James Hardie Industries NV v Australian Securities and Investments Commission - [2010] NSWCA 332

NEW SOUTH WALES COURT OF APPEAL

CITATION:
James Hardie Industries NV v Australian Securities and Investments Commission [2010] NSWCA 332
This decision has been amended. Please see the end of the judgment for a list of the amendments.

FILE NUMBER(S):
2009/298426

HEARING DATE(S):
19 and 20 May 2010

JUDGMENT DATE:
17 December 2010

PARTIES:
James Hardie Industries NV (Appellant/Cross-Respondent)
Australian Securities and Investments Commission (Respondent/Cross-Appellant)

JUDGMENT OF:
Spigelman CJ Beazley JA Giles JA

LOWER COURT JURISDICTION:
Supreme Court

LOWER COURT FILE NUMBER(S):
SC 1490/07

LOWER COURT JUDICIAL OFFICER:
Gzell J

LOWER COURT DATE OF DECISION:
23 April 2009

LOWER COURT MEDIUM NEUTRAL CITATION:
Australian Securities and Investments Commission v Macdonald (No 11) [2009] NSWSC 287

COUNSEL:
A Meagher SC; V Whittaker (Appellant/Cross-Respondent)
A Bannon SC; S Pritchard; J Single (Respondent/Cross-Appellant)

SOLICITORS:
Mallesons Stephen Jaques (Appellant/Cross-Respondent)
Clayton Utz (Respondent/Cross-Appellant)

CATCHWORDS:
CORPORATIONS - market misconduct - false or misleading statements - Corporations Act 2001 (Cth), s 1041E - whether statements false in a material particular or materially misleading - whether statements likely to induce persons to buy or sell shares - whether statements likely to have the effect of increasing, reducing, maintaining or stabilising the price for financial products
CORPORATIONS - market misconduct - misleading or deceptive conduct - Corporations Act 2001 (Cth), s 1041H
CORPORATIONS - continuous disclosure obligations - listing rules - Corporations Act 2001 (Cth), s 674 - ASX listing rule 3.1 - whether information required to be disclosed - whether corporate restructure material - significance of legal advice - relevance of management's view as to non-disclosure - objective ex ante test under s 674 - relevance of ex post facto events
CORPORATIONS - civil penalties - relief from liability - Corporations Act 2001 (Cth), s 1317S - failure of company to provide evidence of honesty - whether breach ‘flagrant’

LEGISLATION CITED:
Corporations Act 2001 (Cth)
Evidence Act 1995
Trade Practices Act 1974 (Cth)

CATEGORY:
Principal judgment

CASES CITED:
Australian Securities and Investments Commission v McLeod [2000] WASCA 101; (2000) 22 WAR 255
Australian Competition and Consumer Commission v Signature Security Group Pty Limited [2003] FCA 3; (2003) ATPR 41-908
Australian Securities and Investments Commission v Fortescue Metals Group Ltd (No 5) [2009] FCA 1586; (2009) 76 ACSR 506
Australian Securities and Investments Commission v Chemeq Limited [2006] FCA 936; (2006) 58 ACSR 169
Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (No 4) [2007] FCA 963; (2007) 160 FCR 35
Australian Securities and Investments Commission v Southcorp Limited (No 2) [2003] FCA 1369; (2003) 130 FCR 406
Australian Securities and Investments Commission v Macdonald (No 12) [2009] NSWSC 714; (2009) 259 ALR 116
Australian Securities Commission v Nomura International Plc (1998) 89 FCR 301
Australian Telecommunications Commission v Kreig Enterprises Pty Ltd (1976) 14 SASR 303
Australian Woollen Mills Ltd v FS Walton & Co Ltd [1937] HCA 51; (1937) 58 CLR 641
Boughey v R [1986] HCA 29; (1986) 161 CLR 10
Campomar Sociedad Limitada v Nike International Limited [2000] HCA 12; (2000) 202 CLR 45
Bull v Attorney General (NSW) [1913] HCA 60; (1913) 17 CLR 370
Cat Media Pty Limited v Opti-Healthcare Pty Limited [2003] FCA 133; (2003) ATPR 41-933
Cream Holdings Ltd v Banerjee [2004] UKHL 44; [2005] 1 AC 253
CSR Ltd v Wren (1997) 44 NSWLR 463; [1998] Aust Torts Reports 81-461
Domain Names Australia Pty Ltd v .au Domain Administration Ltd [2004] FCAFC 247; (2004) 139 FCR 215
Exicom Pty Ltd v Futuris Corporation Limited (1995) 123 FLR 394
Fox v Percy [2003] HCA 22; (2003) 214 CLR 118
General Electric Co (of USA) v General Electric Co Ltd [1972] 1 WLR 729; [1972] 2 All ER 507
Gett v Tabet [2009] NSWCA 76; (2009) 254 ALR 504
Global Sportsman Ltd v Mirror Newspapers Ltd (1984) 2 FCR 82
Henville v Walker [2001] HCA 52; (2001) 206 CLR 459
Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd [1978] HCA 11; (1978) 140 CLR 216
Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd [2008] NSWCA 206; (2008) 73 NSWLR 653
Interlego AG v Croner Trading Pty Limited (1992) 39 FCR 348
James Hardie & Co Pty Ltd v Hall as Administrator of Estate of Putt (1998) 43 NSWLR 554
Jubilee Mines NL v Riley [2009] WASCA 62; (2009) 69 ACSR 659
Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; (2001) 52 NSWLR 705
Morley v Australian Securities and Investments Commission [2010] NSWCA 331
National Exchange Pty Ltd v Australian Securities and Investments Commission [2004] FCAFC 90; (2004) 49 ACSR 369
Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44; (1982) 149 CLR 191
Poseidon Ltd & Sellars v Adelaide Petroleum NL [1994] HCA 4; (1994) 179 CLR 332
R v Firns [2001] NSWCCA 191; (2001) 51 NSWLR 548
R v Wright [1980] VR 593
Re HIH Insurance Ltd (in liq) and HIH Casualty and General Insurance Ltd (in liq); Australian Securities and Investments Commission v Adler [2002] NSWSC 483; (2002) 42 ACSR 80
Rivkin Financial Services Ltd v Sofcom Ltd [2004] FCA 1538; (2004) 51 ACSR 486
Royal Warrant Holders’ Association v Edward Deane & Beal Ltd [1912] 1 Ch 10
S & I Publishing Pty Ltd v Australian Surf Life Saver Pty Ltd (1998) 88 FCR 354
SCA Packaging Ltd v Boyle [2009] UKHL 37; [2009] 4 All ER 1181
Sutton v A J Thompson Pty Ltd (in liq) (1987) 73 ALR 233
Taco Company of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177
Tillmanns Butcheries Pty Ltd v Australasian Meat Industry Employees’ Union (1979) 27 ALR 367
Transport Publishing Co Pty Ltd v Literature Board of Review [1956] HCA 73; (1956) 99 CLR 111
Watson v Foxman (1995) 49 NSWLR 315
Weitmann v Katies Ltd (1977) 29 FLR 336

TEXTS CITED:

DECISION:
1. The appeal and the cross-appeal are each dismissed;
2. The appellant is to pay 90 per cent of the respondent’s costs.

JUDGMENT:

- 2 -

- 1 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

2009/298426
SPIGELMAN CJ
BEAZLEY JA
GILES JA
17 December 2010

James Hardie Industries NV v Australian Securities and Investments Commission

THE COURT:

These reasons are arranged as follows:

1. INTRODUCTION

1.1. Nature of the case [2]

1.1.1. The misrepresentation case [4]

1.1.2. The non-disclosure case [11]

1.2. Some general introductory remarks [14]

2. THE MISREPRESENTATION CASE [25]

2.1. Summary of the alleged contraventions [25]

2.1.1. The legislation: the Corporations Act, ss 1041E and 1041H [27]

2.1.2. The ASX representations [28]

2.1.3. The Edinburgh representations [37]

2.1.4. The London representations [40]

2.1.5. Representations as to legal advice [42]

2.1.6. The alleged contraventions: s 1041E [46]

2.1.7. The alleged contravention: s 1041H [48]

2.2. Findings of the trial judge in the misrepresentation case [49]

2.2.1. Finding of the trial judge as to the representation conveyed by the phrases “fully funded” and “no future liability” [50]

2.2.2. Finding of the trial judge as to representation that there was a reasonable basis for the assertion of certainty or high likelihood [54]

2.2.3. Findings of the trial judge that representations were misleading [58]

2.2.4. Finding of the trial judge as to whether there had been a breach of s 1041E [60]

2.2.5. Findings of the trial judge as to whether the ASX representations contravened s 1041H [75]

2.3. Issues on JHINV's appeal, the cross-appeal and notices of contention [76]

3. FIRST ISSUE ON JHINV's MISREPRESENTATION APPEAL: THE MEANING OF THE STATEMENTS IN SLIDE 4 [77]

3.1. The notional representative class [79]

3.1.1. Campomar Sociedad, Limitada v Nike International Limited [81]

3.1.2. National Exchange Pty Ltd v Australian Securities and Investments Commission [85]

3.1.3. Domain Names Australia Pty Ltd v .au Domain Administration Ltd [88]

3.2. Were the ASX representations misleading or deceptive? [90]

3.2.1. Principles applicable to determining whether the ASX representations were likely to mislead [91]

3.2.2. The language of slide 4 [99]

3.2.3. The context of slide 4: whether the statements referred to the historical position [116]

3.2.3(i) The format of the slides and the need to read the slides as a whole [121]

3.2.3(ii) The purpose for which the slides were prepared [126]

3.2.3(iii) Information generally available in the market [131]

(a) Form 20-F filed with the US Securities and Exchange Commission [135]

(b) The Annual Report for year ending 31 March 2002 [143]

3.2.3(iv) JHINV's reliance on Mr Humphris' evidence [146]

3.2.3(v) Analysts' reports [160]

3.2.3(vi) Conclusion on language and context arguments [164]

3.2.4. The reliance on the ASX Announcement reasoning [167]

3.3. Conclusion on misleading nature of the representations [173]

4. SECOND ISSUE ON JHINV'S MISREPRESENTATION APPEAL: THE LIKELY INDUCING EFFECT OF THE ASX REPRESENTATIONS [176]

4.1. Meaning of "likely" in s 1041E and s 1041H [180]

4.2. Did the trial judge err in finding the ASX representations had the relevant inducing effect? [194]

4.2.1. Did the trial judge address the wrong question? [195]

4.2.2. Was there evidence to support his Honour's finding that the representations were likely to induce persons to sell or acquire shares? [198]

4.2.2(i) Evidence of Mr Baxter [200]

4.2.2(ii) Evidence of Mr Thompson and Mr Simons [213]

4.2.3. Whether evidence to support the trial judge's finding as to the effect of slide 4 on JHINV's share price [224]

4.3. Conclusion on the second issue of the misrepresentation appeal [247]

5. EDINBURGH AND LONDON REPRESENTATIONS: ASIC CROSS-APPEAL AND JHINV'S NOTICE OF CONTENTION [248]

5.1. The findings of the trial judge in respect of the Edinburgh and London representations [252]

5.2. JHINV's notice of contention: whether the Edinburgh and London representations were made [254]

5.2.1. Emphatic statements [255]

5.2.2. The Watson v Foxman submission [259]

5.2.2(i) The evidence of Mr Thompson [259]

5.2.2(ii) The evidence of Mr Simons [271]

