Thinking | 25 June 2020
Continuous disclosure vs COVID-19: has the ability to rely on information being ‘insufficiently definite’ become ‘insufficiently uncertain’?
In part two of our four-part series, ‘Continuous disclosure vs COVID-19’, we discuss exceptions to the continuous disclosure obligation, including where the information in question comprises matters of supposition or is insufficiently definite to warrant disclosure.
It is nothing new that the continuous disclosure obligations imposed by the ASX Listing Rules require all listed entities to promptly disclose important information to the market. Specifically, information which a reasonable person would expect to have a material effect on the price or value of their securities must be released.
‘Information’ in this context includes external information that affects the company (such as information about key customers and suppliers), but also extends beyond matters of fact to matters of opinion and intention.
The exception where the information comprises matters of supposition or is insufficiently definite to warrant disclosure exists separately to others available to disclosing entities, such as where information relates to an incomplete proposal or negotiation. Understandably, ASX is concerned to avoid situations where listed entities make announcements that have the propensity to misinform the market.
ASX’s Guidance Note 8, which assists listed entities in managing their continuous disclosure obligations, includes guidance on how to determine the point at which ‘insufficiently definite’ information has ripened and becomes price sensitive. This point arises when a reasonable person would no longer expect disclosure to be withheld on the basis that:
- the information is so vague, embryonic or imprecise;
- the veracity of the information is so open to doubt; or
- the likelihood of the matter occurring, or its impact if the relevant event does occur, is so uncertain.
ASX took the opportunity to clarify this last point by stating that this exception will not be available solely because the extent of the material effect of a known event or circumstance, while tangible, is yet to be quantified.
This is particularly relevant given the dynamic nature of the COVID-19 outbreak; an event that has generated a wave of information that is likely (on its face) to be price sensitive. While many listed entities are not yet in a position to measure the direct or indirect financial impact of certain information related to COVID-19, ASX still expects entities to inform the market promptly of the relevant information in their possession, even if quantification of the impact is announced subsequently.
In contrast, where an entity is yet to form a reasonable view on the market sensitivity of an event or circumstance, for want of more information or expert advice (for instance), disclosure will not be required until that information or advice is obtained and the entity can determine whether the information needs to be disclosed.
How does COVID-19 affect these considerations?
The COVID-19 pandemic has created significant and enhanced levels of uncertainty and confusion about companies’ disclosure obligations. In particular, disclosure issues have arisen in relation to earnings guidance, capital raisings, supply chain issues, impact on incomplete transactions and contractual negotiations, asset valuations, and compliance with debt covenants, to name a few, which has put the ‘insufficiently definite’ exception under the spotlight.
Furthermore, the full economic impact of COVID-19 or its duration are unknown, not to mention the changes that continue to occur with the virus itself (such as the increased number of positive test results in Melbourne at present) and uncertainties relating to the duration and extent of government subsidies and relief.
Although Guidance Note 8 doesn’t refer to the looming global pandemic of COVID-19, it does nevertheless contain helpful and detailed guidance on the interpretation and application of the ‘insufficiently definite’ exception, which can assist in navigating the various disclosure issues raised by the COVID-19 pandemic.
ASX has since released a compliance update that specifically addresses some of the issues raised by the COVID-19 pandemic, and reassures companies that they are not expected to ‘predict the unpredictable’ or make forward looking statements to the market without a reasonable basis for doing so. We have outlined below some of ASX’s practical guidance which should assist companies with determining whether to make disclosures in light of some common events or circumstances precipitated by COVID-19.
For many entities, complying with the ASX Guidance involved the withdrawal of earnings forecasts until the financial impact could be more precisely quantified. Despite pressure from investors to now fill in the blanks, directors must remain cautious of making announcements that may inadvertently mislead the market and, in the worst cases, provide grounds for securities class actions.
Entities that have withdrawn earnings guidance are urged by the ASX to avoid further publication until appropriate due diligence has been conducted. Any forward looking statements must have a reasonable basis in fact to avoid being deemed misleading and carrying significant legal consequences. Underlying figures and assumptions must be carefully vetted and signed off at a suitably senior level before any earnings guidance is to be published again.
Entities that are aiming to restore or bolster their balance sheet by means of a capital raising are reminded that an announcement will be necessitated at the point at which the entity is committed to proceeding with the capital raising. ASX provides the example of an underwritten capital raising. In this case, immediately upon execution of the underwriting agreement, the listed entity would be expected to inform investors of the material terms of the offer so that investors can understand its ramifications and to assess the impact on the price or value of the entity’s securities.
Where information about a proposed capital raising is leaked to the public, the entity will be expected to confirm this in an announcement to the market (as confidentiality has been lost and the principle of ‘equality of information’ becomes paramount).
Apart from capital raisings, any proposal or negotiation will be deemed incomplete and need not be disclosed unless and until such a proposal has been adopted and the entities are committed to proceeding. This may occur at the point when a legally binding agreement is executed. Again, the time for disclosure may be brought forward where negotiations have been leaked.
ASX does not consider that the disclosure of information that a listed entity has received an offer is necessary to warrant disclosure. The execution of a confidentiality agreement and the completion of due diligence are also ordinarily not matters concerning a complete proposal or negotiation.
Our recommended approach
Listed entities are cautioned against leaning too heavily on the ‘insufficiently definite’ exception to delay market disclosure of information where it may take time to put a figure or estimate on the financial impact of such information. While this position is not ideal in circumstances where investors are seeking more confidence, significant criminal and civil penalties may be incurred for contravention of continuous disclosure obligations.
It is also important to keep in mind that listed entities can only avail themselves of the ‘insufficiently definite’ exception where the relevant information also remains confidential, and a reasonable person would not expect it to be disclosed.
We therefore recommend that disclosure is made promptly upon becoming aware of information that is market sensitive, even where further steps are required to quantify the likely financial impact of the information. Announcements should be appropriately qualified and clearly state where information is subject to change. We also recommend that announcements signpost that further updates will be provided in appropriate circumstances.
Avoiding the dangers of misleading the market (and, at worst, creating a false market) by disclosing too much information before it has been appropriately verified and tested, and failing to disclose market sensitive information in a timely manner, continues to be difficult.
However, the impact of COVID-19 has given rise to more entities appropriately using the ‘insufficiently definite’ exception to avoid disclosing information that remains too uncertain to benefit the market, but still alerting the market that the pandemic will affect the entity and the extent of this impact will be announced as soon as it can be done with certainty (and then updated as circumstances change over time).
In a world where we all continue to adapt and evolve to the ever changing health and economic environment we find ourselves in, so too are listed entities required to adapt their disclosure practices to ensure sufficiently definite information is made available to the market.
You can read part one of our 'Continuous disclosure vs COVID-19' series here. Our first article deals with the introduction of a due diligence defence.
 Amended version released on 28 February 2020.
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