categories: Australasia, Directors & Officers | Tags: , ,

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