Legal advice

The current attitudes of the public, lawmakers, regulators and the Courts mean that more than ever directors need to be across the detail of what is going on in their companies and be more aware of the personal risk to them of mistakes. This article is a reminder of two important rights that you have as a director: the right to have your questions answered and your right to receive independent legal advice paid for by the company.

What are a directors rights to information?

There is a clear common law right to access any information of the company that can only be denied in very limited circumstances. (Edman v Ross (1922) 22 SR(NSW) 351). This right is supplemented by the Corporations Act 2001 (Cth) (See section 198F (Right of access to company books) and section 290 (Director access).

It follows that these rights are only effective if they are read to mean that management has an obligation to furnish information on request – therefore, if you ask a question insist on it getting answered. The often heard response of “this is a matter for management” is not a legal excuse to withhold information.

When are you entitled to independent legal advice paid for by the company?

A director can, in our view, obtain legal advice whenever they want to in relation to their obligations and liabilities as a director, provided they are acting in good faith. The question is: who pays? The Corporations Act lists circumstances where directors are not entitled to indemnity – but not where they are entitled to indemnity. The company’s constitution will usually provide for reimbursement of reasonable costs incurred as a director. But neither clearly say when the company should pay for the legal advice to directors. (See Corporations Act section 199A (Indemnification and exemption of officer or auditor).

ASX’s Corporate Governance Principles and Recommendations suggest that a Board Charter should contain the entity’s policy on when and how directors may seek independent professional advice at the expense of the entity – and that this should be whenever directors, especially non-executive directors, judge such advice necessary for them to discharge their responsibilities as directors. The UK position is substantially the same. (Financial Reporting Council Guidance on Board Effectiveness.)

A director’s appointment letter may also include the company’s policy on when directors may seek independent professional advice at the expense of the entity. Often the policy says that the Chairman’s consent is required. In many instances, directors rely on advice from the company’s in-house team or from the company’s external lawyers. For cost reasons this makes sense in a benign regulatory and litigious environment.

But the environment is no longer benign. When we hear calls for criminal action against individuals including directors and officers, when ASIC adopts a “why not litigate” approach, when the ACCC takes cartel action against individual officers, when APRA seeks to disqualify officers and when the Attorney-General asks the Australian Law Reform Commission to look at our corporate criminal responsibility regime, including whether provisions enabling senior corporate officers to be held liable for misconduct by corporations are needed you know that things have changed. Moreover, these shifts are occurring against a backdrop of higher corporate and financial services sector penalties.

So when might a director exercise these rights?

If shareholders, regulators and Courts are to take a more aggressive attitude to directors, then it is fair that directors take a more assertive approach to getting legal advice. In complex matters they need to ask: who in the Board Room is looking after my interests? Who is focussed on protecting my reputation, assets and liberty? Where legal advice is given, it needs to be clear who the lawyers are acting for - the company or the directors? Who has legal professional privilege in the advice?

It is common for board papers to include legal advice or summaries of advice the company has received. Often it is unclear (a) whether the director personally can rely on the advice; and (b) whether the director or the company has legal professional privilege in it. Although it may be thought that there is always an alignment of interests between the company and the directors, that isn’t always the case.

In our view, board policies and practices should be tightened so advice can be designed to protect those affected. Directors and officers should be more assertive in exercising their rights to get advice.

The views and opinions set forth in this article are the personal views or opinions of the authors; they do not necessarily reflect views or opinions of Jones Day, or the AICD.