Investor confidence is an obvious imperative of corporate legislation. Section 674 of the Corporations Act, which requires disclosure of information concerning securities that is not generally available (and that a reasonable person would expect if it were generally available) to have a material effect on the price or value of those securities is one way that the law reacts to this imperative. The section was expected to be at the forefront of the recent High Court appeal decision in the Fortescue Metals matter (Forrest v ASIC  HCA 39).
However, this did not occur. The Court’s decision — that the market announcements by Fortescue were not misleading or deceptive — meant that the breach of the continuous disclosure provisions became a non-issue. Even ASIC’s secondary argument regarding non-disclosure — that Fortescue was obliged to disclose the terms of the agreements — was rejected by the Court on two grounds: by the majority as not necessary as the announcements accurately conveyed the effect of the agreements, and by Heydon J on the ground that if they really were “unenforceable agreements to agree” (which was ASIC’s position), then they were not of relevant significance in any case. The target or intended audience, and the special nature of the arrangement — particularly the involvement of Chinese state-owned enterprises — were important parts of the grounds for the decision.
The categorising of the target audience as commercially shrewd or relatively sophisticated — that is, having the ability to distinguish between intentions and legal effect — may possibly strengthen future arguments for companies similarly placed to Fortescue. But because of the nature of the facts in the case, this is unlikely. Contract negotiations may ebb and flow, and the precise timing of a disclosure, or even the more drastic step of a trading halt, may prove a difficult decision with regard to continuous disclosure requirements.
ASX has been revising its listing rules (3.1 – 3.1B) in relation to continuous disclosure. It had held off announcing its position until the High Court decision in Fortescue Metals. Its 69-page report, contained in Guidance Note 8, is thorough, and given the somewhat neutral outcome in relation to continuous disclosure in the High Court decision, it is also pertinent. Of the issues it addresses, the following stand out: the meaning of “immediately”; the value of trading halts; a perspective on the reasonable person test in s 674 (2) © (ii).
Listing Rule 3.1 requires market-sensitive information to be disclosed immediately upon the entity becoming aware of it. In explanation of the definition of “immediately”, ASX uses Queen v Berkshire Justices (1879) 4 QBD 469, a 19th-century case offering “prompt and vigorous, without any delay” as the equivalent. Unfortunately for investors, delay is sometimes the tactic applied to disclosing market-sensitive material as companies balance timing of disclosure with time-critical, and perhaps financially beneficial, deadlines.
To ensure companies are appraised of their responsibilities, the Guidance Note sets out that ASIC may issue infringement notices for even relatively short delays in disclosure. In fact, the whole of the Guidance Note, with its practical, example-based tone, will provide companies with the sort of detailed information that should lead to more transparency in relation to the continuous disclosure regime.
There is recognition in the Guidance Note of the realities of lines of communication in companies, for instance concerning the need to verify information, or seek board approval. How such factors impact upon the concept of “prompt and without delay” is not only relevant to ASX but also to ASIC in considering its options for proceedings under s 674.
The material in Guidance Note 8, particularly the importance of market-sensitive information being brought to the notice of directors and senior managers, looks very much like good corporate governance practice. This connection was drawn in the judgement in ASIC v Chemeq LtdFCA 936, where the need to consider regulatory obligations as part of day-to-day decision making processes in companies was stressed.
The significance of trading halts is tied to timing issues, which are inherent in the need for immediate disclosure. A trading halt can be requested under Listing Rule 17.1 for a maximum period of two days. A trading halt not only may protect potential investors, but also may reduce the exposure of the listed entity if it is subsequently found to have breached its obligations. The use of a trading halt may go some way to satisfying the spirit, intention and purpose of Listing Rule 3.1 (see Listing Rule 19.2). The focus upon the use of trading halts is a positive factor and the explicit support of these in the Guidance Note is a step in removing the reticence that listed companies may feel in implementing the procedure, which may arise from the perception of negative market response regardless of eventual outcome.
The usefulness of the continuous disclosure provisions in the Corporations Act, and the Listing Rules, is based on not only what is required to be disclosed, but on what isn’t. Listing Rule 3.1A.1 is relevant in this regard and lists categories of information excluded. Listing Rule 3.1A.2 sets out that excluded information must also be confidential and 3.1A.3 requires that a reasonable person would not expect the information to be disclosed. Sensibly, the Guidance Note accepts that confidential information satisfying 3.1A.1 would generally be information that a reasonable person would not expect to be disclosed.
Timely and adequate disclosure is critical to the integrity and efficiency of the market. The ASX Guidance Note stresses context. This is particularly important for the purposes of balancing the regulatory regime with the realities of corporate practice, particularly in critical situations where the continuous disclosure provisions may have an impact. In the High Court judgement in the Fortescue Metals case, it was considered important to examine what the statements made by the company conveyed to their target audience. The target audience, it decided, could see the For[r]est for the trees.