Introduction
2.1
This chapter examines the views held by stakeholders on the provisions of the Treasury Laws Amendment (2021 Measures No.1) Bill 2021 (the bill). The committee accepted and published 26 submissions and reported based on the bill's explanatory materials and submission received.
2.2
Submissions showed that there was widespread support on the temporary amendments for virtual meetings and electronic communications of documents in Schedule 1. There was also support for the continuous disclosure amendments in Schedule 2, although some stakeholders were opposed to the changes.
2.3
This chapter is intended to provide an indicative, though not exhaustive, account of the key issues in both schedules examined during the committee's inquiry. The chapter concludes with the committee's views and recommendations on the bill.
Reporting timeframe
2.4
Numerous submitters drew attention to the fact that the amendments made pursuant to the Corporations (Coronavirus Economic Response) Determination (No. 3) 2020 (Determination No. 3) and Corporations (Coronavirus Economic Response) Determination (No. 4) 2020 (Determination No. 4) are due to expire on 21 and 23 March 2021 respectively. Submitters were concerned at the extension of the committee's reporting date to 30 June 2021 and encouraged the committee to produce its report in enough time to allow the bill to pass before the expiry of Determination No. 3 and Determination No. 4.
Schedule 1–Virtual meeting and electronic communication of documents
Rationale of temporary measures and their effectiveness during COVID-19
2.5
There was widespread support in submissions for the changes to permit virtual and hybrid meetings, as well as for the provisions to allow the virtual sending, signing and keeping of documents related to meetings and the execution of company documents.
2.6
Submitters noted the changes were necessary and effective during the COVID-19 pandemic and furthered the objective of modernising regulation to enable the use of technology to facilitate business efficiency.
2.7
Ai Group welcomed the Schedule 1 amendments on the basis that they were sensible and practical changes that will permit efficiencies to be realised from widely-available digital technologies.
2.8
The Business Council of Australia (BCA) commented:
These reforms recognise the current and future capacity for technology to facilitate the holding of company meetings in a more modern and efficient manner. They will also bring Australia into line with other comparable jurisdictions, such as the United Kingdom, Canada and parts of the United States. The ability to hold 'virtual meetings' has been necessary as a result of limits on the size of physical gatherings since the onset of COVID-19. It is likely that such limits will continue to apply in some form for the foreseeable future.
…
Allowing for the electronic execution of documents means that company officers need not be physically located in the same place as other parties, which removes unnecessary costs and delays on a range of transactions and decisions. It reflects the reality that, prior to COVID-19, many businesses were increasingly entering into transactions and contracts electronically, where it was possible to do so.
The Bill removes requirements for counterparties and their legal advisers to require proof of the technical and procedural matters that the Act would otherwise allow them to assume. Even in the absence of these measures as a result of COVID-19, such reforms to the Act were already desirable in order to keep pace with developments in technology that now enable businesses to execute documents without company officers or advisers being physically present.
…
Most notably, these reforms are another major step forward in the shift to a digital economy. Australia needs to adapt and keep pace with other jurisdictions if we are to more fully unlock the productivity benefits that will flow from the use of digital technology.
Extension of temporary measures rather than permanent reforms
2.9
The Government has indicated that when the provisions of Schedule 1 expire on 16 September 2021:
permanent changes will be in place to allow for the electronic signing, sending and execution of documents; and
member meetings will need to be conducted consistent with pre-COVID-19 laws, which require an in-person meeting to be held. However, the Government will conduct a 12-month opt-in pilot for companies to hold hybrid annual general meetings (AGMs) to enable a proper assessment of the shareholder benefits of virtual meetings.
2.10
Submitters expressed differing views about the Government's approach to implementing permanent measures. PwC and the BCA considered the extension of the relief to September 2021 to be sensible given the likelihood of ongoing travel disruptions and social distancing requirements due to the COVID-19 pandemic.
2.11
PwC welcomed the Government's approach to legislating for longer term use of technology to meet the regulatory requirements, viewing it as 'cautious and consultative'. It noted the importance of involving retail investors in the development of long-term policy as this may be a group of shareholders impacted by the availability and capability of technology options.
2.12
The Australian Council of Superannuation Investors (ACSI) made similar comments, supporting further consultation on permanent changes and supporting the proposal for a hybrid model. The BCA also supported the Government's approach to allow all interested parties to have input into the permanent regime.
2.13
The Australian Banking Association emphasised the need to avoid disruption to business:
The ABA considers it crucial for the temporary relief to be extended to 16 September 2021, or later, in the form as proposed under the [the bill]. This would avoid the disruption and costs that will ensue if businesses and consumers were to lose the benefit of the temporary reforms, even if only for a limited time before the Parliament has the opportunity to consider legislation that can make the benefits of these electronic execution reforms permanent.
2.14
Several submitters, including Allens, the Australasian Investor Relations Association (AIRA) and Group of 100 (G100) welcomed the objective of the Schedule 1 provisions, yet would have preferred the provisions to be enacting permanent changes rather than expiring in September 2021.
2.15
The Law Council of Australia (Law Council) recommended the Schedule 1 amendments be made permanent before the Annual General Meeting (AGM) season from September to November 2021 after undertaking an expedited hybrid AGM pilot or consultation process. Alternatively, the Law Council recommended the Schedule 1 measures be in place until December 2021.
2.16
Similarly, the Insurance Australia Group Limited (IAG) argued that the sunset date should be extended to 31 December 2021 for the following reasons:
the current absence of a requirement for the measures to be made permanent by 16 September creates uncertainty for companies planning their 2021 AGMs;
without further reform, companies proposing to hold AGMs after 16 September 2021 will be required to hold a physical meeting; and
companies proposing to release meeting materials after 16 September 2021 will be required to do so by post if permanent measures are not effective by that date.
2.17
The Governance Institute of Australia (Governance Institute) supported the move to facilitating virtual meetings and electronic execution of documents. However, it queried the benefit of introducing changes to the relief introduced by Determination No. 3 (discussed later in this chapter) for a short time period. It considered that the status quo should be maintained until the Government has finalised its consultation on the permanent measures.
Virtual and hybrid AGMs
Attendance and participation at AGMs
2.18
Submitters drew attention to data which suggested that using technology to hold virtual and hybrid meetings improved, rather than hindered, attendance at AGMs during the COVID-19 pandemic. For example, the Australian Institute of Company Directors (AICD) cited data from Computershare which demonstrates that overall attendance at AGMs increased by 36 per cent when compared to attendance from 2019 to 2020. Similarly, the Governance Institute pointed to an increased level of stakeholder engagement that occurred during the 2020 AGM season.
2.19
The Governance Institute described several ways companies facilitated the engagement of stakeholders and the ability to ask questions at virtual and hybrid meetings:
a number of companies included a 'button' to enable shareholders to submit questions online in advance of the meeting on an online voting page;
smaller companies, charities and not-for-profit organisations used video meeting platforms such as Zoom, Microsoft Teams and Webex to hold all types of company meetings. These platforms provided a reasonable opportunity to participate and interact through features such as 'Hands Up' which enabled attendees to speak at the meeting; and
shareholders of larger listed companies submitted questions in advance or during the meeting using a keyboard to type questions into the question function of the secure online platform which were then relayed to the Chair for a response.
