CORPORATE UPDATE (AUSTRALIA)
Following the High Court's recent decision in Forrest v ASIC; Fortescue Metals Group Ltd v ASIC  HCA 39, the Australian Securities Exchange (ASX) this week released its much anticipated draft Guidance Note 8 on continuous disclosure for listed entities (GN8) for consultation. The guidance indicates a commercially realistic approach to how entities should comply with their obligations under Listing Rule 3.1 and provides a useful insight into how ASX will monitor and enforce compliance with the Rule. GN8 runs to 69 pages and ASX has also released an abridged guide of 13 pages.
Key points arising from the revised guidance are ASX's understanding that in some circumstances entities may need time to assess information before announcing it and its encouragement for entities to use trading halts to assist in managing their continuous disclosure obligations.
Listing Rule 3.1
There is no significant change in principle to the disclosure obligations in Listing Rules 3.1, 3.1A and 3.1B, although ASX proposes minor drafting changes. The key benefits of the review are the elaboration of the ASX's interpretation and policy, and the more detailed examples provided in GN8.
Key messages of GN8
Some of the key messages of GN8 are outlined below.
Test for 'material effect'
ASX acknowledged the difficulty in determining whether information is market-sensitive. The relevant test, laid down in the Corporations Act 2001 (Cth) (the Act), is whether the information would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of securities.
However ASX states that only the entity can form this view about the information it knows. It suggests that officers consider whether the information would influence their decision to buy or sell securities in the entity at their current price, and whether they would feel exposed to an action for insider trading if the information is not disclosed. It also emphasises the need to consider the information in the context of the entity's circumstances at the time, publicly available information and previous disclosures the entity has made.
Meaning of 'immediately' and use of trading halts
GN8 states ASX's view that 'immediately' does not mean 'instantaneous', but rather, 'promptly and without delay'. However the actual wording of Listing Rule 3.1 remains unchanged. While we consider the terms 'promptly', 'without delay', 'immediate' and even 'instantaneous' to be synonymous, it is clear that ASX is seeking to project a commercially realistic interpretation of 'immediate' that recognises that the speed with which a notice can be given will vary depending on the circumstances.
ASX continues to emphasise the high standard of disclosure this threshold sets and encourages entities to request trading halts where there is likely to be delay in releasing market-sensitive information. ASX points to two previous infringement notices issued by the Australian Securities and Investments Commission (ASIC) where market-sensitive information was withheld from the market for only 60 and 90 minutes respectively and comments that requesting a trading halt could reduce exposure to the legal consequences of a breach of the obligation to disclose information immediately.
We assume that in light of its close and cooperative work with ASX on GN8, ASIC will also take a less technical view of the word 'immediately' when considering issuing infringement notices (also known as speeding fines) or initiating proceedings.
Listing Rule 3.1A carve-outs - incomplete proposals
ASX states that a proposal is incomplete until the entity has adopted it and is committed to proceeding with it. Negotiations are not complete unless and until they result in a legally binding agreement or the entity is otherwise committed to proceeding with the transaction.
ASX goes on to state that an agreement is not binding until it is signed or formally adopted in some way, which resonates with the recent findings by the High Court that the agreements signed by Fortescue Metals Group Limited with Chinese entities were binding, and therefore that company was within its rights to disclose them as such.
Listing Rule 3.1A carve-outs - confidentiality
ASX's view is that information is confidential if it is known to only a limited number of people who understand it should be treated in confidence and abide by that understanding. Entities relying on this carve-out to withhold information from the market should monitor the price of their securities, major newspapers and news wire services, investor blogs, and enquiries from analysts and journalists for signs that information may have leaked. An entity should immediately contact ASX if it detects such signs.
Alluding to debates ASX has had with various entities, ASX says unequivocally that if the market price moves suddenly and significantly when material information is being withheld from the market, absent any other explanation for the price movement, confidentiality will be treated as lost and the information must be disclosed.
Listing Rule 3.1A carve-outs - reasonable person would not expect disclosure
ASX stresses that a reasonable person may expect disclosure of information even where that information satisfies the other carve-outs in Listing Rule 3.1A.
ASX considers a reasonable person to be an independent and judicious bystander, whose interests are not aligned with the listed entity or the investment community. Although not necessarily at odds with ASX, in the Fortescue case the High Court identified the audience for continuous disclosure announcements as investors and some wider section of the commercial or business community.
In the detail of GN8, ASX gives guidance that a reasonable person would not expect an entity to disclose confidential information that it is planning a takeover bid or that it has received an offer from a bidder. However, it is likely that without any legislative change to the takeover provisions of the Act and regulatory guidance from ASIC, the tactical practices of announcement or leaking of a non-binding proposed bid by a bidder to pressure the board of the target to engage with it (also known as a bear hug) will continue, largely due to the threat of, or the actual, loss of confidentiality of the proposed bid and the subsequent need to address market rumour to prevent a false market.
Earnings guidance and surprises
ASX does not consider that Listing Rule 3.1 requires an entity to give earnings guidance, except where earnings for a reporting period will be materially different to market expectations. GN8 notes that 'as a forward looking statement, earnings guidance must have a reasonable basis in fact or else it will be deemed misleading, with all the significant legal consequences that entails'. GN8 states that an entity has a legal obligation to notify the market:
- If it becomes aware that earnings for a reporting period will be materially different to market expectations if the difference is of such magnitude a reasonable person would expect it to have a material effect on the price or value of the entity's securities (under Listing Rule 3.1 and the continuous disclosure provisions of the Act); or
- If it becomes aware that its earnings for a reporting period will materially differ from specific earnings guidance it has given to the market (under the misleading and deceptive provisions of the Act).
ASX considers that whether information is material for these purposes will depend on the circumstances and refers entities to the questions it recommends officers ask themselves above in relation to 'material effect' on price. However it suggests a more comprehensive approach than in the current version of GN8, which states that a variation of 10-15% in analysts' projections or the entity's earning guidance.
Where an entity has published specific earnings guidance, ASX recommends that the entity apply the threshold for materiality in the Australian Accounting and International Financial Reporting Standards, being that an expected variation of 10% or more should be considered as material and of 5% or less as immaterial, with the entity's discretion being exercised within this range.
Other key points
- Opinions - In what appears to be a reference to confusion resulting from the Full Federal Court's decision in the Fortescue case, ASX states that opinions expressed in announcements should be honestly held and balanced, and clearly identified as an opinion rather than a statement of fact.
- Procedures to assist companies - GN8 emphasises the need for entities to have in place procedures to enable them to quickly identify disclosable information and to disclose it. It suggests various tools and steps to assist entities, including using trading halts, delegation by the board to senior management and ensuring the ASX liaison officer has sufficient knowledge of the entity.
- Full board approval is not a reason to not disclose - GN8 notes that where an entity considers an announcement as so significant that board approval is required before its release, and the information relates to an event that has already occurred and does not fall within Listing Rule 3.1A, the board meeting must be convened promptly and the announcement cannot be delayed until the next scheduled board meeting.
- New disclosure rules - New Listing Rules proposed by ASX require entities to announce the material terms of the CEO's employment and the material terms of employment for any director or other related party, when it declares a dividend or distribution or when a dividend or distribution will not be declared, and information about substantial holders.
- Enforcement practices - GN8 outlines actions that ASX will take upon detecting abnormal trading, including the use of 'price query letters' and 'aware letters'.
Consultation closes on 30 November 2012. It will be interesting to see the results of that process, particularly whether ASIC's submission reveals how it is likely to interpret and enforce the continuous disclosure regime.
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