Potential changes to disclosure legislation leaves shareholders vulnerable and exposed

Proposed amendments by Federal Treasurer, the Hon Josh Frydenberg MP, to permanently adopt changes to Australia’s continuous disclosure regime have been met with a mixed reaction. The changes, which were originally put in place in March 2020, sought to assist listed entities in relation to their obligations for timely disclosure of information to financial markets during the tumultuous COVID-19 pandemic period.

The Treasury Laws Amendment (2021 Measures No. 1) Bill proposes to amend the Corporations Act 2001 (Cth) (Corporations Act) by introducing a “fault” element to listed companies’ continuous disclosure obligations. If enacted by Parliament, companies would only be liable for breaches of the continuous disclosure obligations in circumstances where they have acted with “knowledge, recklessness or negligence”. Although still before the Parliament, the proposed bill adds a further hurdle to be overcome in order to hold companies responsible for failing to keep the market aware of information that is material to the value of their shares. Currently, a plaintiff must prove:

  1. the company held information that was not publicly available;
  2. a reasonable person would expect such information to have a material effect on the price or value of the company’s securities; and
  3. the company failed to notify the ASX of that information.

The Treasurer’s proposed amendment would add the need for a plaintiff to prove that the company also had knowledge that, or was reckless or negligent as to whether, the information would have the material effect on the price or value of the company’s shares (Fault Element). This proposed fault element would also be carried across, and be applicable to, actions arising under the ACL for misleading and deceptive conduct.

The Government, in its Second Reading speech to the Senate, argues that “…Reforming continuous disclosure obligations will allow business to reallocate resources towards improving efficiency and output. This will make it easier for businesses to invest, create jobs and grow the economy.” Certainly, business groups, including the Australian Institute of Company Directors, are welcoming the proposed permanent amendments, arguing that it will force ASIC to be more proactive in its regulation of companies, rather than relying on shareholder class actions to hold companies to account (Company Directors reject ASIC's enforcement tilt, Ronald Mizen, 5 April 2021, AFR).

On the other hand, if the continuous disclosure obligations are watered down, average shareholders will find it more difficult to recover compensation for loss suffered due to a company failing to disclose material information to the market, at a time when they can least afford it. Further, the amendments may be damaging Australia’s reputation as a well-regulated market that enables investors to operate from a position of knowledge and confidence.

We should preserve and promote a continuous disclose regime that requires companies and their directors to be vigilant in the management and disclosure of information, promoting a prosperous market that is based on integrity and efficiency.

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