NZX has released its inaugural thematic review on continuous disclosure.
The review has a practical focus, with case studies using real examples to illustrate the key takeaways. NZX undertook a voluntary survey to gain a better understanding of the current practices followed by issuers.
The review is a useful companion piece to the NZX Continuous Disclosure Guidance Note, the NZX Corporate Governance Code and NZX's practice notes. We consider this essential reading for those responsible for continuous disclosure at all listed issuers.
Steps in the disclosure process
NZX has outlined the steps involved in the disclosure process that all issuers should be considering:
- being prepared to disclose
- identifying and managing information
- knowledge and responsibility
- using safe harbours, and
- effective disclosure
Being prepared to disclose
NZX expects that all issuers have adequate arrangements in place to enable the release of Material Information as soon as they become aware of it. NZX's survey revealed that 85% of the issuers surveyed had a written continuous disclosure policy, with a further 10% being in the process of adopting one.
Only around half of the issuers surveyed provided training to their executive officers, and most did not provide specific training to their directors.
NZX refers to its earlier Continuous Disclosure Guidance Note, which sets out recommendations as to compliance procedures that an issuer should put in place, and encourages all directors and management to actively engage in training on continuous disclosure. Helpfully, NZX's review includes an appendix with discussion prompts to enable issuers and their directors to understand their obligations and identify policies and procedures that may assist in meeting those obligations.
NZX also notes that while issuers may seek advice from their external legal advisers, ultimately the decision on whether to release information is for the issuer to make. This is underscored by the recent public censure of Veritas Investments Limited for a breach of the Listing Rules in relation to continuous disclosure. In that case, the NZ Markets Disciplinary Tribunal noted that while it was a mitigating factor that Veritas had taken legal advice in relation to the specific issue, it was ultimately a matter for the board to exercise its own commercial judgement based on its knowledge of the issuer and its business to determine whether disclosure is required.
Identifying and managing information
As the obligation to release material information is immediate, issuers must have processes in places to ensure timely disclosure following a sudden or unexpected event. NZX gives some examples from its survey of when disclosure had to be considered urgently, including the unexpected resignation of a director, a misleading media article and the awarding of a significant tender.
NZX notes that it encourages issuers to engage with it when dealing with urgent or unexpected disclosure events, particularly if they may need to announce material information during the trading day.
Ongoing monitoring and assessment of material information is also an important consideration. NZX notes that when information is developing, issuers are not able to wait until scheduled meetings of the board to address those matters. A developing situation may require board meetings to be called early or special board meetings held in order to address the developing information. Appropriate delegations to persons other than the full board may also help with managing urgent continuous disclosure obligations.
NZX also notes the importance of monitoring external sources of information, but repeats its earlier guidance that issuers do not have a general obligation under the Listing Rules to correct analyst reports or forecasts. On the topic of forecasts, NZX expressly cautions that issuers may come into possession of information about their actual results immediately prior to, and immediately following, the issuer's balance date, as well immediately prior to the release of the issuer's preliminary announcement for the relevant period.
NZX highlights the following case studies in this section:
- Using special board meetings and a delegation to a sub-committee to effectively manage continuous disclosure obligations in relation to a significant transaction.
- Pre-drafting a release to cover the possibility of a leak during a transaction and effectively using a trading halt to make a release when an issuer is no longer able to rely on a safe harbour to disclosure (for an incomplete negotiation in relation to a proposed transaction), where an executive officer of that issuer mischaracterised the status of the transaction in a media interview which was then reported.
Knowledge and responsibility
It is important to note that anyone at an issuer may become
aware of potential material information. As such, issuers should
have processes in place to ensure that potential material
information is escalated efficiently and effectively.
Clear allocation of responsibility is also important to ensure compliance with continuous disclosure obligations. Based on NZX's survey, all but one issuer had a nominated disclosure officer to whom disclosures should be made. Most issuers had specified persons who were authorised to communicate with analysts and some required at least two issuer representations to be present when communicating with analysts.
