The judgment by Beach J in ASIC v Mitchell (No 2) offers helpful guidance on the role of the chairperson, the extent to which boards can rely on the judgment and expertise of management and the scope of the business judgment rule.
The judgment arose out of a high profile legal battle over a $200 million broadcast agreement between Seven Network Holdings (‘Seven’) and the peak tennis body, Tennis Australia Ltd (‘Tennis Australia’). ASIC alleged that Mr Stephen Healy, the former Chair of the Tennis Australia board, breached various statutory directors’ duties under the Corporations Act 2001 (Cth) (‘the Act’)[1] in the course of negotiations between Tennis Australia and various networks (including Seven) in respect of the Australian Open broadcast rights.
In the midst of the negotiations with Seven, the then-CEO of Tennis Australia, Mr Steven Wood, chose not to provide certain information to the board, which related to the other potential bidders for the broadcast rights. Mr Healy was also aware of this information and ASIC alleged that as chairperson, Mr Healy had a responsibility to disclose this information to the full board and that in failing to do so, Mr Healy breached his duty of care and diligence under s 180(1) of the Act.
In defence of his conduct, Mr Healy contended that he was entitled to rely on Mr Wood’s judgment in respect of what information would be of assistance to the board at the relevant time, as Mr Wood was charged with managing the broadcast right negotiations and was accordingly best placed to make that judgment.
In finding that ASIC had not made out any of its allegations of breach against Mr Healy, Beach J provided directors and chairpersons with useful direction in how to approach their roles and appropriately discharge their duties to their organisation.
Duties of the Chairperson
As Beach J observed, the Act does not make any express reference to the role or functions of the chairperson. Accordingly, chairpersons have previously had to turn to academic commentary and soft law principles for guidance, such as the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations. It is important to understand the proper scope of the role of the chairperson because their duty of care and diligence under s 180(1) of the Act is to be determined by reference to not only statutory responsibilities, but also any other responsibilities they might have within the corporation, regardless of how those responsibilities come to be imposed.
Justice Beach provided a comprehensive overview of the overarching powers and responsibilities of chairpersons, including:
Further, Beach J identified matters specific to the particular organisation and the particular chairperson that would need to be considered in understanding the chairperson’s role in any given case. Those matters include:
Despite the enumerated list of responsibilities set out above, Beach J observed that the position of chairperson carries no greater authority than that of an ordinary director, even though the power and authority to manage board meetings may mean that the chairperson has greater responsibility for the performance of the board as a whole. Indeed, the responsibilities unique to the chairperson can be seen to be procedural and facilitative in nature, aimed at enhancing the effectiveness of the board as a whole, rather than directed to giving any greater powers to the chairperson in any substantive matters.
Respective Roles of the Board and the Executive
In considering whether Mr Healy had discharged his responsibility as chairperson to determine the amount and quality of information to be put before the board to deal with any one or more agenda items, Beach J had regard to the specific role and responsibilities of Mr Wood as CEO, as outlined in Mr Wood’s employment agreement, and the respective roles of the board and CEO as outlined in Tennis Australia’s annual report.
Justice Beach held that, in performing his role as chairperson and a director of Tennis Australia, Mr Healy was entitled to take into account Mr Wood’s role as CEO and to act on the basis that, in the absence of good reason to suggest to the contrary, Mr Wood was adequately discharging his duties.
While noting that the chairperson was not entitled to completely delegate to the CEO the function of determining the amount and quality of information to be put before the board, Beach J held that Mr Healy could and should consult with Mr Wood on that issue and was entitled to rely on Mr Wood’s judgment if satisfied that it had been exercised appropriately.
Section 189: Reliance on Others
In defence of his reliance on Mr Wood’s judgment, Mr Healy invoked s 189 of the Act. Section 189 creates a presumption that a director’s reliance on information, or professional or expert advice given by competent employees, other directors or professional advisers is reasonable, so long as such reliance is made in good faith and after having made an independent assessment of the information or advice. In considering these criteria, Beach J held that:
‘independent assessment requires no more than that the director, having listened to and assessed what his colleagues have said, must bring his own mind to bear on the issue using such skill and judgment as he may possess. Further, there must be evidence that he in fact relied on the information provided.’
After considering the evidence of both Messrs Wood and Healy on the issue, Beach J held that Mr Wood had appropriately exercised his judgment regarding what information to provide to the board and Mr Healy had reasonably relied on that judgment.
Section 180(2): Business Judgment Rule
Although it was not necessary for him to do so in the context of his findings, Beach J also considered the operation of the ‘business judgment rule’ contained within s 180(2) of the Act and made some relevant comments. The ‘business judgment rule’ provides that a director who makes a business judgment is taken to have discharged their duty of care and diligence if they (a) make the judgment in good faith for a proper purpose; (b) do not have a material personal interest in the judgment; (c) inform themselves to the extent they reasonably believe to be appropriate; and (d) rationally believe that the judgment is in the best interests of the organisation.
The question of who bears the evidentiary and legal onus to establish these four elements of s 180(2) of the Act is one that has plagued Courts since the provision’s beginning. Justice Beach expressed the strong view that it is the defendant who bears the onus of proving these matters, and voiced his disagreement with previous decisions to the contrary. In the opinion of Beach J, the fact that the statutory criteria are within the ‘purview, personal knowledge of and proof by the defendant’ suggests that Parliament’s intention is that the defendant bear the evidentiary and legal onus of proving them. Justice Beach also noted that his view is strengthened by the fact that s 180(2) of the Act creates a presumption, necessitating that the defendant establish the criteria to enliven that presumption.
Justice Beach agreed with Austin J’s interpretation in ASIC v Rich (2009) 75 ACSR 1 that the questions of whether the director has informed themselves about the subject matter of the judgment to the extent that they reasonably believe to be appropriate and whether they rationally believe that the judgment is in the best interests of the company, are to be determined by reference to what the director knew and not by reference to what they ought to have known.
However, Beach J commented that, if he were required to consider the issue (which he was not), he ‘very much doubt[ed]’ that Mr Healy’s decision to include or not include information to be provided to the board would fall within the statutory definition of ‘business judgment’ in s 180(3) of the Act (‘any decision to take or not take action in respect of a matter relevant to the business operations of the corporation’). Although Beach J’s comments on this issue are only obiter and are not fully reasoned, they indicate a potentially narrower scope for the business judgment rule than may have otherwise been thought to be the case based on the expansive language in the statute itself. While not many decisions have yet directly considered this application of the business judgment rule, Beach J’s obiter is generally consistent with the comments made in other decisions where the issue has been raised. Justice Beach’s comments in this regard serve as a useful reminder to chairpersons (and directors) in their approach to similar decisions, that the scope of protection available under the business judgment rule may not be as broad as the language in the statute otherwise suggests.
[1] ASIC also brought claims for breach of duty against Mr Harold Mitchell, the former vice president of the Tennis Australia board, but those claims are not relevant to the issues discussed in this note.
