Senate debates

Monday, 9 August 2021


Treasury Laws Amendment (2021 Measures No. 1) Bill 2021; Second Reading

6:09 pm

Photo of Paul ScarrPaul Scarr (Queensland, Liberal Party) Share this | Hansard source

That was a terrific speech by Senator McKim. It was a great speech to his base; absolutely terrific! It had all the metaphors and the grandiose flourishes of phrase that one would expect. It appealed directly to his base. Unfortunately, amongst all of that, to the extent that there was a kernel of a rational, reasonable argument, it was lost in the rhetoric. So, first, I'll put the argument in a reasonable way against this legislation and this recommendation, and I'll deal with that argument.

The best argument against this legislation is that, in some way, by changing the strict liability nature of the continuous disclosure obligation in the Corporations Act and introducing a fault element, companies are going to be less inclined to comply with their continuous disclosure obligations than they are today. That's the kernel of the reasonable argument that one could put against this legislation.

Senator McKim talked about the Law Council of Australia. In relation to the Class Actions Committee of the Law Council of Australia, the Bills Digest states:

… the Class Actions Committee of the LCA is of the view that the Bill's impact on the continuous disclosure regime and the prohibitions on misleading and deceptive conduct 'will dampen the ability of the regulators and of shareholders to enforce corporate accountability for wrongdoing'.

That's the reasonable argument against this legislation—not the rhetorical flourish about big business, those in the know and all of this that Senator McKim rolled out. That's the reasonable argument against this legislation, and I'll deal with it.

The Law Council of Australia actually made two submissions: one by the Class Actions Committee and one by the Corporations Committee. Who would have thought that lawyers would have different views on two sides of the argument, depending upon who their client base was? But there you go—my friends in the legal profession. I'm in the legal profession! Who would have thoughts lawyers would have different views on something? How profound. The Corporations Committee of the Law Council of Australia said:

… these reforms will not lead to a lower standard of conduct, more limited disclosure or an inability to successfully prosecute cases of significant concern. However, the Corporations Committee suggests that these reforms may redress the technical imbalance in continuous disclosure laws that has contributed to inflated insurance.

On the one hand, the Corporations Committee of the Law Council of Australia says it's not going to lead to a lower standard of conduct in practice but addresses the technical imbalance of strict liability plus class action litigation. On the other hand, the Class Actions Committee of the Law Council of Australia says it will dampen the ability of regulators and shareholders to enforce the continuous disclosure obligation. That's a reasonable starting point for this debate. So let's put to one side the hysterical rhetoric that we've just heard from Senator McKim, which I don't think does the argument justice.

There are a few preliminary points to note, and I make these preliminary points as someone who lived and breathed a continuous disclosure obligation as a company secretary for an ASX 200 listed company for 10 years. I was in the firing line in terms of advising boards and dealing with shareholders in terms of continuous disclosure obligations. Bear in mind, this is an obligation to make immediate disclosure of price-sensitive information to the market unless one of certain exceptions applies in terms of information not being complete or some sort of incomplete proposal et cetera. So this obligation is one of making immediate disclosure. It's a difficult obligation in practice to comply with. Reasonable people acting in good faith, highly trained professionals, can have disagreements with respect to the nature of disclosure, whether or not the continuous disclosure obligation is triggered and what disclosure should be made. And they've got to do that in real time because the obligation is immediate.

The first point to note in relation to this legislation is that the continuous disclosure obligation does not change. There is no change in the continuous disclosure obligation. This legislation only deals with the issue of class action litigation brought by a class of shareholders against the company. The continuous disclosure obligation does not change.

The second point is that there is no change to the criminal element in terms of continuous disclosure obligations and breaches. All those scenarios that Senator McKim outlined would fall foursquare within the criminal obligations that are attached to breaches of continuous disclosure obligations.

Third, ASIC's enforcement powers in relation to this are unchanged. Let me give you just one example of how onerous this can be. Rio Tinto were hit with a civil penalty of $100,000 from ASIC because they were one hour late in making a disclosure to the market in relation to a transaction that was occurring in the Americas. They were tripped up by the time difference and they were hit with a $100,000 penalty for being one hour late. That's how onerous the obligation is, and ASIC's enforcement powers are unchanged under this legislation.

The fourth point I want to make is that both the class action legislation and the continuous disclosure obligations were never intended, when they were introduced, to underwrite these litigation funder funded class actions against companies. It was an unintended consequence. Don't believe me on that, Madam Acting Deputy President. You might have faith in what I say in this forum but you don't have to believe me on this. All you need to do is look at the Australian Law Reform Commission's discussion paper on class action litigation. The Australian Law Reform Commission itself says that when the obligations we're talking about were introduced it was not in an environment where there were litigation funder funded class actions against companies in the continuous disclosure space. So we are dealing with the ramifications of an unintended consequence here.

The fifth point: there has been an increase in shareholder class actions. Senator Gallagher, in her contribution in this debate, actually gave us the figures. They're increasing over time. There has been an increase in class action litigation and there has also been an increase in premiums for directors and officers insurance. Let me tell you, I had to sit and negotiate those premiums with underwriters and arrangers in the context of increasing class action litigation, and it got harder and harder. And that was years ago, when I was company secretary of a listed public company. That was what was happening at the coalface.

