House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Josh Frydenberg MP)

Chapter 2 - Continuous disclosure obligations

Outline of chapter

2.1 Schedule 2 to the Bill amends the corporations law to ensure that, in determining whether a listed disclosing entity contravenes its existing continuous disclosure obligations, its state of mind is taken into account (for both civil contraventions and criminal contraventions). However, ASIC continues to be able to issue an infringement notice regardless of the state of mind of the entity.

2.2 Similarly, entities and officers are not liable for misleading and deceptive conduct in circumstances where the continuous disclosure obligations have been contravened unless the requisite mental element has been proven.

Context of amendments

2.3 In May 2020, the Australian Government temporarily amended continuous disclosure obligations to enable companies and their officers to more confidently provide guidance to the market during the coronavirus pandemic.

2.4 The continuous disclosure obligations in Chapter 6CA of the Corporations Act require disclosing entities to disclose price-sensitive information on a continuous basis. If they are listed on a listing market whose rules require it, then they make those disclosures to the market operator, or if they are an unlisted disclosing entity, they must lodge that information with ASIC. An entity contravenes these obligations if the entity has information that is not generally available, the information is such that a reasonable person would expect it to have a material effect on the price or value of the entity's enhanced disclosure securities if it were generally available, and the entity fails to notify the market operator or ASIC of the information.

2.5 The temporary Determination No. 2 temporarily modified the Corporations Act to ensure that, in determining whether a listed disclosing entity contravenes its existing continuous disclosure obligations, its state of mind is taken into account (for both civil contraventions and criminal contraventions). The effect is that persons must prove the entity had knowledge of, or was recklessness or negligent with respect to whether information they did not disclose would have had a material effect on the price or value of that entity's securities. These temporary changes were subsequently extended by Determination No. 4.

2.6 On 21 December 2020, the Parliamentary Joint Committee on Corporations and Financial Services (the Committee) handed down the report of its inquiry into litigation funding and the regulation of the class action industry.

2.7 The report of the Committee provides that securities class actions are frequently brought in Australia alleging contraventions of the continuous disclosure obligations and that this has a significant financial and compliance impact on the entities and officers subject to these actions.

2.8 The Committee recommended a permanent change to the Corporations Act to ensure that, in determining whether a listed disclosing entity contravenes its existing continuous disclosure obligations, its state of mind is taken into account. The Committee's view was that this change would address an imbalance between the benefits to the market of continuous disclosure obligations and the costs imposed on entities and officers. This would bring Australia's continuous disclosure regime closer to the regimes in comparable jurisdictions such as the United States and United Kingdom.

2.9 Civil penalty proceedings concerning contraventions of continuous disclosure obligations are often brought in conjunction with allegations of misleading and deceptive conduct under section 1041I of the Corporations Act. This is because the same conduct (i.e. failure to disclose price-sensitive information in a timely manner) can trigger both the continuous disclosure obligations and the misleading and deceptive conduct prohibition.

2.10 Schedule 2 to the Bill amends continuous disclosure obligations to ensure that, in determining whether a listed disclosing entity contravenes its existing continuous disclosure obligations, its state of mind is taken into account. Schedule 2 to the Bill further provides that entities and officers are not liable for misleading and deceptive conduct in circumstances where the continuous disclosure obligations have been contravened unless the requisite mental element has been proven.

Summary of new law

2.11 Schedule 2 to the Bill amends the corporations law to ensure that, in determining whether a listed disclosing entity contravenes its existing continuous disclosure obligations, its state of mind is taken into account (for both civil contraventions and criminal contraventions). However, ASIC continues to be able to issue an infringement notice regardless of the state of mind of the entity.

2.12 Similarly, entities and officers are not liable for misleading and deceptive conduct in circumstances where the continuous disclosure obligations have been contravened unless the requisite mental element has been proven.

Comparison of key features of new law and current law

Detailed explanation of new law

2.13 Schedule 2 to the Bill amends the corporations law to ensure that, in determining whether a listed disclosing entity contravenes its existing continuous disclosure obligations, its state of mind is taken into account (for both civil contraventions and criminal contraventions).

