The ASX has released a consultation paper seeking input on its latest proposed changes to its continuous disclosure guidance (Listing Rules Guidance Note 8 Continuous Disclosure: Listing Rules 3.1 – 3.1B) (Guidance Note 8).
ASX published a major re-write of Guidance Note 8 in May 2013 (see our previous Alert) but is concerned that its updated guidance is not being correctly interpreted or applied by companies in relation to providing earnings guidance, dealing with analyst forecasts and estimates and investor and analyst briefings.
In this Alert, Partner Michael Hansel and Associate Katherine Hammond outline eight key tips from ASX's proposed revised guidance in relation to providing earnings guidance and how companies should deal with analyst and investor briefings, analyst forecasts and consensus estimates, and earnings surprises.
Directors and advisors should bear in mind that the proposed updates are not yet formal ASX guidance. However as the updates are intended to be more of a clarification of, rather than a substantive change to, ASX's existing policy, for now it is likely the best indication of ASX's current interpretation of its existing policy.
Submissions on the consultation paper close on 24 April 2015 with ASX proposing to publish a revised Guidance Note 8 on 1 July 2015 so that the revised guidance is in place for the new financial year.
Eight key tips:
- There is no general requirement to provide earnings guidance.
- Be careful not to give "de facto earnings guidance".
- Only "market sensitive" earnings surprises trigger disclosure obligations.
- There is no general obligation to correcting analyst forecasts and consensus estimates.
- Take an all or nothing approach to publishing analyst forecasts and consensus estimates.
- Any presentation materials should first be provided to the ASX before any investor presentation or analyst briefing (even if you think there is no market sensitive information).
- Entities must have a compliance plan and respond quickly to continuous disclosure issues.
- The parties to a material contract may need to be disclosed.
The above tips are discussed in more detail below.
There is no general requirement to provide earnings guidance
It is acceptable for an entity to have a policy of not providing earnings guidance to the market.
However, such a policy does not take precedence over the entities' continuous disclosure obligations, to disclose market sensitive information unless an exception applies.
Similarly, entities are not required by Listing Rule 3.1 to release its internal budgets or earnings projections to the market provided they remain confidential.
Be careful not to give "de facto earnings guidance"
De facto earnings guidance is given where an entity makes statements such as
- the entity is "happy" with or expects its earnings to be "in line with" analysts' forecasts; or
- the entity expects its earnings to be in line with, or within particular percentage range above or below, the corresponding prior period.
If an entity has a policy of not giving earnings guidance, it must be careful to preserve the confidentiality of its internal budgets and projections and not make statements which may be construed as de facto earnings guidance, particularly when communicating with security holders, analysts and the press.
Otherwise, if that information is market sensitive, it will have to be disclosed immediately.
Only "market sensitive" earnings surprises trigger disclosure obligations
Not all "earnings surprises" are market sensitive and only "market sensitive earnings surprises" trigger disclosure obligations.
A "market sensitive earnings surprise" is 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.1
To assess whether the earnings surprise is market sensitive, ASX provides a list of factors to be considered2, with two proposed additions since the previous guidance:
- the extent of the earnings surprise (Extent); and
- whether the earnings surprise relates to earnings guidance published by the entity or to some other measure of expected earnings, such as analyst forecasts or earnings for the prior corresponding period (Nature).
ASX considers that the market will expect earnings guidance from an entity itself to be inherently more authoritative and reliable than the other measures of expected earnings and is therefore likely to take a comparatively smaller variation for that to be considered market sensitive.
Where an entity has published earnings guidance, that guidance will be a basis for the market's expectations and if it expects there to be a material difference between its actual or projected earnings and the published guidance, it should update its guidance to the market. For these purposes, ASX suggests the following as a guide on materiality3:
- Treat an expected variation of 10% or more as material;
- Treat an expected variation of 5% or less as not being material;
- For a variation between 5% and 10%, the entity needs to form a judgment as to whether it is material.
If the entity has not published earnings guidance, the fact that internal earnings projections may differ from analyst forecasts or prior corresponding period earnings by those materiality thresholds will not necessarily be market sensitive and does not need to be disclosed.
Where an entity has not published guidance, ASX does not lay down any general rule of thumb or thresholds on when a variation in earnings compared to market expectations will be "market sensitive". Instead ASX suggests that an officer asks two questions, where an answer of "yes" to either should be a cautionary indication that the information may be market sensitive:
- "Would this information influence my decision to buy or sell scurrilities in the entity at their current market price?"; and
- "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?"
Entities which publish earnings guidance make a positive representation to the market that will serve to set the market's expectations for their earnings. If they subsequently expect their earnings to differ from their published guidance they will also need to consider their potential liability under section 1041H of the Corporations Act 2001 (Cth) for having misled the market as to their likely earnings, in addition to disclosure obligations.
If an entity realises when preparing a periodic disclosure statement that there will be a market sensitive variation between reported earnings and market expectations, it must update the market immediately and not wait until it releases the periodic disclosure statement.
There is no general obligation to correcting analyst forecasts and consensus estimates
According to ASX, an entity does not have any obligations to:
- correct the earnings forecast of any individual analyst or a consensus estimate to bring it into line with the entity's internal earnings projections; or
- publish its internal earnings projections just because they happen to differ from an analyst's forecast or a consensus estimate.
However, analyst forecasts and consensus estimates are relevant indicators of market expectations. As such, an entity will 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.
