Australia: Continuous Disclosure, Insider Trading And Conflicts

Continuous Disclosure

1 Takeovers – Approaches and Disclosure

1.1 Listing Rule 3.1

The first topic of discussion today is the application of the continuous disclosure requirements of the ASX Listing Rules in the context of bid proposals. Although not a director's duty, it is however an important disclosure issue for the board of any listed company which is subject to a bid proposal.

Further, it now seems clear that a failure by a listed company to comply with its continuous disclosure requirements may result in a breach of duty by the directors of the company. In the James Hardie decision,1 the James Hardie directors were found to have breached their duty to act with the required degree of care and diligence by approving a draft ASX announcement containing false or misleading statements.

Under ASX Listing Rule 3.1, a listed company must immediately disclose to ASX any information it becomes aware of that a reasonable person would expect to have a material effect on the price or value of the company's securities.2

A company becomes aware of information if a director or executive officer (i.e. a person taking part in the management of the entity) has, or ought reasonably to have come into possession of the information in the course of the performance of their duties as a director or executive officer of the company.3 Information can include opinions (ie. of the board) as to matters including the solvency of a company4 and the legal effect of agreements entered into by a company5. However, a disclosable obligation only arises in relation to opinions actually held. It does not require the disclosure of opinions that should have been held or could have been held, but were not.

Under the Corporations Act 2001 (Cth) (the Act), a reasonable person is taken to expect information to have a material effect on the price or value of securities if it would, or would be likely to, influence persons who commonly invest in securities in deciding whether or not to subscribe for, buy or sell the securities.6 This does not distinguish between sophisticated or wholesale investors and retail investors, large and small investors. Rather, 'persons who commonly invest in securities' are a hypothetical class of reasonable, not irrational or idiosyncratic persons.7

1.2 Listing Rule 3.1A

Listing Rule 3.1A contains an exception to the disclosure requirement in Listing Rule 3.1. It applies while each of the following three requirements are satisfied:

  1. one or more of the following applies:

    1. it would be a breach of a law to disclose the information;
    2. the information concerns an incomplete proposal or negotiation;
  1. the information comprises matters of supposition or is insufficiently definite to warrant disclosure;
  2. the information is generated for internal management purposes of the company; or
  3. the information is a trade secret.
  1. the information is confidential and ASX has not formed a view that the information has ceased to be confidential; and
  2. a reasonable person would not expect the information to be disclosed.

A proposed bid for a listed company is information which would be expected to have a material effect on the value of the target's securities and therefore require disclosure under Listing Rule 3.1. However, the requirement to disclose that information will not apply where the information is confidential and relates to an incomplete proposal or negotiation. This exception will continue to apply to the bid proposal for so long as it remains incomplete and confidential. However, there are two important considerations that apply to this exception.

Confidentiality

First, the exception will cease to apply if ASX forms the view that confidentiality has been lost in relation to the information. ASX has stated that loss of confidentiality may be demonstrated by:

  1. otherwise unexplained movements in a company's share price or changes in trading volumes; or
  2. information in media or analysts' reports- especially where references to a company or its proposals come from a credible source and are reasonably specific or detailed.

ASX will take into account the extent to which confidentiality has been lost. If a proposed transaction is revealed, ASX may ask the entity only to confirm to the market that negotiations are taking place, and not require disclosure of the details of the transaction which remain confidential.8

False market in securities

Second, the carve-out for confidential and incomplete proposals and Listing Rule 3.1A will not apply if ASX considers that there is, or is likely to be a false market in the company's securities and asks the company to give it information to correct or prevent the false market.9 In this case, the entity must give ASX the information needed to correct or prevent the false market even if the information falls within the carve-out for Listing Rule 3.1 because it is incomplete and confidential.

ASX will consider that there is, or there is likely to be a false market in a company's securities in the following circumstances:

  1. the company has information that it has not released to the market because, for example the carve-out for Listing Rule 3.1A applies;
  2. there is reasonably specific rumour or media comment in relation to a transaction involving the company that has not been confirmed or clarified by an announcement by the company to the market; and
  3. there is evidence that the rumour or media comment, is having, or ASX forms the view that the rumour or media comment is likely to have, an impact on the price of the company's securities.

