Amid the evolving COVID-19 pandemic, ASX has released a compliance update providing guidance and temporary relief to ASX-listed entities.
The measures are intended to provide emergency assistance to ASX-listed entities and to mitigate against any dishonest market activity in the volatile COVID-19 economic environment.
ASX and ASIC should be congratulated on their prompt but considered response to the unfolding environment. Regulatory responses put in place before the GFC (eg. the ability to undertake a rights issue without a prospectus) were important factors in assisting entities through that difficult period). These recent changes go further than those available through the GFC and we expect them to be even more critical. On a case by case basis perhaps even more may be necessary, but on a positive note market participants and regulators are approaching events with an open mind.
Continuous Disclosure Obligations
Given the inherent uncertainty of the COVID-19 pandemic and its impact on listed entities, ASX has sought to clarify one of the exceptions to the continuous disclosure obligations by re-affirming that ASX does not expect listed entities to announce information that relates to matters of supposition or that is insufficiently definite to warrant disclosure. Put simply, ASX has clarified that a listed entity's continuous disclosure obligations do not extend to predicting the unpredictable.
ASX has also clarified that it does not expect listed entities to make forward-looking statements to the market unless they have a clear and reasonable basis for doing so.
The key practical guidance ASX has provided regarding disclosure obligations for listed entities is outlined below:
- Earning guidance: ASX is strongly encouraging entities that have not reviewed their published earning guidance in light of COVID-19 to do so and, if it is no longer current, to update it or withdraw it entirely. ASX has indicated that withdrawal of earnings guidance without quantifying the magnitude of the expected difference (where there is no reasonable basis for doing so) is acceptable and understandable in the circumstances.
In our view, this should not be interpreted as a new rule or blanket excuse to withdraw all guidance without explanation in all circumstances. Entities should still first assess whether they need to withdraw their guidance (for example because they no longer have a reasonable basis for it). Having formed that view they should also consider whether they are nevertheless aware of information around their expected performance or the impacts of COVID-19 on their business which is price sensitive and which they do have a reasonable basis for. Information of this nature, even if only narrative in nature, should be considered for disclosure.
- Material operational decisions: ASX has advised that operational decisions which are likely to have a material effect on the price or value of a listed entity's securities should be immediately announced to the market (for example, a decision to stand down a material number of employees or suspend certain operations).
- Market announcements to be given to ASX first: ASX has reminded listed entities of the requirement not to release information that is for release to the market to anyone else, unless and until it has been provided to ASX and has been released by ASX to the market.
- Reaffirmation of other key disclosure obligations: ASX has re-affirmed the immediate disclosure requirements of ASX-listed entities:
- which decide to undertake a capital raising;
- facing serious financial difficulty (in circumstances when a decision to appoint an administrator is made, or an event of default occurs with a major lender); and
- which intend to cancel a dividend or distribution payment that it had already resolved to pay. On this point, ASX also makes the important observation that a listed entity needs to confirm the legal basis for cancellation, including by reference to the entity's constitution.
ASX has clarified these particular disclosure obligations to ensure listed entities are disclosing the appropriate information at the correct time so that the market remains properly informed during the pandemic.
ASX has also noted a disturbing number of instances where listed entities have made announcements with potentially misleading claims around COVID-19. ASX has specifically warned against this, in particular those claiming that the entity has found a cure or treatment for COVID-19, or claiming to be in negotiations to utilise their manufacturing facilities to manufacture necessary medical equipment. ASX noted its power to suspend or censure entities that make misleading COVID-19 claims to mitigate this behaviour.
Capital Raising Relief
ASX has introduced temporary relief to facilitate emergency capital raising by ASX-listed entities until 31 July 2020. ASX has introduced this relief as recognition that many ASX-listed entities will need to urgently raise capital in the coming months to sustain their operations and protect themselves from a steep drop in revenue caused by the economic disruptions of COVID-19.
Many ASX-listed entities are going to come to the conclusion in the coming weeks and months that raising capital is necessary. During a crisis such as this, effective boards should remain informed about the relief available to them and consider whether their financial situation warrants taking advantage of such relief.
ASX is introducing three key measures as part of this temporary relief, being:
- Back-to-back trading halts: ASX will permit an entity to request two consecutive trading halts (enabling up to a 4 day trading halt) to consider, plan and complete a capital raising.
