Continuous Disclosure 2021 Reforms: Fault Element for Listed Entities

The continuous disclosure obligation

The continuous disclosure obligation requires listed disclosing entities to notify the relevant market operator (ASX) of information. This obligation is imposed by Section 674 of the Corporations Act 2001 (Cth) and mirrored by ASX Listing Rules continuous disclosure in ASX Listing Rule 3.1. The obligation concerns information that a reasonable person would expect to have a material effect on the price or value of the entity’s enhanced disclosure securities.

Examples of information triggering this obligation include profit downgrades, material acquisitions or disposals, material litigation, changes to executives, and material changes in credit rating. The continuous disclosure regime is considered among the strongest globally.

ASIC and the ASX are the joint regulators responsible for overseeing compliance with the continuous disclosure regime. ASX Listing Rules continuous disclosure includes carve-outs, such as those relating to confidentiality and ASX waivers, outlined in Listing Rule 3.1A.

The 2021 reforms

The Treasury Laws Amendment (2021 Measures No. 1) Act 2021 amended section 674. This amendment introduced a fault element – knowledge, recklessness or negligence – for civil penalty liability and private actions relating to breaches of the continuous disclosure regime.

Previously, the continuous disclosure regime operated under a strict liability framework for both civil penalty and private action purposes. The reforms took effect on 14 August 2021.

The change was intended to align Australia’s continuous disclosure regime with those of the United States and the United Kingdom. It also aims to reduce the potential for shareholder class actions arising from technical breaches of disclosure obligations. The criminal offence under section 674(2) retains its existing requirement of knowledge as a fault element.

Impact on shareholder class actions

The introduction of a fault element for continuous disclosure breaches has significant implications for shareholder class actions. Previously, plaintiff law firms and litigation funders frequently initiated large class actions based on strict liability following events such as profit downgrades. The reforms now require proof that the listed entity knew, was reckless, or was negligent in failing to disclose information, raising the evidentiary bar for plaintiffs.

Similar changes to the fault element apply to misleading or deceptive conduct provisions relating to financial products. This broadens the impact of the reforms beyond solely continuous disclosure breaches, potentially affecting the viability of related claims.

It is important to note that the reforms do not eliminate all risk. Listed entities and their directors and officers remain subject to ASX Listing Rule liability, which is a contractual obligation and does not require proof of fault. Furthermore, ASIC’s enforcement powers, such as issuing infringement notices, operate independently of the civil penalty fault test.

Practical compliance implications

The introduction of a fault element does not diminish the importance of robust compliance programs. Listed entities must continue to maintain effective materiality assessment frameworks and timely escalation processes to ensure information is appropriately assessed and disclosed. Failure to do so remains a significant risk, even with the fault element consideration.

ASX retains its powers to issue price query and aware letters, and to suspend trading, where it suspects a continuous disclosure obligation may have been breached. This oversight function continues, and entities should expect scrutiny where market concerns arise.

Despite the changes, continuous disclosure remains a significant area of civil penalty exposure. ASIC will prioritise investigations focusing on cases involving knowledge, recklessness or negligence, and body corporates face substantial potential penalties under section 1317G. The D&O insurance market has seen some stabilisation following the reforms, but entities should review their coverage.