Continuous disclosure guidance not completely clear...
6 February 2013
ASX’s 69 pages of draft guidance interpreting a few pages of listing rules have been analysed and, generally speaking, applauded by law firms and commentators. Whilst the certainty that comes with receiving direction is welcome, the guidance does not deal with two of the key issues that have caused trouble in the past: disclosure of debt arrangements and exclusivity agreements.
Consider the following scenario. The board of an ASX-listed company (ListCo) is considering entering into two commercial arrangements: the issue of medium-term notes to high net worth and institutional investors and an exclusivity agreement with a prominent foreign company (RaidCo) in relation to a potential takeover transaction. Under the guidance, will ListCo be required to disclose the existence of the arrangements? If so, what details should be provided?
As part of the process of issuing the notes, a large number of prospective investors will be provided with an information memorandum outlining the full terms and conditions including events of default, financial covenants and change of control provisions.
In the past, many issuers have limited disclosure to the amount, maturity date and pricing of their notes without divulging full commercial terms. Market practice is for even less to be said about more traditional bank facilities, including syndicated deals.
The wide dissemination of the information memorandum means that its contents cease to be confidential, so a key element of the disclosure carve-out in the current Listing Rule 3.1A cannot be met. For a bank facility, confidentiality might be maintained but it is difficult to see why one or more of the items in Listing Rule 3.1A.3 would apply. The traditional minimalist approach to disclosure is difficult to reconcile with this more literal analysis of the test.
ASX’s draft guidance states that entities do not necessarily have to disclose commercially sensitive matters, provided they give the market enough detail to enable it to assess the impact of a transaction on the price or value of the entity’s securities.
This might sound sensible in theory, but in practice it is a form of ‘carve-out creep’ which introduces additional uncertainty into an already complex test. What will be enough to enable the market to assess the impact of the notes on the price or value of the issuer’s securities? Probably more importantly, when should the test be applied?
If ASX is suggesting that listed entities should make additional disclosure in relation to transactions as and when particular terms become price sensitive, boards will need to completely rejig their approach to disclosure. Without a comprehensive system for monitoring past deals in light of current circumstances, the ‘James Hardie moment’ where a board considers what needs to be said about a particular issue may never arise.
Conversely, encouraging more fulsome disclosure up front would reduce the chance of Centro-type issues arising again. The classification issue that plagued the Centro directors and their advisers would surely have been picked up by the market if participants had been aware of the tenor of Centro’s facilities from an earlier disclosure.
The exclusivity agreement with RaidCo raises further anomalies. A preliminary takeover approach will normally fall within the exception under Listing Rule 3.1A for incomplete proposals or negotiations.
The draft guidance specifically states that this extends to agreements entered into to facilitate negotiations about a transaction even though these agreements are themselves final, and also makes it clear that ASX thinks a reasonable person would not generally expect disclosure of a confidential, non-binding takeover approach from a potential bidder.
ASX’s stance is most likely in response to the growing tendency to disclose confidential takeover offers, as David Jones did in 2012. That situation can be distinguished from our scenario, where RaidCo is a prominent foreign company and the parties have finalised an exclusivity agreement.
Prima facie, the execution of an exclusivity agreement with a credible bidder is price sensitive information and in most cases, none of the items in Listing Rule 3.1A.3 will apply. Market participants are therefore entitled to expect that it be disclosed. Any attempt to relax principles to provide comfort to boards seeking to shield their companies from speculative influences should cause concern.
Consultation on ASX’s draft guidance has now closed and ASX has indicated that it aims to have the new guidance note, abridged guide and changes to the Listing Rules take effect in the first quarter of 2013.
Whilst the broader consideration of disclosure issues is welcome, further clarification needs to be provided to the market before the guidance is finalised. One solution would be for the ‘reasonable person’ test in Listing Rule 3.1A.1 to be moved to become an element of Listing Rule 3.1A.3, giving listed entities an unambiguous basis to take market practice into account when considering their disclosure obligations.
Failing this, the first board to try and satisfy a class action litigator’s ‘20/20 hindsight’ test after a disclosure issue arises might be less enamoured with ASX’s laudable intentions.
For more information contact Kate Bartlett on +61 7 3233 8632.
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