An Australian appeals court set aside fines and suspensions levied on James Hardie Industries NV former non-executive directors over a misleading statement the company issued regarding compensation for asbestos victims.
The Australian Securities & Investments Commission failed to prove that the directors passed a resolution in 2001 approving the release of a statement to the Australian Stock Exchange, or ASX, claiming the company’s asbestos compensation fund was sufficient to pay all future claims, the New South Wales Supreme Court of Appeal said today.
“We are not satisfied that the non-executive director appellants voted in favor of the draft ASX announcement resolution,” Chief Justice James Spigelman wrote on behalf of the appeals panel. “We do not think ASIC discharged its burden of proof.”
ASIC is facing a string of losses in its attempts to prosecute companies and directors for alleged misdeeds. The regulator a year ago failed to win a conviction against Andrew Forrest, the billionaire founder of Fortescue Metals Group Ltd., who was alleged to have misled investors over iron ore projects in China. The case is being appealed. ASIC also lost an eight-year case against One.Tel founder Jodee Rich last year.
ASIC is reviewing today’s judgment and will decide later whether to ask the High Court to consider an appeal, the commission said in a statement.
The commission should have called Allens Arthur Robinson lawyer David Robb, who had advised the James Hardie board, to support its case that the directors approved the statement, the appeals court said.
“The failure to call Mr. Robb in our view significantly undermines the cogency of ASIC’s case,” Spigelman said.
The non-executive directors had said they relied on advice from the company’s executives to make their decisions.
“They have to rely on management,” said Tim Bednall, partner at Mallesons, Stephen Jaques, an Australian law firm that represented James Hardie. “That’s just the way it works.”
Bednall said today’s ruling doesn’t change Australian corporate law, or the duties and responsibilities of management and board members.
The case examined the responsibilities of public companies, executive and non-executive directors, ASIC Chairman Tony D’Aloisio said in the statement.
“The appeal court has also provided analysis of the evidentiary burden on ASIC in a civil penalty case, and the obligation on ASIC to call witnesses,” D’Aloisio said.
James Hardie, the biggest seller of home siding in the U.S., used asbestos in Australia beginning in the 1920s. The fibrous mineral, used to make fiber cement sheets for housing, has been linked to lung cancer and mesothelioma, a form of cancer affecting the chest or abdomen. The company began phasing out asbestos in 1968 and all products it made were asbestos-free by 1986.
Today’s ruling “doesn’t change the fact that this is an ongoing problem,” Karen Banton, the widow of Bernie Banton who had campaigned for victims of asbestos, said outside the courthouse in Sydney. “It’s ridiculous the amount of money companies like Hardie have spent defending themselves.”
She said the money would be better used to help victims of diseases associated with asbestos.
In 2001, James Hardie created a A$293 million ($291 million) fund to compensate asbestos victims, saying in a news release it was satisfied that the foundation had “sufficient funds to meet anticipated future claims.” ASIC alleged the directors approved the release and knew it was misleading, with potential claims exceeding the money available by A$1.3 billion.
A trial judge agreed with ASIC, fining the company A$80,000. Former Chief Executive Officer Peter Macdonald was fined A$350,000 and barred from managing a corporation for 15 years and former company secretary and general counsel Peter Shafron received a A$75,000 fine and a seven-year ban. Eight other former directors were banned from managing corporations for five years and given fines of either A$30,000 or A$35,000.
The company and the directors, except Macdonald, appealed.
The appeals court upheld the fine against James Hardie.
“They expressly found the statements were misleading,” Bednall said. “There’s no joy there.”
James Hardie said in a statement to the Australian Stock Exchange that it’s reviewing the judgment and doesn’t plan to comment further.
The appeals court also ruled that Shafron and former Chief Financial Officer Phillip Morley failed to advise the board of potential future shortfalls in the fund. The court ordered another hearing to review the penalties against Shafron and Morley. The former CFO received a A$35,000 fine and a five-year suspension from serving as executive or a director of a publicly traded company.
The case is Australian Securities Investment Commission v. James Hardie Industries NV. 2009/00298426. New South Wales Supreme Court of Appeal (Sydney).
Joe Schneider in Sydney at +61-2-9777-8680 or email@example.com