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.
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.
As our paper shows, Australia provides an interesting comparison with the United States in this area of law. Although Australia’s corporate and financial services regulatory system shares many features with that of the United States, there are also interesting differences. First, although, like the United States, Australia has a state-based system of corporate law, it created a de facto federal system when the Australian states referred their powers to the federal parliament. Whereas federalization of corporate law through statutes such as the Sarbanes-Oxley Act 2002 and the Dodd-Frank Act 2010 has been extremely contentious in the United States, however, it was welcomed by the Australian business community as enhancing corporate efficiency. Second, unlike in the United States, there is no clear structural dividing line between corporate law and securities law in Australia. This merging and centralization of corporate and securities law in Australia paved the way for national, rather than state-based, regulators, in contrast to Canada, for example, where creation of a national regulator proved challenging from a constitutional perspective.
Third, in contrast to America’s byzantine financial regulatory framework, Australia operates under a “twin peaks” model of financial regulation. This model distributes regulatory responsibility between the Australian Prudential Regulation Authority (“APRA”) and the Australian Securities and Investments Commission (“ASIC”). In the aftermath of the global financial crisis, there was concern that complex systems, such as the U.S. model, had facilitated regulatory arbitrage. Since the crisis, several jurisdictions have adopted Australia’s twin peaks model as a potential antidote to this problem, given that Australia fared relatively well in the crisis. Fourth, although the OECD describes Australia as having a predominantly “dispersed” ownership structure, Australia has lower institutional ownership than in the United States and also has significant levels of blockholding. Fifth, in contrast to U.S. securities law, which has historically been based on periodic disclosure, Australia adopted a “continuous disclosure” regime, which is designed to ensure that investors are adequately informed of market sensitive information on a timely basis. Although the New York Stock Exchange listing rules contain a similar continuing disclosure obligation, its enforcement is weak, with no right to a private cause of action for violation.
Finally, there are significant differences between Australia and the United States in the areas of enforcement and directors’ duties. Whereas U.S. law relies primarily on a private enforcement model for breach of directors’ duties, Australia’s statutory directors’ duties regime relies mainly on public enforcement. Unlike U.S. directors, Australian public company directors face the very real prospect of liability for breach of the duty of care. Shareholder class actions, which were non-existent in Australia until the 1990s, offer another enforcement route. Yet, although broadly modeled on U.S. shareholder class actions, Australian class actions differ in many respects, such as the absence of any U.S.-style certification requirement.
Our paper explores the background of Australian regulation to examine how well Australian law protects public company investors who rely on inadequate, false, or misleading information. We analyze the operation of the twin peaks regulatory model from a comparative perspective. We also 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 in detail the regulatory role and powers of Australia’s business conduct regulator, ASIC. 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 as a result of its enforcement role. 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 who have suffered loss as a result of inadequate, false, or misleading corporate information. We undertake a close examination of Australia’s continuous disclosure regime and consider the consequences of breach of this regime for directors, officers, and the company itself.
Australian company directors and officers face higher risks of liability for defective corporate disclosures than their counterparts in other common law jurisdictions, including the United States, 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 forefront of its general enforcement strategy. We also discuss private enforcement by means of statutory derivative suits and shareholder class actions. The number of shareholder class actions in Australia has risen exponentially in the last 30 years, however, as our paper shows, enforcement of statutory breaches through shareholder class actions currently favors substantial settlements over concluded litigation.
This paper comes to us from professors Olivia Dixon and Jennifer G. Hill at the University of Sydney Law School. It is based on their recent paper, “The Protection of Investors and the Compensation for their Losses: Australia,” available here.