The Australian Securities Exchange has put continuous disclosure in the spotlight again, with a comprehensive redraft of its guidance note on the continuous disclosure provisions that are critical to market integrity and efficiency. The attention is welcome, especially in light of the recent controversial High Court decision in Fortescue Metals.
The ASX has also made minor amendments to the text of the continuous disclosure Listing Rules; however, the significant changes are in the Guidance Note.
Compliance with the ASX’s continuous disclosure Guidance Note is not necessarily a safe harbour from ASIC or court action. However, the Guidance Note is the product of extensive consultation between ASX and ASIC and notes that ASIC is in “broad agreement with the thrust and contents” of it. Consequentially, it should be taken into account immediately by disclosing entities even in its draft form.
Below we detail some of the key features of the proposed new Guidance Note.
What information is market sensitive?
- Listing Rule 3.1 requires disclosure of information that a reasonable person would expect to have a material effect on the price or value of the securities.
But how does a disclosing entity make this determination? ASX suggests its officers ask two questions:
- Would this information influence my decision to buy or sell securities at their current market price?
- Would I feel exposed to an action for insider trading if I were to buy or sell at the current price (knowing this information has not been disclosed to the market)?
If yes to either, this is an indication that the information is market sensitive.
What does “immediately” mean?
- The need to disclose “immediately” remains. But it does not mean “instantaneously”, it means “promptly and without delay”.
- What “promptly and without delay” means will vary in the circumstances. Relevant factors include the source of the information, any forewarning the entity had, the amount and complexity of the information, the need to verify the accuracy or bona fides of the information and, in some cases, the need for board approval.
- The standard is high: ASIC has issued infringement notices for delays of 60 and 90 minutes.
Does the need for board approval impact “immediately”?
- The requirement for the matter to be dealt with “promptly and without delay” remains. An entity needs to have structures in place to enable this to occur. For example, can the matter be dealt with by delegations to senior management or a disclosure committee, rather than the full board?
- In practice, and in our view, some matters will unavoidably need to go to the full board. In these circumstances the entity needs to think carefully about how it will manage its disclosure obligations (so that disclosure can be made “promptly and without delay”). The entity should carefully consider whether a trading halt is needed to prevent the market trading on an uninformed basis.
How can trading halts be used?
- Trading halts are a key tool to balance competing forces: the need for speed and the need for accuracy.
- Request a trading halt promptly. Delay in doing so is a factor that ASX and ASIC will consider in determining whether a breach of the continuous disclosure rules has occurred. In one case, a delay of 38 minutes was an aggravating factor in ASIC’s view.
- If a trading halt is not sought, ASX recommends that the entity monitor the market, press and blog sites to see whether the information has leaked.
- Importantly, while the Listing Rules continue to apply during the trading halt (including the continuous disclosure rules), ASX will not apply the rules during that period in a technical way, but rather in a way that accords with their spirit, intention and purpose. If a company promptly requests a trading halt and promptly makes an announcement afterwards ASX considers this complies with the spirit, intention and purpose of the listing rules.
- Overall, while the trading halt provides breathing space, it is only a little extra space.
- If possible, enter into material contracts that require an announcement outside of trading hours so that a trading halt is not needed (allowing an announcement before trading commences on the next day).
What about information that would be prejudicial to the entity?
- The ASX has withdrawn the statement: “A reasonable person would not expect information to be disclosed if the result would be unreasonably prejudicial to the entity”. ASX considers that this statement has been misconstrued by some to mean that entities in material financial difficulty do not have to disclose materially negative information. ASX has now provided more detailed guidance for entities in financial difficulty.
Are there materiality thresholds in certain circumstances?
- Yes there are, but they only apply in certain circumstances.
- The thresholds apply to published earnings forecasts (the principle being that earnings reports should not contain earnings surprises). The thresholds are that a variation of less than 5% from published earnings guidance is presumed not material, greater than 10% is presumed to be material, and between 5 to 10% requires judgement.
- Thresholds also apply in ASX’s consideration as to whether there has been a breach of the continuous disclosure rules (which it would refer to ASIC). ASX will examine the share price before and after the (late) announcement. If the movement exceeds 10% (relative to other securities in the market or the entity’s sector) ASX will regard it as market sensitive and refer it to ASIC. Between 5% and 10% will be determined on a case-by-case basis. Of course, these are after the fact tests. Nonetheless, they will provide helpful guidance to disclosing entities – if ASX uses these thresholds disclosing entities are well advised to as well.
- Thresholds do not apply to consensus forecasts from analysts, nor to comparisons to the prior corresponding period. In these cases ASX does not consider it appropriate to lay down general rules, but simply suggests that the entity ask the same questions as to whether the information is ‘market sensitive’.
What about takeover approaches and bear hugs?
- ASX does not consider that a reasonable person would expect disclosure of confidential and incomplete proposals to enter into control transactions. If a potential target rejects such a proposal which is still confidential, while it needs to be considered on a case-by-case basis, ASX guidance suggests that there are strong arguments the rejection would not need to be disclosed. Disclosure would also not be required if the target board writes to the potential bidder saying that they are prepared to negotiate and recommend the offer in the absence of a superior proposal if the proposal is still incomplete. However, when a ‘merger implementation agreement’ is signed disclosure would be required. Also, if confidentiality is lost before the proposed transaction ceases to be ‘incomplete’ this changes the disclosure obligation, as does the emergence of an interloper bidder.
- Of course, this does not mean the “bear hug” is futile. A suitor simply needs to leak the information as this may trigger the requirement for the target to publicly respond. Nor does it mean that the target cannot disclose (to start an auction) – this is a strategic decision, not a legal one (subject to confidentiality obligations).
- Guidance on these matters is to be firmly welcomed, especially in light of market uncertainty as to whether disclosure is required and the implications for the market if premature disclosure is made.
The draft new guidance note contains numerous examples which will prove very helpful to disclosing entities. The ASX has also produced an abridged guidance note (as the main guidance note is 69 pages). The shorter document is targeted at directors and other officers, while the main document will be more relevant legal and other professional advisers.
The consultation period ends on 30 November 2012. ASX expects that the final Guidance Note will be released in early 2013. We will keep you updated of significant developments.