In the past year, much has been it was broadly consistent with previous 25 February 2004
said about what James Hardie did such reports provided to JHIL over a The NSW State Government
and sought to do in relation to the number of years. Taking into account announced that Mr David Jackson QC
establishment of the Medical Research that advice, the Foundation was would conduct a Special Commission
and Compensation Foundation provided with A$293 million of cash of Inquiry (SCI) into the establishment
(“the Foundation”) and James Hardie’s funds as well as income-producing of the MRCF (the Foundation).
subsequent group restructuring. assets, including additional funding James Hardie welcomed the SCI but
These were complex transactions provided by JHIL itself, to meet the expressed concern that the terms of
which have frequently been actuarial best estimate of future claims. reference failed to examine the impacts
misunderstood or misrepresented, of the alleged blow-out in asbestos
The money provided to the Foundation
as have the company’s actions and liability claims on all parties, including
included funds for medical research
objectives. the NSW Government.
aimed at finding treatments and cures
To facilitate a more informed for asbestos-related diseases and it 16 March 2004 (to 13 August 2004)
understanding, we have set out continues to be involved in this area. The SCI held public hearings at
below some of the key events and which the Commissioner and
The board of JHIL at the time
their context. representatives of all those admitted
considered these arrangements were
to appear questioned individuals
PRIOR EVENTS in the best interests of both JHIL and
about the events being considered
asbestos claimants.
16 February 2001 by the SCI. James Hardie pursued a
The Board of James Hardie Industries 29 October 2003 policy of dealing with the issues to be
Limited (“JHIL”, now ABN 60) In the course of filing its year-end addressed in the Commission and not
established the Foundation to provide financial accounts, the directors of in the media. We sought at all times
financial compensation for those with the Foundation announced that they to be respectful of the Commission
asbestos-related diseases and, at the had obtained revised actuarial advice and complied with all requests that
same time, to assist James Hardie to which predicted a future total liability the Commission made of us in terms
focus on the pursuit of international of A$1.089 billion which resulted of providing information and making
growth opportunities by removing in an estimated funding shortfall of available company officers and
asbestos liabilities from its balance approximately A$800 million. This employees.
sheet. shortfall was at odds with the actuarial
7 June 2004
advice that JHIL directors had
The Foundation was created as a The different actuarial estimates,
previously received and which they
dedicated organisation to manage which led to varying shortfall figures,
had thought was reliable.
and deal with the asbestos liabilities and the known excesses in the
of the former subsidiaries of JHIL which In considering how it could offer the claims system, did not provide any
were transferred to it. Foundation further funding, in the basis for assessment of affordability
interests of all stakeholders, James and certainty for the Board to
As part of considering the establishment
Hardie directors needed to work consider the development of a
of the Foundation, the JHIL Board
through a huge range of complex funding proposal that might be put
commissioned and received actuarial
factors, which took (and which to shareholders. Therefore, James
advice as to the actuarial best-estimate
continue to take) considerable time. Hardie commissioned a new actuarial
of future asbestos claims. That advice
report from KPMG Actuaries, and
was believed by the JHIL directors to be
submitted it to the Commissioner on
a reliable actuarial report, partly because
Special Commission of Inquiry
and Asbestos Compensation
This document does not aim to present arguments for or against the company’s
voluntary funding proposal. These will be the subject of a separate Explanatory
Memorandum which will be provided to holders in advance of an Extraordinary
General Meeting which will be called to allow debate and voting on the proposal.
12 James Hardie Annual Report 2005
PERFORMANCE
7 June 2004. The report provided however, seek a significant reduction Board said it believed the proposal
an independent actuarial review of in legal costs in light of these being a would be in the best interests of
future asbestos liabilities of the former large component of the total liabilities asbestos claimants and their families,
James Hardie subsidiaries Amaca and and the extensive cost savings that as well as the best interests of James
Amaba, as well as KPMG Actuaries’ it had identified could be achieved Hardie shareholders.
view of historical and then-current without detracting from the rights of
13 August 2004
projections by other actuaries and claimants.
In response to questions from
highlighted “an unforeseeable upward
19 July 2004 Mr Jackson in the SCI, James Hardie
trend” in claims numbers and average
The Board announced the provided additional information about
claims costs in recent years.
establishment of a Board Special its funding proposal.
