The ASX has finalised and released its updated Listing Rules and new ‘Guidance Note 8’ on continuous disclosure, which will come into effect on 1 May 2013 (subject to formal approval by the Minister).
It is crucial that company directors understand the new Guidance Note 8, which offers important insights and useful tips to help directors comply with the continuous disclosure obligations for their company. As ASIC Commissioner John Price has said, “[c]ompanies that carefully consider the updated guidance and adopt appropriate processes with the benefit of that guidance can minimise the risk that ASIC will seek to take continuous disclosure enforcement action against them… One factor ASIC may take into account in deciding whether to take action is the nature and seriousness of the conduct of the company that contributed to the potential breach including the compliance approach of the company.”
Among other enforcement remedies, ASIC can issue an infringement notice to a company of up to $100,000 for a single breach of the rules. Directors may also face civil action, resulting in significant personal liability.
Partner Michael Hansel and solicitor Katherine Hammond outline their top tips for company directors to ensure compliance with the new Listing Rules and Guidance Note 8.
- Under both ASX Listing Rule 3.1 and the Corporations Act 2001 (Cth), the core obligation of a listed entity under the continuous disclosure regime is to immediately disclose any information that concerns it to the ASX if a reasonable person would expect that information to have a material effect on the price or value of the entity’s securities (‘market sensitive information’). There are very limited exceptions to this rule, which are contained in Listing Rule 3.1A.
- The new Listing Rules and Guidance Note 8 do not substantively change this core obligation or the exceptions to it. However, they provide firm guidance on the ASX’s expectations and interpretation of various aspects of this obligation.
The finalised materials are essentially the same as the draft released in October 2012, although they have been elaborated on in a few key areas following stakeholder consultation. Areas that have been amended include:
- the meaning of ‘without delay’ in the context of ‘immediate’ disclosure;
- the circumstances in which a trading halt should be requested;
- responding to media speculation and market rumours;
- the ASX’s expectations regarding disclosure of earning surprises;
- the new Listing Rule 3.17B, which includes additional requirements for dual listed entities;
- obligations to disclose terms of director and related party contracts; and
- the operation of the ‘reasonable person test’ in the exception to disclosure.
Top tips to help company directors comply with the new continuous disclosure obligations
1. Understand the new specific disclosure obligations
There are several new Listing Rules that will require disclosure of certain information, even if it is not judged to be ‘market sensitive’.
Notably, new Listing Rule 3.16.4 will require disclosure of the material terms of any employment, service or consultancy agreement an entity enters into with its chief executive officer, a director, or any other person or entity who is a related party, and also of any variation to such an agreement.
Following consultation, the ASX has qualified this to clarify that a company will not be required to disclose the following:
- Non-executive director fees paid out of the shareholder approved remuneration pool or the related superannuation contributions
- Shareholder approved increases to director fees
- Periodic remuneration reviews in accordance with the agreement
- Provisions relating to reimbursement for out of pocket expenses
- Provisions requiring D&O liability insurance
- Arrangements for access to company records
- An agreement on arms’ length and ordinary commercial terms with a relative of the CEO or director
2. Understand the meaning of ‘immediately’ and ‘without delay’
The ASX has confirmed that ‘immediately’ does not mean ‘instantaneously’. However, it is stronger than the expression ‘within a reasonable time’ and implies ‘promptly and without delay’.
The ASX has clarified that doing something ‘promptly and without delay’ means doing it 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).
The ASX recognises that a period of time will necessarily pass between when an entity first becomes obliged to give information to the ASX and when it is able to give that information in the form of a market announcement, and that the speed with which a notice can be given will depend on circumstances including:
- where and when the information originated;
- any forewarning;
- the amount and complexity of the information;
- the need to verify the accuracy or bona fides of the information;
- the need for an announcement to be carefully drawn so that it is accurate, complete and not misleading;
- the need to comply with specific legal and Listing Rule requirements; and
- the need for some announcements to be approved by the board.
The state of the market is also relevant. If the obligation to disclose is triggered while the market is not trading, it will generally be sufficient for the entity to give the information to the ASX before trading next resumes.
3. Use trading halts to manage disclosure obligations
Immediate disclosure is required to promote market integrity and efficiency by ensuring that trading in an entity’s securities does not occur on an uninformed basis.
The ASX urges that if the market will be trading at any time after an entity first becomes obliged to announce market sensitive information and before it can give an announcement to the ASX (including due to one of the circumstances listed above), the entity should consider whether it may be appropriate to request a trading halt (or in an exceptional case, a voluntary suspension).
