On 13 March 2013 the Australian Securities Exchange (ASX) released its final version of Guidance Note 8 on the key continuous disclosure obligations under Listing Rule 3.1 (Guidance Note). The Guidance Note is expected to become operational on or about 1 May 2013.
Listed companies should review their current disclosure practices and policies to ensure they will comply with the new requirements once they become effective.
We have previously written about the draft version of the Guidance Note which was released by ASX in October 2012 - see link. The final Guidance Note is not radically different to the draft, but it does contain some important “upgrades” (amendments and clarifications). Below we discuss some of the key changes compared to the October 2012 draft Guidance Note.
What does “immediately” mean?
- If information is required to be disclosed under the continuous disclosure obligations it must be disclosed “immediately”. In the October 2012 draft Guidance Note ASX said that “immediately” means “promptly and without delay”. ASX has now expanded on the meaning of these critical words. To do something “promptly and without delay” it must be done “as quickly as it can be done in the circumstances (acting promptly) and not deferring, postponing or putting it off to a later time (acting without delay)”.
- Of course, announcements unavoidably take time to prepare. The passing of time by itself does not mean there has been a “delay”, but rather the issue is whether the entity is going about the process as quickly as it can in the circumstances, without deferring, postponing or putting it off to a later time.
Use of trading halts to manage continuous disclosure obligations
- The emphasis on trading halts remains in the final Guidance Note, this time with greater detail provided by ASX on when ASX would expect a trading halt / voluntary suspension to be used and when it would not.
Trading halts might be required, for example, if:
- there are indications that information has leaked and it is having (or likely to have if the entity’s securities are not currently trading) a material effect on the price or volume of the securities;
- the entity has been asked by ASX to provide the information to correct or prevent a false market; or
- the information is especially damaging and likely to cause a significant fall in the securities’ price,
and, where the market is trading, the entity is not in a position to make an announcement straight away or, if not trading, will not be in a position to do so before trading commences.
- While trading halts will continue to be a key tool in managing disclosure obligations, notably they are not appropriate in all circumstances. For example, trading halts last for two days. Therefore, if complex and protracted matters are unlikely to be resolved within that time, a trading halt may not be sufficient and a voluntary suspension might be necessary. ASX also does not expect an entity to go into a trading halt before it has assessed whether the information is market sensitive.
- Of course, any trading halt must be actioned quickly. If it needs to be approved by the Chairperson / CEO the process to do so “must be able to be activated and any necessary approvals obtained within a matter of minutes”. The process should also include contingencies if the decision makers are not available.
Earnings guidance and in principle approval of financial statements and dividends
ASX has continued its theme of providing detailed discussion on earnings surprises, which we discussed in our previous article. In its revised Guidance Note, ASX has clarified the following:
- The benchmark for a company estimating what the market is expecting its current period earnings to be are (in order): published earnings guidance by the entity for the current period, sell side analysts’ forecasts and, thirdly, earnings for the prior corresponding period.
- In terms of using analysts’ forecasts for the current reporting period, ASX says that there are a number of approaches that an entity may legitimately use. These include consensus forecasts (which the entity may calculate itself or obtain from an information vendor). If an entity feels that the consensus estimate is being distorted by an obvious outlier it may adjust the consensus to exclude those outliers. Others may not use consensus estimates at all but rather plot analysts’ forecasts and if all or most cluster within a reasonable range, treat that as being the market’s view of their likely earnings.
- ASX has also provided further guidance on the materiality thresholds for entities to consider. As with the October draft version of the Guidance Note, above 10% should be presumed to be material, and below 5% should be presumed not to be material. Between 5-10% requires judgment from the entity and entities should look at the consistency of their earnings – for very large entities or those with very stable earnings it may be more appropriate to adopt a threshold that is closer to 5%, however, smaller entities or those with relatively variable earnings may choose to adopt 10% (or close to it) as its materiality trigger.
- ASX has also noted that it is common practice for listed company boards to approve in-principle financial reports and dividends, with formal approval given just prior to the release date (this is often done to ensure that any post balance date events are reflected in the financial statements and factored into the dividend decision). ASX has confirmed it has no issue with this approach and that disclosure is not required at the in-principle approval stage.
Emphasis placed on the objective nature of the test
- Importantly, the continuous disclosure test is an objective test. Namely, the fact that an entity’s officers may honestly believe that the information is not market sensitive and does not need disclosure will not avoid a breach of Listing Rule 3.1 if that view is found to be incorrect objectively. This merely states the current law, but it is given prominence in the revised Guidance Note.
- The exceptions to the continuous disclosure requirement also require that a “reasonable person” would not expect the information to be disclosed (there are 3 limbs to satisfy the exceptions, with the final limb being the reasonable person test). That has been, and remains, an objective test as well. But ASX has now said that “the reasonable person test ... has a very narrow field of operation”. The reason for this, in ASX’s view, is that where the other two prerequisite limbs are satisfied, generally this will also mean that the reasonable person limb is satisfied (the other two limbs are a requirement for confidentiality and a requirement to fall within one of five exceptions including that the information concerns an incomplete proposal or negotiation).
When does an entity become aware of information?
- The test for when an entity becomes “aware” of information has not changed between the draft and final Guidance Note (although it has changed compared to the existing policy and Listing Rules). It is when an officer has, or ought reasonably to have, come into possession of the information in the course of the performance of their duties. In the final Guidance Note, however, particular attention is drawn to the “ought reasonably” test which deems an entity to become aware of any information known to anyone within the entity that is of such significance that it ought to have been escalated and brought to the attention of an officer. Therefore, it is important that listed entities “have in place appropriate reporting and escalation processes” so that there are no gaps between what the officers actually know and what they ought to know.
Dealing with market speculation
- ASX has clarified that market reports and rumours need to be “reasonably specific and reasonable accurate” for confidentiality to be lost which would result in the exceptions to the disclosure requirement not applying. ASX will assess the degree of specificity in the rumour or report in deciding the extent to which there has been a loss of confidentiality.
Examples in the Guidance Note
- ASX has also amended some of the examples that are included in the Guidance Note. In particular, ASX has removed the example that provided that a reasonable person would expect a confidential and non-binding proposed control transaction to be announced by a target that is subject to a competing bid at the time.
As we noted in our previous article, ASX has produced an abridged version of the Guidance Note which is specifically targeted at directors and other officers. We recommend that listed companies should review their current continuous disclosure practices and policies to ensure compliance once the new Guidance Note and Listing Rule changes become effective in a few weeks’ time.