The AICD is acutely aware of the challenges presented by Australia’s strict market disclosure regime in the COVID-19 environment – which is characterised by extreme market volatility and ongoing uncertainty – and is focused on formulating a targeted solution.
Given the uncertainty facing companies and the broader economy, we understand that it is particularly difficult to provide earnings guidance and general forward-looking information about company performance. This brings with it a materially heightened risk of opportunistic securities class action litigation that may be launched with the benefit of hindsight. As we have highlighted for some time, Australia’s strict disclosure laws, combined with the ease of bringing class actions, makes our market fertile ground for litigation funders (see here).
The AICD proposal
The AICD’s targeted solution is to modify the operation of the Corporations Act through the Treasurer’s new COVID-19 power to provide that only ASIC can take action against listed entities or their directors or officers in relation to earnings guidance or forward looking statements about company performance made in the context of the COVID-19 pandemic. An overview of our proposal can be accessed here.
Implementing the AICD proposal would reflect a deliberate policy choice to reduce the risk of opportunistic litigation at a very sensitive time while balancing the need for accountability and redress. It is important to note that we are not suggesting that legal obligations to comply with continuous disclosure and misleading and deceptive conduct provisions be switched off. Rather, it would be left to ASIC and ASX to enforce the laws as they see fit. ASIC has acknowledged the difficult judgment calls that can be involved in compliance with disclosure obligations, and will consider the regulatory benefits and public interest in bringing a case. We also know that ASX has already taken action to clamp down on entities wishing to make dubious disclosures in the COVID-19 impacted market.
The AICD proposal extends to forward-looking disclosures only. Securities class actions could still be brought in relation to breaches of continuous disclosure obligations or misleading or deceptive conduct connected to any materially price sensitive information that is not forward looking (eg, in relation to debt covenants, the loss of a material contract, or material changes to organisations’ workforces).
Encouraging good faith disclosures
Importantly, a key policy objective is to encourage good faith disclosures made on reasonable grounds. Given the inherently uncertain nature of the current crisis, we believe there is a risk of a long-term information vacuum for investors if appropriate protections are not put in place. While the ASX guidance encouraging entities to be cautious with COVID-19 related disclosures clarifies its position, it is not a comprehensive solution, nor does it represent the views of funders and lawyers who may wish to allege that disclosures should have been made, notwithstanding the prevailing uncertainty.
Approach in the United States
Notably, the U.S. Securities and Exchange Commission (SEC) has taken a different tack, in recognising that whilst it is extremely challenging to produce forward-looking disclosures in the current environment, this type of information is more important than ever in order to give investors and the public a heightened level of confidence and understanding. A recent SEC statement (accessible here) emphasises that high quality disclosure will not only provide benefits to investors and companies, it also will enhance valuable communication and coordination across the economy—including between the public and private sectors.
The SEC has also encouraged companies to avail themselves of the safe-harbors already available in the United States for such forward-looking statements and noted that they would not expect good faith attempts to provide appropriately framed forward-looking information to be second guessed by the SEC. This is the outcome we need to get to in Australia.
We are continuing to engage closely with government and other stakeholders and will keep members updated. For legal commentary on our proposal, see here.
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