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Shareholder meetings
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Evolving market practice
on corporate law
ESG’s increasing influence
Bootmakers bites: Podcast
Overcoming practical difficulty
What the ASX 200 really think
Impact on corporate law
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Meet our editors
RACHEL LIDGATE
PARTNER, LONDON
CHARLIE MORGAN
Partner, LONDON
ALEX CRAVERO
DIGITAL LAW LEAD, UK, US & EMEA
SUSANNAH WILKINSON
DIGITAL LAW LEAD, AUSTRALIA & ASIA
Continuous disclosure
the challenge, the consequences, the future.
Reforms recommended
Insider trading
Decoding a decade of Australian cases
Bootmakers bites: Podcast series launch
The future of insider trading laws
Calling on the government
Tony Damian
Partner & Co-Editor
Amelia Morgan
Reviving Corporate Australia: An Interview with Tony and Amelia
Nick Pantlin
Head of TMT & Digital UK & Europe
Julian lincoln
Head of TMT & Digital Australia
securities framework
Evolving Australia's
Directors' duties
Navigating emerging risk with nuanced adaption
PURCHASE
Purchase your copy Bootmakers, Boards and Rogues
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So what is the key?
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Where the real problem lies
Mind Blowing Money
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= Competitive Advantage
Tech x Time = Competitive Advantage
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Keeping focus on "the S"
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Start at the Source
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Risk and return under every rock
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Executive Summary
Unlocking ESG Investment in Australia
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Contents
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Next Chapter
A provocative new book diagnoses what ails corporate law in Australia.
Increasingly complex markets, political gyrations and disruptive technologies are putting intense demands on major companies and corporate governance at a global level. But, according to a new book Bootmakers, Boards and Rogues, Australia's corporate law regime has failed to keep pace with a fast-changing world. Backed by Herbert Smith Freehills and the University of Sydney, the book has been edited by corporate veteran Tony Damian and rising star Amelia Morgan. The pair discuss the pressures facing Australian companies and make the case for overdue reform.
LISTEN +
Bootmakers bites: [insert subheader]
If you look at the continuous disclosure reforms, they're incomplete. If you look at insider trading, which is criminal liability, it's clearly not fit for purpose. You stack these things with other areas, a clear case emerges that we need to fix things.”
Tony Damian Partner & Co-Editor
TD: This is at the centre of the class action industry focus. To address the issues and regulate securities class actions, there were reforms to make things more manageable for companies and directors. These continuous disclosure decisions are often made in a quick timeframe and the requirements are heavily scrutinised because of the spectre of class actions. The 2021 reforms that came in sought to balance things. Those reforms are a good start but they're incomplete. The defence available to individuals is a different defence to the one available to entities, which have it harder. That makes no sense. The theme here is in the modern age with class actions, fair and reasonable commercial judgement by directors ought to be OK. Applying in retrospect some hindsight test is not appropriate because if we do that, we'll end up with plenty of class actions and fewer directors.
Continuous disclosure is another area where you back reform. What needs fixing?
AM: The insider trading laws are a perfect example – they've basically remained unchanged since the early 2000s despite various reviews, including one by the Corporations and Markets Advisory Committee in 2003. That report has effectively been shelved. But in the background, the penalties for insider trading breaches have increased significantly. Some of that has come out of the Banking Royal Commission a few years ago. That had nothing to do with insider trading but resulted in penalties across multiple provisions becoming more severe. We are left with insider trading provisions containing some of the most extreme penalties of any provisions in the Corporations Act, yet the underlying law is complex, inconsistent and in need of reform.
What areas of corporate law most need modernisation?
The way the law is evolving is very reactive and there's no body looking at where the law should be going. The time has come to bring a programme and look at where the law needs to be fixed.”
Amelia Morgan Partner & Co-Editor
AM: Law is not static. Shortcomings and crises also drive that change as do new ESG-related rules. There are more complex transaction structures, larger organisational structures and technological advancements. That's made the law more layered with statutes and soft law in the form of guidance. It all reflects the complex world we're living in. TD: A good example is that there are age-old laws related to disclosure which were crafted when we didn't have a class action industry scrutinising so many decisions directors make. There are new challenges which mean laws in good shape 20 years ago are not in good shape now. We've dabbled with reform – there's been some on continuous disclosure. But things change and you can end up with something that was good at the turn of the century but isn't so good now.
A recurrent point is the increased complexity businesses are facing and the demands that places on them. What's behind this?
Tony Damian (TD): The common theme is there are so many areas of law that have not been considered for too long and are in serious need of repair. We dive into different areas of corporate law but what they have in common is no one has cared for them in decades and some need reform.
Amelia Morgan (AM): The topics we've written about are the backbone of corporate law in Australia – they're the key areas of law individuals and corporates use to guide their conduct. It's something we need to address. From directors' duties to related party transactions and continuous disclosure, we can do better.
Your book explores the governance pressures facing corporate Australia. What's the core theme?
