COVID-19: important changes to continuous disclosure provisions

The COVID-19 pandemic has caused widespread market volatility and uncertainty, making life very difficult for many boards trying to comply with Australia's continuous disclosure and misleading and deceptive conduct laws. As we have previously discussed, for many listed entities it is near impossible to accurately predict the financial impact of the constantly changing business environment. Consequently, the economic fallout from COVID-19 has materially heightened the risk of securities class actions based on alleged inadequate disclosure.

The Federal Government is clearly conscious of the risk posed by unmeritorious class actions and, in addition to a range of other measures, on 25 May 2020 made temporary modifications to the Corporations Act 2001 (Cth) (Corporations Act), raising the threshold for breach of civil penalty disclosure provisions to circumstances where information was withheld with knowledge that it would, or recklessness or negligence as to whether it would, have a material effect on the price or value of an entity's securities.

Unfortunately, the changes miss the mark in, at least, two important respects and won't materially alter the risk profile for listed entities trying to provide meaningful forward-looking information, particularly detailed information regarding future operating conditions.

These latest changes, which were designed to relieve directors and officers providing profit guidance from the more onerous aspects of the continuous disclosure rules for the next six months, were effected under the Corporations (Coronavirus Economic Response) Determination (No.1) 2020.

For months now corporate Australia has been trying to make the Federal Government aware of the challenges of providing accurate forward-looking statements and earnings guidance during the time of the COVID-19 pandemic. The problem will only get worse for directors in the coming weeks and months as pressure increases from the market and analysts to provide answers about the financial impact of COVID-19 on their business.

In these circumstances, a practical issue for directors is how to manage their disclosure obligations, in line with ASX guidance. ASX has acknowledged the particular disclosure challenges for listed entities arising from the rapidly evolving and highly uncertain situation. In particular, directors need to assess whether each piece of new information is still a matter of 'supposition' or 'insufficiently definite' and therefore exempt from disclosure.1

It is heartening that the Treasurer has taken steps to reduce the reasons for companies to "...hold back from making forecasts of future earnings or other forward-looking estimates, limiting the amount of information available to investors during this period." Acknowledging the risk of opportunistic class actions, the Treasurer has made it clear that the intended effect of these changes is to "...make it harder to bring such actions against companies and officers during the coronavirus crisis, while allowing the market to continue to stay informed and function effectively."

The announced changes do not, however, fully achieve the Government's stated objective.

Section 674 of the Corporations Act stipulates that where information is price-sensitive, in the sense that a reasonable person would expect it to have a material effect on the company's value or share price (and subject to certain specified listing rule exceptions), a listed entity must disclose such information immediately upon becoming aware of it. The continuous disclosure obligation is only triggered where the information that becomes known to the listed entity is market sensitive information – that is, information that would, or is likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of the securities.2 Section 675 of the Corporations Act provides equivalent disclosure rules that are applicable to other disclosing entities.

The temporary changes operate by modifying ss 674 and 675 so that disclosing entities and their officers are only liable if there has been "knowledge, recklessness or negligence" with respect to updates on price sensitive information to the market. The definitions of 'knowledge' and 'recklessness' are imported from the Criminal Code Act 1995 (Cth) and 'negligence' is a common law concept. The use of these terms essentially amounts to a reinstatement of the law on continuous disclosure prior to 2001.3 The re-introduction of fault elements (that is, the need for a potential claimant to show knowing, reckless or negligent non-disclosure of price sensitive information) means that the plaintiffs will need to establish some level of director fault in order to attract the application of s 674 or 675.

The hope is that creating an extra hurdle for shareholder plaintiffs, through the need to prove that directors were at fault, will function as a disincentive for shareholders to bring unmeritorious 'nuisance' compensation claims. Unfortunately 'negligence' is a quite low standard and only involves showing that the conduct fell short of the standard of care that a reasonable person would exercise in the circumstances.4 This is not far from where the provision was before the Treasurer's determination, with a breach occurring where a reasonable person would expect the relevant information to have a material effect on the price or value of the entity's securities.

