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http://www.minterellison.com/articles/covid19-summary-of-instrument-implementing-temp-relaxation-of-continuous-disclosure-obligations

COVID-19: Directors and companies to be temporarily insulated from 'opportunistic class actions'

5 minute read  27.05.2020 Kate Hilder, Mark Standen

Overview: Corporations (Coronavirus Economic Response) Determination (No 2) 2020

Key Takeouts

  • Corporations (Coronavirus Economic Response) Determination (No 2) 2020 temporarily relaxes continuous disclosure obligations under the Corporations Act 2001 (Cth) (the Act), to enable companies and their officers to 'more confidently provide guidance to the market during the Coronavirus crisis'. 
  • Announcing the changes, Treasurer Josh Frydenberg said that they will shield directors from the 'threat of opportunistic class actions for allegedly falling foul of their continuous disclosure obligations if their forecasts are found to be inaccurate'.
  • The changes are now in effect and will be in place for six months (until the 26 November 2020).
  • The changes have been welcomed by the Australian Institute of Company Directors and separately by the Business Council of Australia.

Overview

What's changed? 

Corporations (Coronavirus Economic Response) Determination (No 2) 2020 temporarily modifies the operation of the civil penalty provisions in subsections 674(2), 674(2A), 675(2) and 675(2A) of the Corporations Act 2001 (Cth) by replacing the existing objective test in 674(2)(b) and 675(2)(b) for determining whether information is material (and therefore needs to be disclosed), with a temporary new test.

The Explanatory Statement states that, 

'The new temporary test is based on a disclosing entity or its officers' knowledge, recklessness or negligence with respect to whether certain information would have a material effect on the price or value of its enhanced disclosure (ED) securities and therefore should be disclosed under section 674 or 675 of the Act...

Under the new temporary test, a person knows or is reckless or negligent as to whether the information will have a material effect on the price or value of the entity's ED securities if it knows or is reckless or negligent as to whether the information would or would be likely to influence persons who commonly invest in securities to acquire or dispose of the ED securities'.  

Explaining the change, Treasurer Josh Frydenberg said that it means that 'companies and officers’ will only be liable if there has been knowledge, recklessness or negligence with respect to updates on price sensitive information to the market'.

Limits the scope to commence civil proceedings 

The determination also temporarily modifies the scope to commence civil proceedings - i.e. proceedings will only be able to be brought where alleged breaches are committed knowingly, recklessly or negligently for the six month period that the instrument is in force.

The determination impacts all 'civil consequences' for breaching continuous disclosure provisions including 'all civil consequences enforced by the Australian Securities and Investments Commission (ASIC)'.  

The Determination does 'not modify the operation of the criminal offences based on subsections 674(2) or 675(2)'.

Timing

The changes will be in place for a period of six months (until 26 November 2020).  

Rationale for the change

According to the Explanatory Statement, the change is intended to ensure investors continue to receive the information they need during the pandemic, while also providing some temporary protection for directors/entities against the threat of potential civil action.  

The explanatory memorandum states,

'In this environment, the continuation of many businesses may depend on investment, and investors rely on timely disclosure of information to financial markets. It is appropriate to encourage disclosing entities to continue to disclose information to markets or to ASIC by temporarily modifying the scope to commence civil proceedings for breaches of the continuous disclosure obligations in circumstances relating to COVID-19. At the same time, it is appropriate that serious breaches committed knowingly, recklessly or negligently during the period the instrument is in force may continue to be litigated'.

Announcing the changes, Treasurer Josh Frydenberg said that in the present circumstances, he considers it appropriate to shield companies and their officers from the threat of 'opportunistic class actions'.   Mr Frydenberg said,

'The heightened level of uncertainty around companies' future prospects as a result of the crisis also exposes companies to the threat of opportunistic class actions for allegedly falling foul of their continuous disclosure obligations if their forecasts are found to be inaccurate. In response, companies may hold back from making forecasts of future earnings or other forward-looking estimates, limiting the amount of information available to investors during this period. The changes announced today will make it harder to bring such actions against companies and officers' during the Coronavirus crisis and while allowing the market to continue to stay informed and function effectively'.

The AICD and the BCA have separately welcomed the changes

Australian Institute of Company Directors (AICD) CEO and Managing Director, Angus Armour, said 'This is a critical step in acknowledging the challenges facing the business community to rebuild in the wake of COVID-19…This measure allows directors to provide greater disclosure in this uncertain environment at the same time as it maintains measures to discipline irresponsible companies to protect the community.'  

Mr Armour adds that the upcoming parliamentary inquiry into litigation funding and class actions will be an opportunity to 'look closely at how the system is working and examine whether permanent reform is necessary'.  

[Note: The inquiry referred to appears to be the Parliamentary Joint Committee on Corporations and Financial Services Inquiry into Litigation funding and the regulation of the class action industry. The Terms of Reference are here. The Inquiry is due to report by 7 December 2020.] 

[Note: In April, the AICD identified six areas where it considered urgent reform was needed to support directors and companies through the pandemic. A temporary 'safe harbour' from liability for directors and companies to shield them from the risk of legal actions in connection with earnings guidance or forward-looking statements about company performance made in the context of the COVID-19 pandemic was one of the areas identified. See: AICD proposal for temporary continuous disclosure safe harbour. For a summary see: Governance News 08/04/2020]

Business Council of Australia (BCA) CEO Jennifer Westacott also welcomed the changes and congratulated the Treasurer 'for acting to help protect Australians from the uncertainty caused by the COVID-19 pandemic'.  

Ms Westacott said,

'Left unchecked this issue would have hampered business confidence and performance which would have adversely impacted on the broader community at a time when business needs certainty to power the recovery, rehire workers and create more jobs. As a community our priority must be on keeping Australians in work and laying the groundwork to create new jobs, this announcement will help businesses do that. Our recovery must be jobs focussed and that means every resource businesses have should be focussed on getting Australian's safely back to work and creating new opportunities'.

[Sources: Corporations (Coronavirus Economic Response) Determination (No 2) 2020; Explanatory Statement; Treasurer Josh Frydenberg media release 25/05/2020; AICD media release 25/05/2020; BCA media release 25/05/2020; [registration required] The AFR 25/05/2020; The SMH 25/05/2020; [registration required] The Australian 25/05/2020

Related News: In related news, Treasurer Josh Frydenberg has announced that litigation funders will be regulated under the Corporations Act.  To increase regulatory oversight of litigation funders, they will be required obtain an Australian Financial Services Licence (AFSL) from the Australian Securities and Investments Commission (ASIC) and to comply with the managed investment scheme regime.  This development is covered in more detail in the 27 May issue of Governance News which you can access here.

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http://www.minterellison.com/articles/covid19-summary-of-instrument-implementing-temp-relaxation-of-continuous-disclosure-obligations

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