Easing of continuous disclosure obligations made permanent by the Federal Government

On Tuesday 10 August 2021, the Australian Parliament enacted changes to company continuous disclosure laws under Schedule 2 of the Treasury Laws Amendment (2021 Measures No 1) Act 2021 (Amending Act).

Schedule 2 to the Amending Act was originally given life by:

1. 1. Treasurer Frydenberg’s introduction of the Corporations (Coronavirus Economic Response) Determination (No. 2) 2020, which was intended to temporarily ease the continuous disclosure obligations on listed entities under sections 674 and 675 of the Corporations Act 2001 (Act), to enable companies and their officers to ‘more confidently provide guidance to the market during the Coronavirus crisis’. That Instrument was effective from 26 May 2020 until 25 November 2020, and extended by further instrument on 23 September 2020 until 22 March 2021; and
   2. Recommendation 29 of the Parliamentary Joint Committee on the Corporations and Financial Services Inquiry into Litigation Funding and the Regulation of the Class Action Industry published 21 December 2020 (PJC Report). 

Practical Effect of the reforms:

The main reforms:

1. 1. amend chapter 6CA of the Act, which will see companies and officers only liable for financial services civil penalties for breaches of continuous disclosure obligations if there has been ‘knowledge, recklessness or negligence’ (Fault Test) in updating the market with price sensitive information;
   2. introduce the Fault Test for misleading conduct provisions in section 1041H(1) of the Act, and will ensure directors and officers can access corresponding defences which line up with the altered continuous disclosure regime. That is, a breach of continuous disclosure obligations will no longer immediately trigger misleading and deceptive conduct liability unless the Fault Test ‘knowledge, recklessness, or negligence’ is established; and
   3. inserts an analogous provision into section 12DA of the ASIC Act, limiting claims for loss or damage as a result of misleading or deceptive conduct which can be brought in connection with alleged continuous disclosure contraventions in the same terms as section 1041H(1) of the Act;

However, the reforms will not:

1. 1. impact ASIC’s power to issue infringement notices to listed entities regardless of the state of mind of the entity; or
   2. remove a listed entity’s obligation to comply with ASX Listing rule 3.1, (namely that the entity must still immediately notify the ASX of any information that a reasonable person would expect to have a material effect on the price or value of the entity’s securities).

Rationale for the Reforms

The Federal Government’s motives behind the changes, among others appear to include:

1. 1. to reduce uncertainty concerning the continuous disclosure obligations existing in the current Act;
   2. to overcome anxiety and perceived non-compliance with disclosure obligations by listed entities, which may be preventing or limiting them from providing accurate forecasts and forward looking estimates in a post COVID-19 environment, ultimately enabling investors to continue investing in the wake of COVID-19;
   3. to thwart exposure to ‘opportunistic’ and ‘speculative’ shareholder class actions – a reaction to the perceived large profits which litigation funders, and contingency fee law firms are said to be making from such class actions; and
   4. to re-balance the consequential rise in D&O insurance premiums which are being passed on to consumers, as a result of insurers and corporations paying large payouts in damages for corporate misbehaviour.

Competing Arguments

Senators favourable to the reforms, including Senator Paul Scarr (Liberal) and Senator Stirling Griff (Centre Alliance Centre), cited the current disclosure obligations as ‘onerous’, blaming the increase in D&O insurance premiums, which Senator Griffs said “doubled between 2005 to 2018, and doubled again in 2019” as a result of rising speculative class actions. The Senate Economic References Committee rejected this argument, citing the Insurance Council of Australia’s own submission made on behalf of the insurance industry that “the measures in Schedule 2 ‘will quite likely have no discernible effect’ on D&O insurance premiums, either in the short to medium or medium to long terms.”[1]

Senator Brockmen (Liberal) referred to a submission made by the (non-partisan) Australian Institute of Company Directors to the “harm [being] caused by the strict liability basis in the current law, which said….in our view, the current class actions regime leads to adverse outcomes for Australian businesses and shareholders. On continuous disclosure, a strict liability approach is not appropriate for obligations that involve time-sensitive and complex judgement calls, and it is currently too easy to launch or to threaten securities class actions for alleged breaches of these strict liability provisions.”

Arguments for and against the reforms are crystallised in the Senate Economic References Committee Report published in June 2021, which ultimately forecast a long term decrease in the amount and timeliness of information being disclosed to the market by listed entities, and potential for redress if the integrity of Australia’s capital market is undermined. The report denounced Assistant Treasurer Michael Sukkar’s ‘opportunistic class action’ policy consideration argued in his second reading speech, noting the Treasurer, nor the Attorney General’s Department, could identify a single “opportunistic class action – despite the committee providing them with multiple opportunities to do so”[2].

