Australian Government responds to independent review of continuous disclosure laws by adopting its recommendations

In August 2021 a “fault element” was introduced to Australia’s continuous disclosure laws requiring that, in civil liability actions, a disclosing entity or its officers must be shown to have acted either with knowledge, recklessness or negligence, with the stated intention of reducing the incidence of “opportunistic class actions”.

As required under the relevant legislation, the Government commissioned an Independent Review of the 2021 Amendments, conducted by Dr Kevin Lewis. On 12 August, the Government response to the Independent Review was released – with the promise of future, as yet undetailed, amendments to the Corporations Act 2001 (Cth).

In its response the Government accepted the primary recommendations of the Independent Review that:

1. the 2021 Amendments be repealed in respect of enforcement action by ASIC (including for ASIC “civil penalty” proceedings and actions by ASIC for “misleading and deceptive conduct”); and
2. the 2021 Amendments be retained for the time being in respect of private litigants.

It should be noted that any repeal of the 2021 Amendments in respect of enforcement action by ASIC will only occur if and when the relevant amending legislation is introduced by the Government and passed by Parliament.

Class actions based on continuous disclosure laws will continue

The 2021 Amendments were introduced with the stated intention of reducing the incidence of “opportunistic class actions”. To the extent that the 2021 Amendments have been retained in respect of private litigants (ie. class actions), then the intention of the legislation is unchanged.

That said, as noted in the Independent Review, opinions differ as to the practical effect of the 2021 Amendments on class actions against disclosing entities. In fact Dr Lewis concluded that, on the basis of the submissions to the Independent Review, “The 2021 Amendments have had, and are likely to have, little (if any) impact on the number and type of continuous disclosure class actions against disclosing entities”.

So, while there may still be individual cases where the “fault element” contained in the 2021 Amendments is relevant in determining class action liability – as a general rule disclosing entities should continue to take steps to ensure compliance with the primary disclosure obligations in section 674 of the Corporations Act (and Listing Rule 3.1), and not put any weight on the reduced risk of liability from class actions.

ASIC actions based on continuous disclosure laws will likely increase

While the 2021 Amendments were stated to be directed at “opportunistic class actions”, they also applied to actions by ASIC, including “civil penalty proceedings” (under section 1317E) or actions by ASIC for “misleading and deceptive conduct” (under section 1041H of the Corporations Act, or 12DA of the ASIC Act).

The Independent Review concluded that the 2021 Amendments have had a negative impact on ASIC’s enforcement of continuous disclosure laws, and the Government has accepted that they should be repealed in respect of ASIC enforcement action.

Importantly, ASIC also submitted to the Independent Review that the “fault element” reduced ASIC’s appetite to use infringement notices (even though the infringement notice regime itself did not contain a “fault element”). This was because ASIC will generally only issue infringement notices if it considers it would be able to bring civil penalty proceedings (which do contain a “fault element”) in the event the infringement notice penalty is not paid.

ASIC’s use of infringement notices for contraventions of continuous disclosure laws has been relatively limited in recent years, aside from the recent increase in the issuance of ASIC infringement notices directed at alleged “greenwashing”.

If the “fault element” for ASIC enforcement actions is removed (as proposed by the Government) then, together with ASIC’s abandonment of its “Why not litigate” strategy, we expect to see an increase in ASIC’s use of infringement notices to enforce the continuous disclosure laws.

Climate-related financial disclosure liability – a continuing focus

The laws enacting mandatory climate-related financial disclosures which are currently before the Senate create a particular risk for disclosing entities, because many of the statements required to be made are forward-looking and/or are inherently uncertain, especially statements concerning scope 3 emissions, scenario analyses and transition plans.

Some of these statements are subject to a temporary "limited immunity" framework which applies for the first three years. The limited immunity framework prevents claims in relation to certain statements, unless the proceedings are brought by ASIC.

The Government Response to the Independent Review and the proposed removal of the “fault element” for actions by ASIC would therefore weaken the “limited immunity” framework. This is because ASIC will no longer need to establish the “fault element” in bringing any “civil penalty” proceedings or actions for “misleading and deceptive conduct” in respect of mandatory climate-related disclosures. This will also be the case following the end of the immunity period.

That said, the fact that the 2021 Amendments and the “fault element” will be retained for the time being in respect of private litigants will be a welcome outcome for disclosing entities concerned about the class-action risks of mandatory climate-related financial disclosures.

Attribution of “fault” to a corporation – to be clarified

The 2021 Amendments (which are to be retained for claims by private litigants) require a claimant seeking to recover damage from a disclosing entity for a breach of the continuous disclosure laws to prove that the entity had the requisite state of mind (i.e. acted knowingly, recklessly or negligently). The question is then which individual(s) (whether a director, employee or agent of the entity) must have the requisite state of mind for the entity’s state of mind to be established.

This fundamental question is not easily answered in the context of the 2021 Amendments, and the Independent Review recommended that this shortcoming should be addressed.

In its response the Government has agreed to propose amendments the Corporations Act to address the issue.

Some unfinished business

The Independent Review noted that the wording of the 2021 Amendments attached the “fault element” (ie. the requirement that the entity acted knowingly, recklessly or negligently) to the determination as to whether the information is “market sensitive” – and recommended that the “fault element” ought instead be attached to the failure to disclose.

Separately, the Independent Review also noted that under the current continuous disclosure laws there are significant difficulties in determining the requisite state of mind (whether intention or recklessness) necessary to form the basis of a criminal offence. The Independent Review recommended that the Government consider amending these provisions.

The Government did not accept these recommendations, but noted it would consider them at a later time, when “the opportunity arises to consider broader changes to the continuous disclosure regime”.

So these shortcomings in the legislation will remain for the foreseeable future.