In July 2013, the Australian Securities and Investments Committee (ASIC) released a media statement stating that for the upcoming reporting season (the first since the Australian Securities Exchange (ASX) released its revised Guidance Note 8) that ASIC would be focusing on communications between entities and investment analysts that cover their stock. ASIC would be doing so by conducting spot checks with certain entities so ASIC could observe how entities brief analysts and measure how entities understood and complied with their own procedures for handling market-sensitive information.
ASIC has now released ‘Report 393: Handling of confidential, market-sensitive information: Briefings and unannounced corporate transactions’, which outlines ASIC’s observations on the practice of listed entities (particularly small-to-mid capitalisation entities) regarding their handling of confidential, market-sensitive information and the greatest areas of risk for potential breaches of the continuous disclosure rules under the ASX Listing Rules (Listing Rules) and the insider trading prohibitions set out in the Corporations Act 2001 (Cth) (Act) (Report 393).
Several examples in the last 12 months have caused ASIC and ASX to increase their focus on how entities handle (and disclose) confidential, market-sensitive information. Media coverage surrounding the release of Report 393 has highlighted the following case examples:
- Newcrest Mining Limited’s (Newcrest) production and profit figures. On 7 June 2013, Newcrest announced approximately $6 billion in asset write-downs, a gold production downgrade, the closure of its Brisbane office, job losses and the cancellation of its final dividend; resulting in a drop in its share price. However, two days prior to this announcement, several equity analysts downgraded their earnings forecasts and profit guidance for Newcrest, causing a Newcrest closing price on 6 June of $13.36 (down $1.79 from the closing price two days prior). Following the announcement on 7 June, ASX issued an “aware query” in respect of the price drop.
- Private equity firm Kohlberg Kravis Roberts’ (KKR) takeover offer for Treasury Wine Estates (TWE). On 15 May 2014, TWE dismissed speculation around offers for its assets. On 20 May, TWE announced that KKR had first approached TWE on 16 April and that it had rejected KKR’s offer. TWE stated that KKR had requested that negotiations be kept confidential and that its approach was consistent with its continuous disclosure policy.
- David Jones’s (DJs) proposed merger with Myer. On 30 January, DJs announced that in October 2013, it had received a confidential invitation from Myer to merge by way of scheme of arrangement for a zero premium exchange ratio. DJs stated that it had rejected this invitation as the zero premium offer held no value for DJs’ shareholders. Further, two directors and the chairman of DJs (at the time) were accused of buying shares in DJs days before DJs announced strong sales results and a day after it received a merger proposal from Myer (which ultimately led to them vacating their positions on the board).
The case examples outlined above suggest a need for further guidance around how entities handle confidential, market-sensitive information and ASIC’s work to date around this issue has led to it releasing Report 393.
Report 393’s findings in relation to analyst and investor briefings
Although Report 393 found that there was no evidence of selective disclosure of confidential, market-sensitive information at the sample briefings ASIC attended, it did state that analyst and investor briefings posed a significant risk for selective disclosure of confidential, market-sensitive information and for breaches of the continuous disclosure rules under the Listing Rules and the insider trading prohibitions set out in the Act.
Report 393 specifically found that:
- none of the entities ASIC investigated made a recording or transcript of briefings publicly available (which may hinder the market trading on equal information);
- although most analysts seek to either identify whether market-sensitive information they receive has previously been announced to the market or embargo unannounced information, other analysts willingly passed information to their sales desks and to clients;
- there were instances where staff below the board and officer level (who may not be aware of their obligations around confidential, market-sensitive information) had been involved with discussions with analysts (such as where a group of analysts are flown to a mine site and given full access to technical staff); and
- in relation to the mining and exploration sector, certain analysts were seeking information that did not have a reasonable basis or comply with industry codes (such as the Joint Ore Reserve Committee code) and that certain mineral companies felt obliged to provide this information to analysts.
