Australia: Seven commandments of continuous disclosure

What you need to know

• The ASX Listing Rules require ASX-listed companies to "immediately" disclose to the ASX any information concerning them "that a reasonable person would expect to have a material effect on the price or value" of their securities.
• Given their inherent scientific and regulatory complexities, life sciences companies must be particularly careful to disclose all required information in terms that are clearly understood by investors, allowing them to assess the commercial significance of that information.
• We suggest seven 'commandments' for companies considering how best to meet their disclosure obligations.

Obtaining listing on the ASX is an exciting milestone for any company. It also carries with it some important obligations including the requirement to give 'continuous disclosure'.

In this article we explore practical compliance with ASX continuous disclosure requirements in the particular context of the life sciences industry. We then suggest 'seven commandments' to assist life sciences companies in understanding and meeting their continuous disclosure obligations.

Immediate and balanced disclosure

ASX Listing Rule 3.1 requires that ASX-listed companies "immediately" disclose to the ASX any information concerning them "that a reasonable person would expect to have a material effect on the price or value" of their securities.

ASX Guidance Note 8 explains the "immediate" disclosure requirement as a requirement to disclose "promptly and without delay".

In practice, this means that companies need to be both proactive and reactive to ensure they meet their disclosure obligations. Being appropriately reactive means sufficiently monitoring publicly available information regarding their securities, including any commentary in major newspapers and social media, to promptly respond to market rumours or any loss of confidentiality.

The social media landscape in particular has the potential to throw up tricky issues for life sciences companies conducting clinical trials, given the risk that the trial participants may make claims or statements to which a company might need to respond. This is precisely the scenario that Neuren Pharmaceuticals faced a few years ago when, part way through its Phase 2 clinical trial of a drug to treat adolescents and adults with Rett Syndrome (a severe genetic disorder of the nervous system), some of the participants' parents posted comments on social media about the positive effect the drug was having on their children. As a result, Neuren Pharmaceuticals issued a clarifying statement in August 2013:

The events that unfolded for Neuren are a clear illustration of the need for life sciences companies to keep close tabs on public discussion or debate about their business activities, and be ready to respond when required.

It is also important for companies to consider the expectations of the 'reasonable person' in determining what is to be announced. Companies should not 'cherry pick' information – for example, by publishing positive but not negative results of clinical trials. If a company needs time to assess the impact of new developments, it can request a trading halt to do so.

When you can hold back

Under Listing Rule 3.1A, a company is excused from disclosure when all of the following three requirements are satisfied:

• at least one of the following five situations applies:
• • disclosure would break the law
  • the information relates to an incomplete proposal or negotiation
  • the information comprises matters of supposition or is insufficiently definite
  • the information is prepared for internal management purposes
  • the information is a trade secret
• the informtion is confidential; and
• a reasonable person would not expect the information to be disclosed.

These exemption criteria must be considered with care, as there are significant consequences of getting it wrong and failing to disclose something that should have been disclosed.

The cost of getting it wrong

The Corporations Act 2001 (Cth) (Corporations Act) imposes penalties for failure to disclose in accordance with the Listing Rules. In particular:

• Individuals involved in the failure may face criminal charges with a fine of up to $36,000 and/or up to five years imprisonment,¹ or a civil penalty fine of up to $200,000,² unless they took reasonable steps to ensure the company complied with its disclosure obligations and had reasonable grounds to believe it did.
• The company itself may face a civil penalty fine of up to $1 million.³ Alternatively, ASIC may issue an infringement notice to the company,⁴ attracting a fine of between $33,000 and $100,000 depending on the company's size, type and track record.⁵

Failure to disclose may also attract class action suits against the company.

Specific guidance for life sciences companies

Acknowledging that life sciences companies routinely engage in activities that can throw the continuous disclosure requirement into stark light, the ASX and AusBiotech have jointly published an industry-specific guide to disclosure for Australian listed life sciences companies. This is known as the "Code of Best Practice for Reporting by Life Science Companies" (Code).

Now in its second edition, the Code provides a recommended disclosure framework around the key drivers of value for life sciences companies, including R&D, clinical trials, intellectual property and manufacturing. It offers guidance on the circumstances in which disclosure obligations might apply and the level of detail required, as well as explanations of various technical terms. Here are some highlights:

• Companies should bear in mind the importance of ensuring their announcements are clear, particularly since many investors will have a limited understanding of the science underlying their activities. Announcements should explain the implications of the information disclosed and thus facilitate the evaluation of its significance.
  For example, when reporting on clinical trials, companies should clearly explain how the study is linked to the relevant regulatory process so that investors understand the trial's commercial or regulatory significance. Trial results should be disclosed with reference to the initial goals (were the endpoints achieved?), structure and key aspects of the trial protocol.
• Companies whose activities are primarily in the R&D space are encouraged by the Code to provide periodic reports to the market (at least half yearly) on their R&D activities in the preceding period, including a summary of related expenditure. Information regarding R&D activities needs to be fair and balanced so that investors can assess the commercial prospects of the proposed or pipeline product.
• It is common for life sciences companies to enter into licensing arrangements, co-marketing agreements, joint ventures or similar engagements for various commercial or other reasons. In disclosing these types of arrangements, companies need to balance commercial sensitivity with the need to enable investors to properly assess the value of the relevant arrangement or transaction. This requires proactive engagement with the other party as to the content of announcements.

Seven commandments

The practical implications of the continuous disclosure requirement will look different for every company.

As a starting point, we suggest these 'seven commandments' to guide companies in meeting their disclosure obligations:

1. Be quick: Understand the need to disclose market sensitive information "immediately".

2. Be savvy: Understand the exceptions to disclosure.

3. Be fair: Don't cherry pick your disclosures (for example, don't rush to share the good news and hold back the bad).

4. Be prepared: Have a protocol for preparing and signing off updates to the market, and use trading halts to give yourself time if you need it.

5. Be appropriately proactive and reactive: At each board meeting, ask 'have we decided anything today that ought to be disclosed?' Also ensure there are sufficient measures in place to monitor the media and identify issues that might require a response.

6. Be commercial: Consider the company's key drivers of value in determining what should be disclosed.

7. Be practical: Don't just provide information, but explain its implications for the company and unpack its significance if there is dense scientific or technical content involved.

While the details and intricacies about the continuous disclosure regime can sometimes be overwhelming, a common sense approach that draws upon these seven commandments should go a long way towards helping life sciences companies communicate well with the market.

Footnotes
¹Corporations Act 2001 (Cth) s 1311(1), Schedule 3; Crimes Act 1914 (Cth) s 4AA(1).
²Corporations Act s 1317E, 1317G(1B)(a).
³Corporations Act s 1317E, 1317G(1B)(b).
⁴Corporations Act s 1317DAC.
⁵Corporations Act s 1317DAE(2)-(7).

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories