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Permanent changes to the continuous disclosure laws

permanent changes have been made to the continuous disclosure laws

By Stuart Hutton, Lawyer and Victoria-Jane Otavski, Principal

The Treasury Laws Amendment (2021 Measures No. 1) Act 2021 (Cth) (Act) came into effect on 14 August 2021. The Act makes permanent certain previous temporary provisions dealing with liability for failure to comply with continuous disclosure obligations and misleading and deceptive conduct.

At a broad level, companies and their officers may be liable in civil proceedings where they have acted with knowledge, recklessness or negligence in connection with their continuous disclosure obligations. The changes also import a fault element into misleading or deceptive conduct claims where reliance is placed on the Australian Consumer Law to support claims for breaching continuous disclosure obligations.

Effect of the amendments

Continuous disclosure obligations

Schedule 2 of the Act amends continuous disclosure obligations under the Corporations Act 2001 (Cth) (Corporations Act) so that when determining whether a listed reporting entity has contravened any continuous disclosure obligations, its state of mind is taken into account.

Prior to temporary changes to the Corporations Act introduced by the government in May 2020, a listed reporting entity was required to publish information that:

  1. was not generally available; and
  2. a reasonable person would expect the information to have a material effect on the price or value of an entity’s enhanced disclosure securities if it were generally available.

The Act permanently amends this position to require that directors and entities may only be liable in civil suits where the entity knows, is reckless or is negligent in considering whether information would have a material effect on the price or value of the entity’s enhanced disclosure securities if published.

In contrast, the continuous disclosure provisions in ASX Listing Rule 3.1 (and 3.1A) and section 674(2) of the Corporations Act require listed entities to disclose price sensitive information where a “reasonable person” would expect it to have a material effect on the price or value of the entity’s securities. The existing provisions rendering it a criminal offence for failing to comply with the continuous disclosure obligations set out in the ASX Listing Rules and the Corporations Act and the provisions which enable ASIC to issue infringement notices remain unchanged and continue to apply together with the new reforms.

The Act also introduces a corresponding accessorial liability provision in section 674A of the Corporations Act. Specifically, it provides that a person contravenes the new accessorial liability provision if they are involved in a listed reporting entity’s contravention of the new civil penalty provision. However, a person does not contravene the accessorial liability provision if they take all steps (if any) that were reasonable in the circumstances to ensure that the listed reporting entity complied with its obligations under the new civil penalty provision, and after doing so, believed on reasonable grounds that the listed disclosing entity was compliant with its obligations.

Misleading and deceptive conduct

Schedule 2 to the Act also amends section 1041H of the Corporations Act to limit the circumstances in which entities and officers are liable in civil actions for misleading and deceptive conduct where the continuous disclosure obligations have been contravened, unless the requisite mental element has been proven.

Conduct of a listed reporting entity that does not contravene one of the new civil penalty provisions, but would contravene that obligation if it contained the relevant objective test in section 674 or 675 instead of the test of knowledge, recklessness or negligence, does not contravene the prohibition on misleading and deceptive conduct in section 1041H(1).

Reason for amendments

The legislative amendments have been introduced following the report handed down by the Parliamentary Joint Committee on Corporations and Financial Services (the Committee) on litigation funding and the regulation of the class action industry. A copy of that report can be found here. The report of the Committee highlighted that securities class actions are frequently brought in Australia alleging contraventions of the continuous disclosure obligations and that this has had a significant financial and compliance impact on the entities and officers subject to these actions. It is expected that the amendments will curtail the number of speculative class actions.

Additionally, claims of misleading and deceptive conduct under section 1041I are often brought simultaneously with claims of contraventions of continuous disclosure obligations, as a failure to disclose price-sensitive information in a timely manner can trigger both provisions.

The explanatory memorandum to the Act (Explanatory Memorandum) noted that the cost of Directors and Officers insurance (D&O Insurance) has risen markedly in the last decade. The amendments are also aimed to assist in reducing insurance premiums and thereby encourage more listed entities to obtain D&O Insurance coverage.

Without the modifications, the Corporations Act would not require ASIC or private plaintiffs to prove an entity’s knowledge, recklessness or negligence in establishing a civil contravention of the continuous disclosure obligations. The permanent introduction of a ‘fault’ element is expected to insulate companies and their officers from the threat of ‘opportunistic’ litigation, while ensuring the market is kept informed of material information – an approach the Treasurer has described as striking the right balance.

How long do these changes last for?

The Act was passed by the Senate on the basis that an independent review of the changes would be conducted in two years’ time, and if no such review is conducted, the amendments will automatically lapse.

Have ASIC’s powers changed?

In short, no. ASIC still has the ability to issue infringement notices for breaches of continuous disclosure obligations regardless of the state of mind of the entity or its officers.

ASX Listed entities

ASX listed companies must continue to adhere to ASX Listing Rule 3.1 and section 674(2) of the Corporations Act, which requires the disclosure of information based on the “reasonable person” test.

Compliance with amendments

Listed entities should ensure that they have rigorous and documented corporate governance processes to ensure they can receive the benefits of these amendments, including:

  • documenting their processes around disclosure and non-disclosure of information; and
  • creating a documentary trail that demonstrates any decision to disclose or not disclose has been made following an assessment of whether the information would have a material effect on the price or value of its securities and subject thereto, the reasons as to why it determined that the information would not, or would not be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of the securities.

Additionally, risk, compliance and disclosure committees should review their continuous disclosure policies and consider how their processes reveal and/or record the decision-making processes for continuous disclosure purposes so as to ensure that if required, any claims of ‘knowledge, recklessness or negligence’ with respect to obligations can be disproved. The true benefit of these amendments for entities will only be realised if listed entities establish a counter factual to the hindsight bias that regularly sits behind continuous disclosure or misleading and deceptive conduct claims.

How can we help?

If your organisation requires any assistance with implementing any of the above changes, or you would like any further information regarding corporate law matters generally, please contact Automic Legal on (02) 8072 1400. Alternately, click here to be contacted by one of our Legal team members.

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