ASX will take the circumstances of each case into account when deciding whether there is, or is likely to be, a false market in the entity's securities. It will usually consult with the entity in question to gain a full understanding of the matter before it decides that a false market exists, or is likely to exist, in relation to an entity's securities.

1.3 Disclosable or not?

In this context, there are two case studies worthy of mention:

Promina

In March 2007, Promina Group Limited (Promina) elected to pay $100,000 to ASIC after being issued with an infringement notice on 21 February 200710 which alleged that Promina had failed to comply with its continuous disclosure requirements in relation to the proposal by Suncorp-Metway Limited (Suncorp) to acquire Promina.

The relevant facts11 were:

  • Promina first became aware of the Suncorp proposal at approximately 6 pm on 10 October 2006.
  • Shortly before noon on 11 October 2006, Promina became aware of press speculation about a potential acquisition of Promina.
  • Promina discussed the matter with ASX and, after consultation with Suncorp and its advisers, was of the view that it was not required to make an announcement, as the proposal remained incomplete and confidential.
  • On 11 October 2006, Promina's share price increased from an opening price of $6.10 to a high of $6.82, an increase of 11.8%. Significantly heavier trading volumes accompanied this increase.
  • Promina's board met to consider the Suncorp proposal on the evening of 11 October 2006. Later that evening Promina received the first written acknowledgement of the terms of the proposal. Discussions in relation to the proposal continued between Promina and Suncorp through the course of the night.
  • Promina lodged an announcement in respect of the proposal at approximately 7 am on 12 October 2006. That announcement was released to the market at approximately 8.29 am.
  • ASIC's position was that Promina should have made this announcement on 11 October 2006, following press speculation on the proposal around noon that day.

Rio Tinto

In June 2008, Rio Tinto Limited (Rio Tinto) elected to pay $100,000 to ASIC after being issued with an infringement notice on 10 April 200812 to had failed to comply with its continuous disclosure requirements in relation to a proposed acquisition of

Alcan Inc. (Alcan).

The relevant facts13 were:

  • Rio Tinto had been engaged in confidential discussions with Alcan in relation a merger for some time. Rio Tinto understood that Alcan was in discussions with a number of other parties whose merger proposals were being considered by Alcan.
  • Rio Tinto was advised that it was the preferred bidder at approximately 8.07 am on 12 July 2007, subject to final negotiation and agreement of transaction documents. At this stage, Rio Tinto was of the view that there was no requirement for an announcement or a trading halt.
  • At approximately 2.30pm on 12 July 2007, Dow Jones Newswires reported that Rio Tinto was close to finalising a deal with Alcan at a cash price of $100 per share- the actual price was US$101. Articles were also published by Reuters speculating that Rio Tinto was close to finalising a deal with Alcan.
  • After discussions with ASX, Rio Tinto was of the view that it was not required to make an announcement in relation to the transaction. In particular, Rio Tinto was of the view that confidentiality had not been lost because:
    • media reports were only general in nature and some continued to refer to at least one other party as a bidder; and
    • there had been no material increase in the price of Rio Tinto shares or any abnormal trading volumes.
  • Between 2.30 pm and 3.41 pm on 12 July 2007, 725,624 Rio Tinto shares were traded (representing 37.6% of the volume of the day's trading) and the value of the shares traded in that period was $64,899,964 (representing 35.3% of the value of the day's trading).
  • Rio Tinto initiated a trading halt at approximately 3.40 pm on 12 July 2007. The trading halt was applied at 3.42 pm.
  • At approximately 4 pm on 12 July 2007, Rio Tinto announced details of its offer for Alcan.
  • ASIC was of the view that confidentiality was lost at 2.30pm when the Dow Jones Newwires reported that Rio Tinto was close to finalising a deal with Alcan.

It's fair to say the outcome of these cases was to create some confusion and uncertainty in the market in relation to the disclosure of confidential bid discussions and proposals. This confusion and uncertainty culminated in the David Jones debacle in 2012.

