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Economics References Committee
Treasury Laws Amendment (2021 Measures No.1) Bill 2021, Provisions

GERGIS, Mr Christian, Head of Policy, Australian Institute of Company Directors

PETSCHLER, Ms Louise, General Manager, Advocacy, Australian Institute of Company Directors

CHAIR: I now welcome representatives from the Australian Institute of Company Directors. Thank you for appearing before the committee today. Information on procedural rules governing public hearings has been provided to witnesses and is available from the secretariat. I would also like to advise witnesses that answers to any questions on notice should be sent to the secretariat by 5.30 pm on Wednesday 16 June 2021. Did you wish to make an opening statement?

Ms Petschler : Thank you for the opportunity to appear before the committee. The Australian Institute of Company Directors mission is to be the independent and trusted voice of governance, building the capability of a community of leaders for the benefit of society. The AICD's membership of more than 45,000 is drawn from directors and leaders of non-for-profit organisations, private business and the government sector, reflecting the diversity of Australia's director and governance community. The AICD supports the measures in the bill, as outlined in our submissions.

On continuous disclosure, the AICD strongly supports permanent changes to Australia's continuous disclosure laws as proposed in the bill. This includes the bill's proposal to introduce a fault element into continuous disclosure laws and to extend this to misleading and deceptive conduct provisions. We would like to emphasise that the AICD strongly supports continuous disclosure as fundamental to a well-functioning market and to investor confidence. The proposed amendments, in our view, do not change the obligations on continuous disclosure placed on companies and their offices. Directors who are reckless or negligent in respect of their disclosure obligations or who knowingly seek to breach them will continue, under the proposals, to be subject to the full force of the law, as they should be. In our view, the current class actions regime leads to adverse outcomes for Australian businesses and shareholders. On continuous disclosure, a strict liability approach is not appropriate for obligations that involve time-sensitive and complex judgement calls, and it is currently too easy to launch or to threaten securities class actions for alleged breaches of these strict liability provisions.

The now expired temporary disclosure relief provided some evidence of the impact of the changes proposed. There's been no evidence that the temporary relief led to a deterioration in disclosure standards, nor a loss of confidence in Australia's capital markets. In fact there were significant capital raisings during the relief period. The bill's opponents have not been able to point to instances where the temporary measures have left shareholders without remedy, which they alleged would occur. The AICD is of the view that the changes proposed in the bill will improve the effectiveness of the current securities class action regime without weakening Australia's strong disclosure standards.

The AICD also welcomes provisions of the bill seeking the extension of the temporary relief for companies to hold virtual AGMs with certainty, as well as to distribute meeting related materials, and validly execute documents electronically. We are of the view that virtual AGMs can contribute to reinvigorating company meetings and provide companies with flexibility to use the best format for their circumstances, shareholders and stakeholders. The AICD strongly supports annual general meetings as a key governance accountability forum. We strongly support the existing legal requirement that shareholders and members as a whole must have a reasonable opportunity to ask questions or make comments on their company's board and management. We do have concerns about the bill's proposal to include a new requirement that, for those entitled to attend a meeting, the reasonable opportunity to participate would include specifically the right to speak orally. We believe it's better that the act set out broad principles supported by ASIC and industry led governance. To this end, in April 2021, the AICD, together with stakeholder groups, including the Governance Institute, picking up the company secretary component, released joint guidance to help organisations navigate this interim period around holding AGMs. In terms of permanent reform, our view is that the parliament should not hardwire a particular format of AGM into legislation.

We also encourage, separately to the bill, further consideration of extending temporary relief to provide certainty for companies through the complete 2021 reporting season, given the continued disruption risks of the pandemic and the need for June year-end companies to commence planning for their annual meetings. We're very happy to take questions.

CHAIR: Thanks very much. Senator Brockman, did you want to go first with questions?

Senator BROCKMAN: I'm happy to; thank you very much, Chair. Thank you very much for being here today. We've had some varied evidence on the number of class actions; whether it's decreasing or increasing or staying roughly stable. Do you have a view on that?

