Last night, 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 Act).
The change aims to assist ASX-listed entities in complying with continuous disclosure obligations in the current COVID-19 circumstances.
The Treasurer's determination essentially means that 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.
As such, listed entities who carefully consider the question of materiality should minimise the risk of a breach of section 674(2).
The change to section 674(2) should significantly impact opportunistic class actions based on breaches of continuous disclosure rules in these uncertain and disrupted COVID-19 times.
The change applies for 6 months from 26 May 2020.
What did the continuous disclosure rules used to say?
Section 674 of the Act sets out the key continuous disclosure rules for ASX-listed entities. (Section 675 applies to certain other entities listed on other markets.)
In summary, section 674(2) makes it an offence for an ASX-listed entity to fail to comply with ASX Listing Rule 3.1. Under section 674(2) of the Act, an ASX-listed entity must notify ASX of information required to be disclosed under the ASX Listing Rules (i.e. ASX Listing Rule 3.1) if the information:
- is not generally available; and
- is information that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of the relevant securities of that entity.
An ASX-listed entity which fails to comply with section 674(2) commits an offence. Section 674(2) is also a civil penalty provision and an infringement notice may be issued for an alleged contravention of section 674(2).
Additionally, a person involved in an ASX-listed entity's contravention of section 674(2) also commits an offence under section 674(2A). A narrow defence to section 674(2A) is available if the person took all steps that were reasonable in the circumstances to ensure that the listed entity complied with its continuous disclosure obligations under section 674(2) and, after doing so, believed on reasonable grounds that the listed entity was complying with its obligations under that section.
Section 677 of the Act further states that, for the purposes of section 674, a reasonable person would be taken to expect information to have a material effect on the price or value of a listed entity's securities if the information would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of the securities.
Overall, consistent with the importance placed on continuous disclosure from a market integrity and policy perspective, the bar is set high for compliance with continuous disclosure obligations. They apply an objective test, focusing on whether a reasonable person would expect information to have a material effect on the price or value of a listed entity's securities. The views of a company, its Board and executives – even if held in good faith – are not decisive of the matter. Illustrating the strictness of the rule, it has been said that even if there was no other evidence apart from a listed entity's own deliberations, it remains for a Court to evaluate whether information is material so as to require disclosure under section 674.
Why were the continuous disclosure rules significant?
The high bar set by the former continuous disclosure obligations has been the basis of a number of class actions including Myer and Babcock & Brown (summarised in our earlier client alert: here).
Broadly, in these kinds of cases, class action litigants typically allege a breach of the civil penalty provision in section 674(2) as the basis for seeking compensation under sections 1317HA and 1325 of the Act.
In particular, in the Myer case, it was found that Myer breached its continuous disclosure obligation under section 674(2) of the Act in failing to correct guidance and, further, that Myer engaged in misleading and deceptive conduct under section 1041H of the Act because it did not disclose updated guidance.
What do the Treasurer's temporary changes do?
The Treasurer's change to the Act modifies sections 674(2) and 674(2A) by replacing the objective tests set out above. (Broadly equivalent changes are also made to the relevant provisions in section 675.)
In particular, section 674(2)(c)(ii) no longer applies a test of whether the relevant information requiring disclosure is information that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of the listed entity's securities.
Instead, it is replaced by a test of whether the entity knows or is reckless or negligent with respect to whether that information would, if it were generally available, have a material effect on the price or value of the listed entity's securities.
This creates a welcome safe-harbour for diligent listed entities in relation to continuous disclosure matters. It recognises that listed entities which do their best to understand the impacts of the current COVID-19 conditions shouldn't be subject to capricious legal action.
Further, the objective test in section 677 is modified so that an entity knows or is reckless or negligent with respect to whether information would have a material effect on the price or value of securities if the entity knows or is reckless or negligent with respect to whether the information would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or disclose of the relevant securities.
All civil consequences of breaching the continuous disclosure provisions are affected by the Treasurer's determination. This includes all civil consequences enforced by ASIC, including infringement notices for breaches of the continuous disclosure provisions under Part 9.4AA of the Act. The Determination does not affect the operation of the criminal offences based on section 674(2).
The changes apply for a period of 6 months from 26 May 2020.
Why are the changes significant?
COVID-19 has caused a considerable degree of uncertainty for all businesses, including ASX-listed entities. Compliance with the former continuous disclosure obligations in the COVID-19 environment was no easy task.
The Treasurer's Explanatory Statement to the change in law noted:
"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."
The Treasurer's determination means that listed entities' decisions on continuous disclosure should not attract liability under section 674 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.
This means listed entities who carefully consider the question of materiality (and, as relevant, seek comfort from external advisers) should minimise the risk of a breach of section 674(2).
In turn, this should close the door to opportunistic class actions based on breaches of section 674(2). Appropriately, the Treasurer's determination does not modify the operation of the criminal offences based on section 674(2), so that criminal conduct is not excused.
What more can be done?
The Treasurer's changes to continuous disclosure rules are welcome step in the right direction.
However, more remains to be done on class actions. As described in our separate client alert here, the Treasurer recently announced that litigation funders will be subject to greater regulatory oversight by requiring them to hold an Australian financial services licence and to comply with the statutory scheme governing managed investment schemes. Those changes were also introduced to complement the inquiry being undertaken by the Parliamentary Joint Committee on Corporations and Financial Services into litigation funding and the regulation of the class action industry. It is hoped that the inquiry will explore further rebalancing of the playing field for class actions.
Additionally, we think more could be done in relation to the inconsistency in the Corporations Act on defences to statements made by listed entities on ASX. It is in disappointing that due diligence defences only exist for certain documents (such as prospectuses for initial public offerings) but not for other ASX announcements, such as presentations for entitlement offers or information memorandums for schemes of arrangement. As illustrated by the Myer case, the broad misleading deceptive conduct provisions in section 1041H of the Act and elsewhere – which do not have any due diligence defence – can be used as the basis for a class action claim. That is not consistent at the policy level and just does not make sense to us.
Last but not least, directors and officers of listed entities should take comfort from the amendments to the continuous disclosure provisions. However, we hope further changes will be made to directors' and officers' statutory duties, in particular, the duty under section 180 of the Act. As we have previously noted here, it is an anomaly under Australian law that a director can be found not to have breached section 674(2A) of the Act on the basis of the defence in section 674(2B), but can nonetheless be found liable of breaching section 180 for exactly the same conduct. Nonetheless, these temporary changes are likely to reduce the risk of a breach of section 180 in relation to non-compliance with continuous disclosure rules.
 James Hardie Industries NV v ASIC  NSWCA 332 at .