AM: A lot of those reforms make sense. There are other things which have emerged in recent times which could be looked at too. For example, corporate liability for insider trading is both criminal and civil, which is very complicated. The Australian Law Reform Commission has recently looked into whether criminal liability for corporations is the right way to regulate because it doesn't have the same deterrent effect as for individuals. The other thing with insider trading is there's never been a criminal case put against a corporation in Australia.
Would the reforms you recommend match those proposed by the Corporations and Markets Advisory Committee?
TD: The one that comes to mind immediately is ESG. We have the requirements of the International Sustainability Standards Board disclosure standards coming in. If you happen to be in a regime with safe harbours for forward looking disclosures, you probably have more confidence you can make mandated forward-looking climate disclosures. That's because, while you're making disclosures on matters which are inherently uncertain, the regime is calibrated to deal with that by not seeking to reopen the matter with hindsight where it's gone wrong. But in Australia we have a reasonable grounds test which is difficult and in some of our disclosure statutes we have a reverse onus of proof. That's a challenge because if we want to encourage those climate disclosures – which we do – our regime is not a good fit. It's another example of where circumstances have changed and the machinery of the Corporation Act isn’t up to it.
What other pressures are directors facing with disclosure?
TD: Over the last 12 months there's been some high-profile breaches in Australia. The regulatory community from a disclosure point is landing in a sensible spot. The ASX takes a good approach and what we're talking about here is companies being subject to criminal attacks and in that context, they provide good, pragmatic guidance on continuous disclosure. The investment community is rallying around the principles of: "Say what you know; say what you don't know; update reasonably; and don't pretend to know more than you do." On the director liability side, it's fair to ask whether we need to do anything to duties. My sense is there are already comprehensive provisions in the Corporations Act on what directors ought to do. Maybe our attention should be focused on helping companies avoid the breaches in the first place instead of legislating for the sake of pointing to a few extra lines in the Act which don't do much.
Cybersecurity is another topical area with disclosure. How has that impacted duties in Australia?
AM: These are all the fundamental areas of corporate law. Currently, there's no dedicated body to assess these laws. In the past we've had the Corporations and Markets Advisory Committee, which has effectively been disbanded. The Australian Law Reform Commission is looking at corporate law simplification but that doesn't look at any of the underlying substantive law. And the way the law is evolving is very reactive and there's no body looking at where the law should be going. The time has come to bring a programme and look at where the law needs to be fixed. TD: If you look at the continuous disclosure reforms that have been made recently, they're incomplete. If you look at insider trading, which is criminal liability, it's clearly not fit for purpose. You stack these things with other areas, a clear case emerges that we need to fix things. We need a programme and we need it now. Bootmakers, Boards & Rogues is available now.
You’ve highlighted many areas where laws governing corporate Australia could be improved. What's your main call to action?
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Our experts have examined a decade of insider trading cases and have a number of proposals for reform of insider trading regulation in Australia.
Enforcement of insider trading continues to be an enduring enforcement priority for ASIC and according to a recent speech from the ASIC Chair, Joseph Longo, ASIC commenced 33 insider trading investigations in the last 3 years.
Melanie Debenham Partner herbert Smith Freehills
There is a huge opportunity here to enhance outcomes of offset projects by taking a more holistic view of what they can achieve. In particular working collaboratively with First Nations people and leveraging their deep knowledge of country.”
Amelia Morgan Partner & Co-Author
A critical issue is also the complexity and inconsistencies which exist in the insider trading laws. Remaining largely untouched for the past 20 years since the Corporations and Markets Advisory Committee (CAMAC) recommended wide-ranging reforms. However, the penalties for contraventions have been significantly increased.”
Barriers ranked consistently at number 1 include legal issues, tax issues, and tenure of investment
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of companies see barriers to greater levels of ESG-aligned investment
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95% of all insider trading cases identified were against individuals and were criminal proceedings. Only 5% of cases identified were against corporations, which were the only civil penalty proceedings; where criminal proceedings were pursued, enforcement action was successful in 84% of cases, although in 81% of cases a guilty plea was entered; most cases were for contraventions of the trading prohibition (71%), with a fairly even number of cases commenced for contraventions of the procuring and communication prohibitions (21% and 17%, respectively); and almost half of the cases related to a control (M&A) transaction (45%).
