Australia adopts ‘fault-based’ continuous disclosure framework – how will this affect directors?

As canvassed in our March paper, Australia has officially adopted a ‘fault-based’ continuous disclosure framework.

What will the new law say?

Going forward, the failure by a disclosing entity to disclose materially price-sensitive information that is not generally available to the public, will only be actionable if the company acted with knowledge, recklessness or negligence in withholding the information. That is, the company actually knew that the withheld information would or would be likely to influence persons who commonly invest in securities in deciding whether to acquire or dispose of its securities, or the company was reckless or negligent with respect to whether the withheld information would have such an effect.

What does the new law mean for company directors?

Theoretically, it will be harder for shareholders to seek recompense from, and for ASIC to pursue civil penalties against, a company and its directors for inadvertent failures to disclose, or inadvertent delays in disclosing, materially price-sensitive information. This includes an action for misleading and deceptive conduct based on an alleged failure to keep the market informed, for which a company and directors will only be liable if they knowingly, recklessly or negligently failed to disclose the relevant material information. While ASIC will still be able to issue infringement notices without the need to prove fault on the part of a company, the associated penalty is relatively small of between $33,000 and $100,000 per alleged contravention depending on the market capitalisation of the contravening entity.

However, as a practical matter, it would be unwise for disclosing entities – particularly, ASX listed entities – to adopt less robust processes in identifying information requiring immediate disclosure to the market, as a result of the new law.

Why do directors of ASX-listed companies need be as vigilant as ever?

Because there has been no change to the continuous disclosure requirements in the ASX Listing Rules.

Notwithstanding the changes to be made to the Corporations Act, ASX listed entities are still expected under Listing Rule 3.1 to immediately tell ASX if it becomes aware of any information concerning it that a “reasonable person would expect” to have a material effect on the price or value of its securities.

While a breach of the Listing Rules may not be actionable by ASIC, it is well within ASX’s enforcement powers to: (1) direct the entity to disclose specified information to the market; (2) suspend the quotation of the entity’s securities; (3) censure the entity for breaching the Listing Rules; and/or (4) terminate the entity’s admission to ASX, depending on the nature and severity of the breach.

Directors who are repeat offenders of Listing Rule 3.1 are also likely to find it difficult to satisfy ASX that they are of “good fame and character” and therefore an appropriate person to be a director of an entity seeking admission to ASX.

So what should directors of disclosing entities do?

Companies should not change existing due diligence processes and practices for flushing out a company’s material non-public information, especially ahead of a capital raise, shareholder meeting or other material transaction or event. The law remains unchanged in most of these areas and in line with ASIC guidance, companies should continue to conduct robust due diligence processes for all transactions, including ‘low doc’ share offers, so as to avail directors and officers of the ‘due diligence defence’ in the event of defective disclosure.

What next?

It will be interesting to see how ASX responds to the new continuous disclosure laws. Will it amend Listing Rule 3.1 to mirror the legislative changes, or will it retain the objective “reasonable person” expectations of materiality in assessing whether information is market sensitive?

The new continuous disclosure laws are subject to review in two years’ time. So perhaps ASX will wait until then to see how the new rules are implemented in practice. In the meantime, please reach out if you have any questions as to how the new law might affect you and your organisation.

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