James Hardie – legal responsibility and corporate morality

I have been observing with interest the latest news that ASIC has commenced action against the directors of James Hardie Industries for breaches of the Corporations Act between 2001 and 2003.

Now you may recall that in a blaze of publicity over asbestos related illnesses and claims by former employees and those that used products produced by James Hardie, the company proposed to move its operations off-shore to the Netherlands. This may have meant that the assets of James Hardie would be placed out of reach of potential claimants. They facilitated the move by setting up a compensation fund to meet current and future claims. In due course, it became apparent that the fund was insufficient by an order of magnitude. Ken Parish commented on this at the time (with some reference to relevant facts). The Age summarises the relevant facts thusly:

The Australian Securities and Investments Commission (ASIC) is alleging breaches of the Corporations Law between February 2001 and June 2003. This includes company statements that its asbestos compensation was “fully funded” when it moved offshore to the Netherlands in 2001.
Company executives were first told in April 2001 that a trust set up just two months earlier was likely to run out of money decades before all claims were paid.
The company did not agree to meet the shortfall until July 2004, after a NSW special commission of inquiry sparked a public furore.

This has the potential to be one of the great Australian corporate shame files. The various inquiries into the actions of James Hardie, its lawyers Allens Arthur Robinson and other key parties at best paint the whole process as an undertaking by people not very concerned about whether or not compensation would be paid. But criminal charges have yet to arise from the debacle. I am sure that the regulators were keen to ensure that nobody could be seen to be getting away with murder, especially following the announcement that payment of the claims are now indeed fully funded.

ASIC claims civil penalties for failures to disclose facts which would have adversely impacted on the ability of James Hardie to meet its potential liabilities. There are all sorts of obligations to disclose information in relation to public companies. However, it is interesting here that the relevant information here is not directly about the performance of the market or the company, but about whether the company is able to meet its broader obligations to potential litigants, some of whom were not yet identified. James Hardie’s actions, if they had managed to get away with it, would have actually been positive in a traditional corporate law assessment of the situation – they would have resulted in a greater profit being available to shareholders. So the case raises the question of how these corporate responsibilities can be weighed against things like the public interest or commercial morality.

This type of litigation is likely to have broad implications for the type of corporate behaviour that is expected from companies which are the target of mass litigation – tobacco companies, and chemical companies spring to mind as examples. The James Hardie directors have predictably said that they will strongly defend the claims, most likely using James Hardie money to do so. Despite the media spin, the court will be limited to determining the issues based on the law as it stands. So the determination of this claim will be taken seriously and will have serious implications.

It remains to be seen whether ASIC is successful in shoe-horning a requirement for corporate morality into the disclosure requirements. The result, however it turns out, may have a significant impact on the development of the ideas of corporate responsibility in this country.

UPDATE – I see that ASIC has now uploaded their (lengthy) statement of claim to their website in pdf format.

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14 years ago

You should read the back of today’s AFR for a better perspective on it.

Notably, the actual charges relate to a single statement about the sufficiency of the first-established Fund to meet its likely claims.

A harsh rap for the likes of Hellicar who was arguing at that time (internally) for the full indemnity.

Danielle McCredden
Danielle McCredden
14 years ago

The ASIC news release was a lot more vague and referenced a number of statements or omissions that they were relying on. I note that the ASIC now has a pdf of the statement of claim on its website, which is worth taking a look at.

Ken Parish
Ken Parish(@ken-parish)
14 years ago

“Notably, the actual charges relate to a single statement about the sufficiency of the first-established Fund to meet its likely claims.”

This is just plain wrong. According to the Statement of Claim, which I’ve just perused (thanks Danielle), the particulars of seriously misleading conduct/statements include claims in various statements and announcements to the ASX, information memoranda attached to the scheme of arrangement proposal, accompanying solicitors’ letter, statements at publicity “roadshows” and so on. It’s certainly true that all these various statements spruiked essentially the same spurious message, namely that the funds set aside for asbestos claimants were sufficient (when in fact the directors allegedly never had, and knew they didn’t have, any proper basis for making such assertions).

