The recent Newcrest decision1 is a timely reminder for listed issuers to take particular care in the selective disclosure of information, particularly in the context of “ordinary course” briefings to analysts and institutional investors. Newcrest also highlights the importance for listed issuers to have in place policies and procedures for the disclosure of information and for employees to be trained on, and regularly reminded of, those policies and procedures so as to best ensure compliance with them.
On the basis of surveillance and investigation work conducted by the Australian Securities and Investments Commission (ASIC), such briefings (whether formal or informal) are considered by ASIC to be a significant risk area for selective disclosure of market-sensitive information. In the New Zealand context, the Financial Markets Authority (FMA) recently stated that it is considering conducting a general review of the issue of listed companies that intentionally leak market-sensitive information to analysts.
Background to Newcrest
On 2 July 2014, the Australian Federal Court imposed a A$1.2 million penalty on Newcrest Mining Limited (Newcrest) for contravening its continuous disclosure obligations. In particular, and following proceedings by ASIC, Newcrest admitted that one of its employees had disclosed price-sensitive information (being total production information and capex information) in a series of briefings to analysts without having first notified ASX of that information.
Confidentiality in that information was lost through a series of briefings to analysts. Upon the loss of confidentiality, the exemption from disclosure previously afforded by the relevant ASX listing rule no longer applied and Newcrest was obliged to notify ASX of that information at that time. Newcrest’s ASX notification in respect of total production information was not made until nine days after the employee had first disclosed that information in a telephone call with analysts.
In addition to, and following, the ASIC proceedings, a class action was commenced against Newcrest on 21 July 2014 on behalf of current and former shareholders, alleging misleading and deceptive conduct and breaches of continuous disclosure obligations in relation to the admitted contraventions as well as a wider course of misconduct.
Relevance to New Zealand listed issuers?
Although Newcrest concerns an Australian-listed issuer, the decision by the Australian Federal Court is directly applicable since the relevant NZX Main Board listing rule (Listing Rule 10.1.1) is, in substance, the same as the relevant ASX listing rules (Listing Rules 3.1 and 3.1A). In broad terms, Listing Rule 10.1.1 obliges a listed issuer to immediately release material information to NZX unless the exemption from disclosure (in the proviso to Listing Rule 10.1.1(a)) applies. Confidentiality of the information is a pre-requisite of the exemption. However, the exemption also requires that a reasonable person would not expect the information to be disclosed, and one or more of the following to apply:
- the release of the information would be a breach of a law;
- the information concerns an incomplete proposal or negotiation;
- the information comprises matters of supposition or is insufficiently definite to warrant disclosure;
- the information is generated for the internal management purposes of the issuer; or
- the information is a trade secret.
Put another way, if Newcrest were a NZX Main Board issuer, it would have breached Listing Rule 10.1.1 in selectively disclosing the relevant price-sensitive information to analysts ahead of disclosing that information to NZX.
A breach of continuous disclosure obligations may result in the NZX Markets Disciplinary Tribunal (the NZMDT), following referral from NZX, imposing a penalty (financial and/or non-financial) on the relevant listed issuer. The NZMDT’s procedures provide guidance as to the appropriate financial penalties to be imposed by the NZMDT in respect of breaches of the NZX Main Board Listing Rules. A breach of continuous disclosure obligations, prima facie, falls within the highest of the six penalty bands (highlighting the seriousness of such a breach), with the range of financial penalty being up to NZ$500,000.
The Securities Markets Act 1988 also contains various statutory consequences for breaches of continuous disclosure obligations, including a pecuniary penalty (up to a maximum amount of NZ$1million) and declaration of contravention (on application by FMA only) and a compensatory order to compensate an aggrieved person who has suffered loss or damage because of the contravention.
The prospect of class actions against issuers that make late disclosure is also continuing to rise. Foreign litigation funders and plaintiff law firms are becoming increasingly active in New Zealand markets. It may only be a matter of time before we see the first investor class action (or ‘representative action’ as they are known here) for breaches of our disclosure rules.
Practical steps to mitigate risk
Shortly before issuing proceedings against Newcrest, ASIC released Report 393 Handling of confidential information: Briefings and unannounced corporate transactions (Report 393). Report 393 includes recommendations for listed entities, analysts and advisers about how to ensure they comply with best-practice disclosure policies. In relation to briefings by listed entities to analysts and investors, Report 393 advises that “listed entities can minimise the risk of regulatory action by:
- refraining from attempting to manage the expectations of the market by selectively briefing analysts and key investors; and
- having policies in place to ensure as broad as possible access to analyst and investor briefings. Some ideas for entities to consider are:
- providing advance notice and dial-in details of group briefings to the market;
- if the entity undertakes an ‘investor roadshow’, giving wide access to one of the roadshow briefings (or making a recording immediately available);
- making available full transcriptions or recordings of group briefings – for example, by posting webcasts, podcasts and/or transcripts on [NZX] and/or archiving these on the entity’s website for public access after the event; and
- having compliance systems in place to support the handling of confidential, market-sensitive information. For example, it may be appropriate in certain circumstances to have a system that allows for the segregation of certain teams who conduct briefings.”
Change in Newcrest policies and procedures
It is worth noting that, prior to the contraventions occurring, Newcrest had written policies and procedures to manage its continuous disclosure obligations. These policies and procedures required:
- only publicly available information to be referred to or provided as part of its investor relations programme;
- the Head of Investor Relations to be the sole point of contact with analysts on a day to day basis;
- at least one Newcrest person in addition to the presenter to attend significant meetings and briefings conducted pursuant to the investor relations programme so that the nature and content of what was discussed can be verified; and
- a record to be kept of all substantive discussions, meetings and briefings and placed on file with the Head of Investor Relations.
That Newcrest did not comply with any of these policies and procedures highlights the importance of regularly training and reminders for listed issuer employees in this regard. Report 393 identifies other cases where a listed entity had well-documented policies on how to conduct briefings and interact with analysts and institutional investors, but these policies were not followed.
Following an independent review of Newcrest’s disclosure and investor relations policies and practices, and in addition to certain of the practical steps identified by ASIC above, Newcrest:
- established a formal disclosure committee with delegated authority for making and executing disclosure decisions and overseeing investor relations functions; and
- imposed an investor relations “blackout” period for a period of two weeks leading up to regular results and reports announcements and for any other periods as determined by the disclosure committee.
Relevant to the issue of selective disclosure, on 26 August 2014 NZX released a consultation memorandum on proposed amendments to its guidance note on continuous disclosure.