These findings indicate:
We have surveyed the last decade of Australian insider trading cases, identifying a number of insights into the enforcement of insider trading in Australia. In Bootmakers, Boards and Rogues our experts highlight that Australia’s present insider trading regime is complicated, unclear and inconsistent, and in need of overhaul. Co-author and partner, Amelia Morgan noted that: “Our current insider trading laws have remained largely untouched in the past 20 years and are in desperate need of reform. These laws need to be revisited in order to avoid overreach and provide market participants with a clear framework to guide conduct.” Our survey identified 42 insider trading cases in which there was a material development (i.e. a court judgment or ASIC media release) between 1 January 2013 and 1 January 2023. The detailed results of our survey are discussed in Chapter 5 of Bootmakers, Boards and Rogues. The key findings:
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ASIC continues to have a preference for pursuing criminal proceedings against individuals when it comes to insider trading, primarily because of their perceived greater deterrent effect. This is despite the civil penalty provisions being extended to insider trading in 2002 to increase the ability to bring successful cases, due to the lower standard of proof; ASIC has a very high success rate for insider trading cases overall where criminal proceedings are pursued. However, this is skewed by the high number of guilty pleas and does not speak to ASIC’s success rate when liability is contested;
A critical issue is also the complexity and inconsistencies which exist in the insider trading laws.
Our insider trading laws have remained largely untouched for the past 20 years since the Corporations and Markets Advisory Committee (CAMAC) recommended wide-ranging reforms. However, the penalties for contraventions have been significantly increased. This includes as part of reforms post the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which was unrelated to insider trading. For example, an offence under the insider trading provisions now carries (without increases in the value of penalty units being accounted for):
This appears to be partly due to continuing issues in the collection of evidence given the nature of insider trading cases. That is despite ASIC’s increasingly sophisticated surveillance systems, changes to the legislation in 2010 which, amongst other things, made interception and search warrants easier to obtain, and the release of ASIC’s immunity policy in 2021.
noting the majority of cases identified were for trading offences, this may indicate those are easier to prosecute than procuring or tipping offences which may be more challenging to pursue when it comes to collecting evidence; and perhaps unsurprisingly, M&A transactions appear to provide particular opportunities for insider trading as compared to other contexts.
for an individual, a maximum prison term of 3 times greater, and a maximum fine of at least more than double, the position in 2010; and for a corporation, a maximum penalty of at least more than 4.5 times the position in 2010.
This is problematic because there are now even heavier penalties for a contravention of the insider trading laws than there were at the time of CAMAC’s recommendations, despite the underlying laws having been widely accepted as needing significant reform.
To enable the regime to achieve its stated purposes of market fairness and efficiency, and noting recent significant increases in penalties, the authors propose:
narrowing the scope of the insider trading laws to listed securities only; reducing the uncertainty in what constitutes “generally available” information by adopting a fairer and clearer definition of a “readily observable matter”; ensuring that the “own intentions” defence applies to members of a prospective bid consortium on behalf of the consortium and wholly-owned subsidiaries so that good faith bidder parties are not in technical breach of a criminal offence; and attaching criminal liability only to conduct which is significant or egregious.
For further details in relation to our experts’ proposed reforms, please see Chapter 5 of Bootmakers, Board and Rogues which is available to purchase here.
Our analysis shows that some challenges continue with regards to enforcement of insider trading laws. This appears to be partly due to continuing issues in the collection of evidence given the nature of insider trading cases."
In the authors’ view, some sensible reforms would go a long way toward addressing many of those challenges and would help to restore balance between the competing needs of the timely disclosure of material information and placing reasonable and appropriate regulatory burdens on market participants. The recalibration and extension of the defence to civil liability would be a good place to start. For further discussion on the continuous disclosure regime, see Chapter 6 of Bootmakers, Boards and Rogues, which is available to purchase here.
While the Australian continuous disclosure regime has evolved over time through the introduction of various reforms, the current regime still presents a series of challenges and practical difficulties for listed entities in seeking to comply with its requirements, with the consequences for these entities, and their directors and officers, for failing to do so being severe and wide ranging.
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No two words invoke more fear among corporate Australia than “continuous disclosure”. The high stakes game of when and what to disclose can be the greatest of challenges. Decisions need to made under severe time pressures, yet are scrutinised with hindsight by class actions firms looking to cash in on one of the world’s least forgiving disclosure regimes.
What is “continuous disclosure”?
awareness test – an entity must become aware of information; market sensitive information test – the information must concern the entity and be information a reasonable person would expect to have a material effect on the price or value of its securities; and immediacy test – the entity must immediately notify the ASX.
ASX listed entities are subject to strict continuous reporting obligations and required to disclose material price sensitive information to the market on a timely basis. These obligations are imposed by a combination of Corporations Act and the ASX Listing Rules. The core continuous disclosure obligation is set out in Listing Rule 3.1, which contains three key elements:
The first is that an entity’s consideration of whether disclosure is required and, if so, the proposed form, is time critical. The regime requires immediate disclosure upon a listed entity becoming aware of information. Entities need to make disclosure decisions under immense time pressures. The difficulty of this is compounded by the fact that determining whether disclosure is required is not always a straightforward exercise. Sometimes the facts are hard to determine, and the situation is fluid. This fluidity makes it difficult for entities to determine, at any given point in time, whether information requires disclosure and what the information actually is. Information is helpful to the market, speculation is not. Disclosure decisions are made “in real time”, yet they are often poured over later by class action litigants, commentators, regulators and the market. This leaves listed entities exposed to criticism and regulatory scrutiny following disclosure decisions, through a 20:20 lens of perfect hindsight.
