25 August 2021
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Long-awaited changes to Australia’s continuous disclosure regime have now come into effect. After stalling for months in the Senate, the Federal Government passed the Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 (Cth) (Bill) on 10 August 2021, making permanent the temporary changes that were initially introduced in May 2020 in response to the COVID-19 pandemic. We discussed the pre-COVID-19 continuous disclosure regime and the changes proposed in the Bill in our previous article.
Prior to the changes, a disclosing entity’s failure to disclose market-sensitive information was a ‘no fault’ offence, which attracted civil liability based on an objective “reasonable person test”. If the entity did not disclose to the market operator, or ASIC, information which a reasonable person would expect to have a material effect on the price or value of the entity’s securities, then the entity would have contravened its disclosure obligations. An entity’s state of mind was not taken into account when determining if a contravention had occurred.
The Treasury Laws Amendment (2021 Measures No. 1) Act 2021 (Cth) (Act), which received assent on 13 August 2021,[1] has amended the Corporations Act 2001 (Corporations Act) so that:
In terms of determining whether the information could have a “material effect in price or value” (section 677 of the Corporations Act ) for the purposes of the new civil penalty provisions (sections 674A and 675A of the Corporations Act), the information would have to be information of a kind that would (or would likely) influence persons who commonly invest in securities in deciding whether to acquire or dispose of an entity’s securities.
The Act also introduces accessorial liability provisions for persons ‘involved’ (see section 79 of the Corporations Act) in an entity’s contravention of the new civil penalty provisions. However, a defence to accessorial liability is available to individuals who have taken all reasonable steps in the circumstances to ensure compliance, and after doing so, believed an entity’s obligations were complied with on reasonable grounds.
The existing continuous disclosure regime held disclosing entities and their officers in a constant state of fear, concerned about inadvertently breaching their disclosure obligations and the threat of a shareholder class action that would likely follow. This has resulted in boards taking a highly cautious approach to disclosure and decision making. We saw that this had become problematic during the emergence of COVID-19 in March 2020, where the high level of market uncertainty compromised the ability of many boards to provide forward-looking guidance to investors, prompting the temporary disclosure relief provided at that time.
According to the Australian Law Reform Commission’s most recent inquiry into class actions in Australia, shareholder claims are the most commonly filed class actions in the Federal Court (fuelled mostly by alleged continuous disclosure breaches) and have been consistently on the rise since the class action regime was introduced in Australia in the early 1990s. A large majority of shareholder class actions have settled before trial, with entities wanting to resolve claims quickly, and are often willing to pay significant sums to make these matters go away to avoid reputational damage and market scrutiny.
Given the increased risk of these claims and the low appetite of entities to defend them, Director’s and Officer’s (D&O) insurance premiums for disclosing entities have reportedly spiked significantly, in some cases making these policies available only with an extraordinarily high excess on claims or otherwise, completely inaccessible.
It is hoped that the additional hurdles for shareholder class action claims introduced by these changes will provide entities and their officers greater confidence to provide guidance to the market, ensuring investors stay appropriately informed.
Recognised as the person who has been championing these changes for some time, Treasurer Frydenberg has described the approach to the changes as “striking the right balance”. However, not everyone is convinced, with concerns that the changes would make it difficult for shareholders to hold entities and their officers to account. As a result, the Bill was only passed by the Senate on the basis that an independent review of the changes would be conducted in two years’ time, and if no such review is conducted, the amendments will automatically lapse.
Only time will tell whether the right balance has been struck. In our view, these changes will certainly prompt litigation funders and plaintiff class action firms alike to reconsider reasonable success prospects for civil class action claims moving forward, and hopefully over time, reset the costs of D&O insurance for disclosing entities.
It is important to remember that these continuous disclosure regime changes are hurdles that need to be satisfied to establish civil liability for a contravention. The changes do not alter or relax rules around the kind of information that entities must disclose. Therefore, entities must continue to maintain robust and thorough disclosure practices with the same degree of care and oversight before the changes become effective.
ASX listed companies
ASX listed companies must continue to adhere to ASX Listing Rule 3.1 and section 674(2) of the Corporations Act, which requires the disclosure of information based on the “reasonable person” test. ASIC will still have the ability to prosecute listed entities for a breach of this rule, regardless of whether that entity acted with “knowledge, recklessness or negligence”.
Criminal liability
The changes do not affect the existing criminal offences for breach of continuous disclosure obligations as outlined in sections 674(2) and 675(2) of the Corporations Act. These provisions remain unchanged and continue to apply.
ASIC’s enforcement powers
[1] The continuous disclosure obligations changes commence on 14 August 2021, being the day after assent was received.
Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.
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