Protecting the Authority of Directors: An Empirical Analysis of the Statutory Business Judgment Rule
Jenifer Varzaly, Lecturer in Law, The University of Adelaide, Australia.
Introduction
The global financial crisis and continuing climate of economic instability has created new challenges for
all stakeholders of corporations, both within Australia and abroad. Directors have been faced with
increasing uncertainty in relation to the economic position of the companies they manage as well as the
requisite legal regime they operate within. If Australia is to continue its steady emergence from the
existing financial turmoil and if economic growth is to continue, directors must be able to make
decisions which inevitably involve some degree of commercial risk. Likewise, careless and dishonest
director behaviour must be discouraged if shareholder interests are to be adequately protected.
Australian corporate law has attempted to strike this balance through the enactment of the statutory
business judgment rule (BJR) contained in s180(2) of the Corporations Act 2001 (Cth) (the Corporations
Act).
While this defence has been available to Australian officers and directors since March 2000, this is the
first research project which has empirically presented the impact of this defence on Australia’s
corporate governance legal regime. This paper analyses whether the statutory BJR has adequately
fulfilled the expectation of the legislature, namely, to protect the authority of directors in the exercise of
their duties but not to insulate them from liability; to encourage directors to take advantage of
opportunities involving responsible risk taking; to confirm the common law position that Courts will
rarely review bona fide business decisions; and to provide a clear presumption in favour of a director’s
judgment.1 This question is answered by reference to how the Australian Courts have applied the BJR.
1
As set out in the Corporate Law Economic Reform Program Bill 1998 (Cth) (CLERP) Explanatory Memorandum.
1
This paper outlines the findings which have been compiled from an examination of all of the cases which
have considered the BJR since its enactment.
Background to Empirical Research
The goal of a successful corporate governance framework should be to motivate directors and reduce
agency costs, so that directors monitor the affairs of the company with due care and refrain from selfdealing transactions. However, increasing legal liability is not necessarily the best way to achieve this
aim. The law should induce directors to act diligently and concomitantly deter misconduct. However,
legal regulation should not over-deter. Over-deterrence results in excess caution in decision making and
excess interference in management, neither of which is economically desirable.
Further, over-deterrence results in qualified people refusing to take up director positions, the evidence
of which is continuing to emerge in Australia, with a landmark Australian Institute of Company Directors
(AICD) survey and a number of national media sources reporting that directors are resigning from
boards and abandoning plans to take up directorships at an alarming rate. 2 The large-scale survey
undertaken by the AICD and released in November 2010, ‘Impact of Legislation on Directors’, highlights
some of the grave concerns apparent under the current level of legal regulation in Australia. The survey
included 623 directors in Australia, from a range of companies such as ASX 200 companies, small and
medium sized companies, and not-for-profit organisations. More than 90 percent of directors surveyed
stated that potential liability had an impact on business decision making, and almost a third of
respondents indicated that they had personally declined a directorship offer, due to the risk of personal
liability.
2
Australian Institute of Company Directors ‘Impact of Legislation on Directors’ survey, November 2010; reported
further in the national Australian media, see for example: ‘Wary directors flee boards as liability fears take their
toll’, The Australian, November 1, 2010.
2
In relation to the available defence in Australia, namely the BJR, over 73 percent of respondents opined
that there was a medium to high risk of directors being found personally liable for business decisions
they made in good faith. Further, fifty four percent believed that there were no reasonable defences or
‘safe harbours’ for directors making decisions in good faith, that is, they thought that the BJR would not
be applied by the Courts to protect directors in such situations. This is reflective of academic
commentary in the area including the assertions that the BJR “offers nothing but window dressing” or is
a “sleepy hollow” with little practical effect as a defence. 3
Given the current economic climate and the business organisation and media attention surrounding the
issue of over-deterrence of director conduct due to liability fears, a review of the operation of the
existing BJR is indeed important; in order to determine whether the BJR, as implemented by the
Australian Courts, has fulfilled or fallen short of the legislature’s intent.
The Directors’ Duties Framework in Australia
Company directors in Australia are subject to a range of legal duties and responsibilities which exist both
as part of the common law as well as under the Corporations Act. Directors’ duties have been enacted
with the purpose of ensuring that directors act with reasonable care and diligence, in the best interests
of the company, with good faith, and for a proper purpose.
3
See, for example, Young, N. (2008) ‘Has Directors’ Liability Gone Too Far or Not Far Enough? A Review of the
Standard of Conduct Required of Directors Under Sections 180-184 of the Corporations Act’ 26 C&SLJ 216.
3
The common law directors’ duties fall broadly under the classifications of care and diligence and loyalty
and good faith.4 The first category is generally concerned with the active monitoring of the affairs and
financial position of the company, while the second category aims to ensure the loyalty of the director
to the company by purporting to deter, for example, business deals which would benefit directors to the
detriment of the company.
The general category of care and diligence also includes the statutory duty to prevent insolvent trading.
Similarly, the duty of loyalty and good faith also includes a number of other more specific duties, which
are the duty to act in good faith in the best interests of the company, the duty to act for a proper
purpose, the duty to retain discretions, and the duty to avoid conflicts of interest. 5
The statutory directors’ duties are found in sections 180-184 and section 588G of the Corporations Act.
Section 185 of the Corporations Act states that the statutory duties have effect in addition to and not in
derogation of other laws relating to the same duty. More specifically, the statutory duties include:
1. The duty to exercise reasonable care and diligence (though subject to an exception for good
faith business judgments, that is, the BJR) (s 180);
2. The duty to exercise powers and discharge duties in good faith for a proper purpose in the
best interests of the company (s 181);
3. The duty not improperly to use their position to gain advantage for themselves or someone
else or cause detriment to the company (s 182); and
4. The duty not improperly to use information gained in their position to gain advantage for
themselves or someone else or cause detriment to the company (s 183).
4
Hanrahan, P., Ramsay, I. and Stapledon, G. (2011) Commercial Applications of Company Law, 12th edition, CCH
Publishing.
5
Hanrahan, P., Ramsay, I. and Stapledon, G. (2011) Commercial Applications of Company Law, 12th edition, CCH
Publishing.