2.14 However, ASIC continues to be able to issue an infringement notice regardless of the state of mind of the entity.

2.15 Similarly, entities and officers are not liable for misleading and deceptive conduct in circumstances where the continuous disclosure obligations have been contravened unless the requisite mental element has been proven.

Continuous disclosure - criminal offences

Criminal offences

2.16 The existing criminal offences for failing to comply with the continuous disclosure obligations set out in sections 674(2) and 675(2) of the Corporations Act continue to apply.

2.17 However, sections 674(2) and 675(2) are no longer civil penalty provisions (including in the list of civil penalty provisions in section 1317E of the Corporations Act). These are replaced with new civil penalty provisions are included in the new law (which require a mental element to be proven in order to establish a contravention). These new civil penalty provisions are discussed further below. [Schedule 2, items 2, 3, 4, 6, 8, 9 10 and 11, sections 674, 674(2)(c), note 2 to section 674(2), sections 675, 675(2)(a) and (b), note 2 to section 675(2) and note 2 to section 674(5) of the Corporations Act 2001]

2.18 The operation of these provisions are otherwise unchanged. In particular, the content of the obligation remains unchanged. The existing objective test for whether a person would expect the information, if it were generally available, to have a material impact on the price or value of the securities, is retained.

2.19 The civil accessorial liability provisions (and their corresponding defences) are repealed. [Schedule 2, items5, and 12, sections 674(2A), 674(2B), 675(2A) and 675(2B) of the Corporations Act 2001]

Continuous disclosure - new civil penalty provisions

Listed disclosing entities bound by listing rules of a listing market

2.20 As noted above, there is a new civil penalty provision for listed disclosing entities bound by a continuous disclosure requirement in market listing rules that replaces the existing civil penalty provision. The rule applies to a listed disclosing entity if section 674 applies to that entity. [Schedule 2, items 7 and 22, sections 674A(1)and (2) and 1317E(3) of the Corporations Act 2001]

2.21 If a listed disclosing entity has information that the listing rules of a listing market require the disclosing entity to notify to the market operator, and the information is not generally available, and the entity knows or is reckless or negligent with respect to whether the information would have a material effect on the price or value of the entity's enhanced disclosure securities, the entity must notify the market operator of that information in accordance with its listing rules. [Schedule 2, item 7, section 674A(2) of the Corporations Act 2001]

2.22 The new civil penalty provision is identical to the criminal offence in section 674, except where the criminal offence contains an objective test as to the effect of the information on the price or value of the entity's enhanced disclosure securities, the new civil penalty provision contains a test of the entity's knowledge, recklessness, or negligence with respect to the effect of that information on the price. [Schedule 2, item 7, note 1 to section 674A(2) of the Corporations Act 2001]

2.23 The new civil penalty provision is a financial services civil penalty provision under section 1317E. The existing rules regarding financial services civil penalty provisions in Part 9.4B of the Corporations Act apply (including the orders that are available for contravening a civil penalty provision). These consequences are appropriate given the nature of the offending conduct - which involves the non-disclosure of price sensitive information to the market by large corporate actors. These consequences are also consistent with the existing law - which includes a civil penalty provision for the same conduct (but without the requirement to establish a mental element). [Schedule 2, items 7 and 21, note 2 to section 674A(2) and section 1317E(3) of the Corporations Act 2001]

2.24 There is a corresponding accessorial liability provision. A person contravenes the new accessorial liability provision if they are involved in a listed disclosing entity's contravention of the new civil penalty provision. The accessorial liability provision is a financial services civil penalty provision and is identical to the previous accessorial liability provision that was included on the former civil penalty provision. [Schedule 2, item 7, section 674A(3) of the Corporations Act 2001]

2.25 As above, the existing rules regarding financial services civil penalty provisions in Part 9.4B of the Corporations Act apply. These consequences are appropriate as it ensures that other persons, involved in the relevant conduct are incentivised to ensure compliance. These consequences are also appropriate for consistency with the existing law (which, as noted above, applied accessorial liability for the same conduct but without the requirement to establish a mental element). [Schedule 2, item 7, section 674A(3) of the Corporations Act 2001]

