Understanding The Business Judgment Rule In Australia Is Crucial For Essay.

Background

Task A
1. What is the business judgment rule (5 marks) and what is the principle behind it? 
2. Justice Austin compares the US model and the Australian position in respect of business judgment rules. Who, according to Justice Austin, bears the burden of 
proof of the elements of s180(2)?Is this the same as the position taken in America in respect to its business judgment 
3. Does Justice Austin agree with ASIC’s submission that in Australia (unlike America) the defence is not available if the decision taken by the director is 
based on an unreasonable belief?
 
Task B  
Several recent cases have seen the courts approving ASIC's employment of a 'stepping stone' approach that applies directors' statutory duty of care as well as their 
other statutory duties in a novel context. The first 'stepping stone' involves an action against a company for contravention of the Corporations Act 2001 (Cth). The 
establishment of corporate fault may then step stone to a finding that by exposing their company to the risk of criminal prosecution, civil liability or significant reputational damage, directors contravened one or more of their statutory duties in ss 180–2 of the Corporations Act, particularly their statutory duty of care, with the attendant civil penalty consequences. The effect of the 'stepping stone' approach is that directors may face a type of derivative civil liability for corporate fault. 
 
In the 2015 decision Australian Securities and Investments Commission v Mariner Corporation Limited [2015] FCA 589 Beach J commented on the liability of directors for a company in breach of the law.  Briefly, the case concerned Mariner’s takeover bid for the company Austock Corporation Ltd, with ASIC alleging a contravention of s631(2)(b) in that the bid was reckless, and contravention of s1041H in that Mariner had engaged in conduct that was misleading or deceptive – and more importantly for the purpose of this assignment  - that each of Mariner’s three directors had breached their s180(1) duties by either authorising Mariner’s 
announcement of the bid; or alternatively not progressing with the bid once announced. 
 
Task B
1. Was ASIC successful in its claims that the directors had breached their s180(1) 
duty to act with due care and diligence?
2. How did Justice Beach describe the framework within which s180 must be analysed?
3. Do you think Justice Beach recognizes the need for directors to take an entrepreneurial approach on occasions? Why or why not?
4. Did Justice Beach find that the elements of the statutory business judgment rule in s180 (2) had been met by each of the directors?
Was Justice Beach required to apply the rule? Why or why not? (10 marks) 5. How does the decision in ASIC v Mariner compare to the decision in ASIC v Rich referred to in Task A?

Ans 1: In this case, it was alleged by the ASIC that the directors of the company have breached their statutory duty mentioned in s180. According to this duty, it is the obligation of the directors to use reasonable care and perform their functions with due diligence when they are making a business decision. However, the ASIC has not pointed out towards the specific conduct of the directors that may amount to the breach of this duty. Instead, the ASIC pointed out towards the general conduct of the directors when they had, withheld financial information. While delivering his judgment, Justice Austin also dealt with the mainly unexplored fields of the business judgment rule. This rule has been provided as a defense to the directors who are facing the allegation of violating their duty of care if they had made the business judgment in good faith and for a proper purpose, and at the same time, the directors did not have any personal interest in the judgment. It is also required in this regard that the directors should have appropriately informed themselves regarding the subject matter of the judgment. They should rationally believe that the business judgment being made by them was in the best interests of the corporation. The judgment given by Austin J in this case provides direction to the seemingly awkward future of the difference of business judgment rule in Australia. As this rule was not applied in ASIC v Rich, it was stated by Austin J. that this cannot be considered as binding on the other courts. Similarly, it was also held by the court in this case that the evidence that has been submitted by the ASIC in this case failed to establish the case of the regulator is the defendant directors. A large amount of evidence had been provided by the ASIC in its attempts to establish in the court that the general conduct of the directors of the company amounted to a breach. However, Austin J, held that the ASIC should have pointed out towards the specific conduct, which could establish that a breach of duty has taken place by the directors on the balance of probabilities.

