Labor Senators note that several stakeholders raised concerns that the proposed amendment to the Bill would:
(a)
Reduce shareholder rights to accountability and transparency, and the ability to effectively participate, if virtual-only Annual General Meetings (AGMs) are normalised without shareholder opt-in/out election
(Schedule 1); and
(b)
Cause significant disadvantage and financial loss where directors fail to disclose information and consequently deceive individuals or groups including shareholders and the general public, leaving them exposed to other risk of financial loss.
Additionally, Committee members were unable to take evidence from submitters and other potential witnesses due to the Government’s rushed legislative process and the combination of Schedule 1 (in the face of the looming 21 March 2021 deadline) and Schedule 2 within the same Bill.
The committee’s decision to report early diverges from the Senate’s request for an extended inquiry. An extended inquiry would have allowed further time for submission to be made and for extended consideration of the continuous disclosure measures contained in Schedule 2 of the Bill.
Schedule 1 - Virtual meetings and electronic communication of documents
Labor Senators support the use of electronic technology that facilitates the effective participation of shareholders in the communication and execution of company documents, and in virtual AGMs, provided shareholders have the option to elect:
(a)
to receive and execute hard copies of documents if that is their preferred method of communication; and
(b)
to attend AGM’s either in person and/or by electronic means.
As the International Corporate Governance Network observed:
“…we encourage regulators to ensure that shareholders rights are not infringed so as not to restrict their ability to hold companies properly to account. Certain minimum shareholder rights should be guaranteed to allow for robust challenge of boards and management through interactive and unmoderated questioning or statements made by shareholders to have meaningful dialogue on contentious proposals.”
Labor Senators subsequently support the 12-month pilot of hybrid AGMs that is proposed at the end of this temporary measure on 16 September 2021 along with a review of the efficacy of the Schedule and its related legislation and regulations.
Labor Senators do note the views of submitters and members of the public who are concerned about permanent virtual AGMs. Labor Senators are of the view that any changes to the AGM system must ensure that ordinary shareholders rights are preserved – particularly the right to ask questions of directors and move motions.
Schedule 2 – Continuous disclosure obligations
Schedule 2 to the Bill provides that all civil penalty proceedings commenced under the continuous disclosure and misleading and deceptive conduct provisions must prove that an entity or officer acted with ‘knowledge, recklessness or negligence’ in respect of an alleged contravention.
Evidence provided to the Committee by submitters outlines the deep concern of shareholders and legal practitioners that Schedule 2 is unnecessary and ‘turns back the clock’ leaving shareholders at risk of a return to the darker days of the distress and high legal costs to individuals or groups of shareholders pursuing redress.
Undermining continuous disclosure
The Government’s own explanatory memorandum to the Bill notes the risk that entities and officers may not meet the same standards of disclosure that they did under the previous status quo. However, it is clear from evidence provided to the committee that the Government has drastically understated this risk.
The Australian Council of Superannuation Investors said:
If shareholders are required to prove a subjective standard (the mental state of the disclosing entity) rather than the current objective standard of materiality, this will make it more difficult for shareholders to hold companies to account…
…The proposed changes to the continuous disclosure rules could therefore adversely affect the balance between companies and investors, and work to undermine market integrity.
The costs of the Government ignoring this risk go far beyond what has been acknowledged by Government Senators. This change undermines the fundamental integrity of the share market, and is bad for ordinary investors. Evidence provided to the committee by the International Corporate Governance Network said:
Circumventing a true and accurate valuation of the company;
Hindering the functioning of fair and efficient capital markets;
Fostering misleading and dishonest conduct;
Suppressing shareholders of their right to redress for mass wrong-doing; and
Shielding companies, directors, advisors and auditors from accountability.
The costs of failures of disclosure to ordinary investors are not immaterial. The Law Council of Australia’s submission noted the following:
Material misstatements in financial statements that cause inflated share prices that result in the loss of value when the truth is revealed will be unassailable unless one can prove that the company actively mislead its auditors and the market.
Labor Senators are of the view that the changes to continuous disclosure rules could lead to major failures of disclosure. These failures could have significant costs for millions of Australian investors and shareholders, and make Australia a less attractive destination for international investment.
Labor Senators are on the side of ordinary investors and shareholders who will suffer as a result of the changes of Schedule 2 of the Bill.
Lack of consultation
The Government’s explanatory memorandum points to the recommendations made by the Australian Law Reform Council in Report 134: Integrity, Fairness and Efficiency—An Inquiry into Class Action Proceedings and Third-Party Litigation Funders and the Parliamentary Joint Committee on Corporations and Financial Services’ Inquiry into Litigation Funding and the Regulation of the Class Action Industry as justification for the Bill. However, as suggested by the ALRC report’s title, it did not focus on corporate disclosure rules or market operations.
The ALRC did not call for changes to these rules. The only reference to continuous disclosure rules in the ALRC recommendations was Recommendation 24:
The Australian Government should commission a review of the legal and economic impact of the operation, enforcement, and effects of continuous disclosure obligations and those relating to misleading and deceptive conduct…
While the Parliamentary Joint Committee on Corporations and Financial Services has considered some of these issues, the terms of reference of their inquiry into class actions did not mention continuous disclosure. The review recommended by the ALRC has therefore not taken place.
It is the view of Labor Senators that there has been inadequate consideration and consultation in relation to the corporate disclosure changes in this Bill. In developing this Bill, the Government has set out to make shareholder class actions more difficult, and ignored the broader consequences for market integrity. Evidence provided to the Committee has made it clear that there are significant risks to market integrity.
Savings for whom?
One of the Government’s stated objectives for the Bill was to reduce the cost of directors and officers insurance. The Government’s regulatory burden statement indicated that the average reduction in premiums for directors and officers insurance would be $912.5 million. However, it is unclear how this estimate has been arrived at.
Evidence from the Insurance Council of Australia indicated that a best-case scenario would result in little or no changes to the price of directors and officer insurance:
in the short to medium term at best stem the rate of increase in D&O premiums, but will quite likely have no discernible effect; and
in the medium to long term may lead to some reduction in D&O premiums, but quite likely will have no discernible effect.
Given evidence provided to the committee by industry experts, Labor Senators are of the view that the Government’s estimate of savings on insurance premiums is likely to be entirely fictional.
The Government’s estimates also do not consider the considerable costs that may be imposed on ordinary shareholders and investors if the changes weaken continuous disclosure rules. Labor Senators consider this to be a significant oversight by the Government in considering the Bill’s regulatory burden.
Recommendation
Schedule 1 should ensure shareholders are always able to elect to receive communications and execute documents by either hard copy and/or electronic means, and also attend AGMs in person and/or by electronic means. The pilot of hybrid-AGMs is supported, subject to review.
Recommendation
Schedule 2 of the bill not be passed.
Senator Alex Gallacher
Deputy Chair
Labor Senator for South Australia
Senator Jenny McAllister
Member
Labor Senator for New South Wales