Despite their best efforts, it is sometimes challenging for ASX listed entities to comply with their continuous disclosure requirements. There are several reasons for this.
The continuous disclosure regime, which is charged with ensuring market transparency and fostering investor confidence, provides various avenues for public and private enforcement. While public enforcement of the regime, which is primarily administrated by ASIC, has often been in the limelight, private parties have also played a significant role.
The potential consequences for getting it wrong include:
In May 2020, the Federal Government introduced a fault element into the continuous disclosure regime whereby, under sections 674A and 675A of the Corporations Act, entities or their officers are only liable for civil penalty proceedings for continuous disclosure breaches where it is shown they acted with “knowledge, recklessness or negligence” as to whether the information would have a material effect on the price or value of the entity’s securities. While this is a step in the right direction, the authors consider that a more appropriate standard, consistent across both entities and individuals, would be a defence from civil liability where the relevant entity or person “acted honestly” and took reasonable steps in the circumstances to ensure compliance with the continuous disclosure requirements. The defence also needs to extend to all aspects of the continuous disclosure decision-making process – such as the reliance on carve-outs – and not just the decision as to materiality. In the authors’ view, the defence should also be extended to apply equally to entities as well as persons “involved in” continuous discourse breaches. Practically, these changes could be effected by amending the existing wording of sections 674A(4) and 675A(4).
While there are several potential avenues for reform to the continuous disclosure regime, there is one area in particular which would be benefit from change.
The exception to the general disclosure obligation is set out in Listing Rule 3.1A and provides that the obligation does not apply where:
the information falls within one (or more) of five categories set out in Listing Rule 3.1, which include where disclosure would result in a breach of law, information concerning an incomplete proposal, information comprising insufficiently definite matters, information generated for internal management purposes and information which is a “trade secret”; the information is confidential (and ASX has not determined otherwise); and a reasonable person would not expect the information to be disclosed.
The disclosure obligation is particularly relevant and needs to be carefully considered in the context of matters such as earnings guidance as well as M&A deals.
Shareholder class actions
ASX involvement
Administrative penalties
Criminal liability
Civil liability
Disgruntled shareholders can band together to bring private enforcement actions, by way of class actions, against entities for breach of their continuous disclosure obligations. Shareholder class actions play an important part in the enforcement of the continuous disclosure regime, with more than 160 shareholder class actions being commenced since 1999.
The ASX has various powers with respect to ASX listed entities, which include the power to compel an entity to give the ASX any document, information or explanation it requires, which the ASX may release to the market on its own accord, along with a range of other powers to require entities to do, or refrain from doing, any act required to comply with the Listing Rules.
Including enforceable undertakings or infringement notices accepted or issued by ASIC in response to suspected continuous disclosure breaches.
For a disclosing entity for contravention of the financial services penalty provisions under section 674A(2) or 675A(2) of the Corporations Act.
In particular, the financial services penalty provisions and corresponding accessorial liability provisions under sections 674A and 675A of the Corporations Act, which extend liability to persons (including directors and officers) “involved” in a contravention.
The Federal Government also introduced a fault element and modified the standard of liability for non-disclosures that are misleading or deceptive, such that an entity is only civilly liable if it was “aware, reckless or negligent” in failing to disclose information. However, the fault element and standard do not apply to disclosures that were made but later found to be misleading or deceptive – which are currently subject to a different liability regime. In the authors’ view, there is no reason to treat such disclosures any different from misleading or deceptive non-disclosures. Accordingly, the authors’ view is that the proposed defence should apply equally to misleading or deceptive non-disclosures and disclosures.
The theme here is in the modern age with class actions, fair and reasonable commercial judgement by directors ought to be OK. Applying in retrospect some hindsight test is not appropriate because if we do that, we'll end up with plenty of class actions and fewer directors."
AGMs are an important event on the corporate calendar and it will be important to continue to take stock and consider what meeting format is best for your company.
What is right for one company may not be for another. For example a company with a small retail shareholder base and low levels of attendees may find that a hybrid AGM incurs excessive costs which may be harder to justify in comparison to physical or virtual meetings. On the other hand, companies with a larger retail shareholder base may feel that the cost of a hybrid meeting is appropriate as it will allow more shareholders to attend in one form or the other, and it provides management and the Board with the opportunity to connect with a wide range of shareholders.
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A pivotal question has emerged: Should shareholder meetings revert to the traditional physical meeting format or embrace a new future?
The COVID-19 pandemic forced companies to pivot to online shareholder meetings in an effort to protect the health and safety of shareholders and other meeting attendees. As a result, shareholders got the chance to experience a different type of AGM format from the traditional physical shareholder meeting experience.
Lauren Selby Partner
Facilitating shareholder engagement is, of course, one of the primary purposes of an AGM. However, with belts tightening, costs of the AGM must also be taken into account."
