23 Sep Companies get an extension to shield against class actions
Source: The Australian Financial Review.
By: John Kehoe.
Companies will face softer financial disclosure rules for a further six months from Wednesday under a COVID-19 regulatory shield extended by Treasurer Josh Frydenberg, fuelling a brawl between supportive directors and investors who warn the weakening will damage Australia’s capital markets.
Company directors and executives giving business outlook guidance to investors will be protected from the continuous disclosure law and be liable for breaches only if there is “knowledge, recklessness or negligence” with respect to updates on price-sensitive information.
The relief, which began in late May, aims to make it harder for class action lawyers to sue companies and their officers during the heightened economic uncertainty stemming from COVID-19 when many companies withdrew market guidance.
The original concession was due to expire in late November, but will now run until March 23, 2021, under an extension to be announced by Mr Frydenberg on Wednesday and obtained by The Australian Financial Review.
“Importantly, evidence to date shows that the temporary exemption has assisted companies to continue to update the market during this difficult and uncertain time,” Mr Frydenberg said.
“In fact, Treasury has identified that there has been an increase in the number of material announcements to the market during the period the relief has been in place, relative to the same period last year.”
The extension is supported by the Business Council of Australia and the Australian Institute of Company Directors.
“We would welcome the Treasurer’s extension given the uncertain economic environment during COVID-19 and the threat of class actions, and look forward to continuing the conversation on permanent reform,” AICD chief executive Angus Armour said.
BCA chief Jennifer Westacott said the extension would enable directors to keep markets well informed and focus on keeping their businesses open and Australians employed.
However, shareholders groups, such as the Australian Council of Superannuation Investors, have previously voiced concerns.
Fund manager Gabriel Radzyminski, of Sydney’s Sandon Capital, said the directors’ lobby had exaggerated the threat of class actions and used COVID-19 as cover to achieve their long-held goal of “making sure they are never held accountable for mistakes”.
“There was an over-egging and the government relief shouldn’t be a get-out-of-jail-free card for companies to simply not tell investors what they need to know.
“If the company knows it they should tell the market under continuous disclosure, but if the company doesn’t know it then there is no problem.”
Mr Radzyminski said directors already had a “due diligence” defence.
Half-yearly corporate financial reports provided information to investors if companies in badly affected industries had to withdraw future guidance due to the COVID-19 uncertainty, he said.
Dean Paatsch, a director of proxy and governance risk adviser Ownership Matters, said it was “dangerous” to weaken disclosure rules because private investor enforcement was vital to cover for the regulator’s poor track record.
He cast doubt on whether there was a real link between COVID-19 and the continuous disclosure shield, which the Treasurer has relied on to make the temporary regulatory change.
Continuous disclosure laws had given Australia a corporate governance premium over other markets, boosting investor confidence and helping companies raise capital, including $33 billion when the pandemic struck, Mr Paatsch said.
Many companies appropriately withdrew outdated guidance during the early stages of COVID-19, which might not have occurred without robust continuous disclosure rules. “Partly those appropriate withdrawals were due to the threat of action.”
Australian Securities and Investments Commission documents obtained by the Financial Review under freedom of information in July showed that days before Mr Frydenberg relaxed the rules in May, the regulator told him they were crucial for companies to conduct emergency capital raisings and to promote investor confidence.
In a nine-page note to Treasury on March 31, ASIC said continuous disclosure was a “fundamental tenet of our markets and is particularly important during times of market uncertainty and volatility”.
ASIC advised Treasury there was a range of tools available to directors worried they would be sued in investor class action lawsuits, such as a “due diligence” defence whereby directors could not be sued if they took reasonable steps to ensure the company complied with its obligations.
Separately, the Financial Review reported in August that Treasury is considering permanently easing continuous disclosure rules to make it harder for class action lawyers to launch civil actions, while retaining the strict liability offence for criminal breaches that the Australian Securities and Investments Commission can pursue.
‘No fault’ offences
Under the proposal, shareholder lawsuits seeking financial compensation would have to prove a fault element, such as recklessness or intent, to establish a breach of continuous disclosure rules.
Currently, disclosure breaches are “strict liability” or “no fault” offences, meaning shareholders and class action lawyers need only prove companies or their directors failed to disclose information to the market to succeed in a claim, regardless of whether the failure was reckless or intentional.
ASIC has downplayed claims by business about a surge in class action lawsuits, noting only 82 shareholder class actions have been filed in Australia over 16 years, compared with 441 in the US in 2018 alone.
But businesses say funder-backed securities class actions are driving directors’ and officers’ insurance to unaffordable levels, with some premiums increasing by more than 200 per cent a year.
Separately, since August Mr Frydenberg has forced litigation funders to operate under tough new oversight rules and regulatory reporting requirements by requiring them to hold an Australian Financial Services Licence from August 22 and operate as Managed Investment Schemes.
The move was designed to slow Australia’s class action industry and provide additional protections for firms and company directors.
Litigation funders were quick to criticise the move, saying it would bring class action lawsuits to a grinding halt.
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