14 October 2019

Directors’ duties in a disaster

This article was written by Adrian Perkins and Will Heath.

Being an Australian company director isn’t easy in 2019.  The job requires dealing with more prescriptive compliance burdens, increasingly aggressive regulators and demanding stakeholders.  Business-as-usual directorship is tough.

But no situation is more stressful and demanding than a corporate crisis or major incident.  Crises can come in many forms and from different root causes.  Regardless of the form and cause, they are always unwanted, frequently unforeseen and rarely easily resolved.

Part of the complexity of a crisis is that it will invariably raise significant legal issues.  While many of those issues are nuanced and require specialist advice, there are some common themes we encounter in advising Australian company boards on crisis management.  Here are our five key thoughts.

Where’s your plan?

It’s trite to say that companies should consider formulating a crisis management plan that deals with known risks and responses.  Although not all disasters can be anticipated, some supposed black swan events can be mitigated with careful thought and preparation.  In this context, the Board’s role is to oversee the implementation of an appropriate plan and periodically test it against new circumstances including changes in company business and operations, markets and emerging risks. 

You need a legal adviser who you can trust

By nature, corporate crises and major incidents raise significant legal issues.  Boards will need legal advice on the issues that arise from an adviser they trust.  This has two aspects.  First, internal legal counsel should be empowered to assist the Board’s response to a crisis.  Crisis-management should not be limited to operational executives.  Second, Boards will typically need external advice and support on a broad range of legal issues including continuous disclosure, directors’ duties, and in relation to non-Australian operations or foreign stakeholders (raising issues of foreign law) and/or regulated sectors (where governments or regulators may have prescribed certain steps to be taken in respect of a crisis).    

Directors’ duties set a high bar

Directors should always comply with their statutory and general law duties.  In the context of responding to a corporate crisis, the baseline duties of every company director are to act with reasonable care and diligence (section 180 of the Corporations Act) and in good faith in the best interests of the company and for proper purposes (section 181 of the Corporations Act).  While it is always essential for company directors to act with integrity and honesty, doing so will not necessarily discharge these statutory duties.[1]  Under Australian law, regulators and courts will judge directors’ acts and omissions by the objective standard of the reasonable company director and with the benefit of hindsight.  And, as we have noted elsewhere, ASIC has a strong track record in prosecuting directors for breaches of statutory duties.[2]  In particular, the recent “stepping stones” cases (including, most recently, the Vocation decision) illustrate that directors may be pursued for an alleged breach of their statutory duty of reasonable care where their acts or omissions have exposed the company to a breach of law.[3]

Get your ASX disclosure right

In responding to a crisis, listed company directors will need to manage continuous disclosure obligations and keep the market informed of material developments.  It’s not enough to make timely disclosures.  Disclosures also need to be accurate and not misleading. 

One of the biggest traps for Boards is to sign-off on disclosures that have not been subject to an appropriately robust review process.  We know from the results in a long line of cases from James Hardie to Vocation that ASIC will not hesitate in pursuing (with a very high rate of success) directors who authorise misleading company announcements.  Additionally, the recent Vocation case confirms the principle (rightly or wrongly) that the business judgment rule will not apply to directors’ decisions in relation to ASX releases and other compliance matters.  Practically, this means carelessness in corporate disclosure will almost invariably lead to liability.

Don’t miss the shifting sands

Much of the law of corporate governance – both legislative and judicial – has grown, and continues to grow, out of corporate crises.  The law is dynamic and Boards should not assume that their previous experience dealing with, and former advice in relation to, particular legal issues remains correct.  In Australia, the law dealing with companies in financial distress has significantly changed and Boards should seek advice on the application of the safe-harbour regime from the outset.  Overseas, including in the United Kingdom, courts have been expanding the circumstances in which litigation can be brought against parent companies for corporate crises involving their subsidiaries.  The prospect of ASX-listed companies and their Boards being subjected to liability for mishaps affecting their subsidiaries is ever increasing.  In these changing circumstances, second-guessing the law in a crisis can be its own disaster.

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