Moreover, the very fact cited by Patrick, namely that Meredith Hellicar was “arguing at that time (internally) for the full indemnity” rather tends to contradict directors’ assertions that they didn’t know the indemnity fund actually offered was insufficient to meet expected claims from asbestos victims.

Danielle McCredden
Danielle McCredden
14 years ago

Well that seems to make sense, and is consistent with the initial releases by ASIC about the nature of its claims. In fact some of the contexts of the claims are quite novel – should a director of a publicly listed company be liable for statements made on behalf of the company at a press conference or a PR event?

One suspects that if Hardie had moved to the Netherlands at the height of the eighties, it might have avoided having to make much comment on the provision for potential claims at all. What a difference a decade makes.

Francis X Holden
14 years ago

Is the outcome of the charges likely to go the heart of the fundamental Director / Board commandment?

Danielle I had always seen it as maximising value to shareholders not just profit. As I see it value may be more long term and involve capital whereas profit tends to at least be seen as short term distributions.

anyway I knew my bible knowledge would come in handy one day:

For what is a man profited, if he shall gain the whole world, and lose his own soul

Danielle McCredden
Danielle McCredden
14 years ago

Fair call with the profit/value comment. However the analysis still works – if Hardie had managed to shift offshore while jettisoning a large amount of liability, it would have increased the value of the capital in the company.

The counter argument is of course that in making provision to meet the claims, they have increased the regard in which the company is held and some of those non-tangible expressions of value. While this might be theoretically true, companies subject to large liability claims such as Hardie or British American Tobacco can only improve their PR capital to a limited degree. Tobacco companies, however much they might try, are never going to be embraced by the community as great contributors to society. Likewise, asbestos manufacturers are always going to have to deal with that image.

Is the outcome of the charges likely to go the heart of the fundamental Director / Board commandment?

I don’t think it will go that far, but I think that this is one of thoses cases where there is a public/media/regulatory will to try and change some of the expectations of the duties of directors and boards, including taking into account broader interests than just those of the shareholders/company. I am just not sure that anything that they have done is a breach of their duties as the law currently stands, but I have enough moral outrage to consider that it *ought* to be a breach of their duties to have behaved in this manner. As a lawyer, I think that ASIC might be trying to stretch the law a little, but as a human being, I support the attempt.

{note that nothing in this comment should be taken to suggest that lawyers and human beings are mutually exclusive groups}

Becky Jo Hull
Becky Jo Hull
6 years ago

Regarding the James Hardie compensation fund payments being slashed by 44%… This is obviously a “breach of contract”, and a blatant disregard for the horrific damages the business leaders of this corporation have originally caused to all the victims of this ongoing crime against humanity. The extent of the harm these business leaders have done to their victims is multiplied exponentially over time. So, time to teach these greedy bastards that Justice is not blind, and that Karma can be a bitch. Change the laws that apply to corporate responsibility and requirements of legal compensation for damages they cause to the unsuspecting people they cold-heartedly sacrifice to Greed for the sake of profit through unsustainable and unethical business practices. Make directors, CEOs, and anyone who was/is working for, or on behalf of that corporation legally liable for any wrongdoing that they have knowingly participated in. Corporate fines should be high enough to confiscate ALL profit gained from these destructive corporate business practices… to be used to set up a government regulated trust fund to be paid to all known victims and their loved ones who have also suffered by association, along with those who will become known in the future. Right now I also favour a 44 year minimum prison sentence with no possibility of parole for anyone prosecuted and found guilty of being directly involved in causing these devastating violations of “duty of care”. We are all connected in the Web of Life. Sooner or later, what affects one affects all, to some degree, for good or for ill. Teach them that when they engage in destructive business practices, that ultimately, they risk the destruction and loss of everything they value, the alienation and loss of everyone they may care about. If they can be made to realize that they are engaging in a “no-win” business practice, they will soon change the way they do business, for the sake of their own self-preservation.