July 03 2012
On May 3 2012 the High Court dismissed the appeal of Peter Shafron, company secretary and general counsel of James Hardie Industries (JHIL), and found that he had contravened Section 180(1) of the Corporations Act 2001 (Cth). The decision raises concerns for in-house counsel who perform other roles, such as company secretary.
In 2001 the board of JHIL expected there to be further claims against two wholly owned subsidiaries of JHIL for personal injury from those who had come in contact with its asbestos products. The board decided to separate the two companies from the James Hardie group and to establish the Medical Research and Compensation Foundation to pay out on asbestos-related claims.
On February 15 2001 the board agreed to release information to the Australian Stock Exchange (ASX), which resulted in the following statement being released: "James Hardie is satisfied that the Foundation has sufficient funds to meet anticipated future claims." It was later found that the Medical Research and Compensation Foundation was underfunded by over A$1 billion.
In 2007 the Australian Securities and Investments Commission (ASIC) brought proceedings against seven former non-executive directors, three former executive directors and Shafron for breaches of Section 180(1) of the act. ASIC alleged that they had failed to exercise due care and diligence in relation to the release of information to the share market, thereby breaching their duties to the company.
The Court of Appeal agreed that Shafron had breached the act. Shafron appealed the decision to the High Court. An important issue for the court to determine was whether Shafron was an 'officer', as defined by Section 9 of the act, for the purpose of Section 180.
Shafron did not dispute that Section 180(1) applied to him in his capacity as company secretary, but submitted that because the alleged contraventions occurred in his capacity as general counsel, he was not subject to the duty. Shafron contended that:
The High Court held that Shafron's participation within the project team and his status as approver of ASX announcements in his role as "general counsel and company secretary" fell within the definition of 'officer' in the act. The nature and extent of his participation involved more than just providing the board with information and advice; instead, he had considerable input into the proposal that he and others put to the JHIL board for approval.
As such, it was found that he had a duty to take care and employ diligence so as to protect the company from "legal risk". A reasonable person with his responsibilities would have drawn to the attention of the board the particular matters of which he was aware.
The two roles, general counsel and company secretary, were found to be indivisible and were to be assessed as a whole under Section 180. The court found it impossible to sever the responsibilities of Shafron into "watertight compartments" with the expression 'company secretary' not being a term of art.
Section 180(1)(b) of the act provides that the degree of care and diligence required of an officer is to be referenced to the 'office held' and the 'responsibilities within the corporation' of that particular officer. The scope or responsibilities of that relevant officer within the company is to be determined by examining all work undertaken by that officer and is not to be assessed from an examination of tasks performed by persons in the same position at other companies.
This involves evaluating whether a person participates in the making of a decision of significance for the business and then an "examination of what contribution that person makes to the making of a decision". That a person is not the decision maker does not mean they cannot participate in the making of that decision.
Furthermore, the fact that an in-house counsel is not an expert in a particular subject field will not absolve him or her of liability where he or she has enough knowledge to understand the importance of information he or she has. He or she will be required to bring it to the attention of the relevant decision makers. Shafron had failed to tell anyone that actuarial documents relied on did not factor in "superimposed inflation" such that the value of asbestos-related claims might increase at a rate above the usual inflation rate. Shafron was no actuarial expert, but it was proved that he knew that the cashflow projections did not allow for this.
It is thus important for in-house counsel to be thorough in placing important information before the board or, at very least, the chief executive officer.
In-house counsel should take care to:
To the extent possible, in-house counsel should take steps to separate work done in each role. That may involve a use of separate sign-offs on emails and correspondence and physically separating files or email folders. The individual should clarify on what basis he or she is providing information to the board and attending board meetings and ensure that the minutes reflect this.
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