18 Jun Directors’ Duties in Relation to Company Announcements
Directors are the focal point for the governance of corporations. As all decision making derives from them, directors play a fundamental role in maintaining the integrity of and ensuring confidence in the operations of companies and those that invest in them. In times of any uncertainty, focus often shifts to apportion blame and responsibility for corporate failures and misrepresentations. The Australian Securities and Investment Commission (ASIC) continue to probe failures and has regulated by prosecuting cases involving directors failing to meet their duties in relation to proper disclosure.
The Listing Rules of the ASX and in particular Rule 3.1 place significant obligations on directors of a listed company to get announcements correct. These obligations are given the strength of the Corporations Act 2001 (Act) through the operation of the sections highlighted below.
In practice we often see directors take a lax view of company announcements and as such we advise our clients to approach the drafting and release of announcements carefully and use the same care and skill as they would if releasing a public disclosure document.
This brief paper looks at the duties of company directors in relation to company announcements and some examples of situations where directors have acted both properly and improperly.
Recent ASIC enforcement
During 2014 ASIC, in collaboration with the Commonwealth Department of Public Prosecutions, completed 366 criminal proceedings with another 112 matters pending. ASIC has also completed 25 civil proceedings with 26 other matters pending. These actions are in addition to the administrative remedies, enforceable undertakings and negotiated outcomes brought by ASIC.
The Act sets out the statutory duties that directors (and in some cases, other officers and employees) owe to companies. Most of these duties are set out in chapter 2D of the Act. Some significant cases (including recent case law) regarding these statutory provisions are contained in this section, illustrating how courts have applied and interpreted these statutory provisions.
Duty of care and diligence
Section 180(1) requires that a director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
(a) were a director or officer of a corporation in the corporation’s circumstances; and
(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.
A director will satisfy this duty if a reasonable person in a position as a director holding the same responsibilities within a corporation, in the corporation’s circumstances, would exercise his/her power or discharge his/her duty with the same degree of care and diligence as the director.
This is a civil obligation only.
Business judgment rule
A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection 180(1), and their equivalent duties at common law and in equity, in respect of the judgment if they:
(a) make the judgment in good faith for a proper purpose; and
(b) do not have a material personal interest in the subject matter of the judgment; and
(c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and
(d) rationally believe that the judgment is in the best interests of the corporation.
The director’s or officer’s belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position could hold.
A business judgment means any decision to take or not take action in respect of a matter relevant to the business operations of a corporation. Subsection 180(2) cannot be invoked if a director neglects to make a judgment or makes any decision otherwise than in good faith.
As section 180 relates to directors’ duties of care and diligence, it is not surprising that a large number of the cases brought for breach of directors’ duties relates to this section.
Below is a brief summary of some of the relevant recent cases dealing with section 180 and instances where the care and diligence given to announcements by directors have been considered.
Care and diligence regarding company announcements
This may be a particular area of interest for our clients as many are listed on the ASX and are frequently required to release announcements on the ASX. There have been a number of recent cases which have concerned announcements made by companies listed on the ASX, whether these announcements misled the audience for whom they were intended and whether as a consequence section 180 was breached by the company and its directors.
James Hardie Cases
The James Hardie group sought to quarantine certain liability (arising from the production of asbestos) by transferring the relevant subsidiaries with the liability to a separate trust (the Foundation). James Hardie provided a substantial amount of funding to the Foundation, which was to be used for providing compensation to asbestos victims. However, it became apparent that the funding was insufficient, which led to ASIC bringing this action.
The non-executive directors were found to have failed to meet their duty of care and diligence. This was in relation to approving a misleading ASX announcement concerning the establishment of the Foundation. The ASX announcement was found to be misleading because it suggested that the Foundation was fully funded to meet all compensation claims, when it was known, or the directors ought to have known, that it was probably not.
The court therefore found in the first instance that the directors breached their duty of care and diligence in section 180.
In our view directors should take guidance from this case as follows:
- Draft announcements on all significant transactions should be provided with board papers and directors should review the announcement against their understanding of the transaction – make sure that the announcement correctly reflects the facts.
- Directors who are not physically present at a board meeting should insist on having the same material as their colleagues or be satisfied that the absence of the material is not important – and if they have received the material they will be judged as having read it.
- Draft ASX announcements should be treated with the same degree of care as the underlying substantive board decisions.
- If the director does not agree, the director must abstain or vote against the resolution, and ensure that the minutes record their reasons for abstention or dissension.
- Draft minutes should be reviewed carefully before adoption – for example where the draft minutes have been prepared in advance, make sure they do in fact reflect the discussions.