4
The general law and statutory duties have common characteristics and in practice entail similar
standards of review of director conduct by the courts.6 The result of this is that a director found to be in
breach of, for example, the Corporations Act duty of care will also be in breach of the equivalent general
law duty. However, one noteworthy difference between directors’ duties under the Corporations Act
and the common law relates to the enforcement of these duties. The Corporations Act duties are
enforced by the Australian Securities and Investment Commission (ASIC)7, whereas the common law
duties must be enforced by the company itself.8
Further, directors must meet the requirements of various State and Territory laws which impose
personal liability on directors in situations where the company breaches, for example, Environmental
Protection or Occupational Health and Safety legislation.
The Australian legal regime thus requires compliance with numerous standards of conduct in order for
directors to avoid legal responsibility for management decisions or monitoring requirements. Australian
directors are subject to a stringent regime of legal duties which are viewed by some as overly strict,9 but
may conversely be considered necessary due to the importance of the role of a director in leading the
strategic direction of a company.10
6
Hanrahan, P., Ramsay, I. and Stapledon, G. (2011) Commercial Applications of Company Law, 12th edition, CCH
Publishing.
7
Australia’s corporate, markets and financial services regulator.
8
Hanrahan, P., Ramsay, I. and Stapledon, G. (2011) Commercial Applications of Company Law, 12th edition, CCH
Publishing.
9
Baxt, R. (2008) ‘“Encouraging” entrepreneurialism: What parts do/should the courts play’ 36(1) Australian
Business Law Review 62; Young, N. (2008) ‘Has Directors’ Liability Gone Too Far or Not Far Enough? A Review of
the Standard of Conduct Required of Directors Under Sections 180-184 of the Corporations Act’ 26 C&SLJ 216
(2008), p219.
10
Young, N. (2008) ‘Has Directors’ Liability Gone Too Far or Not Far Enough? A Review of the Standard of Conduct
Required of Directors Under Sections 180-184 of the Corporations Act’ 26 C&SLJ 216, p218.
5
The Statutory Business Judgment Rule
The BJR encapsulates the principle that courts will generally not review the merits of a management
decision made by a director. The rationale behind the existence of this rule is to protect directors,
encourage risk taking and director action, while balancing this with the need for directors to act in good
faith and adequately inform themselves before making management decisions. The BJR has its origins in
the American Law Institute’s ‘Principles of Corporate Governance: Analysis and Recommendations’,
however courts have not interpreted the similarly worded Australian BJR in a manner consistent with its
US origins.11
The statutory BJR first came into being in March 2000 in Australia, as an element of the Corporate Law
Economic Reform Program (CLERP). Section 180(2) of the Corporations Act was introduced by the CLERP
Act 1999 (Cth) in order to clarify and confirm the general law position that bona fide business decisions
are seldom open to review. 12 Its rationale was to promote entrepreneurial business activities and
prevent excessive inhibition of directors, while also increasing certainty regarding director liability.13
The introduction of the BJR was ultimately motivated by a perception in Australia that the legal rules
which were imposed on directors were unnecessarily harsh.14
The Australian BJR was purported to serve as a protection from liability, or a safe harbor, for directors
who make a business decision to take or not to take action regarding the business operations of a
corporation.15 Under section 180(2) of the Corporations Act, a director of a corporation will be taken to
11
Lumsden, Andrew (2010) ‘The business judgment defence- Insights from ASIC v Rich’ 28 C&SLJ 164.
Corporate Law Economic Reform Program Bill 1998 (Cth) (CLERP) Explanatory Memorandum.
13
Corporate Law Economic Reform Program Bill 1998 (Cth) (CLERP) Explanatory Memorandum.
14
Robert Baxt (2008) ‘“Encouraging” entrepreneurialism: What parts do/should the courts play’ 36(1) Australian
Business Law Review 62.
15
Corporate Law Economic Reform Program Bill 1998 (Cth) (CLERP) Explanatory Memorandum.
12
6
have met the requirements of the duty of care and diligence in section 180(1) in respect of making a
business judgment if the relevant judgment is made:
•
In good faith and for a proper purpose;
•
While acting on an informed basis to the extent reasonably believed to be appropriate;
•
Without material personal interest; and
•
Holding a rational belief that the decision is in the best interests of the corporation.
It is noteworthy that the BJR, if satisfied, only applies to shield a director from liability under the duty to
act with care, skill and diligence.
The proposals to extend the Australian BJR and to enact a General Defence
In light of the foregoing there has been ongoing debate as to what the optimal content of the Australian
law should be, in order that a proper balance is struck between the ability of directors to take
reasonable risks in exercising their management function, while ensuring that such actions benefit the
company and its associated stakeholders. The most recent debate surrounding director legal
responsibility in Australia concerns the available defences which can be argued by directors whose
conduct is impugned, and whether these should be reformed, extended, or remain the same.
The first step towards regulatory change in Australia began in 2006 with the release by the Treasury
Department of the consultation paper entitled ‘Corporate and Financial Services Regulation Review’.
One of the most interesting suggestions made by the consultation paper was the proposed extension of
the BJR, foreshadowing an extension of the BJR to apply to all liabilities of directors under the
7
Corporations Act, including the duty of good faith, proper use of position and use of information, and
insolvent trading.
This was followed by the release of a consultation paper in 2007 by the Treasury, entitled ‘Review of
Sanctions in Corporate Law’, which sought further consultation on the issue of introducing a ‘general
defence’ to protect directors from breaches of their duties (this would perhaps act as a replacement to
the statutory BJR). The proposed changes would be implemented to enable directors to pursue risktaking business activities with the ability to rely on a general defence which would potentially excuse
liability for breaches of ss180-183 and the insolvent trading prohibition in s588G of the Corporations Act.
This proposed ‘general defence’ was made to alleviate concerns that some corporate law sanctions were
adversely affecting directors’ willingness to engage in responsible risk taking.16 The 2007 paper
canvassed a general protection for directors which would relieve them of liability for decisions made
where they acted: in a bona fide manner; within the scope of the corporation’s business; reasonably and
incidentally to the corporation’s business; and for the corporation’s benefit. 17
More recently, a Discussion Paper was released in 2010, entitled ‘Insolvent Trading: A Safe Harbour for
Reorganisation Attempts Outside of External Administration’. This was released in the wake of the global
financial crisis, when commentators were highlighting the significant negative impacts on the availability
of credit, leading to both an increase in reorganisation attempts and increased difficulties for companies
16
Insolvent Trading: A Safe Harbour for Reorganisation Attempts Outside of External Administration, Discussion
Paper, January 2010, at 1.3.
