On 25 May 2020 the Federal Treasurer issued Determination No. 2 modifying the operation of certain frequently used disclosure rules for listed entities found in the Corporations Act:
Section 674 Continuous disclosure – listed disclosing entity bound by a disclosure requirement in market listing rules
Section 675 Continuous disclosure – other disclosing entities
Section 677 – material effect on price or value
The change aims to assist ASX-listed entities in complying with continuous disclosure obligations during the COVID-19 pandemic.
Purpose of relief
This relief is designed to encourage listed entities and other disclosing entities to continue to disclose information, even in the current circumstances where it is more difficult for disclosing entities to know whether that information would have a material effect on the price or value of its securities. It will also provide listed entities and other disclosing entities some safe harbour from the more aggressive litigants starting shareholder claims and class actions during this tumultuous time.
As the Treasurer states in the Explanatory Statement for the Determination:
In the current environment it is significantly more challenging for disclosing entities to know whether a given piece of information will have a material effect on the price or value of its ED securities and therefore forecast the entity’s future earnings or prospects. In this environment, the continuation of many businesses may depend on investment, and investors rely on timely disclosure of information to financial markets. It is appropriate to encourage disclosing entities to continue to disclose information to markets or to ASIC by temporarily modifying the scope to commence civil proceedings for breaches of the continuous disclosure obligations in circumstances relating to COVID-19. At the same time, it is appropriate that serious breaches committed knowingly, recklessly or negligently during the period the instrument is in force may continue to be litigated.
Change in test for disclosure for listed and other disclosing entities
Prior to the temporary “safe harbour” relief under this Determination, section 674(2) of the Corporations Act made it an offence for a listed entity to fail to comply with market disclosure rules. Under that section, an ASX-listed entity must notify the ASX of information required to be disclosed under the ASX Listing Rules (namely Listing Rule 3.1) if the entity has information that is not generally available and “is information that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of ED securities of the entity”.
This Determination temporarily removes the more onerous objective test of what a “reasonable person would expect” when deciding what information it is required to disclose, and replaces it with a more subjective, arguably less onerous test of requiring disclosure where: “the entity knows or is reckless or negligent with respect to whether that information would, if it were generally available, have a material effect on the price or value of ED securities of the entity”.
Similar changes have flowed through section 675 for other disclosing entities.
The test for “material effect on price or value”
The objective test for “material effect on price or value” in section 677 of the Corporations Act is modified in a similar way by this Determination, by removing the reference to the “reasonable person”.
The Determination brings in the same new temporary test so that now, when considering “material effect” for the purpose of disclosure under section 674 or 675, the test is: “an entity knows or is reckless or negligent with respect to whether information would have a material effect on the price or value of ED securities of the entity if the entity knows or is reckless or negligent with respect to whether” the information would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of the securities.
Knowledge and recklessness have the same meaning as in the Criminal Code.
This instrument comes into force on 26 May 2020 and will automatically repeal on the 25 November 2020.