On 24 October 2019, Justice Beach of the Federal Court handed down the first judgment in a shareholder class action in Australian history: TPT Patrol Pty Ltd v Myer Holdings Limited (Clayton Utz acted for Myer in this proceeding). Much was said about the TPT judgment immediately after it was handed down. Now, four months on, we've seen the first material consequence of the TPT judgment: an update to ASX Guidance Note 8. Those who deal with continuous disclosure will be very familiar with Guidance Note 8. It's a detailed, 90-page account of the ASX's views on continuous disclosure obligations for listed entities. It addresses the continuous disclosure obligation in section 674 of the Corporations Act, the prohibition on misleading or deceptive conduct in section 1041H and Chapter 3 of the ASX Listing Rules.
It's true that Guidance Note 8 is the ASX's view of how sections 674 and 1041H of the Corporations Act operate and not an authoritative statement from a court, but the Note is still highly significant because it contains the ASX's views on Chapter 3 of the ASX Listing Rules and the ASX has the power to suspend and censure listed entities if the ASX believes that they have not complied with the Listing Rules.
Clearly any change to Guidance Note 8 is something that listed entities should be aware of. So what's changed? There are three significant amendments.
1. When would a reasonable person expect information to have a material effect on the price of securities?
Depending on other factors, a listed entity may need to disclose information if a reasonable person would expect that information to have a material effect on the price or value of the entity's securities. Section 677 of the Corporations Act deems a reasonable person to have this expectation "if the information would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of … [those] securities". Section 677 raises two main question: what does it mean to "influence" and who are "persons who commonly invest in securities"?
Section 4.2 of Guidance Note 8 has been updated so that the ASX now expresses a view on what to "influence" means. The ASX says that to "influence" means to "move or impel (a person) to some action". The Guidance Note previously said that for information to be influential, it must be more than minor or immaterial to an investor's decision. This statement has been retained, but it is of limited use since it only tells us what influential information is not (i.e. minor or immaterial information) and not what it is. The Guidance Note now says that influential information is information that moves or impels someone to act.
The ASX has also expanded its guidance on what constitutes "persons who commonly invest in securities". The guidance now includes statements made by the Full Court in Grant-Taylor v Babcock & Brown Limited (in liq)  FCAFC 60. The Full Court said "persons who commonly invest in securities" are a class that includes the sophisticated, the unsophisticated, small investors, large investors, frequent investors and infrequent investors. The only people who aren't included are the irrational. The statements by the Full Court are somewhat different to those made by the trial judge, who said that "persons who commonly invest in securities" have "a degree of sophistication" which exceeds "those who have more than a passing or occasional interest in … securities exchanges." The Guidance Note still quotes the trial judge but specifically notes the different view of the Full Court. This update to the Guidance Note is a reminder that "persons who commonly invest in securities" are a highly diverse group. This is troublesome because one sub-group of this diverse group may be influenced by certain information while another sub-group may not. If so, do we treat information that influences only one sub-group as being information that influences "persons who commonly invest in securities" or must it influence all sub-groups? The TPT judgment suggests that one will suffice.
Section 4.2 of Guidance Note 8 has been updated to indicate that the ASX is now more wedded to its view that "persons who commonly invest in securities" does not include "traders who seek to take advantage of very short term (usually intraday) price fluctuations and who trade into and out of securities without reference to their inherent value and without any intention to hold them for any meaningful period of time". The Guidance Note now refers to Justice Nicholas's decision in ASIC v Vocation Limited (In Liquidation)  FCA 807 as supporting this view. His Honour is quoted as saying that "persons who commonly invest in securities" is "someone who makes an assessment as to whether to buy or sell securities on the basis of a company's earnings or potential earnings" and it does not include "the investing behaviour of speculators and day traders who seek to profit on the back of rumour or momentum rather than company fundamentals". Such speculators and day traders includes "hedge funds at least in circumstances where they are not making their investment decisions based on company fundamentals." His Honour's view focuses upon the word "invest" in the phrase "persons who commonly invest in securities", particularly the fact that investing is different to simply buying and selling.
2. What is de facto earnings guidance?
Section 7.2 of the Guidance Note 8 addresses the concept of "de facto earnings guidance". What constitutes "earnings guidance" is important because the ASX's view is that if a listed entity gives "earnings guidance" and then discovers its expected earnings will be more than 5-10% above or below this guidance, it should update the market.