Based on the information that would Committee to oversee the company’s
10 September 2004
have been available to actuaries, further participation in the SCI,
James Hardie deferred a resolution
Trowbridge, at the time it prepared its including reviewing the SCI’s report
to adopt its annual Dutch GAAP
actuarial report for JHIL in February and recommending appropriate
accounts for the year ended 31
2001 (and upon which the funding for actions in response to its findings;
March 2004 at its upcoming AGM to
the Foundation was based), KPMG and overseeing any developments
provide the opportunity, if necessary,
Actuaries believed its best estimate or discussions of suitable
to accommodate any impact the SCI’s
would have been in the order of arrangements to ensure all legitimate
report might have on the company’s
A$694m. The equivalent Trowbridge claimants receive fair and equitable
financial statements. The company
figure at that date was A$323m. compensation.
also announced that its Audit
James Hardie directors expressed their
28 July 2004 Committee had commissioned an
concern at the different figures, and
All parties’ submissions to the SCI internal investigation, to be conducted
announced they were considering the
were released. In its submissions, by independent legal and other
implications of the report.
James Hardie vigorously defended advisors, to investigate any potential
30 June 2004 the company, its directors and impacts on the financial statements of
Following hearings, but in advance officers against allegations made in the various allegations of illegal acts
of the deadline for submissions from others’ submissions and confirmed made during the SCI’s proceedings.
all parties, Counsel Assisting the SCI the company’s earlier proposal
15 September 2004
released his Issues Paper, making for a Board recommendation that
James Hardie Chairman, Meredith
contentions about the actions of shareholders approve the provision
Hellicar, delivered her address to the
the company and its officers. In of additional funding if an effective
company’s Annual Information Meeting
accordance with the processes of the statutory scheme was established. The
of Security Holders in Sydney. Ms
Commission, James Hardie undertook submission outlined the key principles
Hellicar reassured holders that the
to respond to these contentions in its of a proposed scheme which, again,
Board was focussed on finding a
submission to the inquiry. did not include a cap on payments to
solution that:
claimants.
14 July 2004
– addressed in an affordable way, the
The Board announced that it would 11 August 2004
issue of funding compensation for
recommend that shareholders approve James Hardie Chairman, Alan
victims of asbestos-related diseases
the provision of additional funding to McGregor, resigned due to ill health
caused by James Hardie’s former
enable an effective statutory scheme to and Meredith Hellicar was named as
Australian subsidiaries;
be established to compensate future the company’s Chairman. In public
claimants for asbestos-related injuries statements following her appointment, – addressed the concerns of the
caused by former James Hardie Ms Hellicar apologised to those community; and
Australian subsidiary companies. The affected by asbestos for the stress
– allowed the company to meet its
company confirmed its willingness and uncertainty caused because the
responsibilities to its shareholders and
to contribute to a resolution in the Foundation set up to meet their claims
employees.
best interests of all parties, including proved to have insufficient funding, and
current and future Australian asbestos confirmed plans to put to shareholders 21 September 2004
claimants against the Foundation, a proposal that the compensation to Mr David Jackson QC presented the
James Hardie shareholders and other which these people are entitled be SCI Report to the NSW Government.
constituents. continued to be provided in a manner
In relation to Terms of Reference 1:
that is speedy, fair and equitable.
A submission discussing these issues Adequacy of the MRCF funding,
was provided to the SCI in response to 12 August 2004 Mr Jackson found there was a
Term of Reference 4. The submission In its concluding submissions to the significant estimated funding shortfall
did not propose a cap on payments to SCI, James Hardie provided more in relation to the asbestos related
claimants and did not impose detailed detail about the scheme proposed liabilities of Amaca and Amaba. In
requirements by the company because in its 14 July offer to recommend part this was based on an actuarial
the Board believed it best to make the to shareholders that they fund an report prepared by KPMG Actuaries,
broad proposal and to leave the details appropriate scheme. While affirming commissioned by James Hardie for
for subsequent discussion. It did, the company’s legal position, the the purpose of the SCI indicating that
James Hardie Annual Report 2005 13
the discounted value of the central of assets to meet the future asbestos- asbestos claimants which would create
estimate of the asbestos-related related liabilities of Amaca and Amaba; a valuable cause of action against,
liabilities of Amaca and Amaba however, he expressed an opinion and therefore a material liability of, any
was approximately A$1.5 billion. that “in practical terms” the separation James Hardie entity or would lead to
Mr Jackson accepted this figure as was likely to have had such an effect any of the restructuring arrangements
the minimum central estimate but because if separation had not taken being reversed. Mr Jackson noted that
concluded that a significantly greater place in February 2001 he thought that there were significant hurdles, which
sum would be required to provide a it seemed likely that, for the indefinite might be insuperable, to establishing
high degree of assurance that all future future, the asbestos-related liabilities any liability in respect of these claims
claims would be met. He found that would have been treated, as they had against James Hardie, ABN 60 or
the net assets of the Foundation and been for years, as one of the annual their respective directors, and that
ABN 60 (estimated to be $179.2m as expenses of the James Hardie Group. even if such liability were established
at 30 June 2004) were not sufficient there were further hurdles which might
In relation to the circumstances of
to meet these prospective liabilities prove to be insuperable against any
the establishment of the Foundation,
and were likely to be exhausted in a substantial recovery or remedy by such
Mr Jackson made certain adverse
relatively short timeframe (the first half potential claimants in respect of them.
