Thinking | 5 March 2021
Relaxation of continuous disclosure laws to be made permanent
With the relaxation of continuous disclosure laws to be made permanent, we take a closer look at the changes and implications for directors and their insurers.
Directors of listed entities, and their insurers, are set to benefit from a relaxation of continuous disclosure laws, which are shortly to be made permanent under new legislation. The proposed changes shift risk from disclosing entities and their directors onto investors, with investor plaintiffs facing additional hurdles in pursuing class action proceedings based on alleged continuous disclosure breaches.
The Federal Government has introduced the Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 (Cth) (Bill) into Parliament, which seeks to make permanent the temporary COVID-19 related changes to continuous disclosure requirements first introduced in May 2020 and which are due to expire on 22 March 2021. If enacted in its current form, the Bill will amend the Corporations Act 2001 (Cth) (Corporations Act) so that in determining whether a listed disclosing entity contravenes its existing continuous disclosure obligations, its state of mind is taken into account.
In addition, the Bill will go further than the temporary changes do by providing that entities and officers are not liable for misleading and deceptive conduct in circumstances where the continuous disclosure obligations have been contravened unless the requisite mental element has been proven. The changes will affect both civil and criminal actions.
The Bill follows recommendations in a report by the Parliamentary Joint Committee on Corporations and Financial Services (Committee) into litigation funding and the regulation of the class action industry. The report handed down late last year observes that securities class actions are frequently brought in Australia alleging contraventions of the continuous disclosure obligations and that this has a significant financial and compliance impact on the entities and officers subject to these actions.
The Committee recommended a permanent change to the Corporations Act to ensure that, in determining whether a listed disclosing entity contravenes its existing continuous disclosure obligations, its state of mind is taken into account, which would bring Australia’s continuous disclosure regime closer to the regimes in comparable jurisdictions such as the United States and United Kingdom.
ASIC, for its part, has cautioned against any weakening of continuous disclosure laws, emphasising the importance of timely and accurate disclosure to the operation of fair and efficient capital markets.
The legislation, consisting of amendments to the Corporations Act and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), will commence the day after assent.
A closer look at the changes
Continuous disclosure obligations
The continuous disclosure obligations in Chapter 6CA of the Corporations Act require disclosing entities to disclose price-sensitive information on a continuous basis. Prior to the temporary amendments, an entity contravened these obligations if the entity had information that was not generally available, the information was such that a reasonable person would expect it to have a material effect on the price or value of the entity’s enhanced disclosure securities if it were generally available, and the entity failed to notify the market operator or ASIC of the information. In effect, the Corporations Act did not require ASIC or private plaintiffs to prove an entity’s knowledge, recklessness or negligence in establishing a civil contravention of the continuous disclosure obligations.
If passed, Schedule 2 of the Bill will amend the Corporations Act by inserting a new section 674A, which provides that a listed disclosing entity contravenes its continuous disclosure obligations if all the following elements are satisfied:
- it has information that the listing rules of a listing market require the disclosing entity to notify the market operator; and
- the information is not generally available; and
- the entity knows, or is reckless or negligent with respect to whether the information would have a material effect on the price or value of the entity’s enhanced disclosure securities; and
- the entity fails to notify the market operator of that information in accordance with its listing rules.
The same will apply to certain other listed entities on other markets under an equivalent provision (section 675A of the Corporations Act).
The new law also clarifies that section 1317QB(1) does not apply to the new civil penalty provision or its corresponding accessorial liability provision, because in proceedings for a declaration of contravention of the new civil penalty provision and accessorial liability provision, it is necessary to prove the person’s knowledge, recklessness or negligence as appropriate.
In addition, the objective test in section 677 of the Corporations Act is modified so that an entity knows or is reckless or negligent with respect to whether information would have a material effect on the price or value of securities if the entity knows or is reckless or negligent with respect to whether the information would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or disclose of the relevant securities.
The Bill also amends certain penalties for contraventions of continuous disclosure obligations, which are summarised in the table below.
|Offence||Criminal penalty||Civil penalty|
|Breach of sections 674(2) or 675(2) of the Corporations Act||The existing criminal offences will continue to apply. In particular, the existing objective test for whether a reasonable person would expect the information, if it were generally available, to have a material effect on the price or value of the securities, is retained.||Civil penalties no longer apply and the provisions are not included in the list of civil penalty provisions in section 1317E of the Corporations Act. These are replaced with new civil penalty provisions in order to establish a contravention, discussed below. The civil accessorial liability provisions (and their corresponding defences) are repealed and replaced with the new civil penalty provisions.|
|Breach of proposed new sections 674A or 675A of the Corporations Act||N/A||The new civil penalty provisions applies to a listed disclosing entity if sections 674 or 675 applies to that entity.
The new civil penalty provision is identical to the criminal offence in sections 674 and 675, except where the criminal offence contains an objective test as to the effect of the information on the price or value of the entity’s enhanced disclosure securities, the new civil penalty provision contains a test of the entity’s knowledge, recklessness, or negligence with respect to the effect of that information on the price.