Transparency and quality of participation and engagement
2.20
Several submissions emphasised the integral role of AGMs in facilitating transparency and company accountability and noted that virtual AGMs should not diminish that capacity.
2.21
The G100 explained the governing principles of AGMs:
The principles that govern the requirements for public companies to hold AGMs are centred on purposeful communication and participation between shareholders of the company and the board of directors of that company in relation to those matters that the law considers to be of utmost importance to shareholders...
In addition, the AGM can provide at least one opportunity a year for shareholders to attend and engage with directors…
AGMs are one of the primary events in an organisation's governance calendar. They are a critical forum for shareholders/members: to hold companies, board and management accountable for their performance and reporting; to hear directly from the Chair and management; and to vote on the composition of the board and key governance resolutions.
2.23
The International Corporate Governance Network (ICGN) expressed concern about the potential for virtual AGMs to infringe on shareholder rights:
While ICGN members recognise the need for hybrid and virtual-only AGMs in this current environment, we encourage regulators to ensure that shareholder 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.
2.24
Some submitters noted challenges experienced with virtual AGMs reduced their ability to participate and diminished the value of the AGM as an accountability mechanism. These challenges included:
technological issues affecting participation, such as receiving incomplete instructions to connect to online platforms, connection interruptions and delays in obtaining help to resolve technological issues;
issues with shareholders' questions, such as:
company directors not being available to answer questions;
a requirement to submit questions in advance, rather than in real-time;
the avoidance or editing of reasonable questions;
the bundling of questions deemed to be of a similar nature;
placing an unreasonable character limit on questions;
limits on discussion time; and
shareholders' lack of a right to reply to unanswered or partially answered questions.
2.25
For these reasons, some recommended reforms included:
a requirement for hybrid meetings, with solely virtual meetings to be permitted only in emergency circumstances;
a requirement for all appropriate questions to be accepted and answered, and all questions and answers to be recorded and transcribed; and
an opportunity for questions and statements to be made in advance as well as at the meeting with the option for follow up questions and statements from participants.
2.26
The G100 recognised some issues pertaining to shareholder participation:
In a few cases, dissatisfaction has been raised with the 'question and answer' sessions. Many companies have undertaken to ensure that all questions received in a virtual AGM are read out, or collated where they are similar, or have answered them individually subsequent to the meeting. It is expected that accepted practice will evolve as Virtual/Hybrid AGMs continue, and that ASIC may review the situation to see if guidance is appropriate after a relevant passage of time.
2.27
The Law Council also acknowledged concerns expressed by shareholder interest groups, proxy advisers and activists about the ability to be heard or to ask questions being hindered by the technology used to hold virtual or hybrid meetings. The Law Council recommended the Government considers developing guidance to ensure the ability of meeting attendees (including shareholders) to be heard or to ask questions is not stifled by features of the technology used to hold a virtual or hybrid meeting.
The case for virtual and hybrid AGMs on a permanent basis
2.28
Some submissions advocated making permanent the virtual meeting provisions of Schedule 1. Some contended that the application of the measures should apply without the need for companies to change their constitutions.
2.29
The AICD noted the advantages of allowing companies to hold virtual and hybrid meetings on a permanent basis, including:
removal of geographical and physical barriers to attendance by retail shareholders and members;
increased questioning and engagement; and
bringing Australia's regulatory rules into line with other countries such as the United States, Canada, Spain, South Africa, Denmark, Ireland and New Zealand.
2.30
The AICD, the Law Council and the AIRA advocated for permanent reforms allowing companies the flexibility to adopt the best meeting format for the circumstances.
2.31
The AICD warned against legislative change which would mandate a particular format for AGMs, especially a requirement for hybrid AGMs. Such a requirement may cause entities to hold physical meetings only, thus sacrificing the benefits of virtual meetings.
2.32
The Property Council of Australia (Property Council) preferred virtual over hybrid meetings and encouraged the Government to undertake further consultation to explore fully virtual AGMs alongside the Government's proposal to undertake a 12-month opt-in pilot program for companies to hold hybrid AGMs.
2.33
Conversely, ACSI advocated for hybrid, rather than virtual, meetings to be the minimum standard with virtual meetings to be required only in extreme circumstances.
2.34
The Law Council recommended that Schedule 1 should clarify that the provisions regarding the use of technology in meetings do not override provisions in company constitutions that already provide for the technology and format for company meetings. Relatedly, the AICD recommended that, as part of the hybrid AGM pilot, the Government should consider how companies could participate in the pilot without the need for changing their constitution to permit this format.
Critique of certain provisions of Schedule 1
Reasonable opportunity to participate in virtual meetings
2.35
Determination No. 3 allows company meetings required under the Corporations Act and relevant legislative instruments to be held virtually 'using one or more technologies that give all persons entitled to attend a reasonable opportunity to participate without being physically present in the same place'.
2.36
The Governance Institute and the AICD noted that during the COVID-19 pandemic, some companies organised telephone connections to facilitate attendance at meetings to enable shareholders to ask questions orally. Both commented that attendance via phone was less common and posed challenges, including:
telephone connection often comes at an additional cost, plus call charges;
verifying the identity of the caller as a shareholder was important because only shareholders have a right to speak at shareholders' meetings, whereas guests do not; and
the use of multiple technologies significantly increases the complexity and administrative burden of the arrangements required for shareholders' meetings and introduces greater risks.
2.37
The AICD considered the approach where questions are submitted online to webcast meetings is more securely monitored by the platform provider as it requires shareholders to provide a passcode to verify identity.
2.38
Proposed subsection 253Q(2) adds to the measures introduced by Determination No. 3, stating that a 'reasonable opportunity to participate' includes a reasonable opportunity to exercise a right to speak, which a person may elect to exercise (including a right to ask questions) orally rather than in writing. The Property Council noted that this provision is not present in the exposure draft on which Treasury undertook consultation.
2.39
The AICD, the Governance Institute and Property Council expressed concern at the new requirement in proposed paragraph 253Q(2)(b) that a reasonable opportunity to participate includes a right to speak orally rather than in writing.
2.40
The Governance Institute did not support the introduction of proposed paragraph 253Q(2)(b) because it has not been subject to prior consultation. The Governance Institute submitted that the introduction of an untested provision for a limited time poses practical difficulties.
2.41
The AICD suggested an alternative approach to including this requirement in proposed section 253Q. It advocated for the legislation to set principles and a framework which are appropriate for organisations of all sizes and resources, and which do not impose overly prescriptive or unduly burdensome minimum requirements. To this end, the AICD suggested that ASIC regulatory guidance could be used to:
create a clear expectation of practice and provide guidance on how the corporate regulator will enforce companies' pre-existing legal obligation to provide members as a whole with a 'reasonable opportunity to participate' at meetings.
