Proposals to limit liability for continuous disclosure errors to circumstances where companies, directors or officers can be shown to have actual knowledge that the disclosure is incorrect or where they act negligently have been opposed by the Commonwealth Senate’s Economic References Committee (Committee). The Committee issued its report (Report) on the Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 (Bill) on 30 June 2021 which, in addition to continuous disclosure liability reforms, also proposes to make permanent the previous temporary COVID-19 changes to the Corporations Act 2001 (Act) relating to electronic document execution and virtual meetings and communication of documents.
The potential introduction of a ‘knowledge’ element for continuous disclosure breaches remains a highly controversial proposal given its fundamental potential impact on the current market disclosure regime, market integrity and the risk profile for companies facing disclosure questions.
In contrast, there is bipartisan support for amendments to facilitate virtual meetings, electronic communication of documents and electronic execution.
Practically speaking, this Report won’t have any impact on what listed entities and their officers do for the time being with respect to meeting continuous disclosure obligations – the temporary 'knowledge' element fell away in March this year when the Treasurer’s determination expired. The significance of debating the continuous disclosure amendments now lies in the potential for delay or rejection of the permanent introduction of those reforms which were temporarily in place at the commencement of the pandemic. The controversy may also delay the passage of the electronic document execution and virtual meetings amendments if the Government continues to tie those amendments to the continuous disclosure regime proposals.
The Report crystallises the competing arguments in relation to the proposed continuous disclosure reforms and the potential significance that long term changes of the kind proposed would have on the manner in which disclosure is approached by companies and the potential for redress in the event of inaccurate market disclosure. The debate has particular significance for the class action market given the introduction of the proposed ‘knowledge or negligence’ requirement would materially raise the evidentiary requirement necessary to establish liability in a securities class action.
The Report’s conclusions
With respect to the proposed amendments to facilitate virtual meetings, electronic communication of documents and electronic execution, the Report recommended those be passed.
Separately, the Bill proposes to:
- amend Chapter 6CA of the Act so that entities and their officers will only be liable for civil penalty proceedings in respect of continuous disclosure obligations where they have acted with “knowledge, recklessness or negligence”; and
- makes clear that entities and their officers are not liable for misleading and deceptive conduct under s1041H of the Act (or corresponding provisions in the ASIC Act) in circumstances where the continuous disclosure obligations have been contravened unless the requisite mental element is also proven (this change would overcome the major limitations of the COVID-19 temporary measure which we discussed last year.
The proposed changes are intended to discourage ‘opportunistic’ class actions under Australia’s continuous disclosure laws.
The Report recommended that the continuous disclosure reforms not be passed (noting that the Coalition members of the Committee dissented) on the basis that:
- there was insufficient consultation on the proposed changes;
- there was very little support for the changes (even from some company directors);
- the changes would make it more difficult for company shareholders to hold directors accountable for withholding price sensitive information, or in some circumstances, for providing investors with misleading information;
- the changes are likely to lead to a decrease in the amount and timeliness of information that is disclosed to the market;
- there may be a disproportionate negative impact on retail investors (including self-funded retirees, mum and dad investors, and the growing number of younger Australian investors);
- Australia’s existing continuous disclosure laws are world-leading and protecting the integrity of Australia’s capital markets is in the national interest;
- the Government had not identified an example of an ‘opportunistic’ class action;
- the insurance industry did not agree that the measures would result in a significant decrease in D&O insurance premiums; and
- if the Government is determined to progress the changes, it should first commission a comprehensive and independent review of the legal and economic impact of the operation, enforcement and effects of the existing laws (as recommended by the ALRC).
The Committee has also recommended that the Bill be split into 2, to allow more timely passage of the reforms to facilitate virtual meetings and electronic document execution.
At this stage, the Senate isn’t next due to sit until 3 August 2021.
We cover the practical impacts above. We do agree with the Report insofar as it recommends disentangling the electronic document execution and virtual meetings reforms from the continuous disclosure reforms to ensure that the former are passed as soon as possible.
There is no question that continuous disclosure law reform is a politically charged and important topic. The submissions made to the Committee were emotionally charged and included some surprises (for instance, the Insurance Council of Australia’s submission that they do not think the changes would affect premia in the short, medium or long term warrants much more scrutiny as to what else is driving the trends our clients are seeing on D&O cover and cost).
However, whilst Australia’s continuous disclosure regime is fundamental to the efficiency and integrity of our capital markets, its current strict liability position does contribute to the ever growing class action industry and the corresponding risks to public companies and their directors and officers in relation to disclosure issues. The Government’s proposed measures seek to recognise that many disclosure issues involve difficult judgments made under significant time pressure with imperfect information. The harder question is whether in addressing that legitimate concern they disproportionately shift the balance in a way that may undermine market integrity or accountability.
Our view is that it shouldn’t, but in light of the strongly held and divergent views, we think there is sense in more work being done on the operation of the current laws to examine the potential impact of introducing a knowledge element for civil liability as the Report suggests.