In terms of when a trading halt is appropriate, the ASX has confirmed that it would not expect an entity to request a trading halt before it has assessed whether the information is market sensitive. Having made that assessment, a trading halt may be necessary where:
- information may have been leaked ahead of the announcement;
- the entity has been asked by the ASX to provide information to correct or prevent a false market;
- the information is especially damaging and likely to cause a significant fall in the market price (eg when an administrator is appointed or a default event occurs that may trigger the appointment of a receiver); or
- the announcement is so significant that it should be considered by the entity’s entire board, and the meeting cannot be convened without delay.
The ASX has stated that it places considerable emphasis on whether and how promptly an entity has requested a trading halt in assessing whether the entity has complied with its continuous disclosure obligations. Further, a trading halt will reduce an entity’s exposure to investors trading on an uninformed basis if the entity is ultimately found to have breached its obligation to disclose that information immediately.
4. Implement compliance strategies
The ASX recommends that listed entities have appropriate compliance systems in place to ensure that information that is potentially market sensitive is promptly assessed to determine whether it requires disclosure, and if so, that it is promptly given to the ASX.
To help manage continuous disclosure obligations, the ASX has also suggested that a listed entity should consider the following strategies:
- Have a template letter requesting that the ASX grants a trading halt ready for use at all times.
- Anticipate what might happen if information about a confidential transaction that is being negotiated is leaked, and have a template announcement ready that can be updated and issued straight away.
- Where you have advanced notice of an event that is likely to require an announcement, prepare a draft announcement ahead of time.
- Where the event that gives rise to the need to make an announcement is within your control (eg signing a material contract), try to schedule the event to take place outside market trading hours.
- Ensure that the person appointed under Listing Rule 12.5 to be responsible for communications with the ASX has all the necessary knowledge about potentially market sensitive matters and is readily contactable.
- Give appropriate delegations to senior management, or have a disclosure committee that can meet on short notice, to enable announcements to be issued immediately.
- Ensure that all analysts have access to the same information so that they can prepare their forecasts off the same fact base, and have a procedure in place for reviewing any discussions with analysts to check whether any market sensitive information has been disclosed.
- Put appropriate reporting and escalation processes in place to ensure that information that is potentially market sensitive is promptly brought to the attention of officers, so there are no gaps between the information officers actually know and information they are deemed to know. Listing Rule 3.1 deems an entity to be aware of information if it is known by anyone within the entity and is of such significance that it ought reasonably to have been brought to the attention of an officer in the normal course of performing their duties as an officer.
- Contact your entity’s ASX listings advisor if you are in doubt.
5. Monitor and respond to media speculation or market rumours
Where an entity is preparing or awaiting board approval of a market sensitive announcement, or has information which has not been disclosed because it is in the course of negotiating a market sensitive transaction (and therefore falls within a disclosure exemption), the ASX strongly encourages the entity to monitor the following for signs that the information in the announcement may have leaked and is no longer confidential (and therefore does not fall within the exception to disclosure):
- The market price of its securities
- Major national and local newspapers
- Major new wire services, such as Reuters and Bloomberg
- Any investor blogs, chat sites or other social media it is aware of that regularly include postings about the entity
- Enquiries from analysts or journalists
Inaccurate information published on social media can also create a false market in the entity’s securities.
The ASX does not expect a listed entity to respond to every comment or rumour about it that appears in the media. However, where the media report or rumour appears to be based on credible market sensitive information (whether accurate or not) and there is a material change in the market price (or is likely to be when trading resumes), the entity should respond in a timely manner.
6. Take the test for market sensitive information
It is the entity, and only the entity, that can and must form a view as to whether the information it knows (and the rest of the market does not) is market sensitive and therefore needs to be disclosed.
The ASX cautions that the test is objective, which means that even if officers honestly believe that information is not market sensitive, they cannot avoid a breach of the Listing Rules if that view is ultimately found to be incorrect.
The ASX suggests a two-question test for officers faced with this often difficult decision:
- “Would this information influence my decision to buy or sell securities in the entity at their current market price?”
- "Would I feel exposed to an action for insider trading if I were to buy or sell securities in the entity at their current market price, knowing this information had not been disclosed to the market?”
An answer of ‘yes’ to either question should be taken to be a cautionary indication that the information may well be market sensitive.
7. Know the types of information that may be market sensitive
The examples in the ASX Listing Rules of types of information that may be market sensitive will be restated as follows:
- A transaction that will lead to a significant change in the nature or scale of the entity’s activities
- A material mineral or hydrocarbon discovery
- A material acquisition or disposal
- The granting or withdrawal of a material licence
- Entering into, varying or terminating a material agreement
- Becoming a plaintiff or defendant in a material law suit
- The fact that the entity’s earnings will be materially different from market expectations
- The appointment of a liquidator, administrator or receiver
- The commission of an event of default under a material financing facility, or another event entitling a financier to terminate such a facility
- Under subscriptions or over subscriptions to an issue of securities
- Giving or receiving a notice of intention to make a takeover
- Any rating applied by a rating agency to an entity or its securities and any change to such a rating
The ASX also confirms that ‘information’ extends beyond pure matters of fact and includes matters of supposition, opinion and intention.
