The Business Judgment Rule as enshrined in the Australian Corporations Act of 2001, Section 180 demands that the liability of directors and similar officers trusted by the company in question and therefore placed in defined positions by the company to exercise care and diligence in the execution of their duties be protected by the statutory business rule. The rule as documented in subsections 180(2) and 180(3) provides a safe harbor for the stated company directors and officers so long as their now questionable judgment (a) was in good faith and properly purposed, (b) was not carried with personal interest, (c) was diligently and reasonably conducted, and (d) was conducted with the best interest of the corporation in mind (AustLII, 2017; Muswaka, 2013; Legg & Jordan, 2014).
The underlying principle of the business judgment rule is albeit simple, even though falls into convolution as the circumstances of distinguishing negligence from genuine error while acting in the best interest of the corporation and not the self proves to be an issue of contention. Worth mentioning is that the reasoning in the case under scrutiny, Australian Securities and
Investments Commission v Rich, sought in a way to redress the fundamental underpinnings of the business judgment rule (ASIC, 2009). The baseline of the rule has but three primary intentions with regard to solution of corporate disputes brought before court. The first is protecting the trusted persons while executing their duties since their duties are bound by belief in their skills and practices. The second is investor or rather stakeholder protection, while the third is protecting corporations from overreaching hand of the judicial process, a scenario that choruses the precedent set in the Howard Smith Ltd v Ampol Petroleum Ltd case of 1974 (Muswaka, 2013; Jacobson, 2015).
In the context of the first principle, the business judgment rule acknowledges that the trusted persons may undertake risky decisions that fit the prescriptions of subsections 180(2) and 180(3) of the Corporations Act, decisions that base on their knowledge and experience and would potentially benefit the company (ASIC, 2009; Legg & Jordan, 2014). Therefore managers deserve protection from skeptical investors that would unjustifiably look towards lawsuits as solutions. The second principle is that the rule takes the form of a rebuttable presumption that enshrines the obligation of the trusted persons to investors. Therefore despite the fact that the managers may be protected persons by default, investors have a justification to unwind the protection in case of negligent practices. The third principle is that rule restrains the authority of the courts in a business environment that requires particular knowledge or rights that go contrary to judicial process that would most likely misconstrue the business contention.
The opaqueness and ambiguity of the subsections 180(2) primarily on what party bears the burden of proof as regards the ascertainment of whether one or all of the elements (a) to (d) of ss180(2) were met only leaves the situation open for speculation (Hargovan & Du Plessis, 2014; Czoch & Whalebelly, 2012: Wan, 2015; Barnes, 2010). Even though the Australian statutory business law borrows from American corporate laws, Justice Austin reasons that ascertaining who bears the burden of proof of the elements of s180 (2) is a question demanding the contextualization of the law from Australian perspective by either extracting views from the Explanatory Memorandum, precedent (ASIC v Adler of 2002) or reasoning forward to ss182 and 183 (ASIC, 2009: par.7269). In that case, Justice Austin argues that the burden falls on the defendant(s).
However, it is quite apparent that Justice Austin’s inclination as concerns the burden of proof differs from the American business judgment rule since the latter places the burden on the plaintiff rather than the defendant. In the American context, such as is affirmed by precedent set in Aronson v Lewis of 1984, the provision of the law presumes that since the elements of the rule address the defendants (directors and trusted officers), therefore it presupposes they (defendants) have fulfilled the prerequisites pertaining the rule’s applicability. The presumption then implies without a formal statement that the burden of proof as regards the ascertainment of the fulfillments of the elements in s180 (2) lies with the defendant.
Justice Austin’s analysis of the psychoanalytic “weight” of the terminology detailing the rule, specifically s180 (3) presupposes that conscientiousness is a fundamental ingredient of the rule (ASIC, 2009: par.7276). He therefore agrees with plaintiff’s (ASIC) submission that without rational thought taken by the director in taking or refraining from taking action in the affairs of the corporation of which they have a duty to care, then their actions cannot be defendable by the business judgment rule. They (defendant) will have disqualified themselves from the definitional implications of s180 (3) which also qualify them from invoking the elements of s180 (2).
The reason behind the assumption is that in addition to precedent set in previous cases dwelling on the issue, the semantic analysis of s180 (3) foreshadows the elements stipulated in s180 (2), which is to say, unless s180 (3) defines what a “business rule” may be, regardless of its more or less debatable terms thereby, then all the elements in s180 (2) lack meaning, or rather, do not constitute part of any rule, and certainly not the Australian corporate statutes (AustLII, 2017). It then goes without saying that defining the confines, at least in the broadest terms possible, of what ought to constitute a business judgment which will warrant the considerations of elements (a) to (d) in s180 (2) will have to take into account how to define a judgment attributed to the director or any other trusted officers tasked with predefined duties by the organization. For instance making judgment in good faith according to the prerequisite of s180 (2) (a) cannot be possible unless the director makes a conscious decision to take or refrain from taking an action with the business in mind.
