The Federal Government's Treasury Laws Amendment (2021 Measures No. 1) Bill 2021, if passed, will make significant changes:
- to the continuous disclosure laws which while maintaining the integrity relating to the disclosure of price sensitive information to the market, ensures that an entity and its directors will only be liable for breach where there is a knowing failure to comply or recklessness or negligence;
- provide for the electronic delivery of notices, requests and resolutions and proxies relating to general meetings of members and extending to 16 September 2021 the ability to hold virtual general meetings but most importantly requiring that the technology used must permit members attending the meeting to exercise the right to speak at the meeting and to ask questions orally; and
- also extending the temporary provisions included as a COVID measure relating to the signing of documents until 16 September 2021 and expanding them to enable the fixing a company's common seal and witnessing the same, to be effected electronically.
Changes to continuous disclosure law for listed entities
The Federal Government will make permanent the temporary relief to the continuous disclosure provisions of the Corporations Act 2001 (Cth) provided in response to the COVID-19 crisis which is due to expire 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 require listed entities to disclose on a continuous basis price sensitive information that is generally not available to the market where the information is such that a reasonable person would expect it to have a material effect on the price or value of securities.
The permanent changes, which take effect the day the Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 receives Royal Assent, ensure that an entity will only be liable for breach 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.
Without these changes, the entity and its officers would be in breach of the continuous disclosure provisions if it failed to disclose any information that a reasonable person would consider to be price sensitive and would not require the requisite mental elements of knowledge, recklessness or negligence.
In addition to making the temporary continuous disclosure changes permanent, the Bill 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.
These changes together 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.
Under the announced changes, ASIC still retains the ability to issue infringement notices as an administrative penalty without needing to have proof of the entity's or officer's knowledge, recklessness or negligence.
The changes maintain the integrity of the principles of disclosure to the market which underlies Listing Rule 3.1 and section 674 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 liability can arise.
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.
Extended relief for the holding of virtual general meetings of members and the circulation of notices of general meetings and other documents electronically
These changes will also take effect when the Bill receives Royal Assent and will continue until 16 September 2021, but may be further extended if appropriate.
Firstly, the Bill removes the need for all directors to consent to the use of technology for calling and the holding of directors' meetings.
Secondly, a notice of a general meeting and a request relating to (including a notice of a resolution) and the appointment of proxies may be given electronically.The time and location of general meetings must be reasonable.
The holding of virtual general meetings is maintained but with significant directions in relation to the convening and conduct of virtual general meetings.Members must be given sufficient information to allow the members to participate in the meeting by means of the specific technology.A resolution put to a vote at a meeting conducted virtually must be decided on a poll unless the entity's constitution provides otherwise.
The technology used needs to give the persons entitled to attend the meeting, as a whole, a reasonable opportunity to participate without being physically present.Members attending virtually must be given the opportunity to vote in real time and to record a vote in advance of the meeting.
Most importantly the law will now state, to avoid doubt, that members participating at a virtual meeting must be given a reasonable opportunity to exercise a right to speak and to ask questions orally rather than in writing.This is a very helpful enhancement to ensure that virtual meetings are conducted as closely as possible to a physical meeting and to address a weakness observed in many virtual general meetings where the technology used did not permit members to exercise these rights.This will require many ASX listed entities and their share registries to enhance the technology used for virtual general meetings so as to ensure that these requirements are met.
Extended relief for e-signatures and new rules on witnessing the fixing of a company's common seal electronically
With the existing arrangements allowing company officers to sign documents electronically due to expire on 21 March 2021, the Government has released a temporary relief package that will extend, and expand on, those arrangements for a further 6 months.
In September 2020, the Treasurer made the Corporations (Coronavirus Economic Response) Determination (No 3) 2020 (Cth), modifying the operation of sections 127 and 129 of the Corporations Act to allow company directors and secretaries to sign documents on separate paper or electronic copies (ie. counterparts). The Treasurer's power to make determinations under section 1362A expired on 24 September 2020.
As a result, the Bill proposes to continue the existing arrangements made under Determination No. 3, but also expands on the current measures by allowing company officers to witness the fixing of a company's common seal electronically. They may do this by:
- observing the fixing of the seal by electronic means (eg. video conferencing);
- signing the document or a copy of the document (either physically or electronically); and
- including a statement that the person observed the fixing of the seal by electronic means.
If a company's common seal is fixed to a document in the manner described above, a copy or counterpart of that document need not include the seal in order for it to be valid.
The changes made pursuant to the Bill will remain in force until 16 September 2021 by which time the Government has indicated that permanent changes will be in place.
As with Determination No. 3, there is no express abolition of the paper rule. Where the proper law of the deed is NSW, Victoria or Queensland law, then the combined effect of the current statutory position in those jurisdictions and the Bill is that a deed is able validly to be executed and formed electronically. However, it is less clear in other jurisdictions and there are potential gaps.