ASIC Enforcement of Australia's Continuous Disclosure Regime Gets a Boost Through Government Response to Independent Review on Continuous Disclosure Laws

The Australian federal government recently issued its response to the "report of the independent review of the changes to the continuous disclosure laws" prepared by Dr Kevin Lewis (Independent Review). In its response, the government accepted the key recommendations of the Independent Review, with the market now awaiting details of the introduction of amending legislation by the government, including likely timing.

Recap of the Independent Review

The government, as required under the Corporations Act 2001 (Cth), commissioned the Independent Review into the changes introduced into Australia's continuous disclosure regime back in 2021, under the Treasury Laws Amendment (2021 Measures No.1) Act 2021 (Cth). The changes were expressly stated to be intended to reduce the incidence of opportunistic class actions against ASX-listed companies accused of not keeping the market informed of price sensitive information. The key aspect of the amendments was to introduce a fault element into the continuous disclosure laws, which meant that it was a requirement for a plaintiff or regulator to demonstrate that a disclosing entity or its officers had acted with either knowledge, recklessness or negligence, in breaching their continuous disclosure obligations for civil liability actions.

Despite commenting that the two-year review period since the changes was insufficient to draw meaningful evidence-based conclusions on many matters included in the Terms of Reference, the Independent Review made six recommendations—with the government subsequently announcing its support for four of the recommendations, and noting the remaining two.

Primary Recommendations Arising From the Independent Review

The government agreed with the following primary recommendations:

• Removal of the requirement that ASIC needs to prove in civil penalty proceedings for a breach of continuous disclosure laws that the disclosing entity acted knowingly, recklessly or negligently; and
• Retention "for the time being" of the requirement that private litigants in civil compensation proceedings need to provide that the disclosing entity acted knowingly, recklessly or negligently. 

Disclosing Entities Must Maintain a Strong Focus on Compliance With Their Continuous Disclosure Obligations—Removal of the "Fault Element" Coupled With ASIC's Enforcement Focus Could Lead to an Increase in ASIC Actions

One of the primary findings of the Independent Review was that the 2021 Amendments have had, and are likely to continue to have, a negative impact on ASIC's enforcement of the continuous disclosure laws.

In its submission to the Independent Review, ASIC remarked that, in the context of issuing infringement notices, the need to ultimately prove the "fault element" (as part of bringing civil penalty proceedings for contravening conduct when an infringement notice penalty is not paid) was likely to reduce ASIC's appetite to use infringement notices for contraventions of continuous disclosure. Accordingly, the recommended removal of the "fault element" may encourage ASIC to increase its issuance of infringement notices.

The key takeaway of the removal of the fault element, if this recommendation is given effect by legislative changes, is that ASIC will be able to pursue enforcement action (including civil penalty proceedings) for unintentional or inadvertent breaches of Australia's continuous disclosure laws. It is therefore critical that disclosing entities renew their focus on their continuous disclosure obligations and related policies and processes.

Finally, companies, directors and officers should have regard to the proposed release in early 2025 of the ASX Corporate Governance Council's fifth edition Corporate Governance Principles and Recommendations, which also makes recommendations in relation to continuous disclosure policy and process matters.

Practical Effect of the 2021 Amendments on Continuous Disclosure-Related Class Actions Remains Undecided—"Fault Element" Retained (for Now)

In its response, the government noted that a diversity of views were expressed and submissions received during the consultation period for the Independent Review. In that context, the Independent Review observed that the 2021 Amendments have had, and are likely to continue to have, little (if any) impact on the number and types of continuous disclosure class actions against disclosing entities and that meritorious continuous disclosure class actions are still likely to proceed.

The government agreed with the recommendation to retain—for the time being—the requirement for private litigants to prove the "fault element" in continuous disclosure-related class actions. 

Given the comment that the review period was too short to discern any pattern arising from the 2021 Amendments in the number of continuous disclosure class actions, we expect the government to continue monitoring the situation for the emergence of any negative effect as a result of class action filings on disclosure standards. We expect both proponents and defendants of class actions to put forward different perspectives on the statistics and (any) causal links. 

Climate-Related Financial Disclosures Remain in Focus

The consultation process for the Independent Review flushed out some concerns between the interplay between the 2021 Amendments and potential class action risks arising from the mandatory climate-related reporting requirements, particularly in relation to the forward-looking statements required by that regime. 

The government's response to the Independent Review said that it had considered the implications of Recommendations 1 and 2 (as set out above) as part of its process to implement the climate-related disclosure legislation. The key point for companies, directors and officers is that they should remain alive to the prospect of enforcement action by ASIC utilizing the continuous disclosure regime, as well as other legislative provisions, in relation to their climate-related disclosures, once that regime comes into effect (which is expected to occur from 1 January 2025). The retention of the fault element for private litigants will provide some assistance to companies who may find themselves defending those claims, as will the transitional modified liability regime for private actions included in the incoming climate-related disclosure legislation.