Therefore for the director to be within the safe harbor of the statute, they must demonstrate that their now questionable actions were taken with a conscious understanding of the equity, common laws, and statues that govern the responsibilities attached to the post and that failure to grasp the prerequisite of the mentioned laws does not exempt them from litigation or otherwise exemption from the protections of the business judgment rule concerning their fiduciary duties. However, the “safe harbor” of the rule only retains its preserve based on actions that reflect rational thought and not unreasonable belief, or in other terms, a belief or thought that would most likely not be conceived of other persons within the same position other than them (AustLII, 2017). Under such circumstances the director will have taken actions that are not of sound judgment and that nullify the provisions of s180 (2) and are therefore indefensible.
Assuming the role of a director or other official post trusted with the fiduciary duties of the company demands an individual or individuals who can make decisions as prescribed in s180 (3) and one who understand the severity of their decisions and its implications on the company. The three officers under scrutiny, Mr Olney-Fraser, Mr Christie and Mr Fletcher, made decisions that reflected their skill, expertise, and most of all, the duties which they owed the company (ASIC, 2015: par.13). Under such “qualified” circumstances, the directors breached their duty to act with due care and diligence as demanded by s180 (1). The plaintiff, ASIC, was therefore successful in ascertaining the liability of the directors.
In the bid to give due credibility to the case, that is whether the directors would be liable for their actions under the business judgment rule, ASIC maintains that the framework under which s180 is to be interpreted within the confines of the case is in two directions. The first is analyzing disposition of the directors who are the source of the contention. There was need to review whether s180 (3) held its weight on the matters at hand with regard to the director’s duties and subsequent decision tandem with s180 (2). The second was the principles issues of the actions, which is whether they breached the provisions of s180 (2).
In the first instance, it was necessary to ascertain that the decisions taken by the directors fell within the safe harbor of the business judgment rule, which is that individuals (directors) were qualified to take the decisions and that the decisions involved matters relevant to the organization (ASIC, 2015: par.441). In the second instance, there was need to analyze organizational characteristics that would influence the roles and actions of the directors, and the specific decisions taken by the directors that now jeopardizes the position of the organization in compliance with the provisions of Australian Corporations Act, that is s180 (ASIC, 2015: par.442).
Justice Beach affirms that analyzing the liability of the directors within the umbrella of the Corporations Act recognizes the restriction of the law in possible regard of the directors on grounds of accessorial civil liability for contraventions. Therefore even though the company could be liable for contravening particular or all the provisions of the Corporations Act, it would not immediately imply that the directors were liable (ASIC, 2015: par.447). Following the “stepping stone” approach, the liability of directors only follows their possible contravention of the provisions of s180, contraventions of which exposed the company to litigation for the breach of the Corporations Act (Herzberg & Anderson, 2012; Langford, 2016).
Nonetheless, even though the scrutiny of the liability of the directors under s180 (2) dwells on the factor of foreseeable risk, it also ought to weigh the potential positive implications of the risk taken by the directors as part of their care and duty portfolio. It is therefore the weight between the adverse effects of the director’s choice and projected implication of the benefit that the decision aimed constitutes the ingredient of liability on the part of the directors. In that regard, Justice Beach implicitly argues that directors can occasionally take entrepreneurial approaches in so far as the approaches comply with the provisions of s180(1)(a) to (d) and that they outweigh any adverse effect that might accrue due to the decision. After all, business decisions involve considerable uncertainty and risk and making a decision that ends in failure on the part of the company does not imply the directors contravened s180.
By analyzing the position of Mr Olney-Fraser through a stepwise review of their compliance with the subsections (a) to (d) of s180 (2), Justice Beach confirmed that indeed the directors met the prerequisites of the statutes. The first task of ascertaining whether the decision taken by the directors amounted to a business judgment as outline in s180 (3). It was found to be so. The second analysis was confirming whether the judgment complied with s180 (2) (a) which proved correct. The third was ascertaining whether the judgment observed s180 (2) (b) which proved correct. The fourth was confirming whether the judgment complied with s180 (2) (c) which proved correct. Justice Beach also confirmed compliance with s180 (2) (d).
ASIC was bound by the obligation to prove that Mariner had in fact contravened s631 (2) and s1041H concerning the company’s takeover bid in order to justify the company’s breach of the Corporations Act s180. However, as Justice Beach argues, ASIC fearing for the inadmissibility of arguments in the defense of Mariner’s contravention of s631 (2) and s1041H assumed the stepping stone approach to bring a case against the directors for breaching the provisions of s180 in which case Mariner would still remain exposed for breaching the Corporations Act. The logic of ASIC’s arguments were however in doubt since they relied in a series of “maybes” rather than actual occurrences or reasonable inferences impinged on ex ante analyses. In that regard, Justice Beach had the obligation to review and possibly disqualify ASIC’s arguments and absolve the directors from undue liability. It was necessary that decisions taken by the directors be reviewed in light of s180 of which ASIC claims liability on the part of the company. It is as though ASIC implicitly claims that if Mariner is a guilty of breaching the Corporations Act, then it goes without saying that the directors, being the source of decisions that placed the interest of the company in jeopardy bear blame for their breach of a few or all the provisions of s180(2).
