Referral of the inquiry
1.1
The Treasury Laws Amendment (2021 Measures No.1) Bill 2021 (the bill) was introduced in the House of Representatives and read a first time on 17 February 2021.
1.2
On 18 February 2021, the Senate referred the provisions of the bill to the Senate Economics Legislation Committee (Legislation Committee) for inquiry and report by 12 March 2021. On 25 February 2021, the Senate extended the reporting date to 30 June 2021.
1.3
Despite the Senate extending the reporting date, and despite the committee holding no public hearings and receiving no submissions from any government department or agency, the Legislation Committee reported on this inquiry on 12 March 2021
1.4
On 16 March 2021, the Senate referred the provisions of the bill to the Senate Economics References Committee (the committee) for inquiry and report by 30 June 2021 to enable meaningful public consultation. The Senate adjourned debate on the bill until the first sitting day in August 2021.
Purpose of the bill
1.5
In response to the COVID-19 pandemic, the government introduced a raft of regulatory relief measures for companies. Measures relating to Schedules 1 and 2 of the bill self-repealed on 16 March 2021, before the bill could be passed (noting that the government rejected a proposal by Mr Stephen Jones MP, Shadow Minister for Financial Services and Superannuation, to separate Schedules 1 and 2 to facilitate the passage of Schedule 1 prior to 16 March 2021). Provisions reverted to those in place prior to the COVID-19 temporary measures.
1.6
The bill seeks to amend the Corporations Act 2001 (Corporations Act) and the Australian Securities and Investments Commission Act 2001 (ASIC Act) with regulatory relief measures. Schedule 1 of the bill seeks to reinstate temporary measures first introduced on 5 May 2020, with an expiry date of 16 September 2021.
1.7
The temporary measures permitted companies and registered schemes to use technology to satisfy the regulatory requirements in the Corporations Act to hold meetings, distribute relevant document and execute documents. The bill expands upon some aspects of the relief in response to feedback provided during consultations.
1.8
The intent of Schedule 1 of the bill was explained by the Assistant Treasurer, the Hon Michael Sukkar MP, on 17 February 2021:
While this [Determination No. 3] relief expires on 21 March 2021, the rationale for its introduction remains. COVID-19 continues to cause uncertainty and associated public health orders are introduced from time to time. It's necessary for the continuation of business that companies be able to host meetings and execute documents without having to physically meet. This relief ensures that companies can get on with business, while cooperating with public health orders made to deal with COVID-19 outbreaks as and when they occur.
1.9
Schedule 1 was supported by a majority of parliamentarians—including both the Liberal and Labor parties.
1.10
On the 25 May 2020 in response to COVID-19, a second determination for regulatory relief was introduced to implement temporary amendments to the continuous disclosure obligations. The Corporations Act was temporarily modified to the effect that, in determining in a civil penalty proceeding whether an entity contravened its obligation to disclose price-sensitive information on a continuous basis, the entity's state of mind must be taken into account. Before the temporary relief, there was no requirement to prove a mental element in a civil penalty proceeding.
1.11
Schedule 2 of the bill seeks to apply these measures permanently. The purpose of Schedule 2 of the bill was explained by the Hon Michael Sukkar MP:
Raising the liability standard so that companies only face civil penalty actions where they have acted with knowledge, recklessness or negligence allows companies and their officers to more confidently provide guidance to the market without exposing themselves to the risk of opportunistic class actions.
Reforming continuous disclosure obligations will allow business to reallocate resources towards improving efficiency and output. This will make it easier for businesses to invest, create jobs and ultimately grow the economy.
Inability to extend pandemic temporary measures
1.12
The Coronavirus Economic Response Package Omnibus Act 2020, which inserted section 1362A into the Corporations Act, empowered the Treasurer to make disallowable legislative instruments to temporarily modify the provisions of the Corporations Act (and other specified actions).
1.13
Pursuant to these powers, on 5 May 2020 the Corporations (Coronavirus Economic Response) Determination (No. 1) 2020 (Determination No. 1) made temporary modifications to allow the use of electronic means to hold meetings and execute documents. The Corporations (Coronavirus Economic Response) Determination (No. 3) 2020 (Determination No. 3) extended the application of these modifications and they self-repealed on 21 March 2021.
1.14
Similarly, on 25 May 2020 the Treasurer made the Corporations (Coronavirus Economic Response) Determination (No. 2) 2020 (Determination No. 2) which made temporary modifications relating to continuous disclosure. The Corporations (Coronavirus Economic Response) Determination (No. 4) 2020 (Determination No. 4) extended the application of these modifications and they self-repealed on 22 March 2021.
1.15
Importantly, section 1362A restricted the Treasurer's power to make such legislative instruments to the period 25 March 2020 to 24 September 2020. This section also limited the duration of Determinations Nos. 1 to 4 to a maximum duration of six months.
1.16
These provisions prevented further extension of the COVID-19 temporary measures.
1.17
Submissions to the Legislation Committee inquiry noted the business uncertainty created by the temporary nature of the COVID-19 measures were partly addressed by extensions to these measures. However, the self-repeal of the temporary measures in March 2021 had considerable impacts on business. These are discussed further in chapter 2.
1.18
The bill's explanatory memorandum (EM) notes that it is intended that permanent reforms will be in place when the bill's temporary modifications expire on 16 September 2021.
Provisions of the bill
1.19
The bill contains two schedules:
Schedule 1—Virtual meetings and electronic communication of documents; and
Schedule 2—Continuous disclosure obligations.
