On 17 October 2012, the ASX released the long awaited draft revisions to the continuous disclosure obligations under the ASX Listing Rules and ASX Listing Rule Guidance Note 8. Since the ASX Listing Rule Guidance Note 8 was last revised in June 2005, the Australian market has been exposed to the global financial crisis, court rulings in the James Hardie and Fortescue Metals matters, the collapse of Centro, and the questionable takeover approach of David Jones by the British-based firm EB Private Equity. It is therefore anticipated that the changes will provide listed entities with clearer, more detailed information to help them understand and comply with their continuous disclosure obligations.
Continuous Disclosure
Section 674 of the Corporations Act 2001 and ASX Listing Rule 3.1 requires that listed entities disclose to the ASX information that a reasonable person would expect to have a material effect on the price or value of the entity’s securities unless an exception applies. Directors are also required to disclose information to prevent or correct a false market. This obliges directors to amend and correct past disclosures if they are inaccurate, in addition to providing the market with updated information. A failure to disclose relevant information or correct past disclosures is an offence under section 674(2A) of the Corporations Act 2001.
Proposed Amendments to the Listing Rules
The ASX has proposed many changes to the various Listing Rules in relation to listed entities’ continuous disclosure obligations. The main changes to the Listing Rules are as follows:
- The principles which underpin the obligations imposed on listed entities
- Listing Rule 3.1 in relation to the non-exhaustive examples of the type of information that, depending on the circumstances, could require disclosure
- Listing Rule 3.1A in relation to the definition of what information is “confidential”
- Listing Rule 3.1B in relation to correcting a ‘false market’
- Listing Rule 3.16 in relation to the material terms of, and any changes to, any employment, service or consultancy agreement with the entity’s CEO or director
- Listing Rule 3.17 in relation to communications with security holders
- Listing Rule 3.17A in relation to documents given to an overseas stock exchange
- Listing Rule 4.2A, 4.3D, 4.5, 4.5A and 4.10.17 in relation to reporting requirements
- General amendments in relation to the market announcements office
Guidance Note 8
Listing Rule Guidance Note 8 assists listed entities to understand and comply with their disclosure obligations under Listing Rules 3.1 – 3.1B. Compliance with these is critical to the integrity and efficiency of the ASX market, and other markets that trade in ASX quoted securities or derivatives of those securities.
The draft revisions to Guidance Note 8 seek to provide more information on a number of areas, including:
- the test for determining what constitutes material or ‘market sensitive’ information
- clarifying that ‘immediately’ does not mean ‘instantaneously’ but rather ‘promptly and without delay’ (making it consistent with judicial authority)
- how to use trading halts to manage disclosure issues, including how to deal with the tension between immediate disclosure and “accurate disclosure.”
- exceptions to the requirement to release information immediately
- the meaning of ‘false market’
- managing ‘earnings surprises’
- responding to market and media speculation and analyst commentary
- how the continuous disclosure requirements apply to confidential offers
- to enter into control transactions, confirming that the “reasonable person” test does not, in general, require that one must disclose when a confidential approach has been made concerning a possible control transaction.
- ASX enforcement practices, including an explanation of the roles of ‘price query’ and ‘aware’ letters
Of particular interest is the guidance on how the continuous disclosure rules apply in takeover transactions. Draft Guidance Note 8 clarifies that, generally speaking, a listed entity does not have to disclose a confidential approach it receives to enter into a takeover or other control transaction. The guidance sets out specific examples of “information that ASX considers a reasonable person would not expect to be disclosed”. These include “confidential information that an entity is planning to make a unilateral takeover bid for another entity”; and “confidential information that an entity has received an offer from another entity to enter into a control transaction”.
The ASX has also stated that a reasonable person would not expect information to be disclosed by a bidder “until the bidding entity formally launches its takeover bid for the target”; and a reasonable person would not expect information to be disclosed by a target “until any negotiations entered into concerning the transaction are successfully concluded.”
However a company that is seeking to rely on the “confidentiality” of a takeover approach must be conscious of whether disclosure is required following any market rumours. Rumours, for example, can be in the form of media or analyst reports, but will also be evidenced by comments in emails, blogs, bulletin boards, chat sites or other social media. ASX has stated that on the one hand, if a market rumour is wholly or partially inaccurate, a failure by the entity to correct the rumour could lead to a false market in its securities. On the other hand, if the rumour is accurate, a failure by the entity to confirm that fact could contribute to doubt about the truth of the rumour and that too could lead to a false market in its securities.
The proposed changes appear to be in response to the recent challenges faced by Boards when assessing their continuous disclosure obligations on disclosing potential offers where they have received “indicative” and “non-binding” approaches prior to formal offers being made. The clarifications will also not only help target entities when faced with a decision whether to disclose, but will also assist bidders in that the potential transaction will not be announced by the target company purporting to rely on the previous continuous disclosure rules.
Continuous Disclosure: An Abridged Guide
Some of the materials in the Guidance Note (particularly those in the footnotes) are targeted at legal and other professional advisers and are intended to assist them in understanding the ASX’s approaches on some of the more technical issues that can arise in this context. Accordingly the ASX is also proposing to issue a shorter guide entitled Continuous Disclosure: An Abridged Guide, targeted specifically at directors and other officers of listed entities.
Comments on Changes
ASIC has stated that it has welcomed the ASX’s updated continuous disclosure rules and guidance and the ASX has urged the business community to have their say on the proposed guidelines. Submissions are due by Friday, 30 November 2012.
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