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As the impact of COVID-19 was experienced in Australia, we outlined the need for listed entities to proactively consider how to meet their continuous disclosure obligations under the ASX listing rules. ASX has since acknowledged the disclosure challenges for listed entities arising from COVID-19, and that listed entities are affected in different ways.
In its latest compliance update, ASX reiterated that entities in financial difficulty (including with respect to their debt arrangements) will receive no special treatment. On earnings guidance, it was acknowledged that many listed entities have taken the opportunity to withdraw guidance issued before the outbreak of COVID-19. ASX also strongly encouraged entities to review their published guidance in light of COVID-19 and to either update it if it was not current or withdraw it in this highly uncertain climate.
While ASX confirmed that a listed entity’s continuous disclosure obligations do not extend to predicting the unpredictable, the legal position remains the same. Disclosure is required if and when an entity becomes aware of information that a reasonable person would expect to have a material effect on the price or value of its securities, including further impacts arising from COVID-19. As such, entities must carefully and continuously consider the impacts of COVID-19 and ensure that changing circumstances are assessed, and analysis is updated.
There continues to be a wide variety of ways in which COVID-19 might give rise to market-sensitive information, including:
- ongoing and further government intervention;
- capital management events;
- operational impacts;
- material changes in business fundamentals;
- mitigation and response actions;
- changes in law;
- employee safety issues;
- changes in demand for products; and
- impacts on material contracts.
While these issues may trigger standalone disclosure obligations, we believe the most common continuous disclosure issues (and often the most difficult to manage) will arise from impacts on earnings and debt arrangements.
Market expectations over the near term are usually a material driver of an entity's share price. ASX recognises such expectations may be set by (i) earnings guidance given to the market; (ii) earnings forecasts of sell-side analysts; or (iii) earnings results for the prior corresponding period. Many entities are withdrawing guidance, recognising the uncertainty they face. The prior corresponding period is similarly less likely to be relevant in setting expectations given the pace with which the COVID-19 pandemic is unfolding and the scale of government and community response.
This leaves market expectations informed by the earnings forecasts of sell-side analysts. While ASX notes there is no obligation to correct consensus estimates, they can be relevant indicators of market expectations. ASX considers that information that an entity's earnings are likely to differ significantly from market expectations (referable to consensus estimates) is likely to be market-sensitive information and should be disclosed.
In the current environment, we see real difficulty in applying this guidance from ASX where the forecasts contributing to consensus estimates may be pre- or post-COVID-19 impact. If an entity's consensus estimate is based on pre-COVID-19 forecasts, and the entity has announced the withdrawal of previously provided guidance, we do not think it could properly be said that the market expectations are reflected in those consensus numbers. While this may seem obvious, it is an important clarification for listed entities. Further, we have real doubts about the appropriateness of equating post-COVID-19 analyst forecasts with market consensus given what ASX acknowledges is a 'rapidly evolving and highly uncertain situation'. We think it would be helpful if ASX clarified that – without better information (when available) from an entity – consensus is unlikely to be an appropriate measure of market expectation in these uncertain times. Not only will this assist the market, it will relieve already stretched management teams from the fraught exercise of trying to unpick assumptions that underly often complex models for consensus estimates against their own trading data.
We also expect the next period to give rise to complicated continuous disclosure issues in relation to debt facilities. While the occurrence of an event of default under a material financing facility is likely to require immediate disclosure, the analysis (and its timing) is more complex when considering potential or anticipated events of default, associated negotiations with financiers, the likelihood of a waiver being obtained and the possibility of further government intervention. The COVID-19 driven volatility in financial markets means it is difficult to predict whether debt covenants will be tripped when tested in the future, and how third parties may behave. On one hand, listed entities must exercise extreme caution in not disclosing potential or anticipated breaches on the basis of incomplete negotiations with third parties, such as financiers or governments. But on the other, premature disclosure could cause significant or irreparable damage to an entity's prospects. These issues were canvassed in a consultation draft of the ASX's guidance on continuous disclosure in 2012 but were not ultimately included in the final version, leaving a difficult judgment call for listed entities.
Unsurprisingly, all these scenarios are usually fact specific and require careful consideration, advice and monitoring. While further ASX guidance would be helpful, it remains imperative that entities have tools and systems in place to continually monitor and assess these issues to ensure they comply with their continuous disclosure obligations.