Continuous disclosure vs COVID-19: correcting false market consensus and engaging with analysts

The COVID-19 pandemic and resulting economic crisis have caused widespread market volatility, making it increasingly difficult for listed entities to provide accurate and current announcements to the market. In part three of our four-part series, ‘Continuous disclosure vs COVID-19’ we discuss how crucial it is for listed entities to be proactive in correcting situations where the media, an analyst report or market speculation surfaces that could lead to a false market in its securities.

Even without the COVID-19 crisis, this is essential. However, the risk of a false market being created is inevitably higher where there is increased scrutiny and speculation in relation to the performance of Australian and international financial markets (as is presently the case). This, combined with an influx of ‘extraordinary’ corporate activity, means that listed entities need to be acutely aware of market speculation and rumours and potential ‘inaccurate leaks’.

Also, given the current uncertainty and volatility, it’s an important time for reminding those responsible for engaging with market analysts to limit briefings to the appropriate information.

Correcting ‘false market’ consensus

A ‘false market’ is created where there is material misinformation or materially incomplete information in the market which compromises proper pricing of a listed entity’s securities. The may arise where:

• the entity has made a false or misleading announcement;
• there is other false or misleading information (such as ‘rumours’) circulating in the market; or
• a segment of the market is trading on the basis of market sensitive information that is not available to the market as a whole (ie trading on ‘inside information’).

There are certain exemptions to an entity’s continuous disclosure obligations, which operate only to the extent that information is also both confidential, and a reasonable person would not expect it to be disclosed (as previously noted in part two of our ‘Continuous disclosure vs COVID-19’ series here). However, as highlighted in the Myer[1] decision, this does not apply to information necessary to correct or prevent a false market in securities, because the exemption does not apply on the basis that a reasonable person would expect a listed entity, acting responsibly, to immediately disclose any information to correct or prevent a false market in its securities (ie regardless of whether an exception to mandatory disclosure would otherwise apply).

False markets in the context of COVID-19

Listed entities (together with their directors and senior management) need to have a heightened awareness of the obligation to correct a false market in the current environment, given the increased scrutiny and speculation about the state of the market generally, specific indices, and the performance of certain sectors.

While the need to correct a false market is usually considered where the market is potentially trading on a ‘false positive’ (such as a purported leaked transaction beneficial to the business), it is important for listed entities to also be aware of correcting any ‘false negatives’ arising from current market pessimism that satisfies the material misinformation or materially incomplete threshold (eg that a business may be expecting a prolonged drop in revenue).

Further, in any situation where a listed entity considers undertaking a significant corporate action (such as a capital raise), close monitoring of information leaks is required. Where a transaction is at a preliminary stage and not yet announced to the market (for example, where the structure or nature of a capital raise has not been settled), rumours regarding such a transaction may lead to the creation of a false market where the details reported are not accurate or set in stone. This also leads to the entity becoming ineligible to rely on other exemptions to the continuous disclosure rules, discussed here.

Engaging with analysts

When engaging with analysts, it is pertinent that listed entities ensure compliance with their continuous disclosure obligations. In Australia, briefing analysts is an important and common stakeholder engagement for many listed entities.

This is different to other jurisdictions, such as the United States, where listed entities face more onerous restrictions on the type of information that can be disclosed between entity and analyst.

Despite this, in Australia listed entities must be mindful that there are significant risks associated with inadvertently disclosing confidential, market-sensitive information (ie ‘inside information’) in this context. Analysts are of course asking questions given the current market volatility. When responding to queries or conducting analyst briefings, listed entities should ensure that:

• the messaging regarding the business’ response to the COVID-19 crisis must be consistent with, and no more informative than, the information released to the market. This captures not only key matters such as earnings guidance, but also other measures that the business may be taking to respond (such as remuneration or staffing changes); and
• if any new information will be disclosed in a presentation to analysts, the presentation should be released to the market prior to the analyst briefing.

In addition, each listed entity should ensure that it is following any policies and procedures it has in place that apply to briefings. These policies often require reporting on analyst briefings, which should be given more than cursory attention to ensure that the procedures put in place do in fact serve their purpose and provide a level of protection from a continuous disclosure or insider trading claim.

ASIC has provided recommendations in ASIC Report 393, which, if followed, may reduce the risk of regulatory action arising out of analyst briefings. These recommendations include that listed entities should:

• refrain from trying to manage or correct market expectations through selective briefings;
• have policies in place to ensure that access to analyst briefings is as broad as possible;
• make available full transcripts or recordings of group briefings, such as posting webcasts and/or transcripts on the ASX; and
• have compliance systems in place (such as their continuous disclosure policy) to support the handing of confidential, market-sensitive information.

In such an uncertain environment and continuously evolving situation, it is more important than ever that listed entities are familiar with their continuous disclosure policy and obligations to ensure that they correct any false market consensus that may arise and appropriately engage with analysts.

[1] TPT Patrol Pty Limited as trustee for Amies Superannuation Fund v Myer Holdings Limited [2019] FCA 1747, per Justice Beach.

You can read part one and two of this series here:
Part one: ‘Continuous disclosure vs COVID-19: the welcome introduction of a due diligence defence’
Part two: ‘Continuous disclosure vs COVID-19: has the ability to rely on information being ‘insufficiently definite’ become ‘insufficiently uncertain’?’