Overview: AICD's six reform proposals

The Australian Institute of Company Directors (AICD) has identified six key areas where it considers that urgent reform is needed to support companies and directors through the pandemic.  A high level summary of the AICD's proposals is below.

1. Securities class actions and continuous disclosure: proposed introduction of a temporary safe harbour for directors and companies

The AICD considers that meeting continuous disclosure obligations to be a particular challenge for boards and directors in light of the 'extreme market volatility and ongoing uncertainty' caused by the COVID-19 pandemic.

'The provision of earnings guidance and general forward-looking information about company performance that will not fall foul of the law has become very difficult given the uncertainty facing companies and the broader economy' the AICD writes.  In addition, 'the circumstances generate a significant risk of opportunistic securities class actions, creating another significant board and company distraction in the current environment'.

To address these issues, The AICD proposes that the Treasurer should exercise his new power to temporarily amend the Corporations Act 2001 (Cth) to: 

• Bar ASIC and shareholders from bringing an action: The AICD proposes that the Treasurer should exercise his new power to temporarily amend the Corporations Act 2001 (Cth) to provide that that no action can be brought against listed disclosing entities or their directors or officers in relation to earnings guidance or forward-looking statements about company performance, that are made in the context of the COVID-19 pandemic.
  It's proposed that the suggested amendment would cover any claim or proceeding at Federal, State or common law level in relation to a breach of continuous disclosure or misleading and deceptive conduct in relation to earnings guidance and forward-looking statements connected to COVID-19.  
• It would apply both to actions initiated by the Australian Securities and Investments Commission (ASIC) and to shareholders.
  In proposing this change, the AICD makes clear that it would be limited to forward looking statements or earnings guidance. Companies would still need to disclose where they have actual figures or information to update the market with – eg in relation to debt covenants, the loss of a material contract, or material changes to their workforce.
  The AICD observes that this approach would align with the approach taken by the US and Canada in regulating forward looking statements.  
• Bar shareholders (but not ASIC) from bringing an action? In the alternative, the AICD suggests that the Treasurer should exercise his power  to bar actions initiated by shareholders in connection with earnings guidance or forward-looking statements made in the context of the pandemic, but preserve ASIC's ability to bring an action in appropriate circumstances. 
  The AICD suggests that ASIC could then provide guidance on the way in which it intends to regulate disclosure in the current COVID-19 environment, to provide 'some comfort to organisations grappling with very difficult disclosure judgements'.

[Note: The AICD's proposal includes proposed working for the amendment to the Corporations Action.  See: Dealing with continuous disclosure in COVID-19 environment: AICD proposal for a temporary safe harbour at p2.] 

Preferable to the current approach

The AICD considers that the proposed change will achieve a better outcome than the alternative.

'While the ASX’s updated guidance has recommended that companies simply withdraw all guidance to the market, we believe a better and more sustainable approach is to encourage bona fide efforts from companies and their officers to inform the market that are appropriately protected from subsequent claims or proceedings. This will become even more important as consensus starts to develop, which may lead to a gap between market and company expectations and potentially require a corrective disclosure from the company' The AICD states.

Further, as the change would be temporary, there is no danger that it would have lasting impacts on the the existing continuous disclosure scheme.

Response to the proposal

The AFR reports that a number of prominent directors have expressed support for the proposed changes but that neither CGI Glass Lewis nor the Australian Council of Superannuation Investors (ACSI) are supportive of the proposed change.

Glass Lewis reportedly characterises it as a 'classic case of attempting to never let a good crisis go to waste'. 'Investors are right to be cautious of the pandemic being used for a legal land grab…Whilst the continuous disclosure regime puts a heavy burden on directors, investors' rights to be fully informed on the financial position and prospects of ASX-listed companies should be protected'.

In a similar vein, ACSI CEO Louise Davidson is quoted as saying that 'continuous disclosure provisions are fundamental to market integrity and should not be diminished, even on a temporary basis…The ASX has already clarified how companies should manage continuous disclosure in the current environment. Current disclosure obligations do not require companies to predict the unpredictable. When companies are aware of material information, the law is clear and should not be undermined.  The accuracy of corporate disclosures is crucial in the current market. These changes will provide protection for companies making misleading disclosures.'

2. Reporting: Proposed extension on reporting deadlines

Given the challenges that COVID-19 poses for organisations, including their auditors, the AICD has called for reporting deadlines for companies who are balancing on 31 March 2020 and for those entities whose financial year ends 30 June to be extended. The AICD suggests that ASIC could provide relief on a class basis, and in doing so, would be in 'lock step' with international regulators.

In addition, the AICD says that it is in dialogue with interested stakeholders (including regulators) around other challenges connected with making accurate financial assessments in the current economic environment eg difficulties in completing audited reports and directors’ declarations as to solvency and assessment of going concern.

3. General meetings: Proposed amendments to the Corporations Act to provide clarity/certainty

To provide clarity and certainty for companies, the AICD proposes that the Treasurer makes temporary modifications to the Corporations Act to: a) allow companies to hold virtual general meetings that are conducted solely online; b) extend the deadline by which companies must hold an AGM after the end of the financial year from five to seven months; c) enable companies to postpone or cancel already convened meetings; and d) reduce the general meeting notice period for both listed and unlisted companies.

The AICD has also suggested a new replaceable rule in company constitutions that would give boards the temporary ability to amend their constitution to deal with issues such as postponing an AGM, holding virtual meetings and similar matters.

4. Moratorium on regulatory change and consultations

The AICD has asked the government and regulators to pause both regulatory reforms and consultations that are not time critical and/or necessary to protect consumers or the market.  'It is crucial that distractions and additional costs are reduced at this time' the AICD writes.

5. Regulatory and enforcement posture: A temporary pause on ASIC's 'why not litigate?' enforcement approach?

The AICD states that directors, under immense pressure, need to be able to focus on urgent and difficult issues associated with guiding their companies through the crisis, including making rapid decisions.  As such, the AICD considers that 'clarity from regulators' around their approach to board decision-making in the current context would be welcome.  'Flexibility and pragmatism are needed in the current environment, and we have encouraged regulators such as ASIC to re-consider their ‘why not litigate’ approach in light of COVID-19' the AICD states.

In addition, the AICD considers that clarity from ASIC regarding how it will enforce directors’ duties in light of the temporary safe harbour from insolvent trading would also be welcome.

6. Not-for-profits and charities: The need for a nationally consistent regulatory approach 

The AICD has called for a 'nationally consistent statement' outlining the regulatory approach the Australian Charities and Not for Profits Commission (ACNC) and state and territory regulators will take to various issues during the COVID-19 crisis. The AICD has called for the statement to address the following issues:

• The extension of the insolvent trading safe harbour to all ACNC regulated entities and state and territory regulated incorporated associations.
• A consistent approach to fundraising laws to ensure that red tape is not an obstacle to fundraising.
• A consistent approach to financial reporting and filing extensions.

[Sources: AICD article 02/03/2020; AICD proposal for temporary continuous disclosure safe harbour;  [registration required] The AFR 06/03/2020]