In the September 2013 issue of Company Director, Kristen Le Mesurier of Ownership Matters highlighted some practical issues facing listed company boards when deciding whether or not to disclose litigation to the market. Among other things, that article looked at ASX-listed companies' continuous disclosure obligations.
The purpose of this article is to highlight some further risks for boards to consider when deciding how or what to disclose to the market in relation to litigation, and how those risks can be managed before problems arise (which, in our experience, does not always occur).
First, we address the risk of inadvertent waiver of legal professional privilege when disclosing litigation, and how to manage that issue. Secondly, we provide some guidance to directors and officers to assess whether their insurance and indemnity arrangements will give the real protection that will be needed if a claim arising from a failure to disclose litigation at all, accurately or soon enough is made.
How and what to disclose
If the board decides to disclose litigation to the market, there may be a commercial inclination to include in the disclosure an assurance that the company's case is strong. However, companies must be mindful to ensure that any such statement does not inadvertently waive legal professional privilege that subsists in legal advice which the company has obtained.
An example of what can go wrong
The risk of inadvertent waiver of legal professional privilege is amply demonstrated by the Supreme Court of Victoria's decision in Switchcorp Pty Ltd v Multiemedia Limited  VSC 425.
In Switchcorp, Multiemedia had announced to the ASX that, in relation to litigation brought against it by Switchcorp, "[t]he Board's lawyers have been instructed to vigorously defend the claim and have advised that the plaintiff's claim will not succeed."
Notwithstanding the lack of specificity about the advice, the Supreme Court found that legal professional privilege in the advice referred to in the announcement had been waived because there was a "clear and deliberate disclosure of the gist or the conclusion of" the advice. As a consequence, Multiemedia was ordered to produce all documents constituting the advice to the plaintiff.
The decision demonstrates that it is not necessary for a waiver to be subjectively intended or expressly made. The key issue is whether, the disclosure having occurred, there is an inconsistency between the disclosure and the maintenance of confidentiality in the advice sufficient to imply a waiver of privilege. In Switchcorp, the Court found that it would have been unfair to allow Multimedia to make the statement to the public to justify or explain its position but insist upon confidentiality when disclosure was sought.
A matter of fact and degree - the difficulty facing boards
The difficulty facing boards in assessing how or what to disclose in an announcement (on top of the difficulty which may attend the decision of whether or not to disclose) is illustrated by the High Court's decision in Osland v Secretary to the Department of Justice (2008) 249 ALR 1.
In Osland, the Victorian Attorney-General publicly announced that a petition for a pardon for a murder conviction had been denied and that a joint advice by three prominent barristers had recommended denial of the petition.
Although the announcement disclosed the gist or substance of the advice, the High Court found that legal professional privilege in the advice was not waived because "[t]he evident purpose of what was said in the press release was to satisfy the public that due process had been followed in the consideration of the petition, and that the decision was not based on political considerations" and that purpose was neither inconsistent with the maintenance of privilege nor unfair.
The High Court remarked that "questions of waiver are matters of fact or degree" and reflect "a judgment that the conduct of the party entitled to the privilege is inconsistent with the maintenance of the confidentiality which the privilege is intended to protect… to be made in the context and circumstances of the case, and in the light of any considerations of fairness arising from that context or those circumstances".
Those remarks do not provide any reliable guidance to boards to assess what they may disclose without inadvertently waiving legal professional privilege. The safest course will be for the company to avoid publicly disclosing the substance or gist of any legal advice. However, Osland suggests that if a company discloses the substance of advice to satisfy its stakeholders that it has followed due process in relation to litigation, and the disclosure does not prejudice the fairness of the judicial process, a waiver is less likely to be implied.
If in any doubt, boards should refer the issue to their in-house or external lawyers for consideration.
Disclosure of legal advice in financial reports
The September 2013 article referred to above looked at the trading of shares in Bradken Limited, an ASX-listed company, after Bradken first publicly disclosed litigation against it in a contingent liability note to its financial reports only five weeks before judgment was given against it and after a full hearing and failed mediation had taken place.
