ASIC v Mariner Corporation Limited

Rare insights from the Federal Court on the business judgment rule

The ‘business judgment rule’ recognises the inherent risks associated with making business decisions and that bad outcomes do not necessarily mean that directors have breached their duty. Since it was incorporated into the Corporations Act 2001 (Cth) (Act) 15 years ago, it has been seldom invoked.  Nevertheless, while its practical relevance has arguably been limited, the business judgment rule has proven to be a successful defence in a recent decision of the Federal Court.

The business judgment rule

The business judgment rule means a director is taken to have met their duty of care and diligence if they:

• make the judgment in good faith, and for a proper purpose 
• do not have a material personal interest in the subject matter of the judgment
• inform themselves about the relevant subject matter to the extent they reasonably believe to be appropriate, and 
• rationally believe that the judgment is in the company’s best interests.¹

Honest and reasonable…or irresponsible?

A proposed new defence for company directors

The Australian Institute of Company Directors (AICD) has recently proposed a new ‘honest and reasonable director defence’ for inclusion in the Corporations Act 2001 (Cth) (Corporations Act).  The new broad based defence would apply to all contraventions of the Corporations and ASIC Acts, significantly expanding the scope of protections currently afforded to directors. 

The proposal has been met with criticism from both ASIC and certain shareholder groups, concerned with a defence which they argue potentially goes too far in protecting directors that may not have been acting responsibly.

The impetus for change

The ‘business judgment rule’ defence in section 180(2) of the Corporations Act, introduced in 1998, has a relatively narrow scope.  Importantly, the defence only applies to a director’s statutory duty of care and diligence under section 180(1) and the equivalent common law and equitable duties.  It is not available, for example, to directors who are charged with insolvent trading or the duty to act in good faith and the best interests of the company.  The rule is also limited to positive business judgment decisions and so is not seen to cover a breach arising from an omission by a director, such as in the Centro litigation in 2011. 

The AICD proposal highlights what are, in its view, a number of negative consequences of the limited existing protections.  Its surveys have revealed significant concerns among directors about the risk of personal liability that has prompted an overly conservative approach to business decisions, creating a negative shift in the directors’ role away from governance and toward technical compliance.  Such an approach leads to problems in making forward looking statements and responding to corporate insolvency, the latter often causing directors to place potentially profitable companies too quickly into external administration. The AICD also identifies the lack of protection for directors as a key reason for the reluctance of strong candidates to take on directorships. 

The ‘honest and reasonable director defence’

The AICD’s proposed solution to the above issues is to introduce a new catch-all defence to liability where a director acts:

• honestly
• for a proper purpose, and
• with the degree of care and diligence that the director rationally believes to be reasonable in the circumstances.

The key features of the proposed defence are:

The defence would apply to all provisions of the Corporations and ASIC Acts (and their common law and equitable equivalents), not just the duty of care and diligence. 

The AICD has suggested that this would also apply to strict liability provisions.  This is potentially difficult to reconcile, as having regard to the subjective state of mind of the person that breached such a provision goes against the nature of strict liability (which ignores the director’s intention).  Some example strict liability provisions are the duty to disclose material personal interests (section 191), to not vote on resolutions in which a director has a material personal interest (section 195) and the duty to disclose directors’ remuneration (section 202B).  Any application to strict liability offences will need to be carefully considered.  A broader issue is the seemingly increasing tendency for strict liability to be applied to statutory drafting as a default.  

 

The defence extends to omissions as well as positive acts, which was considered by many to be a key failing of the existing business judgment rule.  

This aspect of the defence could potentially improve directors’ access to the protections in a manner consistent with the Corporations Act without overly compromising the position of shareholders. 

 

The defence includes a subjective test – that a director rationally believes their action (or inaction) was reasonable in the circumstances. 

By contrast, the business judgment rule provides that the director’s judgment must be rational ‘unless the belief is one that no reasonable person in their position would hold.’  This is an important distinction, allowing for a broad range of potential arguments based on the surrounding (potentially high pressure) commercial circumstances at the time the decision was made, rather than by reference to an objective standard.  Concerns with this subjective element are valid and it is this aspect of any new defence which is likely to be subject to the greatest scrutiny.

 

The AICD has raised important issues with the proposed new defence, which has been met by concerns from ASIC and certain shareholder groups.  As is always the case when dealing with directors’ duties and protecting shareholder (and other stakeholder) interests, it is a balancing act which, if a new defence is developed, will need to strike a mid-point between the views of each group.

Blogs: protecting your business from damaging posts

The Federal Court of Australia has handed down a valuable decision for business owners concerned their business reputation is being damaged by a competitor’s misleading online blog posts. 

The decision of Nextra Australia Pty Limited v Fletcher [2014] FCA 399 establishes that, in certain circumstances, the posting of a misleading online blog article regarding a business competitor can amount to conduct which is prohibited under the Australian Consumer Law.  With recent reports indicating there are now more than 150 million blogs in existence, the decision is a timely reminder for those operating a blog for commercial reasons.

