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Treasury Laws Amendment (2021 Measures No. 1) Bill 2021



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ISSN 1328-8091

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BILLS DIGEST NO. 1, 2021-22 19 JULY 2021

Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 Paula Pyburne Law and Bills Digest Section Contents

Purpose of the Bill ........................................................... 3

Structure of the Bill ......................................................... 3

Background ..................................................................... 3

Government’s coronavirus response .......................... 3

Temporary instrument making power ...................... 3 Duration .................................................................... 4

Committee consideration ................................................ 4

Senate Standing Committee on Economics—first referral ......................................................................... 4

Dissenting comments .................................................. 5

Labor .......................................................................... 5

Greens ....................................................................... 5

Senate Standing Committee on Economics— second referral ............................................................ 5

Senate Standing Committee for the Scrutiny of Bills .............................................................................. 6

Statement of Compatibility with Human Rights................ 6

Parliamentary Joint Committee on Human Rights ..... 7 Key issues and provisions—Schedule 1 ............................ 7

Corporations determinations ...................................... 7

Operation of Chapter 2G of the Corporations Act ...... 8 Virtual meetings .......................................................... 8

Right to hold a virtual meeting ................................. 9

Tabling of documents ................................................ 9

Place and time of virtual meetings ........................... 9

Key issue—reasonable opportunity to participate ............................................................... 10

Electronic communication and signatures ................ 10 Relevant documents................................................ 10

Date introduced: 17 February 2021

House: House of Representatives

Portfolio: Treasury

Commencement: Sections 1-3 on Royal Assent; Schedule 1 and Parts 1-3 of Schedule 2 on the day after Royal Assent; Part 4 of Schedule 2 contains contingent amendments the commencement of which is conditional on the passage of other statutes.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at July 2021.

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Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 2

Giving the document ............................................... 11

Election to receive documents in hard copy only ... 11 Key issue—‘opt in’ for hard copy documentation .. 12 Signing the document ............................................. 12

Electronic recording and keeping of minute books ....................................................................... 13

Amendments to Parts 2G.2 and 2G.4 ....................... 13

Giving notice of meetings........................................ 13

Contents of notice of meetings ............................... 13

Accessibility of meetings ......................................... 14

Quorum ................................................................... 14

Proxies ..................................................................... 14

Voting—company members ................................... 15

Voting—members of a registered scheme ............. 15 Exercise of company powers ..................................... 15

Executing company documents .............................. 16

Key issue—requirement for entire document ........ 16 Executing a document as a deed ............................ 17

Stakeholder comment ............................................. 17

Financial implications ................................................ 17

Key issues and provisions—Schedule 2 .......................... 17

Corporations determinations .................................... 18

Current state of the law ............................................ 18

Effect of Determination No. 4 ................................... 19

Relevant reports ........................................................ 19

ALRC report ............................................................. 19

Parliamentary Joint Committee report ................... 20 What the Bill does ..................................................... 20

Criminal penalties are unchanged .......................... 21

Amendments to civil penalties—entities ................ 21 Amendments to civil penalties—persons ............... 21 Conduct element ..................................................... 22

Stakeholder comments ............................................. 22

Misleading and deceptive conduct ........................... 23

Current law—Corporations Act ............................... 23

What the Bill does ................................................... 24

Current law—ASIC Act ............................................. 24

What the Bill does ................................................... 24

Stakeholder comments ............................................. 25

Financial implications ................................................ 25

Concluding comments ................................................... 25

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Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 3

Purpose of the Bill The purpose of the Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 (the Bill) is:

• to make temporary amendments to the rules relating to meetings of directors, shareholders of companies and members of registered schemes to facilitate the use of electronic technology and

• to add a conduct element to specified civil penalty proceedings arising from the continuous disclosure rules.

Structure of the Bill The Bill comprises two Schedules:

• Schedule 1 amends the Corporations Act 2001 to create new rules which will allow meetings to be held virtually, to allow documents relating to meetings to be provided and signed electronically and for minutes to be kept electronically

• Part 1 of Schedule 2 amends the Australian Securities and Investments Commission Act 2001 (ASIC Act) and the Corporations Act so that all civil penalty proceedings commenced under the continuous disclosure provisions, and the misleading and deceptive conduct provisions (in circumstances where the continuous disclosure obligations have been contravened) must prove that an entity or officer acted with ‘knowledge, recklessness or negligence’ in respect of an alleged contravention. Parts 2 to 4 of Schedule 2 contain consequential amendments, application provisions and contingent amendments respectively.

Background

Government’s coronavirus response With the onset of the coronavirus pandemic, the Government moved to amend:

… the Corporations Act to establish a temporary mechanism to provide short-term regulatory relief to classes of persons that, due to the Coronavirus, are unable to meet their obligations under the Corporations Act or the Corporations Regulations. It also provides for short-term regulatory changes to facilitate continuation of business or mitigate the economic impact of the Coronavirus.1

Speaking about the originating Bill, Treasurer Josh Frydenberg stated:

We’re providing more flexibility in the Corporations Act. Treasury ministers will be given a time limited instrument-making power in the Corporations Act to grant time limited relief from regulatory requirements where these will interfere with the ability of companies to manage their businesses through the impacts of the coronavirus. Each instrument would be effective for up to six months from when the instrument is created.2 [emphasis added]

Temporary instrument making power Amongst other things, the Coronavirus Economic Response Package Omnibus Act 2020 inserted section 1362A into the Corporations Act.3 That section empowered the Treasurer to make a disallowable legislative instrument to temporarily exempt specified classes of persons from the operation of specified provisions, or temporarily modify the operation of specified provisions of the Corporations Act or the Corporations Regulations 2001 due to the Coronavirus.

1. Explanatory Memorandum, Coronavirus Economic Response Package Omnibus Bill 2020, p. 110. 2. J Frydenberg (Treasurer), ‘Second reading speech: Coronavirus Economic Response Package Omnibus Bill 2020’, House of Representatives, Debates, 23 March 2020, p. 2777. 3. Parliament of Australia, ‘Coronavirus Economic Response Package Omnibus Bill 2020 homepage’, Australian Parliament

website.

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Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 4

Duration Importantly subsection 1362A(4) of the Corporations Act provides that the duration of such a legislative instrument is six months beginning on the day after the instrument is made—or a shorter period if the instrument so specifies.

In addition, subsection 1362A(5) provides that the Treasurer may not make a legislative instrument under this section after the end of the period of six months beginning on the day the section commences, being 25 March 2020. This means that section 1362A of the Corporations Act provided the Treasurer with the requisite instrument making power only during the period 25 March 2020 to 24 September 2020. That time has now elapsed.

The provisions in the Bill flow from two of the determinations made by the Treasurer to provide a temporary response to COVID 19.

Committee consideration

Senate Standing Committee on Economics—first referral The Bill was referred to the Senate Standing Committee on Economics (Economics Committee) for inquiry and report by 12 March 2021.4 The Economics Committee received 26 submissions. Stakeholder comments set out in the submissions are canvassed below under the heading for the relevant Schedule to the Bill.

The final report of the Economics Committee was published on 12 March 2021.5 With respect to the amendments in Schedule 1 to the Bill the Committee considered:

… the extension of regulatory relief to allow companies and registered schemes to use technology to hold meetings, execute documents and send documents relating to meetings has been effective in facilitating the continuation of business during the COVID-19 pandemic …

The extension of temporary relief allows business to continue in a manner compliant with public heath orders. It also allows companies and registered schemes to take advantage of the benefits of modernising business communication and operations.6

In relation to the amendments in Schedule 2 to the Bill the Committee acknowledged the differing views of stakeholders. However, it took the view:

… there is significant support for the aims underpinning the amendments. In the committee's view, the reforms strike an appropriate balance. On the one hand, they provide business and markets with sufficient certainty to pursue growth and facilitate economic recovery from the pandemic without the prospect of opportunistic shareholder class actions. On the other hand, the reforms retain sufficient sanctions to deter misconduct and maintain Australia's global reputation for market cleanliness.7

The majority Senators on the Economics Committee recommended that the Bill be passed.8

4. The terms of reference, submissions to the Senate Economics Committee and the Committee’s report are available on the inquiry homepage. 5. Senate Economics Legislation Committee, Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 [Provisions], The Senate, Canberra, March 2021. 6. Ibid., p. 55.

