Legal Update 2012 Introduction Important background developments in 2012 Impact on directors’ duties Legislative change Key case law Broader corporate governance trends Put your organisation’s logo here
Australian Background BHP Billiton (1 st ) CBA (2 nd ) Westpac (3 rd ) Telstra (7 th )Woolies (9 th ) Wood- Side (10 th ) Market cap $102.1b$87.15b$76.29b$47.9b$36.5b$27.3b FMG (20 th ) Caltex (50 th ) Primary Health (100 th ) Fisher & Paykel (150 th ) Market cap $10.9b$4.5b$1.8b$0.99b 2011AllASXPublicPtyNewInsolv Co’s1,839,7721,85020,0001,800,000163,27610,757 Data: ASIC Annual Reports & SMH Top Companies 1 st Sept 2012
Corporate legislative reform: – Personal Liability for Corporate Fault Reform Bill 2012 – draft release – Future of Financial Advice (FOFA) reform – Personal Property & Securities Act 2009 Commenced operation 30 January 2012 – Work, Health and Safety legislation National, once State/Territories pass aspects – Comp & Consumer Act 2010 – ACCC - ACL – Corruption legislation – internationally
Officers and directors: There are key questions, scholars are asking – What are the definitions of Officer and Director? – What are the changes to directors’ duties and other roles? CFO, general counsel, company secretary? Impact of case law and legislation – Diversity in the boardroom add value? Gender &culture (race/ethnicity) - technology
Definitions of officers? The law is reasonably stable as to the meaning of who is an officer (s 9 definition in Corps Act) and who is a director: Case law has recently helped explain the definitions: – Hodgson v Amcor  – broader meaning – Chameleon Mining  – de facto roles In 99.9% of cases it is really obvious!
Directors case law: – Centro litigation ASIC v Healey – financial literacy test Class actions – PwC, Centro $200m settlement, $15m lawyers, $60m IMF ($125m shareholders) Kirby v Centro Properties – privilege in documents – James Hardie litigation Lessons to be learnt ASIC v Hellicar & Shafron v ASIC Tax issues HCA case and asbestos fund? – FMG & Forrest HCA – strategic importance on disclosure – Mansfield v R HCA on insider trading
9 Corporations Act 2001 Reasonable care Act honestly Misuse information Misuse position Insider trading Insolvent trading Criminal offences Liable for all “Adams officers’ overlap diagram” Harris, Hargovan & Adams, Australian Corporate Law LexisNexis 2011
Background to enforcement ASIC1995200120102011 Jailed12251216 Successful81%71%91%90% Litigation74150156202 Misconduct7,2876,94613,37215,634 From 2000 to 2010 there were 220 officers sent to jail Data: ASIC Annual Reports ASIC/DPP Enforcement Statistics
Case law on duties: ASIC v Adler, Williams & Fodera (2002) – R v Adler (2005) and R v Williams (2005) ASIC v Vines, Robertson & Fox (2005) Centro litigation; ASIC v Healey (2011/2012) AWA litigation (1986) AWA v Daniels (1992 ) Mr Koval (2012) AWB litigation (Lindberg, CEO) (2009/2010/2012) James Hardie litigation (2009 to 2012)
Background to James Hardie case 2001 JHI group reorganised via “Scheme of Arrangement” to Netherlands; founded in Australia in 1895; listed ASX 1951. Business case reasons for moving, not to avoid liability for asbestos claims! 16 th February 2001 media release (ASX announcement) that MRCF (trust) was “fully funded” for asbestos victims – $293 million worth of assets placed in the MRCF to cover claims
Background to JHI case (2009) JHI started warning workers and consumers of asbestos in 1978 and stopped production in 1987. 50% of NSW Dust Diseases Tribunal matters directly relate to JHI products NSW Jackson QC Report in 2004 found liability was at least $1.573 billion by end of 2003 Actuaries completely wrong!
