Companies who have recently been on the wrong side of ASX and ASIC demonstrate why all industry participants should familiarise themselves with ASX's most recent Compliance Update.

For as long as anyone in corporate Australia can remember, trust and trustworthiness have been common themes for Australia's corporate watchdogs ASX and ASIC.

That's why ASX's Compliance Update no 02/18's position on continuous disclosure requirements of customer contracts and good fame and character requirements should come as no surprise to those in the industry. It goes without saying that every entity and its directors need to take responsibility, act with integrity and not mislead investors, particularly in their pursuit to share what they consider to be good news.

What the Compliance Update really serves to do is clarify ASX's expectations of industry participants and the manner in which they conduct themselves.

The heightened media and industry interest in this Compliance Update may well be as a result of the spotlight recently cast on tech companies such as Big Un and GetSwift whose shares have recently been suspended from trading by ASX. The regulators have not singled out tech companies but, in our view, companies who were once startups pitching to venture capitalists, and are still driven by entrepreneurial flair, should be mindful of the requirements which apply to them as ASX listed entities.

Even so, all companies can expect to come under increased scrutiny as ASX promises to sharpen its enforcement focus, particularly companies that:

  • announce a contract with a major global customer without providing details;
  • exaggerate customer revenue forecasts;
  • fail to disclose that a customer contract is subject to a trial period; or
  • misrepresent contracts as material when they are not.

ASX points out that whenever it "detects this sort of behaviour it will not hesitate to suspend the entity, query it and require it to correct any inadequate or misleading disclosures."

Disclosing material customer contracts

ASX confirms that investors and advisers should be provided with sufficient information about a customer contract to understand the impact of the contract (if any) on the price or value of the entity's securities.

As an example, an entity disclosing it has entered into a contract with one of the Big 4 banks, but not that it is subject to the bank's final approval, can expect to fail ASX's disclosure standards and to receive a swift call from its ASX listings adviser requiring the entity to release a clarification announcement.

Consequently, the matters that ASX would usually require be disclosed in an announcement of a customer contract include the:

  • name of customer;
  • term of contract;
  • description of products/services to be supplied;
  • material conditions and any other material information; and
  • significance of the contract to the entity.

ASX also reminded directors of the information it expects to be disclosed in an announcement about the signing of a market sensitive contract for an acquisition or disposal.

Good fame and character requirement

Entities seeking admission to ASX (via an IPO and now also a backdoor listing) must satisfy ASX that each director or proposed director is of good fame and character.

To demonstrate this, the following must be provided for each director or proposed director:

  • criminal and bankruptcy checks; and
  • a statutory declaration confirming that they have not been the subject of any criminal or civil penalty proceedings or other enforcement action by any government agency (such as behaviour involving fraud, dishonesty, misrepresentation etc).

This requirement does not only apply to directors ‒ ASX can require these documents for members of management if it considers a manager has key decision-making powers but has not been appointed to the board because of the good fame and character requirements. Of course, if ASX suspects an entity is attempting to circumvent the requirements it has the ultimate power to stop the entity's admission to ASX.

What does all this mean for you?

While ASX's actions against Big Un and GetSwift draw into focus the regulatory compliance of two tech companies, ASX's Compliance Update demonstrates an increased level of scrutiny on all industry participants, big and small.

Needless to say, in supporting ASX's principles, it remains up to every entity and its directors to act with integrity in acting in the best interest of all shareholders in order to maintain the trust of investors and all other stakeholders in the market.