The Australian Senate has passed the proposed reforms to the continuous disclosure regime to limit liability to circumstances where companies, directors or officers can be shown to have actual knowledge that the company’s disclosure is incorrect or where they act recklessly or negligently. The legislation will now return to the House of Representatives to be passed in final form before being sent for Royal Assent. As such, we do not yet have a date for formal implementation of these reforms but anticipate it to be soon. These reforms were contained in the Treasury Laws Amendment (2021 Measures No. 1) Bill 2021.
In short, the changes:
- 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
- ensures that corresponding misleading conduct provisions of the Corporations Act and ASIC Act contain defences which are consistent with the altered disclosure regime (i.e. to ensure the respective legal requirements are consistent and overcomes the major limitations of the COVID-19 temporary measure which we discussed last year - Continuous Disclosure in the time of COVID-19 – do the temporary changes actually make a difference?).
The proposed changes are intended to reduce the uncertainty concerning some continuous disclosure decisions and discourage ‘opportunistic’ class actions under Australia’s continuous disclosure laws. We expect that changes will have a significant impact on the class action market given the introduction of the ‘knowledge or negligence’ requirement materially raises the evidentiary burden on what a class action claimant would need to establish liability in a securities class action.
The changes follow on from a contentious period, including the granting of temporary relief through the Treasurer’s COVID-19 emergency powers and then a Senates Economic References Committee Report in June which recommended against the reforms. That report crystallised the competing arguments on both sides and articulated the potential significance that long term changes could have on the manner in which disclosure is approached by companies and the potential for redress in the event of inaccurate market disclosure. We discussed that report in detail - Continuous disclosure reforms rejected by Senate Committee.
The legislation will also provide temporary relief for virtual AGMs and the signing of electronic documents until 31 March 2022 as well as some additional technical measures around electronic communications we will address in a separate update.
Obviously, any reform to the long-standing continuous disclosure laws is a politically charged and important topic. The submissions made to the Senate Committee were emotive and critics of the proposed reforms have argued there was insufficient consultation and that the changes are likely to lead to a decrease in the amount and timeliness of information that is disclosed to the market.
While Australia’s continuous disclosure regime is fundamental to the efficiency and integrity of our capital markets, the previous strict liability position has undoubtedly contributed to the significant growth in the securities class action industry and the corresponding risks to public companies and their directors and officers in relation to disclosure issues. Striking the right balance between encouraging good disclosure and penalising poor disclosure is always difficult. The reforms seek to more fully recognise that many disclosure issues involve difficult judgments made under significant time pressure with imperfect information.
In our view you can still have very strict continuous disclosure obligations while recognising that directors do not always have perfect information or the benefit of hindsight. Given that, we think there is good reason to believe that the changes will not disproportionately shift the balance in a way that undermines market confidence in corporate disclosure, integrity or accountability nor result in a material practical difference in the approach that listed companies take to their continuous disclosure obligations. Companies will need to approach continuous disclosure with the same rigour and care, it should simply mean that there is some reasonable protection for circumstances where failures to disclose information in a timely way did not involve knowledge, recklessness or negligence.