The federal government has announced that temporary changes to continuous disclosure obligations imposed on listed companies under the Corporations Act 2001 (Cth) (Corporations Act) will become permanent. The temporary changes were introduced in May 2020 as part of the government's response to the COVID-19 crisis, directed at assisting companies and directors during the pandemic.
"Continuous disclosure" refers to the legal requirement of a company to immediately inform the market about material information affecting the company, whether this information is positive or negative.
What are the legislative changes?
Pre-COVID-19 disclosure regime
To understand the impact of the legislative changes, it is useful at the outset to understand the pre-COVID-19 disclosure regime in Australia.
The pre-COVID-19 regime applied an objective test for disclosure, which focused on whether a 'reasonable person' would expect information to be price sensitive.
Consequently, the views of a company's directors and executives – even if held honestly and in good faith – were not decisive of the matter. This meant that a listed company's failure to disclose market-sensitive information was a 'no fault' offence, and attracted civil liability under the Corporations Act, regardless of the company's knowledge or intention.
COVID-19 response – temporary modifications to the disclosure regime
Broadly, the modifications introduced in May 2020 effectively replaced the objective 'reasonable person' test, with a test of whether the entity knows or is reckless or negligent with respect to whether the information is price sensitive.
Under these modifications, companies will only attract civil liability if they knew or were reckless or negligent with respect to whether the information would, if it were generally available, have a material effect on the price or value of their securities (Amended Provision).
These provisional changes, which were initially due to expire in March 2021, limit the circumstances in which a continuous disclosure breach can be said to have occurred.
Temporary modifications to become permanent
The Treasury Laws Amendment (2021 Measures No. 1) Bill (Bill) was introduced into the House of Representatives on 17 February 2021, and if passed, will make the Amended Provision permanent.
In effect, the Bill proposes to modify the Corporations Act so that listed entities will only be liable for civil penalties in respect of continuous disclosure obligations if they acted with 'knowledge, recklessness or negligence' (mental fault element).
The Amended Provision requires an entity's state of mind to be considered when determining civil liability for a contravention of the continuous disclosure obligations. Further, the Explanatory Memorandum to the Bill confirms that entities and officers will not be liable for misleading and deceptive conduct in circumstances where continuous disclosure obligations have been contravened unless this mental fault element has been proven.
The Bill also proposes a corresponding accessorial liability provision for those persons 'involved' in a disclosing entity's contravention of the new civil penalty provisions. Determining a person's 'involvement' is to be made by reference to section 79 of the Corporations Act, which provides a fairly broad definition and could capture a range of persons involved in an entity's decision making in this regard. However, a defence is available to persons who have taken all reasonable steps in the circumstances to ensure compliance, and after doing so, believed an entity's obligations were complied with on reasonable grounds.
Are the changes welcome?
Australia's pre-COVID-19 disclosure regime sets a very high bar for continuous disclosure compliance and is widely regarded as one of the toughest disclosure regimes in the world. This high bar forms a bedrock of market integrity and therefore inspires investor confidence in our local markets. However, it has also created challenges for company officeholders in making determinations on continuous disclosure matters, under circumstances where quick judgement calls are very often required.
The continuous disclosure liability risk can be significant for directors and the high bar set by the pre-COVID-19 regime has been the basis of a flourishing class action industry. This trend has, in turn, led to major increases in D&O insurance premiums.
This is why, from a policy standpoint, we consider the legislative changes to be a welcome development. In practical terms, it should mean that:
- diligent directors are provided with a safe harbour of sorts, as listed companies who carefully consider the question of materiality should minimise the risk of breaching their disclosure obligations
- opportunistic class actions based on disclosure breaches should be reduced.
As noted by Treasurer Josh Frydenberg in his announcement here, the changes will also more closely align Australia's continuous disclosure regime with the approaches of other jurisdictions such as the United Kingdom and the United States.
Can companies relax their disclosure practices following the legislative changes?
While the permanent codification of the Amended Provision may offer companies greater protection from shareholder lawsuits, we caution listed entity directors against relaxing their existing continuous disclosure practices in response to the Amended Provision, for a number of reasons.
1. ASX-listed companies must continue to adhere to their existing disclosure obligations
The Amended Provision does not affect or limit the situations in which action can be taken against a listed company that fails to comply with the listing rules of a financial market. As such, notwithstanding the lower disclosure threshold introduced by the Amended Provision, companies listed on the ASX must still continue to adhere to their existing disclosure obligations contained in ASX Listing Rule 3.1:
"Once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity's securities, the entity must immediately tell ASX that information."
Importantly, unlike the Amended Provision, Listing Rule 3.1 does not require a mental fault element. Any failure to disclose information that a reasonable person would deem material may be considered a breach of this rule and will expose the entity to possible action by ASX.
2. Provision of materially false or misleading information remains a criminal offence
Any officer or employee of an entity who gives, or authorises the giving of, materially false or misleading information to the ASX under Listing Rule 3.1 may be guilty of a criminal offence under section 1309 of the Corporations Act.
3. ASIC remains in power to issue infringement notices and penalties
ASIC continues to have the power to issue infringement notices and administrative penalties to companies who have failed to disclose material information, irrespective of whether the mental fault element can be established.
Although the changes are a positive development, due to their inherent limitations, we would still encourage directors of listed companies to maintain robust disclosure practices with the same degree of oversight and diligence – as always, seeking external advice where necessary.
We also strongly encourage listed entity directors to consider, and document their consideration of, the materiality of certain disclosures. Such documentation may serve as valuable evidence in a shareholder dispute, to disprove the entity's knowledge, recklessness or negligence.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.