Am I the only person who thinks it is quite ironic that a company called CSR (the old Colonial Sugar Refining company or founded in 1855 in Sydney) is leading the way in CSR (corporate social responsibility) in relation to asbestos compensation?
For over 20 years I have been monitoring, commenting and analysing corporate law, corporate governance and the more contemporary concepts of CSR.
The full bench of the Federal Court on 23 April 2010 handed down a very technical appeal on CSR Limited, which involved CSR and the world of “commercial morality”!
Before delving into schemes of arrangements, reductions of share capital, procedural matters, shareholders meetings, directors’ duties and the thorny issue of protecting asbestos victims compensation payments for the next forty-years, let’s look at some background issues.
Corporate governance as a concept has probably been around since before 1844 (the first joint stock companies by registration) and certainly by 1855 when limited liability came along.
However, getting anyone to agree on a reasonable definition took about 150 years. A mixture of the Cadbury Report in the UK in 1992 and the HIH Royal Commission final report in 2003 provides an acceptable working definition.
But CSR seems to be a sub-set of corporate governance with little agreement of what is included in a definition.
There have been numerous attempts (mostly by academics) but little agreement, other than it seems to include “stakeholders”, which catches-up employees, the environment and local communities.
If a Federal Court judge starts listening to counsel arguing about “commercial morality”, and we have known companies with problems (such as James Hardie Industries, founded in 1888 in Melbourne) and multiple parties “interested” in asbestos compensations long-tail claims, you have a recipe for disaster.
Hence the importance of CSR to CSR Limited.
In fact, the three appellant judges all agreed that Justice Stone, at first instance on February 3 erred in dismissing CSR Ltd’s application of October 8, 2009 to convene a meeting of its shareholders to consider a scheme of arrangement.
The appeal decision in CSR Ltd is only 26 pages (90 paragraphs) long, but does include some very important principles of law and procedure.
It also separates the emotion surrounding a topic like asbestos and to a certain extent corporate social responsibility from the boring aspects of procedure, e.g. reductions of capital and schemes of arrangements as laid out in the Corporations Act 2001 (Cth).
Companies are allowed under the law to reduce capital if they are solvent and comply with well established procedures.
A scheme of arrangement is the correct procedure in difficult and complex matters. For example, the NRMA failed to demutualise the roadside-assistance organisation from its insurance entity in 1995.
By applying an appropriate scheme of arrangement in 2000, it was successful in creating NRMA (members’ roadside assistance) and a commercial insurance company (IAG) as completely separate entities.
For commercial reasons, the board of directors of CSR Ltd wanted to separate its sugar and renewable energy business from its building products and aluminium business.
Directors decided it was best to establish two new companies listed on the Australian Securities Exchange (ASX) to be called “Sucrogen” and a “New CSR” company.
Unfortunately for CSR Ltd, along with James Hardie, it had been a leading manufacturer of asbestos and had many outstanding liabilities to pay as compensation, even though it had stopped producing asbestos products in 1977.
There was public outrage at James Hardie moving “off-shore” to the Netherlands in 2001, potentially to reduce its exposure to asbestos payments in the name of tax and administrative savings by way of a scheme of arrangement.
The consequence has been significant cynicism about corporate rearrangements by asbestos companies.
James Hardie Ltd and its modern Dutch entity James Hardie Industries NV and CSR Limited have very different histories.
I am not connected to either company in anyway. My observation is that CSR Ltd has a long, public, track-record, of good corporate governance and genuine attempts at CSR.
The board of CSR Ltd, in its various versions, has consistently taken into account its responsibilities for asbestos compensations and made appropriate financial provisions.
This can be contrasted with the James Hardie directors, who were found (along with the company) in 2009 to have misled the public and the ASX in 2001 by claiming the asbestos compensation was “fully funded”.
David Jackson QC (pic) found in 2004 found there was a $1.5 billion shortfall.
Aspects of Gzell J’s judgment in the Hardie case are currently on appeal.
CSR Ltd devises a scheme of arrangement under the law to demerge two businesses and reduce capital, but provide sufficient funds to meet future claims arising from its old asbestos building products division.
The application to the court under s.411 is a standard safeguard to convene a shareholders meeting where a complex transaction is about to take place.
There must have been some surprise when the Australian Securities and Investment Commission joined with the Attorney General of NSW and James Hardie Industries SE and James Hardie 117 Pty Ltd and the Asbestos Injures Compensation Fund to object to CSR Ltd’s proposed scheme.
Justice Stone heard the application from CSR Ltd and also the many reasons not to allow the meeting to be convened by the opponents who believed that CSR Ltd had not provided enough future funds for asbestos victims.
The key provision in question, s.411, is a procedural step and does not introduce concepts that the Justice Stone discussed as “commercial morality”.
In fact, schemes of arrangement have a long history and judges have tended to avoid endorsing or evaluating the actual schemes, instead preferring shareholders to decide the merits of the proposal (including any moral or ethical issues).
At the heart of CSR Ltd’s application (as outlined by the full bench) is whether future asbestos victims (who have not been identified) had been taken into account (the answer was “yes”) and whether $446.8 million was sufficient for CSR Ltd to pay future claims for the next 40 years.
The expert actuaries in Australia and USA believed that there was an exposure of between $30 million to $50 million each year (with a high of $60-$70 million for a few years) and tapering to zero in 40 years time.
The worst case estimate by CSR Ltd was $661 million and the Asbestos Injuries Compensation Fund calculation was $896.5 million.
CSR Ltd provided evidence that even these amounts could be met out of cash-flow, capital raising or cost-cutting, if necessary.
The Chief Justice Keane CJ and Justice Jacobson both concluded that the increased risk of CSR Ltd not paying was more theoretical than material and did not warrant blocking the shareholders meeting to approve the reduction in shareholders capital.
The primary judge had erred by focusing on the merits of the scheme. She placed weight upon “commercial morality”, which is not included in the legislation.
Justice Finkelstein (pic) added a further 20 paragraphs.
While agreeing with the conclusions and orders, he added his own clarifying thoughts.
His focus was on the importance of convening a scheme of arrangement and that judges should emphatically not consider the merits or fairness of the proposed scheme, but decide on the manner of the meetings to be conducted.
“Pubic policy” considerations and the approach of the courts can be dated to 1891 in Re Alabama, New Orleans, Texas and Pacific Junction Railway Company case  1 Ch 213 and the more challenging “commercial morality” concept to the 1970 case of Re Mascot Home Furnishing Pty Ltd (in liquidation)  VR 593.
But the community standards to be applied are constantly changing and do not help judges determine if the scheme is fair and reasonable.
This is the role of the shareholders and creditors, whose interests are protected in the legislation.
The bottom-line is that the judges believed (from the evidence provided) that CSR Ltd has put aside sufficient funds to pay the creditors in the “worst case” scenario.
The additional risks identified are more theoretical than practical and thus are insufficient to cause the court to refuse the scheme.
The next step is that the matter is sent back to a single judge of the Federal Court to hear the application to approve the scheme to be put to the shareholders.
We’ll see what happens then.
*Professor Michael Adams (pic) is head of the School of Law, University of Western Sydney.