The continuous disclosure and class action laws in Australia are again under scrutiny, with the Australian Law Reform Commission (ALRC) releasing a discussion paper, the Australian Securities Exchange (ASX) encouraging discussion, and Law Firms Australia (LFA) advocating change.
The concerns centre around the rise of class actions against listed companies and their directors in Australia, the increasing scarcity of D&O insurance, and the disincentive for qualified people to become non-executive directors of listed companies, particularly small ones.
The current position is that listed entities must immediately disclose information a reasonable person would expect to have a material effect on the price or value of its securities.
While a number of carve-outs are available, and there is a defence if a person involved in the contravention took all reasonable steps and believed on reasonable grounds that the company was complying with its obligations, the net effect is that directors must continually be on the alert. They must also set aside significant time and corporate resources to ensure the company meets its disclosure obligations on an urgent basis.
In addition to meeting disclosure obligations, directors must also consider the risk of possible class actions around disclosure.
Over the past decade, shareholder class actions have been steadily rising driven, in large part, by the growth in the third party litigation funding market. There has also been growing acceptance of shareholder class actions by the Australian investment community, particularly among institutional investors. While not usually taking the role of lead plaintiff, the size of many institutional holdings in major listed companies means that institutional participation in class actions is increasing. This, in turn, has increased the potential exposure associated with many shareholder class actions.
While much judicial uncertainty exists at present around competing shareholder class actions, there is likely to be greater clarity given in the coming year as case law is refined at both the State and Federal level. This will have important consequences for directors faced with continuous disclosure obligations as well as for third party funders eagerly awaiting public announcements by listed companies.
The current positions are as follows:
- ALRC: the continuous disclosure laws should be reviewed and litigation funders should be regulated by the Corporations Act
- ASX: is open to a review of the continuous disclosure laws
- LFA: supports a review of the laws, noting increases in the cost of D&O insurance and shrinking availability
- Litigation funders: are concerned about the potential erosion of shareholder rights.
Given the relative scarcity of continuous disclosure based class actions in comparable jurisdictions such as the United States and the United Kingdom, an assessment of how those countries' class action regimes interact with their continuous disclosure requirements merits further investigation in Australia.
The reality is that it is impossible for every company to get its disclosure obligations right all the time and good faith decisions may be interpreted differently when viewed with hindsight.
Each time the issue arises, companies need to consider:
- What does "material" mean in this context?
- What would the "reasonable" person expect?
These are concepts that are difficult to define precisely and require boards to virtually have predictive skills as to how a piece of information will impact the price of securities.
The fact that all Australian class actions have been settled rather than proceed to final judgement indicates that the balance between shareholder rights, when included as part of a class action process, and the rights of the discloser is not right.
In the meantime, directors should ensure that their companies have robust compliance systems in place and should:
- have a written continuous disclosure policy;
- establish a committee or overseer of the policy with responsibility for making decisions on when to disclose;
- set clear reporting lines from senior management to the committee/overseer;
- implement regular training; and
- undertake regular stress testing of the structure.
We will be hosting a series of roundtables over the coming weeks about possible reforms and the future of the continuous disclosure landscape. For more information or to join the debate, please email Hamish.Walton@dentons.com.
You can find a link to the Australian Law Reform Commission (ALRC) discussion paper here.
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