Post pandemic, companies are now faced with an important choice: do they return to the traditional physical shareholder meeting format, or do they look to adopt a hybrid or virtual meeting format going forward?
For many, hybrid meetings are the best option as they allow shareholders to choose to attend virtually or in person, whichever is preferable for the individual. Some proxy advisors as well as shareholder activists have expressed concerns about virtual-only meetings, including due to concerns that the company may “cherry pick” which questions are asked and answered, as well as limiting the ability of retail shareholders to engage informally with the Board and management in person. On the other hand, some shareholders have criticised physical only meetings for being inaccessible for many shareholders, especially those living outside major cities or internationally.
In practice, the cost of an AGM will not just be the result of the AGM format adopted – it will also be driven by a number of factors including the size of the company, number of shareholders and guests who attend, and the “production value” of the AGM. However, AGM format will influence costs, and anecdotally we are aware that companies who have adopted a hybrid AGM format typically had higher average costs (which is probably inevitable given that they have the expenses of both a physical and virtual meeting).Consideration needs to be given to which format will promote the most engagement for your shareholder base.
Stakeholders have taken different positions on the pros and cons of different AGM formats.
Generally, physical meetings involve significant logistics for the benefit of a relatively small number of shareholders in attendance. On the other hand, virtual and hybrid meetings are reliant on technology, which comes with its own challenges, including juggling questions from the floor and online, as well as dealing with the possibility of technology failures. Online formats also introduce unpredictability if more shareholders (especially large institutions) look to vote live online during the meeting rather than appoint a proxy in advance. And of course, the costs of the different formats need to be taken into consideration – which is discussed below.
For companies, though, the question of which format to adopt has additional considerations.
Facilitating shareholder engagement is, of course, one of the primary purposes of an AGM. However, with belts tightening, costs of the AGM must also be taken into account.
Shareholder attendance at AGMs is relatively low (regardless of which format is adopted), which in some cases may result in companies feeling that the cost per attendee is excessive or the overall costs are disproportionate to the level of shareholder participation.
In addition, you may want to consider which format gives you the most ‘bang for your buck’ when you consider the number of attendees against the costs incurred.
For investors, this ranges from proposing resolutions at general meetings calling for a company to adopt a climate transition plan (including to divest from particular assets) or First Nations policies, to requisitions calling for changes to the board, in addition to using their voting power to oppose mergers and acquisitions to place pressure on company directors to achieve ESG outcomes. Investors may also apply to the Court for an order authorising them to inspect the “books of the company” or submit written questions to the company’s auditors as to the company’s alignment with international agreements – each applying pressure in pursuit of the particular investor’s ESG goals. These levers are increasingly used by activist investors and appear to be achieving some measure of success.
ESG is a rapidly expanding and changing area and while ESG-specific regulation is still developing, market participants have found ways to use existing levers in corporate law to pursue their ESG goals.
Mark Smyth Partner
A critical shift is underway in Australia's disclosure framework to support comprehensive ESG reporting. That will have significant implications for corporate reporting, require significant uplift in expertise, and ultimately lead to further embedding of ESG issues into corporate and investment decision-making."
Gain insight into the practical connections between ESG and corporate law. Reviewing the implications, motivations, and regulatory interventions that shape this rapidly evolving landscape.
A review of environmental, social, and governance concerns and its impact on Australian corporate law.
Timothy Stutt Partner & ESG Lead Australia
ESG concerns are business concerns and must become an increasing focus for companies and their directors. ESG concerns can no longer be simplified, isolated, or sealed off from what might once have been seen as the core of a company’s value proposition or reason for being.”
Why does ESG matter and why should it become an increasing focus? How have market participants used existing levers in corporate law to pursue their ESG goals? What do Australia’s regulators think about ESG issues, and what are they focused on? Beyond greenwashing – where will the ESG discourse go next?
Environmental, Social, and Governance, or “ESG”, is an exciting, but challenging, rapidly expanding and evolving area of legal practice that presents a wide range of risks and opportunities for corporations. The chapter “ESG and its impact on corporate law” in Bootmakers, Boards, and Rogues, answers key ESG-related questions that corporations must grapple with, including:
Environmental (E), Social (S) and Governance (G) (ESG) is commonly understood as an umbrella term for a family of concerns primarily directed towards a company’s social capital, standing, or licence — a way for companies to quantify their goals and values (and their progress towards them), and the externalities produced by their activities. Although companies and their directors have existing legal obligation to identify, plan, account for and respond to material issues impacting their business under regulatory frameworks, ESG has taken on greater importance because a company’s response to ESG matters affecting it have an increasingly direct effect on its profitability, social licence, consumer retention, appeal to investors and exposure to regulatory action or litigation. In this context, ESG concerns are business concerns and must become an increasing focus for companies and their directors. ESG concerns can no longer be simplified, isolated, or sealed off from what might once have been seen as the core of a company’s value proposition or reason for being.
