Understanding The Business Judgment Rule In Australian Corporate Law Essay.

Purpose

To enable you to consider and research a topic of current interest of relevance to Australian corporate law.

In Australian Securities and Investments Commission v Rich [2009] NSWSC 1229,

Justice Austin comments specifically on the business judgment rule. he refers to both the Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1998 and to the second reading speech of the then responsible minister, Mr Hockey MHR, in relation to the introduction of s180 in its present form.

Read the Chapter of the judgment in Australian Securities and Investments Commission v Rich  [2009] NSWSC 1229  and answer the following questions:

1.What is the business judgment rule 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 rule?

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?Why?

Where possible, you should refer to appropriate paragraphs of the judgment to support your answer.

Since the decision in ASIC v Rich there has been discussion of a ‘stepping stones’ approach in proceedings brought by ASIC.

The following paragraph is the abstract to an article by Abe Herzberg and Helen Anderson entitled “Stepping stones - from corporate fault to directors' personal civil liability” [online] in the Federal Law Review, Vol. 40, No. 2, 2012.

http://search.informit.com.au/documentSummary;dn=804114116386970;res=IELHSS

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.

Read paragraphs 13 and then 439 to 562 in Part VII: Duties of Care and Diligence – Section 180 of the judgment in Australian Securities and Investments Commission v Mariner Corporation Limited [2015] FCA 589 and answer the following questions:

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?

5.How does the decision in ASIC v Mariner compare to the decision in ASIC v Rich referred to in Task A?

The discussion to be conducted in the present task is pertaining to the judgement given in the case of Australian Securities and Investments Commission v Rich (2009) NSWSC 1229. Within this task the business judgement rule has to be understood and its rationale has to be determined.

1) The business judgement rule is contained within section 180 of the Corporations Act 2001 (Cth). Section 180 speaks about the civil obligation of the directors and other officers of the company to use care and diligence. The subsection 1 of the section 180 says that the officers and directors of a company or corporation have to use or implement their powers and exercise their duties using care and diligence that a person of reason would use (Du Plessis, 2010). This is true in case the person is a director or holder of authority of a company within the circumstance of a company. This is applicable even in the case if the person is acting and holding the same responsibilities within the company similar to the directors and the authority holders. Taking consideration of subsection 1 the business judgement rule is elaborated in sub section 2 of section 180 (Giordano, 2011). It is said that requirements of subsection 1 can be met by the directors and other members of the company and also similar duties present in the common and equity law provided certain criteria is met. This is when the directors or the officers of the company make their decisions and judgements in a bona fide manner and also for an appropriate purpose ("CORPORATIONS ACT 2001 - SECT 180", 2017). While making a business decision or judgement the directors or the officers should not have any material or personal interest pertaining to it. The directors and the officers of the company or the corporation should be adept with the subject matter of the decision or judgement they are making to ensure that they can justify the appropriateness of the judgement (Hooper, 2011). The directors and the officers of the company should genuinely have a belief that the decisions or judgements which they are taking are in the betterment and best interests of the company. This point can be rationally proved unless the belief is contrary to what a person of reason in such position would have. Thus when speaking of business judgement it refers to a decision of doing or not doing an action with respect to issues inherent in the business operations of the company. The principle behind the making of the business judgement rule is to motivate the directors to believe in their decisions which are for the benefit of the company and the members as a whole. The purpose of the rule is remove burden or liability from the shoulders of the directors with regards to the effectiveness of their business decisions.

Thus the subsection 1 of the section 180 outlines norm based standards regarding conduct for all directors and office bearers of the company which they have to follow. In this manner the general law regarding duties of the directors and office bearers of the company gets codified (Lowry, 2012). The business judgement rule within the subsection of section 180 acts as a defence in case there is contravention to the subsection 1 of the section 180. The Explanatory Memorandum contained within the Corporate Law Economic Reform Program Bill 1998 has introduced the subsection 2 of section 180. According to this memorandum, this rule is a safe harbour for those directors who use benefit of opportunities with respect to benevolent risk taking (Lan and Heracleous, 2010).