5.2.3. Mr Baxter's notes [275]

5.2.4. Similar reasoning as in respect of the ASX Announcement [281]

5.2.5. Failure to consider context [283]

5.2.6. The question of legal advice [284]

5.2.7. Conclusion as to whether the Edinburgh and London representations were made and were misleading [291]

5.3. The cross-appeal: Edinburgh and London representations: the relevant effect on the market [292]

5.3.1. JHINV's declared intent [304]

5.3.2. Reliance on factors other than the representations [309]

5.3.3. Reliance upon the actual outcome and Mr Humphris' evidence [315]

5.3.3(i) Did Mr Humphris have the relevant expertise? [322]

5.3.3(ii) Did Mr Humphris address the pleaded case? [325]

5.3.3(iii) Whether assumptions on which opinion was based were made out on the evidence [328]

5.3.3(iv) Failure to analyse position if statements had not been made out [338]

5.3.4. Conclusion in respect of likely inducing effect [341]

6. THE CONTINUOUS DISCLOSURE CASE [345]

6.1. The pleaded contravention [357]

6.2. Trial judge's findings [362]

6.3. The disclosure case in context [367]

6.3.1. JHINV and the Foundation [371]

6.3.2. The asbestos issue [372]

6.3.3. The first Allens' advice: 31 January 2003 [384]

6.3.4. The second Allens' advice: 28 March 2003 [419]

6.3.5. Analysts' reports [435]

6.3.6. The views of management [453]

6.4. Submissions on the appeal [460]

6.4.1. JHINV's submissions [460]

6.4.2. ASIC's submissions [464]

6.5. Consideration of JHINV's arguments [470]

6.5.1. The second Allens' advice [471]

6.5.2. The analysts' statements [480]

6.5.3. JHINV's internal documents [492]

6.5.4. Mr Humphris' evidence [504]

6.5.5. Whether the separation of JHIL was material [524]

6.5.6. Movement in JHINV share price on 15 May 2003 [531]

6.5.7. Period of contravention [541]

6.6. Conclusion on continuous disclosure obligation [546]

7. EXONERATION, PENALTY AND COSTS [551]

7.1. The trial judge's reasons as to the penalty [559]

7.2. Was the breach flagrant? [571]

7.3. Costs [578]

ORDERS [579]
1. INTRODUCTION
1.1. Nature of the case

This is an appeal from a decision of Gzell J in which his Honour held that the appellant, James Hardie Industries NV (JHINV), contravened the Corporations Act 2001 (Cth), ss 1041E and 1041H (the misrepresentation case) and s 674 (the non-disclosure case). His Honour rejected JHINV’s case that the contraventions should be excused pursuant to s 1317S and imposed a pecuniary penalty of $80,000.
The proceedings against JHINV were heard by Gzell J at the same time as his Honour heard proceedings brought by the Australian Securities and Investments Commission (ASIC) against the directors and officers of JHINV and were determined by his Honour in the same judgment: Australian Securities and Investments Commission v Macdonald (No 11) [2009] NSWSC 287; (2009) 256 ALR 199 (Liability Judgment). Our consideration of his Honour’s reasons in the Liability Judgment is the subject of paragraphs [4]-[550] below. His Honour gave judgment on relief from liability and on pecuniary penalties in a separate judgment: Australian Securities and Investments Commission v Macdonald (No 12) [2009] NSWSC 714; (2009) 259 ALR 116 (Penalty Judgment). Our consideration of his Honour’s reasons in the Penalty Judgment is the subject of paragraphs [551]-[577]. The directors and officers appealed against his Honour’s decision, with those appeals being determined by the Court in Morley v Australian Securities and Investments Commission [2010] NSWCA 331 (Morley v ASIC). The factual circumstances considered by the Court in that appeal provide a background to the factual matters considered in this appeal.
1.1.1. The misrepresentation case
There were three components of the misrepresentation case. The first component related to statements made in slide 4 of a series of slides (the slides) that had been lodged with the Australian Stock Exchange (ASX) in June 2002. Those statements were “future claims separated and fully funded” and “no future liability – no provision required” (the statements in slide 4). The slides, including relevantly slide 4, had formed part of two oral presentations given by Peter Macdonald, JHINV’s Chief Executive Officer, in London and Edinburgh in June 2002. The slides related to the establishment, in 2001, of the Medical Research and Compensation Foundation (the Foundation) and the total amount of funding available to the Foundation to meet potential asbestos claims against two James Hardie subsidiaries, James Hardie and Coy Pty Limited (Coy) and Jsekarb Pty Limited (Jsekarb). The slides were later lodged with the ASX and made available to the public.
The trial judge held that the information in slide 4 contravened the misleading and deceptive provisions of ss 1041E and 1041H. His Honour made declarations to that effect.
The second and third components of the misrepresentation case related to statements made at the Edinburgh and London presentations by Mr Macdonald in respect of the Foundation and the funding that was available to meet potential asbestos claims. It was alleged that, in Edinburgh, Mr Macdonald said “asbestos has been ring fenced”, “asbestos is a non-issue” and “the foundation is fully funded to meet future claims”. It was alleged that, in London, Mr Macdonald said the “Foundation is fully funded” and “James Hardie has no liability”.
Although his Honour held that those statements were made and were materially misleading, he found that a contravention of s 1041E had not been made out in respect of those statements. His Honour was not satisfied that the representations made in Edinburgh and London would have the effect of inducing persons to purchase shares or of increasing, reducing, maintaining or stabilising the price for JHINV shares.
JHINV has appealed against his Honour’s findings of contravention in relation to the first component of the misrepresentation case.
ASIC has cross-appealed against the rejection of the second and third components of its misrepresentation case that JHINV contravened s 1041E in respect of the statements made at the Edinburgh and London presentations.
JHINV has also filed a notice of contention, in which it seeks to support the trial judge’s decision in respect of the Edinburgh and London representations. JHINV contends that his Honour was in error in holding that the Edinburgh and London representations were made and were misleading. JHINV also contends that his Honour was correct in holding that the Edinburgh and London representations would not have the required inducing effect.
1.1.2. The non-disclosure case
The central element of the non-disclosure case was JHINV’s failure to disclose to the market the separation of its wholly owned subsidiary, James Hardie Industries Limited (JHIL), from JHINV in March 2003, contrary to s 674. By that time, JHIL had been renamed ABN 60 Pty Ltd. We will continue to refer to the company as JHIL. However, we have not altered the use of the name ABN 60 Pty Ltd in the documents extracted in these reasons.
The separation of JHIL was effected by a series of transactions which were approved by JHINV at a Board meeting held on 23 March 2003 and which included the cancellation, for no consideration, of partly paid shares that JHINV held in JHIL, the creation of a new Foundation, the ABN 60 Foundation, the issue of shares by JHIL to the ABN 60 Foundation and the execution of a Deed of Covenant, Indemnity and Access (DOCIA) by JHINV and JHIL on 31 March 2003. These arrangements are described in greater detail later in these reasons.
His Honour held that JHINV’s failure to notify this information to the market contravened s 674(2). JHINV has appealed against his Honour’s finding of contravention, and the rejection of JHINV’s case that any contravention should be excused.
1.2. Some general introductory remarks
Certain companies in the James Hardie Group of companies had been major manufacturers and distributors of asbestos products in Australia and overseas. Prior to the events that underlie the appeal, JHIL had been the holding company in the James Hardie Group and had manufactured and sold asbestos products itself up until 1937.
Coy and Jsekarb (later renamed Amaca Pty Limited and Amaba Pty Limited respectively) were JHIL subsidiaries. Both had been manufacturers and distributors of asbestos products in Australia until 1987. Each company had been subject to a significant number of asbestos claims by their own employees (employee claims) and by persons who had worked in industries that used their asbestos products (industry claims). Claims by persons who had used asbestos products in domestic and other non-industry circumstances were starting to emerge (non-industry claims). An actuarial study undertaken for James Hardie in 1998 estimated the potential exposure to known and potential asbestos-related claims was in the order of $281 million.
Following a plan of reorganisation and capital restructuring in 1998, a new company, James Hardie NV (JHNV), was incorporated in Holland as an intermediary holding company, with its common stock owned by indirect subsidiaries of JHIL. JHIL contributed its fibre cement businesses, its US gypsum wallboard businesses, its Australian and New Zealand building systems businesses and its Australian windows business to JHNV and its subsidiaries.

