Changes in Disclosure Laws Threaten Class Actions

Treasurer Josh Frydenberg continues his assault on class actions by making permanent what was meant to be a temporary regulatory shield. The extension of the COVID-inspired policy means that corporations breaching their disclosure obligations may now only be subjected to civil penalties in situations where they acted knowingly and with negligence or recklessness.

Financial Review details that before COVID, disclosure rules were more strict. A shareholder lawsuit could be pursued when company officers did not disclose relevant information—regardless of the intent. This makes sense, as the intent doesn’t negate shareholder losses.

ASIC is still able to prosecute criminal breaches when they occur, but unless malicious intent can be established, shareholders are unlikely to see their day in court. Meanwhile, Frydenberg claims that these are necessary changes needed to ensure that litigation funders face even more regulatory scrutiny. The treasurer also suggested that class actions backed by third-party funding should register as managed investment schemes.  

As one might expect, big business is strongly in favor of the new policy. It was also recommended by the Parliamentary Joint Committee for Corporations and Financial Services. Frydenberg claims that this puts Australia’s policies more in line with those in the UK and US courts.

Opponents of the measure suggest that it’s another in a long line of ways in which Frydenberg besmirches litigation funders with accusations of ‘opportunistic’ or even ‘frivolous’ class actions. Essentially, companies and officers will not be held liable for conduct that is deceptive or misleading, unless “fault” is also proven.

Without the realistic threat of shareholder class actions, what’s to stop companies from engaging in deception or misleading shareholders? Still, the recent parliamentary inquiry was not complimentary toward legal funding, asserting that it “uses” the justice system to generate a return on investment.