ASX response to COVID-19 market conditions

ASX has released a package of regulatory relief to assist listed companies manage their disclosure obligations and help investors remain informed during a time of extreme market volatility due to the COVID-19 crisis.

Given the pace of change that companies are currently facing, it is difficult for boards to understand and forecast the impact of COVID-19 both on the individual entity and the wider economy. It is also a resource intensive task for boards at a time when their focus must be on business continuity and crisis management.

To assist companies resolve some of the novel issues arising during the crisis, ASX’s compliance update includes various temporary measures and updated guidance on:

• continuous disclosure obligations, including earnings guidance and decisions not to pay a dividend;
• reporting deadlines, including specific relief for ASX/NZX dual-listed entities;
• capital raisings;
• AGMs; and
• market announcements.

A copy of the ASX’s updated guidance is available here.

Continuous disclosure obligations

ASX acknowledges that COVID-19 may present challenges for listed companies that are required to comply with continuous obligations, and in particular, the challenges associated with giving earnings guidance and forecasts.

Importantly, ASX has confirmed it does not expect listed entities to announce information under listing rule 3.1 ‘that comprises matters of supposition or that is insufficiently definite to warrant disclosure’, nor does it expect the release of 'forward-looking statements to the market unless they have a clear and reasonable basis for doing so’.

To address compliance issues in the current environment of extreme volatility and uncertainty, ASX provides practical guidance on the following:

• Earnings guidance: noting it is both acceptable and understandable that companies that have issued guidance prior to the outbreak of COVID-19 have taken the opportunity to withdraw that guidance, the ASX strongly encourages companies that have not yet reviewed their published guidance in light of COVID-19 to do so (and if it is no longer current, update it) or perhaps more sensibly for most companies, to simply withdraw it.
• Material operational decisions: companies should immediately announce any operational decision that is likely to have a material effect on the price or value of its securities (for example, a decision to stand down a material number of employees or to close or suspend certain operations or facilities).
• Capital raisings: companies proposing to restore their financial position by way of a capital raising will need to announce it to the market as soon as it is committed to proceeding.
• Entities in financial difficulty: companies that are in financial difficulty are subject to the same disclosure standards as any other company. If there is an adverse development which a reasonable person would expect to have a material effect on the price or value of securities, companies must immediately disclose that information. This could include, for example, the board resolving to appoint an administrator or a major lender declaring an event of default and calling for the immediate repayment of an outstanding loan balance causing an entity to become insolvent.
• Decisions not to pay a dividend or distribution: companies that decide not to pay a dividend or distribution in respect of a period must immediately notify ASX of the cancellation if they have previously announced an intention to do so for that period, or have paid a dividend or distribution in respect of the prior corresponding period. The announcement will need explain the legal basis for the cancellation (including confirming that the cancellation is authorised by the company’s constitution, where that is a legal requirement).
• Trading halts and voluntary suspensions: companies should also be reminded that it may be appropriate to request a trading halt or a voluntary suspension if the market is, or will be, trading at any time after a company first becomes obliged to provide market sensitive information to ASX and before it can give an announcement with that information for release to the market.

The ASX’s guidelines on continuous disclosure and earnings guidance are likely to encourage many listed entities to reduce the amount of disclosure they would normally make to the market. It remains to be seen whether this will be acceptable to investors. Further, while the ASX guidance clarifies what the ASX’s position will be in terms of its enforcement approach, it does not materially reduce the significant risk of securities class actions in the current environment. Accordingly, the AICD has been advocating to Government for a temporary safe harbour for companies and directors in relation to earnings guidance and forward-looking statements related to COVID-19.

Reporting deadline relief on a case-by-case basis

Critically, ASX has opted not to grant an extension for companies with 30 September, 31 December or 31 March balance dates to the deadlines for filing half year and full year financial statements, but rather will consider requests on a case-by-case basis where companies can demonstrate there has been an unavoidable delay in having financial statements audited or reviewed.

ASX’s discretion to provide a ‘short extension’ for filing half yearly or audited annual financial statements may be granted so long as:

• ASIC, or an equivalent corporate regulator for overseas companies, has agreed to grant an extension to the relevant reporting deadline under the Corporations Act or overseas equivalent legislation; and
• the company’s auditor has confirmed in writing to ASX that they will not be able to complete their audit or review of the company’s financial statements by the deadline.

