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Clifford Chance

Clifford Chance

Regulatory Investigations and Financial Crime Insights

Caution! Temporary changes to Australian continuous disclosure regime likely to be ineffective to reduce class-action risk

The temporary changes, which are in effect for six months from 26 May 2020, ignore a number of provisions commonly invoked by class action plaintiffs to pursue damages claims in relation to alleged continuous disclosure failings.

On 25 May 2020, the Australian Government announced temporary amendments to the continuous disclosure regime in Chapter 6CA of the Corporations Act 2001 (Cth) (Corporations Act) to enable companies and their officers to "more confidently provide guidance to the market during the Coronavirus crisis".

The amendments have been introduced by way of a legislative instrument—the Corporations (Coronavirus Economic Response) Determination (No. 2) 2020 (Cth) (Instrument)—made by the Australian Treasurer, the Hon. Josh Frydenberg MP, pursuant to his power under the new s 1362A of the Corporations Act, to make temporary legislative instruments to modify the operation of the Corporations Act in order to mitigate the impact of the COVID-19 crisis.

The announcement was accompanied by a media release (available here) from the Treasurer, explaining that:

  • "the impact of the Coronavirus crisis and the uncertainty it continues to generate" had made it "considerably more difficult for companies to release reliable forward-looking guidance to the market";
  • "the heightened level of uncertainty around companies' future prospects as a result of the [COVID-19] crisis also exposes companies to the threat of opportunistic class actions for allegedly falling foul of their continuous disclosure obligations if their forecasts are found to be inaccurate"; and
  • the temporary changes were designed "to make it harder to bring such actions against companies and officers' (sic) during the Coronavirus crisis and while allowing the market to continue to stay informed and function effectively".

The Instrument seeks to achieve this purpose by amending sections 674, 675 and 677 of the Corporations Act, insofar as those sections operate as civil penalty provisions, such that an entity will only be found to have contravened those civil penalty provisions if the entity knew or was reckless or negligent with respect to whether the information in question would, if it were generally available, have a material effect on the price or value of the entity's ED (short for "enhanced disclosure") securities. This knowledge/recklessness/negligence requirement replaces the usual regime's "reasonable person" test. Under that test, the requirement to disclose depends not on whether the entity knows or is reckless or negligent about the price sensitivity of the information in question, but whether a reasonable person would expect the information in question, if it were generally available, to have a material effect on price or value.

This would be welcome relief for corporates and their directors and officers, if only it were effective.

Unfortunately, the Instrument only purports to modify sections 674 and 675 insofar as they operate as civil penalty provisions. While that may be effective to set the bar higher for class action plaintiffs to bring damages claims under section 1317HA of the Corporations Act (insofar as that section operates to impose liability for damages for contravention of those civil penalty provisions), it will have no bearing on other provisions in the Corporations Act which can be invoked to claim damages or compensation in connection with alleged continuous disclosure failings and which do not depend on a finding of contravention of a civil penalty provision.

In particular, sections 1041H and 1041I (which together impose liability for loss or damage suffered as a consequence of engaging in conduct, in relation to a financial product or a financial service, that is misleading or deceptive, or likely to mislead or deceive) are left utterly undisturbed by the Instrument.

Further, paragraph 9 of the Instrument expressly states, for the avoidance of doubt, that it does not affect the operation of sections 674 and 675 as offence provisions. Presumably this qualification was deemed necessary so as not to disturb the operation of sections 678 and 1308A of the Corporations Act, which apply the general principles of criminal responsibility in Chapter 2 of the Criminal Code to all offences against the Corporations Act, including in respect of corporate criminal responsibility. But paragraph 9 of the Instrument may have had an unintended consequence, namely to preserve the operation of section 1325 of the Corporations Act, insofar as it may operate to permit a Court to make a compensation order in relation to a contravention of section 674 or 675, in their unamended form (at least insofar as corporate criminal responsibility can be proved in accordance with Part 2.5 of the Criminal Code). (That said, it should be noted, the proper construction of section 1325 is a question of some controversy which has not been settled by the Courts.)

These sections—1041H, 1041I and 1325—are among the provisions most commonly invoked by class action plaintiffs in Australia to bring damages claims in connection with alleged continuous disclosure failings. The landmark Myer Class Action (TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Ltd [2019] FCA 1747) is a recent example involving claims under each of these three sections, as well as section 1317HA.

The upshot is that Boards will want to proceed with caution and not assume that the Instrument operates to reduce the risk of class action liability for continuous disclosure breaches.