Shifting focus: a new compass for corporate success.
This regulatory activity provides additional guidance to companies and directors as to what each regulator expects of them in meeting those expectations. In this context, ESG risks are more likely to be understood as reasonably foreseeable to companies and their directors. There is a need for businesses to be aware of, and responsive to, ESG issues to achieve good governance and business outcomes, and to protect their companies from the risk of any adverse action.
Australia’s regulators are increasingly conscious of ESG matters and are, in turn, seeking to guide companies as to how they are expected to communicate and manage particular risks and are taking action to enforce compliance with their expecations.
While the Australian Securities and Investments Commission (ASIC) has been the most active in this space, the Australian Prudential Regulation Authority (APRA) and the Australian Competition and Consumer Commission (ACCC) have also taken an active interest. Each has either released ESG-related guidance (whether in draft or final form) and are taking an increased interest in how companies consider ESG risks. Most notably, ASIC and the ACCC are openly monitoring greenwashing and have indicated they will take enforcement action where necessary – ASIC recently commenced regulatory and court action against companies for greenwashing and/or non-compliance with existing regulations and guides.
While the Australian Government considers the inputs from various consultations on greenwashing and ESG, it has also indicated an intent to align legislation with the climate and sustainability-disclosure standards developed by the IFRS. In addition, we anticipate that ESG discourse will grow around the following emerging areas of focus:
There is a strong movement towards reforming Australia’s disclosure framework so that it supports harmonised and comprehensive ESG-related disclosure.
ESG metrics in long-term incentive plans
ESG due diligence obligations
First Nations consultation and cultural heritage
Human rights
The just transition
M&A campaigning
Diversity and inclusion
The rapid expansion of ESG’s importance and prevalence across the corporate legal world makes it both an exciting and challenging area for analysis. Corporations and their directors must be remember that:
ESG concerns are inherently business concerns and require increased focus due to their direct and indirect impact on the prospects of a company. Market participants, particularly investors and shareholder activists, use existing levers in corporate law to pursue ESG goals and their tactics are expected to become increasingly sophisticated, and to take advantage of emerging regulation. Australia’s regulators presently have a strong interest in ESG issues, particularly greenwashing, and are actively issuing guidance papers and taking action to enforce compliance and punish non-compliance. Beyond greenwashing, emphasis on other ESG concerns is likely to grow – including issues of ESG-related remuneration, due diligence, First Nations rights, M&A campaigning, diversity, human rights and the management of a just transition.
All-in-all, ESG issues are likely to be a shifting, but inescapable, area of corporate legal practice. This chapter introduces stakeholders to this area and points the way towards what they can expect in future
The Federal Government, in its Cyber Security Strategy 2023-2030 poses the following, as a discussion question: “should the obligations of company directors specifically address cyber security risks and consequences?”. On one view, the statutory duty to act diligently and with due care and in the best interests of the company is flexible enough to apply to rapidly changing risk landscapes, such as cyber risk. Any law reform in this area should form part of a broader assessment of cyber risk management as a whole, rather than be directed at singling out how directors and officer should go about discharging their duties as they relate to cyber risk.
As climate change and cyber risk continue to emerge, we ask if directors’ and officers' duties will change in light of those evolving risks.
Notwithstanding an absence of significant legal reform of directors’ and officers’ duties in recent times, emerging climate change and cyber risks as well as recent regulatory enforcement action indicates there is scope for development of the established legal principles on the horizon. Further scrutiny of directors’ and officers’ duties will undoubtedly arise given the number of recent cases commenced by ASIC against company directors and officers, some of which appear to test the boundaries between the remit and accountability of senior management versus directors. But what do those emerging risks and recent litigation mean for directors and officers in discharging their duties? Rather than a seismic shift, we expect a more nuanced refinement of directors’ and officers’ duties to adapt to these emerging risks.
A recent UK High Court decision highlights against imposing prescriptive duties upon directors, given the existing fundamental duties that exist. A minor shareholder (and environmental law charity) unsuccessfully sought leave to bring a derivative action against directors of Shell, alleging breaches of directors’ duties for failing to manage climate change risk, claiming the directors owed prescriptive ‘incidental duties’ such as a duty to implement strategies that reasonably mitigate climate risk. The UK High Court rejected imposing such specific duties upon directors. Instead, the Court acknowledged the well-established principles that it is for the directors to determine, acting in good faith, what will benefit the company as a whole. Further, the Court recognised that directors in the UK have a general duty to have regard to many competing considerations as to what will benefit the company and imposing ‘incidental duties’ in absolute terms would cut across that general duty. The shareholder invoked its right to request an oral hearing for the Court to reconsider its first instance decision, following which the Court reaffirmed its earlier decision. During that oral hearing, the shareholder argued that even though it may not have been appropriate for the law or Courts to intervene with the Board’s commercial decision to adopt a certain climate strategy, there was still room for the “incidental duties” to apply at the stage of implementation. This was rejected by the Court – any attempt to impose those “incidental duties” on directors at either the adoption or implementation stage would undercut and interfere with the well-established and general duty to have regard to the interests of the company as a whole. This approach aligns with our view that specific duties should not be imposed upon directors in respect of climate risks, rather, the test should continue to be what is in the best interests of the company as a whole and what decision reflects the exercise of reasonable care and diligence.
