RESETTING CONTINUOUS DISCLOSURE OBLIGATIONS – THE TEMPORARY MADE PERMANENT
Going forward a listed entity or its officer will only be liable for continuous disclosure obligation civil penalties where there has been “knowledge, recklessness or negligence”. What began as temporary relief during COVID-19 has been made permanent.
Before, the pandemic the Corporations Act demanded that entities and officers of public
companies notify the ASX of information that a reasonable person would expect, if it were generally available, to have a material effect on the share price. Failure to do so meant action by ASIC with the threat of civil penalties or the possibility of a shareholder class action - both with significant repercussions for your professional lines insurance policies. In May 2020, a temporary reform replaced the objective ‘reasonable person’ test with a mental fault element or intention - entities or officers acting with “knowledge, recklessness or negligence”. The bar was lowered – the reasoning being that it’s hard to get forward thinking market guidance right in a global pandemic.
The pre-COVID-19 regime for continuous disclosure compliance was designed to enforce market integrity and investor confidence. The flip side was that officers were challenged to make determinations on disclosure matters, sometimes on the run, giving rise to class actions with considerable pressure on the D&O market. Pre-pandemic an element of fault was not needed and a plaintiff only had to prove that there had been a failure to disclose material information. A class action, under the old regime, was easier to pursue.
Now, entities and officers are not liable for misleading and deceptive conduct where
continuous disclosure obligations have been contravened unless the mental fault element is proven. (1) As of 14 August, companies will only be liable for ASIC imposed civil penalties or shareholder actions where there was “knowledge, recklessness or negligence” involved (there is also corresponding accessorial liability if an officer is involved in the listed entity’s
contravention). The obligation to comply with the principles of disclosure found in the relevant Listing Rule and Corporations Act provision remain. (2) Officers must still disclose information that a reasonable person would expect to have a material effect on the price or value of securities but there is now relief for the entity or officer by seeking to limit the circumstances when such liability arises. The recklessness or negligence is assessed in light of the circumstances at the time the company became aware of the situation. That
means you should implement, follow and document good process as evidence that there has been no recklessness or negligence. These recent reforms don’t alter the disclosure obligations for a criminal prosecution or the regulator’s infringement notices (with penalties up to $100,000).
In brief: the reform might dampen opportunistic shareholder class actions and eventually
relieve pressure on the D&O market and premiums (the new regime will be reviewed in two years). The reform is not a green light for less diligence in continuously disclosing material information. With the new emphasis on mental intention, it is vital to keep accurate records of decisions around material information. Now is a good time to revisit continuous disclosure in-house policies and procedures.
Sources
Treasury Laws Amendment (2021 Measures No. 1) Act 2021
ASX Listing Rule 3.1 and section 674(2) Corporations Act 2001