Mr Gergis : I'm happy to take that question. There's been a marked increase in the number of class actions filed since inception of the class action regime in 1992. In the first 14 years of that regime, there were only eight securities class actions filed, and over the next 14 years, 114 securities class actions were filed. That's data not from the AICD but from Professor Vince Morabito. I should note as well that the ALRC stated in its report that shareholder claims were the single largest source of class actions, and that is something which Professor Morabito himself has also acknowledged. So I think what you need to do here is look at the trend. There can be yearly fluctuations, as there might be in the course of one year to the next, but we need to look at that longer term trend. Clearly securities class actions are a very key part of the class action landscape and, we would argue, quite distinct to the considerations in other aspects of class actions, whether it's environmental class actions or tort class actions. We think the factors that play out are very different.

Senator BROCKMAN: What's the range of outcomes? How often do companies settle these class actions rather than fight them, given the current legal arrangements?

Mr Gergis : Often these matters are actually settled. Professor Morabito produced an article in late 2019, and that showed around 53 per cent of matters were settled. It's interesting that of those that weren't settled, around a third of them were resolved with no compensation to shareholders. I think this speaks to that argument around opportunistic class action. Around five per cent was summarily dismissed, around 17 per cent were permanently stayed, and about another 11 per cent were discontinued by the class representative of the court—taken cumulatively, around a third of those cases led to no compensation to shareholders. So I think it's reasonable to say some of those cases were weak cases, and some might characterise them as speculative or opportunistic. In a system where you have a no-fault strict liability regime, I think that's the natural consequence; some people will chance their arms. Obviously the cases that are pursued are those which have the greatest commercial return to litigation funders.

Senator BROCKMAN: Can you just talk the committee through the downside of those actions that are either found to have no claim to answer or are effectively stayed or having no financial settlement? What's the downside for companies?

Mr Gergis : I think there are downsides for the companies and there are downsides for the market more generally. For the company, obviously, there is a legal expense incurred with defending any claim. Litigation is not a cheap exercise. Secondly, there is the management time that's spent on these matters. Thirdly, there's the reputational damage that can occur whenever there's a suggestion that a company has not disclosed appropriately. I think it's important to recognise that disclosure really relates to matters often in the minds of the senior management team or the board, so a class action that's brought against the company often impugns the reputation and professional standing of those senior officers of the organisation. More broadly, the proliferation of securities class actions has damaged the D&O market, and I'm happy to talk to that point as needed through this inquiry. So I think there is a real-world impact to these matters.

Senator BROCKMAN: Did the temporary changes brought in with COVID have any impact, in your opinion, on the quality of disclosure?

Mr Gergis : No, absolutely not. It's interesting. There's been a lot of public commentary around the nature of those reforms and what their impact might be. But some of the doomsayers' predictions haven't been borne out by the evidence. There's been no diminishing in quality of disclosure, to our knowledge. We haven't had anyone highlight that, whether it's the ASX or ASIC or investors highlighting that. We've had very strong capital raisings, which are highlighted in our submission to this inquiry. I think it's important to deal with the concrete facts we have. Capital raisings went up, disclosure continued, and indeed class actions continue to be filed in some cases. We shouldn't overstate what the real world impact of those changes were. These changes were sensible, balanced reform in order to help organisations to navigate their way through the COVID crisis, which obviously was a period of unprecedented uncertainty and volatility for the markets.

I should also point out that the ASX, in its submission to the parliamentary joint committee inquiry last year, didn't think the changes were inconsistent with the continuous disclosure regime and didn't think it would lead to a diminishing in the quality of disclosure. I think it's really important to listen to their evidence, given they are the closest market participant to disclosures. They monitor those disclosures, and where they have concern they'll refer them on to ASIC. They've probably got their ear closer to the ground on what kinds of disclosures are being made and whether there are problems with them.

Ms Petschler : There's a particular AICD slant on this, too, which we can draw on from the feedback we've received from our listed company members who are directors. We've seen absolutely no change in the degree of substance and seriousness that they bring to their continuous disclosure obligations in terms of our engagement with them and our feedback around the temporary relief. So boards continue to take very seriously their obligations to keep the market informed of price-sensitive information.

