Shareholder disclosure on the line in move to reduce class actions

Shareholder disclosure ASX continuous laws rules Treasurer Josh Frydenberg
The government is seeking to permanently ease disclosure obligations currently in place for ASX-listed companies and their directors.

When you are a shareholder, one of the moments of great suspense comes when you open up an ASX announcement from a company that you own.

Will it be good news that will send the share price up or a hidden land mine that could blow up the company and with it, the value of your investment?

Well, that feeling of apprehension could be experienced a bit less often since the Federal Government decided to permanently soften the continuous disclosure laws that lie behind all of those announcements from listed companies.

Started as temporary measure

Initially, the softening was meant to be a temporary thing for the COVID-19 pandemic but now Treasurer Josh Frydenberg has decided to make them permanent, following on from the majority report from the Parliamentary Joint Committee on Corporations and Financial Services inquiry.

The idea is to restrict the rash of class actions that have seen lawyers assemble groups of investors to sue directors of companies they own shares in on the basis that those directors have failed to disclose relevant information to inform their shareholders.

Australian Institute of Company Directors chief executive Angus Armour said Australia’s securities class action settings were out of step with the world, “making us a lucrative market for litigation funders and driving adverse consequences for businesses, shareholders and the economy generally”.

Actions now need to be reckless or negligent

Under the changes, companies will now only be liable in civil penalty cases for continuous disclosure breaches where they have acted with “knowledge, recklessness or negligence” relating to updates of market-sensitive information.

Before the changes, disclosure rules were a “strict liability” or “no fault” offence, meaning shareholder lawsuits only needed to prove companies failed to disclose information to the market, regardless of intention.

The Australian Securities and Investments Commission (ASIC) will retain the power to prosecute criminal breaches and issue administrative notices and infringement penalties without proving fault.

Changes have split the investment community

The changes have really split the investment community right down the middle.

Big companies and their directors on the whole like the watering down of the laws, saying that the barriers to class actions were too low and that it did not make sense for current shareholders to effectively pay damages to past shareholders.

They claim that Australia’s securities class action settings were out of step with the world, encouraging litigation funders to sue too often, damaging businesses, shareholders and the economy.

However, many investor groups and even large financial institutions have come out swinging, saying that watering down the continuous disclosure laws undermines the integrity of the share market, encourages insider trading and will enable directors not to keep shareholders informed in a timely way.

Class action lawyers not happy

The class action lawyers, of course, are up in arms about the changes, which they claim will allow all but the most egregious cases of directors withholding important information from arriving in courts.

One of the critics of the change is Australian Council of Superannuation Investors chief executive officer Louise Davidson, who said disclosure laws support the integrity of information provided to the market.

“Making these changes permanent could damage investor confidence at a time when investment will be crucial to a recovery,” she told the Australian Financial Review.

“Reducing accountability for poor disclosures is not the answer to addressing issues with class actions.

Like other investor groups, Ms Davidson said the changes to make a temporary situation permanent had happened without enough consultation.

Others say they appreciate that limiting class actions could be a good idea but it was a shame that it came at the cost of investors.

Changes still need to be legislated

Wanting to water down disclosure laws is one thing but the next challenge will be getting the changes through Parliament.

Labor has announced that it will oppose the changes, which leaves the government needing to negotiate with crossbench senators, including One Nation leader Pauline Hanson, who has previously expressed some support for cracking down on class action law firms.

Labor financial services spokesman Stephen Jones said the foundation of a functioning share market was disclosure and the opposition did not believe it was right to back the interests of directors over mum and dad shareholders.

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