17
Insolvent Trading: A Safe Harbour for Reorganisation Attempts Outside of External Administration, Discussion
Paper, January 2010, at 1.3.
8
in maintaining solvency on a short-term basis as informal work-outs are attempted, while concomitantly
being faced with the personal liability of directors for insolvent trading. 18
The latest paper outlines three proposed options for reform: 1. Retain the status quo with no change to
the current law; 2. The introduction of a modified business judgment rule which would cover a situation
in which there is an alleged breach of the directors’ duty not to engage in insolvent trading; and 3. A
moratorium from the duty not to trade whilst insolvent for the purpose of attempting a reorganisation
of the company outside of external administration. 19
The BJR would operate to relieve directors of the duty not to trade whilst insolvent in situations where:
the financial accounts and records of the company presented a true and fair picture of the company’s
financial circumstances at the time that the rule was invoked; the director was informed by
restructuring advice from an appropriately experienced and qualified professional with access to those
accounts and records, as to the feasibility of and means for ensuring that the company remains solvent,
or that it is returned to a state of solvency within a reasonable period of time; it was the director’s
business judgment that the interests of the company’s body of creditors as a whole, as well as members,
were best served by pursuing restructuring; and the restructuring was diligently pursued by the
director.20
18
Insolvent Trading: A Safe Harbour for Reorganisation Attempts Outside of External Administration, Discussion
Paper, January 2010, at 1.5.
19
Insolvent Trading: A Safe Harbour for Reorganisation Attempts Outside of External Administration, Discussion
Paper, January 2010, at page vi.
20
Insolvent Trading: A Safe Harbour for Reorganisation Attempts Outside of External Administration, Discussion
Paper, January 2010, at 5.3.6.
9
The latest proposal aims to provide a high degree of protection for directors from the threat of personal
liability for insolvent trading.21 Thus far, no further legislative action has been taken on any of the
outlined Discussion Paper proposals.
Empirical Research
Aim of Research
The aim of this study is to examine the operation of the Australian statutory BJR during the twelve years
it has been part of the Australian Corporations Act. Specifically, the BJR will be evaluated in reference to
the policy reasons for its introduction, namely:22
1. For the fundamental purpose of protecting the authority of directors in the exercise of their
duties, not to insulate directors from liability;
2. To encourage directors to take advantage of opportunities that involve responsible risk taking;
3. For the statutory BJR to clarify and confirm the common law position that the Courts will rarely
review bona fide business decisions; and
4. To provide a clear presumption in favour of a director’s judgment. Specifically, the proposed BJR
was to act “as a rebuttable presumption in favour of directors which, if rebutted by a plaintiff,
would mean the plaintiff would then still have to establish that the officer had breached their
duty of care and diligence.”23
21
Insolvent Trading: A Safe Harbour for Reorganisation Attempts Outside of External Administration, Discussion
Paper, January 2010, at 5.3.7.
22
As set out in the Corporate Law Economic Reform Program Bill 1998 (Cth) (CLERP) Explanatory Memorandum.
23
Paragraph 6.10 Explanatory Memorandum.
10
5. To provide legal certainty; as expressly stated in the second reading speech by the responsible
minister of the time, “Directors will benefit from the certainty that the rule provides in terms of
their liability.”24
This article outlines the results of the first empirical study of the Australian statutory BJR since it was
enacted, with the aim of providing assistance to policy makers in reviewing the current defence as well
as evaluating the potential merits of a new defence. The study moreover provides insight into the
judicial treatment of the BJR since its inception and how this accords with the stated policy aims. As is
the case within all regulatory regimes, policymakers should evaluate periodically whether improvements
can be made.
The aim of the research was to locate, extract data from, and analyse every case in which the business
judgment rule was argued. Current arguments either for or against the amendment of the BJR have so
far been anecdotal in their scope, so this paper purports to bring some valuable data to the debate.
Research Methodology
The aim of the research methodology was to identify and analyse every case which has made reference
to s180(2) of the Corporations Act. This was done with the purpose of examining how the Courts have
actually implemented the BJR with respect to the preceding policy considerations. The research was
undertaken using legal electronic databases of Australian case law,25 with search terms based on the
business judgment rule, the Corporations Act, and s180(2).26 After the initial case law findings were
compiled, those cases which only discussed the common law version of the BJR were eliminated from
24
Mr Hockey MHR, Hansard, 3 December 1998, p1284.
The LexisNexis AU and Austlii databases were extensively searched.
26
The following search terms were used: “180(2) w/p corporations act” and “business judgment rule”.
25
11
the analysis27, as well as those cases which only had an abstract reference to s180(2) 28. Further, cases
were counted only once even if they were appealed and the BJR was discussed on appeal. That is, only
the appeal case was counted in the event that a case went through numerous levels of appellate judicial
consideration. The research resulted in the location and compilation of 17 cases29 for reading and
analysis, with the objective of answering the following five questions to the extent possible:
1. How many cases have considered the statutory business judgment rule and in which years were
the cases decided?
2. Was the BJR interpreted as a rebuttable presumption in favour of the defendant(s) prior to any
consideration of whether the duty of care and diligence had been breached, or did the burden
of proof lie with the impugned director(s)?
3. Who was the relevant defendant in each of the cases i.e. which type of officer as defined in s9
of the Corporations Act?
4. How many judgments found that the BJR had been satisfied?
5. If the BJR defence was not satisfied, why not? Which element(s) were not satisfied?
Research Results
The BJR was introduced for the purpose of protecting and providing deference to directors in making
management decisions. Yet the following research findings indicate that since its inception the BJR has
only once been successfully argued by a company receiver,30 and it has never been successfully applied
by a director. The BJR has typically received little judicial attention since the rule was enacted in March
27
Often these cases dealt with factual situations which occurred prior to the introduction of s180(2).