Some time after this restructure, JHIL gave consideration to a further restructure of the group. One of the considerations driving the new proposal was a desire to separate from the James Hardie Group those companies in the Group that were at risk of further asbestos claims being made against them. Another objective was to achieve a better worldwide income tax position (at [80]).
At a Board meeting held on 15 February 2001, JHIL decided that the separation would proceed. The new structure involved the establishment of the Foundation, which was a trust entity with an independent Board. JHIL’s shares in Coy and Jsekarb were vested in the Foundation and thereafter it was the Foundation’s function to manage and pay out asbestos claims against Coy and Jsekarb. The Foundation also had a $3 million fund for research into asbestos-related diseases. The Foundation was established shortly after the 15 February 2001 Board Meeting.
The restructure was formalised by way of a members’ scheme of arrangement (the Scheme) under the Corporations Act, s 411. The Scheme was approved by Santow J on 11 October 2001 (at [33]). Under the Scheme, JHINV, a Dutch incorporated company, became the holding company in the James Hardie Group. JHIL became a wholly owned subsidiary of JHINV. This aspect of the restructure was effected by JHIL issuing to JHINV 100,000 partly paid shares at a cost of $50 each, with an uncalled amount on each share of $19,603.62. The total uncalled capital on the shares was $1.96 billion (at [30]). Following the restructure, JHINV controlled the same assets and liabilities as JHIL held prior to the reorganisation.
An integral part of the restructure arrangement was the execution of a Deed of Covenant and Indemnity (DOCI), under which JHIL covenanted to pay substantial annual sums to Coy and Jsekarb for 50 years. In return there were: covenants by Coy and Jsekarb not to sue JHIL in relation to their manufacture and sale of asbestos products; an indemnity in respect of claims against JHIL by asbestos claimants; and a put option for Coy to acquire from a (future) sole shareholder in JHIL its shares in JHIL.
Matters relating to these arrangements are subject of the judgment in Morley v ASIC. The events which relate to this appeal arose subsequently to the events that were the subject of that appeal.
The first of those events involved the Edinburgh and London presentations, which were part of a larger ‘roadshow’ conducted between May and December 2002, in which Mr Macdonald gave a number of presentations relating to the then present circumstances and the future aims of the James Hardie Group, both in Australia and overseas. The presentations consisted of either an oral presentation and PowerPoint slideshow followed by a question and answer session or one-on-one meetings or group meetings at which hard copies of the slides were handed to participants.
The statements in slide 4 and the statements made by Mr Macdonald at the Edinburgh and London presentations were the subject of the misrepresentation case. ASIC claimed that these representations contravened s 1041E of the Corporations Act. ASIC also claimed that the statements in slide 4 formed the basis of a contravention of s 1041H. ASIC’s case in respect of the statements in slide 4 was made out under both sections. The case under s 1014E, insofar as it related to statements made by Mr Macdonald in Edinburgh and London, was not made out.
The second of the events occurred in March 2003, when JHINV resolved upon a series of steps to effect a further restructure of the James Hardie Group so as to sever the Group’s connection with JHIL. The intention was to eliminate any connection that the James Hardie Group had with asbestos-related liabilities. JHINV did not immediately disclose the arrangements involved in this restructure. This restructure, and the steps by which it was effected, are the subject of the non-disclosure case, which the trial judge also found was made out.
2. THE MISREPRESENTATION CASE
2.1. Summary of the alleged contraventions
ASIC alleged that JHINV made representations in:
(a)slide 4 which was one of the slides lodged with the ASX on about 11 June 2003 (the ASX representations),
(b)the oral statements by Mr Macdonald at the presentation in Edinburgh (the Edinburgh representations); and
(c)oral statements by Mr Macdonald at the presentation in London (the London representations);
and that these representations were false in a material particular or materially misleading. Each of these representations was the subject of the alleged contravention of s 1041E. The ASX representations were also the subject of the alleged contravention of s 1041H.
Each of the representations will require separate consideration.
2.1.1. The legislation: the Corporations Act, ss 1041E and 1041H
Relevantly for the purposes of this appeal, ss 1041E and 1041H provided:
“1041E False or misleading statements
(1)A person must not (whether in this jurisdiction or elsewhere) make a statement, or disseminate information, if:
(a)the statement or information is false in a material particular or is materially misleading; and
(b) the statement or information is likely:
…
(ii)to induce persons in this jurisdiction to dispose of or acquire financial products; or
(iii)to have the effect of increasing, reducing, maintaining or stabilising the price for trading in financial products on a financial market operated in this jurisdiction; and
(c)when the person makes the statement, or disseminates the information:
(i)the person does not care whether the statement or information is true or false; or
(ii)the person knows, or ought reasonably to have known, that the statement or information is false in a material particular or is materially misleading …”
“1041H Misleading or deceptive conduct (civil liability only)
(1)A person must not, in this jurisdiction, engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive.”
2.1.2. The ASX representations
In the first half of June 2002, Mr Macdonald conducted a series of ‘roadshow presentations’ around the UK, including one in Edinburgh and one in London. As part of those roadshows, Mr Macdonald presented the slides to small groups of investors. Under cover of a letter dated 11 June 2002, sent by Mr Baxter, JHINV’s Senior Vice President, Corporate Affairs, JHINV lodged with the ASX a copy of the slides. In the covering letter, Mr Baxter identified the slides as being “a presentation dated 11 June 2002” and informed the ASX that the slides were for “release to the market”. Once received by the ASX, the slides were placed on the ASX website and were available to be accessed by anyone who was interested.
There were 34 slides in all. Slide 1 was an introductory slide, which bore the James Hardie corporate logo and the name “James Hardie” and stated:
“Unique Technology Driving High Growth
June 2002”
Slides 2 and 3 were entitled “A Brief History” and “An Emerging Company” respectively. Slide 3 included information as to turnover, assets, areas of operation, number of employees and a statement, “ASX Top 50 company”.
Slide 4 was the critical slide in ASIC’s case. The slide was entitled, “Restructured for Focus and Growth”. Its full text was:
“Restructured for Focus and Growth
>             All non-core businesses sold 1996-2002
- proceeds 96-02 US $600 million
- profit over book 96-02 US$170 million
>             Asbestos Foundation established 2001
               - future claims separated and fully funded
- no future liability – no provision required
>             New corporate structure established 2001
- higher after tax returns
- ASX primary listing with full index weighting
- ADRs listed on NYSE”   (emphasis added)
It is the emphasised portion of slide 4 which was the subject of the pleaded misrepresentations.
Slides 5 to 17 set out JHINV’s “Attractive Investment Attributes”. Slides 18 to 20 provided information about the state of the market in the United States for exterior building products and JHINV’s share of the market in 2002, as well as a forecast for 2007. Slide 21 referred to the Asia Pacific region, including Australia. It contained the statement, “Australia/New Zealand restructured to reduce cost and generate growth”. The remaining slides, other than the last slide, slide 34, presented JHINV’s business plan in various markets and countries, as well as financial information including return and gearing ratios.
Slide 34 stated:
“This presentation contains forward-looking statements … Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements. These factors, which are further discussed in our periodic reports filed with the Securities and Exchange Commission on [Form 20-F] and in our other filings, include but are not limited to: … exposure to environmental or other legal proceedings …” (emphasis added)
ASIC’s pleaded allegation in respect of the statements in slide 4 was contained in [261] of the Fourth Further Amended Statement of Claim (the final statement of claim) in the following terms:
“261.The fourth of the slides:
(a)addressed the exposure to the James Hardie Group to Asbestos Claims and Asbestos Liabilities; and
(b)          stated:
‘Asbestos Foundation established 2001
-              future claims separated and fully funded
-              no future liability – no provision required’.”
ASIC claimed that, by provision of these slides to the ASX, containing as they did these statements, JHINV represented that:
“(a) it was certain, or highly likely, that the amount of funds available to [the Foundation] would be sufficient to meet all legitimate present and future Asbestos Claims brought against Amaca and Amaba;
