Recent significant reforms to Australia’s continuous disclosure laws designed to address the increasing cost of obtaining directors and officers (D&O) liability insurance and deter unmeritorious class actions have now been made permanent.
But despite this, concerns about the availability and affordability of D&O insurance continue to linger, and the economic fallout from COVID-19 has materially heightened the risk of securities class actions based on alleged inadequate disclosure. How can listed entities and their officers manage the risks associated with Australia’s continuous disclosure and misleading conduct regime?
From 14 August 2021, listed entities and their officers will only be liable for penalty proceedings where they are knowingly involved in a failure to comply with the continuous disclosure obligation (Treasury Laws Amendment (2021 Measures No. 1) Bill amends the Corporations Act 2001). The changes also import the fault element into misleading or deceptive conduct claims where those provisions are relied on to support continuous disclosure claims.
This means that if a listed entity took the view that the matter did reach a threshold of certainty where it can be reasonably expected to be relied on by a reasonable retail investor and decided not to make a disclosure, they should not be liable for penalty proceedings.
The disclosure rules require listed entities to immediately disclose to the ASX any information of which it is aware that a reasonable person would expect to have a material effect on the price or value of its securities. Breaches of the obligations can give rise to both civil and criminal penalties for the entity and its directors. The entity will be treated as being aware of information if an officer has, or ought reasonably to have, come into the possession of the relevant information in the course of performing their duties.
Implications and effects of the changes
The changes had their genesis in the Parliamentary Joint Committee on Corporations and Financial Services as part of its inquiry into litigation funding and the regulation of the class action industry. Treasurer Josh Frydenberg said “these changes will mitigate the risk of companies and their officers being subject to opportunistic class actions under our continuous disclosure laws”, and that the changes “strike the right balance between ensuring shareholders and the market are appropriately informed while also allowing companies to more confidently make forecasts of future earnings or provide guidance updates.”
But while the changes align Australia’s continuous disclosure regime more closely with similar regimes in the United States and the United Kingdom, given the issues in the global professional indemnity insurance market, it remains to be seen if we will see reductions in the increasing cost of obtaining D&O insurance.
While there may be a connection between an increased number of class actions/resultant insurance claims paid and premiums, retentions and availability of D&O insurance, this does not necessarily mean that these changes will have that effect.
How can listed entities manage the risks?
Listed entities and their officers need to understand that these reforms will not change the content of continuous disclosure obligations, nor do they affect ASIC’s ability to issue infringement notices and undertake non-penalty proceedings for continuous disclosure breaches where there has been no fault element. The amendments also do not affect the application of ASX Listing Rules 3.1 and 3.1A, which continue to apply.
In order to get the benefit of the provisions, listed entities should ensure that:
- they are documenting their processes around disclosure and non-disclosure of matters; and
- there is an evidence trail that demonstrates that their decision is based on an analysis of whether the information would have a material effect on the price or value of its securities and how it decided that the information would not, or would not be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of the securities.
Disclosure committees need to review their continuous disclosure policies and think about how their processes demonstrate that their decisions did not involve knowledge, recklessness or negligence, and that they reasonably formed a view that the material was not ‘information such that a reasonable person would expect it to have a material effect’ on price. Listed entities need to establish a counter factual to the hindsight bias that all too often sits behind continuous disclosure or misleading and deceptive conduct claims.
It remains to be seen if the initial objective of improving the cost and quality of D&O insurance will eventuate. However, the liability regime in relation to disclosure and directors’ and officers’ obligations remains sub-optimal and we think there is scope for further law reform to introduce a clear and consistent rules for meeting disclosure obligations.