The ASX yesterday released the final version of its guidance note on continuous disclosure (Guidance Note 8). The revised Guidance Note 8 has been submitted to ASIC and is anticipated to come into operation on or around 1 May 2013.
The revised Guidance Note 8 provides listed entities, directors and those who advise them with clearer and more detailed information to help them understand and comply with their continuous disclosure obligations. In this spirit, ASX is moving forward with its proposal for both a long form version for use by legal and other professional advisers and also an abridged version targeted at directors and officers of listed entities. The final ASX consultation response to Guidance Note 8 can be found here.
The key changes to the old Guidance Note 8 are detailed in our client alert - Continuous disclosure: The 5 things you need to know today about the new ASX guidance – issued on 17 October 2012, and in summary include:
- clarification that “immediately” does not mean “instantaneously” but rather “promptly and without delay”;
- greater recognition of the role of trading halts in managing disclosure issues;
- withdrawal of the old guidance that a 10-15% variation in earnings guidance, consensus forecasts or prior year results would trigger an earnings revision. ASX will apply accounting standards criteria for assessing quantitative materiality issues;
- confirmation that the “reasonable person” test does not generally require disclosure of confidential approaches concerning a possible control transaction; and
- more worked examples.
While the final version of Guidance Note 8 is not materially different from the draft version circulated in October 2012, ASX has made a number of important “upgrades” to reflect concerns voiced during the consultation process. These include:
What does ASX mean when it defines immediately as “promptly and without delay”?
ASX interprets “immediately” to mean “promptly and without delay”. 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).
A period of time will necessarily pass between when an entity is first required to give information to ASX and when it is able to give that information to ASX in the form of a market announcement. This passing of time, of itself, does not mean that there has been a “delay” in the provision of information.
Operation of the “reasonable person” test in LR 3.1A.3
Further clarity is given on the “reasonable person” test in the carve outs from the disclosure requirement. ASX considers that the reasonable person test has a “very narrow field of operation”.
ASX specifically identifies two prime examples of circumstances where it considers that a “reasonable person” would expect information to be disclosed:
- to prevent “cherry-picking” of disclosure (ie disclosing “good” information but then declining to disclose “bad” information of the same type on the pretence that it is not market sensitive); or
- where the information needs to be disclosed to prevent an announcement of other information from being misleading or deceptive.
When should an entity use a trading halt to manage its continuous disclosure obligations?
Guidance on the use of trading halts and voluntary suspensions to manage disclosure issues has been expanded considerably. Greater recognition has been given to the role that trading halts can perform in managing continuous disclosure issues, both to the benefit of the market and the entity.
While recognising that a decision to request a trading halt is a serious one, ASX also notes the importance of the listed entity being able to request a trading halt very promptly. If an entity has internal procedures in place which require a request to be approved by, say, the CEO or Chairman, those processes must be able “to be activated and any necessary approvals obtained within a matter of minutes”.
Monitoring rumours and market commentary
In assessing whether there is a false market in securities where an entity hasn’t made an announcement or sought a trading halt, the entity is strongly encouraged to monitor:
- the market price of its securities;
- major national and local newspapers;
- major news wire services (if it has access to them);
- investor blogs, chat-sites or other social media it is aware of that regularly post comments about it; and
- enquiries from analysts or journalists.
This obviously follows recent circumstances involving “rumours” surfacing in some of these forms of media.
In some cases, this may expand the roles and responsibilities of investor relations departments and/or company secretaries.
Interaction with periodic disclosure obligations
ASX expressly recognises (in new note 97) that it is common practice for boards of listed entities to approve in principle half year/annual financial statements, profit announcements and/or dividends ahead of their scheduled release date and then for the board, or a committee of the board, to formally approve those documents or the payment of a dividend, just prior to when the announcement is due to be released to the market.
ASX has clarified that it has no issue with this practice and does not expect the financial statements to be released, profit announcement made or dividend decision to be notified just because they have been approved in principle.
Voluntarily disclosing an incomplete proposal
ASX acknowledges that an entity may choose to disclose an incomplete proposal or negotiation, even though it is not required to do so. However, an entity that voluntarily discloses an incomplete proposal should take care to make it clear that the proposal or negotiation is incomplete and readers are not misled as to the likelihood of the proposal coming into fruition or the negotiations being successfully concluded. ASX notes that if such information is disclosed, this may create further obligations to update the market on any material developments as they arise.
If an entity becomes aware that its earnings for the current reporting period will differ materially from market expectations, it must consider whether it has a legal obligation to notify the market of that fact. Revised Guidance Note 8 expressly seeks to address the question of how an entity should determine what the market is expecting its earnings for the current reporting period to be.
ASX considers that the best and most appropriate base guides to use for these purposes are (in order): (i) any published earnings guidance by the entity itself; (ii) the earnings forecasts of sell-side analysts; and (iii) the entity’s earnings for the prior corresponding period.
ASX also notes that even though an entity may have published earnings guidance, a sudden and unexpected event which will have an obvious and material impact on earnings may well result in the market regarding any previous earnings guidance as no longer being current.
Disclosure of terms of employment of CEO and other directors
As part of the consultation, ASX proposed changes to LR 3.16 to require an entity to notify ASX of the material terms of (or changes to) any employment, service or consultancy agreement with its CEO (or equivalent), any director or any related party of the CEO or directors. These changes are intended to formalise ASX’s previous recommendations in a Companies Update from May 2003.
In the final revised LR 3.16, ASX has clarified that only material variations to those agreements must be notified to the market (previously ASX proposed that any change be notified). Further, LR 3.16 will now provide for certain carve outs to the obligation to disclose, including in relation to fees paid to non-executive directors out of a pool of remuneration approved by security holders and other types of arrangements considered to be “standard”. The changes to LR 3.16 are also expected to take effect on or about 1 May 2013.
Other Guidance Notes
The release of the revised Guidance Note has also resulted in ASX making consequential changes to Guidance Note 1: Applying for Admission – ASX Listings, Guidance Note 4: Foreign Entities Listing on ASX; Guidance Note 12: Significant Changes to Activities; Guidance Note 16: Trading Halts and Voluntary Suspensions; and Guidance Note 17: Waivers and In-Principle Advice.