(b) the material available to JHINV provided a reasonable basis for the assertion that it was certain, or highly likely, that the amount of funds made available to MRCF would be sufficient to meet all legitimate present and future asbestos claims brought against Amaca and Amaba; and
(c) that the James Hardie Group had received legal advice supporting the statement that the James Hardie Group had no Asbestos Liabilities.”
These representations were, ASIC claimed, false or misleading in that:
“(a)there were not reasonable grounds for making the statement that it was certain, or highly likely, that the amount of funds made available to [the Foundation], either in its own right, or via Amaca and Amaba, would be sufficient to meet all legitimate present and future Asbestos Claims brought against Amaca and Amaba; and
(b)the material available to JHINV did not provide a reasonable basis for the assertion that it was certain, or highly likely, that the amount of funds made available to [the Foundation], either in its own right, or via Amaca and Amaba, would be sufficient to meet all legitimate present and future Asbestos Claims brought against Amaca and Amaba; and
(c)the James Hardie Group had not received legal advice supporting the statement that the group had no Asbestos Liabilities.”
2.1.3. The Edinburgh representations
During the Edinburgh roadshow, Mr Macdonald conducted a presentation at which a small group, including a Mr Alistair Thompson, was present. Mr Thompson was employed by Edinburgh First Managers as Head of Asia Pacific (excluding Japan), and was the portfolio manager for a range of funds and a leading investment trust. Mr Thompson said that the Edinburgh roadshow was delivered over lunch with some opening comments by Mr Macdonald and a question and answer session. Mr Baxter was present at this presentation.
ASIC’s pleaded allegation in respect of the Edinburgh roadshow was contained in the final statement of claim in the following terms:
“261A.    At the Edinburgh roadshow, Macdonald:
(a)addressed the exposure of the James Hardie Group to Asbestos Claims and Asbestos Liabilities;
(b)          stated words to the effect:
(i)‘We set up a foundation and asbestos has been ring fenced’;
(ii)          ‘Asbestos is a non-issue’ and
(iii)‘The foundation is fully funded to meet future claims, so asbestos is not an issue for James Hardie’.”
ASIC claimed that, by making these statements in Edinburgh, Mr Macdonald made the same representations as set out at [35] above, namely, that it was certain or highly likely that the funding available to the Foundation was sufficient to meet future claims and that JHINV had a reasonable basis for so asserting. These representations were, ASIC claimed, false and misleading for the same reasons as set out at [36] above.
2.1.4. The London representations
The London roadshow followed a day or so after Edinburgh and involved a presentation to Mr Paul Simons, of Pyrford International plc, at Pyrford’s offices in London. Mr Baxter was again present. ASIC’s pleaded allegation in respect of the London roadshow was contained in the final statement of claim in the following terms:
“262.      At the London Roadshow, Macdonald:
(a)addressed the exposure of the James Hardie Group to Asbestos Claims and Asbestos Liabilities;
(b)          stated:
(i)‘The asbestos liability has been shifted to a Foundation”;
(ii)         ‘The Foundation is fully funded’;
(iii)        ‘James Hardie has no liability’; and
(iv)‘Our legal advice is to the effect that we’ve set up a Foundation and the company no longer has a liability’.”
As with the Edinburgh representations, ASIC claimed that, by making these statements in London, Mr Macdonald made the same representations as set out at [35] above. These were said to be false or misleading for the same reasons as set out at [36] above.
2.1.5. Representations as to legal advice
ASIC also claimed, with respect to the statements made in slide 4, that by lodging those statements with the ASX, JHINV represented:
“… that the James Hardie Group had received legal advice supporting the statement that the James Hardie Group had no Asbestos Liabilities.”
With respect to the statements made by Mr Macdonald in London, ASIC claimed that he had represented that:
“… the James Hardie Group had received legal advice that it had no remaining Asbestos Liabilities.”
Both these representations as to legal advice were also alleged to be false and misleading, as JHINV had not received legal advice that it did not have any remaining asbestos liabilities.
The allegation as to legal advice in respect of the ASX representations was rejected by the trial judge. ASIC has not cross-appealed in respect of that finding. JHINV, in its written submissions, sought to utilise his Honour’s rejection of this allegation of legal advice to bolster its argument in respect of the statement in slide 4, “no future liability – no provision required”. We understand that this argument was abandoned in oral submissions and, therefore, it is not necessary to deal with it. The trial judge accepted the claim as to legal advice in respect of the London representations. That finding was the subject of submissions on the appeal, and is discussed later in these reasons.
2.1.6. The alleged contraventions: s 1041E
ASIC alleged that the representations of certainty or high likelihood in each of the ASX, the Edinburgh and the London representations, made in circumstances where it was conveyed that there was a reasonable basis for the representation of certainty or high likelihood, constituted statements that were false in a material particular, or materially misleading (1041E(1)(a)); that those statements were likely to induce persons in Australia to acquire a financial product (s 1041E(1)(b)(i)); or were likely to have the effect of increasing, maintaining or stabilising the price for trading in financial products, namely, securities in JHINV (s 1041E(1)(b)(ii)), contrary to the Corporations Act, s 1041E.
ASIC alleged that in making the representations, JHINV:
“(c)did not care whether the ASX Representations, the Edinburgh Representations or the London Representations were true or false; or
(d)knew that the ASX Representations, the Edinburgh Representations and the London Representations were false in a material particular, or materially misleading; or
(e)ought reasonably to have known that the ASX Representations, the Edinburgh Representations and the London Representations were false in a material particular, or materially misleading.”
in contravention of the Corporations Act, s 1041E(1)(c)(i) and/or (ii).
2.1.7. The alleged contravention: s 1041H
ASIC alleged that in making the ASX representations, JHINV engaged in conduct in this jurisdiction in relation to financial products, namely, securities of JHINV, which was misleading or deceptive, or was likely to mislead or deceive, contrary to the Corporations Act, s 1041H. This claim was not made with respect to the Edinburgh or London representations.
2.2. Findings of the trial judge in the misrepresentation case
The trial judge held that in making the ASX representations, JHINV had contravened both ss 1041E and 1041H. However, his Honour rejected ASIC’s case that there had been a contravention of s 1041E in respect of the London and Edinburgh representations because there had been no relevant inducing effect. The specific findings made by his Honour are addressed in the next section of these reasons.
2.2.1.Finding of the trial judge as to the representation conveyed by the phrases “fully funded” and “no future liability”
The ASX, Edinburgh and London representations each contained the phrase “fully funded” and also used a phrase as to future or further liability. In this respect, the ASX representations used the phrase “No future liability”; the Edinburgh representations used “fully funded to meet future claims”; and the London representations, “James Hardie has no liability”
His Honour held that the reference in the Edinburgh representations to “fully funded” was a reference to the position in June 2002, that is, at the time that the presentation was made (at [955]). Likewise, his Honour also held that the statement in slide 4 conveyed the meaning that the Foundation was fully funded in 2002 and there was no future liability that required a provision to be raised in the accounts (at [956]). His Honour made the same finding in respect of the London representations (at [980], [984]). In making this finding, his Honour expressly rejected the argument advanced by JHINV that the statement as to the Foundation being “fully funded” was an historical statement directed to the position 12 months previously when the Foundation was established (at [980]-[983]).
His Honour held that the emphatic nature of the words “fully funded” and “no future liability” implied “certainty or high likelihood” (at [957], [989]). As his Honour stated, at [959], “the vice lay in choosing to use over-emphatic language”. In this regard, his Honour held that what is conveyed does not need to match the words used (at [957], [989]).
His Honour held that the statement that the Foundation was “fully funded” was not merely a repetition of information already in the public domain in respect of something that had happened over a year previously (at [960]). Rather, his Honour found that it was a statement relating to the position of the Foundation as at June 2002, which was a new assertion, not in the public domain (at [961]).
2.2.2.Finding of the trial judge as to representation that there was a reasonable basis for the assertion of certainty or high likelihood
The trial judge found that the statements made in each of the ASX representations, the Edinburgh representations, and the London representations conveyed that the material available to JHINV provided a reasonable basis for the assertion of sufficiency of funds (at [995]).

