The Federal Government has extended the temporary changes (Temporary Changes) to the continuous disclosure provisions in the Corporations Act (Act) to 22 March 20211. They were due to expire in November 20202.
The Temporary Changes modify the test of whether there has been a breach of the continuous disclosure provisions in the Act from an objective to a subjective test.
This means that an ASX listed entity will be in breach of the continuous disclosure provisions of the Act if it does not disclose information which is not generally available (which does not come within one of the exceptions to disclosure) and:
- without the modification – objective test:
- 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 entity’s securities.
- with the modification – subjective test:
- 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 entity’s securities.
In addition, the entity’s directors (or other persons, e.g. the entity’s other officers) who are involved in a breach by the entity will, under the Temporary Changes, only be liable if the entity knows the information, or is reckless or negligent with respect to whether the information, would, if it were generally available, have a material effect on the price or value of the entity’s securities.
At the time of the introduction of the Temporary Changes, the Federal Treasurer, Josh Frydenberg, said that these measures mean that “companies and officers will only be liable if there has been knowledge, recklessness or negligence with respect to updates on price sensitive information to the market”.
This is good news for listed companies and their directors and officers, but it is not the whole story in an action for breach of an entity’s continuous disclosure obligations.
Certainly, the Temporary Changes limit the Australian Securities and Investments Commission (ASIC) to taking action only where an ASX entity knew, or was reckless or negligent as to whether the information would, if it were generally available, have a material effect on the price or value of the entity’s securities.
So the action that ASIC took against Vocation Limited3 and its directors including the Chairman, John Dawkins, under section 674 (continuous disclosure) of the Act may not have succeeded if the Temporary Changes were in place, although give the Court’s finding of fact as to the actual knowledge of Vocation and certain of its directors at a particular point in time, this cannot be stated categorically.
However, in the Vocation case, in addition to an action under section 674, ASIC also took action against Vocation under the misleading and deceptive conduct provisions of the Act4 and against certain of its directors for breach of their duty as directors for failing to act with reasonable care and diligence5. These causes of action have not been modified by the Temporary Changes.
Also in the Myer case6, which was a class action on behalf of a group of Myer shareholders, the allegation was that Myer and certain of its officers breached:
- s769C – making representations about future matters that are taken to be misleading if made without reasonable grounds;
- s1041H – misleading and deceptive conduct; and
- s674(2A) – involvement in a breach by an entity of its continuous disclosure obligations.
Damages were sought for breaches of these provisions by the class action plaintiffs under sections 1041I, 1317HA and 1325.
Also ASX has not changed the requirement in ASX Listing Rule 3.1 that once an ASX listed entity “is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity’s securities, the entity must immediately tell ASX that information.”
The ultimate sanction that ASX has for a failure by an ASX listed entity to comply with this rule is to suspend trading in its securities or, in an extreme case, to terminate its listing. This power is not exercised lightly by ASX and usually the threat of suspension or termination is sufficient to have the entity comply with their obligations.
Nevertheless, a director may find themselves in threat of a breach of their duties as a director to act with a reasonable degree of care and diligence if the entity that they are a director of fails to comply with ASX Listing Rule 3.1, notwithstanding the introduction of the Temporary Changes. The argument being that a director acting in accordance with the standard expected of them would foresee a risk of harm to their entity if they failed to comply with the ASX Listing Rules7.
So what should directors do?
Directors should continue to comply with their entity’s Continuous Disclosure Policy and disclose relevant matters to ASX.
However, in this COVID-19 environment ASX advises that a listed entity’s continuous disclosure obligations do not extend to “predicting the unpredictable”. In its Compliance Update of 31 March 2020, ASX said that:
“ASX does not expect listed entities to announce information under listing rule 3.1 that comprises matters of supposition or that is insufficiently definite to warrant disclosure1 and that otherwise meets the requirements of all three limbs of listing rule 3.1A, mentioned above.2 Nor does ASX expect listed entities to make forward-looking statements to the market unless they have a clear and reasonable basis for doing so.
Clearly forecasting future circumstances will continue to be difficult exercise in the current environment so should be avoided, if possible, within the scope of what the ASX has said in its Guidance Note 8 about forecasting.”
ASX’s Compliance Update of 31 March 2020 gives some practical guidance to listed entities on their disclosure obligations in relation to earnings guidance, decisions to pay dividends and other matters. ASX’s Compliance Update of 31 March 2020 can be accessed here.
This article is part of the October 2020 Equity Capital Markets Bulletin, click here to download.
1. Corporations (Coronavirus Economic Response) Determination (No.4) 2020 which commenced on 24 September 2020 and is due to expire on 22 March 2021.
2. Corporations (Coronavirus Economic Response) Determination (No.2) 2020 which commenced on 26 May 2020 and expired with the introduction of Corporations (Coronavirus Economic Response) Determination (No.4) 2020 on 24 September 2020.
3. ASIC v Vocation Ltd (in liq) and Others  FCA 807.
5. s180. See also the recent case of ASIC v Big Star Energy Ltd (No. 3)  FCA 1442. The action against the director in this case was that he failed to discharge his duties to his company with the requisite degree of care and diligence by causing the company to fail to comply with its continuous disclosure obligations.
6. TPT Patrol Pty Ltd ATF Amies Superannuation Fund v Myer Holdings Limited  FCA 1747. The class action plaintiffs did not win this case.
7. The foreseeable harm being suspension or termination of their listing or some other action, like the possibility of a class action. See Cassimatis v ASIC  FCAFC 52.
Liability limited by a scheme approved under Professional Standards Legislation.
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