As advisors to listed companies, two questions that we are frequently faced with are:
- what do I need to disclose to the market about our new contract?; and
- how do I deal with ’bad’ news from a disclosure perspective?
The simplistic answers are:
- you need to provide a sufficient summary of the contract terms to enable an investor to properly understand the full implications of the agreement; and
- ’bad’ news should be dealt with the same as ’good news’.
The objective should always be to ensure that the disclosure being made by the company to investors is both comprehensive and balanced. The risk is that investors will feel aggrieved if they believe, or even perceive that anything less than full disclosure has been made to the market.
Unsurprisingly, companies can show reluctance to making lengthy announcements about contract terms and can be a little more reticent about informing the market when the news is expected to have a negative impact. The recent events involving logistics software maker, Getswift Limited (Getswift), provide a timely reminder of the price that can be paid by a company which does not get the disclosure balance right.
What happened to Getswift?
As a logistics software developer, the Getswift business model is dependent upon business relationships with third parties that can give Getswift access to users of its software. During the 12 months after listing in December 2016, Getswift made no less than 20 announcements relating to multi-year service delivery contracts with business partners who could support growth in the use of the software - presenting a positive news trail in conjunction with a range of other positive announcements linked to their product development and growth during 2017.
However, an investigation by the Australian Financial Review (AFR), resulting in a news report issued in late January 2018, alleged that Getswift had failed to notify the market of the termination of several of these service delivery contracts during or upon the expiration of a trial or pilot stage.
In summary, Getswift appeared to be very keen to announce the entry into new service agreements, but significantly less keen to announce when some of those agreements had been terminated or otherwise ended. In other words, the positive news of more and more agreements being entered into by Getswift had not been qualified by the fact that some of those earlier contracts were no longer in force.
It is quite common for start-up software/technology based companies to undertake their initial public offer at a time when they are looking to finalise the development of the product and move into the commercial exploitation phase, requiring a significant injection of capital with the prospect of some revenue generation after years in the development cycle. Share price gains can be achieved as the company gains operational momentum through the expansion of the use and availability of the product. In Getswift’s case, during the subject 12 month period, their share price had increased from 20 cents on listing in December 2016 to a peak of $4.30 cents in December 2017.
As a result of the AFR report:
- Getswift entered a four week trading halt during which it was required to respond to multiple queries from ASX, as well as be exposed to negative press coverage;
- Getswift announced that it had engaged PwC to undertake a review of its compliance with its continuous disclosure obligations, followed by the appointment of a new company secretary to assist with the company’s ongoing work to improve governance and ASX compliance;
- Getswift’s share price subsequently fell nearly 60% on reinstatement of trading from $2.92 to $1.31, despite having given responses to ASX together with additional market updates, including the declaration that Getswift was “pleased to now confirm that it is in compliance with listing rule 3.1”;
- ASIC issued a notice to Getswift to produce documents;
- two class actions have been commenced on behalf of aggrieved investors alleging a failure by Getswift to meet its continuous disclosure obligations; and
- the share price has since fallen further to $0.455.
The queries made by the ASX did not just focus on the absence of disclosure surrounding the termination of the identified contracts as raised by the AFR report, but also questioned the adequacy of the initial announcements themselves, which were generally brief and did not acknowledge that the arrangements were subject to an initial trial or pilot phase.
What do ASX and ASIC want companies to do?
Under Listing Rule 3.1, a listed company must immediately disclose any information to the market which a reasonable person would expect to have a material effect on the price or value of shares in the company. Under section 677 of the Corporations Act, a “material effect on price or value” occurs where the information would, or would be likely to, influence persons who invest in shares when deciding whether or not to subscribe for, buy or sell the shares. Listing Rule 3.1 identifies the “entry, variation or termination of a material contract” as an example of information which could require disclosure. ASX Guidance Note 8 notes that the disclosure on a material contract should contain sufficient detail for investors or their professional advisers to understand the ramifications of the contract and to assess its impact on the price or value of the entity’s securities, including any material conditions that need to be satisfied before the contract becomes legally binding or proceeds to completion.
ASIC Regulatory Guide 228, also provide guidance for continuous disclosure (as well as prospectus disclosure) and highlights the need for balance and equal prominence when dealing with positive and negative information.
What should boards do?
The boards of listed companies must always remain mindful of the need to:
- provide a balanced view of the positive and negative attributes of any new material contract; and
- share potentially negative news with the market, not just positive news.
Regarding contract terms, an announcement should not just pronounce the commercial benefits to the company of the contract, but also outline any terms which may affect the ability of the company to receive those benefits. These include, the duration of the agreement, any condition precedents to implementation and any other early termination rights (in particular those belonging to the third party). When a listing occurs, the prospectus will include a detailed summary of material contracts and outline the risk factors that may impact the continuation or enforcement of those contracts - this approach should be carried through in relation to post-listing disclosure.
The consideration of potentially negative news should encompass a consideration of the materiality of the negative news in the overall context of the company in addition to the materiality of the agreement itself. The termination of an agreement at the conclusion of a trial period may not necessarily be a material matter that requires disclosure in itself - but in the context of:
- the termination of a number of agreements in a similar manner;
- the existence of a number of other arrangements that remain subject to trial periods; and
- a history of growth in the value of the company on the back of a corresponding growth in these relationships.
The cessation of an agreement on this basis will potentially be information that an investor may expect to have a material effect on the price or value of shares in the company. Such an impact could also be magnified by the aggregation of the effect of a number of cessations in close proximity to each other.
It may well be that the board of a company, having considered all of the facts relevant to its own set of circumstances, can formulate an argument that the negative news is not material and, arguably, does not require disclosure. However, a brief announcement including an explanation as to the impact (or lack of impact) of the end of the agreement which allows the market to digest and assess the news may reduce the risk of a more significant impact down the track - especially where the entry into the agreement was considered to be sufficiently material to announce to the market in the first instance.
The legal outcome for Getswift will remain undetermined for some time to come. Irrespective of this outcome, Getswift has already paid a heavy price as a result of its approach to the disclosure of these contractual arrangements and a loss in investor confidence, despite the information and explanations released by the company. If a contravention is established, then more serious consequences may eventuate for the company and those involved in the contravention. Getswift will no doubt look to restore investor confidence by adopting a different approach to its disclosure obligations and look to swing the attention back to its product and those business partnerships where success (and growth) is achieved. However, the current impacts will no doubt continue to hang over the company to some degree in the near future. These impacts could have been prevented, or at least reduced considerably, if Getswift had adopted a different approach as to its disclosure requirements earlier in its infancy stage.
Both startup and mature listed companies can learn from these outcomes when it comes time to give consideration to the approach they take the next time a new business relationship is entered into...or comes to an end.