17 October 2012
ASX today released for consultation a revised version of Guidance Note 8 on continuous disclosure for listed entities. The new guidance note has the support of ASIC, and seeks to address the developments in the law and ASIC's enforcement practices since the last update to the guidance in 2005.
There have been minor edits to the drafting of Listing Rule 3.1 itself, but the main development is a detailed articulation of ASX's (and ASIC's) views on the interpretation of the rule, and worked examples of the disclosure required in a number of fact scenarios.
Two of the key messages repeated throughout the revised guidance are the re-emphasis of the need for entities to assess the impact that information will have on their share price in place of other bright line tests that may currently be used as a proxy for this as well as the fact that sudden and significant movements in an entity's market price will continue to drive the exercise of ASX's discretion and enforcement powers in respect of the continuous disclosure obligations.
The key changes are outlined below:
Material information ─ no "bright line" test, but ASX now looks to movements in share price rather than earnings
ASX is sending companies back to fundamentals in assessing whether information is likely to be material to the entity's share price, and therefore within the scope of Listing Rule 3.1. ASX emphasises that there is no bright line test which definitively determines whether information is material ─ it is up to the entity to undertake the sometimes difficult assessment of the expected impact of the news on their share price (although it confirms that companies only need to consider the impact on inherent value and need not consider the likely reaction of high frequency traders).
In particular, ASX suggests officers of listed entities ask themselves whether such information would influence their decision to trade securities in the entity at their current price, as well as whether they would feel exposed to action for insider trading if they traded without disclosure. ASX also suggests that in considering these questions, it is helpful to have regard to the way ASX assesses materiality of movements in share price for enforcement purposes by the application of the materiality test in the accounting standards, namely by reference to a 5 to 10% movement in the entity's share price.
Immediately ─ ASX recognises commercial reality, and "immediate" means "promptly and without delay"
ASX has sensibly recognised the commercial reality that it takes time for entities to assess material information and to prepare an announcement to the market, by interpreting the requirement to announce immediately to mean "promptly and without delay". This compares with previous suggestions that immediate means instantaneously in every case.
Despite this, ASX does confirm that the standard is a high one and issues very clear warnings about the risks involved in allowing the market to trade while the entity is preparing its announcement. Entities need to monitor their share price during this time, and if it starts to move, they must obtain a trading halt notwithstanding that the information is still being assessed.
ASX also continues to encourage the use of trading halts ─ even in the absence of evidence of price movements ─ while assessing the materiality of information and preparing announcements, to ensure that the market does not trade on an uninformed basis. Trading halts have not been generally embraced by the market as a method of managing disclosure obligations as they are perceived to be unpopular with the market, indicative of an entity that has failed to properly manage its disclosure obligations and because they have the potential to lock the entity into having to make an announcement about an issue, even if it is ultimately determined that it is not material information which strictly requires disclosure.
ASX also makes it clear that if an entity finds itself in a situation where it is aware of the facts of an important matter, but has not yet assessed the implications to determine the impact of those facts on the entity, the facts should be announced, with the assessment of implications to follow when they are known. If an understanding of the implications is necessary to avoid a false market, ASX considers that a trading halt should be obtained while the implications are determined.
Following the decision in James Hardie, and as part of its broader recognition of corporate reality in disclosure processes, ASX has acknowledged that some significant announcements are required to be approved by the board. Accordingly, such announcements do not need to be made until that board consideration has taken place, so long as that process occurs promptly and without delay and the market is not trading uninformed in the meantime.
Incomplete ─ negotiations are incomplete until the entity is legally committed, but you can't artificially delay signing to delay disclosure
ASX has confirmed that negotiations are incomplete until they result in a legally binding agreement, or until the entity is committed to proceeding with the transaction being negotiated (for example, under truth in takeovers laws or because the agreement has otherwise been formally adopted by the entity). While signing of an agreement can be arranged for after market hours, it is not acceptable for an entity to be committed to an agreement (such as through a handshake or side letter) and to delay disclosure by delaying signing. If it did so, the disclosure exception would cease to apply at the time the entity was committed to proceed with the transaction.
