Company directors may take heart from Mariner decision

Justice Beach in Australian Securities and Investments Commission (ASIC) v Mariner Corporation Ltd [2015] FCA 589 had to consider questions relating to the statutory business judgment rule as outlined in s 180(2) of the Corporations Act 2001 (Cth) (the Act), and some light was shed as to how the courts may approach questions of whether directors have breached the duty of care and diligence as stated in s 180(1) of the Act. What is of particular interest in relation to the decision of Beach J, was the emphasis on a more business friendly approach in his Honour’s decision which is worth noting for company directors.

The facts of ASIC v Mariner Corporation Ltd

Mariner was a corporate investment company that wished to purchase either a considerable number, or all of the shares in Austock Group Ltd. On 8 June 2012, the Chief Executive Officer of Mariner, Mr Olney-Fraser, received an unsolicited approach from Mr James Goodwin, who was the joint managing director of Arena Investment Management Limited, which was part of the international real estate arm of Morgan Stanley Inc. Mr Goodwin in his initial communication expressed an interest in purchasing a business unit of Austock upon the completion of the takeover.

Over the subsequent days after the initial approach from Arena, further discussions between Mr Olney-Fraser and Mr Goodwin were held in relation to the potential purchase, and the possibility of providing the funds from Arena in order to facilitate the takeover. Although there were a number of extensive discussions between Mr Olney-Fraser and Mr Goodwin, no binding agreement was reached. Furthermore, no other company directors from Mariner were privy to the communications, however, Mr Olney-Fraser did present a number of proposals to the other two non-executive directors from Mariner.

Mariner on 25 June 2012, put out a statement to the Australian Securities Exchange (ASX) announcing that the company had made a conditional offer to acquire all of Austock shares at 10.5 cents per share, with the offer being described as “an off-market offer”. The Mariner board of directors believed that that the value of Austock was approximately $20 million, which was the amount required to fund the complete takeover. Mariner received a letter from Austock stating that the offer was not valid on the basis of the price per share that was offered, and subsequently, Mariner increased its bid to 11 cents per share, and the increased amount was made in order to meet the minimum bid price rule. Ultimately, Folkestone Limited put forward a more attractive offer, thus, defeating Mariner’s takeover bid.

ASIC initiated proceedings against Mariner and its directors alleging the following breaches:

• the alleged lack of financial resources to fund the bid was “reckless” and in breach of s 631(2)(b) of the Act;
• Mariner engaged in misleading or deceptive conduct in contravention of s 1041H of the Act with their initial 10.5 cents per share takeover bid;
• breach of the s 180(1) directors’ duties of due care and diligence.

Justice Beach dismissed all of the above actions bought by ASIC, however, one of the more interesting points that his Honour made was in relation to the directors’ duties of care and diligence, and worth further examination due to the director friendly flavour of his Honour’s comments.

Observations about the business judgment rule

In looking at the question of whether the directors of Mariner had breached their duty of care and diligence, especially in relation to the takeover offer, his Honour espoused a more business friendly approach when it comes to business decisions of directors, while still issuing a warning about using hindsight when second guessing judgment calls at [13]:

“Three observations should be made at the outset concerning ASIC’s case against the directors. First, the directors had extensive backgrounds and expertise in mergers, acquisitions and finance. Such backgrounds no doubt informed their judgment calls, assessments of risk and the strategies they pursued in relation to the transaction the subject of this proceeding. It is necessary to bear this in mind when assessing the case of a regulator second guessing such judgment calls with the benefit of hindsight, using a largely paper based analysis and viewing the events from a timeframe perspective divorced from the reality of the speed at which the events occurred in real time. Second, in looking at the transaction in question, it is important to adopt an ex ante perspective where one is not just looking at potential risks and downsides but also the potential benefits. That was the directors’ framework at the relevant time. And that is necessarily the framework within which s 180 must be analysed. A retrospective analysis of a transaction which did not proceed has the tendency to overlook that latter dimension. Third, ASIC made no attack on the credibility of the evidence given…”

Justice Beach made additional observations later in his judgment relating to the alleged breach of duty care and diligence, and provides further context in relation to the business judgment rule by relying on earlier authorities at paragraphs [449]-[452]:

“In order for an act or omission of the director to be capable of constituting a contravention of s 180 there must be reasonably foreseeable harm to the interests of the company caused thereby.

Further, relevant to the question of breach of duty is the balance between, on the one hand, the foreseeable risk of harm to the company flowing from the contravention and, on the other hand, the potential benefits that could reasonably be expected to have accrued to the company from that conduct.

Not only must the Court consider the nature and magnitude of the foreseeable risk of harm and degree of probability of its occurrence, along with the expense, difficulty and inconvenience of taking alleviating action, but the Court must balance the foreseeable risk of harm against the potential benefits that could reasonably be expected to accrue from the conduct in question.

After all, one expects management including the directors to take calculated risks. The very nature of commercial activity necessarily involves uncertainty and risk taking. The pursuit of an activity that might entail a foreseeable risk of harm does not of itself establish a contravention of s 180. Moreover, a failed activity pursued by the directors which causes loss to the company does not of itself establish a contravention of s 180.”

Concluding remarks

The decision in ASIC v Mariner Corporation Ltd points to a more business and director friendly approach, and that it is appropriate if directors make reasonable commercial judgment decisions when it comes to certain activities.

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