ASX’s updated guidance note on continuous disclosure is directly relevant to the increasing number of New Zealand companies listed on both the ASX and the NZX and also provides a useful supplement to the NZX guidelines on how to manage earnings surprises and analyst meetings.
ASX draws on the recent Babcock & Brown litigation.
ASX notes that earnings expectations can be set by guidance given by the issuer to the market, by analyst forecasts or by the issuer’s earnings results in the prior period.
An earnings surprise will become “material information” requiring disclosure when it differs from expectations by a significant degree – in general, a movement of more than 10% from any earnings guidance published by the issuer is presumed to be material. A movement of less than 5% is presumed not to be material.
Correcting earnings forecasts of analysts may be appropriate in some circumstances. ASX notes that in some cases there is nothing wrong with having a conversation with an analyst to understand the rationale for a forecast that differs significantly from the issuer’s own view or the consensus estimates – provided no market sensitive information is divulged which is not also released to the market.
Analyst and investor briefings
ASX confirms that market sensitive information must not be disclosed at a briefing, unless and until it has first been disclosed to ASX.
Prudent practice is to release any presentation materials through ASX and on the issuer’s website to reduce the risk of being accused of inappropriate disclosure - especially if the disclosed materials contain different or more up-to-date information than has been released to the market.
The ASX guidance includes a couple of practical points of clarification, confirming that:
a series of presentations to analysts and investors over a short period containing materially the same information, but tailored for each audience, will not be regarded as “new” by ASX so will not need to be released to the market provided at least one copy of the relevant presentation has been disclosed, and
issuers should as a matter of practice conduct a review as soon as practicable after an analyst or investor briefing, including any questions asked, to make sure that no market sensitive information has been disclosed inadvertently.
Relevance to NZX listed issuers
As we noted in our Brief Counsel earlier this year on NZX’s updated guidance on continuous disclosure, the guidelines offered by the two exchanges are broadly consistent but the ASX guidance is much more detailed and, in our view, more helpful to market participants.
The latest ASX update has reinforced this trend. The ASX commentary on earnings surprises and analyst briefings, for example, runs to 11 pages against five paragraphs from the NZX.
So NZX listed issuers may find the ASX guidance a useful reference point as we head into the reporting season for 30 June balance dates.
Continuous disclosure fallout from the Babcock & Brown implosion
The ASX revised guidance draws on the recent Grant-Taylor v Babcock & Brown Limited (In Liquidation) Australian Federal court decision which considered aspects of the Australian statutory continuous disclosure regime in the context of litigation arising from the collapse of Babcock & Brown after the GFC and allegations of inadequate market disclosure.
Under the Australian Corporations Act, which has close parallels with Part 5 of the Financial Markets Conduct Act, information is “material” if it would, or would be likely to, influence the decisions of persons who “commonly invest” in securities.
Perram J usefully held that the test for determining materiality is:
“an objective test to be applied at the time it is alleged the disclosure should have occurred. This involves a survey of all of the available material including, because they are part of the factual matrix, the views of the company and individual investors whilst accepting, of course, that those views cannot by themselves be determinative….Despite this ex ante approach, it is nevertheless permissible to examine how the market subsequently behaved when the information was disclosed as a device for confirming the correctness of a conclusion already reached”.
He also stated that the class of persons who “commonly invest” in listed securities is not directed to:
"self-funded retirees who, from time to time, (perhaps between games of bingo) play the stockmarket”.
Instead, it refers to persons with “a degree of sophistication which might be expected from those who have more than a passing or occasional interest in the activities of securities exchanges”. This does not mean professional investors only.
Roger Wallis was interviewed by Radio New Zealand on this topic. Listen to his comments here.