7. Ibid., pp. 55-56. 8. Ibid., p. 56.

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Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 5

Dissenting comments Australian Labor Party (Labor) Senators and Australian Greens (Greens) Senators made dissenting reports.

Labor In relation to the amendments in Schedule 1 to the Bill, the Labor Senators supported the use of electronic technology that facilitates the effective participation of shareholders in the communication and execution of company documents, and in virtual AGMs—on the condition that shareholders have the option to elect:

• to receive and execute hard copies of documents if that is their preferred method of communication and

• to attend AGM’s either in person and/or by electronic means.9

However, in relation to the amendments in Schedule 2 to the Bill, the Labor Senators were of the view:

… there has been inadequate consideration and consultation in relation to the corporate disclosure changes in this Bill. In developing this Bill, the Government has set out to make shareholder class actions more difficult, and ignored the broader consequences for market integrity. Evidence provided to the Committee has made it clear that there are significant risks to market integrity.10 [emphasis added]

They recommended that the amendments in that Schedule should not be passed.11

Greens The Greens Senators were also generally supportive of the amendments in Schedule 1 to the Bill.12 However, they too, considered that Schedule 2 to the Bill should be opposed stating:

… it’s hardly as though class action lawsuits are crippling corporate Australia. By ASIC’s count, there has been an average of just five class actions a year for the last twenty years with a median settlement value of $36 million.

Secondly, as ASIC also points out, ‘The economic significance of fair and efficient capital markets dwarfs any exposure to class action damages.’ Class actions and the prospect of them support ASIC’s enforcement regime and help ensure that corporate Australia does the right thing. In turn, this improves investors’ trust in Australia and the functioning of Australian markets.13

Senate Standing Committee on Economics—second referral The Bill was referred to the Economics Committee for a second time for inquiry and report by 30 June 2021.14 The Economics Committee received 15 additional submissions. The Committee also had the opportunity to conduct public hearings on 9 and 10 June 2021 and to consider written responses to questions on notice. Questions 2-4, and 10-11 in particular were directed to Treasury and sought to ascertain with some degree of granularity, the number of ‘opportunistic’

9. Labor Senators, Dissenting report, Senate Economics Legislation Committee, Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 [Provisions], op. cit., p. 57. 10. Ibid., p. 60. 11. Ibid., p. 61. 12. Australian Greens, Dissenting report, Senate Economics Legislation Committee, Treasury Laws Amendment (2021 Measures

No. 1) Bill 2021 [Provisions], op. cit., p. 66. 13. Ibid., p. 65. 14. The terms of reference, submissions to the Senate Economics Committee and the Committee’s report (when published) are

available on the inquiry homepage.

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Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 6

class actions which had been brought against companies for a failure to comply with the continuous disclosure rules since 2015.

The final report of the Economics Committee was published on 30 June 2021.15 The Committee acknowledged that evidence provided to it:

… shows widespread support for the changes proposed in Schedule 1 of the Bill. By contrast, there is significant opposition to the changes in Schedule 2 by a diverse range of stakeholders—including retail investors, institutional investors, academics and legal experts. While there is some support for the measures in Schedule 2 … the arguments in favour of those provisions are based on very limited (or sometimes no) concrete evidence and are—in the whole—unpersuasive.16

The Committee concluded:

Given the ongoing impact of COVID-19 lockdowns and restrictions, and the benefits of the Schedule 1 changes, the committee considers it would be beneficial to split the Bill into two—with Schedule 1 forming one Bill and Schedule 2 forming a separate Bill. This would facilitate the timely passing of Schedule 1 provisions.17

In the Committee’s view, Schedule 2 should not pass at all.18

Dissenting comments by Coalition Senators However, the dissenting report from Coalition Senators, indicates their opinion that ‘the Bill should be passed at the earliest possible opportunity’.19 In relation to the changes proposed in Schedule 2 to the Bill, the Coalition Senators emphasised:

This change will encourage companies and directors to release forward-looking guidance to the market. These changes strike the right balance between ensuring shareholders and the market are appropriately informed while also allowing companies to more confidently make forecasts of future earnings or provide guidance updates without facing the undue risk of class actions. Introducing a fault element protects entities where they provide earnest updates to the market, allowing the market to continue to stay informed and function effectively.20

Senate Standing Committee for the Scrutiny of Bills The Senate Standing Committee for the Scrutiny of Bills has considered the Bill but had no comment to make in relation to it.21

Statement of Compatibility with Human Rights As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.22

15. Senate Economics References Committee, Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 [Provisions], op. cit. 16. Ibid., p. 77. 17. Ibid. 18. Ibid. 19. Coalition Senators, Dissenting report, Senate Economics References Committee, Treasury Laws Amendment (2021 Measures

No. 1) Bill 2021 [Provisions], op. cit., pp. 83-85. 20. Ibid., p. 84. 21. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 4, 2021, 24 February 2021, p. 17. 22. The Statement of Compatibility with Human Rights can be found at pages 37-39 of the Explanatory Memorandum to the Bill.

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Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 7

Parliamentary Joint Committee on Human Rights The Parliamentary Joint Committee on Human Rights has considered the Bill but had no comment to make in relation to it.23

Key issues and provisions—Schedule 1 Quick guide to Schedule 1 The provisions in Schedule 1 to the Bill amend the Corporations Act to make temporary amendments to the rules about meetings of directors, shareholders of companies and members of registered schemes to: • allow meetings to be held virtually • allow documents relating to meetings to be provided and signed electronically • allow minutes of meetings to be kept electronically and • allow the electronic execution of other company documents. Importantly the amendments in Schedule 1 are intended to remain in force only until 16 September 2021.24 By that time, the Government intends to have permanent reforms in place.

Corporations determinations In accordance with the terms of section 1362A of the Corporations Act, the Treasurer made the Corporations (Coronavirus Economic Response) Determination (No. 1) 2020 (Determination No. 1) which commenced on 6 May 2020. The Determination was to operate for a period of six months.

Determination No. 1 deals with provisions about meetings and document signatures that are not compatible with public health requirements for social distancing during the Coronavirus pandemic. It:

• gives companies, responsible entities, external administrators and other classes of persons certainty about how they can meet their legal obligations by ensuring they may hold meetings, using technology rather than face-to-face meetings

• enables a quorum, votes, notices and the asking of questions to be facilitated electronically

• allows for information required for the meeting to be circulated and accessed electronically and

• alters the operation of section 127 of the Corporations Act to give certainty that when company officers sign a document electronically (including an electronic document), the document has been validly executed.25

Determination No. 1 was repealed and replaced by Corporations (Coronavirus Economic Response) Determination (No. 3) 2020 (Determination No. 3) which came into effect on 23 September 2020. According to the Explanatory Statement accompanying Determination No. 3:

The first instrument is being remade … to ensure that for at least the rest of this year, companies can hold their Annual General Meeting (AGM), and other meetings, using technology rather than face-to-face. Stakeholders have indicated that many companies would typically hold their AGMs between when the first instrument is due to expire and the end of the year. As the Coronavirus situation is uncertain, public health and travel restrictions may continue to limit face-to-face meetings. The Determination will facilitate continuation of business in circumstances relating to the coronavirus, by enabling companies

23. Parliamentary Joint Committee on Human Rights, Human rights scrutiny report, 2, 2021, 24 February 2021, p. 67. 24. Corporations Act, proposed section 1679F, inserted by item 34 in Schedule 1 to the Bill. 25. Explanatory Statement, Corporations (Coronavirus Economic Response) Determination (No. 1) 2020.

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Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 8

to plan their AGMs and other meetings with certainty that they can go ahead while also complying with any Coronavirus-related restrictions that are in place at that time.26

The duration of Determination No. 3 was six months. It self-repealed on 21 March 2021.

