Duty of Care

Duty of Due Diligence Duty of Business Judgment Case Analysis ASIC vs RICH

Directors' duties are a series of statutory, common law and equitable obligations owed primarily by members of the board of directors to the corporation that employs them.
Directors' core duty is to remain loyal to the company,

and avoid conflicts of interest

Directors are expected to display a high standard of care,

skill or diligence
Directors are expected to act in good faith to promote

the success of the corporation

Definition
An obligation to conform to a certain standard of conduct for the protection of another against an unreasonable risk of harm

Directors Duty of Care

A director must discharge his/her duties in good faith and with that degree of diligence, care, and skill that an ordinarily prudent person would exercise under similar circumstances in a like position

Tearing the definition apart "A director must discharge his/her duties in good faith... Act to the best of abilities to ensure the good of all involved in the company "...and with that degree of diligence, care, and skill...

Care
Directors are often unable to fully investigate information that is received from others or to carry out their decisions on their own. Care translates to an obligation to act in an oversight capacity and to question the acts of subordinates when they seem abnormal, or might not conform with the company's best interests.

Duty of care is a legal obligation imposed on an individual requiring that they exercise a reasonable standard of care while performing any acts that could foreseeably harm others.

Definition
Such a measure of prudence or an activity as is properly to be expected from, and ordinarily exercised by, a reasonable and prudent man under the particular circumstances; not measured by any absolute standard, but depending on the relative facts of the special case. [Blacks Law Dictionary]

Due Diligence
It is the effort made by an ordinarily prudent or reasonable party to avoid harm to another party or himself. Failure to make this effort is considered negligence

Directors Duty of Due Diligence

Have written policies and procedures in place. Take time to always fully discuss the issues. Exercise patience and thoroughness. Obtain expert assistance, such as attorneys, accountants,

appraisers, investigators and insurance agents, when the circumstances dictate it.
Use due diligence before there is a problem, not as a

reaction to something gone wrong !

Some misconceptions
Does not mean rocking the boat.
Does not mean that management is not being trusted. Does not mean that managements decisions are being

questioned.

What it actually means

Director is interested in doing what is best for the

owners that it represents together with management

Definition
Directors of a corporation are clothed with the presumption, which the law accords to them, of being [motivated] in their conduct by a bona fide regard for the interests of the corporation whose affairs the stockholders have committed to their charge [Gimbel v. Signal Cos, 1974]

Directors Duty of Business Judgment Any conflict in regard to the issue before the board Facts to make a decision on the issues before the board Rational business decision based on all the facts available Decision in the best interest of the company Transparency in communication Company to be seen as good corporate citizen as a result of the decision Good steward of the companys assets in making this decision Exercise the concepts of intellectual honesty and intellectual naivety Understand the material in the board pack and the discussion at the boardroom table The impact of publishing the decision in the news [Mervyn King]

One.Tel, was a service provider of GSM mobile and long distance calls formed in Australia in 1995 and expanded its operations overseas in 1998. One.Tel grew to be 4th largest Australian Telecomm with 3 million subscribers, 3000 employees, operating in 7 countries and a $1 billion turnover with the market capitalization at peak standing at $5.4 billion. In May 2001, ONE.Tel became insolvent after financial investors pulled the plug on a $132 million injection of funds, claiming they have been misled about the companys troubled finances.

ASIC, a corporate regulator, brought civil penalty proceedings for breach of statutory duty of care of company directors and officers ASIC claimed that Director & Joint CEO Jodee Rich and Finance Director Mark Silbermann had breached their duties as directors and officers by failing to make proper disclosure to the ONE.Tel board of the poor financial position of the ONE.Tel Group prior to its collapse in May 2001. ASIC argued that they breached their duties of care and diligence under section 180(1) of the Corporations Act 2001, as they should have
Known about ONE.Tels true financial position. Promptly ensured that the board was made aware and fully informed of the Groups position; and Immediately recommended that the Group cease trading.

In addition to claims that they misled the Board by including unfounded forecasts and earning positions in board papers and failing to disclose accurate material on Groups cash flow, RICH was accused of failing to ensure proper systems were maintained to produce accurate financial information flowing from management to the Board.

ASIC sought $92 million in damages and a lifetime banning order against the former ONE.Tel directors.

Section 180 of Corporation Act 2001 provides that directors and officers have a basis duty to exercise their powers and discharge their duties with the care and diligence that a reasonable person would exercise, taking into account the corporations circumstances, the offices occupied by the person and their responsibilities within the corporation. However, in considering the nature of the duty of care, one key question is the extent to which the standard of conduct expected of a director and officers is objective or subjective and, in particular, how a Court will have regard to the circumstances of the relevant corporation and the responsibilities of that particular director or officer. Moreover, directors and officers also encounter risks in commercial setting therefore how their response to risk is perceived while determining whether they have discharged their duty of care and diligence.

There is statutory defence to an allegation of breach of section 180, which is contained in section 180(2) and is referred to as the business judgment rule. This rule provides that a director or officer will have been taken to have discharged their obligations in accordance with section 180 if he/she
Makes a business judgment in good faith and for a proper

purpose; Does not have a material personal interest in the subject matter of the judgment; Informs himself/herself about the subject matter of the judgment to the extent he/she reasonably believes to be appropriate; and Rationally believes that the judgment is in the best interest of the corporation.

One of the biggest civil cases in NSW Supreme court history. The legal process almost ran for nine years and after 232- day hearing, Justice Austin held that the Officers decisions were protected by the business judgment rule in section 180(2) of the Corporation Act. He ruled, if you a director or an officer, you will not be liable for breaching your duty of care and diligence where you can show that:

You have made a business judgment; You acted in good faith, for a proper purpose and without any material personal interest in the subject matter; You informs yourself of the subject matter to what you believe is an appropriate extent that is reasonable (in light of time constraints and the accessibility of information); You believe your decision is in the best interest of the corporation; and Your belief is rational, based on an arguable chain of reasoning, and is not a belief that no reasonable person in your position would hold.

Business Judgment Rule is applicable to decisions about planning, budgeting and forecasting. It is not applicable to duties to monitor a corporations affairs or financial position. The importance of responsible risk taking in a commercial setting is fully recognized. Defence ensures that directors and officers are not discouraged from taking advantages of opportunities that involve responsible risk taking. Decision making at the Board or Management level is protected from the consequences of decisions where it can be demonstrated that these were taken with due care and diligence. Obtaining expert opinions and relying on input of other parties assist in demonstrating that duties have been discharged as expected.

&A