Continuous disclosure: a change of consequence

23 August 2021

In brief

Temporary reforms to the continuous disclosure regime that were implemented in response to COVID-19 last year (but which ceased to apply in March this year) have now been made permanent under amendments to the law contained in the Treasury Laws Amendment (2021 Measures No.1) Bill passed on 10 August 2021 (August Bill). 

The reforms introduce a fault element in civil penalty proceedings for failure to disclose price sensitive information in a timely way so that an entity and its officers will only be liable for civil penalties where there is a knowing, reckless or negligent failure to comply. The introduction of this fault element more closely aligns with the continuous disclosure regimes in other countries – notably the US and UK.

The August Bill also extends the reforms such that entities and their officers will not be liable for misleading and deceptive conduct (in circumstances where the continuous disclosure obligations have been contravened) unless the same requisite fault element has been proven.

It is important to note that the continuous disclosure obligations under the listing rules have not changed. Further, the objective test “no fault” disclosure obligations in the Corporations Act remain in place to enable the Commonwealth to prosecute criminal breaches and the Australian Securities and Investments Commission (ASIC) to issue infringement notices and administrative penalties.

In order that the operation of these reforms is assessed, the Treasurer must cause an independent review to be undertaken within 6 months after the second anniversary of their commencement. The amendments will cease to have effect if the review is not conducted or other requirements to table the report in Parliament or publish the recommendations of the review are not satisfied.

In detail

Background

The changes to introduce fault to found civil penalty liability for continuous disclosure breaches were originally a response to the market uncertainties arising from the initial COVID-19 impact. Their continuation aligns with findings and recommendations of the Parliamentary Joint Committee (PJC) review into litigation funding and the regulation of the class action industry commenced in May 2020. However, their expansion into misleading and deceptive conduct was not a recommendation of the PJC but enabled by overseas examples, the consideration of class action cases and stakeholder concerns and the retention of the complementary “no-fault” prosecution and infringement regimes including non-financial ASIC enforcement.

The PJC report highlighted the increasing prevalence of continuous disclosure laws in class actions and their many negative financial and compliance effects, including the potential for actions increasing the price of directors’ and officers’ insurance. The PJC noted evidence of the ease by which class actions may be triggered by an alleged breach of the “no-fault” standard of continuous disclosure and recommended that the Australian Government permanently legislate the changes to continuous disclosure laws as contained in the temporary regime. 

Following implementation of the temporary regime in 2020, Treasury undertook targeted consultation with key stakeholders on the effectiveness of the regime. Among stakeholders who supported the regime the biggest concern expressed was that it would not be materially effective in lowering the threat of class actions because it did not also apply to misleading and deceptive conduct. The changes introduced by the August Bill, which has now received royal assent, now extend to misleading and deceptive conduct.

The changes

New section 674A is introduced to Chapter 6CA of the Corporations Act as a civil penalty provision under section 1317E of the Corporations Act. It is essentially the same as section 674 prior to the August Bill (including accessory liability and due diligence defenses) except that breach is constituted by a listed entity failing to notify the market operator of information where the entity knows or is reckless or negligent as to whether the information would, if generally available, have a material impact on the price or value of its securities. Amendments to the Corporations Act limit the scope of section 674 to offences and infringement notices and remove accessory liability and the due diligence defense. Analogous amendments have been made to Chapter 6CA in relation to continuous disclosure for other disclosing entities.

Amendments have been made to section 1041H of the Corporations Act and section 12DA of the ASIC Act (and by a number of consequential changes) in order to align misleading and deceptive conduct under these provisions with the fault requirements introduced into continuous disclosure in Chapter 6CA of the Corporations Act.

Part 9.4AA of the Corporations Act is amended to provide that offences arising from breach of the “no-fault” continuous disclosure provisions in sections 674 and 674 are offenses of strict liability. ASIC’s power to commence proceedings for contravention of an infringement notice has been removed subject to limited compensation and enforcement proceedings. 

The implications

In announcing the passing of the August Bill, the Treasurer stated that the changes in the August Bill:

“strike the right balance between ensuring shareholders and the market are appropriately informed while also allowing companies to more confidently make forecasts of future earnings or provide guidance updates without facing the undue risk of class actions.”

It is anticipated that the changes should raise the bar for class action claims and at least discourage speculative or opportunistic actions. Class action activity will likely be linked to the extent to which a failure to make a disclosure can be successfully claimed to be negligent including a negligent failure of an entity to form a view about its awareness of material information.

Whether this will be sufficient to support companies and their officers in releasing forward looking guidance to the market with more regularity is yet to be seen although the Treasurer noted in his release that during the period the temporary fault element was in place Treasury identified that there was an increase in the number of material announcements to the market (particularly around earnings), relative to the same period in the previous year. 

The changes do not lessen the disclosure obligations of disclosing entities even though it may be more difficult to substantiate a civil claim or civil penalty claim against a company and its officers for breach. As with the previous “no-fault” civil penalty regime, the reforms include accessory liability for persons “involved in” a contravention and a due diligence defense. The incentives for company officers to continue their compliance monitoring therefore remains. 

ASIC enforcement options include both prosecuting criminal breaches and issuing infringement notices without proof of knowledge, recklessness or negligence as well as pursuing civil penalties where the requisite fault element can be proven.