On 17 February 2021, the Federal Treasurer announced the introduction of the Treasury Laws Amendment (2021 Measures No. 1) Bill (‘2021 Bill’) which will introduce permanent changes to the continuous disclosure requirements imposed on listed entities and other disclosing entities. These permanent changes build on the temporary continuous disclosure changes which were introduced in May 2020 and which are set to expire in March 2021.
The permanent changes ensure that where a person (other than a regulator) seeks to allege a civil contravention of the requirement to disclose price sensitive information pursuant to Chapter 6CA of the Corporations Act 2001 (Cth) (‘Corporations Act’), then the person must prove that the disclosing entity or its officers had knowledge of, or were reckless or negligent with respect to, whether the information that was not disclosed would have a material effect the price of the entity’s securities (‘State of Mind’).
These changes apply where there has been a failure to disclose information. However, they do not provide any additional protection to disclosing entities or their officers where they have actually disclosed false or misleading information.
Building on the temporary changes
In May 2020, the Federal Treasurer used the Corporations (Coronavirus Economic Response) Determination (No. 2) (‘2020 Determination’)to address the uncertainty in the market caused by the COVID-19 pandemic and the difficulty for disclosing entities in releasing reliable forward-looking information. The temporary changes were intended to have the effect that companies and officers would only be liable if there had been ‘knowledge, recklessness or negligence’ with respect to updates on price sensitive information to the market.
However, as noted by various commentators at the time of the release of the 2020 Determination, the changes only really provided protection against civil proceedings where a disclosing entity decided not to disclose an update to the market (i.e. protection against proceedings under section 674 of the Corporations Act). It was also noted that the changes were not sufficient for that purpose, as they didn’t affect claims under the misleading and deceptive conduct provisions for failure to disclose (as the ‘State of Mind’ requirement was not added to those provisions). Moreover, if the disclosing entity did make a disclosure to the market, then the disclosing entity and its officers could still be liable under the misleading and deceptive conduct provisions of the Corporations Act without a claimant having to prove State of Mind.
Knowledge, recklessness or negligence
The 2021 Bill will permanently add a requirement to prove State of Mind when seeking to make disclosing entities or their officers liable under the civil liability provisions relating to a breach of the obligation to disclose market sensitive information.
Further, the 2021 Bill will also include a State of Mind requirement in the misleading and deceptive conduct prohibition provisions, but only to the extent that these provisions relate to actions that would have breached the continuous disclosure obligations (i.e. failure to disclose). The misleading and deceptive conduct provisions are not being varied to the extent that they apply to information that is actually disclosed to the market.
Therefore, while the 2021 Bill closes off a gap in the 2020 Determination by requiring State of Mind to be proven in civil actions for failure to disclose which are based on the misleading a deceptive conduct provisions, disclosing entities and their officers should be mindful that the changes do not affect their potential liability for the disclosures which they release to the market. As such, disclosing entities and their officers must continue to take all reasonable steps to ensure that their market releases are accurate and not misleading.
The 2021 Determination restores ASIC’s ability to issue infringement notices without having to prove State of Mind. This reverses the position under the temporary changes under in the 2020 Determination, which required ASIC to prove State of Mind when issuing an infringement notice for a continuous disclosure breach.
This makes it clear that the permanent continuous disclosure changes are targeted on private claims, such as class actions, as opposed to claims from the regulator.
Status of the proposed change
The first reading of the 2021 Bill occurred earlier this week, on 17 February 2021. The bill contains more than the amendments discussed above, including amendments to the Corporations Act addressing virtual meetings and electronic communication of documents.
However, the continuous disclosure provisions are likely to be the most contentious elements of the 2021 Bill. These changes have already attracted significant press coverage from those who support the changes as a welcome development that brings Australia into line with the regimes in the United States and the United Kingdom and reduces the risk of disclosing entities and their officers being unduly exposed to class actions, as well as from those who strongly oppose the changes on the grounds that they water down Australia’s rigorous continuous disclosure rules.
For more information or assistance with continuous disclosure obligations, please contact James Burchnall.