2.42
The ASIC guidance proposed by the AICD could be supplemented by industry-agreed best practice principles, modelled on, for example, the Principles and Best Practices for Virtual Annual Shareowner Meetings in the United States, to achieve 'meaningful shareholder engagement without embedding unnecessary prescription in legislation'.
2.43
Conversely, the ACSI supported proposed paragraph 253Q(2)(b). The AIRA also welcomed the amendment but noted it should expressly allow companies to elect which technology they use to allow shareholders to attend AGMs via electronic means to speak and to ask questions.
2.44
With respect to a different yet related issue, the Law Council endorsed the application of the requirement for a 'reasonable opportunity to participate' with respect to membership 'as a whole', rather than the more comprehensive requirement inserted by Determination No. 3 of 'all persons entitled to attend'.
Voting at virtual meeting
2.45
Determination No. 3 states that at virtual meetings votes must be taken on a poll using applicable technologies to enable all attendees entitled to vote to do so 'in real time and, where practicable, by recording their vote in advance'.
2.46
Proposed subsection 250J(1) preserves this requirement and includes the option for it to be used if demanded. The Law Council highlighted that proposed subsection 253Q(4) states that all persons entitled to vote must be given the opportunity to do so in real time and may be given the opportunity to record a vote in advance 'at the election of the voter'. The Law Council recommended that 'may' be amended to 'must' to ensure members retain a right to vote if unable to reliably vote in real time.
2.47
A different concern for the Governance Institute was the requirement in proposed subsection 253J(2) for all resolutions at a company meeting to be decided on a poll. It argued that the cost incurred by the company for each poll on the meeting platform has resulted in companies limiting the number of polls in some circumstances. The Governance Institute recommended amending this requirement so that only substantive resolutions at a meeting are decided by poll, achieving consistency with the ASX Corporate Governance Council's Corporate Governance Principles and Recommendations.
2.48
Alternatively, the Law Council recommended that the default requirement for a poll for virtual meetings applies only to listed companies, as the number of shareholders is likely to justify the expense and logistics of undertaking a poll on all resolutions.
Opt-in regime to receive hard copy documents
2.49
The Governance Institute supported the opt-in regime for hard copy documentation in proposed section 253RB but expressed concern about proposed section 1679B requiring a company or responsible entity to contact shareholders or members in writing within two months of the commencement of the bill. It submitted that this requirement would impose a significant regulatory and administrative burden because:
the provisions will sunset in September 2021;
many shareholders have already expressed a preference for digital communication; and
the new provisions do not consider the long-standing difficulty with 'lost shareholders' and would require companies to write to lost shareholders to advise them of the right to opt-in to receive hard copy documents.
2.50
The Property Council submitted the requirement to provide a notice in writing to inform shareholders or members appears 'antithetical to the intent of the bill' and imposes a 'significant administrative burden for companies when the provisions are likely to be in place only until September 2021'. AIRA considered that, if an email address is already on file for a shareholder or member, it should be permissible to electronically notify that person within the two month timeframe.
2.51
IAG expressed support for an approach which would allow companies to continue to send short-form printed notices, relief which was introduced during the COVID-19 pandemic, to shareholders who have not elected to receive meeting materials electronically, which provides information about where to find the meeting materials online.
2.52
AIRA opposed the strict liability offence in proposed section 1679B for failure of a company or registered scheme to advise a person of their right to elect to receive a document in hard copy within the requisite time. Conversely, the Law Council considered the strict liability offence to be justified because:
with respect to culpability and penalty, the offence is objectively less serious than many other criminal offences;
strict liability may be necessary for the effectiveness of the regulatory regime; and
failure to comply with the requirement is likely to be obvious.
Electronic communication, signing and execution of documents
Support
2.53
The majority of submissions supported the Schedule 1 provisions pertaining to the electronic communication, signing and execution of company documents relating to meetings. Submitters' reasons for supporting amendments to allow companies to electronically send documents and notices of meetings included:
greater flexibility for business engagement with stakeholders, investors and shareholders;
significant cost savings;
reduced postal delays for shareholders and members, particularly in rural and regional communities; and
positive environmental impact.
2.54
The Law Council recommended the Schedule 1 measures about electronic execution of documents be made permanent and endorsed the following changes:
improving the ability to electronically sign and execute documents, including deeds;
improving the ability to witness and attest to witnessing the execution of documents electronically;
amending section 127 of the Corporations Act to clarify that company documents can be executed electronically; and
expressly acknowledging that officers of a corporation who are signing a corporate document in that capacity may electronically sign an electronic copy of that document.
Critique
2.55
While wide support was expressed for Schedule 1, attention was drawn to implementation challenges or potential interpretation issues for some proposed provisions of Schedule 1. Technical amendments to some provisions were suggested, such as:
remove proposed paragraphs 127(3A)(b) and 127(3B)(b) so as to permit 'split execution' of company documents without the requirement to print the entire document so as to validly execute the document;
amend the wording in proposed section 127 to state 'the original or a copy or counterpart' to make clear there is no requirement to have a separate original document;
the language in proposed subsections 127(2A), (3A) and (3B) be amended to make clear they are not comprehensive or exclusive, and do not limit subsections 127(1), (2) or (3).
2.56
Furthermore, the Law Council made the following set of recommendations:
consideration should be given by the Australian Government as to the possibility of facilitating dialogue between the States and Territories with a view to harmonising, where possible, e-signature (and e-witnessing) processes across jurisdictions, not just in cases of emergency;
the Australian Government should encourage all Australian Government agencies to accept electronically executed documents (including deeds) and encourage the States and Territories to do the same;
the Bill should clarify that the amendments to section 127 of the Corporations Act are effective to override requirements of common law and State legislation for valid execution of a deed; and
the Treasury and the Attorney-General's Department should:
consider whether there is constitutional power to expand the categories of signatories to documents capable of being executed under the Corporations Act or the Electronic Transactions Act 1999 (Cth) (ETA);
consider the extent to which the Corporations Act could alternatively validate the execution of contracts by individuals, corporations and other entities, where a company is a counterparty to the contract (expanded jurisdiction); and
consider the extent to which the Corporations Act could recognise (at least as a matter of Australian law, where Australian law is the law of the contract) documents executed pursuant to that expanded jurisdiction under the Corporations Act. However, the Law Council recognises that this may require broader consideration and assessment than is practicable for the current Bill;
changes for electronic execution of documents be extended for more general application by inclusion of the relevant enabling provisions in the ETA, alongside the removal of many of the exclusionary regulations made under that Act; and
a concerted effort be made by the Australian Government to work with the States and Territories to harmonise their presently divergent implementations of the ETA.
