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The Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 has passed both houses of Parliament and is expected to receive Royal Assent sometime in August.
It represents a significant shift in what consequences apply to companies and their directors and officers for a breach of the continuous disclosure laws.
The continuous disclosure obligations remain the same. They require disclosing entities to disclose price sensitive information on a continuous basis. However, the original continuous disclosure laws are no longer civil penalty provisions which means shareholders cannot claim for compensation suffered as a result of a breach of the laws unless they can prove the company (or its directors and officers) acted with knowledge, recklessness or negligence in the breach. This is a much higher test.
Shortly after the Covid-19 pandemic hit our shores in 2020 and companies were faced with a high level of uncertainty about how the pandemic was likely to impact their fortunes; the government introduced temporary measures (which expired in March 2021) effectively protecting companies and their directors from civil action relating to breaches of the continuous disclosure laws unless those companies and their directors acted with knowledge or were reckless or negligent about the breach.
Then in December 2020 the Parliamentary Joint Committee (PJC) on Corporations and Financial Services released its report into litigation funding and the regulation of the class action industry. The PJC recommended the continuous disclosure laws be amended to introduce a ‘fault’ element before compensation could be claimed, or before ASIC could pursue the significant civil penalties. See that report here.
The business community has been lobbying persistently for these measures to make their way into the law as permanent amendments, and that lobbying has secured the support of the Senate cross bench and achieved assent through both houses of parliament.
The continuous disclosure obligations in Chapter 6CA of the Corporations Act 2001 (Cth) (Act) require disclosing entities to disclose price-sensitive information on a continuous basis. A listed entity contravenes this obligation if:
If a plaintiff could prove the company had failed to immediately disclose market sensitive information, then they could make a claim for compensation arising from that failure.
Now however, plaintiffs will need to prove that a company or director or officer acted with 'knowledge, recklessness or negligence' in disclosing, or failing to disclose, the market sensitive information.
People involved in the company’s breach of the continuous disclosure laws will have a defence if they can prove they took all steps that were reasonable to ensure the company complied with its continuous disclosure obligations and, after doing so, believed on reasonable grounds that it was complying.
However, the ASX Listing Rules test has not been amended, and there is no lessening of the disclosure obligation to ASX. So, ASX can still use its powers under the Listing Rules to require corrective disclosure or suspend a company’ shares. All that has changed is the threshold for shareholders or ASIC to pursue a damages claim or civil penalties. Further, ASIC’s ability to issue infringement notices for breach of continuous disclosure obligations has not changed either – see below.
Misleading or deceptive conduct amendments
Plaintiffs will often also allege a breach of the misleading or deceptive conduct prohibitions when commencing an action related to a breach of the continuous disclosure laws, using section 1041H of the Act or section 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) which before these changes gave rise to a ‘no fault’ right to damages where financial products (such as listed securities) were concerned. In other words, “you failed to disclose market sensitive information and you were misleading the market in not doing so”.
Therefore, the misleading or deceptive conduct provisions of both the Act and the ASIC Act have also been amended so that the ‘fault’ element, i.e., “with knowledge, recklessness or negligence”, has been introduced in relation to an allegation of misleading or deceptive conduct related to a breach of the continuous disclosure laws, or more generally in relation to statements made by a disclosing entity about a financial product. This has the interesting effect that other kinds of disclosure documents, such as ‘low doc’ rights issue offers, now have a fault element to prove when alleging a breach of disclosure laws.
This also means the current misleading or deceptive conduct provisions will still apply, without the ‘fault’ element, to other forms of disclosure or capital raising material by companies which are not disclosing entities.
Consequences for a breach of the continuous disclosure obligations
The changes above mean that if a plaintiff wants to claim for loss or damage, or ASIC wants to pursue a civil penalty, then they will each need to prove the company and/or its directors and officers had knowledge, or were reckless or negligent in failing to comply with the continuous disclosure obligations (and the obligation not to be misleading or deceptive in relation to financial products or financial services).
However, ASIC will still have the ability to issue infringement notices for a breach of the ‘no fault’ continuous disclosure obligation which will remain in sections 674 and 675 of the Corporations Act (with a cap of $100,000 for entities with a market capitalisation of over $1 billion), and obtain non-financial remedies such as court orders requiring disclosure or declarations without having to prove knowledge, recklessness or negligence. Private plaintiffs may also seek injunctions without proving fault.
This is a permanent implementation of the measures introduced by the Treasurer in May 2020 in response to the COVID-19 pandemic and the associated difficulty with making accurate statements about a company’s business, especially any kind of forward looking statements, during that time. The changes are controversial and were opposed by certain shareholder groups and plaintiff law firms.
The amendments are hoped to “reduce the amount of time entities and officers must spend on assurance they have complied, as well as the legal fees associated with assuring compliance” and “lead to significant savings on the cost of directors and officers insurance”, which in recent years has increased by over 250%.
The amendments bring Australia’s continuous disclosure regime closer in line to the regimes in comparable jurisdictions such as the United States and United Kingdom.