Such as a reference only in a footnote of a judgment; a reference to s180(2) outside the scope of directors’
duties e.g. a passing citation in relation to a scheme of arrangement and of no relevance to the decision, or a
reference in a quotation from a different case which was cited for a wholly different reason than to analyse s180(2).
29
For the period of March 2000 to March 2011.
30
In Deangrove Pty Ltd v Buckby and Another (2006) 56 ACSR 630, at [68].
28
12
2000, however its legal importance has gradually been increasing as can be seen in the research results
below.
Table 1 and Figure 1 present the distribution of cases found in accordance with the year in which the
case was decided.
Table 1- When were the relevant cases decided?
Number of Cases
Year Case Decided
Percentage
0
2000-2002
0%
3
2003
17.6%
1
2004
5.9%
1
2005
5.9%
3
2006
17.6%
3
2007
17.6%
1
2008
5.9%
5
2009
29.5%
Total: 17
100%
Since the BJR provision came into force on 13 March 2000, the rule was not judicially considered at all
until 2003, and then the greatest number of decisions which considered the defence occurred in 2009.
Further, three of tabled cases are being appealed in 2010, which is likely to generate further important
case law in relation to the application of the BJR.
13
The increase in 2009 is perhaps not surprising considering the economic climate of the time, with share
prices falling by 26% over the course of the 2008-2009 financial year,31 company insolvencies reported
at a record high,32 in addition to the fact that ASIC has been perceived as more aggressively acting to
litigiously pursue company directors.33 These issues relating to corporate governance increased the
public outcry for increased regulation and enforcement of corporate misconduct, while concomitantly
highlighting the invidious position that many directors find themselves in when economic uncertainty
ensues.
The research nonetheless indicates that the defence has gradually gained in importance since its
inception (see Figure 1, below, for a graphical representation of the data).
Figure 1- Charting the judicial consideration of s180(2)
Number of Cases per Year
6
5
4
3
Number of Cases
2
1
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
31
ASIC 2008-2009 Annual Report, available at www.asic.gov.au.
ASIC Publication, 2009 Insolvency Statistics, available at www.asic.gov.au.
33
Baxt, R. (2010) ‘Director liability for corporate fault’ (2010) 28 C&SLJ 59.
32
14
The second important question when dealing with the implementation of the BJR by the courts in
relation to the purported policy aims of its enactment was whether the Australian BJR has been
interpreted as a presumption in favour of directors. As stated, under the US common law BJR directors
are presumed to have met the requirements of the rule unless the Plaintiff can prove that the
requirements of the rule have not been met.
Table 2- Was there a rebuttable presumption in favour of directors?
Was the BJR interpreted as a
Number of Cases
Percentage
Yes
0
0%
No
17
100%
Total:
17
100%
presumption in favour of
director(s)?34
The results indicate that no Australian case has interpreted the BJR to operate as a presumption in
favour of director conduct. This is despite the Explanatory Memorandum policy objective of confirming
and clarifying the common law position that the Courts will rarely review bona fide business decisions,35
as well as the fact that the statutory formulation was to provide a ‘clear presumption in favour of a
director’s judgment’.36
34
If the presumption issue was not dealt with at all or discussed at all, the case was categorised as not having
interpreted the rule as a presumption in favour of directors.
35
Although prior to the enactment of the BJR the notion of a common law BJR was well established as a defence
setting down the principle that there can be no appeal to the courts on the merits of management decisions. See,
for example, Young, N. (2008) ‘Has Directors’ Liability Gone Too Far or Not Far Enough? A Review of the Standard
of Conduct Required of Directors Under Sections 180-184 of the Corporations Act’ 26 C&SLJ 216, citing Howard
Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 at 832 and Harlowe’s Nominees Pty Ltd v Woodside (Lakes
Entrance) Oil Co NL (1968) 121 CLR 483 at 493.
36
Corporate Law Economic Reform Program Bill 1998 (Cth) (CLERP) Explanatory Memorandum, at 6.4.
15
Yet, through the Australian Court interpretation that the BJR shall not operate as a presumption in
favour of directors, there has necessarily been some review of the management decisions made by
directors- as the burden of proof has required directors to produce evidence in favour of any business
judgment made in order to satisfy the elements of the BJR.
Further, the Australian BJR was drawn, ‘to a large extent’ from the US BJR as contained in the ALI’s
Principles of Corporate Governance. The ALI formulation has the same elements as s180(2), and has
been interpreted as a clear presumption in favour of directors in the US. Yet, that same interpretation
has not occurred in Australia.
This has led to a situation in which there is a lack of certainty for directors. Despite the policy aims of the
BJR, there has not been a clarification of the law in this area. Furthermore, the only Judge who dealt
with the presumption issue in any detail in his judgment37, remarked that the statutory wording was
‘confusing’. If the esteemed members of our judiciary cannot clearly understand the Parliamentary
drafting or purported interpretation of the BJR, what hope do directors have in understanding the
statutory requirements that they are subject to?
Table 3- Who was the defendant?
Who was the relevant
Number of Cases
Percentage
Director
12
70.6%
Liquidator
3
17.6%
Receiver
1
5.9%
defendant(s)?
37
Justice Austin in ASIC v Rich, discussed below in the ‘Analysis of key cases’ section of the paper.
16
Administrator
1
5.9%
Total:
17
100%
The significance of this question stems from the fact that the BJR applies to directors and other officers,
and the definition of ‘officer’ in section 9 of the Corporations Act includes not only a director, but a
liquidator, receiver, and an administrator. Thus, even though the purpose of the enactment of the BJR
was to provide a safe-harbour for directors in light of rising liability fears,38 the wording of the provision
theoretically allows for officers to equally utilise the BJR.
Interestingly, approximately 18% of all cases which discussed the BJR were in relation to the liability of
liquidators. Moreover, the only case in which the BJR was successfully argued involved a receiver, not a
director.39 Yet, it can be appreciated from the Explanatory Memorandum that the policy aims of the BJR
enactment were specifically to provide directors with a safe harbour from personal liability40, so that
‘they will be encouraged to take advantage of business opportunities and not behave in an
unnecessarily risk averse way’ 41. Clearly, this has not eventuated on the basis of the interpretation of the
BJR by the courts.
