In brief - Treasurer Josh Frydenberg announced on 25 May 2020 that the government will temporarily amend the continuous disclosure provisions in the Corporations Act.

The announcement acknowledged the difficulty companies are facing in releasing forward-looking market guidance during COVID-19.
 
The Treasurer said that companies may "hold back" from making forecasts of future earnings for fear of exposure to class actions, therefore limiting the amount of information available to investors.
 
The changes take effect from 26 May 2020 and will remain in place for six months.

How will continuous disclosure rules change?

The Corporations Act has been temporarily amended for six months so that companies and officers will only be liable if there has been "knowledge, recklessness or negligence" in relation to updates on price sensitive information.
 
The latest amendments replace the requirement for listed entities and their officers to decide whether "a reasonable person would be taken to expect information to have a material effect on the price" of securities when assessing whether information must be released. Instead, listed entities must now release information (subject to exceptions contained in the listing rules) where:

a)   they know that the information would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of the securities; or

b)   they are reckless or negligent with respect to whether information would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of the securities.

Our expectation is that recklessness or negligence will be assessed in light of circumstances at the time the company becomes aware of the information. Following and documenting good processes could assist listed companies demonstrate that they have not been reckless or negligent.
 
We anticipate that this may lead to companies limiting information disclosed in relation to future earnings or forward-looking estimates during the relief period.

Changes recognise current market volatility

It appears that the government is recognising the difficulty of:

  • determining the effect of information on market prices in the current volatile economic environment; and

  • issuing forward-looking statements and earnings guidance amid the economic uncertainty created by the coronavirus.

In our experience, the continuous disclosure rules can be challenging to apply where circumstances are changing in real time and companies must make rapid assessments of complex facts. The assessment often requires input from multiple internal, and sometimes external, experts. In that regard, it is relevant to note that even the best market analysts can be wrong about the impact of information on share prices.
 
The response to these changes has been mixed. Whilst many business representatives welcome the measures, some investor groups have expressed concern that the changes could reduce the flow of information to the market.

Changes may impact class actions

One potential outcome of the changes will be to reduce class action litigation against listed companies. Continuous disclosure rules have been used by new shareholders to allege that a listed entity has been too slow to release information. In these circumstances, class action litigators have represented parties who purchased shares in the period between the company knowing price-sensitive information and releasing that information. Shareholder class actions can be extremely expensive and time consuming to defend.
 
It is important however, for listed companies to ensure that any information they release is not misleading or deceptive. Whilst the continuous disclosure rules form the basis of many class actions, they are often also combined with laws prohibiting misleading and deceptive conduct. The recent changes do not negate the obligation not to mislead. Listed companies should remain vigilant when informing the market.

Conclusions

The continuous disclosure rules, whilst important for ensuring integrity of the market, have proven onerous for listed companies during COVID-19. Many listed companies have withdrawn their profit guidance and forecasts due to unprecedented uncertainty. These temporary amendments may provide some relief to listed companies and their officers when considering what information to release to the market.
 
These changes are the latest in a raft of measures introduced to address the economic conditions brought about by the COVID-19 pandemic. Other measures include changes by ASX and ASIC to capital raising and financial disclosure rules.

This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2020.

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