Australia's continuous disclosure laws have now been amended such that breaches of continuous disclosure obligations will only attract civil penalties where a company has knowledge, or is reckless or negligent with respect to, whether the information would have a material effect on the price of value of securities. Corresponding changes have also been made to the statutory prohibitions on misleading or deceptive conduct such that companies and officers will not be liable where continuous disclosure obligations have been contravened unless the requisite mental element has been proven.
The background to these reforms was explained in our earlier article and a more detailed explanation of the changes can be found here
In this Insights, we briefly explore some of the considerations that are likely to arise in shareholder or securities class actions.
What does it mean to have knowledge, or be reckless or negligent?
There is common law guidance in criminal and quasi-criminal context on the meaning of the terms "knowledge", "reckless" and "negligent", together with the definitions provided under Chapter 2 of the Criminal Code Act 1995 (Cth), which applies to the continuous disclosure offences:
A person has knowledge of a circumstance or a result if he or she is aware that it exists or will exist in the ordinary course of events.
Recklessness with respect to a circumstance or result arises if the person is "aware of a substantial risk" that the circumstance or result exists or will exist, and, "having regard to the circumstances known to him or her, it is unjustifiable to take the risk". The question of whether taking a risk is unjustifiable is a question of fact. Proof of intention or knowledge will also satisfy the fault element of recklessness.
The test for "negligence" is whether a person’s conduct involves: (a) such a great falling short of the standard of care that a reasonable person would exercise in the circumstances; and (b) such a high risk that the circumstance or result exists or will exist; that the conduct merits criminal punishment for the offence.
How do your ascertain the company's state of mind?
Proof that a company has the requisite state of mind will no doubt attract evidentiary difficulties. It has been said that "to speak of a corporation having a state of mind is almost orphic in its conception". Commentators in the US have acknowledged the difficulties that securities fraud plaintiffs face in pleading "corporate scienter". While there is substantial law in Australia relating to corporate attribution, albeit not necessarily in the context of continuous disclosure obligations, methods of corporate attribution continue to evolve (the ALRC's Report on Corporate Criminal Responsibility sets out a detailed history of the law).
The traditional approach to corporate attribution was based on notions of vicarious liability where the company is held vicariously liable for the actions of its agents, so long as the agent was acting within the scope of their agency.
The approach has evolved to ascertaining a company's state of mind by identifying the person who is the "directing or guiding mind and will" in relation to the relevant act or conduct, and attributing that person's state mind to the company. It goes without saying that the difficulty (from a plaintiff perspective) with such an approach lies in the fact that it is likely that very few persons would fall within that category of being the directing mind and will of the company.
It may also be possible in certain circumstances to aggregate and attribute to the company itself the knowledge of several people within the company. Such an approach may not be appropriate where each person does not necessarily hold the relevant directing mind and will of the company or where each person separately holds knowledge of a separate particular fact or circumstance.
Ultimately, attribution of knowledge to a company will also be shaped or governed by the statute in question. The Criminal Code again contains some guidance as to attributing the company's state of mind.
The company is taken to have the relevant fault element if it expressly, tacitly, or impliedly authorised or permitted the offence. Authorisation or permission can be established by proving:
(a) the board of directors intentionally, knowingly or recklessly carried out the relevant conduct, or expressly, tacitly or impliedly authorised or permitted the commission of the offence; or
(b) a high managerial agent intentionally, knowingly or recklessly engaged in the relevant conduct, or expressly, tacitly or impliedly authorised or permitted the commission of the offence; or
(c) a corporate culture existed that directed, encouraged, tolerated or led to non-compliance with the relevant provision, or the company failed to create and maintain a corporate culture that required compliance with the relevant provision.
The company is taken to have the relevant fault element if an individual employee, agent or officer has that fault element, or if the company's conduct is negligent when viewed as a whole by aggregating the conduct of any number of its employees, agents or officers. That negligence can be established by proving that the conduct was substantially attributable to:
(a) inadequate corporate management, control or supervision of the conduct of one or more of its employees, agents or officers; or
(b) failure to provide adequate systems for conveying relevant information to relevant persons in the company.
What's next for continuous disclosure and shareholder class actions
From an evidentiary point of view, the requirement to show the company's knowledge, recklessness or negligence may give rise to preliminary discovery applications, so that plaintiffs have access to the internal communications or documents of a company to ascertain whether there is a cause of action.
Only time will tell whether these continuous disclosure reforms (or other reforms to litigation funding) will provide any reprieve from further shareholder class actions.
Plaintiffs may also adopt a wait and see approach while ASIC prosecutes its first case under the temporary changes made to continuous disclosure obligations during COVID, and while the appeal remains pending from the judgment in the Worley Parsons shareholder class action.