In brief 5 min read
The Treasurer has used his emergency powers under the Corporations Act (the Act) to temporarily modify the operation of Australia's continuous disclosure laws. The Treasurer's release states that the changes are designed to enable listed companies to more confidently provide earnings guidance, and other forward-looking statements, to the market during the COVID-19 crisis, without being exposed to the threat of opportunistic class actions if the guidance or other statements are found to be inaccurate.
While the modifications are welcome, in that they may provide a measure of protection in civil proceedings where a listed company decides against updating the market as to its earnings outlook because of the additional uncertainty inherent in its internal forecasts in the current business environment, the changes don't actually provide any protection where the company does decide to give guidance (or update existing guidance). This is because the company will still be exposed to class action risk under the misleading and deceptive conduct provisions of the Act if that guidance proves to be inaccurate (the Treasurer's instrument does not amend those misleading and deceptive conduct provisions). Further, the amendments provide no protection for criminal offence provisions, which continue to operate unmodified.
The background to the changes is that most listed companies which had previously given earnings guidance withdrew that guidance once the COVID crisis hit. The ASX has pointed out that there is already an exception to the continuous disclosure requirements in the Listing Rules where the information 'comprises matters of supposition or that is insufficiently definite to warrant disclosure’, but the modifications go a step further in actually amending the law to seek to limit the circumstances where the company will need to update the market.
The civil penalty provisions in subsections 674(2), 674(2A), 675(2) and 675(2A) of the Act have been modified to establish a temporary test which raises the bar on when certain information will have a material effect on the price or value of securities and therefore should be disclosed under section 674 or 675 of the Act. Importantly, the modifications do not affect the operation of the criminal offences based on subsection 674(2) or subsection 675(2).
The unmodified test requires entities to disclose non-public information that a reasonable person would expect to have a material effect on the price or value of the entity's securities. Under the temporary test, which applies for six months for the purposes of civil proceedings only, non-public information need only be disclosed if the entity knows or is reckless or negligent1 with respect to whether that information would, if it were generally available, have a material effect on the price or value of the entity's securities.
The modifications also provide 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 its 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 dispose of the securities.
The modifications have been drafted to apply to all information - not just forward-looking guidance, future earnings or prospects.
The net effect of replacing the reasonable person standard with one of knowledge, recklessness or negligence is to require a higher degree of certainty that the forward-looking information would have the necessary market impact, before it is required to be disclosed under the Act (for the proposes of civil proceedings only). ASIC and third parties will not be entitled to bring a claim for a failure to disclose information that, absent the modification, would have required under the continuous disclosure provisions in the Act. The changes are therefore designed to make it harder for such actions to be brought against companies and officers’ during the COVID crisis and will be welcomed by disclosing entities.
As mentioned above, the Treasurer's press release announcing these modifications indicated that they are designed to enable listed companies to more confidently provide earnings guidance, to the benefit of investors. However, we think that in practice there is unlikely to be any practical change to existing continuous disclosure policies and practices for the following reasons:
- The modifications do not limit liability where earnings guidance is given, or some other forward-looking statement is made, which is later found to be inaccurate. The modifications do not apply to other market misconduct rules including misleading or deceptive conduct rules2 which are frequently form the basis of claims by class action plaintiffs (see for example ASIC v Vocation Limited (in Liquidation) (2019) and the Myer Class Action (2019). While the modifications may make it more difficult to bring a class action for breach of the continuous disclosure provisions, they do not necessarily blunt other avenues for class actions arising out of the continuous disclosure regime.
- The unmodified standard of disclosure continues to apply for the purposes of any criminal offences based on subsection 674(2) or subsection 675(2) of the Act so as a practical matter entities and their directors and officers must continue to comply with the unmodified provisions or risk committing a criminal offence.
It is curious that Government has sought to address the reluctance to provide guidance by applying a more subjective test to the effect of information on the price or value of the entity's securities, rather than the effect of the announcement. On one view, an entity may be more confident to provide guidance if it would avoid liability, provided it did not know the guidance was misleading or inaccurate and was not reckless or negligent as to whether the guidance was misleading or inaccurate.
While the modifications are welcome, there remain a number of practical reasons why disclosing entities and their directors and officers must continue to exercise caution in relation to their continuous disclosure obligations and will be unlikely to make any forward-looking statements beyond those properly disclosed based on the unmodified Act. A little bit like the long awaited COVID-19 vaccine, this is no panacea.
Negligence is not defined and so it will remain for courts to decide what constitutes negligence in a given case. The definitions of 'knowledge' and 'recklessness' are imported from the Criminal Code Act 1995. Under the Criminal Code, the fault elements of knowledge and recklessness apply with respect to circumstances. The expression 'circumstances' encompasses the legal construct of 'circumstances' as a physical element in a criminal offence, but may also bear its ordinary meaning in other contexts.
For example see sections 769C, 1041E, 1041F, 1041H of the Corporations Act and section 12BB(1) and 12DA of the ASIC Act.