With the background of the pandemic, the government pushed through temporary changes to the continuous disclosure laws for listed company directors to make breach in several cases more of a fault based matter. Those changes have now become permanent as of August 14, 2021. Dentons partner Hamish Walton and solicitor Nick Worth take a closer look at these changes and discuss their impact on continuous disclosure standards and policies for Australian listed companies.

Key points

• The amendments to Chapter 6CA of the Corporations Act introduce a requirement to demonstrate fault in several cases for breaches of listed company directors’ continuous disclosure obligations.
• These changes may present a greater preliminary hurdle to shareholder class actions in this area.
• Boards should continue to ensure policies and processes address, and are adapted to, the new environment.

Overview

While hopefully closer to the end of the pandemic than the beginning, businesses still face considerable uncertainties. Boards have had to juggle the interests of existing and prospective shareholders, while contemplating the survival of the companies they govern. The last 12 months has demonstrated that running a business on shifting sands, in the context of volatile COVID-19 infected markets, is even more of a challenge than it has traditionally been.

With the background of the pandemic, the government pushed through temporary changes to the continuous disclosure laws to make a breach which could lead to a company being sued by shareholders more of a fault based matter. Those changes have now become permanent.

The previous law provided that a failure to disclose a matter that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of securities, was of itself a breach. A claimant did not need to prove anything relating to the mental state of the company directors; if the relevant event occurred, that was all that needed to be established. Sometimes it seemed directors needed to have hindsight to determine whether a disclosure should be made.

Fortunately for directors of Australian listed companies, the government has identified that this uncertainty impacted:

1. Directors negatively in assessing and working out whether to disclose certain information, including forecasts, which in turn could have had a material effect on the price or value of their companies’ securities; and
2. The ability of companies to obtain directors and officers (D&O) liability insurance. The decrease in the number of insurers offering policies in Australia, added to the huge increases in premiums, affected the ability to source policies with knock-on effects through the director talent pool and company performance generally.

What were the changes?

The temporary measures introduced to the continuous disclosure laws were extended and, as of August  14, 2021, have now taken permanent effect through an amendment to Chapter 6CA of the Corporations Act 2001 (Cth) and related provisions. They provide that entities and officers are now only liable for civil penalty proceedings (which also give shareholders the right to make claims) in respect of continuous disclosure obligations if they have acted with “knowledge, recklessness or negligence” as to whether the information would have a material effect on the price or value of its securities.

The new requirement under the Corporations Act to also establish a mental element in respect of continuous disclosure breaches represents a movement away from the previous strict liability style approach. The changes also introduced the requirement to prove a mental element with respect to misleading and deceptive conduct in circumstances where the continuous disclosure obligations have been contravened.

It is envisioned that the movement to fault based liability may present a greater preliminary hurdle to shareholder class actions. This is in the context of Federal Court data, also noted by the Attorney General, that class action industry filings have increased by 325% over the past decade.

There have been no changes to the disclosure requirements set out in ASX Listing Rule 3.1.

Comparison with the UK and ‘negligence’ as a key threshold

Eyes have been drawn to the UK in trying to determine whether these changes will in reality limit the threat of shareholder class actions. The UK shares similar non-strict liability with respect to causes of action against listed companies under s 90A of the Financial Services and Markets Act 2000 (UK) for a failure to disclose potentially price sensitive information.

In the UK, in order to have a claim under s 90A investors need to show the occurrence of (a) any omissions, or delay in the publication, of information required by the applicable regulatory disclosure rules; and (b) any untrue or misleading statements made in company announcements. However, investors are not able to rely on the fact the company was simply negligent as to whether the information was concealed. Instead, they must demonstrate that the directors’ failure to disclose was reckless or dishonest.

Data suggests that the requirement to establish recklessness and dishonest conduct has created a significant hurdle for private claims and s 90A in its current form has played a key role in diminishing shareholder class actions in the United Kingdom since it was introduced in 2010.

The introduction of ‘negligence’ along with other types of fault brings Australia closer to the UK.

The reasonable person standard and negligent failure

Applying what a plaintiff must prove in a claim for damages in negligence at common law, to now succeed in a claim against a director a plaintiff will need to show that the director had a duty, they breached that duty and this negligence caused or materially contributed to the injury or damage suffered by the plaintiffs. This may translate as the difference in trading position and therefore value of securities if the directors had disclosed the information. Moreover, in determining whether the directors had breached their duty of care, the court would assess whether the standard of care is generally that attributed to a reasonable person. Court decisions on what constitutes a reasonable person in these circumstances will be interesting to monitor, and whether this results in company directors being subject to a higher test than the person in the street, which we expect will be the case.

Notwithstanding Australia is unique in that ‘negligence’ is included as a fault element, private litigants are still confronted with legal complexity and should be aware that courts will likely approach actions differently to when the reasonable person standard was the only requirement in place.

What this means for listed company directors

ASIC still has the power to issue infringement notices for breaches on a no fault basis - that is, the mental element does not need to be established. The criminal offence for the same breach still remains.

It should be noted that there continues to be an “accessorial liability” provision for officers involved in a contravention which can be mitigated by a “reasonable steps” type defence i.e., that it is a defence to an action against an officer as accessory under the new provisions if they took reasonable steps in the circumstances to ensure that the entity complied with its obligations under the new civil penalty provisions, and after doing so, believed on reasonable grounds that the entity was complying with its obligations.

In light of these changes company directors should:

• Review existing D&O policies to see if any changes need to be made due to the new environment, and to ensure coverage in relation to breaches of the new continuous disclosure laws;
• Reassess policies and processes currently in place and upgrade if required;
• Ensure regular updating of the board by management in accordance with a documented process and guidelines for all staff potentially in possession of sensitive information and check that the process surrounding the making of each significant disclosure is well documented;
• Seek advice from experts; and
• Rigorously review and question each significant disclosure.

While it is uncertain what the exact repercussions of the changes will be, it is certain there are new considerations for private litigants and new layers of complexity in taking action against companies and their directors for breaches of the continuous disclosure laws.