In other words, listed entities seeking relief will need to obtain the permission of both ASIC and the ASX. ASIC retains the power to grant relief on financial reporting deadlines by either individual application or by class exception. So far they have adopted a “wait and see” approach and declined to make a class exception for entities balancing on 31 December and 31 March – unlike corporate and financial market regulators in other jurisdictions (see for example NZX class waiver relief below). They have also not said how they plan to address the inevitable volume of exceptions-basis requests from 30 June companies.

Reporting relief for ASX/NZX dual-listed entities

Notwithstanding ASX’s current approach to general reporting relief noted above, to facilitate the operation of a class waiver announced by the NZX extending the deadlines for filing financial statements and annual reports for NZX listed entities with balance dates between 30 September and 31 May, the ASX has granted an equivalent class waiver extending the reporting deadlines for dual-listed ASX/NZX entities incorporated in New Zealand and admitted to ASX as a standard ASX Listing.

In line with the NZX class waiver, dual-listed ASX/NZX entities will have up to an additional 30 days to prepare and release their results announcements (including preliminary interim and full year statements), and up to an additional two-months to prepare and release their annual reports.

Temporary emergency capital raising relief

Recognising that some companies will have an urgent need to raise capital due to the immediate and potential effects of the COVID-19 pandemic, ASX is implementing temporary emergency capital raising measures by way of class waiver to help facilitate capital raisings in the short term. These include:

• permitting companies to request back-to-back (two consecutive) trading halts to plan for and carry out a capital raising; and
• lifting the 15% limit on placement capacity to 25%, provided all security holders are offered the opportunity to participate in the capital raising at the same or a lower price than security holders participating in the placement.

The class waiver will expire on 31 July 2020 and ASX will review the temporary arrangements closer to that date to determine whether they need to be altered or extended.

In addition, ASX has endorsed ASIC’s guidance on fair treatment in capital raisings which outlines ASIC’s expectations that, when deciding on the timing and structuring of any capital raising, directors of listed entities must continue to act in the best interests of the entity. This requires directors to balance a range of considerations, such as the need for quick and certain capital, and the cost to and possible dilution of existing security holders.

AGMs

The ASX further endorses ASIC’s guidance on temporary measures for upcoming AGMs, including taking a ‘no action’ position where companies with a 31 December financial year end need to defer their AGMs for two-months; hold virtual AGMs; or send shareholders supplementary information for online participation and voting electronically, where a notice of meeting has already been dispatched, which may otherwise not comply with Corporations Act requirements. For further detail, see the AICD’s update on ASIC’s ‘no action’ position for AGMs here.

While these measures are welcome, ASIC does not currently have the power under the Corporations Act to enable fully virtual AGMs and its ‘no action’ position will not necessarily remove the risk of legal action from third parties.

Consistent with recent emergency reform taken in other jurisdictions to address these same issues, a more pragmatic solution would be to amend the Corporations Act to enable companies to hold virtual AGMs, even notwithstanding any company constitutional limitations. Doing so would not only provide greater flexibility for holding meetings, but also provides an opportunity to bring the Corporations Act provisions around the use of AGM-facilitative technology into the 21st century. This is a position we are continuing to pursue with Government,

Market announcements

The ASX also reminds companies of the requirement for market announcements to be given to the ASX first before that information is released to the market or anyone else. This does not however prevent a company from communicating with its employees, customers or suppliers about important information relevant to those parties relating to COVID-19 – for example, information about business closures, and working from home arrangements.

AICD monitoring and engagement

While ASX’s temporary relief measures go some way toward addressing the challenges companies are beginning to grapple with in the current climate, they are limited in affect – both in terms of the necessarily limited comfort they provide to entities on continuous disclosure obligations, and in the decision to take a case by case approach to reporting relief that is at odds with other key jurisdictions.

The AICD will continue to discuss with Government options for further focused solutions, in particular for continuous disclosure and financial reporting obligations, which reflect the unprecedented market conditions. We will continue to update members on our advocacy efforts.