ASX has released the final guidance note on the continuous disclosure provisions of the ASX Listing Rules. This comes after the completion of a public consultation process which followed the release of the first draft guidance note in October 2012. It is due to come into force on 1 May 2013.
In broad terms, the continuous disclosure provisions provide that subject to certain carve outs, once an entity is “aware” of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity’s securities, the entity must “immediately” tell ASX that information.
The changes made to the guidance note are intended to provide further clarity to ASX’s approach in interpreting the continuous disclosure provisions in light of feedback received from the market.
The key points to note are:
- The meaning of “immediately”: Further to ASX’s earlier guidance that “immediate” disclosure means “promptly and without delay”, ASX has explained that this means making disclosure as quickly as possible in the circumstances (ie acting promptly) and not deferring, postponing or putting the disclosure off to a later time (ie acting without delay). For example, if the announcement is of such importance that the entity considers it requires board approval prior to release, the board meeting must be held promptly and any delay in being able to convene such a meeting cannot be used as a justification for delaying the disclosure (rather, consideration needs to be given to applying for a trading halt).
It is important to note that only some announcements (such as announcements relating to earnings guidance) require board approval before they are released. Accordingly, entities should establish a procedure which allows a speedy determination as to whether an announcement is required where the subject of the announcement does not require board approval.
In addition, entities should nominate a senior officer (“responsible person”) to be the main contact point for compliance with continuous disclosure requirements. This responsible person should have authority to request trading halts (or the ability to obtain approval in minutes) and be readily contactable by ASX (including ensuring their mobile phone is turned on for an hour each side of trading i.e. 9am to 5pm AEST). Entities may also wish to consider appointing two responsible persons to cater for leave or absence.
The meaning of “aware” and the importance of a sound compliance system: The definition of “aware” in the Listing Rules makes it clear that the entity is deemed to have the information:
- actually held by its officers (ie its directors and senior management); or
- which its officers ought to have by virtue of their position.
For this purpose, ASX has placed greater emphasis on the importance of listed entities having in place an appropriate reporting and escalation process (including the adoption of a written disclosure policy or rapid response plan) to ensure that information which is potentially market sensitive is promptly brought to the attention of officers.
ASIC, in its media release responding to the final Guidance Note, also picked up this point, stating that “companies that carefully consider the updated guidance and adopt appropriate processes with the benefit of that guidance can minimise the risk that ASIC will seek to take continuous disclosure enforcement action against them”. The importance of instituting systems which encourage the escalation of material, or potentially material, information to senior management and the board cannot be understated.
- The use of trading halts: One of the concerns about ASX’s original guidance was the suggestion that entities ought to be using trading halts more extensively to manage their continuous disclosure obligations where circumstances prevent them from making a prompt announcement. To alleviate that concern, ASX has clarified that it would not expect an entity to request a trading halt or a voluntary suspension before it has assessed whether particular information needs to be disclosed under Listing Rule 3.1.
However, ASX warns that a trading halt may still be necessary if:
- there are indications that the information may have leaked and is likely to have a material effect on price;
- the entity has been asked by ASX to provide information to correct or prevent a false market; or
- the information is “especially damaging and likely to cause a significant fall in the market price of the entity’s securities”.
In those circumstances, a trading halt would be necessary if either the market was currently open or, if the circumstances arose after market close, if the entity would not be in a position to release an announcement pre-open.
- Further guidance on carve outs from the disclosure requirements: One of the more significant areas of guidance concerns the carve outs from continuous disclosure contained in Listing Rule 3.1A. ASX has broadened its guidance to explain the role that this carve out plays in balancing the interests of the market in receiving materially price sensitive information at the earliest reasonable time and the interests of the entity in not having to disclose information prematurely or where it would clearly be inappropriate to do so.
ASX has maintained its proposal to re-order the limbs of the carve out test to emphasise that the two key elements of that test are that:
- the information falls into one of the five recognised carve outs, of which the most commonly relied on is information concerning an “incomplete proposal or negotiation”; and
- the information be confidential (that is, secret).
In respect of the scope of the carve out relating to incomplete proposals or negotiations, ASX notes that a proposal or negotiation is incomplete unless and until the entity has adopted it (for example by executing the relevant documentation) or is otherwise committed to proceeding with it.
ASX encourages entities to arrange for execution of a market sensitive agreement at a convenient time (ie before market opens or after market closes) to avoid disrupting the normal course of trading. However, ASX warns that entities should not commit to an agreement (ie by “hand shake” or side letter) and delay signing in an attempt to delay disclosure.
The third limb of the test, being that a reasonable person would not expect the information to be disclosed, was de-emphasised by relocating its position within the Listing Rules. ASX now explains that this final limb is intended to have a “very narrow field of operation” and noted it would only be tripped if there was something in the surrounding circumstances that would otherwise compel disclosure of matters that satisfy the first two limbs of the test.
ASX specifically identifies two prime examples of circumstances where it considers that a “reasonable person” would expect information to be disclosed:
- where an entity has “cherry-picked” its disclosure, disclosing “good” information that is likely to have a positive effect on the price or value of its securities (for example, good drilling results) but then declining to disclose the relevant equivalent “bad” information that is likely to a negative effect on the price or value of its securities (such as a bad drilling result), on the pretence that it is not market sensitive or is incomplete or otherwise protected from the continuous disclosure provisions; or
- where the information needs to be disclosed to prevent an announcement of other information from being misleading or deceptive.