NZX also highlighted that based on the survey, some issuers did not appear to be correctly applying the concept of who is an "executive officer" – this is relevant as the knowledge these people hold is an important element of the continuous disclosure obligation. One issuer responded that they did not understand the question, while another responded that its board is responsible for compliance with the Listing Rules.
Most issuers noted that board minutes generally record the reasons for the board deciding to disclose or not disclose information. However, practice was varied and some issuers noted that reasons for the board's decision are not recorded or only recorded on an ad hoc basis.
One key advantage of recording these decisions in board minutes is that it makes undertaking an offer in reliance upon the exclusion for offers of financial products of the same class as quoted financial products more straightforward, as issuers can more readily consider whether there is any excluded information that needs to be disclosed in a cleansing notice.
Using safe harbours
NZX notes that none of the issuers surveyed reported having any difficulty in applying the safe harbour to disclosure provisions. NZX highlights that one of the key requirements is that the confidentiality of information is maintained. In this regard, it is important for issuers to be prepared with appropriate market announcements in case confidentiality is breached (to the extent possible).
NZX also notes that it has not experienced many issuers making inappropriate trading halt applications – instead, there have been instances where NZX has engaged with issuers to understand why a trading halt was not sought.
NZX highlights the following case study in this section:
Making an announcement in the middle of a trading day that an issuer expected NPAT to be significantly lower than previously released forecast NPAT guidance. NZX sought further information and identified that the issuer had held a board meeting on the morning of the announcement, outside of its usual cycle, specifically to consider new information provided by management, and was satisfied that the issuer was not required to make a disclosure prior to the board meeting. A draft announcement had been provided in the board papers, and the issuer had to make some amendments following conclusion of the board meeting and seek approval of the revised announcement (each of which the issuer considered it had completed as quickly as practicable). NZX was satisfied that the issuer had released the announcement in compliance with Listing Rule 10.1.1, but noted that the issuer should have considered a trading halt in the circumstances.
Again, NZX reiterates that while an intra-day announcement may be necessary to disclose material information immediately, issuers should try to manage their activities to enable material information to be released outside trading hours. Examples of how this can be done include managing the timing of:
- board meetings at which potential material information will be considered, and
- signing material contracts.
NZX also provides some practical guidance about how to manage the release of information where an issuer is listed on both the NZX and ASX.
The review provides a useful companion piece to the NZX Continuous Disclosure Guidance Note, the NZX Corporate Governance Code and NZX's practice notes by providing a practical and comprehensive guide to the continuous disclosure issues that we see arising day to day for our issuer clients. We strongly recommend that all directors and executive officers at issuers (and others responsible for continuous disclosure) make the time to read this review.
NZX has also recently released its fourth and final batch of practice notes for 2017. Again, these provide useful practical guidance for issuers on:
- changing balance date
- relying on the QFP exemption set out in Financial Markets Conduct Act 2013
- approaching a bond redemption or call
- making more effective announcements, and
- making an application for listing and quotation of new equity securities.
NZX has also updated a number of its existing practice notes.
NZX should be commended for the more proactive approach it is taking in publishing these useful resources for issuers, which should promote a more consistent approach across the market.
It is also worth noting that there is an increasing amount of overlap between a number of the practice notes and the guidance notes, with some key areas, such as continuous disclosure, being covered in a number of different documents. As such, it is important for issuers to ensure that they are not just focusing on the Listing Rules, but are keeping up to date with the latest regulatory publications from NZX more generally.
NZX's strong focus this year on issuer education and guidance will be capped off with the NZX Issuer Forum next week.
The forum is intended to provide issuers with an opportunity to meet NZX staff, network with peers and better manage the practical requirements of being listed.
Chapman Tripp will provide an update on what's on the legislative horizon for issuers at the forum and we look forward to seeing many of you there.
The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.