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 (the committee) for inquiry and report by 12 March 2021. On 25 February 2021, the Senate extended the reporting date to 30 June 2021.
Purpose of the bill
1.3
In response to the COVID-19 pandemic, the Government introduced a raft of regulatory relief measures for companies. The bill concerns two regulatory relief measures.
1.4
First, temporary relief initially introduced on 5 May 2020 permits companies and registered schemes to use technology to satisfy the regulatory requirements in the Corporations Act 2001 (Corporations Act) to hold meetings, distribute relevant document and execute documents. Schedule 1 of the bill seeks to extend the expiry date of this temporary relief from 21 March 2021 until 16 September 2021. It also expands upon some aspects of the relief in response to feedback provided during consultations.
1.5
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 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.
1.6
Second, a different type of regulatory relief introduced in May 2020 was the 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.
1.7
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.
Provisions of the bill
1.8
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
1.9
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.
1.10
Pursuant to the special determination powers granted to the Treasurer during the COVID-19 pandemic under section 1362A of the Corporations Act, on 5 May 2020 the Corporations (Coronavirus Economic Response) Determination (No. 1) 2020 made temporary modifications to allow the use of electronic means to hold meetings and execute documents until 6 November 2020. The Corporations (Coronavirus Economic Response) Determination (No. 3) 2020 (Determination No. 3) extended the application of the modifications to 21 March 2021. For 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
1.11
The EM states that the amendments in Schedule 1 extend, and expand upon, the changes in Determination No. 3. An interim report by the Senate Select Committee on Financial Technology and Regulatory Technology discusses at some length stakeholder views on the temporary changes under Determination No. 3 and the issues to consider in formulating permanent changes.
Future proposal—Permanent reforms
1.12
On 19 October 2020, 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. The bill's EM notes that it is intended that permanent reforms will be in place when the temporary modifications expire in September 2021.
Future proposal—Opt-in hybrid Annual General Meetings pilot
1.13
A further proposal mentioned in the EM is 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 temporary relief ends. ASIC has issued guidelines for conducting hybrid and virtual meetings.
Overview of the amendments
1.14
Schedule 1 partially implements the measure, JobMaker Plan–Digital Business Plan from the 2020-21 Budget. It seeks to extend until 16 September 2021 the 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.
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.
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.
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.
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: Explanatory Memorandum, pp. 8-9.
Detailed explanation of the new law
1.15
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
1.16
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 to execute document under section 127 apply from the day that the Act commences.
1.17
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.
1.18
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.
1.19
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
1.20
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.
1.21
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.
1.22
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 of documents relating to meetings
1.23
Where meetings are held virtually or in person, documents relating to the meeting may be given or signed 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.
1.24
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) 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).
Electronic recording and storage of minute books
1.25
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.
1.26
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
1.27
The EM does not mention a consultation process specific to the bill. However, as noted above, Treasury has undertaken a consultation process on an exposure draft bill which seeks to make permanent reforms in respect of virtual meetings and electronic document execution.
Commencement
1.28
Schedule 1 commences on the day after the bill receives Royal Assent.
Financial impact
1.29
The EM states there are no financial impacts of the bill.
Schedule 2—Continuous disclosure obligations
Background
1.30
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.
1.31
Sections 674 and 675 of the Corporations Act contain the continuous disclosure obligations for listed and unlisted disclosing entities. On 25 May 2020, the Corporations (Coronavirus Economic Response) Determination (No. 2) 2020 (Determination No. 2) made temporary amendments to continuous disclosure. 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.
1.32
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.
1.33
The amendments in Determination No. 2 were permitted pursuant to special determination powers granted to the Treasurer during the COVID-19 pandemic under section 1362A. On 23 September 2020, the amendments were extended until 23 March 2021 by Corporations (Coronavirus Economic Response) Determination (No. 4) 2020 (Determination No. 4). The purpose for the extension was detailed in the Explanatory Statement to Determination No. 4:
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.