Mr Gergis : I should say, just to add to Louise's comment, that the temporary relief did not change in any way what needed to be disclosed or by when. So the nature of the disclosure obligation did not change one bit.

Senator BROCKMAN: And these proposed laws don't actually change disclosure laws at all, do they?

Mr Gergis : No. All it does is set a higher threshold in terms of liability—we would say a modestly increased threshold for liability, not a dramatic change—that brings us closer into line with international peers.

Senator BROCKMAN: Do you have a view—you may not—on the originating source for litigation funding? I mean, most litigation funding firms are based overseas. That's correct, isn't it?

Mr Gergis : There's a mixture, is my understanding.

Senator BROCKMAN: Do you have a view on the impact of those overseas based litigation funders on the market in Australia?

Mr Gergis : I think we should say from the outset that there is a role for litigation funders in this market. I don't think we are trying to suggest that there should be a ban of litigation funders; they can play a legitimate role. What we're saying is that, particularly in relation to securities class actions, there's a problem in our system which has led itself to the ability for actions to be brought quite easily in this space. So the other point is that because of the propensity to settle—and there are a very good, economically rational reasons to settle which we have made and others have made about why a company may decide to settle the claim, even where there is very strong advice that it would win a case if it went to court. There are very good reasons why defendants defend those claims and then also very good reasons why they get settled. But the litigation funders are clearly focusing on those cases which will give them the best commercial return. They're essentially managed funds. They get investors from various parts of the world in some cases, and it's a commercial operation. It's not a pro bono operation; it's a commercial operation. The figures we've seen from the ALRC are that are around 49 cents on the dollar goes to litigation funders and plaintiff law firms. We think if that's access to justice, that's a very high cost. I think more recent data from the Law Council put it around just over 40 per cent going to litigation funders and plaintiff law firms. I think they have a role to play in the system, but equally they should be subject to a degree of oversight, which the government obviously regulated last year through the MIS regime and the financial services licensing regime. But I also know they are currently contemplating the idea of a cap on returns to plaintiff class members, which I think is a sensible reform.

Senator BROCKMAN: Alright. That's enough for me, Chair. I will hand back to you.

CHAIR: I'm just picking up on some of your evidence there. I think you referred to litigation funders chancing their arm. That, to me, sounded a little bit flippant. Generally speaking, we're talking about millions of dollars here that they take on. You wouldn't have thought that that would be something that those people would chance their arms at. The evidence that we've heard from people within the industry has been quite contrary, in that those sorts of decisions aren't taken lightly, given the financial risks that they take on when they take on these cases.

Mr Gergis : I think they're chancing the arm in the sense that they run a portfolio approach. Some cases in their portfolio will be of lower risk, and some will be of higher risk. I think Professor Legg, in his evidence to the PJC, highlighted this point around the economic rationality of settling and, therefore, even the economic rationality, you might say, of pursuing a case. Professor Legg's example was: a settlement involves basically comparing the amount of a potential judgement discounted by the probability that it will be not successful, plus the transaction costs of further litigation with the cost of the settlement package. So if a corporation, for example, believes its prospects for success are high—let's say it's an 80 per cent chance of winning—but the claim is $100 million, settling it for $20 million to remove that reliability risk and avoid further costs is economically rational. I think that the inverse case can be made in terms of litigation funders; even if they find a case which they think is of relatively low merit, if the potential upside is very high, then it's worth including as part of a portfolio of cases. Clearly they're looking for those cases which don't necessarily involve the most egregious cases of continuous disclosure but rather those that are going to offer the best commercial returns.

CHAIR: Do you have figures on how many cases settle rather than go ahead?

Mr Gergis : Yes. I referred to them earlier; they are the figures from Professor Morabito. As at 8 November 2019, I think, around 53 per cent of them settled.

CHAIR: Why do you think they settled? Do you think it's just companies weighing up the cost or do you think it's more complex than that?