- General counsel and executive officers will also be covered by the Act, and must ensure that the board is advised on any issues within their expertise.
- Directors will be judged in the light both of what they know and of what they ought to know in placing reliance on others and in reviewing announcements.
In ASIC’s appeal to the High Court, ASIC sought some explanation as to the particular role and scope of ASIC obligations in civil penalty proceedings, and for the findings of the trial judge to be upheld.
ASIC’s appeal to the High Court was successful. The decision effectively upheld the original findings of the trial judge that by approving the ASX announcement, the board of directors breached section 180.
The Court of Appeal has recently confirmed the issue of penalties in this case, with disqualification orders ranging from 2 years to 7 years and pecuniary penalties ranging from $25,000 to $75,000.
Action brought by ASIC alleged that seven directors of Centro Properties Group and Centro Retail Group failed to discharge their duties with due care and diligence in approving financial reports. It was alleged the directors and former CFO knew the entities liabilities were incorrectly classified in the financial reports.
ASIC sought to disqualify the directors and officers from managing corporations and asked the Court to impose pecuniary penalties on them.
The central question of this case was whether directors are required to apply their own intellect to carefully review both financial statements and directors’ reports to decide whether the information they disclose was consistent with their knowledge of company matters.
Middleton J held that duty of care and skill involves directors having the ability to read and understand financial reports. This is one responsibility that cannot be delegated. The directors did not consider the information themselves, rather the directors solely relied on others as to whether accurate information was being included in the reports. It was found that directors had not satisfied their duty of care and diligence under section 180.
In determining the penalties to be imposed, the Court showed its willingness to consider the specific circumstances in which breaches occur. The directors had acted honestly by attempting to rectify their errors. Middleton J also noted the aim of the orders was to indicate the Court’s disapproval of the directors’ actions, deterring others from acting is the same way.
The non-executive directors did not incur any fines, nor were any of them disqualified from acting as a director. The CEO was also not disqualified but ordered to pay a pecuniary penalty of $30,000. The CFO was disqualified for 2 years but not fined.
Fortescue Metals Group (FMG)
FMG made announcements on ASX that it had entered into binding agreements with several Chinese entities. ASIC alleged that FMG and its director Mr Forrest made a series of misleading public announcements over a 6-month period by referring to these agreements as “binding”. It was claimed that Forrest knew the announcements were inaccurate, and did nothing to correct them.
ASIC alleged that Forrest breached his duty as a director to exercise care and diligence under section 180(1) by failing to ensure FMG complied with its obligations to properly inform the market about these agreements. The Federal Court dismissed ASIC’s case against FMG and Forrest. Gilmour J found that the series of announcements to the market were expressions of opinions in relation to the binding nature of the agreements rather than fact.
The Full Court of the Federal Court by a unanimous decision upheld ASIC’s appeal against the decision of the Federal Court to dismiss ASIC’s civil penalty proceedings against both FMG and Forrest. It found that Mr Forrest had breached his duties as a director in contravention of section 180 as he contributed to the company’s breach of the Act.
The business judgment defence in section 180(2) was not available to Forrest as it is confined to cases involving decision-making about the ordinary business operations of the company and therefore should not relieve him from any liability. In rejecting Forrest’s attempts to rely on section 180(2), the Court found that his decision to release the false information could not be defined as a “business judgment”. There is difference between compliance with the law and business judgment.
The High Court allowed an appeal from Mr Forrest and FMG, overturning the Full Court of the Federal Court’s decision. In this decision, the High Court focused on the ordinary meaning of the announcement regarding whether the agreements were binding in nature. Ultimately, the High Court found that the meaning of the announcement was that FMG believed the agreements were binding, rather than making a representation that the agreements would be enforced by a court in all circumstances.
As ASIC did not establish that FMG or Mr Forrest was fraudulent in relation to the announcements or that they were engaged in misleading or deceptive conduct, ASIC’s other allegations fell away. In particular, as there was no breach of the Act by FMG, it was decided that Mr Forrest had not failed to exercise his powers or discharge his duties as a director with the degree of care and diligence required by section 180(1) of the Act.
In summary, the announcement correctly represented that there was an agreement and that the parties intended it to be binding (on satisfying certain conditions), so it was not necessary to consider whether the agreements were in fact enforceable under Australian law for the purposes of the announcement. Further, ASIC was unsuccessful in establishing that continuous disclosure obligations required it to disclose the agreements in full – disclosure of a proper summary consistent with market practice is all that is required.
In essence, this case confirmed market practice to disclose an accurate summary in terms understood by astute investors, rather than a need to provide a legal opinion or agreements in full.
We regularly advise clients on corporate governance issues so please get in touch with Hunt & Humphry if you require any advice.