→ John Hanna

On 19 August 2009, the Supreme Court of the State of New South Wales in Australia imposed civil penalties on former James Hardie Industries Ltd (JHIL) directors and officers, including seven non-executive directors, who the Court found had failed to exercise their powers and discharge their duties with an appropriate degree of care and diligence. Each non-executive director was fined $30,000 and disqualified from managing a corporation for a period of 5 years.
Companies in the James Hardie group manufactured and sold asbestos products. As a result of decisions made at a JHIL board meeting in February 2001, a Foundation with assets of $293 million was set up to manage and pay out asbestos claims made against members of the group. Although the board papers did not refer to it, the board was asked at the meeting—as “a last minute affair”—to approve a draft announcement to the Australian Stock Exchange. Company practice required such an announcement to be approved by the CEO, CFO, general counsel and JHIL’s external legal advisers before a finalised version went before the board, but this had not been done.
The draft was handed to board members personally present but was not provided to two directors participating by telephone. It included a statement, “The Foundation has sufficient funds to meet all legitimate compensation claims anticipated from people injured by asbestos products that were manufactured in the past by two former subsidiaries of JHIL.” It referred to “a fully-funded Foundation” which provided “certainty for people with a legitimate claim.” The practice of the board was not to put formal resolutions and each of the non-executive directors did not admit that what had taken place at the meeting amounted to approval of the draft statement. Nonetheless the Court was satisfied that the board had approved the draft.
The Court found that statements contained in the draft were false or misleading or deceptive, the problem being “the emphatic nature of the announcement.” A special commission of enquiry later concluded that the funds set aside would be exhausted by early 2007 and that up to $2,240 million might be needed to cover all future asbestos-related claims.
The Court considered that the directors’ approval of the draft involved a serious and flagrant breach of duty. Late provision of the draft did not excuse the directors: rather, this provided all the more reason for a detailed consideration of the contents. All of the non-executive directors knew or should have known that statements as to sufficiency of funding could have legal consequences and damage the company’s reputation and the value of its securities; accordingly, the matter was not one where a director was entitled to rely on co-directors more concerned with communications strategy. Further, a director could not rely on management, co-directors or expert advisers because approval “involved no more than an understanding of the English language used in the document.”
The Court considered the material which had been before the board. This included a cashflow exercise based on numerous assumptions and the latest in a series of rising actuarial estimates which updated a report that JHIL general counsel had earlier advised board members was “insufficiently definite in that it is heavily based upon assumptions subject to considerable uncertainties.” In the Board papers it was stated, “We have learned that actuarial advice is not a reliable basis for assessing these kinds of liabilities” and “we will not be able to provide key external stakeholders with any certainty that the funds set aside to compensate victims of asbestos diseases will be sufficient to meet all future claims.” In the circumstances, the non-executive directors—who were “intelligent people”—must have realised that unqualified statements that there were sufficient funds in the Foundation to cover all legitimate asbestos claims could not be made. The fact that the directors who participated by telephone did not have a copy of the document did not prevent them from being liable, as they did not object to not having a copy, nor did they ask for one or abstain from approving the draft.
The decision—and the penalties imposed—means that non-executive directors should rethink the extent to which they rely on management or the opinions of experts. At least where important issues are at stake, it is vital that they obtain, read, evaluate and—where appropriate—question all relevant material. Irrespective of management’s views or agenda, they must be prepared to modify or reject a proposal, make further enquiries or require additional steps to be taken before making a final decision.
The decision also has implications for procedures relating to meetings. It is clearly advisable for notices of meeting to detail draft resolutions proposed, that resolutions should be put formally and that minutes should be contemporaneous and detailed enough to ensure that they are “an accurate reflection of the proceedings of the meeting rather than a reconstruction of them.”