Both Labor (Senators Katie Gallagher and Jenny McAllister) and the Greens (Senator Nick McKimm) advanced strong dissenting arguments to the reforms with Senator McKimm accusing the Federal Government of “[paving] the way for insider traders to make hay” by introducing the fault element.

Senator Gallagher argued that “[Schedule 2] permanently [weakens] the continuous disclosure laws.”

The Senate Economic References Committee ultimately recommended against the reforms, finding
“it is vital that the rights and interests of shareholders be protected. To that end, the overwhelming evidence to the committee was that the existing continuous disclosure laws in Australia are world-leading and should not be watered down.”[3].

Senators Griff and Pauline Hanson’s (One Nation) support proved critical to the passage of the bill through the Senate.

Amendments under Schedule 2 to the Bill cease to have effect if review of operation of laws is not conducted

Whilst Schedule 2 of the Bill passed in the House of Representatives on Tuesday 10 August (42:35) (Amending Act), the Government is required to redress any adverse effects of the proposed changes within two and half years of its commencement.

Section 1638B has been inserted into the Act, which requires the Minister to cause an independent statutory review of the changes to the continuous disclosure obligations in Schedule 2 of the Amending Act to be conducted within 6 months of the second anniversary of its commencement, to be tabled in each house of Parliament within 15 days of such report being given to the Minister, and the Government’s responses made public as soon as possible, but no more than three months of the statutory report being issued. Should the Minister fail to comply with any one of these requirements, the continuous disclosure amendments will automatically sunset the day after the end of the period to which the first failure relates (section 1638C of the Act). For example, if the Treasurer fails to cause the review to be conducted within the required timeframe, the amendment provisions under Section 1638B of the Act will sunset on the day after the six-month period ends.[4]

Broader Implications

According to the Explanatory Memorandum to the Amending Act, financial implications of the amending provisions in Schedule 2 will have ‘nil’ financial impact.[5] However, it is estimated that the measures will generate $912.5 million in regulatory savings per annum for business.[6]

The practical effect of the Amending Act may fall short of its intended purpose. Listed entities and their officers remain exposed to significant liabilities, both civil and criminal, for market disclosures and non-disclosures which contravene the Act and/or other legislation, such as the ASIC Act. Company officers still need to mitigate acting negligently or recklessly, as such misconduct will remain the subject of future class actions or significant civil penalty proceedings brought by ASIC.

Whilst the ‘fault’ test is now to be applied, Boards must remain vigilant to ensure they do not fault foul of the ‘negligence’ limb of the test when forming views about disclosing materially sensitive information to the market. Whilst we may see a temporary reduction in shareholder claims (being unable to successfully establish the new ‘fault’ test for continuous disclosure breaches), we are likely to such actions supplemented by other breaches of the Act.

ASIC’s enforcement options (which do not require the Fault Test to be met) remain intact, such as prosecuting criminal breaches and issuing infringement notices.

In the eyes of insurers, D&O policy costs and availability may improve, given the newly carved out civil penalty provisions for continuous disclosure breaches and non-automatic triggering of misleading and deceptive conduct claims. However, premium pricing impacts are unlikely to be felt until we have a clearer view of the aggressiveness, and frequency of actions commenced under the new regime (both by shareholders, and ASIC).

Finally, the reforms remain open to scrutiny and repeal in two and half years’ time by the Federal Government should the reforms fail or cause negative impacts to Australia’s capital market.

Conclusion

Boards should proceed with caution in assessing the materiality of information required to be disclosed to the market and, to the extent reasonably possible, aim to comply with the former continuous disclosure obligations under the Act.

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Authored by:

Glenn McGowan QC, Partner
Rebecca Di Rago, Associate

[1] Ibid, p. 76 (s2.156).

[2] Senate Economic References Committee Report, 30 June 2021, p. 75 (s 2.152).

[3] Senate Economic References Committee Report, 30 June 2021, p. 87 (s 2.1204).

[4] Second Explanatory Memorandum, Treasury Laws Amendment (2021 Measures No. 1) Bill 2021, s 1.10

[5] Explanatory Memorandum, Treasury Laws Amendment (2021 Measures No. 1) Bill 2021, p. 4

[6] Ibid.