directors counsel

When Justice Jonathan Beach handed down his decision in the Tennis Australia (TA) case in late July, the Australian Securities and Investments Commission (ASIC) was quick to claim it as a win. But the outcome in ASIC v Mitchell (No 2) [2020] FCA 1098 deserves closer scrutiny.

The ASIC case was that former TA chair and president Stephen Healy and vice-president Harold Mitchell had breached their directors’ duties in connection with the sale of broadcasting rights for the Australian Open to the Seven Network in 2013. Of the numerous contraventions alleged by ASIC, none was found against Healy and only three against Mitchell. The trial, held six and a half years after the events in question, ran for five weeks and his Honour’s judgement is 441 pages long — all to conclude Mitchell had breached his duty of care on three occasions and that “none of this ultimately caused damage to TA”.

Regulators will — and sometimes should — run cases they do not win, so long as they meet their obligations as model litigants acting in the public interest and there is a serious case for the defendants to answer. This is so, even where the company in question has suffered no actual loss. Careful forensic examination of corporate conduct against the legal standards can provide useful guidance for directors, whatever the outcome.

Lessons to be learned

Three issues of interest are explored in the decision. The first is the role of the chair, including in ensuring that adequate information comes to the board. The second is when a director inappropriately interfering with management’s conduct of commercial negotiations, and disclosing inside information to other parties, can amount to breach of their duty of care in s 180(1) of the Corporations Act 2001 (Cth). The third concerns what ASIC must prove to establish that a director has improperly used his or her position, or information obtained through it, in breach of s 182(1) or s 183(1) of the Act.

ASIC’s case against Healy concerned “an alleged failure to exercise reasonable care and diligence under s 180(1) by failing to disclose certain information and documents” at three TA board meetings held between December 2012 and May 2013.

On this issue, Justice Beach made several observations about the role of the chair, listing various responsibilities and functions ranging from managing the board to a “public relations role” in representing the board and the company. His Honour observed that the chair “is not some sort of directorial overlord. But [they] have the power and authority to manage board meetings and to that extent… may have greater responsibility for the performance of the board as a whole”.

On the matters that were the subject of the ASIC case against Healy, as chair he had “the power, authority and responsibility for setting the agenda items for board meetings, although these may be added to by the agreement of other directors. He can also discharge that responsibility in consultation with the CEO”. In the TA case, the CEO had largely kept the board appraised of the progress of the broadcast rights negotiations orally through the CEO’s report; documents touching on the negotiations were not included in the board pack.

Justice Beach observed that the chair “has the power, authority and responsibility to ensure that the board has before it sufficient information, whether presented in written or oral form, such as to be able to meaningfully consider, discuss and decide on the agenda items before the board at the relevant meeting taking into account the context of the decision required or consideration necessary by the board at that meeting… in consultation with the CEO”.

Here, the CEO had “exercised his judgment as to what documents or other information would be of assistance to the board at the time of each relevant board meeting”. Healy’s “duty to exercise reasonable care and diligence did not require him to countermand [the CEO’s] judgement with respect to the information [the CEO] decided after consideration to put before the board and the method [the CEO] used to convey such information”. Accordingly, ASIC failed to establish its narrow negligence case against Healy.

Win some, lose some

ASIC’s case against Mitchell was partially successful. In December 2012, Mitchell had forwarded internal TA emails to, and discussed internal TA deliberations with, commercial director Bruce McWilliam at Seven. Justice Beach concluded it was “entirely unacceptable to send to Seven TA’s internal emails”; to McWilliam that “he ought not have disclosed internal deliberations”; and that it was “simply not appropriate” for Mitchell to advise McWilliam to hold off communicating to the then CEO of TA Steven Wood (who had carriage of the negotiation) points that Seven was planning to concede in the negotiation.

While ASIC was unable to establish that Mitchell “wrongly cooperated with Seven and that his communications with Mr McWilliam were nefarious”, his conduct was found to be negligent because the unauthorised disclosures carried with them a reasonably foreseeable risk of harm to TA by weakening its bargaining position with Seven. ASIC failed to demonstrate that Mitchell improperly used his position, or information obtained through it, to gain an advantage for Seven.

His Honour dismissed the allegations of breach of ss 182 and 183 on the basis the “purposive elements” of the contraventions were not made out. Noting that the “test of whether conduct is improper is objective”, Justice Beach said “the inquiry is whether the defendant’s behaviour breached the norms of conduct thought necessary for the proper conduct of commercial life”. It is not a “universal standard”; it must be assessed “focusing upon the particular duties and responsibilities of the officer concerned”.

The test of impropriety “looks at the character of the conduct of the director in question”. It is about the purpose, rather than the result, of the conduct. Further, “it is purpose which counts, not motive. It is well accepted that purpose and motive are not the same thing. The purpose of conduct is the end sought to be achieved. The motive is the reason for seeking that end”. ASIC failed to prove that Mitchell’s purpose in engaging in the conduct complained of was to achieve an advantage for Seven.

The TA case is unusual in that it involves conduct in connection with a commercial negotiation, rather than the more typical ASIC “stepping stones” case arising out of a company contravening its regulatory or disclosure obligations. It is important in that respect. But along the way it paints a bleak picture of what can happen to other directors whose actions later raise concerns about probity and process.

Despite ASIC’s press release, it hardly counts as a victory for the regulator — and does little to raise the standards of corporate governance and conduct in Australia.