Hence, since the inception of the statutory BJR, from a purely statistical perspective, the rule has not
protected the authority of directors in the exercise of their duties. That is not to say, as was aptly
38
Corporate Law Economic Reform Program Bill 1998 (Cth) (CLERP) Explanatory Memorandum.
Deangrove Pty Ltd v Buckby and Another (2006) 56 ACSR 630.
40
The Corporate Law Economic Reform Program Bill 1998 (Cth) (CLERP) Explanatory Memorandum, at 6.1.
41
ASIC v Rich, Austin J quoting from second reading speech, Hansard (3 December 1998) p1284, at [7267] in
judgment.
39
17
pointed out in ASIC v Rich42, that a successful factual scenario is not possible, but the data merely
indicates that no case has yet met the stringent requirements of the rule.
Table 4 sets out whether the BJR was satisfied, and if it was not satisfied, the associated reasons for nonacceptance of the defence, if they were specified.
Table 4- What was the case result in relation to the BJR? If the BJR was not satisfied, why not?
The BJR result and reasoning
Number of Cases
Percentage
BJR successful
1
5.9%
BJR not applied, reasoning
11
64.6%
1
5.9%
1
5.9%
1
5.9%
1
5.9%
unspecified or comments purely
obiter dicta
Unsuccessful due to material
personal interest
Material personal interest AND
not in good faith or for proper
purpose
No evidence that believed
judgment in best interests of
corporation AND not
appropriately informed about
subject matter
No evidence that believed
42
ASIC v Rich and Another (2009) 75 ACSR 1; NSWSC 1229.
18
judgment in best interests of
corporation AND no evidence
that a business judgment was
made
No business judgment made, or
1
5.9%
17
100%
if made, no evidence made in
good faith for proper purpose
AND not appropriately informed
about subject matter
Total:
In relation to the 16 cases in which the BJR was not satisfied, Table 4 indicates that in the majority of the
identified cases the reason for not allowing the application of the BJR was either unspecified or the
comments made were purely obiter dicta. Unfortunately this makes it difficult to distill a pattern from
the empirical findings, as the reasoning has either been unnecessary for the decision at hand, or the
cases have otherwise provided disparate reasons for denying directors or officers the protection of the
defence. The result of this is that it is difficult to determine whether there is a particular element of the
section which has led to difficulty for defendants that have sought to rely upon the BJR to prove,
whether there is a particular issue of legislative drafting which should be remedied, or whether in fact
there have simply been few factual circumstances which have come before the Australian courts which
would adequately fit within the intended scope of the BJR. The disparate and sometimes unspecified
reasoning observed from the Australian case law may also be viewed as a consequence of the fact that
the courts have not interpreted the BJR as a presumption in favour of director conduct; as it can be
observed that if the BJR had been interpreted as a presumption which was required to be rebutted by
19
the plaintiff, then there would be a clear indication in each and every case in which the BJR was sought
to be relied upon as to the reason(s) why it was not satisfied.
Table 4 moreover indicates that there was in fact one Australian case, since the inception of the BJR in
March 2000, in which it was held that the BJR was satisfied. The circumstances of this case, which
involved a receiver and not a director, are discussed below in the ‘Brief Analysis of Key Cases’ section of
the paper. The above results hence confirm that the BJR has not acted to insulate directors from liability;
however it has equally not provided protection to the authority of directors in the exercise of their
duties. Moreover, it has not led to legal clarity, as it is not clear under which circumstances liability will
ensue or conversely when directors will be protected.
Analysis of Key Cases
ASIC v MacDonald and the rising standard of care
One of the recent cases which illustrates the limited nature of the application of the business judgment
rule, and the increasing standard of review that directors appear to be subject to, is the James Hardie
litigation in the case of Australian Securities and Investments Commission v Macdonald (No 11) [2009]
NSWSC 287 and the associated appeal decision of the New South Wales Court of Appeal in Morley v
Australian Securities and Investment Commission [2010] NSWCA 332. While the facts were quite
extreme and related to the restructuring of the James Hardie Group of companies to the effect that
there would not be adequate funds to pay out future asbestos claims by victims of asbestos poisoning,
the implications for directors (and particularly non-executive directors) have been heralded as farreaching.
20
The key issues related to whether Australian Stock Exchange announcements and media releases which
were ‘emphatic’ in nature and asserted that there would be sufficient funding to pay out claimants even
after the restructuring took place constituted a breach of the directors’ duty of care. That is, whether
the directors (both executive and non-executive) should have taken steps to ensure the correctness of
any such announcements made to the public.
Moreover, the non-executive directors could not rely on the BJR as they asserted that they did not
approve the announcement and would never have approved it. Thus, without a relevant business
judgment or decision, such as a board approval, this defence could not be successfully argued by any of
the non-executive directors. That is, this case confirmed the Australian position that the BJR will not
cover non-decisions or monitoring requirements.
One of the executive directors, Mr. Macdonald, who was the CEO of James Hardie Industries Limited,
also sought to rely on the BJR. However he did not give evidence at the trial and Justice Gzell held that
the BJR was not available to Mr Macdonald, as there was no evidence that Mr Macdonald rationally
believed that a business judgment was in the best interests of the corporation. 43 Further, Gzell J could
not find that any of the other requirements in the BJR were satisfied in the absence of any evidence, or
even that Mr. Macdonald had in fact made a business judgment at all,44 as stated at [544] in the
judgment:
‘Similar problems arise with respect to the other requirements in s 180(2). Mr Macdonald
submitted that he made a business judgment not to disclose the DOCI information. There is no
evidence that he made such a judgment.’
43
44
ASIC v Macdonald (No 11) [2009] NSWSC 287, at [542].
ASIC v Macdonald (No 11) [2009] NSWSC 287, at [544].
21
Thus, this case illustrates that business decisions may be subject to review, and that the BJR has not
been interpreted as a presumption in favour of directors, as Mr. MacDonald was not entitled to rely on
the BJR as he failed to give evidence at the trial. Hence, the burden of proof was squarely placed upon
the defendant director.
