Contributed by: Kirsten Massey, David Raudkivi and Marika Eastwick-Field
Published on: June 19, 2020
Following recent changes in Australia, the FMA has considered the need for regulatory relief in relation to director liability thresholds in the COVID-19 environment. It has announced this week that it does not consider that change is required here in New Zealand - see the FMA's announcement here.
Last month the Australian government implemented changes to modify temporarily the test for assessing the materiality of information to be disclosed to the market. The amendments replace the objective 'reasonable person' test with a subjective test of what the company actually 'knows or is reckless or negligent' with respect to whether information will have a material effect on price.
The stated purpose of the amendments is to enable companies and their directors to more confidently provide guidance to the market in circumstances where the impact and uncertainty created by the COVID-19 crisis has made it considerably more difficult for companies to provide reliable forward-looking guidance.
The amendments are also expressly intended to make it harder to bring opportunistic class actions for potential breaches of continuous disclosure obligations. The threat of such actions was perceived to make it more likely that companies might hold back from providing forward-looking guidance and that therefore these amendments were needed to allow the market to continue to stay informed and to function effectively.
The FMA noted the Australian changes and the reasons for them, but said its view was that New Zealand's current legislation and the application of it remain appropriate in the COVID-19 environment and already afforded listed companies and their directors with sufficient protection to encourage disclosure.
The FMA also noted that:
There was very little evidence in New Zealand of an opportunistic class action culture developing in relation to director liability, but that it would keep the position under review.
It intends to consult with MBIE and other stakeholders on the appropriate steps to reduce the risk of speculative class actions proliferating, but recognised the crucial part that private class actions play in addressing defective corporate disclosure and that litigation funding can be important in enabling investors to bring such actions.
In assessing regulatory action for possible breaches of continuous disclosure obligations, the FMA is mindful not to apply hindsight and that, where an issuer and its directors can show evidence they exercised appropriate due diligence and acted reasonably on information available at the time, the FMA is unlikely to pursue a continuous disclosure breach.
It urged issuers to be brave in their disclosure decisions, and be willing to confront material uncertainties in their financial statements and forward-looking information.
So, two very different responses to the issues faced by listed companies and their directors in the current environment, with the FMA's decision seemingly in large part based on the relative lack of class action activity here compared with Australia. However, it has said it will keep the position under review and there is a possibility of the FMA stepping in should there be a rapid increase in class actions here in New Zealand.
Partner, Corporate Advisory