In brief - The requirement of 'knowledge, recklessness or negligence' to bring a claim for breach of listed entities' continuous disclosure obligations is now permanently a part of the Corporations Act.
Main takeaways for disclosing entities, directors and officers
Information that a reasonable person would expect to have a material impact on the price of securities must be disclosed, unless exceptions apply.
Recklessness or negligence will be assessed in light of the circumstances at the time the company becomes aware of the information.
Following and documenting good processes may assist you to demonstrate that you have not been reckless or negligent.
Plaintiffs may attempt to circumvent these amendments by bringing a negligence claim, for example, but success will depend on facts and circumstances of the case.
On 10 August 2021, the Federal Government passed the Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 and has made permanent the temporary relief it made to continuous disclosure rules in May 2020.
The Bill was introduced in Parliament in March 2021 and passed the House of Representatives, but stalled in the Senate until now.
Background to temporary relief amendments introduced in 2020
The continuous disclosure changes, as discussed in our article Temporary relief for listed companies during COVID-19, were initially introduced in 2020 to address difficulties faced by listed companies in releasing forward-looking market guidance during COVID-19.
Prior to the changes, listed entities could breach the continuous disclosure rules if they failed to disclose to the market "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 (provided the various exemptions did not apply).
To prove liability in civil actions under the old regime, an element of fault was not required to be established. This strict liability approach meant that a plaintiff needed only to prove that the company failed to disclose material information when it was known or ought to have been known by directors or officers of the company.
The temporary amendments eased these continuous disclosure obligations. That made liability apply only where there was 'knowledge, recklessness or negligence' involved. The introduction of a 'fault' element makes it more difficult to sue listed companies for failing to disclose market-sensitive information under civil penalty proceedings claims, including class action lawsuits.
New changes to the Corporations Act
Companies will now only be liable for continuous disclosure obligations civil penalties where there has been 'knowledge, recklessness or negligence' (under section 674A of the Corporations Act for listed entities, and section 675A for other disclosing entities). However, the operation of these amendments are subject to expert review in 2 years' time.
It is important to note that these amendments do not negate disclosing entities' obligations to comply with ASX Listing Rule 3.1 for listed entities and section 674(2) or section 675(2) of the Corporations Act. That is, disclosing entities and their officers are still required to disclose information that a reasonable person would expect to have a material effect on the price or value of the entity’s securities.
Where the fault element is made out, a claim can be brought by ASIC or shareholders. The amendments will not, however, affect the Commonwealth’s ability to prosecute criminal breaches. It will also not affect ASIC’s ability to issue infringement notices and administrative penalties without proving fault.
Unlike the temporary amendments, the permanent amendments expressly provide that companies and officers are not liable for misleading and deceptive conduct under section 1041H of the Corporations Act or section 12DA of the ASIC Act where neither knowledge, recklessness nor negligence can be shown. These amendments will prevent plaintiffs from circumventing the new fault requirements by arguing that the failure to disclose material information amounts to misleading or deceptive conduct.
Aligning with the rest of the world
Prior to implementing these recent changes, Australia's strict liability regime was particularly onerous by comparison to other major capital markets, including the United States and United Kingdom.
For example, United States legislation requires a misstatement or omission to be made "with an intent to deceive, manipulate or defraud". In the United Kingdom, the test requires actual knowledge that a statement was untrue or misleading, recklessness as to whether it was, or that an omission was a dishonest concealment of a material fact.
The inclusion of a fault element into Australia's continuous disclosure laws brings it into line with its global peers, and recognises the complex process involved when companies and directors make corrective disclosures to the market.
Will it have any effect on class actions?
There has been significant debate about the impact the new continuous disclosure regime will have on class actions in Australia.
Securities class actions frequently involve allegations that a company failed to recognise and disclose information material to its share price. Those allegations are likely to be tested by plaintiffs as to whether such a failure constitutes negligence within the confines of the new continuous disclosure regime.
The introduction of a fault element in actions for breach of continuous disclosure obligations and for misleading or deceptive conduct will present an additional hurdle for plaintiffs. This will involve fewer 'speculative' class actions being commenced. However, we expect claims in negligence arising from failures to disclose material information will become increasingly common in Australia.
A correction to D&O premiums?
Over recent years, listed companies have experienced increases in their directors' and officers' (D&O) insurance premiums (in excess of 200 per cent). The increase in premiums has been so significant that there are concerns about the continuing availability or affordability of D&O insurance, particularly Side C cover (Entity Securities Coverage).
The increasing incidence of class actions has coincided with the increase in premiums. Any impact of the new continuous disclosure regime on the insurance market will take some time to materialise. To the extent the new rules reduce more 'speculative' claims, that may involve some improvement in the availability of cover and reductions in premiums. However, it is still simply too early to tell.
What are the implications of the proposed changes and what are your obligations?
Disclosing entities, directors and officers should remember that in the absence of exceptions applying, they must still disclose information that a reasonable person would expect to have a material impact on the price of securities. This remains the case even though it is more difficult for an aggrieved shareholder to bring a claim against the company or its officers.
The new changes are not an invitation to decrease the quality of disclosure to the market.
Despite the introduction of a fault element, the Treasury in a February 2021 media release Permanent Changes to Australia's continuous disclosure laws, actually identified an increase in the number of material announcements to the market, the temporary relief period relative to the same period last year.
Our expectation is that recklessness or negligence will be assessed in light of the circumstances at the time that the company becomes aware of the information. Following and documenting good processes could assist listed and other disclosing companies to demonstrate that they have not been reckless or negligent.
It appears that the Federal Government intends to disincentivise speculative, opportunistic and frivolous class actions, and hopes that the proposed changes will result in a reduction (or at least a stabilisation) in the cost of D&O insurance policies.
It remains to be seen whether this outcome is achieved, as plaintiffs may nonetheless attempt to bring claims framed in negligence (or similar). For example, a plaintiff may try to argue that a breach of the conventional continuous disclosure duty on the basis of the reasonable person standard is a negligent failure to keep the market informed.
Whether such an argument will be successful will depend on the facts and circumstances of the case.
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 2021.