WHAT THE JAMES HARDIE SAGA MEANS FOR SMALL TO MEDIUM-SIZED COMPANIES
In February 2001, James Hardie Industries Limited made an announcement on the ASX. It claimed that it had established a foundation fully funded to meet asbestos injury claims caused by products manufactured by two companies in the James Hardie Group. It soon became apparent that the foundation was actually significantly short-funded, and the directors who allegedly approved the announcement have since undergone long-running litigation to determine the nature and extent of their liability.
In the latest installment to the proceedings, ASIC has won its appeal in the High Court which reinstates the original declaration that by failing to personally verify the claims of the announcement, the directors breached their duties under the Corporations Act 2001.
As a large public listed company undergoing a particular set of circumstances at the time, the outcome of these proceedings may seem far removed from the realities of what you do as an officer of a small or medium-sized proprietary company. Putting aside then those elements of the judgment which depend upon a limited set of facts, we have set out below two things which directors of small to medium-sized companies can and should take from this decision:
1. KEEP ACCURATE MINUTES
The thrust of ASIC’s argument which won the appeal in the High Court was not an argument about the extent of directors’ duties of care and diligence. Rather, the issue at hand was whether or not ASIC had proved that the draft ASX announcement was in fact tabled and approved at the board meeting. The directors of James Hardie claimed that the minutes for the meeting were incorrect and that they had not in fact approved the draft announcement.
However, the High Court held that absent evidence to the contrary, the minutes of a board meeting is evidence of what is represented. Accordingly, ASIC established its case by simply tendering the minutes of that meeting.
In the same way, directors of small and medium sized companies must recognize the importance of keeping accurate records of the company, including minutes. Inaccurate minutes will not provide an effective defense to an allegation that you have breached your duties as a director. Even if you did not do what the minutes allege, passive acceptance of incorrect minutes may itself indicate that you have failed to discharge your duty to the level required.
If there is reason to question the accuracy of board minutes, company directors must not fall into the trap of regarding the minutes as a mere formality and simply brush the error aside.
2. WITH GREAT POWER COMES GREAT RESPONSIBILITY
The right for a director to delegate is enshrined in legislation and this recognizes the reality that company directors ought not to be expected to command expertise in every possible area related to the business of the company. However, the result of James Hardie and a string of other case law in recent years have cast significant uncertainty over to what extent a director can rely on others and which issues can be delegated at all.
If nothing else, what the recent media spotlight has reaffirmed is that the role of a director is something which the courts will hold to a particularly high standard. Company directors must engage actively and astutely in carrying out their obligations, whether the actual execution of those obligations is delegated or not.
Under calls for better definitions of the role of directors and the boundaries of reasonable reliance, many look towards legislative change as the more appropriate avenue to clarify these issues. Until then, however, company directors ought to continue to err on the side of caution and keep a close eye on the decisions they are ultimately responsible for.
ARE YOU A DIRECTOR OF A COMPANY?
- Keep accurate company records and minutes
- Ensure there is a process in place for reviewing company minutes
- Always review the actions of delegates
- Never approve the actions of a delegate until you are satisfied that there has been proper execution
- If there is any doubt, always seek a second opinion.