Mr Gergis : I think it's companies weighing up the costs associated. As we said, it's the litigation costs, the board time that's spent, the senior management time that's spent, as well as the fact that these cases are hard to defend. The law is operating currently on a strict liability basis, which has obviously been submitted to by various people to this inquiry. Therefore, there is a very sound reason why a board may decide to settle those claims rather than defend them all the way through to a final judgement. It can take many years and involves a lot of time and resources on the part of the company.

CHAIR: In terms of how you gather information within the AICD, what sort of process do you go through to ensure you get a good cross-section of feedback? I think you mentioned different categories that you consulted with. Could you briefly explain that to me?

Ms Petschler : Yes. I mentioned that across the AICD it's a broad church. Our membership includes listed company directors as well as directors of other organisations. We tend to take a sector approach. We've got a variety of ways in which we tap into the director perspective, specifically, and then the stakeholder perspective and broader policy environment. We have a number of longstanding committees, including a committee that comprises ASX 50 chairs and other committees that are more topic-specific around corporate governance issues at a high level or corporate reporting issues or law reform issues. They will have a mix of directors on them. We have a not-for-profit chairs forum similar to the ASX chairs forum. We have regular engagement with a structured process through those forums.

Where there's an issue that will be specific to a particular sector, we will hold round tables or reach out for bilateral engagement with directors who are in that sector, particularly if we know they might have some direct experience or some compelling insight that might be really useful to our position. In addition to that, we have our professional policy team, which is headed by Christian Gergis. That team includes a number of lawyers and policy professionals.

Using our own internal expertise and reviewing the environment, we also consult with stakeholders that we think are relevant to the particular policy proposal. That would be a mix of desk based or legal review, conversations with other stakeholder organisations and conversations where you're in a consultation process—for example, potentially, with Treasury or the regulator, depending on the issue. We will also take external advice where there are particular issues that are beyond the remit of our internal expertise and we feel we need to draw on that more specialised legal interpretation, in particular.

CHAIR: Just following up from that, your organisation was one of a handful that the Morrison government consulted on the temporary changes to continuous disclosure laws last year. I just wanted to get a sense of how that consultation took place. I think it was on 3 September 2020. Who was involved and what form did it take?

Ms Petschler : I'd be happy to take that on notice. My understanding or my recollection is that would have been Treasury checking in with stakeholders around how the temporary relief was operating. I assume we would have been one of those stakeholders that had the perspective of bringing a director view to those discussions. That was a little bit of time ago, but we'd certainly be happy to take that on notice and come back with the detail you're asking for.

I can say, categorically, that we weren't consulted or given any advance notice of the bill that's before the committee today. In fact, going back in time, we had no advance notice of the temporary relief on continuous disclosure that the Treasurer announced. In fact--and this is a matter of public record--the AICD had put forward a quite different temporary relief proposal to the direction the government eventually took. But, wherever we're invited by Treasury or other agencies to contribute to a review of legislative proposals, we certainly aim to do that.

CHAIR: Did you have more than one meeting with Treasury?

Ms Petschler : We would meet with Treasury periodically. We meet with the markets and corporations area as part of periodic engagement on a range of topics. I'm not aware of a separate meeting other than the one that you've referred to specifically about the temporary relief. But I’m happy to take that on notice.

CHAIR: Yeah, we were interested in some details about that meeting: who was involved, where the meeting was held and if minutes were taken. Could you provide a copy of those details to the committee?

Ms Petschler : We will that on notice.

CHAIR: Prior to any of those meetings, did participants sign any sort of confidentiality undertaking or exchange any form of written undertaking with Treasury?

Ms Petschler : I'll have to take it on notice.

Mr Gergis : Not that I'm aware of.

CHAIR: Just for clarification, we asked Treasury for details of the meeting that took place between the AICD and the Treasury on 21 September 2020, and Treasury said the following: 'Our meetings were undertaken on an understanding of confidentiality, and to disclose the minutes of those meetings or the individuals who attended them would be in breach of that confidence'. We're just trying to clarify whether it was the AICD or the Treasury that insisted on confidentiality.

Ms Petschler : We would need to look at that specific meeting. I would say that it would not be unusual for Treasury to seek input from stakeholders, in my experience, to share information that could inform their thinking or contribute to that. But I can also assure the committee that the positions that we would have outlined in those discussions are reflected in the submissions and in our prior public statements.

