Australian High Court ruling has implications for dual general counsel/company secretarial role

Two recent decisions of the Australian High Court have significant corporate governance implications for companies subject to the Commonwealth Corporations Act 2001.  Although the findings are inevitably framed within the confines of the national legislation, the issues canvassed are of broad interest, and merit consideration by general counsel in other jurisdictions. 

In Shafron v Australian Securities and Investments Commission [2012] HCA 18, the High Court found that a general counsel, who also fulfilled the role of company secretary, acted as an officer of the company in respect of all of his responsibilities, including those of general counsel.  Mr Shafron had a duty to take care and employ diligence to protect the company from legal risk in relation to its legal obligations to make disclosures to the Australian Stock Exchange ("the ASX").  

Duties owed by virtue of role as secretary to the corporation

Mr Shafron argued that his obligation of care and diligence was limited to performance of those responsibilities that attached to the office held or the circumstances that made him an "officer": he contended that his work in advising the board or others about such matters as duties of disclosure was work done as, or "in the capacity of", general counsel, not as, or "in the capacity of", company secretary.  He did not lead evidence demonstrating or suggesting that he performed certain tasks in one "capacity" and other tasks in another, although he described the role of his co-company secretary as being of an administrative character only. 

The degree of care and diligence required under the applicable legislation is fixed as an objective standard identified by reference to two relevant elements – "the corporation's circumstances", and the office and the responsibilities within the corporation that the officer in question occupies and has.  The High Court held that the statutory duty of an officer (within the meaning of the Commonwealth Corporations Act 2001) to exercise powers and discharge duties with care and diligence applied to whatever responsibilities the officer concerned had within the corporation, regardless of how or why those responsibilities came to be imposed on that officer. 

Whilst accepting that the nature of the responsibilities of a company secretary - or indeed any officer - in a particular company will be a question of fact, and may vary from company to company, within companies, and over time, the judgment also endorses the Court of Appeal's finding that:

"A company secretary with legal background would be expected to raise issues such as potential misleading statements (in relation to the draft ASX announcement) and disclosure obligations [ ] with the board".

The High Court confirmed that Mr Shafron was in breach of duty for not advising, or obtaining advice for, James Hardie Industries Ltd's Chief Executive Officer or its board that certain information (relating to a Deed of Covenant and Indemnity) should be disclosed to the ASX.   Mr Shafron had argued that he was entitled to assume that the company's solicitors would have advised him if disclosure of the information to the ASX was required.  Since the solicitors' retainer had not expressly or impliedly extended to advising on that question, this argument did not succeed on the facts.   

An officer by virtue of participating in making decisions

Mr Shafron also contended that he should not be considered an officer (under a different limb of the statutory definition) on the basis of 'participating in making decisions' merely because he had been concerned in or taken part in the management of the company. The High Court held that the idea of "participation" directs attention to the role that a person has in the ultimate act of making a decision, even if that final act is undertaken by some other person or persons.  The notion of participation in making decisions is a question of fact and degree which requires an assessment of the significance to be given to the role played by the person in question.

The fact that Mr Shafron was an employee of the company, and not an external adviser, was in the High Court's view an important consideration. What Mr Saffron did went well beyond proffering advice and information to the board of the company. He had played a large and active part in formulating the strategic proposal that he and others chose to put to the board as one that should be approved. Although it was the board that ultimately had to decide whether to adopt the proposal, what Mr Shafron did, as a senior executive employee of the company, could properly be described as participating in the decision to adopt the proposal that he had helped to devise. 

The conclusion that he participated in making the decision depended not solely upon what Mr Shafron did, but also upon identifying the relationship between his actions and the decision to adopt the proposal as "participation" in making the decision. In this case, Mr Shafron was one of three senior executives who shaped and developed the proposal through its successive variants, and who presented successive proposals to the board (which did not itself decide what elements would go to make up any of the several proposals it considered and was "reactive" rather than "proactive" in the formulation of the proposals).

Board minutes as evidence

In the related case of Australian Securities and Investments Commission v Hellicar [2012] HCA 17, the court ruled that seven non-executive directors and the company secretary/general counsel of James Hardie Industries Ltd had breached the duties of care and diligence they owed as directors or officers of the company in approving the release of a misleading announcement to the ASX.  This case highlights the significance of minutes of meetings of directors as evidence of decisions taken at their meetings.

ASIC alleged, and the directors denied, that the directors had approved the company's releasing the misleading announcement.  It is worth noting that there was a significant dispute in connection with the accuracy of board minutes which recorded that a draft ASX announcement was tabled and approved.  Because the minutes were not signed and recorded in the company minute book in the timeframes required by the Corporations Act 2001, there was no statutory presumption that the resolutions recorded in the minutes had been passed. 

None of the witnesses called by the Australian Securities and Investments Commission (ASIC) had any specific recollection of the matters discussed at the meeting (almost seven years earlier).  Although the minutes contained various omissions and inaccuracies, none of these bore on the central point at issue, the tabling and approval of the draft announcement. 

The High Court ruled that the minutes of the board's meeting were a formal and near contemporaneous record (and were subsequently adopted by the board as a correct record) of what had happened at the meeting.  They were evidence of the truth of the matters recorded – in particular, that a draft ASX announcement was tabled and approved.  

The cases will now be remitted to the Court of Appeal for determination of penalty.  ASIC is seeking pecuniary penalties and orders disqualifying the officers from managing corporations.  In the press release welcoming the decision, ASIC's chairman is quoted as saying:

"I am certain this case has and will be studied in boardrooms across Australia and in legal circles, and I know that it is already shaping corporate behaviour and is having a positive deterrent effect."

ASIC's duty of fairness

The cases also raised the question of ASIC's duties in the conduct of its civil proceedings.  It had been argued that a failure by ASIC to call a witness in its case had been unfair.  The High Court found it convenient to assume, without deciding, that ASIC was subject to some form of duty, even if a duty of imperfect obligation, that could be described as a duty to conduct litigation fairly.  The duty did not equate to a prosecutor's duty to call material witnesses at a criminal trial.

In the event, the High Court found that in this case there had been no unfairness and no basis for drawing any inference that the witness in question would have given evidence adverse to ASIC’s case.  The Court of Appeal had been wrong to conclude that a failure to call a witness, in breach of a duty of "fairness", diminished the cogency of the evidence that was called.

In its press release, ASIC accepts it has an obligation to act as a model litigant, but stresses that that obligation does not encompass a duty to call all material witnesses.