The case ASIC v Mariner is particularly similar to and in a way borrows argumentative capital from ASIC v Rich even though the former reflects the emergence of the “stepping stone” principle that had not come into full effect in the ruling of ASIC v Rich. The Rich case had been much more complex since it was in many ways expounding on the business judgment rule and even evaluating the appropriateness of definitions as important considerations in arguments about matters of the law. It proved that the Australian Corporate Act still needs further redress to affirm its position for example on who bears the burden of proof of whether the defendants adhered to the provisions of s180 (Australian Institute of Company Directors, 2014; Wan, 2015; Barnes, 2010).
The Mariner case on the other hand dwelt more on the point of entry regarding the plaintiff’s accusations. Is it the overall view of the Corporations Act, or is it from the perspective of the directors? The stepping stone principles sets precedent of proving the directors, and then exposing the position of the company regarding its compliance with Corporations Act (Robertson, 2015; Back, 2014). Both cases however acknowledge that directors have a safe harbor that protects them against undue blame taken as part of their duty and care. Therefore the possibility of breach of the Corporations Act by the company does not necessarily translate to a breach of s180 by its directors or trusted officers (Hooper, 2010).
References
Legg, M., & Jordan, D. (2014). The Australian Business Judgment Rule after ASIC v. Rich: Balancing Director Authority and Accountability. Adelaide Law Review, 34, 403-426.
Muswaka, L. (2013). Shielding Directors against Liability Imputations: The Business Judgment Rule and Good Corporate Governance. Speculum Juris, 1, 25-40.
Hargovan, A. & Du Plessis, J. (2014). Re-assessment of the Statutory Business Judgment Rule in Australia – The Case for Law Reform. Retrieved May 26, 2017, from https://www.aph.gov.au/DocumentStore.ashx?id=d5ef7ac3-cd5a-4ba3-acf2-41d2a10519a3&subId=301402
Australian Securities and Investments Commission v Rich [2009] NSWSC 1229 (18 November 2009). Retrieved May 26, 2017, from https://jade.io/article/120004?at.hl=Australian+Securities+and+Investments+Commission+v+Rich+%5B2009%5D
Herzberg, A., & Anderson, H. (2012). Stepping Stones-From Corporate Fault to Directors’ Personal Civil Liability. Federal Law Review, 40, 181.
Langford, R. T. (2016). Corporate Culpability, Stepping Stones and Mariner-Contention Surrounding Directors’ Duties Where the Company Breaches the Law. Retrieved May 26, 2017, from https://www.business.unsw.edu.au/About-Site/Schools-Site/Taxation-Business-Law-Site/Documents/Corporate_Culpability_Stepping_Stones_and_Mariner.pdf.
Australian Institute of Company Directors. (2014). The honest and reasonable director defence. Retrieved May 26, 2017, from https://www.governanceinstitute.com.au/media/681519/the-honest-reasonable-director-defence-a-proposal-for-reform_august-2014_f.pdf
Black, A. (2014). Recent developments in corporate law. NSW Young Lawyers Annual One Day Seminar – Business Law 2014 – 8 March 2014. Retrieved May 26, 2017, from https://www.austlii.edu.au/au/journals/NSWJSchol/2014/17.pdf
Hooper, M. (2010). The Business Judgment Rule: ASIC v Rich and the Reasonable-Rational Divide’ Company and Securities Law Journal, 28, 423-427.
Australian Securities and Investments Commission v Mariner Corporation Limited [2015] FCA 589 (19 June 2015). Retrieved May 26, 2017, from https://jade.io/article/398014
Wan, W. Y. (2015). Directors’ defence of reliance on professional advisers under Anglo-Australian law. Common Law World Review, 44(1), 71-93.
Barnes, J. (2010). When Plain Language Legislation is Ambiguous-Sources of Doubt and Lessons for the Plain Language Movement. Melb. UL Rev., 34, 671.
Czoch, K. & Whalebelly, R. (2012, May 7). Australia: The James Hardie Decisions: ASIC v Hellicar & Ors [2012] HCA17; Shafron v ASIC [2012] HCA 18 [Web log post]. Retrieved May 26, 2017, from https://www.mondaq.com/australia/x/176336/Directors+Officers+Executives+Shareholders/The+James+Hardie+Decisions+ASIC+v+Hellicar+Ors+2012+HCA17+Shafron+v+ASIC+2012+HCA+18
Jacobson, D. (2015, July 9). Case note: Directors successfully rely on business judgment rule [Web log post]. Retrieved May 26, 2017, from https://www.brightlaw.com.au/case-note-directors-successfully-rely-on-business-judgment-rule/
Robertson, M. (2015, October 27). ASIC v Mariner Corporation Limited. Retrieved May 26, 2017, from https://www.lexology.com/library/detail.aspx?g=870f24b4-10d9-4d90-b7c4-95ef5011ebd5.
AustLII. (2017, May 22). CORPORATIONS ACT 2001 – SECT 180: Care and diligence–civil obligation only [Web log post]. Retrieved May 26, 2017, from https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s180.html
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