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Legal Update – Prof Michael Adams FCSA

Legal Update – Prof Michael Adams FCSA. 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.

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Legal Update – Prof Michael Adams FCSA

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  1. Legal Update – Prof Michael Adams FCSA

  2. 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

  3. Australian Background Data: ASIC Annual Reports & SMH Top Companies 1st Sept 2012

  4. 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

  5. 289% increase

  6. 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

  7. 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 [2012] – broader meaning • Chameleon Mining [2012] – de facto roles • In 99.9% of cases it is really obvious!

  8. 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. “Adams officers’ overlap diagram” Harris, Hargovan & Adams, Australian Corporate Law LexisNexis 2011 Corporations Act 2001 Criminal offences Insolvent trading Insider trading Reasonable care Misuse position Misuse information Act honestly Liable for all

  10. Background to enforcement ASIC/DPP Enforcement Statistics From 2000 to 2010 there were 220 officers sent to jail Data: ASIC Annual Reports

  11. 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)

  12. 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! • 16th 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

  13. 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!

  14. 23rd April Justice Gzell of NSW Supreme Court handed down 194 page judgment on ASIC v Macdonald (No 11)[2009] 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

  15. 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

  16. James Hardie litigation(2012) Lessons from ASIC v Hellicar[2012] 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

  17. Lessons learnt Shafron v ASIC[2012] 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

  18. 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”?

  19. 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

  20. 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”

  21. HIH Royal Commission (2003) • 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

  22. Prof Adams – working definition: Corporate governance has two simple aspects: • Doing the right things • Doing things right

  23. 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

  24. 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.

  25. Walker v Wimborne(1976, HCA) Built on the UK Court of Appeal decision in Percival v Wright [1902] 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

  26. Global corporate governance • Adams, M; “Global trends in corporate governance” (2012) vol 64 (9) Keeping Good Companies pages 522 - 526. 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.

  27. Global trends 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

  28. Resources 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” byProfessorsClaessens & Yurtoglu (January 2012)

  29. Questions Thank you Questions Dean.Law@uws.edu.au Put your organisation’s logo here

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