His Honour also rejected JHINV’s submission that the words “fully funded” and “no future liability” only conveyed that the funding available to the Foundation was by reference to calculations and estimates that involved predictions as to the future incidents and the outcomes of claims at that time (at [959]).
His Honour’s reasoning in reaching both of these conclusions was the same reasoning as had led him to the same view in respect of the ASX Announcement, the subject of the judgment in Morley v ASIC. That reasoning was contained at [321]-[322], where his Honour stated:
“[321]The non-executive directors must have been aware that the … ASX Announcement conveyed, or was capable of conveying, that the material available to JHIL provided a reasonable basis for the assertion of certainty of sufficient funding; that it conveyed, or was capable of conveying, that Mr Macdonald believed there was certainty of sufficient funding; that it conveyed, or was capable of conveying, that all the directors or a majority of them believed there was certainty of sufficient funding; and that it conveyed, or was capable of conveying, that JHIL had received expert advice from PwC and Access Economics that supported the statement as to certainty of sufficient funding.
[322]No reasonable reader would think that the statements had been made without supporting material; that statements were attributed to Mr Macdonald that he did not believe; that statements were attributed to the board that a majority of them did not believe; and that the expert advice to which reference was made did not support the directors’ belief.”
(There was a significant issue in Morley v ASIC as to a Draft ASX Announcement which was the progenitor of the Final ASX Announcement lodged with the ASX. Much of his Honour’s reasoning related to that Draft ASX Announcement. For the purposes of this judgment, it will be convenient to refer compendiously to the Draft and the Final Announcements as the ASX Announcement.)
The findings at [321]-[322] were made in the context of dealing with allegations against JHIL’s non-executive directors. Insofar as his Honour reached the same view as against the company, these reasons must be read as a reference to JHINV and its management.
2.2.3.Findings of the trial judge that representations were misleading
His Honour rejected JHINV’s argument that, read in light of a Form 20-F filed with the US Securities and Exchange Commission in October 2001 and JHINV’s 2002 Annual Report filed with the ASX on 14 June 2002, the statements in slide 4 were not misleading. In his Honour’s view, the qualifications made in those documents as to James Hardie’s exposure to asbestos claims provided “all the more reason for Mr Macdonald not to make emphatic statements about a fully funded Foundation” in relation to slide 4: at [996]. The trial judge also found that Mr Macdonald had been informed on a number of occasions prior to June 2002 that Coy and Jsekarb did not have sufficient funds to meet all future asbestos claims: at [999].
His Honour held, at [1022], that the Edinburgh and London representations and the accompanying slides were designed to have the effect of encouraging the purchase of JHINV shares and the maintenance or stabilisation of the market for those shares. In those circumstances, his Honour found that the representations were misleading. As his Honour said, at [1024]:
“Mr Macdonald was aware that the Edinburgh Representations, the London Representations and the ASX Representations were false or misleading and not in a minor way. The central thrust of the representations was to quell concern about the ability of JHINV to meet Asbestos Claims. The statements that future Asbestos Claims were separated and fully funded with no further liability for JHINV, that Asbestos Claims had been ring fenced in the Foundation and that James Hardie had no liability, were not merely false or misleading they were false in a material particular or were materially misleading.”
2.2.4.Finding of the trial judge as to whether there had been a breach of s 1041E
The trial judge, at [1021], stated that s 1041E called for a predictive exercise: the statement made had to be examined in light of the circumstances that existed at the time and the question asked whether it would have been likely to induce members of the public to purchase JHINV shares. No issue was taken with that approach.
His Honour held that the statements in slide 4 were false in a material particular or materially misleading and were likely to have the effect of inducing persons to acquire JHINV shares and to have the effect of maintaining or stabilising the share price.
In this regard, his Honour held that the members of the market to whom slide 4 was addressed:
“… included the sophisticated and the unsophisticated and the reaction of each was likely to be similar to that discussed with respect to the … ASX Announcement.” (at [1062])
His Honour’s reference to the reaction of persons to the ASX Announcement was a reference to his earlier findings in respect of the ASX Announcement relating to the establishment of the Foundation.
In response to a submission that the ASX Announcement did not convey certainty that the Foundation had funds sufficient to meet all asbestos claims and that there was no evidence of anyone being misled, his Honour said:
“[313]It was submitted that the … ASX Announcement did not convey certainty that the Foundation’s funding was sufficient to meet all Asbestos Claims. It was submitted that no evidence was adduced of any person being mislead by the Final ASX Announcement. It has been held, however, that where a regulatory authority seeks to prevent conduct in breach of provisions like Section 52 this will often be the case and such an applicant will rely upon the terms of the representation and the circumstances in which it was, or is to be made, looking to the notional representative class member as the basis for assessing the likely effect of the conduct in question (National Exchange Pty Ltd v Australian Securities and Investments Commission [2004] FCAFC 90; (2004) 49 ACSR 369 at [23]).
[314]Where the representation is to be made to the public or to a section of it, consideration must be given to its effect upon an ordinary or reasonable member of the class in question. In this case the class was broad. It not only included financial market analysts and investors but also stakeholders of a wide range. It included the sophisticated and the unsophisticated.”
His Honour held that if the document was misleading, or likely to be so, the notional representative class member must be shown to labour under some erroneous assumption, or may be expected to do so: (at [315]): see Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd [2008] NSWCA 206; (2008) 73 NSWLR 653 at [608].
His Honour accepted that a sophisticated reader might understand that there was uncertainty associated with asbestos claims to be made in the future, but that to an unsophisticated stakeholder, the message in the ASX Announcement was that it was certain that the Foundation had sufficient funds to pay all legitimate asbestos claims (at [316]).
His Honour found that the statements in slide 4, along with the London and Edinburgh representations, were designed by Mr Baxter to have the effect of encouraging the purchase of JHINV shares and the maintenance or stabilisation of the market for those shares (at [1022]).
In reaching his conclusion in respect of the statements in slide 4, his Honour reiterated that the members of the market to whom slide 4 was addressed included the sophisticated and the unsophisticated and the reaction of each was likely to be similar to that discussed with respect to the ASX Announcement.
His Honour was fortified in the conclusion he had reached by the interpretations placed upon the statements in slide 4 by Mr Thompson and Mr Simons (at [1063]). His Honour also noted that there was an increase in the share price within a fortnight of the release to the market of the slides, which may have been influenced in part by the statements in slide 4 (at [1064]).
The trial judge held that the Edinburgh representations and the London representations were false in a material particular or materially misleading as Mr Macdonald (and hence JHINV) knew (at [1024]). However, his Honour concluded that the representations did not have the relevant inducing effect. In respect of the Edinburgh representations, his Honour, at [1066], was not satisfied:
“… that the statements made by Mr Macdonald to an audience of three analysts, institutional investors, or fund managers was likely to have the effect Mr Humphris placed upon them. And none of them, in fact, was induced to recommend the purchase of JHINV shares. The absence of any purchase means that there could be, in fact, no maintaining or stabilising effect on the market.”
As to the London representations, his Honour found, at [1070], that:
“The same conclusion applies a fortiori to the London Representations that were made to a non-investing audience of one. The statements were not likely to induce the purchase of JHINV shares and Mr Humphris needed more material before he could express an opinion on whether they were likely to maintain or stabilise the market for JHINV shares.”
Accordingly, his Honour rejected ASIC’s allegations that JHINV had breached s 1041E in making the Edinburgh and London representations.
ASIC cross-appealed against his Honour’s findings that there was no relevant likely inducing effect in respect of either the Edinburgh or London representations. By notice of contention, JHINV sought to uphold his Honour’s decision, on the basis that the statements made in Edinburgh and London did not give rise to the misleading representations alleged by ASIC. The contention point logically arises first for determination.
His Honour also held that JHINV knew or ought reasonably to have known that the statements were false in a material particular or were materially misleading. His Honour had earlier, at [1024], made a finding that Mr Macdonald was aware that the ASX, Edinburgh and London representations were false or misleading and not in a minor way.
2.2.5.Findings of the trial judge as to whether the ASX representations contravened s 1041H
His Honour’s finding at [316] was the basis of his conclusion that there had been a breach of s 1041H, because by delivering the slides to the ASX, JHINV had engaged in conduct that was misleading or deceptive or likely to mislead or deceive, relating to JHINV’s shares and there was a representation made in the jurisdiction (at [1072]).
2.3.Issues on JHINV’s appeal, the cross-appeal and notices of contention
The first two issues that arose on the appeal related to the ASX representations. JHINV contended:
(a)that his Honour was in error in holding that the ASX representations were false or misleading, in that his Honour incorrectly interpreted the statements made in slide 4;
(b)that his Honour erred in finding that the statements in slide 4 would have induced persons to purchase JHINV shares or had the effect of maintaining or stabilising JHINV’s share price.
Those same two issues arise with respect to the cross-appeal and notice of contention, albeit with respect to the Edinburgh and the London representations.
3.FIRST ISSUE ON JHINV’s MISREPRESENTATION APPEAL: THE MEANING OF THE STATEMENTS IN SLIDE 4
The first issue on the appeal was whether the trial judge erred in the meaning he gave to the statements “fully funded” and “no future liability” in slide 4. JHINV contended that the trial judge erred in the meaning he gave to these statements in that his Honour:
(a)concluded that the representation as to certainty or high likelihood was made out solely because of the language in the slide which his Honour characterised as emphatic;
(b)isolated slide 4 from the context in which it was provided to the ASX and from the context in which the slide appeared in the complete set of slides;
(c)isolated the slides from the purpose for which they were prepared, namely, to accompany an oral presentation;
(d)isolated the slides from other statements made by the company in the Form 20-F filed with the US Securities Exchange Commission in the and in its Annual Report released on 12 June 2002; and
(e)relied upon the same reasoning in respect of his findings as to the representations made in the ASX Announcement issued in February 2001, when the Foundation was established to meet future asbestos claims brought against the subsidiaries Coy and Jsekarb. It was submitted that the ASX Announcement was of a significantly different nature from slide 4. The circumstances surrounding the drafting of the ASX Announcement and its contents are considered in Morley v ASIC. The terms of the ASX Announcement are indicated at [216].
The meaning of the statements in slide 4 is the meaning they would bear to an ordinary reasonable member of the notional class to which the statements were directed. It is convenient, therefore, to first understand the notional representative class, before proceeding to consider the arguments raised by JHINV in challenging his Honour’s finding that the representations were misleading or deceptive, or were likely to mislead or deceive.
3.1. The notional representative class
His Honour found that in determining whether a statement was misleading it was appropriate to look to the notional representative class to which the relevant statutory regime was directed: see National Exchange Pty Ltd v Australian Securities and Investments Commission [2004] FCAFC 90; (2004) 49 ACSR 369, in which Dowsett J applied the principles set out by the High Court in Campomar Sociedad, Limitada v Nike International Limited [2000] HCA 12; (2000) 202 CLR 45. Both parties accepted that this was the correct approach. His Honour held that the class to whom the representations were directed was wide and included “sophisticated and unsophisticated” persons who were interested in the market for JHINV shares (at [1062]). The sophisticated members of the class included financial market analysts and investors. The unsophisticated included stakeholders of a wide range (at [313]).
The parties accepted that the trial judge was correct in his approach to the determination of the relevant market. However, it is convenient to review the relevant principles which govern the determination of the notional class, as they go to the heart of the issues raised in this part of the case.
3.1.1. Campomar Sociedad Limitada v Nike International Limited
In Nike, the Court endorsed the observation of Deane and Fitzgerald JJ in Taco Company of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177 at 202, that whether or not conduct amounted to a representation is “a question of fact to be decided by considering what [was] said and done against the background of all surrounding circumstances”. In Taco Bell, Deane and Fitzgerald JJ further observed that:
“In some cases, such as an express untrue representation made only to identified individuals, the process of deciding that question of fact may be direct and uncomplicated. In other cases, the process will be more complicated and call for the assistance of certain guidelines upon the path to decision.”
The Court noted, at [101], that the “other classes of case” that Deane and Fitzgerald JJ had in mind included cases where those representations were made to the public at large, or a section thereof. The Court observed, at [102], that:
“It is in these cases of representations to the public … that there enter the ‘ordinary’ or ‘reasonable’ members of the class of prospective purchasers. Although a class of consumers may be expected to include a wide range of persons, in isolating the ‘ordinary’ or ‘reasonable’ members of that class, there is an objective attribution of certain characteristics.”
Given the “heavy burden” that s 52 imposed, catching both intentional and non-intentional conduct, the Court held, at [103], that where the representation is made to a wide and undefined section or group, such as consumers, the section must be “regarded as contemplating the effect of the conduct on reasonable members of the class”: see Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44;(1982) 149 CLR 191 at 199 per Gibbs CJ. The Court sought to identify the characteristics of the ordinary or reasonable member of such class as follows:
“Where the persons in question are not identified individuals to whom a particular misrepresentation has been made or from whom a relevant fact, circumstance or proposal was withheld, but are members of a class to which the conduct in question was directed in a general sense, it is necessary to isolate by some criterion a representative member of that class.”
The Court continued:
“The inquiry thus is to be made with respect to this hypothetical individual why the misconception complained [of] has arisen or is likely to arise … In formulating this inquiry, the courts have had regard to what appears to be the outer limits of the purpose and scope of the statutory norm of conduct fixed by s 52.” (footnote omitted)
The Court next referred to the “so-called ‘doctrine’ of ‘erroneous assumption’”. This, in essence, is a shorthand reference to the notion that “no conduct can mislead or deceive unless the representee labours under some erroneous assumption”: see Taco Bell at 200; or may be expected to labour under an erroneous assumption: Ingot Capital Investments v Macquarie Equity Capital Markets at [608]. The Court stated, at [105], that:
“The initial question which must be determined is whether the misconceptions, or deceptions, alleged to arise or be likely to arise are properly to be attributed to the ordinary or reasonable members of the classes of prospective purchasers.”
The reference to the “misconceptions or deceptions” is a reference back to the so-called doctrine of erroneous assumption. At [105], the Court observed that in assessing the reaction, or likely reaction of the ordinary or reasonable members of the class, “the court may well decline to regard as controlling the application of s 52 those assumptions by persons whose reactions are extreme or fanciful”.
3.1.2.National Exchange Pty Ltd v Australian Securities and Investments Commission
In National Exchange, Dowsett J, after considering the judgments in Nike, concluded, at [24]:
“Whilst it is true that members of a class may differ in personal capacity and experience, that is usually the case whenever a test of reasonableness is applied. Such a test does not necessarily postulate only one reasonable response in the particular circumstances. Frequently, different persons, acting reasonably, will respond in different ways to the same objective circumstances. The test of reasonableness involves the recognition of the boundaries within which reasonable responses will fall, not the identification of a finite number of acceptable reasonable responses.”
The finding of the trial judge in this case that the notional class included sophisticated and unsophisticated persons interested in the market for JHINV shares established the “boundaries within which reasonable responses” of members of the class needed to be assessed.
In this respect, in National Exchange, Jacobson and Bennett JJ said, at [68]-[69]:
“In Nike at [102] and [103] their Honours referred to the attribution of characteristics to the ordinary or reasonable members of the class and to the need to isolate the hypothetical member of the class who has those characteristics. The attribution is to be objective in order to allow for the wide range of persons who would, in fact, make up the class. It is also to allow for unreasonable reactions of members at either end of the spectrum which makes up the class. We see no difference between this approach and that which was contemplated by Deane and Fitzgerald JJ in Taco Bell.
Indeed, the same view seems to have been taken by Gibbs CJ in [Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44; (1982) 149 CLR 191 at 199] as follows:-
‘Although it is true, as has often been said, that ordinarily a class of consumers may include the inexperienced as well as the experienced, and the gullible as well as the astute, the section must in my opinion by regarded as contemplating the effect of the conduct of reasonable members of the class.’”
3.1.3.Domain Names Australia Pty Ltd v .au Domain Administration Ltd

