Since legislative amendments were introduced in 2021,1 for ASIC to be successful in a civil penalty proceeding under section 674A of the Corporations Act 2001 (Cth) (Act), or for a plaintiff to be successful in a proceeding for damages, for an alleged breach of the continuous disclosure obligations, they must show that the entity and/or its officers acted with ‘knowledge, recklessness or negligence’ (2021 Amendments).
It was announced that Dr Kevin Lewis (the ASX’s former chief commercial officer) would lead the review on the impact of the 2021 Amendments (Review).2 The Treasury consultation paper of 1 November 2023 outlines the Review’s key considerations:
- whether the 2021 Amendments are working in support of an efficient, effective, and well-informed market;
- the effect of the 2021 Amendments on the quality and nature of disclosures made by listed companies;
- comparisons to continuous disclosure regimes in overseas jurisdictions; and
- whether the 2021 Amendments have given rise to any barriers that might prevent enforcement of, or compliance with, continuous disclosure obligations.3
Interested parties can make submissions to Treasury until 1 December 2023 and Dr Lewis will produce his report and recommendations to the government by 14 February 2024.
Continuous disclosure obligations
Continuous disclosure is a key obligation imposed to ensure that the market is fully informed and to maintain investor confidence. Companies listed on the ASX and other disclosing entities are required to disclose information that, if made public, a reasonable person would expect to have a material effect on the price or value of their shares.
An entity will be in breach if it fails to update the market with information which it knew was price sensitive or was reckless or negligent regarding whether that information was price sensitive. In relation to an entity, its state of mind is determined by identifying the person, or persons, that are the ‘guiding minds’ behind the entity whose knowledge is attributed to the entity. An entity may be reckless if it foresees a risk that the information will materially impact the value of its shares but acts with indifference to, or disregard for, this risk and does not disclose the information. Negligence could arise if an entity’s conduct (or failure to disclose) falls short of the standard of care that a reasonable person would exercise in that circumstance.
Current penalties and available defences
Breach of this obligation is an offence under the Act and can result in shareholder class actions being brought if an entity has misled investors.4 Individuals, such as officers, who are involved in an entity’s contravention of its obligations may also be held to have breached the Act.5
ASIC can issue infringement notices for breach of the continuous disclosure obligations without having to prove the state of mind of the entity, which may impose a penalty of up to $100,000.6 However, a disclosing entity can decline to comply with an infringement notice. In this case, ASIC may bring civil penalty proceedings seeking a declaration that the entity has breached its continuous disclosure obligations and that the entity pay pecuniary penalties. In addition, ASIC may also prosecute the entity for criminal offences.
Directors who are involved in an entity’s breach of its continuous disclosure obligations may also breach their directors’ duties, including the duty to act with due care and diligence.7 Where a person has taken all steps reasonable in the circumstances to ensure compliance and has reasonable grounds to believe that the disclosing entity complied with its obligations, there is a defence available under section 674A(4).8 This is a fundamental reason to ensure that a disclosing entity has robust processes in place to prove that all reasonable steps were taken.
Feedback sought under the review
The 2021 Amendments were introduced, in part, to minimise the risk of class actions to companies, as such proceedings often result in decreased share prices and significant profits for litigation funders and other advisers (to the detriment of shareholders as a whole).9 Parliament also intended that the changes reduce companies’ regulatory costs associated with complying with their continuous disclosure obligations. The Review is seeking feedback on whether these objectives have been met.
Treasury is specifically asking whether, if the 2021 Amendments were repealed, this would have an impact on the number and/or type of class actions against companies, and the competitiveness of Australian equity markets to attracting new listings when compared to overseas markets. ASIC has stated that the introduction of the 2021 Amendments put the Australian regime at odds with the United Kingdom and United States, whose company regulators can take enforcement action without considering a company’s state of mind.10
When the 2021 Amendments were introduced, Parliament noted that the cost of directors’ and officers’ (D&O) insurance had been rapidly increasing, in part as companies insure against the risk of adverse findings in proceedings for breach of their continuous disclosure obligations. It was anticipated that the 2021 Amendments would reduce the cost of D&O insurance by decreasing the risk of such proceedings. Parliament also estimated that the changes would cause annual savings of approximately $912.5 million in companies’ costs of complying with their continuous disclosure obligations. 11 Treasury is accepting submissions on whether these savings have occurred.
Our corporate team at HWL Ebsworth Lawyers regularly advises listed companies on ASX and Corporations Act compliance and can assist you in complying with your continuous disclosure obligations or making a submission to Treasury. Please reach out if you wish to discuss.
This article was written by Thomas Kim, Partner, Kenneth Lee, Special Counsel and Josh Hanegbi, Solicitor.
1 Treasury Laws Amendment (2021 Measures No 1) Act 2021 (Cth).
2 Ministers Treasury Portfolio, ‘Government appoints independent reviewer of continuous disclosure regime amendments’ (19 September 2023) Government appoints independent reviewer of continuous disclosure regime amendments | Treasury Ministers
3 Australian Government the Treasury, Continuous disclosure: Review of changes made by the Treasury Laws Amendment (2021 Measures No.1) Act 2021 (Consultation Paper, November 2023).
4 There have been class actions against entities under sections 674 and 1317HA of the Corporations Act 2001 (Cth), involving security holders who purchased securities in an entity when adverse information having a negative effect on the value of its securities was alleged to have been withheld from the market.
5 Penalties may apply to a director, secretary or other officer involved in a contravention by the disclosing entity of section 674A(2) of the Corporations Act 2001 (Cth). This includes where a person has (a) aided, abetted, counselled, procured; or (b) induced the contravention whether by threats, promises or otherwise; or (c) been knowingly concerned in the contravention; or (4) conspired with others to effect the contravention.
6 Corporations Act 2001 (Cth) s1317DAE and Australian Securities and Investments Commission, Regulatory Guide 73 – Continuous disclosure obligations: Infringement notices, October 2017.
7 Corporations Act 2001 (Cth) s180.
8 Ibid s674A.
9 Explanatory Memorandum, Treasury Laws Amendment (2021 Measures No. 1) Bill 2021.
10 Australian Securities and Investments Commission, Submission No. 14 to Senate Economics References Committee, Inquiry into the Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 (June 2021) .
11 Explanatory Memorandum, Treasury Laws Amendment (2021 Measures No. 1) Bill 2021, 45.