Damned if you disclose, damned if you don’t?
The COVID-19 pandemic has been a reality-check testing the adaptability of Australia’s continuous disclosure regime in times of crisis. Intervention by the Government is needed to ensure that companies that are trying to honestly inform the market in rapidly changing business conditions are fairly protected from opportunistic litigious proceedings later brought against them and their officers with the benefit of perfect hindsight.
While withdrawal of earnings guidance by companies such as Ramsay, Qantas, Cochlear, Mirvac, Virgin and others is a thoroughly sensible first step in responding to the current uncertainty, over the coming weeks listed companies are likely to face considerable, and increasing, pressure to update the market on the impact of COVID-19 containment measures for their businesses and prospects. In many cases, companies may also be forced to provide guidance to bridge the gap between their own internal forecasts and broader market expectations, whether evidenced through analyst consensus or other means.
In the context of Australia’s strict continuous disclosure regime, there is a real risk that anything listed companies say in the market may ultimately come back to haunt them in the form of shareholder class actions or regulatory proceedings. The issue is compounded by the usual approach to disclosure-related class actions in Australia, where claims are brought with perfect hindsight and rarely recognise the uncertainty that companies have to operate within.
While the ASX has provided helpful guidance on the topic that encourages listed companies to hasten slowly with COVID-19 disclosure, the guidance is not a formal bar to potential class action claims.
For example, if a company’s understanding of the impact of COVID-19 on the business is supposition or insufficiently definite, and it remains confidential, then it is recognised as being excepted from the requirement for immediate disclosure under the ASX Listing Rules. However, in a class action context, relevant allegations will be framed with the benefit of hindsight and focus on the first point at which the issue was raised at the senior management level, which is likely to be much earlier than the point at which the issue was scoped and properly understood by the board to be disclosable.
Given the level of uncertainty that listed companies are currently facing, it seems appropriate for the Government to adopt the AICD’s proposal for a limited safe harbour for companies in respect of providing, or failing to provide, guidance or forward-looking statements relating to the impact of COVID-19.
Importantly, such a protection would provide protection to listed companies and their officers in respect of their efforts to keep the market informed and it would not constrain other forms of continuous disclosure, such as factual disclosure relevant to loss of material contracts or issues with debt covenants.
Directors’ and officers’ duties should provide a degree of comfort with respect to the quality to disclosures made, given that directors and officers would still be required to act with care and diligence when making such disclosure, and also act in good faith in the best interests of the company.
Given the scope of the challenges currently facing Australian businesses, it would be an unfortunate circumstance if listed companies and their officers were exposed to further distractions and the significant financial burden of class action claims arising from their disclosure obligations. For this reason, the Government should act swiftly to provide a safe harbour to listed companies and their officers.
Timothy Stutt is the Australian lead for Herbert Smith Freehills’ ESG, sustainability and responsible business practice and a member of the firm’s Head Office Advisory Team.
This article was first published in the Australian Financial Review, Monday April 6 2020.
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© Herbert Smith Freehills 2020