Disclosure laws aim to ensure the reduction of information asymmetries and the accuracy of share prices, but their success is predicated on enforcement. My recently published article (also available here) examines the empirical incidence of the private and public enforcement of disclosure laws in Australia. In order to understand and analyse the enforcement landscape, it presents two new comprehensive disclosure law action datasets, comprising both private and public enforcement, for further examination. In light of the empirical findings, it then addresses the effectiveness of the Australian system of enforcement, by reference to whether the actions compensate, deter, and signal.
The empirical analysis indicates that the prevalent mode of in-court enforcement is private enforcement. During the study period, there was notable growth in the number of commercial litigation funders and institutional investors as active participants in class actions. These developments are correlated with a reduction in coordination costs and collective action problems, and an increase in enforcement. Notably, 100% of the class actions in the dataset were backed by commercial litigation funders. Where settlement and stock market data is available, this indicates that these actions have a tiny net recovery amount, compared to investor losses, measured in relation to the market capitalisation decrease. Regarding public enforcement, the action types predominantly consist of administrative sanctions as opposed to litigation. There were 22 actions initiated by the Australian Securities and Investments Commission (ASIC) over the study period, which included civil and criminal penalties, infringement notices, and enforceable undertakings.
The research finds that the Australian system of disclosure law enforcement deploys an interesting mix of modalities, with a combination of public enforcement actions and class actions. It is important to understand the respective contributions of both public and private enforcement, for the purposes of better serving enforcement aims and improving the understanding of which legal factors and institutional components stabilise and strengthen financial markets. Given the dual modality finding, it may be the case that the Australian disclosure law regime is moving closer to becoming a functional analogue of the US model, with litigation funders substituting for contingency fee agreements and adverse costs rules and hence incentivising increased rates of litigation. Indeed, Australia now appears to be the key jurisdiction outside of the US in which a corporation is most likely to face a class action.
Regarding deterrence, in relation to case frequency, the empirical findings indicate that there is a 0.22% probability that a publicly listed company will have a class action filed against it in a given year, and that there is a 0.04% probability that such a company will have a director named a defendant in a filed case. This indicates that the observed enforcement intensity is unlikely to carry a deterrent effect. This can be compared with the private enforcement intensity found in the UK, which previous research indicates is close to zero in the disclosure law context.
Additionally, a deterrent impact is more likely where directors are targeted by the actions. This was the case in only 21% of the class actions, and in 27% of the ASIC actions. The results further confirm that loss compensation is not achieved, regardless of the modality of enforcement deployed. While the absence of compensation is not dispositive, the fact that the vast majority of actions are brought solely against the company itself means that deterrence aims are unlikely to be met.
It is thus argued that the clear message for ASIC and policy makers is that actions should be redirected to target those parties who are responsible for the misconduct, at least in addition to corporate defendants. This is of particular importance in the disclosure law context, where deterrence can increase enforcement effectiveness when compensation is unachievable or ineffectual. It is further asserted that the results indicate that policy and legislative development should take a dual modality perspective, rather than evaluating the effectiveness of each modality in isolation.
Indeed, a different picture of the effectiveness of the Australian system of disclosure law enforcement emerges when both modalities are analysed from a data-driven perspective. Based on this understanding, there are three important messages for policymakers. First, both public and private enforcement matter as a means for reducing information asymmetries and ensuring accurate share pricing. Second, the fact that over the study period different enforcement strategies and shareholder patterns have predominated suggests that there are substitution effects between different modalities of enforcement, and complementarities between private enforcement, the involvement of litigation funders, and the degree of dispersion of share ownership. And third, the significance of both public and private modalities of disclosure law enforcement in Australia implies that inferences about a system drawn solely from either public or private enforcement are likely to be misleading.
Jenifer Varzaly is a Director of Studies and Bye-Fellow in Law at Downing College, University of Cambridge