The Australian Securities and Investments Commission - Case Study Example

ASIC v Rich Student’s Name University Affiliation The issue The Australian Securities and Investments Commission (ASIC) v Rich case revolved around special responsibilities of chairperson of the board of directors. The case was based on the element of duty of care and diligence as stipulated under Corporations Act 2001. According to provisions laid down under the Corporations Act, a chairperson of a listed company is required to undertake special duties to reflect community expectations in the contemporary society. Ideally, directors are expected to meet numerous obligations above legal and commercial expectations. In 2003, court case decision involved action against three executive directors of One. Tel and non-executive chair named John Greaves (Woodward, 2009 p. 17). ASIC v Rich made the list of one of the biggest civil cases in history of the NSW Supreme Court. In the case, the Australian Securities and Investments Commission blamed Jodee Rich and Mark Silbermann, both former directors of One.Tel Communications Company for failing to meet their legal duty of care during months just before their company collapsed on May 2001. The case led to a nine-year legal process involving 232 siting days, which produced 16,642 pages of scripts (Brooks, 2013 p. 38). Rich and James Packer established One-Tel Communications Company in Australia in 1995. In 1998, the business stretched out its undertakings by launching overseas operations. In the years that followed, it grew and became Australia’s fourth largest telecommunications company, which operated in seven countries, employed close to 3000 people and 3 million subscribers. Problems emerged on May 2001 when News Corporation, Murdoch’s PBL and James packer withdrew their support for underwritten rights issue. The withdrawal of support from key shareholders ensured collapse of the company. Immediately after their withdrawal, it was discovered that the company needed close to $300 million to survive (Krueger, 2004 p. 66). Following withdrawal of support from major shareholders, the company ceased operations from June 2001. During the month, ASIC acquired a criminal warrant that granted them permission to raid houses of One-Tel executive directors. ASIC also succeeded in acquiring a freezing order for all Jodee Rich’s assets including some selected family assets. Surprisingly, the ASIC never raided houses, froze assets, or seized documents from Murdoch, Packer, Yates and other PBL directors. When major shareholders withdrew their support, Brian Long who was a former One.Tel auditor and chairperson of Ernest and Young, was requested to write a report to test chances of the company’s survival. The fact that Brian Long had a long relationship with the Packer family might have been the reason for miscommunication and misrepresentation. ASIC’s accusation pointed out that Rich and Silbermann had failed to undertake their duties and responsibilities as top executives of the company. As the executive directors of the company, Rich and Silbermann were required by law to provide sufficient material information concerning One.Tel’s prospects, performance and financial position. Such kind of information was particularly instrumental during the period before cancellation of proposed rights. Securities and investment agencies are required by the law to protect shareholders and other stakeholders from unscrupulous executive directors who can bend the rules for selfish gain. In the case of ASIC v. Rich, investors were expecting that ASIC would assist them through holding the accused party responsible for their actions. During the case, ASIC hoped to achieve a lifespan prohibiting order against former executives of One.Tel. In addition, the ASIC sought to be granted damages up to $92 million (Williams, 2013 p. 79). Rules underpinning the case Rules applied in the case emanated from various common laws, past cases of similar nature and provisions laid down under Corporation Act. The duty of care, provided under section 180 (1) of the Corporate Act was the main point of consideration. Section 180 (1) of the Corporation Act indicate that a director or any senior officer of an entity is required to exercise powers and render duties within a standard of care a diligence that a reasonable person would be expected to demonstrate under two circumstances (George, 2004 p. 38). First, the degree of care and diligence would be called for if the individual were a director or executive of a firm in the firm’s environments. Second, the responsibilities would be expected if an individual were deemed to have occupied the office held by, and acquired similar responsibilities within the entity as the director or officer (Lowry, 2012 p. 250). Section 180 also presents the business judgment rule that was also considered while handling the case. The term ‘business judgment’ is used to imply a choice to take or not to take action in relation to an issue that is imperative to business operation within a corporation (Shailer, 2004 p. 19). The business judgment rule indicates that any director or officer of a corporation must meet standards outlined under subsection (1) while making a business judgment. Under the rule, duties of such officers are equivalent to provisions laid down under common law and equity if they make judgments based on the following situations. a. When they rationally believe that decision is done in the best interest of the entity b. If they inform themselves concerning the subject matter to a level that they believe their judgment is reasonable c. When they do not hold material personal interest on the subject matter of the judgment d. When they arrive at judgment based on good faith channeled for right purpose Traditionally, duties of a chairperson and other officers of a corporation were drawn from common law. Under common law, the role of a corporation’s chair was to preside over meetings and exercise powers required to ensure success of such meetings (Matt, 1993 p. 578). Justice Street expressed the duty in 1966 during the Colorado Constructions case (Farrar, 2001 p. 378). According to Justice Street, it was mandatory for any business meeting to be led by an appointed Chairperson who will exercise procedural control and enable smooth operation. Since then, duties of top executives in a corporation have changed considerably due to community expectations (Ferguson, 2000 p. 150). Since the enactment of the Corporation Act 2001, duties of chair and directors seemed to have expanded. Justice Megarry in the case of John v Rees held that although the chair had wide powers, he also had a special duty of applying those powers for proper purposes. Chief Justice Rogers after also expanded duties of the chair in the case of AWA Ltd v Daniels t/a Deloitte Haskins & Sells (Daniels). Chief Justice Rogers held that the chairperson holds a greater responsibility than any other director does, particularly for performance of the board. The primary responsibilities of a chair include selecting documents and matters to be presented before a board for creating policies used for promoting the company (Whincop, 2005 p. 357). While discharging the duties, the chair will be expected to collaborate with managing director in case the two positions are separate. Based on Chief Justice Rogers’s statement, the function