James Hardie Case Study Analysis

This assignment delves into the landmark Australian case of ASIC v Macdonald (No 11), focusing on the James Hardie Industries scandal. Students are tasked with critically analyzing the case, examining issues related to misleading and deceptive conduct, continuous disclosure obligations under the Corporations Act 2001, and the broader implications for corporate governance in Australia. The analysis should consider the role of directors, officers, and the company itself in perpetuating the misconduct, as well as the legal and regulatory responses to the scandal.

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INTRODUCTION
In Australia, the Corporation Act (Cth) is the legislative instrument which applies on the
companies and through which different provisions are provided which help in the running of
operations of the companies. A key part of this act relates to the duties of the directors, who run
the operations of the company on behalf of the company. ASIC v Macdonald (No. 11) [2009]
NSWSC 287 is a case where the contravention of duties of directors was decided by the Supreme
Court of New South Wales. In this case, the court considered whether the officers and directors
of James Hardie Industries Ltd (James) were in breach of duties covered under section 180(1) of
this act. This section relates to the obligation of care and diligence and the matter was brought
before the court regarding the board’s approval and the release of a defective media statement to
Australian Securities Exchange, i.e., ASX (Hargovan, 2009).
Through this discussion, an attempt has been made to detail this case based on the allegations
which the Australian Securities and Investments Commission, i.e., ASIC made in this, in
addition to the decision given by the court in this case.
BACKGROUND
James was the holding company of the James Hardie Group (Group) which was responsible for
the manufacturing and sale of asbestos products till 1937. Jsekarb Pty Ltd (Jsekarb) and James
Hardie & Coy Pty Ltd (Coy) were the two wholly owned subsidiaries of James for the period of
1937 to 1987 and they were also both the manufacturer and seller of asbestos products.
In the starting days of February 2001, the board of James had created a foundation and named it
“Medical Research and Compensation Foundation”. This foundation was created for managing

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and paying the claims which were raised for the asbestos related claims made against the Group.
In connection to the creation of this foundation, the board approved a draft announcement for the
ASX and this was also circulated in the general public through its release (Lavan, 2017).
Concurrently, a covenant and indemnity deed was entered into by James with Coy and Jsekarb,
due to which James was indemnified from all liabilities which were brought forward owing to
the sale or manufacturing of asbestos products by James (Czoch and Mulder, 2010).
The Group then released an ASX announcement which stated that the Foundation had asset, the
value of which was $293 million and that these would be sufficient for fulfilling the purpose of
the genuine claims which were expected to be raised from such people who had been harmed due
to the asbestos products. During the press conference, it was claimed that Macdonald, who was
the chief executive officer of James made a statement regarding the funds in the Foundation
being sufficient for the purpose of the claims. The same theme was followed in the ASX
announcements which were made in the weeks to come in relation to this Foundation. Though,
the ASX announcements never covered a disclosure regarding the Deed (Norton Rose Fulbright,
2010).
Upon the creation of this Foundation, a new company, which was holding of James, was formed,
and this company was JHINV, and the place of incorporation of this company was the
Netherlands. In 2002, overseas presentations were made by Macdonald, the defendant of this
case study, in the matter of James and it was so represented that the Foundation had sufficient
funds (Plessis, Hargovan and Bagaric, 2010). In 2007, the ASIC raised civil proceedings against
James and JHNIV for the misleading and deceptive conduct, for the false statements which were
made related to the securities and for the continuous disclosure failures (Czoch and Mulder,
2010).

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BREACH OF DUTIES
Section 180 of the Corporations Act, 2001 covers the provisions regarding duty of the officers
and the directors of the company regarding care and diligence. Under section 180(1), it has been
stated that the individuals have to apply care and diligence in their work, when their powers are
being utilized by them and when they are discharging their duties, as would be done in their
place, by a reasonable/ rationale person who held their office in similar situation with same
powers and duties (Federal Register of Legislation, 2017). If the provisions of section 180(1) are
not fulfilled, the civil penalties covered under section 1317E become applicable, which gives the
power to the court to make a declaration of contravention, pursuant to which, the ASIC can apply
for a disqualification order as per section 206C or seek pecuniary penalties as per section 1317G
(Austlii, 2017).
The duty under this section is applied with the misleading and deceptive conduct of the directors
where the directors have been given some crucial or significant information, which could result
in a civil claim being made against the company in which they are the director or officer, owing
to the deceptive or misleading conduct. This makes it obligatory for the directors to ensure
diligence and care while releasing any information and also to ensure that the information which
is released is not misleading or deceiving (Gadens, 2010).
A similar duty can be seen in section 181, which requires the directors and officers of the
company to use their powers and discharge their obligations in the best interest of the company,
with good faith and lastly, for proper purpose (Department of the Premier and Cabinet, 2016).
The breach of this section also attracts penalties under section 13177E.

