A breach of continuous disclosure obligations has cost Newcrest Mining Limited $1.2 million following a recent decision of the Federal Court. This case highlights the care that needs to be taken by listed companies in briefing analysts to ensure that no more information is disclosed to analysts than that which has already been disclosed to the ASX.
Listed companies also need to ensure that their governance structure and disclosure procedures and policies are appropriate and effective to ensure compliance with the continuous disclosure rules. Even more important than that, listed companies need to make sure management actually follows those procedures and policies on a day to day basis.
Recap on continuous disclosure rules
Under the ASX Listing Rules, once an entity becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of its securities, the entity must immediately tell the ASX that information, unless an exception is available1.Importantly, in the context of the Newcrest case, in order for information to come within an exception under the Listing Rules, it is essential that the information is confidential and ASX must not have formed the view that the information has ceased to be confidential.
Section 674(2) of the Corporations Act 2001 (Cth) gives statutory force to the continuous disclosure obligations under the Listing Rules, in circumstances where information is required to be disclosed under the Listing Rules and the information: (1) is not generally available; and (2) would be reasonably expected to have a material effect on the price of the entity’s securities.
The facts in Newcrest
The agreed facts in Newcrest were that:
- between 28 and 31 May 2013, Newcrest’s Investor Relations Manager (Newcrest’s IRM) made presentations and held various discussions with analysts in which it was disclosed that Newcrest’s management expected total gold production for the 2014 financial year (FY14) to be approximately 2.2 to 2.3 million ounces and/or 5% higher than its previously disclosed guidance for the 2013 financial year (production information); and
- on 5 June 2013, Newcrest’s IRM held discussions with two investment houses in which it was disclosed that Newcrest’s management expected capital expenditure for FY14 to be approximately AU$1 billion (capex information).
Newcrest did not disclose the production information or capex information to the ASX until 7 June 2013.
Prior to 28 May 2013, Newcrest had made various announcements in relation to its gold production guidance for the 2013 financial year, the expected capital expenditure for FY 2014 ($1.5 billion) and its 5 year outlook and growth rate for gold production (30-50% over 5 years or 5-10% compound annual growth rate). However, it appears no specific disclosure had been made in relation to expected gold production for FY14.
As part of Newcrest’s FY14 budget process, management’s expectations in relation to total gold production and capital expenditure as previously announced were under constant review. As at 28 May 2013, Newcrest’s revised expectations, in the form of the production information and the capex information disclosed to analysts, had been circulated to the Newcrest Executive Committee in drafts of the FY14 budget and those draft budgets were subsequently circulated to the Newcrest board on 31 May 2013. However, at all relevant times, the FY14 budget had not been approved by the Newcrest board.
According to the agreed facts, Newcrest’s IRM had mistakenly formed the view that the production information had previously been publicly disclosed by Newcrest’s CEO at a conference in Barcelona and it was on that basis that he proceeded to disclose that information to various analysts in the course of his meetings with them between 28 and 31 May 2013. In fact, all that had been disclosed by the CEO was that Newcrest would “increase production in the years ahead at about 5% per annum” and expected “to grow production at 5% per annum over the next 5 years”. These statements by the CEO were consistent with Newcrest’s prior public announcements in relation to the 5 year outlook, but did not reveal any specific guidance for FY14.
There was no apparent explanation for the disclosure of the capex information by Newcrest’s IRM.
It was accepted by Newcrest that:
- prior to Newcrest’s ASX announcement on 7 June 2014, the production information and the capex information were not generally available; and
- the production information and the capex information were both likely to have a material effect on Newcrest’s share price.
Finally, it was agreed that the disclosure of the production information and the capex information to analysts on 28 May 2013 and 5 June 2013, respectively, resulted in the loss of confidentiality in respect of that information on and from those dates. Accordingly, the exceptions from continuous disclosure previously afforded by the Listing Rules no longer applied and Newcrest was required to immediately tell that information to the ASX on those dates. However, Newcrest did not do so until 7 June 2013.
Newcrest admitted to two contraventions of section 674(2) of the Corporations Act:
- firstly, failing to notify the ASX of the production information during the period 28 May 2013 and 7 June 2013; and
- secondly, failing to notify the ASX of the capex information during the period 5 June 2013 and 7 June 2013.
Furthermore, Newcrest also conceded the each of the contraventions was ‘serious’ for the purposes of the pecuniary penalty provisions of the Corporations Act.
Middleton J accepted the agreed facts and ordered that Newcrest pay a pecuniary penalty of:
- $800,000 for the contravention relating to the production information; and
- $400,000 for the contravention relating to the capex information.
Clearly, with the penalties totalling $1.2 million, Newcrest will pay a heavy price for what, in the case of the production information, may be described as an unintended breakdown in management’s communication. This was notwithstanding Newcrest’s admission of the contraventions and co-operation with ASIC in the proceedings.
A question was raised during the proceedings as to whether the production information and capex information was information that should have been disclosed at some time earlier than 28 May i.e. prior to its loss of confidentiality. Presumably this question was premised on the argument that the information did not fall within the Listing Rules exceptions because it was not information concerning an incomplete proposal or a matter of supposition or insufficiently indefinite to warrant disclosure.
Importantly, Middleton J held that the production information and the capex information related to a proposal that was incomplete given that it related to Newcrest’s budget process which, at the time of the disclosure to analysts on 28 May and 5 June 2013, had not yet been approved by the Newcrest board. Therefore, in the absence of the loss of confidentiality caused by the disclosure to analysts, this information would not ordinarily require disclosure by Newcrest to the ASX until it formed part of a budget that had been finalised and approved by the Newcrest board.
The timing of this decision has coincided with the recent issue of ASIC Report 393: Handling of confidential information: Briefings and unannounced corporate transactions, which was a report by ASIC on various investigations it has undertaken to assess and understand the prevalence of the leakage of market-sensitive information by listed companies. The report highlighted analyst briefings as a significant area of risk. Overall, ASIC found that the guidance it has given in this area is adequate and that the challenge is really ensuring that the rules and guidance are being followed by listed entities and recipients of information. ASIC has stated in no uncertain terms that it plans to achieve this by increased market surveillance and taking enforcement action where appropriate.
Lessons for listed companies
It is important that listed companies adopt a governance structure and appropriate policies to ensure compliance with their continuous disclosure obligations. It is even more important that management actually adheres to those procedures and policies. There is no point in having a well-meaning Disclosure Policy if it is not actually followed by management, as was the case in Newcrest. ASIC has made it abundantly clear that continuous disclosure is most certainly on its radar and the Courts have sent a strong message to listed companies that special care should be exercised in their dealings with analysts.