2.57
Additionally, the BCA considered the provisions which facilitate electronic execution 'are an overdue modernising of the [Corporations] Act to enable Australian businesses to make use of technology to manage their affairs more efficiently'. It submitted there is no reason why these provisions should not be extended to also apply to foreign and statutory corporations.
Schedule 2 – Continuous disclosure
2.58
The following sections summarise the range of arguments received by the committee for and against the amendments in Schedule 2 of the bill. Some further amendments proposed by submitters are also noted.
Support for the bill
2.59
Submissions contended the amendments in Schedule 2 would address, to varying extents, the following matters:
alignment of Australia's continuous disclosure laws with other jurisdictions;
the low threshold for commencing shareholder class actions for an alleged breach of continuous disclosure and the consequent high incidence of class actions in Australia;
the impact of continuous disclosure shareholder class actions on the limited availability and high cost of directors and officers (D&O) insurance;
the risk-aversion of company boards and officers as a result of shareholder class actions;
the ineffectiveness of shareholder class actions due to the circularity problem and costs involved; and
adverse consequences not appearing to have arisen from the temporary changes to continuous disclosure laws introduced during the COVID-19 pandemic as there are other protections in place.
Alignment with international jurisdictions
2.60
Several submitters drew attention to how the amendments in Schedule 2 would align Australia's laws with other relevant jurisdictions.
2.61
In expressing support for Schedule 2, the AICD, BCA and G100 noted the amendments would better align Australia's continuous disclosure provisions for private civil actions with those of other jurisdictions, including England, Wales and the United States (US). The AICD stated that Australia's new threshold for liability will remain lower than in the US and United Kingdom (UK).
2.62
The Association of Litigation Funders Australia (ALFA) disagreed the amendment would bring Australia's continuous disclosure laws into line with the UK and US. ALFA noted that research into 'information leakage' (a measure indicative of insider trading and other forms of market abuse) found that Australia's markets were performing better than those in the US, UK and Canada.
2.63
The Law Council of Australia Class Actions Committee (LCA Class Actions Committee) observed that Australia's pre-pandemic continuous disclosure regime was comparable with Canada, Hong Kong and South Africa.
Consequences of the low threshold to commencing a class action
2.64
Some submitters supported the Schedule 2 amendments because of their potential to reduce the number and size of shareholder class actions.
2.65
The BCA argued that shareholder class actions had been pursued on an opportunistic basis. Prior to the temporary amendments introduced during the COVID-19 pandemic, there was a lower threshold for initiating a class action for an alleged breach of continuous disclosure obligations. The BCA argued that, as a result, companies had been making fewer and more cautious disclosures on revenue, profit, and dividend forecasts. The BCA supported the disclosure regime established by Schedule 2 because it:
Encourages business to invest, take risks and create jobs;
Is consistent with strong disclosure practices and well-informed securities markets;
Penalises blameworthy conduct but not inadvertent mistakes; and
Ensures that there is an effective and fair means for smaller investors to be compensated for loss in appropriate circumstances (including a role for litigation funders).
2.66
The AICD argued there was a disconnect between the number of class actions occurring and the number of enforcement actions taken by ASIC. The AICD noted there had been 24 ASIC enforcement actions over a five-year period compared to a larger number of shareholder class actions.
2.67
The Property Council noted Australia has the second-largest litigation funding market and welcomed the amendments because they would protect company directors and officers against honest mistakes and unintentional withholding of information. The Property Council considered the amendments strike an appropriate balance between informing shareholders and markets while allowing companies to operate without undue risk of class actions.
2.68
Omni Bridgeway countered the above arguments by drawing attention to the the size of the shareholder class action market in Australia:
Professor Morabito found that total recoveries in all shareholder class actions since 1992 were $889 million on behalf of 94,984 shareholders. These recoveries compared with the current capitalisation of the 2,200 companies listed on the ASX of approximately $1.7 trillion. It is not credible to suggest, therefore, that class actions are causing economic damage to long-term shareholders, diverting company resources from investment opportunities to pay legal costs and distracting boards from their core duties.
2.69
ACSI disagreed there were large increases in the number of class actions based on continuous disclosure breaches. ACSI suggested consideration be given to other ways to solve the problems associated with class actions:
The challenges in the class action system are a result of the way the system has evolved, rather than of the operation of the continuous disclosure provisions or the misleading or deceptive conduct laws. It is crucial not to conflate the challenges with the class action system with the operation of the continuous disclosure obligations, because this undermines the distinct value and purpose of continuous disclosure obligations, which underpin market integrity.
Rather than watering down the continuous disclosure obligations by imposing a requirement to prove the mental state of the disclosing entity, we propose that a more appropriate solution would be to conduct a broader policy discussion…
Cost and availability of directors and officers insurance
2.70
Several submitters commented on whether the amendments in Schedule 2 would provide relief from the rapidly rising costs and unavailability of D&O insurance.
2.71
Ai Group, BCA and the AICD strongly supported the continuous disclosure amendments in Schedule 2 on the basis they would address the cost and availability of D&O insurance. Ai Group and BCA noted the average increase in premiums in 2019 for D&O insurance for ASX200 companies was 118 per cent. The AICD noted that public companies have seen average D&O insurance cost increases of 229 per cent and deductibles climbing as high as $250m in 2020.
2.72
The Property Council reported the experience of its members in seeking to renew D&O policies:
Several of our largest members have reported premium costs in excess of $20m for FY 2020/21 with increases of over 500% on the previous year alone. Many have reported forecast costs amounting to more than a 2000% increase on 2016 premiums. These premiums are predominantly being paid to offshore insurance companies and are not being reinvested in the Australian economy.
Our feedback from members, who have renewed their policies within the last three months or are currently seeking to renew their policy, is of figures ranging between 40 and 150% increases with only a marginal forecast of prices cooling if the reforms do not go ahead. The general consensus is increases of over 100% generally for the same level of cover, whilst anything lower than a 100% increase generally related to a reduction in cover.
2.73
Ai Group noted several insurers had recently withdrawn from offering D&O insurance and others had increased restrictions in their policies. The AICD argued that insurers are increasingly unwilling to provide D&O cover, noting six insurers were effectively exiting the Australian D&O insurance market.
2.74
Some submissions drew a link between the cost and availability of D&O insurance in Australia and class actions alleging contraventions of continuous disclosure obligations. For example, the AICD noted that insurers and brokers identify securities class actions as the main driver of restricted D&O insurance availability in Australia.
2.75
The Law Council of Australia Corporations Committee (LCA Corporations Committee) supported the amendments in Schedule 2, arguing a misalignment of liability provisions in the Corporations Act has caused an unacceptable escalation of insurance costs. The LCA Corporations Committee suggested the reforms to continuous disclosure and its link to misleading or deceptive conduct are an essential first step to addressing that imbalance.
2.76
The Property Council noted D&O insurance has several parts and the Side C cover for companies' liabilities were most affected:
D&O policies are made up of three key sections and there are more elements to consider than price. For example, we understand some companies are contemplating removing Side C (Securities Entity Coverage) from their D&O programs which will mean a reduced premium pool for insurers. At present, our members estimate the total premium pool for D&O in Australia is approximately $1 billion.
