ASX Guidance Note 8 on Continuous Disclosure

Articles Written by James Burchnall

Introduction

ASX's new Guidance Note 8: Continuous Disclosure: Listing Rules 3.1 - 3.1B (GN8) became effective on 1 May 2013.

The final version of GN8 was released in March 2013 following an extensive public consultation process, in which ASX received a number of submissions in relation to a consultation draft released on 17 October 2012 (Consultation Draft), including a submission by Johnson Winter & Slattery.

In this update, we:

  • look at the notable changes made in the final version of GN8;
  • highlight the associated Listing Rule amendments and changes to other Guidance Notes that became effective on 1 May 2013; and
  • set out the practical steps that can be taken by listed entities in response to these changes.

What is GN8? 

The new GN8 replaces the previous ASX guidance in this area, which was last updated in June 2005. The purpose of GN8 is to provide listed entities with information and guidance to help them understand and hence more readily be in a position to comply with their continuous disclosure obligations under the ASX Listing Rules (LRs). The primary continuous disclosure obligation is set out in LR 3.1, which requires a listed entity to disclose material information to ASX immediately. This general rule is subject to certain exceptions listed in LR 3.1A, requiring that the information be confidential, be such that a reasonable person would not expect it to be disclosed and also fall within one of five specific categories, including information relating to an incomplete proposal or negotiation. ASX also has powers under LR 3.1B to require disclosure of information where it considers there to be a "false market" in a listed entity's securities.

GN8 contains detailed guidance on these continuous disclosure rules. This guidance deals with key issues faced by listed entities such as the types of information that must be disclosed, how quickly disclosure must be made, when trading halts should be used and when the exceptions to disclosure will or will not apply. GN8 also deals with specific disclosure issues relating to earnings guidance, earnings surprises, monitoring and responding to media reports and market rumours and the correction of analyst forecasts. Worked examples are also included in GN8 to illustrate the application of the rules in particular cases.

Notable changes in the final version

Notable changes in the final version

The final version of GN8 includes some notable changes in comparison to the Consultation Draft, including the following:

Immediacy of disclosure

In the Consultation Draft, ASX confirmed that the requirement in LR 3.1 to disclose information to ASX immediately should not be read as meaning "instantaneously", but rather as meaning "promptly without delay". ASX has now taken this further by providing guidance that "promptly without delay" means doing it as quickly as it can be done in the circumstances and not deferring, postponing or putting it off to a later time.

The key point coming out of this new guidance is that even a short deliberate postponement can mean that the immediacy requirement is not satisfied. GN8 cites an example where an ASIC infringement notice was issued due to an entity postponing the release of information until after close of trading to coincide with another announcement, even though the relevant information was effectively only withheld from the market for 60 minutes.

The final version of GN8 acknowledges that a period of time will necessarily pass between when an entity first becomes aware of the requirement to give information to ASX and when the entity is able to make an announcement, and that some announcements will take longer to prepare.

One point we made in our submission was that GN8 should make it clear that ASX will put itself in the position of a listed entity at the time when it adjudges whether the entity has acted "promptly and without delay", so as not to succumb to hindsight bias. The final version of GN8 addresses this point by acknowledging that the speed with which an entity can make an announcement will be dictated by the circumstances confronting it at the time. GN8 lists the factors that may be relevant in determining how promptly an announcement can and should be made, which include where and when the information originated, any forewarning the entity had, the amount and complexity of the information, the need to ensure accuracy and, in some cases, the need for board or committee approval. In response to our submission on the Consultation Draft, ASX has now included an acknowledgment that an additional relevant factor will be whether the market is open and trading.

Trading halts

The final version of GN8 contains expanded guidance on when a listed entity should seek a trading halt. ASX has set out specific scenarios where, if an entity is not in a position to announce market sensitive information straight away, ASX will generally expect it to request a trading halt. These scenarios include where the information is particularly damaging and is likely to cause a significant fall in share price, where there are indications that there has been a leak that is materially affecting share price or trading volumes or where the entity has been required to provide information to correct a false market. A trading halt will also be necessary if for any reason there is going to be a delay in the release of an announcement under LR 3.1 and the market is trading during any part of the delay. However, ASX has also acknowledged that it would not expect an entity to request a trading halt before it has assessed whether particular information is in fact market sensitive.

The net effect of the new guidance is that listed entities will be expected to move very swiftly in assessing whether a trading halt is required and then (if required) requesting a trading halt. While acknowledging that the decision to request a trading halt is a serious one, and that certain internal approvals may be required (for example, from the chairperson and/or CEO), the final version of GN8 states that any such approvals must be obtained "within a matter of minutes".