The passage at [68] of National Exchange was applied by the Full Court of the Federal Court (Wilcox, Heerey and RD Nicholson JJ) in Domain Names Australia Pty Ltd v .au Domain Administration Ltd [2004] FCAFC 247; (2004) 139 FCR 215. The question before the Full Court in that case was whether notices sent out by the appellant inviting recipients to register domain names were likely to mislead or deceive. There was no allegation by the respondents that they had actually been misled or deceived. A question also arose as to whether the trial judge had correctly identified the characteristics of the members of the class to whom the notices were sent. In that respect, the Court said, at [25]:
“The attribution of characteristics to the ordinary and reasonable members of the class must be objective in order to allow for the wide range of persons who would in fact make up the class: National Exchange [at [68]]. Within a large class there may be a number of subclasses of ordinary and reasonable people. Thus in the present case there may be ordinary and reasonable persons who were well informed about the internet and the domain name registration system and other persons, equally ordinary and reasonable, who were not.”
As we have already indicated, the parties accepted that his Honour was correct in determining that it was appropriate to look at the notional representative class to whom the relevant statutory regime was directed. There was no challenge to his Honour’s characterisation of the class as including sophisticated and unsophisticated persons interested in the market for JHINV shares and that the unsophisticated included stakeholders of a wide range.
3.2.Were the ASX representations misleading or deceptive?
JHINV contended that his Honour erred in finding that the ASX representations were materially misleading or misleading in a material particular: s 1041E, or misleading or deceptive or likely to mislead or deceive: s 1041H. It is convenient to approach this question first by reference to the relevant legal principles as to what when a statement is misleading or deceptive or likely to mislead or deceive and how the Court is to determine whether the pleaded representation was likely to mislead.
3.2.1.Principles applicable to determining whether the ASX representations were likely to mislead
In Domain Names Australia, the Court dealt with the principles that govern the likelihood of recipients of a representation being misled. The Court stated, at [17]:
“It has long been established that:
When the question is whether conduct has been likely to mislead or deceive it is unnecessary to prove anyone was actually misled or deceived: Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 at 198.
Evidence of actual misleading or deception is admissible, and may be persuasive, but is not essential: Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82 at 87.
The test is objective and the Court must determine the question for itself: Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177 at 202.
Conduct is likely to mislead or deceive if that is a real or not remote possibility, regardless of whether it is less or more than 50%: Global Sportsman.”
The Court further noted, at [18], that the likelihood of persons being deceived or misled was not a matter to be proved by evidence, or judicial notice or its statutory equivalent. Rather:
“The existence or otherwise of such a likelihood is a jury question for the trier of fact: Australian Competition and Consumer Commission v Telstra Corp Ltd (2004) 208 ALR 459 per Gyles J.”
On this basis, the Court considered that direct evidence of being misled was not of much assistance, at least where the representation was made to a large and diverse group. This was because evidence of some members of the large group might be unrepresentative. For example, in Domain Names Australia, the Court pointed out that if the respondents had called 50 of the 418,000 recipients, not only would that be expensive in terms of court time, it would be open to a submission that those 50 witnesses represented only 0.01 per cent of the recipients and their evidence ought thus be considered as unrepresentative and unreliable. Nor was opinion evidence of assistance. In this regard, the Court referred to the observation of Dixon CJ, Kitto and Taylor JJ in Transport Publishing Co Pty Ltd v Literature Board of Review [1956] HCA 73; (1956) 99 CLR 111 at 119 that:
"... ordinary human nature, that of people at large, is not a subject of proof by evidence, whether supposedly expert or not."
The Court noted that market research evidence had been received coolly in recent years in the Federal Court.
In Cat Media Pty Limited v Opti-Healthcare Pty Limited [2003] FCA 133; (2003) ATPR 41-933, Branson J said:
"... It seems to me that evidence of opinions based on market research and expert appreciation of consumer behaviour will rarely be of assistance in litigation where the Court's primary concern is with the behaviour to be expected of, and the judgments likely to be made by, ordinary (even if it might be thought, somewhat credulous) members of the community intent on making a relatively modest purchase in a conventional way. I endorse the comment of Beaumont J in Pacific Publications Pty Ltd v IPC Media Pty Ltd that where a claim is essentially a matter for the Court's impression, expert views which are merely `impressionistic' can be given no more than nominal weight ...”
Although addressing a different subject matter, in Australian Woollen Mills Ltd v FS Walton & Co Ltd [1937] HCA 51; (1937) 58 CLR 641 Dixon and McTiernan JJ commented, at 657, that:
“In a question how possible or prospective buyers will be impressed by a given picture, word or appearance, the instinct and judgment of traders is not to be lightly rejected, and when a dishonest trader fashions an implement or weapon for the purpose of misleading potential customers he at least provides a reliable and expert opinion on the question whether what he has done is in fact likely to deceive.”
The role of the trial judge in determining the ‘likelihood’ of deception was explained by Lord Diplock in General Electric Co (of USA) v General Electric Co Ltd [1972] 1 WLR 729; [1972] 2 All ER 507. His Lordship said, at 738; 515:
"[W]here goods are sold to the general public for consumption or domestic use, the question whether such buyers would be likely to be deceived or confused by the use of the trademark is a ‘jury question’. By that I mean: that if the issue had now, as formerly, to be tried by a jury, who as members of the general public would themselves be potential buyers of the goods, they would be required not only to consider any evidence of other members of the public which had been adduced but also to use their own common sense and to consider whether they would themselves be likely to be deceived or confused.
The question does not cease to be a ‘jury question’ when the issue is tried by a judge alone or on appeal by a plurality of judges. The judge's approach to the question should be the same as that of a jury. He, too, would be a potential buyer of the goods. He should, of course, be alert to the danger of allowing his own idiosyncratic knowledge or temperament to influence his decision, but the whole of his training in the practice of the law should have accustomed him to this, and this should provide the safety which in the case of a jury is provided by their number. That in issues of this kind judges are entitled to give effect to their own opinions as to the likelihood of deception or confusion and, in doing so, are not confined to the evidence of witnesses called at the trial is well established by the decisions of this House itself.”
Those observations were applied by Gummow J (Black CJ and Lockhart J agreeing) in Interlego AG & Anor v Croner Trading Pty Limited (1992) 39 FCR 348. The position is different where a special market is involved (see General Electric at 515, 733, 738; Interlego AG at 388-389). That is not this case.
3.2.2. The language of slide 4
JHINV contended that his Honour erred in finding that the ASX representations were materially misleading within the meaning of s 1041E or were misleading or deceptive or likely to mislead or deceive within the meaning of s 1041H.
JHINV challenged his Honour’s finding by advancing a number of arguments in relation to the language used in the slide and the context in which the slides, and slide 4 in particular, were made public. Slide 4 contained two statements, which on ASIC’s case, were misleading representations that (i) it was certain or highly likely that the funding available to the Foundation was sufficient and (ii) there was a reasonable basis for that assertion. The statements were “future claims separated and fully funded” and “no future liability – no provision required”.
JHINV submitted that slide 4 did not contain or make representations as to certainty or high likelihood of sufficiency of funds, or as to that being JHINV’s assessment of the position in June 2002. It was submitted that the trial judge erred in construing the statements in slide 4 as he did because:
(a)slide 4, by its language, could not convey the meaning that the Foundation was fully funded in 2002;
(b)the statement “Future claims separated and fully funded” said nothing as to the basis upon which, or assumptions by reference to which, or the degree of confidence with which, in February 2001 the future claims were “separated and fully funded”; and
(c)slide 4 did not contain or make any representation or assessment of the sufficiency of the funding as at February 2001, as assessed by JHINV in June 2002.
These three submissions were predicated upon an acceptance of JHINV’s argument that the language used in slide 4 represented the historical position as at 2001. We reject that argument for the reasons that follow.
ASIC’s pleaded case was that the statements in slide 4 conveyed representations of sufficiency of funding and of JHINV having a reasonable basis for that assertion. JHINV challenges that any such representations were made by the statement “fully funded” in slide 4. Accordingly, it is necessary to consider JHINV’s submissions on this issue, making the necessary allowance for the finding we go on to make, that slide 4 was a statement as to the present position.
The first submission arises from the importance the trial judge attributed to the emphatic language used in the slides. His Honour rejected the submission that the statements in slide 4 (and for that matter, the statements made by Mr Macdonald in Edinburgh and London, with which we deal later) said nothing as to whether the outcome was “certain” or “highly likely”. Rather, as his Honour said, at [957]:
“… The term ‘fully funded’ is emphatic as is the phrase ‘no future liability’. The emphatic nature of the statements implies certainty or high likelihood. What is conveyed does not need to match the words used.”
JHINV submitted that it was not clear whether, in rejecting its submission, his Honour relied upon both statements in slide 4, that is, “future claims separated and fully funded”, as well as “no future liability – no provision required” but that if he did so, that was contrary to the case advanced by ASIC, which it contended relied only upon the statement “future claims separated and fully funded” in respect of the representation as to certainty or high likelihood. JHINV submitted that in any event, it was not possible to take from the shorthand statements in slide 4:
“… an unqualified and current assessment as to the funding position of an entity JHINV did not control and in respect of which it had no ongoing connection or access to information.”
The first part of this submission, that ASIC relied on only one of the two statements in the slide, must be rejected. In the pleading, ASIC relied upon both aspects of the statements in slide 4: (see [261] of the final statement of claim, extracted above at [34]). His Honour’s finding was based upon both aspects. In both its written and oral submissions, ASIC refuted JHINV’s assertion that it relied on only one of the statements in slide 4. JHINV did not point to any part of the transcript below where the extent of the pleading was modified in any way. ASIC submitted that in any event, the expression “no future liability – no provision required” was “part and parcel” of the context of the misleading statement in slide 4, that the Foundation was “fully funded”. It submitted that to divorce the two statements, both of which were in emphatic terms, was artificial: to say something was fully funded carried with it the logical inference that there was no need for any additional provision.
The second part of the submission, that it was not possible for the trial judge to make a finding that a representation of certainty and high likelihood was made, was no more than a restatement of JHINV’s overall position on this aspect of the appeal. Our conclusion on this is at [173]-[174].
JHINV’s second submission was that the statement “future claims separated and fully funded” said nothing about the assumptions made or the confidence with which the claims had been separated and funded. It submitted that the statements in slide 4 conveyed no more than that funding was provided by reference to calculations and estimates which involved predictions as to the future incidence and outcomes of claims. This, JHINV submitted, called for explanation or inquiry as to the relevant detail such that the ordinary reasonable member of the public who had access to slide 4 would have appreciated this and, if unfamiliar with the company’s public statements, would have sought more information. That person would, therefore, have sought out JHIL’s original announcements as to the creation of the Foundation and its funding in February 2001 and would also have accessed information in JHINV’s 2002 Annual Report and in a Form 20-F lodged with the US Securities and Exchange Commission. The content of these documents is discussed below.
ASIC submitted that this “complex process”, which JHINV asserted would be undertaken by an ordinary member of the public, did not find any support in the evidence, nor could any reasonable assumption be made that this is what an ordinary member of the public or any relevant subset of the public would do. ASIC submitted that the words were unqualified and unequivocal and were to be understood in the way found by the trial judge.
The resolution of these competing contentions depends upon the composition of the relevant class to whom the statements were directed. Given the wide range of persons within the class, we consider that the approach for which JHINV contends is unrealistic. Some members of the general public interested in investing in shares would be experienced enough, or sufficiently savvy, to know that investment decisions ought only be made after proper research and investigation. Others would not be so experienced or savvy. In any event, it is a moot point as to what proper research and investigation would entail. Would it involve accessing the Form 20-F? Would the reasonable member of the class know that James Hardie had lodged a Form 20-F? Would the reasonable member of the class search out information released into the public domain after the slides were released by the ASX? If not, then it is factually relevant to observe that, of the information relied upon by JHINV, only the filing of the Form 20-F predated the release of the slides. The Annual Report and the analyst’s opinions all postdated the publication of the slides on the ASX website.
In any event, we do not accept that the statements in slide 4 called for explanation or inquiry. We accept that the statements in slide 4 were in an abbreviated form and would have indicated to a reasonable member of the class reading it that some corporate and/or financial activity lay behind them. However, we do not accept that a reasonable member of the class would necessarily go searching for available information to ascertain whether they were accurate statements or whether some qualification should be read into them.
The third submission was that slide 4 did not contain or make any representation or assessment of the sufficiency of funding as at February 2001, as assessed by JHINV in June 2002. JHINV submitted that questions asked of Mr Macdonald in Edinburgh were indicative of how slide 4 ought to be interpreted. In this regard, Mr Baxter had recorded, in his notes of the meeting, a question concerning the Foundation and asbestos liability in terms, “How much time before it runs out?”. This question, it was submitted, was inconsistent with slide 4 conveying a representation that JHINV’s current assessment of the adequacy of funding was that it would be sufficient.
The trial judge, at [979], rejected that Mr Baxter’s note made it clear that the statement “fully funded” was an historical one. His Honour said that was contrary to his reading of the slide and was inconsistent with the way Mr Thompson and Mr Simons understood the slide. His Honour also considered that Mr Baxter’s note was unhelpful because the context in which the question was asked was not known. Further, to give to the statements in slide 4 the meaning and relevance placed upon them by JHINV would be contrary to what was known of Mr Macdonald’s purpose in making the roadshow presentations, namely, to extol the current position of JHINV. The slides and slide 4 in particular was one of the communication tools employed to convey that message.
ASIC’s submission to this Court supported his Honour’s finding. It contended that Mr Baxter’s note did not and could not sensibly provide any confirmation of the meaning of “fully funded” as relating to the position in February 2001. For a start, it submitted that there was no context to Mr Baxter’s note in which it could be assessed: it was not known who asked the question; to what topic it was directed; or whether it was directed to a statement in the slide or to something that was said. ASIC suggested that the question could have been directed to the time the asbestos liability ran out. It submitted that this was at least its likely context, as otherwise the question implied that the fund would run out and it was only a question of when. ASIC pointed to the unlikelihood that Mr Macdonald would publicly state the fund would run out of money.
We agree with ASIC’s submission that Mr Baxter’s note does not provide support for JHINV’s submission. It is a matter for the Court to determine whether a representation is or is likely to be misleading. Obscure and non-contextual evidence such as Mr Baxter’s note does not assist in making that determination. We see no error in his Honour’s reasoning on this point. We would add that, even if Mr Baxter’s note was indicative of how the slide was interpreted by those at the Edinburgh presentation, it is of no assistance in determining how the statements in slide 4 would have been interpreted by members of the public who read them on the ASX website.
3.2.3.The context of slide 4: whether the statements referred to the historical position
JHINV also contended that his Honour erred in the meaning he gave to the words “fully funded” and “no future liability” in slide 4 by isolating the slide from its context. The relevant context in which JHINV submitted that the slide should be interpreted was: (a) that it was one of a complete set of slides and had to be understood in that context; (b) that it was intended to accompany an oral presentation; and (c) that the information in slide 4 had to be understood in the context of other information already disseminated by the company in the Form 20-F and the 2002 Annual Report.
A central aspect of JHINV’s context argument was directed to its fundamental position that slide 4 was to be understood as a statement of the sufficiency of funding as at February 2001 when the Foundation was established and not as at June 2002 when slide 4 was lodged with the ASX. In this regard, JHINV submitted that the trial judge had misinterpreted the information in slide 4 because he had isolated the slides and slide 4 in particular, from their proper context. It said that slide 4 was part of a set of slides which had to be viewed comprehensively. Had his Honour done so, JHINV submitted, he would have concluded not only that the slides related to the historical position, but also that they failed to convey a message of certainty.