23 rd April Justice Gzell of NSW Supreme Court handed down 194 page judgment on ASIC v Macdonald (No 11)  NSWSC 287 = CEO $350,000 & 15 year disqualification 45 hearing days, 12 defendants, including the old company (JHI – ABN 60 Pty Ltd) and current entity – JHI NV PositionCA2001Breaches old JHIMisleading/falsesix Current JHI NVs1041H misleadingthree CEOs180 (duty of care)ten Lawyers180 (duty of care)six CFOs180 (duty of care)one Seven non-execs180 (duty of care)one each
Appeal of JHI case (2010) Morley v ASIC NSW Court of Appeal – Non-executive directors appeal successful – Executive officers still held liable (CFO) Key question was Peter Shafron’s capacity as both company secretary and general counsel? Really HCA decisions most important – Penalties from NSW Court of Appeal
James Hardie litigation (2012) Lessons from ASIC v Hellicar  HCA 17 – Case does not change general law of directors – Significant event needs board & management focus – Silence cannot be interpreted by Chair as assent & boilerplate resolutions can be dangerous – Clear procedures for delegation of decisions » Media Releases to ASX etc – Approval of board minutes and evidence – Role of external expert advisors – $25,000 ($20K) & two year ban
Lessons learnt Shafron v ASIC  HCA 18 – Cannot split roles of company sec and general counsel – Duty of care in s 180 clear – Peter Shafron fell short of the standard expected: » Failed to advice Board on cash-flow model given by external consultants for asbestos claims » Failed to advice CEO and Board so consider information about the Deed of Covenant and Indemnity to be disclosed to ASX (continuous disclosure rules LR3.1) – Check roles and D&O policy – reality not words that count….. – $75,000 penalty and seven years disqualification
Board diversity questions? There is a lot of debate around the need for diversity: Gender is obvious Latest ASX/AICD figures show 13.8% of ASX200 – Up from 11.2% in 2010 – 68 new female appointments (one in three) Top 20ASX have 20% female directors (17.3% top100) European Union outlines a board quota on gender – Culture/race/ethnicity is lagging – Technology Generation baby-boomer or “X” or “Y”?
Meaning of ‘governance’? There is a clear theoretical distinction between the concepts of: – Corporate governance Corporate social responsibility – Due diligence Internal system approach External (transactional) approach – Compliance programmes
Useful academic definition by Cochran & Wartick (1988) “ An umbrella term that includes specific issues arising from interactions among senior management, shareholders, boards of directors and other corporate stakeholders”
Chapter Six “Corporate Governance” “Corporate governance is not a term of art” “At its broadest, the governance of corporate entities comprehends the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations” page 101 of Final Report HIH Royal Commission (2003)
Prof Adams – working definition: Corporate governance has two simple aspects: – Doing the right things – Doing things right
Corporate Social Responsibility: Is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large. – Making Good Business Sense by Lord Holme & Richard Watts
Dodge v Ford (1919, USA) Henry Ford wanted to use corporate profits that he viewed as excessive to raise worker salaries and reduce the price of his company's automobiles. His stockholders wanted that money for themselves. Judge ruled that the whole purpose of business is to maximize shareholder wealth, and if Ford “wanted to pursue a (charitable end) he should do it with his own money, not with other people's.” This case highlights the American view that shareholders reign supreme in regards of the actions of the company.
Walker v Wimborne (1976, HCA) Built on the UK Court of Appeal decision in Percival v Wright  2 Ch 421 In conducting the financial affairs of a business, the board of directors of a business have a fiduciary duty to consider firstly the shareholders and creditors best interests. The High Court of Australia held that directors were personally liable for the funds moved from subsidiaries to holding companies within the group. Case has not been overturned
Global corporate governance Scholars around the world are asking questions about the role of corporate governance; its impact on share-price; its links to failures; convergence! – European financial crisis and post-2008 GFC – forced questions to be asked. Adams, M; “Global trends in corporate governance” (2012) vol 64 (9) Keeping Good Companies pages 522 - 526.
Convergence debate shows a degree of arrogance to the Anglo-American approach to both law and regulation: see opinion: Adams (KGC, 2002) – The access to information, via the internet, has revolutionised the ability to compare and contrast different jurisdictions Global trends
Two key resources on global issues in governance have occurred in the last year: – Deloitte published a report covering a large number of countries and directors entitled: “Director360°” (Deloitte, UK 2011) Compare to empirical work of Clarke and Adams (2010) Aus Jnl Corp Law – World Bank “10 Focus: Corporate governance & development – An update” by Professors Claessens & Yurtoglu ( January 2012 ) Resources
Questions Thank you Questions Dean.Law@uws.edu.au Put your organisation’s logo here