This chapter examines the views held by stakeholders on the provisions of the Treasury Laws Amendment (2021 Measures No.1) Bill 2021 (the bill). It is based on the bill's explanatory materials, the prior Senate Economics Legislation Committee inquiry (Legislation Committee inquiry) and submissions received by this inquiry, including two public hearings, in Canberra on 9 June 2021 and Sydney on 10 June 2021. The prior Legislation Committee inquiry into the bill received 26 submissions which this inquiry was able to access. This inquiry drew an additional 15 submissions.
Submissions showed widespread support for the temporary amendments relating to virtual meetings and electronic communications of documents which are largely reproduced by Schedule 1. Opinion was divided over the continuous disclosure amendments in Schedule 2, with a small number of submitters expressing support and a larger and more diverse number of submitters expressing opposition to the provisions.
This chapter provides an indicative, though not exhaustive, account of the key issues in both schedules. The chapter concludes with the committee's views and recommendations on the bill.
Schedule 1—Virtual meetings and electronic communication of documents
Temporary measures and their effectiveness during COVID-19
There was widespread support for changes permitting virtual and hybrid meetings, as well those enabling the virtual sending, signing and keeping of documents related to meetings and the execution of company documents. This was in keeping with submissions made to the earlier Legislation Committee inquiry.
Submitters noted the changes were necessary and effective during the
COVID-19 pandemic and furthered the objectives of modernising regulation and enabling the use of technology to facilitate business efficiency.
Nitro Software noted the productivity and efficiency gains in relation to electronic signing and execution of documents over the period of the temporary measures:
The COVID-19 pandemic has been a challenging period for businesses worldwide, accelerating a fundamental shift in how businesses and workers interact and operate. Measures put in place to address COVID-19 resulted in more people working from home and, for many organisations, this change is here to stay. To this end, there is an increased need for electronic signatures to ensure business continuity and execution of business documents.
…[the Schedule 1 changes] will dramatically improve workplace productivity and efficiency. In fact, the Future of Work research found the use of electronic signing [during the COVID-19 temporary measures period] contributed to a 43 per cent increase in signature rates across all document types, including contracts and invoices.
The Law Institute of Victoria (LIV) also spoke to the positive impacts and benefits of certainty regarding electronic execution of documents that was provided by the temporary measures. Mr Mark Burrows, Executive Committee Co Chair, Technology and Innovation Section, LIV, told the committee:
…when the pandemic hit, it's fair to say that, for those who weren't yet familiar with using electronic execution processes, they were required to come to grips with what was required, given the pandemic and given that everyone was working remotely and their clients weren't able to leave their home. So that was fantastic. To the extent that it was required, the temporary legislation was great in that it provided a level of certainty that some of those more conservative firms or practitioners were looking for to give their clients or themselves comfort that electronic execution under the corps act [sic] was valid, even though there was a consensus view as well that it could be done without it. But the clarification in the temporary legislation was very helpful.
The Governance Institute of Australia (GIA) was also supportive of the positive impacts of the temporary measures but remarked on the regressive impacts of their self-repeal in relation to document execution:
Our members' report the temporary relief which expired on 21 March 2021 expressly allowing electronic execution and split execution (where company officers wet-ink sign different copies of the same document) was extremely helpful during the pandemic. It also represented a significant move to a modern digitally enabled workplace. With the Determination's expiry, it is safe to assume there are once again differing views about whether electronic and split execution satisfies the requirements of section 127 of the Corporations Act.
The GIA confirmed the importance of reforms being responsive not just in relation to COVID-19 but in relation to other disruptive events, geographic isolation of shareholders and members, behavioural changes, technological changes, and intergenerational inclusion. Ms Megan Motto, Chief Executive Officer, GIA, argued for the bill's reforms:
So we need to make sure that it's fit for purpose, not just for now, but for the future. And of course, it needs to be responsive to both intergenerational and behavioural change. The pace of that change is such that legislation needs to be less prescriptive and more principle based so that it's able to cope in the environment where that change is really rapid. It also needs to be inclusive for all types of the community and all parts of the community. That's not just geographical inclusion, but it's intergenerational inclusion and inclusion on a whole range of bases…We as a country simply cannot afford to go backwards.
Impacts of legislative delay
Numerous submitters drew attention to the fact that the amendments made pursuant to the Determination No. 3 and Determination No. 4 which expired on 21 and 23 March 2021 respectively, before the bill could be passed.
The GIA observed that 'the unexpected delay to the bill had created uncertainty, increased costs and regulatory burdens for listed, private and not-for-profit organisations'. Both the GIA and the LIV noted that the negative impacts of the reversion to pre-COVID-19 provisions relating to the execution of documents. Nitro Software used themselves as a typical example of business experiencing the impacts of the expiry of the temporary measures:
Nitro is, in fact, a perfect case study of an ASX-listed business that will be adversely affected by any wind-back of the temporary electronic execution measures. The majority of Nitro's Board members and all of our senior leadership team, with one exception, reside outside of Australia. With the current border closures expected to remain in force into 2022, it is impossible for Nitro's leadership to meet physically in Australia to conduct business or execute contracts.
The GIA pointed out that the Australian Securities and Investment Commission's (ASIC) 'no-action' position does not apply to electronic document execution:
With the Determination's expiry, it is safe to assume there are once again differing views about whether electronic and split execution satisfies the requirements of section 127 of the Corporations Act. Permanent reform in this area is uncontroversial and long overdue.
The 'no-action' position also does not remove the risk of legal action from third parties, for example, with regard to the validity of resolutions passed at a virtual-only meeting. The GIA argued that entities cease virtual meetings while this uncertainty continues.
Temporary bill provisions and support for extended or permanent reforms
A number of submitters were concerned at the temporary nature of the bill's provisions. The provisions relating to virtual and hybrid annual general meetings (AGMs), electronic communications and the valid electronic execution of documents are due to sunset on 16 September 2021.
The LIV said that considerable uncertainty was likely to result:
Given the time required to pass the Bill, the LIV is concerned that it is unlikely to be in effect for a meaningful period. While the Explanatory Memorandum (EM) contemplates the proposal of permanent reform once the temporary extension sunsets, the LIV recommends permanent reform be introduced immediately to avoid the potential for widespread uncertainty, as arose when Determination No. 3 self-repealed on the 21 March 2021, reverting to 'pre-COVID-19' perceptions and processes.
Along similar lines, Ms Motto of the GIA also warned of the uncertainties created by the bill's sunset date:
Volatility and uncertainty are the enemies of business, and the current temporary relief measures run out in only three months' time. We currently have a large membership that is very challenged in terms of dealing with their future and the AGMs that they're trying to plan. We as a country simply cannot afford to go backwards. We commend both the bill and our recommendations to you.
While ASIC is due to review its 'no-action' position in September 2021, the Australian Institute of Company Directors (AICD) suggested that the bill provisions relating to virtual and hybrid meetings, be extended until December 2021. This would provide some certainty for the September to November 2021 AGM season.
Computershare suggested that the September 2021 bill sunset date be extended by at least six months to seamlessly dovetail with the development of permanent reforms, and to provide certainty for forthcoming AGMs.
Nitro Software added that 'the expiry of those critical measures and the reinstatement of archaic paper-based requirements for document execution have created significant uncertainty for businesses which need to be addressed as a matter of urgency'.
There was some support for making the bill's provisions permanent in relation to virtual meetings, electronic communications and electronic document execution to provide much needed certainty particularly as COVID-19 restrictions and uncertainties continue. It would also enable productivity and efficiency gains.
The LIV supported immediate, permanent reform, arguing that prior consultation and the temporary measures provided sufficient consultation on the Schedule 1 provisions. This view was supported by the Australasian Investor Relations Association (AIRA):
We've long held the view that Australia's corporate governance and investor framework has failed to embrace digital technology and is not flexible enough to respond to emerging developments. The consequences of this rigidity and inadaptability were experienced by Australia's corporate community following the outbreak of COVID-19 in Australia, which placed many outdated and outmoded aspects of the Corporations Act into sharp relief. The need for permanent long-term reform in this area has only increased since Treasury's initial consultation in 2016 when it issued its Technology neutrality in distributing meeting notices and materials proposals paper. This is due to the continuing high levels of adoption of technology in this country; the high levels of Australians owning shares, both direct and indirect, through their superannuation and other shareholdings; and the decline in timely postal delivery services.
The AICD supported amendments to allow virtual meetings on a permanent basis, noting that the changes would bring Australia into line with other countries such as the United States (US), Canada, Spain, and New Zealand. It contemplated that:
…this could contribute to reinvigorating company meetings, providing companies with flexibility to use the best format for their circumstances and stakeholders, without diminishing accountability.
Nitro Software also supported permanent changes to document signing and execution provisions:
We support the Proposal, but think it is critical that these reforms be embedded as a permanent solution (and not simply a temporary measure in place until 15 September 2021).
CPA Australia thought that permanent changes to electronic communications should not be delayed while an opt-in pilot for hybrid AGMs is tested.
The GIA raised concerns that unsuitable temporary provisions relating to virtual and hybrid meetings and electronic communications may become permanent, placing an unreasonable regulatory burden on its members for years to come. It recommended further consultation with shareholders, members and regulated entities in all sectors.
