‘Christmas present for corporate criminals’: inquiry’s support for weakening corporate disclosure laws condemned

Investor groups and class action lawyers have denounced a Liberal-dominated parliamentary inquiry’s recommendation to permanently water down laws requiring listed companies to keep the market fully informed.

The Keep Corporations Honest group, an alliance of class action lawyers and litigation funders, said the inquiry’s recommendations were “an early Christmas present for corporate criminals”. One of Australia’s leading proxy advisers, Dean Paatsch of Ownership Matters, warned that undermining private lawsuits could damage the country’s ability to attract investment.

Labor members of the inquiry have also criticised the final report, calling it “a direct attack on public interest litigation and access to justice in Australia”.

Among recommendations in their report, the Liberal majority said temporary changes watering down continuous disclosure rules, introduced by the treasurer, Josh Frydenberg, as a coronavirus emergency measure, should be made permanent.

Other changes the majority also recommended included forcing litigation funders to provide security for costs, capping the share of settlements taken by funders and lawyers at 30%, tightening rules governing how class actions are started and making the federal court the only place they can be heard.

The inquiry was chaired by Victorian Liberal senator James Paterson and its members included NSW MP Jason Falinski and NSW senator Andrew Bragg – part of a backbench grouping that over the past 18 months has emerged as hostile to corporate regulation.

In shareholder class actions, investors often allege directors have breached continuous disclosure laws, which require listed companies to immediately inform the market of material changes in their financial position.

Frydenberg’s changes make it harder to win such cases by requiring proof that directors acted with “knowledge, recklessness or negligence”.

When he introduced the move in May, Frydenberg said it would protect companies from the “threat of opportunistic class actions for allegedly falling foul of their continuous disclosure obligations if their forecasts are found to be inaccurate” during the crisis.

In September, he extended the relief to March.

Making the changes permanent was supported by company directors and their lawyers but opposed by investment groups, including Australia’s biggest super fund, the $200bn AustralianSuper.

In a submission to the inquiry, Aussie Super said it did not support changing the rules because “we believe these operate effectively in ensuring market integrity for the protection of shareholders”.

Other bodies rejecting the move included the Law Institute of Victoria and two regulators – the Australian Securities and Investments Commission and the Australian Competition and Consumer Commission.

Louise Davidson, the chief executive of the Australian Council of Superannuation Investors, which represents funds with total investments of more than $1tn, said changing the rules would have far-reaching consequences for the entire Australian economy and could “protect poor-quality disclosure”.

“The disclosure provisions do more than just provide a basis for securities class actions in cases where companies provide the wrong information,” she said.

“The laws support the integrity of information provided to the market. It is crucial that any permanent changes to continuous disclosure laws be the subject of proper review and debate.

“Investors do not want to see permanent changes that would diminish the integrity of the market.”

Paatsch, whose firm advises investors including large super funds, told Guardian Australia the pre-pandemic disclosure rules were part of a system that gave investors confidence Australian companies were mostly well-run.

“We have a corporate governance premium that flows through to a low cost of capital, which ultimately flows through to employment as well,” he said.

“This is not the be all and end all. However, the private enforcement of actions when there’s been misleading and deceptive conduct is part of that mix.

“You’ve got major investment groups saying this is a bad idea.”

Ben Hardwick, who is the head of class actions at law firm Slater & Gordon and the spokesman for Keep Corporations Honest, said changing the rules “gives free reign for corporations to act unscrupulously”.

“They can now mislead the market as long as they say they’re sorry, they’ve made a mistake. That’s not good enough and it’s dangerous.”

He also attacked the majority report as a whole, saying: “This report is an early Christmas present for corporate criminals.”

In their dissenting report, Labor members of the committee said the government’s approach to class actions had been “an embarrassing shambles”.

They said the majority report largely mirrored the recommendations of an Australian Law Reform Commission inquiry, which they accused the government of ignoring for three years.

The committee should not have made findings about the continuous disclosure laws because they were not part of the inquiry’s terms of reference, they said.

“Against the background we have set out above, the committee’s recommendation that Mr Frydenberg’s changes to Australia’s continuous disclosure regime be made permanent is, with respect, reckless and grossly irresponsible.”