That so many did so without these new protections suggests they were comfortable with their obligations, even in this unprecedented period.
Fund manager Gabriel Radzyminski, of Sydneys Sandon Capital, says companies have been doing a good job with disclosure during the pandemic, with regular trading updates a welcome feature.
Theyve opened the gates to a very slippery slope.
Gabriel Radzyminski, of Sandon Capital
He says investors have understood why most companies have pulled their guidance, and points out that the provision of guidance is something that companies arent required to do at any time, let alone during times of crisis.
I think that was the right response and I think that was the adequate response,” he says.
But Radzyminski is one of a number of investors Chanticleer spoke with who is worried that even changing the continuous disclosure regime for a short period could erode investor confidence.
Theyve opened the gates to a very slippery slope. Its one of these slow but undermining steps that goes to shareholder rights and keeping investors informed,” he says.
The voice of investors seems to be have been lost in these changes.
Victory for the business lobbyists
The AICD pushed the changes hard in April, but Chanticleer understands the directors’ union found little support in Treasury or the Australian Securities and Investments Commission.
Sources suggest the BCA then joined the campaign with a tweaked proposal, but this second push also failed to get much more momentum until the past few days.
Frydenberg was explicit that the relaxation of the regime was directly related to the risk presented by class actions, saying in his announcement the changes will make it harder to bring such actions against companies and officers.
And the changes come hard on the heels of a new regime for the oversight of litigation funders, who will now be subject to a new regulatory reporting requirement.
Taken together, the two changes announced by the Treasurer represent a clear victory for the AICD and the BCA against what they see is a class action sector that has become too aggressive in recent years.
But putting aside for a moment the question of whether these groups are right that there is a major problem with class actions, changing a continuous disclosure regime that is the envy of the world even temporarily is a huge step and one that will not come without cost and risk.
The cost could come in the message that such a change sends to international investors, who play an important role in Australias capital markets.
Risk of the ‘honest idiot’ defence
As one investor pointed out on Tuesday, US investors would be rioting in the streets if changes to Americas disclosure rules were suggested. They may well ask why Australia has suddenly seen fit to erode shareholder rights in this way, and make different decisions around capital allocation.
The risk is that we have a big corporate calamity during the next six months when the watered-down regime is in place.
Imagine a company completes a big capital raising using flaky guidance numbers, only for that company to quickly unravel and for shareholders to suffer massive losses.
Will that company and its executives simply be able to fall back on what essentially amounts to an “honest idiot” defence under these laws?
Louise Davidson, chief executive of the Australian Council of Superannuation Investors, agrees: “The concern we have is whether the changes might be used to protect poor quality disclosure in the coming months, particularly ahead of capital raisings or other major announcements. Information is only useful to investors where it has a sound basis and is reliable.
With good luck, the honesty of most ASX 200 directors and the impressive way theyve handled market disclosure so far during this crisis will avoid such a disaster.
But weve already seen how temporary changes can have unintended consequences.
The changes to capital raising rules that lifted the cap on the size of placements from 15 per cent of a company’s existing share base to 25 per cent were supposed to be about helping stricken firms raise emergency capital in this crisis, even though it would mean more disclosure for existing investors, and particularly retail shareholders.
Instead, a number of companies used these super-sized raisings to get capital to fund growth initiatives, amid accusations of unfair treatment of retail and even institutional investors.
Its also notable that neither the capital raising changes nor the disclosure regime relaxation were considered necessary during the GFC, which was arguably a far more dire period for Australian companies given the high levels of debt on corporate balance sheets.
Which brings you back to the sense that this is all about the business lobby scoring a win over the class action sector.
Will the changes work?
Ironically, the continuous disclosure changes are unlikely to practically prevent class actions from being lodged, says Professor Michael Legg, a class action and continuous disclosure expert at the University of NSW.
While most class action claims are made under the continuous disclosure regime, they also typically rely on laws prohibiting misleading and deceptive conduct and there is no protection for the latter if youre not knowledgeable, reckless or negligent.
As long as what you say is effectively incorrect, youre on the hook, Legg tells Chanticleer. I just hope that corporations and directors appreciate that they still have risk here. Their good faith attempts to comply with the law need to continue.
Allens partner Guy Alexander agrees, and says directors and companies would be well advised to continue with the current disclosure practices.
“A little bit like the long-awaited COVID-19 vaccine, this is no panacea,” he says.
While Frydenberg’s changes are only scheduled to last for six months, Legg believes they could become permanent as pressure mounts on the government over what the business lobby and, it should be said, several lawyers and barristers believes is a class action industry that has found a profitable line in launching action against companies they know will settle on the advice of their insurers, and because few directors want to be put on the spot in the witness box.
Which raises two questions. First, do we want to return to the days where the private enforcement of continuous disclosure obligations via class actions was not allowed?
Whatever many directors would say, that seems unreasonable, given the public enforcement of the regime by ASIC is unlikely to deliver shareholders the compensation they deserve in some not all, but some cases.
So if we do think class actions are reasonable part of the checks and balances of our system, do we need to tighten their scope to ensure they are an effective deterrent, as well as a channel to compensation?
Is it time, for example, to look at a meaningful package of reforms to make directors liable only where they have been dishonest or reckless?
Such a move would be hotly debated, and rightly so. But let’s have that debate, rather than tinkering with investor protections that are a vital pillar of Australia’s strong capital markets.
Home>>Theatre>>The relaxation of the continuous disclosure regime might be a win for the business lobby over the class action sector, but it creates costs and risks for investors.
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