Deed of Access & Indemnity to Protect Directors

Reliance on Professional Advisors v. Duty of Diligence

It is important to compare and contrast the major difference between the standard of the legal duty imposed on Directors in Australia versus the U.S.A.

Reliance on the work of professional advisors is available as a defense in the U.S.A so long as Directors can show they had a sufficient basis to reasonably believe their Professional Advisors are both reliable + competent.

In Australia, Directors are held to a much higher standard!

Under the Corporations Act, Directors have a mandatory Duty of Diligence to take additional steps and to make further inquiries to satisfy themselves with regard to the information and advice provided (even if it is provided by professional advisors they reasonably believe are reliable + competent).

Elliot J. at para [610-612]:

The Business Judgment Rule (BJR)

The Business Judgment Rule (BJR) defence/defense is available to Directors in both the U.S.A + Australia.

It appears that the above distinction between the reliance on professional advisors v. Duty of Diligence has been incorporated into each countries application of the BJR.

In the Australian version of the BJR, the third element states:

3️⃣ Informs her or himself about the subject matter of the judgment to the extent she or he reasonably believes to be appropriate …

In the U.S.A version of the BJR (refer below), Director's need to make an informed decision, but in doing so they can rely upon professional advisors they reasonably believe to be reliable + competent.

Once advice has been obtained from professional advisors, in the U.S.A. there is no duty to make any further inquiry beyond this point.

Elliot J. at para [620-626]

The Business Judgment Rule (BJR) in the U.S.A.

A Court will not second guess a business decision if it was:

1️⃣ Informed;

2️⃣ Made in Good Faith;

3️⃣ Without Conflicts of Interest; and

4️⃣ Had a Rational Basis.

So, whether Directors' will be held liable for breach of their duty of care depend on the facts …

✅ Was the Board reasonably informed?

✅ Did it do appropriate homework before making the decision (analyze information, deliberate)?

✅ Did it act in good faith, free of self-interest, and with the belief that the decision was in the best interest of the Corporation?

If so, the Directors' are not liable, despite the poor substantive outcome of the decision, because the BJR recognizes that a Director is not a guarantor of success.

Reliance on others: It is not unreasonable for a director to rely on information from officers, legal counsel, committees, etc. the director reasonably believes to be reliable and competent.

Directors' Duties in Australia

The article Directors duties: care & diligence, business judgment rule, good faith, use of position & information by the Commercial Law Barrister: Jonathan Wilkinson provides a useful summary of the Directors' Duties required under the Corporations Act in Australia as set out by Elliot J. in the recent Victorian Supreme Court decision United Petroleum Australia Pty Ltd v Herbert Smith Freehills [2018] VSC 347.

Source: For a more detailed discussion, please read our blog article.

Credits:

This FAQ was written by James D. Ford GAICD | Principal Solicitor, Blue Ocean Law Group℠.

Important Notice:

This FAQ is intended for general interest + information only.

It is not legal advice, nor should it be relied upon or used as such.

We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.