Shafron v Australian Securities and Investments Commission  HCA 18
This decision of the High Court is related to the decision in ASIC v Hellicar & Ors  HCA 17, which was the subject of our recent update.
The Shafron decision is of considerable importance in confirming the potential liability under section 180 (1) of the Corporations Act 2001 (Cth) of in-house counsel, particularly those who are also company secretaries and/or involved in making high-level business decisions.
It is also consistent with recent decisions of the courts which have confirmed that the title “in-house counsel” or “general counsel” will not be allowed to mask the true role of the incumbent. The courts will examine the role to determine whether the counsel is either an executive of the company involved as a “project driver”, or is acting in a traditional counsel role of oversight of governance and protection of the company against legal risk. The outcome of that enquiry may have profound implications, not only for the individual’s potential liability as an officer of the company but also for determining whether advice given, purportedly as counsel, will attract legal professional privilege. Significantly, in the Shafron case the general counsel and company secretary was found to be acting in both roles: as project driver, and also as governance adviser. It must be questionable whether these two roles can ever be combined in the same person, without compromising one of them.
Summary of facts
Mr Shafron was both general counsel and company secretary for James Hardie Industries Ltd (JHIL). The NSW Court of Appeal found that Mr Shafron had contravened section 180(1) by his omission to give advice. One contravention involved failure to advise the CEO and the board of JHIL that information about a Deed of Covenant and Indemnity (DOCI information) should be disclosed to the Australian Securities Exchange (ASX). The other contravention involved failure to advise the board that an actuarial study he had commissioned to estimate potential liabilities to asbestos disease victims failed to make any allowance for “superimposed inflation”, which a prudent estimate would have included.
Mr Shafron did not suggest that as company secretary he was not an officer of the company under section 9 of the Corporations Act. That argument was not open, since a company secretary is expressly included within the definition of “officer”. However, he submitted that in his duties as general counsel he was not acting as an officer of the company; his obligations under the Corporations Act were limited to the exercise of powers and discharge of his duties as secretary. He further submitted that his duties as company secretary were limited to administrative matters and did not extend to the tendering of advice to the board as general counsel.
High Court Decision
Mr Shafron’s argument required the Court to accept that a distinction could be drawn between the capacities in which he performed certain tasks.
The Court held that there was no evidence demonstrating or suggesting that Mr Shafron performed certain tasks in the capacity of secretary and other tasks in the capacity of general counsel. Due to Mr Shafron’s qualifications and the position in which he was employed (as general counsel and company secretary) his duties extended beyond administration and included offering advice, including advice about how the company’s duties of disclosure should be met. His duties, viewed as an overall whole, required him to protect the company against legal risk. Under section 180(1) of the Corporations Act, an officer’s duty of care and diligence is measured by reference not only to the office they hold, but also by reference to the actual responsibilities they have within the corporation. Thus the responsibilities of a company secretary with a legal background extended to giving legal advice to the CEO and the board.
Further, the evidence revealed that Mr Shafron was a senior executive of JHIL and formed part of the executive team responsible for formulating proposals for the separation of certain entities from the corporate group. Not only was he a legal adviser, he was also a participant in the decision making of JHIL. Even if he had not been classified as an officer by reason of his position as company secretary, he would have been an officer because he was a person who participated in making decisions that affected the whole or a substantial part of the company’s business. The Court provided valuable guidance on the meaning of “participating in” a decision: Mr Shafron had participated in the decision to separate asbestos liabilities from operating revenue, because he had “played a large and active part in formulating the proposal”, even though it was the board that actually made the decision on the proposal.
The Court held that a reasonable person in his position would have drawn to the attention of the board that the estimate of required funding excluded superimposed inflation, and also pointed out to the CEO and the board that the DOCI information required disclosure to ASX. He could not rely on the failure of the external lawyers to advise the board on the continuous disclosure issue, because the lower courts had found as a matter of fact that advising on continuous disclosure was not part of the external solicitors’ retainer. A final lesson from the James Hardie case: take care with retainer agreements. If advice from external lawyers is required to extend to consequential compliance issues, this should be made clear.