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27 May 2020

COVID-19 temporary changes to continuous disclosure provisions for listed entities

The Treasurer announced on 25 May 2020 the Federal Government will temporarily amend the continuous disclosure provisions of the Corporations Act 2001 (Cth) such that an entity will only be liable for breach of those provisions if it fails to update the market with information which it knew was price sensitive or if it was reckless or negligent with respect to whether that information was price sensitive. Without this change, an entity breaches the provisions if it fails to disclose any information that a reasonable person would consider to be price sensitive. The changes will apply prospectively and will be in effect for 6 months beginning 26 May 2020.

The rationale for the amendment is to enable listed entities and their officers to more confidently provide earnings guidance to the market during the COVID-19 crisis by modifying the circumstances in which the entity and its officers will be liable for failure to include information in its guidance, or for failure to update existing guidance. The uncertainty generated by the COVID-19 crisis together with the looming threat of "opportunistic class actions", has seen a trend for listed entities to refrain from making forecasts of future earnings or other forward-looking estimates. As a result the market has seen listed entities withdraw their existing guidance or refrain from giving any further guidance.  

Where the directors and officers of a listed entity are contemplating releasing or updating earnings guidance or forward-looking statements they should nevertheless still exercise an appropriate level of diligence and care to ensure compliance with their statutory duties and obligations. This is because they are still potentially liable if their market announcements (or their failure to update the market) results in the market being misled, including by omission. Directors are also potentially liable to the extent the conduct falls short of the standards or care and diligence expected of directors.

The COVID-19 environment also presents significant challenges for sell-side analysts who cover large listed entities and periodically release earnings forecasts because of the uncertainties in trading conditions. Those analysts are now facing difficulties in updating their forecasts.

ASX Guidance Note 8 makes it clear that entities do not have to provide earnings guidance to the market but may wish to do so to assist investors. The entity is under no obligation to publish its internal earnings projections just because they happen to differ from an analysts' forecast or consensus.

That being said, ASX does expect an entity that has not published earnings guidance but is covered by sell-side analysts, to consider its continuous disclosure obligations in the context of a material variation against those analysts' consensus numbers. This requirement can impose an onerous obligation on an entity in the current COVID-19 environment given the challenges which analysts face as identified above. This will also be important as companies come closer to reporting on their current financial year and have greater certainty as to where their results will end up, or where they gain greater certainty generally as to the impacts of COVID-19 on their businesses as time goes on.

Overall, the proposed amendment is a positive development for entities and officers impacted by COVID-19 in circumstances where earnings guidance is given in a highly uncertain environment.  

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.