- Increase in the 15% placement capacity to 25%P: ASX has increased the 15% limit on placements in listing rule 7.1 to 25%. Entities that already have shareholder approval for the additional 10% placement capacity under listing rule 7.1A will be able to elect to use that additional placement capacity or the additional 10% placement capacity available under this temporary measure, not both. Entities who utilise this temporary additional capacity must also offer securities under a pro-rata entitlement offer or a follow-on offer under an SPP to retail investors at the same or lower price.
The increase in placement capacity is a one-off measure meaning, once utilised, an ASX-listed entity will not be able to replenish its temporary extra placement capacity. Furthermore, ASX will only allow listed entities to undertake one placement to take advantage of their temporary extra placement capacity. Should a listed entity seek to undertake more than one placement using their temporary extra placement capacity, the entity will need to approach ASX for an individual waiver.
- Waiver of the one-for-one cap on non-renounceable entitlement offers: ASX will waive the requirement that the ratio of securities offered under a standard non-renouncement entitlement offer must not be greater than one security for each security held by a shareholder. The waiver of the one-for-one cap provided in listing rule 7.11.3 will apply to standard non renounceable entitlement offers and ANREOs. (Renounceable offers may still be offered at a ratio greater than 1 for 1, but we would expect that in many cases non-renounceable offer structures will be required in order for the offer to be successful.)
The above measures will be implemented by class waivers, meaning there is no requirement for ASX-listed entities to apply individually to gain access to the above relief measures. ASX will review the above measures with industry participants closer to 31 July 2020 to determine whether they warrant an extension or alteration if they are not have the desired effect on capital raisings.
ASX has also advised that it supports the guidance given by ASIC in its "Market Integrity Update – COVID-19 Special Issue – 31 March 2020" which clarified ASIC's expectations regarding fair treatment of retail shareholders in capital raisings. Importantly, as part of its relief measures, ASIC has increased the allowable suspension period for listed entities undertaking "low doc" offers (including rights offers, placements and SPPs) to include listed entities that have been suspended for a total of up to 10 days in the previous 12-month period (the previously allowable limit was up to 5 days in the previous 12-month period).
ASX also reiterated its expectation that capital raising will be conducted in the best interest of the entity – such as the need for quick and certain capital and that the capital raising relief being provided will not be abused by listed entities.
ASX has provided some guidance and relief on the reporting requirements of listed entities. The key reporting requirements dealt with by ASX in its compliance update are detailed below.
- Reporting relief for listed entities with a 30 September, 31 December or 31 March balance date: ASX has indicated that it is open to granting individual waivers to listed entities with a 30 September, 31 December or 31 March balance date requesting an extension to the deadlines for filing their financial statements in circumstances where there has been unavoidable delay in having financial statements audited or reviewed. ASX will assess this on a case-by-case basis.
- Quarterly reporters: ASX has indicated that it is unlikely to agree to an extension to quarterly reporters for the filing of quarterly cash flow or quarterly activity reports, as these reports are not generally audited or reviewed.
- ASX/NZX dual-listed entities: The NZX recently announced that it had granted a class waiver extending the deadlines for filing financial statements and annual reports for NZX listed entities with balance dates between 30 September and 31 May. ASX has granted an equivalent class waiver under to dual listed ASX/NZX entities incorporated in New Zealand and admitted to ASX as a standard ASX Listing, extending the reporting deadlines to the substituted deadlines provided in the NZX class waiver.
Annual General Meetings (AGM)
ASX has also confirmed that it supports the guidance given by ASIC in its media release "Guidelines for meeting upcoming AGM and financial reporting requirement" in which ASIC confirmed it will take no action if an AGM is postponed for two months (until the end of July 2020) and promoted the use of appropriate technology to hold an AGM during this time.
In addition to ensuring continued compliance with the ASX listing rules during the COVID-19 pandemic, boards of ASX-listed entities should be carefully monitoring their current revenue streams and liquidity position and ensure they remain informed about the relief available to them to determine whether their financial situation warrants taking advantage of any relief.
Boards should also be continually updated by management with respect to financial or operational changes in the business as a result of COVID-19 to determine whether any announcements to the market is required to be made.