Report 393 did acknowledge that just over half of the entities investigated provided details (such as dial-in numbers for teleconference group briefings) in announcements lodged with ASX before the briefing, so that the wider market could access the briefing in real time. Report 393 also acknowledged that some listed entities have posted a webcast or audio recording of briefings on their websites, and most briefings are available via Bloomberg (although an investor would need to subscribe to obtain access this way).
Report 393’s findings in relation to handling of confidential, market sensitive information regarding transactions
Report 393 found that listed entities, particularly small-to-mid capitalisation entities, were heavily reliant on their advisers (investment banks, brokers, accountants and lawyers) when it came to handling confidential, market- sensitive information and that soundings for capital raisings presented a particularly problematic area.
In relation to market practice around handling confidential, market-sensitive information in relation to transactions, Report 393 specifically found that:
- listed entities in the small-to-mid capitalisation range did not have relevant documented policies and, if they did, did not have a sophisticated understanding of the issues and associated risks and also relied heavily on their advisers for both protection of the information’s confidentiality and on when to disclose such information;
- none of the listed entities maintained an “insider list” of people who possessed confidential, market-sensitive information about the transaction;
- only one listed entity used password protection and encryption of documents sent by email;
- none of the listed entities had in place “leak investigation policies”; and
- just one listed entity had a draft trading halt request and ASX announcement prepared in the event of a leak.
Report 393 did state, however, that most listed entities had policies in place providing that employees must not speak to the media unless authorised to do so.
Report 393’s findings in relation to soundings before capital raisings
As stated above, a particularly problematic area for handling confidential, market-sensitive information is in relation to soundings of investors in connection with capital raisings. Report 393 specifically found that:
- despite ASX, in its revised Guidance Note 8, clearly emphasising the importance of trading halts to mitigate against the market trading on an uninformed basis, soundings were conducted as early as four days before the entity’s securities were placed in trading halt;
- at times, more than 50 investors were sounded before the capital raising was announced;
- small-to-mid capitalisation entities felt as if they did not have enough expertise, or were not in a bargaining position, to be able to influence their underwriters in relation to soundings as they feared that the underwriters would walk away from the raising (placing the entire proposed raising in jeopardy);
- there seemed to be a tension between an entity seeking to keep information confidential and an underwriter’s desire to conduct soundings to confirm price in order to reduce its risk related to underwriting the raising; and
- although it is ASIC’s position that a sounding confirmation email is a useful reminder of the legal risk associated with being sounded, certain fund managers expressed to ASIC that they, on many occasions, had not received such sounding confirmation emails.
Advisers did express to ASIC that the standardised sounding script and sounding confirmation email prepared by the Australian Financial Markets Association (AFMA) in its 2011 publication, “Handling confidential and price-sensitive information and soundings: Best practice guidelines” were proving useful when conducting soundings. The use of AFMA’s standardised script and email is important as both contain clear wording restricting recipients from disclosing the information attached to the email to anyone external to their organisation and also from recipients or their organisation using the information in breach of the insider trading prohibitions set out in the Act.
Report 393’s recommendations for entities
Report 393 did not state that ASIC was proposing to issue any additional guidance around handling of confidential, market-sensitive information. Instead, Report 393 recommended that an entity implement (and then educate) their employees on the entity’s continuous disclosure policies, avoid selective briefings, be frank with advisers in relation to soundings for capital raisings and to prepare draft leak announcements and draft trading halt requests in the event of a leak. If entities do not heed Report 393’s recommendations, they risk breaching their continuous disclosure obligations under the Listing Rules or persons using the information in contravention of the insider trading prohibitions set out in the Act.
It is worthwhile to note that handling of confidential, market-sensitive information has already been adequately addressed by a range of existing guidelines, particularly the Governance Institute and Australasian Investor Relations Association’s joint publication “Handling confidential, market-sensitive information: Principles of good practice”, AFMA’s 2011 publication (mentioned above), ASX’s revised Guidance Note 8 and ASIC Regulatory Guide 62, “Better disclosure for investors”. It would be prudent for all entities to familiarise themselves again with these guidelines.
Azlan Mohamed Noh