The Effectiveness of Disclosure Law Enforcement in Australia

Abstract

This article examines the empirical incidence of the private and public enforcement of disclosure laws in Australia. Disclosure laws aim to ensure the reduction of information asymmetries and the accuracy of share prices, but their success is predicated on enforcement. In order to assess the enforcement landscape, this article presents two new datasets comprising both private class actions and public enforcement for further examination. The analysis indicates that 41% of all Federal Court actions filed within the dataset included allegations relating to continuous disclosure failures. Further, regarding in-court actions, private enforcement predominates. This is consistent with theory, which suggests that coordination costs may be expected to affect the likelihood of private enforcement by shareholders. 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.

This article additionally provides an outlook on enforcement since the judicial approval of litigation funders, which removed numerous procedural barriers to class actions. This allows for an analysis of the impact of these procedural changes, which occurred in parallel to ASIC resource decreases. Perhaps surprisingly, 100% of the cases in the dataset are supported by commercial litigation funding agreements. Moreover, the empirical analysis of settlement findings in the dataset indicates that the degree of investor loss coverage is tiny. Where settlement data and stock decline information is available, taking into account legal costs and litigation funder commissions, the mean net recovery amount is less than 4% of the market decline. This level of compensation can be compared with US figures, indicating a median settlement to investor loss coverage of 2.6% in 2017 and 2018.

In light of the findings, this article addresses the question of whether the Australian system of enforcement is effective, by reference to whether the enforcement actions compensate, deter, and signal. The empirical analysis confirms the signalling function of enforcement, shows that there is likely to be a reasonable degree of deterrence where directors are targeted, however, that the compensation rationale is not met. This results in a moderately effective enforcement framework with notable room for improvement across both modalities of enforcement. Overall, the significance of both modalities of disclosure law enforcement implies that inferences about a system drawn solely from either public or private enforcement are likely to be misleading.

Keywords: Public and private enforcement, Corporate law, Director liability, Deterrence, ASIC, Class actions, Litigation funding, Corporations Act 2001, Continuous disclosure, ASX Listing Rules, Settlement size, Civil and criminal penalties, Infringement notices, Enforceable undertakings.

JEL Classification: G30, G38, K22, K41, K42, N20