Schedule 1—Virtual meetings and electronic communication of documents
Background
1.20
The Electronic Transactions Act 1999 (ETA) facilitates the use of electronic transactions. It does not apply to the Corporations Act and instruments made under the Corporations Act. Therefore, company documents must be executed by all parties signing the same static document if parties are doing so in order to rely on the presumptions relating to valid execution contained in the Corporations Act.
1.21
By way of example, under the changes company boards may:
provide notice of annual general meetings (AGMs) to shareholders using email;
achieve quorum with shareholders attending online; and
1.22
The EM states that the amendments in Schedule 1 extend, and expand upon, the changes in Determination No. 3.
Other relevant inquiries
1.23
An interim report by the Senate Select Committee on Financial Technology and Regulatory Technology (now reporting as the Select Committee on Australia as a Technology and Financial Centre) reported on stakeholder views on the temporary changes under Determination No. 3 and their effectiveness.
1.24
In relation to virtual meetings and the electronic execution of documents, it noted that submitters and witnesses to the inquiry were generally supportive and argued that the changes should be made permanent, along with additional measures to modernise the Corporations Act and make it more technology friendly. Submissions and statements also discussed a number of issues to consider in the formulation of permanent changes.
1.25
Some submitters raised concerns about virtual meetings and the lack of accountability to shareholders and issues with shareholder engagement. For example, some shareholders were unable to access online AGMs, some experienced physical constraints that prevented them from participating in meetings, and some had their questions moderated.
1.26
The committee recommended that the Corporations Act be amended to:
allow companies to decide the best format for holding their AGMs and other meetings, while ensuring the needs of shareholders are taken into account;
enable companies to communicate with shareholders electronically by default, with shareholders retaining the right to opt-in to paper-based communications; and
allow for the electronic signature and execution of legal documents (along with the amendment of other relevant legislation and regulations).
1.27
It also recommended that the relevant regulations be amended to enable the witnessing of official documents via teleconferencing or other secure technological means.
1.28
The Legislation Committee, which reported on the bill in March 2021, also received submissions and considered matters raised by the bill at length. In summary, the committee supported that the extension of the regulatory relief proposed by Schedule 1 of the bill, enabling companies and registered schemes to use technology to meet their regulatory requirements while disruption caused by the pandemic continues, and to benefit from the use of modern technology in their business operations.
1.29
The Legislation Committee also welcomed the government's consultation on potential permanent measures noting that some of the issues raised in relation to Schedule 1 may further assist in the development of permanent measures. It also supported the development of an opt-in pilot for hybrid meetings.
1.30
Dissenting comments were received from the Australian Labor Party (Labor) Senators and Australian Greens (Greens) Senators. Labor broadly supported Schedule 1, provided shareholders could elect to receive and execute hard copy documents if preferred, and that they could attend AGMs either in person and/or by electronic means.
1.31
The Greens also largely supported Schedule 1 on a temporary basis, but thought there should be further opportunity to consider the impacts, particularly on shareholders being able to hold companies to account, before the measures become permanent.
Future proposal—opt-in hybrid AGMs pilot
1.32
The EM contained an additional proposal that, following 15 September 2021, a 12-month opt-in pilot for hybrid AGMs will be undertaken where shareholders can choose to attend in person or virtually. The pilot will commence when the bill's temporary relief ends.
1.33
The Australian Securities and Investments Commission (ASIC) has issued guidelines for conducting hybrid and virtual meetings.
Future proposal—permanent reforms
1.34
On 19 October 2020, the Department of the Treasury (Treasury) announced a consultation on an exposure draft bill which seeks to make permanent reforms after 16 September 2021 in respect of virtual meetings and electronic execution of documents. This consultation closed on 6 November 2020 and received 62 submissions.
1.35
Further to this consultation, Treasury's Deregulation Taskforce commenced a consultation process into how to best improve the technology neutrality of Treasury portfolio laws, beyond the actions that had already been taken by government. In December 2020, it released its consultation paper Modernising Business Communications: Improving the technology neutrality of Treasury Portfolio Laws.
1.36
The consultation paper considered issues relevant to the bill, including communications among stakeholders, the option of removing current exemptions in the Electronic Transactions Regulations 2020 to the ETA, the ability to meet written signature requirements electronically, and electronic recordkeeping requirements.
1.37
Treasury noted that as part of this process it would also be 'consulting broadly with industry representatives and other interested parties'. It conducted both general and targeted consultation on the issues raised in the paper, including big and small businesses, other government agencies and peak industry bodies. Consultation closed on 28 February 2021, with 24 submissions received.
1.38
As part of the consultation, Treasury also worked with other parts of government including the Modernising Business Communications Expert Panel, which is supported by the Deregulation Taskforce in the department of Prime Minister and Cabinet, as well as portfolio regulators.
1.39
Stakeholders were 'generally supportive of the principles and proposed approach' and they 'noted the need to adapt to emerging technologies and move towards a more agile, updated and fit for purpose regulatory environment'. Stakeholders were encouraged by the temporary measures outcomes and 'viewed reform as a priority'.
1.40
On 25 June 2021 Treasury opened consultation on exposure draft legislation to support companies and their officers to use technology to satisfy Corporations Act requirements. The reforms will 'make permanent the temporary measures put in place during the COVID-19 pandemic relating to electronic execution of company documents and meeting notifications', as well as the ability to use technology to hold meetings. Consultation closes on 16 July 2021. Treasury noted that 'work is also being undertaken to ensure that these amendments can be progressed in the Spring sitting period even if Treasury Laws Amendment (2021 Measures No. 1 Bill 2021) does not receive passage'.