CHAIR: Coming back to the substance of your submission, you appear to characterise opponents of schedule 2 as class action law firms and litigation funders—essentially financially motivated. Would you accept, though, that there is a broader coalition of groups, like academic Professor Spender, the CPA and the Shareholders' Association, who are also opposed to schedule 2? So it is broader than just the litigation funders themselves.

Mr Gergis : I'm happy to respond to that. Clearly there is some opposition to this. We're not trying to downplay that. All we would say to those who are opposed and those who have cited the risks associated with this proposal is that we don't think the evidence stacks up. There are two key fears around the temporary relief, and around making the reforms permanent, and the first is that the quality of disclosure would fall. As I've said before, there has been no evidence that the quality of disclosure has fallen. Indeed, the ASX, in its submission to the PJC last year, said they did not think that the measures taken by the government at that time would reduce the quality of disclosure—and, as I said, there has been no evidence presented that it has—and, equally, that it would lead to a loss of confidence in Australia's capital market system. In fact, there have been very significant capital raisings over the course of the relief period, May 2020 to March 2021. The details are contained in our submission, so I won't repeat them here. They're the two key points.

I think it's important also to recognise that it would be a strange argument to suggest having strict liability would actually improve disclosure practices. People take disclosure practices seriously. There's the risk of regulatory action by ASIC as well as the ASX, which has been lost in a lot of the debate. The ASX has the power to take action, and does take action. Then, of course, you have the buoyant securities class action market as well. All these changes do is require people to establish negligence, which, as we know, is a relatively low legal threshold and involves necessarily hindsight bias. That would be our response. Different stakeholders have a different view, but I would probe the evidence for their views.

CHAIR: In regard to the process that's been gone through for continuous disclosure laws, it was over two years ago, December 2018, that the Australian Law Reform Commission recommended a comprehensive review of continuous disclosure laws. They said that any such review undertake:

… wide consultation; collect and draw from an evidence base; and should be conducted by agencies with sophisticated understanding of the regulatory provisions, class action law and procedure and the securities market.

The government has never really implemented that recommendation, and they've sort of rushed through a process of targeted consultation on these temporary measures, which Treasury conducted last year. Do you believe that is a substitute for the comprehensive review that was recommended by the Law Reform Commission?

Mr Gergis : I don't think it's an either/or proposition. As you've said, we support the bill. The issue of Australia's continuous disclosure laws being out of step with the jurisdictions is well documented. There was an ALRC inquiry, which specifically highlighted that there was an issue worth further examination around the interaction between our class action settings and our disclosure settings. There was the PJC inquiry last year, which you'd be aware of. There was the Senate inquiry earlier this year, which you'd obviously be aware of, and, of course, there is this specific inquiry right now. I think what we need to do is move quickly to address problems that we know are there in the market, rather than be bogged down in another process. That's not to say we wouldn't support a more comprehensive review in the future, should this bill be legislated. One of the areas to look at there might be, for example, the economic costs of securities class actions and whether the most efficient way to compensate shareholders is via them. For example, in that ALRC review which you referred to, they in fact floated the idea of a collective redress scheme as potentially another way of compensating shareholders. So let's not let the perfect be the enemy of the good. I think there are important reforms on the table here. We've had the chance to trial them during the COVID period. We haven't seen any major loss of market confidence. We haven't seen any collapse in quality of disclosure. I think that should be enough to move forward.

CHAIR: Thanks. Senator Patrick, did you have some questions?

Senator PATRICK: Yes, I do. Just following up from the chair's questions about confidentiality arrangements. It's probably not unreasonable that Treasury, when working on something that is not fully developed, might seek confidentiality around its propositions, but I would expect there might be time limits or an expiry date for that confidentiality. Are you able to—and maybe you need to do this on notice—just confirm that any confidentiality was restricted to disclosure of their proposals prior to public announcement?

Ms Petschler : I think we should take that on notice. I'm neither confirming nor denying that there were any such erasures. We just need to check that.

Mr Gergis : Is it okay if I just add something to that?

Senator PATRICK: Yes, that's fine.

