Shortly before Christmas, NZX released a revised version of its continuous disclosure guidance note (the
Revised Guidance Note). This followed the release of a consultation draft earlier in the year. The previous version of NZX’s continuous disclosure guidance note was released in April 2011.
The Revised Guidance Note is a significant rewrite of its predecessor. It provides more detailed guidance on several important topics, in particular some of the key terms within the “material information” definition, immediacy, safe harbour concepts and various practical matters.
NZX has not sought to replicate ASX’s continuous disclosure guidance note (the
ASX Guidance Note), following its revision in March 2013. The Revised Guidance Note has significantly less detail than the ASX Guidance Note. NZX has, however, stated that the Australian continuous disclosure requirements are broadly in line with the New Zealand continuous disclosure requirements. Accordingly, we believe that the ASX Guidance Note will continue to be a useful resource for NZX listed issuers when considering their continuous disclosure obligations.
The key changes in the Revised Guidance Note are outlined in the table below.
“Material Information” definition – key terms |
Who is a “reasonable person” when assessing whether information is likely to have a material effect on the price of an issuer’s securities?||The Revised Guidance Note provides that a “reasonable person” is a person who commonly invests in securities, and holds such securities for a period of time, based on their view of the inherent value of the securities. This is consistent with the interpretation of this term under the ASX Guidance Note.|
The term therefore does not include traders who seek to take advantage of very short term (usually intraday) price fluctuations and who trade into and out of securities without reference to their inherent value and without any intention to hold them for any meaningful period of time.
What constitutes a “material effect” on the price of an issuer’s securities?||The Revised Guidance Note sets out price movement thresholds that NZX Regulation (NZXR) will consider when determining whether information has had a material effect on the price of securities. Those thresholds are:
NZXR notes that it will consider all available evidence when analysing a particular price movement. This includes price movements in the market generally or within a particular index or sector.
- a price movement of greater than 10% will generally be treated by NZXR as evidence that information has had a material effect on the price of the relevant securities;
- a price movement of 5% or less will generally be treated by NZXR as evidence that information has not had a material effect on the price of the relevant securities; and
- whether a price movement of between 5% and 10% is evidence of a material effect will depend on the specific facts and circumstances (in particular the liquidity of the relevant securities and the size of the issuer concerned).
NZXR acknowledges in the Revised Guidance Note that the material information test is not a hindsight test based on the degree of price movement which
actually occurred after information is released. Rather it is based on what a reasonable person would
expect to happen upon the release of information. Therefore, the price movement thresholds set out above are only a guide as to the level of price movement that NZXR is likely to consider to be evidence that information has had a material effect on the price of listed securities. It does not preclude NZXR (or any other regulatory body) from taking a different approach in a particular case.
The meaning of “immediately”||NZXR confirms that “immediately” does not mean instantaneously but rather “promptly and without delay”.|
NZXR acknowledges in the Revised Guidance Note that there will inevitably be a period of time between becoming aware of information and releasing that information to the market. How promptly an issuer is able to release an announcement will depend on the particular circumstances and the particular nature of the material information. The Revised Guidance Note lists the follows as potentially relevant factors:
The Revised Guidance Note does not include the statement in the ASX Guidance Note which states that doing something “promptly and without delay” means doing it as quickly as it can be done in the circumstances (acting promptly) and not deferring, postponing or putting it off to a later time (acting without delay). We believe that this ASX statement is a good summary of how that phrase should be interpreted.
- the nature, amount and complexity of the information concerned;
- where the information originated from and whether the information needs to be checked or verified; and
- how long it takes the issuer to draft the necessary announcement, including to ensure the announcement is complete, accurate and not misleading. This last factor expressly recognises the inherent time versus accuracy trade off.
The Revised Guidance Note clarifies that where a decision or recommendation is incomplete pending Board approval, NZXR considers that an issuer will generally meet the requirement to release information “promptly and without delay” if it does so at the conclusion of that particular Board meeting (i.e., generally there will not be a requirement to release the announcement midway through a Board meeting once the relevant approval has been obtained).
NZX has, rightly in our view, not introduced the concept of a prescribed grace period.
Safe harbour concepts
Application of the reasonable person limb – would a reasonable person expect the information to be disclosed||The Revised Guidance Note provides that the reasonable person limb of the “safe harbour” provisions under Listing Rule 10.1.1 has a narrow application in practice. This is because, in NZXR’s view, information which falls within one of the other prescribed categories and remains confidential will generally also satisfy the reasonable person limb.|
Incomplete proposals ||NZXR has clarified in the Revised Guidance Note that a proposal or negotiation can generally be considered complete when both parties sign an agreement to
implement or give effect to the transaction (the relevant change being italicised).|
In this regard, NZXR has included a new footnote stating that an agreement entered into for the purposes of facilitating the negotiation of a transaction would generally not be expected to be disclosed (unless the existence of that option or arrangement was material information in its own right) and can be distinguished from an agreement which gives effect to the transaction.
We note that there is significantly more detail on whether or not a proposal is incomplete in the ASX Guidance Note. NZX issuers may therefore wish to refer to the ASX Guidance Note for further guidance on this topic.
