The impact of the COVID-19 pandemic is being felt in many sectors around the world. For ASX listed companies, the impact of COVID-19 is manifesting in many different ways. Aside from the obvious difficulties of operating a business in a fluid economic environment, ASX listed entities will also need to ensure they continue to meet their Listing Rule obligations and that the market is properly informed about the company’s position and operations.
In the wake of a significant number of market disclosures relating to COVID-19 being made via the ASX platform, the ASX has recently published guidance for listed entities on their obligations under the Listing Rules in the COVID-19 era. Some companies have already reported a negative effect on their business, while others have been fortunate to strike a major contract or to announce a sale ahead of expectations due to increased demand for their products.
What is the continuous disclosure obligation?
The ASX Listing Rules impose several disclosure requirements on listed entities, one of which is the continuous disclosure obligation, which has gained particular attention in the volatile time of COVID-19. This obligation is imposed by Listing Rule 3.1 which states that a company must immediately disclose to ASX any information which a reasonable person would expect to have a material effect on the price or value of their securities. In this context:
- ‘Immediately’ does not necessarily mean instantaneously, but rather, promptly (as quickly as possible) and without delay (without postponing the announcement to a later time).
- ‘Information’ is not strictly a matter of fact but can also be an opinion or intention. It does not need to be financial information, or even measurable in financial terms – as long as it has a material effect on the company’s securities price.
Listing Rule 3.1A contains various carve-outs in respect of certain market-sensitive information that would otherwise require disclosure under Listing Rule 3.1. This rule applies if one or more of the following five situations apply:
- it would be a breach of the law to disclose the information;
- the information relates to an incomplete proposal or negotiation;
- the information comprises matters of supposition or is insufficiently definite to warrant disclosure;
- the information is for internal management purposes; or
- the information is a trade secret.
In addition, the information must be confidential (and ASX has not formed the view that the information has ceased to be confidential) and a reasonable person must not expect the information to be disclosed in order to rely on Listing Rule 3.1A.
ASX guidance
The recently published ASX guidance emphasised that the continuous disclosure obligations of listed entities do not extend to predicting the unpredictable. If information comprises matters of supposition or is insufficiently definite to warrant disclosure and otherwise meets the requirements of Listing Rule 3.1A above, ASX does not expect disclosure of that information. ASX also does not expect entities to make forward looking statements to the market unless they have a clear and reasonable basis for doing so.
Unlike some industries where financial implications of COVID-19 are already known (such as aviation, tourism and hospitality), significant numbers of companies operating in other industries are still grappling to measure the magnitude and extent of the impact to their business at this stage. In such cases, should the information be considered a matter of supposition or insufficiently definite, listed entities may be able to rely on this carve-out in Listing Rule 3.1A and should be wary of making any forward looking statements that do not have a clear, reasonable basis. Listed companies will need to strike a balance between their obligation to disclose to the ASX all market sensitive information and ensuring that no announcements are misleading or deceptive as a result of the uncertainty.
ASX has provided some specific examples of situations that companies may find themselves in as the COVID-19 pandemic develops and what ASX expects of entities in these situations. We have set out a few of these examples below.
Entities in financial difficulty
Where an entity finds itself experiencing financial difficulty, the disclosure standards of Listing Rule 3.1 continue to apply. If there is an adverse development affecting the financial condition or prospects of the entity that falls outside the carve-outs in Listing Rule 3.1A and a reasonable person would expect information about that development having a material effect on the price or value of the entity’s securities, the entity must disclose that information.
Matters requiring immediate disclosure to the market would include information that a major lender to the listed entity has declared an event of default and called for immediate repayment of the outstanding balance of its loan, causing the entity to become insolvent, or information that the board of a listed entity has resolved to appoint an administrator.
Capital raisings
ASX has stated that an entity proposing a capital raising to restore its financial position will need to announce it to the market under Listing Rule 3.10.3 as soon as it is committed to proceeding with the capital raising.
