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Australia – ASX Proposes New Guidance On Continuous Disclosure.

21 October, 2012

 

Legal News & Analysis – Asia Pacific – Australia – Regulatory & Compliance

 

In brief

 

  • Today ASX released the much anticipated consultation paper on the proposed new version of Guidance Note 8 Continuous Disclosure: Listing Rule 3.1, proposed minor changes to the disclosure related provisions in the Listing Rules and a proposed new abridged guide on continuous disclosure targeted at company directors.
  • Key aspects of the proposed new version of Guidance Note 8 include: 
    • quantitative thresholds to guide an assessment of whether information is likely to be market sensitive;
    • confirmation that “immediately” means “promptly and without delay”, endorsement of the use of trading halts to manage continuous disclosure obligations and recognition of the need for due process in making announcements
    • confirmation that, in the most part, a reasonable person would not expect confidential takeover approaches which involve an incomplete proposal or negotiation to be disclosed; and 
    • withdrawal of the previous guidance that a variation of 10-15% against earnings guidance or consensus forecasts or the results of a prior period ought to be disclosed under ASX Listing Rule 3.1 because there is no necessary correlation between such a change and the percentage impact that will have on the share price. However, where an entity has given specific earnings guidance the listed entity should be guided by AASB 1031 (ie a variation of equal to or greater than 10% ought to be presumed to be material and a variation between 5-10% requires a judgment call) when assessing whether disclosure is required for the purpose of ensuring there is no contravention of the misleading and deceptive conduct provisions in the Corporations Act.
  • There has been a process of consultation between ASX and ASIC in respect of the proposed new version of Guidance Note 8 and the proposed Listing Rule changes and the regulatory settings in the proposed new version of Guidance Note are not likely to change.

 

ASX consultation on Guidance Note 8

 

Today ASX released a proposed new version of Guidance Note 8 Continuous Disclosure: Listing Rule 3.1 and a proposed new abridged guide on continuous disclosure targeted at company directors as part of a wider consultation process on the disclosure related provisions in the Listing Rules. The proposed new version of the Guidance Note represents a “ground up” redraft and provides more detailed guidance (including a number of worked examples) as to how ASX interprets and administers Listing Rules 3.1, 3.1A and 3.1B. ASX is seeking submissions as to whether there are any issues that would merit further guidance that are not currently addressed or not addressed in sufficient detail. They are not seeking submissions as to substantive changes to the Listing Rules as it is unlikely that ASIC would support any fundamental changes which undermine the policy underlying the Listing Rule or statutory provisions. Submissions are due on 30 November 2012 and ASX anticipates that, subject to completion of the process for Ministerial disallowance, the changes will be finalised and released in the first quarter of 2013.

 

This update is intended to summarise some of the key aspects of the proposed new Guidance Note in a timely fashion.

 

Clarification of the operation of Listing Rule 3.1

 

When is information market sensitive?

 

Listing Rule 3.1 requires immediate disclosure of information that a reasonable person would expect to have a material effect on the price or value of the listed entity’s securities. Under section 677 of the Corporations Act, a reasonable person is taken to expect information to have a material effect on the price or value of securities if it would be likely to influence persons who commonly invest in securities in deciding whether to buy or sell the securities.

 

ASX clarifies that it interprets the reference to persons who commonly “invest” in securities as a reference to persons who commonly buy and hold securities for a period of time, based on their view of the inherent value of the security (ASX specifically states that such persons do not include high frequency traders).

 

ASX acknowledges that the test for making an assessment as to the materiality of information gives rise to some practical difficulties for directors and senior management as they are effectively required to predict how investors will react to particular information when it is disclosed. However, in ASX’s view this difficulty is inescapable.

 

ASX suggests that when making this assessment it may be helpful for officers to ask two questions:

 

  • 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?

 

If the answer to either question is yes then this would be an indication that the information is market sensitive.

 

ASX also suggests that listed entities may find the parameters that ASX uses for determining whether or not to refer a breach to ASIC helpful. Following the quantitative thresholds in AASB 1031, ASX considers that if the information is likely to cause the share price to change by 10% or more, it will generally be regarded as material and where the information is likely to cause the share price to change by less than 5%, it will generally be regarded as not being material. Where the anticipated price movement is between 5% and 10%, the answer will turn on the circumstances of the case but, given the potential consequences which flow from a breach of Listing Rule 3.1, ASX cautions that listed entities would be wise to err on the side of disclosure and disclose if in doubt.

