The Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 (the bill) was introduced into Parliament on 17 February 2021. The bill contains two schedules relating to corporations law. Schedule 1 reinstates temporary relief which allowed companies to use technology to meet regulatory requirements to hold meetings, distribute meeting-related materials and validly execute documents until 15 September 2021. Schedule 2 provides that all civil penalty proceedings relating to breaches of continuous disclosure (whether commenced under the continuous disclosure or misleading and deceptive conduct provisions) must prove that an entity or officer acted with 'knowledge, recklessness or negligence' in respect of an alleged contravention.
The bill has already been reviewed, as is standard practice on bills deemed to require consideration by committee, by the Senate Economics Legislation Committee. This legislation inquiry was thorough and properly recommended that the bill be passed without amendment. It had dissenting reports from Labor Senators and the Greens. The Legislation Committee report was tabled on 12 March 2021.
For purely political reasons, the bill was then referred a second time to the Senate Economics References Committee. As outlined below, this had detrimental impacts on many Australian companies and by implication their shareholders. Coalition members of the Senate Economics Committee make the following reflections on the two schedules of the bill.
On 21 March 2021, the temporary relief that Schedule 1 of the bill was to reinstate expired. As a result, the law has reverted to what it was prior to the temporary relief being introduced at the height of the coronavirus crisis, and the relief will not be reinstated until passage of this bill or permanent reform.
This has the following implications:
counterparties cannot presume that electronically executed documents (including contracts and deeds), are legally binding, on account of the Corporations Act. This will likely mean that companies will revert to the practices they used under the pre-COVID law to satisfy themselves that company documents were validly executed;
companies and registered schemes must generally send meeting notices to members via hard copy, unless members have consented to receiving copies electronically; and
companies and registered schemes must generally hold meetings of directors and members required under the Corporations Act at a physical location.
The reforms to Australia’s continuous disclosure laws were reviewed at length by the Parliamentary Joint Committee on Corporations and Financial Services as part of their inquiry into litigation funding and the regulation of the class action industry. Schedule 2 of this bill implements recommendation 29 of that committee, whose recommendations were based on a seven-month inquiry that conducted public hearings and received over 100 submissions.
The changes to continuous disclosure contained in Schedule 2 reduce the threat to companies and their officers of being subject to opportunistic class actions. The changes do not alter the legal duty for companies to disclose information to the market that is material or price-sensitive, and they do not amend the standard for criminal prosecution or the standard at which the Australian Securities and Investments Commission can issue infringement notices or undertake non-civil penalty actions. The changes only require that for a company or officer to be liable in a civil penalty proceeding it must be proven that the company acted with knowledge, recklessness or negligence.
This change will encourage companies and directors to release forward-looking guidance to the market. These changes strike the right balance between ensuring shareholders and the market are appropriately informed while also allowing companies to more confidently make forecasts of future earnings or provide guidance updates without facing the undue risk of class actions. Introducing a fault element protects entities where they provide earnest updates to the market, allowing the market to continue to stay informed and function effectively.
During this committee’s public hearing process, we heard evidence in favour of the reforms contained in Schedule 2 of the bill from the Australian Institute of Company Directors (AICD). Recognising that the underlying continuous disclosure standard is not being amended by the bill, they submitted that:
…the proposed amendments, in our view, do not change the obligations on continuous disclosure placed on companies and their officers. Directors who are reckless or negligent in respect of their disclosure obligations or who knowingly seek to breach them will continue, under the proposals, to be subject to the full force of the law, as they should be.
The AICD also pointed to the harm that is being caused by the strict liability basis in the current law, continuing:
…in our view, the current class actions regime leads to adverse outcomes for Australian businesses and shareholders. On continuous disclosure, a strict liability approach is not appropriate for obligations that involve time-sensitive and complex judgement calls, and it is currently too easy to launch or to threaten securities class actions for alleged breaches of these strict liability provisions.
The Group of 100 (Chief Financial Officers) also provided strong support for the bill, submitting to the committee that Australia’s continuous disclosure laws:
…generally provide good protection for investors, for customers and for employees. The proposed amendments, we would argue, do not weaken these protections or lessen the obligations of directors and officers of ASX-listed companies who, if they are not being deliberately misleading, reckless or negligent, take their responsibilities towards their shareholders and the market and thus their continuous disclosure obligations very seriously indeed. What they do is remove a loophole which has had unfortunate and unforeseen of course negative ramifications.
Coalition Senators believe this second inquiry into the bill was an unnecessary waste of resources. Further, the delay in the bill’s passage was a source of potential confusion and uncertainty in relation to meetings, distribution of materials and execution of documents.
Coalition Senators are firmly of the opinion that the bill should be passed at the earliest possible opportunity.
Senator Slade Brockman
Liberal Senator for Western Australia