Material operational decisions
Should an entity make an operational decision, such as standing down a material number of employees or closing or suspending certain operations or facilities, this information should be announced immediately where the information is likely to have a material effect on the price or value of its securities.
Trading halts and voluntary suspensions
ASX has reminded listed entities that if the market is (or will be) trading at any time after an entity first becomes obliged to announce market sensitive information under Listing Rule 3.1 but before it can make an announcement, it should carefully consider whether it is appropriate to request a trading half or enter a voluntary suspension.
Recent practice shows that companies are frequently resorting to requesting trading halts and voluntary suspensions in order to allow themselves more time to fully assess the operational and financial impacts driven by COVID-19 and manage their continuous disclosure obligations.
Misleading COVID-19 announcements
ASX has expressed its concerns regarding misleading announcements following a significant number of instances where listed entities have made announcements with potentially misleading claims surrounding COVID-19. ASX is concerned that entities who do not have any prior meaningful involvement in similar activities have lodged announcements claiming:
- to have found a cure or new treatment for COVID-19;
- their product kills the COVID-19 virus; or
- to have developed new forms of test kits for COVID-19.
ASX has reported that a number of these claims have not been properly substantiated to ASX’s satisfaction and have resulted in the entity being prevented from releasing the announcement on ASX or, where it has already been released, having to retract the announcement or to make substantial amendments to the announcement to ensure that it is accurate, complete and not misleading. Where there are concerns about COVID-19-related announcements, ASX is likely to immediately suspend trading in the entity’s securities pending further enquiries by ASX to establish that the announcement meets the requirements of the Listing Rules. It is also underscored that ASX will not hesitate to use its new power of censure in Listing Rule 18.8A to censure entities that make misleading COVID-19 claims.
Separate to any issues the ASX may take with misleading COVID-19 announcements, it is also important to be aware that there is a real risk of regulatory action by ASIC or shareholder class actions where market announcements are misleading generally.
ASX has also raised concerns with companies breaching their Listing Rule obligation to ensure that material information is released to the market before it is otherwise circulated. In particular, companies should ensure that material information is not released via social media channels (whether the company’s or its directors’ or employees’) before it is released to the ASX, even where the company is in trading halt or voluntary suspension. Companies should ensure that they have an appropriate social media policy in place in this regard.
What if you are still not sure if certain information is required to be disclosed?
Although the rules might sound clear-cut, in reality companies are struggling to stay abreast of their continuous disclosure obligations in this constantly changing environment. In addition, the ASX’s Guidance Note 8 also provides useful information to steer boards of listed entities in the right direction. It encourages directors to consider the following two simple questions:
- Would knowing this impact my choice to buy or sell shares in the company at its current price?
- Would I feel vulnerable to a claim of insider training if I were to buy or sell shares in the company at its current price, knowing the information was not disclosed?
A positive response to either question indicates that the information may well be market sensitive and subject to a duty to disclose if it does not fall within the carve-outs in Listing Rule 3.1A. The ASX itself will approach their consideration of compliance by looking at the actual effect the information had on the company’s share price once it was announced.
Key takeaways
For any director of an ASX listed company, it is imperative to keep the ASX informed of any price sensitive information in order to meet the entity’s continuous disclosure obligations under Listing Rule 3.1. If not already disclosed, it may be sensible to consider making an announcement in respect of:
- measures that are being taken for combating the fallouts of COVID-19;
- changes to a previously released earnings guidance;
- a decision not to pay a dividend;
- effects on supply chain or other significant operational issues;
- changes in consumption and demand for a company’s goods and services;
- implications to material contracts, financial and insurance arrangements;
- impact on workforce; and
- impact of measures and restrictions imposed by the state and federal government.
Once disclosure has been made, companies need to stay attentive and ensure they are aware of developments relating to COVID-19 and to consider whether any new information of this kind triggers their obligation of disclosure to ASX.
For advice or assistance with your continuous disclosure obligations, please contact HopgoodGanim’s Corporate Advisory team.