Changes to Australia's Continuous Disclosure Regime

The purpose of the amendments is to protect companies and their officers from the threat of "opportunistic class actions" and to make it harder for shareholders to bring such actions, following short-term moratoriums in place for part of the pandemic.   

What is the change?

Currently, under the Act, a listed entity is required to disclose price-sensitive information immediately to the market operator. A civil contravention of that obligation occurs if:

1. an entity has price-sensitive information that is not generally available;
2. 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 share; 
3. the entity fails to disclose the information; and
4. none of the exceptions to disclosure in the Listing Rules apply.

Under the new regime, a civil contravention of that obligation occurs only if the entity knows, or is reckless or negligent as to whether the information would, if it were generally available, have a material effect on the price or value of the entity’s share price. A person who is involved in a listed disclosing entity’s contravention also contravenes the Act.  

A corresponding change to the Act's misleading or deceptive conduct provisions and those mirrored in the Australian Securities and Investments Commission Act 2001 (Cth) will also come into effect whereby entities and officers will not be liable for misleading or deceptive conduct regarding their continuous disclosure obligations unless the requisite fault element is proven. 

Implications

The amendments ensure that when determining whether a listed disclosing entity contravenes its existing continuous disclosure obligations, its state of mind is taken into account. The critical issue is likely to revolve around establishing whether an entity was negligent in failing to disclose material information. This will require a determination of whether the entity's conduct involved a breach of the standard of care that a reasonable listed entity (or director) would exercise in the same circumstance. 

We have some scepticism that the amendments will provide substantive relief to companies, their directors and officers and insurers from securities class actions. Whilst the amendments provide an additional level of defence to an entity, most class actions involve allegations that the entity failed to appreciate that it held material information which was not disclosed, which we expect will now merely be pleaded as a negligent failure to appreciate the consequences of that information.  

There are many instances of securities class actions proceeding against directors who are alleged to be liable as an accessory to the contravention of the entity and that will continue under the new regime. There is likely little practical difference between the previous due diligence defence available to a director sued as an accessory and a claim in negligence against the entity, where the entity can only act through the conduct of its directors and/or officers.  

For D&O insurers, introducing a fault element may have a flow-on effect to increase D&O coverage disputes in securities class actions, especially where intentional conduct is alleged, as the policy usually excludes claims for intentional conduct or wilful violations of law. The risk of losing coverage by admitting to an intentional or wilful act may be a strong driver for companies to seek a settlement with no admission of liability rather than risk an adverse judgment which is uninsured, and the requirement to pay back substantial defence costs.

If you have any questions please get in touch with any of the key contacts below.

[1] Treasury Laws Amendment (2021 Measures No. 1) Bill 2021