The reforms would make permanent the temporary relief that the Australian government extended to listed issuers in the context of COVID-19, and would make some further changes to cover gaps identified in the temporary measures. The reforms would limit the liability of issuers for civil penalty proceedings in respect of continuous disclosure breaches, or for misleading or deceptive conduct, so that the company and its officers are only liable where they have acted with knowledge, recklessness, or negligence.
The requirement to prove fault in order to establish civil liability for penalties softens an otherwise strict liability regime and will go some way to alleviating the concerns that had been raised in the Australian market about the scope of liability.
The reforms raise the question of whether New Zealand will follow Australia's lead, not least because some of the stricter aspects of the New Zealand continuous disclosure regime had been implemented to harmonise the laws between the two countries.
This note considers the proposed Australian reforms and the issues that New Zealand might consider when deciding whether to follow suit.
2020: relief in Australia, no change in New Zealand
In late May 2020, the Australian Government temporarily changed the continuous disclosure rules to ease the compliance burden.
Those changes were made due to the uncertainty for forward-looking guidance in the context of COVID‑19. Under the temporary changes, which were originally to last for six months but extended until March 2021, companies and officers were only liable in civil penalty proceedings where they have acted with knowledge, recklessness or negligence in relation to their continuous disclosure obligations.
The FMA decided not to follow Australia, concluding instead that New Zealand's current legislative settings, and the manner in which they are applied, remain appropriate for the COVID-19 environment.2
Proposed Australian reforms
The proposed Australian reforms follows recommendations made by the Australian Parliamentary Joint Committee on Corporations and Financial Services just before Christmas. They reflect concerns that:
- There has been a proliferation of shareholders class actions, due to the liability settings unduly exposing issuers and directors to the risk of class actions.
- There are concerns that some class actions are driven by opportunism rather than merit.
- The cumulative effect of the liability settings and class action behaviour has been to drive up directors and officers insurance costs.
The proposed reform would also better align Australia's settings with those in the United States and the United Kingdom.
Under the proposed reforms, an entity would have only committed a civil contravention if it does not release information when it knows, or is reckless or negligent with respect to whether, information is price sensitive. However, ASIC will continue to be able to issue infringement notices regardless of the state of mind of the entity. The settings for criminal contraventions remain unchanged.
The proposed reforms would also ensure that entities and officers would not be liable for “misleading and deceptive conduct" in relation to continuous disclosure unless the same mental element has been proven. This differs from the temporary measure that was previously put in place due to the impact of COVID-19 and ensures that entities and officers have protection for both innocent acts and omissions in relation to their continuous disclosure obligations. This follows some criticism that the temporary measure did not provide adequate protection for entities and officers when they did make statements.
Reconsideration in New Zealand
In our view, the proposed Australian reforms should prompt reconsideration of New Zealand's continuous disclosure rules.
From our perspective, the settings for the continuous disclosure rules are currently too tough on issuers. The rules do not require intentionality, recklessness, or even negligence.
We also observe that the change to the NZX Listing Rules to impose a constructive knowledge standard (i.e., requiring issuers to disclose material information that directors or senior managers ought reasonably to have known, but did not in fact know) were, as we understand it, influenced by a desire to harmonise New Zealand's settings with those in Australia.
Bell Gully's submissions at the time opposed that change and highlighted our concern that the Australian rules had created undue risk for issuers in Australia – and that similar issues might arise in New Zealand given the growing number of class actions here.3
With Australia now looking to turn its back on no fault civil liability, it may now be time to revisit the continuous disclosure laws in New Zealand to ensure that they are fit for purpose, appropriate compared to other jurisdictions, and that they strike the right balance between ensuring a fairly informed market and fairness to issuers and their directors and officers.
If you have any questions about the matters raised in this article, please get in touch with the contacts listed, or your usual Bell Gully adviser.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.