NZX listed issuers should take note of a recent ASX reminder on continuous disclosure obligations surrounding periodic financial reporting

In its January 2009 Companies Update, ASX has provided further guidance to ASX listed issuers on their disclosure obligations in the period leading up to the deadline for lodging periodic reports for half-year or annual reporting periods where there is expected to be a material difference in the issuer's financial results.

Both the ASX and NZX listing rules contain continuous disclosure obligations which require issuers to keep the market fully informed in a timely way about material information relevant to the issuer. These are supplemented by separate Guidance Notes which set out the respective regulatory body's expectations in relation to best disclosure practice.

The ASX's Guidance Note 8 includes guidance to ASX listed issuers which is particularly relevant to their continuous disclosure obligations in the context of periodic financial reporting.

ASX's reminders on profit warnings and announcements of expected material differences in financial results

The key points made by the ASX in its latest update which may be of assistance to NZX issuers in their consideration of whether a matter requires disclosure under the NZX Listing Rules are:

• ASX listed issuers are required to make an appropriate announcement immediately they become aware that there is expected to be a material difference in the financial results for that period from the results that were recorded in the previous corresponding period, or from forecasts for that period that have been provided to the market by the issuer, or (in some cases) from analysts' consensus forecasts. The ASX does not consider that it is acceptable for the release of such information to be delayed until the release of the periodic financial report or until the release of the information has been considered by the board.

• As a general policy, a variation in excess of 10 to 15 percent may be considered material, and should be announced by the ASX listed issuer as soon as the issuer becomes aware of the variation. If the issuer has not made a forecast, a similar variation from the previous corresponding period will need to be disclosed. In certain circumstances a smaller variation will be disclosable.

• In making such disclosure, the ASX listed issuer must provide some details, however qualified, of the extent of the variation. For example a statement by an issuer may indicate that, based on internal management accounts, its expected net profit or EBIT will be an approximate amount (e.g. approximately $6m) or alternatively within a stated range (e.g. between $5m and $7m). Alternatively, the issuer may indicate an approximate percentage movement (e.g. "up [or down] by 25%").

• In some cases, it may be appropriate for the ASX listed issuer to disclose material variations from analysts' consensus forecasts and expectations. This may occur where previous results do not provide the most relevant reference point or the market is moving in such a way as to indicate that there is a false market in an entity's securities. Officers of ASX listed issuers should refrain from publicly commenting they are "happy" or "comfortable" with analysts' consensus forecasts or a range of analysts' forecasts.

NZX's Continuous Disclosure Guidance Note

The equivalent NZX Guidance Note (issued in March 2005) also discusses the importance of disclosing a material change to prospective financial information, and sets out some examples similar to those outlined in ASX's Guidance Note. In particular it notes that:

• Disclosure would be required where the issuer, on reviewing management accounts part way through a half year period, becomes aware that revenues and profits for the period will vary from one or more of the following to a material extent:

• the financial results for the previous corresponding period;

• prospective financial information such as forecasts or projections contained in any prospectus;

• prospective financial information such as forecasts or projections previously provided to the market in relation to the half-year period.

• In making such disclosure, the entity must provide some details, however qualified, of the extent of the variation. For example a statement by an entity may indicate that based on internal management accounts, its expected net profit or EBIT will be an approximate amount (e.g. approximately $10m) or alternatively within a stated range (e.g. between $9m to $11m). Alternatively, the entity may indicate an approximate percentage movement (e.g. "up [or down] by 25% on the previous corresponding period"). NZX accepts that this information may not be precise and may be changed or amended on completion of the final accounts. NZX does not require entities to make forecasts. The disclosure required would be limited to information known to the company – for example, close to or following the end of the reporting period.

• Immediate disclosure would be required if two weeks prior to the due date for lodgement of a preliminary annual report an issuer's year end adjustments and write downs will result in a significant reduction in the issuer's result (even if the trading results for the issuer are broadly in line with the previous corresponding period). It is not appropriate for the issuer in these circumstances to delay the release of this information until the time of lodgement of the preliminary final report.

The question of when an issuer becomes "aware" of material information for the purposes of its continuous disclosure obligations is similar in both jurisdictions. The NZX Listing Rules state that an issuer becomes "aware of information if a Director or an executive officer of the issuer (and in the case of a Managed Fund, a Director or executive officer of the Manager) has come into possession of the information in the course of the performance of his or her duties as a Director or executive officer."

Commentary

In New Zealand, a breach of the continuous disclosure rules can result in a fine or other penalty imposed by NZX Discipline on the issuer under the NZX Listing Rules. The continuous disclosure rules are backed up by the Securities Markets Act 1988 (SMA) which provides liabilities for non-compliance with the NZX Listing Rules and enforcement mechanisms for the Securities Commission.

Since an amendment to the SMA in early 2008, a breach of the continuous disclosure rules can also result in personal liability for the directors or senior management of the company. Liability under the SMA now extends to all persons "in any way, directly or indirectly, knowingly concerned in, or a party to, the contravention by any other person". The Securities Commission has expressed the view that this is intended to allow it (or shareholders) to bring proceedings against the directors of a company which fails to comply with its continuous disclosure obligations.

This liability under the SMA can take the form of a liability to pay compensation to shareholders who have suffered loss by the non-disclosure (such as those who acquire securities at a time when price-negative information is not announced) and/or a pecuniary penalty of up to $1 million.

We believe that NZX and the Securities Commission are likely to be particularly vigilant about inquiring into possible continuous disclosure breaches in respect of unexpected financial results. A focus by regulators on continuous disclosure is heightened where a listed company's share price falls sharply. In those circumstances the issue will be addressed with the benefit of hindsight and the non-disclosure of matters which have subsequently contributed to a significant loss of shareholder value can be difficult to justify. This therefore represents one of the major areas of risk for issuers and their directors.

To access a copy of ASX's January Company Update visit the ASX's website at www.asx.com.au

If you would like to discuss any aspect of this update, please contact any of the Bell Gully team listed below.

Auckland

Anna Buchly
Partner

Garry Downs
Partner

David Flacks
Partner

James Gibson
Partner

Brynn Gilbertson
Partner

Glenn Joblin
Partner

Gavin Macdonald
Partner

Haydn Wong
Partner

Wellington

Mark Freeman
Partner

Chris Gordon
Partner

Dean Oppenhuis
Partner

Enquiries and information

For more information on any of the cases, articles and features in Commercial Quarterly, please email Diane Graham or call her on 64 9 916 8849.