The ASX has released a new Consultation Paper on the Continuous Disclosure Guidance Note, which specifically addresses analyst and investor briefings, analyst forecasts, consensus estimates and earnings surprises. In recent times these matters have never been far from the spotlight and the ASX's consultation on these matters is welcome.
The ASX is proposing to clarify several areas of confusion it perceives have arisen following the release of its Continuous Disclosure Guidance Note in March 2013. These include:
- When an earnings surprise ought to be disclosed to the market;
- Analyst and investor briefings; and
- Correcting and publishing analyst forecasts and consensus estimates.
Although not necessarily extensive, these clarifications are important for all listed entities, analysts and advisors. The ASX is planning on having the updated guidance in place in July 2015. Below we provide details of the key proposed changes.
This Consultation Paper follows the release in March 2013 of the revised Guidance Note 8 on the continuous disclosure obligations under Listing Rules 3.1, 3.1A and 3.1B.
Since the release of the revised Guidance Note, some market developments have indicated to the ASX that listed entities and their advisors would benefit from further guidance in these areas. These developments include:
- The release of ASIC's well publicised report Handling of confidential information: Briefings and unannounced corporate transactions in May 2014;
- A $1.2 million penalty imposed by the Federal Court on Newcrest Mining Limited in July 2014, due to breaches of the continuous disclosure obligations following a series of analyst briefings; and
- The release by the Australasian Investor Relations Association (AIRA) of an update on the compilation and dissemination of broker forecasts and consensus estimates by listed entities in August 2014.
There are three key changes proposed under the Consultation Paper.
When an earnings surprise ought to be disclosed to the market
The ASX is seeking to remove the perceived confusion surrounding earnings surprises and disclosure obligations. Specifically, it proposes to update various sections of Guidance Note 8 to draw out the distinction between a "market sensitive earnings surprise" and "those lesser situations." Importantly, only market sensitive earnings surprises trigger disclosure obligations under Listing Rule 3.1.
The ASX proposes to clarify, on the one hand, that a "market sensitive earnings surprise" occurs where an "entity's actual or projected earnings differ so significantly from market expectations that a reasonable person would expect information about its actual or projected earnings to have a material effect on the price or value of its securities." On the other hand, "those lesser situations" occur where an entity's reported earnings differ from consensus estimates but "not necessarily to an extent that a reasonable person would expect information about its reported earnings to have a material effect on the price or value of its securities." Again, only market sensitive earnings surprises will trigger disclosure obligations.
The ASX also recognises that market participants may have confused or conflated its 5-10% variation rule with those situations where an entity has not given earnings guidance to the market. It proposes to insert additional commentary in Guidance Note 8 to draw out the distinction between situations where an entity has published earnings guidance for the current reporting period, and those where it has not. Importantly, additional obligations are likely to attach to entities that make positive representations to the market.
The ASX currently recommends that an entity should update any earnings guidance it has given to the market if actual earnings are likely to be 5-10% more or less than the represented earnings. The fact that an entity's internal earnings projections at a point in time may differ by 5-10% from sell-side analysts, or from their earnings for the prior corresponding period, will not necessarily be market sensitive and therefore does not necessarily require disclosure to the market under Listing Rule 3.1. This is particularly the case if entities have not made positive representations to the market regarding its earnings forecast.
Analyst and investor briefings
The ASX is proposing to add a new section to Guidance Note 8 covering analyst and investor briefings held by entities. The key issue is the selective disclosure of market sensitive information. The guidance offered by the ASX is straightforward. All analysts and investors should have equal access to the same information in order to prepare their forecasts. To achieve this end, any market sensitive information should be disclosed to the ASX first. This includes any new presentation or printed materials intended to be distributed at an analyst or investor briefing being published first on the ASX Market Announcements Platform, and then on the entity's website.
Correcting and publishing analyst forecasts and consensus estimates
The ASX proposes to clarify an entity's obligation to correct analyst forecasts and consensus estimates. The ASX acknowledge that analyst forecasts and consensus estimates are relevant indicators of market expectation. However, an entity will only have an obligation under the Listing Rules to make an appropriate announcement if it becomes aware that its earnings for the current reporting period are likely to differ so significantly from market expectations that information about that difference is market sensitive. If this is not the case, an entity has no obligation to correct the earnings forecast of any individual analyst or the consensus estimate of any individual market data vendor, to bring it in line with the entity's internal earnings projections.
The ASX is of the view that a single analyst's forecast or a single consensus estimate is not information that is required to be disclosed, with limited exceptions. Entities should be aware that to do so may be viewed as a tacit endorsement and therefore interpreted as de facto earnings guidance. If an entity wishes to do so, the ASX recommends additional forecast information is also published, including a relevant disclaimer.
Where to from here?
The ASX is particularly interested in feedback as to any issues that listed entities or other stakeholders consider would merit further guidance that are not currently addressed, or not addressed in sufficient detail or clarity, in the revised version of Guidance Note 8.
The ASX will be publishing the revised version of Guidance Note 8 in July 2015, so that the updated guidance is in place from the beginning of the next financial year. We will keep you updated about material developments.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.