Wednesday, 13 July 2011

New Zealand: directors' duties, delegation and criminal liability for untrue statements in a prospectus

Last week, in R v Moses HC Auckland CRI 2009-004-1388 [2011] NZHC 646, Heath J (sitting in the High Court) found three directors guilty of criminal offences under section 58 of the Securities Act (1978) in respect of untrue statements in a prospectus. The judgment is available here (html, with the footnote formatting a little awry) or here (pdf) or here (rtf). This is an important judgment which makes clear that the directors' duty to ensure that the prospectus does not contain misleading statements is non-delegable. Heath J found that the directors had purported to delegate to senior management the task of determining whether the prospectus met the regulatory requirements. In the course of his judgment he considered the role directors and their duties and, in particular, what is expected of the chairman and non-executive directors (at paras. [397] to [402], footnotes omitted):

... As a matter of law, no distinction is drawn between the roles performed in the boardroom by directors, whether labelled executive or non-executive. Every director is required to act in good faith, in what he or she believes to be the best interests of the company and to exercise the 'care, diligence, and skill that a reasonable director would exercise in the same circumstances'. Use of the term 'reasonable director' does not suggest different types of directors but is consistent with each having particular responsibilities within the board structure. The degree of care, diligence and skill required depends upon the nature of the company, the nature of the decision, the position of the director and the nature of the responsibilities undertaken by him or her ...

A chairman is not just a figurehead. His or her role involves leadership. A chairman has the primary obligation of ensuring that the agenda for a meeting is properly formulated, guiding discussion and ensuring that the meeting is conducted efficiently and effectively. As s 128 of the Companies Act 1993 makes clear, it would be wrong for the board to focus only on supervisory functions because it has the obligation of setting the policy that is to be implemented by management.

A focus on supervision or monitoring 'presupposes that the business drive comes from the managers of a company and that the board is there primarily to keep them on the rails', whereas it is 'for the board, representing the interests of those who appoint them, to set the standards which they expect from managers and to set them high'. Those views are reinforced by the Institute of Directors' Code of Practice for Directors, in which it is said that the chairman's role involves ensuring that all directors receive sufficient and timely information to enable them to be effective as board members; including the need to ensure that adequate information is before the board on any major issue on which a decision is required.

The term 'non-executive director' is used to refer to a person who has no executive functions to fulfil, in relation to the company‘s day-to-day operations. Nevertheless, in carrying out his or her duties as a director, the non-executive must ensure that he or she has enough information on which to make an informed decision. It is not enough to rely on an executive director to bring something to the attention of the board, if it is clear that information on a particular point is relevant to a decision. Once sufficient information is available, the non-executive director‘s duty will be discharged through the provision of 'independent judgement and outside experience and objectivity, not subordinated to operational considerations, on all issues which come before the board'.

In the context of a finance company, a non-executive director is required to have the ability to read and understand the financial statements, the way in which such statements classify assets and liabilities as current or non-current, and to use that understanding when making decisions about such matters as solvency and liquidity".

No comments: