Continuous Disclosure

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1 ASX 200 Roundtable Summary Paper 2012 Continuous Disclosure ASX 200 Supporting Partner

2 The Australian Institute of Company Directors hosted a series of roundtable events in November 2012 supported by the Commonwealth Bank of Australia, at which Priscilla Bryans (Partner Herbert Smith Freehills Head Office Advisory Team) led discussions on the Australian continuous disclosure regime. Events were held in Melbourne, Sydney and Perth. The Australian Institute of Company Directors appreciates the participation of ASX 200 directors in these roundtables. This paper provides a summary of key themes from the roundtable discussions. The ideas presented in this paper are not necessarily the views of the Australian Institute of Company Directors or Herbert Smith Freehills and may not reflect the consensus view of roundtable participants. Looking at the same regime with new lenses A review of the continuous disclosure regime In October 2012, the Australian Securities Exchange (ASX) released draft proposed changes to its guidance and ASX Listing Rules (Listing Rules) relating to continuous disclosure. The ASX released a package of documents for consultation relevant to the proposed changes. The documents include: ASX Public Consultation Paper ASX Listing Rules Revised Guidance Note 8 Continuous Disclosure (Revised Draft Guidance) Continuous Disclosure: an Abridged Guide Proposed amendments to the ASX Listing Rules At the time of this Summary Paper, these documents are available at The ASX requested comments on its proposals by 30 November The Australian Institute of Company Directors submission in regard to this consultation is available at expands the old guidance from 17 pages to 69 pages and provides extensive examples of when, in the view of the ASX, a company s continuous disclosure obligations are triggered. The package of documents also includes an Abridged Guide which is a shorter version of the guidance designed for directors. The approach taken by the ASX in relation to the Revised Draft Guidance is largely pragmatic and commercial. The Revised Draft Guidance incorporates the comments of the Australian Securities and Investments Commission (ASIC), which may provide some hope for directors that ASIC s approach to the enforcement of a company s continuous disclosure obligations will be in line with the ASX guidance. How will the regime operate with new guidance and amendments?, proposed amendments to the Listing Rules and the implications of the proposed changes for companies and directors facing disclosure judgments formed the basis of the roundtable discussions. A summary of the key issues discussed is set out below. Listing Rule 3.1 Pursuant to the Revised Draft Guidance and proposed Listing Rule amendments, the wording of Listing Rule 3.1 will remain unchanged and will still provide as follows: Once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or ASX200 Roundtable: Fuelling Australia s Future Growth Page 2

3 Once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity s securities, the entity must immediately tell ASX that information. 1 In summary, section 674(2) of the Act provides that if a listed disclosing entity has information which the entity is required to notify to the market operator and the information is not generally available and is information that reasonable person would expect, if it were generally available to have a material effect on the price or value of ED securities of the entity the entity must notify the market operator of that information in accordance with those provisions. 2 See proposed Disclosure Related Amendments to the ASX Listing Rules, October 2012 on page 7. value of the entity s securities, the entity must immediately tell ASX that information. Failing to disclose information in accordance with ASX Listing Rule 3.1 will still be a breach of section 674(2) of the Corporations Act (the Act). 1 Listing Rule 3.1A The Listing Rules and the Act provide exceptions from disclosure in certain circumstances. The exceptions in Listing Rule 3.1A will remain the same under the proposed changes, but the wording of the exceptions will be re-ordered. The ASX is of the view that the reversal of the order of the exceptions will put the reasonable person test in a more appropriate place, in terms of the order of emphasis of the different requirements in Listing Rule 3.1A. 2 Accordingly, companies will not be required to disclose particular information under Listing Rule 3.1 while each of the following is satisfied in relation to the information: One or more of the following applies It would be a breach of a law to disclose the information The information concerns an incomplete proposal or negotiation The information comprises matters of supposition or is insufficiently definite to warrant disclosure The information is generated for the internal management purposes of the entity The information is a trade secret The information is confidential and ASX has not formed the view that the information has ceased to be confidential A reasonable person would not expect the information to be disclosed In addition, a company will not breach section 674(2) if the information is generally available. The meaning of immediately provides that immediately does not mean instantaneously, but rather promptly and without delay. The word immediately is still contained in Listing Rule 3.1, but the ASX will apply an interpretation that requires the disclosure of price sensitive information promptly and without delay. While this interpretation is an improvement, directors at the roundtables still had concerns about balancing the speed and accuracy of disclosure. There was a strong view from directors that a reasonable period of time was needed for boards to assess the veracity and certainty of information reported to them before disclosures were made to the market. Trading Halts places a strong emphasis on the use of trading halts to manage a company s obligations under the continuous disclosure regime. The ASX200 Roundtable: Fuelling Australia s Future Growth Page 3

4 Many directors expressed the opinion that the market viewed trading halts negatively and that companies were extremely reluctant to request a trading halt unless it was absolutely necessary, often because the trading halt creates an impression of significance that exceeds the significance of the announcement itself. 3 See Revised Draft Guidance on page 13. ASX notes in its Revised Draft Guidance that the sensitivity of the market to information will be at its highest during the trading hours of the ASX. On this basis, if a company becomes aware of material price sensitive information during trading hours and is not yet able to issue an announcement, it should carefully consider a trading halt. Similarly, if a company becomes aware of the information outside of trading hours and will not be in a position to release an announcement before morning trading commences, a trading halt will also need to be considered. The ASX has stated that, in principle, it does not have an issue with companies organising the signing of major transactions outside of market trading hours, so long as an announcement is ready for release when the market opens. Despite the trading halt mechanism (and the ASX s reassurance that it will regard a company as having complied with the spirit, intention and purpose of Listing Rule 3.1 if the company obtains a trading halt promptly and then acts to issue an announcement as quickly as it can in the circumstances), the Revised Draft Guidance confirms that even when a company s securities are in a trading halt, the company is not technically relieved from its obligations to release price sensitive information immediately. 3 Many directors expressed the opinion that the market viewed trading halts negatively and that companies were extremely reluctant to request a trading halt unless it was absolutely necessary, often because the trading halt creates an impression of significance that exceeds the significance of the announcement itself. The trading halt mechanism was also considered to be less useful when a complex issue came to the attention of the board but it had not yet been determined whether the issue raised was accurate or material. In the view of directors, pinpointing the exact time frame within which the company would be in a position to release an announcement impacted the ease at which the trading halt mechanism could be used. The most common example cited by directors on this issue was determining whether a particular event required a revision to the company s earnings guidance or profit forecast, a process that ASX200 Roundtable: Fuelling Australia s Future Growth Page 4

5 Many directors, particularly those from smaller listed entities had reservations about the change to consensus estimates and were concerned that a continuous disclosure obligation would arise based on minimal coverage and coverage that, in their experience, had been less than rigorous. 4 Revised Draft Guidance at page 35. frequently takes longer than the two business days afforded by a trading halt. Consensus Estimates provides that where an entity becomes aware that its earnings for a reporting period will materially differ (downwards or upwards) from: Earnings guidance it has given for the period. Where the entity is covered by the sell-side analysts and has not given guidance, the consensus estimate of those analysts for the period. Where the entity is not covered by sell-side analysts and has not given guidance, its earnings for the prior corresponding period. It needs to consider carefully whether it has a legal obligation to notify the market of that fact. 4 The key change in the Revised Draft Guidance is that where a company has not issued formal guidance, but is covered by sell side analysts, a continuous disclosure obligation will be triggered for the company if there is a material movement from the analysts consensus. The Revised Draft Guidance does not attempt to prescribe a mechanism that companies must use to determine a consensus. Previously, ASX Guidance Note 8 stated that a 10-15% change in earnings guidance (or if no guidance has been given, earnings from the prior corresponding period) would likely trigger a disclosure obligation. This guidance is withdrawn in the Revised Draft Guidance. The view of the ASX is that, where guidance has been given, materiality should be determined in accordance with the threshold set out in the Accounting Standards, which states that a 5-10% change would likely require disclosure. Many directors, particularly those from smaller listed entities had reservations about the change to consensus estimates and were concerned that a continuous disclosure obligation would arise based on minimal coverage and coverage that, in their experience, had been less than rigorous. Aware Listing Rule 3.1 requires disclosure of material price sensitive ASX200 Roundtable: Fuelling Australia s Future Growth Page 5

6 According to the ASX, the amendment is intended to remove a company s ability to argue that it does not have to provide information to correct or prevent a false market because, in its opinion, the information the ASX is asking for is not required to achieve that purpose. 5 Revised Draft Guidance, example H6, on page 60. information when the company becomes aware of the information. The test for determining whether a company is aware of information will remain the same under the Revised Draft Guidance. A company will become aware of information, when an officer knows or ought reasonably know the information. To ensure that potentially disclosable material is available to the executives and the board, the importance of fostering a culture which channels information (whether good or bad) upwards is critical if companies are to ensure effective compliance with the continuous disclosure regime. False markets It is proposed that Listing Rule 3.1B relating to false markets be amended to provide as follows: If ASX considers that there is or is likely to be a false market in an entity s securities and asks the entity to give it information to correct or prevent a false market, the entity must give ASX the information it asks for. Previously the rule provided that the entity must give ASX information needed to correct or prevent the false market. According to the ASX, the amendment is intended to remove a company s ability to argue that it does not have to provide information to correct or prevent a false market because, in its opinion, the information the ASX is asking for is not required to achieve that purpose. Directors at the roundtables were concerned that the proposed amendment to Listing Rule 3.1B was too wide and that the proposal should be re-framed. There was a concern that the rule would allow the ASX to request any company information regardless of whether that information related to preventing or correcting a false market. Takeover Offers provides examples of situations where a reasonable person would expect information to be disclosed even though the information would otherwise fall within the other criteria for non-disclosure under Listing Rules 3.1A described above. There was lively discussion at the roundtables relating to the example in the Revised Draft Guidance relating to a company s disclosure obligations in a hostile takeover scenario. The example discussed 5 relates to the requirement for a target company to disclose any indicative non-binding confidential offer from ASX200 Roundtable: Fuelling Australia s Future Growth Page 6

7 Australia must consider ways for the public, the Government and companies to better support the commercialisation of innovation. a friendly potential competing bidder received during the offer period of a hostile takeover bid. Under the Revised Draft Guidance, the ASX would expect the directors of the target company to disclose the competing proposal if it was received during a hostile takeover offer period. This is despite the fact that such an offer would otherwise fall within the conditions for nondisclosure including an incomplete proposal or negotiation and the information being confidential. Directors had significant concerns about the ramifications of this type of information being disclosed too early and the potential detriment it could cause to shareholders in deciding whether to accept the existing hostile takeover offer. Referrals to ASIC explains the process by which the ASX will refer matters to ASIC. In circumstances where the ASX notices abnormal trading it will generally contact the company for an explanation. If the issue is not adequately resolved by an informal query, the ASX may then issue a price query letter. The company must respond to the price query letter in the time frame specified by the ASX and the company s response will be posted on the ASX markets announcement platform. The ASX may also issue an aware letter if it has concerns about whether the listed entity has disclosed price sensitive information in accordance with its obligations under the Listing Rules. If the information is price sensitive, the ASX will ask the company when it first became aware of the information. The company must respond to the aware letter in the time frame specified by the ASX, and again, the company s response will generally be posted on the ASX markets announcement platform. If the ASX is concerned that, despite the company s response, a significant contravention of the Listing Rules or the Corporations Act may have occurred, it is required under the Corporations Act to give a notice to ASIC with details of the suspected contravention. suggests that a 5-10% change in the price or value of an entity s securities will be the benchmark range from which the ASX will consider referring matters to ASIC. What does the Revised Draft Guidance mean for directors? Directors need to become familiar with the final Guidance Note and amendments when released Note 8 and the Listing Rule amendments have not yet been finalised. Following public consultation the ASX may choose to make amendments to either the Revised Draft Guidance or the Listing Rules. Directors should review the final guidance and the Listing Rules amendments when they are released to become familiar with ASX200 Roundtable: Fuelling Australia s Future Growth Page _12

8 The company should clearly set out in its continuous disclosure policy the procedure that must immediately be followed if a trading halt is required. It must be clear who within the company has the authority to issue a trading halt. the new regime. In particular, directors should personally familiarise themselves with the examples in the final guidance that reflect ASX s approach to common continuous disclosure scenarios. It is anticipated that the new guidance will commence in early Listed companies need a good investor relations team Companies that are covered by sell side analysts, even if they are small listed entities, should consider employing an investors relations professional to help the company to monitor analysts expectations. Investor relations professionals can also assist to monitor mainstream media coverage, social media, blogs and websites that may contain information about the company. This type of expertise can be invaluable in assisting the board and the company secretary to identify and deal with market rumours, loss of confidentiality over information and changing analyst expectations. Companies need to have a fast track system in place to issue a trading halt It is strongly recommended that companies nominate an officer or employee to be the key contact within the company for receiving ASX inquiries. This person should be based in Australia and available to receive calls promptly from the ASX during market trading hours. The company should also clearly set out in its continuous disclosure policy the procedure that must immediately be followed if a trading halt is required. It must be clear who within the company has the authority to issue a trading halt. It may be the Chairman or a Committee of directors able to be called together at short notice. The company s approach to continuous disclosure should be consistent The need for companies to have a good continuous disclosure policy in place remains. Once the Listing Rule amendments and the new Guidance Note 8 come into operation the company s existing policy should be reviewed and where necessary updated. Further, the company s approach to continuous disclosure should be consistently applied on each occasion. For example, the company should use a consistent methodology to determine how an analysts consensus is arrived at and use the same thresholds for disclosure of good news and bad news. ASX200 Roundtable: Fuelling Australia s Future Growth Page _12

9 The company should use a consistent methodology to determine how an analysts consensus is arrived at and use the same thresholds for disclosure of good news and bad news. Slow burning issues continue to be an area of difficulty When an external event occurs, the price sensitive information is often not that the particular event has happened, but the impact of that event on the company. The impact of a particular event on the company will commonly be the information not known by the market. If this information is material and price sensitive it must be disclosed. Although this issue was addressed in the 2011 ASX 200 roundtables on continuous disclosure it was re-iterated that slow burning issues continue to be an area where companies fall into difficulty. For example, natural disasters, financial difficulties of a major supplier, an economic downturn or new legislation may be well known to the market, however, even if the event is publicly known, the price sensitive information which must be disclosed (if a carve out does not apply) is how the event is expected to impact on the company. Where the size of the impact on the company is not fully known, companies may still need to alert the market if the impact is likely to be material and follow up with a second announcement when the size of the impact is assessed. Disclaimer Copyright in this material (Material) is strictly reserved. Any disputes arising out of the Material are subject to the laws of the state of New South Wales, Australia. No part of the Material covered by copyright should be copied or reproduced in any form or by any means without the written permission of the Australian Institute of Company Directors. The Australian Institute of Company Directors endeavours to contact copyright holders and request permission to reproduce all copyright Material. Where the Australian Institute of Company Directors has been unable to trace or contact copyright holders, if notified, the Australian Institute of Company Directors will ensure full acknowledgment of the use of copyright Material. The Material has been prepared for information purposes only and is not intended to embody any professional or legal standard. The Material does not constitute legal, accounting or other professional advice. While all reasonable care has been taken in its preparation, neither the Australian Institute of Company Directors nor any contributor makes any express or implied representations or warranties as to the completeness, currency, reliability or accuracy of the Material. The Material should not be used or relied upon as a substitute for professional advice or as a basis for formulating business decisions. To the extent permitted by law, both the Australian Institute of Company Directors and all contributors exclude all liability for any loss or damage arising out of the Material Australian Institute of Company Directors ASX200 Roundtable: Fuelling Australia s Future Growth Page 9

Continuous Disclosure Policy

Continuous Disclosure Policy Magellan Asset Management Limited as Responsible Entity for Magellan Global Trust ARSN 620 753 728 14 August 2017 Continuous Disclosure Policy 1. Introduction Magellan Asset