The Financial Markets Authority (FMA) has considered the need for regulatory relief in relation to director liability thresholds, following changes in Australia.
The Australian Government has, for a period of six months from 26 May 2020, relaxed the liability threshold for assessing the materiality of information to be disclosed to the market from a “reasonable person” test to one of “knowledge, recklessness or negligence” (civil proceedings). The move is to encourage Australian listed issuers to provide guidance and forward-looking information to the market, and to reduce the risk of “opportunistic” class actions for potential breaches of continuous disclosure obligations.
It is understood that the risks to directors from speculative class actions influenced the decision by the Australian Treasurer. It has been announced that litigation funders in Australia will need to be licensed.
The FMA believes New Zealand’s current legislative settings, and the manner in which they are applied, remain appropriate for the COVID-19 environment, and should already afford listed issuers and their officers’ sufficient protection to encourage disclosure.
The FMA’s view is that there has been very little evidence in New Zealand of an opportunistic class action culture developing in relation to director liability, but we will keep this position under review. We note that the Capital Markets 2029 review recommended more generally that the settings around director liability for continuous disclosure be reviewed.
The FMA intends to consult with MBIE and other stakeholders on the appropriate steps to reduce the risk of speculative class actions proliferating. However, the FMA does recognise that private class actions play a crucial part in addressing defective corporate disclosure and that litigation funding can be an important part of enabling investors to bring such actions.
In assessing regulatory action for possible breaches of continuous disclosure obligations, the FMA is mindful not to apply hindsight in determining the appropriateness of an issuer’s disclosure. Where an issuer and its officers can show evidence they have exercised appropriate due diligence and acted reasonably on information available at the time, the FMA is unlikely to pursue a continuous disclosure breach. This will include considering what market conditions and uncertainties existed at the time of disclosure when determining whether the action was ‘reasonable’.
FMA Chief Executive, Rob Everett urged directors to be brave in their disclosure decisions, and be willing to confront material uncertainties in their financial statements and forward-looking information.
“We want investors to get the best information available from the companies they invest in. If that information has to include cautionary statements about the ability to project future economic or trade conditions or about the reliability of particular data used, we would rather see that shared with investors than avoided altogether,” said Mr Everett.
The FMA urged listed issuers to carefully consider the content of their announcements, to ensure they use appropriate tone, context, and caveat statements, particularly where the information includes uncertainties or relies on assumptions.
Notes to editors:
The legislative settings are established in the Financial Markets Conduct Act (FMC Act):
Section 270 of the FMC Act sets out a Listed Issuer’s continuous disclosure obligations (reference also Section 3 of the NZX Listing Rules).
Section 533 of the FMC Act sets out how a Director may become involved in a contravention of section 270 (and therefore exposed to possible liability).
NZX has a number of publications to support understanding of continuous disclosure requirements, including:
NZX Regulation update: COVID-19 and continuous disclosure
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