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Corporations - Corporate governance under scrutiny
Directors’ duties remain in the spotlight after the filing of a wide-ranging lawsuit by the Australian Securities and Investments Commission (ASIC) against building supplies manufacturer James Hardie. If successful, the case will magnify the “care and diligence” obligations of company directors across corporate Australia.
On 15 March, ASIC launched civil action in the NSW Supreme Court against all Hardie directors for breach of the Corporations Act. The 10 directors are accused of making misleading statements to the public regarding the company’s ability to meet the demands of a compensation fund for asbestos disease victims.
The $293 million compensation fund was set up in 2001 after James Hardie Group subsidiaries were found to be responsible for the majority of asbestos-related diseases and death in Australia, a result of asbestos products they manufactured up until 1987. A special commission inquiry later found the compensation fund to be significantly flawed, falling more than $1 billion short of the amount actually required.
Further, during the period from 2001 and 2003, the company made a successful application to its shareholders and the NSW Supreme Court to relocate its headquarters to the Netherlands. This move was viewed by some as an attempt by the company to distance itself from its existing compensation liabilities and that, in making the application, the company may have misled the Court. If these allegations of misleading the court can be substantiated, criminal charges may also apply to the company directors involved.
Evidence giving rise to allegations of misleading conduct by Hardie directors include a media release in 2001, approved by the company board, which gave inaccurate assurances that the compensation scheme was “fully funded”. Soon after the media release came the company’s relocation application. Then, in 2003, a proposal to cancel $1.9 billion in partly paid shares, held by former Australian parent company JHIL, was also signed off but not disclosed until later.
If ASIC is successful in this latest legal action, Hardie directors will face fines of up to $200,000 for each breach of the Corporations Act. The same legislation prevents the company from paying any fines on behalf of those individuals involved. Furthermore, ASIC can seek that bans be placed on specific directors, precluding them from future directorships in other companies.
Since legal action began, Hardie chairman Meredith Hellicar and non-executive directors Michael Brown and Michael Gillfillan have stood down from the board. Ms Hellicar has also resigned from the federal government’s Takeovers Panel but maintains her positions on the boards of AMP and Southern Cross Airports Group.
Her departure came amidst praise from acting chairman John Barr for her contribution to the Amended and Restated Final Funding Agreement made with asbestos victims before the ASIC civil penalty proceedings were launched. The settlement, approved by Hardie shareholders, commits $4 billion to a new Asbestos Injuries Compensation Fund (AICF). The first annual payment is due on 1 July 2007.
ASIC’s decision to pursue the directors of James Hardie sends a cautionary message to all the board members of corporate Australia. As the civil court case proceeds and criminal investigations continue, directors around the country will be carefully considering not only their own corporate governance responsibilities but those wider community obligations that are implied through their core business operations and activities.
More information
From the LIV Bookshop
Australian Corporations Legislation 2007, published by Butterworths, $68
Useful web links
Visit ASIC at www.asic.gov.au
Disclaimer: The information in this newsletter is not intended to be a complete statement of the law relating to the issues raised. Accordingly, no person should rely on this information without first obtaining specific advice from Mr Brendan Kelly of our office.
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