Side C cover is an important mechanism to protect companies' balance sheets, especially in a volatile market where disclosure issues have become increasingly difficult. In addition, removal of Side C results in companies taking on greater risk by self-insuring because something that has been a fundamental part of a listed company's insurance framework has become uneconomic as a result of current class action landscape in Australia.
2.77
The BCA argued shareholder class actions had increased the cost of D&O insurance to such unsustainable levels that it is now at risk of becoming prohibitive for smaller listed companies:
This has also created heightened risks for directors and difficulties in attracting directors onto boards. Smaller ASX companies are hit particularly hard. Boards of companies outside the ASX 200 that are not household names need to actively reach out to investors. When looking for new directors, the issue of insurance is a real focus, as are the distractions associated with burgeoning litigation and reputational risk.
2.78
Similarly, the AICD summarised its concerns as follows:
The negative impact of class actions on D&O cover extends well beyond the listed sector. Given the limited pool of insurance capital in this class of insurance, private and not-for-profit entities are also bearing cost increases. Insurance is a critical risk mitigation tool with appropriate cover being crucial to attracting and retaining the most skilled and dedicated directors to Australian boards — a need all the more acute given the impact of the pandemic.
2.79
The Insurance Council of Australia (Insurance Council) considered the Schedule 2 amendments have merit, given the growth of class actions had been a significant driver in the recent increase in D&O premiums. However, the Insurance Council argued that the bill's EM overstates the savings on D&O insurance costs for two reasons:
overseas jurisdictions with similar existing laws continue to see rapid growth in class actions relating to continuous disclosure; and
alleged breaches of continuous disclosure obligations are not the only grounds upon which class actions may be commenced against companies, and the class action and litigation funding industry is well-developed and profitable.
2.80
According to the Insurance Council, until the number and size of successful shareholder class actions in Australia decreases, the industry expects the proposed amendments to continuous disclosure laws will:
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.
2.81
The Property Council identified similar issues, commenting that 'even if the market pricing does moderate down to the suggested 10 per cent increases, the cumulative increases over the past five years means such lower rate of increases are on massively higher base costs'.
2.82
Omni Bridgeway and ACSI argued that other factors affect D&O insurance premiums, including:
previous chronic under-pricing;
non-class action litigation;
exposure of evidence of corporate wrongdoing (including by the Financial Services Royal Commission); and
the subsequent enforcement actions by regulators.
2.83
Omni Bridgeway further commented:
The reality is that the increase in the cost of D&O liability insurance is indicative of the extent of the wrongdoing, which historically companies have been reluctant to attempt to defend at trial. The appropriate response to increasing evidence of breaches of the law causing losses to Australian investors is not to curtail their ability to access the law, especially at the behest of insurers. The profitability of D&O liability insurance would increase if there was broader compliance with the continuous disclosure laws.
2.84
Omni Bridgeway and ACSI also observed that D&O premium increases were not unique to Australia and had been substantial in the US, UK, European Union (EU) and the Pacific.
Addressing risk-aversion and other costs
2.85
Some submissions commented on the importance of Schedule 2 for addressing a growing trend of risk aversion amongst company boards and executives.
2.86
The AICD noted the current continuous disclosure regime has led to an excessive focus on continuous disclosure issues at the expense of broader strategic considerations. That is, company directors consider shareholder class actions as a significant risk that consumes board and company resources. The AICD drew attention to Australia's recovery from the COVID-19 pandemic, where calculated risk-taking will be critical to accelerating growth and job creation:
Notably, the AICD's latest director index sentiment for the second half of 2020 shows that 73 per cent of directors agree there is a risk-averse decision-making culture on Australian boards. The main reason given for this is the excessive focus on compliance over performance. This constrains innovation and productivity, which is particularly problematic given the need to foster economic growth.
2.87
PwC considered the changes to continuous disclosure to be a step forward in addressing the negative impacts of class actions. PwC argued that Australian capital markets could be adversely impacted by the current class action environment because experienced non-executive directors may be disincentivised to accept appointments on public boards, and accountants discouraged to be registered public auditors.
2.88
The Property Council agreed, commenting that the high prevalence of class actions in Australia discourages experienced and capable professionals from becoming board directors with resulting detrimental impacts for corporate governance in the longer term.
2.89
The G100 noted that the consequences of difficulties in attracting and retaining company directors are poorer governance and less economic growth:
The consequence of the 'strict liability' regime is poor governance with shareholder returns constrained by an unsustainable compliance regime and a risk adverse culture.
Company directors in Australia are exposed to potential liability under more than 600 pieces of legislation. Australia is now the most likely jurisdiction, outside of the United States in which a corporation may face significant class action. D&O insurance is an important part of strong corporate governance, ensuring the sustainability of boards and organisations as a whole.
Australian boards are generally conservative and risk averse. The main reason given for this is the excessive focus on compliance over performance. This constrains innovation and productivity, which is particularly problematic given the need to foster economic growth. Australia's regulatory environment creates a strong incentive for conservatism and risk-aversion in boardrooms.
2.90
The Property Council suggested the prevalence of class actions is also making it less attractive for companies to be headquartered and listed in Australia.
Reducing the circularity and class action cost problems
2.91
Some submitters viewed the amendments in Schedule 2 as an important part of addressing the circularity problem in shareholder class actions.
2.92
The BCA explained the circularity problem in the following terms:
if shareholders who bought shares in a market adversely affected by a disclosure pursue a class action, they are suing their own company;
insurance may cover some of the costs of any losses, but all shareholders in the company bear the remaining costs;
even if a small recovery is made by a shareholder on one portfolio holding, the lawyers' and litigation funder's fees mean that the company will be out of pocket on the claim and it and all the other companies in the shareholder's portfolio are paying higher insurance premiums; and
taken as a whole, it is a negative sum game for shareholders.
2.93
The AICD also drew attention to this issue:
Continuing shareholders will ultimately be the most impacted when settlements are reached with companies. It is their investments that will suffer as a result of expenses incurred and the increases in D&O insurance premiums, not those shareholders who are alleged to have sold their stock at the inflated prices. This issue has been referred to as the 'circularity problem' or a 'pocket-shifting exercise'.
2.94
The AICD and BCA emphasised that class action lawyers and litigation funders often obtain large shares of settlements, or damages awarded by a court, for breaches of continuous disclosure obligations. Analysis by the Australian Law Reform Commission indicates that between 2013 and 2018, litigation funders and legal advisers in securities class actions in the Federal Court of Australia received a median return of 49 per cent of the proceeds of litigation.
No adverse consequences to date from the temporary amendments
2.95
Several submitters suggested the temporary COVID-19 amendments to continuous disclosure obligations provided a test of how the permanent change proposed in Schedule 2 would operate.
