Slowing the Growth of Shareholder Class Actions? Australia Announces Permanent Changes to Continuous Disclosure Laws
The Situation: Australia's Federal Government has announced that it intends to make permanent reforms introduced during the COVID-19 pandemic to continuous disclosure requirements for ASX-listed companies. The temporary measures are due to expire on 22 March 2021 unless made permanent.
The Result: The permanent reforms, if passed by Federal Parliament, will mean that a level of intent is required to prove a company or person liable for a civil penalty under the continuous disclosure provisions of the Corporations Act 2001 (Cth) ("Corporations Act"). The reforms will also limit the circumstances in which a continuous disclosure contravention will constitute misleading or deceptive conduct under the Corporations Act.
Looking Forward: Australia has become a hot spot for shareholder class actions alleging continuous disclosure contraventions by companies, directors and officers. The present reforms will make it harder for plaintiffs to succeed in shareholder class actions against ASX-listed companies, and further reforms appear likely in light of recent statements by the Federal Attorney-General and the release of a Joint Parliamentary Committee report recommending reforms for class actions and litigation funding.
Background and Further Details
On 17 February 2021, Australia's Federal Treasurer confirmed that the Federal Government will be seeking to make permanent temporary changes to Australia's continuous disclosure laws, which were first introduced in May 2020 using the COVID-19 powers of the Corporations Act. The changes were introduced to enable companies, directors and officers to more confidently provide guidance to the market during the COVID-19 pandemic, without facing the undue risk of class actions. The temporary measures are due to expire on 22 March 2021 unless made permanent.
These reforms, if made permanent, will continue the existing relaxation of the continuous disclosure requirements for ASX-listed companies, directors and officers. In short, companies, directors and officers will be liable for civil penalties linked to continuous disclosure contraventions only if they knew, or were negligent or reckless with respect to whether, undisclosed information would have had a material effect on the price or value of the company's securities. The previous test for civil penalty liability for continuous disclosure required disclosure of all relevant information where a reasonable person would expect that the information would have a material effect on the price of the stock.
The reforms will also limit the circumstances in which a contravention of a continuous disclosure obligation will constitute misleading or deceptive conduct under the Corporations Act. The effect of the change is that companies and officers are not liable for misleading or deceptive conduct in circumstances where the continuous disclosure obligations have been contravened, unless the requisite mental element in the continuous disclosure obligation has been proven.
Under the proposed permanent reforms, Australia's corporate regulator, ASIC, will retain its power to issue infringement penalties for continuous disclosure contraventions without proving fault or state of mind.
The reforms must be passed by Federal Parliament before they can take permanent effect. A bill to give permanent effect to the reforms was introduced into Parliament by the Government on 17 February 2021. We will report on the bill's progress as it moves through the Houses of Parliament.
Four Key Takeaways
- These reforms, if passed by Parliament, will permanently bring Australia into line with continuous disclosure obligations in major jurisdictions such as the United Kingdom and United States.
- The reforms will permanently raise the standard necessary for plaintiffs to allege and prove a breach of continuous disclosure obligations and associated allegations of misleading or deceptive conduct. The reforms will make it harder for plaintiffs to succeed in shareholder class actions against ASX-listed companies—but this is still expected to remain an active class action area.
- Further reforms, with the same policy goal, appear prospective as the Federal Attorney-General has indicated his commitment publicly on many occasions to trying to curb "opportunistic" class action filings, with shareholder claims a particular focus of his attention. Other recent, related reforms have included the introduction of new licensing requirements for litigation funders.
- The Government is also presently considering a range of reform recommendations from a Joint Parliamentary Committee ("JPC") inquiry into class actions and litigation funding, which released its report in December 2020. The present change in relation to continuous disclosure laws is one of the changes recommended by the JPC. The Government is expected to release, during Q1 of 2021, a response to the JPC report and its plans for the introduction of further reform measures.
Jones Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our “Contact Us” form, which can be found on our website at www.jonesday.com. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.