NZX proposes to provide further guidance to issuers about correcting consensus guidance or forecasts published by analysts and other third parties.
NZX has today released a consultation paper requesting feedback on the proposed amendments to its existing continuous disclosure guidance note.
Submissions close on 9 December 2016.
The consultation is welcome as it should provide useful guidance to issuers and more closely align the ASX and NZX continuous disclosure guidance.
Proposed new guidance
The proposed new guidance outlines when an issuer needs to make disclosure because its actual financial performance will or is likely to deviate from market expectations.
Importantly, NZX notes in its proposed guidance that it does not consider that issuers have a general obligation to correct third party earnings forecasts or consensus estimates that do not align with the issuer's internal projections or to publish those internal projections solely because they do not align with third party earnings forecasts or consensus estimates. NZX also accepts that differences between an issuer's expected results and market expectations can arise for a number of legitimate reasons, such as the issuer having access to information that is (properly) being withheld from disclosure to the market.
Disclosure will only be required when a deviation from market expectations is material information. However, NZX notes that a disclosure obligation will only arise where there is sufficient certainty that the deviation will arise. In practice, this means that a material deviation requiring disclosure is most likely to arise towards the end of, or while the results are being prepared for, a reporting period (as earlier in the period any potential deviations may remain too uncertain to merit disclosure).
NZX suggests that issuers manage the risk of having to announce a material deviation by managing market expectations on an ongoing basis (which could include educating the market about the issuer's business model or publishing forecasts of key performance metrics). In addition, NZX encourages issuers to monitor analyst coverage and, if appropriate, clarify any issues with an analyst proactively. It is always possible that an analyst has made an error or has overlooked some information in relation to the issuer, which may explain the deviation in estimates.
Chapman Tripp comments
As we have previously noted, we support alignment of the NZX guidance on continuous disclosure, where practicable, with the equivalent ASX guidance. This consultation by NZX is a step in the right direction.
What the market's expectations are for any given issuer's financial performance will be influenced by:
- an issuer's own forecasts of financial performance, if it has chosen to publish them;
- where an issuer is covered by an analyst or other third party, the forecasts and estimates of the analyst or other third parties (or, if multiple analysts cover a stock, a consensus of those views); and
- where an issuer has not published forecasts and is not covered by an analyst, the performance of the issuer for the previous period.
NZX's existing continuous disclosure guidance addresses point 1 above and the proposed new guidance will now address point 2 above. Where an issuer does not publish forecasts and is not covered by an analyst (point 3 above) is not addressed by the current guidance or the proposed new guidance. However, this is expressly addressed in the ASX continuous disclosure guidance note and, in our view, is an important point for issuers to be alert to - it would be wrong for issuers in that position to assume that the market has no expectation of their performance against which they should monitor their disclosure obligations.
We will be submitting in support of the inclusion of the new guidance with a suggestion that this point is expressly addressed.
Looking ahead, we believe there remain a number of further areas where NZX could usefully include further detail in its continuous disclosure guidance (along the lines of the ASX Guidance Note), including:
- Providing further guidance about incomplete proposals or negotiations.
- Incorporating the new price enquiry process introduced from 6 June 2016 into the guidance note to replace the existing description.
- Clarifying that an in principle decision may be made by a board to approve periodic financial reports and dividends subject to formal approval by the board (or a subcommittee) to manage disclosure.