Investor protection has been an ideal in corporate and securities law ever since the early 20th century, when Berle and Means famously highlighted shareholder vulnerability in modern public corporations. In more recent times, investor protection has been treated as a litmus test for the quality of a jurisdiction’s corporate governance, and as having a direct link to capital market structure. Corporate governance employs an array of regulatory strategies to address the issue of investor vulnerability. Although some of these strategies focus on shareholder protection, others focus on encouraging greater investor participation as a self-help mechanism. Disclosure is an important regulatory technique from both these perspectives. However, enforcement is critical to its effectiveness.
Our recent Working Paper examines the adequacy of Australian law in protecting public company investors in a particular situation – namely, when they rely to their detriment on inadequate, false or misleading information released by the company. As our paper shows, although investors in these circumstances are in theory protected by the continuous disclosure regime and by the misleading or deceptive conduct provisions of the Australian Corporations Act 2001, the existence of certain carve-out provisions can limit the scope and effectiveness of that protection in practice.
Our paper sets the scene by analysing the regulatory backdrop to Australian corporate and securities law from a comparative perspective. Australia operates under a ‘twin peaks’ model of regulation. Under this model, the Australian Prudential Regulation Authority (‘APRA’) supervises deposit-taking, general insurance, life insurance and superannuation institutions, and the Australian Securities and Investments Commission (ASIC) supervises business conduct and consumer protection. In the aftermath of the global financial crisis, this ‘twin peaks’ regulatory model received considerable attention (and was adopted by some jurisdictions), given that Australia fared relatively well during the crisis. Although Australia’s corporate and financial services regulatory structure shares many features with other common law jurisdictions, including the United States, there are interesting structural differences, which we outline and discuss in our paper.
First, we investigate the current contours of Australia’s capital markets. These markets are highly developed. For example, companies listed on the Australian Securities Exchange (ASX) have a combined market capitalization of A$1.5 trillion, and the financial sector is the largest contributor to the national output. By international standards, Australia also has high levels of capital market investment, partly driven by its distinctive system of retirement funding or ‘superannuation’.
We then examine ASIC’s regulatory role and powers in detail. As we note, ASIC has a far broader remit than most comparable international regulators; indeed, some of its regulatory responsibilities have been described as ‘unique’. ASIC plays a particularly important role in relation to the ‘civil penalty regime’ under the Corporations Act 2001. This is because ASIC is the primary enforcer of contraventions of civil penalty provisions, which include statutory directors’ duties, continuous disclosure requirements, and market misconduct offences, such as market manipulation and insider trading.
Against this broad regulatory backdrop, we consider the specific legal framework under the civil penalty regime, which protects investors that have suffered loss as a result of inadequate, false or misleading corporate information. The paper examines Australia’s continuous disclosure regime, and the consequences of breach of this regime for the company, as well as its directors and officers. The continuous disclosure regime, which dates from the mid-1990s and is based on a ‘fairness’ rationale, is designed to ensure that public company investors are adequately informed on a timely basis and have equal access to market sensitive information. The Australian regime is materially different to disclosure regimes in the United Kingdom, Canada and the United States.
Australian company directors and officers face higher risks of liability for defective corporate disclosures than their counterparts in other common law jurisdictions, as a result of the development of so-called ‘stepping stone’ liability, whereby directors and officers may be liable for breach of their statutory duty of care and diligence for permitting the company to contravene its disclosure duties. Quality is just as important as quantity when it comes to corporate information, and our paper also examines whether the statutory provisions concerning misleading or deceptive conduct in relation to financial services or a financial product provide adequate protection for investors.
Finally, we consider the public and private enforcement mechanisms for contravention of the various provisions discussed in the paper. We note, for example, that although ASIC is the main enforcer of the civil penalty regime, recovery of compensation for affected investors does not appear to be at the foremost of its general enforcement strategy. We also discuss private enforcement by means of statutory derivative suit and shareholder class actions. The number of shareholder class actions, which were non-existent in Australia prior to the 1990s, has risen exponentially since that time. However, as our paper shows, enforcement of statutory breaches through shareholder class actions currently favours substantial settlements over concluded litigation.
Olivia Dixon is Lecturer in the Regulation of Investment and Financial Markets at the University of Sidney.
Jennifer Hill is Professor of Corporate Law at the University of Sydney.