Federal Government commits to refine continuous disclosure laws

Following the changes made to the continuous disclosure laws in 2021, an independent review was conducted to consider whether the changes were working in support of an efficient, effective, and well-informed market and to assess the impact of the changes on the quality and nature of disclosures made by disclosing entities.

The review made six recommendations, four of which have been accepted by the Government, including the two primary recommendations relating to the requirement to establish knowledge, recklessness or negligence in civil proceedings for breaches of the continuous disclosure laws.

In this article, we take a look at some of the key recommendations from the review and the Government’s response.

Introducing a fault element for continuous disclosure breaches

The 2021 amendments introduced a requirement for ASIC (in the case of civil penalty proceedings) or private litigations (in the case of civil compensation proceedings, including class actions) to prove, in proceedings for a breach of the continuous disclosure regime, that a disclosing entity knew, or was reckless or negligent, with respect to whether information would have a material effect on the price or value of its securities.

This is commonly referred to as the “fault element”, and also applies to claims of misleading or deceptive conduct where the conduct in question involves an alleged breach of the continuous disclosure regime.

The changes were intended to “stem the flow of opportunistic class actions” and more closely align Australia’s regime with that of other jurisdictions, such as the US and UK.

The key findings

The independent review made a number of key findings, including that:

• insufficient time had elapsed since the introduction of the fault element to draw meaningful evidence-based conclusions about its impact on disclosure standards or the efficiency and effectiveness of the market;
• the changes have had, and are likely to continue to have, a negative impact on ASIC’s enforcement of continuous disclosure laws; and
• the changes have had, and are likely to continue to have, little (if any) impact on the number and type of continuous disclosure class actions.

The key recommendations

Based on these key findings, the review made six recommendations – including two primary recommendations that:

• the Corporations Act should be amended to remove the fault element requirement in civil penalty proceedings commenced by ASIC; and
• the fault element should (for the time being) be retained for civil compensation proceedings brought by private litigants.

The Government, in its response, has accepted both of these recommendations.

Increased enforcement activity by ASIC

The review commented that it was unclear why the fault element had been extended to civil penalty proceedings by ASIC in the first place, given that the stated intention was to limit opportunistic class actions. In doing so, it was accepted that:

• the need to prove the fault element was hindering ASIC’s investigations and enforcement action, as contraventions were harder to prove, more resource intensive and less certain; and
• ASIC’s appetite to use infringement notices had reduced, as it will generally only issue an infringement notice where it considers it would be able to bring civil penalty proceedings.

Removing the fault element insofar as it applies to ASIC has the potential to result in an increased use of infringement notices as an enforcement tool for breaches of the continuous disclosure regime.

Shareholder class actions will continue

The review noted that there were differing opinions as to the effect the changes were having on class actions – although ultimately accepted that continuous disclosure class actions are still likely to proceed despite the changes, and that there was no evidence of an urgent or compelling need to remove the fault element to facilitate continuous disclosure class actions.

Given an increasingly challenging and evolving liability and disclosure landscape – including in relation to climate reporting, greenwashing, cybersecurity and data breaches (just to name a few) – disclosing entities need to continue to have regard to their continuous disclosure obligations and not over-rely on any perceived reduced liability risk relating to class actions.

Attributing knowledge, recklessness or negligence

The review raised the issue of how it can be proved that a disclosing entity acted knowingly, recklessly or negligently, and recommended that the Corporations Act be amended to address more fully how the fault element is to be attributed.

It was suggested that this recommendation could be implemented by:

• including as part of the continuous disclosure regime a provision similar to section 769B(3) of the Corporations Act (which deals with a similar issue in the context of financial services laws);
• incorporating (by reference) rules in the Criminal Code dealing with corporate criminal responsibility; or
• doing both of the above.

The review suggested that the third alternative was preferable, as it would reinforce the critical importance of having adequate systems for the management, control and supervision of officers, employees and agents.

The Government has accepted the recommendation to address the attribution of the fault element but has not yet indicated how it intends to do so.

Other matters

The fault element attaches to the determination of whether information is “price sensitive” (that is, the question is whether a disclosing entity knew, or is reckless or negligent with respect to whether, information would have a material effect on the price or value of its securities).

Questions have been raised as to whether the fault element should instead apply to the determination of whether information should be disclosed – and although the review did not form a view on this issue, it recommended that the Government should consider whether the application of the fault element should be changed.

The review also recommended further consideration be given to clarifying the fault element applying to criminal offences for breaches of the continuous disclosure regime.

The Government has not accepted either of these recommendations but has left the door open for further consideration “at a later time” when there is an opportunity to consider broader changes to the continuous disclosure laws.

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