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DECISION OF COURT
Justice Gzell presided over this matter and gave his decision regarding each point in a specific
manner. He stated that in connection to the draft announcements made to ASX, all the 7 ex non-
executive directors, the General Counsel, the CEO and the CFO of James were in breach of
section 180(1) as they had failed in ensuring that the draft announcement regarding the funds’
sufficiency of the Foundation was not deceiving or misleading regarding paying the
compensation to the victims (Czoch and Mulder, 2010). In the matter of the deed, His Honour
stated that the CEO and the General Counsel were in contravention of section 180(1) due to their
failure in giving the proper advice to the board of the company appropriately, which could have
allowed the Deed to be properly disclosed (Jacobson, 2009).
With regards to the ASX Announcements, which had been properly approved, His Honour stated
that section 180(1) had been contravened by the company’s CEO, which was MacDonald, as he
failed in ensuring that the made announcements were nether misleading nor deceptive. Along
with this, the sections 995(2) and 999 of Corporations Act were also contravened due to the
misleading and deceptive information being released under the ASX Announcements (Sixth
Floor St James Hall Pty Limited, 2009). His Honour also looked into the presentations made by
MacDonald which were deemed as a contravention of CEO’s duty under section 180(1) as a
result of making sure that these presentations were not misleading or deceptive. The new
company, JHINV also contravened sections 1041E and 1041H as they were engaged in
misleading and deceptive conduct with regards to the presentations made to ASX (Czoch and
Mulder, 2010).
His Honour also stated that the ASIC had failed in showing various allegations made towards the
Group, its non-executive and the executive directors. Under these different allegations, one was

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related to the claim against MacDonald for the contravention of section 181, which was related
to acting in good faith by the CEO (Czoch and Mulder, 2010). Till late July 2000, the court
listened to the submission made by the parties of this case for the defendant to be exonerated
pursuant to section 1317S and 1318 of the Corporations Act regarding the undertaken breaches
and also for the type of penalty or sanction to be imposed over MacDonald (Austin, 2012).
The ASIC submitted a contention to the Court which asked for the CEO of the company to be
disqualified from running the affairs or managing any company for 12 to 16 years and the CEO
to get a penalty as a fine, ranging between $1.47 million to $1.81 million. They also applied for
the General Counsel’s disqualification from managing any company for 8 years, with a fine
between $350,000 and $450,000. It was also proposed to ban all of the nonexecutive directors for
5 years and to be fined between $120,000 and $130,000. The CFO was also claimed to be
disqualified from the management of company for 6 years minimum and to be fined in the range
of $150,000 to $250,000. Lastly, the ASIC applied for 90% of the costs borne by them for
bringing this case, to be jointly and severally be paid by the defendants of this case (Czoch and
Mulder, 2010).
ASIC also made a submission to the Court to consider the penalties which were to be applied on
the defendants and to consider the matter of indemnity. Given that the Corporations Act, 2001
restricts the companies of the nation from indemnifying against civil penalties of such kind, the
submission of ASIC was that some of the defendants could be indemnified by the foreign
companies within the Group. The defendants applied to be exonerated from ASIC’s claims and
contented the banning orders and also stated that the fine which the ASIC had applied for, were
excessive in nature. The only exception to this was MacDonald as he had admitted that the
contraventions had been serious in nature (Czoch and Mulder, 2010).

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Justice Gzell refused the exoneration of the previous members of board on 20th August 2009 and
handed down the penalties in this case and provided these penalties:
 The General Counsel was disqualified for 7 years from management of any company,
with a fine of $75,000 (Taylor, 2012).
 The CEO, i.e., MacDonald was disqualified for 15 years from management of any
company, with a fine of $350,000.
 The Chief Financial Officer was disqualified for 5 years from management of any
company, with a fine of $35,000.
 Individually, each of the non-executive directors was disqualified for 5 year period from
management of any company, with a fine of $30,000 to be borne separately by each
individual.
 The new company was also fined to the amount of $80,000 (Czech and Mulder, 2010).
The decision given in this case was considered as a landmark one by ASIC with regards to the
Australian corporate governance. This was because of the important guidance and direction
provided to the boards with regards to the practical applicability of the scope and the content of
the executives’ duties which were undertaken in a major matter related to the board and related
to the disclosure of these in the market. Along with this, the guidance and direction related to the
responsibility of the non-executive of the public companies when being asked about the
consideration of board’s strategic issues and for the approval of disclosure in market pertaining
to the board’s decisions (Austlii, 2009).