The applicant in the case, Nextra, is the franchisor of a newsagency franchise operating throughout Australia.  The respondent, Mr Fletcher is a director and 50% shareholder of NewsXpress, another newsagency franchise system, and competitor of the Nextra franchise.  Mr Fletcher operates an internet blog under the name ‘Australian Newsagency Blog’.  On 27 April 2011, Mr Fletcher posted an article on the Blog entitled ‘Nasty campaign from Nextra misleads newsagents’ (Article), and referred to a flyer which had been distributed in print form by Nextra.

After publication of the Article, Nextra commenced proceedings seeking orders that the Article be removed from the blog, that Mr Fletcher be restrained from publishing the Article in any other form and that Mr Fletcher publish a retraction of the Article with an apology to Nextra. 

To succeed in its case, Nextra was required to satisfy the Court that the contents of the Article were ‘misleading and deceptive’, and that the posting of the Article occurred ‘in trade or commerce’.

The Court concluded that the Article published by Mr Fletcher, when viewed as a whole, would leave a reasonable reader with the impression that Nextra had distributed false information in its promotional campaign.  The evidence was that Nextra had not, in fact, distributed false information in its promotional campaign.  

As to whether the posting of the Article occurred ‘in trade or commerce’, Mr Fletcher submitted the Article was merely published in a public forum for matters affecting the newsagency industry.  The Court dismissed this submission and instead found that Mr Fletcher had sought to promote his own commercial interests in posting the Article. 

Accordingly, the Court found that the posting of the Article was done with an inherently commercial motive which gave the conduct the requisite commercial character. 

The Court ultimately ordered that Mr Fletcher remove the Article from the blog and be restrained from publishing the Article in any other form.  In so ordering, the Court remarked that readers of the Article would be misled to form erroneous and negative conclusions about Nextra and added that it was in the public interest for such misleading and deceptive material to be removed from the public forum.

Readers should note that the mere publication of an article should not, of itself, be seen as constituting conduct ‘in trade or commerce’.  Importantly, as in the Nextra case, the particular blog or forum on which the article is published must be one where its owner seeks to promote its own commercial interests.  

Often a misleading or deceptive blog article (whether in stock forums, private blogs or Facebook posts) can be simply and inexpensively removed or retracted through directed legal correspondence with the blog’s owner or the service provider.  If this approach is not successful, remedies such as those used in the Nextra case may also be available to affected business owners.

Andrew Poulton, Tim Case

UK Corporate Governance Reform Proposals and the Implications for Australia

Recently, the UK Business Secretary, Dr Vince Cable, launched a policy paper entitled Making companies more accountable to shareholders and the public containing some radical law reform proposals with major implications for corporate governance.  As corporate law developments in the UK often influence Australian law reform, it is worth considering some of the more dramatic proposals.

The role of British banks in the GFC and the consequential impacts upon public finances and the economy in the UK provided the setting and motivation for the release of the paper.  In particular, it drew on the considerations and recommendations set out in the final and major report of the Parliamentary Commission on Banking Standards (PCB) entitled Changing banking for good.

That report criticised the lack of regulatory body action against those who had presided over substantial failures within banks and found the existing regime provided an imbalance of incentives (i.e. permission to undertake aggressive risks but without sufficient accountability mechanisms to act as a counterbalance).  Further, it identified a combination of collective decision-making, complex decision-making structures and extensive delegation which made it difficult to hold particular senior banking officials responsible for even the most widespread and flagrant failures. Two measures in particular recommended that:

• all key responsibilities within a bank be assigned to a specific, senior individual who, regardless of any delegation or sharing of tasks, would remain legally responsible (Senior Persons Regime), and
• the Commission proposed the creation of a new criminal offence of reckless misconduct in the management of a bank which was subsequently supported by the Industry Secretary .  This offence would apply to those covered by the proposed Senior Persons Regime.  Regardless of the degree of difficulty in obtaining a conviction, such a specific regime would galvanise the attention of those who lead a bank which is over-leveraging its assets; creating high risk, complex products; or departing from reasonable standards of asset allocation.  The criminal offence proposal is accompanied by a recommendation that civil recovery action can be taken against those convicted of reckless management of a bank.  To increase the prospect of directors being personally liable for the consequences of fraudulent or wrongful trading (a term of potentially wide import) liquidators will have the right to sell or assign fraudulent or wrongful trading actions.

Other proposals put forward by Secretary Cable include:

• a regime to identify beneficial ownership of company shares to effectively identify the ultimate controllers of shares and companies
• limits on the use of bearer shares, and
• new directors’ duties and wider powers for the Court to assess directors’ duties.

The paper proposes some specific reforms for the banking and finance sectors and others of general applicability to directors.

