Flat White

Continuous disclosure obligations: now with less activist tail wagging the corporate dog

25 August 2021

1:30 PM

25 August 2021

1:30 PM

It was 2012 and I found myself walking into the High Court in Canberra: shiny red soles on my stilettos, a stud in my right nostril, and a file under my arm marked ‘Forrest & FMG v ASIC’. Directors’ duties, continuous disclosure obligations and misleading and deceptive conduct were on the menu. And for the record, my firm was acting for Mr Forrest.  

It was one of those court actions: the contest was fierce and the stakes were high.  

In the wash, this matter taught us two things: how continuous disclosure obligations are inextricably linked to the everyday decision-making of directors, and how to not run a case against a director. The former I will cover here; for the latter, I suggest paragraphs [23] to [30] of the High Court judgment.  

Now, the Corporations Act regulates all aspects of a corporation’s existence from incorporation to dissolution and the Australian Stock Exchange’s Listings Rules contributes a side-serve of extra obligations for listed companies. It’s a complex and prescriptive regime which places onerous impositions on directors and is precisely why many sensible people don’t actually want to be directors of public companies.  

Picture the Hunger Games in French cuffs. 

Anyway, pre-pandemic, the Act required directors of public companies to notify the Australian Stock Exchange of information that is not generally available and that a reasonable person would expect, if it were generally available, to have a material effect on the share price. If a disclosure was not made in those circumstances, then a listed company’s directors could either be subject to private suit or slapped with civil penalties by ASIC.  

During the pandemic, the federal government passed a temporary measure which altered the continuous disclosure obligation such that directors would be required to notify the ASX of information that is not generally available and the entity knows, or is reckless or negligent with respect to whether the information would, if it were generally available, have a material effect on the share price. Recently, with the help of the crossbench, the Federal government made those changes permanent. And it’s worth noting that the bill which was introduced to parliament following reported recommendations from the Parliamentary Joint Committee on Corporate and Financial Services into litigation funding and class actions. 


So, what does this amendment mean? 

Well, it changes the threshold from the traditional ‘reasonable person’ test to a fault test. Consequently, whoever is trying to argue that a company failed to discharge its continuous disclosure obligations must prove that the directors knowingly refused or failed to disclose that information as opposed to ought have reasonably, in the circumstances, disclosed that information. It also means that the conduct which triggers continuous disclosure requirements will not automatically also lead to a breach of misleading and deceptive conduct – that is, the fault element will also need to be proven. 

The use of a fault test also means the ‘civil penalty’ consequences that flow from a breach are more closely aligned with the nature of the conduct. That is, you would ordinarily impose a penalty (rather than compensation) for a wrongdoing rather than the failure to meet an objective standard. It recalibrates and rebalances obligations, accountability and consequences.  

And these are sensible reforms. Directors make decisions every day and it’s unduly harsh to slap them with a penalty if they do not disclose information that they were not necessarily aware of or which they didn’t consider to be material at the time. Even if a ‘reasonable person’ may have objectively considered the information material, anyone who has been a director will know some things are line ball and subjective reasoning may not always fall the same way as objective reasoning. It’s easy to determine the materiality of information with 20:20 hindsight. However, the materiality of certain information is not always evident or easy to determine when you’re in the midst of running a business, particularly during a period of uncertainty. This is distinct from knowingly concealing or refusing to disclose information that is clearly material.  

Of course, Labor threw their toys out of the cot, arguing that the changes represented a shift of power from the shareholders to the directors. So typical of Labor to view something as mechanical as continuous disclosure through the lens of power: who has it, who doesn’t, and how can we get more of it. In fact, this isn’t really about power; it’s about responsibility — who carries the can for the governance of a company and who cops it in the neck if something goes array.  

In recent years, the rise in shareholder activism has unveiled the ambition of niche vested interests to influence the decisions of companies while leaving directors to wear the consequences. And little affords commercial leverage quite like an impending class action. In practice, claimants in a class action often allege that directors failed to form a view on whether they were aware of the material information. Under the new rules, this may still be arguable under the ‘negligence’ limb of the test if it can be shown that they were negligent in not forming a view, but it does make proof more difficult on the whole, particularly under the ‘knowing or reckless’ elements of the test.  

Claimants no longer have the perennial ‘reasonable person’ to rely on.   

Ultimately, it is still in the interests of directors to do the right thing, because even if class actions are not being instituted to attempt to wag the corporate dog, our friends at ASIC are still able to penalize directors with a range of enforcement options which don’t require proof of knowledge, recklessness or negligence. And listed companies are also still required to comply with the Listing Rules, including Listing Rule 3.1, which requires a company to immediately inform the ASX of information a reasonable person would expect to have a material effect on its share price.  

The reality is that this amendment operates to adjust and refine our already onerous system of disclosure, whilst still giving the regulator the tools it needs to bring rogues to heel. It also brings the Australian model closer into line with Britain and the United States.  

It is not by any means a get-out-of-goal-free card and it certainly isn’t the wholesale transfer of power from the proletariat to the oppressors as Labor would have you believe.  

No one is suggesting anyone else eat cake. 

Caroline Di Russo is a lawyer, businesswoman and unrepentant nerd.

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