The amendments in Schedule 1 to the Bill will remain in force until 16 September 2021.27 According to Assistant Treasurer, Michael Sukkar:

… the Government proposes that permanent reforms that will continue to allow companies to electronically sign documents and send meeting-related materials electronically [will be] in place when this temporary extension ends.28

Operation of Chapter 2G of the Corporations Act Subsection 198A(1) of the Corporations Act provides that the business of a company is to be managed by, or under, the direction of the directors. Directors are accountable to members, in the sense that they are required to report to members and the members in general meeting have the power to remove them from office. An important issue of corporate governance is whether the directors are sufficiently accountable to members, and conversely whether members are adequately able to bring the directors to account.29

The matter of accountability of the directors of a company to its members is addressed in part by the requirement for an annual general meeting.30 The requirements for holding meetings are set out in Chapter 2G of the Corporations Act. Chapter 2G currently contains four Parts. Parts 2G.2 and 2G.4 are in similar terms and relate to the meetings of members of companies and meetings of members of registered schemes respectively.31

Virtual meetings Item 31 in Schedule 1 to the Bill inserts proposed Part 2G.5—Virtual meetings, electronic communication of documents, and recording and keeping of minute books into Chapter 2G of the Corporations Act. The Bill inserts the definition of Chapter 2G meeting being:

• a meeting of a company’s members

• a meeting of the directors of a company (including meetings of a committee of directors) or

• a meeting of a registered scheme’s members.32

Meetings held under Parts 2G.2 and 2G.4 fall within the definition of Chapter 2G meetings. That being the case, the Bill makes amendments to various sections in those Parts so that they apply

26. Explanatory Statement, Corporations (Coronavirus Economic Response) Determination (No. 3) 2020. 27. Corporations Act, proposed section 1679F, inserted by item 34 in Schedule 1 to the Bill; Explanatory Memorandum, Treasury Laws Amendment (2021 Measures No. 1) Bill 2021, p. 8. 28. M Sukkar, ‘Second reading speech: Treasury Laws Amendment (2021 Measures No. 1) Bill 2021’, House of Representatives,

Debates, 17 February 2021, p. 1022. 29. R Austin and I Ramsay, Ford, Austin and Ramsay’s principles of corporations law, 16th edn, LexisNexis Butterworths, Chatswood, 2015, pp. 238-239. 30. Australian Council of Superannuation Investors (ACSI), Submission to the Senate Standing Committee on Economics, Inquiry

into the Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 [Provisions], [Submission No. 25], 1 March 2021, p. 1. 31. Managed investment schemes are also known as ‘managed funds’, ‘pooled investments’ or ‘collective investments’. Generally, in a managed investment scheme multiple investors contribute money or money's worth and get an interest in the

scheme; money from the different investors is pooled together or used in a common enterprise; and a ‘responsible entity’ operates the scheme. Investors do not have day-to-day control over the operation of the scheme. Section 601ED of the Corporations Act sets out the circumstances in which a scheme must be registered. 32. Corporations Act, proposed section 253P inserted by item 31 in Schedule 1 to the Bill.

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Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 9

the new rules about the operation of virtual meeting technology and the use of electronic signatures consistently across Chapter 2G of the Corporations Act.

Right to hold a virtual meeting The Bill provides that virtual meeting technology may be used in holding a Chapter 2G meeting, on the condition that the technology gives the persons entitled to attend the meeting, as a whole, a reasonable opportunity to participate without being physically present in the same place.33 Relevantly:

• a reasonable opportunity to participate includes a reasonable opportunity to exercise a right to speak and

• a person may elect to exercise a right to speak (including a right to ask questions) orally rather than in writing.34

Consistent with existing subsection 1322(3A), the Bill provides that if a meeting of members is held at two or more locations, or virtual meeting technology is used in holding the meeting and a member does not have a reasonable opportunity to participate in the meeting or a proceeding at the meeting that meeting (and its outcomes) will only be invalid on that ground if:

• the Court is of the opinion that a substantial injustice has been caused or may be caused and that injustice cannot be remedied by any order of the Court and

• the Court declares the meeting or proceeding invalid.35

Tabling of documents Where virtual meeting technology is used in holding a Chapter 2G meeting a document that is required to be tabled at the meeting is taken to have been tabled at the meeting if:

• before the meeting—it is given to the persons entitled to attend the meeting (either physically or by using virtual meeting technology) or

• during the meeting—it is made accessible to the persons attending the meeting (whether physically or using virtual meeting technology).36

Place and time of virtual meetings For a person who is entitled to attend a Chapter 2G meeting physically, the place for the meeting is the place set out in the notice of the meeting—or if there are two or more locations available for attendance—the main location specified in the notice. The time for the meeting is the time at the place for the meeting.37

Where no person is entitled to physically attend the meeting, the place for the meeting is taken to be the address of the registered office of the company or the registered office of the responsible entity for the registered scheme (depending on the nature of the meeting). The time for the meeting is the time at the place for the meeting.38

33. Corporations Act, proposed subsection 253Q(1). 34. Corporations Act, proposed subsection 253Q(2). 35. Corporations Act, proposed subsection 1322(3A) is repealed and replaced by item 33 in Schedule 1 to the Bill. 36. Corporations Act, proposed subsection 253Q(5). 37. Corporations Act, proposed subsection 253QA(2). 38. Corporations Act, proposed subsection 253QA(3).

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Key issue—reasonable opportunity to participate Some submitters to the Economics Committee expressed concern about the explanation of the term reasonable opportunity to participate.39 For instance, the Australian Institute of Company Directors expressed concern about the ‘right to speak’ orally rather than in writing stating:

… facilitating telephone dial-in options that enable participants to speak during a meeting, in addition to webcasting, is less commonly used by organisations and their virtual meeting platform providers. We understand that it is difficult for organisations and platform providers to securely verify the identity of those dialling-in as shareholders seeking to put questions orally to the meeting. By contrast, the ability to submit questions online to the webcast meeting is more securely monitored by the platform provider requiring shareholders to provide a passcode to verify identity. This still allows general access for interested stakeholders (for example, media, employees and other stakeholders) to view the webcast. 40

However, the Australian Council of Superannuation Investors (ACSI) supported the requirement that shareholders be given an opportunity to address the meeting in real time—citing the possible lack of genuine interaction and engagement between shareholders and company representatives in virtual meetings due to:

• company directors being unavailable for questions during meetings

• audio-only format being used, which has not allowed shareholders to observe company representatives address the meeting and answer questions, or to see the reaction of the audience

• meetings that focus solely on the chair of the board with minimal or no opportunity for shareholders to interact with other directors

• companies requiring questions and comments to be submitted in writing ahead of the meeting rather than in real-time

• discussion time being limited and

• companies cherry-picking questions and ignoring follow up comments.41

These amendments and the comments by stakeholders highlight the need for the directors of a company to be accountable to members, and that members must be able to bring the directors to account. Much relies on the adequacy of the technology available to directors and the ability of members to access that technology.

At the time of writing this Bills Digest, only one reporting period has elapsed—that is, 2020. That being the case, it is too soon to judge whether these amendments will have long term negative consequences—although the issues around giving shareholders a reasonable opportunity to participate which have been highlighted by some stakeholders will need to be monitored.

Electronic communication and signatures

Relevant documents Within new Part 2G.5, Division 3 relates to electronic communication and signatures. The documents to which Division 3 applies are:

• any document that is required or permitted to be given to a person (called the recipient) that relates to a Chapter 2G meeting such as:

39. See, for instance, Governance Institute of Australia Ltd (GIA), Submission to the Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 [Provisions], [Submission No. 7], 1 March 2021, p. 2.

40. Australian Institute of Company Directors (AICD), Submission to the Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 [Provisions], [Submission No. 6], 1 March 2021, p. 6. 41. ACSI, Submission, op. cit., p. 3.

