Governance lessons from Tennis Australia: ASIC v Mitchell (No 2)

  • This case offers rare insights into boardroom deliberations and offers guidance on the role of the chair.
  • Opinion expressed by the judge restricts access by the chair to the statutory business judgment rule defence when deliberating upon information to be provided to the board — a potential point of concern for directors and officers.
  • With proper processes in place, directors do not have to second guess their CEO.

The recent decision in Australian Securities and Investments Commission v Mitchell (No 2)1 is noteworthy for many reasons, notwithstanding the monumental loss by the regulator in this case in which 41 out of 44 allegations of breach of directors’ duties were dismissed by the court.

From a governance perspective, the judgment by Justice Beach in this case offers great insights on the operation of the reasonable reliance defence to meet allegations of breach of duty of care and diligence by directors and officers. Aspects of the obiter dicta expressed in this case on the operation of the statutory business judgment rule are also of interest. Its potential implications may give cause for concern for directors and officers.

Apart from a consideration of these defences, the case offers a rare insight into the deliberative process of the board and on the management of information flows within an organisation. Equally, it has also been uncommon for the judicial spotlight to fall on the power, authority and responsibility of the chair.2 The case addresses this gap and offers valuable guidance to boardrooms across the country.

Board deliberative process

Judicial remarks on the board process in Mitchell (No 2) offers comfort to dynamic boards engaged in robust decision-making.

The judgment offers reassurance that the law does not expect homogeneity in the board decision-making process and sees legitimate scope for ‘personality differences of board members, dissension and diverse styles3 as part of the ‘robust dynamics necessary to achieve the best outcome.’4 The judgment cautions that these factors, which are not unusual in boardrooms around the country, should not automatically be condemned as board dysfunction.

Context and perspective, as emphasised in the judgment, is the other side of the coin which deserves consideration before seeking to label the deliberative process adopted by the board as dysfunctional.5

Facts

The facts of this case, together with judgment, are lengthy and complex but can be distilled to the following salient features. The board of directors of Tennis Australia Ltd (TA) made a unanimous decision in May 2013 to accept the recommendation of TA’s then CEO to approve a $195.1 million domestic broadcast rights deal with the Seven Network (Seven). The fees negotiated with Seven, over a five-year agreement, was a very substantial increase over an earlier agreement with Seven that was due to expire in July 2014. This deal was the catalyst for the litigation ASIC brough against the two former directors of TA, Mr Harold Mitchell (vice president) and Mr Stephen Healy (president and chair) for breach of directors’ duties.

ASIC alleged that in the internal deliberation by TA in respect of securing domestic broadcast rights, and in its negotiations with the Seven Network for such rights, the defendants failed to exercise the degree of care and diligence that a reasonable person in their position would exercise and therefore acted in breach of s 180(1) of the Corporations Act 2001 (Corporations Act).

ASIC said the evidence of interest from Network Ten, Nine and IMG showed there was clear potential for serious competitive tension in the market and that, given the chance, there were interested parties who were willing to bid more than was Seven had offered. In ASIC’s view, the defendant directors should have called for a competitive tender for the tennis broadcast rights.

Further, it was alleged that Mr Mitchell, a media buyer, improperly used this position as a director of TA and improperly used information gained from that position to gain an advantage for Seven during the course of its negotiations with TA — and therefore acted in breach of ss 182(1) and 183(1) of the Corporations Act.

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Decision

In dismissing ASIC’s case against Mr Healy, and in sustaining only a narrow part of ASIC’s case against Mr Mitchell, the judgment covers a wide range of governance issues some of which are highlighted below.

Breach of directors’ duties: Mr Healy

The case against Mr Healy, for alleged breach of s 180(1) by failing to disclose certain material information and documents in the board pack at three TA board meetings [between December 2012–May 2013], was dismissed after considering TA’s circumstances, Mr Healy’s position as chair and his particular responsibilities.

