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Temporary and Limited Continuous Disclosure Relief

The Australian Government has announced that it will provide further temporary relief for companies listed on the Australian Securities Exchange and other disclosing entities during COVID-19 by amending the continuous disclosure provisions in Chapter 6CA of the Corporations Act 2001 (Cth) (Corporations Act).

The amendments were brought in through the Corporations (Coronavirus Economic Response) Determination (No. 2) 2020 (Determination) issued by the Treasurer on 25 May 2020. The Determination has commenced on 26 May 2020 and will be in force for six months (unless repealed earlier or extended).

Rationale

The purpose of this Determination is to facilitate the continuation of business in circumstances relating to COVID-19.

As stated in the Explanatory Statement, in this environment, the continuation of many businesses may depend on investment, and investors rely on timely disclosure of information to financial markets. However, it is now significantly more challenging for disclosing entities to know whether a given piece of information will have a material effect on the price or value of its securities and therefore it is difficult for an entity to forecast  future earnings or prospects with a high degree of certainty. Therefore 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.

What’s changed?

The Determination temporarily modified the operation of the civil penalty provisions in subsections 674(2), 674(2A), 675(2) and 675(2A) of the Corporations Act by replacing the previous 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 previous objective test (as it applied prior to the relief coming into effect) for determining whether information is material requires that a disclosing entity or its officers to release the information if a reasonable person would expect, if it were generally available, to have a material effect on the price or value of the ED securities of the entity.

The Determination has adopted a temporary new test, which is of a lower standard than the previous objective test.

Under the temporary new test, a disclosing entity or its officers are required to release the information if 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.

Knowledge and recklessness are given the same meaning as in the Criminal Code Act 1995 (Cth). That is, a person:

  • (Knowledge) has knowledge of a circumstance if he or she is aware that it exists or will exist in the ordinary course of events; and
  • (recklessness) is reckless with respect to a circumstance if he or she is aware of a substantial risk that the circumstance exists or will exist and having regard to the circumstances known to him or her, it is unjustifiable to take that risk.

As negligence is not defined by the Determination, the Explanatory Statement says that as a civil tort, it is a common law concept and appropriate for courts to decide what constitutes negligence in a given matter.

Consequences

Although the hope as announced by the Treasurer is that this relief would encourage companies to continue to disclose forecasts of future earnings and other forward-looking estimates, it in fact only offers limited comfort to disclosing entities.

The temporary relief may provide entities with greater latitude not to disclose certain information (since the materiality of impacts of such information is more difficult to be known by a disclosing entity in the time of COVID-19) and therefore such information does not  need to be disclosed under the temporary new test. However, the relief provides limited assistance to a disclosing entity or its officers that do disclose information, but later turns out to be incorrect. This is because the entity or its officers will remain liable to shareholders on the ground that the information was misleading or deceptive under section 1041H of the Corporations Act, regardless of whether the entity was unaware, negligent or reckless in making that statement.

What do I do next?

Due to the limited nature of the relief, listed companies and company officers must still carefully assess whether any new developments in the company need to be disclosed and make sure that any disclosure, especially release on forecasts and guidance, is in made on a reasonable basis and is not be misleading or deceptive.

For advice on your continuous disclosure obligations in this rapidly changing regulatory environment, please contact:

The contents of this article, current at the date of publication, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your circumstances should be sought before taking any action based on this publication.