In our view, legal reform is not required to further clarify directors’ and officers’ duties in respect of climate risks. The current Australian law already requires directors and officers in relevant sectors to consider both direct and indirect foreseeable risk (which includes climate risk) and the longer-term interests of the company. How directors and officers should ensure they discharge those duties should be left to their judgment, as with all other types of risks.
UK SHELL DECISION - A WARNING AGAINST FIXING WHAT IS NOT BROKEN
The core fundamental duties of directors are to act diligently and with due care and in the best interest of the company. Arguably, the standard of care to be exercised by directors and officers with respect to climate change has risen in recent years and will continue to rise as market expectations evolve. Noel Hutley SC’s opinion on climate change and directors’ duties makes clear that directors (and in our view, officers) in relevant sectors must now take reasonable steps to see that positive action is being taken to identify and manage climate risk and make accurate assessments and disclosures about it. ASIC has also publicly recognised that disclosing and managing climate-related risk is a key director responsibility.
ASIC has recently commenced a number of separate cases against directors and officers for breach of their duties under the Corporations Act. Additionally, ASIC allege that those individuals have also breached s 1309(2) of the Corporations Act (TerraCom, Noumi, McPherson’s, iSignthis). Section 1309(2) is contravened if a director, officer or employee provides information about the affairs of the company to a director, auditor, shareholder or the securities exchange (amongst others) that is materially false or misleading, without taking reasonable steps to ensure that information is not false or misleading. Given the number of s1309 cases that ASIC has commenced in quick succession, we expect this provision will continue to be more prominent in ASIC investigations and proceedings. In theory, s 1309 should not create a seismic shift in the way directors, officers and even employees conduct themselves, given the underlying principle to ensure accuracy of information flow is evident in other provisions of the Corporations Act (e.g. s 1041H, s 670A, s 728). However, we expect this provision will become central in clarifying where the line is drawn in respect of knowledge and information flow between officers in senior management and the board of directors.
S1309 – A TICKING TIME BOMB?
Cyber risk is increasingly a focus for the discharge of directors’ and officers’ duties, particularly because the technology, standards and ways in which cyber risk crystallises are constantly evolving, often at a much faster rate than other risks
Kate Cahill, Partner
Rather than a seismic shift, we expect a more nuanced refinement of directors’ and officers’ duties to adapt to these emerging risks."
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Balancing investor empowerment, capital generation and consumer protection amid evolving regulation and expanded financial product offerings.
disclosure documents including:
A core part of Australian corporate law are the rules for the offering of securities. These rules have evolved as regulators and the legislature have sought to strike an appropriate balance between informing and protecting investors and enabling the efficient raising of capital. However, the Corporations Act now covers the offering of a far broader category of financial products than traditional fund raising securities such as shares and debentures and increasingly does so through a consumer lens.
While there is a broad universe of financial products now available, capital raising using securities remains an important avenue of funding for entities in the Australian economy. Securities and some of the broader range of financial products are an important form of investment for investors, both directly and indirectly, as a result of Australia’s compulsory superannuation system. Other categories of financial products are acquired for financial investment and to manage financial risk, for example, superannuation, insurance and more complex types of investment products, and they are very different from securities.
There is a continuing debate about the usefulness of financial product disclosure for retail investors, and what alternatives may exist as a whole or partial solution, particularly from more of a consumer perspective than a traditional investor perspective. Regulation now seeks to cover, to at least some degree, the spectrum from investor protection, with its correction of information asymmetries between issuers and investors, towards consumer protection, with the recent introduction of obligations on issuers to determine if the product that they are offering is appropriate for the offeree. That position moves well beyond an offeree being provided with information for them to make an investment decision. Having a financial product offering system that covers a wide variety of financial products, and both traditional fundraising with its attempt to balance efficiency of funding and investor protection and the broader offering of financial products with an increasing consumer protection element warrants an examination of the offering structures that Australia now has and their appropriateness.
There is an ongoing debate about the appropriateness of disclosure as the core element of the financial product offering system.
The Corporations Act now includes ‘consumer-centric’ regulation, the Design and Distribution Obligations, requiring issuers and distributors to determine whether it is appropriate for some offers of financial products to be made to some retail investors, as an additional overlay to disclosure in relation to those financial products. We have examined what is now a regulatory patchwork of:
various types of prospectuses ranging from full, transaction specific, short-form and in two parts for simple corporate bonds various types of product disclosure statements ranging from full to various shorter forms and product specific categories profile statements and offer information statements specific offer documents for employee share schemes and for crowd sourced equity; and
to consider whether that regulatory patchwork offers investors and issuers an appropriate system for the offering of securities.
disclosure exemptions which turn on the offeror, offeree and the amount offered,
Tim Mcewen Partner
Although the disclosure regimes have adapted to market changes, a distinct separation should be established between conventional fundraising and varied financial product offers, recognising their differing natures.”
