Finding fault in continuous disclosure rules – independent review recommends change to playing field for ASIC and private litigants

An independent review of the 2021 amendments to the continuous disclosure laws has highlighted areas for improvement (Review).  The Review looked at how effective introducing a ‘fault’ element into the proof of a breach of continuous disclosure claim has been, in deterring opportunistic class actions and addressing the rising cost of D&O insurance.  

While there wasn’t enough data to properly measure the full impact of the reforms, the Reviewer made a number of important observations, including:

1. the 2021 amendments did not help ASIC’s enforcement of the continuous disclosure laws – rather, ASIC reports that the burden of proving fault put undue strain on ASIC’s already stretched resources, in turn limiting ASIC’s ability to commence proceedings; and  
2. litigants could benefit from more guidance as to how to prove a company’s state of mind in establishing the mental element of ‘fault’ in the context of a breach of continuous disclosure obligations – that is:

(a) how do you prove that a company knew, or was reckless or negligent with respect to a fact; and  

(b) what is it that the company needed to have known, been reckless to or negligent towards in order to be held liable for failing to disclose price-sensitive information to the market – is it:

(i) the fact that the information was price-sensitive; or

(ii) that the information should have been disclosed to the market because it was price-sensitive?

From this, the Reviewer made the following primary recommendations:

1. in civil penalty proceedings brought by ASIC, the requirement to prove fault should be removed and strict liability reinstated, with the effect that a company can be held liable for breach of continuous disclosure obligations simply by proving that price-sensitive information had not been disclosed at the requisite time, without regard to the state of mind or level of care of the company or its officers; and  
2. in civil compensation proceedings brought by private litigants, the requirement to prove fault should be retained.

These recommendations make sense, as the added hurdle of proving fault to establish a cause of action seems counterproductive in the context of regulatory actions taken to advance the public interest. By proposing a change to the playing field for ASIC and private litigants, the amended continuous disclosure laws will continue to protect companies against the risk of opportunistic class actions, but also support public interest proceedings taken to protect market participants.  

We will be keeping a keen eye on how the Government responds to the recommendations in the Review, which is due to be published by 14 August 2024.  

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