However, the GIA supported splitting the bill into two to enable Schedule 1 changes to be enacted promptly:
Schedule 1 is so important to our members in terms of providing the certainty that they need to get on with business and that they need to be efficient and innovative in the way that they do that business, that we would be prepared to split the bill.
Virtual and hybrid AGMs
Attendance and participation at AGMs
The AICD drew attention to data suggesting that using technology to hold virtual and hybrid meetings improved, rather than hindered, attendance at AGMs during the COVID-19 pandemic. It suggested that:
There could be a range of drivers for companies to adopt hybrid or virtual meeting formats, including removing geographic and physical barriers to attendance by retail shareholders and members; as well as increasing engagement and the opportunity for shareholders/members to ask questions.
The onset of COVID-19 has demonstrated that feasible alternatives to virtual meetings may not be available during a period of emergency lockdowns or other emergency events. Virtual meetings have significant benefits, in terms of general convenience and a lack of geographical constraints.
The AICD cited Computershare data which shows that attendance at AGMs had been declining over a 10-year period, with less than one per cent of shareholders attending AGMs in 2015.
They also referred to more recent Computershare data shows that attendance at AGMs increased by 36 per cent from 2019 to 2020 'suggesting that the virtual and hybrid platforms have not inhibited shareholder and member attendance or engagement'.
The AICD also pointed out that the temporary measures enabling hybrid and virtual meetings had enabled greater certainty in AGM planning for entities, and better communication and engagement with shareholders, members and stakeholders.
Transparency and quality of participation and engagement
Evidence to the committee highlighted the issues relating to the accountability of directors to shareholders and members, and whether the latter are provided with sufficient opportunity to hold directors to account.
The AICD noted the impacts of transparent and quality engagement of shareholders and members in virtual AGMs and noted that 'the participation of shareholders…in general meetings is a crucial component of good governance' and that shareholders and members must be given a reasonable opportunity to ask questions or make comments.
Ms Rita Mazalevskis spoke to her observations on the 2020 AGM season, noting that participation in virtual meetings was constrained:
My experience in participating in virtual AGMs over the last 12 months has been far from positive. The process is not fit for purpose and is not designed as a fair or transparent process for shareholders. Governance measures for transparency and accountability have diminished because of the virtual-AGM-only process. Issues include technical faults; incorrect and misleading log-in instructions; lack of fast real-time internet access; buffering; lack of technical support; and long delays on hold, where technical support is offered. Frankly, too many roadblocks are too convenient an excuse to shield directors from critical but fair questions from shareholders.
Ms Mazalevskis explained the impacts on retail shareholders, in particular:
Large shareholders often gain privileged access to management and directors throughout the year; small shareholders have only this one day a year to question the board on company matters or concerns. It is already a low level of accountability.
The LIV had similar concerns about the accessibility of virtual meetings to certain shareholders who may have limited access to, or familiarity with, technology.
The Australian Shareholders' Association (ASA) strongly supported hybrid, rather than virtual-only, meetings but understood the need for pragmatic measures, including for example virtual-only meetings during pandemic lockdowns. The ASA told the committee it expected the functionality of technology to improve the virtual meeting experience over time:
Emergency measures are fine, but it really needs to be curated as a way of engaging with your shareholders and being as close to a physical meeting as possible. Some companies were better at that than others.
…as a temporary emergency measure, virtual meetings would be acceptable. I also think that the technology is improving, so that over five or 10 years you may be able to get quite a decent virtual meeting. But we're nowhere near that yet, and the quality's definitely not universal across the big and the small companies.
There was agreement that the performance of some entities had been less than optimal during 2020, but that practices and processes were evolving and improving with time and experience. Ms Fiona Balzer, Policy and Advocacy Manager, ASA told the committee that:
Clearly, some of the meeting practices reported by investor groups around the 2020 AGM season did not meet these objectives. At the same time, during 2020 many listed companies have shown that it is possible to hold virtual meetings in a way that increases, rather than decreases, shareholder participation. However, as with any new technology or alterations to established governance practices, there will inevitability be a period of evolution as stakeholders work through the practical changes to processes and practice. It is important that all stakeholders work together to improve the experience for all participants and ensure that virtual AGMs are not used as a means to reduce board accountability to shareholders/members.
In addition to guidance for virtual and hybrid meetings released by ASIC, the AICD, together with the GIA, AIRA and the Law Council of Australia (LCA) released guidance to help entities manage uncertainties relating to virtual and hybrid AGMs (as well as electronic document execution and electronic communications). This guidance included key learnings from the 2020 AGM season and measures for ensuring effective shareholder participation. AICD submitted that 'this demonstrates that industry can learn from the experience and develop good practice without the need for prescriptive arrangements in legislation'.
Default meeting format
A number of submissions discussed the notion of a 'default meeting format' not contained in the bill. As currently drafted, the bill enables physical, virtual and hybrid meetings. The GIA suggested that this be clarified in the bill and virtual-only and hybrid meetings be expressly permitted.
The ASA, Australian Council of Superannuation Investors (ACSI), Bank Reform Now, and Ms Mazalevskis supported physical and hybrid meetings as the preferred meeting formats because they allow direct engagement with directors, and in-person attendance reduces the possibility of technical issues and triaging of questions. Ms Mazalevskis said:
I think there should be a hybrid model which would allow people to attend virtually if they wanted to, such as people from regional and remote areas or people who can't travel interstate because of their financial circumstances, which is affecting a lot of people at the moment, and that would still give the people who can attend in person the opportunity to attend; I think that's only fair. When shareholders buy shares, they know that they have the right then to attend an AGM and to meet and greet directors and ask them questions about the business, now that they're owners in the business, and that's been taken away.
Ms Kate Griffiths, Executive Manager, Public Policy and Advocacy, ACSI also spoke in support of hybrid meetings to make meetings more accessible:
It's our view that hybrid meetings should be the minimum regulatory standard. Providing shareholders with the option to attend in person or virtually ensures that company meetings are accessible for all, and it is likely to increase attendance while maintaining the quality of participation.
The AICD, AIRA and the GIA argued that entities should be free to determine the most appropriate format for meetings, be that physical, hybrid or virtual, without prescription in legislation. Given the diversity of entities, structures, and geographic distribution of shareholders or members they considered that companies themselves were best positioned to decide which format would attract the most attendees or be the most cost-effective. Mr Ian Matheson, Chief Executive Officer, AIRA said that:
The feedback from our members has overwhelmingly been that the choice and accountability to tailor meeting formats to an increasingly diverse investor community has increased attendance and investor engagement. These benefits are pillars of strong corporate governance and meaningful investor communications which may be stymied by the possibility of mandating hybrid meetings for listed entities or implementing a technology-specific framework.
Ms Motto similarly argued for less prescriptive and more flexible legislation:
Some of the companies that we've talked to in our membership include small listed or unlisted public entities that might have only a very small footprint in only a very small geographic location; through to large not-for-profit associations that in fact have a very large national footprint; through to multinational listed entities who, of course, have to traverse the difficulties and challenges across international borders as well as national borders.
…There are many examples of organisations and we would say once again that the legislation should be less prescriptive and give organisations optionality on a principled basis, that they should do what's in the best interests of their members, shareholders and so forth, rather than be prescriptive around a certain format.
In favour of virtual-only meetings, the AICD identified additional complexity and costs when managing hybrid meetings, compared to virtual or
physical-only formats. The committee also heard of the lack of viable alternatives to virtual meetings during emergency events, such as COVID-19 lockdowns. The GIA also submitted arguments in favour of virtual-only meetings, with particular benefits for smaller entities, and those with geographically diverse members:
Wholly virtual meetings were especially helpful for charities, membership associations, not-for-profits and other companies limited by guarantee with large member bases spread widely across Australia. Any poor shareholder experiences at wholly virtual AGMs in 2020 can be addressed through education and ASIC and industry.
Submitters noted that some organisations would need to amend their constitutions to permit hybrid or virtual meetings, requiring shareholder approval either at their AGM or via an extraordinary general meeting.
The GIA and AICD suggested the inclusion of 'non-replaceable' provisions in the Corporations Act to relieve entitles of the need to make constitutional changes individually.
Reasonable opportunity to participate
Determination No. 3 allowed company meetings required under the Corporations Act and relevant legislative instruments to be held virtually 'using one or more technologies that give all persons [emphasis added] entitled to attend a reasonable opportunity to participate without being physically present in the same place'.
The provisions of the bill differ from the temporary measures as they enable virtual and hybrid meetings 'provided the technology gives the persons entitled to attend the meeting, as a whole [emphasis added], a reasonable opportunity to participate without being physically present at the same place'. The bill also makes provision for a 'reasonable opportunity to participate' to include the right to speak (including a right to ask questions) orally rather than in writing.
ASIC assisted companies to meet their obligations in relation to participation through the release of guidelines relating to virtual and hybrid meetings on 6 May 2020. It contained clear guidance to corporations, covering the ability of shareholders and members to participate, and ask questions, and recommending that participants be given the same rights as if they were attending in-person.
