This morning, ASX released for public consultation a draft update to its continuous disclosure guidance note, accompanied by incidental and minor rule changes. The draft is a rewrite of the former Guidance Note 8 and covers substantial new ground.
Guidance note helpful
ASX has responded to the call of listed entities and advisers for greater clarity and guidance on continuous disclosure obligations by addressing issues which have continued to cause concern and which have not been resolved by Fortescue or other continuous disclosure regulatory actions.
In guidance with which ASIC is in broad agreement, ASX seeks to assist those involved in ECM and other transactions as well as in day to day compliance.
Continuous disclosure compliance in a prospective capital raising context raises two specific types of concern:
- Leaks of information which result in a requirement for early disclosure can damage a prospective raising, particularly its pricing, and in some cases the viability of the listed entity.
- Alleged breach of the rules at any time during the course of the capital raising process can risk triggering of an underwriting condition, ability to rely on short form prospectus disclosure, pricing, reputation and ability to conduct the raising successfully.
Like the context of potential M&A transactions, the risks and stakes are high for listed entities in determining if, when and what to disclose in relation to a developing capital raising proposal.
Key assistance of a general nature is proffered by ASX:
- confirming that, in the absence of leaks, a transaction will ordinarily only become announceable when ‘signed up’,
- confirming that the requirement for disclosure to occur ‘immediately’ means ‘promptly and without delay’ rather than ‘instantaneously’, and that the required timing will depend on the circumstances – helpfully, ASX specifically acknowledges that where the market is closed, either outside trading hours or because of a trading halt or suspension, greater latitude is allowed, and
- indicating a greater willingness to offer trading halts as a tool to prevent false markets and facilitate drafting of releases in the context of leaks.
Issues and examples in an ECM context
The most significant changes made by the draft guidance note that are relevant in an equity capital markets context include:
- Incomplete proposals or negotiations: The draft guidance note confirms generally that proposals and negotiations are incomplete (and therefore disclosure is not required if the ‘confidentiality carve-out’ otherwise applies) until the board has resolved to proceed with the transaction, a binding agreement has been entered into or the entity is otherwise committed to proceeding with the transaction (eg by handshake or ‘side letter’). This is consistent with market practice that, at least where a capital raising has remained confidential, disclosure is not made until the underwriting or offer management agreement has been signed, despite the (necessary) existence of advanced preparations prior to that.
- Worked example of capital raising by issue of securities: The draft guidance note contains a detailed worked example relating to a capital raising, setting out both when disclosure is required and the information that ASX would expect be disclosed. The draft guidance note expressly approves the established practice of parties coming to agreement or the board determining to proceed with a unilateral transaction while the markets are closed, with the transaction being announced before the next open.
Confidentiality and false market
- When might you have a false market
The draft guidance note confirms that ASX will generally regard a significant change in market price or trading volumes as indicative of the fact that undisclosed price sensitive information has leaked (and so must be disclosed), even if it is arguable that other factors are at play.
- How to address a false market – potential for trading halt
ASX encourages contact with listing advisers so that ASX can offer assistance on how to address a situation which might lead to a false market, including whether it is appropriate to request a trading halt and the scope of the announcement needed to address the situation.
Where ASX has received a trading halt request and it considers the information which is the reason for the request is market sensitive, ASX says it will invariably agree to the trading halt request so as to afford the entity the time it needs to prepare and issue an announcement. This is effectively on the proviso that the entity then moves to issue an announcement as quickly as it can in the circumstances.
This affirms common practice in capital raisings, where trading halts are routinely sought if, for example, a confidential sounding process has leaked. However, it remains the position that a trading halt is limited to a maximum of 2 business days (from the time of commencement of the halt to open of trading on the second business day thereafter) except in the specific case of a 2+2 business day halt to facilitate conduct of a renounceable accelerated offer. After expiry of the maximum permitted halt period, a suspension may need to be sought.
- Earnings guidance and surprises: Of relevance both in the capital raising context and more generally, the draft guidance note contains more detailed guidance regarding the consequences of providing earnings guidance and the steps that entities should therefore take before doing so, and how such guidance should be framed. It also highlights the need for entities that do not give such guidance to be wary of inadvertently giving de facto guidance (for example, by expressing views in respect of analysts’ forecasts or consensus estimates).
There is detailed guidance in relation to ‘earnings surprises’, and whether these occur by reference to guidance issued by the entity, analyst’s forecasts or the prior period’s results (as appropriate). Importantly, the draft guidance note omits the yardstick contained in the current Guidance Note 8, which provides that a variation of 10-15% against the appropriate expected measure should be disclosed. Instead, the draft guidance note states that if a variation of 5-10% from an entity-issued earnings forecast is anticipated, that guidance should be corrected. No numerical yardstick is provided for variations from analyst’s forecasts or the prior period’s results, although ASX notes generally that divergence from “market expectations” may be a material matter requiring disclosure. Where guidance is provided, any important assumptions and qualifications should be stated.
Public consultation in relation to the draft guidance note, its associated summary guidance and the proposed changes to the listing rules closes at the end of November. The draft guidance note expected to come into effect in early 2013.