Asic vs Adler

Introduction

Since ASIC is a corporate entity, it can engage in legal action with other corporate companies that it suspects to be committing criminal or civil offences within the financialsystem. There are several famous court cases that ASIC has been involved with in Australian law and ASIC vs Adler is one of the cases. The sections that defendants commonly breached include ss180, 181, 182, and 183, which involve failing to act in good faith, failing to provide a duty of care and diligence, and avoiding the use information gained in their positions for their own benefit.
The ASIC v Adler (2002) case involved the defendant directors obtaining highly confidential information due to their positions, and using this information to base decisions upon which to buy or sell shares. The main defendant, Adler, was found guilty of breaching ss 180, 181, 182 and 183 of the Corporations Act. The court held that Alder benefited both himself and his family in the transactions.

http://www.scribd.com/doc/18531717/CO5121-Assignment

Facts

Adler was a non-executive director of HIH Insurance Ltd (HIH). William was a director and the CEO of HIH. Fodera was a director and the finance controller of Hih. HIHC was a wholly owned subsidisry of hih. Adler requested and williams and fodera arranged for HIHC ot advance $10 million to Pacific Eagle Equity Pty Ltd (PEE), a company controlled by Adler. The $10 million payment was arranged so that no other director of HIH would be aware of the advance. During the next two weeks PEE used some of these funds to purchse HIH shares to the value of approximately $4 million. Through these share purchases Adler sought to support HIH’s share price for the benefit of his substantial personal shareholdings in the company. Williams was aware of the intended use of the $10 million to acquire HIH shares. Soon after a unit trust was established with PEE as trustee. Units were issued to HIHC at a price of $10 million, representing the $10 million advance. Units were also issued to another corporation controlled by Adler, A Co.
The $10 million advance and the HIH shares purchased with such funds became part of the trust propert. The HIH shares were subsequently sold at a loss of more than $2.1 million. Adler caused the unit trust to use a further part of the$10 million to buy certain unlisted technology/communications investment from A Co at cost. The purchases were made without any independent analysis of their worth and after the collapse of the stock marlet for technology and communications stocks. The unit trust suffered a loss of more than $3.8 million on these onvestments. Adler Also cause PEE to make three unsecured loans totaling more than $2 million to companies and funds associated with Adler.

The ASIC brought proceedings against Adler, Williams, Fodera and A Co for breaches of s206A. It was contended that HIHC had contravened s260 by providing financial assistance to PEE to acquire shares in its holding company, HIH. The defendants asserted that the financial assistance did not materially prejudice the interest of the company or its shareholder or its ability to pay its creditors within s260A(1)(a).

Section 260(A) has been contravened. HIH had suffered material prejudice as a result of financially assisting PEE to acquire shares in HIH. The rights HIHC acquired through the transaction, whether as an unsecured creditor or through aresulting trust, were of a materially lesser value than the advance of $10 million that had been made. Moreover any equitable rights the company had under the arrangement were contentious and would require expensive litigation to enforce. Material prejudice also stemmed from the other, interlocking factual elements that gave rise to the financial assistance. Thus the subsequent entry into the unit trust arrangement affected a amaterial prejudice upon HIHC, as the trust deed lackedthe proper safeguard to protect it against Adlers potential conflict of interst. Moreover, that the arrangement was significantly one-sided against HIHC was evident from the inherently likely, and ultimate factual, loss from the HIH shares. Adler, Williams, Fodera and A Co weresufficiently involved in the contravention to breach s260(D)(2). http://books.google.com.au/books?id=nx1IUDLtzmAC&pg=PA133&lpg=PA133&dq=facts+of+asic+vs+adler+2002&source=bl&ots=6NE_6rez3v&sig=I0FFq2MV0Abxrm-1geJxW05YDpg&hl=en&sa=X&ei=DzmbT_eUCojYige7wu3lDg&sqi=2&ved=0CDYQ6AEwAw#v=onepage&q=facts%20of%20asic%20vs%20adler%202002&f=false http://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1243&context=blr&sei-redir=1&referer=http%3A%2F%2Fwww.google.com.au%2Furl%3Fsa%3Dt%26rct%3Dj%26q%3Dasic%2520vs%2520adler%25202002%26source%3Dweb%26cd%3D10%26ved%3D0CGEQFjAJ%26url%3Dhttp%253A%252F%252Fepublications.bond.edu.au%252Fcgi%252Fviewcontent.cgi%253Farticle%253D1243%2526context%253Dblr%26ei%3DaSabT62AGIuXiAfOh8yvDg%26usg%3DAFQjCNG_yianFUMyPnYnCpjvekme6REPkg#search=%22asic%20vs%20adler%202002%22