8. Understand the operation of the ‘reasonable person test’ in the disclosure exception
The exception to the requirement for immediate disclosure of market sensitive information is substantively unchanged, but has been re-drafted to clarify the ASX’s expectations of when the exception will apply.
1. The ASX has clarified the operation of the ‘reasonable person test’ in the exception to disclosure. There are three limbs which must be satisfied for the exception to apply:
The information must fall within one of the following categories: It would be a breach of law to disclose the information.
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 entity.
The information is a trade secret.
2. The information must be confidential.
3. A reasonable person would not expect the information to be disclosed.
The ASX has clarified that as a general rule, information that falls within one of the prescribed categories in the first limb and meets the confidentiality requirement in the second limb will also satisfy the reasonable person test. As a result, the reasonable person test has a narrow field of operation, and will only be tripped if there is something in the surrounding circumstances sufficient to displace it - for example:
- where an entity has ‘cherry-picked’ its disclosures by disclosing good information but declining to disclose bad information at the same time on the pretence that it falls within the exception; or
- where information needs to be disclosed in order to prevent an announcement of other information from being misleading or deceptive.
The ASX has further confirmed that the reasonable person test does not have any broader application requiring disclosure of a particular type or quality of information that would otherwise satisfy the first and second limbs.
9. Give due attention to earnings surprises
The ASX has given particular attention to disclosure obligations where an entity becomes aware that its reported earnings will differ materially from market expectations, whether arising from:
- the entity’s earnings guidance for the period;
- sell-side analysts’ consensus estimate; or
- where there are no analyst estimates, the entity’s earnings for the prior corresponding period.
Given the many variables involved in determining whether any variation may constitute market sensitive information, the ASX has deliberately refrained from providing any general quantitative materiality thresholds.
However, where an entity has published specific earnings guidance for the current period and it expects its earnings to differ from that guidance, failing to disclose that information may constitute misleading conduct under the Corporations Act. Accordingly the ASX has recommended (although not prescribed) that a variation of:
- 10 percent or more should be treated as material, and therefore presume that the guidance should be updated;
- 5 percent or less should be treated not to be material, and therefore presume that the guidance need not be updated; and
- between 5 and 10 percent will require the entity to form a judgement as to whether or not it is material.
Of some comfort to companies, the ASX has stated that when it considers whether to refer a potential breach to ASIC, it is mindful that:
- forecasting earnings for the current reporting period with an appropriate degree of confidence;
- endeavouring to work out what the market is expecting its earnings to be; and
- predicting how the market will react if its earnings differ from those expectations to any material extent,
involve many variables and require considerable judgment.
10. Keep an eye on exploration and production targets
The ASX points out that (similar to earnings estimates) if an entity becomes aware that its exploration or production results for a period will differ materially from any target it has published, it may have an obligation to disclose that to the market if it is judged to constitute market sensitive information.
11. Don’t rely on confidentiality agreements to avoid disclosure
The ASX confirms that confidentiality agreements are not accepted as a valid reason to not disclose market sensitive information.
Supporting this position, the ASX notes that the Listing Rules are contractually binding on a listed entity and are enforceable against a listed entity under both the Corporations Act and the general law. Accordingly, an attempt by a party to prevent disclosure of information by enforcing a confidentiality agreement may be unsuccessful, given that it would interfere with the contract between the entity and the ASX, and that even if it is successful, it may constitute the procurement of a breach of the Corporations Act, exposing that party to civil penalties.
12. Dual listed? Ensure your entity complies with its obligations
The ASX has outlined what is required of dual listed entities to comply with their continuous disclosure obligations.
A dual listed entity which is required to release information to an overseas stock exchange may do so provided it gives the information to the ASX at the same time, together with advice that the information has been released to the overseas stock exchange.
A dual listed entity must also ensure that it coordinates any trading halts or voluntary suspensions requested on an overseas stock exchange with an equivalent on the ASX.
In addition, new Listing Rule 3.17B requires a dual listed entity to immediately give to the ASX (in English or with an English translation) a copy of any document it gives to the overseas stock exchange that meets the following requirements:
- The document is given to the overseas stock exchange by the entity in its capacity as an entity listed on that exchange.
- The document is, or will be, made public by the overseas stock exchange.
- The document includes accounts or other financial information.
- The document is not materially the same as another document that the entity has already given to the ASX.
13. Read the abridged guide for more guidance
The 16-page abridged version of the 78-page Guidance Note 8 has been specifically drafted for directors as a port of reference when considering their disclosure obligations.
The abridged guide, along with the annexures to Guidance Note 8 (available to download under 'Related Documents' below), contain a number of useful worked examples of when disclosure is likely to be required, including in relation to change of control transactions.