Significant reforms to Australia's continuous disclosure laws passed Parliament and became law on 13 August 2021. Section 1683B of the Corporations Act 2001 (Cth) requires the Minister to cause an independent review within six months of the second anniversary of the 2021 amendments. Accordingly, the final report was received by government on 13 February 2024 and was tabled in both houses of Parliament on 14 May 2024.
The independent review of the changes to continuous disclosure laws was undertaken to evaluate the impact of the 2021 Amendments on the enforcement and effectiveness of continuous disclosure regulations in Australia. The review aimed to assess whether the amendments have affected ASIC's ability to enforce these laws and the incidence of class actions related to continuous disclosure breaches. The report has now been published and includes six recommendations.
The 2021 amendments
The Federal Government made permanent the temporary relief to the continuous disclosure provisions of the Corporations Act provided in response to the COVID-19 crisis which expired on 22 March 2021.
The continuous disclosure provisions in ASX Listing Rules 3.1 (and 3.1A) and section 674(2) of the Corporations Act require listed entities to disclose price sensitive information on a continuous basis. The permanent changes, which were legislated pursuant to the Treasury Laws Amendment (2021 Measures No. 1) Act 2021, are now in effect and ensure that an entity will only be liable for civil penalty proceedings in respect of its continuous disclosure obligations if it:
- fails to update the market with information which it knew was price sensitive; or
- was reckless or negligent with respect to whether that information was price sensitive.
Prior to these reforms, a listed entity and its officers could have been found to be liable for civil penalty proceedings in respect of a breach of the continuous disclosure provisions if they failed to disclose any information that a reasonable person would have considered to be price sensitive and such finding did not require the requisite mental elements of knowledge, recklessness, or negligence.
The Act also brings across the same standard of liability to misleading or deceptive conduct so that an entity or officer will not be liable for misleading and deceptive conduct in circumstances where the continuous disclosure obligations have been contravened, unless the requisite mental element of knowledge, recklessness or negligence has been proven.
Diverse submissions
The consultation paper for these amendments attracted diverse submissions. Organisations such as the Australian Institute of Company Directors (AICD), Business Council of Australia (BCA), and Governance Institute of Australia (GIA) argued for the retention of the amendments. They highlighted benefits like reduced regulatory burden and increased attractiveness for capital raising in Australia.
By contrast, the Association of Litigation Funders Australia (ALFA), Maurice Blackburn (MB), and the Australian Council of Superannuation Investors (ACSI) argued that the amendments negatively impact market efficiency and information quality. They believed that requiring proof of fault (knowledge, recklessness, or negligence) would weaken enforcement, leading to lower disclosure standards. ASIC similarly submitted that the fault requirement introduced in the 2021 amendments should be repealed in relation to ASIC's civil penalty proceedings.
Recommendations made
The reviewer made two primary recommendations and four secondary recommendations regarding the 2021 amendments.
Recommendation 1: The Government should amend the Corporations Act to remove the requirement introduced by the 2021 Amending Act for ASIC to prove in civil penalty proceedings for a breach of continuous disclosure laws that the disclosing entity acted knowingly, recklessly or negligently.
ASIC submitted that the reasons for introducing the amendment including an increase in shareholder class action for contravention of continuous disclosure laws and parity with international regimes did not apply to ASIC's enforcement of the continuous disclosure obligations. The ASX supported removing the fault requirement for ASIC’s civil penalty proceedings to maintain robust disclosure practices and market integrity. The reviewer also agreed with ASIC's comments and found that the 2021 amendments have had a negative impact on ASIC's enforcement of continuous disclosure laws.
Recommendation 2: The Government should retain the requirement for private litigants to prove that the disclosing entity acted knowingly, recklessly or negligently in civil compensation proceedings.
The reviewer found that the 2021 amendments had little impact on the number of continuous disclosure class actions and there is no evidence of an urgent need to repeal the amendments. The Consultation Paper sought feedback on the impact of the 2021 amendments on class actions related to continuous disclosure obligations. Stakeholders had mixed opinions. Proponents of class actions, like ALFA and Woodsford, argued the amendments added uncertainty and made class actions riskier and costlier and advocated for their repeal. Opponents to this view, including AICD and ICA, felt the amendments struck a balance between investor protection and reducing opportunistic lawsuits.
Recommendation 3: Where recommendation 1 is accepted and/or recommendation 2 is rejected, the government should consider statements about the 2021 amendments in the Treasury's consultation paper Climate-related financial disclosure (June 2023).
Some respondents raised concerns about the interaction between the 2021 Amendments and the potential class action risks from the proposed climate reporting requirements. HSF noted that the Federal Government's consultation on climate-related financial disclosure emphasised the need for higher thresholds for liability, which the 2021 Amendments support. Therefore, the reviewer found that implementing recommendations 1 and 2 would align with Treasury's stance on climate-related financial disclosures.
Recommendation 4: If the Government rejects recommendation 1 and/or accepts recommendation 2 the Government should amend the Corporations Act to address more fully how knowledge, recklessness or negligence is attributed to the disclosing entity.
The reviewer considered ASIC and ALFA's submissions which raised the 'fault attribution issue' explaining the difficulty of proving an entity's state of mind.
Recommendation 5: If the Government rejects recommendation 1 and/or accepts recommendation 2 the Government should consider whether that requirement should attach to the determination of whether the relevant information should have been disclosed to the market rather than to the determination of whether the relevant information was market sensitive.
Recommendation 6: the Government should consider whether sections 674 and 675 should be amended to specify the applicable physical and fault elements.
The reviewer also found that the two-year period specified in section 1683B of the Corporations Act is not sufficient to draw meaningful, evidence-based conclusions about the impact of the 2021 Amendments on many key issues outlined in the Terms of Reference for the review.
The Minister must cause a statement setting out the Government's response to each of the recommendations by 14 August 2024, within three months of 14 May 2024 when the report was tabled in both houses of Parliament.