Our review of the regulatory patchwork also highlights that further reform is needed to support the adjacencies of the offering of securities and financial products. There should be a greater focus on improved financial advice, including the use of appropriate digital advice, reform of the retail client/sophisticated investor tests having regard to a consumer focus and financial literacy. In some cases too much work has been left to disclosure alone.
While overall, the two core disclosure regimes in Chapter 6D and Part 7.9 of Chapter 7 of the Corporations Act have worked effectively and, importantly, have continued to evolve to meet developments in the financial markets, we consider that there should now be a clearer demarcation between traditional fundraising and its offers of securities and the offers of the balance of financial products, which while in some cases may be offered for investment purposes, are in many cases fundamentally different to securities used for fundraising.
Simple corporate bond offers, the crowd sourced equity funding regime and the employee share scheme offer regime would remain as they are. The Design and Distribution Obligations would be removed from securities that are to be listed. The clear demarcation between fundraising and offers of other financial products would benefit both regimes and in particular reinforce the need for an appropriate balance between investor protection and efficiency of capital raising through a fund raising focus, while allowing a more consumer centric focus to be appropriately applied to the financial products that are not used for fund raising.
shares in a company, whether ordinary shares or preference shares and regardless of whether the company is an “investment company”; debentures, whether or not they are a simple corporate bond; hybrid securities, whether structured as a debt instrument or a preference share; and interests in managed investment schemes (other than a limited number of product orientated managed investment schemes, such as simple managed investment schemes).
Chapter 6D prospectuses and exemptions from prospectuses would apply to fundraising, that is the offers of:
Chapter 6D and Part 7.9 of Chapter 7 should be delineated so that:
Part 7.9 of Chapter 7 following the removal into Chapter 6D of most managed investment scheme products would regulate the disclosure obligations of the broader range of consumer financial products ranging from superannuation and insurance and more complex investment products, such as contracts for difference, which are inherently different from fund raising products.
Bootmakers, Boards and Rogues is a comprehensive text in relation to Australia’s corporate and securities law.
It has been almost two decades since the last significant review of our corporate laws was undertaken. It has become clear that many of those laws are no longer fit for purpose. The time has come to take up the challenge of reform and consider a wide-ranging overhaul of our corporate and securities laws. We commend such an initiative to the Government.”
The book, which is co-edited by M&A partners Tony Damian and Amelia Morgan, features 17 chapters across a range of topics written by more than 30 authors from various offices and practice areas of Herbert Smith Freehills. It is an essential work for legal practitioners, directors, executives, advisers and others involved in Australian corporate and securities law, as well as students and those interested in the policies and principles that underpin the practices regulating this area of law. Chair of the Australian Securities and Investments Commission, Joseph Longo describes the book as “informative, thought-provoking, and rich in analysis and ideas”.
Bootmakers, Boards and Rogues includes contributions from more than 30 authors from a wide range of offices and practice areas of Herbert Smith Freehills. The co-editors of the book, Tony Damian and Amelia Morgan, are partners at Herbert Smith Freehills who have acted on many of Australia’s most significant corporate and M&A matters. Co-editor Tony Damian - who has acted on many of Australia’s most significant corporate and M&A matters - explained: “It has been almost two decades since the last significant review of our corporate laws was undertaken. It has become clear that many of those laws are no longer fit for purpose. The time has come to take up the challenge of reform and consider a wide-ranging overhaul of our corporate and securities laws. We commend such an initiative to the Government.” Co-editor Amelia Morgan added: “A new corporate law reform initiative would be the best way to address the various pressing areas for reform to Australia’s corporate and securities law landscape. Those areas range from our continuous disclosure regime to our insider trading rules, through to liability for forward-looking statements. This last area is particularly topical given new climate disclosures being required of companies.”
Copies of the book can be purchased by the form below.
Joseph Longo, The Chair of the Australian Securities and Investments Commission
informative, thought-provoking, and rich in analysis and ideas”.
A new corporate law reform initiative would be the best way to address the various pressing areas for reform to Australia’s corporate and securities law landscape. Those areas range from our continuous disclosure regime to our insider trading rules, through to liability for forward-looking statements. This last area is particularly topical given new climate disclosures being required of companies.”
To purchase a copy of Bootmakers, Boards and Rogues: Issues in Australian Corporate and Securities Law, please complete the below form. Once we have received the completed form, we will be in contact with you to provide instructions for payment. PRICE General price $250 (inc. GST) + $15.95 postage (Australia) Student price $125 (inc. GST) + $15.95 postage (Australia) International postage costs will vary and will be provided to you prior to confirmation of order.