 

ASX also makes the point that in assessing whether or not information is market sensitive the information needs to be looked at in context against a backdrop of:

 

  • the circumstances affecting the listed entity at the time;
  • any external information that is publicly available at the time; and
  • any previous information the listed entity has provided to the market.

 

The meaning of “immediately”

 

In the proposed new version of Guidance Note 8, ASX helpfully clarifies that it considers that “immediately” does not mean “instantaneously”, but rather “promptly and without delay”.

 

However, ASX is quick to point out that the standard of promptness expected is justifiably high and notes that ASIC has issued infringement notices for breaches of the continuous disclosure requirement for delays in disclosure as short as 60 minutes in the case of the Commonwealth Bank and 90 minutes in the case of Rio Tinto where a trading halt has not been requested to cater for the delay.

 

For this reason ASX emphasises that it is important to have in place appropriate compliance systems to ensure that potentially market sensitive information is promptly assessed and, if it requires disclosure, promptly disclosed or, if that is not possible, a trading halt promptly requested.

 

ASX recognises that the speed with which an announcement can be released will vary and will take into consideration the following factors when considering whether a listed entity has complied with its obligation to disclose information in a timely manner under Listing Rule 3.1:

 

  • where and when the information originated;
  • the forewarning (if any) the listed entity had of the information;
  • the amount and complexity of the information concerned;
  • the need in some cases to verify the accuracy or bona fides of the information;
  • the need in some cases to comply with specific legal or Listing Rule requirements (such as the JORC Code for mining, oil and gas activities);
  • the need in some cases for an announcement to be approved by the board or disclosure committee; and
  • whether the listed entity has promptly requested a trading halt to minimise the period that the market is trading on an uninformed basis.

 

How can trading halts be used to manage the requirement for timely disclosure?

 

Whilst ASX notes that the Listing Rules (including Listing Rule 3.1) technically continue to apply while a listed entity is in a trading halt, ASX helpfully confirms that it does not apply the Listing Rules in a technical manner but rather in a manner that accords with their spirit, intention and purpose and in a way that best promotes the principles on which they are based.

 

This means that if a listed entity approaches ASX promptly after it becomes obliged to disclose information under Listing Rule 3.1 to request a trading halt and, after the halt has been granted, then acts to issue an announcement as quickly as it can in the circumstances, ASX will regard the entity as having complied with the spirit and intent of Listing Rule 3.1. ASX also states that it understands that ASIC will also take into account whether or not a listed entity has promptly requested a trading halt in determining whether it will take enforcement action in relation to a possible breach of its continuous disclosure obligations.

 

Is there justification for delay when board approval required?

 

The current version of Guidance Note 8 takes a strict line on the need for board approval and states that a listed entity cannot delay giving information to ASX pending formal sign-off or adoption by the board.

 

In the proposed new version of the Guidance Note ASX acknowledges that it is appropriate for some particularly significant continuous disclosure announcements to be considered and approved by the board before release but notes that this is not always the case.

 

Given the requirement for announcements under Listing Rule 3.1 to be immediate, ASX states that a listed entity should have in place suitable arrangements (such as delegations to senior management or having a disclosure committee that can meet by phone or on short notice) to enable this to occur.

 

If board approval is required, the requirement to “immediately” release information can accommodate the time needed to get board approval, provided the board meeting is convened and the announcement is settled and approved “promptly and without delay”. The entity should also consider whether, in the particular circumstances, a trading halt ought to be requested during the period whilst waiting for board approval.

 

During this period ASX also encourages listed entities to monitor:  the market price of its securities;

 

  • major national and local newspapers;
  • major news 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; and
  • enquiries from analysts or journalists.

 

Clarification of the exceptions to immediate disclosure under Listing Rule 3.1A

 

When is information insufficiently definite to warrant disclosure?

 

The proposed new version of the Guidance Note indicates that information will be “insufficiently definite to warrant disclosure” if:

 

  • the information is so vague, embryonic or imprecise;
  • the veracity of the information is so open to doubt; or
  • the likelihood of the matter occurring, or its impact if it does occur, is so uncertain, that a reasonable person would not expect it to be disclosed to the market.