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- a request in relation to such a meeting - a notice of the meeting - a notice of a resolution or record of a resolution - a statement about a matter to be considered at the meeting - the appointment of a proxy or any other document in relation to a proxy for the meeting - a question for, or response by, an auditor of the company - minute books • any document that is required or permitted to be given to a recipient relating to a resolution to

be considered without a meeting and

• any document that is required to be signed by a person which relates to a Chapter 2G meeting or a resolution to be considered without a meeting.42

Giving the document Any of the documents listed above may be given to the recipient electronically.43 However, this general rule is limited to circumstances where:

• it is reasonable to expect that the document would be readily accessible so as to be useable for subsequent reference and

• an election by the recipient to receive documents in hard copy only is not in force.44

Election to receive documents in hard copy only Proposed sections 253RB and 253RC of the Corporations Act provide that a person may elect to receive hard copy documents in relation to companies and registered schemes respectively. They are in near equivalent terms. The general rule is:

• a member of a company or a member of a registered scheme may elect to receive documents in hard copy only and

• the election is in force for the period which begins on the day that the person gives notice of the election in writing until the day that the person gives written notice of its withdrawal.45

There are exceptions to the general rule. An election is not in force in either of two circumstances.

The first circumstance is that the document relates to a Chapter 2G meeting and written notice of the election is given on or after the day that is 10 business days immediately before the day on which the minimum notice period for the meeting under section 249H or 249HA begins.46

The second circumstance is that the document relates to a resolution to be considered without a meeting and written notice of the election is given on or after the day the document is given to the member.47

A company and/or the responsible entity for a registered scheme must give a person notice in writing setting out the person’s rights under this section within two months after the day on which the person becomes a member of the company or registered scheme or within two months of

42. Corporations Act, proposed section 253R. 43. Corporations Act, proposed subsections 253RA(1). 44. Corporations Act, proposed subsection 253RA(3). 45. Corporations Act, proposed subsections 253RB(1) and (2); proposed subsections 253RC(1) and (2). 46. Corporations Act, proposed paragraph 253RB(3)(a) (companies); Corporations Act, proposed paragraph 253RC(3)(a)

(registered schemes). Note that for registered schemes the minimum notice period is in section 252F. 47. Corporations Act, proposed paragraph 253RB(3)(b) (companies); Corporations Act, proposed paragraph 253RC(3)(b) (registered schemes).

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Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 12

commencement of the Bill for existing members.48 A failure to comply with that requirement is an offence of strict liability.49 The maximum penalty for the offence is 30 penalty units.50

Key issue—‘opt in’ for hard copy documentation A number of submitters expressed concern about the operation of proposed sections 253RB, 253RC and 1679B. For instance, according to the Governance Institute of Australia:

As currently drafted, this would require companies to contact shareholders to advise of the right to opt to receive hard copy documentation under section 253RB within two months of the commencement day … Given that many shareholders have expressed a preference for digital communications the section would require them to override a shareholder’s previously stated preference. The provisions in the Bill are intended to sunset on 16 September 2021 so that these arrangements are only in force for six months and may be subject to change following further consultation. Requiring companies to take this step within two months when the provisions may only be in place for six months, imposes a significant regulatory and administrative burden.51

The Australasian Investor Relations Association (AIRA) also commented on the operation of these provisions, recommending instead:

… where an email address exists for a shareholder, they be communicated electronically within two months of the day of commencement. Where only a physical address exists for a shareholder, companies and responsible entities of registered schemes should be required to notify these members at the next opportunity that hard copy materials are distributed to shareholders.52

It is unsurprising that there is some resistance from companies and responsible entities given that the amendments in Schedule 1 to the Bill are intended to remain in force only until 16 September 2021. Without knowing what permanent changes might arise from a subsequent Bill yet to be introduced into the Parliament, companies and responsible entities of registered schemes may find themselves having to duplicate this administrative process for the reporting period in 2022 and so might wish to minimise the administrative burden that arises from the ‘opt-in’ provisions in the Bill.

Signing the document The requirement that a document must be signed by a person will be satisfied in relation to the electronic communication of the document, or access to the document electronically if both of the following conditions are met:

• first, a method is used to identify the person and to indicate the person’s intention to sign a copy or counterpart of the document. That method must be as reliable as appropriate for the purpose for which the document was generated or communicated, in light of all the circumstances; or the method has been proven in fact to have fulfilled those purposes53 and

48. Corporations Act, proposed subsection 253RB(4) (companies); Corporations Act, proposed subsection 253RC(4) (registered schemes), proposed section 1679B (notice to existing members after commencement day). 49. Corporations Act, proposed subsection 253RB(7) (companies); Corporations Act, proposed subsection 253RC(7) (registered schemes). The imposition of strict liability means that a fault element does not need to be satisfied, but the offence will not

criminalise honest errors and a person cannot be held liable if he, or she, had an honest and reasonable belief that they were complying with relevant obligations. See sections 6.1 and 9.2 of the Criminal Code Act 1995. 50. Item 35 in Schedule 1 to the Bill amends the table in Schedule 3 to the Corporations Act, which sets out penalty amounts. The value of a penalty unit is currently $222: section 4AA of the Crimes Act 1914 and Notice of Indexation of the Penalty Unit

Amount. This means that the maximum amount of the penalty is $6,660. 51. GIA, Submission, op. cit., pp. 5-6. 52. Australasian Investor Relations Association (AIRA), Submission to the Senate Standing Committee on Economics, Inquiry into

the Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 [Provisions], [Submission No. 26], 3 March 2021, p. 4. 53. Corporations Act, proposed paragraphs 253RD(1)(a) and (c).

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Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 13

• second, the copy or counterpart includes the entire contents of the document—although it need not include the signature of another person signing the document, any material used to identify that person or to indicate the person’s intention with respect to the document’s contents.54

The Australian Securities and Investments Commission (ASIC) must accept a document for lodgement which has been signed in accordance with the above.55

Electronic recording and keeping of minute books The Bill provides that where information is required to be recorded in a minute book, it may be recorded in electronic form if, at the time of the recording of the information, it was reasonable to expect that the information would be readily accessible so as to be useable for subsequent reference.56

The Bill sets out the conditions that must be satisfied for the keeping of a minute book at a place.57

Amendments to Parts 2G.2 and 2G.4 The Bill amends existing provisions in relation to meetings in Parts 2G.2 and 2G.4 so that they are consistent with new Part 2G.5.

Giving notice of meetings Section 249J in Part 2G.2 of the Corporations Act provides for giving notice of a meeting of the company’s members. Items 12 and 13 of Schedule 1 to the Bill amend section 249J so that a company may give the notice of meeting to a member by electronic means in accordance with proposed section 253RA.58

Items 22 and 23 amend section 252G in Part 2G.4 of the Corporations Act in equivalent terms for registered schemes. Importantly, the amendments provide that the notice of meeting is taken to be given:

• if it is sent by post—three days after it is posted

• if it is sent by means of an electronic communication—on the business day after it is sent or

• if it is sent by giving the member sufficient information about how to access the document electronically—on the business day after the day on which the information is sent to the member.59

Contents of notice of meetings Item 14 repeals and replaces paragraph 249(L)(1)(a) of the Corporations Act so that a notice of meeting of a company’s members must set out all of the following:

• if there is only one location at which the members who are entitled to physically attend the meeting may do so—the date, time and place for the meeting

• if there are two or more locations at which the members who are entitled to physically attend the meeting may do so—the date and time for the meeting at each location, and the main location for the meeting and

54. Corporations Act, proposed paragraph 253RD(1)(b) and proposed subsection 253RD(2). 55. Corporations Act, proposed subsection 253RD(3). 56. Corporations Act, proposed subsection 253S(1). 57. Corporations Act, proposed subsection 253S(2). 58. Corporations Act, proposed paragraphs 249J(3)(c) and 249J(4)(b), inserted by items 12 and 13 in Schedule 1 to the Bill. 59. Corporations Act, proposed subsections 249J(4) (Part 2G.2) and 252G(4) (Part 2G.4).

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Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 14

• if virtual meeting technology is to be used in holding the meeting—sufficient information to allow the members to participate in the meeting by means of the technology.

Item 24 in Schedule 1 to the Bill makes equivalent amendments to section 252J in Part 2G.4 of the Corporations Act.60

Accessibility of meetings Item 15 repeals and replaces section 249R of the Corporations Act. Proposed section 249R extends the requirements for the time and place of a meeting of a company’s members. In particular:

• the meeting must be held at a reasonable time—taking into account whether the meeting is held in a single location, multiple locations or using virtual meeting technology61

• for those who are entitled to attend in person—at a reasonable location62 and

• where virtual meeting technology is used, the meeting is in accordance with proposed section 253Q.63

Item 26 in Schedule 1 to the Bill makes equivalent amendments to section 252P in Part 2G.4 of the Corporations Act.64

Quorum Section 249T in Part 2G.2 of the Corporations Act sets out the rules for determining whether there is a quorum for a meeting of a company’s members.

