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