1.41
The draft provisions appear to have taken account of some of the issues raised by stakeholders during this and other inquiries. For example a document may be validly executed by a sole director for proprietary companies with a sole director but no company secretary; documents may be given electronically if a person has not opted-in to receive hard copy documents; and companies are free to choose the meeting format which best fits their circumstances.
Expiry of temporary relief
1.42
The temporary relief in Determination No. 3 expired on 21 March 2021, before the bill could be passed.
1.43
ASIC has adopted a temporary 'no-action' position in relation to the convening and holding of virtual meetings in order to provide businesses and the markets with a degree of certainty and allow additional time for distribution of financial reports to members prior to meeting.
1.44
ASIC's 'no-action' position does not extend to the measures to facilitate the electronic execution of company documents as ASIC does not have the power to modify the operation of these provisions in a way that affects third party rights.
Overview of the amendments
1.45
Schedule 1 partially implements the measure, JobMaker Plan—Digital Business Plan from the 2020-21 Budget. It seeks to put in place temporary relief allowing companies to meet the requirements in the Corporations Act relating to:
executing company documents;
holding meetings of directors of a company, meetings of shareholders of a company (including AGMs) and meetings of members of a registered scheme;
executing documents relating to meetings;
recording, keeping and providing minutes; and
providing notice of a meeting and giving other documents relating to meetings to the prospective attendees.
Table 1.1: Comparison of key features of new law and current law
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Company documents executed both with and without a seal may be executed using electronic means. If the document is executed by fixing a company seal, electronic means may be used to witness the fixing of the seal. These changes remain in force until 16 September 2021.
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To execute a company document, all persons must physically sign the same hard copy.
Note: Temporary relief from this requirement for documents executed without a company seal was granted in Determination No. 3.
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Directors meetings, meetings of shareholders of a company and meetings of members of a registered scheme may be held using electronic means until 16 September 2021 provided that the persons entitled to attend the meeting, as a whole, have a reasonable opportunity to participate.
If electronic means are used to hold the meeting, the notice of the meeting must include sufficient information to allow all attendees to participate and the quorum includes all persons participating virtually.
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Meetings must be held at a physical location. While technology can be used to connect people at one or more other locations, wholly virtual meetings are not permitted.
Note: Temporary relief was granted in Determination No. 3 to allow meetings to be held virtually.
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Directors meetings, meetings of shareholders of a company and meetings of members of a registered scheme may be held using electronic means until 16 September 2021 provided that the persons entitled to attend the meeting, as a whole, have a reasonable opportunity to participate.
If electronic means are used to hold the meeting, the notice of the meeting must include sufficient information to allow all attendees to participate and the quorum includes all persons participating virtually.
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Meetings must be held at a physical location. While technology can be used to connect people at one or more other locations, wholly virtual meetings are not permitted.
Note: Temporary relief was granted in Determination No. 3 to allow meetings to be held virtually.
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Documents relating to a meeting may be given electronically until 16 September 2021 if it is reasonable to expect that the document would be readily accessible so as to be usable for subsequent reference at the time that it is given. Members have the right to opt-in to receiving documents in hard copy.
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Documents relating to a meeting must be posted unless the member has agreed to the document being sent via email or fax and the specific requirements in the Corporations Act are met. Some documents may only be provided via post.
Note: Temporary relief from this requirement was granted in Determination No. 3.
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Documents relating to a meeting may be signed electronically by using a method to identify the signatory and indicate the signatory's intention until 16 September 2021.
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Documents relating to a meeting must generally be signed in hard copy.
Note: Temporary relief from this requirement was granted in Determination No. 3.
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The minutes for meetings of shareholders and members of registered schemes may be taken electronically and the minute book may be provided to shareholders and members and kept electronically.
These changes sunset on 16 September 2021.
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In general, minutes must be kept in hard copy.
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Source: adapted from the Explanatory Memorandum, pp. 8-9.
Detailed explanation of the new law
1.46
To avoid confusion about the application of rules to meetings convened under Chapter 2G and documents executed under section 127, the rules in Determination No. 3 for holding meetings using alternative technology do not apply to any meetings or documents covered by the new rules in Schedule 1 of the bill.
Execution of company documents
1.47
Items 1 to 9 (Schedule 1) permit the electronic execution of company documents, including documents executed with or without a common seal and documents executed by a deed. These amendments to the requirements for companies executing documents under section 127 apply from the day that the Act commences.
1.48
The director, secretary or witness may sign a copy or counterpart of the document, rather than the same single, static document, if the following requirements are met:
the copy must include the entire contents of the document but does not need to include the signatures of the other person;
a method must be used to identify the person and indicate their intention to sign the document; and
the method must be reliable as appropriate for the purposes for which the document was generated or proven in fact to have indicated the person's identity and intention.
1.49
A company may choose the manner in which it executes documents. It may continue to execute in the traditional manner by applying wet signatures to the physical paper documents, or a combination of different methods. For example, one director may electronically sign the paper version of the document while the second director could electronically sign.
1.50
With respect to the execution of a document by fixing a common seal, the bill expands on Determination No. 3 by permitting the person to electronically witness the fixing of the seal. The witness does not need to sign the same document as the one to which the seal was affixed and, therefore, there can be a delay between the witnessing and document being signed.
Virtual meetings
1.51
Item 31 (Schedule 1) seeks to insert new Part 2G.5 to allow for meetings of shareholders, directors and members of registered schemes to be held:
using virtual meeting technology;
inviting persons to physically attend at a designated location;
inviting persons to physically attend at different locations and using virtual meeting technology to connect the different locations together; or
using a combination of these methods.