of a chair appears to encompass both communication and strategic roles (Wilks, 2002 p. 23). While handling the case of ASIC v Rich, Justice Austin also applied Woolworths v Kelly and Dovey v Cory cases in a bid to establish the extent of duties and responsibilities of a corporation’s executives. From the cases, it was clear that duties and responsibilities of a chair surpassed merely fulfillment of procedural role during meetings. Justice Justine linked requirements under the concept of care and due diligence with contemporary community expectations. The expectations outlined by the justice were to be sourced from common law and various statutes. Analysis Numerous issues in the case of ASIC and Rich were considered controversial because laws and regulations paved way for multiple interpretations. The first concern was the significance of the term ‘responsibility’. The ASIC argued that the term responsibility stipulated in section 180 (1) meant that Mr. Greaves had a special responsibility by virtue of occupying the position of a chair of One.Tel’s Board of Directors and Finance and Audit Committee. In addition, ASIC claimed that Mr. Greaves had a special responsibility owing to the fact that he possessed vast experience, high qualification and expertise as compared to other directors. Conversely, Mr. Greaves argued that the word ‘responsibility’ meant specific tasks delegated to a certain director including the chairperson in an effort to distribute functions of a corporation as outlined in articles of the company. Mr. Greaves claimed that despite the fact that he was the chairperson of the corporation, he operated in the same position as the other directors who were not sued by ASIC. The court upheld ASIC’s argument and stated that the term responsibility meant acquisition of duties not via special delegation but via the manner in which work is distributed within a corporation. The court further noted that responsibilities emanated from expectations attached through the arrangements on the individual directors. Analysis of contemporary cases, such as the AWA Ltd v Daniels t/a Deloitte Haskins & Sells, Woolworths v Kelly and Dovey v Cory plainly shows that duties and responsibilities of company directors and chairpersons have shifted dramatically (Adams, 2002 p. 467). Procedure applied by chief justice Rogers during the Daniels case created a strong influence on the ASIC v Rich case. Chief Justice Rogers realized that responsibilities of company directors had expanded beyond regulatory and legal scope. In that respect, he applied non-legal material to discover the work of chairs (Publishing, 2013 p. 55). The work presaged Justice Austin’s strategy during the ASIC v Rich case. Notably, Justice Austin digressed from legal and regulatory provisions and considered ‘contemporary community expectations’. Community expectations concerning the role of chair were drawn from postmodern corporate governance literature. According to contemporary corporate governance literature, responsibilities of a chair surpass those of other directors (Hannigan, 2012 p. 489). Leadership qualities of a chairperson are often used to examine level of effectiveness of a board. Responsibilities of a chair based on community expectations are majorly drawn from corporate governance best practice codes and guides (Wertheimer, 2008 p. 160). The international corporate governance best practice codes and guides list responsibilities of a chair as follows. i. Ensuring that board policies are implemented ii. Spokesperson for the company and the board of directors iii. Ensuring that directors are well informed to enable effective discharge of their duties iv. Ensuring that shareholders access sufficient information concerning financial state of the company v. Formulating suitable membership of the board and making board alterations when necessary While handling the case, Justice Austin noted responsibilities of a chair had not been previously outlined in statute or common law. The justice also pointed out that although literature on corporate governance was voluntary and exhortatory in nature, they were relevant in determining responsibilities of chairpersons in a contemporary corporation. Apart from understanding their responsibilities, the case also introduced a thought that directors or chairs were supposed to take rational strides to certify that all their duties and responsibilities were duly met (Moran, 2013 p. 46). Conclusion In conclusion, the ASIC v Rich case served as a caution to chairpersons that they need to consider accomplishing additional responsibilities and amplified legal duties that could be placed on them. Based on dynamic nature of corporate governance law, duties of chairs were expected to expand beyond those held by directors (Wallis, 2003 p. 8). Lack of suitable and reliable standard for setting governance rules for company leadership revealed the need to formulate and effect new changes. According to Justice Austin, the court was tasked with the responsibility of coming up and enunciating a standard of care, which would reflect community expectations concerning elements of corporate governance, particularly duties and responsibilities of top management (Kolb, 2008 p. 27). Emerging issues clearly pointed out that directors were required to be continually informed concerning activities and functions of a corporation, especially financial matters. The requirement was made despite the fact that in most cases, directors tend to leave matters to management team. The case set am implied standard that directors should never assume complete trust in subordinates, especially about sensitive matters. The ASIC v Rich case greatly expanded operation of section 180 (1) of the Corporations Act 2001. It was realized that a chairperson or other directors of a corporation could assume various special responsibilities while discharging their duties to ensure that standards of care and diligence are adequately achieved (Kakabadse, 2008 p. 49). The special responsibilities could be pegged on certain circumstances of the company, expertise of the individual and core responsibilities are stipulated under articles of association. From the case, it was acknowledged that qualifications and standards of corporate governance were rapidly evolving owing to dynamic nature of community expectations. The postmodern community expected that a chairperson was to take judicious steps to guarantee that a company had an effective reporting system to provide useful information. Such information would be instrumental in assisting the board to achieve effective monitoring of a corporation’s financial health (Conger, 2009 p. 88). From the case, it was discovered that a chairperson is the most duty-laden official of a corporation. The reason is that post-modern corporate governance literature and community expectations points out that chairperson had greater responsibilities above other directors. For instance, during times of financial challenges, the chairperson was expected to undertake appropriate action to salvage the situation. References Adams, M. (2002). Australian Essential Corporate Law. London: Routledge Cavendish Australia. Brooks, D. J. (2013). Corporate security in the Asia-Pacific region: Crisis, crime, fraud and misconduct. Boca Raton, Fla.: CRC Press. Conger, J. A. (2009). 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