On 1 December 2023, the AICD made a submission to the review of changes made to Australia's continuous disclosure laws made by Treasury Laws Amendment (2021 Measures No. 1) Act 2021 (Review).
The AICD strongly supported the permanent changes to Australia's continuous disclosure regime in 2021 which re-introduced a fault element into the continuous disclosure provisions and misleading and deceptive conduct provisions. The 2021 reforms represent a modest change that have brought better balance to the disclosure laws involving complex, time sensitive judgment calls and should be retained.
Entities, directors and officers who are reckless, negligent, or knowingly fail to disclose will rightly be subject to the full force of the law. However, a strict liability threshold without regard to the state of mind or level of care of an entity or its directors is not appropriate in light of the challenges faced by entities in complying with their continuous disclosure obligations. In the AICD's view, such challenges have only been amplified since 2021, given the complexities of disclosures in the emergent areas of cyber security incidents and increasingly complex climate reporting.
Key points in the AICD's submission were:
- The 2021 reforms have brought Australia’s continuous disclosure regime closer into line with major overseas markets. However, Australia’s disclosure laws remain stricter, in a number of material respects compared with other jurisdictions:
- The threshold for liability in respect of a breach of continuous disclosure laws remain lower in Australian than in leading capital markets;
- There is no equivalent ‘safe harbour’ in respect of forward-looking statements to the market as in other major jurisdictions; and
- The interaction between Australia’s strict disclosure laws and its facilitative class action environment means that Australian entities and directors are far more exposed to liability risks than comparable overseas regimes.
- Analysis indicates that securities class actions continue to be brought under the 2021 reforms, with claims remaining relatively constant relative to the pre-2021 Amendments period.
- The 2021 reforms have not hindered ASIC’s enforcement capabilities in respect of continuous disclosure breaches. ASIC’s civil actions have increased since the 2021 reforms took effect, and it remains open for the corporate regulator to issue infringement notices on a ‘no fault’ basis. Legal analysis from HSF also confirms that ASIC is not disadvantaged in bringing enforcement actions compared to regulators in major overseas markets.
- The 2021 reforms have contributed, amongst other factors, to a stabilisation of the previously under-stress D&O insurance market, with evidence of decreased premiums and re-entry of global insurers to the Australian market. Insurance industry participants have cautioned however that if the 2021 reforms were to be repealed, there would likely be a negative impact on the D&O market where a ‘no fault’ threshold regime would change the risk profile for securities class actions in Australia.
- There is no evidence that the quality or nature of disclosures has declined since the 2021 reforms took effect. The substance of continuous disclosure obligations remains unchanged - the reforms have not in any way modified what needs to be disclosed, or by when. Negligence is a low bar and consistent feedback from directors and legal experts is that the approach to making disclosures is consistent, with the same level of rigour applied to these important decisions as prior to the 2021 reforms.
- Since the 2021 reforms took effect, the disclosure landscape has evolved. There is increasing market demand for more complex, often forward-looking information, whether it be from investors or regulators:
- Australia’s forthcoming climate reporting regime will introduce new, complex challenges for the provision of forward-looking information. For example, disclosure of decarbonisation targets, transition planning and scenario analysis will be based on inherently uncertain inputs and assumptions due to data availability and quality challenges, while receiving only limited assurance (at least initially). This will present material liability risks to companies and directors where these disclosures are not corrected in a timely manner; and
- The increasing prevalence of cyber security and data breach incidents are also currently presenting novel challenges for boards in making timely and accurate disclosures to the market, based on limited information.
Without a fault threshold in Australia’s disclosure laws, there is a heightened risk of opportunistic class actions. It is critical that the Review consider this dynamic environment in its consideration of whether the 2021 reforms should be retained.
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