Introduction to Task A

2) In order to find a source point for the application of the business judgement rule it is necessary that the parties bearing the onus or burden of proof of the elements of section 180 (2) of the Corporations Act 2001 (Cth) have to be identified. This is important because findings of facts are often applicable in cases which are linked with the business judgement rule. Thus Justice Austin who presided in the present case that determining the onus or burden of proof is important to analyse the business judgement rule (Altman and Hotchkiss, 2010). While interpreting the provisions, the judge came to the conclusion that the legal provisions did not clearly show which parties held the responsibility of proving the implementation of the business judgement rule. The judge could not make any conclusion by simply going through the text. The judge could not extract any information from the legislative policy consideration statement contained in the Second Reading Speech and the Explanatory Memorandum. The judge took reliance of the business judgement rule of the United States which was a major influence on the construction of the business judgement rule contained in Section 180 (2) of the Corporations Act 2001 (Cth). The business judgement rule of the United States has placed the burden of proof on the plaintiff (Johnson, 2011). The judge has outlined the practical difficulties which could arise in ascertaining the burden of proof to be applicable either on the directors and the officers or the party alleging the liability. The judge ultimately determined that this decision should be determined at an appellate level. The business judgement rule of America seeks to protect the directors with respect to their decisions taken by them in relation to the business. The opposing party has to provide rebuttal to this presumption. If this alleging party fails to rebut, the directors will be protected by the existing business rule of America.  However as per the business judgement rule of Australia and decision of Justice Austin the onus of proof is placed on the directors and the officers.

3) The reasoning of the judge in the present in the interpretation of what is provided in section 180 (2) (d). Under this provision the directors are required to have a rational belief that the decisions or judgements are in favour of the company’s interests. Herein it is further provided that the point will be considered rational unless such belief is contrary to a reasonable person’s belief (Jones and Welsh, 2012). Thus the business judgement rule has been considered to be mere lying down of rules and does not hold any practical implementation. It is as stringent as the normative standard of rules propounded in subsection 1 of the section and is equally stringent. It is difficult to consider it as defence to the earlier section. Thus critics such as Neil Young QC believe that this ambiguity has resulted in lack of litigations and cases based on section 180 (2)  because of limitations in its scope of operations. ASIC had contentions regarding the impact of section 180 (2) (d). They also said that rational belief meant that the belief of the directors must be ascertained from the levels of reasonableness. However it would be impossible to provide defence with respect to a decision which is based on a belief that is unreasonable. The commission also objected to the fact that all directors could not be reasonable (Hazen and Hazen, 2012). The judge agreed to the fact that no degree or level can be determined to measure reasonableness. He admitted that a belief could be either reasonable or unreasonable. There could not be middle path or measure to determine the reasonableness. Thus the judge makes a clear demarcation between a reasonable person and an unreasonable person. He has agreed that if the meaning of the word ‘reasonable’ is utilised for defining rational belief then whatever submitted by ASIC can be considered as true and accurate (Hiller, 2013). However, the judge came to the conclusion that if the submission of ASIC was taken into consideration it would make section 180 (2) in fructuous and defunct. This would clearly contravene the intention of the drafters of keeping the standard lenient compared to the ideal levels of reasonableness. Justice Austin has tried to bring out another alternative way to interpret the section which would be more viable and devoid of ambiguity and absurdity. The judge gave the reasoning that the drafters wanted to interpret the term ‘rationally believe’ according to the business judgement rule created by the American Law Institute (Laster and Zeberkiewicz, 2015). This is seen the precedents contained in most of the jurisdictions of United States. According to the judge, those who drafted the definition of ‘rationally believe’ wanted to focus on the fact that reason or reasoning is derived. This means that the belief of the officers and the directors would be rational if it was base on reason or reasoning. This is immaterial of the fact that he judge is not convinced with the reasoning.

Task A

This particular task relies on the case of Australian Securities and Investments Commission v Mariner Corporation Limited (2015) FCA 589. It deals with fault of the directors in terms of contravention of duty to take care and being diligent in their decision making.

1) In the present case the application put up by ASIC was dismissed by Justice Beach from the Federal Court. The application was that the directors of the Mariner Corporation had breached their duty of acting in a diligent manner and acting with due care (Clark and Babson, 2011). This contravened the provisions of section 180(1) of the Corporations Act. The allegation was that the defaulter company decided in a reckless manner by announcing that they would take over Austock without having sources of finance. However the judge opined that all the directors had complied with mentioned elements of the business judgement rule propounded in section 180 (2) and this exonerated them from the allegation (Klettner et al., 2010).

