On 26 May 2020, the Corporation (Coronavirus Economic Response) Determination (No.2) 2020 (Determination) came into effect. The Determination temporarily amended the continuous disclosure provisions under the Corporations Act 2001 (Cth) (Corporations Act) that apply to companies and their officers.
Specifically, the amendments provided that a breach of the civil penalty provisions under sections 674 and 675 of the Corporations Act only occurs where information is withheld from disclosure with knowledge that it would, or recklessness or negligence as to whether it would, have a material effect on the price or value of a company's securities.
The temporary amendments were supposed to last for six months but were extended and due to expire in March 2021.
However, on 17 February 2021, the Australian Government introduced the Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 (Bill) into Parliament. The Bill proposes making the temporary amendments to the continuous disclosure laws permanent. The introduction of the Bill follows the Parliamentary Joint Committee on Corporations and Financial Services delivering its report on litigation funding and the regulation of the class action industry on 21 December 2020.
This edition of Limelight considers the potential impact on future shareholder class actions in Australia if the Bill's proposed amendments are ultimately enacted.
Continuous disclosure laws
The continuous disclosure obligations in Chapter 6CA of the Corporations Act require companies to disclose price-sensitive information on a continuous basis to the Australian Securities Exchange (ASX) in the case of listed disclosing entities, or the Australian Securities and Investments Commission (ASIC) in the case of unlisted disclosing entities.
Generally speaking, and unless an exception applies, an entity contravenes these obligations if it has information that is not generally available, the information is such that a reasonable person would expect it to have a material effect on the price or value of the entity's shares if it were generally available, and the entity fails to notify the ASX or ASIC of the information.1
Schedule 2 to the Bill seeks to amend the continuous disclosure obligations to ensure that, in determining whether a disclosing entity contravenes its existing continuous disclosure obligations, its state of mind is taken into account. Specifically, the Bill seeks to add new sections 674A and 675A into the Corporations Act, which provide that companies will only be liable for civil penalty proceedings in respect of continuous disclosure obligations where they have acted with knowledge, recklessness or negligence (Fault Element).2
In other words, the Bill seeks to introduce an additional criterion for proving breach of the continuous disclosure provisions. Otherwise, the content of the obligation remains unchanged. Specifically, the existing objective test for whether a person would expect the information, if it were generally available, to have a material impact on the share price is retained.
Misleading or deceptive conduct
Section 1041H of the Corporations Act prohibits a person from engaging in conduct, in relation to a financial product or service, that is misleading or deceptive or is likely to mislead or deceive.
In Australia, shareholder class actions are commonly founded on two causes of action:
- breach of the continuous disclosure obligations in relation to a company's failure to disclose material information to the market; and
- misleading or deceptive conduct under section 1041H of the Corporations Act and section 12DA of the ASIC Act in connection with the same alleged contravening conduct.
In those circumstances, the alleged conduct that is said to trigger the continuous disclosure provisions is said to also constitute misleading or deceptive conduct.
The Bill seeks to amend section 1041H of the Corporations Act and section 12DA of the ASIC Act to limit the circumstances in which a contravention of a continuous disclosure obligation will constitute misleading and deceptive conduct. The effect of the change is that entities and their officers will not be liable for misleading or deceptive conduct in circumstances where the continuous disclosure obligations have been contravened unless the requisite mental element in the continuous disclosure obligation has also been proven – that is, the Fault Element. 3
Currently, ASIC may issue an infringement notice if it has reasonable grounds to believe a disclosing entity has contravened sections 674 or 675 of the Corporations Act.4
The Bill seeks to amend the infringement notices regime by inserting a new provision which provides that, for the purposes of issuing an infringement notice, the offences created by sections 674 and 675 of the Corporations Act are to be treated as strict liability offences – that is, without a finding of fault.5
The rationale for this amendment is that for lower levels of offending, the strict liability offence is appropriate to deter future unlawful behavior. Further, in complex case where it is difficult to find adequate evidence of fault elements, the strict liability offence allows ASIC to still take appropriate enforcement action ensuring contraventions can still be brought to account.6
Potential impact on future shareholder class actions
The proposed amendments, if enacted, would create a higher bar for establishing liability in shareholder class actions and may prevent some of the more spurious class actions from being brought. That said, it is not yet clear whether the amendments will significantly decrease the number of class actions that are brought in Australia. That is principally because:
- plaintiff law firms and funders may use the changes to increasingly seek preliminary discovery to gather material to support a pleading for the Fault Element;
- having a reasonable basis to plead (as opposed to proving) the Fault Element is not a particularly high bar and the class action experience in Australia has overwhelmingly favoured matters being resolved by settlement rather than judgment. Accordingly, plaintiff law firms and funders may proceed with pleading the Fault Element and obtain a settlement before trial;
- other causes of action may be utilised – for example, rather than pleading a contravention of the continuous disclosure provisions, plaintiff law firms and funders may seek to rely on a disclosure to the market that is claimed to be misleading and deceptive as a standalone claim; and
- the proposed amendments may increase the number of shareholder class actions where a company's directors or officers are named as defendants. This is particularly so where the Bill proposes a corresponding accessorial liability provision. A person contravenes the new accessorial liability provision if they are involved in a listed disclosing entity's contravention of section 674A.7 Given a Board of Directors generally approves ASX Announcements, Board members may be joined to shareholder class actions on the basis of this new accessorial liability provision.
Conversely, the proposed amendments to the infringement notices regime may assist, to a certain extent, in reducing potential shareholder class actions that flow after regulatory investigations. Just because an infringement notice has been issued, does not necessarily assist potential plaintiffs in a shareholder class action against the disclosing entity. This is because the tests for an infringement notice and civil proceedings for breach of the continuous disclosure provisions are different. As discussed above, ASIC can issue an infringement notice on a strict liability basis, whereas a shareholder class action for breach of the continuous disclosure provisions and/or misleading or deceptive conduct would require the Fault Element to be established, which is a higher bar.
The Bill is currently before the House of Representatives.8
1Sections 674 and 675 of the Corporations
2 Schedule 2, items 7 and 13, sections 674A and 675A of the Corporations Act.
3 Schedule 2, item 21, section 1041H(4)-(5) of the Corporations Act. The Bill also inserts an analogous provision into section 12DA of the Australian Securities and Investments Commission Act 2001 (Cth).
4 Section 1317DAD of the Corporations Act.
5 Schedule 2, item 47, section 1317DAA(4) of the Corporations Act.
6 Explanatory Memorandum at [2.52].
7 Schedule 2, item 7, section 674A(3) of the Corporations Act.
8 Track the Bill's progress here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.