2.26 A defence to the accessorial liability provision is available. A person does not contravene the accessorial liability provision if they take all steps (if any) that were reasonable in the circumstances to ensure that the listed disclosing entity complied with its obligations under the new civil penalty provision, and after doing so, believed on reasonable grounds that the listed disclosing entity was complying with its obligations. [Schedule 2, item 7, section 674A(4) of the Corporations Act 2001]

2.27 It is appropriate that a contravention-specific defence to the new civil penalty provision is available, which may have the effect of requiring a defendant to bear the evidential burden in relation to the defence. In accordance with the Attorney-General's Department's guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers (the Guide), it is appropriate for the defendant to bear the evidential burden in relation to whether they took the required action. These matters are peculiarly within the knowledge of the defendant. It would be significantly more costly and difficult for the regulator to disprove than for the defendant to establish the matter, as the defendant would be better positioned to readily adduce evidence as to the steps they took and their beliefs after so doing.

2.28 Analogous rules for the responsible entities of registered schemes and operators of notified foreign passport funds to those in existing sections 674(3) and (3A) also apply in relation to the new civil penalty provision. [Schedule 2, item 7, section 674A(5) of the Corporations Act 2001]

2.29 The new civil penalty provision is not intended to affect or limit the situations in which action can be taken in respect of a failure to comply with listing rules of a listing market. [Schedule 2, item 7, section 674A(6) of the Corporations Act 2001].

2.30 The new law clarifies that section 1317QB(1) does not apply to the new civil penalty provision or its corresponding accessorial liability provision because in proceedings for a declaration of contravention of the new civil penalty provision and accessorial liability provision, it is necessary to prove the person's knowledge, recklessness or negligence as appropriate. That is, an entity or person's state of mind is relevant .[Schedule 2, item 7, section 674A(7) of the Corporations Act 2001]

Other disclosing entities

2.31 Similarly there is a new civil penalty provision for disclosing entities listed on markets whose listing rules do not contain continuous disclosure provisions, and unlisted disclosing entities. [Schedule 2, item 13, section 675A(1) of the Corporations Act 2001]

2.32 If the disclosing entity becomes aware of information that is not generally available, and the entity knows, or is reckless or negligent with respect to whether the information would have a material effect on the price or value of the entity's enhanced disclosure securities if it were generally available, the entity must lodge a document with ASIC as soon as practicable containing the information. [Schedule 2, item 13, section 675A(2) of the Corporations Act 2001]

2.33 The new civil penalty provision is a financial services civil penalty provision under section 1317E. As discussed above, the existing rules in Part 9.4B of the Corporations Act apply regarding the consequences for contravening civil penalty provisions. These consequences are appropriate given the nature of the offending conduct - which involves the non-disclosure of price sensitive information to the market. These consequences are also consistent with the existing law - which includes a civil penalty provision for the same conduct (but without the requirement to establish a mental element) [Schedule 2, item 13, note 2 to section 675A(2) of the Corporations Act 2001]

2.34 There is a corresponding accessorial liability provision. A person will contravene the accessorial liability provision if they are involved in a disclosing entity's contravention of the new civil penalty provision. These consequences are appropriate as it ensures that other persons, involved in the relevant conduct are incentivised to ensure compliance. These consequences are also appropriate for consistency with the existing law (which, as noted above, applied accessorial liability for the same conduct but without the requirement to establish a mental element). [Schedule 2, item 13, section 675A(3) of the Corporations Act 2001]

2.35 A defence to the accessorial liability provision is available. A person does not contravene the accessorial liability provision if they take all reasonable steps in the circumstances to ensure that the listed disclosing entity complied with its obligations under the new civil penalty provision, and after doing so, believed on reasonable grounds that the listed disclosing entity was complying with its obligations. It is appropriate that a contravention-specific defence to the new civil penalty provision is available, which may have the effect of requiring a defendant to bear the evidential burden in relation to the defence. In accordance with the Attorney-General's Department's guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers (the Guide), it is appropriate for the defendant to bear the evidential burden in relation to whether they took all reasonable steps in the circumstances to ensure the entity complied with its obligations and believed on reasonable grounds that the entity had complied. These matters are peculiarly within the knowledge of the defendant. It would be significantly more costly and difficult for the regulator to disprove than for the defendant to establish the matter, as the defendant would be better positioned to readily adduce evidence as to the steps they took and their beliefs after so doing. [Schedule 2, item 13, section 675A(4) of the Corporations Act 2001].