Despite the guidelines available to assist corporations, a number of submissions raised concerns about the reduced ability of shareholders and members to participate in hybrid and virtual-only meetings during 2020 AGMs. Particular concerns were raised about the inability of shareholders to ask questions. Ms Mazalevskis told the committee:
Companies often engage third-party moderators to run their virtual AGMs. Questions are submitted to the moderator's portal and then passed to the company holding the AGM who sometimes or often unfairly triages them; why? There is usually no direct communication that occurs at virtual AGMs. This process allows convenient side-lining or obfuscation of questions and issues in many cases. Answers which are not directly relevant to the question are deflected or conflated. I have experienced this as a cultural characteristic used to manipulate the genuine shareholder voice. The questioner has no come back to follow up or respectfully challenge such digression.
This position was supported by Bank Reform Now, with Dr Peter Brandson, Chief Executive Officer and Founder, Bank Reform Now, highlighting technical and accountability issues:
At a live AGM, if you stand up, you go to the microphone and you ask your question, there's no triaging, there's no censorship. At a virtual AGM, as I said before, some of our bank warrior colleagues found last year that they were not able to ask the questions, and they were given the run around. There were all sorts of technical issues. Some people weren't even able to sign in, and that was just not acceptable. If you're interacting virtually, you've got to have the same capabilities and same rights as anybody else in the physical environment, and that should be guaranteed.
…the virtual participants must be able to have the same rights as the other people and all their questions should be allowed and all the questions should be recorded properly and transcribed and be available for research purposes.
The LIV raised concerns over the ability of shareholders and members to participate given the bill's provisions relating to participation 'as a whole'.
To improve accountability at virtual meetings it suggested that an opportunity to ask oral questions in real time would be helpful and that:
…reasonable opportunity to participate should thus be applied strictly, with the relevant benchmark being what would otherwise be available to members at a physical meeting. Accountability issues would arise if, for example, written questions were submitted through private channels, as it lacks transparency and risk members' questions being curated by company officers.
The GIA made it known that there had been no prior consultation on proposed subclause 253Q(2) relating to participants exercising a right to speak, including orally. It reported that its members had identified some practical difficulties with the untested provision and expressed concern at the possibility that some companies may return to physical-only meetings.
The GIA also observed that there had been media commentary about 'cherry picking' of questions at virtual meetings but that the conduct of many meetings in 2020 had enabled questions to be asked through a variety of means including platform 'hands-up' facilities, or submission ahead of the meeting through a secure platform:
…a participant observed that they had seen the 'back end' of more than 500 meetings and had not observed companies selectively answering questions. The main reason they noted that questions were not put to a meeting was that they had been previously answered. The evidence indicates that despite concerns about shareholders not being able to ask questions at 2020 AGMs 'the number of clients offering questions increased in all indices'.
Computershare provided evidence that demands for voice facilities enabling participants to participate orally at meetings had been small. By way of example it cited the case of a large client which held its AGM during the last quarter of 2020, noting that the proportions of usage are 'fairly consistent' across other clients:
261 shareholders and 15 proxyholders attended the AGM;
374 visitors attended the AGM; and
4 investors utilised the phone facility that was offered.
Computershare recommended that, due to the lack of consultation and short notice for implementation, the requirements for voice participation be removed from the bill but incorporated as part of longer-term consultation and reform during the opt-in hybrid meeting pilot.
The GIA explained in its submission that some listed companies arranged for telephone links to meetings, usually at additional cost, to enable verbal questions. Callers were either connected to the meeting via an operator, incurring a time delay, or after verifying the identity of the caller they connected directly. However, it noted the significantly more complex and risky arrangements caused by multiple technologies and that the experience of their members was that telephone participation was not widely used. For example, a top 20 listed company with 356,000 shareholders had 589 virtual attendees to the 2020 AGM, and fewer than 5 people join by telephone.
The AICD was in agreement with this position and supported the right of shareholders and members, as a whole, to have a reasonability opportunity to participate, but spoke against the right of attendees to exercise a right to speak orally. Instead, the AICD suggested that the bill focus on setting out broad principles for participation, with supporting guidance from ASIC and industry.
Voting at meetings
Determination No. 3 provided votes at virtual meetings 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'. Proposed subsection 250J(1) preserves this requirement and includes the option for it to be used if demanded.
The GIA did not support the requirement for all resolutions at a meeting of a company's members to be decided on a poll, but suggested that this extend to 'substantive' resolutions only. It explained that procedural motions, such as points of order, were not intended to be captured by this requirement and recommended that these be resolved by a show of hands instead. It noted that that smaller companies had successfully used a 'hands-up' function in Zoom, or similar, for votes on a show of hands. The GIA justified this position by explaining that companies, particularly smaller, not-for-profit companies limited by guarantee have few resources and, when using a technology platform, there is a cost attached to each poll. For this reason many small, listed companies try to limit the number of polls.
Hybrid meeting pilot
There was cautious support for an opt-in hybrid meeting pilot foreshadowed by the government.
CPA Australia welcomed further details about the pilot, and wanted to ensure direct or face-to-face engagement between shareholders or members and directors to promote accountability and transparency. The AICD also looked forward to further details about the pilot, although they would have preferred to see the provisions put in place permanently.
ACSI supported an opt-in pilot for hybrid AGMs, recognising the need to protect the right of shareholders to attend AGMs while also benefiting from technological innovation.
In contrast, AIRA believed that previous consultations and the temporary measures have allowed for sufficient consultation and assessment of the benefits of virtual and hybrid meetings. AIRA concluded that that the pilot is unnecessary and would only increase costs and risks for companies.
There was widespread support for the provisions relating to electronic communication of documents. Submitters noted the benefits associated with electronic communications, including reduced printing and postage costs, mitigation of postal delays worsened by COVID-19, less waste and lesser environmental impacts.
Increasingly shareholders are electing to receive communications digitally and take up of hard copy communications during 2020 was low.
Clubs Australia, which represents 6,440 not-for-profit licensed and registered clubs, of which more than 1,000 are public companies limited by guarantee, provided significant evidence about the impact of the provisions on its members. The bill will result in regulatory savings of at least $9 million per year, almost 27,500 extra staff hours and will save more than 41 million pieces of paper. For larger clubs the cost of posting meeting notices is in excess of $100,000 per meeting—costs that will not be incurred after the bill is passed.
The ASA supported the idea that shareholders and members should be given a choice for their preferred way of receiving communications, with the option to opt-in to hard copy communications. The GIA thought that electronic communications should be the default with an 'opt-in' for hard copy communications, as per the provisions of the bill for most communications.
CPA Australia and the LIV supported hard copy communications unless the shareholder or member has not elected to receive a hard copy, opting in to digital distribution. With the LIV maintaining that this would help redress some of the disadvantage experienced by certain shareholders or members who have limited access to or familiarity with technology.
Clubs Australia expressed misgivings at the requirement to provide notice of the right to opt-in to receive hard copy communications within two months of commencement. As an alternative, it suggested that companies should be prohibited from sending documents electronically if the recipient has not nominated an electronic address and was not sent a document under proposed section 253RA. It proposed that this would enable companies to send notices of their rights with other documents when the company next communicates with them and would negate the requirement to send a notice to a person who has already nominated an electronic address.
Computershare also expressed concerns. In the 2020 financial year, it sent out 56,700,000 individual communications to investors, with digital addresses and digital communications elections in place for approximately 8 million investor accounts. While welcoming the changes to electronic communications, Computershare were concerned that the provisions relating to the right to
opt-in to hard copy communications would confuse those who already had electronic elections in place:
Computershare absolutely acknowledges the rights and choices that investors make, but the application of this policy would seem to be addressing the needs of a small number and segment of investors, whilst potentially confusing a significantly broader segment.
The GIA had similar concerns and argued that, as many shareholders have already stated their preference for digital communications, this would be viewed unfavourably. As the provisions may only be in place for a very short period, it also imposes a significant regulatory and administrative burden.
The GIA also explained the difficulties associated with 'lost' shareholders and the requirement to send them materials at least once per year for six years before they can treat them as 'uncontactable', and the requirement imposed by the bill to advise them of their right to opt-in to receive hard copy communications.
Dr Brandson, of Bank Reform Now, told the committee of his concerns regarding the electronic communication of documents and the ability for these communications to be intercepted and interfered with. He argued for appropriate identity verification and document integrity mechanisms to be put in place.
Ms Mazalevskis also raised concerns about electronic communications noting that 'Most electronic notices…discriminate against many shareholders who rely on reading printed information, and there are many such shareholders'.
Electronic execution of documents and deeds
In general, submissions did not differentiate between electronic execution requirements for company documents and those relating to Chapter 2G meetings.
The majority of submissions supported provisions relating to the electronic execution of documents and deeds, noting the improved flexibility, reduced costs and greater efficiencies that would result from these amendments. Nitro Software strongly supported the proposed amendments, and highlighted their importance to enabling business globally and bringing Australia into line with similar jurisdictions including the US and United Kingdom (UK):
It is our belief that permanently enabling electronic execution of documents will enable Australian organisations to operate more productively and efficiently and will enable Australian businesses to remain at the forefront of technological innovation. A return to mandated paper-based document execution risks leaving Australia as an outlier in global business practices.
…it is critical that these changes be embedded as a permanent solution.
Research conducted by Nitro during COVID-19 provided evidence of the global shifts in how businesses and workers operate, emphasising the need for modernisation of signing and execution provisions in Australia. In addition to the statistics it provided in Figure 2.1 below, it found that the use of electronic signing technology contributed to a 43 per cent increase in signature rates for documents, including contracts and invoices:
Figure 2.1: Changes to business practices during COVID-19
Source: Nitro, The Future of Work: four emerging trends shaping how we work, June 2020.
