Amendments to ASX Guidance Note 8: Continuous Disclosure

ASX Guidance Note 8 was amended on 9 March, to provide greater clarity about ASX’s expectations in relation to the disclosure of market sensitive contracts and disclosures by entities in financial difficulties. With continuous disclosure increasingly becoming an area of potential risk for listed entities (given the current prevalence of shareholder class actions and increasing regulator oversight), guidance as to the expectations for such market announcements is useful in providing greater certainty and comfort to listed entities about the nature of their obligations.

As a reminder, ASX Listing Rule 3.1 requires that an entity immediately notify the market once it becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of that entity’s securities. Among the non-exhaustive examples of matters that may require disclosure under Listing Rule 3, the following are of particular relevance to the recent amendments:

• a material acquisition or disposal
• the entry into, variation or termination of a material agreement
• the appointment of a liquidator, administrator or receiver and
• the commission of an event of default under, or other event entitling a lender to terminate, a material financing facility.

Further to this, ASX Guidance Note 8 provides guidelines on the contents of announcements to be made under Listing Rule 3.1.

Market sensitive contracts

The amendments to ASX Guidance Note 8 provide more extensive guidance on what information should be disclosed concerning market sensitive contracts for an acquisition or disposal and, for the first time, includes guidance about ASX’s general expectations in respect of announcements about the entry into market sensitive contracts with customers.

Market sensitive contracts for an acquisition or disposal

ASX now expects that the following matters be included in an announcement relating to a market sensitive contract for an acquisition or disposal:

• the consideration for the acquisition or disposal
• the expected completion date
• the intended source of funds to pay for an acquisition (including the details of any required capital raising, including a timetable and the effect on the total issued capital)
• the intended use of funds received for a disposal
• any security holder approvals that may be required in relation to the transaction, and the timetable for those approvals and
• any other material information relevant to assessing the impact of the transaction on the price or value of the entity’s securities.

While these matters were not expressly provided for in the previous version of ASX Guidance Note 8, entities may already have been disclosing some or all of these matters in relation to certain transactions on the basis that they were required to enable investors to understand the ramifications of the contract and assess its impact on the price or value of securities (being the general disclosure threshold provided in Guidance Note 8).

Interestingly, ASX has removed the guidance that an announcement should also include a timetable for implementing the relevant transaction, the likely effect on the entity’s total assets, equity interests and annual revenue and the proposed issue of any securities in connection with the transaction. However, entities should still consider, if relevant, whether this information needs to be disclosed either:

• under another Listing Rule (for example, the proposed issue of securities under Listing Rule 3.10.3) or
• as it is in fact required in the particular circumstances to enable investors to understand the ramifications of the contract and assess its impact on the price or value of securities (being the guideline threshold provided in Guidance Note 8).

Market sensitive contracts with customers

ASX would expect that the following matters be included in a market announcement in relation to a market sensitive contract with a customer (ie one that does not relate to an acquisition or a disposal):

• the name of the customer (including whether that customer is a child entity of, or acting as a nominee entity for, another ‘more well-known’ entity)
• the term of the contract
• the nature of the products or services to be supplied to the customer
• the significance of the contract to the listed entity (having regard to the fact that any forward looking statements must have a reasonable factual basis so as not to be misleading)
• any conditions precedent that need to be satisfied before the customer becomes legally bound to proceed with the contract and
• any other material information relevant to assessing the impact of the transaction on the price or value of the entity’s securities.

The amendments to Guidance Note 8 are likely to prompt some listed entities to disclose information that they may not have previously, and it is important that entities consider the full ambit of matters included in the amended guidance when determining what should be included in announcements regarding market sensitive contracts.

Case by case judgement and an overall assessment of the contract in the context of a listed entity’s business will continue to be necessary – a purely objective continuous disclosure test that applies to ASX100 entities as well as small caps, and which can cover the ambit of industries and businesses on the ASX, is simply not possible.

Entities in financial difficulties

The amended Guidance Note 8 has also affirmed ASX’s position that entities in financial difficulties are subject to the same continuous disclosure obligations as other entities, and will be held to the same disclosure standards, under Listing Rules 3.1 – 3.1B.

In particular, ASX has provided guidance that if there is an adverse development affecting the financial condition or prospects of an entity that falls outside the carve-outs contained in Listing Rule 3.1A, and a reasonable person would expect the information to have a material effect on the price or value of its securities, the entity must immediately disclose that information. For example, information that an entity has resolved to appoint an administrator or a major lender has declared an event of default should be announced to the market.

However, ASX has also noted that the fact an entity’s directors are relying on the insolvent trading safe harbour to develop a course of action that may lead to a better outcome than insolvent administration is not, of itself, a matter that ASX would generally require to be disclosed. Investors would generally expect that the directors consider whether a better alternative to administration is available, and an obligation to disclose is unlikely to be required unless that matter ceases to be confidential or a definitive course of action has been determined.

Price sensitive? You decide!

As those involved with listed entities would be aware, market announcements that are assessed by ASX as being very likely to have an impact on the price of a listed entity’s securities are currently marked by ASX as ‘sensitive’. This allows the market to more readily identify announcements that may be material to decisions about whether or not to buy or sell securities.

Earlier this year, ASX has announced that it will, from mid-2018, include an option in the announcement lodgement process for listed entities to indicate that an announcement is price sensitive.

Given the ambit of information that could be regarded as price sensitive, listed entities should take care when assessing the price sensitivity of an announcement. However, the final assessment of whether the announcement is in fact price sensitive will be made by the ASX Market Announcement Office, to ensure consistency across the market. With an average of 500 announcements per day being lodged with ASX, there are hopes that the initial self-assessment of price sensitivity by listed entities will reduce the time it takes ASX to process announcements.

But importantly, it does not necessarily give rise to legal risk on the part of listed entities and their officers. That said, with all dealings with the ASX, care should be taken when making the initial assessment of price sensitivity.

Where to from here?

Continuous disclosure continues to be one of the most critical areas for careful, ongoing attention by all listed entities (and also, for completeness, unlisted disclosing entities required to comply with the continuous disclosure regime contained in the Corporations Act). ASX has provided further helpful assistance in recent years by reviewing and issuing updated versions of its Guidance Note 8. That said, as we’ve noted above, ASX can’t provide a foolproof rule book to follow when it comes to assessing what information needs to be disclosed and, often more importantly when the disclosure obligation arises. On the latter point, this is often what class action litigants are looking for: loss suffered as a result of an entity delaying an announcement rather than not announcing at all.

All listed entities need to ensure their personnel are fully aware of the entity’s obligations in this area, as well as the requirements of their own continuous disclosure policy. Too often policies are adopted to tick a box (and make a positive affirmation in the annual corporate government statement). But these policies and the underlying procedures need to be regularly reviewed, updated, reinforced and restated through trailing and awareness.

Like with anything, it’s much better to avoid a problem than to spend significant time and money, and suffer often unquantifiable reputational harm, in fixing one that needn’t have arisen!