2.36 The regulations may also provide for circumstances in which disclosure under the new civil penalty provision is not required. The regulation making power is appropriate and necessary for the proper administration of the new civil penalty provision. It provides an efficient means to reduce undue regulatory burden (on regulated parties) and unreasonable diversion of resources (from the regulator) in circumstances where disclosure by way of lodging a document with ASIC is unnecessary. In this way the regulation-making power provides for efficient administration of the regime, rather than setting out a defence in subordinate legislation. [Schedule 2, item 13, section 675A(2)(d) of the Corporations Act 2001]

2.37 Analogous rules for the responsible entities of registered schemes and operators of notified passport funds to those in sections 674(3) and (3A) also apply in relation to the new civil penalty provision. [Schedule 2, item 13, section 675A(5) of the Corporations Act 2001]

2.38 The new law clarifies that section 1317QB(1) does not apply to the new civil penalty provision or its corresponding accessorial liability provision because in proceedings for a declaration of contravention of the new civil penalty provision and accessorial liability provision, it is necessary to prove the person's knowledge, recklessness or negligence as appropriate. That is, an entity or person's state of mind is relevant. [Schedule 2, item 13, section 675A(6) of the Corporations Act 2001]

2.39 Section 676 of the Corporations Act, dealing with when information is considered to be generally available for the purposes of the continuous disclosure provisions, has been amended to apply to the new civil penalty provisions as well as the original provisions. [Schedule 2, items 14 and 15, section 676 (heading) and 676(1) of the Corporations Act 2001]

2.40 For the purposes of the new civil penalty provisions, an entity knows information would have a material effect on the price or value of its enhanced disclosure securities if it knows the information would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of the enhanced disclosure securities. [Schedule 2, items 16, 17 and 18, section 677 (heading) and 677(2)(a) of the Corporations Act 2001]

2.41 Similarly an entity is reckless or negligent with respect to whether the information would have a material effect on the price or value of its enhanced disclosure securities if it is reckless or negligent with respect to whether the information would or would be likely to influence persons who commonly invest in securities in deciding whether to acquire or dispose of the enhanced disclosure securities. [Schedule 2, item 18, section 677(2)(b) of the Corporations Act 2001]

Misleading and deceptive conduct

2.42 Schedule 2 to the Bill amends section 1041H of the Corporations Act to limit the circumstances in which a contravention of a continuous disclosure obligation will constitute misleading and deceptive conduct.

The effect of the change is that entities and officers are not liable for misleading and deceptive conduct in circumstances where the continuous disclosure obligations have been contravened unless the requisite mental element in the continuous disclosure obligation has been proven.

2.43 Firstly, minor drafting amendments are made to section 1041H(3) to clarify that the carve-out from the prohibition on misleading and deceptive conduct in section 1041H(1) applies to persons engaging in conduct that would contravene the provisions listed in section 1041H(4)(a)-(b). [Schedule 2, items 19 and 20, section 1041H of the Corporations Act]

2.44 Secondly, Schedule 2 inserts a new provision into section 1041H. The new provision operates to carve-out certain conduct in relation to breaches of the continuous disclosure provisions from the prohibition on misleading and deceptive conduct in section 1041H(1). [Schedule 2, item 21, section 1041H(4)-(5) of the Corporations Act]

2.45 Conduct of a disclosing entity that does not contravene one of the new civil penalty provisions, but would contravene that obligation if it contained the relevant objective test in section 674 or 675 instead of the test of knowledge, recklessness or negligence, does not contravene the prohibition on misleading and deceptive conduct in section 1041H(1). [Schedule 2, item 20, section 1041H(4) of the Corporations Act 2001]

2.46 This means that conduct that triggers the continuous disclosure provisions will not automatically also constitute misleading and deceptive conduct for the purposes of section 1041H(1). In particular, conduct that contravenes the continuous disclosure obligations that contain the objective test will not contravene section 1041H(1). [Schedule 2, item 20, section 1041H(4)(a) and (b) of the Corporations Act 2001]

2.47 If a contravention of section 1041H(1) in connection with a contravention of a continuous disclosure obligation is alleged, the new requirement to prove knowledge, recklessness or negligence with respect to the effect of the information on the price or value of the disclosing entity's enhanced disclosure securities will also apply commencing civil penalty proceedings concerning a contravention of section 1041H(1).

