The proposed changes to Continuous Disclosure Guidance Note 8 issued by ASX for consultation today do not radically change the continuous disclosure landscape, but do provide welcome clarification and insight into both ASX and ASIC’s approach to applying and enforcing Australia’s continuous disclosure laws.
Continuous disclosure is, in our experience, the area of law which most frequently vexes Australian listed company boards and general counsels.
The intersection of the continuous disclosure obligations (in particular the requirement to disclose materially price sensitive information “immediately”) and events such as the global financial crisis and the associated earnings downgrades, the Fortescue Metals and James Hardie cases, high profile penalty orders and enforcement undertakings sought by ASIC, the rise of class actions and the use of social media to leak information have brought a company’s obligations of the when, how and what to disclose sharply into focus.
Within this context ASX has today issued for consultation:
While a number of market participants were hoping for broad ranging changes to Listing Rule 3.1, it would have been optimistic to expect significant changes to the continuous disclosure regime in Australia at this stage. Instead, ASX’s proposals seek to clarify the “murkier” aspects of the operation of Listing Rule 3.1 and we welcome the transparency and insight these revisions provide.
Revised Guidance Note 8 is a complete rewrite of the existing Guidance Note 8 and provides substantially more detailed guidance in a number of areas. In addition to Revised Guidance Note 8, a number of minor changes to the Listing Rules are proposed.
To our mind the most significant changes contemplated by the package of documents are set out in Revised Guidance Note 8 and relate to the issues of:
Under Listing Rule 3.1, market sensitive information must be disclosed to ASX immediately upon a listed company becoming aware of that information unless it falls within the carve-outs from disclosure. There have been various views expressed about the interpretation of the word “immediately” and in particular ASIC has previously appeared to adopt a strict interpretation of the term. Indeed, Revised Guidance Note 8 notes that ASIC has issued infringement notices for breaches of section 674 of the Corporations Act where market sensitive information has been withheld from the market for a period as short as 60 and 90 minutes and a trading halt has not been requested to cater for the delay.
The amendments proposed to the Listing Rules do not amend the use of the term “immediately”. However, to address concerns about the uncertainty of the term “immediately”, Revised Guidance Note 8 sets out ASX and ASIC’s views about the timing for disclosure and factors which may affect that timing.
First, Revised Guidance Note 8 confirms that, consistent with judicial authority, the term “immediately” in the context of Listing Rule 3.1 does not mean “instantaneously” but rather means “promptly and without delay”. Revised Guidance Note 8 explains that prompt disclosure of market sensitive information is critical to the integrity of the market and the standard of promptness expected by the markets and regulators is justifiably high.
In this context, ASX recognises that the speed with which a notice can be given under Listing Rule 3.1 will vary depending on the circumstances. Revised Guidance Note 8 sets out relevant factors that will be taken into account by ASX in assessing whether a company has complied with its obligation to disclose information in a timely matter.
These factors (which appear to address some of the complex issues which arise for companies in the context of leaks, bogus bids and the growth of social media) include:
Additional understanding of some of these factors is facilitated through the use of some helpful examples.
Coupled with any consideration of the timing for disclosure, is the extent to which trading halts can be used to manage continuous disclosure obligations. Guidance Note 8 presently contemplates the use of trading halts as a tool of good disclosure which is also reflected in Guidance Note 16. It has not been clear whether this view has accorded with the position of ASIC which has indicated in the past that continuous disclosure obligations are unaffected by a trading halt.
Section 3.6 of Revised Guidance Note 8 describes how trading halts can be used to manage a listed company’s continuous disclosure obligations. While noting that technically the obligations of a company under Listing Rule 3.1 apply during a trading halt, Revised Guidance Note 8:
In assessing whether a company has promptly sought a trading halt, the revised Guidance Note states that the factors listed for a consideration of “immediately” (outlined above) will also be taken into account in this assessment.
Significantly, footnote 42 provides that ASX understands that ASIC will also take into account whether or not a listed company has promptly requested a trading halt in determining whether it will take enforcement action. However, in the next footnote it is noted that the fact that ASX may regard a company as having complied with the spirit, intention and purpose of the Listing Rules does not preclude ASIC or a civil litigant from taking a different view and arguing that a company has nonetheless failed to comply with Listing Rule 3.1 and section 674.
In our view, clear support from ASX and ASIC about the use of trading halts better serves the market.
Revised Guidance Note 8 provides what appears to be a relaxation of the commonly held view about the timing for disclosure of incomplete proposals and negotiations.
Commentators have previously suggested that companies should disclose market sensitive agreements at the time there is a “meeting of the minds”, that is when two parties reach an arrangement or understanding in respect of a matter, rather than on entry into a binding legal agreement.
ASX confirms in Revised Guidance Note 8 that “negotiations will be complete only when the parties enter into an agreement to implement or give effect to that transaction and not beforehand”. Revised Guidance Note 8 goes on to provide that, generally speaking, an agreement is not binding until it is signed or formally adopted in some other way and notes that until that time any party is free to walk away from the agreement or reopen negotiations.
In our view the guidance reflects a clear and commercial view about the need for companies to enter into market sensitive agreements at a convenient time and so as manage the disclosure of information. Indeed, Revised Guidance Note 8 provides that ASX encourages companies to so manage the execution of market sensitive agreements.
