On Tuesday, 10 August 2021, the Morrison government passed the Treasury Laws Amendment (2021 Measures No. 1) Bill, making permanent the temporary changes implemented in May 2020 to Australia’s continuous disclosure laws. Under the new framework – as has been the case since last May – companies and their officers will only be liable for civil penalty proceedings in respect of continuous disclosure obligations where they have acted with “knowledge, recklessness or negligence”.

“These changes will mitigate the risk of companies and their officers being subject to opportunistic class actions under our continuous disclosure laws and in doing so, will support companies and their officers to release forward-looking guidance to the market,” the Treasurer noted.

Importantly, he went on – during the period the temporary fault element was in place – “Treasury identified that there was an increase in the number of material announcements to the market, relative to the same period last year”.

“The changes strike the right balance between ensuring shareholders and the market are appropriately informed while also allowing companies to more confidently make forecasts of future earnings or provide guidance updates without facing the undue risk of class actions,” he submitted.

The reforms follow a review by the parliamentary joint committee on corporations and financial services as part of its inquiry into litigation funding and the regulation of the class action industry.

‘Right balance has been struck’

Norton Rose Fulbright head of disputes Cameron Harvey agreed that the “right balance has been struck”.

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“At a time when boards are facing a multitude of complex risks, from regulation and investigations, to supply chain and data breach issues, we expect this sensible approach will be welcomed by companies too,” he said.

“Under the new regime, investors should continue to expect timely and adequate market disclosures from listed companies, and there will also be more certainty for decision-makers at the board and executive level.

“Shareholder class actions will continue to have their place, but we are pleased to see permanent moves made to discourage the more opportunistic claims.”

Herbert Smith Freehills partner Jason Betts agreed that the reforms are important, adding that the narrative that making the 2020 changes permanent would amount to a “substantial weakening” of Australia’s disclosure laws needs to be carefully tested for three reasons.

“First, listed entities are still required to comply with Listing Rule 3.1, which means they have to immediately tell the market information that a reasonable person would expect to have a material effect on price. We shouldn’t forget that ASIC retains the ability to prosecute offences and issue infringement notices for breach of that obligation, regardless of the new ‘state of mind’ defences. The defences kick in to limit liability from private actions or civil penalties,” he listed.

“Second, the breadth of this defence is untested. For the company to benefit from the defence, it first has to have information that a reasonable investor would expect to be disclosed – but it must show that it would not be negligent to keep that information to itself. It may be that this is a relatively ‘narrow target’ for a listed entity to hit to receive the benefit of the defence – and it will be highly factually dependent. Time will tell if the current protections go as far as the government intended.”

Finally, Mr Betts said, many past and present shareholder class actions “have gone very close to alleging negligence or recklessness”, even if not pleaded in that precise way, he said.

“The standard anatomy of many shareholder class actions is that a company disclosed guidance with actual or constructive knowledge that it lacked foundation. That has the flavour of negligence by another name. Plaintiffs will no doubt allege, as is customary, that information to the effect that a company had no confidence in its own guidance is classically what investors want to know, and in those circumstances, it was negligent to hold it back. Whether that amounts to negligence under Australian law will become a new battleground for class actions in Australia,” he said.

Governance Institute of Australia chief executive Megan Motto added that governance professionals across the country have “seen first-hand” the increase in the cost of D&O insurance, which is increasingly challenging for company officers to make decisions on market disclosure in real-time in a volatile market environment.

“These technical amendments introduce a fault element for continuous disclosure. Under these changes, if a reasonable and considered judgement on disclosure is made in real time, which turns out later with the benefit of hindsight to be wrong, the company will be less likely to be subject to a class action. However, ASIC can still take regulatory action on a no-fault basis,” she outlined.

“We expect the changes may help address rising insurance costs, without undermining the frequency and quality of market disclosures.”

‘Disappointing’, ‘concerning’

Plaintiff firms, on the other hand, do not share the sentiments of BigLaw practices.

According to a spokesperson from Slater and Gordon: “Australia’s robust stock market disclosure laws have meant that mum and dad investors could operate from a position of knowledge – whether through individual investments on the stock market or through their super fund.

“Australian directors have known they have to be open with the market or they might be accountable to their investors through a class action. Scott Morrison and Josh Frydenberg have apparently been uncomfortable with this situation.”

These reforms will make it easier, the firm surmised, for company directors to “do the wrong thing and dodge responsibility”.

“More concerningly, they are just the beginning of a raft of changes Morrison and Frydenberg have signalled they intend to make,” the spokesperson said.

Shine Lawyers head of class actions Jan Saddler agreed, noting that the passage of the laws is “disappointing, although not unexpected”.

“The announcement from the Federal Government is disappointing, although not unexpected,” she said.

“The move to permanently relax disclosure laws appears to be a bid to protect big businesses, and in our view, is not in the interest of the public.”

“This will not improve processes in large corporations, but instead will mean that shareholders and investors will lose the protection that ensured market integrity, economic prosperity and exceptional corporate governance,” she argued.

“This appears to be a way for the government to control the class action regime, which is not problematic to any corporation that is complicit with its duty to shareholders.

“Relaxing disclosure laws takes away a vehicle for justice for the average Australian.”