The relevant background is:14

  • On 28 May 2012, David Jones Limited received an unsolicited letter from a UK firm, EB Private Equity, containing a 'highly conditional, uncertain and incomplete' expression of interest. At this point, David Jones took the approach that it could rely on the disclosure exception available to it under listing rule 3.1A and the proposal was confidential and incomplete.
  • On 28 June 2012, David Jones received a further letter enclosing an offer which included conditions, and did not include details on the bidder's financial capacity, management or other terms of the acquisition. Again, David Jones' position was that the offer was confidential 'highly conditional, incomplete and uncertain'.
  • On 29 June 2012, David Jones became aware that information about the EB Private Equity's approach was likely to be known to third parties outside the company, including two financial market participants and one property market participant.
  • At the opening of trading on 29 June 2012, David Jones made an announcement saying that it had received 'an unsolicited letter from non-incorporated UK entity about which no usual public information is available, indicating its interest in making an offer for the company'.
  • Later that day, after David Jones became aware that international media outlets had details of the offer and were publishing them online, David Jones released a second announcement to the ASX. The second announcement named EB Private Equity as the potential bidder, referred to the proposal as a A$1.650 million proposal for 100% of the company. It went on to state that 'no details of EB Private Equity's financial capacity, its management, or any of the other terms of the residual equity have been made available. No further details of the proposal have been provided'.

The share price of David Jones went on a roller coaster ride following the announcements. EB Private Equity withdrew its bid following the announcements, although by all accounts there looked to be no substance to EB Private Equity or its proposed bid.

In 2013, ASX updated it Guidance Note on continuous disclosure. Amongst other things, the changes were intended to clarify the operation of Listing Rule 3.1 in relation to disclosure of an incomplete and confidential takeover proposals. The changes sought to de-emphasise the importance of the 'reasonable person' test under Listing Rule 3.1A. ASX was of the view that companies were taking a very broad view of this test, which resulted in the premature disclosure of information (eg. David Jones), or companies refraining from disclosing negative information. ASX confirmed that the reasonable person test would not require disclosure of a takeover offer which was confidential and incomplete.

Despite the changes, there still seems to be some uncertainty in the market around the continuous disclosure rules in the context of takeover approaches.

So, what should a company do if it enters into confidential discussions for a potential takeover? The key message to come out of the ASX guidance and these cases is that the company needs to constantly monitor relevant press coverage, its share price and trading volumes. It should also have a "leak" strategy and a draft announcement or request for a trading halt ready to go in the event that confidentiality is lost in relation to the takeover proposal. In this regard, trading halts have been specifically designed to protect listed entities from premature disclosure where a more detailed announcement is imminent.

Other ways that companies have sought to manage their disclosure obligations in the face of takeover discussions include:

Post-deal due diligence conditions: There have been an increasing number of Australian transactions that have included a due diligence condition, which enables the bidder to conduct due diligence after formal agreements have been executed and ced. Adverse findings in the due diligence might enable a bidder to terminate the transaction (see Toll (Japan Post), Graincorp (Archer Daniels), Gloucester Coal (Yanzhou Coal), AXA APH (AMP) and Oz Minerals (China Min-Metals);

  • Process Agreements: where parties announce a transaction, before they have completed due diligence or agreed on transaction documents (see St.George (Westpac), Ludowici (FL Smidth & Co) and Lion Nathan (Kirin); and
  • Pre-bid conditions: where a bidder will announce an intention to make a takeover on certain terms, subject to completion of due diligence (see MSF Sugar (Mitr Phol Sugar) and Realestate.com.au).

Footnotes

1 Australian Securities and Investments Commission v Macdonald (No11) [2009] NSWSC 287.

2 ASX Listing Rule 3.1.

3 ASX Listing Rules - Chapter 19.

4 Grant-Taylor v Babcock & Brown (in liq) (2015) 322 ALR 723.

5 Australian Securities and Investments Commission v Fortescue Metals Group Ltd (No 5) (2009) 264 ALR 201.

6 Section 677 Corporations Act 2001 (Cth).

7 Grant-Taylor v Babcock & Brown Ltd (in liq) (2016) 330 ALR642, 663 [115]-[116]; 665 [128].

8 ASX Guidance Note 8.

9 ASX Listing Rule 3.1B.

10 Compliance with the notice was not an admission of guilt or liability and Promina was not regarded as having contravened the Corporations Act.

11 Based on publicly available information.

12 Compliance with the notice was not an admission of guilt or liability and Rio Tinto was not regarded as having contravened the Corporations Act.

13 Based on publicly available information.

14 Based on publicly available information.

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