Treasury Reviews Compromised Continuous Disclosure Laws

Key Takeaways

• A Treasury Review into changes to continuous disclosure laws rushed into law as temporary measures in 2020 amidst pandemic panic, then made permanent in 2021 by the former Federal Government, has commenced with a Consultation Paper seeking submissions to an independent review.  
• The changes made it harder to pursue companies for continuous disclosure failures by requiring proof of state of mind to establish liability, that there was requisite knowledge, reckless or negligence, in relation to the breach.
• The Treasury Review will consider whether the changes:

         - work in support of an efficient and well-informed market;

         - impact on the quality and nature of disclosures;

          - are inconsistent with overseas regimes; and

          - create barriers preventing compliance or enforcement of disclosure
             obligations.

• Our view is that the changes should be repealed and the law returned to the state it was before they were made.

The Treasury Review

An independent review by Dr Kevin Lewis (Treasury Review) is underway of the changes to continuous disclosure laws made by the Treasury Laws Amendment (2021 Measures No. 1) Act 2021 (2021 Amending Act). Access the Terms of Reference and Consultation Paper.  The review webpage is here. The Treasury Review is due to report to government by 14 February 2024.

Our Opinion

Our view is that the amendments made by the 2021 Amending Act should be repealed, as they were introduced with inadequate rigor and without a strong public policy basis. Any alternative or future amendments to the prior continuous disclosure regime should only occur following a thorough review of whether or not that regime achieves the objectives of enhancing the integrity and efficiency of Australian capital markets and provides a clear framework for listed entities to make disclosure decisions.

Why the 2021 Amending Act should be repealed

The 2021 Amending Act made permanent amendments to continuous disclosure laws that were initially applied temporarily, at the time of the pandemic.  The temporary amendments were contained in the Corporations (Coronavirus Economic Response) Determination (No 2) 2020.

The intention of the amendments is to require proof of state of mind in actions for breach of the continuous disclosure laws. That is, that disclosing entities only be liable where there is knowledge, recklessness or negligence, in relation to the breach.

The amendments were made permanent by the 2021 Amending Act, following a recommendation by the Parliamentary Joint Committee on Corporations and Financial Services, in its Report on litigation funding and the regulation of the class action industry (PJC Report).

The authors of the PJC Report considered that making the coronavirus amendments permanent would address what they saw as key vices of funded securities class actions; increasing insurance costs and taking from one group of shareholders for the purpose of passing money to another group of shareholders, where only lawyers win.

The Treasury Review will have regard to whether the 2021 Amending Act amendments are:

• working in support of an efficientand well-informed market;
• impacting on the quality and nature of disclosures;
• inconsistent with overseas regimes; and
• creating barriers preventing compliance or enforcement of disclosure obligations.

The Treasury Review has asked stakeholders’ views on whether the 2021 Amending Act has delivered the outcomes aimed for by the PJC Report and have had a positive or negative impact on:

• The efficiency and effectiveness of the market for Australian securities;
• The nature or quality of disclosures;
• The number or type of class actions against disclosing entities for breach of their continuous disclosure obligations;
• The comparability of the Australian regime with major overseas markets;
• The availability and cost of D&O insurance; and
• The capacity of ASIC to enforce continuous disclosure laws.

These are all very helpful questions. However, the fundamental problem is:

1. There is simply insufficient evidence and data to enable an analysis of the impact of the 2021 Amending Act. Securities class actions generally take between 3 to 5 years (some longer) to resolve and very few have gone to judgment.
2. None of these matters and questions were properly considered and analysed with respect to the continuous disclosure law regime that existed prior to the 2021 Amending Act (let alone when the amendments were initially adopted through the coronavirus amendments).
3. It is doubtful the amendments, as drafted, remedy perceived problems with the operation and impact of the prior regime. An effective review might have been able to identify situations, if any, where a company would not be acting with knowledge, recklessness or negligence, but where the company also has information that is material (not subject to pre-existing exemptions) and does not disclose that information to the market.

In 2018, the ALRC ‘Inquiry into Class Action Proceedings and Third-Party Litigation Funders’, recommended that the Australian Government commission a review of legal and economic impact of the operation, enforcement and effects of continuous disclosure obligations and those relating to misleading or deceptive conduct contained in the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission 2001 (Cth).

This did not occur.

Instead, unsupported and often internally inconsistent opinions from the PJC Report were used as the basis for the 2021 Amendment Act.

The 2021 Amendment Act should be repealed due to the reality it was introduced without any proper policy analysis and assessment as to whether the proposed amendments would address the perceived vices, let alone actual ones. Noting that the perceived vices and the proposed remedy was contested by many participants in regulation, class actions and litigation funding.

The contents of this article do not constitute legal advice and it is not intended to be a substitute for legal advice and should not be relied upon as such.  It is designed and intended as general information in summary form, current at the time of publication, for general informational purposes only.  You should seek legal advice or other professional advice in relation to any particular legal matters you or your organisation may have.