Breaches Opined in the Case
Discuss About The Australian Securities Investments Commission?
The main aspect which is highlighted by this decision is the importance which has been placed on the role of the senior executives and the directors, which include both non-executive and the executive directors when implementing and considering essential strategic matters related to the company. The issue apart from being with respect to corporate governance, this judgment also widened the scope of duties for the senior executive who were below the board level.
The ASIC brought civil proceedings against the seven former non-executive directors and James Hardie Industries NV (“JHINV”) and James Hardie Industries Limited (“JHIl”) with respect to breach of their duties under the regarding the public representations that were made and the preparation of the approval for representation Corporations Act, 2001 (Cth.) (“Act”) (Hargovan, 2017).
The subsidiary of the JHIL, James Hardie Group is the subsidiary of JHIL were in the business of manufacturing and selling asbestos until 1937. Jsekarb Pty Ltd (“Jsekarb”) and James Hardie & Coy Ltd (Coy), JHIL’s two subsidiaries which were wholly owned were also in the same business from the period between 1937 to 1987.
The JHIL Board of directors for compensating the claims with respect to the damages that were caused due to their asbestos business made against the group founded the Medical Research and Compensation Foundation (“Foundation”) where they made payments and managed all such claims (Australian Securities & Investments Commission v Macdonald (No. 11), 2009). A draft of the announcement making the public declaration in the ASX with respect to the same was made and the approval for which was sought by the Board. At the same time, JHIL also entered into with Coy and Jsekarb a deed of indemnity and covenant indemnifying it from the different liabilities that arose from their asbestos business (“Agreement”).
The group made an announcement in the ASX that there was a total fund amounting to $293 million in the foundation and that this amount was deemed to be sufficient for payment of all such legitimate claims which they have anticipated to arise due to the damages as mentioned above caused by their business in asbestos. A press conference called by CEO of JHIL Mr. Macdonald also allegedly confirmed the same. In the weeks that followed, there were similar ASX announcements that were made. There was no disclosure of the Agreement in any of the announcements that were made.
Analyzing the Judgment
There was a restructuring that took place of group under JHINV after the establishment of the Foundation. After the Foundation was established, the James Hardie group went through a. This now formed the new holding company and the incorporation of this company was in the Netherlands.
International representations were made by the CEO in 2002 regarding the James Hardie Group regarding the Foundation’s sufficiency of funds. In 2007 Februray there were civil proceedings which were started by ASIC again JHIL and JHNIV for conducts that were misleading and deceptive in nature and also for making representations and statements that were not true regarding the securities and also continuous disclosure breaches. The proceedings were commenced by ASIC against the CEO, CFO and the General Counsel of JHIL.
It was found that with regarding the ASX draft announcement all the former CFO, CEO, General Counsel and the non-executive seven directors were in breach of the Act’s section 180(1) since there were a failure on their part to ensure that this announcement that was made was not in any manner misleading and deceptive in nature (Black, 2014). The General Counsel and the CEO were further in breach of section 180(1) of the Act with respect to the Agreement as there was a failure on their part to advise the board regarding the proper disclosure of the Agreement (Woodward & Bird, 2005). There was a breach on the part of the CEO of section 180(1) with respect to the approving of the draft of ASX Announcements as there was a failure on his part for ensuring that the ASX Announcements made were in no manner deceptive or misleading in nature. There was also a breach of sections 995(2) and 999 of the Act by JHIL by releasing the misleading and deceptive ASX Announcement. There was also further breach under section 180(1) by the CEO as there was a failure on his part in ensuring that the presentations made by him were not deceptive or misleading in nature (Redmond & Brennan, 2013). There was also a breach of sections 1041E and 1041H by JHINV as it engaged in conduct that was deceptive and misleading in nature in relation to the presentations that had been made to the ASX.
There were also several allegations which the ASIC had failed to claim against the James Hardie Group, as stated by his Honour, in this case, Justice Gzell. There was a breach of section 181 of the Act by the CEO as there was a failure on his part with respect to his obligations to act in a manner that was with utmost good faith.
The distinctive feature and the heart of the action of this case were that all the directors, and particularly the CEO were held to be in the breach of the most basic duty that needs to be complied with under the Act. All the ten of the directors were opined without there being any exception were opined to be in contravention of the Act’s section 180(1), under this particular section it states that it is required by the corporation’s director or the officer to discharge the duties which they have in a manner that has certain amount of care and due diligence which is to be expected from a reasonable person in the same position.
There was a failure on the part of the director to meet these obligations that have been set out by the Parliament in the legislation and is known as “statutory negligence”. The necessary care which was required to be taken and that which was expected by the directors of any public listed company in the given circumstance and at that moment in the process of making on the 15th of February the original draft ASX announcement was not taken. This is followed by a number of precedents with respect to officers’ duties that include the case of ASIC v Rich(ASIC v Rich, 2003), ASIC v Adler (ASIC v Adler, 2002) and the GIO case (ASIC v Vines, 2005).
His Honor had considered a various factors against the directors, both executive and non-executives, and the executives of the James Hardie Group, which included sophistication, directors’ intelligence, experience, the company’s nature and the importance of the restructuring of the company and the fact that there was considerable professional advice that had been given to the non-executive directors with respect to the restructuring of the company.