1.52
The rules in new Part 2G.5, with the exception of the rules relating to the time and place of the meeting and the method of voting (see below), apply as mandatory rules rather than replacement rules. Therefore, as a company's constitution cannot displace or modify the rules:
all companies have the power to hold virtual meetings and electronically execute company documents if they elect to do so; and
if a company does elect to hold a virtual meeting or electronically execute a document, it must comply with the minimum requirements.
1.53
For meetings which are held virtually, the following rules apply:
the place of the meeting is taken to be the address of the registered office of the company or responsible entity of a registered scheme;
the notice of the meeting must include sufficient information to allow:
the persons entitled to attend the meeting to participate using the virtual meeting technology; and
members to provide a proxy by electronic means;
the meeting must be held:
at a time that is reasonable at the place where the meeting is taken to be held; and
in a manner which gives the members as a whole a reasonable opportunity to participate, including a reasonable opportunity to exercise a right to speak and ask questions, both orally and in writing;
votes will be taken on a poll rather than a show of hands unless otherwise stated in the company's constitution;
all participants who are entitled to vote must be given the opportunity to vote at the meeting; and
documents may be tabled at a meeting by providing the documents to the person in advance of the meeting or making the documents accessible to persons attending the meeting in any way.
Electronic communication and signing of documents relating to meetings
1.54
Where meetings are held virtually or in person, documents relating to the meeting may be given using electronic means if the following requirements are satisfied:
…it must be reasonable to expect that the document would be readily accessible so as to be useable for subsequent reference at the time that the document is given; and
…
…a document relating to a meeting of the members of a company or registered scheme cannot be provided to a person electronically if they opt-in to receiving hard copies, or the entity failed to notify the person of their right to opt-in.
1.55
A member may elect to receive hard copy documents relating to a meeting or resolution considered without a meeting. The following rules apply to this opt-in scheme:
if the document is a notice of a meeting or accompanies the notice of the meeting, the election does not apply to any documents that are required to be provided to the member within the next 10 business days;
a member who had opted in to receiving documents in hard copy may revoke their election in writing;
a company or responsible entity must notify members (in hard copy or electronically) within 2 months of becoming a member of their right to opt-in to receiving hard copies relating to a meeting or a resolution considered without a meeting (failure of which is a strict liability offence with a penalty of 30 penalty units); and
companies and responsible entities must notify members of their right to opt-in to receive hard copy documents within 2 months of the commencement of Schedule 1 (failure of which is a strict liability offence with a penalty of 30 penalty units).
1.56
Amendments relating to the electronic signing of documents relating to a Chapter 2G meeting are proposed separately. These provisions are similar to those proposed for the execution of company documents, as outlined above. Under the changes, ASIC must accept a document for lodgement where it has been signed in accordance with these requirements.
Electronic recording and storage of minute books
1.57
Minutes may be recorded electronically in a minute book if at the time of recording the information it is reasonable to expect that the information would be readily accessible so as to be usable for subsequent reference. Minute books may be kept electronically if the method used meets this same requirement, and is also a reliable means of maintaining the integrity of the information.
1.58
The bill also sets out the conditions that must be satisfied for the keeping of a minute book at a place.
1.59
These new rules apply to minute books kept before, on or after the day of commencement. The new rules that allow companies to give minute books electronically do not have a special application provision and commence and apply from the day after Royal Assent.
Consultation
1.60
The EM does not discuss a consultation process specific to the bill. However, as noted above, Treasury has undertaken two recent consultation processes, including a consultation process on an exposure draft bill which seeks to make permanent reforms in respect of virtual meetings and electronic document execution. In addition to this, the Senate has also considered matters relating to the bill in two inquiries, also noted above.
Commencement
1.61
Schedule 1 commences on the day after the bill receives Royal Assent.
Financial impact
1.62
The EM states there are no financial impacts of the bill.
Schedule 2—Continuous disclosure obligations
Background
1.63
Continuous disclosure is one aspect of a broader corporate law system which aims to appropriately balance the control of companies by managers and their accountability to shareholders.
1.64
Sections 674 and 675 of the Corporations Act contain the continuous disclosure obligations for listed and unlisted disclosing entities. On 25 May 2020, Determination No. 2 made temporary amendments to continuous disclosure provisions. The effect of subsections 674(2) and 675(2) was amended so that an entity or officer must have acted with 'knowledge, recklessness or negligence' in respect to whether certain information would have a material effect on the price or value of its enhanced disclosure securities (ED securities) and therefore should be disclosed.
1.65
The Explanatory Statement to Determination No. 2 stated:
COVID-19 has caused a considerable degree of uncertainty for business.
In the current environment it is significantly more challenging for disclosing entities to know whether a given piece of information will have a material effect on the price or value of its ED securities and therefore forecast the entity's future earnings or prospects. In this environment, the continuation of many businesses may depend on investment, and investors rely on timely disclosure of information to financial markets. It is appropriate to encourage disclosing entities to continue to disclose information to markets or to ASIC by temporarily modifying the scope to commence civil proceedings for breaches of the continuous disclosure obligations in circumstances relating to COVID-19. At the same time, it is appropriate that serious breaches committed knowingly, recklessly or negligently during the period the instrument is in force may continue to be litigated. On this basis the Minister is satisfied that the modifications in the Determination is appropriate to facilitate the continuation of business in circumstances relating to COVID-19.
