Today ASX announced its long awaited consultation draft of its rewrite of Guidance Note 8 on continuous disclosure. ASX also released an abridged version of the new Guidance Note 8, tailored for directors of listed companies (copies of ASX's consultation materials can be found here).
With ASIC becoming increasingly active in issuing infringement notices, and a number of high profile judicial decisions being handed down recently, a review of ASX guidance in this area was long overdue.
In summary, the key substantive rules regarding continuous disclosure have not changed. The revised guidance is primarily directed at ensuring that market participants revert to interpreting the key rules according to their core original principles. Namely, ensuring timely disclosure of price sensitive information.
The draft Guidance Note is out for public consultation and comment until the end of November. ASX hopes to have it formally issued by January 2013, depending on the level of comments received.
What does this new guidance mean for listed companies?
The key new guidance for listed companies is as follows:
- ASX has adopted a more pragmatic approach to its guidance on the requirement for "immediate" disclosure. It has recognised that "instantaneous" disclosure should give way to "prompt" disclosure that occurs without reasonable justification for delay. This is likely to result in a more workable compliance (and enforcement) framework. However, listed companies should still establish protocols to enable identification and evaluation of price sensitive information as quickly as possible;
- listed companies relying on carve outs to disclosure should monitor movements in the market price or traded volumes of their securities and be prepared to provide explanations for those movements to ASX, or else risk ASX assuming that the movements were caused by a leak of confidentiality. Companies should consider the use of trading halts where there is any doubt about the ability to promptly, and without delay, release price sensitive information, including where board governance arrangements may delay sign-off on significant announcements;
- ASX does not generally require disclosure of confidential approaches to enter into a takeover as long as they involve an incomplete proposal, remain confidential, and the company is not already the subject of a live takeover bid; and
- listed companies should have regard to the arguably lower 5% to 10% guidance on materiality in the Accounting Standards when considering the materiality of variations from earnings guidance or share price movements.
We are encouraged to see ASX (and ASIC by association) taking a more practical approach with respect to the administration of the continuous disclosure requirements, and providing guidance which is focussed on the needs of directors.
Background to ASX and ASIC review
ASX Guidance Note 8 is published to assist listed companies to comply with their continuous disclosure obligations under Listing Rule 3.1. However, there are a number of areas where the ambiguity in the principles based approach has given listed companies some difficulty in their application.
ASX and ASIC have been jointly revising the Guidance Note over the last year, however release of the consultation draft of Guidance Note 8 was deferred until the High Court handed down its decision in ASIC v Fortescue, on 2 October 2012.
It was hoped that the High Court in the Fortescue case would provide guidance on the legal effect of Listing Rule 3.1 and section 674 of the Corporations Act, but the High Court determined that the announcements made in that case were not misleading and therefore detailed consideration of the continuous disclosure rules (and directors duties) was unnecessary. For an in depth analysis of the decision in Fortescue, please refer to our previous alert here.
The continuous disclosure rule
ASX has not proposed to make any amendments to the substantive provisions of ASX Listing Rule 3.1, which requires a company to immediately disclose to ASX any price sensitive information of which the company is aware, subject to the carve out in Listing Rule 3.1A (which ASX does propose to update) discussed below.
Previously "immediately" meant "immediately"
The interpretation of the requirement to disclose price sensitive information "immediately" has been a point of contention between ASIC and listed companies because of the practical issues in meeting the literal requirement of this standard. ASIC chairman Greg Medcraft has previously stated publicly that "immediately means immediately". To underscore this view, ASIC has in the past issued infringement notices to Rio Tinto and Commonwealth Bank for announcement delays of just 60 to 90 minutes. Many directors and legal advisors of listed companies, on the other hand, consider that such a rigid interpretation is practically impossible to comply with.
ASIC's approach to enforcement and the lack of clarity regarding some of the disclosure concepts appears to have resulted in some major listed companies taking a "better safe than sorry" approach to continuous disclosure. Examples include David Jones' trading halt on 19 March 2012 ahead of the release of its half year results following a media report which speculated that it would report a fall of up to 50% in its future credit card earnings; Leighton Holdings' trading halt on 27 March 2012 pending a review of information regarding its March quarter, flagging the possibility of revisions to previous forecast earnings; and Stockland's particularly conservative disclosure of an earnings downgrade of 3.5% on 27 March 2012, only about a month after giving its earnings guidance.
