The Australian Federal Government has proposed new laws which, if enacted, will make permanent the temporary relief from liability for certain breaches of a listed entity’s continuous disclosure obligations.
Introduced on 25 May 2020 (and expiring on 22 March 2021), the temporary relief provides that a breach of the civil penalty provisions under sections 674 and 675 of the Corporations Act 2001 (Cth) occurs only where information is withheld from disclosure with knowledge that it would, or recklessness or negligence as to whether it would, have a material effect on the price or value of the entity’s securities. This modifies the previous objective “reasonable person” expectations of materiality.
By proposing the new laws, the Federal Government’s intention is that the changes will “strike the right balance between ensuring shareholders and the market are appropriately informed while also allowing companies to more confidently make forecasts of future earnings or provide guidance updates without facing the undue risk of class actions.”1 The Treasury has identified that, during the period in which the temporary changes been in place, “there has been an increase in the number of material announcements to the market, relative to the same period last year.”2
The proposed amendments
If the new laws are passed in the form proposed in the Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 (Bill), the changes are as follows:
- if a listed entity fails to comply with its continuous disclosure obligations:
(a) ASIC may pursue civil penalties against the entity if the entity withheld from disclosure with knowledge that it would, or with recklessness or negligence as to whether it would, have a material effect on the price or value of the entity’s securities; and
(b) private actions (such as shareholder class actions) may be brought against the entity if the entity withheld from disclosure with knowledge that it would, or with recklessness or negligence as to whether it would, have a material effect on the price or value of the entity’s securities; and
- a listed entity and its officers are not liable for misleading and deceptive conduct (pursuant to section 1041H of the Corporations Act 2001 (Cth) or section 12DA of the Australian Securities and Investments Commission Act 2001 (Cth)) for failing to disclose material information, unless the entity or officer knowingly, recklessly or negligently failed to disclose material information.
To put it another way, the Bill introduces a fault element (in respect of the judgement as to whether information is materially price sensitive) for private actions for continuous disclosure breaches and for misleading and deceptive conduct in relation to alleged failures to keep markets fully informed.
Importantly, the Bill does not affect the Commonwealth’s ability to prosecute criminal breaches or ASIC’s ability to issue infringement notices or administrative penalties.
The Federal Government has noted that the new laws are consistent with the policy recommendations made by Parliamentary Joint Committee, following its inquiry into litigation funding and the regulation of class actions. It has also noted that “the introduction of the fault element for private actions … more closely aligns Australia’s continuous disclosure regime with the approach taken in the United States and the United Kingdom.”3
Key implications to note are as follows:
- listed entities are still required to comply with ASX Listing Rule 3.1 and section 674(2) of the Corporations Act 2001 (Cth), both of which require the disclosure of information that a reasonable person would expect to have a material effect on the price or value of the entity’s securities;
- whether the amendments will provide substantial relief from class actions in practice is difficult to predict, noting that the potential exists for plaintiffs to avoid the impact of the relief by reformulating their cases to assert a negligent failure to keep the market informed (and any allegation of negligence is heavily reliant upon the relevant facts and context). In addition, the majority of shareholder class actions in Australia have been resolved by settlement as opposed to court judgment, so it may be some time before the full scope and impact of the changes are known; and
- unlike the temporary measures, the amendments impact the law on misleading or deceptive conduct (a common cause of action in shareholder class actions) by introducing the same standard of liability for misleading or deceptive conduct in respect of non-disclosures.
It seems that it is the Federal Government’s hope that the amendments will encourage companies and their officers to provide more earnings forecasts and guidance updates without facing undue risk of class actions for not updating the market if those forecasts or updates change. Whether this will prove to be the case remains to be seen. In any event, companies should be careful not to rely too heavily on these amendments until their scope and impact can be fully understood.
1. Treasury (Cth), ‘Permanent changes to Australia’s continuous disclosure laws’ (Media Release, 17 February 2021).
Liability limited by a scheme approved under Professional Standards Legislation.
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