2.96
The AICD stated it was unaware of any evidence the temporary amendments had caused a decline in the quality of disclosures or a chilling effect on market confidence. The AICD argued that entities continue to provide timely information to the market, and there have been no suggestions by the ASX, investors or other market participants that disclosure quality has fallen since the temporary relief. Similarly, the G100 observed that there does not appear to have been any fall in the standards of continuous disclosure by listed corporates in Australia.
2.97
The AICD also pointed to information indicating there has been no capital flight since the continuous disclosure amendments commenced:
…the ASX states the number of new listings increased 23 per cent year-on-year to 113 from 2019 to 2020, three-quarters of which arrived in the second half of the 2020 calendar year when the relief was in force. There have also been very strong secondary capital raisings, with December 2020 and June 2020 recording respectively the second and third largest monthly capital raisings for the last decade.
2.98
Additionally, the AICD noted other protections for investors. For example, the ASX provides regulatory protection through its oversight of compliance with the Listing Rules. The ASX has a range of powers available to it, such as censure, ordering withdrawal of announcements, and trading suspensions. The AICD noted that, during the recent period of COVID-19 uncertainty, the ASX had taken urgent action in several cases to prevent misleading or inaccurate releases from being made or remaining in the market.
2.99
ACSI questioned the rationale for Schedule 2 and suggested the COVID-19 amendments were unnecessary because companies were not obliged to provide forward-looking disclosures and guidance to the market:
The Explanatory Memorandum takes the pandemic as its starting point, and notes that the Australian Government temporarily amended the continuous disclosure obligations in order to 'enable companies and their officers to more confidently provide guidance to the market during the coronavirus pandemic'(p23). Given that there is no obligation for companies to provide forward-looking guidance to market, these temporary changes were not necessary. This is consistent with the ASX's Compliance Update issued on 31 March 2020 which, early in the pandemic, reinforced the pre-existing regulatory position and should have sufficiently addressed any doubt that companies may have had about the appropriate actions.
Therefore, the pandemic did not create any need to modify the continuous disclosure obligations. This was evidenced by the large number of companies that withdrew their forward-looking guidance as the economic disruption posed by the COVID-19 pandemic emerged. Investors understood why companies took this action, and did not expect the guidance to be replaced in such circumstances, recognising the importance of accurate disclosure from companies.
It follows that there is also no need to change the continuous disclosure obligations or the misleading and deceptive conduct laws on a permanent basis.
Critique of the bill
2.100
Key reasons for opposition to the amendments in Schedule 2, as expressed in submissions, included:
negative impacts on market integrity, trust and reputation;
a weakened ability of ASIC to regulate effectively; and
a lack of analysis for the additional amendments to misleading and deceptive conduct provisions.
Impact on the integrity, trust and reputation of Australia's markets
2.101
Submitters who opposed the Schedule 2 amendments held significant concerns about potential impacts on the integrity, trust and reputation of Australia's markets.
2.102
ALFA noted the creation of Australia's continuous disclosure laws followed the 1987 stock market crash. ALFA argued that the continuous disclosure regime has been critical to building and maintaining the integrity and reputation of Australia's capital markets and protecting those who invest in them.
2.103
The ICGN commented that most institutional investors supported temporary compromises on traditional governance expectations to cope with the multiple challenges faced by companies during the COVID-19 pandemic. However, the ICGN indicated that its members, who manage over $54 trillion of investments globally, expect that when the pandemic recedes, such compromises are reversed and that investor protections are not diluted. The ICGN is concerned that the amendments go beyond what was necessary for the pandemic:
We appreciate that the Covid crisis has demanded substantial adjustments on all fronts, but it is clear that the proposed changes are not entirely the result of Covid, and in effect represent a form of power grab by companies and directors. We are concerned that this will substantially weaken investor rights by reducing officer, director, auditor and adviser accountability.
2.104
ACSI did not support the Schedule 2 amendments and was concerned about the detrimental impact of the amendments on market integrity:
We are concerned that the Bill's proposed changes operate to limit investors' ability to hold companies to account, and therefore undermine the integrity of the market. Without appropriate accountability for the quality of disclosures, it can be expected that the standard of information in the market will deteriorate. Indeed, the time allocated to ensuring information provided to the market is fit-for-purpose is argued as a rationale for the proposed changes. Given the importance of ensuring that information provided to investors is complete, accurate and timely, the time that companies invest in establishing the appropriate systems is time well spent. While many directors will seek to do the right thing, the reality is that some will also seek to take advantage. A stronger, objective test for disclosure obligations is preferable to support focus on high quality information being provided to the market.
Impact on investors
2.105
Several submitters raised concerns about the impacts on investors of the amendments in Schedule 2.
2.106
In opposing the amendments, ALFA noted the impact of the changes to continuous disclosure on investors. Australian households have a high level of share ownership compared to most countries, with 35 per cent of Australian adults directly owning listed investment products. There is also significant indirect ownership through superannuation funds (21 per cent held in equities) and self-managed funds (26 per cent held in equities). ALFA argued that the comparatively high proportion of local retail investors in the Australian equities market justifies stronger protections for shareholders than may exist in other jurisdictions.
2.107
The ICGN argued that the continuous disclosure rules in Australia prior to May 2020 provided a reasonable balance of accountability that facilitated the protection of shareholder rights and good governance. The ICGN commented on the impact on market sustainability and corporate governance:
Accountability is paramount for good corporate governance and long-term sustainability. It is also important that no safe haven should exist between directors and auditors. When a disclosure issue arises, the parties should not be able to shift blame to the other and eliminate their own accountability. This undermines the basic principles of sound corporate governance and threatens the foundation of an efficient capital market, all the while limiting access to justice by eliminating opportunities for redress. This disadvantages shareholders, while leaving management unaccountable.
2.108
The ICGN stated that the proposed amendments would disadvantage investors by:
1. Circumventing a true and accurate valuation of the company.
2. Hindering the functioning of fair and efficient capital markets.
3. Fostering misleading and dishonest conduct.
4. Suppressing shareholders of their right to redress for mass wrong-doing.
5. Shielding companies, directors, advisors and auditors from accountability.
2.109
The LCA Class Actions Committee opposed Schedule 2 of the bill, preferring the pre-pandemic regime. The LCA Class Actions Committee suggested that Schedule 2's impact on the continuous disclosure regime and the prohibitions on misleading and deceptive conduct will dampen the regulator's and shareholders' ability to enforce corporate accountability for wrongdoing. This is because material misstatements in financial statements, which cause inflated share prices, will be unchallengeable unless one can prove that the company actively misled its auditors and the market.
2.110
The LCA Class Actions Committee made the following observations:
The Class Actions Committee is concerned that proposed new standard, being 'the entity knows, or is reckless or negligent with respect to whether, the information would, if it were generally available, have a material effect on the price or value of [enhanced disclosure] securities of the entity', will have a direct impact on accountability concerning published reports. As an example, if auditors sign off on misleading accounts that are published as part of a company's continuous disclosure obligations, the company will be able to hide behind the audit as 'reasonable reliance' while the auditor can avoid responsibility because its liability is accessorial and knowledge must be proved. Those who were misled and suffered loss will have no avenue of redress.