Ans 2: While delivering his judgment, Austin, J., noted the fact that the business judgment rule as mentioned in s180(2) has been mainly drawn from the business judgment rule as mentioned in the "Principles of Corporate Governance" of the American Law Institute that was adopted by the Institute in 1992. In this formulation, broadly speaking, the same four elements have been mentioned as are present in s189(2). However, Austin J stated that the wealth of US case law regarding the subject may provide a useful resource when business judgment rule is invoked during litigation in Australia, it is obvious that the main task of the courts in Australia is to construe and apply the statute that may not be necessarily the complete reflection of the US position in this regard.

Key Elements of the Business Judgment Rule

In case s180(2) is applicable in a particular case, the effect is that the director or officer to whom it is applicable, can be considered to have fulfilled the requirements of s180(1) and the equivalent duties that have been mentioned under the common law. The elements of section 180(2) can be described as follows.

The director should have made a business judgment. The judgment should be made in good faith and it should also be made for proper purpose. The director should not have any personal interest regarding the subject matter of the judgment and it is also necessary that the director should have informed himself regarding the subject matter of the judgment to a reasonable extent. It should be reasonably believed by the director that the judgment being made by them is in the best interests of the company.

In this regard, the belief of the director can be considered as rational unless it is of the nature that no reasonable person under similar circumstances would hold such a belief.

Ans 3: Justice Austin stated the element of business judgment rule that has been mentioned in s180(2)(d) requires that they should be rationally believed by the director or the officer of the corporation that the business judgment being made by them is in the best interests of the company. Similarly, he stated that this section also explains that the belief of the director or the officer regarding such a situation should be a rational belief unless the belief is of the nature that it would not be held by any of the reasonable person acting in the same position. It has been mentioned in page 142 of the American Law Institute Principles that the purpose of the term “rationally believes” in the United States is to allow a considerably wider range of discretion to directors as compared to the discretion that would be allowed by term “reasonable”. The American Law Institute provides that the term “rationally believes” provides a safe harbor to the directors from liability arising out of the business judgments that arguably falls beyond the scope of the term reasonable. In this regard, the view has been expressed that the business judgment rule is much more wider than the honest error of judgment that is present in case of tort law and therefore there is no liability even when the decision cannot be described as reasonable.

Therefore, Austin J expressed his opinion that an alternate and perhaps a preferable construction of this provision, which can avoid these consequences and also provide a justifiable field of operation to the Australian business judgment rule is present. In this case, the objective of the drafters was to define the term “rationally believe” that has been taken from the business judgment rule as applicable in the United States. The concise Oxford dictionary provides that “agreeable to reason, reasonable” is also a meaning of the word “rational”. However there are other meanings of the term, which include “based on, derived from, reason or reasoning”. Therefore it can be stated that the intention of the drafters of the definition of “rationally believe” was to use this latter idea, which was that they belief of the directors can be termed as rational if such belief is based on reason or reasoning (regardless of the fact that the reason was convincing for the judge or not) but it will not be considered as irrational belief in no arguable reasoning process was present to support such a belief. Therefore the drafters have used a latter idea when it was mentioned that “no reasonable person in the position would hold”.

Recent Court Cases and Judicial Opinions

Ans 1: In this case, Justice Beach had dismissed the application made by the ASIC seeking a declaration from the court all the directors of Mariner Corp. should be held liable for the breach of their duty to act with due care and diligence that has been provided by section 180(1), Corporations Act as they had made a reckless decision that the company should announce a takeover bid for Austock without securing funds. In this regard, the court concluded that all the directors have satisfied the required elements for the business judgment rule that has been mentioned in s180(2), and therefore, each director was held to be entitled to the exculpatory operation of this section.

Ans 2: In his judgment, Beach J had described the framework within which the provisions of s180 need to be analyzed. He had declined to accept the proposition that in case of a breach by the company, it can be automatically stated that their individual duties have been breached by the directors. For this purpose, we analyzed the duties imposed on the directors , as well as their obligations that have been imposed when taking risks. Therefore, he stated that while making a decision if reasonable care and diligence has been excised by the directors in the particular case, he noted that the duty mentioned in s180 depends on the below mentioned factors. The circumstances of the particular company need to be considered in context of the type and size of the corporation, the size and nature of this business, the terms of the Constitution of the company and the composition of the board. The same time, the position held by the directors and the responsibilities imposed on the directors need to be considered. In the same way, the experience and skills of the directors and the conditions on which the director has undertaken to act in that position, along with the fact that how the responsibility for the business of the company has been distributed among the directors and employees of the company. He also noted that for this purpose the relevant acts and omissions as well as the circumstances of the particular case also need to be considered.

