On 9 December 2020 ASX published an updated version of Guidance Note 8 in which it has clarified its position on earnings surprises and further emphasised that if a transaction is sufficiently material to warrant disclosure under ASX Listing Rule 3.1, the identity of the other party or parties will generally itself be material information that must also be disclosed.
- For companies that issue earnings guidance as a range rather than as a single figure, ASX will generally interpret that range as a representation that the company’s earnings will not be less than the lower point of the range, nor more than the higher point of the range, so the ends of those ranges need to be carefully monitored.
- For companies that do not issue earnings guidance and are covered by sell-side analysts, ASX recommends careful consideration of whether disclosure is needed where there is a 15% or greater difference between the company’s actual or projected earnings for the period and its best estimate of the market expectations for its earnings.
- ASX has noted a recent decision of the Federal Court in its updated Guidance Note 8 which, consistent with ASX’s previous published guidance, found that announcing the sale of a significant asset without disclosing the name of the counterparty, that no due diligence had been done to verify the ability of the purchaser to complete the sale or that it knew the purchaser had not received all its funding approvals, was a breach of the continuous disclosure requirements of the ASX Listing Rules and the Corporations Act.
In the updates to the Guidance Note, ASX has clarified its position on “earnings surprises”. As was the case previously, an earnings surprise will need to be disclosed to the market if it is market sensitive. That is, if it is of such a magnitude that a reasonable person would expect the information about the earnings surprise to have a material effect on the price or value of the company’s securities.
ASX has clarified that:
- For companies who issue earnings guidance as a range rather than as a single figure, ASX will generally interpret that as a representation that the company’s earnings will not be less than the lower point of the range, nor more than the higher point of the range. Accordingly, the 5-10% test1 in Guidance Note 8 should be applied by reference to the lower point of the range or the higher point of the range when considering if there will be an earnings surprise. Whilst this view is useful, we note that Herbert Smith Freehills has expressed some concerns that a court may not take the same view in all circumstances. For example, if a small range is given, this approach may make sense but if a large range is given, falling outside of that range may surprise the market.
- For companies who do not issue earnings guidance and are covered by sell-side analysts, ASX would recommend that companies carefully consider notifying the market of a potential earnings surprise if and when they expect there to be a 15% or greater difference between the company’s actual or projected earnings for the period and its best estimate of the market expectations for its earnings (which will generally be sell-side analyst forecasts for a large listed company).
ASX also noted that this is guidance only and the mere fact that a company may expect its actual or projected earnings to differ from market expectations by more or less than these particular percentages will not necessarily mean that information about the difference is or is not market sensitive (and where companies publish guidance, is or is not misleading).
Particular care needs to be taken in relation to “negative” earnings surprises, in light of recent class action litigation for continuous disclosure breaches. The practical application of the guidance above is more difficult in real time where updates and expectations in relation to actual or projected earnings can develop iteratively and crystallise over a period of time. The importance of closely monitoring this sort of dynamic was clearly demonstrated in TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Limited  FCA 1747. In that case the Court undertook a forensic analysis of the inner workings of Myer’s Management and Board leading up to a negative earnings update to identify the precise point at which Myer had formed the opinion that previous ‘guidance’ was going to be materially missed, which was earlier than the point of announcement and a breach of Myer’s continuous disclosure obligations was found.
Disclosure of details of sales of assets
ASX also made changes to Guidance Note 8 to note the recent decision in ASIC v Big Star Energy Limited (No 3)  FCA 1442. In that case, the Federal Court held that a listed entity breached the continuous disclosure obligations in the ASX Listing Rules and the Corporations Act by announcing the sale of a significant asset without disclosing: (a) the identity of the purchaser; (b) that the entity had done no due diligence to verify the capacity of the purchaser to complete the purchase; and (c) that the entity had in fact been informed by the purchaser that it had not yet received all funding approvals required to complete the purchase. The transaction ultimately failed to complete. Just because the purchase was for cash consideration did not mean the identity of the purchaser was not material. It was also not an acceptable reason that the purchaser would not engage if its identity were to be disclosed.
Disclosure of these features was already recommended by ASX Guidance Note 8 and this confirms ASX’s position we wrote about in May 2019 about the store ASX puts in disclosure of the identity of the other party to a transaction2.
- ASX suggests that a company should treat an expected variation on earnings compared to published guidance equal to or greater than 10% as material and presume its guidance needs updating, and treat an expected variation in earnings compared to published guidance equal to or less than 5% as not being material and presume its guidance does not need updating – unless in either case there is evidence or a convincing argument to the contrary. The company will need to form a view where the expected variation compared to published earnings guidance is between 5-10%. Importantly, ASX recently clarified that entities in the ASX 300 should consider applying a materiality threshold of 5% rather than 10%.
- ‘What’s in a name? ASX thinks quite a lot actually’ dated 31 May 2019 by Tony Damian and Nicole Pedler