JHINV submitted that the indemnity information was not material and that the content of the disclosure made in the 4^th Quarter report was sufficient so that the information required to be disclosed was “readily available” within the meaning of s 676(2). In support of this submission, JHINV relied upon Mr Humphris’ evidence that the information released on 15 May 2003 was “readily observable”. JHINV submitted that it was, therefore, “generally available” within s 676(2)(a).
It is implicit in this submission that s 676(2)(a) stands as an independent basis upon which information may be found to be “generally available” and that Mr Humphris’ evidence appeared to elide the independent status of s 676(2)(a) and (b), as he said:
“While the information concerning this transfer of JHIL is readily observable on and from 15 May 2003, and therefore can be regarded as being generally available on and from that date, this information does not appear to have been reasonably brought to the attention of investors who commonly invest in securities and the circumstances associated with the transfer of JHIL are not readily observable. To assess the response of investors the information would need to be reasonably brought to the attention of investors.”
JHINV’s submission as to the proper construction of the section is correct. Paragraphs (a) and (b) are disjunctive. It is sufficient if the condition in para (a) is satisfied, even if conditions in para (b) (both of which must be satisfied) are not. Mr Humphris’ evidence did not deal with the materiality of the indemnity given to JHINV in the DOCIA in respect of asbestos liabilities. However, the question remains whether the ABN 60 Information was “generally available” from 15 May 2003 within the meaning of the section.
For the reasons given at [549] below, we consider that the DOCIA was an integral part of the ABN 60 Information, and its absence from the 4^th Quarter report meant that there was no disclosure of the ABN 60 Information until 30 June 2003.
6.6. Conclusion on continuous disclosure obligation
The test under s 674 is an objective test, determined ex ante the relevant event which requires disclosure. That the party with the obligation to disclose might convince itself that information would not be expected to have a material effect on the price or value of its securities, does not answer the question whether the material was disclosable as required by s 674.
Although JHINV considered that the prospect of JHIL becoming liable for asbestos claims was remote, there was a significant body of evidence that supported his Honour’s finding that JHINV’s connection with asbestos was having a negative effect on JHINV’s financial position in the market place. That evidence was to be found in JHINV’s internal Board papers, in emails and conversations between members of management, in comments in the analysts’ reports and Mr Humphris’ expert evidence, all of which have been set out in detail above.
Underscoring the concerns expressed in this material was the possibility that JHIL might be found liable for claims on the basis of the principles in Wren, that claims in the secondary market might be sheeted home to JHIL and that liability of some kind might be legislatively imposed. Senior counsel accepted that if there was a prospect of any of those risks coming home, JHINV could come under a financial obligation. That obligation was to pay up to $1.96 billion, should JHIL find itself in a position that required it to call on the partly paid shares. The effect of the transfer of JHIL out of the James Hardie Group was to completely dispose of that liability for no cost. Given JHINV’s acceptance that evidence was not required to demonstrate the significance of eliminating a contingent liability of that order, we do not consider anything more needs to be said on this. Accordingly, there is no basis to disturb his Honour’s finding as to the materiality of this aspect of the ABN 60 Information and that breach of s 674 up until 15 May 2003 had been established.
That leaves the question whether the existence of the DOCIA was material for the purposes of s 674. We consider it was. JHINV embarked upon a carefully and comprehensively planned proposal to separate itself from any corporate connection with JHIL and to completely remove any possibility of an actual or perceived connection with potential asbestos liabilities. Mr Humphris’ expert opinion, which the trial judge accepted and which has not been successfully challenged on the appeal, was that the DOCIA was material. The indemnity provided by the DOCIA in respect of ongoing asbestos liabilities cannot be viewed as a mere formality. The fact that JHINV considered that it should be provided with such an indemnity as contained in the DOCIA points to the vulnerability JHINV felt in having any connection whatsoever with asbestos. The indemnity contained in the DOCIA was an integral component of the steps JHINV took, both to separate JHIL from JHINV and to protect itself from any asbestos liability or any perceived connection with asbestos claims. The cancellation of the partly paid shares was one process to achieve those combined objectives. The DOCIA was another. Therefore, as indicated, we conclude that there was no disclosure as required by s 674 until 30 June 2003.
We would note that, despite JHINV’s argument that the ABN 60 Information was not disclosable, the inference to be drawn from all of the evidence was that a reasonable person would expect that the information, if generally available, would have a material affect on the price of JHINV’s shares. JHINV never answered this fundamental proposition. Rather, the focus of its argument was on the internal thinking of JHINV’s management, which culminated in Mr Baxter’s email to Mr Robb on 23 March 2003 and the second Allens’ advice that, if JHINV’s view was correct, disclosure was not required. In our opinion, this reflected JHINV’s approach to its contravening conduct, which was exclusively one of continued self-justification. For the reasons we have given, that self-justification was seriously misplaced and demonstrated a fundamental disregard for its statutory obligations.
7. EXONERATION, PENALTY AND COSTS
Having rejected the challenges to his Honour’s findings with respect to the misrepresentation case and the continuous disclosure case, we now turn to a consideration of exoneration and penalty.
In relation to the misrepresentation case, the trial judge found that the ASX representations contravened ss 1041H and 1041E and made declarations to that effect. As neither section is a civil penalty provision, no question of exoneration or pecuniary penalty arises (at [6], [393]). There is no appeal against his Honour’s making of the declaration of contravention with respect to the ASX representations. Having rejected ASIC’s cross-appeal, no question of penalty arises with respect to the Edinburgh and London representations.
With respect to the continuous disclosure case, JHINV, having been found to have contravened s 674, sought to have the Court excuse its contravention pursuant to s 1317S(2). That section provides:
“1317S                 Relief from liability for contravention of civil penalty provision
(2)          If:
(a)eligible proceedings are brought against a person; and
(b)in the proceedings it appears to the court that the person has, or may have, contravened a civil penalty provision but that:
(i)           the person has acted honestly; and
(ii)having regard to all the circumstances of the case (including, where applicable, those connected with the person’s appointment as an officer, or employment as an employee, of a corporation or of a Part 5.7 body), the person ought fairly to be excused for the contravention;
the court may relieve the person either wholly or partly from a liability to which the person would otherwise be subject, or that might otherwise be imposed on the person, because of the contravention.”
Eligible proceedings are defined in subsection (1) to mean, relevantly, proceedings for a contravention of a civil penalty. Section 674(2) is a civil penalty provision in the terms of s 1317E(1).
The trial judge held that he was not prepared to infer that JHINV had acted honestly, as JHINV should have known that the question that they were addressing was not the question required by the legislation. As JHINV had not established the first limb of s 1317S(2) it was not entitled to relief under the section (at [211]-[212]).
His Honour, at [215], found that the breach was flagrant and involved a deliberate decision not to disclose the ABN 60 Information in the face of Allens’ first advice and in non-compliance with Allens’ second advice (at [414]). His Honour imposed a pecuniary penalty of $80,000 (at [415]).
JHINV appealed against his Honour’s penalty order on the following grounds:
“10The trial judge erred in holding that JHINV was not entitled to the relief afforded by s 1317S of the Act.
11The trial judge erred in finding that JHINV should have known that the question it was addressing with respect to disclosure was not the question required by the legislation.
12The trial judge erred in not finding that JHINV had acted honestly.”
Although not the subject of a separate ground of appeal, there was also a challenge to his Honour’s finding that JHINV’s breach of s 674 was ‘flagrant’. It is convenient to deal first with ground 12, the resolution of which renders it unnecessary to deal with ground 10.
7.1. The trial judge’s reasons as to the penalty
The trial judge held that “honesty” for the purposes of these sections meant acting without moral turpitude. His Honour said, at [22]:
“In my view a person acts honestly for the purposes of Section 1317S(2) and Section 1318(1), in the ordinary meaning of that term, if that person’s conduct is without moral turpitude in the sense that it is without deceit or conscious impropriety, without intent to gain improper benefit or advantage and without carelessness or imprudence at a level that negates the performance of the duty in question. That conclusion may be drawn from evidence of the person’s subjective intent. But a lack of such subjective intent will not lead the Court to conclude that a person has acted honestly if a reasonable person in that position would regard the conduct as exhibiting moral turpitude.”
JHINV submitted on the penalty hearing that the trial judge should accept that it acted honestly within the meaning of the section. The trial judge rejected this argument, adopting the approach taken by Santow J in Re HIH Insurance Ltd (in liq) and HIH Casualty and General Insurance Ltd (in liq); Australian Securities and Investments Commission v Adler [2002] NSWSC 483; (2002) 42 ACSR 80 where his Honour stated:
“[166]It would, however, be putting matters rather too high to say that there is no onus on a defendant to positively show honesty, in order to persuade the court to be positively satisfied that the person has acted honestly and to exercise its discretion favourably, if otherwise satisfied to do so.
…
[168]Sensing the impropriety of another falls short, by itself, of a finding of dishonesty. But that is not the same as the court reaching a positive satisfaction that the person concerned ‘has acted honestly’, s 1317S(2)(b)(i), or that the person ‘has acted honestly’ within the meaning of s 1318. If the court is unable to reach a conclusion as to the appearance of honesty, but is not prepared to make the grave finding of dishonesty, more especially in circumstances where no evidence has been given directly by [the relevant director], the better view is that the jurisdiction to give dispensatory relief simply does not arise; indeed if it did arise, it would hardly be exercised favourably in the absence of demonstration of acting honestly, though that may not necessarily be enough.”
Gzell J stated that honesty might be established from the circumstances surrounding the breach and from other evidence, including testimonial evidence as to the person’s conduct before and after breach. Thus, his Honour said that he would not refuse to exercise the discretion simply because the persons involved in making the decision did not give evidence of honest intent.
JHINV submitted that because his Honour had already determined that the issue was not JHINV’s assessment of materiality, but an assessment of the reasonable person’s perception of whether a statement would have a material affect on the price of JHINV shares, his Honour failed to assess the steps JHINV had taken to determine whether disclosure was necessary. This is not correct. His Honour’s finding that JHINV had asked itself the wrong question was made after a detailed consideration of what it had done to lead it to the conclusion that disclosure was not required.
JHINV further submitted that, in any event, the trial judge erred in making the following findings: that JHINV addressed the wrong question required by the legislation (at [210], [211]); and that JHINV did not explain why the question required by the legislation had not been addressed (at [211]). It also contended that his Honour made a number of factual errors. It was said that these errors were material, because they were the basis upon which the trial judge refused to infer that JHINV acted honestly.
The first of the alleged errors revolved around Mr Baxter’s email of 23 March 2003. JHINV submitted that there was nothing in the email to suggest that he did not address the correct question required by the legislation, that is, whether the information would be likely to influence investors when deciding to buy or sell JHINV shares. It was submitted that in each of the reasons advanced by Mr Baxter, the underlying consideration was the likely reaction of investors.
This submission is correct, but only so far as it goes. The tenor of Mr Baxter’s email was that there were reasons to support non-disclosure. However, as we have already explained, his email was directed at justifying that position. That exercise is only valid if the correct question is addressed. For the reasons we have given, his Honour was correct in finding that JHINV had not addressed the correct question.
JHINV gave no evidence, either at the liability hearing or at the penalty hearing, as to why it considered that the Allens’ advice was inapplicable to the circumstances. It was open to his Honour in those circumstances to infer that JHINV’s decision not to disclose was a well-thought out commercial decision made in the face of legal advice to the contrary. The fact that Mr Macdonald sought the expression of “other points” from Messrs Baxter, Shafron, Morley and Robb does not advance the matter very far. His email to these persons was made in the context of disclosure of the repayment of the Foundation. The email did not deal with the disclosure of the cancellation of the partly paid shares for no consideration, the transfer of JHIL or the DOCIA.
The burden of proving that the decision not to disclose was honestly made fell on JHINV. Mr Baxter held the view that the transfer was not material. Although he was an ASIC witness, it was not suggested to him in his evidence that he did not honestly hold that view. JHINV submitted that it was entitled to rely upon his evidence as the opinion evidence of a person who was possibly in the best position to assess the situation, given his expertise and his likely knowledge of the attitudes of shareholders.
However, the reality was that Mr Baxter was not able to give any relevant evidence on the point and, as we have explained, Mr Baxter’s email of 25 March was self-serving. Ms Hellicar, a director of JHINV, gave evidence, but was not cross-examined on this issue. Mr Brown, another director of JHINV, also gave evidence. He said that he thought that there had been reliance on the second Allens’ advice, which he understood was that disclosure was not required. Although there was no challenge to Mr Brown’s evidence on this issue, this simply was not a correct reading of the advice. Rather, as we have said, JHINV’s reliance on the advice was an opportunistic means of justifying its contravening conduct. In any event, management had the assistance of general counsel, Mr Shafron, who would have appreciated the purport of both Allens’ advices. Apart from Mr Baxter, none of the other members of management gave evidence on this issue so as to discharge JHINV’s onus.
Given all of these factors, no appealable error has been demonstrated in his Honour refusing to infer that JHINV’s failure to disclose was an honest mistake.
Having reached that conclusion in respect of ground 12, it is not necessary to deal with ground 10, which is in reality a ‘catchall’ ground, encompassing grounds 11 and 12. It does not raise any matter which requires separate consideration. Ground 11 was directed at his Honour's finding that JHINV “should have” known that it was not addressing the question required by the legislation. It is unclear whether this submission was maintained in oral submissions, and it was not the subject of written submissions. We would reject it in any case. JHINV was required to comply with the continuous disclosure regime. There is no question that compliance with s 674 requires a company to ask the question required by the legislation, namely, whether the information would be likely to influence investors when deciding to buy or sell shares. If non-compliance with the legislation stemmed from a decision that was honestly made, then it was incumbent upon JHINV to provide the trial judge with some evidence of its honesty. It did not do so.
7.2. Was the breach flagrant?
The trial judge’s finding that the breach was flagrant was also challenged, although not subject of a separate ground of appeal.
His Honour’s finding that the breach was flagrant was made in the context of the policy underlying the disclosure provisions. In this regard, his Honour said, in respect of s 1001A(2):
“… it has been said that the continuous disclosure provisions are intended, amongst other things, to prevent selective disclosure of market sensitive information (Australian Securities and Investments Commission v Southcorp Ltd (No 2) [2003] FCA 1369; (2003) 130 FCR 406 at 408 [2]). Protective legislation should be construed beneficially to the public (Exicom Pty Ltd v Futuris Corporation Ltd (1995) 123 FLR 394 at 397), even if a distinction between ‘punitive’ and ‘protective’ proceedings or orders is elusive (Rich v Australian Securities and Investments Commission [2004] HCA 42; (2004) 220 CLR 129 at 145 [32]). The importance of Section 1001A(2) in terms of public policy is that it seeks to enforce immediate disclosure of information not generally available that might be expected to have a material effect on the price of listed shares. The significance that the legislature places upon continuous disclosure was discussed by French J in Re Chemeq Ltd; Australian Securities and Investments Commission v Chemeq Ltd [2006] FCA 936; (2006) 234 ALR 511 at 522-523 [42]-[46].” (at [179])
His Honour considered that the same principles applied to s 674. As he said, at [215], “[t]he requirement of continuous disclosure is important in achieving an informed market”. There was no submission to the contrary and we endorse his Honour’s approach.
JHINV submitted that, if there was a breach, it was not flagrant. Rather, it was, at most, an error of judgment made in respect of a commercial matter, namely, negative perception in the market, which was unquantifiable. However, JHINV had been actively concerned about the negative perception in the market for nearly 18 months and the separation of JHIL was the chosen method, amongst a number of options, to eliminate it. Moreover, the senior management of JHINV had spent many years grappling with what his Honour called the “blight” of the Group’s asbestos liabilities. There is no question that JHINV and its management were aware about the market’s sensitivity to the asbestos issue.

