Lo público y lo privado

One of the primary areas in which Australian law differs from UK law is in relation to the provision of the Business Judgement Rule, which is arguably at the heart of corporate governance and directors’ duties in Australia.²⁷¹ The rule was first proposed in the Corporate Law Economic Reform Program (CLERP bill) in 1997.²⁷² The grounds for its introduction were that it was to protect the authority of directors in the performance of their duties, as explained Stephen Bainbridge, when referring to the American equivalent,

“the Business Judgment Rule reflects the need to reach a compromise between recognising the director’s authority and discretion to decide, and the need for those directors to be accountable.”²⁷³

269 J. Du Plessis, ‘Company Lawyer, Open Sea or Safe Harbour? American, Australian and South African Business Judgment Rules Compared’, Springer Science & Business Media (2011) Part 1. See also Daniels v Anderson [1995] 16 A.C.S.R, 607.

270Ibid.

271 Corporations Act 2001. Sections 180(2) (Canberra: Office of Parliamentary Counsel).

272 Australian House of Representatives, Corporate Law Economic Reform Program Bill, The Parliament of the Commonwealth of Australia (1998). Available online:

https://www.legislation.gov.au/Details/C2004B00269 [Accessed 02/10/2016].

273S. Bainbridge, ‘The Business Judgment Rule as Abstention Doctrine’, Vanderbilt Law Review, 57.1 (2004) 83-84.

The Business Judgment Rule was introduced into the Corporations Act in March 2000. The Australian version contains all the same rules as the American version in that the rule is fulfilled if a director:

− Makes the judgment in good faith for a proper purpose.

− Does not have a material personal interest in the subject matter of the judgment.

− Informs himself or herself about the proper subject matter of the judgment to the extent they reasonably believe to be appropriate.

− Rationally believes that the judgment is in the best interests of the corporation.²⁷⁴

When directors have met the above criteria then the rule is there to prevent their decisions being judged unjustly.²⁷⁵ As highlighted by D’Aloisio, there is a balance that must be found between on the one hand ‘protecting shareholders’ and on the other ‘providing the freedom to the board to allow it to take risks without fear of liability’.²⁷⁶ If there is a legal mechanism in place to bring actions against directors for poor business decisions then it will deter directors from risk taking entirely and they will even apply caution when taking necessary risks through fear of liability.²⁷⁷

274 Corporations Act 2001. Sections 180(2) (Canberra: Office of Parliamentary Counsel).

275Corporations Act 2001. Sections 180(2) (Canberra: Office of Parliamentary Counsel). See also J. Farrar, ‘Corporate governance, Business Judgment and the Professionalism of Directors’, Corporate and Business Law Journal, 6.1 (1993) 18.

276 J. Plessis et al, Principles of Contemporary Corporate Governance (Cambridge:

Cambridge University Press, 2010), 219.

277 Ibid.

• The Legal Basis Of The Business Judgment Rule In Australia The Australian Business Judgment Rule is similar to the American version in many ways.²⁷⁸ The decision in Australian Securities and Investments Commission v Rich²⁷⁹ explained the Business Judgment Rule in

Australian Company Law, and indicated that this rule can provide a protection for actions in some cases that would otherwise amount to a breach of directors’ duty.²⁸⁰ The Business Judgment Rule in section 180(2) states that a director or other officer of a corporation will be protected from liability in relation to decisions made in the company’s best interests unless the belief is one that no reasonable person in their position would hold.²⁸¹ More precisely, it is a defence for actions that may otherwise be in breach of section 180(1), which imposes an obligation on directors to exercise their duty of care and diligence when discharging their decision-making responsibilities.²⁸²

The subject matter of the Business Judgment Rule is included in section 180(2)(c) and it states that,

“The director or officer must inform themselves about the subject matter of the judgment to the extent that they reasonably believe to be appropriate”.²⁸³

278 See also Daniels v Anderson [1995] 16 ACSR, 607.

279Australian Securities & Investments Commission v Rich [2009] FLR 1, 236.

280Australian Securities & Investments Commission v Rich [2009] FLR 1, 236. See also M.

Legg & D. Jordan, ‘Balancing Director Authority and Accountability’, Adelaide Law Review, 34.2 (2013).

Available online:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2507059 [Accessed 20/05/2016], 406.

281 Talbot v National Roads and Motorists’ Association Limited [2000] 18 ACLC, 600.

282 Corporations Act 2001. Sections 180(1) (Canberra: Office of Parliamentary Counsel).

283 Corporations Act 2001. Sections 180(2) (Canberra: Office of Parliamentary Counsel).

Taken directly from US legislation, it requires directors to make informed but not necessarily flawless decisions.²⁸⁴