Clearly earning expectations are critical to price and ASX has taken the view that a change in a company’s previously released financial forecasts or expectations, if material, must be disclosed. Guidance Note 8 currently provides that a variation in earnings is material if it is between 10 - 15% compared against earnings guidance or, if the entity has not issued earnings guidance, against consensus forecasts or the result of the prior corresponding period (in late 2008 ASIC urged companies to take a conservative approach and disclose at the 5 - 10% threshold).
ASX proposes to withdraw its guidance for a 10 - 15% variation threshold and suggests in Revised Guidance Note 8 that a threshold of 5 -10% variation apply only in the case where a company has already given the market earnings guidance or a forecast. This guidance reflects ASX’s view that:
As we know, meeting continuous disclosure requirements involves subjectivity and judgment. Matters that give rise to profit warnings are not easy and companies often struggle to know when they have robust enough information on which to make a disclosure. This problem grows exponentially if a company is also required to manage analysts' forecasts.
In recognition of this issue, Revised Guidance Note 8 strongly states that ASX does not believe that a listed company has any obligation, whether under the Listing Rules or otherwise, to correct analysts’ forecasts to bring them in line with their own. But, Revised Guidance Note 8 goes on to provide that a listed company that is covered by sell-side analysts should be monitoring forecasts of these analysts so as to understand the market’s expectations for its earnings. This is important, as Revised Guidance Note 8 provides that in ASX’s opinion a disclosure obligation arises where the company has a reasonable degree of certainty of an expected material difference in its earnings from market expectations.
Consistent with ASIC’s view on selective disclosure, the revised Guidance Note warns companies to ensure that all analysts have access to the same information and, accordingly, should publish materials presented to an analyst briefing on the ASX Market Announcements Platform and on its website and should not provide preferential treatment to favoured analysts or black list any analyst it may not favour from analyst briefings.
The nature of the obligation to manage market expectations is complex and this additional guidance is a helpful clarification on the existing Guidance Note 8 and market updates issued by ASX on this matter in 2009 and 2010. In our view worked examples on this issue, similar to the detailed examples included for other matters in Annexure A, would further assist companies in clarifying ASX’s expectations in this area.
Revised Guidance Note 8 also provides guidance in respect of the reasonable person test (which ASX highlights as an area which is widely misunderstood). Revised Guidance Note 8 provides that in ASX’s view, a reasonable person would not expect information that falls under the carve outs in Listing Rule 3.1A.2 and which is confidential to be disclosed, unless there is something unusual in the factual matrix to suggest otherwise. Importantly, Revised Guidance Note 8 provides that ASX considers that, generally, a reasonable person would not expect a takeover approach to be disclosed as it would usually fall within the exception to disclosure under Listing Rule 3.1A for as long as it involves an incomplete proposal or negotiation and remains confidential. While this is helpful confirmation of our prevailing view, it is likely that takeover approaches will continue to be announced by companies in any event as boards will be keen to stay in control of market communications, particularly given the proclivity of bidders and their advisers to leak their approaches to effect a bear hug (see most recently Discovery Metals and RuralCo).
We also note that ASX has proposed amendments to Listing Rule 3 which require companies to make specific disclosures regardless of the impact that information may have on the price of value of a company’s securities. For example, the proposed amendments provide that a company will be required to disclose the material terms and any variations to them of any employment, service or consultancy agreement it enters into with its chief executive officer or a director or any other person or entity which is a related party to the company.
ASX is inviting comment from interested parties on:
by 30 November 2012.
ASX with ASIC will review the submissions received and consider whether any amendments to those documents are appropriate before issuing the documents in final form. Subject to Ministerial approval for the proposed Listing Rule changes, ASX proposes to introduce the changes to the Listing Rules and Revised Guidance Note 8 and the Abridged Guide in the first quarter of 2013.
The proposed Listing Rule changes, revised Guidance Note and Abridged Guide raise a number of more specific matters on which we will provide further public updates. The Corrs corporate advisory team is preparing a submission to ASX in relation to some gaps we have identified in the proposed Revised Guidance Note and associated Listing Rule changes. Please contact Lizzie Knight, Sandy Mak or Braddon Jolley if you would like to be involved in this submission or would like to discuss our thoughts on these issues further.
It is well understood that both ASX and ASIC share the responsibility for regulating the continuous disclosure framework that applies to Australian listed companies. Indeed, since the amendments to the Corporations Act in 2004 ASIC has had the pre-eminent role in the enforcement of continuous disclosure in the Australian market.
In the past decade ASIC has primarily sought to enforce continuous disclosure obligations via penalty orders and enforceable undertakings and there has been limited judicial consideration of these matters. This penalty and enforceable undertaking approach has provided little transparency around ASIC’s thinking of these matters and provided limited exploration of the issues relating to continuous disclosure beyond the very specific fact situations resulting in the undertakings and orders.
The ASX Public Consultation Paper, which provides background to its announced consultation on Continuous Disclosure, states that ASX and ASIC “have worked together closely and co-operatively to develop the revised version of Guidance Note 8”. Importantly the Paper goes on to provide, “ASIC is in broad agreement with the thrust and contents of the revised Guidance Note”.
This is first time that ASX and ASIC have together expressed views about the operation of Australia’s continuous disclosure laws and is, in our view, a timely and welcome acknowledgment of the proposed approach of these regulators to the continuous disclosure framework.
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