The High Court of Australia (HCA) has upheld a guilty verdict against the Directors of James Hardie (JH). The judgment has a number of very important implications for company directors because, in the view of their Honours, it “raises issues of considerable public importance”.
If you are a company director or an advisor to a board, we recommend you take time to review the implications of this case.
The proceedings arose out of the 2001 restructure of the JH group of companies and announcements made by the board that were later found to contain misleading statements. The Australian Securities and Investments Commission (ASIC) brought civil proceedings against the directors of JH for contravening s180 of the Corporations Act 2001 (Cth).
ASIC alleged that the JH board had approved a draft ASX announcement that was found to be misleading. ASIC tendered the minutes of the relevant board meeting which recorded the tabling and approval of the ASX announcement. Those minutes had been adopted and signed as a correct record at the next board meeting. The JH directors claimed that the minutes recording and approval of the draft announcement was false and that the minutes were demonstrably wrong in other respects.
The HCA held that inaccuracies in board minutes did not counter their probative value as a contemporaneous and formally adopted record of what was agreed at the relevant board meeting.
1. Board Minutes
The JH case highlights the significance of minutes of board meetings as evidence of decisions taken by directors at their meetings.
The Corporations Act provides that a company must keep minute books in which it records within one month, proceedings and resolutions of directors' meetings. Additionally, a company must ensure that minutes of a meeting are signed within a reasonable time after the meeting by the Chair of the meeting. Furthermore, minutes that are recorded and signed are evidence of the proceeding, resolution or declaration to which they relate.
The minutes of the board's meeting are a formal record. Once adopted by a board as a correct record, they are evidence of the truth of the matters recorded. Directors cannot later argue that the minutes were incorrect or false, particularly where, as in the JH case, the tabling and approval of a significant public disclosure/announcement is involved.
Directors must carefully read and review board minutes. In our view, directors should also take their own detailed notes, ensure the board minutes correspond accordingly and take steps to have the board minutes amended or reviewed where applicable.
ASIC advises that the JH decision demonstrates that directors must review board documents carefully.
Directors will be held personally responsible for misleading statements.
Not reading board papers (as disclosed by one JH director) or not reading them with sufficient care (as disclosed by another JH director) is not an option.
The JH directors complained of receiving board papers that were more than 1,000 pages in length. Directors are the highest decision making body of a company and are responsible for the quantity and quality of documentation they receive. It is not enough for directors to complain that they cannot read board papers. Directors have a clear obligation to ensure that the statements that they make are accurate and can be relied upon.
3. Advisors to the Board
Directors should not rely on the word of managers and advisers. They must undertake their own enquires and the enquiries should not be cursory.
Directors are personally obligated to make decisions on behalf of the company. They must undertake their own enquiries, particularly in relation to financial matters. This was also a key message from the Centro case in 2011.
Directors are responsible for the procedures and process of the board and any internal or external advice received should be tested and verified. Directors must undertake their own due diligence and not solely rely on advisors.
For advice on corporate governance and Directors' obligations, contact one of FAL's Partners.
4 April 2012