1.66
The amendments in Determination No. 2 were permitted pursuant to special determination powers granted to the Treasurer during the COVID-19 pandemic. On 23 September 2020, the amendments were extended by Determination No. 4, which expired on 22 March 2021. The purpose for the extension was detailed in the Explanatory Statement:
COVID-19 continues to cause uncertainty for business, posing challenges for disclosing entities to know whether a given piece of information will have a material effect on the price or value of its ED securities and therefore forecast the entity's future earnings or prospects. In spite of the uncertainty caused by COVID-19 while the Corporations (Coronavirus Economic Response) Determination (No. 2) 2020 was in force, disclosing entities have continued to disclose price-sensitive information to the market in a timely manner. Investors, with the benefit of this information, have continued to invest in Australian securities in an environment where the continuation of business largely depends on investment and capital raising. It is appropriate to encourage disclosing entities to continue to disclose information to markets or to ASIC by temporarily modifying the scope to commence civil proceedings for breaches of the continuous disclosure obligations in circumstances relating to COVID-19. At the same time, it is appropriate that breaches committed knowingly, recklessly or negligently during the period the instrument is in force may continue to be litigated. On this basis the Minister is satisfied that the modifications in the Determination is appropriate to facilitate the continuation of business in circumstances relating to COVID-19.
1.67
The amendments in Schedule 2 go further than the requirements of Determination No. 2 and Determination No. 4 as they also amend the operation of misleading and deceptive conduct provisions.
Other relevant reviews or inquiries
1.68
In 2018 the Australian Law Reform Commission (ALRC) reported on class action proceedings and third-party litigation funders.
1.69
The ALRC described the relevance and importance of continuous disclosure as follows:
Continuous disclosure obligations are based on the efficient market hypothesis that current share prices should reflect all available information. The disclosure of information by companies is a crucial initial step in the process of price formation, whereby market participants rely on available information to evaluate securities and make investment decisions. Continuous disclosure regimes regulate how and what information is to be disclosed to the market and impose sanctions for non-compliance. The objectives of such regimes may be expressed as market integrity and investor protection. They assist in preventing market manipulation and insider trading.
1.70
The ALRC recommended that the government establish a wide legal and economic review of continuous disclosure obligations, covering its operation, enforcement and effects:
…the ALRC was also conscious of the need to avoid recommendations that are focussed narrowly on perceived issues relevant to only one category of class action proceedings …[the law] must be fit for its purpose; namely, to enable 'groups of persons, whether they be shareholders or investors, or people pursuing consumer claims, …to obtain redress and so more cheaply and efficiently that would be the case with individual actions'(emphasis added). Further, the emerging issues that were said to arise out of the inter-relationship between the class action regime and aspects of the corporate law appeared to the ALRC to require consideration of the underlying substantive law on which shareholder claims are typically based and, more importantly, required a thorough economic analysis of the assertions that had been put to it by particular stakeholders.
1.71
The government has not responded to this recommendation and no legal and economic review of continuous disclosure obligations has been undertaken.
1.72
The bill's EM claims that Schedule 2 implements recommendation 29 of the majority report by the Parliamentary Joint Committee on Corporations and Financial Services Inquiry into Litigation Funding and the Class Action Industry (PJC). Recommendation 29 is that the government permanently legislate the changes to continuous disclosure laws in Determination No. 2.
1.73
While acknowledging the different views on Schedule 2, Liberal and National Party Legislation Committee members concluded that the reforms proposed struck an appropriate balance—providing business and markets with certainty without the prospect of opportunistic class action. Liberal and National Party Senators reached that conclusion despite the fact that:
the Legislation Committee did not hold a single public hearing;
the Legislation Committee did not consider any evidence from Treasury, ASIC or any other government department or agency;
no submitter to the Legislation Committee's inquiry was able to identify a single example of an 'opportunistic class action' (let alone substantiate the government's apparently baseless assertion that the existing continuous disclosure laws encouraged or gave rise to any such thing); and
what little evidence the Legislation Committee did consider directly contradicted many of the claims made by the government in the bill's EM, including the assertion that the proposed reforms would drive down directors and officers insurance premiums.
1.74
Liberal and National Party Senators recommended that Schedule 2 be passed.
1.75
Dissenting comments were received from the Australian Labor Party (Labor) Senators and Australian Greens (Greens) Senators. Labor opposed Schedule 2, expressing concern that the changes could lead to poorer disclosure, which could have significant economic impacts for millions of Australian investors and shareholders—including mum and dad investors and self-funded retirees—and the good reputation of Australian markets.
1.76
The Greens also opposed Schedule 2 on the basis that it would make it more difficult for investors and shareholders, including those who invest through superannuation, to bring actions against companies and undermine Australia's markets.
Overview of the amendments
1.77
According to the bill's EM, Schedule 2 aims to amend the corporations law to:
introduce a requirement that, in determining whether a disclosing entity contravenes its continuous disclosure obligations, its state of mind is taken into account for civil penalty proceedings, consistent with Determination No. 4;
retain ASIC's ability to issue an infringement notice under Part 9.4AA for an alleged contravention of the continuous disclosure obligations regardless of the state of mind of the entity; and
introduce a requirement that entities and officers are not liable for misleading and deceptive conduct, in circumstances where the continuous disclosure obligations have been contravened, unless the requisite mental element has been proven.
1.78
The EM contains an overview of the key features of the new law and current law.
Table 1.2: Comparison of key features of new law and current law
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The temporary modification is made permanent.
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ASIC or private plaintiffs are not required to prove an entity's knowledge, recklessness or negligence in establishing a civil contravention of continuous disclosure obligations.
Note: temporary Determination No. 4 modified the Corporations Act to ensure that, in determining whether a listed disclosing entity contravenes its existing continuous disclosure obligations, its state of mind was taken into account.
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Entities and officers are not liable for misleading and deceptive conduct in circumstances where the continuous disclosure obligations have been contravened unless the requisite mental element has been proven.
