The ASX has released a consultation paper on its proposed amended Listing Rules on continuous disclosure, along with a 69 page Draft Continuous Disclosure Guidance Note 8 and an abridged version of this guidance note.
With the spotlight on directors’ duties and continuous disclosure following the High Court’s ruling in Forrest v ASIC and Fortescue Metals v ASIC, the proposed amendments and new Guidance Note offer important insights and useful tips to help company directors understand and comply with the continuous disclosure obligations for their company.
Partner Michael Hansel and solicitor Katherine Hammond outline the top 10 things directors need to know about ASX’s proposed continuous disclosure guidance.
- 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 continuous disclosure materials just released 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.
- Stakeholders have until 30 November to provide comments to the ASX on the continuous disclosure materials, which are expected to be introduced in the first quarter of 2013.
The top 10 things you need to know
1. The meaning of “immediate” disclosure has been clarified
The ASX has confirmed that “immediately” does not mean “instantaneously”. However, it is stronger than the expression “within a reasonable time” and implies “prompt, vigorous action, without any delay”.
The ASX recognises the tension between accuracy and immediacy, and that the speed with which a notice can be given will depend on the 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 to comply with specific legal/Listing Rule requirements; and
- the need for some announcements to be approved by the board.
2. Trading halts should be used 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.
In assessing whether the entity has complied with its continuous disclosure obligations, the ASX has stated that it places considerable emphasis on whether and how promptly an entity has requested a trading halt where the entity is not in a position to issue an announcement immediately (including due to one of the circumstances listed above).
The ASX has suggested that this may help to reduce the entity’s exposure to the legal consequences that could follow - such as action by the ASX or ASIC - if it is found to have breached its obligation to disclose that information immediately.
Directors should be aware that ASIC has issued infringement notices where market sensitive information has been withheld from the market for periods as short as 60 and 90 minutes, and a trading halt has not been requested. In March 2012, ASIC issued Leighton Holdings with a record three infringement notices with the maximum $100,000 fine. ASIC also required an enforceable undertaking to have Leighton Holdings’ continuous disclosure practices audited until 2015 after questioning the timing of its disclosure of a $907 million earnings write-down in 2011.
Accordingly, it is important that listed entities have appropriate compliance systems in place.
3. Suggested strategies for ensuring compliance
To help manage its continuous disclosure obligations, the ASX suggests that a listed entity should consider the following strategies:
- Have a template letter requesting that ASX grant 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 ensure that the event happens outside market trading hours.
- Ensure that the person appointed under Listing Rule 12.5 to be responsible for communications with 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.
Where the 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 ceased to be confidential:
- 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
4. A 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.
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?”
5. Types of information that may be “market sensitive”
The examples in the ASX Listing Rules of types of information that may be “market sensitive” are proposed to 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
6. 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 and it expects its earnings to differ from that guidance, failing to disclose that information may constitute misleading conduct under the Corporations Act, and accordingly the ASX has prescribed that a variation of:
- 10 percent or more should be presumed to be material and therefore should be disclosed;
- 5 percent or less should be presumed not to be material and therefore need not be disclosed; and
- between 5 and 10 percent will require the entity to form a judgement as to whether or not it is material.
7. 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.
8. Confidentiality agreements
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 ASX 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.
9. New specific disclosure obligations
The ASX proposes to introduce several new Listing Rules which will require disclosure of certain information even if it is not judged to be market sensitive information. Notably, it 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 agreement.
10. Abridged Guidance Note 8 and examples
The 13 page abridged version of the 69 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 below), contain a number of useful worked examples of when disclosure is likely to be required, including in relation to change of control transactions.