Don’t find fault, find a remedy – Proposed changes to Australia’s continuous disclosure laws
Henry Ford purportedly coined the phrase “don’t find fault, find a remedy”. However, shareholders seeking a remedy in civil actions for a company’s breach of its continuous disclosure obligations may soon have to also find fault on the part of that company’s directors and officers.
Continuous disclosure obligations can be challenging for directors to navigate at the best of times, and COVID-19 has certainly added another layer of complexity to the disclosure environment.
In May 2020, in response to the uncertainty of the COVID-19 pandemic, the Australian Federal Government introduced temporary measures to ease the continuous disclosure obligations for companies (with such measures set to expire on 22 March this year).
On 17 February 2021, Treasurer Josh Frydenberg revealed that he proposes to make the temporary measures introduced last year permanent, an announcement that will be welcomed by company directors and officers alike.
In short, the Treasurer is proposing to permanently amend the continuous disclosure laws by legislating to include a “fault” element. This will mean that companies and their officers will only be liable for civil penalties (i.e. in class action lawsuits) for failing to disclose market-sensitive information where they either knew, were reckless, or were negligent as to whether the information was market-sensitive and required disclosure.
A similar change to introduce the requisite “fault” element has also been proposed to the laws relating to misleading and deceptive conduct as they relate to continuous disclosure (presumably to seek to prevent class action litigation pleading this action as a proxy for an historic breach of continuous disclosure action).
This is an important change, as the “no fault” continuous disclosure regime prior to the temporary measures was such that an aggrieved shareholder in a civil action only needed to show that the company, and its officers, failed to disclose information that was not generally available when required to do so by law. It was irrelevant whether the company and its officers knew, or were reckless, or negligent with respect to whether the information would have a material effect on the price or value of the company’s shares.
However, companies should take note that the new “fault” element does not apply to the Commonwealth’s ability to prosecute criminal breaches, or impact upon ASIC’s ability to issue infringement notices and administrative penalties.
So, what do the proposed changes mean from both an investor and company perspective?
The proposed changes are likely to achieve Parliament’s stated intention in disincentivising speculative and frivolous class actions (assuming that class action firms do not instead find a way to plead alternative or novel actions). The proposed changes will also hopefully result in a reduction (or at least not an increase) in the cost of directors and officers insurance policies, which have significantly increased in recent years due, in at least part, to the rise of class actions.
However, the additional requirement to establish fault on the part of the company and its officers will also rightly or wrongly, make civil recourse for shareholders with legitimate actions for non-compliance with continuous disclosure more challenging and expensive.
The Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 which seeks to permanently implement the amendments to the Corporations Act, must still pass through both houses of Parliament. This will likely occur over the course of the next month, however the temporary measurers which introduce the “fault” element to the continuous disclosure regime remain in effect until 22 March 2021.
If you would like any further information regarding the proposed changes or continuous disclosure obligations more generally please contact our Corporate Advisory and Governance team.