The contingent liability note stated that "legal advice obtained to date supports Bradken's position and as such no provision has been recognised in the financial statements".
The issue of waiver of legal professional privilege by disclosure of advice in a contingent liability note was considered by the Supreme Court of Queensland in GMCG, LLC v Agenix Ltd  QSC 309.
That case considered statements by Agenix in a contingent liability note to a preliminary final report lodged with the ASX that, in relation to a claim brought against it two months prior, it had "received legal advice that it has no liability whatsoever" and"[i]f the matter proceeds to trial, the company's potential exposure is estimated at $820,000".
The Supreme Court found that privilege in the advice referred to was not waived. The basis for the decision was uncontradicted evidence from the finance manager and joint company secretary of Agenix that he had referred to the advice to make it clear that the claim had been classified as a contingent liability based on Agenix's belief, following legal advice, that it had no liability and also to explain why Agenix believed that its potential further exposure in the proceeding was properly classified as a contingent liability.
The Supreme Court accepted the submission that it was important for Agenix to be able to explain why it had adopted a particular accounting treatment of its potential exposure and that this promoted the integrity of the accounts and market transparency by providing appropriate information to shareholders, potential shareholders and creditors in circumstances where the disclosure gave it no advantage in the litigation.
The decision reinforces that if the purpose of disclosure of legal advice is to satisfy stakeholders that the company has followed due process in relation to litigation against it, rather than to obtain some advantage in the litigation, a waiver is less likely to be implied. However, if disclosure of the litigation is not made until a late stage, it may be difficult to sustain any argument that the disclosure was made to advance market transparency.
Avoiding misleading disclosure
Companies must also be careful to ensure that any disclosure regarding litigation does not overstate the company's prospects of success in the litigation. A subsequent adverse decision may have a negative impact on the company's share price and attract the attention of litigation funders and shareholder claimants.
How to protect directors and officers
Some recent high profile shareholder class actions (e.g. Centro, GPT) and ASIC civil penalty proceedings (e.g. Centro, James Hardie) highlight the risks to both listed companies and their directors and officers (D&Os) of potential claims stemming from financial reporting, ASX announcements and continuous disclosure obligations.
It follows that it is important that D&Os make sure that their insurance and company indemnity arrangements are up to date and give the real protection which will be needed if a claim arising from a failure to disclose litigation at all, accurately or soon enough is made. Some of the key issues which D&Os should consider are:
- Ensuring that their insurance provides cover for their costs of defending a claim brought by ASIC or the company itself seeking compensation orders or pecuniary penalties (e.g. Centro, James Hardie). A company indemnity may respond to a claim by ASIC, but will often provide that funds are advanced by way of loan which may be clawed back if liability is established. Further, the company itself is prohibited from indemnifying its D&Os against liability owed to the company. Accordingly, it is important for insurance to cover that gap and D&Os should carefully review their insurance to make sure that claims brought against them by the company are not excluded (e.g. by an "insured v insured" exclusion).
- Ensuring that their insurance provides cover for shareholder claims, for example a claim relating to a failure to disclose litigation at all, accurately or soon enough. It is not uncommon for such claims to be excluded (e.g. by way of "major shareholder" exclusion which excludes claims by shareholders who hold more than a certain percentage of shares).
- Checking whether their D&O insurance policies include 'Side C' or direct cover for the company for securities litigation. D&Os should be aware that if claims are also brought against the company, the policy limit will be depleted (and possibly exhausted) by the company and there is the potential for a dispute between the company and its D&Os over policy proceeds. This can be avoided if there is separate cover for the D&Os and separate cover for the company (say under a broad "civil liability" policy).
This article is by no means an exhaustive look at potential pitfalls arising from disclosure of litigation. Companies are encouraged to carefully consider the implications of disclosure of litigation and D&Os are encouraged to review their insurance and indemnity arrangements generally with an adviser who specialises in liability risk management and insurance for company directors and officers.