2.48 The effect of the new carve-out is that if a person seeks a remedy against a disclosing entity under section 1041I of the Corporations Act for an alleged contravention of section 1041H(1), and that contravention is connected to an alleged failure to comply with a continuous disclosure obligation, the person will need to establish the contravention of the relevant new continuous disclosure civil penalty provision, including the fault element of knowledge, recklessness, or negligence, in order to establish that the disclosing entity has contravened section 1041H(1).

2.49 Schedule 2 inserts an analogous provision into section 12DA of the ASIC Act. The effect of this provision is also to limit the circumstances in which proceedings seeking compensation for loss or damage as a result of a contravention of section 12DA can be brought in connection with alleged continuous disclosure contraventions, in the same terms as for section 1041H(1) of the Corporations Act. [Schedule 2, item 1, section 12DA of the Australian Securities and Investments Commission Act 2001]

Infringement notices under Part 9.4AA of the Corporations Act

2.50 Schedule 2 amends the infringement notices regime in Part 9.4AA of the Corporations Act, which applies in relation to the continuous disclosure provisions in Chapter 6CA.

2.51 ASIC may issue an infringement notice if it has reasonable grounds to believe a disclosing entity has contravened sections 674(2) or 675(2). For the purposes of issuing an infringement notice under Part 9.4AA of the Act, the offences created by sections 674(2) and 675(2) are to be treated as offences of strict liability. [Schedule 2, item 47, section 1317DAA(4) of the Corporations Act 2001]

2.52 The Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers was considered in determining whether to treat the offences in sections 674(2) and 675(2) as offences of strict liability for the purposes of issuing an infringement notice. The Guide notes that strict liability offences are appropriate where they are likely to enhance the effectiveness of the enforcement regime and where there are legitimate grounds to penalise persons lacking in fault. The strict liability offence creates a lower penalty for engaging in the prohibited conduct. For lower levels of offending, the strict liability offence is appropriate to deter future unlawful behaviour. In complex cases where it is particularly difficult to find adequate evidence of fault elements, the strict liability offence allows the regulator to still take appropriate enforcement action ensuring contraventions can still be brought to account. Issuing the infringement notice has a wider deterrent effect; it places regulated persons on notice to guard against the possibility of future contraventions.

2.53 There are no criminal consequences that flow merely from the failure to comply with an infringement notice. Infringement notices may not be issued as an alternative to proceedings for civil penalties under Part 9.4B of the Corporations Act. [Schedule 2, item 48, section 1317DAB(1) of the Corporations Act 2001]

2.54 The infringement notice is not required to state the maximum penalty a Court could impose under Part 9.4B in relation to the alleged contravention, as sections 674(2) and 675(2) are no longer civil penalty provisions (so this information is no longer relevant). [Schedule 2, item 49, section 1317DAE(1)(f) of the Corporations Act 2001]

2.55 For a Tier 3 entity, the penalty specified in the infringement notice for an alleged contravention of section 674(2) is $66,000 if a civil penalty order under Part 9.4B had at any time been made in relation to the disclosing entity for the continuous disclosure provisions as they were before being amended by Schedule 2 to the Bill. [Schedule 2, item 50, section 1317DAE(3)(d) of the Corporations Act 2001]

2.56 If a civil penalty order under Part 9.4B had at any time been made in relation to the disclosing entity for a contravention of the continuous disclosure provisions as they were before being amended by Schedule 2 to the Bill, the penalty specified in the infringement notice for an alleged contravention of section 675(2) is $66,000. [Schedule 2, item 51, section 1317DAE(5)(b) of the Corporations Act 2001]