Item 17 in Schedule 1 to the Bill repeals existing subsection 249T(3) and inserts proposed subsections 249T(3), (3A) and (3B). Under those sections:

• a meeting that does not have a quorum present within 30 minutes after the time for the meeting set out in the notice of meeting is adjourned to a meeting (the resumed meeting) at a later time65 and

• the directors may specify the date and time of the resumed meeting; its location or locations and whether virtual meeting technology is to be used.66

If one or more of those matters is not specified, the Bill sets out rules which deem when and where the resumed meeting will occur.67

Item 28 in Schedule 1 to the Bill makes equivalent amendments in relation to the meeting of the members of a registered schemed in section 252R in Part 2G.4 of the Corporations Act.

Proxies Section 250B of the Corporations Act sets out the documents to be received by a company before a meeting of its members. In particular, it allows for the appointment of a proxy.68

60. Corporations Act, proposed paragraphs 252J(a) and (e). 61. Corporations Act, proposed paragraph 249R(1)(a), and proposed subsection 249R(2). 62. Corporations Act, proposed paragraph 249R(1)(b). 63. Corporations Act, proposed paragraph 249R(1)(c). 64. Corporations Act, proposed section 252P. 65. Corporations Act, proposed subsection 249T(3). 66. Corporations Act, proposed subsection 249T(3A). 67. Corporations Act, proposed subsection 249T(3B). 68. A proxy is a person with authority to vote at a company general meeting or class meetings in the interest of the person who

appoints the proxy. Source: Butterworths concise Australian legal dictionary, 3rd edn, LexisNexis Butterworths, Australia, 2004, p. 315.

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Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 15

Item 18 in Schedule 1 to the Bill repeals and replaces subsection 250B(3) so that a company receives a document appointing a proxy if the document is given by means of an electronic communication when the document is received by the company.69 Otherwise the document is deemed to have been received when it is received at the company’s registered office or a place specified for the purpose in the notice of meeting.70

Item 19 in Schedule 1 to the Bill amends section 250BA to allow for the receipt of proxy appointments electronically in relation to a notice of meeting for the members of a listed company. There is no equivalent provision in relation to the notice of meeting of members of a registered scheme.

Voting—company members Currently, subsection 250J(1) of the Corporations Act provides that a resolution put to the vote at a meeting of a company’s members must be decided on a show of hands unless a poll is demanded.

Item 21 in Schedule 1 to the Bill repeals and replaces subsection 250J(1) so that a resolution put to the vote at a meeting of a company’s members must not be decided by a show of hands but on a poll if virtual meeting technology is used in holding the meeting or if a poll is demanded.

Item 20 repeals and replaces paragraph 250BB(1)(b) of the Corporations Act so that an appointment of a proxy may specify the way the proxy is to vote on a particular resolution. If it does and the proxy has two or more appointments that specify different ways to vote on the resolution—the proxy must only vote on a poll.

Voting—members of a registered scheme Section 253J in Part 2G.4 of the Corporations Act sets out the method for voting at a meeting of members of a registered scheme. Existing subsection 253J(1) requires that a special or extraordinary resolution put to the vote must be decided on a poll.

Item 30 in Schedule 1 to the Bill repeals and replaces subsection 253J(2) so that any other resolution put to the vote at a meeting of the registered scheme’s members must be decided:

• on a poll—either where virtual meeting technology is used and the scheme’s constitution does not provide otherwise or where a poll is demanded or

• otherwise—on a show of hands.

The resolution is passed on a poll if it has been passed by at least 50 per cent of the votes cast by members entitled to vote on the resolution.

Exercise of company powers Items 1-30 of the Bill amend the Corporations Act to create additional powers—separate from those in Part 2G.5—to allow companies to execute documents electronically.71

69. The note which is inserted by item 18 states that if the document is given by means of an electronic communication, it is received by the company when it becomes capable of being retrieved by the company at an electronic address nominated by the company.

70. Item 29 in Schedule 1 to the Bill makes equivalent amendments to section 252Z in Part 2G.4 of the Corporations Act. 71. Explanatory Memorandum, Treasury Laws Amendment (2021 Measures No. 1) Bill 2021, p. 9.

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Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 16

Executing company documents Currently section 127 of the Corporations Act provides for the execution of documents including deeds by the company.72 The section is contained in Chapter 2B of the Corporations Act and relates to the execution of documents by the company itself.

Items 1, 2, 4 and 7 in Schedule 1 to the Bill insert new headings into section 127 to make clear:

• the rules that apply to the execution of a document without a common seal73

• the rules about the execution of a document with a common seal74

• the rules that apply when executing a document as a deed75 and

• that the other ways of executing documents are not limited.76

The amendments to section 127 are in similar—but not equivalent terms—to those in new Part 2G.5 of the Corporations Act which relates only to the documents under Chapter 2G.

In particular, item 6 in Schedule 1 to the Bill inserts proposed subsections 127(3A)-(3C). First, a document is taken to have been signed by a person if:

• the person signs a copy or counterpart of the document that is in a physical form and

• the copy or counterpart includes the entire contents of the document.

Second a document is taken to have been signed by a person if all of the following are satisfied for an electronic copy or counterpart:

• a method is used to identify the person and to indicate the person’s intention to sign a copy or counterpart of the document

• the copy or counterpart includes the entire contents of the document and

• the method used was either as reliable as appropriate for the purpose for which the document was generated or communicated, in light of all the circumstances, including any relevant agreement, or the method has been proven in fact to have proved an intention to sign.

Third a copy or counterpart of a document need not include any of the following:

• the signature of another person signing the document

• any material included in the document to identify another person signing the document or to indicate another person’s intention in respect of the contents of the document or

• if a common seal is fixed to the document—the seal.

Key issue—requirement for entire document According to the Explanatory Memorandum to the Bill:

The copy or counterpart must include the entire contents of the document. This does not mean that the person needs to physically print or sign every page. Rather it ensures that a document cannot be validly executed by signing a document that does not have the same content as the original document. It simply reflects the common law position that the signatories must agree to the same terms.77

72. A deed is an instrument that has been signed, sealed and delivered that passes an interest, right, or property, creates an obligation binding on some person, or is an affirmation or confirmation of something that passes an interest, right or property. Source: Butterworths concise Australian legal dictionary, 3rd edn, LexisNexis Butterworths, Australia, 2004, p. 116.

73. Corporations Act, subsection 127(1). 74. Corporations Act, subsection 127(2). 75. Corporations Act, subsection 127(3). 76. Corporations Act, subsection 127(4). 77. Explanatory Memorandum, Treasury Laws Amendment (2021 Measures No. 1) Bill 2021, p. 10.

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Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 17

However, Allens Linklaters argues that the plain wording of the section is inconsistent with that interpretation because paragraph 127(3A)(a) requires a copy or counterpart to be in physical form and paragraph 127(3A)(b) requires the physical copy or a counterpart to contain the entire document.78 Whilst the amendments would allow split execution of a document, they would also require the signor to print out the entire document—which may amount to ‘well over 1,000 pages’.79

Executing a document as a deed Item 3 inserts proposed subsection 127(2A) into the Corporations Act which allows for a witness to observe the affixing of the common seal by electronic means. In that case, the witness must sign the document.

As noted above, item 6 inserts proposed subsections 127(3A)-(3C) into the Corporations Act which set out the circumstances in which a person is taken to sign a document, such as a deed, by signing a copy of counterpart or the document.