Mr Gergis : Obviously, it's quite typical for Treasury to consult with stakeholders in the ordinary course. I think generally we would consider those discussions to be confidential, and that's in order to promote a good two-way exchange to hopefully inform the policymaking process. I get the impression that maybe you're implying that we had advance notice of the government's TLAB bill and, in particular, the proposed disclosure changes. Just to reiterate my colleague Louisa's comments, no, we did not have advance notice of that.

Senator PATRICK: No. I wasn’t suggesting that at all. I'm just wondering about engagement. If indeed Treasury imposes confidentiality upon an organisation, and it could be any organisation—just from the position of a responsible government—the confidentiality should be centred around what is absolutely necessary, which might imply that there's only a certain scope that is held confidential or it has an expiry date, in terms of when you can talk about that material that is not to be disclosed. I'm just trying to get an understanding of how that works.

Ms Petschler : There may be times when there's a formal confidentiality undertaking; that would be unusual. From our perspective, there's nothing secret. As I said, everything that we would have said in that meeting is reflected in our submissions. My impression would be that Treasury would want to maintain the ability of stakeholders to engage with it professionally and directly without feeling that every conversation needed to be—they would want to confirm that before detailing. So let us just check the exact nature of that meeting.

Senator PATRICK: I'm not suggesting any impropriety at all. I'm just trying to understand the way in which those sorts of consultations take place. Obviously, I would hate to think that you were bound unreasonably in what you could say, perhaps not directly about the meeting, but as a result of what took place in the meeting.

Ms Petschler : As I said, I'm very confident that everything we said in that meeting is reflected in our submissions. But we should check and confirm and come back if there's additional information. From our perspective, there's nothing secret about that. We believe our positions are transparent and on the public record.

Mr Gergis : Yes. And the submissions are in the media as well.

Senator PATRICK: Sure. Moving to the substance of the amendments, it's fair to say that your membership are likely to be the 99.9 per cent of players that do the right thing. That's fair, isn't it?

Ms Petschler : I don't want to do a promotion for the AICD, but certainly we would hope that your decision to voluntarily be a member of the AICD and to participate in the ongoing professional development should be a signal that you're taking those governance responsibilities very seriously. But there's no obligation on directors of any entity to be a member of the AICD. So that will be a matter of personal choice.

Senator PATRICK: In some sense, I'm saying that you deal with a cohort of people that one might accept does the right thing. From that perspective, I'm guessing it's hard for you to necessarily suggest that there's any change. It wouldn't be unusual to say there has been no change amongst your cohort as to continuous disclosure. That's all I'm suggesting; that, in some sense, you're not well positioned to see how the effect of this temporary measure occurred because your people do the right thing and this change only affects prosecutions or controversies that involve judicial proceedings.

Ms Petschler : I think you're making a very fair point. If all we relied on was our engagement with our listed company director members and bringing that perspective, there would absolutely be a bias in that direction. But we have, as I mentioned, those broader obligations to consider—the broader policies. So I'll hand over to Chris.

Mr Gergis : I will just elaborate on Louise's comments. It's really important, if there are people who oppose the proposed changes, particularly the liability threshold—to show that there has been evidence of a drop in quality of disclosure over the course of the last 10 or so months, from May 2020, which is when the Treasurer made his temporary relief, until March. Unless I'm mistaken, there has been no evidence presented to this committee that there has been a drop in quality. Neither has there been evidence provided to this committee that there's been a collapse in confidence in terms of our regulatory settings, meaning people feel well informed to participate in capital markets. As we've highlighted in our submission, capital raisings went very well over the course of the last 12 months. So I think that's really important to highlight. The ASX as well—obviously, looking at the 2,000-odd entities on its market exchange, it did not think that the temporary changes would lead to a reduction of quality of disclosure. So I think that's really important. I guess I'd take their advice rather than anyone else's really.

Senator PATRICK: In some respects I'm saying I don't think anyone can give any definitive evidence in relation to change, good or bad, as a result of the temporary legislation.