2.57 Schedule 2 repeals section 1317DAG(2). This means that ASIC may not commence any action (such as commence civil penalty proceedings under Part 9.4B or seek disclosure orders under section 1324B), if an entity either fails to pay the penalty specified in the infringement notice, or notify the relevant market operator, or lodge any document with ASIC containing the information specified in the infringement notice. [Schedule 2, item 52, section 1317DAG(2) of the Corporations Act 2001]

2.58 Whilst an infringement notice has not been withdrawn, no proceedings may be started or continued against the disclosing entity in relation to the alleged contravention specified in the infringement notice, or an offence constituted by the same conduct that constituted the alleged contravention. [Schedule 2, item 53, section 1317DAG(3) of the Corporations Act 2001]

2.59 When ASIC withdraws an infringement notice, the withdrawal notice is not required to state that civil proceedings under Part 9.4B may be brought against the disclosing entity for a contravention of the provision specified in the infringement notice. This is because sections 674(2) and 675(2) are not civil penalty provisions. [Schedule 2, item 54, section 1317DAI(6)(d) of the Corporations Act 2001]

2.60 Schedule 2 makes consequential amendments in Part 9.4AA to remove deeming provisions that refer to civil penalty proceedings under Part 9.4B for the purposes of applying Part 9.4AA to registered schemes and notified foreign passport funds. These provisions were removed because sections 674(2) and 675(2) are not civil penalty provisions. [Schedule 2, items 45 and 46, sections 1317DAA(2)(e) and 1317DAA(3)(e) of the Corporations Act 2001]

Consequential amendments

2.61 Consequential amendments are made to various provisions in the Corporations Act to update cross-references to provisions of Chapter 6CA. Provisions that formerly referred only to sections 674 and/or 675 of the Corporations Act have been updated, where appropriate, to refer also to relevant new civil penalty provisions. [Schedule 2, items 25--42, sections 9, 111AP(1), 111AR(1)(d), 708AA(3)(c), 708AA(7)(c)(ii), 708A(2)(c), 708A(6)(d)(ii), 713(6)(aa), 713A(23)(c), 1012DAA(3)(b), 1012DAA(3)(ba), 1012DAA(7)(d)(ii), 1012DAA(7)(da)(ii), 1012DA(2)(b), 1012DA(6)(e), 1013F(2)(d)(ii), 1013FA(3)(a)(ii) of the Corporations Act 2001]

2.62 Similarly section 127(2D)(b)(ii) of the ASIC Act has been updated to refer to the new civil penalty provisions as well as existing sections 674 and 675. [Schedule 2, item 24, section 127(2D)(b)(ii) of the Australian Securities and Investments Commission Act 2001]

2.63 A reference to "sections 674-677" in the first note to section 1017B(2) has been removed to clarify that the new civil penalty provisions are included in the reference to Chapter 6CA. [Schedule 2, item 43, note 1 to section 1017B(2) of the Corporations Act 2001]

2.64 Section 1200K is amended to give the new civil penalty provision (proposed section 675A(2)) an extended operation in relation to disclosing entities that have made recognised offers of securities under Chapter 8 of the Corporations Act. [Schedule 2, item 44, section 1200K of the Corporations Act 2001]

Application and transitional provisions

2.65 The amendments in Parts 1 and 2 to Schedule 2 apply in relation to conduct that is engaged in on or after the day they commence. [Schedule 2, item 55, sections 1683 and 1683A of the Corporations Act 2001]

Contingent amendments

2.66 Part 4 of Schedule 2 makes contingent amendments to the new civil penalty provisions requiring certain information to be lodged with ASIC.

2.67 The amendments will commence on the later of:

•

Immediately after the commencement of Parts 1, 2 and 3 in Schedule 2 to the Bill; or

•

Immediately after the commencement of items 1061 and 1062 in Schedule 1 to the Treasury Laws Amendment Registries Modernisation and Other Measures) Act 2020.

However, the contingent amendments will not commence at all if items 1061 and 1062 in Schedule 1 to the Treasury Laws Amendment (Registries Modernisation and Other Measures) Act 2020 do not commence.

2.68 If the contingent amendments do commence, the disclosing entity will be required to lodge the information with the Registrar, rather than with ASIC. [Schedule 2, items 56 and 57, sections 675A(2)(c)(ii) and 675A(2) of the Corporations Act 2001]