On Wednesday, Treasury announced that the temporary changes made to Australia’s continuous disclosure laws back in May 2020 will now become permanent. Under the new law, which was previously set to expire in March this year, companies and their officers are only liable for civil penalty proceedings where they act with “knowledge, recklessness or negligence” in relation to market updates on price-sensitive information. The legislation also makes it clear that companies and their officers are not liable for misleading or deceptive conduct in circumstances where continuous disclosure obligations have been breached unless the requisite “fault” element is also proven.
These changes align Australia closer to continuous disclosure regimes in other jurisdictions such as the United States and United Kingdom, and alleviates its reputation as an outlier in terms of the prescriptiveness of its company laws.
Coronavirus and Parliamentary Committee Report an impetus for change
The temporary changes were introduced in response to the economic uncertainty caused by the COVID-19 pandemic, and added a “fault” element to the low threshold “strict liability” offence previously introduced by the Howard government. Under the old test, an offence could be established where it was proven that a company or their officer failed to disclose information to the market, regardless of whether recklessness or intention was involved.
The decision to make the relaxed laws permanent came after months of lobbying by the Australian Institute of Company Directors and Business Council of Australia.
A significant impetus was also the release of a report last December by the Parliamentary Joint Committee on Corporations and Financial Services. The focus of the report was litigation funding and the regulation of the class action industry. The parliamentary committee, chaired by Senator James Paterson, recommended that the temporary rules become permanent in response to the report’s finding that return on investment had become the primary motivator for litigation funders’ use of the justice system.
Looking back, the main reason cited for the Government’s decision to temporarily amend the continuous disclosure laws was the economic uncertainty caused by the coronavirus pandemic, which had made it increasingly difficult for companies to provide reliable earnings guidance to the market. At that time, a plethora of ASX-listed companies had already begun withdrawing their forecast guidances.
Growing concerns surrounding litigation funding
However, the main catalyst for the change was the government’s growing concern surrounding the litigation funding industry. In his press release last May, Treasurer Josh Frydenberg pointed to the threat of “opportunistic class actions” being brought against companies and directors in the event that their forecasts turned out to be inaccurate during the pandemic.
Indeed, prior to the change, the ease of taking action under the previous continuous disclosure laws made Australia an enticing market for litigation funders, with shareholder class action lawsuits having tripled over the past decade. This, along with the fallout following the Hayne royal commission, had led to D&O insurance costs rising in Australia at a greater rate than anywhere else in the world. Coverage limits at the same time experienced a noticeable decrease.
The move to make class actions more difficult to pursue forms part of the government’s broader measures being taken against the litigation funding industry. In August last year, tougher oversight rules were introduced, requiring litigation funders to hold an Australian Financial Services Licence and to operate class actions as a Managed Investment Scheme.
Proponents pushback opposition to amendments
Expectedly, the decision to “water down” continuous disclosure laws has been met by opposition by shareholder groups, class action lawyers and litigation funders. They argue that the new laws fail to adequately protect investors by reducing the likelihood of shareholder redress and director accountability where proper market disclosures have not been made. This, they claim, is of particular importance at a time when retail and institutional investors have flooded into the sharemarket throughout the pandemic.
In a press release, Labour MP Stephen Jones said the new laws “tip the scales in favour of directors of public companies and against the interests of their shareholders”.
However, contrary to this view, the Parliamentary Committee in their report found that shareholder class actions were typically economically inefficient, and “amount[ed] to shareholders effectively suing themselves”. This supports the view of business leaders that class action lawyers and litigation funders are making huge profits out of persuading disgruntled shareholders to sue companies and their officers, whilst often being no better off in net terms.
The eased rules are also opposed on the basis that continuous disclosure is critical to maintaining market integrity and ensuring shareholders preserve their right to information. Prior to the temporary change being made in May, the Australian Securities and Investments Commission (ASIC) warned Treasury that continuous disclosure was a “fundamental tenet of our markets and is particularly important during times of market uncertainty and volatility”. It is believed that the relaxation will lead to investors not being accurately informed in relation to price sensitive disclosures as directors evade accountability and hold back from providing guidance in relation to future earnings and other forward-looking estimates.
However, consistent with the government’s intention at the time of introducing the temporary measures, “Treasury has identified that there has been an increase in the number of material announcements to the market, relative to the same period last year”. Treasury’s experience has been that “the changes 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.”
Moreover, supporters of the changes point to the fact that “reckless or negligence directors”, and those who intentionally withhold information that they ought to disclose, will still be liable under the new laws. They also note that, whilst shareholder actions are more difficult to pursue under the new laws, the changes do not affect the Commonwealth’s ability to prosecute criminal breaches, and ASIC retains its power to issue administrative notices and infringement penalties without proving fault.