Corporate collapses such as that of Enron, Worldcom and HIH, and the fall-out from the global financial crisis, turned the spotlight on the role of lawyers in corporate governance - in particular, whether they should act as gatekeepers in protecting the public interest in an informed securities market.

In the US, the Sarbanes-Oxley Act invests in the Securities and Exchange Commission (SEC) the power to issue rules, in the public interest and for the protection of investors, to establish minimum standards of legal professional conduct. In Australia, there is no such power invested in the regulator.

The notion of the 'lawyer as gatekeeper' has been argued to sit uneasily with the traditional solicitor-client relationship, even where the solicitor is serving in an in-house legal role.  Lawyers owe their clients fiduciary duties which require the lawyer to act in the client's best interests, protect confidentiality and avoid conflicts of interest.  This can become problematic where the corporation's and society's interests diverge. Alternatively the gatekeeper function can result in more robust and independent legal advice as the lawyer is incentivised to prevent breaches of the law by the corporation.

The James Hardie litigation deals primarily with directors’ duties and has attracted particular attention for its rulings on non-executive directors’ responsibilities.  However, the High Court’s decision in Shafron v Australian Securities and Investments Commission [2012] HCA 18 can be expected to have far-reaching implications because it has indirectly imposed a gatekeeper function on senior in-house counsel.

In the James Hardie case ASIC alleged that the company's General Counsel and Company Secretary, Mr Peter Shafron, had breached his duty to exercise due care and diligence in failing to advise the board of directors that the draft ASX announcement that was prepared to comply with the company’s continuous disclosure requirements was false and misleading.

The directors’ duties in the Corporations Act, which include discharging their duties with care and diligence, are also imposed on “officers”.  The Act defines an officer to include a person “who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation”.  

The High Court emphasised that this inquiry focuses on what were the responsibilities that a person undertakes, not on the capacities in which those responsibilities were undertaken:  whether as company secretary, general counsel or some other role.

Mr Shafron undertook a number of important roles including addressing strategic options for dealing with the James Hardie group’s asbestos exposure liabilities, performing the role of company secretary and providing legal advice on aspects of securities law, such as publishing false or misleading statements and continuous disclosure obligations.  

The High Court found that the functions performed by Mr Shafron involved him in participating in the making of decisions that affected the whole or substantial part of the business of James Hardie. Suggestions that participation in a decision meant that the person must have a role in actually making the decision were rejected.  Equally, the High Court distinguished the role of an external adviser who proffered advice and information in response to particular requirements of the company.  Mr Shafron’s position was qualitatively different as:

what he did went well beyond his proffering advice and information to the board of the company.  He played a large and active part in formulating the proposal that he and others chose to put to the board as one that should be approved.  It was the board that ultimately had to decide whether to adopt the proposal but what Mr Shafron did, as a senior executive employee of the company, was properly described as his participating in the decision to adopt the separation proposal that he had helped to devise.

The High Court confirmed that Mr Shafron breached his duty of due care and diligence as an “officer” of the corporation.  While the proceedings never set out to turn lawyers into gatekeepers, the imposition of traditional directors’ duties on officers has produced that result. This is because in-house counsel play an important role in today’s corporate decision-making due to the ubiquity of law, regulation and compliance.

To serve as an in-house counsel, at least for those in senior positions, no longer means being simply a client-serving professional.  By designating them as corporate officers the High Court has transformed in-house lawyers into gatekeepers responsible for promoting the public interest in corporate compliance with continuous disclosure obligations and prohibitions on misleading conduct.  Arguably, compliance with the law and being a good corporate citizen are also in the corporation’s interests.  Indeed, had the law been complied with many years of litigation and anger from the community may have been avoided.

The High Court’s findings are expected to be welcomed by ASIC, which since the appointment of Greg Medcraft as Chairman, has focussed on gatekeepers as a crucial component of its regulatory strategy.

In-house lawyers, and the corporations they advise, will need to consider whether they welcome this latest addition to corporate governance and legal ethics.  In-house counsel may wish to step back from corporate decision making, if that is possible in today's regulated world, and return to being advisers.