While supportive of electronic signatures and document execution, the LIV advocated for additional changes to remove legal uncertainties.
The LIV recommended that the EM be amended or clarified to reflect the current state of the law. At present the EM suggests that all company documents must be executed by all parties physically signing the same document or hard copy. The LIV maintained that this position does not have a legal basis, reflect a balanced view, or address the uncertainty arising from recent cases concerning the validity of electronic signatures.
The LIV also recommended that proposed subsection 127(3B) not be the sole basis for determining the validity of electronic execution. In relation to deeds, it favoured the inclusion of an explanatory note stating that non-compliance with this subsection 'does not necessarily mean that the electronic execution is invalid or the statutory assumptions in section 129 cannot be relied on.
The LCA and the LIV also noted the difficulties in conducting cross‑jurisdictional transactions in Australia. It noted the unique state and territory implementations of legislation relating to electronic execution, electronic signatures and remote witnessing, creating problems for businesses. In line with the findings of the Senate Select Committee on Financial Technology and Regulatory Technology interim report, the LCA noted the unique position of the Australian Government to play a leadership role and facilitate the harmonisation of these areas. The LIV said that:
Given the fact that commercial and personal transactions occur at a higher frequency across Australia's borders, the need to harmonise the different positions of each jurisdiction is obvious. The LIV recommends taking this opportunity and the current impetus to look at these issues to consider consolidating some of the divergent requirements and working with the state governments to harmonise these requirements.
Dr Brandson raised concerns about the electronic execution of documents. Both he and Ms Mazalevskis referred to the insecure practice of using a scanned image of a signature on documents, at times without the consent of the signatory. They both spoke of the serious resulting financial harm experienced by some borrowers. Dr Brandson again stressed the need for appropriate document integrity and identity verification processes:
With regard to the provision of electronic signing of documents, it is critical to understand the importance of document integrity and identity verification. Without these issues being well thought out, you are heading into a minefield. Cybercriminality is booming and will only get worse. Documents can be intercepted and manipulated. Impostors could participate in various identity theft scenarios that involve falsely executing contracts and deeds.
Many times in history, professional conmen have been looked upon as pillars of society. The ability to do business without the effective validation of documents and identity will empower these types of people even more.
The Senate Select Committee on Financial Technology and Regulatory Technology and the Legislation Committee received additional evidence relating to the split execution of documents, and the lack of clarity as to whether parties are required to sign a document in physical form and whether it contain the entire contents.
The Senate Economics References Committee notes that technology and frameworks enabling trusted and verified transactions and communications—including digital identity, identity verification, e-signatures, blockchain and smart contracts—are currently under inquiry by the Senate Select Committee on Australia as a Technology and Financial Centre.
Electronic recordkeeping and keeping of minute books
The inquiry received no specific evidence in relation to these provisions.
The ASA noted that recordkeeping with regard to electronic signatures needs to be 'adequate'.
Schedule 2—Continuous disclosure obligations
The committee heard a range of views in respect of the amendments proposed by Schedule 2. The evidence highlighted tension between the interests of some company directors, on the one hand, and the interests of company shareholders, on the other. Some company directors appear to be particularly concerned that shareholders are misusing the continuous disclosure obligations, while shareholders and the corporate regulator made it clear that shareholders rely on the existing continuous disclosure laws to hold company directors to account, ensure market integrity and promote greater and fairer participation in the market.
Submissions in favour of the amendments in Schedule 2 argued that:
the amendments would align Australia's continuous disclosure laws with other jurisdictions (though this was disputed by (among others) ASIC and, in any event, this argument is premised on the notion that other jurisdictions have better continuous disclosure laws than Australia—a suggestion that was strongly rejected by numerous witnesses who described Australia's continuous disclosure regime as 'world-class', 'a world leader', and 'world-leading');
the existing threshold for establishing a breach of continuous disclosure obligations resulted in too many class actions (though, according to the PJC report, there were only 10 shareholder class actions in all of Australia in 2019); and
the amendments would reduce the high cost of D&O insurance (though the Insurance Council of Australia submitted that it is unlikely the amendments would have any discernible impact on the cost of D&O insurance at all).
The committee also heard a range of alternative perspectives opposing the amendments in Schedule 2 (ranging from the Australian Shareholders Association to academic experts to law firms). The opponents of Schedule 2 pointed to:
the effectiveness of the current continuous disclosure regime, as evidenced by Australia's strong markets;
the confusion and uncertainty created by the provisions, as currently drafted;
the disproportionate and negative impact that the amendments in Schedule 2 would have on retail investors, particularly women;
the difficulties in establishing the state of mind of an entity and effective reversal of the burden of proof, severely curtailing the ability of investors to seek redress and recompense or hold company directors to account; and
the impacts on ASIC enforcement.
Comparison with other jurisdictions
Distinct Australian market
The AICD argued that the amendments in Schedule 2 would align Australia's laws with other relevant jurisdictions.
However, the committee heard from a number of other submitters that this was not correct and, in any event, directly comparing Australia with other jurisdictions is misconceived. Professor Peta Spender questioned whether the comparison should be made:
It's my view that those comparisons are misconceived because of the radical differences in many facets between the different jurisdictions. For example, there are different types of markets. The markets operate differently. The class action regimes are different. The types of disclosure between the different components of disclosure are all different in all of those jurisdictions. You have to consider also that you're not comparing the same types of phenomena.
Dr Sean Foley, Associate Professor, Macquarie University, shared this view, as did Mr Andrew Watson, National Head of Class Actions, Maurice Blackburn. Dr Foley discussed the operation of continuous disclosure in Australia compared with other jurisdictions like the US. He observed differences in across regimes, for example in relation to Australia's costs for frivolous actions. In Australia:
…[the continuous disclosure regime] is designed to ensure that investors are fully informed about the likely prospects of the firm when they make the decision to buy or sell securities. This differs quite significantly from other regulatory regimes in the world. In the US, for example, they have periodic disclosure that requires companies to make quarterly statements about this information. Even if a material change occurs to the company, as long as the directors don't announce it to some segments—just to these analysts or something like that—then they don't need to tell anyone. This means that there's a lot more opportunity for things like insider trading and market manipulation and it means that when investors make decisions they are not necessarily fully informed about the state of the market as it is.
Mr Watson argued that merely drawing comparisons with US and UK systems which require a fault element is not enough. He thought proper analysis of the fault element, including its consequences, needs to occur. He maintained that the bill introduces a particular test with a particular consequence which will not operate in the same way as fault elements overseas.
Dr Brandson thought that comparing Australia with other jurisdictions was not helpful and that our frameworks should be exemplary:
With regard to US and UK issues, I wouldn't say that the US is a gold standard in corporate behaviour and governance. I'd like to see Australia lead the pack and have a system which really encourages ethical business behaviour, so I'm not interested in whether we're the same as America or England. We can do much better. We should set the example.
ASIC observed that while some submissions to the Parliamentary Joint Committee on Corporations and Financial Services Inquiry into Litigation Funding and the Class Action Industry (PJC inquiry) claimed that a fault-based framework for private actions would align Australia's rules with the US and UK, there are distinctions between private litigation and enforcement by regulators. It noted the difficulties of making direct comparisons between different jurisdictions and that introducing a fault-based element for enforcement litigation may, place Australia out of step with the US and UK.
In any event, the AICD's argument in favour of aligning the fault element for private enforcement in Australia with the fault elements in foreign jurisdictions like England and the US appears to be premised on the idea that the law in those jurisdictions is superior to the law in Australia. However, numerous witnesses rejected such a proposition—arguing that Australia's continuous disclosure regime is 'world-class', 'a world leader', and 'world-leading'.
High proportion of retail investors
Professor Spender pointed out that the high participation rates of retail investors investing directly Australia's market is sufficient to make 'the Australian market, if not unique, very distinctive,' also negating any direct comparisons. The 2020 ASX [Australian Securities Exchange] Australian Investor Study estimated that 6.6 million Australians hold shares or other on-exchange investments.
Professor Spender observed that:
Australian direct shares are by far the most widely held asset class, owned by 58 per cent of investors. That compares to just 38 per cent of investors who hold residential investment properties and 28 per cent who hold term deposits.
Mr Watson, of Maurice Blackburn, supported this evidence, also drawing attention to investments in superannuation:
Australia has one of the highest rates of direct share ownership globally, with approximately 35 per cent of adult Australians holding exchange investments. An even greater number have an indirect interest in shares through their superannuation, with approximately 16 million Australians, or more than 80 per cent of the adult population, having investments in super, according to the ATO.
Regarding superannuation, ASIC provided evidence that direct super fund investments in ASX 200 companies have more than doubled to $17.3 billion in the last 5 years. If this growth continues it is estimated to reach $157 billion by 2023.
Professor Spender recognised the increasing participation of young investors in the 18 to 24 year age group. This group of investors, she noted, are shifting from residential homeownership to asset-holding, not only to their own benefit but to that of the economy more broadly.
