In the midst of the awakening Global Financial Crisis last year the Australian Stock Exchange (ASX) was made to answer criticisms that its policing of the Australia stock market was somewhat soft. The ASX responded at the Securities and Derivatives Industry Association (SDIA) Conference in May 2008, defending its regulatory practice and promising stricter enforcement practices in the future.
Since that time the ASX has been working hard on its promise to ensure listed entities remain compliant.
Earlier this year the ASX published a reminder to listed entities warning them that they are expected to continuously disclose material changes in their financial performance in accordance with ASX Listing Rule 3.1.
Under the rule, once an entity becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price value of the entity's securities, the entity must disclose that information to the l ASX.
An example of the information an entity would be required to disclose is a change to the entity's previously released financial forecast or expectation. As a general policy the ASX considers a variation from a previous forecast in excess of 10% to 15% as 'material' and requiring disclosure. However in certain circumstances, and particularly given today's market conditions, a 'reasonable person' may deem a smaller variation as information having a 'material effect' and disclosure may therefore still be required.
To assist entities in complying with their disclosure obligations the ASX has issued Guidance Note 8 which outlines its expectations in relation to best practice disclosure. A copy of the guidance note can be obtained from the ASX website at www.asx.com.au.
The ASX has indicated that trading breaches such as late or erroneous reporting would be escalated from an operational level within Market Control. The increase of the severity of the breach, coupled with increased scrutiny from the ASX, means that listed companies should be careful to ensure that they are fulfilling their continuous disclosure requirements correctly.
What Should Be Disclosed In A Report?
For disclosure under Listing Rule 3.1 the ASX expects an entity's report to contain some details, however quantified, of the extent of the variation. It may be an approximate amount, a range, or a percentage movement of the expected variation, but it must be sufficiently precise so as to not mislead investors.
Officers of listed companies are also advised that they should refrain from publicly commenting that they are "happy" or "comfortable" with analysts' forecasts. Doing so may result in the ASX asking the entity to release to the Company Announcement Office an expected profit of an approximate amount or an amount within a stated range.
In order to balance transparency against premature disclosure of incomplete or indefinite matters that could unduly harm an entity, the ASX provides a number of exceptions to the continuous disclosure rule, being when information:
- Is about an incomplete proposal or negotiation
- Is indefinite enough not to warrant disclosure
- Is for internal management purposes
- Is a trade secret
- Is confidential, and the ASX has not determined confidentiality is lost
- Is requested by the ASX in response to market speculation.
A further exception to the rule is when it would be a breach of law to disclose the information or when a reasonable person would not expect the information to be disclosed.
When Should The Information Be Disclosed?
Where disclosure under Listing Rule 3.1 is required, disclosure must occur immediately after an entity becomes "aware" of the information which gives rise to a reporting obligation. The ASX has indicated it will not accept delay in information disclosure due to a board not having considered or signed off on the information, nor will it accept delay until the next periodic financial report is released.
Entities are reminded that under Listing Rule 15.7 information for market release must firstly be disclosed to the ASX before it can be disclosed to anyone else, to ensure efficiency and fairness.
What If The Information Is Not Disclosed?
If the ASX suspects that an entity has failed to disclose information before releasing its financial report, it can request that entity to confirm when it first became aware there was a variation. The ASX can then choose to release this correspondence to the market.
A matter can be referred by the ASX to ASIC which has the power to apply a range of civil and criminal sanctions to offending entities. For less serious breaches ASIC may choose to issue an infringement notice.
Entities should be aware that the ASX's increased surveillance of adherence to disclosure requirements may increase the risk of shareholder litigation against entities who breach their obligations.
This article was prepared by Grant Sefton, Partner, with the valued assistance of Natalie Pala, Paralegal, both from Moray & Agnew's Newcastle office.
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.