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CONCLSUION
In the previous parts, the case of ASIC v MacDonald was discussed where the breaches of
director duties and that of the officers was the key matter, which resulted in disqualification
order and pecuniary penalties being awarded against different parties. The civil proceedings
which the ASIC started against James, the Group and the new company JHINV, the 7 ex non-
executive directors, 3 former executives of James for the contraventions of different provisions
of Corporations Act, and also for the approval and preparation of public statements were the
background of the case being discussed in the previous segments of this discussion. The decision
of this case highlighted the importance of the role of the directors, which not only includes
executive, but also the non-executive directors of the company, in addition to t he senior
executives of the companies, particularly with regards to the consideration and implementation
of the strategic matters of the companies. Apart from the corporate governance issues
surrounding this case, the decision of this case broadened the focus which had been put over the
senior executives who are just below the level of the board and upon the non executive directors.

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REFERENCES
Austin, R. (2012) The High Court decides the James Hardie case. [Online] Minter Ellison.
Available from: http://www.minterellison.com/files/Uploads/Documents/Publications/Alerts/
NA_20120509_JamesHardieDecision.pdf [Accessed on: 22/09/17]
Austlii. (2009) Australian Securities and Investments Commission v Macdonald (No 11) [2009]
NSWSC 287 (23 April 2009). [Online] Austlii. Available from:
http://www.austlii.edu.au/au/cases/nsw/NSWSC/2009/287.html [Accessed on: 22/09/17]
Austlii. (2017) Corporations Act 2001 - Sect 180. [Online] Austlii. Available from:
http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s180.html [Accessed on: 22/09/17]
Czoch, K., and Mulder, M. (2010) Australia: The James Hardie Decision: Australian Securities
& Investments Commission v Macdonald (No. 11) [2009] NSWSC 287. [Online] Mondaq.
Available from:
http://www.mondaq.com/australia/x/106690/Corporate+Governance/The+James+Hardie+Decisi
on+Australian+Securities+Investments+Commission+v+Macdonald+No+11+2009+NSWSC+28
7 [Accessed on: 22/09/17]
Department of the Premier and Cabinet. (2016) 7.3 Corporations Act 2001 (Cth) (the
Corporations Act). [Online] Queensland Government. Available from:
https://www.premiers.qld.gov.au/publications/categories/policies-and-codes/handbooks/
welcome-aboard/member-duties/corp-act-2001-c.aspx [Accessed on: 22/09/17]

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Federal Register of Legislation. (2017) Corporations Act 2001. [Online] Federal Register of
Legislation. Available from: https://www.legislation.gov.au/Details/C2013C00605 [Accessed
on: 22/09/17]
Gadens. (2010) Misleading and deceptive conduct in the corporate sphere. [Online] Gadens.
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in-the-corporate-sphere.aspx [Accessed on: 22/09/17]
Hargovan, A. (2009) Australian Securities and Investments Commission v Macdonald [No 11]
Corporate Governance Lessons from James Hardie. Melbourne University Law Review, 33(3),
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Jacobson, D. (2009) ASIC v James Hardie Decision: Company, Directors and Officers Were
Misleading. [Online] Bright Law. Available from: https://www.brightlaw.com.au/asic-v-james-
hardie-decision-company-directors-and-officers-were-misleading/ [Accessed on: 22/09/17]
Lavan. (2017) The responsibility for continuous disclosure announcements in the light of James
Hardie - Australian Securities and Investments Commission and Macdonald (No 11) [2009]
NSWSC 287. [Online] Lavan. Available from:
https://www.lavan.com.au/advice/banking_finance/the_responsibility_for_continuous_disclosure
_announcements_in_the_light_of [Accessed on: 22/09/17]
Norton Rose Fulbright. (2010) Insurance & Financial Services Bulletin. [Online] Norton Rose
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bulletin#section12 [Accessed on: 22/09/17]

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Plessis, J.J.D., Hargovan, A., and Bagaric, M. (2010) Principles of Contemporary Corporate
Governance. 2nd ed. Cambridge: Cambridge University Press, p. 59.
Sixth Floor St James Hall Pty Limited. (2009) ASIC v Macdonald (No 11) [2009] NSWSC 287.
[Online] Sixth Floor St James Hall Pty Limited. Available from:
http://www.sixstjameshall.com.au/recent-cases/2016/7/14/australian-securities-and-investments-
commission-v-macdonald-no-11-2009-nswsc-287 [Accessed on: 22/09/17]
Taylor, T. (2012) James Hardie – The final instalment – NSW Court of Appeal disqualifies and
penalises company officers. [Online] Holding Redlich. Available from:
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