findings against, amongst others,
of 2007).
Mr Macdonald (the former CEO of In relation to Terms of Reference 3:
In relation to Terms of Reference 2: ABN 60 and James Hardie) and Mr Corporate Restructures, overall the
Separation of the MRCF, Mr Jackson Shafron (the former General Counsel of SCI report found that the relevant
observed that James Hardie was ABN 60 and James Hardie and former corporate restructures conducted by
“perfectly entitled to seek a means CFO of James Hardie). In particular, JHIL and James Hardie over several
whereby it could pursue its business Mr Jackson noted that he found years were for valid business reasons
aims without being perceived, rightly it difficult to accept that JHIL and did not adversely affect the
or wrongly, as associated with management “could really have Foundation’s ability to meet its current
ongoing asbestos liabilities”. He also believed that the funds of the and future liabilities.
indicated that the establishment of Foundation would have been sufficient
On Terms of Reference 4: Adequacy
the Foundation and the establishment to enable it to pay all future legitimate
of current arrangements, Mr Jackson
of the ABN 60 Foundation were asbestos related claims against Amaca
concluded that the current insolvency
legally effective and that, accordingly, and Amaba”. Accordingly, Mr Jackson
arrangements available to the
although any liabilities remained with considered that certain elements
Foundation under the Corporations
Amaca, Amaba or ABN 60 (as the of press releases issued by JHIL at
Act would not assist the Foundation
case may be), no significant liabilities the time of the establishment of the
to manage its liabilities. He went on to
for those claims could likely be made Foundation, which conveyed that
note that the best long term solution
directly against James Hardie or any of the Foundation had been provided
for satisfying the asbestos-related
the other entities in the James Hardie with sufficient funds, were “seriously
liabilities of Amaca, Amaba and ABN
Group. misleading”.
60 would be a scheme, for which that
Mr Jackson also found that it was It is important to note, however, that proposed by James Hardie during the
not possible, in money terms, to say the SCI also found that the alleged SCI hearings might be a starting point.
that separation directly resulted in, or conduct did not cause any material
contributed to, a possible insufficiency loss to the Foundation or to the
Special Commission of Inquiry
and Asbestos Compensation
14 James Hardie Annual Report 2005
PERFORMANCE
The company issued a statement The Board considered this move 25 October 2004
acknowledging the seriousness of to be consistent with its duties to Although the Foundation had a
the findings and comments of the shareholders and, where applicable, shortfall in the longer term, it had
Commissioner and advised that other stakeholders, particularly sufficient funding at the increased
the Board Special Committee and given the original intentions in the rate of claims and costs for a number
the Board would review the report establishment of the Foundation, the of years. Indeed no person entitled
accordingly and, after undertaking a disruptive effects of adverse publicity, to compensation has gone unpaid.
full analysis, issue a response. product bans and boycotts and the Despite this fact, James Hardie wrote
uncertainty regarding the scope or to the Foundation reaffirming its
The statement noted Mr Jackson’s
impact of any legislation that could preparedness to provide assistance for
remarks about the scheme proposed
be introduced in the absence of any its claimed interim liquidity position and
by James Hardie and reconfirmed
further action by the company. reiterated that it is in no-one’s interests
the company’s funding proposal
to have the Foundation placed in a
and its willingness to work with all 18 October 2004
position where it is unable to pay
relevant stakeholders in developing a In response to comments by the
legitimate claimants.
satisfactory compensation solution for ACTU, James Hardie re-confirmed its
asbestos claimants against its former commitment to achieving a sustainable 16 November 2004
subsidiaries which it could put to long-term compensation solution for James Hardie offered new
shareholders for approval. asbestos disease sufferers as quickly arrangements to the Foundation to
as possible. The company said it ensure asbestos victims with legitimate
The NSW Government rejected James
wanted an outcome that was not only claims would have access to further
Hardie’s proposal for a statutory
acceptable to the ACTU and asbestos funding.