1.34
The bill's EM states that Schedule 2 implements recommendation 29 of the Parliamentary Joint Committee on Corporations and Financial Services Inquiry into Litigation Funding and the Class Action Industry (PJC report). Recommendation 29 is that the Government permanently legislate the changes to continuous disclosure laws in Determination No. 4. The EM states that the PJC report:
provides that securities class actions are frequently brought in Australia alleging contraventions of the continuous disclosure obligations and that this has a significant financial and compliance impact on the entities and officers subject to these actions. The committee's view was that this change would address the imbalance.
Overview of the amendments
1.35
As per the bill's EM, Schedule 2 of the bill 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.
1.36
The bill's 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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The temporary Determination No. 4 modifies the Corporations Act to ensure that, in determining whether a listed disclosing entity contravenes its existing continuous disclosure obligations, its state of mind is taken into account.
Without the temporary modification, the Corporations Act does not require ASIC or private plaintiffs to prove an entity's knowledge, recklessness or negligence in establishing a civil contravention of continuous disclosure obligations.
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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: Explanatory Memorandum, p. 25.
Detailed explanation of the new law
Continuous disclosure obligations
1.37
Currently, sections 674 (listed disclosing entities) and 675 (unlisted disclosing entities) contain the continuous disclosure obligations.
1.38
A listed disclosing entity may be required to disclosure any information that may have a material effect on the price of 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.
1.39
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).
1.40
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.
1.41
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.
1.42
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
1.43
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.
1.44
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).
1.45
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).
1.46
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).
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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).
1.47
Item 1 (Schedule 2) seeks to insert an analogous provision into section 12DA of the Australian Securities and Investments Commission Act 2001 (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
1.48
Part 9.4AA of the Corporations Act permits the Australian Securities and Investments Commission (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).
1.49
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
1.50
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'.
Commencement
1.51
Schedule 2 commences on the day after the bill receives Royal Assent.
Financial impact
1.52
The EM states there are no financial impacts of the bill.
Regulatory impact
Schedule 1
1.53
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.
1.54
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.
1.55
On 18 March 2020, the Prime Minister, the Hon Scott Morrison, 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
Independent review certified as equivalent to a Regulation Impact Statement
1.56
The EM states, in regard to Schedule 2, that the PJC report, published in December 2020, 'has been certified as an independent review which involved a process and analysis equivalent to a Regulation Impact Statement'.
1.57
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.
1.58
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.
1.59
With respect to the bill, the Deputy Secretary of Markets Group at Treasury wrote to the OBRP 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).
Supplementary analysis for the Regulation Impact Statement
1.60
As identified in the self-assessment certification letter from Treasury and by the OBPR, Schedule 2 contains two policy proposals that are not within the scope of the certified PJC report:
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.
1.61
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.
1.62
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 as meeting the requirements of a RIS.
1.63
The supplementary analysis describes the expected impact on business:
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 directors and officers (D&O) insurance.
ASIC's use of infringement notices and non-financial enforcement action
1.64
The supplementary analysis states 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.
1.65
The supplementary analysis notes 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.
1.66
Therefore, the supplementary analysis concludes that a complementary regime is created where the actions brought and the potential outcomes are proportionate to the behaviour of the entity. Consequently, entities and officers are expected to be more confident issuing forward guidance while still subject to regulatory discipline.
Fault element for misleading and deceptive conduct
1.67
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.
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 in the PJC report.
Identified risks
1.68
Two risks were identified from the proposed options:
The risk that entities and officers will not meet the same standards of disclosure is low — entities should remain sufficiently deterred from breaching their obligations because any serious misconduct will still be subject to the possibility of a class action or proceedings by ASIC when the entity acted with knowledge, recklessness or negligence.
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
1.69
The regulatory burden estimate covers an outcome where:
private litigants and ASIC must establish a fault element in civil penalty proceedings for:
continuous disclosure; and
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.
1.70
The key anticipated impact relates to premiums for D&O insurance. It is estimated 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.
Human rights implications
Statement of Compatibility with Human Rights
Schedule 1
1.71
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
1.72
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.
1.73
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.
1.74
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.
1.75
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 the presumed innocent until proven guilty under Article 14 of the ICCPR is engaged.
1.76
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.
1.77
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
1.78
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
1.79
The committee advertised the inquiry on its website and wrote to relevant stakeholders and interested parties inviting written submissions by 1 March 2021.
1.80
The committee received 27 submissions as well as additional information, which are listed at Appendix 1.