Mr Gergis : Sorry, Senator—

Senator PATRICK: Part of the reason I say that is because I guess one of the telltale signs—knowing we're not trying to deal with people who are doing the right thing but with people who are doing the wrong thing—is in fact the number of times in which the conduct of a company is challenged through judicial proceedings. It looks to me, on the numbers you provided, that there's only about four per annum that take place. I wonder how many have taken place in the last 12 months or during the period of the relaxation. Indeed, because the number is so small, I wonder whether or not you can actually tell anything from it.

Mr Gergis : Sure. I might just make a couple of points in response to that. So, one, I think your point would be correct if these were novel changes. If having a fault based liability was a novel change, then you might say we don't know what the results will be. But what we've got is essentially from May to March where no-one has presented evidence of a drop in quality of disclosure. We also have long histories in other jurisdictions that do have fault-based elements, such as the UK and US, for private actions, showing that those markets continue to operate well and there aren't major concerns around disclosure quality. So I don't think this is a particularly novel or you might say eccentric piece of drafting by the government. We would expect that our market would respond accordingly.

In terms of the last 12 months, Professor Morabito has updated some of his research and, in an edition of Lawyerly magazine on 20 May this year, he wrote that he found, from March 2020 to March 2021, 14 shareholder class actions were filed. So the shareholder class action train continues to move on. This is compared to 11 from March 2019 to March 2020; 25 from March 2018 to March 2019; and 21 from 2017 to 2018. So I'm not sure where you're getting that 'four' number from, Senator, but I'm happy to—

Senator PATRICK: I'm just dividing—I think you said there were 147 prosecutions or class actions since 1992. I think that was your evidence.

Mr Gergis : What I said was—just to make sure it's on the record—in the first 14 years of the class action regime, there were just eight securities class actions, and then in the next fourteen years there were 114 securities class actions.

Senator PATRICK: Sorry. I missed that.

Mr Gergis : No problems.

Senator PATRICK: So 114. That tells me there's less than four per annum, which doesn't seem consistent with what you just indicated, unless it has leant towards a lot more prosecutions more recently.

Mr Gergis : I think the evidence has been quite clear that securities class actions are the single largest case of class actions historically, and that was in the ALRC's review, as well as the previous Morabito publications. Sorry, Senator, not to harp on it, but why are you saying there are only four class actions a year?

Senator PATRICK: Well, I'm just saying if there was 114 in 1992 class actions—

Mr Gergis : No. Between 1992 and 2006—I believe it is—there were only eight securities class actions. In the next 14 years, there were 114 securities class actions. But, obviously, there has been a significant increase in recent years, and that's highlighted in Professor Morabito's publications, which I'm happy to share, on notice.

Senator PATRICK: Yes. Okay. The odd thing in my mind is you've got an organisation that promotes absolute responsibility in terms of meeting obligations, but in some sense is promoting the idea that those people that don't follow their obligations strictly will benefit from this because there's a higher burden in terms of prosecution. It just seems odd that you wouldn't sit there and say, 'Well, all of our players, all of the people that do the right thing, have no concern because the changes simply won't affect them'. You're adopting the position that you support the people—or you're trying to make it harder to prosecute the people—that are doing the wrong thing.

Ms Petschler : The way I would characterise our position is that a director or a company or its officers who are negligent—which is, as Christian has mentioned, a low legal bar—or who are reckless or who knowingly disclose or fail to disclose, should absolutely be held accountable for their actions. The concern we have at the moment and the reason that it is a concern for all listed company directors is that these are very complex, real-time decisions being made with a strict liability offence attached to them that will be considered with hindsight review, and, because of a range of factors, there are very strong commercial incentives for litigation funders to launch security class actions or threats of actions that may not be based on the most egregious or substantive breach of those provisions. Our view is that directors who do the wrong thing should absolutely be accountable.

We don't accept that these proposals will make it more difficult to take action against them.

We strongly encourage ASIC to enforce the law to a greater degree than it has. We have concerns—and we've expressed those—that it has in some ways absented the field to allow litigation funders and plaintiff class action firms to carry a greater weight of that regulatory burden. We would like to see confidence that the regulators are looking very closely at those breaches. But the nature of the strict liability settings at the moment make the threat of a securities class action for a breach where a company or a director may have committed no act of negligence still a very real threat. As Christian has outlined, there's a range of reasons why that will create incentives for settlement. So that's a concern that is relevant to all listed company directors.

