The government has rightly eased some demands of the continuous disclosure rules. A more balanced system is needed once the virus emergency passes.
What will the Australian economy look like in three or six months? What will be the consequences when we reopen our borders domestically and internationally? Should a company exporting to Asia plan for a long-term downturn or assume a resumption of stability and a revenue bounce back? Should a company operating in the tourism sector or a supplier expect that international travellers will return late in 2020 or in 2022?
There are no precedents to guide us, but these are precisely the kinds of questions businesses must answer to keep trading. Most of those assessments are held tightly within a company: they are scenarios fuelled by layers of assumptions and dependencies, heavily influenced by external events.
However, when scenarios and assumptions transform into information that might materially affect a company's share price, it is integral to a functioning capital market that it is disclosed.
As we grapple with COVID-19, the disclosure challenges are magnified. This challenge was acknowledged by the ASX, which two months ago encouraged entities to withdraw their earnings guidance.
The ASX's initiative was an important short-term solution, but rebuilding the economy will be done by gradually restoring consumer and business confidence over the long term, in an environment that encourages investment and risk-taking amid unprecedented uncertainty.
Keeping investors informed of a company's intentions is an important step in that process, but the unpredictability in our environment cannot be ignored.
Facing into this challenge, the Treasurer has introduced temporary, modest changes to continuous disclosure laws.
Contrary to some commentary that followed the announcement, companies must continue to disclose information that will have a material effect on the price or value of their shares. The reckless or negligent director, and the individual who knew that disclosing information would affect the share price and said nothing, is still on the hook and they should be.
The ASX has already taken prompt action to pull misleading announcements from the market. The small number of individuals who try to game the system, whether in the normal course of events or in capital raisings, will still find themselves in court.
Surely it must not be a model where the big winners are litigation funders and class action law firms.
This limited change is not a significant watering down of investor protections. Core investor protections remain untouched by the Treasurer's action, as do fundamental directors' duties.
ASIC retains its essential role in ensuring market integrity. It remains open to ASIC to pursue a more activist approach by choosing to bring more civil and criminal charges in the public interest, rather than leaving this to plaintiff lawyers and funders driven by commercial incentives.
Acknowledging the challenges with our current system, the Australian Law Reform Commission last year recommended the government review the legal and economic impact and effects of continuous disclosure obligations.
It is common knowledge in the global litigation funding industry that Australia is the second most attractive jurisdiction for shareholder class action litigation. We have a growth industry in class action law firms and litigation funders drawn by the prospect of returns of nearly 400 per cent.
If there is an outstanding feature in our continuous disclosure regime, it is that Australian directors operate without the common-sense protections available to their peers in capital markets such as the US, UK and Canada.
The Australian Institute of Company Directors and the director community had sought more protections in this environment. We had called for a targeted moratorium on all securities class actions tied to forward-looking disclosures during the COVID-19 period.
We believe the government’s temporary reforms are a step in the right direction. As we seek to re-set the economy in a post-COVID-19 world, we should be asking: what is the right balance in our regulatory environment?
To be clear, we continue to support access to justice through class actions in areas such as consumer protection, product liability, large-scale negligence and claims by employees or franchisees.
In determining the settings that ensure market integrity, we should target a system that encourages informed investment, and boards and management should focus on tackling the uncertainties inherent in innovation and risk-taking while protecting investors from a small minority of "bad actors" and safeguarding honest and diligent directors from opportunistic law suits.
Surely it must not be a model where the big winners are litigation funders and class action law firms. As the government looks to refresh policy settings to drive economic recovery, the laws that underpin our listed markets and the enforcement of those laws are a good place to start.
This article originally appeared in The Australian Financial Review on 15 June.
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