Significant reforms to Australia's continuous disclosure laws have passed Parliament and are now law.
The reforms to the continuous disclosure laws ensure that an entity and its officers will only be liable for civil penalty proceedings where there is a knowing failure to comply or recklessness or negligence while maintaining the integrity relating to the disclosure of price sensitive information to the market. The reforms will also mitigate the risk of listed entities and their officers being subject to opportunistic class actions under Australia's continuous disclosure laws and in doing so, will support entities and their officers to release forward-looking guidance to the market.
The introduction of a "fault element" for civil penalty proceedings in respect of the continuous disclosure obligations will more closely align Australia's continuous disclosure regime with that of the United States and the United Kingdom. These reforms have been overwhelmingly welcomed by business leaders in Australia.
Notwithstanding these reforms, listed entities need to bear in mind that their primary obligation to disclose price sensitive information in accordance with the standards set out in both ASX Listing Rule 3.1 (and 3.1A) and section 674(2) of the Corporations Act 2001 (Cth) remains unchanged. The existing enforcement mechanisms prescribed under the Corporations Act, which enable ASIC to issue infringement notices, and the criminal offences for failing to comply with the continuous disclosure obligations set out in section 674(2) of the Corporations Act continue to apply.
Reforms to the continuous disclosure regime
The Federal Government has made permanent the temporary relief to the continuous disclosure provisions of the Corporations Act provided in response to the COVID-19 crisis which expired on 22 March 2021, in a move which will have an important impact on the risk profile for securities class actions and their funders.
The continuous disclosure provisions in ASX Listing Rules 3.1 (and 3.1A) and section 674(2) of the Corporations Act require listed entities to disclose price sensitive information on a continuous basis. A contravention of these provisions will occur if an entity has information that is not generally available, the information is such that that a reasonable person would expect it to have a material effect on the price or value of the entity's securities, and the entity fails to notify the market of the information. This existing criminal offence for failing to comply with the continuous disclosure obligations set out in the ASX Listing Rules and the Corporations Act and the provisions which enable ASIC to issue infringement notices remain unchanged and continue to apply together with the new reforms.
The permanent changes, which were legislated pursuant to the Treasury Laws Amendment (2021 Measures No. 1) Act 2021, are now in effect and ensure that an entity will only be liable for civil penalty proceedings in respect of its continuous disclosure obligations if it:
- fails to update the market with information which it knew was price sensitive; or
- was reckless or negligent with respect to whether that information was price sensitive.
Prior to these reforms, a listed entity and its officers could have been found to be liable for civil penalty proceedings in respect of a breach of the continuous disclosure provisions if they failed to disclose any information that a reasonable person would have considered to be price sensitive and such finding did not require the requisite mental elements of knowledge, recklessness or negligence.
The Act also brings across the same standard of liability to misleading or deceptive conduct so that an entity or officer will not be liable for misleading and deceptive conduct in circumstances where the continuous disclosure obligations have been contravened, unless the requisite mental element of knowledge, recklessness or negligence has been proven. This means that conduct that triggers the continuous disclosure provisions will not automatically constitute misleading and deceptive conduct for the purposes of s1041H of the Corporations Act.
Accessorial liability for officers
The civil accessorial liability provisions (and the corresponding defences) for section 674(2) of the Corporations Act have been repealed since this section is no longer a civil penalty provision.
However, there are now corresponding accessorial liability provisions if an officer is involved in the listed entity's contravention of the new civil penalty provisions. These consequences ensure that other persons involved in the relevant conduct are incentivised to ensure compliance.
Importantly for officers, a defence to accessorial liability is available. A person will not contravene the accessorial liability provisions if they can show that they took all reasonable steps in the circumstances to ensure that the entity complied with its obligations under the new civil penalty provisions, and after doing so, believed on reasonable grounds that the entity was complying with its obligations.
The officer bears the evidential burden in relation to whether they took the required action since these matters are peculiarly within the knowledge of the officer and it would be significantly more costly and difficult for the regulator to disprove than for the officer to establish the matter, since the officer would be better positioned to readily adduce evidence as to the steps they took and their beliefs after doing so.
Impact of contravention
Under the changes, if a listed entity fails to comply with its continuous disclosure obligations:
- ASIC may prosecute the entity for criminal offences or issue infringement notices, in the latter case for an amount up to $100,000;
- ASIC may pursue civil penalties if the entity fails to update the market with information which it knew was price sensitive or was reckless or negligent with respect to whether that information was price sensitive (noting also the accessorial liability provisions for directors if an officer is involved in the entity's contravention of the new civil penalty provisions);
- private actions (such as shareholder class actions) may be brought against the entity if the entity fails to update the market with information which it knew was price sensitive or was reckless or negligent with respect to whether that information was price sensitive.
The retention of ASIC's ability to issue infringement notices for an alleged contravention of the continuous disclosure laws as an administrative penalty without needing to have proof of the entity's or officer's knowledge, recklessness or negligence will allow ASIC to utilise this procedure in cases where ASIC considers appropriate. ASIC will retain the ability to seek more significant penalties in circumstances where they can demonstrate the entity or officers acted with knowledge, recklessness or negligence. The infringement notices are typically used by ASIC for less serious breaches as a fast and effective regulatory response that is proportionate and proximate in time to the alleged contravention.
Purpose of reforms
The changes maintain the integrity of the primary principles of disclosure to the market which underlies ASX Listing Rule 3.1 and section 674(2) of the Corporations Act (the continuous disclosure regime) but provides relief for civil liability attached to the company and officers involved by seeking to limit the circumstances in which such liability can arise.
The ability of ASIC to issue infringement notices on the "no-fault" standard, plus the threat of more significant financial penalties or class actions where an entity or officer has acted with fault, creates a complementary regime where the actions brought and potential outcomes are more proportionate to the behaviour of that entity or officer.
The changes also increase the difficulty factor for class actions as it will have to be proven that the entity or officer acted with the requisite mental element, regardless of whether an action is brought for a breach of continuous disclosure or misleading and deceptive conduct. It also reduces the class action risk as it removes the uncertainty associated with either party in a court of law years after the event as to whether or not the "the information is such that a reasonable person would expect it to have a material effect" on price. That has led to innumerable cases of events study and analysts' reports undertaken many years later often affected by hindsight bias; rather than a decision made in a dynamic market involving judgment on materiality at that particular time.
This is intended to encourage listed entities and their officers to provide earnings guidance to the market more confidently particularly during the ongoing uncertainty generated by the COVID-19 crisis, and will discourage opportunistic class actions being brought under continuous disclosure or misleading and deceptive conduct, unless proof of the requisite mental elements can be established.
Listed entities should review their continuous disclosure policies and procedures to ensure they align with the amended provisions.