Directors get six-month reprieve on disclosure

Company directors and executives providing profit guidance to sharemarket investors will be relieved from continuous disclosure rules for the next six months and further insulated from class action law suits, as the government seeks to protect business from the economic uncertainty fuelled by the coronavirus.

Treasurer Josh Frydenberg announced the government will temporarily amend the Corporations Act so that companies and their officers will only be liable for continuous disclosure breaches if there is “knowledge, recklessness or negligence” with respect to updates on price sensitive information.

"Given the impact of the coronavirus crisis and the uncertainty it continues to generate, it has been considerably more difficult for companies to release reliable forward-looking guidance to the market," Mr Frydenberg said on Monday.

"The Morrison government will temporarily amend the continuous disclosure provisions that apply to companies and their officers to enable them to more confidently provide guidance to the market during the coronavirus crisis."

As flagged by The Australian Financial Review in April, the Business Council of Australia and Australian Institute of Company Directors (AICD) have been lobbying Treasury about the challenge of providing accurate forward-looking statements and earnings guidance during the coronavirus containment measures.

Directors are worried about defending "opportunistic" class actions.

The threat of shareholder class actions and the fallout from the Hayne banking royal commission have fuelled spiralling growth in insurance costs for Australian company directors and finance professionals.

AICD chief executive Angus Armour​ said the government's announcement was a critical step in acknowledging the challenges facing the business community to rebuild in the wake of COVID-19.

"While we are strongly supportive of a robust continuous disclosure regime to maintain market integrity, practically the current environment does not allow the same confidence in making forward statements or providing guidance," he said.

"This measure allows directors to provide greater disclosure in this uncertain environment at the same time as it maintains measures to discipline irresponsible companies to protect the community.”

Shareholder groups including the Australian Council of Superannuation Investors had voiced concerns about a potential watering down of the laws, while governance advisory firm CGI Glass Lewis warned against the pandemic being used for a "legal land grab".

"We acknowledge these are unprecedented times but believe shareholders' rights to an informed market should be preserved," CGI Glass Lewis general manager Daniel Smith said on Monday.

"Notwithstanding this temporary relief, we hope that directors and officers will continue to act in the best interests of the company when informing the market of the company's future prospects."

The regulatory change by the Treasurer will be prospective and apply from Tuesday for six months.

Premium costs skyrocket

Business Council chief executive Jennifer Westacott said the relief meant companies could keep markets well informed and focus on keeping their businesses open and people employed.

“These changes will make it harder to bring opportunistic class actions against employers during the COVID-19 pandemic while keeping the market informed and functioning effectively," she said.

“This gives company directors the space they need to more confidently provide guidance to the market during this uncertain period."

Director insurance premiums rose faster than anywhere else in the world last year, according to insurance broker Marsh, due to the cost of taking out directors' and officers' liability insurance and financial services professional indemnity insurance.

Even before the coronavirus crisis hit Australia, in the December quarter there was a 32.5 per cent jump in premium costs from a year earlier – the seventh straight quarter where pricing rose by more than 20 per cent.

The regulatory reprieve comes after litigation funders were last week told they would be subject to tough new oversight rules and regulatory reporting requirements, as the Morrison government cracked down on costly shareholder class actions.

The government brought litigation funders under the Corporations Act to slow Australia's booming class action industry and provide additional protections for firms and company directors, amid a threefold increase in the number of class action lawsuits over a decade.

Mr Frydenberg said on Monday there was a heightened level of uncertainty around companies’ future prospects as a result of the COVID-19 crisis and it had exposed companies to the threat of "opportunistic class actions" for allegedly falling foul of their continuous disclosure obligations if their forecasts are found to be inaccurate.

"In response, companies may hold back from making forecasts of future earnings or other forward-looking estimates, limiting the amount of information available to investors during this period," he said.

"The changes announced today will make it harder to bring such actions against companies and officers during the coronavirus crisis, while allowing the market to continue to stay informed and function effectively."

Guidance needed: shareholders

In a separate development on Monday, global litigation giant Quinn Emanuel scrapped its class action lawsuit against financial services firm IOOF over alleged breaches of directors' duties.

The suit was filed in April 2019 on behalf of IOOF shareholders who allegedly sustained losses after misconduct and enforcement action by the Australian Prudential Regulation Authority was revealed at the Hayne royal commission and in media reports, wiping billions off the company's market value.

Australian Shareholders' Association policy and advocacy manager Fiona Balzer said on Monday night that investors really needed guidance during the uncertain coronavirus period.

"If this change is what it takes for companies to be able to give the guidance, that will help during this uncertain time," she said.

"Companies should also review previous guidance."

In March, the Morrison government placed a moratorium on insolvent trading laws to help businesses manage the sudden economic shock of the coronavirus and stall an expected avalanche of business failures.

Directors were temporarily relieved of their duty to prevent insolvent trading for any debts incurred in the ordinary course of the company’s business.

Ai Group chief executive Innes Willox welcomed Monday's announcement.

“For companies, providing earnings guidance and forward-looking information about their performance that does not infringe Australia’s strict disclosure rules presents managers and company boards with an extremely difficult task at this time.

"Their attention needs to be on dealing with the immediate threats facing their businesses and the planning needed to navigate the challenges of recovery and rebuilding."