Background

Subject to limited exceptions, Australia’s continuous disclosure regime requires a listed entity to disclose information that is not generally available to the market and is information that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of the securities of that entity. If not, the entity would contravene its continuous disclosure obligations and a person involved in such contraventions may also be held liable. The relevant test is an objective one and the views of the company or its officers are not necessarily decisive – in broad terms, a contravention would occur where there is a failure to disclose material information to the market, which ought to have been disclosed in the eyes of the reasonable person, irrespective of whether there was any intent or recklessness on the entity’s part. This is a ‘no fault’ or ‘strict liability’ regime.

Temporary relaxation of Australia’s continuous disclosure laws

In May 2020, the Federal Treasurer announced the temporary relaxation of Australia’s continuous disclosure laws. His media release at the time relevantly stated that ‘The changes…will make it harder to bring [opportunistic class] actions against companies and officers’ during the Coronavirus crisis and while allowing the market to continue to stay informed and function effectively.’[1] 

The main change related to the modification of the materiality standard from an objective one to a new test based on the knowledge, recklessness or negligence on the entity’s part. The latter contemplated a fault based element. While it could be said that the ‘negligence’ component of the temporary changes represented no real departure from the previous objective test in a practical sense, those changes were nevertheless widely applauded by the business community and the insurance industry but heavily criticised by the plaintiff law firms and the litigation funding industry.

In any event, a major shortcoming with the temporary changes was that there was no corresponding relaxation to the misleading and deceptive conduct laws. Such laws are commonly pleaded in tandem with alleged continuous disclosure contraventions as part of securities class actions. In other words, the temporary changes only solved half of the problem.

Momentum for permanent reform

In December 2020, a Federal Parliamentary Inquiry published its report into the Litigation Funding and the Regulation of the Class Action Industry. One of the majority members’ recommendations was to recommend the Australian Government permanently legislate changes to the continuous disclosure laws introduced in May 2020.

In February 2021, the Federal Government introduced the Treasury Laws Amendment (2021 Measures No. 1) Bill (Cth), which relevantly proposed:

• to make the temporary changes to the continuous disclosure laws permanent; and
• to ‘plug the loophole’ by making corresponding changes to the misleading and deceptive conduct laws;

relating to civil breaches for market disclosure failures.

Earlier this week, the Federal Government secured passage of the Bill through both Houses of Parliament. This was a little unexpected given the vocal resistance from the Labor opposition, a hostile cross bench, the litigation funding industry and the plaintiff law firms. However, the final passage of the Bill was approved with cross bench support, who insisted upon a review of the operation of the new laws after two years.

Conclusion

The practical consequence of the permanent reforms is that the bar should be raised for plaintiffs and litigation funders to bring and pursue future securities class actions. This may lead to fewer Side C claims being brought and/or potentially more such claims being defended to trial. It should also provide greater sustainability for the availability and cost of D&O insurance in Australia as well as aligning Australia’s continuous disclosure laws with those of the UK and the US.

While the permanent reforms are overwhelmingly positive for the insurance market, it remains to be seen how plaintiffs and litigation funders respond and formulate future securities class actions with a view to circumventing the operation of those reforms.

[1] https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/temporary-changes-continuous-disclosure-provisions