Australia: Updated ASX Guidance Note 8 – Continuous Disclosure

On 1 July 2015, ASX released an important update to ASX Guidance Note 8: Continuous Disclosure, which provides guidance on compliance with the continuous disclosure obligations in ASX Listing Rules 3.1 – 3.1B.

The revised Guidance Note 8 expands the existing guidance on earnings surprises, publication of analyst forecasts and consensus estimates, and investor briefings.

The recent amendments follow a major update to Guidance Note 8 in May 2013, which included substantially updated guidance on earnings guidance, de facto earnings guidance, earnings surprises and correcting analyst forecasts. However, concerns that some listed entities may have misinterpreted its guidance, particularly in relation to earnings surprises and analyst forecasts, has resulted in the ASX releasing further guidance to clarify its position.

The changes to Guidance Note 8 seek to address these concerns by providing further guidance on when an earnings surprise ought to be disclosed to the market. They also seek to address a number of issues related to analyst and investor briefings and the publication of analyst forecasts and consensus estimates.

Key changes to Guidance Note 8

Significant updates incorporated into the revised Guidance Note 8 include the following:

Earnings guidance

The ASX has emphasised that, all other things being equal, an entity is not required under Listing Rule 3.1 to release its internal budgets or earnings projections to the market and it is acceptable for an entity to have a policy of not providing earnings guidance to the market, subject to certain exceptions relating to de facto earnings guidance and market sensitive earnings guidance (see below).

De facto earnings guidance

The ASX has modified its guidance to clarify that an entity that has a policy of not giving earnings guidance needs to be careful in its communications with security holders, analysts and the press to preserve the confidentiality of its internal budgets and projections. If an entity's internal budgets or forecasts cease to be confidential, they will lose the protection of Listing Rule 3.1A. If, and to the extent that such materials contain market sensitive information, that information will have to be disclosed immediately to the market pursuant to Listing Rule 3.1.

Market sensitive earnings surprises

Guidance Note 8 clarifies existing guidance in relation to a listed entity's continuous disclosure obligations resulting from an earnings surprise. In particular, the revised Guidance Note 8:

  • draws a distinction between earnings surprises that are "market sensitive" and those that are not and emphasises that it is only market sensitive earnings surprises that trigger disclosure obligations under Listing Rule 3.1;
  • maintains the existing distinction between entities that have provided earnings guidance to the market and those that have not;
  • maintains existing guidance that an entity that has provided earnings guidance to the market should consider updating the market if it expects there to be a material difference between the actual or projected earnings for the relevant period and the guidance provided to the market. An expected variation of 10% or more is generally considered to be material (and requires updated guidance) and an expected variation of 5% or less is unlikely to be material. An expected variation of 5-10% requires the Board of that entity to form a view regarding materiality. The new commentary provides the following as examples of where there might be a convincing argument that a 5-10% variation may not be considered material:
    • where an entity has particularly low earnings and a 5-10% variation would be very low in absolute terms and would be unlikely to have a material effect on the price or value of the entity's securities; or
    • where an entity has "lumpy" revenue or expenses, such that an expected variation of 5-10% above or below its published guidance part way through a financial period may not be market sensitive if that situation is expected to correct itself over the course of the financial period as it receives revenue and incurs expenses; and
  • maintains the existing position that the 5-10% variation guidance does not apply to entities that have not published guidance for the current reporting period. In particular, the guidance provides that the fact that their actual or projected earnings at a point in time may differ, if they are covered by sell side analysts, by 5-10% from the analyst forecasts, or if they are not covered by sell side analysts, by 5-10% from their earnings for the prior corresponding period, will not necessarily be market sensitive and may not necessarily require disclosure under Listing Rule 3.1.

Correcting analyst forecasts 

New guidance has been provided in respect of correcting analyst forecasts and consensus estimates. In particular, the ASX does not, other than as set out below, consider that a listed entity has an obligation to:

  • correct the earnings forecast of any individual analyst, or the consensus estimate of any individual market vendor, to bring it into line with the entity's internal projections; or
  • publish its internal earnings projections just because they happen to differ from an analysts forecast or a consensus estimate of forecasts.