We requested in our submission that GN8 should acknowledge the tension between the use of trading halts and the need to keep the market trading. Whilst ASX included such an acknowledgement in the final version, it remains to be seen whether this tension will be appropriately resolved in practice, particularly as the emphasis on listed entities making very quick decisions on trading halts may well lead to an increase in their use.

Media and analyst reports and market rumours

The final version of GN8 contains guidance as to when a media or analyst report or market rumour may cause ASX to form the view that a matter involving a listed entity has ceased to be confidential, with the result that the disclosure carve-outs in LR 3.1A will cease to apply.

ASX has clarified that a media or analyst report or market rumour will need to be "reasonably specific and reasonably accurate", before ASX will treat it as an indication that confidentiality has been lost. However, even an inaccurate report or rumour may give rise to an obligation to make an announcement under LR 3.1B to correct a false market.

The disclosure (if any) that ASX requires of the listed entity will depend on the level of specificity and accuracy of the report or rumour. For example, ASX will not usually require an entity to announce specific details in response to a general report or rumour, but the entity will usually be required to confirm whether or not the general report of rumour is accurate.

We had argued in our submission that listed entities should not be required to comment on all rumours, particularly where the publicity given to the rumour by denial would outweigh the influence the rumour would otherwise have. ASX has now included a clear statement that listed entities are not required to respond to every report or rumour circulating in the market, particularly where a report or rumour appears to be mere supposition or idle speculation or simply confirms a matter that is generally understood by the market, provided that the report or rumour does not appear to be having an effect on share price or trading volumes.

The reasonable person test

In the final version of GN8, ASX has acknowledged that the "reasonable person" test in LR 3.1A has a very narrow field of operation. As a general rule, if the relevant information falls within one of the 5 categories in LR 3.1A.1 and confidentiality has not been lost, then the reasonable person test will be satisfied. However, the ASX notes that the general rule may be displaced if:

  • an entity has "cherry-picked" its disclosures, by only disclosing positive information likely to have a positive effect on share price, while declining to disclose negative information of the same type on the pretence that it is not market sensitive or falls within one of the 5 situations in LR 3.1A.1; or
  • information needs to be disclosed in order to prevent an announcement of other information from being misleading or deceptive.

ASX has also sought to reduce the emphasis on the "reasonable person" test by reversing the order of the exceptions in LR 3.1A to put the "reasonable person" test at the end of the list, which ASX considers to be "a more appropriate place". While it has been argued that this reordering would have no impact on how a court would interpret LR 3.1A, ASX has noted that ASX's statements about the interpretation of its own rules should carry some weight if the matter come before a court.

Confidential takeover approaches

One issue highlighted in our submissions was that the Consultation Draft contained a worked example suggesting that the "reasonable person" test might not be satisfied (even where the other criteria in LR 3.1A are satisfied) where an entity is the subject of a takeover bid and is approached confidentially by a potential alternative bidder who makes it clear that its interest will be withdrawn if the approach is disclosed. The example suggested that whilst the alternative bidder's approach is confidential and concerns an incomplete proposal, a reasonable person would expect the entity to disclose the approach because shareholders need to make a decision as to whether to accept the existing takeover offer.

We submitted to ASX that this guidance was inappropriate and undesirable. If the target was to disclose the approach, and the alternative bidder was to withdraw its approach in accordance with its stated position, then the target would have eliminated the materiality of the information by making the disclosure. No reasonable person would expect disclosure in these circumstances.

ASX acknowledged the concerns that we (and other interested parties) had with the example and decided to delete it from the final GN8. In doing so, ASX noted that the example was not consistent with the upgraded guidance on the "reasonable person" test discussed above.

Disclosure of earnings surprises

In the June 2005 version of Guidance Note 8, ASX's stated policy had been that a variation of more than 10% to 15% in an entity's previously released financial forecast or the entity's previous corresponding period (if no forecast has been made) or analysts' consensus forecasts would generally be considered material and would require disclosure.

In contrast, the Consultation Draft drew a distinction between:

  • the situation where an entity has released earnings guidance, in which case the entity must be mindful of its obligations under both LR 3.1 and section 1041H of the Corporations Act (misleading and deceptive conduct) and should apply the materiality thresholds in the Australian Accounting and International Financial Reporting Standards (where a variation of 10% or more is presumed material and a variation of 5% or less is presumed immaterial) in determining whether its earnings guidance needs updating; and
  • the situation where no earnings guidance has been released, but where there is a difference between actual or expected earnings and "market expectations", in which case LR 3.1 is the primary concern and a notification obligation would only arise where the difference in earnings is such that a reasonable person would expect it to have a material effect on the price or value of the entity's securities.

