The continuous disclosure regime is a mainstay of our securities markets law so it is important that directors and management keep up with the game and avoid the referee’s whistle.
The central requirement of the NZX Listing Rules and the Securities Markets Act 1988 remains unchanged – once a listed company becomes aware of any material information or misinformation concerning it or its securities, it must immediately inform the market through a statement to the NZX, unless an exception applies.
But a series of developments either already in play or on the immediate horizon make it a good time to revisit how market disclosure works. These are:
- the new Financial Markets Conduct Act 2013 (FMCA)
- the NZX “New Market” proposal for early stage companies, and
- guidance from the Australian Securities and Investments Commission (ASIC) on investor briefings and market soundings.
The key change in the FMCA is a shift in regulatory focus from one-off or point of sale disclosure to ongoing disclosure. The most significant development in this regard for listed issuers is the “same class offers” exemption, which has been in force since 1 April this year. Where companies choose to take advantage of this facility, directors will not automatically be deemed liable if there is defective disclosure.
The exemption allows a listed issuer to offer equity or debt securities of the same class as those already available in the market with limited supporting documentation. Instead a ‘cleansing notice’ must be sent to NZX confirming that the issuer is in compliance with its financial reporting and continuous disclosure requirements, as the main precondition to use the new mechanism.
In effect, any issuer wanting to use it will need to have in place due diligence processes which give them a high level of assurance in the quality of their ongoing market disclosures. Issuers will not want to make a flurry of disclosures immediately prior to launching a same class offer as this would be an indication that the issuer lacked confidence in its ongoing compliance with the disclosure rules.
Of course, issuers will want to ensure that they are in compliance with their continuous disclosure obligations in any event. However, they may also want to review their approach to continuous disclosure (and to periodic disclosure, e.g. annual reports) with a view to the possibility at some stage of a capital raising.
For example, some issuers may wish to update the market on key notes and drivers in their annual reports more explicitly than they may currently do – not because they are required to, but so that potential future investors under a same class offer can have ready access to an up to date overview of those matters.
The NZX New Market
In recognition of the high compliance costs associated with continuous disclosure, the NZX is proposing a “continuous disclosure lite” option for smaller and medium sized companies which choose to list on the NZX’s mooted New Market. At the time of writing, the necessary exemption from the Securities Markets Act had been granted, subject to the Financial Markets Authority (FMA) being satisfied with the design of the regime.
The NZX is recommending that disclosure be limited to:
- interim updates required on the occurrence of specified events, and
- an obligation to correct market information that is misleading and credibly sourced.
We think the triggers for issuing interim updates are appropriate and, for the most part, will be events issuers would need to disclose to manage transactions in the ordinary course.
Our experience suggests that issuers are willing compliers with continuous disclosure obligations, but that compliance often requires a number of difficult judgement calls which chew up the time and energy of management and directors, and can give rise to significant external advisor costs. Any relief from these, within appropriate parameters to protect the investor, is to be welcomed.
ASIC guidance on investor briefings and market soundings
An aspect of market disclosure that has attracted some regulatory attention in Australia is the management of interactions between an issuer and particular classes of market participants (as opposed to the market generally).
ASIC has just released a note on its assessment of market practice around the handling of sensitive information in the context of analyst and investor briefings prior to corporate transactions. Risk areas identified by ASIC include:
- the smaller, less structured and more interactive briefing
- analysts with a poor understanding of the boundaries seeking to elicit market sensitive information, and
- issuers not being careful to ensure that the staff who front briefings have a clear understanding of the relevant issues and of the limits on what should and should not be disclosed.
ASIC has also expressed some concern at an overreliance on advisers to manage risks (rather than the issuer having its own policies) in relation to the informal market soundings that sometimes occur prior to a transaction being announced or a trading halt being sought.
ASIC recommends that issuers:
- prepare in advance for leaks by drawing up draft requests for trading halts and draft exchange announcements
- discuss frankly with advisers if and when soundings should be conducted about a capital raising (and how many investors may need to be sounded), and
- consider using trading halts to manage the risks associated with soundings (presumably where these cannot be completed between market close and open).
It seems unlikely that trading halts prior to informal soundings will be particularly attractive as, in the event that the offer doesn’t proceed, the issuer will have some potentially awkward explanations to make.