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Misleading and deceptive conduct provisions prohibit a person from engaging in conduct in relation to a financial service (including issuing of shares and publishing information in relation to shares) that is misleading or deceptive or likely to mislead or deceive. Failure to comply is not an offence, but may lead to civil liability under section 1041I.
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Source: adapted from the Explanatory Memorandum, p. 25.
Detailed explanation of the new law
Continuous disclosure obligations
1.79
Currently, sections 674 (listed disclosing entities) and 675 (unlisted disclosing entities) contain the continuous disclosure obligations.
1.80
A listed disclosing entity may be required to disclose any information that may have a material effect on the price or value of the entity's ED securities. The obligation created is not to contravene the provisions of the listing rules by failing to notify the listing market (or ASIC in the case of unlisted entities) of information which meets two conditions:
the information is not 'generally available'; and
a 'reasonable person' would, if the information were generally available, expect that information to have a material effect on the price or value of the entity's ED securities.
1.81
Criminal and civil liability may flow from a failure to comply with the continuous disclosure obligations in section 674 or section 675. The civil penalties are financial services civil penalty provisions under section 1317E. Subsections 674(2A) and 675(2A) also impose civil penalties on persons involved in a listed disclosing entity's contravention of subsections 674(2) and 675(2) (the accessorial liability provisions). A 'reasonable steps' defence is contained in subsections 674(2B) and 675(2B).
1.82
Items 3–6 (Schedule 2) seek to amend sections 674 and 675 so that they are no longer civil penalty provisions. Consequently, sections 674 and 675 would contain the criminal offences for failing to comply with the continuous disclosure obligations.
1.83
Item 7 (Schedule 2) inserts new civil penalty provisions contained in proposed sections 674A and 675A. The new civil penalty provisions contain a test of the entity's 'knowledge, recklessness or negligence' with respect to the effect of that information on the price. The new civil penalty provisions are financial services civil penalty provisions, consistent with the existing law.
1.84
The new civil penalty provisions contain corresponding accessorial liability provisions, and a 'reasonable steps' defence, which are identical to the current accessorial liability provisions in existing subsections 674(2A) and 675(2A). However, if the bill was passed, it would be necessary to prove the mental element of acting with knowledge, recklessness or intent.
Misleading and deceptive conduct obligations
1.85
Subsection 1041H(1) contains a prohibition on engaging in conduct in relation to a financial product or a financial service, that is misleading or deceptive, or is likely to mislead or deceive. Failure to comply with the prohibition may lead to civil liability.
1.86
Item 21 (Schedule 2) seeks to insert new subsection 1014H(4) to create a carve-out for conduct in relation to breaches of the continuous disclosure provisions from the prohibition on misleading and deceptive conduct in section 1041H(1).
1.87
The EM notes that conduct of a disclosing entity that does not contravene one of the new civil penalty provisions for the continuous disclosure obligations, but would contravene that obligation if it contained the relevant objective test of a 'reasonable person' in section 674 or 675, instead of the test of 'knowledge, recklessness or negligence', does not contravene the prohibition on misleading and deceptive conduct in subsection 1041H(1).
1.88
The EM explains the effect of the carve-out:
This means that conduct that triggers the continuous disclosure provisions will not automatically also constitute misleading and deceptive conduct for the purposes of section 1041H(1). In particular, conduct that contravenes the continuous disclosure obligations that contain the objective test will not contravene section 1041H(1).
…
The effect of the new carve-out is that if a person seeks a remedy against a disclosing entity under section 1041I of the Corporations Act for an alleged contravention of section 1041H(1), and that contravention is connected to an alleged failure to comply with a continuous disclosure obligation, the person will need to establish the contravention of the relevant new continuous disclosure civil penalty provision, including the fault element of knowledge, recklessness, or negligence, in order to establish that the disclosing entity has contravened section 1041H(1).
1.89
Item 1 (Schedule 2) seeks to insert an analogous provision into section 12DA of the ASIC Act, the effect of which is also to limit the circumstances in which proceedings seeking compensation for loss or damage as a result of a contravention of section 12DA can be brought in connection with alleged continuous disclosure contraventions, in the same terms as for subsection 1041H(1) of the Corporations Act.
Infringement notices
1.90
Part 9.4AA of the Corporations Act permits ASIC to issue an infringement notice for an alleged contravention of subsections 674(2) or 675(2). ASIC may issue an infringement notice if it has reasonable grounds to believe a disclosing entity has contravened subsection 674(2) or 675(2).
1.91
Under the existing law, there is a 'no fault' standard for the issuance of an infringement notice under Part 9.4AA. Item 47 (Schedule 2) seeks to insert new subsection 1317DAA(4) to retain this standard, by stating that the offences created under subsections 674(2) and 675(2) are to be treated as offences of strict liability for the purposes of issuance of an infringement notice under Part 9.4AA. The effect of this is that ASIC retains its existing ability to issue an infringement notice in respect of a breach under subsections 674(2) and 675(2) on a 'no fault' basis.
Consultation
1.92
The EM states that the extension of 'a fault element to misleading and deceptive conduct is based on two Federal Court judgments, as well as the opinions of stakeholders expressed in targeted consultation on the temporary instruments' (that is, not on Schedule 2 itself, which differs to the temporary instruments in numerous respects).
Commencement
1.93
Schedule 2 commences on the day after the bill receives Royal Assent.
Financial impact
1.94
The EM states there are no financial impacts of the bill.
Regulatory impact
Schedule 1
1.95
The EM states that a Regulation Impact Statement (RIS) was not prepared as Schedule 1 falls under an exemption from regulatory impact analysis requirements as it extends an urgent and unforeseen measure made in response to COVID-19.