Stakeholder comment Overall, business groups have expressed their support for use of electronic technology on the grounds that it provides ‘much needed flexibility’.80

For instance, the Australian Industry Group (Ai Group) described the amendments as ‘sensible and practical changes that will assist in permitting efficiencies to be realised from widely-available digital technologies’.81

Financial implications According to the Explanatory Memorandum to the Bill the measures in Schedule 1 will have ‘nil’ financial impact.82

Key issues and provisions—Schedule 2 Quick guide to Schedule 2 Schedule 2 to the Bill amends the ASIC Act and the Corporations Act to: • permanently add a fault element to continuous disclosure civil penalty provisions, so that a

person will only be eligible for a civil penalty where they have acted with knowledge, recklessness or negligence in failing to update the market with price sensitive information • impose the same fault standard for misleading and deceptive conduct that relates to alleged failure to provide an update with price sensitive information to the market • retain the existing standard for administrative penalties, so ASIC can continue to issue

infringement notices without proving knowledge, recklessness or negligence. The existing standard is also retained for ASIC’s other non-pecuniary enforcement tools, such as requiring the disclosure of information to the market by obtaining a court order.

78. Allens Linklaters, Submission to the Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 [Provisions], [Submission No. 12], 1 March 2021, p. 2. 79. Ibid. 80. AIRA, Submission to the Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (2021

Measures No. 1) Bill 2021 [Provisions], [Submission No. 26], 3 March 2021. 81. Australian Industry Group (Ai Group), Submission to the Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 [Provisions], [Submission No. 5], 1 March 2021, p. 1. 82. Explanatory Memorandum, Treasury Laws Amendment (2021 Measures No. 1) Bill 2021, p. 3.

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Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 18

Corporations determinations As stated above, section 1362A of the Corporations Act provides that the Minister may, by legislative instrument, modify provisions of the Act or Regulations in relation to specified classes of persons.

The Treasurer made the Corporations (Coronavirus Economic Response) Determination (No. 2) 2020 (Determination No. 2) commencing on 26 May 2020 (the day after registration). It was due to automatically repeal at the end of the period of six months beginning on the day after it was made. Determination No. 2 was repealed by the Corporations (Corporations Economic Response Determination (No. 4) 2020 (Determination No. 4) which commenced on 24 September 2020 and self-repealed on 22 March 2021.

Current state of the law The continuous disclosure obligations in Chapter 6CA of the Corporations Act 2001 (sections 674-678) require:

• if the entity is a listed entity, then the relevant disclosures are made to the market operator.83 Under section 674 of the Corporations Act and listing rule 3.1 of the ASX Listing Rules, a listed entity has been required to immediately notify the ASX of any information that a reasonable person would expect to have a material effect on the price or value of the entity’s securities once it became aware of that information (that is, market-sensitive information)84

• if the entity is an unlisted disclosing entity it must lodge the relevant information with the Australian Securities and Investments Commission (ASIC).85

Specifically, subsection 674(2) of the Corporations Act provides that if a listed disclosing entity has information that is required to be notified, the information is not generally available86 and a reasonable person would expect, if the information were generally available, it would have a material effect on the price or value of enhanced disclosure securities (ED securities)87 of the entity,88 then the entity must notify the market operator of the information. Section 677 of the Corporations Act sets out when a reasonable person would be taken to expect information to have a material effect on the price or value of securities of a disclosing entity. Subsection 674(2) is a civil penalty provision.89 No fault element is required to be proved for the civil penalty. Subsection 674(2) is also a criminal offence provision.

The provisions are categorised as financial services civil penalty provisions under subsection 1317E(3) of the Corporations Act and that being the case, a court may make a compensation order under section 1317HA for a contravention.90

83. Corporations Act, section 674. 84. International Corporate Governance Network (ICGN), Submission to the Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 [Provisions], [Submission No. 20], 3 March 2021, p. 4. 85. Corporations Act, section 675. 86. Corporations Act, section 676 sets out the circumstances where information is generally available. 87. Corporations Act, section 111AD defines ED securities. Essentially, they are those securities which are subject to the ASX

listing rules. 88. Corporations Act, section 677 sets out the circumstances in which information will or is likely to have a material effect on price or value. 89. The other civil penalty provisions in Chapter 6CA are subsection 674(2A), subsection 675(2) (also a criminal penalty provision)

and subsection 675(2A). 90. ASIC may apply for a declaration of contravention, a pecuniary penalty order or a compensation order: Corporations Act, section 1317J. A civil penalty is an amount owing to the Commonwealth and payable to ASIC on the Commonwealth’s behalf:

Corporations Act, subsection 1317GAA(1); it is treated as a civil judgment debt: Corporations Act subsection 1317GAA(2).

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Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 19

Effect of Determination No. 4 Determination No. 4 modified the operation of the civil penalty provisions in Chapter 6CA. It established a temporary test based on a disclosing entity or an involved person’s knowledge, recklessness or negligence with respect to whether certain information would have a material effect on the price or value of its ED securities and therefore should be disclosed under section 674 or 675 of the Corporations Act.91

The Determination also modified section 677 of the Corporations Act to remove the objective reasonable person test. It was replaced by a test that considers the subjective state of mind of the entity. Under the temporary test:

• an entity knows or is reckless or negligent as to whether the information will have a material effect on the price or value of the entity’s ED securities only if

• the entity knows or is reckless or negligent as to whether the information would or would be likely to influence a person who commonly invests in securities to acquire or dispose of the ED securities.92

Clause 9 of the Determination specified that in modified subsections 674(2) and 675(2), and modified section 677, knowledge and recklessness have the same meaning as in the Criminal Code.93

Relevant reports There are two reports which have a bearing on the amendments in Schedule 2 to the Bill:

• the 2018 report by the Australian Law Reform Commission (ALRC) on class action proceedings and third-party litigation funders94 and

• the 2020 report of the Parliamentary Joint Committee on Corporations and Financial Services (Parliamentary Joint Committee)95 on litigation funding and the regulation of the class action industry.96

ALRC report The ALRC described the relevance and importance of continuous disclosure as follows:

Continuous disclosure obligations are based on the efficient market hypothesis that current share prices should reflect all available information. The disclosure of information by companies is a crucial initial step in the process of price formation, whereby market participants rely on available information to evaluate securities and make investment decisions. Continuous disclosure regimes regulate how and what information is to be disclosed to the market and impose sanctions for non-compliance. The objectives of such regimes may be expressed as market integrity and investor protection. They assist in preventing market manipulation and insider trading.97 [emphasis added]

The ALRC noted that when the continuous disclosure provisions were first proposed it was not recommended that shareholders be given the right to sue the company for contraventions of

91. Explanatory Statement, Corporations (Coronavirus Economic Response) Determination (No. 4) 2020. 92. Ibid. 93. Criminal Code Act 1995 (Criminal Code), sections 5.3 and 5.4. 94. Australian Law Reform Commission (ALRC), Integrity, fairness and efficiency—an inquiry into class action proceedings and

third-party litigation funders, report, 134, ALRC, Brisbane, December 2018. 95. The terms of reference for the inquiry, submissions to the Parliamentary Joint Committee on Corporations and Financial Services and the Committee’s final report are available on the inquiry homepage. 96. Parliamentary Joint Committee on Corporations and Financial Services (PJCCFS), Litigation funding and the regulation of the

class action industry, PJCCFS, Canberra, December 2020. 97. ALRC, Integrity, fairness and efficiency, op. cit., p. 259.

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Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 20

them.98 Instead this was seen to be the responsibility of the directors of the disclosing entity rather than the entity itself. Nevertheless, the ALRC recognised that there had been a number of trends arising from the operation of the continuous disclosure regime being:

• a greater propensity for Australian corporate entities, as compared with those in cognate jurisdictions, to be the target of funded shareholder class actions

• a diminution in the value of the investments of those shareholders (including the investments of the class members themselves) of the company at the time the company is the subject of the class action and

• the impact on the availability of directors and officers insurance (D&O insurance) within the Australian market.99

The ALRC recommended that the Australian Government commission a review of the legal and economic impact of the operation, enforcement, and effects of continuous disclosure obligations and those relating to misleading and deceptive conduct contained in the Corporations Act and the Australian Securities and Investments Commission Act 2001.100

Parliamentary Joint Committee report The Parliamentary Joint Committee conducted a lengthy inquiry into litigation funding and the regulation of the class action industry in 2020. It recommended, amongst other things, that the Australian Government permanently legislate those changes to continuous disclosure laws that were contained in Determination No. 2.101

In making the recommendation, the Joint Committee stated:

Claims for a breach of continuous disclosure laws underpin many shareholder class actions. Shareholder class actions are generally economically inefficient and not in the public interest. Even successful actions amount to shareholders effectively suing themselves and in net terms being no better off. Evidence to the committee focused on the ease with which shareholder class actions may be triggered by an alleged breach of Australia's continuous disclosure provisions. Reform is required to continuous disclosure laws given the increasing prevalence of this type of shareholder class action.