The court found the evidence supported a clear demarcation between the role of the CEO, on the one hand, and the role of Mr Healy as chair, on the other hand. The CEO was responsible for deciding what information he briefed to the board in connection with the domestic broadcasting rights and the form he used to convey it. It was held that Mr Healy was entitled to a significant extent to rely on the CEO’s judgment on such matters, and that he did so rely.6

Reliance on information or advice

The statutory criteria for reliance, in s 189 of the Corporations Act, requires that directors who rely on information, professional or expert advice, must do so in good faith and only after having made an independent assessment of the information or advice. Mr Healy’s reliance on the CEO was held to satisfy s 189 for the following reasons:7

Mr Wood [CEO] was charged with managing the domestic broadcast rights negotiations, he knew all the relevant facts affecting his negotiating strategy, and he was the person best placed to judge. He exercised his judgment as to what documents or other information would be of assistance to the board at the time of each relevant board meeting. Mr Healy was entitled to rely on, and did rely on, Mr Wood’s judgment in those respects. Mr Healy formed an independent view that Mr Wood’s judgment was appropriate.

In the circumstances of this case, it was held that Mr Healy’s duty to exercise reasonable care and diligence did not require him to second guess the CEO’s judgment with respect to the information the CEO decided after consideration to put before the board and the method the CEO used to convey such information.8 Furthermore, the reliance was held to be reasonable because, in the context of this case:9

… independent assessment requires no more than that the director, having listened to and assessed what his colleagues have said, must bring his own mind to bear on the issue using such skill and judgment as he may possess. Further, there must be evidence that he in fact relied on the information provided. In the present case each of those criteria are satisfied on the evidence. Therefore, Mr Healy’s reliance on Mr Wood [CEO] is presumed to have been reasonable. And ASIC has failed to discharge the onus that it was not.

Based on the above, it was held that there was no proper basis for saying that Mr Healy should have countermanded the judgment of the CEO who was entrusted with management of the negotiation strategy.

Any chair who views their role as being largely ceremonial and a mere public relations exercise does so at their own peril from a governance perspective.

Role of the chair

It is striking that the Corporations Act does not make any express reference to the roles or functions of the chair of the board, as observed by the court in Mitchell (No 2).10 To bridge that gap, reliance is placed upon the various replaceable rules which promote the role of the chair from the ‘merely ceremonial’,11 case law 12 and on the guidance offered in recommendation 2.5 of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (4th ed, 2019).

The judgment in Mitchell (No 2) is instructive on the role of the chair. Justice Beach observed that the position carries no greater authority than an ordinary director and cautioned against viewing the chair as ‘some sort of directorial overlord.’13

Mitchell (No 2) affirms that the primary function of the chair is to preside at board meetings, to exercise procedural control and to exercise a casting vote if applicable.14

Justice Beach, however, offered a compendious view on the power, authority and responsibility of the chair which goes far beyond procedural duties. The role and functions of a chair was identified in Mitchell (No 2) as follows:15

  • to set the agenda items for board meetings (which can be done in consultation with the CEO)
  • to ensure the board has sufficient information (whether presented in written or oral form) to be able to meaningfully consider, discuss and decide on the agenda items
  • to manage the board to ensure that sufficient time is allowed for the discussion of complex or contentious matters
  • to ensure that board members work effectively together and to ensure that their skill sets and personalities complement each other
  • to ensure there is a workable and harmonious relationship between various parties (the executive and non-executive directors the board and executive management and between the chair and the CEO)
  • to define and ensure that the board sets and implements the corporate culture of the organisation
  • to define and ensure that the board sets and implements the appropriate corporate governance structure
  • to assist in identifying new directors, dealing with their induction and ensuring continuing education of each director
  • to monitor the performance of the board, board members and board committees.

The amplification above, on the role of the chair, leaves little doubt that any chair who views their role as being largely ceremonial and a mere public relations exercise does so at their own peril from a governance perspective.

 In delving deeper into the position of the chair, Mitchell (No 2) also makes clear the chair cannot completely delegate their functions to the CEO to determine the amount and quantity of information to be put before the board16 and that the chair may have greater responsibility for the performance of the board as a whole.17

General remarks in Mitchell (No 2) also offers useful guidance on how to settle on the nature of the agenda item by asking relevant questions, such as:18

Does it [the agenda item] require detailed and precise information, for example, when one is considering approving a set of accounts? Or does it only require vaguer and more diffuse information, for example, when one is considering future economic trends and their effect on the business?

Additionally, when determining the utility of information to be presented to the board, Mitchell (No 2) offers these helpful questions for contemplation:19

… Is it in a comprehensible form for the directors? Does it raise more questions than it answers? Is it too much? Or is it too little? Is it the right time to present the detail? Or is that for later? All of these questions are to be considered in determining the balance to be struck to ensure that the directors are presented with the required level of accurate and meaningful information so that they can perform their function in dealing with the agenda item in terms of what they are required to consider and decide at the particular meeting in question.

