The responsibility for continuous disclosure announcements in the light of James Hardie - Australian Securities and Investments Commission and Macdonald (No 11) [2009] NSWSC 287

On 23 April 2009 Gzell J delivered judgement in Australian Securities and Investments Commission v Macdonald (No 11) [2009] NSWSC 287. 

The case related to misleading and deceptive comments published by James Hardie to the ASX on 16 February 2001 (Final ASX Statement), following a board meeting of the directors of James Hardie Industries Limited (JHIL).  During the meeting, the Board members were found to have approved a draft ASX statement to the effect that the Medical Compensation and Research Fund (MCRF) created to pay out injuries related to asbestos exposure, was fully funded.

The decision highlights the stringent duty on non-executive directors to be fully informed on any proposal before the board.  Following Gzell J's decision, a director who is not fully informed on a proposal to be voted on, has the obligation to fully inform themselves or to abstain from voting in relation to the proposal.

The decision also highlights the presumptive reliance placed by Courts on the minutes of a meeting, and demonstrates a failure to record the minutes of a meeting within a month of the meeting means little weight attaches to minutes recorded after the expiry of the one month period.

Presumptive reliance on minutes

The directors unanimously contended that they had not been presented, had any discussion of, nor voted on, the draft ASX statement (Draft ASX Statement) recorded in the minutes of the 15 February 2001 meeting, and subsequently did not vote for the approval of the Draft ASX Statement.  Their contention was aided by the fact that the minutes were signed more than a month after the meeting. Pursuant to section 251A(1) a minute signed in such a way should not be deemed as part of the minute book and therefore should not attract special evidentiary value pursuant to section 1305.

Gzell J followed the decision of Wilcox J in Claremont Petroleum NL v Cummings (1992) 110 ALR 239, where unless it was proved to the contrary, a contemporaneously recorded minute was prima facie evidence of the proceedings of a meeting. Gzell J concluded:

One thing that has emerged clearly in this case is that recollection is fallible.  If a minute is to be given evidentiary value, it ought to be a contemporaneous document, for then it is more likely to be an accurate reflection of the proceedings of the meeting rather than a reconstruction of them. 

Although Gzell J confirmed that the failure to record the minute within the month meant ASIC could not use it as evidence suggesting the Draft ASX Statement had been debated at the 15 February 2001 meeting, his Honour did accept the inference that the directors had been presented, discussed and approved the Draft ASX Statement despite their evidence to the contrary.

Duties of non-executive directors

Non-executive directors generally have the responsibility to guide and monitor the management of the company, rather than to be involved in the operational responsibility of the company.  Gzell J found in the circumstances before the James Hardie Board the decision the board faced 'was not a matter of operational responsibility,' and therefore responsibility for approving the Draft ASX Statement rested solely with the directors and not with management.  This is a major aspect of the decision for non-executive directors.  In a regime that requires continuous disclosure it is commonplace (and arguably essential) that disclosures are dealt with as a matter of operational responsibility. 

In approving the Draft ASX Announcement, the directors, executive and non-executive, were found to have breached their statutory duty to JHIL unde section 180(1), to act with care and diligence and not make misleading or deceptive statements.

The court found, contrary to the testimony of the directors, the Draft ASX Statement was:

considered at the meeting, their [the non-executive directors] failure to call for a copy to familiarise themselves with its terms or to abstain from voting constituted a breach of duty. [emphasis added]

This statement clarifies any misconception regarding non-executive directors' ability to rely on the advice of management or executive directors.

The former lower standard of care required by non-executive directors was articulated in Australian Securities and Investments Commission v Rich and Others (2004) 50 ACSR 500, where White J concluded a non-executive director could place reliance on the advice provided by management provided reliance on the advice was reasonable.

Should the higher duty of care and diligence be breached by a non-executive director, then that director will be liable to incur a civil penalty provision pursuant to section 1317E.  This could result in a pecuniary penalty order or disqualification. 

Conclusion

Following Gzell J's judgement, the role of the non-executive director is now more onerous than previously was considered to be the case.  Non-executive directors must familiarise themselves with any proposal put to the board, or at the very least abstain from voting in favour of the proposal.  Failure to do so will lead to the directors breaching their duty of care and diligence to the company and could lead to the director being fined or disqualified.

As a matter of practice, directors who seek to rely on the benefit of the recording of minutes as prima facie evidence of proceedings should strictly comply with the rules of 251A by recording the minutes within one month of the meeting and ensuring the minutes are accurate, particularly in respect of voting. 

Public companies must urgently review their procedures for approval of ASX disclosures.  Non-executive directors similarly should urgently review their role in relation to ASX announcements.