- ASIC, Mr Shafron and Mr Morley have each made applications to the High Court of Australia for special leave to appeal against the judgment of the Court of Appeal of New South Wales.
- ASIC's applications seek to clarify whether a regulator's duty of fairness in bringing civil penalty proceedings can require it to call a particular witness.
- ASIC's applications do not raise any question about the duties of non-executive directors, but the non-executive directors may choose to raise such issues by seeking special leave to cross-appeal.
- Mr Shafron's application seeks to challenge the Court of Appeal's important findings on the legal position of the general counsel/company secretary of a listed public company.
Mr Morley's application seeks to raise issues about the legal position of a chief financial officer of a listed public company.
The Court of Appeal's Judgment - Summary
As we reported in our Corporate HQ Advisory Alert on 22 December 2010, the NSW Court of Appeal's judgment in the James Hardie case was delivered on 17 December 2010.
In summary, the Court of Appeal:
- held (contrary to the trial judge's finding) that ASIC failed to prove that, at the board meeting on 15 February 2001, the non-executive directors (NEDs) approved a draft of a misleading market announcement
- consequently set aside the declarations of contravention that had been made against the NEDs
- indicated that if (contrary to the Court's finding) the NEDs had approved the misleading draft market announcement, they would have breached their duty of care to the company
- overturned the trial judge's findings of breach of duty of care by Mr Shafron (the general counsel and joint company secretary) in some respects, but upheld some findings of contravention by him, and
- upheld the trial judge's findings that Mr Morley (the chief financial officer) breached his duty of care as an officer of the company.
The unsuccessful parties have no automatic right to appeal to the High Court of Australia, but they may apply to the High Court for special leave to appeal. ASIC has made applications to the High Court for special leave with respect to each of the seven NEDs, and with respect to Mr Shafron (but not Mr Morley). Mr Shafron and Mr Morley have also made applications for special leave to appeal.
ASIC's grounds for the applications - the NEDs
The key finding by the Court of Appeal was that, contrary to the conclusion reached by the trial judge, ASIC had failed to prove its allegation that an identified draft of the market announcement about "full funding" of the Foundation was approved at the February board meeting.
The Court of Appeal's function under the Supreme Court Act is to conduct an appeal by way of re-hearing. The appeal judges are therefore obliged to conduct a real review of the trial, to weigh up the conflicting evidence and draw their own inferences and conclusions - though they must bear in mind that the appellate court has neither seen nor heard from the witnesses.
Both ASIC and the respondents to the appeal made extensive submissions about the facts, which went well beyond the trial judge's reasons. To deal with those submissions, the Court of Appeal addressed the evidence at great length (over 100 pages of the Court of Appeal's judgment is directed to the question whether the board meeting approved the draft market announcement).
In reaching its conclusion that ASIC had failed to prove its case on this question, the Court of Appeal took into account ASIC's special duty of fairness in conducting civil penalty proceedings, and held that on the facts of the case, the duty of fairness required ASIC to call a particular witness (the company's solicitor, Mr Robb) to give evidence about what happened at the February board meeting. ASIC's failure to call Mr Robb was a factor leading to the Court's conclusion that ASIC had not proved its case.
In its applications for special leave, ASIC alleges that the Court of Appeal made 11 errors in reaching its conclusion. Most of these relate to detailed factual matters addressed by the Court of Appeal in its reasoning. ASIC contends that the Court did not give sufficient weight to some specified matters, gave too much weight to other matters, and that on some occasions the Court's reasoning amounted to speculation contrary to (or not supported by) the evidence. For the most part, these allegations do not, on their face, raise any issues of law that would be of interest to company directors generally.
In particular, ASIC's applications do not raise any issues about the content or application of the law concerning directors' duties.
The main matters of general legal interest relate to ASIC's duty of fairness. ASIC's applications for special leave do not dispute the existence of the duty of fairness, or challenge the Court of Appeal's formulation of it, but they raise questions as to the scope of the duty and in particular, whether the duty requires ASIC to call a particular witness to which it may have had access.
If ASIC obtains leave to appeal on these grounds, the High Court may have the opportunity to clarify the duty of fairness of a regulator in civil penalty proceedings - but perhaps only on the questions whether the duty can oblige the regulator to call a particular witness, and whether (if so) failure to do so can undermine the regulator's evidentiary case.
ASIC also challenges the Court of Appeal's conclusion that the minutes of the board meeting, which purportedly record that the draft market announcement was approved, were open to question and should be treated with considerable reserve. It is not clear whether, if leave is granted, this argument will raise questions about the legal status of board minutes.
In its applications for special leave, ASIC asks the High Court to do one of three things with respect to the NEDs:
- dismiss their appeals to the Court of Appeal (so that the trial judge's declarations of contravention would be revived), or
- remit the matter to the Court of Appeal for further consideration in light of the High Court's decision, or
- order a re-trial limited to some specific allegations by ASIC.