Temporary amendments were made to continuous disclosure laws in 2020 to raise the bar for establishing a breach, both for private and regulator action. The committee recommends these temporary arrangements be made permanent.102 [emphasis added]

Essentially then, these reports highlight a tension between companies and their shareholders. On the one hand, companies are concerned that the continuous disclosure rules are being misused by activist shareholders who engage in class actions which significantly affect listed entities, their boards and their insurers. On the other hand, shareholders rely on the continuous disclosure rules to ensure market integrity. They would argue that the problem is not shareholder class actions but incidents of corporate misconduct.

What the Bill does The amendments in Schedule 2 of the Bill go further than Determination No. 2 or Determination No. 4.

98. Ibid., p. 262. 99. Ibid., p. 263. 100. Ibid., recommendation 24, p. 259. 101. Parliamentary Joint Committee on Corporations and Financial Services, Litigation funding and the regulation of the class

action industry, op. cit., recommendation 29, p. xxxi. 102. Ibid., p. xx.

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Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 21

Criminal penalties are unchanged The Bill provides that subsections 674(2) and 675(2) of the Corporations Act, which set out the continuous disclosure obligations on entities, are no longer civil penalty provisions.103 The civil penalties for a person who is involved in a contravention of 674(2) or 675(2) are also removed.104

A contravention of 674(2) or 675(2) remains a criminal offence and there is no change to the maximum penalty applicable. These provisions also remain subject to an infringement notice.

Amendments to civil penalties—entities New civil penalty provisions are inserted by proposed sections 674A and 675A.105 Mirroring sections 674 and 675, the proposed provisions apply to listed entities and unlisted entities respectively.

Proposed subsections 674A(2) and 675A(2) require an entity to make a disclosure if it has information that is not generally available and the entity knows, or is reckless or negligent with respect to whether, the information would, if it were generally available, have a material effect on the price or value of securities of the entity. The subsections will be financial services civil penalty provisions.106

A person who suffers damage from a contravention of the requirement can apply to a court for compensation under section 1317HA of the Corporations Act. However, unlike the current law, the amendments will require a fault element of knowledge, recklessness or negligence to be demonstrated to establish a contravention—and with it, eligibility for compensation. As with the current civil penalty provision, a person may be relieved from liability (including in proceedings under section 1317HA) if the court considers that the person has acted honestly and, having regard to all the circumstances of the case, the person ought fairly to be excused for the contravention.107

Amendments to civil penalties—persons Reflecting current subsections 674(2A) and 675(2A) a person who is involved in an entity’s contravention of the continuous disclosure obligation in proposed subsections 674A(2) or 675A(2) of the Corporations Act will be liable for a civil penalty.108 This can be the basis of a court action under section 1317HA.109

Proposed subsections 674A(4) and 675A(4) provide that a person does not contravene proposed subsections 674A(3) or 675A(3) of the Corporations Act if they prove that they took all reasonable steps to ensure the entity complied with its continuous disclosure obligations and, after doing so, believed on reasonable grounds that the listed disclosing entity was complying.

Proposed subsections 674A(7) and 675A(6) put beyond doubt that section 1317QB (which provides that it is not necessary to prove a person’s state of mind in order for a declaration of a

103. Corporations Act, amended by items 4, 11 and 22 in Schedule 2 to the Bill. 104. Corporations Act, amended by items 5 and 12 in Schedule 2 to the Bill. 105. Corporations Act, amended by items 7 and 13 in Schedule 2 to the Bill. 106. Corporations Act, amended by item 22 in Schedule 2 to the Bill. 107. Corporations Act, section 1317S which is not amended by the Bill. 108. Corporations Act, proposed subsections 674A(3) and 675A(3) inserted by items 7 and 13 in Schedule 2 to the Bill. 109. Corporations Act, section 1317S can relieve a person wholly or partly from liability if the requirements of that provision are

met.

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Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 22

contravention of a civil penalty provision) does not apply to the civil penalty provisions in proposed sections 674A and 675A.110

Conduct element The Bill also amends section 677 of the Corporations Act which sets out when a reasonable person would be taken to expect information to have a material effect on the price or value of securities of a disclosing entity. For the purposes of proposed sections 674A and 675:

• an entity knows information would have a material effect on the price or value of ED securities of the entity if the entity knows the information would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of the ED securities and

• an entity is reckless or negligent with respect to whether information would have a material effect on the price or value of ED securities of the entity if the entity is reckless or negligent with respect to whether the information would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of the ED securities.111

Stakeholder comments Some stakeholders strongly approve of the introduction of a conduct element for a civil penalty provision. For instance, the Australian Institute of Company Directors stated:

It is incongruous that, until the recent temporary amendments to the Corporations Act which reintroduce a fault element to the continuous disclosure rules, directors and companies could be held liable without even negligence being established.112

The Business Council of Australia is also in favour of the amendment.113 It noted that the introduction of a fault-based element will return the relevant test to that which applied prior to amendments to the Corporations Act that were made in 2001.114

Other stakeholders took the view that making the changes to officer liability permanent (rather than temporary as was the case in the early stages of COVID 19:

… will return the market an unlevel playing field, where shareholders have no opportunity to hold company officers to account for lack of appropriate disclosures or to seek redress for the losses to shareholders that flow from those deficiencies.115

The Australian Securities and Investments Commission (ASIC) also sounded a note of caution stating:

110. Explanatory Memorandum, Treasury Laws Amendment (2021 Measures No. 1) Bill 2021, p. 30. 111. Corporations Act, proposed paragraphs 677(2)(a) and (b) inserted by item 18 in Schedule 2 to the Bill. 112. AICD, Submission, op. cit., p. 2; Governance Institute of Australia Ltd (GIA), Submission to the Senate Standing Committee on Economics (second referral), Inquiry into the Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 [Provisions],

[Submission No. 9], 28 May 2021, p. 9. 113. Business Council of Australia (BCA), Submission to the Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 [Provisions], [Submission No. 13], March 2021, p. 4. 114. Ibid., p. 5. The continuous disclosure provisions were inserted into the Corporations Law by the Corporate Law Reform Act

1994 (see sections 1001A and 1001B, inserted by item 92 of Schedule 1 to the Corporate Law Reform Act 1994). The continuous disclosure provisions which had existed in the Corporations Law were re-enacted (without change) in Part 7.11 of the Corporations Act 2001. The relevant amendments to the Corporations Act that removed the fault element were made by the Financial Services Reform Act 2001 which repealed Chapter 7 of the Corporations Act and inserted new Chapter 6CA dealing with continuous disclosure. 115. Australian Shareholders Association (ASA), Submission to the Senate Standing Committee on Economics (second referral),

Inquiry into the Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 [Provisions], [Submission No. 6], 27 May 2021, p. 2.

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Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 23

Australia’s continuous disclosure obligations and misleading and deceptive conduct provisions are critical to protect market integrity and maintain the good reputation of Australia’s financial markets. Confidence in the integrity of Australia’s equity markets:

(a) encourages investor participation;

(b) contributes to liquidity;

(c) stimulates more competitive pricing; and

(d) lowers the cost of capital.

