On 25 May 2020, the Treasurer used his temporary power to modify the Corporations Act to make changes to the continuous disclosure regime. From a policy standpoint, this is a welcome development. Australia has one of the world’s toughest disclosure regimes (given the lack of any “at fault” element), a booming shareholder class action industry and now an unprecedented health and economic crisis that has made providing market guidance even more challenging for listed entities and their boards.
So the determination is welcome since it requires that an entity (and its officers) know that information would have a material effect on the price or value of the entity’s securities (or be reckless or negligent as to whether it does). The Treasurer said that the changes are intended to encourage companies and officers to more confidently provide guidance to the market and to make it harder to bring ‘opportunistic’ class actions during the COVID-19 pandemic. The changes are temporary – operating for 6 months (from 26 May 2020 to 25 November 2020). Reactions to the measures have varied – from jubilation from the BCA and AICD to dire warnings about a loss of market integrity and investor protection from other quarters.
Lost in all of this is that the changes do not, in their present form, actually give effect to the policy objectives announced by the Treasurer. There are several reasons for this:
- The changes only stop ASIC being able to bring a particular type of action called a “civil penalty proceeding” and they do not have any impact on the sorts of claims that private litigants (such as shareholders) can make.
- Most significantly, listed entities will remain liable to shareholders and ASIC if guidance or forecasts (or any other disclosures) fail to be accurate and it can be established that the information was misleading or deceptive under section 1041H of the Corporations Act – this is so regardless of whether the entity was unaware, negligent or reckless in making that statement. Section 1041H is one of the main provisions relied upon in shareholder class action claims.
- The inclusion of a “negligence” standard implies that listed entities and their boards can be liable for failing to act reasonably in making an assessment about whether information was material. The measures do not extend to providing a United States-style statutory safe-harbour for forward-looking statements which are accompanied by appropriate qualifying language or a “business judgement rule” type defence for continuous disclosure matters. So, it is still possible that decisions, honestly made, can constitute a breach.
- ASX has not amended Listing Rule 3.1 or Listing Rule 3.1A to reflect the changes (and it is doubtful ASX would do so). So ASX-listed entities must continue to release information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity’s securities as soon as it becomes aware of that information (unless an exemption applies).
- One effect of this “new test”, is that entities will have greater latitude not to disclose anything (since, given the impact of information is so much less certain in these COVID times it is more difficult to see how an entity could “know” that it would be material and therefore need to be disclosed).
- it is not more difficult for securityholders to bring class actions in relation to initial guidance or forecasts (or other alleged disclosure deficiencies); and
- listed entities and officers are not likely to have greater confidence to provide forecasts and guidance to help investors during COVID-19 (contrary to the policy intent of the measures) and in fact, may feel supported in a decision not to say more when there is any room for doubt about the potential impact of information.
Accordingly, we do not expect to see any meaningful change in the approach that ASX-listed entities are taking to disclosures because of these measures, at least not until economic and business conditions become more certain.
Our recommendation is for ASX-listed entities and their officers to continue to comply with their existing continuous disclosure policies with the same degree of oversight and diligence. If an entity is considering releasing forecasts or guidance there must be a reasonable basis for the forecast or guidance, and it must not be misleading or deceptive. It must also consider whether information should be released consistent with ASX guidance on what is likely to be considered price sensitive information for the purposes of the Listing Rules.
Notwithstanding these limitations, this change is a positive development. We hope that it will provide a basis for future law reform to Australia’s continuous disclosure regime. Whilst Australia’s continuous disclosure regime is fundamental to the efficiency and integrity of our capital markets its “no fault” liability position unduly contributes to the unedifying spectacle of competing class action claims in response to disclosure mishaps. The Government’s measures recognise that many disclosure issues involve difficult judgements made under significant pressure with often limited information) and for that it is to be applauded.