The most controversial part of the judgment, however, was clearly in relation to the non-executive
directors. While the case turned largely on whether the evidence provided by the directors stating that
they did not approve the announcement would be accepted by the court, and even though on appeal
the Court of Appeal held that ASIC had not established that the draft announcement had been tabled
and approved by the board, the case nonetheless brings to the forefront of Australian legal attention
the fact that there is no overarching protection against the personal liability of non-executive
directors.45 Yet, there are certainly good policy and economic reasons to protect non-executive
directors in the performance of their duties. They are paid little, they do not perform their duties on a
full-time basis, and it is valuable for companies to be able to attract the most qualified and independent
individuals to sit on their boards in a non-executive capacity, without excessive fear of reprisal, or overdeterrence.
It seems still to be the case even under s 180 that a non-executive director is not bound to give constant
attention to the affairs of the company, but has duties of an intermittent nature to be performed at
periodical board and committee meetings.46 Nevertheless, even a non-executive director cannot rely on
other directors and executives to perform their duties without qualification, and has an obligation to
45
This stands in stark contrast to, for example, the US position, where non-executive directors have almost
complete protection against any out-of-pocket liability, and this includes situations in which they have not made a
decision or business judgment.
46
Gold Ribbon (Accountants) Pty Ltd v Sheers (2005) 23 ACLC 1288; [2005] QSC 198 at [76].
22
keep informed about the company's business and activities and “to supervise managers and practices to
determine whether business practices are safe and proper”. 47
On Appeal to the NSW Court of Appeal, even though the evidentiary findings of Gzell J were overturned,
the court made some interesting obiter dicta comments concerning the standard of care non-executive
directors are subject to. In relation to the liability of non-executive directors, it is an objective inquiry.
The court is to consider what an ordinary person, with the knowledge and experience of the defendant,
must be expected to have done in the circumstances if he or she was acting on his or her own behalf.
Beyond that the circumstances include that a non-executive director may be reliant on management
and other officers to a greater extent than an executive director, no general statement was made by the
court.48
Despite the submissions of the non-executive directors that they were entitled to proceed on the basis
that: management and advisers had reviewed the draft announcement, it was correct and not
misleading, there were appropriate internal monitoring procedures, there was no indication from
management that the usual procedures had not been followed, and that directors were entitled to
proceed on the assumption that experts in the fields of communications, public relations and
corporations law had determined that no further qualification to the announcement was necessary, the
Court of Appeal, in obiter dicta, indicated that it did not believe that this was an occasion of reasonable
reliance on management or other experts. 49
47
Gold Ribbon (Accountants) Pty Ltd v Sheers (2005) 23 ACLC 1288; [2005] QSC 198 at [76], [78].
Morley & Ors v Australian Securities and Investments Commission [2010] NSWCA 331 at [807].
49
Morley & Ors v Australian Securities and Investments Commission [2010] NSWCA 331 at [809-812] and [817].
48
23
Hence, further to the policy aims surrounding the enactment of the BJR, while the court here did not
interpret the BJR as having the effect of insulating directors from liability, there was also no protection
of the authority of directors in exercising their judgment to rely upon management and experts (as this
reliance was held to be unreasonable in the circumstances of the case).50 Further, and perhaps more
importantly, this case is illustrative of the fact that there remains a lack of legal certainty particularly in
the case of non-executive director liability in Australia. ASIC has currently requested leave to appeal this
case to the High Court and it is hoped that, if leave is granted, the High Court will bring clarity to the
judicial interpretation of the law in this area, or that legislative amendments will provide legal certainty
to non-executive directors.
Insights from ASIC v Rich
The case of Australian Securities and Investments Commission v Rich [2009] NSWSC 1229 (ASIC v Rich)
has been of considerable interest to corporate lawyers, company directors, as well as the Australian
legal community generally.
The course of litigation in ASIC v Rich was initiated after the collapse of One.Tel in 2001, with ASIC taking
legal action against four of the One.Tel executive directors, namely, Mr Rich (chief executive), Mr
Keeling (joint chief executive), Mr Silbermann (finance director), and Mr Greeves (chairman).
ASIC claimed that each of these directors had breached their duty of care and diligence, found in section
180(1) of the Corporations Act as well as under the common law. ASIC sought civil penalties,
disqualification orders, and compensation orders of up to $92 million under Part 9.4B of the
Corporations Act.
50
This stands in contrast to, for example, the US situation.
24
One.Tel was formed by Mr Rich and Mr Keeling in 1995 as a provider of mobile phone services to
customers through the Optus network. The company expanded very quickly in its first two years and
listed on the ASX in 1997. In 1998 international expansion commenced, and then in 1999 One.Tel began
to provide fixed-line services and decided to build its own mobile network. Problems emerged in 2000,
with an international collapse in technology stock prices, billing problems, losses on fixed line services,
and delays in the rollout of its mobile network. One.Tel’s cash position tightened in late 2000, and then
deteriorated in the first few months of 2001. In May 2001 administrators were appointed and One.Tel
was later placed into liquidation.
The factual circumstances of the case were very complex, with ASIC basically claiming that the
defendants failed to take into account a number of matters that were material to determining the true
financial position of One.Tel. These matters included: problems with One.Tel’s billing system, the high
cost of the infrastructure rollout ($1.1 billion), management of creditors whereby One.Tel would pay
invoices after the due date, causing the cash balance to appear more favourable, and funds transfers
from international businesses into Australia to improve the accounts, among other things.
ASIC’s case against the defendants was that if they had acted with care and diligence, they would have
recognised earlier that the group was insolvent and reported that to the board, with the result that
external administration would have commenced and One.Tel’s notices to the ASX would have been
accurate.
25
In 2003, Mr Keeling settled with ASIC, 51 and in 2004, Mr Greaves also agreed to a disqualification order
and compensation payment.52 ASIC’s case against Mr Rich and Mr Silbermann continued, although it
was ultimately unsuccessful. Astoundingly, the decision of Justice Austin of the New South Wales
Supreme Court in November 2009 was over 3,000 pages long, of almost overwhelming length to the
Australian business community and other interested parties attempting to understand the legal
implications of the decision.
Despite ASIC’s failure to prove the pleaded allegations of breach, the utility and importance of this
decision lies in the judicial analysis of the duty of care and diligence as well as the in-depth discussion of
the BJR. This is the first case since the inception of the statutory BJR which has attempted to expound
the effect and interpretation of the rule in a detailed manner.
