The Financial Markets Authority (FMA) will take no further action on Gentrack Group Limited’s offer document disclosures following review of its initial public offer (IPO) and subsequent revision of its profit forecast.
Key to the FMA’s decision was the robustness of the due diligence process behind the IPO.
The FMA initiated its investigation after Gentrack issued a profit guidance update less than six weeks after the IPO, indicating that delays on major projects were likely to affect its financial results in its first forecast period (to 30 September 2014).
The FMA formed the view that the offer documents were not misleading in terms of the Securities Act 1978 or Securities Regulations 2009 and did not contain any untrue statements.
But it said that Gentrack could have been clearer in recording (for internal due diligence purposes, rather than in the offer documents) the directors’ assessment of the risks associated with the specific delays which triggered the market update.
After running a review that involved seeking information from Gentrack, its directors and its professional advisers, the FMA concluded that:
- Gentrack undertook a thorough due diligence process pre-IPO and its directors took their disclosure obligations seriously (including attending due diligence committee meetings)
- Gentrack’s directors considered the risks associated with the (at that point potential) delay of some projects and decided that the risks were not material - based on assumptions that the FMA believes were sufficiently supported by information as to be not unreasonable at the time, and
- in this context, the offer documents were not false or misleading by reason of omission of specific (as opposed to generic) risk disclosures.
Lessons for issuers (whether under the Securities Act or impending Financial Markets Conduct Act 2013 regulated disclosure regimes) are:
- the importance of thorough and well-documented due diligence processes pre-IPO
- ideally, this would include the maintenance of risk and significant issue registers (assessing both risk impact and likelihood) that are updated through the process, and
- the FMA does not expect risk disclosures to anticipate every post-IPO development.
Disclosure should focus on the limited range of material risks relevant to the business in preference to long disclosures on every potential risk. This principle has been incorporated in the disclosure regime under the FMCA and we expect the FMA to use its broad range of new powers to target over-disclosure by issuers.
The FMA concluded by stating (helpfully, in our view) that:
“With the benefit of hindsight it would be easy to assume that any matter that has materialised into an issue should have been considered to be a material risk, however we do not believe this is necessarily the case.”
Following on from the recent High Court decision in the Feltex case (see our Brief Counsel here) we consider the FMA’s approach to be manifestly correct.
A well planned, documented and implemented due diligence process will provide a relative level of comfort to issuers, directors and advisers where the vagaries of business mean that actual results differ from forecast.