"Immediately" now means "promptly and without delay"
The new Guidance Note 8 ASX takes a more pragmatic approach, and says that "immediately" does not mean "instantaneously", but instead means "promptly and without delay" having regard to the circumstances.
ASX emphasises that promptness of disclosure is the fundamental principle on which the rule is based. However it also recognises that that the turnaround time for making the disclosure will vary depending on many factors, including:
- where and when the information originated;
- the forewarning (if any) the company had of the information;
- the amount of complexity surrounding the information;
- the need to verify the information;
- the need to comply with specific legal or Listing Rule requirements (such as announcements that must be JORC compliant); and
- the need, in some cases, to have the announcement approved by the company's board.
So, for example, an unexpected piece of complex information that needs confirmation and/or board review could justify a longer delay in disclosure compared with a more routine development. However, in these circumstances, a company should always consider going into a trading halt if the delay in convening any required board meeting is taking place in a context of material movements in the share price.
The ASX has confirmed that companies should consider using trading halts as an effective tool to manage any concerns they have around compliance with the timely release of price sensitive information, and ASX has given guidance that it will readily grant any such requested trading halts.
De-emphasis of "reasonable person" test
ASX has proposed some minor amendments to Listing Rule 3.1A, which essentially reorder the three limbs of the exception without changing the substance of the rule. ASX's intention is that the re-arrangement will de-emphasise the importance of the "reasonable person" test by placing it last in the order, after the "type of information" limb (i.e. an incomplete proposal) and the "confidential" limb.
In ASX's view, a reasonable person would not ordinarily expect information that satisfies the first two limbs to be disclosed, other than in exceptional circumstances such as those noted below.
Significant price/trading movements and assumptions about leaked price sensitive information
According to ASX, listed companies (or their advisors) often debate whether a sudden movement in market price or traded volumes of their securities can fairly be attributed to information about a particular matter ceasing to be confidential. ASX says in the new Guidance Note 8 that such debates are "misplaced", and where a company which is withholding price sensitive information in reliance on Listing Rule 3.1A and is not able to point to a credible explanation for the movement in price or traded volumes, ASX has no other choice but to assume that information has leaked with the result that immediate disclosure (or a trading halt) is required.
ASX has always been able to require an immediate announcement under the "false market" rule (3.1B), but the new guidance makes it clear that ASX will also presume that confidentiality has been lost by reason of market movements alone.
Responses to takeover approaches
Contrary to some views expressed recently in the market (principally by takeover defence strategists), in the new Guidance Note 8 ASX confirms that the "reasonable person" test does not generally require disclosure of receipt of confidential takeover proposals (or other change of control transaction). ASX states that these types of approaches will usually fall within the exception in Listing Rule 3.1A as long as they typically involve an incomplete proposal and remain confidential.
However, where a company is already the subject of a live takeover bid, especially one nearing the end of an offer period, a confidential approach from another bidder may need to be disclosed under the reasonable person test, as shareholders would need to consider whether or not to accept the live bid but should be permitted to have regard to the new information.
Earnings guidance and "surprises"
For many listed companies, the market's expectation of its future earnings will have a significant effect on the value of its securities. The market's expectation is generally affected by the earnings guidance the company has given to the market or the earnings forecasts of analysts.
Timely updates to the market on expected variances in results have long been a focus of ASX and ASIC. Previously, ASX guidance was that a variation of 10% to 15% from the previous period was generally the level at which disclosure should be made. In the new Guidance Note ASX has moved away from a focus on variance from previous results, recognising that the market generally focuses on forward earnings. At the same time, ASX has arguably narrowed the safety margin for variance from earnings guidance before an announcement is triggered.
ASX now recommends that companies should apply the guidance on materiality in the Australian Accounting and International Financial Reporting Standards, i.e. that:
- an expected variation in earnings compared to published earnings guidance of 10% or more should be presumed to be material and therefore should be disclosed; and
- an expected variation in earnings compared to published earnings guidance of 5% or less should be presumed not to be material and therefore need not be disclosed.
For variations between 5 and 10%, the company will need to make a judgement call with respect to materiality.