If the High Court hears the appeal, agrees with ASIC and adopts alternative (a), the litigation will be over when the judgment is delivered. Alternatives (b) and (c) would mean that the litigation would drag on, well over ten years after the events which led to the proceedings.
The position of the NEDs
If ASIC (contrary to the Court's finding) had proved its case that the directors approved the draft market announcement at the February meeting, the Court of Appeal would have found that in doing so they had breached their duty of care. The Court did not accept the NEDs' submissions to the contrary (including their submission that they were entitled to rely on advice from executive officers and external advisers).
If ASIC obtains special leave and the NEDs do not challenge that part of the Court of Appeal's reasoning, and ASIC's appeal succeeds, the NEDs may have no grounds for resisting adverse orders.
The NEDs will have the opportunity to seek special leave to cross-appeal or file a notice of contention in relation to the Court of Appeal's judgment, if ASIC is successful in its applications for special leave. If they do so, they are likely to put in play in the High Court some fundamentally important issues about directors' duties.
As we explained in our December Alert, the Court of Appeal held that Mr Shafron breached his duty of care as an officer of the company by failing to advise the CEO and board to consider whether to disclose to the market the deed of covenant and indemnity (associated with the establishment of the Foundation). He was also found to have breached his duty by failing to advise the board that certain "best estimates" in actuarial estimates of exposure to asbestos claims had failed to take into account superimposed inflation.
In brief, the Court of Appeal found that Mr Shafron was an officer of the company because he participated in making decisions that affected the whole or a substantial part of the company's business, and because he was the company secretary.
Mr Shafron has made an application to the High Court for special leave to appeal from those adverse findings. If leave is granted, the application will raise for consideration in the High Court some very important issues about the legal duties of the general counsel and company secretary of a listed public company. The issues are likely to include:
- whether the general counsel of a listed public company is necessarily an officer of the company, and if not, whether and in what circumstances involvement in management decisions will cause the general counsel to become an officer, and
- whether a company secretary, necessarily an officer when acting as such, can engage in some "non-officer" activities and if so, in what circumstances.
Mr Shafron was held not to have breached his duty of care in two other respects.
ASIC alleged that Mr Shafron failed to advise the board at the February meeting that the draft market announcement was expressed in terms that were too emphatic. The Court of Appeal rejected this allegation on the ground that the draft market announcement was not in fact placed before the board for approval at the February meeting. Consistently with its applications for special leave regarding the NEDs, ASIC seeks leave to overturn the Court of Appeal's finding that the draft announcement was not approved by the board, and consequently the Court's rejection of its allegation against Mr Shafron.
ASIC also alleged that Mr Shafron failed to advise the board of the limited nature of the reviews of the Foundation's cash flow model undertaken by PwC and Access Economics. The Court of Appeal disagreed, on the ground that the evidence did not support a finding that Mr Shafron knew of the limited nature of the reviews. Although the drafting of its application for special leave is not clear, we infer that ASIC does not seek special leave to appeal against that finding.
In substance, therefore, ASIC's grounds for seeking leave to appeal in respect of Mr Shafron are the same as its grounds concerning the NEDs.
The trial judge and the Court of Appeal found that Mr Morley breached his duty of care as an officer of the company by failing to advise the board that the reviews of the Foundation's cash flow model by PwC and Access Economics were limited to the logical soundness and technical correctness of the model, and did not verify key assumptions about earning rates, litigation and management costs, and future claims costs.
Mr Morley's application to the High Court for special leave to appeal seeks to raise the questions whether, when he presented the cash flow model to the February board meeting, Mr Morley was acting as an officer of the company, and whether he had the capacity to affect significantly the company's financial standing.
If Mr Morley succeeds in his application for special leave, his appeal to the High Court is likely to raise some important questions about the scope and nature of the position of chief financial officer of a listed public company.
The appeal process
The High Court's rules set up a timetable for preparing applications for special leave for hearing. The parties to the application are to file summaries of argument and the applicant must file a draft notice of appeal and an application book. In respect of applications filed on 14 January 2011, the process might not be completed until 1 April 2011, if everything is done on the last day. Then the applications for special leave are allocated for hearing. ASIC's applications and the applications by Mr Morley and Mr Shafron may well be heard together.
If special leave is granted, the applicants then serve their notices of appeal and the respondents have 14 days to file notices of cross-appeal, which are subject to the granting of special leave, usually sought when the appeal is called on for hearing. Therefore we may not find out for some time whether the High Court will be asked to consider questions about directors' duties.
Of course, if the applications for special leave succeed, the hearing of the appeal is unlikely to occur for some months.
This article is from our February 2011 edition of Australian Legal Update.