Smashing the shareholder democracy
This Bill is the latest example of this government using COVID as cover to wind back consumers’ protections for the benefit of big corporations and the super wealthy.
Coming from a political party for whom free enterprise is supposedly a foundational principle, and who have spent the best part of forty years pushing the idea that markets are the answer to every problem, this Bill is an assault on the integrity of the Australian share market and, as a result, is a threat to the wealth of the millions of ordinary Australians that depend on the fair and efficient functioning of this market.
So keen is this government to cosy up to big finance and the forces of global capital, they are willing to sell out the mum and dad investors who bought in on John Howard's promise of Australia being the greatest shareholding democracy in the world.
Once again, this government is demonstrating that neoliberalism is a con. The real aim is not fair competition, efficient markets, or a shareholder democracy. The real aim is to rig the game so that the truly rich and the truly powerful can get even richer and more powerful. The real aim is to further entrench the financialised and crony capitalism that now dominates our politics, our economy and our society.
Schedule 2
Markets are meant to work on the basis of equal access to information. This is given effect in Australia by laws requiring ‘continuous disclosure’ to the market of information that is material to the valuation of a company, good or bad. In theory, this creates a level playing field that benefits investors and businesses alike.
The continuous disclosure provisions exist to protect shareholders, market integrity and the good reputation of Australia’s financial markets. In ASIC’s experience the provisions are working well and operate to increase the attractiveness of Australian markets for investors.
Under the existing system, civil action can be taken either by ASIC or private litigants where there is a failure to disclose material information regardless of ‘knowledge, recklessness or negligence’. In simple terms, people running publicly listed companies are expected to be aware of that which is material to the valuation of a company, and must share this information with all investors as soon as they know about it.
Schedule 2 of the Bill will relieve directors and CEOs of this burden. Instead, successful civil action will require proving that those running a company knew they were in receipt of relevant information and that they should have disclosed it to the market. As the Class Actions Committee of the Law Council of Australia put it:
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...
And while ASIC would still be free to pursue criminal action against a company for a failure to disclose information regardless of their ‘state of mind’, this would have to clear the much higher criminal hurdle of ‘beyond reasonable doubt’ rather than the civil hurdle of ‘on the balance of probabilities’.
Schedule 2 effectively reverses the burden of proof for civil action. This will pave the way for insider trading and be a boon for private equity and other large institutional investors who expect to be the first to know. On a wink and nod, the rich and the powerful will get the good oil, buy or sell ahead of the masses, and the companies and their bosses who participate in or facilitate this will, with a little cunning, be immune from any repercussions.
Schedule 2 seeks to make permanent changes introduced temporarily in May 2020, at the behest of the Australian Institute of Company Directors. The temporary suspension of existing laws was supposedly introduced in response to the exceptionally uncertain market conditions that resulted from the pandemic. In September 2020, the initial six-month suspension was extended a further six months. By December 2020, when the Parliamentary Joint Committee on Corporations and Financial Services report on litigation funding and class actions recommended a permanent relaxation of continuous disclosure obligations, the government’s true intentions became clear.
The government is now selling this Bill with the argument that it will reduce the prospect of class action litigation being undertaken on behalf of investors. Apparently, shareholders exercising their rights collectively and holding companies to account is too much of a burden for companies and their highly paid executives and directors.
This is a furphy on two counts. Firstly, it’s hardly as though class action lawsuits are crippling corporate Australia. By ASIC’s count, there has been an average of just five class actions a year for the last twenty years with a median settlement value of $36 million.
Secondly, as ASIC also points out, ‘The economic significance of fair and efficient capital markets dwarfs any exposure to class action damages.’ Class actions and the prospect of them support ASIC’s enforcement regime and help ensure that corporate Australia does the right thing. In turn, this improves investors’ trust in Australia and the functioning of Australian markets. As Ben Hardwick from Slater & Gordon put it:
If you truly believe in markets then you’ll consider transparency and accountability to be good things, because they allow investment to flow rationally. If, however, you prefer crony capitalism and protecting corporations from consequences then you’ll take a different view.
A further justification given by the government is that this Bill will better align Australia with the United Kingdom and the United States. Yet the Class Actions Committee of the Law Council of Australia has pointed out that ‘whilst the UK and US have no-strict liability for private claims, regulators can still take enforcement action without establishing fault.’ So what the government is proposing would actually be a weaker continuous disclosure regime than that which is in place in the UK or the US.
Even so, there is no evidence that the UK or the US are the better for having adopted the approach that they have. Conservatively, researchers from the Australian National University and Macquarie University, who studied the effect of the last twenty years of incremental strengthening of Australia’s continuous disclosure obligations, found that it ‘improves compliance and strengthens markets.’
Schedule 2 of this Bill has been introduced on the flimsiest of pretences and has been rammed through this committee inquiry process in clear contradiction of the will of the Senate in an attempt to disguise its real effects. Schedule 2 will benefit those on the inside and those with market power at the expense of millions of ordinary Australians who rely on timely and accurate information about their investments, including investment made through superannuation. This Bill again confirms that this is a government which exists to serve the interests of its corporate mates who donate so handsomely in return.
Recommendation
Schedule 2 of the Bill be opposed.
Schedule 1
The Greens support Schedule 1 of this Bill on the basis that the measures allowing for the holding of virtual annual general meetings (AGMs) are temporary. It is prudent that companies not be required to hold meetings ‘in person’ for the next six months given the real prospect of further lockdowns and border closures.
However, we are concerned that continued temporary extensions of these measures will encourage the government to attempt to make these measures permanent without due consideration, such as is being attempted with Schedule 2 of this Bill. Virtual AGMs could significantly constrain the ability of shareholders to hold companies to account. The parliament must be given the opportunity to fully examine the merits of any proposal to permanently allow virtual AGMs.
Senator Nick McKim
Australian Greens Senator for Tasmania