In late December last year, the Parliamentary Joint Committee on Corporations and Financial Services (PJC) issued its report in the inquiry into ‘Litigation Funding and the Regulation of the Class Action Industry’ (Report). Previously, in August 2018, Norton Rose Fulbright Australia provided a submission to the inquiry. Our submission focussed on several issues of concern, including the increased cost of D&O insurance and the impact on Australian businesses operating in an environment where there was a substantial risk of class actions. We noted that it was important that a balance be struck between the integrity of Australia’s capital markets; the protection of consumer interests; the promotion of justice and the efficiency and fairness of Australian civil litigation procedures. The Report references many of our submissions throughout.
Although the Report is still being digested by the legal profession and insurance industry, the federal Treasurer Josh Frydenberg has wasted no time in implementing one of the report’s key recommendations: a permanent change to laws regulating continuous disclosure.
The federal Treasurer first introduced a temporary relaxation of the legal requirement for companies to provide continuous disclosure in May 2020. The Corporations (Coronavirus Economic Response) Determination (No. 2) 2020 was primarily intended to assist corporations as they dealt with the uncertain and rapidly changing economic environment at the height of Covid-19.
However, the PJC found that this change may in fact have other important ongoing benefits and that the government should seriously consider permanently adopting the change. By way of explanation for its recommendation, the Report set out that, prior to 2002, a ‘fault element’ was needed to bring a shareholder class action based on an alleged breach of the continuous disclosure laws. The Report concluded that the re-introduction of the ‘fault element’ would stem the flow of opportunistic class actions and bring disclosure laws in line with comparable jurisdictions, such as the United States and United Kingdom.
On 17 February, the Treasurer introduced the Treasury Laws Amendment (2021 Measures No. 1) Bill amending the Corporations Act 2001. If successfully adopted, the amendments will mean that companies and their officers will only be liable in respect of breaches of their continuous disclosure obligations where they have acted with “knowledge, recklessness or negligence”.
Prior to the May 2020 change to the law corporations had been saddled with ‘strict liability’, meaning that a shareholder bringing a lawsuit needed only to prove that there had been a failure to disclose information to the market. Such a low threshold for finding that a corporation had failed to act in accordance with its disclosure obligations led to a proliferation of shareholder class actions in recent years.
The media release accompanying the Bill explicitly states that the intention of the bill is to “discourage opportunistic class actions” but that the change will not “water down” disclosure requirements.
The bill will first have to pass both the lower house and the Senate and is not without its detractors. ASIC, plaintiff law firms and the Labor Party have voiced their preference for a return to the ‘strict liability’ continuous disclosure regime. Likewise, Class Actions Australia has raised concerns about the creation of a perceived unfair advantage for corporations against shareholders and that the change will see directors “get away with duping Mum and Dad investors.”
What does this mean for the insurance industry?
Some are predicting that should the law pass, there may be a sharp decline in the number of shareholder class actions brought in Australia. The extent of that decline remains to be seen. As shareholder class actions have been a fertile ground for litigation funders for a very long time, it can be safely assumed that funders will look for ways to continue with these actions.
The adoption of the changes as permanent will be a welcome one for insureds, because it establishes a higher hurdle to bring a class action. This may assist with the cost of premiums as the rise in shareholder class actions was a major reason for exorbitantly high premiums for directors’ and officers’ insurance. Marsh, a global insurance broker, has reported average premium increases of over 200% for ASX-listed firms over the past year. This was also for more restricted cover and higher deductibles. In effect, companies paid much more for much less.
While it may take some time for the full effect of the change to be felt, it should provide some relief to companies and their officers struggling to secure adequate and affordable cover.