Practical matters |
Dealing with incomplete information||In certain situations, an issuer may receive information over time relating to a particular event. NZXR has clarified in the Revised Guidance Note that if an issuer is able to determine that, based upon initial incomplete information, it holds material information, then it must immediately disclose this to the market. The issuer cannot wait until all information about the event is received until it makes an announcement.|
There may also be situations where an issuer becomes aware that a material event is going to occur but the event has not yet actually occurred. An issuer will be required to immediately disclose the event upon becoming aware that it will occur, instead of waiting until the event has occurred.
Breach of financial covenants ||NZXR has clarified in the Revised Guidance Note that a breach or pending breach of a financial covenant is not automatically material information. It will depend on the particular circumstances, including:
If the issuer determines that a pending breach of a financial covenant is material information, then that pending breach must be disclosed immediately.
- the nature of the covenant;
- the particular loan or facility involved;
- the impact of the breach or pending breach;
- discussions with the lender; and
- the issuer’s current financial position.
Release of dividend information ||The Revised Guidance Note clarifies that information relating to payment of a dividend may be released together with the periodic financial report, unless the dividend information is material information (in which case it should be released immediately following board sign off).|
Release of information outside of NZX hours||Where an issuer needs to make an announcement to the public or to another stock exchange outside of NZX’s operating hours, the issuer may provide the announcement to NZX via the market announcement platform:
NZX will not acknowledge receipt until the next business day.
- at the same time as it is released publicly; or
- if that is not practicable in the circumstances, as soon as reasonably practicable after that time (but provided that the announcement is provided for release before the next market open).
Interaction with trading halts ||The Revised Guidance Note clarifies that an issuer may need to request a trading halt if:
NZXR notes that an issuer should not request a trading halt simply as a tactic to delay releasing information.
- the circumstances require a trading halt until such time as an announcement can be prepared and released; or
- it needs to respond to information released by a third party and needs time to consider the likely impact before a response can be provided.
Selective briefings||NZXR states in the Revised Guidance Note that when briefing analysts or conducting investor presentations, it is best practice for issuers to release to NZX any information that will be discussed. This should be done no later than the commencement of the presentation or briefing. Issuers should ensure that only information that has already been disclosed (or information that is not material) is discussed at these briefings or presentations.|
The Revised Guidance Note does not include detailed guidance on selective briefings, unlike ASIC’s Report 393
Handling of confidential information: Briefings and unannounced corporate transactions. That report was discussed in our September article titled “Selective disclosure by listed issuers: recent ‘best practice’ developments”.
Time for a review of your continuous disclosure policies and procedures?
The release of the Revised Guidance Note provides a natural time for issuers to undertake a general review of their continuous disclosure policies and procedures. This is relevant not only to ensure that issuers avoid possible action by regulators, but also to minimise the risk of civil liability. Shareholder class actions for alleged breaches of continuous disclosure obligations are now an established feature of the Australian legal landscape. Given recent class action activity in New Zealand, and the growing presence of litigation funders in our market, there is a real potential for this type of litigation to develop here too.
If any non-compliance with the continuous disclosure rules is alleged, it will be important to be able to demonstrate that robust policies and procedures were in place. A few reminders:
Be prepared: A high degree of preparedness is important for ensuring compliance with continuous disclosure obligations. In this regard:
Do you prepare draft leak announcements for corporate transactions which are being explored or negotiated?
Do you prepare draft announcements (including for multiple options where appropriate) in advance of Board meetings so that they can be released immediately following the meeting?
Do you have a subcommittee of the Board to deal with matters relating to disclosure? Is the membership of this committee still appropriate? Are the members able to deal with matters at short notice?
Do you have a draft trading halt request letter prepared?
Do you have appropriate systems and processes in place to identify material information?
Take the approach of caution: In several places in the Revised Guidance Note NZXR stresses that issuers should take the approach of caution when managing their continuous disclosure obligations. We endorse this view. If an issuer decides not to make an announcement on the basis that the relevant information is not material but then the price of its listed securities moves significantly, the issuer will be in a difficult position.
Release information before the market opens: In the Revised Guidance Note NZXR states that material information should be released prior to market open, where possible. This can be particularly important where more than one NZX listed issuer needs to make an announcement in relation to the same event.
Revised trading halts and suspension guidance note
At the same time that NZX released the Revised Guidance Note, it also released a revised version of its trading halts and suspensions guidance note. The key changes from the previous version of that note were to add additional guidance:
explaining NZX’s process for applying for administrative trading halts;
explaining when NZX may exercise its discretion to apply non-administrative trading halts; and
in relation to suspensions.
As these changes are not substantive, they are not considered in this article.
More changes to come?
In its explanatory paper that accompanied the Revised Guidance Note, NZXR highlighted the following as areas for further consideration:
whether to amend the reference in the continuous disclosure rules to “immediately” to “promptly and without delay”;
whether to include a definition for the term “officer” for the purposes of the continuous disclosure rules;
whether to provide more guidance in relation to whether issuers should consider analysts’ forecasts and prior year performance as de facto guidance which needs to be updated; and
whether to align its trading halts policy more closely with that of the ASX, to assist dual listed issuers.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.