The Australian Securities and Investments Commission (ASIC) appears to be ramping up its enforcement of the continuous disclosure requirements of listed companies under the Corporations Act 2001 (Cth) (Corporations Act) and the Australian Securities Exchange Listing Rules, with a particular focus on updating previously reported financial forecasts. The corporate regulator, which has the power to issue infringement notices to companies who fail to disclose price-sensitive information to the market 'immediately', has recently fined construction giant Leighton Holdings (Leighton) $300,000 in respect of three separate failures to disclose earnings downgrades in a timely fashion.
This penalty, being $100,000 for each failure and the maximum permitted under the Corporations Act, appears to have instilled a sense of caution in other companies wary of violating their own continuous disclosure obligations, with indications that companies can expect a more aggressive stance on continuous disclosure from ASIC going forward.
On 7 April 2011, Leighton entered into a trading halt pending an announcement in relation to its profit forecast. Two business days later on 11 April 2011, Leighton announced to the market that the previously forecast $480 million profit for the financial year ended 30 June 2011 was now expected to be a $427 million loss (representing a difference of $907 million), due to write downs on three separate projects.
On investigation, ASIC formed the view that by 18 March 2011 (being approximately three weeks before the trading halt commenced), Leighton was 'aware' that the entire amount of the previously forecast profit would not be achieved and that, in fact, Leighton was anticipating to make a loss in the relevant period. Notwithstanding that Leighton was not yet aware of the precise amount of the loss, ASIC's view was than an appropriate announcement should have been made to the market at that time.
In response, ASIC issued three infringement notices and imposed a fine of $100,000 for each. Leighton agreed to pay the fines rather than pursue the matter through the courts, and also entered into an enforceable undertaking with ASIC to engage an independent consultant to review its continuous disclosure practices and implement any recommendations the consultant may make.
More recently, and in relation to separate matters, Leighton acted proactively by placing its shares in a trading halt pending a review of information emerging from its quarterly reviews and an assessment of the potential impact of that information on its recent earnings guidance. This morning, Leighton updated the market by confirming that the quarterly reviews had identified a deterioration in two of its projects, which is anticipated to result in a reduction in forecast profit in the current financial year.
Market reaction - David Jones
On 19 March 2012, the first trading day following the announcement of Leighton's settlement with ASIC, the Australian Financial Review published an article speculating that retailer David Jones was preparing to announce a significant drop in the expected future earnings from its financial services division, with its current partnership with American Express due to end in 2013. In response to the media speculation, the company entered into a trading halt that morning. Several commentators have speculated that this was likely in direct response to the recent Leighton fines.
On 21 March 2012, David Jones' half year results were released along with an update on their 'future strategic direction'. These announcements confirmed the earnings forecast downgrades that were the subject of media speculation and the presumed reason for imposition of the trading halt.
Consequences for other companies
All indications suggest that the Leighton fines are just the beginning, and that ASIC intends to rigorously pursue companies that do not fulfil their continuous disclosure obligations. Of the 18 infringement notices ASIC has issued since it was granted the power to do so in 2004, four have been issued since 1 July 2011. Further, ASIC chief Greg Medcraft has emphasised in recent days the importance of ensuring profit forecasts are reasonable to avoid potential disclosure issues, and warned that companies who do not adhere to their continuous disclosure obligations will face the consequences.
The consequences, as Leighton has discovered, can be severe. The maximum fine is currently $100,000 and Mr Medcraft has called for that amount to be lifted, reportedly to as high as $500,000. Such a move would bring the penalty more in line with those imposed in the US for breaches of disclosure obligations. In more severe cases, directors may be found personally liable along with the company, and criminal sanctions may also be imposed.
With this in mind, companies are reminded of their duty to disclose all price-sensitive information to the market as soon as it comes to light, particularly in relation to previously reported financial forecasts. As companies that have faced difficult decisions in relation to such announcements will attest, this decision involves a delicate balancing act. To gather sufficient information to be able to make a factual and clear announcement that is not misleading may take some time. However, ASIC has made it very clear that a company is not excused from its disclosure obligations merely because the precise details of any material information are yet to be known. The decision is often finely balanced.
If a company is faced with this dilemma, it should seek legal advice and consider the use of a trading halt (as David Jones did on 19 March this year), which may serve to protect companies from premature disclosure where a more detailed announcement is imminent by providing the company with up to two days (whilst in the halt) to prepare and release the more detailed announcement prior to trading recommencing.
In addition, given the recent focus by ASIC on this area, it is prudent for companies to review and, if necessary, update their continuous disclosure policies to reflect new market practices and expectations as to what constitutes reasonable disclosure.
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