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.