Welcome changes for listed entities 5 min read
Following a period of temporary reform, Australia's continuous disclosure regime has been permanently amended in an effort to combat the upward trend of opportunistic shareholder class actions and to put downward pressure on premiums for directors and officers insurance.1
The reform represents a restoration of the former fault elements that were present at the time the continuous disclosure regime first came into operation.
Under the new laws:
- it must be established that a listed entity acted with 'knowledge, recklessness or negligence' in order to sound a breach of the continuous disclosure civil penalty provisions of the Corporations Act;2 and
- a failure to disclose material information will not constitute misleading or deceptive conduct under s1041H of the Corporations Act or s12DA of the ASIC Act unless 'knowledge, recklessness or negligence' is established.
While the changes are important in addressing the imbalance in Australia's shareholder class action regime and will be welcomed by listed entities, we do not consider the amendments will signal an end to shareholder class action risk.
- Listed entities will only be exposed to civil penalties for breaches of continuous disclosure obligations if they act with 'knowledge, recklessness or negligence', making permanent the temporary measures introduced in 2020.
- The 'knowledge, recklessness or negligence' test has been extended to misleading or deceptive conduct claims brought against a listed entity pursuant to s1041H of the Corporations Act or s12DA of the ASIC Act. These amendments are significant because shareholder class actions typically include claims for misleading or deceptive conduct that would otherwise have a lower bar (and no fault element) to establish a contravention.
- The changes will be welcomed by listed entities and represent a significant improvement to the continuous disclosure regime. While we expect the impact of the reform will not deal a major blow to shareholder class actions, we expect there to be a reduction in filings over the short term as class action promoters grapple with the amendments and the tightening of funding regulations introduced in August 2020.
In May 2020, due to the uncertain economic outlook as a result of the COVID-19 pandemic, the Treasurer used his emergency powers under the Corporations Act to temporarily modify the continuous disclosure regime so that a company would only be liable for failing to disclose information not generally available where it knew, or was reckless or negligent as to whether, the information was price-sensitive.
At the time of the temporary reform, a listed entity was required to disclose information that a reasonable person would expect to have a material effect on the price or value of the entity's securities, applying a reasonable person test.3
The temporary reform was initially introduced for a period of six months, and subsequently extended through to 23 March 2021. After the temporary reform lapsed, the continuous disclosure provisions in the Corporations Act reverted to the prior position (applying the reasonable person test) while the Government moved to make the temporary reform permanent.
The former continuous disclosure provision under s674 of the Corporations Act will no longer attract a civil penalty, but has been retained as an avenue for ASIC to bring non-penalty enforcement action (eg infringement notices).
The amendments introduce a new s674A as a civil penalty provision. The new provision is drafted in the same terms as s674, except that it incorporates the 'knowledge, recklessness or negligence' fault element. Accessorial liability for officers only arises under s674A (where the fault element applies to the entity's conduct). Building on the temporary reform, the fault element has also been incorporated in the misleading or deceptive conduct provisions under the Corporations Act and ASIC Act. Where conduct that would be in breach of the misleading or deceptive conduct provisions of the Corporations Act or ASIC Act also gives rise to a breach of s674 but does not contravene s674A (because the fault element is not met), the conduct will not contravene the misleading or deceptive conduct provisions. Accordingly, the reform introduces a carve-out so that conduct that is not a breach of s674A will not breach the misleading or deceptive conduct provisions. This recognises that in shareholder class actions both the continuous disclosure and misleading or deceptive conduct provisions are commonly relied upon by claimants, so amending only the continuous disclosure regime without adjusting the misleading or deceptive conduct regime would not address the shareholder class action risk.
The impact on the risk landscape for shareholder class actions
While the introduction of a permanent fault element is welcomed, we query whether establishing the negligence limb of the new test imposes a materially higher legal standard than the previous law, given that principles of negligence involve a failure to take reasonable care4, and it is conventional for shareholder class actions to allege a company's failure to disclose price sensitive information based on conduct described in terms akin to a failure to take reasonable care.
A proceeding recently commenced by ASIC in the Federal Court may provide guidance on how the courts will interpret the new laws and the evidence that may be required to satisfy the requisite 'knowledge, recklessness or negligence' test.5
The amendments to the continuous disclosure laws are subject to a conditional sunset provision which requires that the Minister take certain steps in two years, or the amendments will cease to have effect.6 However, the steps the Minister is required to take are not onerous: the Minister must ensure that after two years an independent review of the amendments occurs, a report of the review is tabled in Parliament and that any recommendations arising from the report are responded to in a public statement.7 It therefore seems that the changes are here to stay.
It is too early to tell whether the changes will be successful in curbing the appetite for shareholder class actions in Australia. While the reform may cause a short-term reduction on the number of claims, the longer term impact on the rate of filings will likely turn on how the courts apply the new test.
In light of ongoing reform across the class action landscape, including the regulation of litigation funders, Treasury's consultation on the potential introduction of a minimum return to class members and ASIC's consultation on litigation funding schemes, the changes to Australia's continuous disclosure regime are indicative of multi-pronged attempts to curtail opportunistic claims.
Explanatory Memorandum, Supplementary Analysis p 44.
s674A(2) Corporations Act 2001 (Cth). The new test applies only to civil penalties. ASIC retains the ability to issue infringement notices for breaches of continuous disclosure obligations not meeting the new test.
s647(1); ASX Listing Rules r 3.1.
Explanatory Memorandum, 2.1.
ASIC v Holista Collteach Ltd (WAD177/2021).
s1683C Corporations Act 2001 (Cth).
s1683B Corporations Act 2001 (Cth).