It is clear from the judgment that Justice Austin did not view the BJR as merely ‘window dressing’, even
though his comments did not provide a wholly expansive view of the interpretation of the rule. Of note
is his analysis of the onus of proof in relation to the BJR; Austin J observed that s180(2) does not specify
who should bear the onus of proof, and ‘with some hesitation’ opined that the defendant bears the
onus of proving that the defence is satisfied.53
Austin J discussed the ALI formulation of the US BJR, and confirmed that the US position creates a clear
presumption in favour of directors, quoting the work of Professor DeMott: “In litigation involving the
BJR, it is of great practical significance whether the director or the party asserting liability bears the onus
51
The court endorsed order banned him from acting as a director for 10 years, and required the payment of $92
million in compensation.
52
The court endorsed order banned him from acting as a director for 4 years, and required the payment of $20
million in compensation.
53
ASIC v Rich [2009] NSWSC 1229, at [7258]-[7270].
26
of proof. As defined by cases in Delaware, the BJR clearly creates a presumption on behalf of directors
that the prerequisites to the rule’s applicability have been satisfied (citing, for example, Aronson v Lewis
473 A 2d 805 (Del 1984)). As a consequence, the plaintiff bears the onus as to whether the director’s
decision was disinterested, made in good faith with adequate information, and made with a rational
belief that the decision served the corporation’s best interests.”54
Even though Austin J acknowledged that the BJR was drawn to a large extent from the ALI formulation,
Austin J opined that Parliament has not expressly indicated who carries the onus of proving the
application of the BJR, and moreover that the wording used in the BJR unfortunately provided an
“opaque approach” to the important issue of onus of proof.55 Austin J further discussed the fact that a
different drafting style could have been adopted by Parliament in order to clarify the question of onus.56
Consequently Austin J opined that the statutory language was “profoundly ambiguous”, and therefore
he could not extract any reliable indication as to how the presumption issue should be interpreted from
simply reading the text of the provision.57 Further, upon an examination of the explanatory materials,
Austin J did not believe that assistance could be obtained by consulting the explanatory memorandum.58
On the one hand, Austin J acknowledged the use of the word ‘presumption’, and stated that this could
be taken to invoke the US approach; on the other hand he stated that the explanatory memorandum
also addressed the fact that the presumption will only apply when directors have acted on an informed
basis, in good faith, and in the honest belief that the decision was taken in the best interests of the
company. Thus, Austin J decides that this leads to further ‘confusion’, and ultimately states that ‘with
54
At [7261].
At [7262]-[7263].
56
At [7262].
57
At [7264].
58
At [7265].
55
27
some hesitation in light of the US approach, I have reached the conclusion that the Australian statute
casts the onus of proving the four critera in s180(2) on the defendants’. 59
Moreover, Austin J discussed each element of the BJR in some detail. As for the concept of a ‘business
judgment’ it was noted that an actual decision must be made in order to invoke the protection of the
rule. That is, merely failing to monitor the financial affairs of the company or neglecting to observe
proper safeguards does not constitute a business judgment. Thus, oversight duties of managers will not
be afforded the potential protection of the rule.60
In relation to the directors’ requirement of ‘informing oneself about the subject matter of the judgment
to the extent they reasonably believe to be appropriate’, this means that directors must have
information about relevant matters prior to making the decision. The reasonableness of the belief will
be assessed by reference to, for example, the importance of the decision, the time available, the costs
related to obtaining information, and the nature of competing demands on the board’s attention,
among other things.61
The final element of the BJR, namely that the director must ‘rationally believe that the judgment is in
the best interests of the corporation’, can be satisfied where a director holds a sufficiently rational belief.
This is so whether or not the reasoning process is objectively a convincing one. Hence, interestingly, it
was opined that there is room for the personal belief of the director, and this is not to be judged by a
59
At [7266]-[7269].
At [7271]-[7280].
61
ASIC v Rich [2009] NSWSC 1229, at [7283-7284].
60
28
purely objective test through which the judge must be convinced of the rational reasoning process of
the director.62
Ultimately, the BJR would have had significant importance to the ruling of Justice Austin if it had been
held that the directors breached their duties in this case;63 and even though his Honour’s comments are
purely obiter dicta, they provide a useful starting point for future analysis and understanding of the
operation of the rule and the law in this area generally. Thus, here there would not have been an
insulation of directors from liability and, more importantly, the BJR would have been likely to protect
the authority of directors if it applied in this case. However, conversely there was no interpretation of
the BJR as a presumption in favour of a director’s judgment. More important to this issue, it seems that
legislative clarification would be apt in light of this decision, to confirm the intended operation of the
BJR by the Australian Parliament.
The only case in which the BJR has been satisfied: Deangrove Pty Ltd v Buckby and Another 64
This 2006 case involved Deangrove Pty Ltd (receivers and managers appointed), the registered
proprietor of strata units in a property development, commencing proceedings claiming that it had
suffered financial damage because the bank appointed receivers exercised their power of sale without
taking reasonable care to sell the property of Deangrove Pty Ltd for the best price reasonably available
at the time, and hence had breached their duties under ss180 and 420A of the Corporations Act.
62
ASIC v Rich [2009] NSWSC 1229, at [7289].
ASIC v Rich [2009] NSWSC 1229, at [7289].
64
Deangrove Pty Ltd v Buckby and Another (2006) 56 ACSR 630, at [68].
63
29
Justice Branson of the Federal Court of Australia found that the receiver, Mr. Buckby, made a business
judgment within the meaning of s180(3) of the Corporations Act. Further, Branson J was satisfied that
Mr. Buckby’s actions fulfilled the requirements of s180(2), as discussed at *68+:
‘He: (a) made the judgment in good faith for the proper purpose of seeking to maxmise the
amount to be received by Deangrove on the sale of the units;
(b) did not have a material personal interest in the subject matter of the judgment;
(c) informed himself about the subject matter of the judgment to the extent that he reasonably
believed to be appropriate;
(d) rationally believed that the judgment was in the best interests of Deangrove.’