2. http://www.vctsa.asn.au/documents/item/400

3. http://www.aar.com.au/pubs/itd/aug02/acq.htm

4. http://books.google.com.au/books?id=nx1IUDLtzmAC&pg=PA133&lpg=PA133&dq=facts+of+asic+vs+adler+2002&source=bl&ots=6NE_6rez3v&sig=I0FFq2MV0Abxrm-1geJxW05YDpg&hl=en&sa=X&ei=DzmbT_eUCojYige7wu3lDg&sqi=2&ved=0CDYQ6AEwAw#v=onepage&q=facts%20of%20asic%20vs%20adler%202002&f=false
Business judgement rule

ASIC v Adler (2002, NSCA)
Facts in Tutorial 1. See the Appendix for the diagram drawn in Tutorial 2.
Held: the Business judgement rule was not available to either A or W.
Reasoning:
• no judgment was made in good faith for a proper purpose: – A did not seek approval from the Investment Committee as required by the internal rules – there was no evidence that W acted for a proper purpose distinct from A’s improper purpose • neither A or W took reasonable steps to inform themselves of the subject-matter of the decision – W did not seek independent advice and merely took A’s word • both A and W a had material personal interest in the subject matter of the decision to make the $10mn loan to PEE: – A used the transaction for personal advantage – W was a major s/h of HIH → had a personal stake in shoring up its share price • W did not rationally believe the decision was in the best interests of HIH – his inaction amounted to a gross disregard for interests of the coy

The statutory business judgment rule

An Australian board that has followed decision-making processes of this type should be able to avail itself of the protection provided by the new statutory business judgment rule in section 180(2) of the Corporations Act against actions for breach of statutory and common law duties of care. The rule provides that a director or officer who makes a business judgment is taken to satisfy the duty of care and diligence in respect of the judgment, if he or she:

• makes the judgment in good faith and for a proper purpose; • does not have a material personal interest in the subject matter of the judgment; • informs himself or herself about the subject matter of the judgment to the extent reasonably believed to be appropriate; and • rationally believes that the judgment is in the best interests of the company.
If the elements of the business judgment rule are satisfied, the directors of a company considering an acquisition should not be at risk of breaching their fiduciary duty to use due care and skill

Each of the defendants in ASIC v Adler invoked the business judgment rule as a defence to allegations of breach of the duty of care and diligence. The court found that the defence was not available to protect any of the defendants.

The decision provides a useful guide to the limitations of the business judgment rule. The rule may be invoked only if anactual decision is made and will not operate where the company suffers loss because the directors failed to consider a matter or failed to monitor management activities. In ASIC v Adler, the chief financial officer's failure to bring the transactions to the attention of the HIH Board or the Investment Committee were characterised as 'sins of omission'. The court therefore doubted whether the CFO had made a business judgment at all.

The existence of a material personal interest will also preclude reliance on the rule. In ASIC v Adler, Justice Santow held that the major shareholding of former chief executive Ray Williams in HIH meant that he had a 'material personal interest' in encouraging the purchase of HIH shares by the unit trust via Mr Adler. (It is unclear whether a material shareholding in a company will preclude a director from the protection of the business judgment rule in all cases.)

The ASIC v Adler decision provides a useful reminder that the statutory business judgment rule is not a shield to liability for delinquent, dishonest or reckless directors.

http://www.aar.com.au/pubs/itd/aug02/acq.htm www.mulss.com/sts.../Corporations%20Law%20-%20Tute%205.doc 5. http://www.asic.gov.au/asic/asic.nsf/byheadline/HIH+file?openDocument

In issue was a payment of $10M by an HIH subsidiary to a company of which Rodney Adler was a sole director. By use of a trust mechanism, approximately
$4 million was used to acquire HIH shares, venture capital unlisted investments were purchased from another Adler company, and loans were made to entities which were associated with Adler.
65
These transactions occurred with no board or member approval and without disclosure – the loans were given without proper documentation or security being sought and the payment was made so that it would not come to the attention of other HIH directors.
66

Judgement:
Adler was found to have contravened four sections of the Corporations Act relating to a director's duty to act in good faith and for a proper purpose (section 181), duty not to improperly use position (section 182), duty not to improperly use information (section 183), and the duty to act with due care and diligence
(section 180).
The court found that three former directors of HIH, together with a corporation controlled by the defendant, were “knowingly concerned in” a contravention of the related party rules (under section
79 of the Corporations Act), even if they did not appreciate it was a contravention having mistakenly considered that the transaction fell within the “arm's length” exception (under section 210 of the
Corporations Act, as mentioned above in 3.8).

http://www.pwc.com.au/legal/assets/GuideDirectors_Apr08.pdf

parties, facts. Issues, decisions, reasons, :- http://www.maculrob.com.au/downloads/32602_Case%20note%20-%20ASIC%20v%20Adler.pdf http://www.lexisnexis.com.au/aus/academic/text_updater/documents/harrisch16.pdf