Statutory business judgment rule

Given the court finding that Mr Healy did not breach his duty of care and diligence, it was unnecessary to consider the business judgment rule in s 180(2) of the Corporations Act. Mitchell (No 2), however, sheds further light on the operation of s 180(2) which is not free from doubt,20 despite its introduction two decades ago.

The question of who bears the onus of proving the four criteria in s 180(2) to obtain relief from a breach of the duty of care and diligence is a vexed one. In the leading case on this topic, Justice Austin in ASIC v Rich21 noted that the statutory language in s 180(2) was ‘profoundly ambiguous’22 but nonetheless ‘with some hesitation’23 held that the onus of proof fell on the defendant.

Justice Beach in Mitchell (No 2), however, expressed a firm view that the director has the legal and evidentiary onus to establish each of the criteria in s 180(2)24 and expressed disagreement with single judge decisions to the contrary.25 According to his Honour, ‘so much is apparent from the express statutory language’26 in s 180(2).

In relation to the third criteria in s 180(2)(c), Justice Beach endorsed the judicial analysis in ASIC v Rich which rejected ASIC’s attempt to narrow down the scope of this protective provision. The criteria require a director or officer to inform themselves about the subject matter of the judgment ‘to the extent that they reasonably believe to be appropriate’. In ASIC v Rich, the regulator took the view this criterion should be extended to include what he or she should have known (as opposed to what they actually knew). Such a wide interpretation was held by Justice Austin to distort the statutory language.27 The application and scope of section 180(2)(c) was seen by the court in ASIC v Rich as being limited to the decision-making occasion, rather than being extended to capture the general state of knowledge of the director.28

The less stringent judicial approach to the statutory language in s 180(2)(c) in ASIC v Rich, and endorsed in Mitchell (No 2), helps maintain the practical utility of this protective provision for directors and officers.

Similarly, the court in Mitchell (No 2) also favoured the judicial interpretation in ASIC v Rich in relation to the fourth criteria in s 180(2)(d) to ensure that it also has some protective work to do. Accordingly, it was held that it is not to be assumed, for the purpose of s 180(2)(d), that the director or officer knew everything that he or she ought to have known, but only the things that he or she reasonably believed to be appropriate to find out.29

However, the obiter views expressed by Justice Beach in Mitchell (No 2) on the threshold question of what is a ‘business judgment’ is of some concern as it may ultimately limit access to the protective relief in s 180(2).

His Honour cast doubt whether the chair’s decision to include or not to include information to be provided to the board is a ‘business judgment’ as such, for purposes of s 180(3).30 Although conceding that information flow ultimately feeds into the board’s decision which can concern business operations, his Honour queried whether the chair’s choices of information flow fairly fitted with the description ‘business judgment’ as a composite phrase.31

It is important to note that if this narrow judicial view on the meaning of ‘business judgment’ in Mitchell (No 2) is subsequently adopted by other courts, the restrictive interpretation will put all chairs on notice. A chair will be denied access to the statutory business judgment rule defence when deliberating upon information to be provided to the board. If so, to adopt such a limited meaning to the threshold criteria in s 180(3) will unduly emasculate the protective provisions in s 180(2) and will be manifestly undesirable.

Breach of directors’ duties: Mr Mitchell

ASIC alleged that the following three matters constituted a breach of the no conflict rule in ss 182 and 183 by Mr Mitchell:

  1. his communication with Seven and his private discussion with Mr McWilliam of Seven
  2. his interference with TA’s senior management concerning negotiations with Seven
  3. his withholding information from the board of TA.

After an extensive review of the evidence and the leading authorities on the meaning of ‘improper’,32 Justice Beach concluded that Mr Mitchell’s conduct lacked the purposive element required to establish a breach of ss 182 and 183. The court emphasised that, in establishing breach of these statutory provisions, it is purpose what counts, not motive and that both are not the same thing.33

However, the actions of Mr Mitchell’s communication with McWilliam were found to support a breach of s 180(1), but not the no-conflict rule in s 183(1), because:34

… even though Mr Mitchell may not have acted from an improper motive, it was entirely unacceptable to send to Seven TA’s internal emails. The breach of s 180(1) is made out, but not that concerning s 183(1).  Even if there was objective impropriety in relation to s 183(1), the requisite purposive element was missing.