However, Branson J went on to conclude at [69], for the same reasons, that Mr. Buckby did not breach
s180 of the Corporations Act. Therefore, there has still not been a situation where s180(1) has been
breached and s180(2) has concomitantly been satisfied.
The importance of this case lies in the fact that this is the only Australian case in which the BJR has been
satisfied. However, there is still unfortunately no case example which yet satisfies the specific policy aim
of protecting the authority of directors in the exercise of their duties, as here a received was involved.
Nonetheless this case did effectively confirm the common law position that the Courts will rarely review
bona fide business decisions.
The final interesting aspect of this decision is that here the BJR was interpreted in a manner closely
reflecting the procedural policy aims of the BJR. Specifically, the BJR was to provide a clear presumption
in favour of a director’s (officer in this case) judgment and act as a rebuttable presumption in favour of
30
directors which, if rebutted by a plaintiff, would mean the plaintiff would then still have to establish that
the officer had breached their duty of care and diligence.65 Interestingly, in this judgment, Justice
Branson firstly considered whether the BJR was satisfied before embarking on an analysis of the duty of
care and diligence. That is, the BJR was applied prior to a review of the officer’s impugned decision,
which effectively protected the authority of the business decision made in the circumstances of the case.
Analysis of empirical research findings
Based on the empirical evidence and the theoretical framework underpinning the BJR, the four policy
points of evaluation which were presented at the outset of this article will now be addressed.
First, whether the BJR has protected the authority of directors in the exercise of their duties, not
insulated directors from liability. Based on the research findings, the latter goal of avoiding liability
insulation has certainly been achieved. As was presented in the findings above, in the12 identified cases
in which the defendant(s) was a director, not one of those cases led to an insulation from liability by way
of the application of the BJR. As for the former goal of protecting the authority of directors, the data
indicates that this has not occurred, given that no director has yet been able to successfully argue the
protection of the BJR in the exercise of their duties.
Second, to encourage directors to take advantage of opportunities that involve responsible risk taking.
This point has featured greatly in the literature and media, and while it is difficult to objectively
empirically evaluate how the existing Australian legal regime has impacted upon directors’ management
decisions, the recent AICD survey, ‘Impact of Legislation on Directors’, has attempted to do so66. The key
65
Explanatory Memorandum at 6.10.
The survey involved 623 directors from a wide range of sectors including ASX 200 companies, small and medium
enterprises and not-for-profit organizations, drawn from across the AICD membership of 27,000. Although it is
noted that this constitutes a very small sample of the organisation’s membership, it is nonetheless interesting to
observe the responses given, particularly as no other empirical research has been undertaken in this area.
66
31
findings which impact upon the ability of directors to take advantage of corporate opportunities
involving responsible risk taking are as follows: More than 90 percent of those surveyed said that
personal liability of directors had an impact on optimal business decision-making; 65 percent said this
risk of personal liability caused them or their board to take an overly cautious approach to business
decision-making; 79 percent said they are concerned that the time their board devotes to compliance
with regulations detracts from them focusing on issues like enhancing corporate performance and
productivity; and more than 64 percent said they were seriously concerned about being subject to
criminal and civil penalties as a director.
Third, for the BJR to clarify and confirm the common law position that the Courts will rarely review bona
fide business decisions. Given that no Australian case has interpreted the BJR to involve a rebuttable
presumption in favour of directors, this has led to the situation in Australia that if no evidence is given
by the impugned director, then no BJR protection has been possible. Further, as long as the BJR is
interpreted to involve the burden of proof falling upon the defendant director, in order for the court to
analyse whether the BJR requirements have been met, this will no doubt involve a review of what in
some cases will be a bona fide business decision. Hence, the courts have inevitably undertaken to review
the management decisions of directors in some situations despite the goal stated in paragraph 6.4 of the
Corporate Law Economic Reform Program Bill 1998 (Cth) (CLERP) Explanatory Memorandum.
Fourth, to provide a clear presumption in favour of a director’s judgment; as noted above, the results
clearly indicate that the BJR has not been interpreted to operate as a presumption in favour of directors.
This is so despite the policy aims set out in the Explanatory Memorandum and the example of the
operation of the US common law BJR from which the wording of the Australian provision originates,
32
both of which provide a presumption in favour of the authority of the board to govern management
decisions.
The final issue which deserves to be address here is the issue of legal certainty. The lack of consistency
in the judicial interpretation of the BJR results in a situation in which it is difficult for directors to know
or predict when they will be subject to personal legal liability. This uncertainty no doubt leads to further
risk-aversion and the possibility that directors will not take up board positions. The economic
importance of legal certainty can not be denied- the law should facilitate business dealings with minimal
transaction costs in order to maximise social welfare- in the absence of legal certainty suboptimal
decision making will ensue and excessive effort and resources will be used in ensuring legal compliance
with an uncertain standard. These considerations are equally as important from the perspective of the
rule of law itself, as pertinently stated by Waldron:
“Citizens it is said need predictability in the conduct of their lives and businesses. There may be
no getting away from legal constraint in the circumstances of modern life, but freedom is
possible nevertheless if people know in advance how the law will operate and how they have to
act if they are to avoid its having a detrimental impact on their affairs. Knowing in advance how
the law will operate enables one to plan around its requirements.”67
Concluding Remarks
The research indicates that while the BJR appears to be increasingly important in the current economic
climate, it is not achieving the purpose of protecting the authority of directors in the discharge of their
duties, nor has it led to legal clarity regarding director liability. It will remain to be seen how the law in
Australia develops; however for now it can be perceived that tension remains in this area, particularly
67
Jeremy Waldron (2008) ‘The concept and the rule of law’, Georgia Law Review, Volume 43, Issue 1.
33
given the polarized viewpoints regarding the standard of conduct which directors should be required to
meet in order to discharge their duties to the company, and the level of deference which they should be
accorded in making management decisions.
Business confidence and legal certainty will be of particular importance as Australia and the rest of the
world emerges from the financial crisis, thus it is necessary to ensure that the level of corporate
governance regulation in Australia is not prohibitive of qualified individuals taking opportunities to
become directors through fear of legal reprisal, while at the same time deterring undesirable director
conduct. This balance, as was outlined, is not easily achieved or readily measurable; but it must be the
goal of our legislature if Australia is to adeptly progress.
34