As well, the proposed section 674A requires the entity to be negligent which introduces a mental element to the continuous disclosure regime. A company will be vicariously liable for the negligent acts of its employees or agents but the attribution of a state of mind to a corporation is often limited to its Board and senior executives. Boards and senior executives will be able to say they were not negligent with respect to the information that should have been disclosed if they did not have it, whether or not they ought to have had it, thereby limiting accountability even further.
2.111
The LCA Corporations Committee countered some of the above arguments, suggesting that the proposed reforms do not significantly or unreasonably reduce investor protection. The amendments do not remove a shareholder right of action for continuous disclosure breaches, except in the most limited cases where the company is not at fault. Instead, the LCA Corporations Committee argued that the pre-pandemic regime has adverse impacts for investors:
The Corporations Committee notes, however, that it is also important not to overlook the fact that the current regime is having an adverse effect on the value of the investments of other ongoing shareholders of affected corporations, in circumstances where the company is not at fault. Nor is it in the interests of investors that corporate insurance is becoming unaffordable. In the Corporations Committee's view, the proposed reforms strike an appropriate balance.
Less information disclosed to investors
2.112
Some submissions expressed concern that the amendments to continuous disclosure would result in directors failing to keep shareholders informed in a timely manner.
2.113
Ethical Partners Funds Management submitted that a test requiring a higher degree of certainty that the information would have the necessary market impact before being required to be disclosed would obstruct the flow of information to investors. In its view, the extent of the information required to be disclosed under the pre-pandemic regime law is already vague and highly subjective to professional judgement. Ethical Partners Funds Management considered that changes that increase the vagueness of the requirement, or the perception of the requirement, to disclose important information will result in fewer disclosures.
2.114
Ethical Partners Funds Management also drew attention to the possible impacts of the amendments to continuous disclosure on the range and effect are increasingly material to the value and price of securities.
2.115
Similarly, Phi Finney McDonald expressed strong concern about the impact of the changes on retail investors. In its view, the amendments to continuous disclosure will give companies a perverse incentive to fail to disclose to the market, which will place retail investors in a highly vulnerable position given the reliance on the information disclosed by companies.
2.116
Solaris Investment Management Ltd, a mid-sized Australian Equities Fund Manager, argued that the requirement that aggrieved parties must prove a fault element with respect to non-disclosures that had a material effect on the price or value of that entity's securities does not improve the transparency of company disclosures.
Limited recourse to obtain remedies for alleged breaches
2.117
Maurice Blackburn contended the proposed amendments in Schedule 2 would seriously limit Australia's continuous disclosure regime, potentially leaving shareholders without a remedy in cases where companies seriously misinform the market. Maurice Blackburn described the challenge created for private litigants seeking to bring a civil penalty proceeding when required to prove a fault element:
Everyday investors who have been victims of misleading information often start their case for damages knowing there has been a serious failure in the information provided to the market but with no evidence as to the 'state of mind' of the company. It is often not until the commencement of the discovery phase of proceedings that we find that directors have been deliberately, recklessly or negligently misleading.
The critical point here is that many cases of purposeful, wilful misconduct (let alone negligence) would never be uncovered if proceedings never make it to the discovery phase. This Bill rewards corporate cover-ups by making that significantly harder.
…as a practical matter, shareholders may never be in a position to commence an action because they won't be able to allege the requisite knowledge, intention or recklessness without discovery of documents and they won't be able to obtain discovery because they won't be able to allege the requisite mental element.
2.118
In the view of Phi Finney McDonald, the continuous disclosure amendments could mean retail investors may not have a viable cause of action to pursue in the courts and no ability to obtain compensation if they suffer loss due to a company failing to keep the market properly informed. Maurice Blackburn expanded on this point, setting out how the amendments might apply to misstatements in published accounts:
Suppose a company publishes accounts which wrongly recognise revenue and therefore overstate profit by tens of millions of dollars. Under the current s.674 the true level of the revenue and the profit is a matter which a reasonable person would expect to have a material effect on the price or value of the shares. Shareholders who had bought shares in the misinformed market would be able to recover losses from the company, its auditors or more likely both (because in practice the company and it[s] auditors will blame each other for the mistake).
However, under the proposed s.674A the company will be able to say that it relied on its auditors and was not therefore negligent. No action will then lie against the company. Further no action will lie against the auditors under s.674A because they cannot be involved in a contravention by the entity and because of the proposed changes to the misleading and deceptive conduct legislation… the auditors' conduct may not contravene those provisions meaning that, in effect, shareholders will go without compensation for something as fundamental as a misstatement of profit.
Impact on ASIC's civil penalties
2.119
The LCA Class Actions Committee argued that the bill goes too far in dampening the ability of the regulators and of shareholders to enforce corporate accountability under continuous disclosure and misleading and deceptive conduct laws.
2.120
ALFA and the LCA Class Actions Committee noted that the bill removes the strict liability for civil cases by the regulator ASIC. While the US and UK require a fault element for continuous disclosure contraventions in private litigation, the regulators in those jurisdictions can still take enforcement action without establishing fault. The amendments proposed in Schedule 2 of the bill would remove ASIC's ability to seek civil penalties for continuous disclosure contraventions without establishing fault. As a result, the deterrent effect of regulatory action is weakened when compared to relevant jurisdictions. As noted in Chapter 1, ASIC will continue to be able to issue infringement notices without establishing a fault element.
Lack of analysis of misleading and deceptive conduct amendments
2.121
Several submitters commented that the amendments to misleading and deceptive conduct provisions are novel and are additions to the temporary changes to continuous disclosure laws introduced during the pandemic.
2.122
Omni Bridgeway argued that such fundamental changes to misleading and deceptive conduct laws had not had sufficient consultation to assess the impact on capital markets. Omni Bridgeway also noted that the bill would create the perverse outcome of two regimes for misleading or deceptive conduct, one for directors and one for companies. Omni Bridgeway concluded:
In our view, reform to the existing continuous disclosure and misleading or deceptive conduct provisions should only be considered if it can be established there is substantial, clearly demonstrated benefit that exceeds the actual or potential cost of diluting the efficiency and integrity of Australia's financial markets.
2.123
In the view of Maurice Blackburn, weakening the prohibition on misleading and deceptive conduct in the way proposed is 'a risky untested proposal'. ACSI was also concerned about the analysis and consultation for the amendments in Schedule 2. ALFA argued the proposed amendments to the misleading or deceptive conduct provision are ill-conceived and have been advanced without any proper scrutiny of their consequences for investors or the integrity of Australia's financial markets.
However, carving out from misleading or deceptive conduct any conduct that would breach the continuous disclosure obligations (unless fault can be established) raises the possibility that fault would need to be established in most shareholder claims for misleading or deceptive conduct.