The court held that Mr Mitchell stepped over the line on several occasions in the latter part of 2012 concerning his communications with Mr McWilliam, and thereby breached s 180(1).35

Notwithstanding the breadth of ASIC’s case against Mr Mitchell, the court held that ASIC only succeeded on a narrow path of its case which amounted to three contraventions of s 180.36 In light thereof, Justice Breach has flagged to ASIC that a moderate pecuniary penalty may be appropriate, without disqualification,37 but this remains to be seen in the civil penalty decision which will follow from the liability decision. The judicial remarks were prompted by the following observation on the behaviour of Mr Mitchell:38

… his overall conduct had the tendency to undermine the stance and approach of Mr Wood. There were some things that he communicated to Mr McWilliam that he ought not to have done, particularly in the latter part of 2012. Now none of this ultimately caused damage to TA. And none of this was motivated by anything other than Mr Mitchell’s perception that he thought that it was in the interests of TA that a deal with Seven should be stitched up sooner rather than later.

The emperor has no clothes

Strong critical remarks on ASIC’s role in this case, together with the pyrrhic nature of the regulator’s victory, indicates that this was a poor choice of case for ASIC to litigate. ASIC’s view of the commercial deal-making process in TA, which lacked commercial nous, left the regulator vulnerable to the following criticism — as noted by the court:39

ASIC’s case assumed that a commercial negotiation was an adversarial contest intended to produce a winner and a loser, and in which the negotiating parties had to behave at all times as if they were protagonists. But the negotiations between TA and Seven were between two parties who had had a fruitful relationship over decades. They were parties who were exploring whether a win-win deal could be negotiated between them …

From a risk perspective, Justice Beach was critical of ASIC’s failure to consider the potential downside of a competitive tender for the following reasons:40

ASIC seems to have studiously ignored the question of risk in the relevant calculus. ASIC has asserted that approval of Seven’s final offer was not in the best interests of TA and that the domestic broadcast rights should have been exposed to the ‘true market’ by way of a tender process. But in my view, the TA board quite properly decided, in effect, that the prospect of obtaining a better deal in a competitive tender was outweighed by the risks of getting a worse deal.

Much of ASIC’s construction of its evidence was held to have displayed ‘confirmatory bias’.41 Justice Beach noted that the various cover-up and conspiracy theories floated by ASIC lacked substance.42 In approving the commercial deal, the court was satisfied that the executive management team and the directors of Tennis Australia had the information necessary to make an informed choice.43

Furthermore, as noted by the court,44 ASIC’s failure to identify by expert evidence the usual corporate practices within the organisation, or indeed normative corporate practices, made it difficult to compare the chair’s conduct and to measure it against any usual or normative corporate practices.

The exposure of ASIC’s ill-fated role in the formulation of this case was the near equivalent of the court saying that the emperor has no clothes.

The decision puts ASIC on notice not to be too quick to pull the litigation trigger and to intrude into the boardroom without a well-founded cause for legal action.45 ASIC’s colossal loss in this case has implications for its future litigation strategy. It suggests a need for a rethink on how best to execute its new ‘why not litigate’ strategy adopted shortly after the report of the Hayne banking royal commission.46

Conclusion

It will be of comfort for directors to know that the court in Mitchell (No 2) did not intrude into the business judgment made by the board. It is easy to fall into the trap of hindsight bias when reflecting on the making of complex commercial decisions.

The judicial recognition in this case, however, of the cut and thrust nature of doing business, especially when closing a commercial deal, is welcomed. In recognising the commercial realities of the case and, importantly, that the board made an informed choice, the court stayed clear in second guessing and prescribing a different commercial outcome. The court’s willingness to judge the events as they unfolded in real time bodes well for boards who may similarly have to act with speed and make quick commercial decisions under pressure.

The court’s approach in Mitchell (No 2) appears to be influenced by the fact that TA is not a private company whose sole corporate objective is the pursuit of profit for its members. The court noted that the composition of TA’s board aligned with a company with objectives concerned not solely or primarily with the maximisation of profits.47 For such influential reasons, the court concluded:48

… the sufficiency of the information before the board was not just to be assessed on the basis that TA’s sole objective in the broadcast rights negotiations was to realise the highest possible domestic television rights fee. There were many important non-financial considerations which the directors considered to be important.