2) From the evidence received, Justice Beach came to the conclusion that directors of the Mariner Corporation did not act in a reckless manner. He had set a structure based on which the aspects of section 180 of the Corporations Act 2001 could be analysed. Thus he identified certain factors on the basis of which duty would depend. This is for taking into consideration of the fact whether the directors of Mariners Corporation had exercised their duty to act with reasonable care and diligence (Marshall and Ramsay, 2012). The factors included the circumstances of Mariners Corporation which included aspects like its size and nature of business. It also takes into consideration aspects like volume of sales and nature of products and services offered by them. It takes into consideration the provisions mentioned in their Constitution. It also takes into account details and composition of the board of directors of the company. Other factors include the position and responsibilities of the directors. Factors like skills and experience of the directors are also of significance. The terms and conditions on the basis of which the directors have assumed the role of a director is also of importance. Another important factor lies in how the roles and responsibilities of the company have been distributed among the directors and the employers (Nicholson and Newton, 2010). Factors like information sharing, reporting and other requirements are also of relevance. Finally relevant legislations and situations are pivotal for the analysis of the legal provision. All these aspects have to be considered according to Justice Beach for the analysing director’s duties.

3) When referring to entrepreneurial approach it refers to the risk taking ability of the directors. Justice Beach did not take into cognizance of the requirement of the directors to take an entrepreneurial approach. He has made notable observations pertaining to the liability of the directors with respect to taking risks (Ribstein, 2011). He has differentiated between ASIC and defendants in terms of the extent to which the directors have flouted section 180 due to the reason of contravention by the company of another legal provision of the same legislation. The duty contained under section 180 of the Act does not put a broad range of obligations on the directors with respect to ensuring that the matters of the company are carried out in a lawful manner. It should not be used as way to check the accessorial liabilities of the directors. The judge believes that it would be wrongful to say that if a director leads to the company breaching a provision of the Act, he has contravened section 180. These circumstances would not breach the section until actual loss is caused to the company due to the other breach or it was foreseeable that the conduct would act against the company’s interest or the interests of the creditors and shareholders of the company (Batrouney, 2016). Thus for an act or omission of the directors to be considered as a contravention of the section 180 it is important that foreseeable harm should be there.

Introduction to Task B

4) In the present case Justice Beach made analysis of elements of the business judgement rule contained in section 180 (2) by relating with the case scenario. Under the first requirement of the section there had to be a judgement pertaining to business. Under a business judgement a decision has to exist regarding taking or not taking action in context to operations of business of the company. Here in the business judgement was the judgement of taking over Austock which acted as the starting point of the legal decision (Langford, 2016). It could be proved as a business judgement on the basis of the nature of business of the company and possible gains that could be derived by Mariner by taking control over Austock. Thus Justice Beach dismisses the claim of the ASIC that the directors did not comply with the legislation and their citing of the cases that were set aside. On the other hand the directors had complied with the legal requirements of the section.

The second aspect of the provision was that the judgement had to be based on bona fide reasons and for a good purpose. The directors had satisfied this requirement. One of the directors Mr Olney- Fraser had decided to take a stance on the takeover and made an announcement on 25^th of June believing that Mariner had the possibility of making profits. He had believed that the decision of making the announcement and effort to acquire Austock was serving positive interests of the company (Pelling and McGuire, 2015). The judge was also convinced that there was no material personal interest of the directors in regards to the decisions taken and the subject matter of the decisions. Thus the third requisite was also fulfilled. The judge was convinced that the directors had enough knowledge to make the judgement thus confirming the final requirement.

5) With respect to the concept of reasonable belief, Justice Beach has referred to the comments provided by Justice Austin in the case of Australian Securities and Investments Commission v Rich reinstating the fact that the reasonableness of the belief of the directors should be determined on the basis of certain factors (Bainbridge and Connor, 2016).

• This includes relevance and essence of the business judgement to be made.
• It includes time remaining for deriving information and the costs incurred for deriving the information.
• There is relevance of the confidence that the officers and directors have with respect of pursuing the matter.
• The condition of the company at the time of the decision taken is also important.

References

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