Poor compliance
At an industry stakeholder liaison meeting in May, the Australian Securities and Investments Commission (ASIC) advised it was observing poor compliance with the continuous disclosure obligations under the Corporations Act 2001 (Act) by unlisted disclosing entities.
As a result, ASIC is undertaking research into the non-compliance and will issue further guidelines reminding unlisted disclosing entities about their obligations under the Act. Enforcement action is then likely to follow.
Which unlisted entities are disclosing entities?
Disclosing entities include the following unlisted entities:
1. Companies which have issued shares following an offer under a prospectus, and the shares have been held by 100 or more persons at all times since the issue.
2. Companies which have issued debentures and are required to appoint a trustee for debenture holders under Chapter 2L of the Act.
3. Registered managed investment schemes with 100 or more members who hold interests in the scheme following an offer made under a product disclosure statement (PDS).
What are the continuous disclosure obligations for unlisted disclosing entities?
Section 675 of the Act requires an unlisted disclosing entity to lodge a continuous disclosure notice with ASIC as soon as practicable after it becomes aware of information that—
1. is not generally available
2. a reasonable person would expect, if it were generally available, to have a material effect on the price or value of the entity's securities, and
3. is not required to be included, in the case of a company which has issued shares or debentures, in a supplementary or replacement prospectus, or, in the case of a registered scheme, in a PDS, supplementary or replacement PDS.
For an unlisted disclosing entity which is a registered scheme, it is the knowledge of the responsible entity (RE) which is relevant and it is the RE which is responsible for compliance with the obligations in section 675.
Examples of information that needs to be disclosed
As ASIC itself has identified, there is little guidance from the regulator about what kind of information needs to be disclosed by unlisted disclosing entities under section 675. However, the obligation imposed on unlisted disclosing entities under section 675 is similar to the continuous disclosure obligations of listed entities under the Australian Securities Exchange (ASX) listing rule 3.1. In the context of listing rule 3.1, the ASX identifies the following which, if it is material, is information which should be disclosed:
1. A change in the disclosing entity's financial forecast or expectation. While the ASX states that smaller variations may be disclosable in some circumstances, a variation in excess of 10 to 15 percent may be considered material and therefore should be disclosed.
2. A transaction for which the consideration payable or receivable is a significant proportion of the written down value of the disclosing entity's consolidated assets. The ASX says an amount of five percent or more would be significant, but a smaller amount may be significant in a particular case.
3. A change in control of the RE of a scheme.
4. A recommendation or declaration of a dividend or distribution.
5. Under subscriptions or over subscriptions to an issue.
6. A change in accounting policy adopted by the disclosing entity.
7. A proposal to change the disclosing entity's auditor.
8. Any rating applied by a rating agency to a disclosing entity, or securities of a disclosing entity, and any change to such a rating.
We would reasonably expect ASIC to adopt a similar approach to the ASX in relation to the kind of information which should be disclosed by unlisted disclosing entities.
Exceptions
Not all information which meets the conditions set out above is required to be disclosed to ASIC. For example, where information is confidential and relates to an incomplete proposal or a matter that is in the course of negotiation, and a reasonable person would not expect the information to be disclosed, then disclosure under section 675 is not required.
What are the penalties for non-compliance?
It is an offence under the Act to fail to comply with the continuous disclosure obligations in section 675. Liability for non-compliance is extended to persons "involved in" a contravention, although it is a defence if a person—
1. took all steps that were reasonable in the circumstances to ensure the disclosing entity complied with is obligations, and
2. after doing so, believed on reasonable grounds the disclosing entity was complying with its obligations.
ASIC has the power to do the following if there has been non-compliance with the continuous disclosure provisions:
1. Apply to the court to impose a pecuniary penalty of up to $200,000.
2. Seek court orders requiring the disclosing entity to disclose or publicise the relevant information.
3. Issue an infringement notice. The penalty specified in the infringement notice for an unlisted disclosing entity will usually be $33,000, but can be up to $66,000 in certain circumstances. For listed entities, the penalties can be higher. Rio Tinto, for example, paid a penalty of $100,000 earlier this month after receiving an infringement notice from ASIC.
What you should do now to avoid action from ASIC
We recommend you do the following now to avoid action from ASIC in the future:
1. Draft and implement a continuous disclosure policy, which sets out materiality thresholds and the kind of information specific to you which would require disclosure under section 675.
2. Nominate one person from your organisation who is responsible for continuous disclosure. Typically, this would be the company secretary or in the case of a registered scheme, the fund manager.
3. Educate your staff about the kind of information which needs to be disclosed and the processes and procedures you have put in place to ensure information is channelled to the person responsible for continuous disclosure.
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.