In adopting this realistic and pragmatic approach to board deliberations in a company limited by guarantee, it is an open question, however, as to whether a court will offer similar latitude to directors when adjudicating on board deliberations in private companies for profit?

 

Notes
  1. [2020] FCA 1098. Herein after referred to as Mitchell (No 2).
  2. There is limited judicial authority on the role of the chair. See, for example, AWA Ltd v Daniels t/a Deloitte Haskins & Sells (1992) 7 ACSR 759; Woolworths Ltd v Kelly (1991) 22 NSWLR 189; Australian Securities and Investments Commission v Rich [2003] NSWSC 85.
  3. Australian Securities and Investments Commission v Mitchell (No 2) [2020] FCA 1098 at [12].
  4. Ibid.
  5. Ibid.
  6. Ibid at [1198].
  7. Ibid at [1447].
  8. Ibid at [1446].
  9. Ibid at [1459]. The court drew upon legal principles in Australian Securities and Investments Commission v Healey [2011] FCA 717; Australian Securities and Investments Commission v Mariner Corporation Ltd [2015] FCA 589.
  10. [1399]. See further Clarke, A ‘The lacuna in corporate law: The unwritten role of the chair’ (2018) 33 Australian Journal of Corporate Law 125.
  11. Australian Securities and Investments Commission v Mitchell (No 2) [2020] FCA 1098 at [1399]. See therein for identification of the relevant statutory provisions in the Corporations Act (mandatory and replaceable rule) impacting the position of chair.
  12. See above note 2.
  13. Australian Securities and Investments Commission v Mitchell (No 2) [2020] FCA 1098 at [1409].
  14. Ibid.
  15. Ibid at [1410]-[1420].
  16. Ibid at [1166].
  17. Ibid at [1409].
  18. Ibid at [1171].
  19. Ibid at [1172].
  20. See further, Harris J and Hargovan A ‘Still a Sleepy Hollow? Directors’ Liability and the Business Judgment Rule’ (2017) 31 Australian Journal of Corporate Law 319.
  21. Australian Securities and Investments Commission v Rich [2009] NSWSC 1229.
  22. Ibid at [7264].
  23. Ibid.
  24. This approach is consistent with the approach adopted by the Full Federal Court in Australian Securities and Investments Commission v Fortescue Metals Group Ltd [2011] FCAFC 19 at [197]. On appeal, the content on the business judgment rule was not commented upon in the High Court: Forrest v ASIC Fortescue Metals Group Ltd v ASIC [2012] HCA 39.
  25. Australian Securities and Investments Commission v Mitchell (No 2) [2020] FCA 1098 at [1435].
  26. Ibid.
  27. Australian Securities and Investments Commission v Rich [2009] NSWSC 1229 at [7283] and [7284]
  28. Ibid.
  29. Ibid at [[7290] to [7291]. Australian Securities and Investments Commission v Mitchell (No 2) [2020] FCA 1098 at [1439].
  30. Australian Securities and Investments Commission v Mitchell (No 2) [2020] FCA 1098 at [1441].
  31. Ibid.
  32. Chew v The Queen [1992] HCA 18; The Queen v Byrnes [1995] HCA 1; Doyle v Australian Securities and Investments Commission [2005] HCA 78.
  33. Australian Securities and Investments Commission v Mitchell (No 2) [2020] FCA 1098 at [1524].
  34. Ibid at [1725].
  35. Ibid at [1810].
  36. Ibid at [2023].
  37. Ibid at [17].
  38. Ibid.
  39. Ibid at [1806].
  40. Ibid at [1490].
  41. Ibid at [9].
  42. Ibid at [10].
  43. Ibid at [11].
  44. Ibid at [1423].
  45. For similar stinging criticisms on weak case preparation by the regulator, see Australian Securities and Investments Commission v Rich [2009] NSWSC 1229; Forrest v ASIC Fortescue Metals Group Ltd v ASIC [2012] HCA 39.
  46. See ASIC Corporate Plan 2019-23 
    https://download.asic.gov.au/media/5248811/corporate-plan-2019-23-published-28-august-2019.pdf
  47. Australian Securities and Investments Commission v Mitchell (No 2) [2020] FCA 1098 at [1147].
  48. Ibid at [1148]. 

Anil Hargovan can be contacted on (02) 9385 3577 or by email a.hargovan@unsw.edu.au.

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