This article was updated on 23 September 2020 to reflect Government announcements.
The amendments to the continuous disclosure rules have been made by the Treasurer under his COVID-19 emergency instrument-making power.
Important recognition of the disclosure challenges posed by the COVID-19 pandemic
It is clear from the Treasurer’s media releases that the objective of the amendments is to enable companies and officers to more confidently provide guidance to the market during the COVID-19 pandemic. In their most recent release , the Government claims that the first exemption “assisted companies to continue to update the market during this difficult and uncertain time. In fact, Treasury has identified that there has been an increase in the number of material announcements to the market during the period the relief has been in place, relative to the same period last year.”
The Government has also recognised that the current level of business and economic uncertainty means there is a heightened risk of opportunistic class actions being brought against companies who provide forecasts that are later found to be inaccurate. The changes are intended to make it harder to bring such actions against companies and officers during the crisis while allowing the market to continue to stay informed and function effectively.
The AICD welcomes this significant step and the decision to extend the exemption, which recognises the critical challenges facing the business community in the context of the COVID-19 pandemic, and applauds the Government for maintaining its position on this issue.
The AICD strongly supports robust continuous disclosure laws to maintain market integrity, but has raised serious concerns about the significant disclosure challenges posed by the current regime in the COVID-19 environment. The AICD’s original targeted solution that was directed at the specific disclosure challenges presented by COVID-19 is discussed in detail here.
How do the amendments apply?
While the discussion on the objectives of the amendments focuses on the need for protection for companies providing forward looking statements, the relevant instruments modify the requirements in the Corporations Act more broadly. They to any type of information required to be released under companies’ continuous disclosure obligations (not just forward-looking information), and covers both private actions and those brought by ASIC.
The instrument amends section 674 of the Corporations Act (for listed entities) and section 675 (for other disclosing entities) of the Corporations Act by inserting a new provision that a breach of the civil penalty provisions only occurs 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.
Previously, the Corporations Act included an objective limb which provided for a breach where a reasonable person would expect the relevant information to have a material effect on the price or value of the entity’s securities.
The effect of the change is to potentially impose a higher bar, or require a higher degree of certainty that the forward-looking information would have the necessary market impact, before it is required to be disclosed.
Lawyers expect that the changes will provide a degree of protection from litigation where companies are having to make “lineball” disclosure decisions, including where companies are not certain whether they hold information that is required to be disclosed (for example, where they are still attempting to understand the impact of COVID-19 or if it is unclear whether certain information has already been factored into the value of their securities).
How broad are the amendments? Are there limitations?
While the changes are a positive step, directors should be aware of the limits of the protection they offer to companies seeking to give or update guidance or make forward-looking statements.
- the changes do not cut off other routes for pursuing companies for allegedly deficient disclosures. In particular, companies may still be exposed to class action risk under the misleading and deceptive conduct provisions (which often form the basis of claims by plaintiffs in a securities class action) if their guidance proves to be inaccurate. This remains a significant concern for the AICD;
- the amendments do not block the commencement of class action proceedings against companies on the basis of earnings guidance or other forward-looking statements (unlike the AICD's initial solution which proposed that the Corporations Act be amended to provide that only ASIC can take action against listed disclosing entities or their directors or officers in relation to earnings guidance or forward-looking statements about company performance made in the context of the pandemic);
- the Corporations Act continues to require that any forward-looking statement (including guidance) must be made on reasonable grounds. Where forward-looking statements are made without reasonable grounds, they will be deemed to be misleading by law if they later turn out to be inaccurate (regardless of whether the company or its officers believed the statements to be genuinely true at the time they were made); and
the unmodified standard of disclosure continues to apply for the purposes of any criminal offences based on the continuous disclosure provisions.
Notably, there has been significant push back against the changes, including in the media, from the Opposition and plaintiff law firms. However, leading litigation funder, Omni Bridgeway, has called it a “sensible” measure.
There has been a degree of misinformation in the commentary on the issues. The AICD is of the view that the objective of the changes is sound, and should not undermine shareholder rights. In important respects, they actually bring Australia more into line with overseas jurisdictions that already incorporate an element of fault or culpability into their disclosure rules (for further discussion, see here). It is incongruous that, up until now, directors and companies could be held liable without any negligence being established. Such a strict liability approach is not appropriate for obligations which, at their heart, often involve difficult, time-sensitive judgment calls.
If anything, the limitations outlined above suggest that some further protection may be warranted to ensure that companies have sufficient comfort to provide forward-looking information to market and to achieve the Treasurer’s objective.
Parliamentary inquiry into litigation funding
A Parliamentary Joint Committee on Corporations and Financial Services’ Inquiry into the regulation of the class actions regime has been examining the operation of continuous disclosure laws in the context of securities class actions over recent months.
The AICD recommended that the Committee consider:
- Exclusive public enforcement of continuous disclosure and misleading and deceptive conduct laws;
- Reforming the continuous disclosure and misleading and deceptive conduct laws to require an element of fault or intent, in line with comparable jurisdictions including the United States and United Kingdom; and
- Improving the procedural framework to reduce the burden on plaintiffs, courts and businesses caused by competing class actions and unmeritorious claims.
You can read a copy of the AICD’s submission here.
This remains an important issue for the AICD’s members and for the improvement of our economy and we will continue to pursue permanent reform in this area. The Committee is due to report by 7 December 2020.