The Australian Securities Exchange (ASX) has updated its guidance in relation to the continuous disclosure obligations of listed entities, in particular, in relation to ASX’s disclosure expectations for material contracts, and for entities experiencing financial difficulties.
Disclosure of material contracts (including customer contracts)
The ASX has updated Guidance Note 8 (ASX GN8), which deals with the ASX’s expectations regarding the content of announcements which are released by entities in satisfaction of its continuous disclosure obligations. In particular, the ASX has focused on its disclosure expectations for material contracts.
The updated guidance deals with the content of announcements concerning the signing of a “market sensitive contract” for an acquisition or disposal, and the signing of a “market sensitive contract” with a customer (Material Customer Contracts).
Notably, the changes in relation to “market sensitive contracts” for an acquisition or disposal appear to work together, but are separate to an entities’ obligation to disclose details of a material transaction which significantly changes the nature and/or scale of entities’ undertaking in accordance with Chapter 11 of the Listing Rules.
The guidance with respect to Material Customer Contracts is new, and appears to have been driven in part by a number of recent incidents (some, which have attracted media coverage) where the ASX considers that the disclosure of contractual arrangements with customers has fallen short of the required standards.
Recent examples noted by ASX include:
- announcing a contract with a major global customer without providing any details of the nature or substance of the contract or its significance to the entity (i.e. seeking to benefit from the association with the customer without providing proper disclosure);
- announcing what appears to be a material customer contract without disclosing that it is subject to a trial period or other conditions and therefore may not proceed;
- disclosing revenue projections for customer contracts that do not have a proper basis or that do not state the material assumptions or qualifications underpinning them;
- not disclosing when a previously announced material customer contract is terminated or does not proceed (i.e. disclosing good news but not bad); and
- misrepresenting customer contracts as being “material” or with other superlatives when plainly they are not (one of the more notable examples being a listed entity that disclosed a “material commercial agreement with a leading financial entity” under which it was to receive less than $1000 in revenue).
Under the new guidance, ASX has clarified that entities will need to consider the significance of a Material Customer Contract to the entity, and whether the Material Customer Contract is immediately legally binding (and if so, what the term is), or whether certain conditions need to be satisfied before the Material Customer Contract formally commences (i.e. whether a trial period or other similar probationary exists or not).
If an entity decides to publish projected financial information (which are in relation to, or incorporates, a new customer contract), ASX reminds entities that these will be considered “forward looking statements” which will attract regulatory scrutiny, and therefore, entities must have a reasonable basis for making the statements, otherwise, they will be deemed misleading. In terms of disclosure, in accordance with ASIC guidance, ASX reminds entities that any announcement that includes “forward looking statements” should include any material assumptions or qualifications that underpin those “forward looking statements”.
Disclosure of commercially sensitive information
The ASX removed a reference in section 4.20 of ASX GN8 to disclosing the impact of material contracts on revenue, costs or profits. This appears to be as a result of the insertion of the new guidance with respect to customer contracts in section 4.15.
Accordingly, with respect to “commercial sensitive information”, ASX’s guidance remains that it has no issue with an entity structuring an announcement to avoid disclosing commercially sensitive matters, provided it includes sufficient information to enable the impact of the transaction on the price or value of the entity’s securities.
Entities in financial difficulties and application of insolvent trading “safe harbour”
ASX has expanded the guidance in section 5.10 of ASX GN8 to address the new insolvent trading safe harbour for directors in section 588GA of the Corporations Act 2001 (Cth) (Act) and what should be disclosed when an entity in financial difficulties requests a voluntary suspension to complete a transaction necessary for its survival.
ASX has clarified that the fact that an entity’s directors are relying on the “safe harbour” to develop a course of action that may lead to a better outcome for an entity than an insolvent administration, in and of itself, is not something the ASX would generally require an entity to disclose under Listing Rule 3.1 – unless, the course of action ceases to be confidential, or a definitive course of action has been determined.
In relation to entities in financial difficulties, ASX have clarified that the same disclosure standards under Listing Rules 3.1-3.1B apply to all entities (including those in financial difficulties) and the belief that the disclosure of negative information could affect an entity’s ability to continue as a going concern, is by itself, not sufficient to warrant non-disclosure under Listing Rule 3.1/3.1A.
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