- Continuous disclosure obligations have been the subject of much debate in Australia in recent years.
- Recent amendments to the Corporations Act 2001 (Cth) are intended to reduce opportunistic shareholder class actions being brought in the challenging COVID-19 environment.
- These measures bring Australia closer in line with disclosure requirements in other jurisdictions, such as the UK.
- These changes are only temporary – what form the continuous disclosure regime takes beyond November 2020 could well be informed by a comparison with the UK and its disclosure provisions.
On 26 May 2020, the Federal Government modified the continuous disclosure provisions of the Corporations Act 2001 (Cth) in an effort to provide temporary relief to companies and officers for six months until 26 November 2020 (Corporations (Coronavirus Economic Response) Determination (No. 2) 2020 (‘Determination No 2‘)). This relief is expressly aimed at reducing the burden of opportunistic shareholder class actions as companies grapple with the COVID-19 global pandemic.
The amendments introduce a new fault standard, and arguably bring Australia closer in line with the disclosure regimes in other common law jurisdictions such as the UK. Interestingly, the UK’s threshold was a conscious policy choice following a careful review in 2007 (Professor Paul Davies, Davies Review of Issuer Liability: Final Report, June 2007) and was informed by the development of shareholder class actions in Australia and other jurisdictions (Australian Law Reform Commission, Integrity, Fairness and Efficiency—An Inquiry into Class Action Proceedings and Third-Party Litigation Funders, Report 134, December 2018). The UK experience, combined with the six month experimentation period of the temporary relief, may very well inform a more permanent change if the Australian Federal Government takes up recent suggestions to consider a potential overhaul of our continuous disclosure regime.
In this article, we compare and contrast the fault elements in the UK and (temporary) Australian regimes applicable to shareholder class action claims.
The new fault standard in Australia and its interaction with shareholder class actions
Prior to Determination No 2, Australia’s continuous disclosure regime required listed companies to disclose information that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of its securities. To bring a civil claim for breach under the objective ‘reasonable person’ test for materiality, it was not necessary to establish any specific fault on the part of the company or its officers.
The new measures replace the objective test with a subjective test requiring claimants to prove that the company actually ‘knows or is reckless or negligent’ as to whether the information would have a material effect on the price or value of its securities. Accordingly, until November 2020, a civil claim for a continuous disclosure breach will only be available where the non-disclosure occurs deliberately (i.e. the information is known to be material), or if the company unjustifiably turns a blind eye to the risk (i.e. is reckless), or if the company ought to have known (i.e. is negligent) that the information is material.
This temporary relief affects one of the two common causes of action advanced in Australian shareholder class actions. Typically, class action plaintiffs allege that a company has breached: (i) its continuous disclosure obligation by failing to disclose material information to the market in a timely way; and (ii) the prohibition against misleading and deceptive conduct by making inaccurate statements to, or omitting material information from, the market. These causes of action are generally considered to be two sides of the same coin.
As such, the changes provide some respite for non-disclosure. The measures do not impact the law on misleading or deceptive conduct, and will not impact allegations concerning information actually released to the market. Allegations of misleading or deceptive conduct, which are the hallmark of shareholder class actions, would likely continue unimpeded, despite the higher fault standard imposed on claimants in pursuing a continuous disclosure claim.
The fault standards under the UK disclosure laws
In the UK, investors have a cause of action against UK listed companies for : (i) any omissions, or delay in the publication, of information required by the applicable regulatory disclosure rules; and (ii) any untrue or misleading statements made in company announcements (Financial Services and Markets Act 2000 (UK) (‘FSMA’) s 90A).
The thresholds under these s 90A causes of action are high. To establish a limb 1 claim, claimants need to establish that the omission arises from a ‘dishonest concealment of a material fact’ by a director of the issuer. To establish a limb 2 claim, claimants need to show that the director knew or was reckless as to the untrue or misleading nature of the publication.
