This morning, ASX released for public consultation a draft update to its continuous disclosure guidance note, accompanied by incidental and minor rule changes. The draft is a rewrite of the former Guidance Note 8 and covers substantial new ground.
Guidance note helpful
ASX has responded to the call of listed entities and advisers for greater clarity and guidance on continuous disclosure obligations by addressing issues that have continued to cause concern and which have not been resolved by Fortescue or other continuous disclosure regulatory actions.
In guidance with which ASIC is in broad agreement, ASX seeks to assist those involved in M&A transactions.
Because of the significant potential for price movement in the context of potential M&A transactions, the risks and stakes are high for listed entities – bidders and targets – in determining if, when and what to disclose in relation to developing bid proposals.
Key assistance of a general and M&A specific nature is proffered by ASX:
- confirming that the requirement for disclosure to occur ‘immediately’ means ‘promptly and without delay’ rather than ‘instantaneously’, and that the required timing will depend on the circumstances
- clarifying that targets that have before them a confidential non-binding takeover proposal are generally not obliged to disclose that proposal, and
- indicating a greater willingness to offer trading halts as a tool to prevent false markets and facilitate drafting of releases in the context of leaks.
Examples in an M&A context
In the M&A transactions sphere, ASX expands on its guidance with a range of examples where disclosure issues arise.
‘Reasonable person’ test
- This test is satisfied for a non-binding confidential bid
An increasing trend of targets to disclose confidential and non-binding takeover approaches had led some target advisers to the view, and bidders to worry, that targets in this position could no longer satisfy the ‘reasonable person’ test (that is, the requirement, to qualify for the ‘confidentiality carve-out’ from the disclosure requirement, that ‘a reasonable person would not expect’ disclosure). This led those advisers to suggest that all confidential and non-binding takeover proposals that are market sensitive are required to be disclosed.
Helpfully, ASX considers that generally a reasonable person would not expect a non-binding confidential takeover approach to be disclosed, so the ‘reasonable person’ test would be satisfied.
- However the ‘reasonable person’ test might not be satisfied – and disclosure may be required – in relation to a confidential non-binding bid proposal where the target receives it at a time an earlier bid is open for acceptance.
The draft guidance note indicates that this position may be altered by the surrounding factual circumstances. For example, ASX’s position is that the ‘reasonable person’ test would not be satisfied, and immediate disclosure of an approach would be required, if the target was at the time of receiving the approach the subject of an earlier hostile takeover by another bidder where shareholders need to make a decision whether or not to accept that bid.
The target in this position would also need to consider its Corporations Act obligations (from which there is no ‘confidentiality carve-out’) to disclose information material to its shareholders’ decision whether or not to accept the earlier hostile takeover in the target’s statement (or a supplementary target’s statement) for the hostile takeover.
If the subsequent bid proposal is regarded as sufficiently real to be material to target shareholders then it may well require disclosure under the Corporations Act target statement disclosure requirements as well as, in ASX’s view, under the continuous disclosure requirements.
The draft guidance note states that in this competitive scenario, the commonly used wording threatening withdrawal of the approach if it is disclosed would not affect the target’s disclosure obligations.
This may have a ‘chilling’ effect on the formulation of counter-bids that require target assistance before they can be made binding, and on targets’ attempts to develop an auction in this sort of situation. However, with care it may be possible for a potential bidder to ensure discussions remain sufficiently vague to avoid materiality and thus disclosure. Also, different considerations may well apply in a scheme context where there is some time remaining until shareholders are required to vote and it is otherwise in shareholders’ interests for a potential counter-bidder to receive target assistance to facilitate an auction (assuming that is permitted under the applicable no-talk, no-shop provisions).
Incomplete proposal or negotiation
- The incomplete proposal or negotiation test is satisfied until agreement is reached
ASX states that disclosure of the fact that a confidential approach has been received in relation to a proposed control transaction will not ordinarily be required until such time as negotiations with the bidder are successfully completed.
Negotiations are incomplete (and therefore disclosure is not required if the ‘confidentiality carve-out’ otherwise applies) until a binding agreement has been entered into or the entity is otherwise committed to proceeding with the transaction (eg by handshake or ‘side letter’).
ASX expressly approves the established practice of parties coming to agreement while the market is closed and announcing the transaction before the next open.
Examples showing how disclosure rules operate in an M&A context
- More worked examples of takeover scenarios raising disclosure issues
ASX has set out a detailed worked example of a confidential takeover approach scenario, incorporating the common occurrence of an initial rejection by the target’s board. A range of different contingencies are explored.
Confidentiality and false market
- When might you have a false market
The draft guidance note confirms that ASX will generally regard a significant change in market price or trading volumes as indicative of the fact that undisclosed price sensitive information has leaked (and so must be disclosed), even if it is arguable that other factors are at play.
Unfortunately, press commentary of possible or rumoured control transactions, even if speculative, may trigger a disclosure requirement if at or about that time the share price and/or traded volumes materially change.
- How to address a false market – potential for trading halt
ASX encourages contact with listing advisers so that ASX can offer assistance on how to address a situation that might lead to a false market, including whether it is appropriate to request a trading halt and the scope of the announcement needed to address the situation.
Where ASX has received a trading halt request and it considers the information that is the reason for the request is market sensitive, ASX says it will invariably agree to the trading halt request so as to afford the entity the time it needs to prepare and issue an announcement. This is effectively on the proviso that the entity then moves to issue an announcement as quickly as it can in the circumstances.
Public consultation in relation to the draft guidance note, its associated summary guidance and the proposed changes to the listing rules closes at the end of November. The draft guidance note expected to come into effect in early 2013.