It was in the late July of 2000 that the Court heard the submissions from the different parties to the case as to whether the directors were to be absolved under the Act’s 13175S or 1318 for the various breaches as mentioned above or whether there should be some kind of penalty of sanction that should be given to them. The ASIC submitted to the Court that the CEO should be disqualified for a period of twelve years to sixteen years from his position and also that there should be a fine applicable on him amounting to anywhere between $1.47 and $1.81 million should be imposed. Further the General Counsel should also be disqualified for a period of eight years and penalized to an amount anywhere between $350,000 and $450,000. There should be disqualification of the CFO from the managing of a company for a period of minimum 6 years and a fine anywhere between $150,000 to $250,000 is required to be levied on him. There should also be a bann and disqualification on the non-executive directors from the company’s management for a period of five years and a fine anywhere between $120,000 and $130,000. Finally, 90% of the costs of ASIC is to be required to be paid by the defendants jointly.
It was also submitted by the ASIC that at the time of considering of the penalties which are to be imposed on the defendants by the court, the issues of indemnity should also be taken into consideration.
With the CEO’s exception who accepted that the breaches made were of serious nature, but that the banning and fine orders that ASIC sought was excessive in nature, it was sought by the directors that they should be exonerated fully. Justice Gzell on 20th August 2009 refused that any of the former board members were to be exonerated and the penalties that were handed down were that the CEO would for a period of 15 years be disqualified from managing a company and a fine of $350,000 was required to be paid by him. The General Counsel is to be disqualified for a period of 7 years from the managing of a company a that he would be required to pay a fine amounting to $75,000. It would be required that a disqualification for a period of five years for the CFO and payment of fine amounting to $35,000. The non-executive directors further were disqualified for a period of five years and a fine of $30,000 was levied on each. A fine of $80,000 was required to be paid by JHINV (Comino, 2014).
This case is considered by ASIC as a landmark decision in Australian corporate governance since the boardrooms are provided with important directions and guidelines with respect to applying practically the content and scope of the executive’s’ duties which include the CFO, chief executives and company secretaries at the time of taking matters that are important to the board and disclosing such matters to the market and the responsibility that the non-executive directors have a public company when the management asks them to consider strategy related matters and to approve to the market disclosure of the decisions of the board (“10-273MR Decisions in James Hardie civil penalty case | ASIC – Australian Securities and Investments Commission”, 2010). Further, it is stated by the ASIC that this decision of this case illustrates that at the time of making the market statements, companies are required to assess carefully and check the statement’s veracity.
There are various observations which are made in this case which is essential to the Australian Corporations law. The first being that directors are required to be more inclined to ensure that their decisions based at the board meetings on matters that are important are noted in the minutes and understood. The second being that there should be a clarity with the management as to whether the approval of the directors is being sought or whether it is merely providing information documents that do not require an action that is immediate. Third is that where it is required by the board, an approval of a draft announcement placed in front of it with respect to matters of particular importance, extreme caution must be taken in the delegation of this to a chief executive or a subcommittee. Fourth being that the General Counsel needs to be aware of the matter’s true position and as such will be subjected to the duties under the Act. In case there is a failure to warn against a legal risk that is foreseeable on matters that are important can be held against them. Fifth being that if there is an enhanced duty that the General Counsel has for warning the board of legal risks that is foreseeable associated with a given transaction, the same may be applicable to senior executives as well to warn of risks in their given area of responsibility.
This prosecution of ASIC has led to the broadening beyond the traditional executive directors. It is affirmed by this decision that much as the executive directors the non-executive directors shall also be liable as. The management below the board level was also the focus of this decision which included the General Counsel and CEO and thereby confirming the opinion of the case of ASIC v Vines and the management’s positive duties (ASIC v Vines, 2005).
References:
10-273MR Decisions in James Hardie civil penalty case | ASIC – Australian Securities and Investments Commission. (2010). Asic.gov.au. Retrieved 18 September 2017, from https://asic.gov.au/about-asic/media-centre/find-a-media-release/2010-releases/10-273mr-decisions-in-james-hardie-civil-penalty-case/
ASIC v Adler, NSWSC 171 (2002).
ASIC v Rich, NSWSC 85 (2003).
ASIC v Vines, NSWSC 1349 (2005).
Australian Securities & Investments Commission v Macdonald (No. 11), NSWSC 287 (2009).
Black, A. (2014). Recent Developments in Corporate Law. Australian Corporations Legislation; Lexis Nexis Buttersworth.
Comino, V. (2014). UNSW Law Journal. James Hardie And The Problems Of The Australian Civil Penalties Regime.
Hargovan, A. (2017). Australian Securities and Investments Commission v Macdonald [No 11] Corporate Governance Lessons from James Hardie. Melbourne University Law Review, 33(3), 984.
Redmond, P., & Brennan, F. (2013). Corporations and financial markets law (6th ed.). Law Book Corporation.
Woodward, S., & Bird, H. (2005). Corporations law. Pyrmont, NSW: Lawbook Co.
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