James Hardie High Court decision – non-executive directors attending board meetings by phone

09 May 2012 Topics: Compliance and corporate governance

On 3 May 2012 the High Court concluded the James Hardie cases when it overturned the finding of the NSW Court of Appeal, and held that seven non-executive directors of James Hardie Industries Limited (JHIL) contravened their obligations under the Corporations Act 2001 (Cth) (Act).

The High Court unanimously held that the non-executive directors had contravened section 180(1) of the Act by failing to exercise the relevant degree of care and diligence when approving the release of a misleading ASX announcement in 2001.

Importantly, this decision raises some significant considerations for non-executive directors who participate in board meetings by telephone.

The decision considered whether a misleading draft ASX announcement had been tabled and approved by the JHIL board at a meeting in February 2001. Importantly, the High Court found that two non-executive directors who had participated in the board meeting by telephone and had never seen the draft ASX announcement, were also in breach of their duties under section 180(1).

Facts

It was upheld by the High Court that a draft ASX announcement had been tabled at a February board meeting and a resolution had been passed approving the announcement and its release to the ASX. The announcement made false and misleading claims as to the sufficiency of a fund set up by JHIL to meet present and future asbestos related compensation claims.

At the time of the board meeting, Michael Gillfillan and Martin Koffel were in the United States, and both participated in the relevant board meeting telephonically.

Mr Gillfillan and Mr Koffel were not in receipt of a copy of the draft ASX announcement (either at the time of the meeting or afterwards), and submitted that the contents of the draft announcement were not read out in the course of the meeting. Further, the two directors had remained silent when the resolution to approve the draft ASX announcement was passed.

Counsel for Mr Gillfillan and Mr Koffel submitted that their silence did not amount to a vote in favour of the resolution to approve the draft announcement. It was submitted that the common practice at JHIL board meetings for silence to constitute consent applied only when what was being decided was clear to all, and therefore in this instance silence amounted to abstention.

It was further submitted that Mr Gillfillan and Mr Koffel were not in breach of the duty of care and diligence owed under section 180(1) as they had given careful consideration to the material they had received. It was submitted that they had no further duty of care and diligence to attend to anything more, unless the Chairman ensured they were in receipt of more material.

The High Court

The High Court unanimously upheld the trial judge’s decision that by their silence Mr Gillfillan and Mr Koffel had voted in favour of the resolution approving the misleading draft ASX announcement.

Despite not being in receipt of the draft ASX announcement, Mr Gillfillan and Mr Koffel were aware that JHIL would be making an announcement regarding the contentious matter of funding for compensation claims. Whilst the precise content of the announcement may have been unknown, the significance of the content could not have been lost on the two directors.

Further, the Court recognised that owing to the contentious nature of the announcement discussion would have ensued at the meeting during the course of which it would have been disclosed to Mr Gillfillan and Mr Koffel that the other directors in attendance were in possession of a document they had not received.

Mr Gillfillan and Mr Koffel both accepted that it was the board’s practice for the Chairman to summarise a position, and in the absence of express opposition by a director, that was taken to be a unanimous board resolution. The onus was on the directors to exercise caution in passing the resolution by seeking further information, or by expressly abstaining.

It was further noted that Mr Gillfillan and Mr Koffel had both been present at a subsequent board meeting when the minutes of that February board meeting were approved by the directors. They had not indicated at the subsequent meeting that they had abstained from voting in respect of the relevant resolution.

Comments

Mr Gillfillan and Mr Koffel breached their duty to exercise care and diligence by voting in favour of the resolution without asking for a copy of the draft ASX announcement or knowing its terms, or failing to abstain from voting in favour of the approval.

This decision confirms that non-executive directors who are not in attendance at board meetings, but participate by telephone, have a positive obligation to be cautious when voting. If the content of a resolution is unclear, there is a positive onus on the director to seek further information, or abstain from voting.

Blindly consenting to a resolution without the requisite knowledge may amount to a breach of the director’s duty to exercise care and diligence in discharging their responsibilities.

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