Corporate - Revision for statutory business judgement rule PDF

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Revision for statutory business judgement rule...

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Section 180(2) contains a statutory business judgment rule, which was introduced by the Corporate Law Economic Reform Program Act 1999 (Cth). The statutory business judgment rule provides that a director is taken to have exercised their powers with the necessary degree of care and diligence (for the purposes of Section 180(1) of the Act) if they made a 'business judgment'. This requires the director to act in good faith and for a proper purpose, to not have a material personal interest in the subject matter at hand, be informed about the subject matter to the degree determined reasonably appropriate, and hold the belief that the judgment is in the best interests of the entity. Section 180(2) further provides that the director's or officer's belief that a judgment is in the best interests of the corporation 'is a rational one unless the belief is one that no reasonable person in their position would hold'. Section 180(3) defined 'business judgement' to mean 'any decision to take or not take action in respect of a matter relevant to the business operations of the corporation'. The statutory business judgement rule only operates in respect of the statutory duty of care and diligence and the equivalent duties at common law and equity. Courts have developed a general law business judgment rule which applies generally to judgments of directors. The basis for the statutory rule is that directors should not be liable for decisions made in good faith and with due care opportunities that involve responsible risk-taking. It has been argued that a statutory business judgement rule is not needed, because it does not offer superior protection to that already provided by long-established general law doctrines of directors duties which protect business judgements from inappropriate hindsight review by courts, including review of the merits of business judgments. In ASIC v Rich, Justice Austin discusses the difference between the statutory business judgement and the general law. He provides that the statutory duty of care and diligence is essentially the same as the duty of a director or officer at common law. Further, the availability of a civil penalty does not make the statutory standard lower than the common law standard of care and diligence. In Rich the Court found that the common law business judgment rule was not a bright line test (at [7248]). There are “relevant considerations that are an integral part of the application of the standard applied by the general law.” (Justice Austin provides that there is no “bright line” under the general law, but that “to take the ‘business judgement rule’ out of the assessment of a breach of the general duty of care would be to remove one of the entrance points to an understanding of the standard of care itself, and to distort the underlying concept” (para 7253).) However, he provides that the similarity does not mean that the statutory defence in s 180(2) is redundant. Justice Austin states at 23.9.2 that: ‘the business judgment considerations that figure in the articulation and application of the statutory standard of care and diligence are open-ended, whereas s 180(2) is a specific statutory rule having defined components and a defined outcome’. I would agree with Justice Austin’s view that the statutory duty of care and diligence is essentially the same as the duty of a director or officer at common law. Justice Beach's reasoning

Justice Beach relied on his assessment of the relevant legal principle that for directors to held liable for breach of the relevant duty of care and diligence, it must be established that the company had suffered damage as a result of the directors alleged failure to act appropriately. At paragraph 448, he provides that no contravention of s 180(1) would flow from such circumstances unless there was actual damage caused to the company by reason of that other contravention or it was reasonably foreseeable that the relevant conduct might harm the interests of the company, its shareholders and its creditors. For the question of breach of duty, Justice Beach stated that there is a balance between the foreseeable risk of harm to the company flowing from the contravention, and the potential benefits that could reasonably be expected to have accrued to the company from that conduct. It was also reasoned that it is expected for directors to take calculated risks and that the nature of commercial activity necessarily involves uncertainty and risk taking. Pursuing an activity that could entail a foreseeable risk of harm would not, by itself, establish the contravention of s 180. Additionally, a failed activity pursued by the directors which causes loss to the company does not itself establish a contravention of s 180. Under paragraph 444 he provides that: 'The duty owed under s 180 does not impose a wide-ranging obligation on directors to ensure that the affairs of a company are conducted in accordance with law. It is not to be used as a back-door means for visiting accessorial liability on directors' ASIC failed to breach of s 180(1) by the directors. Even though they didn’t need the defence of the statutory business judgment, Justice Beach also considered s 180(2) the statutory business judgment rule as a defence for the directors. The business judgment in the case was Mariner’s decision to initiate a takeover bid for Austock. A requirement under the section is that the director must have acted in good faith. On this point, Justice Beach was satisfied that the director decided to support the takeover and make the announcement because of the potential for Mariner to make a significant profit, believing that the decision to make the announcement and pursue a takeover bid for Austock was in the best interests of Mariner. The director also had no material personal interest in the subject matter of the judgment. The director considered that he had been provided with sufficient information to make an informed judgment to vote by having various meetings and discussions with relevant parties, and his knowledge of the level of interest in Austock’s two businesses. Finally, the director rationally believed that the decision was in the best interests of the company. One point of relevance: This case demonstrates that it is appropriate if directors make reasonable commercial judgment decisions when it comes to certain activities. It shows that courts are prepared to assess matters in a pragmatic and realistic timeframe. Further, it showcases that where a careful explanation of the factors surrounding the operation of the business judgment rule is offered to the court, courts may well come

down in favour of a positive reading in favour of the directors taking a calculated risk in progressing the interests of their company....