Ans 3: In this case, Justice Beach has recognized the need that there are occasions when the directors are required to adopt an entrepreneurial approach. This becomes clear when he laid stress on the fact that balance needs to be maintained between the foreseeable risk of harm that may be caused to the company as a result of the contravention on one hand and the likely benefits that can be easily expected to be derived by the company as a result of such conduct. This question is relevant while deciding the issue of the breach of duty by the directors. Therefore, in support of the above-mentioned statement, Beach J stated that there are certain times when it can be expected that the management of the company including its directors may take calculated risks. He further stated that the "very nature of commercial activity requires the company to be involved in uncertainty and risk taking". As a result of the fact that while following an activity, there may be a foreseeable risk of harm, does not in itself result in the contravention of s. 180 and in the same way, a failed activity that was pursued by the directors and as a result of which a loss has been suffered by the company also does not result in such contravention. Therefore, in case of the present transaction, it was necessary to adopt the perspective according to which, not only the potential risks and downsides should be considered but at the same time the potential benefits should also be considered.

Factors Affecting the Application of the Business Judgment Rule

Ans 4: In his judgment, Beach J had discovered that each director of the company had met the elements of statutory business judgment rule as mentioned in s180(2). The first requirement in this context was that there should be a business judgment. In order to constitute a business judgment, a decision should be made if action needs to be taken or not taken regarding the matters that are relevant to business operations of the company. In this case, the relevant business judgment was the decision to initiate the takeover bid. The second requirement was that the judgment should be made by the directors in good faith and for proper purpose. The Court held that this had also been satisfied. The rule provided that the director should not have any material personal interests concerning the subject matter of the judgment. This requirement was also considered to be satisfied in the present case. Regarding the fourth requirement, it was necessary that the directors should have informed themselves concerning the subject matter of the judgment to the extent that can be considered as reasonable under the circumstances. In this regard, Austin J had stated in ASIC v Rich (2009) that the elements of business judgment rule that has been mentioned in s180(2)(c) requires that the directors should have informed themselves regarding the subject matter of the judgment. In the present case, this requirement was also considered to be fulfilled. As a result, it can be said that in this case, each director has met the elements of statutory business judgment rule.

(b) While discussing the need for applying the rule, Justice Beach had mentioned the liability of the directors for risk-taking in the following words. A significant difference between ASIC and the defendants was allegedly the extent to which a director can be considered to have breached s180 other result of being involved in a contravention by the corporation of some other provision of the Act. If other mentioned that the duty present in s180 does not impose an extensive obligation on the directors to make sure that the affairs of the corporation are being conducted according to the provisions of law. Therefore this duty should not be used as the backdoor method of presenting accessorial liability on the directors. He also held that it will be wrong to believe that if the director has made the company to breach a provision of the Act, it also means that such director has breached s180. Under the circumstances, there will be no breach of s180 unless a real damage has been suffered by the corporation due to that other contravention or if it could be reasonably foreseen that the relevant conduct may result in causing harm to the interests of the corporation, its shareholders or creditors (when the company is facing financial difficulties).

Ans 5: In ASIC v Mariner, it was held by Beach J. That in the present case, he would have applied s180(2) if you do some reason, he would have decided that the directors have breached their duty. Under the circumstances, they would have been relieved of their liability. But in the present case, it was not necessary to make a ruling on this point. Therefore, in other words, the application of statutory business rule as provided in s180(2) was not considered to be relevant under the circumstances. Therefore in this context, ASIC v Mariner can be compared with the judgment delivered by Austin J. in ASIC v Rich (2009).

References

ASIC v Rich (2009) 236 FLR 1

Australian Securities and Investments Commission v Mariner Corporation Limited [2015] FCA 589