There is no doubt that a media release, which says an entity expects (say) $500 million in net profit after tax for the coming financial year, would be earnings guidance, but earnings guidance may include less decisive indications of future earnings. This is where "de facto earnings guidance" comes in. De facto earnings guidance is a form of earnings guidance which might be more informal, such as a verbal comment in an investor briefing.
The ASX has updated its description of de facto earnings guidance in light of the TPT judgment. The Guidance Note now says that de facto earnings guidance includes a "comment" that a listed entity "expects its earnings to be … above or below, its earnings for the corresponding period". Previously, the Guidance Note said the comment must be that earnings will be "a particular percentage range above or below, its earnings for the corresponding period". So, the Guidance Note now indicates that earnings guidance may be less precise than previously indicated. Footnote 201 of the Guidance Note indicates that this change was motivated by the TPT judgment which found that "a statement by an entity's CEO at its 2014 results presentation that he expected its 2015 NPAT to be higher than its 2014 NPAT was de facto earnings guidance".
The Guidance Note has retained other examples of de facto earnings guidance, which also indicate that it includes imprecise statements about future earnings, such as comments that the entity is "happy" or "comfortable with" analysts' forecasts of earnings.
3. Does a 5% or 10% departure from earnings guidance require disclosure?
Section 7.3(2) of Guidance Note 8 addresses the ASX's recommendation for when an entity, which has published earnings guidance, should update the market about a variation between its current earnings expectations and the earnings guidance. The ASX suggests a variation of 10% or more requires the market to be updated while a variation of 5% or less does not. This leaves a grey area where the variation is between 5% and 10%. The previous version of the Guidance Note contained the following guidance:
Smaller entities or those that have relatively variable earnings may consider that a materiality threshold of 10% or close to it as appropriate. Very large entities or those that normally have very stable or predictable earnings may consider that a materiality threshold that is closer to 5% than to 10% is appropriate. [emphasis added]
Arguably, the TPT judgment did not support this view, at least on its face. In the TPT judgment, the defendant company was of average size and had variable earnings yet the Court found a variation of 5% was appropriate to trigger a disclosure. Based on the previous version of the Guidance Note, 10% would have been appropriate. In light of the TPT judgment, the Guidance Note has been changed to say:
- "a materiality threshold of 10%" is appropriate for "[e]ntities outside the ASX 300 that have relatively variable earnings"; and
- a "materiality threshold closer to 5% than to 10%" should be considered for (i) entities in the ASX 300 or (ii) entities that "normally have very stable or predictable earnings".
This change is significant because it indicates that the ASX now believes that a 10% threshold will only be appropriate where an entity has variable earnings when previously it was sufficient if the entity was "smaller".
The change is also significant because it gives greater clarity around the size of entities. Previously an entity could be "smaller" or "very large". These descriptions are not only vague but don't address entities which are medium, large or anything other than "smaller" and "very large". The Guidance Note now refers to entities that are inside or outside the ASX 300. It appears that this change was motivated by the TPT judgment (see footnote 225 in the Guidance Note).
The three changes to Guidance Note 8 addressed above are not the only changes. You should also note the following changes as well as read the marked-up version of the Note made available by the ASX.
- Section 8.8 has been updated to include further information about the ASX's enforcement powers.
- Annexure C, which concerns continuous disclosure policies, has been updated to account for the 4th edition of the ASX Corporate Governance Council's Corporate Governance Principles and Recommendations, which came into effect on 1 January 2020.Our analysis of the 4th edition is here.
- Sections 5.9 and 7.1 have been updated in relation to ASX Listing Rule 3.1A.
- Section 4.5 previously said that the ASX generally expects an announcement about the signing of a market sensitive contract to include the name of the counterparty to the contract. This has now been updated to clarify that this expectation is unchanged even if the counterparty does not wish to be named or has imposed confidentiality obligations.
Finally, it is important to remember that Guidance Note 8 is an account of the ASX's views and not an authoritative statement of how sections 674 and 1041H of the Corporations Act operate. An authoritative statement can only be given by a court. In the TPT judgment, Justice Beach did not directly say that the Guidance Note is incorrect but did say it it "is in some respects a reliable description" of the law.