Let's deal with the other side of the argument. Let's take, on one side of the argument, the Law Council of Australia's proposition: is this legislation going to dampen disclosure in our public capital markets? I say no for these reasons. First, I want to talk about the circularity problem. Senator McKim and others talked about holding directors and companies responsible. What happens in reality? What happens in reality from an economic point of view is that you have one class of shareholders effectively suing another class of shareholders. That's what happens. You have the class of shareholders who were investors in the company at the time there was a continuous disclosure breach effectively suing the class of shareholders who are shareholders of the company at the time the action is brought. The shareholders are the ones who pay, no-one else. At the end of the day, the shareholders are paying. Are the directors paying? No. Do you know why? The first thing a director of a listed public company does is to require that a deed of access, insurance and indemnity be entered into. That deed of access, insurance and indemnity will provide that they won't become a director of a listed public company unless there's D&O insurance in place. It will provide that they're indemnified against any civil liability arising from the discharge of their continuing disclosure obligations. And that's quite legal. So there's actually no circumstance in which the liability arising from these circumstances comes home to roost. The chickens don't come home to roost on the shoulders of the directors; they're suffered by the company. And who's the company? The company simply represents the economic interests of the shareholders. So it's shareholders effectively suing shareholders.

But you've got the D&O insurance provider. Typically, the first thing the class action litigation funder asks is: What's the D&O insurance? What's the maximum coverage? That's the starting point for any negotiation and settlement. What does that mean? It means that D&O insurance premiums get higher and higher. The regulatory impact statement, or the equivalent of it, attached to this bill talks about a five per cent year-on-year increase in insurance premiums that this legislation will avoid. Typically, they're the ones who are paying. It's the insurance companies who are paying, but who pays for the insurance companies? The company pays the premiums for the D&O insurance. Who pays for that economically? It's the shareholders. So it all comes back to the shareholders. It's one class of shareholders versus the other class of shareholders. All this nonsense about the big end of town and directors et cetera is just that—all nonsense. Effectively, economically, it's one class of shareholders against another.

Secondly, I want to make this point: what is so astounding about there having to be a fault element before you sue, before you can bring an action? What is so novel about someone having to be wilfully doing the wrong thing, so knowing they had information that should have been released to the market and wilfully not releasing it to the market, being reckless or negligent, before you can bring a legal action? How profound. What's the problem with that? Can someone explain that to me? I haven't heard an explanation for that yet. Strict liability is in particular inappropriate in the circumstance where the continuous disclosure obligation is immediate. I gave that example of Rio Tinto and one hour and a $100,000 fine—immediate disclosure. That's why strict liability is inappropriate.

What about other jurisdictions? What are they doing? Madam Acting Deputy President O'Neill, I know that you always have an interest in looking at what other jurisdictions are doing and making sure Australia's keeping pace. That is certainly a noble ambition which I agree with. Lets see what the position is in the UK, just as one example. UK law says:

There is no civil statutory liability of directors to shareholders. In relation to the statutory liability of a company to shareholders, in order to establish a claim for loss against the company for a misleading statement or omission to make a disclosure, a shareholder must show that a director knew that the statement was materially misleading or was reckless—

there's that word 'reckless'—

as to whether it was, or that a director dishonestly—

that's wilful—

concealed a material fact, and that he acquired, continued to hold or disposed of the relevant securities in reliance on the misleading statement or omission …

That's the UK law. So all we're doing is trying to get some sort of alignment between our laws and obligations in Australia and what's happening in overseas jurisdictions. This isn't novel stuff. All it is trying to do is level the playing field in the market for capital.

I want to make this point about litigation funders. Senator McKim seems to think that the people behind these class actions aren't entrepreneurs. It is private equity and other capital that is funding the litigation funders. They are absolutely entrepreneurs. When I used to give lectures on continuous disclosure risk to my group of senior executives in the mining sphere, I used to say to them that, just as we had a pipeline of mining projects, litigation funders have a pipeline of litigation cases. It's a business to them. There isn't some broader civil rights motive underpinning this. It's a business, and that needs to be recognised.

Do we think this legislation will make any difference? Firstly, it should be recognised that the current strict liability regime actually has a chilling impact on disclosures made. If you're going to face strict liability and the class action litigators circling, waiting for an opportunity, as per their business model, you are more likely to refrain from making disclosures, from informing the market with respect to market conditions et cetera. We've been seeing that over the last few years, with companies saying that they simply can't give guidance to their shareholders. One of the reasons for that is this strict liability. So in fact shareholders are getting less information than they would if we didn't have this strict liability.

Lastly, there's the opportunity cost. We need our businesses, our publicly listed companies, to be spending time looking for opportunities to build their businesses and to provide more jobs and more opportunities for all Australians, rather than being concerned about looking at the dangers posed by this strict liability when it's attached to the entrepreneurs in a class action litigation funding space. There is the opportunity cost. That shouldn't be forgotten either.


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