The rationality of the rule is that in order to make decisions the director needs to have done sufficient due diligence.²⁸⁵ They require the time available for obtaining information, the costs relating to obtaining information, the director’s confidence in exploring the matter, the state of the company’s business at the time, the nature of the competing demands on the board’s attention, and whether or not material information is rationally available to the director.²⁸⁶ In the circumstances where the decision prompts an uncertain question of law, compliance with section 180(2)(c) involves the procurement of proper independent legal counsel.²⁸⁷ In order for this section to function, there is the requirement for all four principles (they can be seen in the Business Judgment Rule diagram) to be present. Furthermore the drafting suggests that the onus of establishing the presence of those criteria is borne by the party who contends that section 180(2) applies (that is, the director or officer).²⁸⁸

Within Australian law culpability of the director lies in whether any alleged damaging decision was made in an honest, informed and sensible way. If this is the case then the director should be held not liable for any losses sustained by the company. ²⁸⁹ Therefore under the Business

284 R. Austin et al, Company Directors: Principles of Law and Corporate Governance (London: Butterworths, 2005), 242–3.

285 Corporations Act 2001. Sections 180(2) (Canberra: Office of Parliamentary Counsel).

286 Australian Securities & Investments Commission v Rich [2009] ACSR 1, 75. See also New South Wales Supreme Court, 1229, 2009, 7283.

287Re HIH Insurance Ltd [2010] 78 ACSR 405, 240. See also Australian Securities and Investments Commission v Adler [2002] 20 ACLC 576, 176.

288 Australian Corporations Act 2001. Section 180(2) (Canberra: Office of Legislative Drafting and Publishing).

289 Corporations Act 2001. Sections 180(2) (Canberra: Office of Parliamentary Counsel).

Judgment Rule, if all the factors in section 180(2) are fulfilled then the director is deemed to have acted with sufficient care and diligence.

Also, section 180(3) of the Australian Company Law defined a

business judgment as any decision to ‘take or not take’ action regarding ‘a matter relevant to the business’ operations of the company.²⁹⁰ Thus, a business judgment may be a decision to act or not to act. In this section, the language is used ‘in respect of a matter relevant’, that is to say that when a matter presents itself it might require a director’s decision as opposed to simply a decision that the directors produced of their own accord. The language is however recognised as being broad and unspecific.²⁹¹ The courts have to give the definition of ‘business judgment’ a wide interpretation including, according to section 180(3). This provision states that ‘business judgment’ means any decision to take or not take action in respect of a

matter relevant to the business operations of the corporation.²⁹²

Figure 9: Section 180(3) Australian Law, the Business Judgment Rule

1. Decisions that are preparatory to the making of a business decision.

2. Decisions relating to corporate personnel.

3. Decisions relating to the termination of litigation.

4. The setting of policy goals.

290Corporations Act 2001. Sections 180(3) (Canberra: Office of Parliamentary Counsel). See also Australian Securities and Investments Commission v Rich [2009] 75 ACSR, 608.

291P. Redmond, Safe Harbours or Sleepy Hollows in Corporate Governance and the Duties of Company Directors (Melbourne: University of Melbourne, 1997), 195.

292 AWA Ltd V Daniels (t/as Deloitte Haskins & Sells) [1992] 7 ACSR, 759. See also Re HIH Insurance Ltd [2010] 78 ACSR 405, 240.

5. The apportionment of responsibilities between the Board and senior management.

6. Decisions about planning, budgeting and forecasting.

2.7.2 United Kingdom

There has been no attempt to introduce the Business Judgment Rule in the UK as it is currently deemed that there is no issue that exists that the rule would be required to solve. The rule is predominantly to protect directors from liability for decisions made with good intentions based on their professional knowledge. In the UK, case law provides a similar level of protection for directors as a Business Judgment Rule would. Directors can be granted full or partial relief for a director’s liability if it is satisfied that a director acted honestly and reasonably.

With this case law in place, even if it is clear that a decision is not the best decision the director could have made, English courts have on the whole demonstrated a position of standing by the business judgment of the director. This position of the courts coupled with the case law has meant that the UK has not had any requirement to introduce the Business Judgment Rule.²⁹³

2.7.3 Hong Kong

The Business Judgment Rule is not in place in Hong Kong for the same reason as the UK. The courts do not assume to question the decision making of directors unless it is clear that decisions are not made in good

293 Simmons & Simmons, Time for a Business Judgment defense for United Kingdom Directors, International Financial Law Review (2002). Available online:

http://www.iflr.com/Article/2027080/Time-for-a-business-judgment-defence-for- United Kingdom -directors.html [Accessed 25/08/2016].

faith. The case law from the UK also applies in Hong Kong, which means the position of Hong Kong regarding the Business Judgment Rule is no different to that of the UK.

2.7.4 China

At present China does not have the Business Judgment Rule and there are no signs of its intended adoption. That is not to stay however that legislation would not be improved through its adoption. At present when it comes to cases where damage has been caused to a company by directors’

decision making, the judges consider whether the decision making process was reasonable or not in the circumstance. Judges are not businessmen and this approach can be far too subjective. The Business Judgment Rule has standards of review and it is up to the director to demonstrate that their decision was made with good intentions based on the information they had available at the time. The judge is then not allowed to question the reasonableness of the decision, but only whether the decision-making process meets the requirements of the standard or review.²⁹⁴