Government retains continuous disclosure reforms for private litigation

The Australian Government has accepted recommendations of an independent statutory review to retain a fault element for establishing breaches of Australia’s continuous disclosure laws in private litigation, a decision strongly supported by the AICD. The fault element will be removed for the purposes of ASIC public enforcement. We take a look at what directors need to know.

On 12 August 2024, the Federal Government provided its response to an independent statutory review into Australia’s continuous disclosure regime led by Dr Kevin Lewis (former ASX Chief Compliance Officer) and tabled in Parliament in May.

The review examined the impact of permanent changes that were introduced in 2021 to the Corporations Act 2001 (Cth) to re-introduce a fault element for breaches of continuous disclosure laws so that companies and officers would only be liable for civil penalties where they have acted with “knowledge, recklessness or negligence”.

Prior to the reforms, breaches of continuous disclosure provisions were assessed on a strict liability basis without even requiring negligence by the company.

The AICD strongly advocated for the reforms and welcomed their introduction in 2021, which brought Australia more into line with major overseas markets.

We take a look at the key review findings accepted by government and the AICD’s views.

Government’s response to review findings

The review’s overall finding was that not enough time had elapsed to comprehensively assess the impact the changes made to the Corporations Act in 2021, but concluded that there is no evidence of an urgent or compelling need to repeal the reforms.

The review made two central recommendations:

• Private continuous disclosure litigation: On the main issue for directors, the review found the reforms have had little (if any) impact on the number and type of shareholder class actions being brought in Australia. The review recommended that the fault requirement for a private litigants (to prove that the disclosing entity and officers acted “knowingly, recklessly or negligently”) be retained for now and revisited if evidence emerges that the reforms are having a negative effect on disclosure standards; and

• ASIC enforcement: The review found that the reforms have had a negative impact on ASIC enforcement of breaches of continuous disclosure laws. The review recommended removing the fault requirement for civil actions brought by ASIC. Going forward, this would mean that ASIC will be able to impose penalties without needing to establish fault on the part of disclosing entities and officers.

The government has accepted these recommendations, as well as a further review recommendation to amend the Corporations Act to expressly provide how ‘state of mind’ can be attributed to the entity within the continuous disclosure regime.

Two further recommendations made by the review have been ‘noted’ by the government and will be considered when the opportunity arises for a broader review of the continuous disclosure regime.

AICD views

The AICD welcomes the review’s findings and government’s response. At the time, the reforms represented a modest change that have since brought better balance to disclosure laws involving complex and time sensitive judgment calls. While the amendments have only been in effect for a limited time, there are indicators these changes have been a positive step - including stabilisation of a previously under-stress D&O insurance market and no evidence of a decline in the quality of entities’ disclosures.

In the AICD’s view, the retention of a fault element is entirely appropriate, ensuring that directors and companies should only be liable in private proceedings for breaches of continuous disclosure law where they are found to have acted with ‘knowledge, recklessness or negligence’.

The challenges facing Australian companies have only been amplified since the reforms took effect in 2021. The AICD’s submission to the review in 2023 highlighted the evolving disclosure landscape with increasing market demand for more complex, often forward-looking information and heightened liability risks for directors (particularly via shareholder class actions). For example:

• 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; 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 as events unfold. (See recent ASX Guidance Note 8 update which now includes a cyber/data breach scenario).

The AICD strongly encouraged the review to consider this dynamic environment in its consideration of whether the Reforms be retained.

The AICD was pleased to see the government accept the review’s recommendation to consider the implications of retaining or removing the fault element from continuous disclosure laws while drafting the legislation to implement Australia’s mandatory climate reporting regime.

In parallel, the government has proposed that Australia’s climate reporting regime includes a three-year regulator-only enforcement period, meaning only ASIC will be able to bring proceedings in respect of certain disclosures (e.g. scope 3, scenario analysis and transition planning disclosures). This is a critical mechanism to incentivise fulsome disclosure at a time when a generational change to reporting is bedded down.