The proposals in the bill, in our view, are a modest return to a setting that we had in Australia, and are consistent with the same settings that apply. In fact, it will set a lower bar for private litigation than applies in other jurisdictions. So, on that basis, we are very confident that supporting them is consistent with the AICD's commitment to high-quality governance standards.

Mr Gergis : I'll just elaborate on that. In terms of accountability, there are three ways in which directors and companies can still be held accountable. Obviously there are private securities class actions where, if the bill was to pass, negligence would have to be shown, which seems to be a reasonable requirement. You have the ASX, which again, I feel has been lost in some of this debate, which does take action, has powers of censure and can suspend trading in entities. It can essentially require them to change their announcements, and that did occur, I believe, during COVID-19. Then you have ASIC, who, in addition to civil penalty proceedings, which would require a fault-based element if the bill was passed, would have a number of complementary enforcement options available, such as prosecuting an entity for criminal offences, issuing infringement notices which don't require fault to be established, pursuing directors under accessorial liability provisions, and also the general care and diligence obligation, which is section 180 of the Corporations Act for directors. So I think it's probably a mischaracterisation to say that there will be less accountability as a result of these changes.

Senator PATRICK: Okay. Thank you. They're all good points. My final question goes to the fact that there seems to be reasonably widespread support for schedule 1 but controversy around schedule 2, but the government has put these two bills together. Is it your view that the benefits of the provisions in schedule 1 are such that those provisions shouldn’t be put in jeopardy—if the bill in its entirety were to fail because of schedule 2? Should the bill be split? Or would you say that it should remain the way it is and accept an all or nothing?

Ms Petschler : Given our support for the bill as a whole, and as we've just discussed, our view that the continuous disclosure measures are modest and appropriate, our view would be: pass the bill as a whole. They're all important issues. As we've alluded to in a previous answer, there's a whole range of broader issues with the securities class action market, with the D&O market, that warrant further review. We've flagged the need for some relief to extend through the reporting period. We're not suggesting that this legislation would solve all the issues, but we think that the bill is worth passing on its merits, and there are other matters that will still need further exploration. So we'd say: pass the whole thing.

Senator PATRICK: My question doesn't go to whether or not the entire bill should be passed. I'm putting to you that there's a prospect that the bill will fail because schedule 2 is in there. On that basis, should the bill be split? You could end up splitting it and both getting through. But would you be satisfied if it was put as it is at the moment? This is a question of risk, really, and what's important to you.

Ms Petschler : All the issues are important to us. That's the answer I can give. We would support the bill as it stands. Of course, it's up to the Senate and the parliament what decisions it makes about that legislation.

Mr Gergis : The issues around continuous disclosure have been very well ventilated. The Australian Law Reform Commission's inquiry reported in 2018, and highlighted the issues around disclosure settings. It highlighted that there was concern there and that we needed to see whether it was operating efficiently. As I've said, we've also had a PJC inquiry, and now this is the second Senate inquiry which has looked at disclosure. So I don't think it's right to say that these issues are being glossed over in any way. There have been many submissions to this inquiry and other inquiries. I think the evidence base is there to move forward. As I've said, we've had that natural experiment of COVID-19 where there was a fault-based requirement inserted into the laws. Equally, we can look to other jurisdictions that have fault-based laws.

Just for the record, some evidence has been presented that in other jurisdictions private litigants haven't had to show fault, and that's not a complete picture. For example, in Canada, which I think some submissions have highlighted, it is strict liability, in terms of private enforcement. However, there's a due diligence defence, and that's not the case under our current law. In Hong Kong, there is no class action regime. So I just wanted to make sure that was quite clear and on the record, in addition, obviously, to the higher standards expected currently in the UK and US. I think that's important to make clear.

Senator PATRICK: Okay. Thank you.

CHAIR: I thank the witnesses for appearing today.

Mr Gergis : Thanks for your time.