Professor Spender further noted that more women are investing, with 45 per cent of those who began investing in the last 12 months being female. This is particularly significant given the history of lower participation by women and generally lower levels of financial literacy, particularly for older women. However, the ASX investor study also found that women have some hesitation about active engagement with their portfolios and about information. Professor Spender confirmed the vital importance of having a disclosure regime that supports and protects existing and emerging investors, and the Australian market generally. She told the committee that:
The submissions broadly recognise that institutional shareholders have many strategies available to them to find out information and continuous disclosure goes some way to levelling the playing field because it allows retail investors to at least access to the information that may be needed to make investment decisions. In my view, the current regime is more understandable and accessible to retail investors than the proposed regime.
Effectiveness of the current regime
The current provisions had their genesis in the financial markets collapse in 1987 and resulted from inadequacies in disclosure that were demonstrated by the crash. Numerous submissions insisted that the high integrity and trust in Australia's markets has been as a direct result of Australia's strong continuous disclosure regime.
ASIC highlighted the importance of continuous disclosure obligations and misleading and deceptive conduct provisions in protecting investors:
Australia's continuous disclosure obligations and misleading and deceptive conduct provisions are critical to protect market integrity and maintain the good reputation of Australia's financial markets. Confidence in the integrity of Australia's equity markets:
(a) encourages investor participation;
(b) contributes to liquidity;
(c) stimulates more competitive pricing; and
(d) lowers the cost of capital.
Markets cannot operate with a high degree of integrity unless the information critical to investment decisions is available and accessible to investors on an equal and timely basis. That is why market cleanliness and continuous disclosure are essential to investor confidence. Price discovery in a clean market is efficient. Asset prices react immediately after new information is released through appropriate channels and thereby more closely reflect underlying economic value.
Furthermore, Mr Chris Savundra, General Counsel, ASIC, asserted that the continuous disclosure regime is 'critical' to the markets and confidence in those markets and that the current provisions have supported confidence and market integrity.
Mr John Walker, Chairman of the Association of Litigation Funders of Australia (ALFA) and Chief Executive Officer of Investor Claim Partner, noted the positive impact of current laws on overseas capital:
Very recently, over the last 10 years, we've also had a very large increase in overseas capital coming to our markets. So the supply and the price at which that capital is supplied are very much dependent upon the belief in the market that we are getting value for money, that the information in the market is full and complete in regard to the securities that are being chosen and that we're not allocating money to companies that ought not be provided with the capital and certainly at the price that it's being provided at. So these [existing] laws seek to ensure that we get enough capital, we get it at good prices and it's allocated in an appropriate way.
Dr Angelo Aspris, The University of Sydney and Dr Sean Foley, Macquarie University, noted that Australia's current framework has contributed to the strength of Australia's markets globally, despite new and growing risks:
Australia's continuous disclosure obligations are world leading. They facilitate confidence in our market and allow the ASX to punch above its weight in the global market for listings and generally protect investors. Regular policy and procedural reviews should be conducted to ensure that the balance between efficiency and fairness strikes a sensible balance. In recent years, a plethora of new risks such as cybersecurity and pandemic threats have added to the growing operational and financial risks that entities and their officers must address. Given the widening spectrum of risks, there must be greater accountability and prudence displayed by officers and directors to ensure that investors are well-informed and protected. These are simply the costs of doing business in an international marketplace. If we are determined to ensure that businesses thrive, then we must also ensure that investors can confidently assess individual risks, that there are sufficient deterrents for critical breaches of continuous disclosure, and that where these breaches occur, there is access to justice.
Professor Spender, Dr Aspris and Dr Foley acknowledged the positive impacts of the current regime on corporate culture and practice, both through deterrence and as a result of litigation:
What has been really successful in Australia's continuous disclosure regime is the ability to censure directors who choose not to act in the best interests of shareholders or market efficiency. What we've seen in our research, particularly of Australian shareholder class actions, is that firms tend to improve their disclosure culture in the wake of shareholder class actions. They tend to rejig their managerial staff and make changes to their accounting policies. This is in general quite beneficial. Firms that do act badly and are the subject of shareholder class actions tend to improve their practices. Also the threat of shareholder class actions tends to generate better disclosure practices from current listed entities.
Professor Spender told the committee of the regime's favourable outcomes, including in relation to insider trading, arguing that:
the CD [continuous disclosure] regime, it has been in place for 30 years, and it's regarded as a world leader. The markets have prospered under this regime. Just to emphasise that point again, ASIC didn't consider it necessary for it to even be reviewed, because it's very highly regarded.
Along similar lines, Dr Foley explained that the current provisions actually lead to better outcomes for markets and corporations:
There is a well-developed academic literature drawing on experience in the US, UK, and Canada which has shown a link between reduced litigation risk and increased earnings management, poorer firm performance, decreased investment efficiency, increased cost of debt and increased cost of equity. I suspect that these are not the outcomes that the Treasurer is hoping for. There is also academic evidence showing a link between reduced litigation risk and increased managerial entrenchment, as well as an increased profitability and probability of illegal insider trading.
…firms tend to improve their disclosure culture in the wake of shareholder class actions. They tend to rejig their managerial staff and make changes to their accounting policies. This is in general quite beneficial. Firms that do act badly and are the subject of shareholder class actions tend to improve their practices.
Ms Griffiths supported the retention of the existing provisions, maintaining that compliance is not difficult:
A fair, stable and transparent market has been achieved under our existing laws for many years. The existing strict liability test incentivises companies to establish appropriate systems to ensure material information is disclosed in a timely manner. It's not overly burdensome for an ASX-listed company to establish appropriate disclosure systems, and companies have ample guidance from ASIC and from the ASX on how to manage their disclosure responsibilities.
Bank Reform Now spoke to the importance of maintaining the current provisions to safeguard accountability and transparency, especially noting the Australian Government's fundamental role in imposing and maintaining the appropriate frameworks.
Lack of broader analysis and consultation
There was some discussion about the need for broader and independent review before changes to continuous disclosure are made, and deep concerns expressed about the lack of any meaningful consultation process regarding the provisions in Schedule 2.
A number of submissions supported the Australian Law Reform Commission's (ALRC) recommendation for a broader review of the continuous disclosure regime.
As discussed in chapter 1, the ALRC report argued for a broad legal and economic review, covering the operation, enforcement and effects of the continuous disclosure framework. ALRC argued that any such review should draw in expertise from relevant stakeholders and look particularly at information asymmetry in the financial markets.
Some submitters thought that the government's approach to reform in this area is piecemeal CPA Australia warned of the dangers of the government's approach producing 'adverse unintended consequences'.
Consultation on the bill
The lack of any public consultation process by the government in relation to Schedule 2 was raised by a number of witnesses. In response to questions on notice by the committee, Treasury conceded that neither it nor the Treasurer consulted with any external stakeholders in relation to Schedule 2 of the bill. Senators Walsh, McAllister and Chisholm questioned witnesses at length about the government's failure to consult, and there was general agreement among witnesses that many people and organisations who should have been consulted were not consulted.
While not discussed in the EM, Treasury told the committee that it conducted 'targeted consultations' on the effects of the temporary instruments (that is, not on Schedule 2 specifically) with representatives from:
the Law Council of Australia (Business Law Section of the Corporations Committee);
the Business Council of Australia and its members; and
the Australian Institute of Company Directors.
The consultation with the Business Council of Australia was also attended by representatives from Allens Linklaters, Cochlear, Herbert Smith Freehills and King and Wood Mallesons.
Notably, other than ASIC, all of the stakeholders consulted by Treasury on the temporary measures are longstanding advocates for the measures in Schedule 2. For this reason, one witness described the government's failure to consult with any shareholder or consumer advocates, or any institutional investors, as 'suspicious':
It's very suspicious, isn't it? Of course we're disappointed. The government is pushing this agenda for various reasons which aren't in the interest of the community or shareholders, really. Can you interpret it in any other way? They're not talking to the people that are affected; they're just pushing it through.
GIA noted that it was surprised at the appearance of Schedule 2 in the bill, but that members had been more focussed on the issues covered by Schedule 1 at the time. Omni Bridgeway also expressed its surprise at the unexpected changes:
When the Treasurer announced the intention to permanently change these provisions, reference was only made in that announcement to the changes to continuous disclosure. Misleading and deceptive conduct wasn't mentioned. It wasn't until the actual act itself was made available that it became clear that it was to expand what was a temporary change into a more permanent change that affected both the continuous disclosure as well as the misleading and deceptive conduct provisions.
Omni Bridgeway, ACSI and ALFA thought that additional consultation should have been conducted in relation to continuous disclosure obligations.
Ms Mazalevskis expressed concerns that consultation processes were being conducted with industry participants which stood to benefit from the changes and that engagement did not include community members directly affected by the changes:
…my concern is that these processes or this consultation, if it is being had with industry participants, is not involving the community…It shouldn't be left to business to make all of these decisions, on behalf of the Australian people, when those decisions actually are to the detriment of the Australian people.
Impacts of the temporary measures
The committee heard a range of evidence about the impact of the temporary measures.
Support by company directors
The AICD told the committee that it had not observed any reduction in the quality or number of disclosures during the temporary measures, and that the ASX also did not raise any concerns.
The AICD told the committee that during the operation of the temporary measures companies were mindful of their disclosure responsibilities and continued to keep the market informed.
Mr Graeme Blackett, Deputy Chair of GIA's Legislation Review Committee echoed this view.