Markets cannot operate with a high degree of integrity unless the information critical to investment decisions is available and accessible to investors on an equal and timely basis. That is why market cleanliness and continuous disclosure are essential to investor confidence. Price discovery in a clean market is efficient. Asset prices react immediately after new information is released through appropriate channels and thereby more closely reflect underlying economic value.116 [emphasis added]

The Law Council of Australia is concerned that the amendments require:

… the entity to be negligent which introduces a mental element to the continuous disclosure regime. A company will be vicariously liable for the negligent acts of its employees or agents but the attribution of a state of mind to a corporation is often limited to its Board and senior executives. Boards and senior executives will be able to say they were not negligent with respect to the information that should have been disclosed if they did not have it, whether or not they ought to have had it, thereby limiting accountability even further.117 [emphasis added]

Maurice Blackburn Lawyers also expressed concern about the requirement that the entity (rather than a person) is negligent stating:

… the proposed legislation encourages the “I know nothing” defence. This will potentially impact in cases of serious misconduct at lower levels of the company which for whatever reasons have not come to the attention of the board. Situations like the recent events at Crown or the AMP Fee for No Service debacle show the serious danger of a disclosure regime which relies on boards actually having the information they should.118

Misleading and deceptive conduct Neither Determination No. 2 nor Determination No. 4 acted to amend the operation of the misleading and deceptive conduct provisions in the Corporations Act and the ASIC Act. The Bill takes the additional step of doing so.

The Bill amends both the ASIC Act and the Corporations Act so that entities and officers are not liable for misleading and deceptive conduct in circumstances where the continuous disclosure obligations have been contravened—unless the requisite mental element has been proven.

Current law—Corporations Act Currently subsection 1041H(1) of the Corporations Act provides that a person must not engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or

116. Australian Securities and Investments Commission (ASIC), Submission to the Senate Standing Committee on Economics (second referral), Inquiry into the Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 [Provisions], [Submission No. 14], June 2021, p. 19.

117. Law Council of Australia (LCA), Submission to the Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 [Provisions], [Submission No. 21], 3 March 2021, p. 24. 118. Maurice Blackburn Lawyers, Submission to the Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 [Provisions], [Submission No. 11], 1 March 2021, p. 7.

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Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 24

is likely to mislead or deceive. Notes to the subsection make clear that a failure to comply with this subsection is not an offence. However, a failure to comply may lead to civil liability under section 1041I.

Accordingly, section 1041H is not an offence or a civil penalty provision, but can give rise to civil liability under section 1041I, which allows a person who has suffered loss or damage due to a contravention of section 1041H (among other provisions) to recover damages against a person who contravened, or was involved in a contravention of that section.

Subsection 1041H(3) of the Corporations Act contains a ‘carve out’ that specifies that conduct that contravenes certain provisions of the Corporations Act does not contravene subsection 1041H(1) (and therefore does not allow recovery of amounts of loss or damage caused by that conduct).

What the Bill does Item 21 of Schedule 2 to the Bill inserts proposed subsections 1041H(4) and (5) into the Corporations Act. The effect of the amendments made by item 21 is that a person will need to establish the contravention of the relevant new continuous disclosure civil penalty provision, including the fault element of knowledge, recklessness, or negligence, in order to establish that the disclosing entity has contravened the prohibition against misleading and deceptive conduct established by subsection 1041H(1).119

Current law—ASIC Act Currently, subsection 12DA(1) of the ASIC Act provides that a person must not, in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or is likely to mislead or deceive. In this context the term financial services is defined at section 12BAB of the ASIC Act so that (broadly) a person provides a financial service if they:

• provide financial product120 advice121

• deal in a financial product

• make a market for a financial product

• operate a registered scheme

• provide a custodial or depository service

• provide a superannuation trustee service

• operate a financial market or clearing and settlement facility

• provide a service that is otherwise supplied in relation to a financial product or

• engage in conduct of a kind prescribed in Regulations.

Section 12GF of the ASIC Act allows a person who has suffered loss or damage due to a contravention of section 12DA (among other provisions) to recover damages against a person who contravened, or was involved in a contravention, of that section.

What the Bill does Item 1 of Schedule 2 to the Bill inserts proposed subsections 12DA(3) and (4) into the ASIC Act.

119. Explanatory memorandum, Treasury Laws Amendment (2021 Measures No. 1) Bill 2021, p. 31. 120. ASIC Act, section 12BAA provides that a financial product is a facility through which, or through the acquisition of which, a person does one or more of the following: (a) makes a financial investment; (b) manages financial risk; (c) makes non-cash payments.

121. ASIC Act, subsection 12BAB(5) provides that financial product advice in this section means (broadly) a recommendation or a statement of opinion, or a report of either of those things, that: is intended to influence a person in making a decision in relation to financial products; or could reasonably be regarded as being intended to have such an influence.

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Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 25

The effect of the provisions is to limit the circumstances in which proceedings seeking compensation for loss or damage as a result of a contravention of section 12DA can be brought in connection with alleged continuous disclosure contraventions, in the same terms as for section 1041H(1) of the Corporations Act.

Stakeholder comments Some stakeholders have expressed their views about the amendments from the perspective of the benefits that they will create. For instance, PricewaterhouseCoopers states:

We believe the current class action environment has the potential to impact adversely upon Australian capital markets as it could be seen as being a disincentive for well credentialled non-executive directors to accept appointments on public company boards, and potentially a disincentive for accounting professionals to become registered company auditors.122

On the other hand, some stakeholders believe that the amendments should not proceed on the grounds that no economic justification for the changes has been provided. For instance, Omni Bridgeway had this to say:

It is widely recognised that that the continuous disclosure obligations and misleading or deceptive conduct provisions play an essential role in the ongoing success of Australia’s financial markets and, therefore, the broader Australian economy. These obligations protect investors and are fundamental to the perception of Australia’s financial markets as efficient, fair, and exhibiting the highest integrity…

In our view, reform to the existing continuous disclosure and misleading or deceptive conduct provisions should only be considered if it can be established there is substantial, clearly demonstrated benefit that exceeds the actual or potential cost of diluting the efficiency and integrity of Australia’s financial markets.123

Others, such as the Australian Council of Superannuation Investors, have expressed their concern that the amendments to the continuous disclosure obligations and misleading and deceptive conduct laws are ‘an inappropriate answer to the challenges within the class action framework canvassed by the ALRC’.124

Financial implications According to the Explanatory Memorandum to the Bill the measures in Schedule 2 will have ‘nil’ financial impact.125

However, it is estimated that the measures will generate $912.5 million in regulatory savings per annum for business.126

Concluding comments The amendments contained in both of the Schedules to the Bill identify tensions between corporate entities and their members.

For the Schedule 1 amendments, the tension is about the accountability of the directors of a company to its members which is addressed in part by the requirement for an annual general

122. PricewaterhouseCoopers, Submission to the Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 [Provisions], [Submission No. 9], 1 March 2021, p. 2. 123. Omni Bridgeway, Submission to the Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 [Provisions], [Submission No. 17], 1 March 2021, p. 2. 124. ACSI, Submission, op. cit., p. 4. 125. Explanatory Memorandum, Treasury Laws Amendment (2021 Measures No. 1) Bill 2021, p. 4. 126. Ibid.

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Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 26

meeting. Schedule 1 provides for virtual general meetings (as well as the electronic execution of company documents). Whilst the move to virtual general meetings has been generally welcomed there remains for some the question of whether shareholders will be afforded sufficient opportunity to voice their concerns about the management of the entity.

For the Schedule 2 amendments, the tension is between the obligations of companies and registered entities to formally disclose information which may affect the price of their shares and the shareholders who rely on those disclosures.

The amendments insert a ‘conduct element’ into civil liability provisions which is novel for the Corporations Act. Views of stakeholders are mixed. Nowhere is this more evident than in the submission of the Law Council of Australia. On the one hand the Corporations Committee of the LCA suggests:

… these reforms will not lead to a lower standard of conduct, more limited disclosure or an inability to successfully prosecute cases of significant concern. However, the Corporations Committee suggests that these reforms may redress the technical imbalance in continuous disclosure laws that has contributed to inflated insurance.127

On the other hand, the Class Actions Committee of the LCA is of the view that the Bill’s impact on the continuous disclosure regime and the prohibitions on misleading and deceptive conduct ‘will dampen the ability of the regulators and of shareholders to enforce corporate accountability for wrongdoing’.128

However, it is worth noting that upon further consideration of the Bill by the Economics Committee in the light of evidence it obtained from additional submissions and during public hearings, it formed the view that the amendments in Schedule 2 to the Bill should not be passed.

127. LCA, Submission, op. cit., p. 23. 128. Ibid., p. 24.

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Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 27

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