Changes to continuous disclosure laws are now permanent

6 minute read  18.08.2021 Beverley Newbold, David Taylor, Daniel Henningsen, Jacky Wong, Rafael Aiolfi, Daniel Scotti

Is this the end of speculative class actions?

 

Following debate in the Senate this month, the Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 (the Bill) was finally passed by both houses of Parliament. The Bill received Royal Assent on 13 August 2021.

The Bill seeks to permanently amend the continuous disclosure obligations in the Corporations Act 2001 (Cth) (Corporations Act) so that companies and their officers will now only be liable in civil proceedings in respect of alleged breaches of continuous disclosure obligations, where they have acted with 'knowledge, recklessness or negligence'.

While the passing of the Bill is a positive development, the (often) hindsight application of 'knowledge' by shareholder class action promoters when formulating claims against listed companies means that companies and their officers need to continue to record carefully and contemporaneously their consideration of, and decision-making in relation to, continuous disclosure related issues.

The Bill also implements other changes, including extending the current laws to allow for virtual-only annual general meetings and recognition of electronic signatures until at least March 2022.

Background to the changes

In May 2020, Parliament introduced temporary changes to the continuous disclosure obligations under the Corporations Act to enable companies and their officers to more confidently provide guidance to the market during the COVID-19 pandemic. In announcing the temporary changes, Federal Treasurer Josh Frydenberg stated that the temporary changes would shield directors from 'opportunistic' class actions for allegedly falling foul of their continuous disclosure obligations if their forecasts were found to be inaccurate.

The temporary changes introduced a test based on 'knowledge, recklessness or negligence' in assessing whether a company or its officers had breached continuous disclosure obligations under sections 674 and 675 of the Corporations Act. The changes effectively meant that companies and officers would now only infringe their continuous disclosure obligations if they knowingly, recklessly or negligently provided or failed to provide information to the market that would have a material effect on a company's share price.

In December 2020, the Parliamentary Joint Committee on Corporations and Financial Services recommended that the Government make permanent these temporary changes to the continuous disclosure obligations.

Making the temporary changes permanent

The Bill was first introduced into Parliament in February 2021, just as the temporary changes were set to expire in March 2021.

The Bill permanently amends the continuous disclosure obligations in the Corporations Act by introducing new sections 674A and 675A into the Corporations Act. However, the Bill goes further than the temporary changes by providing that companies and their officers who have prima facie contravened their continuous disclosure obligations will not be liable for misleading and deceptive conduct (under sections 1041H of the Corporations Act and 12DA of the Australian Securities and Investments Commission Act 2001 (Cth)) unless the requisite 'fault' elements are also proven, being that the company or officer must have acted with 'knowledge, recklessness or negligence'.

On 10 August 2021, Federal Treasurer Josh Frydenberg stated 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.'

The reforms are a positive step forward and aim to balance the rights of shareholders with the commercial realities experienced by companies and their officers.

Since its passing, the Bill has received mixed reactions from the community:

  • The Australian Institute of Company Directors (AICD) has welcomed the reforms to the continuous disclosure laws, with the AICD CEO and Managing Director stating that the reforms 'provide greater certainty for companies to make disclosures to the market, without the apprehension of speculative class actions challenging this disclosure with the benefit of hindsight…'.
  • Meanwhile, members of the Australian Labor Party have expressed concern regarding the changes, suggesting it creates less transparency for retail investors and damages market integrity.

Potential Impact of the changes

While the changes in the Bill are helpful and provide some comfort to companies and their officers, it remains to be seen whether the reforms will have their intended effect in practice and slow down 'opportunistic' class actions. For example:

  • Class action plaintiffs and litigation funders typically allege that a company or its officers breached their continuous disclosure obligations because they failed to have regard to information that they ought to have had regard to or that a particular profit forecast had no reasonable basis. In our view, there is only a short conceptual step between such allegations and allegations of negligence.
  • ASIC still retains its ability to prosecute listed entities under ASX Listing Rule 3.1, regardless of whether that entity acted with 'knowledge, recklessness or negligence'.
  • Errors in judgment by companies and their officers (even if honestly made) are often effectively alleged to be negligent (with the benefit of hindsight) by class action plaintiffs and litigation funders.
  • It remains unclear whether the permanent changes will be applied with retrospective effect to the period of time between the expiration of the temporary relief in March 2021 and the date that the permanent changes to the continuous disclosure obligations take effect (being the date the Bill received the Royal Assent).

The Bill does not materially change the approach that companies and their officers should take in relation to their compliance with their continuous disclosure obligations. That is, companies and their officers should remain diligent and keep accurate records of each decision made, as such records may prove critical in defending allegations of 'knowledge, recklessness or negligence', should those allegations form part of a shareholder class action. Fundamentally, companies should not be penalised for carefully evaluated and tested decisions that simply turned out to be wrong, but evidence of that evaluation and testing process will be essential.

Review in two years

The reforms could expire in two years. The Bill provides for a review by an independent expert in two years. The independent expert is to prepare a written report of the review (which may set out recommendations to the Government), to be tabled before Parliament. If the report sets out recommendations to the Government, the Minister must within three months after the report is tabled:

  • prepare a statement setting out the Government's response to each of those recommendations; and
  • cause the statement to be published on the Government's website.

If the Minister fails to cause:

  • a review of the new reforms; or
  • a copy of the report prepared by the independent expert to be tabled within 15 sitting days after the report is provided to the Minister; or
  • the statement setting out the Commonwealth's response to each of the independent expert's recommendations to be published on the Department's website within 3 months after the report is first tabled in Parliament,

the amendments implemented by the Bill will be treated as having not been made going forward.

Contact our team for more information about the changes and how they may impact your business.

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https://www.minterellison.com/articles/changes-to-continuous-disclosure-laws-are-now-permanent

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