While the AICD expressed strong support for the temporary measures, the Committee heard evidence that the vast majority of company directors had not relied on the temporary provisions—and did not support the measures being made permanent. Mr Ben Phi, Managing Director, Phi Finney McDonald, cited King and Wood Mallesons' survey of company directors on the continuous disclosure obligation temporary measures. The survey found that 90 per cent of respondents did not rely on the temporary provisions and 80 per cent said that the measures should not be made permanent.
Dr Foley maintained that a review of the effectiveness of the temporary measures should be undertaken before they become permanent:
Before making these temporary measures permanent, a thorough analysis of the effect of the temporary COVID-19 changes should be performed to assess whether key objectives were achieved during this period of uncertainty. To my knowledge, such an analysis has not yet been undertaken.
In order to protect investors and promote fairer, more efficient capital markets, we need regulations that are enacted with consideration based on evidence. The changes proposed in Schedule 2 of the Treasury laws amendment bill, specifically those outlined, were introduced with haste in order to deal with the severe uncertainty COVID-19 brought to our listed entities. They were not designed to be, nor should they be, permanent. It is our opinion that these proposed changes will not have the desired impact on directors and officers fees, nor will they serve investors. Instead, they are likely to generate negative welfare outcomes for all Australian investors.
The ASA agreed that there was no apparent loss of quality of disclosures over during the time that the temporary measures had been in place but that this was due to the temporary nature of the measures, and the fact that the inadequacy of disclosures may not become apparent until 'some years after the disclosures have been made'. The ASA argued the changes would reduce disclosures over time.
Impacts on class actions
The AICD provided statistics on shareholder class actions activity during the temporary measures period, with only 14 such actions being filed in the 12 months to March 2021. The PJC report found that only 10 shareholder class actions had been filed in 2019 (prior to the temporary measures coming into force).
Problematic fault elements
As outlined in chapter 1, the bill seeks to permanently add a fault element to continuous disclosure provisions, meaning that a person will only be eligible for a civil penalty where they have acted with knowledge, recklessness or negligence in failing to update the market with relevant information. The bill will also set the same fault standard for misleading and deceptive conduct that relates to an alleged failure to update the market price sensitive information.
Professor Spender and Dr Michael Duffy provided some commentary on the bill provisions as they are currently drafted.
Professor Spender expressed concern at the bill's imposition of a 'very messy standard that makes it very difficult to use'. She told the committee that:
The problem with messy, complex and fault based law, when you've got a fundamental obligation to the market, is that it discourages people from using it, and that means that you undermine the deterrent element of the law.
According to analysis presented by Dr Duffy, the new fault provisions differ from those in place prior to the amendments to the Corporations Act made in 2001. Dr Duffy was concerned that, as drafted, the bill confuses the issue of knowledge and awareness of the corporation (the mental element) and the materiality of the information to the market and that this may lead to 'perverse and unintended outcomes'. Under the current law the latter is an objective test.
Dr Duffy also provided information about the development and use of civil penalties, explaining that they appear to be intended as a lesser punishment, with the expectation that they might be imposed more frequently—given the lower standard of proof, less serious sanction, and the honesty defence provided by the Corporations Act (although it does not extend to corporations).
The civil penalties also appear to be designed to provide an alternative enforcement action where it may be difficult to prove the necessary fault elements to establish a criminal offence. Dr Duffy observed that the inclusion of fault elements in civil penalty provisions is unusual but not unheard of.
In contrast, a mental element has traditionally been part of criminal offences, except for strict or absolute liability offences, where fault is not required to be proven.
Dr Duffy submitted that the case for inclusion of fault elements in purely civil actions for misleading and deceptive conduct is problematic. He indicated that practice in this area is informed by nearly 50 years of case law, and that these provisions have never required fault elements. Courts have generally treated misleading and deceptive conduct as protective legislation which provides the fullest relief possible, regardless of state of mind.
The proposed amendments have created legal confusion and it is not clear how the changes will apply in practice. For example, when misleading disclosures contain half-truths or incomplete statements that may contravene misleading and deceptive conduct or non-disclosure provisions it is unclear how the fault element would apply. Mr Andrew Saker, Managing Director and Chief Executive Officer, Omni Bridgeway noted that:
They're quite different provisions. Continuous disclosure is an obligation to make known material public information so that people can trade their shares. Misleading and deceptive conduct is a positive act by a director or an officer to otherwise not comply with their obligations to be transparent and open. I think the extension there raises both positive and negative aspects of corporate misbehaviour.
ASIC explained that the fault provisions had created some practical issues for enforcement. These are discussed later in the chapter.
Impacts on corporations
Submissions to the committee explained a range of impacts arising from the bill on corporations.
No changes for responsible companies
A number of submissions expressed the view that the provisions of the bill would not impact companies that already do the right thing by their investors, with sound corporate governance processes in place. Mr Saker thought that class action numbers showed that almost all listed companies in Australia have complied with their obligations in relation to both continuous disclosure and misleading and deceptive conduct.
The ASA argued that mid-companies which placed a lesser priority and amount of effort on maintaining their good reputation and communications would be most affected by the operation of the provisions.
Extent of shareholder class action litigation
The committee heard evidence about the extent of shareholder class action litigation in Australia.
Mr Saker advised the committee of research from Allens as well as King and Wood Mallesons which shows that there has been a decrease in shareholder class actions over the last three years.
As of March 2021, a total of 142 shareholder class actions have been filed in Australia since the commencement of the federal class action regime in 1992.
Professor Vince Morabito, Monash University, pointed out that claims that shareholder actions have been 'exploding' can be partly explained by the fact that for many years only a handful of actions were filed. Furthermore, increasing frequency of competing and related class actions has been witnessed in recent years; with the 142 actions filed by shareholders of only 71 corporations. This is an average of 2.4 companies per year over the period March 1992 to March 2021.
The figures show that the importance of shareholder class actions is declining, decreasing from 44.7 per cent of all class actions in 2017 to 32.2 per cent of all class actions in 2019. Professor Morabito concluded that:
In light of the information provided above, it can be confidently concluded that there has been no explosion of shareholder class actions in Australia over the last 27 years or so in recent years.
Additionally, in just over 75 per cent of cases no action was taken against individual directors so the effect on individuals is modest.
Nearly 83 per cent of actions were funded by litigation funders, with most of the remaining class actions funded through 'no win-no fee' arrangements.
In considering the outcomes for shareholders Professor Morabito found that compensation had been paid to at least 94,984 shareholders. The average payment to class members was $12,829, with lowest and highest average payments ranging from $263 to $327,418 per class member. He also provided evidence suggesting that funded class actions had resulted in higher compensation rates for shareholders.
The Assistant Treasurer, Mr Michael Sukkar MP, argued in his second reading speech that the measures in Schedule 2 were necessary to protect company directors from 'opportunistic class actions'. However, neither Treasury nor the Attorney-General's Department were able to identify a single 'opportunistic class action'—despite the committee providing them with multiple opportunities to do so.
Moreover, Dr Warren Mundy, previous Presiding Commissioner on the Productivity Commission's Access to Justice inquiry, told the PJC inquiry that 'the Commission found no evidence that funded class actions were leading to unmeritorious claims being brought'.
Dr Foley cited evidence from Professor Morabito showing that only 5.1 per cent of shareholder class actions have been summarily dismissed, casting doubts over claims of opportunism. He also noted that litigation funders are unlikely to fund opportunistic actions, given that in taking on a case they are making a business case, they fund only the most serious cases, and as a consequence very few cases have ever been dismissed.
Impacts on costs and availability of D&O insurance
A number of submissions asserted that there is a direct connection between Australia's existing continuous disclosure laws, class action numbers, D&O insurance price increases, and the limited availability of D&O insurance. Treasury told the committee that submissions to the ALRC and PJC inquiries had 'consistently cited the role of shareholder class actions in driving up directors and officers insurance premiums over recent years' (noting that Treasury failed to mention that other submissions to those inquiries had provided contradictory evidence).
The argument that the measures in Schedule 2 would result in lower D&O insurance premiums was contradicted by the insurance industry itself. The Insurance Council of Australia, in a submission made on behalf of the insurance industry, submitted that the measures in Schedule 2 'will quite likely have no discernible effect' on D&O insurance premiums, either in the short to medium or medium to long terms.
Marsh had anticipated that a stabilisation of class action numbers during 2020 would address premium price increases but observed that prices have continued to rise. Marsh also maintained that limited competition in the D&O market has meant that 'D&O insurers have generally been able to take more aggressive stances in negotiations with buyers'.
Mr Matheson explained the difficulties in connecting disclosure practices with D&O insurance premium costs:
Some of our members have actually attended meetings with insurance underwriters to try and explain their process for a disclosure process...to help the underwriters understand the company's continuous disclosure policy and their process for material information being disclosed to the market as a way of trying to give them comfort that those companies that have a robust process for disclosing information and information filtering up through the appropriate channels is a robust process and, therefore, premiums should not continue to go up in the order that they have year in, year out. Something's obviously driving those increases in premiums. For most of our members that have robust disclosure processes, there just doesn't seem to be any connection between their robust disclosure process and these continuing increases in premiums.