Secretary Cable supported the PCB's recommendations that directors of a bank be subject to a duty to prioritise the safety and stability of the bank over the interests of shareholders.  Further, it is proposed to widen the powers of the Court to disqualify directors by allowing a much more extensive range of matters to be considered including the scale of the loss and the impact on wider society.  This would require directors to balance a wider range of stakeholder interests when making decisions and keeping matters under review.  When combined with the Senior Persons' Regime, these proposals, if adopted, have significant implications for corporate governance, including the recruitment process and criteria for appointing senior executives of banks and members of boards.

As history shows, radical regulatory reform proposals often follow dramatic crashes.  This is entirely understandable, as is the desire of a government to respond to failures of market forces which result in, as has recently been the case, the public assumption of private debts and losses.  The Senior Persons Regime appears to be capable of eliminating some of the enforcement complexities and failures of the existing regime, but the wider director duty proposals may, upon closer scrutiny, be more problematic than practical.

For example, if the board in effect has to have regard to the national interest, how in practical terms, can it distill a decision from a wide range of possibly competing factors.  Equally, if there is a duty to advance safety and stability over other considerations, would it imply that all directors have to have extremely high, possibly actuarial, levels of financial literacy?  Without these, how would one be able to assess the potential impacts of complex instruments and algorithmically generated portfolios.

The proposals, which are open for public consideration, will be watched carefully for any signals they may send to Australian law reformers.

Professor Peter Little

Peter is a Professor of Business Law, Executive Dean of the QUT Business School and a Consultant to McCullough Robertson on Corporate Advisory issues.

Will your email trails sink you in court?

Electronic communication, especially email, has grown exponentially and made a major contribution to business efficiency.  It has also changed behaviours, most notably through people being able to instantly issue instructions, converse and negotiate without the formalities of traditional written correspondence or face to face meetings.  Accompanying these changes has been a tendency for unguarded comment to be included in emails creating a permanent record of the person’s state of mind.  Frequently, and regrettably, these can incriminate the sender or the organisation they represent.  Emails of this nature can be referred to as VIPERS because they are viral, instantaneous, permanent, extraterritorial, regrettable and self-harming and are increasingly having a decisive effect in major cases. Such was the case in Norcast S.ár.L v Bradken Limited (No2) [2013] FCA 235.

In this case the plantiff, Norcast succeeded in recovering damages amounting to US$22.4 million representing the difference in price it received upon the sale of a subsidiary, NWS, and that which it would have received had the sale price not been reduced as a result of a bid rigging arrangement.  The original purchaser a Castle Harlan entity (CH) paid US$190 million and, immediately following settlement of the sale, sold NWS to a subsidiary of the defendant, Bradken for US$212.4 million.  It was found that the original and ultimate purchasers had entered into an arrangement whereby CH would bid and Bradken would not.

There are many interesting legal questions raised by this case which is subject to appeal, however the impact of extensive email correspondence between the parties is arguably the one which attracts the most interest.  The first point to be made is when a court is having to decide whether an arrangement has been made the intentions of the parties are crucial. Emails, a few of which are considered below, provided the Court with strong evidence from which to infer what the initial and ultimate purchasers were respectively thinking.

For example, the Judge infers from email correspondence in the early stages of the sale process: “For a company not interested in buying NWS, that was a lot of activity in one day directed to that end - the acquisition of NWS.”  Later, when Bradken asserted that it was considering the value of NWS with a view to making a direct bid Gordon J observes: “The form and content of the various communications are consistent only with an arrangement whereby CH would bid, and Bradken would not bid, for NWS…”

On another occasion, W, a Bradken employee emailed, P, an employee of CH a few days after CH had submitted its letter of intent to purchase NWS. In his Honour’s view, this was because W “could no longer stand the suspense” and wanted to know if there was any news or feedback on the bid.  His Honour’s view was that W “was not enquiring about the weather” and went on to reject W’s assertions that he was not aware that CH was actually making a bid of US$190 million.  These assertions were, he found, contrary to contemporary documentary record, in particular, contemporary emails.

It can be said in defence of emails that, in the circumstances of this case, they facilitated the negotiation of a complex international transaction involving a significant number of participants.  As is common, negotiations were fast moving, at times requiring swift responses to changing circumstances.  Electronic communication enabled this to happen efficiently.  However, it also created a rich transcript from which the court inferred the intentions of the parties from time to time notwithstanding evidence to the contrary from some very distinguished business people and organisations.

It was once said that the nature of an 'arrangement' is such that evidence of its existence will be hard to find as it may be arrived at as easily as by a wink or a nod.  Electronic communication, emails especially, may have changed all of that.

Professor Peter Little

Peter is a Professor of Business Law, Executive Dean of the QUT Business School and a Consultant to McCullough Robertson on Corporate Advisory issues.