It is important to note that the continuous disclosure obligations under Listing Rule 3.1 will continue to apply regardless of whether or not the announcement is in the interests of the entity, the information is the subject of a non-disclosure agreement or whether or not it would have a material negative impact on the price or value of securities.
- Responding to market rumours: ASX has clarified that any rumour or media or analyst report needs to be “reasonably specific and reasonably accurate” before it will prevent an entity from losing confidentiality for the purposes of assessing whether the carve out applies (however, where such a rumour has a material effect on price or trading volumes, ASX can nevertheless require disclosure to prevent or correct a false market).
ASX re-iterated its earlier guidance that an entity needs to monitor media, however, it clarified that entities need only monitor where they are relying on a carve out in Listing Rule 3.1A, and, in those circumstances, monitoring should cover:
- social media (including blogs, chat rooms and broker sites) that typically cover the entity; and
- news wire services the entity or its advisers have access to.
ASX’s starting point is that, all other things being equal, a listed entity isn’t required to publish its earnings for a particular reporting period any earlier than its customary reporting dates.
Nevertheless, if an entity becomes aware that its earnings for the current reporting period will differ materially (either upwards or downwards) from market expectations (an “earnings surprise”), it will need to consider carefully whether it has a legal obligation to notify the market of that fact before the release of its next financial statements.
ASX declined to offer any rule of thumb or percentage guidelines on when a difference in earnings compared to market expectations ought to be considered to be market sensitive given the number of variables that may influence whether an earnings surprise is market sensitive.
However, for entities that have published guidance, ASX recommends adopting the guidance on materiality in Australian Accounting and International Financial Reporting Standards. That is:
- treat an expected variation in earnings compared to its published guidance equal to or greater than 10% as material and presume that its guidance needs updating; and
- treat an expected variation in earnings compared to its published guidance equal to or less than 5% as not being material and presume that its guidance therefore does not need updating.
The middle ground of 5%-10% requires judgment by the entity (though ASX suggests that larger listed entities, or those with more stable earnings, should err on the side of adopting the materiality threshold of closer to 5%).
For entities without published guidance, ASX expects they will monitor any forecasts made by sell side analysts covering the entity (including any consensus estimates).
For entities without published guidance or any analyst coverage, ASX suggests that the results from the prior reporting period, together with any intervening announcements, will form the basis for the market’s expectations of forthcoming financial results.
Exploration and production targets
Exploration and production targets issued by mining or oil and gas entities raise similar considerations. An exploration or production target must have a reasonable basis and appropriate due diligence, vetting and sign off (including Board approval), with adequate disclosure of qualifications and assumptions.
If an entity becomes aware that its exploration or production results for a period will differ materially (downward or upwards) from any published guidance, it may have a legal obligation to notify the market of that fact. This obligation may arise, either:
- under Listing Rule 3.1 and section 674 of the Corporations Act, if the difference is of such magnitude that a reasonable person would expect it to have a material effect on the price or value of the entity’s securities; or
- under section 1041H of the Corporations Act, if the published target is no longer accurate and therefore the failure to update the market constitutes misleading conduct on the entity’s part.
The revised Guidance Note (and the accompanying amended Listing Rules) are due to come into force on 1 May 2013. They have already been subject to public consultation and review by ASIC although, in the interim, they are subject to ministerial review and comment.
Set out below are some helpful tips to assist entities to comply with the revised Guidance Note:
Questions to ask: In assessing whether information should be disclosed to the market and if so, how it should be disclosed, ask yourself the following:
- If the information is not announced, would you feel comfortable buying shares, from an insider trading perspective?
- If you commonly bought and sold parcels of company shares, would this information influence your trading decision?
- What would an announcement of this information look like?
- Halt requests: Have a draft trading halt request ready, asking for time to prepare and issue a market sensitive announcement due to, for example, the amount and complexity of information or a requirement for Board approval.
Draft announcements: Have transactional and leak draft announcements ready for each contingency. Drafts should not be provided to ASX. The final announcement should:
- attach the whole document and/or provide a fair, balanced summary of material terms such as material conditions;
- only contain text that is factual, relevant, clear, objective and even handed. There should be sufficient detail for investors or their professional advisors to assess the impact of the announcement eg for an acquisition, the likely effect of assets, equity interests, annual revenue/expenditure and profit before tax and extra ordinaries, details of any securities issue, management or Board changes and the timetable for implementing the transaction; and
- contain opinions that are honestly held and balanced. There should be a reasonable basis for forward looking statements and material assumptions and qualifications should be disclosed. Do not submit or extract from a broker research report.
Some examples of information which requires disclosure under Listing Rule 3.1 are:
- Receipt of a notice under section 249D of the Corporations Act or any other call for, or request for resolutions at, a general meeting (within two business days)
- Material results of tracing notices, if materially different from what is publicly disclosed
- Any default or termination event under a material financing facility
- If the entity becomes a plaintiff or defendant in a material suit
- Any decision by the board to pay A dividend or not
- Any grant or withdrawal of a material licence