 

ASX differentiates the circumstances identified in the last bullet point above from a situation where information about a known event or circumstance can reasonably be expected to have a material effect on the price or value of a listed entity’s securities but where it may take time for the entity to quantify the financial impact of the event or circumstance. Consistent with the approach taken by ASIC with the infringement notice issued to Leighton Holdings, Listing Rule 3.1 will generally require such information to be disclosed immediately and it is not appropriate for the entity to delay announcing the information because it is not in a position to state the financial impact. In this case, the proposed new version of the Guidance Note states that the appropriate course is to announce whatever information is in the listed entity’s possession and signal that it will make a further announcement once it has had the opportunity to quantify the financial impact of the information.

 

This of course begs the question of how a listed entity is able to make the judgment of whether an event can reasonably be expected to have a material effect on the price or value of its securities in the first place.

 

The requirement for confidentiality

 

One of the three limbs of the exception from Listing Rule 3.1 in Listing Rule 3.1A is that the information remain confidential and that ASX not form the view that information is no longer confidential.

 

Whether information is confidential is a question of fact and therefore it is incumbent on a listed entity which wishes to rely on the carve-out to ensure that it has in place suitable and effective arrangements to preserve confidentiality and to monitor for signs that information may no longer be confidential:

 

  • the market price of its securities;
  • major national and local newspapers;
  • major news 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; and
  • enquiries from analysts or journalists.

 

A listed entity in these circumstances should have ready a draft trading halt request and announcement to be ready to respond in the event confidentiality is lost.

 

ASX may form the view that confidentiality has been lost where there is a media or analyst report about the matter, a rumour in the market about the matter or there is sudden unexplained significant movement in the price or volume of the listed entity’s securities.

 

In relation to unexplained price or volume movements, ASX notes that sometimes listed entities and their advisers want to debate whether a sudden and significant movement in the price or volume of its securities can fairly be attributed to information about a particular matter ceasing to be confidential. ASX considers any such debate to be misplaced. If there is market sensitive information that has not been disclosed and the listed entity is not able to point to any other event which explains the movement in the market price or traded volumes ASX has no choice but to assume that the information has been leaked. Alternatively, significant price or volume movements may be evidence of a false market, in which case ASX may require the information to be released under Listing Rule 3.1B.

 

The “reasonable person” test

 

Another of the three limbs of the exception from Listing Rule 3.1 in Listing Rule 3.1A is that “a reasonable person would not expect the information to be disclosed”. ASX considers that the “reasonable person” test is the least understood limb of the three part test in the exception.

 

ASX has withdrawn the statement that “a reasonable person would not expect information to be disclosed if the result would be unreasonably prejudicial to the entity” on the basis that this statement was causing some of the confusion. Specifically, that statement was being taken as justification for not releasing negative information which may be prejudicial to the listed entity.

 

The proposed new version of the Guidance Note now states that the fact that information may have a materially negative impact on the price or value of an entity’s securities does not mean that a reasonable person would not expect the information to be disclosed. On the contrary, in many cases, this is precisely the type of information that a reasonable person would expect to be disclosed. The proposed new version of the Guidance Note explains that most information that is confidential and falls into one of the prescribed circumstances in Listing Rule 3.1A.3 (breach of law, incomplete proposal, insufficiently definite, internal management documents and trade secrets) would be information that a reasonable person would not expect to be disclosed unless there is something unusual in the fact matrix to suggest otherwise. The proposed new version of the Guidance Note also gives a number of examples of when disclosure will and will not be required under this limb of the exception.

 

ASX expressly confirms that a reasonable person would not expect confidential takeover approaches which involve an incomplete proposal or negotiation to be disclosed. This comes against an increasing trend for target companies to announce the receipt of a confidential, incomplete, conditional, takeover proposal. Of course, it is open for a listed entity to adopt this course of action. However, the proposed new version of the Guidance Note affirms that this is generally a strategic decision (subject therefore to applicable confidentiality agreements) rather than one of legal necessity.

 

ASX however provides as an example of a fact matrix where a reasonable person might expect disclosure in these circumstances is where there is a hostile takeover in progress and the target receives an indicative non-binding confidential proposal from a friendly competing bidder at a higher price and subject to due diligence. As shareholders need to make a decision as to whether or not to accept the hostile offer, ASX concludes that in these circumstances a reasonable person would expect disclosure.