1.96
Pursuant to the Australian Government Guide to Regulatory Impact Analysis:
Only the Prime Minister can exempt a government entity from the need to complete a RIS, and only then in very limited circumstances, namely:
when there are truly urgent and unforeseen events requiring a decision before an adequate regulatory impact assessment can be undertaken.
where there is a matter of Budget or other sensitivity and the development of a RIS could compromise confidentiality and cause unintended market effects or lead to speculative behaviour which would not be in the national interest.
1.97
On 18 March 2020, the Prime Minister, the Hon Scott Morrison MP, granted an exemption from the need to complete regulatory impact analysis in the form of a RIS for all urgent and unforeseen Australian Government measures made in response to COVID-19.
Schedule 2
Report authored by Liberal Party Senator certified as an 'independent' review equivalent to a Regulation Impact Statement
1.98
The EM states, in regard to Schedule 2, that the PJC report, which was authored by a Liberal Party Senator and published in December 2020, 'has been certified as an independent review which involved a process and analysis equivalent to a Regulation Impact Statement'.
1.99
A guidance note from the Office of Best Practice Regulation (OBPR) states:
…a RIS is not required for a regulatory proposal if an independent review or other RIS-like process has been undertaken by, or on behalf of, a department, agency, statutory authority or board, resulting in an analysis that is equivalent to a RIS.
1.100
It is the government department or agency who chooses to use an independent review or RIS-like process in lieu of a RIS. The department or agency self-assesses whether the independent review or RIS-like process has followed a similar process to that of a RIS and has adequately addressed all the requirements of a RIS. The self-assessment must be in writing from the Secretary, Deputy Secretary or Chief Executive to the OBPR and certify that the independent review or the RIS-like process:
has undertaken a process and analysis equivalent to a RIS;
examined the same problem the proposal is seeking to address;
examines options or recommendations that are relevant to the options or recommendations in the proposal, including justification on where the options or recommendations are not substantially the same;
adequately addresses all seven RIS questions in relation to the proposal; and
is consistent with the Australian Government Guide to Regulatory Impact Analysis.
1.101
With respect to the bill, the Deputy Secretary of Markets Group at Treasury wrote to the OBPR on 11 February 2021 to certify, with regards to amendment to the continuous disclosure laws to introduce a fault element, the PJC report as a process and analysis equivalent to a RIS. The Deputy Secretary certified that the report 'adequately [addresses] all seven RIS questions, and is submitted to the [OBPR] for the purposes of a final policy decision'. The letter also notes:
supplementary analysis has been provided on two components of the legislative amendments in Schedule 2 that were not part of the recommendation in the PJC report; and
the regulatory burden to business, community organisations or individuals of introducing a fault element to continuous disclosure, and in limited circumstances misleading and deceptive conduct, has been quantified as an average annual regulatory saving of $912.5 million (both discussed below).
1.102
The committee notes that, far from the PJC report being an 'independent analysis', the report was authored by the then-Liberal Chair of the PJC. Moreover, the PJC's inquiry was not an inquiry into continuous disclosure laws. In fact, those laws were not even referred to in the PJC's terms of reference (let alone a focus on the PJC's inquiry).
Supplementary analysis for the Regulation Impact Statement
1.103
According to the self-assessment certification letter from Treasury and by the OBPR, Schedule 2 contained two policy proposals that were not within the scope of the certified PJC report (noting that, in fact, none of the policy proposals in Schedule 2 formed part of the PJC's terms of reference):
the introduction of a fault element for misleading and deceptive conduct in relation to alleged failures to keep the market fully informed; and
retaining the ability of ASIC to issue infringement notices and undertake non-penalty proceedings against entities and officers without having to prove knowledge, recklessness or negligence.
1.104
The OBPR noted the following with respect to the need for additional analysis:
The Office of Best Practice Regulation (OBPR) does not assess the quality of independent reviews and RIS-like documents used in lieu of a RIS, but does assess whether the options analysed in the independent review are relevant to the regulatory proposal. The OBPR assessed that the options analysed in the independent review were not sufficiently relevant to the regulatory proposal and required additional supplementary analysis. The supplementary analysis prepared by the Treasury addresses the gap in the analysis between the certified independent review and the government's consideration of options for introducing a fault element to continuous disclosure.
1.105
Supplementary analysis on these policy proposals is included in Attachment A to the EM. This supplementary analysis, along with the PJC report, has been certified by the Deputy Secretary of Markets Group at Treasury as meeting the requirements of a RIS.
1.106
The supplementary analysis describes the expected impact on business (though offers little to no evidence to support the analysis):
entities and officers will not face the same level of financial risk where they allegedly fail to comply with the continuous disclosure obligations unless they do so with 'knowledge, recklessness or negligence';
reduced time and costs to be spent on compliance assurance; and
significant savings on the cost of D&O insurance.
Use of infringement notices and non-financial enforcement action by ASIC
1.107
The supplementary analysis claims that some of the negative impacts, as discussed in the PJC report, of shareholder class actions that are not applicable to infringement notices, such as:
the circularity problem, where the incidence of an action brought by shareholders will often be borne by a group of shareholders with whom there is significant overlap, given the action will negatively affect the value of the securities they hold;
the reliance on litigation funders in almost all continuous disclosure class actions and therefore incurring the associated high litigation funding commissions and legal fees; and
the effect of an increasing prevalence of class actions of the cost of D&O insurance.
1.108
The supplementary analysis claims that by retaining a 'no fault' standard for ASIC's issuance of infringement notices:
ASIC can use infringement notices for minor infractions and retains the ability to seek significant penalties when it is demonstrable that the entity or officer acted with knowledge, recklessness or negligence; and
responses to contraventions which are proportionate and proximate in time to the alleged breach can be achieved, as infringement notices are a fast and effective regulatory response.
