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The ethical deal

The Hardie Case: Muscling up ASIC

The Australian Securities and Investments Commission (ASIC) has secured a major victory in its ongoing battle to enforce the efficacy of the continuous disclosure regime here as well as its standing as a model litigant.

The High Court of Australia has overturned a New South Wales Court of Appeal ruling which had voided a lower court’s adjudication that the non-executive directors of the cement manufacturer James Hardie Industries Limited (JHIL) failed to exercise the degree of care and diligence that a reasonable person would exercise if they were a director of a corporation in JHIL’s circumstance.

The High Court found that the New South Wales Court of Appeal had erred in discounting the factual evidence that the non-directors had approved the release of erroneous and misleading information to the market because ASIC had declined to call a senior external legal adviser who had minuted the board’s deliberation to give evidence.

Not surprisingly, ASIC has expressed satisfaction in the outcome. ‘We made it clear when launching these proceedings that the action was in the public interest as it would involve the responsibility of executives and non-executives when boards of public companies make important or ‘bet the farm’ type decisions,’ said the current chairman, Greg Medcraft. ‘ASIC took this case to the highest court in the land and I am certain this case has and will be studied in boardrooms across Australia and in legal circles, and I know that it is already shaping corporate behaviour and is having a positive deterrent effect,’ he continued.

In much the same way as the judicial scepticism expressed in the Court of Appeal ruling sent a signal that privileged regulatory restraint, the victory in the High Court, coupled with the expansion of the use of enforceable undertakings, signal that ASIC is now exceptionally well-placed to use the threat of enforcement to ensure compliance.

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