Repercussions of the sunset clause

The future of continuous disclosure law amendments could well depend on a contentious sunset clause written into the legislation, writes Dr Robert Austin AM.

Readers will be aware that the ASX Listing Rules require a listed entity to make immediate disclosure of material price-sensitive information, subject to some important exceptions. In 1994, the parliament amended the Corporations Act 2001 (Cth) to reinforce the continuous disclosure listing rules by making non-compliance an offence, and by exposing the listed entity and persons involved in the contravention (including directors and officers) to civil liability for damages.

Subsequently, class actions became prevalent. For example, today, if a listed entity makes a market announcement that leads to collapse of the entity’s share price, it is very likely that a shareholder class action for damages will be initiated against the listed entity and perhaps also against its directors and other parties involved. The grounds for the shareholders’ claim will usually include the legislative provisions about failure to comply with the continuous disclosure requirements of the listing rules and the Corporations Act.

Until 2021, the legislation applied when the listing rules required disclosure of material information that was not generally available if a “reasonable person” would expect the information to have a material effect on the price or value of the listed entity’s securities when made generally available. Lawyers refer to the “reasonable person” test as an objective test that invites the court to consider the attitude of a hypothetical reasonable person, rather than what the directors and officers of the listed entity actually believed at the time of the contravention.

A consequence of the 1994 legislation was that a listed entity that failed to disclose information to the ASX might be held to have committed a criminal offence if a reasonable person would expect the information to have a material effect on price or value. Its directors and officers were also at risk if they were involved in the contravention, although they had a defence if they could show they took all reasonable steps to ensure compliance and believed on reasonable grounds that the listed entity was complying.

Additionally, under the 1994 legislation and subsequent amendments to the Corporations Act, listed entities came to be exposed to civil penalties for contravention of the disclosure requirements, including an action for damages that could be brought by anyone who suffered damage in relation to a contravening of the legislative disclosure requirement. This was a readily available foundation for a class action.

Responding to concerns raised by the AICD and others, the parliament enacted amendments to the continuous disclosure legislation in the Treasury Laws Amendment (2021 Measures No 1) Act 2021 (Cth). The main amendments were:

• While a contravening listed entity would still commit an offence if the “reasonable person” test applied, civil penalty proceedings, including proceedings for damages, were no longer available under the “reasonable person” test.
• However, a listed entity could be subject to civil liability (including a compensation order) if a new subjective fault requirement applied, namely that the entity knew or was reckless or negligent with respect to whether the information would have a material effect on the price or value of the securities.
• Liability for directors and officers and others involved in a contravention of the disclosure requirement would depend on whether the subjective fault requirement of knowledge or recklessness or negligence was satisfied, rather than the objective “reasonable person” requirement.
  

These amendments were recommended in December 2020 in a report by the majority of the Parliamentary Joint Committee on Corporations and Financial Services, on the grounds that:

• Shareholder class actions were having a significant financial and compliance impact on listed entities and their officers.
• The Corporations Act should be changed to ensure the state of mind of an entity and its officers would be taken into account in determining whether there had been a continuous disclosure obligation breach.

But the committee’s recommendation was controversial. It was supported by Liberal MPs, but there was considerable opposition from the then minority Labor MPs.

The 2021 amendments are important changes, but it is not easy to determine whether they have, in fact, had any significant practical effect on the conduct of directors and officers of listed entities. In their publication The Review: Class Actions in Australia 2021/2022, King & Wood Mallesons reported that filings of shareholder class actions against listed entities reached their peak of 22 in 2017–18, dropping to 17 in 2018–19, 13 in 2019–20 and eight in 2020–21. In 2021–22, filings increased to 13.

These figures don’t provide any firm basis for conclusions about increases or decreases in shareholder class actions after the 2021 amendments, although they tend to undermine the argument that the 2021 amendments have substantially discouraged such litigation. An article in The Australian Financial Review (5 December 2022) reported a corporate lawyer’s observation that the 2021 amendments have not borne out critics’ fears that shareholders would be disadvantaged, although she added that, “it’s probably too early to say there’s been any trend”.

Likewise, it is probably too early to assess whether the 2021 amendments have affected the availability and cost of directors’ and officers’ insurance. However, whatever the practical significance of the 2019 amendments might be, the overriding question ought to be whether the amendments make the continuous disclosure law more fair. It is plausible to argue an objective “reasonable person” test is unfair, given the consequences of class action litigation for breach of the continuous disclosure law may include:

• Potentially substantial damages to be paid by the listed entity
• Substantial disruption for directors and officers in managing the entity’s defence to the litigation
• The potential destruction of the careers of individual directors and officers.

Fairness points towards making those consequences depend upon fault of some kind, as the 2021 amendments do.

After contentious debate about whether the 2021 amendments should be enacted, the parliament introduced a “sunset clause” for the 2021 amendments. The amendments commenced on 14 August 2021. The 2021 legislation requires the government to cause a review of the operation of the amendments to be conducted by an independent expert. The expert’s review, which must be completed by 14 February 2024, may make recommendations to the Commonwealth government. Within three months after the report is first tabled in the parliament, the government must publish a statement responding to the expert’s recommendations.

Oddly, while the wording of these provisions is expressed in mandatory language, there is a “sunset clause”, according to which if the government fails to take one or more of the steps prescribed by the legislation, the continuous disclosure provisions will thereafter apply as if the 2021 amendments had not been made. On a literal construction, this would appear to enable the present Labor government to cause the 2021 amendments to disappear, simply by doing nothing about the appointment of an independent expert over the period 14 August 2023 to 14 February 2024. Perhaps that will prove to be a tempting strategy for Labor. But many may think it would be a pity if a fairer law disappears through government inaction.

Dr Robert Austin AM is a barrister at University Chambers, Sydney, specialising in corporate/securities market law, banking/ finance, equity and trusts.

This article first appeared under the headline 'Riding Into The Sunset' in the May 2023 issue of Company Director magazine.