It is disappointing that the Government did not also choose to deal with misleading and deceptive conduct as this is a major avenue for liability. In investor class actions it is often alleged that the loss incurred by investor plaintiffs is caused not only by a failure of the issuer to comply with continuous disclosure rules but also by misleading and deceptive conduct engaged in by the issuer.5

Shareholders may be somewhat restricted from bringing actions based on failure to make proper disclosure as a result of the temporary changes. However, they will still be able to bring an action against directors for misleading and deceptive conduct using the general prohibition on false or misleading conduct in relation to a financial product or financial services under s 1041H of the Corporations Act and under a range of other Corporations Act provisions including directors' duties and the requirement that forward-looking statements be made on reasonable grounds.

Guidance Note 8 makes numerous reference to the misleading conduct elements of s 1041H and its connection to continuous disclosure. In Myer6 the claim made was for loss and damage caused by Myer's successfully proven breaches of ss 674 and 1041H, concerning non-disclosure to the ASX of price sensitive information about MYR ED securities and misleading or deceptive conduct. Indeed in that case the Federal Court supported the then terms of ASX Guidance Note 8:

Where an entity has published earnings guidance for the current reporting period and it expects its earnings to differ materially from that guidance, it needs to give careful consideration to its potential exposure under section 1041H for misleading conduct, as well as its responsibilities under Listing Rule 3.1 and section 674.7

The Treasurer's determination is a welcome development. It is in the interests of the market and the wider economy that there is better disclosure. As the SEC recently commented, broad and extensive coordination across employees, firms, investors and governmental officials is critical to successfully emerging from the pandemic. In this context the exchange of forward-looking information is essential to that coordination, however the proposed new rules provide none of the sorts of safe harbours that exist in the US.8

Unfortunately the changes, while a worthwhile initiative, miss the mark and will do very little to discourage speculative securities class actions in relation to these matters.

Footnote

1 ASX does not expect listed entities to announce information under listing rule 3.1 that comprises matters of supposition or that is insufficiently definite to warrant disclosure - See section '5.5 (matters of supposition or that are insufficiently definite to warrant disclosure) in Guidance Note 8.

2 Section 677. A similar but different test to the question that needs to be explored for insider trading prosecutions: see ss 1042A and 1042D.

3 Revised Explanatory Memorandum, Financial Services Reform Bill 2001 [18.11] : see Lumsden, Andrew J., Continuous Disclosure Class Actions – Stemming the Flow (August 29, 2018). Available at SSRN: https://ssrn.com/abstract=3240394 or http://dx.doi.org/10.2139/ssrn.3240394

4 See s 5.5 of the Criminal Code Act 1995 (Cth). See also the decision in Australian Securities and Investments Commission v Vocation Limited (In Liquidation) [2019] FCA 807 and TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Limited [2019] FCA 1747. The Australian position contrasts its international counterparts; the requisite level of wrongdoing in equivalent class actions in the United States requires proof of an intent to deceive, manipulate or defraud to ground a private right of action (Securities Exchange Act 1934 (US) s 10(b)) while UK law requires a dishonest omission or delay (Financial Services and Markets Act 2000 (UK) s 90A).

5 See eg s 1041H(1) which provides that 'a person must not . . . engage in conduct, in relation to a financial product or a financial service, which is misleading or deceptive or is likely to mislead or deceive'. Section 1041I provides that 'a person who suffers loss or damage by conduct of another person that was engaged in contravention of s . . . 1041H . . . may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention ...'. and see Australian Securities and Investments Commission Act 2001 (Cth) s 12DA

6 TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Limited [2019] FCA 1747

7 at paragraph 1272

8 See eg s 27A of the US Securities Act and s 21E of the Exchange Act which allows companies to make speculative statements based on current market trends or research directions without fear of material repercussion, while ensuring that potential investors are informed of the speculative nature of the statements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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