Written by Will Heath.
As we noted earlier, in late May, the Federal Treasurer made a welcome and significant change to Australia's continuous disclosure laws using his COVID-19 powers under section 1362A of the Corporations Act.
The Treasurer's determination essentially means that ASX-listed entities' decisions on continuous disclosure should not attract liability under section 674(2) unless they knew or were reckless or negligent with respect to whether information would, if it were generally available, have a material effect on the price or value of their securities.
The Treasurer's change is, however, temporary, and applies only until 26 November 2020.
We believe the Treasurer's change should be made permanent and, in addition, other changes should be made to the Corporations Act to restore balance to continuous disclosure laws.
We are advocating for change through a number of channels: in the media, directly to the Government, in collaboration with industry groups, and via our own submission to the Parliamentary Joint Committee on Corporations and Financial Services' current inquiry into litigation funding (the PJC Inquiry).
Although the primary focus of the PJC Inquiry is on litigation funding, a number of the submissions to the inquiry (including our own) highlighted the relevance of Australia's continuous disclosure laws in the growth of the class action industry in Australia.
A central concern has been that, prior to the Treasurer's recent temporary change, Australia's continuous disclosure laws – when coupled with the rules for the conduct of class actions – were facilitating shareholder class actions against ASX-listed companies with no requirement to prove fault by the company, and no statutory defences for companies that have taken reasonable measures to prevent continuous disclosure breaches.
This has had several undesirable consequences including a tightening of the D&O insurance market, where insurance is difficult to obtain and the cost has risen dramatically. If D&O insurance is not available or affordable, people will not be willing or indeed able to serve as directors of ASX-listed entities, which would have a significant detrimental impact on the ASX and the Australian economy.
Concerningly, the predecessor provision to section 674 of the Corporations Act contained a fault-based element which was removed by the Financial Services Reform Act 2001 (Cth) without much, if any, Parliamentary debate and no substantive consultation.
By introducing a fault-based element to section 674, the Treasurer's temporary change to the Corporations Act returns continuous disclosure rules to a more balanced position. Further changes that we think should be made to the Corporations Act include:
- Addressing the strict liability which ASX-listed companies can face for inadvertent mistakes in ASX releases, including under section 1041H (on misleading and deceptive conduct) and similar statutory provisions. This would provide a consistent approach to listed company liability for the timing, substance and accuracy of ASX releases.
- Addressing the anomalous and selectively onerous treatment of directors in relation to disclosure matters. In particular, it is an anomaly that a director whose conduct in relation to a disclosure breach by the company does not contravene the specific statutory provision dealing with accessorial liability for a company's breach of continuous disclosure rules (section 674(2A)) can still be found liable for breaching the general statutory duty of care (under section 180) for the same conduct.
We hope that, with 2020 hindsight, the Treasurer's temporary change to continuous disclosure rules opens the door for these broader changes to restore balance and consistency to the Corporations Act.