The federal treasurer’s plan to permanently water down laws supposed to ensure companies keep shareholders properly informed could scare off investment needed to recover from the coronavirus recession, investors say.
The Australian Council of Superannuation Investors, which represents 39 large local and international pension funds, on Wednesday dismissed Josh Frydenberg’s claim the law needed to be weakened to combat class action litigation.
Frydenberg’s bill would make it easier for directors of companies to avoid legal liability for misleading the market by requiring proof that they acted with “knowledge, recklessness or negligence” when they did so.
In May, against advice from the corporate regulator, the Australian Securities and Investments Commission, the treasurer used emergency Covid powers to temporarily enact the fault provision for six months, sparking concern that it would allow directors to escape penalty by claiming to be “honest idiots”.
Australian company directors, who have long opposed laws that hold them responsible for keeping the market informed at all times and limit the excuses they can use to avoid liability, lobbied for the change to be made permanent.
Announcing the legislation on Tuesday, Frydenberg said the “changes strike the right balance between ensuring shareholders and the market are appropriately informed while also allowing companies to more confidently make forecasts of future earnings or provide guidance updates without facing the undue risk of class actions”.
However, the Acsi chief executive, Louise Davidson, said the disclosure laws were “critical to ensuring that investors can rely on the information provided by companies”.
“Investor confidence in the Australian market relies on disclosures being accurate,” she said.
“These changes could undermine that confidence by providing protection for companies making poor disclosures. Making these changes permanent could damage investor confidence at a time when investment will be crucial to a recovery. Continuous disclosure provisions are fundamental to market integrity and should not be diminished.”
Davidson said Frydenberg was wrong to link the move to class action lawsuits.
“Reducing accountability for poor disclosures is not the answer to addressing issues with class actions,” she said. “These policy issues should be considered and addressed separately from the continuous disclosure and director liability regime.”
The changes had also been announced “without adequate consultation,” she said.
The Australian Shareholders’ Association, which represents mum and dad investors, said the current regime kept directors accountable to investors but the change would let them off the hook.
“Previously if there was any failure to keep the market informed under the current continuous disclosure rule, it was a simple black and white situation – don’t tell shareholders something material and the company and its directors were liable,” chair Allan Goldin said.
“The fact that directors could be held personally liable was a great incentive to ensure that companies behaved in a correct manner and kept the market informed. Now the pressure is taken off.
“So the new instruction to management from boards could be, if you want to keep some information to yourself or exaggerate a bit just make sure you don’t tell me so no one can sue me.”
Class action lawyers also attacked the move.
Class Actions Australia spokesman Ben Hardwick, who is a lawyer at Slater & Gordon, said it was “funny how the pandemic crisis has apparently abated enough to stop jobkeeper but is still serious enough to warrant permanently watering down corporate responsibility”.
“The ASX is about to hit an all-time high and the treasurer thinks it’s important to offer extra shields to company directors to avoid accountability,” Hardwick said. “It’s madness.”
He said Frydenberg appeared uncomfortable with the idea that company directors might be held accountable for misleading the market through shareholder class action lawsuits.
“His plan to water down continuous disclose laws would advantage powerful company directors over mum and dad investors,” he said.
Asked on Wednesday if he was concerned that the changes might make Australia a less attractive place to invest, Frydenberg said: “Not at all.
“We have also left in place the existing law where Asic can issue infringement notices on a no-fault basis and that sees Australia adopt a similar position to the US and UK regulators.
“It is really important that we have a balance here, where the regulation provides the opportunity for transparency, for accountability, for actions to be brought, but, at the same time, it doesn’t create an undue burden on the corporate sector.”