Where an entity has not published earnings guidance to the market, analyst forecasts can be relevant indicators of market expectations and an entity will have an obligation 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.

Where there is a significant difference between the entity's internal earnings projections and the earnings forecasts of analysts and/or consensus estimates, an entity should consider whether:

  • there is any information, not protected by the carve outs from disclosure in Listing Rule 3.1A, that should have been, but has not been, disclosed under Listing Rule 3.1; or
  • there is information, already previously announced by the entity which the market has failed to fully appreciate, that the entity needs to publish a further announcement with more information.

The ASX guidance provides that, although there is nothing wrong with pointing out an error in the forecast of a particular analyst, listed entities should exercise caution when engaging in any conversations with analysts so as not to breach their continuous disclosure obligations.

ASX has indicated that it would generally expect an entity to be monitoring analyst forecasts and consensus estimates so that it has an understanding of the market's expectations for its earnings and is "alive to any potential market sensitive information".

Publishing analyst forecasts or consensus estimates

Guidance Note 8 includes new guidance regarding publication analyst forecasts and/or consensus estimates. In particular, an entity is not generally required to publish a single analyst's forecast or a single consensus estimate. The guidance makes it clear that publication of a particular forecast or consensus estimate on the ASX Market Announcements Platform constitutes an implied endorsement of the forecast or estimate as it implies that the forecast or estimate reflects, or approximately reflects, the entity's own view of its likely earnings (and accordingly the entity considers this information to be market sensitive), and may amount to de facto earnings guidance.

Accordingly ASX will not generally permit an entity to publish a single analyst's forecast or a single consensus estimate on the ASX Market Announcements Platform without a detailed acceptable explanation as to why the entity considers the information to be market sensitive. For entities wishing to publish information about analyst forecasts, ASX recommends that, to reduce the risk of any perceived de facto earnings guidance, the entity publish either:

  • a list of the individual earnings forecasts of the analysts known to be covering its stock; or
  • a range showing the low, average (or consensus) and high earnings forecasts of the analysts known to be covering its stock,

along with a disclaimer making 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 expected range of forecasts provided". It is preferable to obtain legal advice on the form and content of an appropriate disclaimer. The entity should disclose the source, completeness and currency of such information. ASX would not regard such publication as de facto guidance provided that the entity does not say or do anything that conflicts with the disclaimer.

The guidance recommends that publication of information about analyst forecasts should include all analysts known by the entity to cover its securities, and that an analyst's forecast should not be excluded from publication just because the entity considers the analyst an "outlier", as this increases the risk of the published information being considered de facto earnings guidance.

A new section regarding publication of analyst forecasts or consensus estimates to analysts has been added to Guidance Note 8. In light of the tendency of some entities to provide periodic summaries of their forecasts to analysts covering their securities, the ASX cautions that such practices may be interpreted as de facto earnings guidance. It will generally be safer for an entity to make such information available to the market generally by publishing it on its website or releasing an appropriate market announcement.

Analyst and investor briefings

Guidance Note 8 includes a new section on presentations to analysts and investors and emphasises the importance to avoiding selective disclosure of market sensitive information. It is prudent practice to first provide any materials to be handed out at an analyst or investor briefing to the ASX and publish the information on the entity's website. Entities should be alive to the risk that market sensitive information may be inadvertently discussed at an analyst or investor briefing that is not included in the presentation pack or written materials handed out at the briefing. In this respect, the ASX suggests that an entity should review proceedings at analyst and investor briefings, including any response provided to questions asked at the briefing, shortly afterwards, to verify that no market sensitive information has been disclosed, and if it has, the entity should immediately publish the information on its website.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Kemp Strang has received acknowledgements for the quality of our work in the most recent editions of Chambers & Partners, Best Lawyers and IFLR1000.

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