- Continuous disclosure obligations have been the subject of much debate in Australia in recent years.
- Between May 2020 and March 2021, temporary changes were made to the continuous disclosure laws to bring Australia closer in line with disclosure requirements in other jurisdictions.
- These temporary changes are now permanent, albeit subject to an independent review in two years.
On 10 August 2021, the Federal Government passed the Treasury Laws Amendment (2021 Measures No.1) Bill 2021 (Cth) (‘the Bill’). Among other things, the Bill amended the Corporations Act 2001 (Cth) to introduce a fault element for civil penalties and private action for alleged breaches of Australia’s continuous disclosure laws. It received Royal Assent on 13 August 2021 and the continuous disclosure amendments took effect on 14 August 2021.
These new laws are in line with recommendations made by the Parliamentary Joint Committee on Corporations and Financial Services following its inquiry into litigation funding and the regulation of class actions.
In this article, we explore the background to the Bill and examine whether the amendments represent a seismic change to Australia’s disclosure and class action landscape, or merely shifts the sand.
History of reform
The Bill was introduced following temporary modifications of continuous disclosure laws instituted by the Federal Government in May 2020 to provide relief to companies and officers from opportunistic shareholder class actions during the COVID-19 global pandemic. (The temporary modifications were in place for a total of twelve months and lapsed on 22 March 2021: see Corporations (Coronavirus Economic Response) Determination (No. 2) 2020 (Cth) and Corporations (Coronavirus Economic Response) Determination (No. 4) 2020 (Cth). Those temporary measures replaced the objective ‘reasonable person’ test for materiality with a subjective test. As a result, during the period of temporary relief, a civil claim for a continuous disclosure breach was only available where the non-disclosure occurred deliberately (i.e. the information was known to be material), or if the company unjustifiably turned a blind eye to the risk (i.e. was reckless), or if the company ought to have known (i.e. was negligent) that the information was material.
In addition, in May 2020, the Federal Government referred to the Parliamentary Joint Committee on Corporations and Financial Services terms of reference for an inquiry into litigation funding and the regulation of class actions. In December 2020, the Parliamentary Joint Committee delivered its recommendations, proposing that the Australian Government permanently legislate changes to continuous disclosure laws (among other things) in an effort to curb the excesses of opportunistic shareholder class actions.
In February 2021, the Bill was originally introduced into Parliament, however it was not able to be passed before the expiry of the temporary relief. Instead, the Bill was sent to the Senate Economics References Committee for review. Ultimately, to secure sufficient Senate support, an automatic sun-setting clause was added, which would operate if the Treasurer failed to trigger a review of the continuous disclosure amendments after two years.
Following the changes made by the Bill (as passed), the continuous disclosure regime will operate as follows:
- Listed entities are still required to comply with Listing Rule 3.1 and section 674(2) of the Corporations Act, which requires the timely disclosure of information that a reasonable person would expect to have a material effect on the price or value of the entity’s securities;
- If the listed entity fails to comply with its continuous disclosure obligations:
- ASIC may prosecute the entity for criminal offences, issue administrative penalties or issue infringement notices;
- ASIC may pursue civil penalties against the entity, if the entity withheld from disclosure with knowledge that it would, or with recklessness or negligence as to whether it would, have a material effect on the price or value of the entity’s securities;
- private actions (such as shareholder class actions) may be brought against the entity, if the entity withheld from disclosure with knowledge that it would, or with recklessness or negligence as to whether it would, have a material effect on the price or value of the entity’s securities; and
- Listed entities and their officers are not liable for misleading and deceptive conduct (pursuant to section 1041H of the Corporations Act or section 12DA of the Australian Securities and Investments Commission Act 2001 (Cth)) for failing to disclose material information, unless the entity or officer knowingly, recklessly or negligently failed to disclose material information.
In other words, the new laws introduce a fault element (in respect of the judgement as to whether information is materially price sensitive) for private actions for continuous disclosure breaches and for misleading and deceptive conduct in relation to alleged failures to keep markets fully informed. Similar provisions apply to other disclosing entities.
The (potential) sunset
The new disclosure regime is subject to a conditional sunset provision whereby the Treasurer must cause within six months of 14 August 2023 an independent review of the amendments (to be tabled in Parliament within fifteen sitting days of the report being given to the Treasurer). The Government is required to respond to the review, and publish its response as soon as practicable (and in any event, within three months after the report is first tabled).
The purpose of this process is to assess the effects of the new disclosure regime. If this process is not complied with, the amendments will cease to have effect.
Watering down of disclosure quality?
The new disclosure regime provides partial protection for listed and disclosing entities, particularly where the materiality of the information is unclear or difficult to determine.
However, the amendments are unlikely to substantively change disclosure standards in practice. The reasons for this are three-fold.
First, listed entities must still comply with Listing Rule 3.1 which requires entities to ‘immediately tell ASX’ information that a reasonable person would expect to have a material effect on the price or value of the entity’s securities. ASIC retains the ability to prosecute criminal offences and issue infringement notices, regardless of the state of mind of the entity.
Secondly, the new fault element is not required in respect of the judgement as to whether disclosure of material information can be delayed in reliance on the confidentiality carve-out to Listing Rule 3.1. This is often the more difficult judgement call for officers to make in practice. For that reason, listed entities will need to continue to exercise caution and will be unlikely to place undue reliance on the amendments in practice.
Thirdly, even where negligence is required (as will be the case in relation to the judgement call on materiality), errors of judgement, honestly made, can easily appear negligent in hindsight.
Given the limited scope of the amendments, listed entities will likely continue to exercise caution in approaching market disclosures.
Reducing opportunistic shareholder class actions?
It is important to recognise that the new disclosure regime addresses a ‘loophole’ that existed under the temporary relief. The temporary measures did not impact the law on misleading or deceptive conduct. Typically, class action plaintiffs allege that a company has breached: (a) its continuous disclosure obligation by failing to disclose material information to the market in a timely way; and (b) 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.
The new laws ‘correct’ the temporary measures by applying the same standard of liability for misleading or deceptive conduct in respect of non-disclosures. Regardless of whether an action is brought under the continuous disclosure provisions or misleading or deceptive conduct provisions or both, the listed entity is only liable if it has acted intentionally, recklessly or negligently in failing to disclose price-sensitive information.
By raising the bar for claimants to establish one of the necessary elements for liability (i.e. materiality), the new laws are intended to make it more challenging to bring shareholder class actions. 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 is that a company failed to recognise that it held material information and therefore breached its disclosure obligations. That allegation, in a practical sense, is already very close to an assertion of negligence.
The question of whether this kind of primary allegation meets the legal standard for negligence or recklessness is untested in this context. This will be a new battleground for shareholder class actions requiring judicial guidance. However, that question might not be answered within the two year review period contemplated in the Bill, given the lengthy duration of the average shareholder class action in Australia.
The new disclosure regime poses fascinating policy questions for those monitoring governance developments. Will these changes result in lower quality or less responsive market disclosures (as some have feared)? Will we see less opportunistic shareholder class actions (as some have hoped)? Will we see a mass exodus of plaintiff law firms and litigation funders in the shareholder class action space? If so, will ASIC be sufficiently resourced to ‘fill the void’? Will we see a reduction in directors’ and officers’ insurance costs? It is difficult to predict, particularly in view of the ongoing reform and continuing jurisprudence for class actions in Australia. For that reason, the two year review period may not be sufficiently long to make a meaningful assessment of the impact of the new disclosure regime.