ASX shows its hand on continuous disclosure

The ASX today released its draft guidance note on continuous disclosure. The emphasis placed on trading halts and early consultation is arguably the most important sub-text to the proposed changes.

Given the James Hardie, Centro and Fortescue experiences, among others, it is clear that a major exposure for company directors and officers relates to potential breaches of the ASX’s disclosure regime, which have been magnets for the class action lawyers. ASX’s proposed revision of those disclosure rules therefore constitutes something more than just a routine update.

ASX today released a consultation paper on a draft guidance note on continuous disclosure, which is easily the most significant product of its recent flurry of proposed reforms to its rules and operating framework.

The continuous disclosure regime is the most central and sensitive element of the ASX’s rules, and the most dangerous for directors and officers. It is also arguably the most subjective, which adds to the danger.

What ASX is proposing isn’t radical. The changes are aimed at providing clarity and guidance (complete with a raft of worked examples) and, to some degree, protection for companies which comply with them.

The guidance note isn’t something that has been rushed out in the wake of the High Court’s Fortescue judgement, which cleared Twiggy Forrest of a breach of the rules, although its release was delayed until the judgement (which unfortunately was too narrow to be of much wider value) was handed down.

The note’s gestation was in 2010 when, in the wake of the financial crisis, ASX and the Australian Securities and Investments Commission set up a working group to consider whether the rules, last revised in 2005, needed to be updated. The crisis did highlight the importance of the disclosure laws as well as their menace for company officials and also revealed some confusion about their interpretation.

On some issues, like the ‘’materiality’’ of information, the proposed new ASX rules would shift the thresholds for disclosure from judgements about whether the information was likely to have a material impact on a share price to more pragmatic tests.

Would the information be likely to influence the company executive or director’s decision to buy or sell shares at their current market price? Would they feel exposed to an action for insider trading if they were to buy or sell the shares knowing that the information had yet to be disclosed?

Then there are issues of clarification, helped by court decisions and ASIC actions. How quickly is a company obliged to make a disclosure? Immediately? What does immediately mean in this context? In the revised regime it would mean ‘’promptly’’ or ‘’without delay’’ after taking into account the status and source of the information and whether or not it required board or disclosure committee approval.

Perhaps the most difficult section of the current rules for companies, investors and other market participants have been the ‘’carve-outs’’ from the rules for commercially sensitive, or immature or incomplete information, particularly when the information leaks/is leaked into the media or the market. The proposed changes provide a lot more practical detail on how companies should interpret and respond to the rules.

Arguably the most important sub-text to the proposed changes is the emphasis ASX places on trading halts and early consultation with its own officers.

While some see trading halts as a denial of investors’ ability to trade and therefore the option of last resort, they do prevent trading within an uninformed market and do provide a form of safe harbour for directors and officers, or at least a mechanism for minimising their liabilities.

The ASX consultation paper emphasises ASX’s willingness to agree to requests for trading halts and says that if a company has been granted a trading halt and then issues an announcement as quickly as it can in the circumstances, it would regard the entity as having complied with the spirit and intent of the rule.

There is an implicit encouragement in the proposed changes for companies to use trading halts and early consultations with the ASX itself as a self-defence mechanism.

The proliferation of class actions based on alleged breaches of the continuous disclosure regime means that companies will review the proposed changes through the lens of their exposures.

The centrality of the regime to ensuring an informed market, however, means that encouraging companies to announce material developments appropriately and in as timely a manner as practicable by providing greater certainty and clarity about their obligations, a more commercial and pragmatic approach to compliance issues and perhaps some incentives in the form of reduced exposures to liability is as much in the interests of the investors and the market as it is in the interests of the directors and officers themselves.


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