Confidentiality ─ if your share price moves, or trading volumes increase, confidentiality has been lost
ASX confirms its position that it will regard specific media or analyst comment or other market rumours about particular information or a significant movement in an entity's market price or trading volume as evidence that confidentiality has been lost in respect of that information. In those circumstances, the exception to the need to disclose that information will no longer be available. ASX also require disclosure in those circumstances under Listing Rule 3.1B because a false market exists. ASX gives guidance as to the range of sources that it believes an entity should be monitoring to test confidentiality and includes within this list social media that regularly includes postings about the entity.
The guidance on the interaction between the interpretation of the confidentiality carve out and ASX's powers if it thinks a false market exists, is an important development in a practical sense, because its price query letters will be amended, and entities will be more likely to be forced into disclosure of confidential information by ASX, if there is a significant change in trading price or trading volume.
Reasonable person ─ ASX is de-emphasising the importance of this limb of the exception ─ a reasonable person would not expect a matter to be disclosed just because it is material
One of the drafting changes made to Listing Rule 3.1A is to move the "reasonable person" test to the bottom of the list of matters that need to be satisfied in order to qualify for the exception to disclosure.
In practical terms, this means that ASX is de-emphasising the importance of this limb of the exception. Previously, the test had been interpreted more widely by both the regulators and listed entities. ASX considers that in order for a reasonable person to expect disclosure of information that otherwise meets the exception to disclosure, there must be unusual circumstances.
Insofar as it relates to the receipt of a takeover proposal by an entity, ASX confirms that the "reasonable person" test does not generally require the disclosure of either the receipt of confidential takeover proposal, nor a decision to pursue or reject it, in the absence of unusual circumstances. For example, unusual circumstances could exist where the takeover proposal is received while shareholders are already considering a competing bid which is open for acceptance.
This narrower interpretation of the reasonable person test gives target boards some more flexibility in determining whether to disclose takeover approaches and gives much greater flexibility than some of the legal advice that was being given in relation to the expectations of the reasonable person. We don't expect however that this articulation of views by ASX will see the end of the bear hug approach.
The reality is that, irrespective of the technical position, many target boards will still choose to disclose such approaches at a time and in a manner of their choosing and consistent with the response strategy they adopt. If they do not, target boards will be exposed to the tactical disadvantages which will flow from losing control of the disclosure of the approach if confidentiality is lost, whether due to disclosure by the bidder, significant movements in the target's share price or the need to respond to other market speculation.
Earnings guidance ─ focus is on the effect of variations on share price rather than a bright line test based on the magnitude of the variation
ASX has moved away from its current guidance that a variation of 10-15% from earnings guidance, analysts' consensus or the results for the prior corresponding period requires disclosure. Instead, ASX directs entities to consider whether its earnings will materially differ from market expectations (whether based on company earnings guidance, consensus analyst estimates or earnings for the prior period) and if they will, whether the difference is of such magnitude that a reasonable person would expect it to have a material effect on the price or value of the entity's securities. The focus has moved from a material change in earnings to a change in earnings which has a material effect on the price or value of the entity's securities.
ASX does note that entities which give earnings guidance or confirm or adopt analysts' consensus estimates may still need to consider whether disclosure of material variations in these numbers needs to be disclosed, adopting the 5-10% accounting standards earnings test for materiality. However, the need to do so is no longer driven by Listing Rule 3.1, but the potential exposure the entity has under the prohibition on misleading or deceptive conduct under the Corporations Act if it fails to update information it has previously given to the market.
Mandatory disclosure of specific information, including beneficial ownership reports
ASX has amended Listing Rule 3 to require mandatory disclosure of some specific information, which may not otherwise be considered material for the purposes of Listing Rule 3.1, such as the beneficial ownership reports that many entities routinely compile based on responses to beneficial interest tracing notices. Against the background that this is routine for many companies, this mandatory disclosure may warrant further consideration during the consultation period.
Overall, ASX has provided a sensible interpretation of the continuous disclosure regime that recognises and accommodates the complexities that listed entities face in the day to day application of the rule to their businesses. However, the corollary to increased flexibility in the interpretation of the rules is increased need for entities to consider each potential disclosure issue on the basis of all the relevant facts and circumstances and exercise judgment and experience in order to ensure that the market for the entity's securities does not trade uninformed.
Consultation on these proposed changes will take place through to 30 November 2012 and ASX hopes to adopt the revised guidance in the first quarter of 2013. In the meantime, market participants would be wise to take many of these proposals into account when considering compliance with their continuous disclosure obligations as indicative of both ASX's and ASIC's interpretation of those obligations.