The new civil penalty provision is a financial services civil penalty provision under section 1317E and the existing rules regarding financial services civil penalty provisions in Part 9.4B of the Corporations Act apply.
There is a corresponding accessorial liability provision, which is identical to the previous accessorial liability provision that was included in the former civil penalty provision. A defence to the accessorial liability provision is available, which provides that a person does not contravene the accessorial liability provision if they take all steps (if any) that were reasonable in the circumstances to ensure that the listed disclosing entity complied with its obligations under the new civil penalty provision, and after doing so, believed on reasonable grounds that the listed disclosing entity was complying with its obligations.
Misleading and deceptive conduct
Schedule 2 of the Bill also amends section 1041H of the Corporations Act to limit the circumstances in which a contravention of continuous disclosure obligations will constitute misleading and deceptive conduct. Civil penalty proceedings concerning contraventions of continuous disclosure obligations are often brought in conjunction with allegations of misleading and deceptive conduct, as the same conduct (ie failure to disclose price-sensitive information in a timely manner) can trigger both the continuous disclosure obligations and the misleading and deceptive conduct prohibition.
The effect of the change is that conduct that triggers the continuous disclosure provisions will not automatically also constitute misleading and deceptive conduct. Accordingly, if a person seeks a remedy against a disclosing entity for an alleged contravention of section 1041H(1), and that contravention is connected to an alleged failure to comply with a continuous disclosure obligation, the person will need to establish the contravention of the relevant new continuous disclosure civil penalty provision, including the fault element of knowledge, recklessness, or negligence, in order to establish that the disclosing entity has contravened section 1041H(1).
Schedule 2 of the Bill also inserts an analogous provision into section 12DA of the ASIC Act, limiting the circumstances in which proceedings seeking compensation for loss or damage as a result of misleading and deceptive conduct can be brought in connection with alleged continuous disclosure contraventions in the same terms as section 1041H(1) of the Corporations Act.
Under the new law, ASIC continues to be able to issue infringement notices regardless of the state of mind of the entity. However, Schedule 2 of the Bill amends section 1317DAA of the Corporations Act so that contraventions under sections 674(2) or 675(2) are treated as offences of strict liability. The Bill also repeals section 1317DAG(2) of the Corporations Act, which means ASIC may not commence any action, such as commencing civil penalty proceedings under Part 9.4B, if an entity either fails to pay the penalty specified in the infringement notice, or notify the relevant market operator, or lodge any document with ASIC containing the information specified in the infringement notice.
The amendments are likely to provide partial protection for listed disclosing entities. However, the extent to which the amendments afford substantive relief from class action risk in practice remains to be seen.
In practical terms, the implications of the amendments include:
- Potential improvement in D&O insurance cost and availability in circumstances where there is new certainty around the statutory regime for continuous disclosure, and particularly having regard to the sectioning off of breaches of continuous disclosure obligations from claims alleging misleading and deceptive conduct. In some ways, the new regime is a double-edged sword from an insurance perspective, in that on one hand it creates new civil penalties which may be covered by a D&O or other management liability policy but then also limits the capacity for third party claimants to rely on those same breaches in potential litigation against the entity. The impact of pricing of D&O policies will in part depend on the frequency of continuous breaches under the new regime and how aggressive ASIC is in its enforcement of the new provisions.
- Directors will still need to ensure that they are not taken to be acting negligently or recklessly, as any serious misconduct will still be subject to the threat of class actions or significant civil penalty proceedings brought by ASIC. Fundamentally, class action litigants usually allege that the disclosing entity in question has breached the continuous disclosure obligations on the basis that it failed to form a view on whether it was aware of material information, a claim that may still hold weight under the 'negligence' limb of the new test.
- There remains enforcement options at ASIC’s disposal that do not require proof of knowledge, recklessness or negligence, such as prosecuting criminal breaches and infringement notices.
- There may be consequences for investors who are adversely affected by continuous disclosure breaches being potentially unable to successfully bring claims against the listed company and its directors (and ultimately, their insurers). This is not to say that such claims cannot be pursued under the new regime, but it may be that shareholders/investors will need to look beyond continuous disclosure provisions for causes of action that support their claims.
Despite the limitations, the amendments are likely to have a dampening effect on class actions given the raised bar for proving contravention of continuous disclosure obligations. If the relatively recent Myer case (the first shareholder class action to proceed to judgment) were to be decided under the new amendments, there may have been different findings as the new provisions may have offered protection to the board if they decided not to disclose information because it considered the information was not materially price sensitive, except in circumstances where the board knew or were reckless or negligent in forming that view. There may also have been greater difficulty in establishing that Myer engaged in misleading and deceptive conduct and contravened section 1041H as proof of knowledge, recklessness or negligence is required.
Although the amendments appear likely to reduce the risk of exposure to class actions, disclosing entities and their directors should remain cautious and continue to exercise care in complying with their disclosure obligations under this new regime.
This article was written with the assistance of Sarah Khan, Graduate Lawyer.
 Section 674A(2) of the Corporations Act.
 Section 674(3) of the Corporations Act.
 Section 674A(4) of the Corporations Act.
 Section 1317DAG(2) of the Corporations Act.
 Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Limited  FCA 1747.
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