1.109
The supplementary analysis concludes—on the basis of these two assertions–that a complementary regime is created where the actions brought and the potential outcomes are proportionate to the behaviour of the entity.
Fault element for misleading and deceptive conduct
1.110
The following points are raised in the supplementary analysis:
actions for continuous disclosure are often accompanied by actions for misleading and deceptive conduct on the same facts;
if a fault element was introduced for continuous disclosure but not for misleading and deceptive conduct, the latter would remain an alternate action available to litigants because the same factual circumstances commonly give rise to allegations of contravention of both obligations; and
it is not conclusively established whether or how the courts may apply different standards to continuous disclosure and misleading and deceptive conduct given the limited number of judgments on these matters. However, changing the standard for both obligations is required to achieve the policy intent of amending continuous disclosure obligations as recommended by Liberal members of the PJC in the PJC report.
1.111
However, changing the standard for both obligations is required to achieve the policy intent of amending continuous disclosure obligations as recommended in the PJC report.
Identified risks
1.112
Two risks were identified from the proposed options:
the risk that entities and officers will not meet the same standards of disclosure; and
if a fault element is not introduced to misleading and deceptive conduct alongside the fault element introduced to continuous disclosure, the latter amendment will not serve its intended purpose.
Regulatory burden estimate
1.113
The regulatory burden estimate covers an outcome where:
private litigants and ASIC must establish a fault element in civil penalty proceedings for,
misleading and deceptive conduct for an alleged failure to disclose price sensitive information to the market; and
ASIC retains the ability to issue infringement notices and undertake non-financial civil enforcement without proving a fault element.
1.114
The government asserts that the key anticipated impact relates to premiums for D&O insurance. The government estimates that the average annual regulatory savings for entities and officers in complying with the continuous disclosure regime, as a result of decreased expenditure on D&O insurance, is $912.5 million. However, Treasury was unable to provide any concrete evidence in support of this estimate (see below).
1.115
Moreover, as outlined in greater detail below, the Insurance Council of Australia submitted on behalf of the insurance industry that the measures in Schedule 2 'will quite likely have no discernible effect' on D&O insurance premiums, either in the short to medium or medium to long terms.
Human rights implications
Statement of Compatibility with Human Rights
Schedule 1
1.116
As discussed in the EM, the Statement of Compatibility with Human Rights (Compatibility Statement) states that Schedule 1 is compatible with the human rights and freedoms recognised in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011, and thus does not raise any human rights issues.
Schedule 2
1.117
The Compatibility Statement states that the bill engages, or may engage, the right to a fair trial under Article 14 of the International Covenant on Civil and Political Rights (ICCPR) due to the new accessorial liability civil penalty provisions.
1.118
The civil penalties in Schedule 2 are not criminal offences under Australian law and do not impose a criminal penalty. However, Guidance Note 2: Offence provisions, civil penalties and human rights (Guidance Note 2) observes that civil penalty provisions may engage the criminal process rights under Article 14 of the ICCPR regardless of the distinction between civil and criminal penalties in domestic law.
1.119
The Compatibility Statement notes that the penalties appear to amount to 'criminal' penalties under international human rights law because they carry a significant maximum penalty for the purpose of punishing and deterring contravening conduct.
1.120
Further, the contravention-specific defence to the accessorial liability provisions may have the effect of placing the evidential burden for the defence on the defendant. Therefore, the right to be presumed innocent until proven guilty under Article 14 of the ICCPR is engaged.
1.121
The reversal of the evidentiary burden is in relation to whether the defendant took all reasonable steps in the circumstances to ensure the entity complied with its obligations and believed on reasonable ground the entity had complied. The Compatibility Statement noted that these matters are peculiarly within the knowledge of the defendant and the defendant is positioned to adduce evidence as to the steps they took and their beliefs after doing so. Requiring the regulator to disprove these matters would be significantly more costly and difficult. Therefore, the Compatibility Statement finds this reversal to be reasonable, necessary and appropriate because it is limited to matters peculiarly within the knowledge of the defendant.
1.122
The Compatibility Statement concludes that, to the extent that Schedule 2 engages the protections under Article 14 of the ICCPR, it is compatible with human rights because the reversal of the evidential burden is limited to matters that are peculiarly within the knowledge of the defendant, of which they are better positioned to readily adduce evidence.
Human rights scrutiny report
1.123
The Parliamentary Joint Committee on Human Rights stated that it had no comment in relation to the bill 'on the basis that the [bill does] not engage, or only marginally engage, human rights; promote human rights; and/or permissibly limit human rights'.
Conduct of the inquiry
1.124
The committee advertised the inquiry on its website and wrote to relevant stakeholders and interested parties inviting written submissions by 23 April 2021. The submission date was subsequently extended until 28 May 2021.
Submissions and public hearings
1.125
The committee received a total of 15 submissions which are listed in Appendix 1. The committee also received additional information, including answers to questions taken on notice (as listed in Appendix 1).
1.126
Submissions made to the previous inquiry undertaken by the Legislation Committee were also considered by this committee in the development of its report.
1.127
The committee held the following public hearings:
9 June 2021 in Canberra; and
1.128
A list of witnesses is provided in Appendix 2.
Acknowledgements
1.129
The committee thanks all the individuals and organisations who assisted with the inquiry through written submissions and appearing at hearings. In particular, the committee would like to acknowledge the efforts that many companies and government departments made to make senior executives available. The committee also notes its appreciation to Legislation Committee and secretariat members for their research, consideration and earlier report into the bill.