For those companies who have robust disclosure processes, there must be something else that's driving those increases in premiums. As I say, members are saying to us that there just doesn't seem to be any rationale for why that is occurring, because they feel that they've done all they can to ensure that, to the greatest extent possible, they've got the policies and processes in place to ensure that all new material information is disclosed to the stock exchange as and when required.
Omni Bridgeway, and ACSI, also supported the notion that other factors are at play in D&O premium pricing. ACSI maintained that:
…it's clear that the statistics are really uncertain. Australia's not unique in terms of the tightening of the market for directors and officers insurance.
I think there are some international statistics that suggest there are similar constraints globally and that some of those constraints really can be attributed to issues other than specifically related to disclosure: uncertainty, re-pricing, non-class action litigation, operational risks. It is certainly not something that's limited to Australia.
Dr Foley was sceptical of a causal link, stating that 'to claim causation between shareholder class action numbers, increased settlement sizes and higher premiums ignores numerous other risk factors that are just as likely to increase fees as shareholder class actions.' Dr Aspris and Dr Foley identified a range of risks that now impact on corporate entities and affect D&O premiums:
Risks currently being borne by shareholders are far more diverse and extreme than at any point in history. Consider cybersecurity risk, pandemic risk, climate risk, and more generally environmental, social, and governance risks (ESG). Many of these risks were unheard of several years ago, and where risks like used to fall into ethical investments, it is now well understood to have important financial implications for all corporate entities.
The Legislation Committee inquiry received evidence that D&O insurance cost increases could also be attributed to previous chronic under-pricing, non-class action litigation, exposure of evidence of wrongdoing (including by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry), and enforcement actions by regulators.
G100 submitted that changes to premiums as a result of the proposed amendments might be a case of timing, but recognised that with lower numbers of claims insurance companies have the potential to make higher profits. It also suggested that if the number of cases declined there would likely be more players in the insurance market, and with more competition prices would fall.
Calculation of regulatory savings of the bill
Treasury provided some context to the regulatory savings put forward in the EM to the bill; with the government claiming that $912.5 million in D&O insurance premiums would be saved per annum. Treasury advised that the figure was based on calculation of an illustrative example and showed the magnitude of the savings that could be expected to flow from the Schedule 2 changes, based on information provided in previous submissions, noting that:
…[the] approach to this costing noted that the period of volatility in these insurance premiums over recent years meant that attempting to calculate the effect of the change based on historical measurements would be too unreliable. We also do not have access to the commercially privileged information that insurers use to generate their cost base. Rather than attempt to calculate the forecast savings, Treasury therefore used an illustrative example of the saving that would be generated if the annual price rise with the change was five per cent, versus what it would have been if it was ten per cent without the change.
Other submitters were sceptical of Treasury's hypothetical regulatory savings. Mr Phi was of the opinion that the projected savings were 'overstated', while Dr Aspris and Dr Foley thought that the analysis was 'not credible', without the consideration of the individual risk factors that drive D&O premium prices.
Most significantly, and as noted above, the insurance industry itself rejected Treasury's analysis. The Insurance Council of Australia told the committee that Treasury's assertion that the changes in Schedule 2 '"will lead to significant savings on the cost of [D&O insurance]" overstates the likely effect of this particular reform'. The Insurance Council went on to say that the measures in Schedule 2 'will quite likely have no discernible effect' on D&O insurance premiums, either in the short to medium or medium to long terms.
Impacts on investors
Mr Phi was emphatic about how the amendments would affect investors:
…the proposal will leave millions of Australians worse off. This includes just about every Australian in paid employment. Each month Australians put a percentage of our income aside for our retirement, with a significant proportion invested in Australian shares.
It's retail investors who will be most exposed. Retail investors rely heavily on corporate disclosures when deciding where to invest and any reduction in the quality of that disclosure will jeopardise their savings. We all know retail investors who have suffered substantial losses on the share market and we all know how reluctant they are to invest again.
Retired Australians are particularly exposed to this. At the end of their working lives they've got a fixed pool of assets and, interestingly, in a zero interest rate world they increasingly demand dividends to maintain their standard of living. They have an extremely low tolerance to losing their capital, and this is what the government's placing at risk through these reforms.
ACSI shared similar concerns for everyday superannuation fund members.
Number and quality of disclosures
In addition to the discussion on disclosures during the temporary measures period, some submissions raised concerns about the dampening effect of the bill amendments on the number and quality of corporate disclosures.
Professor Spender thought that corporations want to be good corporate citizens but that the proposed amendments would make it easier for them not to disclosure. She observed that disclosures are complex, there may be a tendency to delay bad news, and that entities will be exercised over whether they satisfy the fault elements or can shift liability in various ways, for example to auditors or advisors. Likewise, ACSI thought that the changes could lead to companies focussing their attention elsewhere away from disclosure.
Both Professor Spender and Dr Foley maintained that the framework should encourage a culture of compliance and the good quality of disclosures, rather than incentivising misconduct. They emphasised the importance of disclosures to retail investors and their reliance on this information:
…retail investors do not have access to the same information as the large investors, particularly the institutionals. The institutionals can do their own research, they can track market trends very easily and they can sniff deals that are coming on. The sniffing of deals is really an element of the close connections of various people within the markets. Often people know what's happening before it happens, so there's a close nexus between various participants in the market.
The retail investors don't have access to that information. They have to rely upon either secondary sources of the information or information that comes directly from the company; so they're more dependent upon official sources of information. In my view, that encourages participation.
Ms Mazalevskis and Bank Reform Now noted the considerable harm that has been done to investors and customers because of the 'bad behaviour' of corporations and in cases has been withheld because it would have negatively affected a company's repudiation or pricing.
Limits on opportunities for redress and compensation
Difficulties proving fault elements
It had always been intended that the enforcement actions of ASIC would be supplemented by private shareholder class actions which obtain remedy and compensation for breaches. While ASIC has the ability to use class actions to obtain relief for shareholders it has not been a priority; a view reiterated by ASIC itself:
I think almost always in our continuous disclosure cases, ASIC has never sought compensation. I'll correct that on notice if that's not correct.
But we're in the business of deterrence and imposing penalties to deter behaviour; we're not in the business in this space of seeking to recover compensation…We are focused on penalising the company, or at least, through other means, changing their behaviour. We're not usually focused on compensation in this space.
Dr Foley drew out the limiting impacts of the amendments on shareholders:
These changes, if enacted, will further increase the difficulty of undertaking shareholder class actions. This reduction in litigation risk will be harmful for market participants.
He drew on his personal experience as lead plaintiff in the Gunns Limited class action and reflected how the amendments would affected that action:
…[the lawyers] were very skilful and lucky that we were able to get that through. If we had also had the additional burden of needing to prove that the directors had a mindset to be reckless rather than just that they were reckless or negligent in their failure to disclose, it would have been very difficult. I'm almost certain the case wouldn't have been successful.
It's very hard for me to say if it would have been undertaken at all in the first place. But I can definitely say that seeing how difficult it was to reach a settlement, it would have been very difficult if there was this additional burden.
Analysis undertaken by Dr Foley showed that more than 50 per cent of companies which were subject to shareholder class action go bankrupt within two years. He argued that if class actions are only applicable in the case of 'negligence', which is not covered by most D&O policies, and 50 per cent of these companies go bankrupt within a short period, then this effectively prevents shareholders receiving compensation. He argues that 'this could itself effectively kill shareholder class actions in Australia, which I think would be a bad outcome for all involved'.
Dr Duffy concluded that the Schedule 2 proposed amendments would make it more difficult to bring private enforcement actions relating to securities disclosures, noting that 'knowledge and recklessness are going to be very difficult to prove'.
It is more challenging to identify the state of mind of an entity, rather than a person, with state of mind usually ascribed to the board and senior management. Corporate culture also plays a part—including whether it openly or tacitly supports misconduct either by omission or commission.
Mr Watson noted the difficulties in establishing state of mind for an entity, rather than a person, with directors and senior executives able to claim they did not act with knowledge, recklessness or negligence because they did not have the information in question.
The bill effectively reverses the burden of proof from defendant to plaintiff. This, too is challenging as evidence of fault may not be apparent until the discovery stage of litigation. If the evidence is not there to start with class actions will not get this far; this may also result in an increase in satellite litigation.
Dr Brandson had no doubt that the fault element is problematic for investors:
That mental state issue I think is just rubbish. A director either does the right thing or they don't do the right thing. I don't care what his mental state is. There's no mental state issue with organisations. There are directors, and they're the ones that are responsible, and, if they deliberately withhold something, then they've deliberately withheld something.
This view was shared by Ms Mazalevskis, who said succinctly:
The…proposed changes are not in the best interests of the Australian people, and they only benefit corporations.
Risk of blame shifting
A possible, unintended consequence of the provisions—and rushed drafting—is that neither an entity nor its advisors can be held liable for what could be a quite serious wrong, due to the operation of the continuous disclosure and misleading and deceptive provisions:
What the legislation does then, in relation to that accounting misstatement that I've talked about, is give the company a free pass on misleading and deceptive conduct, even though the accounts might have overstated profit by hundreds of millions of dollars or tens of millions of dollars, and it will give the auditors a free pass because, again, they will not be liable under 674A either.
Impacts on ASIC enforcement
Witnesses were of the opinion that the draft amendments would make enforcement more difficult, with ASIC's enforcement options limited to relatively low impact infringement notices and much more complex proceedings such as criminal proceedings under Chapter 6CA.
