ASIC tests director safeguards

In their response, the NEDs are likely to claim the safe harbour of the business judgment rule. That rule protects directors who make a judgment they rationally believe is in the best interests of their company. The rationality standard is deemed satisfied unless the belief is one that no reasonable person in their position would hold.

However, access to this safe harbour is conditional. The condition that will be tested on the first claim is the requirement that the directors were adequately informed in their decision, the very issue that ASIC is contesting. The condition of director good faith and proper purpose might be tested on the second.

Each of ASIC's claims turns substantially upon the alleged misleading effect of the NEDs' own statement of belief or its concealment, rather than upon the general quality of their monitoring, skill or diligence, although elements of the latter arise in the first claim.

Upon examination, therefore, ASIC's action does not appear to open new vistas of NED liability. It is likely, however, to provide a welcome exploration of the business judgment rule's protection.