In other words, the entity will have an obligation to provide corrective disclosure if:
- Analyst forecasts or consensus estimates are out of line with internal projections; and
- the market's expectations can be reasonably said to be based on the forecasts or estimates; and
- the fact that there is a variation between internal projections and forecasts or estimates would have a material effect on the price or value of the entities shares.
Given that obligation, ASX expects an entity that is covered by sell-side analysts to be monitoring analyst forecasts and/or consensus estimates so that it has an understanding of the market's expectations for its earnings and is alive to any potential market sensitive earnings surprise that may be emerging.
Take an all or nothing approach to publishing analyst forecasts and consensus estimates
ASX considers that the act of publishing analyst forecasts or a consensus estimate on the ASX Market Announcements Platform constitutes an implied endorsement of the forecasts or estimate and amounts to de facto earnings guidance.
ASX will not generally allow an entity to publish a single analyst's forecast or a single consensus estimate on the ASX Market Announcements Platform without an acceptable explanation as to why it is market sensitive information.
An entity may publish information about analyst forecasts or consensus estimates on its website, but there is a risk that this may be seen as tacit endorsement and interpreted as de facto earnings guidance.
If an entity wants to publish information about analyst forecasts then ASX recommends that the entity publish either:
- a list of all the individual earnings forecasts of the analysts covering its stock, along with a "Disclaimer" (explained below); or
- a range showing the low, average (or consensus) and high earnings forecasts of all the analysts cover its stock, along with a "Disclaimer".
The "Disclaimer" should make it clear that it does not endorse, confirm or express a view as to the accuracy of the forecasts, nor does it make any representation that its earnings will fall within the range of forecasts provided.
ASX will allow an entity to publish such a list or range with the Disclaimer on the Market Announcements Platform.
There is also a risk of an appearance of providing selective disclosure or de facto earnings guidance (through tacit endorsement) where an entity provides all the other forecasts or estimates that it has to particular analysts, for example to enable each analyst to have an understanding of where its forecast sits vis-ŕ-vis its peers and consensus and so that the analyst's comments have more chance of being accurate. ASX suggests that the entity should instead publish the complete information with the disclaimer on the ASX or its website, as suggested above.
Any presentation materials should first be provided to the ASX before any investor presentation or analyst briefing (even if you think there is no market sensitive information)
An entity must not disclose at an analyst or investor briefing any market sensitive information unless it has first been disclosed to ASX.
Even if an entity believes that investor or analyst presentation does not contain any market sensitive information that has not already been released, an entity should give the presentation materials to the ASX first before the briefing, to avoid any dispute about whether the information is market sensitive.
An entity should have a procedure for reviewing proceedings at analyst and investor briefings afterward, including responses provided to any questions asked at the briefing to check whether any market sensitive information has been inadvertently disclosed and, if so, for ensuring that the information is published immediately on the ASX Market Announcements Platform.4
Entities must have a compliance plan and respond quickly to continuous disclosure issues
Entities must have a compliance plan to deal quickly with continuous disclosure issues, including:
- Ensuring ASX can always contact someone who can speak on behalf of the entity;
- Having contingencies where approval of the board or CEO is required for a particular ASX announcement or trading halt request; and
- Having a template letter requesting ASX to grant a trading halt ready for use at all times.
An entity may expose itself to regulatory action by ASIC (for example an infringement notice) where a continuous disclosure issue cannot be resolved quickly enough. For example, ASIC has issued an infringement notice where a company delayed by no more than approximately 90 minutes.5
The parties to a material contract may need to be disclosed
Also worth noting is that in its proposed amendments to Guidance Note 8, ASX is proposing to add "the parties to the contract" to the list of items that ASX generally expects to be disclosed in an announcement about the signing of a contract relating to a significant acquisition or disposal.6
1ASX explains that a mere "earnings surprise" is 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.
- The extent of the earnings surprise;
- Whether the earnings surprise relates to earnings guidance published by the entity or to some other measure of expected earnings, such as analyst forecasts or earnings for the prior corresponding period;
- Whether near term earnings is a material driver of the value of the entities securities;
- Whether the difference is attributable to a non-cash item that may not impact on underlying cash earnings;
- Whether the difference is a permanent one or, for example, is due to the timing of recording a material revenue item;
- Whether the difference is attributable to one-off or recurring factors;
- Whether the relative outlook for the entity in coming financial periods is positive or negative.
3from the Australian Accounting Standards.
4 See ASIC Regulatory Guide 62, principles 8 and 9.
5 ASIC issued an infringement notice against an entity for taking approximately 70 minutes to request a trading halt and a further 20 minutes to issue an announcement to respond to an article in the Dow Jones newswire service containing fairly specific details of a very material acquisition the entity was close to consummating. Instead of requesting an immediate trading halt, the entity told ASX that it would consider its position and respond. It took a further 38 minutes to do that and to finally request a trading halt.
6 In section 4.15 of Guidance Note 8 the suggested list of details to be included in an announcement would include:
- The parties to the contract;
- The assets or businesses proposed to be acquired or disposed of;
- Any material conditions that need to be satisfied before the agreement becomes legally binding or proceeds to completion;
- Information about the likely effect of the transaction on the entity's total assets, total equity interests, annual revenue (or, in the case of a mining exploration entity or other entity that is not earning material revenue from operations, annual expenditure) and annual profit before tax and extraordinary items;
- If the entity is proposing to issue securities as part of, or in conjunction with, the transaction, information about the issue, including its effect on the total issued capital of the entity and the purposes for which the funds raised will be used;
- If any changes to the board or senior management are proposed as a consequence of the transaction those changes; and
- The timetable for implementing the transaction.
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