The uncertainty created by these amendments is likely to lead to satellite litigation as to the effect of the amendments and whether the alleged misleading or deceptive conduct also breached the continuous disclosure obligations, even if the latter allegation is not made by the plaintiff in the proceeding. Such uncertainty can only be productive of further expense and delay for all parties involved in shareholder class actions.
Perversely, these amendments would also put the protections against misleading or deceptive conduct in relation to financial products and services under the corporation laws out of step with the general protections against misleading or deceptive conduct under s 18 of the Australian Consumer Law.
2.124
In contrast, the AICD argued the extension of the fault element to misleading and deceptive conduct is a sensible change so that continuous disclosure cases cannot be re-cast as misleading and deceptive conduct cases in order to circumvent the requirement that fault be established.
Further amendments suggested
2.125
Several submitters suggested amendments to the changes proposed in Schedule 2.
2.126
The BCA suggested an amendment to the bill to remove uncertainty arising from the way the bill ties the requirement for actual knowledge, recklessness or negligence to the effect of the information on the market. The BCA argued:
First, it is unclear how courts will approach the question of how an entity can show that it was not negligent with respect to whether particular information would have the requisite effect on the market if disclosed. Second, there may be breaches of the provision that are unintentional, and without recklessness or negligence, but which do not relate to the entity's assessment of the likely impact on price or value.
A better and clearer approach would be to adopt the drafting in the Act prior 2001, namely, that an entity is not in breach unless the breach itself is intentional, reckless or negligent. As mentioned above, there may be breaches of the provision that were unintentional and without recklessness or negligence, but which did not occur because of a mistaken belief about impact on the market but because of some other reason (e.g. a mistaken belief about whether information is sufficiently certain to be able to be disclosed).
The recommended amendment also better reflects the intention of the Bill to ensure that, in determining whether a listed disclosing entity contravenes its existing continuous disclosure obligations, its state of mind is taken into account.
2.127
The BCA suggested adding a due diligence defence for the company in relation to breaches of continuous disclosure obligations:
As drafted, the Bill retains the existing section 674 as an offence for breaches of continuous disclosure obligations. Whilst the new civil penalty regime in section 674A will only be breached where the contravention involves knowledge, recklessness or negligence, an entity is still guilty of an offence under section 674 where those elements are not present. It thus retains a strict liability test without a defence.
If section 674 is to be retained, the due diligence defence in section 674(2B), which will be omitted by the Bill, needs to be re-inserted into section 674 for the benefit of the entity itself. This would ensure that the 'reasonable enquiries' defence, which is available for accessorial liability of officers under proposed section 674A, is also available to the entity under section 674.
2.128
The BCA also proposed amendments to provisions regarding misleading and deceptive conduct:
The Bill includes changes to section 1041H of the Act and section 12DA of the ASIC Act to ensure 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 in the continuous disclosure obligation has been proven. These provisions also need to be modified to ensure that entities and officers are not liable for misleading and deceptive conduct if they have in fact given a continuous disclosure notice, unless the requisite mental element has been proven.
The Australian Securities and Investment Commission Act 2001 (ASIC Act) also includes similar provisions related to misleading and deceptive conduct in section 12DA, which are also the subject of consequential amendments made by the Bill.
2.129
The LCA Corporations Committee proposed a broader review to cover matters, including the following:
it should be clarified that any information released to the Australian Stock Exchange (ASX) (or other recognised exchange) is information to which the relevant fault elements apply (so, for instance, it does not matter whether it is disclosed under Listing Rule 3.1, Listing Rule 3.10 or ASX principles of avoiding selective disclosure);
it should also be clarified that where information has been released both to ASX and presented in another forum, the fault elements apply to that information (by itself – leaving aside any separate or additional information or conduct that is not made available via the stock exchange); and
the relevant fault elements should also apply to sections 1308 and 1309 of the Corporations Act, which form part of the disclosure liability regime framework.
2.130
The LCA Corporations Committee also supported a review of the disclosure liability provisions of the Corporations Act:
…the disclosure liability frameworks within the Corporations Act are contorted, and inconsistent, with multiple provisions applying to the same conduct, with different standards and elements of liability, defences and contributory conduct. In the Corporations Committee's view, it is unacceptable for core corporate legislation to be internally inconsistent in this way, and these issues should be addressed as a priority.
2.131
Omni Bridgeway noted that misleading and deceptive conduct provisions apply to both omissions of information and positive statements providing misleading information. Omni Bridgeway argued that only the omission of information is related to the amendments to continuous disclosure laws and, therefore, the provision relating to positive statements should not be amended:
The prohibition against misleading or deceptive conduct includes an obligation to avoid misleading conduct by omission and to avoid misleading conduct through the making of a positive statement. It is possible to see how the 'conduct' in misleading by omission neatly aligns with the 'conduct' of not disclosing information. However, it is difficult to see how making a positive misleading statement is 'conduct' related to a failure to disclose.
If there are to be changes to the misleading or deceptive conduct provisions, they should be limited to circumstances where the conduct is a failure to say something. This is where there is an overlap between misleading or deceptive conduct and the continuous disclosure provisions. Therefore, 'conduct' in the revised s1014H should be limited to conduct by omission.
Committee view
2.132
The committee is grateful to the submitters who contributed to the debate on the bill, given the short time available for submissions and the inquiry.
2.133
With respect to Schedule 1, the committee considers the extension of regulatory relief to allow companies and registered schemes to use technology to hold meetings, execute documents and send documents relating to meetings has been effective in facilitating the continuation of business during the COVID-19 pandemic. The extension of these measures supports companies and registered schemes to continue using technology to meet regulatory requirements while uncertainty and barriers to 'business-as-usual' caused by the pandemic exist.
2.134
The extension of temporary relief allows business to continue in a manner compliant with public heath orders. It also allows companies and registered schemes to take advantage of the benefits of modernising business communication and operations.
2.135
The committee welcomes the measures which enhance or expand upon the COVID-19 temporary measures, giving effect to feedback received from consultations. The committee welcomes the Government's consultation on proposals for implementing permanent measures and undertaking an opt-in pilot for hybrid annual general meetings. Some of the issues raised by stakeholders in relation to Schedule 1 may further assist the formulation of permanent measures and pilot proposals.
2.136
The committee acknowledges the different views on Schedule 2. However, there is significant support for the aims underpinning the amendments. In the committee's view, the reforms strike an appropriate balance. On the one hand, they provide business and markets with sufficient certainty to pursue growth and facilitate economic recovery from the pandemic without the prospect of opportunistic shareholder class actions. On the other hand, the reforms retain sufficient sanctions to deter misconduct and maintain Australia's global reputation for market cleanliness.
2.137
Submissions identified further suggestions for amendments to Schedule 2. As the committee has not received other evidence on those suggestions, it simply notes these comments for the Government's consideration.
2.138
The committee recommends the bill be passed.
Senator Slade Brockman
Chair
Liberal Senator for Western Australia