The judgement handed down last week in the long-running proceedings between the Australian Securities and Investments Commission (ASIC) and former One.Tel directors Jodee Rich and Mark Silbermann, has been a costly lesson for the regulator, providing clarification on the statutory business judgement rule and its implications for directors and other officers.
The business judgement rule currently operates in relation to the statutory duty of care and diligence in section 180 of the Corporations Act 2001 (Cth) (the Act) and the equivalent duties at common law and in equity. It is commonly referred to as a safe harbour rule for directors who make an informed business decision in good faith about a matter relevant to the business operations of the corporation.
Under section 180(2) of the Act, a director or other officer of a corporation will satisfy his or her obligation under section 180(1) of the Act (as well as under the common law) to exercise their powers and discharge their duties with appropriate care and diligence if they:
- make a judgement in good faith for a proper purpose;
- do not have a material personal interest in the subject matter of the judgement;
- inform themselves about the subject matter of the judgement to the extent they reasonably believe appropriate; and
- rationally believe that the judgement is in the best interests of the corporation.
The concept of business judgement is also relevant to the evaluation of a director's duty of care under the common law. It has long been accepted that in determining whether a director has met his or her duty of care under the common law, a court will defer to the director's exercise of business judgement, and will not second guess the merits of a business decision where that judgement has been exercised in good faith and for a proper purpose.
The interaction between the statutory business judgement rule and the consideration of business judgement under the common law, however, has been far from clear. In the recent case, Justice Austin considered the extent to which the statutory business judgement rule might protect a director or other officer when the business judgement standard implicit in the common law duty of care was not met.
In particular, Justice Austin found that the statutory business judgement rule could be applied in circumstances where:
- the director held a "rational" but nonetheless "unreasonable" belief that the decision was in the best interests of the company;
- the decision was to not take an action rather than a decision to act (although the director must have turned his or her mind to the question of whether or not to act);
- and the decision involved planning, budgeting and forecasting and other matters which were relevant to the business operations of the corporation though not itself a business operation matter.
In considering what it means for a director to hold a rational but unreasonable belief, Justice Austin was of the view that a rational belief is one which is based on a reason, even if that reason would not be objectively convincing, so long as the belief is not one that no reasonable person in his or her position would hold.
In dismissing ASIC's case against Jodee Rich and Mark Silbermann, Justice Austin concluded that the statutory business judgement rule could provide a defence in circumstances where the conduct in question would otherwise have breached the statutory duty of care (including the business judgement considerations implicit in that duty of care), where:
- the impugned conduct is a business judgement as defined in the Act;
- the directors or officers are acting in good faith, for a proper purpose and without any material personal interest in the subject matter;
- they make their decision after informing themselves about the subject matter to the extent they reasonably believe to be appropriate having regard to matters such as the information available, the timeframe for making the decision and the importance of the decision;
- their belief about the appropriate extent of information gathering is reasonable in terms of the practicalities of the information gathering exercise;
- they believe that their decision is in the best interests of the corporation; and
- that belief is rational in the sense that it is supported by an arguable chain of reasoning and is not a belief that no reasonable person in their position would hold.1
ASIC has said that it will review the judgement and consider whether to appeal as soon as possible. We will keep you updated of any further developments.
1 Australian Securities and Investments Commission v Rich [2009] NSWSC 1229
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