Government response to Independent Review on continuous disclosure laws released

In a long-awaited update, on 12 August 2024, the Australian Government issued its response to the Independent Review of Australia’s amended continuous disclosure regime.  The previous Government amended the regime by the Treasury Laws Amendment (2021 Measures No.1) Act 2021 (2021 Amendments). The Independent Review recommended the continued operation of the 2021 Amendments for private litigants but not for ASIC. The Australian Government’s response largely agrees with each of the Recommendations.

Background

The 2021 Amendments introduced ss 674A and 675A to the Corporations Act, amending the continuous disclosure regime so that a disclosing entity or its officers who have contravened their disclosure obligations will not be liable unless it can be proven that the disclosing entity or officer acted with ‘knowledge, recklessness, or negligence’ (Fault elements).

The Independent Review, led by Dr Kevin Lewis, considered submissions made by various stakeholders on the impact of the amended continuous disclosure regime. As a result, it put forward six recommendations to the Australian Government regarding their ongoing inquiry into whether the changes introduced by the 2021 amendments should continue.

Government Response

In response to these Recommendations, the Australian Government agreed with 4 Recommendations, and is noting the remaining 2 for consideration at a later date. In summary, the Government’s position on these recommendations is that it:

1. Agrees to remove the requirement for ASIC to prove the requisite Fault elements in civil penalty proceedings;
2. Agrees toretain the requirement for a private litigant to prove the requisite Fault elements in civil compensation proceedings;
3. Agrees to consider the implications of accepting Recommendations 1 and 2 in its drafting of the legislation to implement its proposed climate-related disclosure regime;
4. Agrees to amend the Corporations Act to address more fully how the requisite Fault elements can be attributed to a disclosing entity, and to consider the appropriate model for attribution and extend this to the civil liability regime; and
   
   Notes that it will consider Recommendations 5 and 6 when the opportunity arises to consider broader changes to the continuous disclosure regime.
   
   The recommendations to be considered at a later time are to:

1. Consider whether the requirement to prove fault should attach to the determination of whether the relevant information should have been disclosed to the market, rather than to the determination of whether the relevant information was market sensitive; and
2. Consider whether ss 674 and 675 of the Corporations Act should be amended to specify the applicable physical and fault elements.

What does this mean?

The Government's response maintains the current position for actions by private litigants, including class action litigants, against disclosing entities and their officers, noting that establishing negligence is a low “fault” bar.  The removal of the Fault element for ASIC means that ASIC will again be able to seek civil penalties and other consequences without needing to establish fault on the part of a disclosing entity.

The issue of whether civil penalties should be imposed for faultless conduct remains unresolved. While ASIC’s ability to establish a no-fault breach will be a reversion to the pre-pandemic position, disclosing entities should be vigilant in establishing and monitoring continuous disclosure compliance systems to minimise the risk of penalties for inadvertent non-compliance.

The Ministerial forward to the Government’s response states that “it is important that ASIC is able to pursue egregious breaches of the continuous disclosure laws expeditiously and efficiently”. While this stance discourages egregious conduct and boosts market confidence, it is unclear how this aligns with the Government's decision to remove the Fault element for ASIC, particularly when faultless conduct should not be considered "egregious".

The retention of the Fault elements for private litigants is welcome: it will lower the risk that disclosing entities are exposed to large damages awards in security-holder class actions for breach of hair-trigger disclosure laws without any requirement on the class action litigant to prove fault.

Next Steps

While the Government’s response has given a fair indication of the direction it intends to take, it remains to be seen where the legislation will land following its revision.

The Government's response notes that the review focuses solely on the 2021 amendments and not a broader examination of the continuous disclosure regime. This is reflected in their response to Recommendations 5 and 6, stating that they will be considered in the future when broader changes are reviewed.