Changes to Continuous Disclosure Rules – The Impact on the D&O Market in Australia

The federal government is seeking to make permanent changes to the continuous disclosure rules. This follows the far-reaching recommendations of the Parliamentary Inquiry into Litigation Funding and Regulation of the Class Action Industry which reported in December 2020.  These changes are part of an overall federal government crack-down on the class action industry and marks the beginning of meaningful reform which seeks to, in time, have a positive impact on the D&O market.

The Australian continuous disclosure rules

A listed company in Australia has an obligation to continuously disclose information which may have an effect on its market price or value. Continuous disclosure is based on the principle that all investors should have equal and timely access to information about a company [1]. Failure to do this is a ‘strict liability’ or ‘no fault’ offence so shareholders only have to establish that companies and their officers have failed to disclose material information to the market, regardless of their intention.

As part of the emergency measures in response to COVID-19, the federal government temporarily relaxed the continuous disclosure rules applying to publicly listed companies and this proposal seeks to make these changes permanent. It also seeks to align misleading and deceptive conduct provisions which allege a continuous disclosure breach by requiring a similar ’knowledge, recklessness or negligence’ test.

It is widely known that the disclosure rules for directors and officers in Australia are much harsher than any other country including United States and the United Kingdom and this has led to Australia being considered one of the most favourable jurisdictions in the world for shareholder class actions.

The proposed changes to the disclosure regime – required to pass through the Federal parliament and be enacted as legislation – will mean that disclosing entities and their directors and officers will only be liable in civil penalty proceedings for continuous disclosure breaches where they acted with ‘knowledge, recklessness or negligence’ in relation to updates on market sensitive information. This means that shareholders are only able to commence litigation where there is clear fault by the directors and officers with respect to continuous disclosure.

The impact on the D&O market

These proposed changes are intended to cement protections in the form of fairer disclosure rules for entities and their directors, more regulation to the class action industry and proper regulation of litigation funders. These changes are also aimed at preventing opportunistic class actions and to ensure Australia’s continuous disclosure regime is aligned with the USA and UK.

The D&O market for Australian insureds has been subject to ongoing profitability pressure which has seen numerous insurers both in the local and London markets either reduce their appetite to underwrite listed companies D&O programs or stop underwriting this class of insurance entirely. This in turn has seen a reduction in the overall size of the market and caused large increases in premiums and deductibles. There is little doubt that an unfortunate flow on effect of the evolving securities class action activity in Australia has been the price and general affordability of D&O insurance.

In Aon’s view, these changes, if implemented, will provide the seeds necessary to drive increased sustainability in the D&O market.

[1] AICD: https://aicd.companydirectors.com.au/-/media/cd2/resources/director-resources/director-tools/pdf/05446-2-5-director-tools-bp-continuous-disclosure-requirements_a4_web.ashx