This distinction is retained in the final version of GN8. The key update in the final version is that ASX has now provided some additional guidance as to how the 5% / 10% materiality thresholds should be applied and how an entity should assess "market expectations".

In relation to the 5% / 10% thresholds, ASX has included a statement in the final version of GN8 that smaller listed entities or those that have relatively variable earnings may consider a material threshold closer to 10% to be appropriate, while very large listed entities or those that normally have very stable or predictable earnings may consider a threshold closer to 5% to be appropriate.

As to how the entity should assess "market expectations", ASX considers that the best and most appropriate guide is:

  • the entity's published earnings guidance for the current period (if any);
  • if no such earnings guidance has been published and the entity is covered by sell-side analysts, the earnings forecasts of those analysts; and
  • if neither of the above apply, the entity's earnings for the prior corresponding period.

The key distinction between the assessment of "market expectations" in the final version of GN8 and the Consultation Draft relates to the use of analyst forecasts. The Consultation Draft focused on analysts' "consensus estimates", while the final version acknowledges that some entities may use "consensus estimates" while other entities may simply plot the various analyst forecasts and, if all or most are clustered within a reasonable range, treat that range as representing the market's view of their likely earnings.

One other welcome change in the final version of GN8 is the acknowledgement that announcements containing earnings guidance will generally need to be approved by the board before they are released, given the board's ultimate responsibility for financial reporting. ASX has stated that it will take this approval process into account in assessing whether an entity has acted "promptly without delay" in releasing information about a market sensitive earnings surprise.

Approving financial statements in principle ahead of release

In the Consultation Draft, ASX stated that, all things being equal, a listed entity is not expected to release information in a periodic disclosure document (e.g. half-yearly or annual financial statements) ahead of the scheduled release date for that document.

The final version of GN8 states that ASX has no issue with the common market practice of boards reviewing and approving in principle the entity's financial statements, profit announcement or dividend ahead of their scheduled release date, with the board or a committee then giving its formal approval just prior to when the announcement is due to the market. ASX does not expect an announcement to be made ahead of the due date just because the board has approved such matters in principle.

Requirement to announce a breach of financing covenant

The Consultation Draft included an example where a listed entity, which was experiencing temporary financial difficulties, had become aware that it was in breach of the financial ratios under its debt facility, but reasonably believed that its financier would waive the breach. The example suggested that the "prudent and risk averse approach" would be to release an announcement disclosing the breach and the fact that a waiver would be sought and was expected to be forthcoming.

In our submissions, we argued against this approach, noting that the loss of market confidence that would result from a premature announcement, and the conduct of the negotiations effectively in public, would turn what might have been a straightforward waiver request into a demand by the financiers for half of their money back. ASX decided to delete the example from the final GN8.

Disclosure-related Listing Rule changes effective from 1 May 2013

Disclosure-related Listing Rule changes effective from 1 May 2013

In addition to the new GN8, ASX has released a number of disclosure-related changes to the LRs. These include:

 

Changes to other Guidance Notes effective from 1 May 2013

ASX has also released updated versions of the following Guidance Notes, which are being updated for consistency with the new version of GN8 and the disclosure-related LR changes:

  • Guidance Note 1: Applying for Admission - ASX Listings;
  • Guidance Note 4: Foreign Entities Listing on ASX;
  • Guidance Note 12: Significant Changes to Activities;
  • Guidance Note 16: Trading Halts and Voluntary Suspensions; and
  • Guidance Note 17: Waivers and In-Principle Advice.

These updated Guidance Notes also came into operation on 1 May 2013.

Practical steps in response to the changes

In response to the changes that became effective on 1 May 2013, listed entities should consider reviewing their continuous disclosure policies in light of the final GN8. In particular, continuous disclosure policies may need to be updated to reflect the following aspects of GN8 and the related rule changes:

  • the updated guidance on what "immediate" disclosure means, when a company should request a trading halt, and the company's approach to disclosing earnings guidance (and earnings surprises);
  • the revised examples of information which may require disclosure under the amended LR 3.1;
  • the specific disclosures which are required to be made to the ASX (as set out in LR 3.10.8, LR 3.16.4, LR 3.17, LR 3.17A, LR 3.17B, LR 3.17C and LR 3.21), as well as those which are not required (as set out in LR 3.16.4);
  • ASX's approach to the "reasonable person" test in LR 3.1A;
  • what information an entity must immediately give to the ASX to correct a false market; and
  • the updated definition of "information" in LR 19.2 and the further explanation provided by GN8.

 

 

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

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