 

Particular disclosure issues

 

Earnings guidance

 

Consistent with ASIC’s Regulatory Guide 170 on prospective financial information, ASX cautions that “any forward looking statements in an announcement, such as earnings guidance or exploration or production targets, must have a reasonable basis in fact or else by law they will be deemed to be misleading” and notes that it is for this reason that appropriate due diligence needs to be applied to the preparation of earnings guidance with the underlying figures and assumptions being carefully vetted and signed off at a suitably senior level. Any material assumptions or qualifications that underpin those statements should also be stated in the announcement.

 

Earnings surprises

 

The proposed new version of the Guidance Note continues the theme that financial reports should not contain any “earnings surprises”. The revised draft acknowledges that forward looking earnings expectations are a key driver of the price and value of securities and are therefore of paramount importance.

 

If a listed entity becomes aware that its earnings will materially differ from earnings guidance it has issued, analysts’ consensus or, in the case of entities not covered by analysts, its earnings for the prior corresponding period, it needs to consider carefully whether it has a legal obligation to notify the market of that fact. ASX considers that where the difference is of such magnitude that a reasonable person would expect it to have a material effect on the price or value of the entity’s securities, disclosure is required under Listing Rule 3.1. Additionally, in the case of an entity which becomes aware that its earnings will materially differ from earnings guidance it has given to the market, disclosure may be required under section 1041H, as failing to inform the market that its published guidance is no longer accurate could constitute misleading and deceptive conduct on its part.

 

  • What is a material difference for these purposes?

 

ASX acknowledges this is a difficult question and draws a distinction between: 


  • where an entity has given earnings guidance to the market where a material difference between its actual or expected earnings and its earnings guidance may raise disclosure issues under both Listing Rule 3.1 and section 1041H; and
  • where an entity has not given earnings guidance to the market where a material difference between its actual or expected earnings and market expectations will generally only raise disclosure issues under Listing Rule 3.1.

 

Much will depend on the circumstances and, whilst ASX gives examples of factors that should be considered, it does not consider it appropriate to lay down any general rules but simply suggests asking the same questions as it proposed when considering whether information is market sensitive outlined earlier in this note.

ASX has withdrawn its previous guidance that a variation of 10% to 15% against earnings guidance or against consensus or the results of the prior corresponding period ought to be disclosed under Listing Rule 3.1.

 

However, where a listed entity has published specific earnings guidance, ASX warns of the potential liability under section 1041H of the Corporations Act and that the threshold for liability under this section is different to and in some cases may be lower than the threshold for disclosure under Listing Rule 3.1. Given this, ASX recommends following the quantitative thresholds in Australian Accounting and International Financial Reporting Standards that:

 

  • an expected variation in earnings compared to its published earnings guidance equal to or greater than 10% should be presumed to be material and therefore ought to be disclosed; but
  • an expected variation in earnings compared to its published earnings guidance equal to or less than 5% should be presumed not to be material and therefore need not be disclosed.

 

Where the anticipated variation in earnings compared to its published earnings guidance is between 5% and 10%, the entity needs to make a judgment.

 

  • When does a listed entity become aware that its earnings for a reporting period will be materially different from market expectations?

 

In ASX’s opinion there needs to be a reasonable degree of certainty that there will be a material difference. The fact that an entity’s earnings may be materially ahead or behind market expectations part way through a reporting period does not mean that this situation will prevail at the end of the reporting period. The situation may change so ultimately it comes down to a matter of judgment by the entity.

 

  • What should be announced?

 

The announcement needs to at least indicate the order of magnitude of the difference and disclose any identifiable reasons for the difference. Such an announcement will constitute earnings guidance so should be subject to the same due diligence in its preparation and to the same vetting and sign off processes as any earnings guidance.

 

  • When should it be announced?

 

Such announcements should be made promptly and without delay but ASX will make due allowance for the fact that the preparation of earnings guidance will need to be properly vetted and signed off.

 

 

For further information, please contact:

 

Sarah Dulhunty, Partner, Ashurst
sarah.dulhunty@ashurst.com
 
David Ryan, Partner, Ashurst
david.ryan@ashurst.com
 
Stuart Dullard, Ashurst
stuart.dullard@ashurst.com
 

 

 

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