scheme, stating it would not consider
disease sufferers, but also one that
implementing any proposal advanced Following public statements by the
could be supported by shareholders
by James Hardie unless it was the result Foundation that it required additional
and financiers.
of an agreement reached with the union cash funding to remain solvent,
movement acting through the ACTU, 22 October 2004 James Hardie offered an indemnity to
UnionsNSW as well as representatives After a review conducted by external the ABN 60 Foundation directors to
of the asbestos claimants. These legal advisers did not result in facilitate the immediate provision by
groups rejected the statutory scheme. any finding that Mr Macdonald ABN 60 of $88.5 million in cash to the
had breached the terms of his Foundation.
28 September 2004
employment agreement with the
Three working days after James Hardie In addition to offering the indemnity to
company in relation to the activities
directors around the world received ABN 60, James Hardie advised the
and transactions under review (noting
a copy of the SCI report, the Board Foundation that, should its funds prove
the administrative status of the SCI),
announced that, effective immediately, insufficient to meet legitimate claims,
Peter Macdonald resigned from the
Peter Macdonald would stand aside James Hardie intended to provide
company and received his contractual
as Chief Executive Officer and Peter interim funding on a month-to-month
entitlements.
Shafron would stand aside as Chief basis to enable those claims to be
Financial Officer. Mr Macdonald was engaged as a met.
consultant for an initial term of three
In a separate statement to the ASX, 18 November 2004
to six months to assist in the efficient
Peter Macdonald said he would James Hardie had been trying to
transition of his duties as Chief
vigorously defend himself against the convince the NSW Government
Executive Officer to his successor, and
allegations at the appropriate time, and to address the inefficiencies in the
then for a further 24 months to provide
that he would continue to work in the claims system. Finally, the NSW
advisory or consultative services
best interests of the company and its Government announced a Review
requested by the company. Louis Gries
shareholders to ensure the company of Legal and Administrative Costs in
was appointed interim CEO.
continued to grow and perform. Dust Diseases Compensation. James
Peter Shafron also resigned from the Hardie noted that the reduction of
1 October 2004
company, and was engaged as a legal, administrative and other costs
James Hardie representatives began
consultant for a period of 24 months was an important factor in the future
discussions with the ACTU, UnionsNSW
to provide advice to the company in affordability and sustainability of the
and a representative of asbestos
relation to the work attended to by Mr company’s proposal for the long-term
disease groups to try to reach an
Shafron while he was General Counsel funding of claims.
agreement on an appropriate manner
of the company. Russell Chenu was
in which the company might fulfil the James Hardie welcomed the
appointed interim Chief Financial
original intention in the establishment of government’s involvement and
Officer.
the Foundation. expressed its hopes to achieve an
outcome suitable to all stakeholders.
James Hardie Annual Report 2005 15
22 November 2004 These included: proposal; and approval of the voluntary
Announcing its results for the second funding proposal by the Company’s
– establishment of a Special Purpose
quarter of fiscal year 2005, James shareholders and lenders.
Fund (SPF);
Hardie advised that the internal
Based on current actuarial estimates
investigation into allegations of illegal – initial funding of the SPF by James
and market expectations of James
conduct raised during the SCI and any Hardie on the basis of the November
Hardie’s future financial performance,
impact on financial statements had 2004 KMPG Actuaries’ report (with a
the proposed annual payment caps
been completed, and there was found net present value central estimate of
are intended to allow payments to
to be no impact on the company’s A$1.5 billion); the actuarial assessment
claimants not only to be properly
current financial statements. is to be updated annually;
funded but also to have the benefit
8 December 2004 – a two year rolling cash buffer in the of significant contingency provisions.
In response to public speculation SPF; However, because the number of
questioning James Hardie’s claimants and the amounts that the
– a cap on the annual payments made
commitment to achieving a long-term courts may award cannot be known
by James Hardie to the SPF, initially
financial agreement as soon as is specifically in advance, and James
set at 35% of operating cash flow; and
possible, James Hardie provided an Hardie may not perform as the
update on the then current state of – no cap on individual payments to directors might hope, no absolute
negotiations between the company, proven claimants. assurance on this can be given.
