In mid-February this year, the Australian Federal Government introduced a Bill1 which would make permanent the temporary changes to Australia's continuous disclosure laws2 brought in with the aim of giving issuers and their directors confidence to continue to issue market guidance, despite the uncertainty caused by the COVID-19 pandemic.
In general terms, the changes mean that issuers and their directors are not liable for failing to disclose material information to the market unless they have acted with knowledge, recklessness or negligence. The rationale is to insulate issuers and their directors from facing the "undue" risk of the sorts of shareholder class actions which have become prevalent in the Australian securities landscape in recent times, whilst continuing to ensure the market is kept appropriately informed.
The proposed reform has been lauded by the Business Council of Australia and others who view the existing laws as too onerous, and by those who blame the rise of class actions for driving up the price of D&O insurance. However, both the Australian Securities and Investment Commission and the Australian Competition and Consumer Commission made submissions in support of the pre-COVID laws. Several investor organisations have also expressed the view that the changes will ultimately be to the detriment of shareholders.
In New Zealand, the Financial Markets Authority saw no need last year to follow Australia's temporary changes, expressing the view that New Zealand's current legislative settings remained appropriate for the COVID-19 environment.3 The regulator has given no indication that it intends to revisit that assessment in light of Australia's proposal to make it changes permanent.
While some commentators have called for consideration of similar reforms here, we do not view the changes to the Australian regime as substantially decreasing the risk of liability for a breach of continuous disclosure laws, particularly for directors. We therefore see no compelling need for New Zealand to follow in Australia's footsteps.
We also question whether the changes in Australia will in fact bring about the desired "cooling" effect on class actions, given the complexity and nuance involved in determining the existence of knowledge, recklessness or negligence – and the reality that evidence of such conduct often sits with the defendant and can only be obtained by claimants through discovery (or cross-examination).
Australian reforms
Like New Zealand, Australia's continuous disclosure regime requires issuers to disclose information to the market promptly (subject to certain exceptions) where a reasonable person would expect that information, if it were generally available, to have a material effect on the price or value of that issuer's securities. Issuers who fail to comply can face both civil and criminal liability. Directors and other individuals can also face civil liability where they are "involved" in a contravention (discussed further below).
The temporary reform brought in last year, and the approach now proposed under the Bill, does not seek to change the threshold for disclosure. Issuers must continue to disclose information to the market in accordance with this test, and non-compliance can be the subject of an infringement notice.
The changes instead limit the circumstances in which an issuer who has contravened the disclosure requirements, or a director who has been "involved" in that contravention, can be liable for civil pecuniary penalties and compensation orders. Instead of it being sufficient to show that a reasonable person would have expected the information to be price sensitive, claimants will need to prove that the issuer knew, or was reckless or negligent as to whether, the information was price sensitive.
But is it really that different?
Australia's reforms have been described as a shift from a regime of strict liability to one that requires proof of mental "fault".
While it is true that the new approach emphasises the mental fault element for the purposes of imposing civil liability, this is too simplistic an analysis. Firstly, although the pre-pandemic regime was generally understood to be one of strict liability, the matter was never quite so simple. Questions of knowledge inevitably arose, for example, in relation to the issuer's "awareness" of information of significance to the market. The test also incorporated consideration of what a "reasonable person" would expect by way of price sensitivity.
Secondly, the reforms propose that negligence is sufficient to satisfy the mental fault element. This means that the question of fault encompass not only matters that were actually known to the issuer, but matters that should have been known to or appreciated by the issuer. While it will remain to be seen how the Australian courts approach the negligence threshold under the reforms, there is little apparent daylight between information that:
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a reasonable person would expect to be price sensitive (the existing test); and
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a reasonable person in the position of the issuer would appreciate to be price sensitive (one possible formulation of the negligence test).
These points were raised in submissions to the Parliamentary Joint Committee;4 however the negligence threshold has been retained in the current formulation of the Bill.
Application to directors
The reforms have even less of an impact for directors and other individuals facing potential liability.
Under both the pre-pandemic and post-reform regimes, directors can only be personally liable for the issuer's continuous disclosure contravention if the director has been "involved" in that contravention. Involvement liability requires proof that the director:
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actively participated in the contravention (e.g. was involved in making the decision not to disclose to the market, or took some other step that was instrumental to the contravention); and
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at the time of that participation, had actual knowledge of the essential matters comprising the contravention.
For directors, therefore, the difference in the two regimes comes down to whether it can be proved that the director knew that a reasonable person would expect the information to be price sensitive; or whether the director knew that a reasonable person in the position of the issuer would appreciate that the information was price sensitive. In short, the question under both will be: did the director appreciate that the information was price sensitive and should be disclosed to the market (and, appreciating this, was the director in some way instrumental in bringing about the contravention)? If the answer to that question is "no", then directors should not be liable under either regime.
Finally, a number of the Australian cases have pursued directors, in the alternative to "involvement" in the issuer's contravention, for breaches of their statutory duty of care by causing or allowing the issuer to contravene its continuous disclosure obligations. These actions focus less on the director's knowledge in relation to a specific contravention and more on the director's failure to take care and/or implement appropriate systems and processes to prevent the breach. The reforms do not explicitly alter this statutory duty of care.
How does New Zealand compare?
New Zealand's continuous disclosure regime largely mirrors Australia's pre-pandemic approach. An issuer can be civilly liable for failing to disclose price sensitive information to the NZX. Directors (and other individuals) can only be personally liable if they are "involved" in the contravention by the issuer. Although there have as yet been no cases in this context determined under New Zealand's "involvement" regime, it is expected that the approach will closely follow the established body of judicial authority in Australia.
Given these similarities – and the view expressed above that Australia's reforms do not materially change the position for issuers and their directors – it is not, in our view, surprising that the Financial Markets Authority sees no need for similar reform in New Zealand.
As always, it will remain important for listed issuers to have (and monitor compliance with) appropriate processes and policies to determine whether it is aware of material price sensitive information, and whether that information should be disclosed. These processes should also include adequate mechanisms to ensure that the information released to the market is accurate and not misleading.
This article is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice. If you require any advice or further information on the subject matter of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact one of the partners listed below.