ASIC outlined the range of enforcement actions available for continuous disclosure breaches: criminal action with a fault element; civil penalty actions (with a fault element proposed by the amendments); the issue of an infringement notice without a fault element as an administrative action; and enforceable undertakings which operate effectively as a contractual resolution between ASIC and the entity.
Infringement notices are the most common enforcement action taken, followed by civil penalty court actions, then criminal penalties. Significant increases in maximum penalties for corporates and individuals were passed in 2019. ASIC noted that there have been no criminal prosecutions of an entity and two prosecutions against individuals in relation to breaches of continuous disclosure obligations.
ASIC submitted that the changes raise practical issues and place indirectly place requirements on their investigations:
There are practical issues for ASIC in having to rely on the rules of attribution to establish the fault element. Some of these practical difficulties could be addressed by inserting a deeming provision in relation to Ch 6CA of the Corporations Act.
Another practical impact is that under the Bill ASIC would be required to establish a fault element in order to bring civil penalty proceedings where an entity fails to comply with an infringement notice. In investigating the matter, it is likely that ASIC will need to obtain evidence to establish the fault element to ensure that it can take civil penalty action in that event.
In relation to establishing fault, ASIC emphasised the time and resource that goes into collecting and collating company information and analysing and interpreting the data and its significance at various points of time. It also discussed the difficulties in ascribing knowledge of an individual or their recklessness or negligence to an entity, particularly where information may not have been escalated to the board or where material information is comprised of a number of facts taken together.
ASIC also submitted that it would be likely that it would be difficult for it to prove recklessness or negligence with regard to the materiality of information where the entity was not aware of it but should have been, or in cases where the board may have conflicting views on materiality.
While ASIC has done some analysis of historical cases to gauge whether they would have been able to prove fault elements, they told the committee that drawing conclusions would be 'speculative' as the investigation may not have obtained evidence as to fault (as it is not required under current provisions), and it will depend on the rules of attribution that apply as part of the new regime.
In relation to infringement notices, ASIC noted that the provisions are likely to require ASIC to conduct a more extensive investigation for less serious continuous disclosure breaches so that, where an enforcement notice is issued, it is enforceable.
ASIC made a number of suggested amendments to the bill to facilitate regulatory actions, for example inserting attribution of knowledge provisions.
Role for greater ASIC enforcement
A range of submitters across the spectrum of views noted the light-touch of ASIC's enforcement actions to date and the potential for increased enforcement. A number of reasons for this apparent enforcement reluctance were proposed including the broad nature of ASIC's responsibilities, combined with insufficient resourcing, and a funding model which does not have an incentivising effect on enforcement action.
These views highlighted the importance of complementary private enforcement.
The committee is grateful to the submitters and witnesses who contributed to the debate on the bill.
Evidence provided to the committee shows widespread support for the changes proposed in Schedule 1 of the bill. By contrast, there is significant opposition to the changes in Schedule 2 by a diverse range of stakeholders—including retail investors, institutional investors, academics and legal experts. While there is some support for the measures in Schedule 2, in the committee's view, the arguments in favour of those provisions are based on very limited (or sometimes no) concrete evidence and are—in the whole—unpersuasive.
Given the ongoing impact of COVID-19 lockdowns and restrictions, and the benefits of the Schedule 1 changes, the committee considers it would be beneficial to split the bill into two—with Schedule 1 forming one bill and Schedule 2 forming a separate bill. This would facilitate the timely passing of Schedule 1 provisions. In the committee's view, Schedule 2 should not pass at all.
With respect to Schedule 1, the committee considers the regulatory relief to allow companies and registered schemes to use technology to hold meetings, execute documents and send meeting communications was effective and facilitated the continuation of business during the COVID-19 pandemic. These measures supported companies and registered schemes to use technology to continue their business and meet regulatory requirements during a period of great uncertainty, while complying with public health orders. They further allowed companies and registered schemes to take advantage of the benefits of modernising business communication and operations.
Businesses are experiencing ongoing disruptions due to COVID-19, creating uncertainties for shareholders and members, and increased costs. As such, the committee considers that the government needs to extend Schedule 1's sunset date by at least six months. This will provide certainty for business and enable commercial transactions to proceed, while providing time for issues raised during this inquiry and through other consultation processes to be considered and extensively consulted on before permanent provisions are developed.
The sunset date should be set with regard to AGM cycles to reduce any further unnecessary uncertainty for business.
The committee noted that some of the issues raised by stakeholders in relation to Schedule 1 have the potential to assist in the formulation of permanent measures and pilot proposals, while improving accountability and transparency; including:
evaluating the responsiveness of entities to any concerns and complaints about the ability of shareholders and members to participate, including issues relating to verbal participation at meetings, ensuring that all questions are heard and dealt with, and polling at meetings;
ensuring that shareholders and members have the option to elect to attend a meeting in person and/or by electronic means; and to consider the benefits of setting hybrid meetings as a 'minimum standard' with virtual-only meetings in exceptions circumstances;
the effectiveness of the opt-in hybrid meeting pilot is reviewed along with the efficacy of Schedule 1 amendments prior to the finalisation of permanent measures; and
further consideration of the issues relating to electronic communications and electronic document execution is completed, with a view to improving efficiencies and providing investors with a more seamless experience.
The committee considers that the proposed changes in Schedule 2 are a solution in search of a problem. Indeed, the committee considers that Schedule 2 could be regarded, with some justification, as a textbook example of how governments should not develop legislation.
For starters, in developing the measures in Schedule 2, the government did not consult with a single advocate for retail investors—the people who are most likely to be negatively affected by the changes to continuous disclosure laws (see below). Nor did the government consult with any institutional investors, academic experts or independent economists.
Instead of broad consultation and sober analysis, the government opted for a process that was, from a public policy perspective, indefensible. For example, in an unseemly attempt to lend credibility to Schedule 2, the government certified a report authored by a Liberal Party Senator as an 'an independent review which involved a process and analysis equivalent to a Regulation Impact Statement'. The handful of external stakeholders that were consulted by the government were people and organisations who were already known to be highly supportive of the measures in Schedule 2.
If passed, the changes in Schedule 2 would make it more difficult for company shareholders to hold directors accountable for withholding price sensitive information or, in some circumstances, for providing investors with misleading information. That is not some unintended consequence—that is the government's explicit policy objective.
The committee considers that it is vital that the rights and interests of shareholders be protected. To that end, the overwhelming evidence to the committee was that the existing continuous disclosure laws in Australia are world-leading and should not be watered down.
Based on the evidence, the committee considers that Schedule 2 is likely to lead to a decrease in the amount—and timeliness—of information that is disclosed to the market.
The committee is particularly concerned about the disproportionate and negative impact that the proposed changes would have on retail investors, including self-funded retirees, mum and dad investors and the growing number of younger Australians who are participating in the share market.
As Dr Sean Foley noted, 'the information asymmetry in the market is heightened for retail investors, which means that any reduction in the information provision by listed entities is likely to have a disproportionate impact on retail investors'.
Furthermore, the committee considers that protecting the integrity of Australia's capital markets is in the national interest and essential to Australia's future economic prosperity. The existing continuous disclosure regime is, as outlined by ASIC, a fundamental tenet of our markets and is particularly important during times of market uncertainty and volatility. Against that background, the committee considers that it would be foolish and dangerous to water down the continuous disclosure regime— especially in the absence of a credible and independent review.
It may be that there are cogent and evidence-based arguments in favour of the changes in Schedule 2. But the committee has not heard them, and the government has not made them.
Instead, the government has made numerous claims that have not withstood even the slightest degree of scrutiny.
For example, the government claims that the measures in Schedule 2 are needed because of the threat of 'opportunistic class actions' against companies—but Treasury and the Attorney-General's Department were unable to identify a single example of an opportunistic class action, or even explain what the government meant by that term.
By way of another example, the government claims that the measures in Schedule 2 would result in a significant decrease to D&O insurance premiums, saving Australian companies over $900 million—but the insurance industry itself rejected that assertion, arguing that Schedule 2 'will quite likely have no discernible effect' on premiums.
The existing continuous disclosure regime was introduced by the Howard Government over 20 years ago. Since then, it has served Australian economy and Australian shareholders very well. Given that background, the committee is disappointed that a Liberal Government would seek to make significant amendments to that incredibly successful regime in the absence of a proper and independent review and broad consultation (as recommended by the ALRC).
The committee also notes that there appears to be very limited support for the changes in Schedule 2—even from company directors. According to a recent survey of company directors by King and Wood Mallesons, as many as 80 per cent of Australian directors do not support changes to continuous disclosure laws.
If the current government remains determined to amend the Howard Government's continuous disclosure laws, the committee considers that it should first commission a comprehensive and independent review of the legal and economic impact of the operation, enforcement and effects of the existing continuous disclosure laws (as recommended by the ALRC).
The committee recommends that Schedule 1 of the bill be passed, with the following amendment:
that Schedule 1 provisions sunset at least six months from the bill's date of Royal Assent, with regard to the timing of annual general meeting cycles; and
the government finalise the drafting of permanent provisions within six months of the date of Royal Assent of the bill.
The committee recommends that Schedule 2 of the bill not be passed.
Senator Anthony Chisholm
Labor Senator for Queensland