Australian-listed company boards are exposed to disclosure-based shareholder class actions, leaving them open to high reputational and personal liability risks. Since the introduction of the federal class action regime in 1991, more than 100 shareholder class actions have commenced. Until October this year, not one such action in Australia had ever proceeded to a court judgement.
Justice Jonathan Beach of the Federal Court handed down the judgement in TPT Patrol v Myer. This represents a landmark decision for corporate Australia — not only because it’s the first of its kind, but because it clarifies that “market-based causation” is available to shareholders in Australia.
The case hinged on the plaintiffs’ allegation that shareholders suffered loss and damage due to Myer’s failure to disclose information to the market, which would have a material effect on the share price. The issue of how to prove causation was key — do shareholders need to show that they read or relied on a company’s misleading statement to recover compensation? Or is it enough to show that they overpaid for their shares by purchasing them when the market price was inflated by reason of the misleading statement or omission? Justice Beach confirmed it is the latter. While this is a significant decision, it is important to note the case is complex and fact-specific. In this case, the court also found class members had not proven they had suffered loss, highlighting the complexity of securities class actions for applicants and defendants.
The AICD strongly supports continuous disclosure obligations as vital to market integrity and investor confidence. Similarly, we recognise Australia’s class action framework provides an accessible mechanism for individuals to achieve resolution of disputes and access to justice within our court system.
While this is a significant step, it is important to note that the case is complex and fact-specific.
However, the peculiar characteristics of Australia’s statutory framework mean that its listed companies and directors can face a real threat of shareholder class actions whenever there is a significant shift in the company’s share price. Importantly, liability relating to breaches of continuous disclosure requirements, or misleading or deceptive conduct, does not require any proof of intention, recklessness or negligence. This means these types of claims can be difficult for companies to defend, even where the company (through its directors) may have acted honestly and reasonably. Compare this to the experience in the US and the UK, for example, where the link to liability requires an element of misleading conduct or misbehaviour on the part of the company and its officers.
The AICD has argued directors should have clearer defences where they have acted reasonably, honestly and have taken into account the circumstances facing the corporation with appropriate care and diligence.
It’s also worth taking a moment to highlight one of the results from the AICD’s latest Director Sentiment Index, which revealed 70 per cent of directors already agree, or strongly agree, that boards are too risk averse.
By accepting market-based causation in shareholder class actions, plaintiff firms and litigation funders could be incentivised to bring additional shareholder class actions. Shareholder class actions are now the single most significant cause of directors and officers liability insurance (D&O) claims against listed companies in Australia. Premiums are increasing rapidly — year-on-year premium increases of more than 50 per cent have become common, with some reaching up to 400 per cent or more.
This environment highlights the urgent need for an independent review into the legal and economic impact of Australia’s continuous disclosure regime to ensure there are not unintended consequences, as recommended by the Australian Law Reform Commission. During recent months, the AICD has briefed political offices and stakeholders on the pressing need for this review, difficulties in accessing D&O insurance, and the need to consider the increasing weight on directors in the legislative and regulatory space.
An overview of the Myer case can be obtained from Herbert Smith Freehills here.
The AICD believes boards must ultimately remain responsible, and accountable, for setting remuneration policies that align with their company’s needs, strategy and risk profile.
Response to APRA’s remuneration standard
The AICD has lodged a submission with APRA addressing a range of concerns with its draft prudential standard on remuneration, CPS 511. The standard represents a significant step away from a principles-based approach towards prescriptive regulation.
While recognising the need for a stronger regulatory approach, the AICD believes boards must ultimately remain responsible, and accountable, for setting remuneration policies that align with their company’s needs, strategy and risk profile. We support a number of key aspects of the APRA standard, including requiring board approval of the remuneration policy and active oversight of an entity’s overall remuneration framework, adjustments to remuneration outcomes to reflect performance and risk outcomes, and regular compliance and effectiveness reviews.
However, we are concerned that the more prescriptive elements in the standard, including the proposed 50 per cent cap on financial metrics, may ultimately work against APRA’s objectives. Some elements of the draft standard go well beyond financial services pay regulation in other highly regulated jurisdictions.
It is critical any additional regulatory overlay is workable in practice, recognises the board’s role is one of oversight, and acknowledges that there are competing tensions from different sets of stakeholders — investors, proxy advisers, regulators and customers. The AICD submission includes recommendations on alternative approaches to achieve APRA’s objectives.