Contrary to being an error of judgment, JHINV’s strategy in not disclosing the ABN 60 Information was well thought through. What it told the market and when it did so was deliberate and also well thought through. Its contravening conduct demonstrated a significant disregard for honesty and transparency and a subjective willingness to interpret its statutory obligations to suit its own corporate purposes.
It follows that we reject the appellant's appeal on penalty.
We would only add that, in our opinion, the penalty imposed by his Honour was light, having regard to the seriousness of JHINV’s contravening conduct. However, there was no cross-appeal in respect of the penalty imposed by the trial judge and our comments are confined accordingly.
7.3. Costs
JHINV has been unsuccessful on its appeal and notice of contention and ASIC has been unsuccessful on its cross-appeal. Having regard to the time devoted to the various issues, we consider that the appropriate order for costs in this matter is that JHINV pay 90 per cent of ASIC’s costs of the entire proceedings.
Orders:
1. The appeal and the cross-appeal are each dismissed;
2. The appellant is to pay 90 per cent of the respondent’s costs.

AMENDMENTS:

21/12/2010 - Citation - Paragraph(s) 184

23/02/2011 - Typographical error - Paragraph(s) judgment

23/02/2011 - Typographical error - Paragraph(s) 4

23/02/2011 - Typographical error - Paragraph(s) 6

LAST UPDATED:
23 February 2011

1. INTRODUCTION
1.1. Nature of the case	[2]
1.1.1. The misrepresentation case	[4]
1.1.2. The non-disclosure case	[11]
1.2. Some general introductory remarks	[14]
2. THE MISREPRESENTATION CASE	[25]
2.1. Summary of the alleged contraventions	[25]
2.1.1. The legislation: the Corporations Act, ss 1041E and 1041H	[27]
2.1.2. The ASX representations	[28]
2.1.3. The Edinburgh representations	[37]
2.1.4. The London representations	[40]
2.1.5. Representations as to legal advice	[42]
2.1.6. The alleged contraventions: s 1041E	[46]
2.1.7. The alleged contravention: s 1041H	[48]
2.2. Findings of the trial judge in the misrepresentation case	[49]
2.2.1. Finding of the trial judge as to the representation conveyed by the phrases “fully funded” and “no future liability”	[50]
2.2.2. Finding of the trial judge as to representation that there was a reasonable basis for the assertion of certainty or high likelihood	[54]
2.2.3. Findings of the trial judge that representations were misleading	[58]
2.2.4. Finding of the trial judge as to whether there had been a breach of s 1041E	[60]
2.2.5. Findings of the trial judge as to whether the ASX representations contravened s 1041H	[75]
2.3. Issues on JHINV's appeal, the cross-appeal and notices of contention	[76]
3. FIRST ISSUE ON JHINV's MISREPRESENTATION APPEAL: THE MEANING OF THE STATEMENTS IN SLIDE 4	[77]
3.1. The notional representative class	[79]
3.1.1. Campomar Sociedad, Limitada v Nike International Limited	[81]
3.1.2. National Exchange Pty Ltd v Australian Securities and Investments Commission	[85]
3.1.3. Domain Names Australia Pty Ltd v .au Domain Administration Ltd	[88]
3.2. Were the ASX representations misleading or deceptive?	[90]
3.2.1. Principles applicable to determining whether the ASX representations were likely to mislead	[91]
3.2.2. The language of slide 4	[99]
3.2.3. The context of slide 4: whether the statements referred to the historical position	[116]
3.2.3(i) The format of the slides and the need to read the slides as a whole	[121]
3.2.3(ii) The purpose for which the slides were prepared	[126]
3.2.3(iii) Information generally available in the market	[131]
(a) Form 20-F filed with the US Securities and Exchange Commission	[135]
(b) The Annual Report for year ending 31 March 2002	[143]
3.2.3(iv) JHINV's reliance on Mr Humphris' evidence	[146]
3.2.3(v) Analysts' reports	[160]
3.2.3(vi) Conclusion on language and context arguments	[164]
3.2.4. The reliance on the ASX Announcement reasoning	[167]
3.3. Conclusion on misleading nature of the representations	[173]
4. SECOND ISSUE ON JHINV'S MISREPRESENTATION APPEAL: THE LIKELY INDUCING EFFECT OF THE ASX REPRESENTATIONS	[176]
4.1. Meaning of "likely" in s 1041E and s 1041H	[180]
4.2. Did the trial judge err in finding the ASX representations had the relevant inducing effect?	[194]
4.2.1. Did the trial judge address the wrong question?	[195]
4.2.2. Was there evidence to support his Honour's finding that the representations were likely to induce persons to sell or acquire shares?	[198]
4.2.2(i) Evidence of Mr Baxter	[200]
4.2.2(ii) Evidence of Mr Thompson and Mr Simons	[213]
4.2.3. Whether evidence to support the trial judge's finding as to the effect of slide 4 on JHINV's share price	[224]
4.3. Conclusion on the second issue of the misrepresentation appeal	[247]
5. EDINBURGH AND LONDON REPRESENTATIONS: ASIC CROSS-APPEAL AND JHINV'S NOTICE OF CONTENTION	[248]
5.1. The findings of the trial judge in respect of the Edinburgh and London representations	[252]
5.2. JHINV's notice of contention: whether the Edinburgh and London representations were made	[254]
5.2.1. Emphatic statements	[255]
5.2.2. The Watson v Foxman submission	[259]
5.2.2(i) The evidence of Mr Thompson	[259]
5.2.2(ii) The evidence of Mr Simons	[271]
5.2.3. Mr Baxter's notes	[275]
5.2.4. Similar reasoning as in respect of the ASX Announcement	[281]
5.2.5. Failure to consider context	[283]
5.2.6. The question of legal advice	[284]
5.2.7. Conclusion as to whether the Edinburgh and London representations were made and were misleading	[291]
5.3. The cross-appeal: Edinburgh and London representations: the relevant effect on the market	[292]
5.3.1. JHINV's declared intent	[304]
5.3.2. Reliance on factors other than the representations	[309]
5.3.3. Reliance upon the actual outcome and Mr Humphris' evidence	[315]
5.3.3(i) Did Mr Humphris have the relevant expertise?	[322]
5.3.3(ii) Did Mr Humphris address the pleaded case?	[325]
5.3.3(iii) Whether assumptions on which opinion was based were made out on the evidence	[328]
5.3.3(iv) Failure to analyse position if statements had not been made out	[338]
5.3.4. Conclusion in respect of likely inducing effect	[341]
6. THE CONTINUOUS DISCLOSURE CASE	[345]
6.1. The pleaded contravention	[357]
6.2. Trial judge's findings	[362]
6.3. The disclosure case in context	[367]
6.3.1. JHINV and the Foundation	[371]
6.3.2. The asbestos issue	[372]
6.3.3. The first Allens' advice: 31 January 2003	[384]
6.3.4. The second Allens' advice: 28 March 2003	[419]
6.3.5. Analysts' reports	[435]
6.3.6. The views of management	[453]
6.4. Submissions on the appeal	[460]
6.4.1. JHINV's submissions	[460]
6.4.2. ASIC's submissions	[464]
6.5. Consideration of JHINV's arguments	[470]
6.5.1. The second Allens' advice	[471]
6.5.2. The analysts' statements	[480]
6.5.3. JHINV's internal documents	[492]
6.5.4. Mr Humphris' evidence	[504]
6.5.5. Whether the separation of JHIL was material	[524]
6.5.6. Movement in JHINV share price on 15 May 2003	[531]
6.5.7. Period of contravention	[541]
6.6. Conclusion on continuous disclosure obligation	[546]
7. EXONERATION, PENALTY AND COSTS	[551]
7.1. The trial judge's reasons as to the penalty	[559]
7.2. Was the breach flagrant?	[571]
7.3. Costs	[578]
ORDERS	[579]