FMA statement on director liability and continuous disclosure

The Financial Markets Authority (FMA) has announced that it does not consider that there is a need for regulatory relief in relation to director liability for continuous disclosure breaches. In doing so, the FMA has not followed the Australian Government’s relaxation of 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”. You can view the full announcement here.

What does it cover?

We summarise the key points of the announcement below:

  • The FMA believes New Zealand’s current legislation provides listed issuers and their officers sufficient protection to encourage disclosure and remains appropriate for the COVID-19 environment.
  • There has been little evidence of an opportunistic class action culture developing in New Zealand in relation to director liability, but the FMA are keeping this under review.
  • The FMA intends to consult with MBIE and other stakeholders on the appropriate steps to reduce the risk of speculative class actions increasing but recognise that private class actions play a crucial part in addressing defective corporate disclosure and that litigation funding can be important in enabling investors to bring such actions.
  • 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 has said it is unlikely to pursue a continuous disclosure breach. The FMA has stated it is mindful not to apply hindsight in determining the appropriateness of an issuer’s disclosure.
  • The FMA has urged directors to be brave in their disclosure decisions and be willing to confront material uncertainties in their financial statements and forward-looking information.

Our view

While the FMA expresses a view that there is little evidence of the development of an opportunistic class action culture in New Zealand, there is certainly an increase in the number and significance of representative actions.

  • First, there has been a steady rise in interest in group litigation in New Zealand. Further, a number of New Zealand organisations are dual-listed, exposing them to the potential for “stock-drop” type actions both here and in Australia.  We anticipate that the Australian experience, coupled with the increasing presence of litigation funders, will add to the risk of representative actions arising from continuous disclosure breaches in New Zealand.
  • Secondly, as we have previously discussed, the Court of Appeal in Ross v Southern Response approved an “opt-out” approach to assembling plaintiffs in representative actions. Unless the Supreme Court imposes a more limited approach, class membership will ordinarily be determined on an “opt-out” basis, rather than requiring each member to take a positive step to become involved.  If the New Zealand courts are also willing to make “common fund” orders (which require each class member to contribute to the costs of the litigation even if they have not signed a funding agreement), we expect that adopting the “opt-out” approach will result in more representative actions being brought in New Zealand.  In turn, we would expect the increase in volume of such actions to bring with it an increase in opportunistic actions, as individual claimants will not have to positively determine for themselves whether the claim is worthwhile before it is launched.  We await the Supreme Court’s views on “opt-out” class actions following its hearing of the Southern Response v Ross appeal earlier this week.

With those comments in mind, we welcome the FMA’s commitment to an ongoing review of developments in this area.

What next?

If you have any questions in relation to continuous disclosure requirements under the Financial Markets Conduct Act 2013, or in general, please contact one of our experts.

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