On 6 March 2015, ASX released a consultation paper seeking public comment on proposed changes to Guidance Note 8 ‘Continuous Disclosure: Listing Rules 3.1 – 3.1B’ (GN8). GN8 was last amended in May 2013 (see our alert here).
The proposed changes expand the guidance on analyst and investor briefings, analyst forecasts, consensus estimates and ‘earnings surprises’ (in particular when an ‘earnings surprise’ is disclosable). Comments are due by 24 April 2015 with ASX aiming to issue the updated guidance on 1 July 2015.
Why is GN8 being updated?
Since the re-write of GN8 in May 2013, Newcrest Mining Limited was fined $1.2 million for its high-profile failure to comply with its continuous disclosure obligations following a series of analyst briefings, and ASIC has released a report on the handling of confidential information (REP 393), which highlighted analyst and investor briefings as a significant area of risk for selective disclosure of market sensitive information.
Following these developments, ASX considers that listed entities and their advisers would benefit from expanded guidance. ASX is concerned that aspects of its existing guidance are being misinterpreted, particularly as to when entities need to give an earnings update. ASX is also concerned that some entities are seeking to ‘manoeuvre’ analyst forecasts in a non-public or selective manner to align them with internal projections.
The proposed amendments do not fundamentally change ASX’s existing position, but the updated guidance provides some useful practical clarifications. While these clarifications are generally welcome, with the proposed new GN8 running to 85 pages (the relevant Listing Rules are 1½), it is clear that this aspect of continuous disclosure will continue to be a tricky area for listed companies.
What are the main clarifications?
ASX is seeking to clarify the distinction between a ‘market sensitive earnings surprise’ (where an entity’s actual or projected earnings differ so significantly from market expectations that a reasonable person would expect information about its actual or projected earnings to have a material effect on the price or value of its securities) and the lesser ‘earnings surprise’ (where an entity’s reported earnings differ from consensus estimates (up or down), but not necessarily to an extent that a reasonable person would expect the information to have a material effect on the price or value of its securities).
Only ‘market sensitive earnings surprises’ trigger the relevant disclosure obligation. While the label in the guidance is new, the practical difficultly for entities in managing these issues remains. Assessing whether an ‘earnings surprise’ is a market sensitive surprise invariably involves a series of judgement calls as to whether the information is likely to cause a material movement in the price of value of its traded stock ahead of any disclosure (or non-disclosure). This involves a prediction based on often difficult judgements (including having regard to the general volatility of the stock), the veracity of which will always be unpicked with the benefit of hindsight.
The updated guidance also draws a greater distinction between situations where an entity has published earnings guidance for the current reporting period, and other measures of expected earnings (such as consensus estimates or performance against the prior corresponding period). As published guidance is a positive representation to the market that sets market expectations, any deviation is more likely to be regarded as material (making it a ‘market sensitive earnings surprise’).
ASX is also proposing to re-write the guidance about correcting analysts’ forecasts. ASX is at pains to point out that listed entities are not under any obligation to correct the earnings forecast of any individual analyst, or the consensus estimate of any individual market data vendor, to bring it into line with the entity’s internal projections. This re-write is clearly in response to the Newcrest findings and ASX’s concern that some entities are seeking to shape analysts’ forecasts in a non-public or selective manner. ASX does however expect that entities will monitor analyst forecasts and/or consensus estimates to be alive to any emerging earnings surprise. It is still acceptable for entities to liaise directly with analysts to correct apparent factual or computational errors, provided there is no selective disclosure of market sensitive information.
ASX is also proposing to make the following clarifications in the updated guidance:
- Earnings guidance generally – All other things being equal, an entity is not required to release internal budgets or earnings projections (provided they remain confidential). Accordingly, it remains acceptable for an entity to have a policy or practice of not providing earnings guidance to the market.
- Confidentiality – Entities which do not give guidance need to take care in communications with shareholders, analysts and the media that the confidentiality of its internal budgets and projections is preserved. If confidentiality is lost, the information will need to be disclosed to the market (otherwise it will likely constitute de facto guidance).
- Materiality – The 5% to 10% variation range recommended by ASX in assessing whether updated guidance should be given applies principally to situations where the entity itself has published guidance for the current reporting period. Just because internal projections may differ from analysts’ forecasts or performance in a prior corresponding period by 5% to 10% does not necessarily mean the divergence is market sensitive and therefore needs to be disclosed.
ASX also proposes to make certain minor clarifications in connection with trading halts, the content of certain types of announcements and permitted disclosures to bankers, insurers and ratings agencies.
Comments on the consultation paper are due by 24 April 2015 with ASX aiming to have the updated guidance in place from 1 July 2015.