These thresholds were set deliberately to reduce the risk of a proliferation of shareholder class actions and have been successful in doing so. Section 90A has been in place in its current form since 2010, and to date there has been a low incidence of claims brought. Only a handful of claims have been filed, and no claims have reached judgment. Claims that have been threatened or commenced tend to focus on cases where the company’s misconduct is accepted or reasonably well-defined. Examples include allegations involving serious accounting irregularities or existence of fraudulent conduct. Often, these allegations rely heavily on pre-existing regulatory findings, where a defendant company would have difficulty in disputing the basis of the settlement or criminal plea bargain.
It is easy to see why there have been few class action cases. Establishing knowledge of a material fact at the board level can be a significant hurdle, particularly if the relevant conduct occurred well below the board or senior management level, or in an operating subsidiary. Forensic focus is therefore placed on the operative governance arrangements in place, alongside a detailed factual enquiry of whether the parent company board had any actual or constructive knowledge of that conduct.
Omission cases face an additional hurdle. Establishing the requisite element of dishonesty is a stringent test and requires a finding that the directors appreciated that the non-disclosure would be regarded by the market as dishonest. Constructive knowledge might be sufficient to meet the recklessness bar in a limb 2 claim, but would not be sufficient to meet the standard of dishonesty required for a limb 1 claim.
Of course, there are important structural and doctrinal differences in the aggregate litigation regimes between the UK and Australia that contribute to the varying levels of shareholder class action activity in the two jurisdictions. Nonetheless, the UK experience shows that claims can still be brought (and therefore investor protection pursued) under a disclosure regime that applies a more challenging set of hurdles for claimants to overcome.
Would the temporary measures meet their intended goals?
By raising the bar for claimants to establish the necessary elements, Determination No 2 is intended to make it more challenging to bring shareholder class actions in the current challenging COVID-19 environment. Listed entities are still required to comply with Listing Rule 3.1, to immediately provide the ASX with information that a reasonable person would expect to have a material effect on the price or value of the entity’s securities. However, the temporary measures modify the circumstances in which non-disclosure can give rise to liability, effectively by limiting this to where a company is at least negligent in assessing whether the information is material.
How big is the distinction though, between a company that failed to disclose information that a reasonable person would expect to have a material price effect and a company that failed to disclose information that it knew would have a material price effect (or was reckless or negligent as to that effect)?
In a practical sense, there may be little difference. The primary allegation in most shareholder class actions brought in the last 28 years is that a company failed to recognise that it held ‘Listing Rule 3.1’ information. This is very close to an assertion of negligence. The conventional continuous disclosure breach based on the reasonable person standard could easily be reframed as a negligent failure to keep the market informed. Whether or not that would be successful remains to be seen, as allegations of negligence are heavily context- and fact-dependent.
While Australia’s temporary measures have not raised the bar nearly as high as the UK’s standard under s 90A, it would likely provide protections to companies who find themselves in uncertain disclosure situations. For example, where an outcome is uncertain and it is difficult to assess whether disclosure is warranted.
Where to from here?
Shareholder class actions in Australia are enabled through a combination of our class action procedure (generally considered to be plaintiff-friendly) and the absence of a fault standard on the part of listed entities. The temporary measures adjust the substantive law aspect of that equation — in part. The Federal Government is dipping its toe into the proverbial water by amending only the continuous disclosure regime and not the prohibition against misleading or deceptive conduct. Once the temporary measures come to an end, a critical question will be whether the modified fault standard has achieved a better policy balance between investor protection via private right of action and discouraging opportunistic shareholder class actions.
This question may not be answerable given the limited contours of the temporary measures. But it will certainly fuel policy debate. Should the continuous disclosure regime revert back to its previous form? Will the temporary measures be extended, particularly given the ongoing challenges in managing further waves? Will the temporary measures be made permanent, with or without adjustments, or in combination with other changes? There is certainly much to debate, and the Federal Government may well be influenced by comparing the Australian framework with approaches in the UK and other jurisdictions.