A bit of a fillip for directors

Professor Bob Baxt considers the assessment of directors’ duty of care and diligence and the possible application of the statutory business judgment rule. 

The decision of Justice Beach in the Federal Court of Australia in ASIC vs Mariner Corporation Ltd and others (2015) FCA 589 (Mariner), in relation to the proposed takeover bid for Ausdoc Group (Ausdoc) not only resulted in a positive decision for the company and its directors, but also contains some fascinating commentary by Justice Beach on the assessment of directors’ duty of care and the possible application of the statutory business judgment rule.

The Australian Securities and Investments Commission (ASIC) instituted proceedings against Mariner Corporation (the company) its chief executive officer and managing director, Darren Olney-Fraser, and two other directors Donald Christie and Matthew Fletcher, alleging that a number of provisions of the Corporations Act 2001 (the Act) had been breached.

In its statement of claim, ASIC alleged the company had been reckless in assessing whether it could fulfil its obligations under a proposed bid to acquire the securities in Ausdoc. It was alleged that it did not have the financial resources available itself, or from other sources, to fund the relevant bid or to enable the bid to proceed. ASIC alleged that the announcement made by the company was misleading or deceptive in breach of the Act because:

 The proposed bid was at a price less than the company was permitted to offer to Ausdoc for its shares.

It thus misled the market on the company’s ability to fund the bid.

The directors of the company had breached their duties of care and diligence (among other duties) by failing to give sufficient consideration to the steps that were needed to be taken before making the announcement.

Wide-ranging decision

The decision of Justice Beach dismissing the claims is a complex one. It contains detailed consideration of section 631(2)(b) of the Act which provides that a person must not publicly propose, either alone or with other persons, to make a takeover bid if the person is reckless as to whether they will be able to perform their obligations relating to the takeover bid if a substantial proportion of the offers under the bid are accepted.

Justice Beach ruled that ASIC had failed to establish that the company had breached the section in assessing the company’s ability to finance the proposed bid. Justice Beach held that the directors and the company had not been reckless because the directors believed that there was likely to be a significant proportion of acceptances to the off-market bid.

The directors further believed that they would have the funds available, either directly or indirectly, to acquire the shares. This was based on a subjective evaluation of the test in section 631(2)(b).

Justice Beach also ruled that, even if the relevant test was an objective one, ASIC had not established that the company did not have reasonable grounds to believe that it could perform its obligations under the bid.

He also ruled that there was no misleading or deceptive conduct proved by ASIC. Of greater interest to me, and probably to Company Director readers, was his dismissal of the claim that the directors of the company, in pursuing the relevant bid, had breached section 180 of the Act in that they had not acted with appropriate care and diligence.

Justice Beach reached his conclusions, relying on his assessment of the relevant legal principle that for directors to be held liable for breach of the relevant duty of care and diligence, it must be established that the company had suffered damage as a result of the directors alleged failure to act appropriately. His language in asserting this view is interesting:

“[448] No contravention of s 180 [of the Act] would flow from such circumstances unless there was actual damage caused to the company by reason of that other contravention or it was reasonably foreseeable that the relevant conduct might harm the interests of the company, its shareholders and its creditors (if the company was in a precarious financial position).

[450] Further, relevant to the question of breach of duty is the balance between, on the one hand, the foreseeable risk of harm to the company flowing from the contravention, and, on the other hand, the potential benefits that could reasonably be expected to have accrued to the company from that conduct.

[452] [O]ne expects management including the directors to take calculated risks. The very nature of commercial activity necessarily involves uncertainty and risk taking. The pursuit of an activity that might entail a foreseeable risk of harm does not of itself establish the contravention of s 180. Moreover, a failed activity pursued by the directors which causes loss to the company does not of itself establish a contravention of s 180.”

Justice Beach added that, even if there were risks, the countervailing benefits to the company were significant and outweighed such risks. Although he ruled that there was no breach of section 180, Justice Beach considered whether the statutory business judgment rule in section 180(2) might have offered a defence for the directors.

It is clear that his comments were obiter dicta. This is similar to the position that Justice Austin (as he then was) reached in the case of ASIC v Rich (2009) 75 ACSR1.

Justice Beach noted that, to be a business judgment, there must be a decision “to take or not to take” action in respect of matters relevant to the business operations of the corporation.

In his view, the relevant steps taken with respect to the proposed acquisition was a business judgment. He believed that the directors had acted in good faith and that they had assessed the relevant transaction on the basis of the information that had been supplied to them. It will be interesting to see what impact his discussion of the business judgment rule will have.

Insights on the duty of care

Of critical importance in my view were observations of Justice Beach at the commencement of his judgment concerning the case against the directors. He noted that in such a case one should assess the background and expertise of the directors.

He states at paragraph 13: “Such backgrounds no doubt informed their judgment calls, assessments of risk and the strategies they pursued in relation to the transaction, the subject of this proceeding.

“It is necessary to bear this in mind when assessing the case of a regulator second guessing such judgment calls with the benefit of hindsight, using a largely paper based analysis and viewing the events from a timeframe perspective divorced from the reality of the speed at which the events occurred in real time.

“Second, in looking at the transaction in question, it is important to adopt an ex ante perspective where one is not just looking at potential risks and downsides but also the potential benefits. That was the directors’ framework at the relevant time. And that is necessarily the framework within which s 180 must be analysed. A retrospective analysis of a transaction which did not proceed has the tendency to overlook that later dimension.”

ASIC has indicated that it will not appeal his decision. This is a powerful judgment from the point of view of the directors. It illustrates that courts are prepared to assess matters in a pragmatic and realistic timeframe. It also provides some confidence that, in the appropriate case, where a careful explanation of the factors surrounding the operation of the business judgment rule is offered to the court, the courts may well come down in favour of a positive reading in favour of the directors taking a calculated risk in progressing the interests of their company.