LAWFUEL – The Law News Wire – The NSW Court of Appeal has upheld earlier findings that Geoffrey Vines, a former chief financial officer of GIO Australia Holdings Ltd, contravened his duty of care in respect of profit forecasts made during a takeover bid. The judgment helps clarify the responsibilities of company executives, particularly when preparing profit forecasts during takeovers. Partner Jon Webster (view CV) and Lawyer Christine Swan report:
The NSW Court of Appeal in Vines v ASIC  NSWCA 75 (4 April 2007) considered the judgments of Justice Austin in ASIC v Vines  NSWSC 738 (the Liability Case) and ASIC v Vines  NSWSC 1349 (the Relief from Liability Case). These proceedings arose out of a takeover bid by AMP Limited for GIO Australia Holdings Ltd (GIO) in late 1998.
The Australian Securities and Investments Commission (ASIC) originally commenced civil penalty proceedings against Mr Vines and two other executives (Mr Robertson and Mr Fox) in 2001 in connection with a Part B Statement published by GIO during the takeover bid. The Part B Statement included an $80 million profit forecast from GIO’s reinsurance division (GIO Re). GIO Re, however, was exposed to significant claims as a result of Hurricane Georges, which struck Puerto Rico and the Virgin Islands in September 1998.
ASIC alleged breaches of section 232(4) of the Corporations Law (the precursor to s181(1) of the Corporations Act) by Mr Vines and the two other executives. The case was largely concerned with the reasonableness of including GIO Re’s $80 million profit forecast in light of the claims exposure following Hurricane Georges.
Liability Case: The Court of Appeal confirmed that the standard of care applicable to the statutory duty set out in s232(4) of the Corporations Law does not call for a higher order of negligence to be established than the equivalent duty under the general law.
The court found that the standard of care and diligence applicable to Mr Vines extended to the contents of the Part B Statement and was influenced by the fact that ‘the information was provided within the framework of a due diligence process that was designed to ensure adequate and materially complete disclosure to GIO shareholders in compliance with the law and in a fashion that would protect those involved in the process from liability should a defect later be discovered in the document’.
The Court of Appeal upheld, in part, Justice Austin’s earlier findings. In particular, it found that Mr Vines had contravened his duty of care on three occasions when he:
signed a management sign-off on a due diligence report without taking positive steps to advise GIO’s due diligence committee of the basis of the assumptions underlying the $80 million profit forecast;
informed the due diligence committee that he was comfortable with the integrity of the GIO profit forecast; and
failed to give attention to whether the GIO Re profit forecast would be achieved in the period after the Part B Statement was issued, but before the takeover process ended.
The court did, however, overturn four other contraventions contended by ASIC, reversing, in part, Justice Austin’s decision. The court said that Mr Vines did not contravene his duty of care when he:
made an unqualified statement of management confidence in the GIO Re profit forecast to the board on 9 November 1998; and
failed to provide information about the basis on which the profit forecast was calculated in:
an email sent to the due diligence committee on 22 November 1998; and
a report that was the basis of a media release on 17 November 1998 reporting on the company’s profit.
Relief from Liability Case: In its review of Justice Austin’s decision not to relieve Mr Vines from liability (in accordance with ss 1317JA(2) and 1318(1) of the Corporations Law), the court accepted his Honour’s finding that Mr Vines had acted honestly. However, relief from liability requires an examination of the nature and seriousness of the contraventions. The court accepted Justice Austin’s reasoning that the profit forecast in the Part B Statement was of ‘considerable significance for a fully informed market’ in the ‘special context of defending a hostile takeover’. Moreover, the law seeks to protect investors, and in particular target shareholders, by endeavouring to ensure that the information on which they make their decisions is materially accurate and complete. Accordingly, the court upheld Justice Austin’s decision to deny Mr Vines relief from liability.
The court will consider an appropriate penalty for Mr Vines’ contraventions later this year.
The case specifically serves to clarify the obligations of executive officers when preparing profit forecasts for inclusion in takeover response documents.
More broadly though, directors and executive officers need to ensure that any information given to shareholders in order to make investment decisions is accurate and complete in all material respects.