the ACTU, UnionsNSW and asbestos
A key principle underlying the 8 March 2005
support groups. The update outlined
agreement was the fact that, to The NSW Government announced the
key points contained in a draft Heads
achieve the long-term funding, results of its Review into the Legal and
of Agreement presented by James
James Hardie had to remain profitable Administrative Costs of Dust Diseases
Hardie to the ACTU on 3 November
and strong and be able to continue to Compensation. James Hardie
and called on the NSW Government to
successfully grow its business. acknowledged the recommendations
join negotiations.
as a positive first step towards
The arrangement is subject to a
21 December 2004 establishing a more efficient system.
number of conditions precedent,
James Hardie signed a Heads
including implementation of the 31 March 2005
of Agreement with the ACTU,
findings of the NSW Government’s James Hardie and the Premier of
UnionsNSW, asbestos support
Review of Legal and Administrative New South Wales, the Hon Bob Carr,
groups and the NSW Government,
Costs; other legislation to facilitate provided updates on the timing of
outlining the key provisions and terms
the effectiveness of the voluntary the Principal Agreement to be signed
on which the company proposed to
funding arrangement; entry by the between James Hardie and the NSW
provide voluntary long-term funding
principal parties into a long-term Government. The updated timetable
of asbestos related personal injury
funding agreement; the obtaining of had the signing of the Principal
claims against former James Hardie
tax deductibility for payments by the Agreement to occur in early June,
subsidiaries.
company; recommendation of the reflecting the complexity of the legal
voluntary funding proposal by the and administrative issues surrounding
Board, following receipt of a report the establishment of the Special
from an independent expert of its Purpose Fund.
review and analysis of the funding
Special Commission of Inquiry
and Asbestos Compensation
16 James Hardie Annual Report 2005
PERFORMANCE
POST 31 MARCH 2005 21 June 2005
EVENTS James Hardie and the NSW Premier
separately announced an updated
15 April 2005 timetable which had the signing of
The Board confirmed that the SPF the Principal Agreement scheduled
would cover proven claims by for late July/early August and the
members of the Baryulgil community shareholder meeting to consider the
(former asbestos mine workers and voluntary funding proposal being
residents) against the former Australian held in late September/early October
subsidiary, Asbestos Mines Pty Ltd 2005.
for the period during which it was
owned by James Hardie (until 1976). The further delay was attributed
Further, the Board decided to expand to complex issues including the
the coverage of the SPF to assume interaction of Australian, Dutch and
coverage for the subsequent period US law.
of the mine’s operation, during which
Other
Asbestos Mines Pty Ltd was owned
The Board believes that the
by Woodsreef Mines Ltd (now Mineral
company cannot commit to
Commodities Ltd). This was because
providing any funding support
Asbestos Mines Pty Ltd (since
to address the funding shortfall
renamed Marlew Mining Pty Ltd) went
affecting the Foundation in the
into liquidation in 2002 and there was
absence of shareholder approval,
therefore uncertainty regarding the
because:
availability of funds from its parent,
Mineral Commodities Ltd, for future – Under Dutch law, a commitment
asbestos claims relating to Asbestos made to such a proposal would
Mines Pty Ltd during its period of have an impact on the identity
ownership. or character of the company, in
particular by adding asbestos liability
James Hardie proposed that any
issues to the company, and in such
such valid and proven claims against
circumstances Dutch law requires
Asbestos Mines Pty Ltd not otherwise
shareholder approval;
recoverable from any assets of
Asbestos Mines Pty Ltd; or any – It is consistent with the corporate
insurers of Asbestos Mines Pty Ltd; governance practices of the
or other parties from whom the company and the expectations of
claimant can recover compensation, the company’s shareholders; and
would be able to be covered by the
– In the absence of a current legal
SPF. Any such claims against the SPF
obligation to make such payments,
would also need to be funded within
it is simply prudent, in light of their
the cash flow cap set out in the Heads
significance, for directors to have
of Agreement.
their business judgment considered
16 May 2005 through a shareholder approval
As part of its 4th Quarter and Full Year process.
results presentation, James Hardie
Holders will receive additional
provided the market with an update
information about the proposed
on the voluntary asbestos funding
scheme and meeting in a separate
proposal, reporting considerable effort
mailing.
and steady progress on the finalisation
of the Principal Agreement. The update
noted that the timetable announced
on 31 March 2005 now appeared to
be ambitious, given the complexity of
some of the issues being dealt with.
At the same time, James Hardie
released an updated report from
KPMG Actuaries, providing a Net
Present Value estimate of liability at
31 March 2005 of A$1,684.9 billion.
The figure had not been adjusted
for estimated savings from the NSW
Government Costs Review.
James Hardie Annual Report 2005 17