In her presentation to the 2008 Annual Conference of the Australasian Investor Relations Association on 27 November 2008, ASIC Commissioner Belinda Gibson provided some insight into the current capital markets focus of the corporate regulator. In particular, Ms Gibson offered some useful guidance on ASIC's approach to disclosure by companies in the context of the current 'global financial crisis'
(GFC).
Continuous disclosure and earnings guidance
A difficult area of the law relating to continuous disclosure concerns 'earnings guidance' – in particular, when is a company required to update the market in respect of earlier statements regarding its financial position? The ASX Listing Rules require information that a reasonable person would expect to have a material effect on the price of a company's shares to be disclosed immediately. However, companies and their directors must be cognisant of the potential civil liability that might arise if statements to the market prove to be false or misleading.
Ms Gibson referred to ASX's guidance note on continuous disclosure (Guidance Note 8) and, more specifically, ASX's statements regarding updated earnings guidance. The guidance note states that 'as a general rule, a variation (in a company's previously released financial forecast or expectation) in excess of 10% to 15% may be considered material'. Ms Gibson has urged disclosing entities to be 'conservative' in applying this general rule, as variations in expected earnings at the lower end of this scale 'might reasonably be expected to impact price materially and should be disclosed'.
In providing earnings guidance, companies must advise ASX of their true financial position. Falsely informing the market can lead to the creation of a 'false market', which would in turn lead to the requirement for corrective disclosure.
There also exists the risk of civil liability from investors or other persons who suffer loss as a result of misleading or false earnings guidance announcements. In light of these risks, Ms Gibson emphasised the importance of additional and careful disclosure of the assumptions upon which forward-looking statements are based and the risks that such assumptions may prove to be false or otherwise are not achieved.
Maintaining confidentiality and responding to rumours
There are prescribed exceptions to the continuous disclosure requirement contained in the ASX Listing Rules. In particular, a company is not required to disclose information where all of the following are satisfied:
- a reasonable person would not expect the information to be disclosed;
- the information is confidential and ASX has not formed the view that the information has ceased to be confidential; and
- one or more of certain conditions applies, including that the information comprises matters of supposition or is insufficiently definite to warrant disclosure.
As noted above, one of the key conditions for the non-disclosure of insufficiently definite information is that the information remains confidential. Ms Gibson delivered a reminder to all companies to be disciplined in the establishment of 'information barriers' around price-sensitive information. In addition, information with the potential to become 'rumour' should only be disclosed to 'those who need to know'.
This addresses a common problem for companies who will from time to time selectively disclose information, particularly in response to rumours, major institutional desks, journalists and others without making general disclosure of such information to the market simultaneously. ASIC has issued a firm reminder of the overriding continuous disclosure obligation to disclose price-sensitive information, which does not fall within the above exceptions, through the ASX company announcements platform.
What should your organisation be doing?
Given the current focus on disclosure by investors and regulators alike, particularly in the context of earnings guidance and the GFC, there are a number of things that you can do to ensure your organisation complies with its regulatory obligations, including:
- Review the forward-looking statements your organisation has provided to the market to ensure that they are not false or misleading. Equally as important as the statements themselves are the assumptions upon which such statements are based. These should be reviewed and advice sought to ensure that appropriate disclosure of all assumptions and risks has been made.
- Review your organisation's continuous disclosure policy and remind all employees of their obligations in maintaining the confidentiality of information. This may also involve increasing staff awareness and education initiatives.
- If there is a significant risk that price sensitive information may be leaked (whether it be outside of your organisation or between divisions or business units), your organisation should adopt an information barriers policy and implement the protocols prescribed within the policy.
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